[Federal Register Volume 75, Number 237 (Friday, December 10, 2010)]
[Proposed Rules]
[Pages 77306-77377]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-29719]
[[Page 77305]]
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Part IV
Securities and Exchange Commission
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17 CFR Parts 240 and 249
Security-Based Swap Data Repository Registration, Duties, and Core
Principles; Proposed Rule
Federal Register / Vol. 75 , No. 237 / Friday, December 10, 2010 /
Proposed Rules
[[Page 77306]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 240 and 249
[Release No. 34-63347; File No. S7-35-10]
RIN 3235-AK79
Security-Based Swap Data Repository Registration, Duties, and
Core Principles
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: In accordance with Section 763(i) of Title VII (``Title VII'')
of the Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010 (``Dodd-Frank Act''), the Securities and Exchange Commission
(``Commission'') is proposing new rules under the Securities Exchange
Act of 1934 (``Exchange Act'') governing the security-based swap data
repository (``SDR'') registration process, duties, and core principles.
DATES: Comments should be submitted on or before January 24, 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/proposed.shtml); or
Send an e-mail to [email protected]. Please include
File Number S7-53-10 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 M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549.
All submissions should refer to File Number S7-53-10. 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: John Ramsay, Deputy Director; Jo Anne
Swindler, Assistant Director; Richard Vorosmarti, Special Counsel;
Angie Le, Special Counsel; Miles Treakle, Staff Attorney; or Bradley
Gude, Special Counsel, Division of Trading and Markets, at (202) 551-
5777, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549.
SUPPLEMENTARY INFORMATION: The Commission is proposing Rules 13n-1 to
13n-11 under the Exchange Act governing SDRs. The Commission is
soliciting comment on all aspects of the proposed rules and will
carefully consider any comments received.
I. Introduction
On July 21, 2010, President Barack Obama signed the Dodd-Frank Act
into law.\1\ 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.\2\
Specifically, 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 of the OTC derivatives market. The Dodd-Frank Act
is intended to strengthen the existing regulatory structure and to
provide the Commission and the CFTC with effective regulatory tools to
oversee the OTC derivatives market, which has grown exponentially in
recent years and is capable of affecting significant sectors of the
U.S. economy.
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\1\ The Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law 111-203, 124 Stat. 1376 (2010).
\2\ See Public Law 111-203, Preamble.
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The Dodd-Frank Act provides the CFTC with authority to regulate
``swaps,'' the Commission with authority to regulate ``security-based
swaps'' (``SBSs''), and both the CFTC and the Commission with authority
to regulate ``mixed swaps.'' \3\ The Dodd-Frank Act amends the Exchange
Act to require the following with respect to transactions in SBSs
regulated by the Commission: (1) Transactions in SBSs must be cleared
through a clearing agency if they are of a type that the Commission
determines must be cleared, unless an exemption applies; \4\ (2) if an
SBS is subject to the clearing requirement, then it must be traded on a
registered trading platform, i.e., a security-based swap execution
facility (``SB SEF'') or SBS exchange, unless no facility makes such
SBS available for trading; \5\ and (3) transactions in SBSs (whether
cleared or uncleared) must be reported to a registered SDR or the
Commission.\6\
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\3\ 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 permits 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. 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 are
currently seeking comments from interested parties. See Exchange Act
Release No. 62717 (Aug. 13, 2010), 75 FR 51429 (Aug. 20, 2010) (File
No. S7-16-10) (advance joint notice of proposed rulemaking regarding
definitions contained in Title VII).
\4\ See Public Law 111-203, Sec. 763(a) (adding Exchange Act
Section 3C).
\5\ See Public Law 111-203, Sec. 763(c) (adding Exchange Act
Section 3D).
\6\ See Public Law 111-203, Sec. Sec. 763(i) and 766(a) (adding
Exchange Act Sections 13(m)(1)(G) and 13A(A)(1), respectively). The
Dodd-Frank Act amends the CEA to provide for a similar regulatory
framework with respect to transactions in swaps regulated by the
CFTC.
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The Dodd-Frank Act provides the Commission with broad authority to
adopt rules governing SDRs and to develop additional duties applicable
to SDRs.\7\ Today, the Commission is proposing in this release new
Rules 13n-1 to 13n-11 under the Exchange Act governing SDR registration
process, duties, and core principles, including duties related to data
maintenance and access by relevant authorities and those seeking to use
the SDR's repository services.\8\ Pursuant to the legislation,
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SDRs are required to collect and maintain accurate SBS transaction data
so that relevant authorities can access and analyze the data from
secure, central locations to better monitor for systemic risk and
potential market abuse.
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\7\ See Public Law 111-203, Sec. 763(i) (adding Exchange Act
Sections 13(n)(7)(D)(i) and 13(n)(9)).
\8\ Section 712(a)(2) of the Dodd-Frank Act provides that,
before commencing any rulemaking regarding SBSs, security-based swap
dealers (``SBS dealers''), major security-based swap participants
(``major SBS participants''), SDRs, SBS clearing agencies, persons
associated with an SBS dealer or major SBS participant, eligible
contract participants with regard to SBSs, or SB SEFs pursuant to
Subtitle B of Title VII, the Commission must consult and coordinate
with the CFTC and other prudential regulators for the purposes of
assuring regulatory consistency and comparability, to the extent
possible. See Public Law 111-203, Sec. 712(a)(2). Any person that
is required to be registered as an SDR under Exchange Act Section
13(n) must register with the Commission, regardless of whether that
person is also registered under the CEA as a swap data repository.
Public Law 111-203, Sec. 763(i) (adding Exchange Act Section
13(n)(8)). The Commission preliminarily believes that an entity that
registers with the Commission as an SDR is likely to register also
with the CFTC as a swap data repository. As a result, the Commission
staff and the CFTC staff have consulted and coordinated with one
another regarding their respective Commissions' proposed rules
regarding SDRs and swap data repositories as mandated by Sections
763 and 728 of the Dodd-Frank Act, respectively. The Commission
staff has also consulted and coordinated with other prudential
regulators.
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A separate release issued by the Commission today proposes
Regulation SBSR, which, among other things, implements the provisions
of the Dodd-Frank Act for reporting SBS transactions to SDRs, including
standards for the data elements that must be provided.\9\ In addition,
the Dodd-Frank Act requires the Commission to engage in rulemaking for
the public dissemination of SBS transaction, volume, and pricing
data,\10\ and provides the Commission with discretion to determine an
appropriate approach to implement this important function. In
Regulation SBSR, the Commission proposes to require SDRs to undertake
this role.\11\
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\9\ See Exchange Act Release No. 63346 (Nov. 19, 2010)
(``Regulation SBSR Release'').
\10\ Public Law 111-203, Sec. 763(i) (adding Exchange Act
Section 13(m)(1)).
\11\ See Regulation SBSR Release, supra note 9.
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Taken together, the rules that the Commission proposes today seek
to provide improved transparency to regulators and the markets through
comprehensive regulations for SBS transaction data and SDRs. The
proposed rules would require SBS transaction information to be (1)
provided to SDRs in accordance with uniform data standards; (2)
verified and maintained by SDRs, which serve as secure, centralized
recordkeeping facilities that are accessible by relevant authorities;
and (3) publicly disseminated in a timely fashion by SDRs. In
combination, these proposed rules represent a significant step forward
in providing a regulatory framework that promotes transparency and
efficiency in the OTC derivatives markets and creates important
infrastructure to assist relevant authorities in performing their
market oversight functions.
In preparation for the rulemakings related to SDRs, Commission and
CFTC staff held a joint public roundtable (the ``Data Roundtable'') on
September 14, 2010 to gain further insight into many of the issues
addressed in this proposal.\12\ The rules proposed today take into
account the views expressed at the Data Roundtable, as well as the
comments received.
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\12\ The Commission and the CFTC solicited comments on the Data
Roundtable. See Exchange Act Release No. 62863 (Sept. 8, 2010), 75
FR 55575 (Sept. 13, 2010). Comments received by the Commission are
available at http://www.sec.gov/cgi-bin/ruling-comments?ruling=df-title-vii-swap-data-repositories&rule_path=/comments/df-title-vii/swap-data-repositories&file_num=DF%20Title%20VII%20-%20Swap%20Data%20Repositories&action=Show_Form&title=Swap%20Data%20Repositories%20-%20Title%20VII%20Provisions%20of%20the%20Dodd-Frank%20Wall%20Street%20Reform%20and%20Consumer%20Protection%20Act.
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This proposed rulemaking is among the first that the Commission has
considered in connection with its mandates under the Dodd-Frank Act,
and the Commission is mindful of the considerations raised by this
timing. The Commission notes that the SBS market is in a nascent stage
of regulatory development compared to the markets for equity securities
and listed options and that the SBS market could develop further as the
Dodd-Frank Act is fully implemented and these transactions move to
central clearing and trading on organized markets. Accordingly, the
Commission urges all interested parties to comment on all aspects of
this proposed rulemaking, including whether this proposal, taken as a
whole, appropriately advances the objectives of the Dodd-Frank Act in a
manner that adequately takes into account the characteristics of the
relevant markets.
II. Role, Regulation, and Business Models of SDRs
Under the Dodd-Frank Act, SDRs are intended to play a key role in
enhancing transparency in the SBS market by retaining complete records
of SBS transactions, maintaining the integrity of those records, and
providing effective access to those records to relevant authorities and
the public in line with their respective information needs. The
enhanced transparency provided by an SDR is important to help
regulators and others monitor the build-up and concentration of risk
exposures in the SBS market. Without an SDR, data on SBS transactions
is dispersed and not readily available to regulators and others. SDRs
may be especially critical during times of market turmoil, both by
giving relevant authorities information to help limit systemic risk and
by promoting stability through enhanced transparency. By enhancing
stability in the SBS market, SDRs may also indirectly enhance stability
across markets, including equities and bond markets.\13\
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\13\ See Darrell Duffie, Ada Li, and Theo Lubke, Policy
Perspectives of OTC Derivatives Market Infrastructure, Federal
Reserve Bank of New York Staff Report No. 424, dated January 2010,
as revised March 2010 (``Transparency can have a calming influence
on trading patterns at the onset of a potential financial crisis,
and thus act as a source of market stability to a wider range of
markets, including those for equities and bonds.'').
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In addition, SDRs have the potential to reduce operational risk and
enhance operational efficiency in the SBS market. By maintaining
transaction records that are accessible by both counterparties to an
SBS, SDRs will provide a mechanism for counterparties to ensure that
their records reconcile on all of the key economic details, which may
decrease the likelihood of disputes. The Dodd-Frank Act's requirement
of having all SBSs reported to an SDR encourages standardization of
data elements, which promotes operational and market efficiency.
The data maintained by an SDR may also assist regulators in (i)
preventing market manipulation, fraud, and other market abuses; (ii)
performing market surveillance, prudential supervision, and
macroprudential (systemic risk) supervision; and (iii) resolving issues
and positions after an institution fails.\14\
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\14\ See Letter from DTCC to Chairmen Mary Schapiro and Gary
Gensler (Nov. 15, 2010) (available at http://www.sec.gov/comments/df-title-vii/swap-data-repositories/swapdatarepositories-13.pdf)
(``A registered SDR should be able to provide (i) enforcement agents
with necessary information on trading activity; (ii) regulatory
agencies with counterparty-specific information about systemic risk
based on trading activity; (iii) aggregate trade information for
publication on market-wide activity; and (iv) a framework for real-
time reporting from swap execution facilities and derivatives
clearinghouses.'')
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SDRs themselves are, however, subject to certain operational risks.
The inability of an SDR to protect the accuracy and integrity of the
data that it maintains or the inability of an SDR to make such data
available to regulators, market participants, and others in a timely
manner could have a significant negative impact on the SBS market.
Failure to maintain privacy of such data could lead to market abuse and
subsequent loss of liquidity. Therefore, it is important that SDRs are
well-run and effectively regulated.
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The Commission is cognizant that the proposed rules discussed
herein, as well as other proposals that the Commission may consider in
the coming months to implement the Dodd-Frank Act, if adopted, could
significantly affect--and be significantly affected by--the nature and
scope of the SBS market in a number of ways. For example, the
Commission recognizes that if the measures that are adopted are too
onerous for new entrants, they could discourage competition and
formation of SDRs. On the other hand, if the Commission adopts rules
that are too permissive, SDRs might be prone to deficiencies such as
limited access to their services or potential lack of data integrity.
The Commission is also mindful that further development of the SBS
market may alter the calculus for future regulation of SDRs. As
commenters review this release, they are urged to consider generally
the role that regulation may play in fostering or limiting development
of the SBS market (or, vice versa, the role that market developments
may play in changing the nature and implications of regulation) and to
focus specifically on this issue with respect to the proposals
regarding SDRs that are discussed below.
The Commission is also aware that the regulatory framework for SDRs
being developed by the Commission must take into account the commercial
viability of SDRs, because realizing the benefits of SDRs requires that
entities seek to engage in the business of being an SDR. In this
regard, the Commission, which has limited experience with data
repositories, seeks to understand the potential revenue streams and
operating costs for SDRs. Based on our understanding of existing data
repositories and discussions with industry representatives, it appears
that SDRs might operate under any one of a number of business models.
For example, an SDR could provide basic services and access to data on
an at-cost utility model basis. Alternatively, an SDR might seek to
earn a profit from fees charged to participants for reporting SBS
transaction data to the SDR or for providing raw data to participants
or others. In either of these two models, the SDR could also offer to
participants additional or ancilliary services related to the SBS data
that is reported to the SDR, such as calculating quarterly coupon and
other payments (e.g., upfront fees or credit event payments) due
between counterparties of an SBS; providing bilateral netting
calculations; and providing automated life cycle processing for
successor events such as reorganizations and renaming of corporate
entities, and credit events such as bankruptcies, restructurings, and
insolvencies. Further, an entity that already offers post-trade
processing or matching and confirmation services might seek to expand
its business to include acting as a data repository. Finally, any of
these models could involve the sale of enhanced data or tools derived
from the use and analysis of data reported to the repository.
The SDR regulatory regime set forth in the Dodd-Frank Act and any
rules that the Commission may adopt to implement the Act will likely
affect an entity's decision over which business model to adopt. An
entity likely will remain in or enter into the SBS market as a
registered SDR based upon the interplay between the business model that
it selects and the regulatory requirements that the Commission imposes
under the Dodd-Frank Act.
The Commission recognizes the importance of promoting the
development of SDRs to collect, maintain, and make available accurate
SBS data to relevant authorities and the public. The rules that the
Commission proposes in this release today reflect its preliminary views
on potentially appropriate regulatory requirements to implement the
Dodd-Frank Act with respect to SDRs. In this regard, the Commission has
considered its experience in regulating the securities market and has
sought to propose rules that take into account the obligations the
Commission has imposed on other registrants.\15\ At the same time, the
Commission is interested in gathering additional information regarding
the business models that the industry may utilize to operate registered
SDRs, views on the potential areas of competition among SDRs, and the
interplay between the commercial viability of various SDR business
models and any rules implemented under the Dodd-Frank Act. The
Commission does not intend by the requirements imposed on an SDR to
mandate any particular business model, and it solicits comment on the
effect of the proposed rules on business models that SDRs would adopt,
and the consequences for market integrity, transparency, and
efficiency.
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\15\ For example, proposed Rule 13n-6 would require SDRs to
comply with obligations related to their automated systems'
capacity, resiliency, and security that are comparable to the
standards applicable to self-regulatory organizations, including
clearing agencies, and other registrants pursuant to the
Commission's Automation Review Policy standards. And, the
requirement in proposed Rule 13n-4 for an SDR to ensure that any
dues, fees, or any other charges imposed by, and any discounts or
rebates offered by, an SDR be fair and reasonable and not
unreasonably discriminatory is similar to obligations imposed by the
Exchange Act on other registrants. See, e.g., Exchange Act Section
6(b)(4) (``The rules of the exchange [shall] provide for the
equitable allocation of reasonable dues, fees, and other charges
among its members and issuers and other persons using its
facilities''); Exchange Act Section 17A(b)(3)(D) (``The rules of the
clearing agency [shall] provide for the equitable allocation of
reasonable dues, fees and other charges among its participants'');
see also Exchange Act Sections 11A(c)(1)(C) and (D) (providing that
the Commission may prescribe rules to assure that all securities
information processors (``SIPs'') may, ``for purposes of
distribution and publication, obtain on fair and reasonable terms
such information'' and to assure that ``all other persons may obtain
on terms which are not unreasonably discriminatory'' the transaction
information published or distributed by SIPs).
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Request for Comment
The Commission also requests comment on the following specific
issues:
Are there business models other than those described above
that an SDR may want to adopt? What are the business models, and what
are their benefits and drawbacks for SDRs and for the integrity,
transparency, and efficiency of the SBS market?
Do the Commission's proposed rules favor or discourage one
business model over another? If so, identify which rule(s) and explain.
Should the Commission's rules favor or discourage one
business model over another? If so, which models should be favored or
discouraged and why?
What factors determine whether an entity decides to
operate as an SDR?
Who are the likely investors in or sources of capital for
new SDRs? What are the key sources of risk or uncertainty facing such
persons? How would the rules being proposed by the Commission, taken as
a whole or individually, facilitate or discourage the investment of
capital in SDRs?
What are the revenue sources available to SDRs? How would
the rules proposed or that may be adopted affect potential revenue
sources for SDRs, and their commercial viability? Could repositories be
commercially viable if the only permissible sources of revenue derived
from receiving and generating and providing aggregated data? Which
revenue sources are expected to be most important from the standpoint
of commercial viability?
Would there be advantages or disadvantages to the market
if SDRs were required to provide basic services on an at-cost or
utility model basis?
Do the rules proposed by the Commission in this release,
taken as a whole, reflect an appropriate regulatory burden on SDRs,
considering the statutory mandates and policy goals of the Dodd-Frank
Act? Should the Commission impose additional or fewer requirements on
SDRs? Which
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requirements should be added or removed and why? Which requirements, if
any, in combination or alone, would be unduly burdensome on SDRs?
With respect to entities that currently perform repository
services for SBSs or other instruments, how do current practices
compare to the practices that the Commission proposes to require in
these rules? What are the incremental costs to potential SDRs in
connection with adding to or revising their current practices in order
to implement these proposed rules?
How many SDRs are likely to register with the Commission?
Will there likely be more than one SDR for each asset class of SBSs? If
there will likely be only one SDR for each asset class, will that be
due to the inherent nature of the market and of the SDR business model;
will that be due to the rules proposed by the Commission; or will that
be due to other factors? Should the Commission impose additional
regulatory requirements to mitigate any potential detrimental impact on
the SBS market related to a single, dominant SDR for each asset class?
Or should the Commission instead seek to encourage more competition
among SDRs by modifying or eliminating certain aspects of its proposed
rules to facilitate new entrants into the market?
Exchange Act Section 13(n)(5) requires an SDR to ``provide
direct electronic access to the Commission (or any designee of the
Commission, including another registered entity).'' Under this
provision, should the Commission designate one SDR as the recipient of
the information of other SDRs, through direct electronic access to the
SBS data at the other SDRs, in order to provide the Commission and
relevant authorities with a consolidated location for SBS data? If so,
should the consolidation of data from SDRs be by asset class of SBSs or
across all asset classes? What would be the costs and benefits of
requiring SDRs to report transaction data to another registered SDR
that would consolidate the information? If the Commission were to
designate one SDR to be the consolidator of SBS data in an asset class
or for all SBS data, are there requirements that should be imposed on
such an entity that are different than those imposed on other SDRs? Are
there specific criteria that the Commission should consider in
selecting an SDR to be a consolidator of SBS data?
III. Discussion of Proposed Rules Governing SDRs
Exchange Act Section 3(a)(75), enacted in Section 761 of the Dodd-
Frank Act, defines a ``security-based swap data repository'' to mean
``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 by third parties for the purpose of
providing a centralized recordkeeping facility for security-based
swaps.'' \16\ Exchange Act Section 13(n), enacted in Section 763(i) of
the Dodd-Frank Act, makes it ``unlawful for any person, unless
registered with the Commission, directly or indirectly, to make use of
the mails or any means or instrumentality of interstate commerce to
perform the functions of a security-based swap data repository.'' \17\
To be registered and maintain such registration, each SDR is required
to comply with the requirements and core principles described in
Exchange Act Section 13(n), as well as with any requirements that the
Commission adopts by rule or regulation.\18\ The Dodd-Frank Act also
requires each SDR to appoint a chief compliance officer (``CCO'') and
specifies the CCO's duties.\19\ In addition, the Dodd-Frank Act grants
the Commission authority to inspect and examine any registered SDR and
to prescribe data standards for SDRs.\20\
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\16\ Public Law 111-203, Sec. 761 (adding Exchange Act Section
3(a)(75)).
\17\ Public Law 111-203, Sec. 763(i) (adding Exchange Act
Section 13(n)(1)). Any person that is required to be registered as
an SDR under Exchange Act Section 13(n) must register with the
Commission, regardless of whether that person is also registered
under the CEA as a swap data repository. Id. (adding Exchange Act
Section 13(n)(8)). Under the legislation, a clearing agency may
register as an SDR. Id. (adding Exchange Act Section 13(m)(1)(H)).
In addition, any person that is required to register as an SDR
pursuant to this section must register with the Commission
regardless of whether that person is also registered as an SB SEF.
\18\ See id. (adding Exchange Act Section 13(n)(3)).
\19\ See id. (adding Exchange Act Section 13(n)(6)).
\20\ See id. (adding Exchange Act Sections 13(n)(2) and
13(n)(4)). In a separate proposal, the Commission is proposing rules
prescribing the data elements that an SDR is required to accept for
each SBS in association with requirements under Section 763(i),
adding Exchange Act Section 13(n)(4)(A) relating to standard setting
and data identification. See Regulation SBSR Release (proposed Rule
901), supra note 9. Any comments regarding the data elements should
be submitted in connection with that proposal.
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A. Proposed Rule Regarding Registration of SDRs \21\
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\21\ In separate proposals, the Commission is proposing rules
requiring each SDR to register as a SIP, as defined in Exchange Act
Section 3(a)(22), on Form SIP based on additional requirements
proposed in those rules and to register as a clearing agency,
depending on an SDR's services. See, e.g., Regulation SBSR Release
(proposed Rule 909), supra note 9. Any comments regarding such
registrations should be submitted in connection with these
proposals.
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The Commission is proposing Rule 13n-1, which establishes the
procedures by which an SDR may apply to the Commission for
registration. The proposed rule would provide that an application for
the registration of an SDR must be filed electronically in a tagged
\22\ data format on proposed new Form SDR with the Commission in
accordance with the instructions contained in the form.\23\ The
Commission anticipates developing an online filing system through which
an SDR would be able to file and update Form SDR.\24\ The information
filed would be available on the Commission's Web site.\25\ The
Commission preliminarily believes that filing Form SDR in an electronic
format would be less burdensome and more efficient for both the SDRs
and the Commission.
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\22\ The term ``tag'' (including the term ``tagged'') would be
defined as an identifier that highlights specific information
submitted to the Commission that is in the format required by the
Electronic Data Gathering, Analysis, and Retrieval System
(``EDGAR'') Filer Manual, as described in Rule 301 of Regulation S-
T. See proposed Rule 13n-1(a)(3); see also 17 CFR 232.301. The term
``EDGAR Filer Manual'' would have the same meaning as set forth in
Rule 11 of Regulation S-T (defining ``EDGAR Filer Manual'' as ``the
current version of the manual prepared by the Commission setting out
the technical format requirements for an electronic submission'').
See Proposed Rule 13n-1(a)(1); see also 17 CFR 232.11.
\23\ See proposed Rule 13n-1(b).
\24\ The Commission anticipates that SDR filings will be
submitted through EDGAR, in which case the electronic filing
requirements of Regulation S-T would apply. See generally 17 CFR 232
(governing the electronic submission of documents filed with the
Commission).
\25\ If the Commission adopts the rule as proposed, it is
possible that SDRs might be required to file Form SDR in paper until
such time as an electronic filing system is operational and capable
of receiving the form. SDRs would be notified as soon as the
electronic system can accept filing of Form SDR. At such time, the
Commission may require each SDR to promptly re-file electronically
Form SDR and any amendments to the form.
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As part of the Commission's longstanding efforts to increase
transparency and the usefulness of information, the Commission has been
implementing data-tagging of information contained in electronic
filings to improve the accuracy of financial information and facilitate
its analysis.\26\ Data becomes machine-readable when it is labeled, or
tagged, using a computer markup language that can be processed by
software programs for analysis. Such computer markup languages use
standard sets of definitions, or ``taxonomies,'' that translate text-
based information in
[[Page 77310]]
Commission filings into structured data that can be retrieved,
searched, and analyzed through automated means. Requiring the
information to be tagged in a machine-readable format using a data
standard that is freely available, consistent, and compatible with the
tagged data formats already in use for Commission filings would enable
the Commission to review and analyze effectively Form SDR submissions.
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\26\ See Regulation S-T, 17 CFR 232. See also Securities Act
Release No. 8891 (Feb. 6, 2008), 73 FR 10592 (Feb. 27, 2008);
Securities Act Release No. 9002 (Jan. 30, 2009), 74 FR 6776 (Feb.
10, 2009); Securities Act Release No. 9006 (Feb. 11, 2009), 74 FR
7748 (Feb. 19, 2009); Exchange Act Release No. 61050 (Nov. 23,
2009), 74 FR 63832 (Dec. 4, 2009); Investment Company Release No.
29132 (Feb. 23, 2010), 75 FR 10060 (Mar. 4, 2010).
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1. Proposed New Form SDR
Proposed Form SDR includes a set of instructions for its proper
completion and submission. These instructions are attached to this
release, together with proposed Form SDR. The instructions would
require an SDR to indicate the purpose for which it is submitting the
form (i.e., application for registration, or amendment to an
application or to an effective registration) and then to provide
information in seven categories: (1) General information, (2) business
organization, (3) financial information, (4) operational capability,
(5) access to services and data, (6) other policies and procedures, and
(7) legal opinion. As part of the application process, each SDR would
be required to provide additional information to the Commission upon
request.\27\
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\27\ See proposed Rule 13n-1(b).
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The Commission preliminarily believes that permitting an SDR to
provide information in narrative form would allow the SDR greater
flexibility and opportunity for meaningful disclosure of relevant
information. The Commission also preliminarily believes that it is
necessary to obtain the requested information in proposed Form SDR to
enable the Commission to determine whether to grant or deny an
application for registration. Specifically, the information would
assist the Commission in understanding the basis for registration as
well as an SDR's overall business structure, financial condition, track
record in providing access to its services and data, technological
reliability, and policies and procedures to comply with its statutory
obligations. The information would also be useful to the Commission in
tailoring any requests for additional information that it may ask an
SDR to provide. Furthermore, the required information would assist the
Commission in the preparation of its inspection and examination of an
SDR.
General Information. Proposed Form SDR would require an SDR to
provide contact information, information concerning successor entities
(if applicable), a list of asset classes of SBSs for which the SDR is
collecting and maintaining data or for which it proposes to collect and
maintain data, and a description of the functions that it performs or
proposes to perform. This information would assist the Commission and
its staff in evaluating the applications and overseeing registered
SDRs.
An SDR would be required to consent that any notice or service of
process, pleadings, or other documents in connection with any action or
proceeding against the SDR may be effectuated by certified mail to an
officer or person specified by the SDR at a given U.S. address. The
Commission preliminarily believes that this consent is important to
minimize any logistical obstacles (e.g., locating defendants or
respondents abroad) that the Commission may encounter when attempting
to provide notice to an SDR or to effect service, including service
overseas.
Form SDR must be signed by a person who is duly authorized to act
on behalf of the SDR. The signer would be required to certify that all
information contained in the application, including the required items
and exhibits, is true, current, and complete. This certification is
consistent with the certification provisions in the registration forms
for SIPs, investment advisers, and broker-dealers (i.e., Forms SIP,
ADV, and BD).\28\
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\28\ See 17 CFR 249.1001 (Form SIP, for application for
registration as a securities information processor or to amend such
an application or registration); Form ADV (available at http://www.sec.gov/about/forms/formadv.pdf); and Form BD (available at
http://www.sec.gov/about/forms/formbd.pdf).
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If an applicant is a non-resident SDR, then the signer of Form SDR
would also be required to certify that the SDR can, as a matter of law,
provide the Commission with prompt access to the SDR's books and
records and that the SDR can, as a matter of law, submit to onsite
inspection and examination by the Commission.\29\ For purposes of the
certification, the term ``non-resident security-based swap data
repository'' would mean (i) in the case of an individual, one who
resides in or has his principal place of business in any place not in
the United States; (ii) in the case of a corporation, one incorporated
in or having its principal place of business in any place not in the
United States; or (iii) in the case of a partnership or other
unincorporated organization or association, one having its principal
place of business in any place not in the United States.\30\ Certain
foreign jurisdictions may have laws that complicate the ability of
financial institutions such as SDRs located in their jurisdictions from
sharing and/or transferring certain information, including personal
financial data of individuals that the financial institutions come to
possess from third persons (e.g., personal data relating to the
identity of market participants or their customers). The Commission
preliminarily believes that the non-resident SDR certification is
important to confirm that each SDR located overseas has taken the
necessary steps to be in the position to provide the Commission with
prompt access to its books and records and to be subject to onsite
inspection and examination by the Commission. Failure to make this
certification may be a basis for the Commission to deny an application
for registration. If a registered non-resident SDR becomes unable to
comply with this certification, then this may be a basis for the
Commission to revoke the SDR's registration.
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\29\ Under Exchange Act Section 13(n)(2), an SDR is subject to
inspection and examination by the Commission. See Public Law 111-
203, Sec. 763(i).
\30\ See also proposed Rule 13n-1(a)(2). This definition is
substantially similar to the definition of ``non-resident broker or
dealer'' in Exchange Act Rule 17a-7(d)(3). See 17 CFR 240.17a-
7(d)(3).
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Business Organization. Proposed Form SDR would require each SDR to
provide information regarding its business organization, including
information about (1) any person who owns 10 percent or more of the
SDR's stock or who, either directly or indirectly, through agreement or
otherwise, in any other manner, may control or direct the SDR's
management or policies, (2) the business experience, qualifications,
and disciplinary history of its designated CCOs, officers, directors,
governors, and persons performing functions similar to any of the
foregoing, and the members of all standing committees,\31\ (3) its
[[Page 77311]]
governance arrangements, (4) the SDR's constitution, articles of
incorporation or association with all amendments to them, existing by-
laws, rules, procedures, and instruments corresponding to them, (5) the
SDR's organizational structure, (6) its affiliates,\32\ (7) any
material pending legal proceedings to which the SDR or its affiliate is
a party or to which any of its property is the subject, (8) the SDR's
material contracts with any SB SEF, clearing agency, central
counterparty, and third party service provider, and (9) the SDR's
policies and procedures to minimize conflicts of interest in its
decision-making process and to resolve any such conflicts of interest.
Obtaining this information would assist the Commission in understanding
an SDR's overall business structure, governance arrangements, and
operations, all of which would assist the Commission in its inspection
and examination of the SDR.
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\31\ More specifically, proposed Form SDR would require an SDR
to disclose the following information regarding its designated CCOs,
officers, directors, governors, and persons performing functions
similar to any of the foregoing, and the members of all standing
committees: (a) Name, (b) title, (c) date of commencement and, if
appropriate, termination of present term of position, (d) length of
time such person has held the same position, (e) brief account of
the business experience of such person over the last five years, (f)
any other business affiliations in the securities industry or OTC
derivatives industry, and (g) a description of: (1) Any order of the
Commission with respect to such person pursuant to Exchange Act
Sections 15(b)(4), 15(b)(6), 19(h)(2), or 19(h)(3); (2) any
conviction or injunction of a type described in Exchange Act
Sections 15(b)(4)(B) or (C) within the past ten years; (3) any
action of a self-regulatory organization with respect to such person
imposing a final disciplinary sanction pursuant to Exchange Act
Sections 6(b)(6), 15A(b)(7), or 17A(b)(3)(G); (4) any final action
by a self-regulatory organization with respect to such person
constituting a denial, bar, prohibition, or limitation of
membership, participation, or association with a member, or of
access to services offered by, such organization of a member
thereof; and (5) any final action by another federal regulatory
agency, including the CFTC, any state regulatory agency, or any
foreign financial regulatory authority resulting in: (i) A finding
that such person has made a false statement or omission, or has been
dishonest, unfair, or unethical; (ii) a finding that such person has
been involved in a violation of any securities-related regulations
or statutes; (iii) a finding that such person has been a cause of a
business having its authorization to do business denied, suspended,
revoked, or restricted; (iv) an order entered, in the past ten
years, against such person in connection with a securities-related
activity; or (v) any disciplinary sanction, including a denial,
suspension, or revocation of such person's registration or license
or otherwise, by order, a prevention from associating with a
securities-related business or a restriction of such person's
activities.
\32\ For purposes of proposed Form SDR, an ``affiliate'' of an
SDR would be defined as a person that, directly or indirectly,
controls, is controlled by, or is under common control with the SDR.
See also proposed Rule 13n-4(a)(1). This proposed definition of
``affiliate'' is designed to allow the Commission to collect
comprehensive identifying information relating to an SDR.
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Financial Information. Each SDR would be required to disclose as
exhibits to proposed Form SDR certain financial and related
information, including (1) its balance sheet, statement of income and
expenses, statement of sources and application of revenues, and all
notes or schedules thereto, as of the most recent fiscal year of the
SDR, or, alternatively, a financial report, as discussed further in
Section III.K.3 of this release, (2) a balance sheet and statement of
income and expense for each affiliate of the SDR as of the end of the
most recent fiscal year of each such affiliate, or, alternatively,
identification of the most recently filed annual report on Form 10-K of
the SDR's affiliate, if available, (3) the SDR's schedule of dues,
fees, and other charges imposed, or to be imposed, for its services as
well as any discounts and rebates offered, or to be offered, and (4) a
description of any differentiations in such dues, fees, other charges,
discounts, and rebates.
Operational Capability. Proposed Form SDR would also require each
SDR to provide information on its operational capability, including (1)
its functions and services, (2) the computer hardware that it uses to
perform its functions, (3) personnel qualifications for each category
of professional, non-professional, and supervisory employees employed
by the SDR or the division, subdivision, or other segregable entity
within the SDR, (4) the SDR's measures or procedures to provide for the
security of any system employed to perform its functions, including any
physical and operational safeguards designed to prevent unauthorized
access to the system, (5) any circumstances within the past year in
which such security measures or safeguards failed to prevent any such
unauthorized access to the system and any measures taken to prevent a
reoccurrence, (6) any measures used to satisfy itself that the
information received or disseminated by the system is accurate, (7) the
SDR's backup systems or subsystems that are designed to prevent
interruptions in the performance of any SDR functions, (8) limitations
on the SDR's capacity to receive (or collect), process, store, or
display its data and factors that account for such limitations, and (9)
the priorities of assignment of capacity between functions of the SDR
and any other uses and methods used to divert capacity between such
functions and other uses. Obtaining this information would assist the
Commission in determining, among other things, whether an SDR is able
to comply with proposed Rule 13n-6, as discussed further in Section
III.F of this release.
Access to Services and Data. Proposed Form SDR would further
require an SDR to provide information regarding access to its services
and data, including (1) the number of persons who presently subscribe,
or who have notified the SDR of their intention to subscribe, to its
services, (2) instances in which the SDR has prohibited or limited any
person with respect to access to services offered or data maintained by
the SDR,\33\ (3) the storage media of any service furnished in machine-
readable form and the data elements of such service, (4) copies of the
contracts governing the terms by which persons may subscribe to the
SDR's services, including ancillary services, (5) any specifications,
qualifications, and criteria that limit, are interpreted to limit, or
have the effect of limiting access to or use of any services offered or
data maintained by the SDR, (6) any specifications, qualifications, or
other criteria required of persons who supply SBS information to the
SDR for collection and maintenance or of persons who seek to connect to
or link with the SDR, (7) any specifications, qualifications, or other
criteria required of any person who requests access to data maintained
by the SDR, and (8) the SDR's policies and procedures to review any
prohibition or limitation of any person with respect to access to
services offered or data maintained by the SDR and to determine whether
any person who has been denied access has been discriminated against
unfairly. Obtaining this information would assist the Commission in
determining, among other things, whether an SDR can comply with
proposed Rule 13n-4(c)(1), as discussed further in Section III.D.2.a in
this release.
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\33\ If the Commission adopts proposed Rule 909 of Regulation
SBSR, which would require each SDR to register as a SIP, then
Exchange Act Section 11A(b)(5) would govern denials of access to all
SDRs' services. See Regulation SBSR Release (proposed Rule 909),
supra note 9.
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Other Policies and Procedures. Proposed Form SDR would require each
SDR to submit as exhibits: (1) The SDR's policies and procedures to
protect the privacy of any and all SBS transaction information that the
SDR receives from a market participant or any registered entity, (2) a
description of the SDR's safeguards, policies, and procedures to
prevent the misappropriation or misuse of (a) any confidential
information received by the SDR, including, but not limited to, trade
data, position data, and any nonpublic personal information about a
market participant or any of its customers; (b) material, nonpublic
information; and/or (c) intellectual property by the SDR or any person
associated with the SDR for their personal benefit or for the benefit
of others, (3) the SDR's policies and procedures regarding its use of
the SBS transaction information that it receives from a market
participant, any registered entity, or any other person for non-
commercial and/or commercial purposes, (4) the SDR's procedures and a
description of its facilities for resolving disputes over the accuracy
of the transaction data and positions that are recorded in the SDR, (5)
the SDR's policies and procedures relating to its calculation of
positions, (6) the SDR's policies and procedures to prevent any
provision in a valid SBS from being invalidated or modified through the
[[Page 77312]]
procedures or operations of the SDR, and (7) a plan to ensure that the
transaction data and position data that are recorded in the SDR
continue to be maintained after the SDR withdraws from registration,
which shall include procedures for transferring transaction data and
position data to the Commission or its designee (including another
registered SDR). As discussed further below, the Commission is
proposing to require each SDR to establish, maintain, and enforce these
seven policies and procedures. In addition, an SDR would be required to
submit as exhibits to Form SDR all of the policies and procedures set
forth in Regulation SBSR.\34\
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\34\ See Regulation SBSR Release, supra note 9.
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Legal Opinion. Finally, Form SDR would require each non-resident
SDR to provide an opinion of counsel that the SDR can, as a matter of
law, provide the Commission with prompt access to the books and records
of such SDR and that the SDR can, as a matter of law, submit to onsite
inspection and examination by the Commission. Each jurisdiction may
have a different legal framework with respect to its laws (e.g.,
privacy laws) that may limit or restrict the Commission's ability to
receive information from an SDR. Providing an opinion of counsel that
an SDR can provide prompt access to books and records and can be
subject to onsite inspection and examination will allow the Commission
to better evaluate an SDR's ability to meet the requirements of
registration and ongoing supervision. Failure to provide an opinion of
counsel may be a basis for the Commission to deny an application for
registration.
Request for Comment
The Commission requests comment on the following specific issues:
Are the instructions in proposed Form SDR sufficiently
clear? If not, identify any instructions that should be clarified and,
if possible, offer alternatives.
Are the Commission's proposed definitions of
``affiliate,'' ``non-resident security-based swap data repository,''
and ``tag'' appropriate and sufficiently clear? If not, why not and how
should they be defined?
Should the Commission implement an electronic filing
system for receipt of Form SDR, and, if so, what particular features
should be incorporated into the system?
Do SDRs anticipate any burdens of filing Form SDR
electronically that the Commission should consider?
In the event that there is a delay in the full
implementation of the Commission's electronic filing system for
receiving Form SDR, should the Commission require each SDR to promptly
re-file electronically Form SDR and any amendments to the form after
the system is operational? If so, what would be a reasonable timeframe
to allow such re-filing (e.g., 30 days, 60 days)? Would the re-filing
be unduly burdensome for SDRs?
Which information in Form SDR, including exhibits, should
be subject to the proposed data tagging requirements?
Regarding the format of tagged data, as discussed in
Section III.K.3 of this release, the Commission is proposing that an
SDR's financial reports be submitted in eXtensible Business Reporting
Language (``XBRL'') format. Should the Commission require a specific
format for tagging other information in proposed Form SDR (e.g.,
financial information that is not a financial report as described in
proposed Rule 13n-11(f), operational capability, access to services and
data, and other policies and procedures)? If so, which format (e.g.,
XML, XBRL) would be best suited to such information?
Would it be useful for the Commission to provide any
additional instructions or define any additional terms in proposed Form
SDR? If so, what are they?
Is the consent relating to notice and service of process
on proposed Form SDR appropriate and sufficiently clear? If not, why
not and what would be a better alternative to obtaining such consent?
Are there other factors that the Commission should
consider, in addition to an opinion of counsel, that address whether
the Commission can legally, under applicable foreign law, obtain prompt
access to an SDR's books and records and conduct onsite inspection or
examination of the SDR?
Are the representations that would be required to be made
by the person who signs Form SDR appropriate and sufficiently clear?
Should the Commission require any additional or alternative
representations?
Should the Commission require SDRs to provide information
on persons who own ten percent or more of the SDR's stock or who may
control or direct the management or policies of the SDR? Would a
different ownership or control threshold be more appropriate? If so,
why?
Are the suggested timeframes of the business experience,
qualifications, and disciplinary history of an SDR's designated CCOs,
officers, directors, governors, and persons performing functions
similar to any of the foregoing, and members of all standing committees
appropriate? If not, what should the timeframes be?
Should the suggested timeframe relating to any conviction
or injunction of a type described in Exchange Act Sections 15(b)(4)(B)
or (C) be ten years as proposed? If not, should it be longer, shorter,
or indefinite? Should it be consistent with other forms (e.g., Form BD)
or with Section 15(b)(4)(B) itself?
Is the financial information that the Commission is
requesting on proposed Form SDR appropriate? If not, identify any items
that are not appropriate, explain why, and, if possible, offer
alternatives. For example, should the Commission request financial
information of all affiliates of an SDR or only specific affiliates
(e.g., an SDR's parent company, an SDR's wholly-owned subsidiaries,
entities in which an SDR has at least a 25% interest, entities that
have at least a 25% interest in the SDR)?
Is the information relating to an SDR's operational
capability that the Commission is requesting on proposed Form SDR
appropriate? If not, identify any items that are not appropriate,
explain why, and, if possible, offer alternatives.
Should the Commission require on Form SDR a narrative
description of any interruption in an SDR's functions performed by
automated facilities or systems that has lasted for more than thirty
minutes within the preceding six months of filing Form SDR, including
the date of each interruption, the cause and duration of each
interruption, and the total number of interruptions that have lasted
thirty minutes or less? If not, why not? Should the timeframes be
longer or shorter? Would this request be necessary in light of the
Commission's proposed Rule 13n-6(b)(3)'s requirement that an SDR notify
the Commission in writing of material systems outages, as discussed
further in Section III.F.1.c. of this release?
Is the information relating to access to an SDR's services
and data that the Commission is requesting on proposed Form SDR
appropriate? If not, identify any items that are not appropriate,
explain why, and, if possible, offer alternatives.
Is the Commission's request for information on the
specified policies and procedures of an SDR appropriate? If not,
explain.
Would any of the requested information on proposed Form
SDR be difficult for an SDR to supply? If so, explain.
Should the Commission require any additional information
on proposed
[[Page 77313]]
Form SDR? If so, what information and why?
Are there any items on proposed Form SDR that the
Commission should not request? If so, which items and why?
Under proposed Regulation SBSR, an SDR would be required
to register with the Commission as a SIP on Form SIP.\35\ Should the
Commission combine Form SDR and Form SIP such that an SDR would
register as an SDR and SIP using only one form? For example, should the
Commission add item 28c from Form SIP to Form SDR? Are there other
items from Form SIP that should be added to Form SDR that would help
facilitate the registration process?
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\35\ See Regulation SBSR Release (proposed Rule 909), supra note
9.
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Should the policies and procedures required under proposed
Regulation SBSR be filed with the Commission as exhibits to Form SDR or
attachments to a separate schedule to Form SDR?
What is the likely impact of the Commission's proposed
rule on the SBS market? Would the proposed rule potentially promote or
impede the establishment of SDRs?
2. Factors for Approval of Registration and Procedural Process for
Review
Proposed Rule 13n-1(c) would provide that within 90 days of the
date of the filing of Form SDR (or within such longer period as to
which the SDR consents), the Commission shall either grant the
registration by order or institute proceedings to determine whether
registration should be denied. The 90-day period would not begin to run
until a complete Form SDR has been filed by an SDR with the Commission.
Proceedings instituted pursuant to this proposed rule shall include
notice of the grounds for denial under consideration and opportunity
for hearing on the record and shall be concluded not later than 180
days after the date on which the application for registration is filed
with the Commission under proposed Rule 13n-1(b).\36\ At the conclusion
of such proceedings, the Commission, by order, shall grant or deny such
registration.\37\ The Commission may extend the time for conclusion of
such proceedings for up to 90 days if it finds good cause for such
extension and publishes its reasons for so finding or for such longer
period as to which the SDR consents.\38\
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\36\ Proposed Rule 13n-1(c).
\37\ Id.
\38\ Id.
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The proposed rule would further provide that the Commission shall
grant the registration of an SDR if the Commission finds that such SDR
is so organized, and has the capacity, to be able to assure the prompt,
accurate, and reliable performance of its functions as an SDR, comply
with any applicable provision of the Federal securities laws and the
rules and regulations thereunder, and carry out its functions in a
manner consistent with the purposes of Exchange Act Section 13(n) and
the rules and regulations thereunder.\39\ The Commission shall deny the
registration of an SDR if the Commission does not make any such
finding.\40\
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\39\ Proposed Rule 13n-1(c)(3).
\40\ Id.
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The Commission preliminarily believes that its proposed timeframes
for reviewing applications for registration as an SDR are appropriate
to allow the Commission staff sufficient time to ask questions and, as
needed, to require amendments or changes to address legal or regulatory
concerns before the Commission approves an application for
registration. In addition, the registration provides a mechanism for an
SDR to demonstrate that it can comply with the federal securities laws
and the rules and regulations thereunder. The proposed procedural
process for reviewing applications for registration as an SDR is
consistent with the procedural process for reviewing applications of
other registrants by the Commission (e.g., SIPs, broker-dealers,
nationally recognized statistical ratings organizations, national
securities exchanges, registered securities associations, clearing
agencies) although the timeframes for review vary.\41\
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\41\ See 15 U.S.C. 78k-1(b)(3), 78o(b), 78o-7(2), and 78s(a).
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In order to form a more complete and informed basis on which to
determine whether to grant, deny, or revoke an SDR's registration, the
Commission is considering whether to adopt a requirement that an SDR
file with the Commission, as a condition of registration or continued
registration, a review relating to the SDR's operational capacity and
ability to meet its regulatory obligations. The Commission could
require such a review to be in the form of a report conducted by the
SDR, an independent third party, or both. This review could be required
as an exhibit to Form SDR at the time of registration or as an
amendment to Form SDR at a later date (e.g., one year after the
registration becomes effective) to allow the review to evaluate the
SDR's capabilities after some operational experience following
registration.
Request for Comment
The Commission requests comment on the following specific issues:
Is the Commission's proposed registration process
appropriate and sufficiently clear? If not, why not and what would be a
better alternative?
Are the timeframes in the proposed registration process
appropriate? If not, why not and what would be more appropriate
timeframes?
Are the proposed factors in determining whether the
Commission should grant or deny an application for registration
appropriate and sufficiently clear? If not, why not? Should the
Commission take into consideration any other factors in determining
whether to grant or deny an SDR's application for registration?
If a non-resident SDR is registered as an SDR in a foreign
jurisdiction, should the registration process for the non-resident SDR
be any different than the Commission's proposed registration process?
For example, should the registration process be more streamlined for
such non-resident SDR? Should the process instead require more
information from a non-resident SDR? What would be the reasons to
provide for a different registration process or, on the other hand, to
require a uniform process?
Should the Commission consider any other factors relating
to a non-resident SDR with respect to the Commission's registration
rules or in general?
What is the likely impact of the Commission's proposed
rule on the SBS market? Would the proposed rule potentially promote or
impede the establishment of SDRs?
Should the Commission require an SDR to conduct or obtain
a review relating to the SDR's operational capacity and ability to meet
its regulatory obligations? If not, why not? If so, how should the
Commission define the nature and scope of this review? Should the
Commission identify a specific framework for SDRs or independent third
parties to follow when conducting a review? If so, what would the
critical components of the framework include? Are existing frameworks
available that are suitable for this purpose and, if so, which ones
would be considered appropriate? Should the review resemble a report,
audit, or something else?
Should the Commission require the SDR, an independent
third party, or some other entity to conduct the review? What are
examples of such a review? Should the Commission require a review on a
case-by-case basis or for
[[Page 77314]]
all SDRs? Should the Commission require that the review be filed with
the Commission? If not, why not? If so, should it be required to be
filed with the Commission as a condition of registration pursuant to
proposed Rule 13n-1? If not, why not? When should the Commission
require the filing of any review? Would conducting or obtaining a
review, or filing such review with the Commission, impose impracticable
burdens and costs on SDRs? Please explain the burdens and quantify the
costs of such a review.
If the Commission were to adopt a rule requiring a review
by an independent third party, should the rule specify some minimum
standard of review or the types of review that should be performed? If
so, what should the standards be? Should there be minimum qualification
standards for the independent third party? Are there any particular
types of third party service providers that should not be permitted to
conduct a review of an SDR?
Should the Commission also require that an SDR certify the
accuracy of the review and provide disclosure regarding the nature of
the review, findings, and conclusions? To what extent should an SDR be
permitted to rely on a third party that it hired to perform the review?
Should the Commission condition the ability of an SDR to rely on a
third party's review?
Would a review by an independent third party be necessary
in light of the CCO's annual compliance report or proposed Rule 13n-6,
as discussed further below?
3. Temporary Registration
Proposed Rule 13n-1(d) would provide a method for SDRs to register
temporarily with the Commission. Specifically, the Commission, upon the
request of an SDR, may grant temporary registration of the SDR that
shall expire on the earlier of: (1) The date that the Commission grants
or denies registration of the SDR, or (2) the date that the Commission
rescinds the temporary registration of the SDR.\42\ The reasons that
the Commission may rescind such temporary registration would be the
same as those set forth in proposed Rule 13n-2(c), discussed below, for
revoking or cancelling a registration of an SDR--e.g., if the
Commission finds that an SDR has made any false and misleading
statements with respect to any material fact on its Form SDR, is no
longer in existence, has ceased to do business in the capacity
specified in its application for registration, or has violated or
failed to comply with any provision of the federal securities laws or
the rules or regulations thereunder. In addition, the Commission would
expect that SDRs registered on a temporary registration basis
demonstrate that they have the capacity and resources to comply with
their regulatory obligations on an ongoing basis as their business
evolves.
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\42\ Proposed Rule 13n-1(d).
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The proposed temporary registration would enable an SDR to comply
with the Dodd-Frank Act upon its effective date (i.e., the later of 360
days after the date of its enactment or 60 days after publication of
the final rule implementing Exchange Act Section 13(n)) \43\ regardless
of any unexpected contingencies that may arise in connection with the
filing of Form SDR. The temporary registration would also allow the
Commission to implement the registration requirements of the Dodd-Frank
Act for SDRs while still giving the Commission sufficient time to
review fully the application of an SDR after it becomes operational,
but before granting a registration that is not limited in duration. An
SDR that is temporarily registered with the Commission would be subject
to Exchange Act Section 13(n) and the rules and regulations thereunder
during the period in which the Commission is reviewing the SDR's
application of registration.
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\43\ See Public Law 111-203, Sec. 774.
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Notwithstanding the potential for temporary registration, the
Commission encourages each SDR to apply for registration as soon as
possible, following the Commission's adoption of final Rules 13n-1
through 13n-11, to permit sufficient time for an SDR to answer any
questions that the Commission staff may have and to provide additional
information or documentation, if necessary. The Commission will review
applications in the order in which they are received. Applications
received close to the effective date of the SDR registration
requirement may not be reviewed and approved by the effective date.
Request for Comment
The Commission requests comment on the following specific issues:
Is the Commission's proposed rule regarding temporary
registration appropriate? If not, why not? For example, should the
temporary registration be time-limited (e.g., eighteen months from the
date the registration is made effective)?
Is the Commission's proposed rule for temporary
registration sufficiently clear? If not, how can it be clarified?
What conditions should apply to the granting of a
temporary registration? For example, should a temporary registration be
granted provided that an SDR's completed Form SDR suggests that it can
comply with Exchange Act Section 13(n) and the rules and regulations
thereunder?
Is it feasible for an SDR to comply with Exchange Act
Section 13(n) and the rules thereunder upon the effective date of the
final rules applicable to SDRs? If not, which requirement(s) would be
difficult for an SDR to comply with upon the effective date? Should
such requirement(s) be imposed on an incremental, phased-in approach?
If so, what would be an appropriate timeframe for such requirement(s)
to be met?
Are there specific requirements that the Commission should
consider not requiring an SDR to comply with during the temporary
registration period for reasons other than feasibility? If so, what
requirements and for what reasons?
Are there any other reasons not specified in this release
upon which a temporary registration should be denied or rescinded?
What is the likely impact of the Commission's proposed
rule on the SBS market? Would the proposed rule potentially promote or
impede the establishment of SDRs?
4. Amendment on Form SDR
Under proposed Rule 13n-1(e), if any information reported in items
1 through 16, 25, and 44 of Form SDR or in any amendment thereto is or
becomes inaccurate for any reason, whether before or after the
registration has been granted, an SDR shall promptly file an amendment
on Form SDR updating such information (``interim amendment'').
Generally, an SDR would be required to file an amendment within 30 days
from the time such information becomes inaccurate.
For example, a non-resident SDR should file an amendment promptly
after any changes in the legal or regulatory framework that would
impact its ability or the manner in which it provides the Commission
with prompt access to its books and records or impacts the Commission's
ability to inspect and examine the SDR onsite. The amendment should
include a revised opinion of counsel describing how, as a matter of
law, the SDR will continue to meet its obligations to provide the
Commission with prompt access to the SDR's books and records and to be
subject to the Commission's onsite inspection and examination under the
new regulatory regime. As noted in Section III.A.1.a of this release,
if a registered non-resident SDR
[[Page 77315]]
becomes unable to comply with this requirement, because of legal or
regulatory changes, or otherwise, then this may be a basis for the
Commission to revoke the SDR's registration.
In addition to the proposed interim amendments, an SDR would be
required to file an annual amendment on Form SDR, including all items
subject to interim amendments, within 60 days after the end of its
fiscal year.\44\ Proposed Rule 13n-1(e) is consistent with the
Commission's requirements for other registrants (e.g., national
securities exchanges, SIPs, broker-dealers) to file updated and annual
amendments with the Commission.\45\ The Commission believes that such
amendments are important to obtain updated information on each SDR,
which would assist the Commission in determining whether each SDR
continues to be in compliance with the federal securities laws and the
rules and regulations thereunder. Obtaining updated information would
also assist the Commission in its inspection and examination of an SDR.
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\44\ Proposed Rule 13n-1(e).
\45\ See Exchange Act Rules 6a-2 and 15b3-1, 17 CFR 240.6a-2 and
240.15b3-1, respectively. See also 17 CFR 249.1001, supra note 28.
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Request for Comment
The Commission requests comment on the following specific issues:
Is the Commission's proposed rule for interim amendments
on Form SDR appropriate and sufficiently clear? If not, why not and
what would be a better alternative?
Is the proposed timeframe to file an amendment on Form SDR
appropriate? If not, should the timeframe be shorter or longer?
Should an SDR be required to file an interim amendment for
any other items on Form SDR other than items 1 through 16, 25, and 44?
If so, which item(s) and why?
Should any of the items 1 through 16, 25, and 44 not be
required to be amended in the interim? If so, which item(s) and why?
Should interim amendments be required under any other
circumstances not specified?
Is the Commission's proposed rule requiring SDRs to file
annual amendments on Form SDR appropriate and sufficiently clear? If
not, why not and what would be a better alternative?
Is an annual filing requirement redundant, in light of the
requirement to update promptly the form, or should the annual filing be
sufficient to obviate the need for prompt updates?
Is the proposed timeframe to file an annual amendment on
Form SDR appropriate? If not, should the timeframe be shorter or
longer? Should the Commission permit the SDR to request an extension to
file an annual amendment on Form SDR (e.g., due to substantial, undue
hardship)?
5. Service of Process and Non-Resident SDRs
The Commission is proposing Rule 13n-1(f) to require each SDR to
designate and authorize on Form SDR an agent in the United States,
other than a Commission member, official, or employee, to accept any
notice or service of process, pleadings, or other documents in any
action or proceedings against the SDR to enforce the Federal securities
laws and the rules and regulations thereunder. If an SDR appoints
another agent to accept such notice or service of process, then the SDR
would be required to file promptly an amendment on Form SDR updating
this information.\46\ Proposed Rule 13n-1(f) is intended to conserve
the Commission's resources and to minimize any logistical obstacles
(e.g., locating defendants or respondents abroad) that the Commission
may encounter when attempting to effect service. For instance, by
prohibiting an SDR from designating a Commission member, official, or
employee as its agent for service of process, the proposed rule would
reduce a significant resource burden on the Commission, including
resources to locate agents of registrants overseas and keep track of
their whereabouts.
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\46\ See proposed Rule 13n-1(e).
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Proposed Rule 13n-1(g) would further require any non-resident SDR
applying for registration pursuant to this rule to certify on Form SDR
and provide an opinion of counsel that the SDR can, as a matter of law,
provide the Commission with prompt access to the books and records of
such SDR and that the SDR can, as a matter of law, submit to onsite
inspection and examination by the Commission. For the reasons stated in
Section III.A.1.a above, the Commission preliminarily believes that
before granting registration to a non-resident SDR, it is appropriate
to obtain assurance and an opinion of counsel that such person has
taken the necessary steps to be in the position to provide legally the
Commission with prompt access to the SDR's books and records and to be
subject to onsite inspection and examination by the Commission.
Request for Comment
The Commission requests comment on the following specific issues:
Is the Commission's proposed rule regarding service of
process appropriate and sufficiently clear? If not, why not and what
would be a better alternative?
Should the Commission impose any minimum requirements on
the agent whom a non-resident SDR designates to accept any notice or
request for service of process?
Are there any factors or alternatives that the Commission
should take into consideration to ensure that there could be effective
service of process on a non-resident SDR applying for registration as
an SDR?
Are there any factors that the Commission should take into
consideration to ensure that a non-resident SDR seeking to register as
an SDR can, in compliance with applicable foreign laws, provide the
Commission with access to the SDR's books and records that are required
pursuant to proposed Rule 13n-7(b), as discussed below, and submit to
onsite inspection and examination by the Commission?
Are any other documents or information necessary to
establish a non-resident SDR's ability to comply with the federal
securities laws and the rules and regulations thereunder?
What is the likely impact of the Commission's proposed
rule on the SBS market? Would the proposed rule potentially promote or
impede the establishment of SDRs?
6. Definition of ``Report''
Proposed Rule 13n-1(h) would provide that ``[a]n application for
registration or any amendment thereto that is filed pursuant to this
[rule] shall be considered a `report' filed with the Commission for
purposes of Sections 18(a) and 32(a) of the [Exchange] Act and the
rules and regulations thereunder and other applicable provisions of the
United States Code and the rules and regulations thereunder.'' Exchange
Act Sections 18(a) and 32(a) set forth the potential liability for a
person who makes, or causes to be made, any false or misleading
statement in any ``report'' filed with the Commission (e.g., Form
SDR).\47\
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\47\ Exchange Act Section 18(a) provides, in part, that ``[a]ny
person who shall make or cause to be made any statement in any * * *
report * * * which statement was at the time and in the light of the
circumstances under which it was made false or misleading with
respect to any material fact, shall be liable to any person (not
knowing that such statement was false or misleading) who, in
reliance upon such statement, shall have purchased or sold a
security at a price which was affected by such statement, for
damages caused by such reliance, unless the person sued shall prove
that he acted in good faith and had no knowledge that such statement
was false or misleading.'' 15 U.S.C. 78r(a). Exchange Act Section
32(a) provides, in part, that ``[a]ny person who willfully and
knowingly makes, or causes to be made, any statement in any * * *
report * * * which statement was false or misleading with respect to
any material fact, shall upon conviction be fined not more than
$5,000,000, or imprisoned not more than 20 years, or both, except
that when such person is a person other than a natural person, a
fine not exceeding $25,000,000 may be imposed.'' 15 U.S.C. 78ff(a).
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[[Page 77316]]
B. Proposed Rule Regarding Withdrawal From Registration
Proposed Rule 13n-2(b) would permit a registered SDR to withdraw
from registration by filing a notice of withdrawal with the Commission.
An SDR would be required to designate on its notice of withdrawal a
person associated with the SDR \48\ to serve as the custodian of the
SDR's books and records.\49\ The purpose of this requirement is to
ensure that the books and records of an SDR are maintained and
available to the Commission and other regulators after the SDR
withdraws from registration, and to assist the Commission in enforcing
proposed Rules 13n-5(b)(7) and 13n-7(c), as discussed below.
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\48\ The term ``person associated with a security-based swap
data repository'' would be defined as (i) any partner, officer, or
director of such SDR (or any person occupying a similar status or
performing similar functions), (ii) any person directly or
indirectly controlling, controlled by, or under common control with
such SDR, or (iii) any employee of such SDR. Proposed Rule 13n-
2(a)(2). The term ``control'' (including the terms ``controlled by''
and ``under common control with'') would be defined 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. Under the proposed rules, a person is presumed to control
another person if the person: (i) Is a director, general partner, or
officer exercising executive responsibility (or having similar
status or functions); (ii) 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 (iii) in the case of a partnership, has the
right to receive, upon dissolution, or has contributed, 25 percent
or more of the capital. Proposed Rule 13n-2(a)(1).
\49\ Proposed Rule 13n-2(b).
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Prior to filing a notice of withdrawal, an SDR would be required to
file an amended Form SDR to update any inaccurate information.\50\ If
there is no inaccurate information to update, then an SDR should
include a confirmation to that effect in its notice of withdrawal. The
Commission anticipates developing an online filing system through which
an SDR can file its notice of withdrawal. The information filed would
be available on the Commission's website. The Commission preliminarily
believes that filing a notice of withdrawal in an electronic format
would be less burdensome and more efficient for both the SDRs and the
Commission.
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\50\ Id.
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Proposed Rule 13n-2(c) would provide that a notice of withdrawal
from registration filed by an SDR shall become effective for all
matters (except as provided in Rule 13n-2(c)) on the 60th day after the
filing thereof with the Commission, within such longer period of time
as to which such SDR consents or which the Commission, by order, may
determine as necessary or appropriate in the public interest or for the
protection of investors, or within such shorter period of time as the
Commission may determine. Proposed Rule 13n-2(d) would provide that a
notice of withdrawal that is filed pursuant to this rule shall be
considered a ``report'' filed with the Commission for purposes of
Exchange Act Sections 18(a) and 32(a) and the rules and regulations
thereunder and other applicable provisions of the United States Code
and the rules and regulations thereunder.
Under proposed Rule 13n-2(e), if the Commission finds, on the
record after notice and opportunity for hearing, that any registered
SDR has obtained its registration by making any false and misleading
statements with respect to any material fact or has violated or failed
to comply with any provision of the federal securities laws and the
rules and regulations thereunder, the Commission, by order, may revoke
the registration. The proposed rule would further provide that pending
final determination of whether any registration shall be revoked, the
Commission, by order, may suspend such registration, if such suspension
appears to the Commission, after notice and opportunity for hearing on
the record, to be necessary or appropriate in the public interest or
for the protection of investors.\51\
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\51\ Proposed Rule 13n-2(e).
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Finally, proposed Rule 13n-2(f) would provide that if the
Commission finds that a registered SDR is no longer in existence or has
ceased to do business in the capacity specified in its application for
registration, the Commission, by order, may cancel the registration.
This proposed rule is similar to Exchange Act Rule 15b6-1, which
relates to withdrawal from registration as a broker-dealer. The
Commission believes that implicit in its authority to register an SDR
is its authority to revoke or cancel such registration.
Request for Comment
The Commission requests comment on the following specific issues:
Is the Commission's proposed rule regarding withdrawal
from registration appropriate and sufficiently clear? If not, why not
and what would be a better alternative?
Are the proposed definitions of ``person associated with a
security-based swap data repository'' and ``control'' appropriate and
sufficiently clear? If not, why not and how should they be defined?
Should the Commission require an SDR to designate on its
notice of withdrawal a custodian of the SDR's books and records? If
not, why not and what would be a better alternative?
Are there any other instances not specified in this
proposed rule in which the Commission should have the authority to
revoke or cancel an SDR's registration?
Is the proposed effective date of 60 days from the filing
of the notice of withdrawal with the Commission appropriate? If not,
would an earlier or later date be more appropriate?
What is the likely impact of the Commission's proposed
rule on the SBS market? Would the proposed rule potentially promote or
impede the establishment of SDRs?
C. Proposed Rule Regarding Registration of Successor to Registered SDR
1. Succession by Application
Proposed Rule 13n-3 would govern the registration of a successor to
a registered SDR. Because this proposed rule is substantially similar
to Exchange Act Rule 15b1-3, which governs the registration of a
successor to a registered broker-dealer, the Commission is proposing to
incorporate the concepts that the Commission explained when it adopted
amendments to Rule 15b1-3.\52\
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\52\ See Registration of Successors to Broker-Dealers and
Investment Advisers, Exchange Act Release No. 31661 (Dec. 28, 1992),
58 FR 7 (Jan. 4, 1993).
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Specifically, proposed Rule 13n-3(a) would provide that in the
event that an SDR succeeds to and continues the business of an SDR
registered pursuant to Exchange Act Section 13(n), the registration of
the predecessor shall be deemed to remain effective as the registration
of the successor if, within 30 days after such succession, the
successor files an application for registration on Form SDR, and the
predecessor files a notice of withdrawal from registration with the
Commission. A successor would not be permitted to ``lock in'' the 30-
day window period by submitting an application that is incomplete in
material respects.
The proposed rule would further provide that the registration of
the
[[Page 77317]]
predecessor SDR shall cease to be effective 90 days after the
application for registration on Form SDR is filed by the successor
SDR.\53\ In other words, the 90-day period would not begin to run until
a complete Form SDR has been filed by the successor with the
Commission. This 90-day period is consistent with proposed Rule 13n-1,
pursuant to which the Commission would have 90 days to grant a
registration or institute proceedings to determine if a registration
should be denied.
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\53\ Proposed Rule 13n-3(a).
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The following are examples of the types of successions that would
be required to be completed by filing an application: (1) An
acquisition, through which an unregistered entity purchases or assumes
substantially all of the assets and liabilities of the SDR and then
operates the business of the SDR, (2) a consolidation of two or more
registered entities, resulting in their conducting business through a
new unregistered entity, which assumes substantially all of the assets
and liabilities of the predecessor entities, and (3) dual successions,
through which one registered entity subdivides its business into two or
more new unregistered entities.
2. Succession by Amendment
Proposed Rule 13n-3(b) would further provide that notwithstanding
Rule 13n-3(a), if an SDR succeeds to and continues the business of a
registered predecessor SDR, and the succession is based solely on a
change in the predecessor's date or state of incorporation, form of
organization, or composition of a partnership, the successor may,
within 30 days after the succession, amend the registration of the
predecessor SDR on Form SDR to reflect these changes. Such amendment
shall be deemed an application for registration filed by the
predecessor and adopted by the successor. In all three types of
successions, the predecessor must cease operating as an SDR. The
Commission preliminarily believes that it is appropriate to allow a
successor to file an amendment to the predecessor's Form SDR in these
types of successions.
3. Scope and Applicability of Proposed Rule 13n-3
The purpose of proposed Rule 13n-3 is to enable a successor SDR to
operate without an interruption of business by relying for a limited
period of time on the registration of the predecessor SDR until the
successor's own registration becomes effective. The proposed rule is
intended to facilitate the legitimate transfer of business between two
or more SDRs and to be used only where there is a direct and
substantial business nexus between the predecessor and the successor
SDR. The proposed rule would not allow a registered SDR to sell its
registration, eliminate substantial liabilities, spin off personnel, or
facilitate the transfer of the registration of a ``shell'' organization
that does not conduct any business. No entity would be permitted to
rely on proposed Rule 13n-3 unless it is acquiring or assuming
substantially all of the assets and liabilities of the predecessor's
SDR business.
Proposed Rule 13n-3 would not apply to reorganizations that involve
only registered SDRs. In those situations, the registered SDRs need not
use the rule because they can continue to rely on their existing
registrations. The proposed rule would also not apply to situations in
which the predecessor intends to continue to engage in SDR activities.
Otherwise, confusion may result as to the identities and registration
statuses of the parties.
Request for Comment
The Commission requests comment on the following specific issues:
Is there a sufficient likelihood of successors to
registered SDRs to warrant a successor rule?
Is the Commission's proposed successor rule appropriate
and sufficiently clear? If not, why not and what would be a better
alternative?
Are the 30-day and 90-day timeframes in the proposed
successor rule appropriate? If not, what would be more appropriate
timeframes and why?
Are there any other instances not specified in the
proposed rule in which a successor should be permitted to file an
amendment to the predecessor's Form SDR for registration?
Are there any reasons not to allow a successor to rely on
its predecessor's registration by filing an amendment to the
predecessor's Form SDR in the specified circumstances?
What is the likely impact of the Commission's proposed
rule on the SBS market? Would the proposed rule potentially promote or
impede the establishment of SDRs?
Are there any factors not specified that the Commission
should consider with respect to this proposed successor rule?
D. Proposed Rule Regarding Duties and Core Principles of SDRs
Section 763(i) of the Dodd-Frank Act requires an SDR to comply with
the requirements and core principles described in Exchange Act Section
13(n) as well as any requirement that the Commission prescribes by rule
or regulation in order to be registered and maintain registration as an
SDR with the Commission.\54\ The Commission is proposing Rule 13n-4,
which would implement the enumerated duties and core principles and
establish additional requirements by rule.
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\54\ See Public Law 111-203, Sec. 763(i). The legislation also
authorizes the Commission to establish additional requirements for
SDRs by rule or regulation.
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In May 2010, the Committee on Payment and Settlement Systems
(``CPSS'') and the Technical Committee of the International
Organization of Securities Commissions (``IOSCO'') issued a
consultative report that presented a set of factors for trade
repositories in the OTC derivatives markets to consider in designing
and operating their services (``CPSS-IOSCO consultative report'').\55\
The OTC Derivatives Regulators' Forum \56\ (``ODRF'') has also made
general recommendations relating to the functionality of trade
repositories. The Commission's proposed rules draw from recommendations
made by CPSS-IOSCO and the ODRF.
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\55\ See Considerations for Trade Repositories in OTC
Derivatives Markets, CPSS-IOSCO (May 2010) (available at http://www.bis.org/press/p100512.htm). CPSS is a forum for central banks to
monitor and analyze developments in payment and settlement
arrangements as well as in cross-border and multicurrency settlement
schemes. See Press Release, CPSS-IOSCO, CPSS and IOSCO Consult on
Policy Guidance for Central Counterparties and Trade Repositories in
the OTC Derivatives Market (May 12, 2010) (available at http://www.bis.org/press/p100512.htm). IOSCO is an international policy
forum for securities regulators. The objective of the Technical
Committee, a specialized working group established by IOSCO's
Executive Committee, is to review major regulatory issues related to
international securities and futures transactions and to coordinate
practical responses to these concerns. See id.
\56\ The OTC Derivatives Regulators' Forum is comprised of
international financial regulators, including central banks, banking
supervisors, and market regulators, resolution authorities, and
other governmental authorities that either have direct authority
over OTC derivatives market infrastructure providers or major OTC
derivatives market participants or that consider OTC derivative
market matters more broadly. See OTC Derivatives Regulators' Forum
Overview, http://www.otcdrf.org/.
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1. Enumerated Duties
Under Exchange Act Sections 13(n)(2), 13(n)(5), and 13(n)(6), each
SDR is required to:
(1) Subject itself to inspection and examination by the Commission;
(2) Accept data as prescribed by the Commission for each SBS; \57\
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\57\ In a separate proposal, the Commission is proposing rules
prescribing the data elements that an SDR is required to accept for
each SBS in association with requirements under Section 763(i) of
the Dodd-Frank Act (adding Exchange Act Section 13(n)(4)(A) relating
to standard setting and data identification). See Regulation SBSR
Release (proposed Rule 901), supra note 9. Any comments regarding
the data elements should be submitted in connection with that
proposal.
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[[Page 77318]]
(3) Confirm with both counterparties to the SBS the accuracy of the
data that was submitted, as discussed further in Section III.E.2.a of
this release;
(4) Maintain the data in such form, in such manner, and for such
period as prescribed by the Commission, as discussed further in Section
III.E.2 of this release;
(5) Provide direct electronic access to the Commission (or any
designee of the Commission), including another registered entity;
(6) Provide such information in such form and at such frequency as
the Commission may require to comply with requirements set forth in
Exchange Act Section 13(m) and the rules and regulations thereunder;
\58\
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\58\ Exchange Act Section 13(m) pertains to the public
availability of SBS data. See Public Law 111-203, Sec. 763(i). In a
separate proposal relating to implementation of Section 763(i) of
the Dodd-Frank Act (adding Exchange Act Section 13(m)), the
Commission is proposing rules that would impose various duties on
SDRs in connection with the reporting and real-time public
dissemination of SBS transaction information. See Regulation SBSR
Release, supra note 9. Any comments regarding Exchange Act Section
13(m) should be submitted in connection with that proposal.
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(7) At such time and in such manner as may be directed by the
Commission, establish automated systems for monitoring, screening, and
analyzing data;
(8) Maintain the privacy of any and all SBS transaction information
that the SDR receives from an SBS dealer,\59\ counterparty, or any
registered entity, as discussed further in Section III.I of this
release;
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\59\ Section 761 of the Dodd-Frank Act codified the term
``security-based swap dealer'' at Exchange Act Section 3(a)(71) to
generally mean any person that holds itself out as a dealer in SBSs,
makes a market in SBSs, regularly enters into SBSs with
counterparties as an ordinary course of business for its own
account, or engages in any activity causing it to be commonly known
in the trade as a dealer or market maker in SBSs. See Public Law
111-203, Sec. 761; see also Definitions Contained in Title VII of
Dodd-Frank Wall Street Reform and Consumer Protection Act, Exchange
Act Release No. 62717 (Aug. 13, 2010), 75 FR 51429 (Aug. 20, 2010).
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(9) On a confidential basis pursuant to Exchange Act Section 24 and
the rules and regulations thereunder, upon request, and after notifying
the Commission of the request, make available all data obtained by the
SDR, including individual counterparty trade and position data, to the
following:
(i) Each appropriate prudential regulator; \60\
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\60\ ``Prudential regulator'' is defined in Exchange Act Section
3(a)(74) to have the same meaning as in the CEA. See Public Law 111-
203, Sec. 761. The CEA identifies the Federal Reserve Board, the
Office of the Comptroller of the Currency, the Federal Deposit
Insurance Corporation (``FDIC''), the Farm Credit Administration,
and the Federal Housing Finance Agency as prudential regulators. See
Public Law 111-203, Sec. 721(a)(17) (adding Section 1a(39) of the
CEA, 7 U.S.C. 1a(39)).
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(ii) The Financial Stability Oversight Council;
(iii) The CFTC;
(iv) The Department of Justice; and
(v) The FDIC \61\ and any other person that the Commission
determines to be appropriate, including, but not limited to--
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\61\ Subject to the statutory requirements of Sections
13(n)(5)(G) and (H), the FDIC, for example, would have access to all
data maintained by an SDR, including in connection with its
resolution authority under Title II of the Dodd-Frank Act or the
Federal Deposit Insurance Act and with respect to SBS data in the
SDR related to all counterparties to SBS transactions.
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(i) Foreign financial supervisors (including foreign futures
authorities);
(ii) Foreign central banks; and
(iii) Foreign ministries.
(10) Before sharing information with any entity described in
Exchange Act Section 13(n)(5)(G), obtain a written agreement from each
entity stating that the entity shall abide by the confidentiality
requirements described in Exchange Act Section 24 and the rules and
regulations thereunder relating to the information on SBS transactions
that is provided, and each entity shall agree to indemnify the SDR and
the Commission for any expenses arising from litigation relating to the
information provided under Exchange Act Section 24 and the rules and
regulations thereunder (``indemnification provision''); and
(11) Designate a CCO who must comply with the duties set forth in
Exchange Act Section 13(n)(6).
With respect to the SDR's duty to provide direct electronic access
to the Commission or any designee of the Commission, the Commission is
proposing to define ``direct electronic access'' to mean access, which
shall be acceptable to the Commission, to data stored by an SDR in an
electronic format and updated at the same time as the SDR's data is
updated so as to provide the Commission or any of its designees with
the ability to query or analyze the data in the same manner that the
SDR can query or analyze the data.\62\ The Commission may specify the
form and manner in which an SDR provides direct electronic access. The
Commission is considering different--and possibly multiple--ways in
which an SDR may be required or permitted to provide direct electronic
access, including, but not limited to, (1) a direct streaming of the
data maintained by the SDR to the Commission or any of its designees,
(2) a user interface that provides the Commission or any of its
designees with direct access to the data maintained by the SDR and that
provides the Commission or any of its designees with the ability to
query or analyze the data in the same manner that is available to the
SDR, or (3) another mechanism that provides a mirror copy of the data
maintained by the SDR, which is in an electronic form that is
downloadable by the Commission or any of its designees and is in a
format that provides the ability to query or analyze the data in the
same manner that is available to the SDR.
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\62\ See proposed Rule 13n-4(a)(5).
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The Commission is not proposing in this release that an SDR
establish automated systems for monitoring, screening, and analyzing
SBS data. The Commission believes that a measured approach to
addressing this provision of the Dodd-Frank Act is appropriate. The
market infrastructure of the SBS market is in its infancy. The Dodd-
Frank Act and the rules and regulations that the Commission will
promulgate over the next year will direct further development and
refinement of this market. As the infrastructure for the SBS market
continues to develop and the Commission gains experience in regulating
this market, the Commission will consider further steps to implement
this statutory provision.\63\
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\63\ In a separate proposal relating to implementation of
Section 763(i) of the Dodd-Frank Act (adding Exchange Act Section
13(n)(5)(E)), the Commission is considering proposing rules that
would require SDRs to collect data related to monitoring the
compliance and frequency of end-user clearing exemption claims. Any
comments regarding the end-user clearing exemption proposed rules
should be submitted in connection with that proposal.
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With respect to an SDR's duty to notify the Commission when any
entity described in Exchange Act Section 13(n)(5)(G) requests directly
from the SDR access to data obtained by the SDR, the SDR must keep such
notifications and any related requests confidential.\64\ Failure by an
SDR to treat such notifications and requests confidential could render
ineffective or could have adverse effects on the underlying basis for
the requests. If, for example, a regulatory use of the data is
improperly disclosed, such disclosure could possibly signal a pending
investigation or enforcement action, which could have detrimental
effects.
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\64\ See Public Law 111-203, Sec. 763(i) (adding Exchange Act
Section 13(n)(5)(G)).
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With respect to the indemnification provision, the Commission
understands that regulators may be legally prohibited or otherwise
restricted from agreeing to indemnify third parties, including SDRs
[[Page 77319]]
as well as the Commission. The indemnification provision could chill
requests for access to data obtained by SDRs, thereby hindering the
ability of others to fulfill their regulatory mandates and
responsibilities. The Commission preliminarily believes that by having
access to such data, however, regulators would be in a better position
to, among other things, monitor risk exposures of individual
counterparties to swap and SBS transactions, monitor concentrations of
risk exposures, and evaluate systemic risks.\65\ As such, the
Commission expects that an SDR would not go beyond the minimum
requirements of the statute so as not to preclude entities described in
Exchange Act Section 13(n)(5)(G) from obtaining the data maintained by
an SDR.
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\65\ See Duffie et al., supra note 13 (Regulators can ``explore
the sizes and depths of the markets, as well as the nature of the
products being traded. With this information, regulators are better
able to identify and control risky market practices, and are better
positioned to anticipate large market movements.'').
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The Commission notes that, pursuant to Exchange Act Section 24 and
Rule 24c-1 thereunder, the Commission may share nonpublic information
\66\ in its possession with, among others, ``federal, state, local, or
foreign government, or any political subdivision, authority, agency or
instrumentality of such government * * * [or] a foreign financial
regulatory authority.'' Pursuant to Exchange Act Section 21(a), the
Commission also may assist a foreign securities authority in
investigating whether any person has violated, is violating, or is
about to violate any laws or rules relating to securities matters that
the requesting authority administers or enforces.\67\
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\66\ Under Rule 24c-1, the term ``nonpublic information'' means
``records, as defined in Section 24(a) of the [Exchange] Act, and
other information in the Commission's possession, which are not
available for public inspection and copying.'' 17 CFR 240.24c-1.
\67\ Exchange Act Section 21(a)(2) provides: ``On request from a
foreign securities authority, the Commission may provide assistance
in accordance with this paragraph if the requesting authority states
that the requesting authority is conducting an investigation which
it deems necessary to determine whether any person has violated, is
violating, or is about to violate any laws or rules relating to
securities matters that the requesting authority administers or
enforces. The Commission may, in its discretion, conduct such
investigation as the Commission deems necessary to collect
information and evidence pertinent to the request for assistance.
Such assistance may be provided without regard to whether the facts
stated in the request would also constitute a violation of the laws
of the United States. In deciding whether to provide such
assistance, the Commission shall consider whether (A) the requesting
authority has agreed to provide reciprocal assistance in securities
matters to the Commission; and (B) compliance with the request would
prejudice the public interest of the United States.'' 15 U.S.C.
78u(a)(2). Exchange Act Section 3(a)(50) defines ``foreign
securities authority'' to mean ``any foreign government, or any
governmental body or regulatory organization empowered by a foreign
government to administer or enforce its laws as they relate to
securities matter.'' 15 U.S.C. 78c(a)(50).
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Request for Comment
The Commission requests comment on the following specific issues:
Is the Commission's proposed rule incorporating the
enumerated duties appropriate and sufficiently clear? If not, what
would be a better alternative?
Under Exchange Act Section 13(n)(2), an SDR shall be
subject to inspection and examination by any representative of the
Commission. Should the Commission specify in its rule or clarify when
the Commission anticipates inspecting prospective or newly registered
SDRs?
Is the Commission's proposed definition of ``direct
electronic access'' appropriate and sufficiently clear? If not, how can
the Commission clarify this definition?
What are the advantages and disadvantages of requiring
SDRs to provide a direct streaming of data to the Commission or its
designee? Should the Commission require periodic electronic transfer of
data as an alternative? If so, how often should such transfer occur
(e.g., hourly, a few times a day, every few days, once a week)?
What are the advantages and disadvantages of requiring
SDRs to provide a user interface that provides the Commission or any of
its designees access to the data maintained by the SDR and that
provides the Commission or its designee with the ability to query or
analyze the data in the same manner that is available to the SDR?
What are the advantages and disadvantages of requiring
SDRs to provide a mirror copy of its data, which is in an electronic
form that is downloadable and is in a format that provides the ability
to query or analyze the data in the same manner that is available to
the SDR?
What would be the most feasible and cost-effective method
for an SDR to provide direct electronic access to the Commission or its
designee?
Are there other methods of providing direct electronic
access to the Commission or its designee that the Commission should
consider?
Are there any other factors that the Commission should
take into consideration when requiring SDRs to provide the Commission
or its designee with direct electronic access?
What would be the advantages and disadvantages of the
Commission appointing as its designee for direct electronic access
another registered SDR, to which SDRs would grant direct electronic
access and which would consolidate the data that would then be provided
to the Commission?
Are there specific reports or sets of data that the
Commission should consider obtaining from SDRs to monitor risk
exposures of individual counterparties to SBS transactions, to monitor
concentrations of risk exposures, or for other purposes that would help
encourage the transparency and open trading of SBSs?
In addition to the data already subject to the
Commission's request,\68\ are there additional reports or sets of data
that the Commission should consider obtaining from SDRs to evaluate
systemic risk or that could be used for prudential supervision?
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\68\ See Regulation SBSR Release, supra note 9.
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Are there any other reports or sets of data that the
Commission should consider obtaining from SDRs?
Should the Commission require SDRs to establish automated
systems for monitoring, screening, and analyzing SBS data or provide
the data for the Commission to perform these functions? Should the
Commission require SDRs to monitor, screen, and analyze all SBS data in
their possession in such a manner as the Commission may require,
including in connection with ad hoc requests by the Commission?
Besides the FDIC, should the Commission specify in its
rules any other appropriate person to have access to all data
maintained by an SDR (e.g., the Federal Reserve Bank of New York)?
Are there alternative ways that the Commission could
address the indemnification provision while being consistent with
Exchange Act Section 13(n)(5)(H)?
Should the Commission provide in its rules specific
indemnification language that an SDR would be required to use when
requesting indemnification from entities described in Exchange Act
Section 13(n)(5)(G)? If so, what indemnification language would address
the requirements of the statute and the needs of information users?
Alternatively, should the Commission explicitly require
that the indemnification agreement be fair and not unreasonably
discriminatory so as not to preclude entities described in Exchange Act
Section 13(n)(5)(G) from obtaining the data maintained by an SDR?
Should the Commission limit the amount of indemnification
to an SDR and the Commission? If so, what should the limit be? For
example, should it be limited to only reasonable litigation expenses
(and not any damages) in order to facilitate the ability of entities
[[Page 77320]]
described in Exchange Act Section 13(n)(5)(G) to obtain data maintained
by an SDR?
Should the Commission impose any additional duties on
SDRs? For example, should SDRs be required to provide downstream
processing services or ancillary services (e.g., managing life cycle
events and asset servicing)?
Should any additional duties imposed on SDRs depend on the
asset class of SBSs that the SDR is collecting and maintaining? If so,
clarify.
What is the likely impact of the Commission's proposed
rule on the SBS market? Would the proposed rule potentially promote or
impede the establishment of SDRs?
With respect to entities that currently perform repository
services for SBSs or other instruments, how do current practices
compare to the practices that the Commission proposes to require in
this rule? What are the incremental costs to potential SDRs in
connection with adding to or revising their current practices in order
to implement the Commission's proposed rule?
How might the evolution of the SBS market over time affect
SDRs or impact the Commission's proposed rule?
2. Implementation of Core Principles
Each SDR is required, under Exchange Act Section 13(n)(7), to
comply with core principles relating to (1) market access to services
and data, (2) governance arrangements, and (3) conflicts of interest.
Specifically, unless necessary or appropriate to achieve the purposes
of the Exchange Act and the rules and regulations thereunder, an SDR
\69\ is prohibited from adopting any policies and procedures or taking
any action that results in any unreasonable restraint of trade or
imposing any material anticompetitive burden on the trading, clearing,
or reporting of transactions. In addition, each SDR must establish
governance arrangements that are transparent to fulfill the public
interest requirements under the Exchange Act and the rules and
regulations thereunder; to carry out functions consistent with the
Exchange Act, the rules and regulations thereunder, and the purposes of
the Exchange Act; and to support the objectives of the federal
government, owners of the SDR, and market participants. Moreover, each
SDR must establish and enforce written policies and procedures
reasonably designed to minimize conflicts of interest in the SDR's
decision-making process and to establish a process for resolving any
such conflicts of interest. Proposed Rule 13n-4(c) incorporates and
implements these three core principles.
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\69\ Although Exchange Act Section 13(n)(7)(A) refers to ``swap
data repository,'' the Commission believes that the Congress
intended it to refer to ``security-based swap data repository.''
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a. First Core Principle: Market Access to Services and Data \70\
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\70\ The Dodd-Frank Act refers to the first core principle as
``antitrust considerations,'' which the Commission believes include
market access to services offered by and data maintained by SDRs.
See Public Law 111-203, Sec. 763(i).
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In implementing the first core principle, the Commission is
proposing rules that are intended to protect investors and to maintain
a fair, orderly, and efficient SBS market. These proposed rules would
protect investors by, for example, fostering transparency in the
services that an SDR provides and its pricing for such services as well
as promoting competition in the SBS market. As discussed more fully
below, when administering these rules, the Commission would generally
expect to apply the principles and procedures it has developed in other
areas in which it monitors analogous services, such as clearing
agencies.
First, proposed Rule 13n-4(c)(1)(i) would require each SDR to
ensure that any dues, fees, or other charges it imposes, and any
discounts or rebates it offers, are fair and reasonable and not
unreasonably discriminatory.\71\ Such dues, fees, other charges,
discounts, or rebates shall be applied consistently across all
similarly situated users of the SDR's services, including, but not
limited to, market participants,\72\ market infrastructures (including
central counterparties), venues from which data can be submitted to the
SDR (including exchanges, SB SEFs, electronic trading venues, and
matching and confirmation platforms), and third party service
providers.
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\71\ The Exchange Act applies a similar standard for other
registrants. See, e.g., Exchange Act Section 6(b)(4) (``The rules of
the exchange [shall] provide for the equitable allocation of
reasonable dues, fees, and other charges among its members and
issuers and other persons using its facilities''); Exchange Act
Section 17A(b)(3)(D) (``The rules of the clearing agency [shall]
provide for the equitable allocation of reasonable dues, fees and
other charges among its participants''); see also Exchange Act
Sections 11A(c)(1)(C) and (D) (providing that the Commission may
prescribe rules to assure that all SIPs may, ``for purposes of
distribution and publication, obtain on fair and reasonable terms
such information'' and to assure that ``all other persons may obtain
on terms which are not unreasonably discriminatory'' the transaction
information published or distributed by SIPs).
\72\ The term ``market participant'' would be defined as any
person participating in the SBS market, including, but not limited
to, SBS dealers, major SBS participants, and any other
counterparties to an SBS transaction. Proposed Rule 13n-4(a)(7).
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The terms ``fair'' and ``reasonable'' often need standards to guide
their application in practice. One factor commonly taken into
consideration to evaluate the fairness and reasonableness of fees,
particularly those of a monopolistic provider of a service, is the cost
incurred to provide the service.\73\ The Commission does not, however,
intend to establish fees or rates, or to dictate formulas by which fees
or rates are determined. Based on our experience with other
registrants, the Commission would need to take a flexible approach and
evaluate the fairness and reasonableness of an SDR's charges on a case-
by-case basis. The Commission recognizes that there may be instances in
which an SDR would charge different users different prices for the same
or similar services. Such differences, however, cannot be unreasonably
discriminatory. For example, if an SDR's policies and procedures
provide that it may accept an electronic confirmation as reasonable
documentation that the data submitted by both counterparties to an SBS
is accurate, then an SDR may charge a smaller fee to a market
participant that is expected to send a large volume of data that is all
electronically confirmed. If, on the other hand, an SDR requires
greater resources to contact a counterparty to reasonably satisfy
itself that the data that was submitted to the SDR is accurate, then
higher fees may be appropriate. The Commission preliminarily believes
that an SDR should make reasonable accommodations, including
consideration of any cost burdens, on a non-reporting counterparty of
an SBS transaction in connection with any follow-up by the SDR
regarding the accuracy of the SBS transaction data.
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\73\ See Regulation of Market Information Fees and Revenues,
Exchange Act Release No. 42208 (Dec. 17, 1999).
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Second, proposed Rule 13n-4(c)(1)(ii) would require each SDR to
permit market participants to access specific services offered by the
SDR separately. Although an SDR would be allowed to bundle its
services, including any ancillary services, this proposed rule would
require the SDR to also provide market participants with the option of
using its services separately.\74\ For instance, if an SDR or its
affiliate
[[Page 77321]]
provides an ancillary matching and confirmation service, then the SDR
would be prohibited from requiring a market participant to use and pay
for that matching and confirmation service as a condition of using the
SDR's data collection service. In evaluating the fairness and
reasonableness of fees that an SDR charges for bundled and unbundled
services, the Commission would take into consideration the cost to the
SDR of making those services available on a bundled or unbundled basis,
as the case may be.
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\74\ See also CPSS-IOSCO, supra note 55 (``To the extent a
[trade repository] provides complementary post-trade processing
services, these should be available independently from its
recordkeeping function so that users can selectively utilise the
services they require from the suite of services a [trade
repository] may offer.'').
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Third, proposed Rule 13n-4(c)(1)(iii) would require each SDR to
establish, monitor on an ongoing basis, and enforce clearly stated
objective criteria that would permit fair, open, and not unreasonably
discriminatory access to services offered and data maintained by the
SDR as well as fair, open, and not unreasonably discriminatory
participation by market participants, market infrastructures, venues
from which data can be submitted to the SDR, and third party service
providers that seek to connect to or link with the SDR. The Commission
is concerned, among other things, that an SDR, controlled or influenced
by a market participant, may limit the level of access to the services
offered or data maintained by the SDR as a means to impede competition
from other market participants or third party service providers. To
satisfy the requirements of this proposed rule, an SDR should seek to
ensure that its practices and procedures do not stifle innovation and
competition in the provision of post-trade processing services. The
Commission concurs with the CPSS-IOSCO consultative report's
recommendation that ``[r]equirements that limit access and
participation on grounds other than risks should be avoided'' and that
``[d]enials of access should only be based on risk-related criteria''
\75\ (e.g., risks related to the security or functioning of the SDR).
Moreover, ``[m]arket infrastructures and service providers that may or
may not offer potentially competing services should not be subject to
anti-competitive practices such as product tying, contracts with non-
compete and/or exclusivity clauses, overly restrictive terms of use and
anti-competitive price discrimination.'' \76\
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\75\ See CPSS-IOSCO, supra note 55.
\76\ Id.
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Finally, proposed Rule 13n-4(c)(1)(iv) would require each SDR to
establish, maintain, and enforce written policies and procedures
reasonably designed to review any prohibition or limitation of any
person with respect to access to services offered, directly or
indirectly, or data maintained by the SDR and to grant such person
access to such services or data if such person has been discriminated
against unfairly. The Commission preliminarily believes that for any
such policies and procedures to be reasonable, at a minimum, those
involved in the decision-making process of prohibiting or limiting a
person from access to an SDR's services or data cannot be involved in
the review of whether the prohibition or limitation was appropriate.
Otherwise, the purpose of the review process would be undermined. An
SDR should consider whether its internal review process is best
delegated to the SDR's board of directors, a body performing a function
similar to the board of directors (collectively, ``board''), or an
executive committee.
Request for Comment
The Commission requests comment on the following specific issues:
Are the Commission's proposed rules implementing the first
core principle appropriate and sufficiently clear? If not, why not and
what would be better alternatives?
Is the Commission's proposed definition of ``market
participant'' appropriate? If not, is it over-inclusive or under-
inclusive and how should it be defined?
Would the proposed rules relating to fees provide
sufficient flexibility to SDRs such that they can operate in a
commercially viable manner?
Besides an SDR's costs of providing its services, what
other factors should the Commission consider in determining whether the
SDR's fees, dues, other charges, rebates, or discounts for such
services are fair and reasonable?
Are there circumstances in which it would be fair or
reasonable for an SDR to charge a reporting or non-reporting
counterparty to an SBS a fee or require that a counterparty invest in
certain technologies to satisfy the SDR that the SBS data submitted to
the SDR is accurate? Under what circumstances and for what purposes
might allowing SDRs to charge higher fees or requiring counterparties
to invest in certain technologies be appropriate?
Is the Commission's proposed rule requiring an SDR's fees
to be fair, reasonable, and non-discriminatory appropriate and
sufficiently clear? If not, why not and what would be a better
alternative?
Are there circumstances in which it would be fair and
reasonable for an SDR to charge a counterparty to an SBS a fee to
satisfy itself that the SBS data submitted to the SDR by the other
counterparty to the SBS is accurate?
In what instances would an SDR differentiate among its
users with respect to fees, dues, other charges, discounts, and
rebates? Should any of those instances be explicitly prohibited or
restricted?
Are there any other requirements that the Commission
should impose on an SDR that would promote competition?
Is the Commission's proposed rule requiring an SDR to
permit market participants to access specific SDR services separately
appropriate and sufficiently clear? If not, why not?
Are there instances in which permitting an SDR to offer
bundled services that are not provided separately would be better for
market participants or the SBS market as a whole? For example, would
bundling certain services improve data quality or promote efficiency?
If so, what services should be permitted to be bundled?
Are there any other factors not mentioned that the
Commission should take into consideration with respect to requiring the
unbundling of services and fees?
Should the Commission require an SDR to notify the
Commission about the outcome of the SDR's internal review of any
prohibition or limitation of access to its services or data? If so,
should the Commission specify a timeframe in which an SDR must notify
the Commission? What should the timeframe be?
Are the Commission's proposed rules regarding an SDR's
criteria relating to access to services and data and participation
appropriate and sufficiently clear? If not, why not and what would be a
better alternative?
Should the Commission prescribe specific criteria for
fair, open, and not unreasonably discriminatory access and
participation? If so, what should the criteria be?
In what instances (besides risk-related reasons) would it
be reasonable for an SDR to deny access to its services and data?
Is the Commission's proposed rule requiring an SDR to
review its denials of access appropriate and sufficiently clear? If
not, why not and what would be a better alternative?
Are there any measures that the Commission can require
that would result in a more meaningful internal review process? For
example, should the Commission explicitly require that the board review
all denials of access? If so, within what timeframe should the review
be completed?
[[Page 77322]]
Should the Commission require an SDR to promptly file
notice with the Commission if the SDR, in its capacity as an SDR rather
than a SIP, prohibits or limits any person's access to services offered
or data maintained by the SDR? If not, why not and what would be a
better approach?
What is the likely impact of the Commission's proposed
rule on the SBS market? Would the proposed rule potentially promote or
impede the establishment of SDRs?
With respect to entities that currently perform repository
services for SBSs or other instruments, how do current practices
compare to the practices that the Commission proposes to require in
this rule? What are the incremental costs to potential SDRs in
connection with adding to or revising their current practices in order
to implement the Commission's proposed rule?
How might the evolution of the SBS market over time affect
SDRs or impact the Commission's proposed rule?
What is the likely impact of the Commission's proposed
rule on the development and use of different technologies for reporting
SBS transaction information to SDRs and for accessing the services
offered and data maintained by SDRs?
b. Second Core Principle: Governance Arrangements
To implement the second core principle, proposed Rule 13n-4(c)(2)
would require each SDR to establish governance arrangements that are
well defined and include a clear organizational structure with
effective internal controls. The proposed rule would also require an
SDR's governance arrangements to provide for fair representation of
market participants.\77\ This requirement is similar to requirements
imposed on exchanges.\78\ Additionally, an SDR would be required to
provide representatives of market participants, including end-
users,\79\ who are on the board with the opportunity to participate in
the process for nominating directors and with the right to petition for
alternative candidates.\80\ The Commission notes that directors of an
SDR owe a fiduciary duty to the SDR and all of its shareholders, and
that the board as a whole is ultimately responsible for overseeing the
SDR's compliance with the SDR's statutory obligations.
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\77\ Proposed Rule 13n-4(c)(2)(ii).
\78\ Exchange Act Section 6(b)(3) requires that the rules of an
exchange assure a fair representation of its members in the
selection of its directors and administration of its affairs, and
must provide that one or more directors be representative of issuers
and investors and not be associated with a member of the exchange,
broker, or dealer. See 15 U.S.C. 78f(b)(3).
\79\ The term ``end-user'' would be defined as any counterparty
that is described in Exchange Act Section 3C(g)(1) and the rules and
regulations thereunder. Proposed Rule 13n-4(a)(6).
\80\ Proposed Rule 13n-4(c)(2)(iii).
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The proposed rule would further require each SDR to establish,
maintain, and enforce written policies and procedures reasonably
designed to ensure that the SDR's senior management and each member of
the board or committee that has the authority to act on behalf of the
board possess requisite skills and expertise to fulfill their
responsibilities in the management and governance of the SDR, to have a
clear understanding of their responsibilities, and to exercise sound
judgment about the SDR's affairs.\81\ This proposed requirement is
based on a recommendation in the CPSS-IOSCO consultative report.\82\
Given an SDR's unique role in an SBS market, the Commission
preliminarily believes that it is particularly important that those who
are managing and overseeing an SDR's activities are qualified to do so.
An SDR's failure to comply with its statutory obligations, for example,
could impact the SBS market as a whole.
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\81\ Proposed Rule 13-4(c)(2)(iv).
\82\ See CPSS-IOSCO, supra note 55.
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As part of its consideration of governance issues as they pertain
to SDRs, the Commission is considering whether potential conflicts
between commercial incentives of owners of an SDR and statutory
objectives would warrant prescriptive rules relating to governance,
particularly in light of the Commission's general oversight authority
and the other specific rules proposed in this release intended to
minimize conflicts and ensure that SDRs meet core principles.\83\ As
discussed further below, the owners of an SDR may have an interest in
maximizing the potential commercial value of the information reported
to the SDR, which depends on the extent to which the SDR and its
affiliates are permitted to use such information for commercial
purposes. The Commission is not at this time proposing to preclude an
SDR or its affiliates from making commercial use of the transaction
data, e.g., by developing analytical reports or tools that are derived
from aggregate transaction reports. This commercial interest may
conflict with the statutory objective of protecting data privacy and
providing for fair and open access to the data maintained by the SDR.
For example, an SDR might attempt to restrict access to parties who
would seek to use the data for their own commercial purposes.
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\83\ See, e.g., proposed Rule 13n-4(c)(1) (implementing core
principle relating to market access to SDRs' services and data),
supra Section III.D.2.a; proposed Rule 13n-4(c)(3) (implementing
core principle relating to conflicts of interest), infra Section
III.D.2.c; and proposed Rule 13n-5 (requiring an SDR to accept all
SBSs in a given asset class if it accepts any SBS in that asset
class), infra Section III.E.2.a. See also Item 32 of proposed Form
SDR (requiring disclosure of instances in which an SDR has
prohibited or limited a person with respect to access to the SDR's
services or data).
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In order to address this issue, the Commission could choose to
prescribe minimum requirements pertaining to board composition or
impose ownership restrictions. For example, the Commission could
require each SDR to establish a governance arrangement with a certain
percentage of independent directors \84\ (e.g., majority of independent
directors, 35% independent directors) on its board and any committee
that has the delegated authority to act on behalf of the board so as
not to undermine the effect of the former requirement. The Commission
could also require each SDR to establish a nominating committee that is
composed of a certain percentage of independent directors (e.g.,
majority or solely composed of independent directors). Additionally,
the Commission could require each SDR to establish governance
arrangements that would restrict any SDR participant and its related
persons or any person and its related persons \85\ from (1)
beneficially owning,\86\ directly or indirectly, any
[[Page 77323]]
interest in the SDR that exceeds a certain percentage (e.g., 20 percent
for any SDR participant and its related persons, 40 percent for any
person and its related persons) of any class of securities, or other
ownership interest, entitled to vote of such SDR, or (2) directly or
indirectly voting, causing the voting of, or giving any consent or
proxy with respect to the voting of, any interest in the SDR that
exceeds a certain percentage (e.g., 20 percent) of the voting power of
any class of securities or other ownership interest of such SDR. The
Commission recently has proposed similar requirements for SBS clearing
agencies and SB SEFs, which pose a different set of competing
interests.\87\
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\84\ The term ``independent director'' may generally be defined
as a director who has no material relationship with the SDR, any
affiliate of the SDR, an SDR participant, or any affiliate of an SDR
participant. The term ``material relationship'' may be defined as a
relationship, whether compensatory or otherwise, that reasonably
could affect the independent judgment or decision-making of the
director. The term ``participant'' when used with respect to an SDR
may be defined as any person who uses an SDR's services. Such term
would not include a person whose only use of an SDR is through
another person who is a participant.
\85\ The term ``related person'' may be defined as (i) any
affiliate of an SDR participant; (ii) any person associated with an
SDR participant; (iii) any immediate family member of an SDR
participant who is a natural person, or any immediate family member
of the spouse of such person, who, in each case, has the same home
as the SDR participant, or who is a director or officer of the SDR,
or any of its parents or subsidiaries; or (iv) any immediate family
member of a person associated with an SDR participant who is a
natural person, or any immediate family member of the spouse of such
person, who, in each case, has the same home as the person
associated with the SDR participant or who is a director or officer
of the SDR, or any of its parents or subsidiaries. The term
``immediate family member'' may be defined as a person's spouse,
parents, children, and siblings, whether by blood, marriage, or
adoption, or anyone residing in such person's home.
\86\ The term ``beneficial ownership'' (including the terms
``beneficially owns'' or any variation thereof) may have the same
meaning, with respect to any security or other ownership interest,
as set forth in Exchange Act Rule 13d-3(a), as if such security or
other ownership interest were a voting equity security registered
under Exchange Act Section 12; provided that to the extent any
person is a member of a group within the meaning of Exchange Act
Section 13(d)(3), such person shall not be deemed to beneficially
own such security or other ownership interest for purposes of this
section, unless such person has the power to direct the vote of such
security or other ownership interest.
\87\ See Exchange Act Release No. 63107 (Oct. 14, 2010), 75 FR
65882 (Oct. 26, 2010).
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Request for Comment
Should the Commission's proposed rule regarding fair
representation of market participants include fair representation of
others (e.g., public representation)? What are the advantages and
disadvantages of including others?
What requirements, if any, should be in place with respect
to the duties owed by the board to mitigate tensions between commercial
interests and statutory goals? What types of tensions might exist and
how do they compare in severity and consequences to those that exist in
clearing agencies or exchanges?
Is the proposed definition of ``end-user'' appropriate and
sufficiently clear? If not, why not and how should it be defined?
Should end-users or any other group be given guaranteed
rights of participation in an SDR's governance? Alternatively, should
the Commission require an SDR to establish governance arrangements
whereby certain market participants, including end-users, may consult
with the board on matters of concern?
Is requiring an SDR's management to meet certain minimum
standards appropriate? If not, what would be a better alternative?
Is requiring the members of an SDR's board or committee(s)
to meet certain minimum standards appropriate? Does the answer depend
upon whether the Commission requires that a certain percentage of the
SDR's board be independent? If so, in what way? Would minimum standards
have a significant effect on the experience and efficiency of an SDR's
board?
What is the likely impact of the Commission's proposed
rule on the SBS market? Would the proposed rule encourage or impede
competition and the establishment of a greater number of SDRs?
With respect to entities that currently perform repository
services for SBSs or other instruments, how do current practices
compare with the practices that the Commission proposes to require in
this rule? What are the incremental costs to potential SDRs in
connection with adding to or revising their current practices in order
to implement the Commission's proposed rule?
How might the evolution of the SBS market over time affect
SDRs or impact the Commission's proposed rule?
Should the Commission require an SDR to have independent
directors on its board and board committees? If not, why not and what
would be a better alternative to improve governance and mitigate any
tensions between commercial interests and statutory goals? If so, what
should be the required composition of the board and each board
committee? How should the terms ``independent director'' and ``related
person'' be defined? Should the Commission rely on definitions from
existing rules (e.g., Exchange Act Rule 10A-3(b)(1)(ii)(A) or
Instruction 1 to Item 404(a) of Regulation S-K)?
Would requiring the board and each board committee to be
composed of at least 35% independent directors improve governance of
the SDR or effectively address concerns pertaining to conflicting
interests of SDR owners? What potential benefits or drawbacks might
result from requiring at least 35% of an SDR's board and each board
committee to be independent directors? Would 35% be sufficient to give
independent directors a meaningful voice within the board and board
committees? If not, would a higher or lower level be appropriate?
Should the Commission require that a majority of an SDR's
board and each board committee be independent directors? What potential
benefits or drawbacks might result from such a requirement? Would a
majority independent board be likely to enhance an SDR's management of
any tensions between commercial interests and statutory goals or to
enhance its compliance with the proposed rules? Would a majority
independent board be necessary to ensure that an SDR appropriately
manages any tensions between commercial interests and statutory goals?
Should there be a minimum requirement on the number of
independent directors on the board or each board committee? If so, what
should the minimum requirement be and why? For example, would a minimum
requirement of two independent directors be sufficient?
How are independent directors likely to affect the
activities of the SDR? What are their incentives to assure open and
fair access to the services offered and data maintained by the SDR? Do
independent directors have any conflicts of interest that would affect
their ability to facilitate this objective?
Would participant owners of an SDR be able to exercise
undue influence over an SDR even if at least 35% of the board consists
of independent directors? Would the requirement of at least 35%
independent board effectively insulate an SDR from undue influence by
its participant owners?
Would participant owners of an SDR be able to exercise
undue influence over an SDR even if the majority of the board consists
of independent directors? Would the requirement of a majority
independent board effectively insulate an SDR from undue influence by
its participant owners?
Should the Commission require each SDR to establish a
nominating committee? If not, why not and what would be a better
approach? If so, what should be the required composition of the
nominating committee? Would 51 percent, 100 percent, or some other
percentage be sufficient to avoid undue influence by participants? What
is the potential impact of requiring the nominating committee to be
composed of a majority of independent directors? What is the potential
impact of requiring the nominating committee to be solely composed of
independent directors? What is the likely impact of requiring the
nominating committee to be composed of another percentage of
independent directors? Should the Commission require that all or a
majority of the nominating committee be independent even if it does not
establish requirements for independent directors on an SDR's board? Why
or why not? What are the benefits or drawbacks of composition
requirements directed specifically to an SDR's nominating committee?
Should the Commission require an SDR to establish any
other committee? If so, what would be the responsibilities of such
committee?
[[Page 77324]]
Should the Commission impose any ownership and voting
limitations on SDR participants and others? If not, why not and what
would be a better alternative to minimize any tensions between
commercial interests and statutory goals? If so, what should the
required ownership and voting limitations be? For example, would 20%
ownership and voting limitations on an SDR participant and its related
persons be sufficient to limit the ability of a market participant or a
group of participants from exercising undue influence or control over
the governance of the SDR? Should the 20% limitations be higher or
lower given the existing concentration of the industry in a small
number of large dealers? Would a 40% ownership limitation for any
person and its related persons be sufficient to limit anyone from
exercising undue influence or control over the governance of the SDR?
Should the 40% ownership limitation be higher or lower given the
existing concentration of the industry in a small number of large
dealers?
Would requirements related to the governance arrangements
(i.e., independent directors, nominating committee) of an SDR be more
or less effective than ownership or voting limitations at addressing
any tensions between commercial interests and statutory goals? Could
restrictions regarding the governance arrangements of an SDR, on their
own, be sufficient to effectively address concerns pertaining to undue
influence (assuming that such restrictions are necessary for this
purpose)? Would it be appropriate or necessary to require both
governance arrangements and ownership or voting limitations in order to
effectively address these concerns?
If the Commission were to require ownership and voting
interest limitations, should the Commission permit an SDR's board to
waive the limitations for a person who is not an SDR participant and
its related persons provided that certain conditions are met? If so,
under what conditions (e.g., waiver is consistent with the SDR's
statutory obligations, waiver would not impair the Commission's ability
to enforce the Federal securities laws and the rules and regulations
thereunder, such person and its related persons can comply with the
Federal securities laws and the rules and regulations thereunder, such
person and its related persons irrevocably submit to the jurisdiction
of the United States federal courts and Commission, such person's books
and records related to an SDR's activities would be subject at all
times to the Commission's inspection and examination, the Commission
would have access to such person's books and records at all times)?
Should the waiver be subject to the Commission's review?
If the Commission were to impose ownership and voting
interest limitations, should limitations be phased in for SDRs to
provide a grace period for those entities that would not meet the
limits at the outset, but that could potentially meet them at a later
date, e.g., one year after the registration of an SDR with the
Commission?
If the Commission were to impose ownership and voting
interest limitations, should the Commission specifically require
remediation by any SDR when any person and its related persons exceed
the ownership or voting limitations? For example, should the Commission
explicitly require that an SDR's policies and procedures provide a
mechanism to divest any interest owned or not give effect to any voting
interest held by any person and its related persons in excess of the
proposed limitations?
Are there other methods for mitigating any tensions
between commercial interests and statutory goals without placing any
voting and ownership limitations?
Are there potential ways to more narrowly target voting
and ownership limitations while effectively mitigating any tensions
between commercial interests and statutory goals?
How do potential tensions between commercial interests and
statutory goals for SDRs differ from tensions for clearing agencies and
SEFs? Is there a qualitative difference? Are potential tensions more or
less attenuated for SDRs?
How are potential tensions between commercial interests
and statutory goals for SDRs similar to potential tensions for clearing
agencies and SEFs? Would such similarities warrant similar restrictions
regarding their governance arrangements and/or voting and ownership
limitations?
Are there any other restrictions or measures that the
Commission should impose on SDRs to improve governance and mitigate any
tensions between commercial interests and statutory goals at SDRs?
Is it important that the Commission and the CFTC adopt
compatible provisions regarding governance for SDRs? To what degree are
SDRs registered with the Commission also likely to register as swap
data repositories with the CFTC? Would incompatible or conflicting
governance provisions provide significant difficulties for SDRs?
c. Third Core Principle: Rules and Procedures for Minimizing and
Resolving Conflicts of Interest
As mentioned above, each SDR is statutorily required to establish
and enforce written policies and procedures reasonably designed to
minimize conflicts of interest in the SDR's decisionmaking process and
to establish a process for resolving any such conflicts of
interest.\88\ Based on information provided by industry representatives
regarding how SDRs will likely operate, the Commission preliminarily
believes that a small number of dealers could control SDRs, which may
require SDR owners to balance competing interests.\89\ Owners of an SDR
could derive greater revenues from their non-repository activities in
the SBS market than they would from sharing in the profits of the SDR
in which they hold a financial interest. In addition, there may be a
tension between an SDR's statutory obligations (e.g., maintaining the
privacy of data reported to the SDR) and its own commercial interests
or those of its owners.\90\
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\88\ See Public Law 111-203, Sec. 763(i) (adding Exchange Act
Section 13(n)(7)(C)).
\89\ See Office of the Comptroller of the Currency, Quarterly
Report on Bank Trading and Derivatives Activities, First Quarter
2010 (``Derivatives activity in the U.S. banking system continues to
be dominated by a small group of large financial institutions. Five
large commercial banks represent 97% of the total banking industry
notional amounts * * *.'').
\90\ See, e.g., CPSS-IOSCO consultative report, supra note 55
(noting the conflicts of interest ``between the unique public role
of the [SDR] and its own commercial interests particularly if the
[SDR] offers services other than recordkeeping or between commercial
interests relating to different participants and linked market
infrastructures and service providers'').
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A few entities that presently provide or anticipate providing
repository services have identified conflicts of interest that could
arise at an SDR. First, owners of an SDR could have commercial
incentives to exert undue influence to control the level of access to
the services offered and data maintained by the SDR and to implement
policies and procedures that would further their self-interests to the
detriment of others.\91\ Specifically, owners of an SDR could exert
their influence and control to prohibit or limit access to the services
offered and data maintained by the SDR in order to
[[Page 77325]]
impede competition.\92\ Second, an SDR could favor certain market
participants over others with respect to the SDR's services and pricing
for such services.\93\ Third, an SDR could require that services be
purchased on a ``bundled'' basis, as discussed above.\94\ Finally, an
SDR or a person associated with the SDR could misuse or misappropriate
data reported to the SDR for financial gain.\95\ As one repository
noted, ``SDR data is extremely valuable and could be sold either stand
alone or enhanced with other market data and analysis. The use of this
data in this matter would present competitive problems'' as well as
conflicts of interest issues.\96\ Because these conflicts have been
identified by only a few potential SDRs, the Commission recognizes that
this information may not reflect all business models for SDRs. The
Commission invites comment on this issue.
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\91\ See, e.g., Reval, Responses to the CFTC's Questions on the
SDR Requirements (available at http://www.cftc.gov/ucm/groups/public/@swaps/documents/file/derivative9sub100110-reval.pdf)
(stating that an SDR with any ownership or revenue sharing
arrangements directly or indirectly with a dealer would be an
obvious conflict of interest) (``Reval Response Letter'').
\92\ See, e.g., Warehouse Trust Company, Draft Response to CFTC
re: CFTC Request for Information regarding SDR Governance (available
at http://www.cftc.gov/ucm/groups/public/@swaps/documents/file/derivative9sub100510-wt.pdf) (stating that ``ownership of an SDR
could lead to access restrictions on non-owners.'') (``Warehouse
Trust Response Letter'').
\93\ See Reval Response Letter, supra note 91 (``Preferential
treatment in services provided by an SDR could also occur * * *.'').
\94\ See Warehouse Trust Letter, supra note 92 (``The issue of
vertical bundling could arise where [SEFs and clearing agencies]
have preferred access or servicing arrangements with SDRs primarily
due to ownership overlaps.'').
\95\ See Reval Response Letter, supra note 91 (``There will
always be an underlying conflict to ensure that the position
information or client activity does not get into the hands of
investors or an SDR business partner who could benefit from that
information.'').
\96\ See Warehouse Trust Letter, supra note 92; see also Reval
Response Letter, supra note 91 (``[I]f only one SDR is created for
an asset class and that SDR is held by a market participant that
could gain by having an edge on when the information is received, it
could have a trading edge.'').
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Proposed Rule 13n-4(c)(3) would provide general examples of
conflicts of interest that should be considered by an SDR, including,
but not limited to: (1) Conflicts between the commercial interests of
an SDR and its statutory responsibilities, (2) conflicts in connection
with the commercial interests of certain market participants or linked
market infrastructures, third party service providers, and others, (3)
conflicts between, among, or with persons associated with the SDR,
market participants, affiliates of the SDR, and nonaffiliated third
parties,\97\ and (4) misuse of confidential information, material,
nonpublic information, and/or intellectual property. Such conflicts of
interest could limit the benefits of an SDR and undermine the mandatory
reporting requirement in Exchange Act Section 13(m)(G), thereby
impacting efficiency in the SBS market.\98\
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\97\ The term ``nonaffiliated third party'' of an SDR would be
defined as any person except (1) the SDR, (2) an SDR's affiliate, or
(3) a person employed by an SDR and any entity that is not the SDR's
affiliate (and ``nonaffiliated third party'' includes such entity
that jointly employs the person). See proposed Rule 13n-4(a)(8).
\98\ See Public Law 111-203, Sec. 763(i). Exchange Act Section
13(m)(G) imposes a mandatory reporting requirement, which provides
that ``[e]ach security-based swap (whether cleared or uncleared)
shall be reported to a registered security-based swap data
repository.''
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Proposed Rule 13n-4(c)(3)(i) would require each SDR to establish,
maintain, and enforce written policies and procedures reasonably
designed to identify and mitigate potential and existing conflicts of
interest in the SDR's decisionmaking process on an ongoing basis. The
Commission preliminarily believes that requiring an SDR to conduct
ongoing identification and mitigation of conflicts of interest is
important because such conflicts can arise gradually over time or
unexpectedly. Furthermore, a situation that is acceptable one day may
present a conflict of interest the next. In order to identify and
address potential conflicts that may arise over time, the Commission
believes that, in general, an SDR's procedures should provide a means
for regular review of conflicts as they impact the SDR's decisionmaking
processes.
Proposed Rule 13n-4(c)(3)(ii) would require an SDR to recuse any
person involved in a conflict of interest from the decisionmaking
process for resolving any conflicts of interest. The Commission
preliminarily believes that such recusal is necessary to eliminate an
apparent conflict of interest in an SDR's decisionmaking process.
Additionally, recusal would increase confidence in the SDR's
decisionmaking process and avoid an appearance of impropriety.
Finally, proposed Rule 13n-4(c)(3)(iii) would require an SDR to
establish, maintain, and enforce reasonable written policies and
procedures regarding the SDR's non-commercial and/or commercial use of
the SBS transaction information that it receives from a market
participant, any registered entity, or any other person. The Commission
recognizes that an SDR may have commercial incentives to operate as an
SDR. To the extent that an SDR uses data that it receives from others
for commercial purposes, the Commission preliminarily believes that
such uses should be clearly defined and disclosed to market
participants. If, for example, a market participant agrees to waive
confidentiality of the data that it provides to an SDR, then, at the
very least, the market participant should understand how an SDR is
going to use that data and the scope of the market participant's
waiver.
Request for Comment
The Commission requests comment on the following specific issues:
Is the Commission's proposed definition of ``nonaffiliated
third party'' appropriate and sufficiently clear? If not, why not and
how should it be defined?
Are the Commission's proposed rules implementing the third
core principle appropriate and sufficiently clear? If not, why not and
what would be a better alternative?
Are the Commission's examples of potential conflicts of
interest in its proposed rules adequate? If not, are there other
examples of conflicts that the Commission should identify in its rule?
Do commenters agree with the potential conflict concerns
that the Commission has identified in this release? How might conflicts
of interest change as SDRs become more established? How might
competitive forces within the SBS market affect or change current
conflicts of interest? What potential new conflicts of interest could
arise that the Commission should consider? Will competition potentially
create different or additional conflicts of interest that the
Commission should consider? Will competition potentially mitigate
conflicts of interest?
What is the likely impact of the Commission's proposed
rule on the SBS market? Would the proposed rule potentially promote or
impede the establishment of SDRs?
With respect to entities that currently perform repository
services for SBSs or other instruments, how do current practices
compare to the practices that the Commission proposes to require in
this rule? What are the incremental costs to potential SDRs in
connection with adding to or revising their current practices in order
to implement the Commission's proposed rule?
Should the Commission require an SDR to identify and
mitigate conflicts of interest in an SDR's governance arrangements
periodically rather than on an ongoing basis? Should the proposed
requirement extend to any other circumstances?
Is the Commission's proposed rule requiring recusal of any
person involved in a conflict of interest appropriate and sufficiently
clear? If not, what would be a better alternative?
Is the Commission's proposed requirement relating to an
SDR's non-commercial and commercial use of data
[[Page 77326]]
appropriate and sufficiently clear? If not, why not and what would be a
better alternative?
Are there conflicts of interest specific to the commercial
use of data by an SDR that the Commission should address? What are
these conflicts? Can they be mitigated? If so, by what means?
Should the Commission restrict or prohibit an SDR's use of
data for commercial purposes? If so, in what way? For example, should
the Commission prohibit an SDR's use of data for commercial purposes
unless an SDR obtains express written consent from the market
participants submitting such data? Should the Commission require that
an SDR's policies and procedures require it to obtain consent from
market participants before the SDR uses the data for any purpose or
transmits such data to other parties other than regulators? Should the
Commission require that an SDR's policies and procedures require it to
obtain consent from market participants before the SDR provides
aggregated SBS transaction data to the public without charge?
If some commercial use of data is permitted, should
particular commercial uses of data by an SDR nonetheless be prohibited?
If so, which uses should be prohibited and why? Should certain
potential uses of data, or the use of particular types of data, pose
particular concern to the Commission? Which uses or data types are
they, and how should the Commission respond?
Should an SDR's affiliates be subject to any or all of the
restrictions on commercial use that are imposed on an SDR? Should the
Commission restrict the ability of an SDR to share data with any of its
affiliates? For example, should an SDR be prohibited from sharing data
with an affiliate unless the same data is also made available at the
same time and on reasonable terms to market participants that are not
affiliates? Should an SDR be prohibited from sharing certain types of
data with an affiliate that trades SBSs?
Would full disclosure by an SDR of its commercial use of
data provide meaningful protection for market participants? Are market
participants likely to have a meaningful choice to preclude the
commercial use of their transaction data by choosing to report
transactions to an SDR that does not make commercial use of the data?
If commercial use of data is permitted, is it likely that any SDR would
refrain from such use?
What are the possible consequences of restricting or
prohibiting an SDR's use of the data that it receives for commercial
purposes? For example, would it deter persons from registering as SDRs?
Would it result in existing SDRs to cease operating as such? Would
prohibiting an SDR from making commercial use of data reported to it
have positive benefits, such as enhancing the confidence of market
participants that their trade or position information will not leak
into the market?
Would an SDR need to use data that it receives for
commercial purposes in order to be a viable business? If so, explain.
Are there any additional requirements that the Commission
should impose to implement the third core principle?
E. Proposed Rule Regarding Data Collection and Maintenance
The Commission is proposing Rule 13n-5 under the Exchange Act to
specify the data collection and maintenance requirements applicable to
SDRs.\99\
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\99\ Proposed Rule 13n-5 is being promulgated under Exchange Act
Sections 13(n)(4)(B), 13(n)(7)(D), and 13(n)(9). See Public Law 111-
203, Sec. 763(i).
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1. Definitions
Proposed Rule 13n-5(a) would define terms used in the proposed
rule. Proposed Rule 13n-5(a)(1) would define ``transaction data'' to
mean all the information reported to the SDR pursuant to the Exchange
Act and the rules and regulations thereunder.\100\ This would include
all information, including life cycle events, required to be reported
to the SDR under Rule 901 of proposed Regulation SBSR.\101\
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\100\ In a separate proposal relating to implementation of
Section 763(i) of the Dodd-Frank Act (adding Exchange Act Section
13(m)), the Commission is considering rules requiring an SDR to
publicly disseminate certain SBS data that has been affirmed by the
parties but has not necessarily been confirmed. See Regulation SBSR
Release (proposed Rule 902), supra note 9. Any comments regarding
the public dissemination proposed rules should be submitted in
connection with that proposal. In another separate proposal relating
to implementation of Section 763(i) of the Dodd-Frank Act (adding
Exchange Act Section 13(n)(5)(E)), the Commission is considering
rules that would require SDRs to collect data related to monitoring
the compliance and frequency of end-user clearing exemption claims.
Any comments regarding the end-user clearing exemption proposed
rules should be submitted in connection with that proposal.
\101\ A definition of ``life cycle event'' is being proposed in
proposed Regulation SBSR. See Regulation SBSR Release (proposed Rule
900), supra note 9.
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Proposed Rule 13n-5(a)(2) would define ``position'' as the gross
and net notional amounts of open SBS transactions aggregated by one or
more attributes, including, but not limited to, the (i) underlying
instrument, index, or reference entity; (ii) counterparty; (iii) asset
class; (iv) long risk of the underlying instrument, index, or reference
entity; and (v) short risk of the underlying instrument, index, or
reference entity.\102\ Position data is required to be provided by SDRs
to certain entities pursuant to Exchange Act Section 13(n)(5)(G).\103\
Therefore, the Commission proposes defining the term, and has designed
this definition to reflect the way the term is currently used in the
industry.\104\ The proposed term is designed to be sufficiently
specific so that SDRs are aware of the types of position calculations
that regulators may require an SDR to provide, while at the same time,
provide enough flexibility to encompass the types of position
calculations that regulators and the industry will find important as
new types of SBS are developed.
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\102\ For purposes of this definition, positions aggregated by
long risk would be only for the aggregate notional amount of SBSs in
which a market participant has long risk of the underlying
instrument, index, or reference entity. Similarly, positions
aggregated by short risk would be only for the aggregate notional
amount of SBSs in which a market participant has short risk of the
underlying instrument, index, or reference entity. For SBSs other
than credit default swaps, a counterparty has long risk where the
counterparty profits from an increase in the price of the underlying
instrument or index, and a counterparty has short risk where the
counterparty profits from a decrease in the price of the underlying
instrument or index. For credit default swaps, a counterparty has
long risk where the counterparty profits from a decrease in the
price of the credit risk of the underlying index or reference
entity, and a counterparty has short risk where the counterparty
profits from an increase in the price of the credit risk of the
underlying index or reference entity. As market events require, the
Commission may request that an SDR calculate positions in another
manner and to provide those positions to the Commission on a
confidential basis.
\103\ See Public Law 111-203, Sec. 763(i) (adding Exchange Act
Section 13(n)(5)(G)); see also proposed Rule 13n-4(b)(9).
\104\ The Commission notes that Section 763(h) of the Dodd-Frank
Act adds Exchange Act Section 10B, which provides, among other
things, for the establishment of position limits for any person that
holds SBSs. Specifically, Section 10B(a) provides that ``[a]s a
means reasonably designed to prevent fraud and manipulation, the
Commission shall, by rule or regulation, as necessary or appropriate
in the public interest or for the protection of investors, establish
limits (including related hedge exemption provisions) on the size of
positions in any security-based swap that may be held by any
person.'' In addition, Exchange Act Section 10B(d) provides that the
Commission may establish position reporting requirements for any
person that effects transactions in SBSs, whether cleared or
uncleared. See Public Law 111-203, Sec. 763(h).
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Proposed Rule 13n-5(a)(3) would define ``asset class'' as ``those
security-based swaps in a particular broad category, including, but not
limited to, credit derivatives, equity derivatives, and loan-based
derivatives.'' The Commission is proposing this definition in order to
implement proposed Rule 13n-5(b)(1)(ii), discussed below.
[[Page 77327]]
Proposed Rule 13n-5(b)(1)(ii) would require an SDR, if it accepts any
SBS in a given asset class, to accept all SBSs in that asset class.
Request for Comment
The Commission requests comment on the following specific issues:
Are these proposed definitions over-inclusive or under-
inclusive? Is there some data that is captured by the term
``transaction data'' that should not be subject to the collection and
maintenance requirements described below? Is there data that should be
subject to these requirements that is not included in the proposed
definition of ``transaction data''?
Is the proposed definition of ``position'' sufficiently
precise?
Are there other attributes of SBSs for which the
Commission should specifically require SDRs to calculate positions?
Exchange Act Section 10B authorizes the Commission to
establish limits on the size of positions in any SBS that may be held
by any person. Would the definition of ``position'' in proposed Rule
13n-5(a)(2) be appropriate for purposes of any rules the Commission
might propose with regard to position limits?
Is the proposed definition of ``asset class'' sufficiently
precise? Is there another definition of ``asset class'' that better
describes the broad categories of SBSs commonly referred to as credit
derivatives, equity derivatives, and loan-based derivatives, but
excluding those that are not SBSs?
Should each SDR be allowed to define the ``asset class''
for which it will accept SBS transaction data under proposed Rule 13n-
5(b)(1)(ii)?
2. Requirements
a. Transaction Data
Proposed Rule 13n-5(b)(1)(i) would require every SDR to establish,
maintain, and enforce written policies and procedures reasonably
designed for the reporting of transaction data to the SDR, and would
require the SDR to accept all transaction data that is reported to the
SDR in accordance with such policies and procedures. A fundamental goal
of Title VII is to have all SBSs reported to SDRs.\105\ This proposed
requirement would prevent SDRs from rejecting SBSs for arbitrary or
anti-competitive reasons, minimize the number of SBSs that are not
accepted by an SDR, and to the extent that the SDR's policies and
procedures make clear what SBSs the SDR will accept, make it easier for
market participants to determine whether there is an SDR that will
accept a particular SBS.\106\
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\105\ See Exchange Act Section 13(m)(1)(G) requiring ``[e]ach
security-based swap (whether cleared or uncleared)'' to be reported
to a registered SDR. Public Law 111-203, Sec. 763(i).
\106\ In a separate proposal relating to implementation of
Section 763(i) of the Dodd-Frank Act, the Commission is considering
additional rules requiring an SDR to have policies and procedures
relating to the reporting of SBS data to the SDR. See Regulation
SBSR Release (proposed Rule 907), supra note 9. Any comments
regarding the proposed reporting rules should be submitted in
connection with that proposal.
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Proposed Rule 13n-5(b)(1)(ii) would require an SDR, if it accepts
any SBS in a given asset class, to accept all SBSs in that asset class
that are reported to it in accordance with its policies and procedures
required by paragraph (b)(1) of the proposed rule. This proposed
requirement is designed to maximize the number of SBSs that are
accepted by an SDR. The Commission preliminarily believes that if
certain SBSs are not accepted by any SDR and are reported to the
Commission instead, the purpose of the Dodd-Frank Act to have
centralized data on SBSs for regulators and others to access could be
undermined. Without this requirement, the transaction costs for the
Commission and other regulators to gather complete information on the
SBS market could be higher. In addition, the Commission preliminarily
believes that this proposed requirement would make it easier for market
participants to determine whether there is an SDR that will accept a
particular SBS.
However, an SDR would be required to accept only those SBSs from
the asset class that are reported in accordance with the SDR's policies
and procedures required by paragraph (b)(1) of this proposed rule.\107\
For example, an SDR's policies and procedures could prescribe the
necessary security and connectivity protocols that market participants
must have in place prior to transmitting transaction data to the SDR.
An SDR would not be required to accept transaction data from market
participants that did not comply with these protocols; otherwise the
transmission of the transaction data could compromise the SDR's
automated systems.
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\107\ An SDR would be required to disclose to market
participants its criteria for providing others with access to
services offered and data maintained by the SDR pursuant to proposed
Rule 13n-10(b)(1), as discussed in Section III.J of this release.
Therefore, market participants would be aware of an SDR's policies
and procedures for reporting data.
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To the extent that an SDR already has systems in place to accept
and maintain SBSs in a particular asset class, the Commission
preliminarily believes that the requirement of proposed Rule 13n-
5(b)(1)(ii) would not add a material incremental financial or
regulatory burden to SDRs. The Commission preliminarily believes that
SDRs may have commercial incentives to limit SBSs for which they
receive reports to those with relatively standardized terms, for
operational reasons and because standardized instruments lend
themselves more readily to aggregation of information that would have
commercial value (to the extent that SDRs are entitled under the rules
the Commission adopts to use such information for commercial purposes).
Given these incentives, the requirement that, if an SDR accepts any SBS
in a given asset class, it must accept all SBSs in that asset class, is
meant to facilitate the aggregation of and access to SBS transaction
data.
Proposed Rule 13n-5(b)(1)(iii) would require every SDR to
establish, maintain, and enforce written policies and procedures
reasonably designed to satisfy itself by reasonable means that the
transaction data that has been submitted to the SDR is accurate. This
proposed rule would also require SDRs to clearly identify the source
for each trade side and the pairing method (if any) for each
transaction in order to identify the level of quality of that
transaction data.
Exchange Act Section 13(n)(5)(B) requires an SDR to ``confirm with
both counterparties to the security-based swap the accuracy of the data
that was submitted.'' \108\ This requirement is based on the premise
that an SDR is useful only insofar as the data it retains is
accurate.\109\ SBS data that is not trusted does not enhance
transparency. In order to ensure that the data submitted to an SDR is
accurate and agreed to by both counterparties, the SDR must
substantiate the accuracy of the data submitted with the
counterparties. The Commission understands that with respect to certain
asset classes, current market practice is for third party service
providers to provide electronic confirmations prior to the SBS data
reaching an SDR. The Commission preliminarily believes that an SDR
would be able to fulfill its responsibilities under Exchange Act
Section 13(n)(5)(B), proposed Rule 13n-4(b)(3),\110\ and this proposed
rule by
[[Page 77328]]
developing reasonable policies and procedures that rely on
confirmations completed by another entity, such as an SB SEF, clearing
agency, or third party vendor, as long as such reliance is reasonable.
The SDR would have a continuing responsibility to oversee and supervise
the performance of the third party confirmation provider. This could
include having policies and procedures in place to monitor the third
party confirmation provider's compliance with the terms of any
agreements and to assess the third party confirmation provider's
continued fitness and ability to perform the confirmations.
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\108\ See also proposed Rule 13n-4(b)(3).
\109\ See, e.g., CPSS-IOSCO, supra note 55 (the primary public
policy benefit of an SDR is facilitated by the integrity of the
information maintained by an SDR).
\110\ Proposed Rule 13n-4(b)(3) would require SDRs to
``[c]onfirm, as prescribed in Rule 13n-5, with both counterparties
to the security-based swap the accuracy of the data that was
submitted.''
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For example, if an SBS is traded on an SB SEF, that SB SEF would
confirm the accuracy of the transaction data with both counterparties,
and the SBS would then be reported to the SDR by the SB SEF. The SDR
would not need to further substantiate the accuracy of the transaction
data, as long as the SDR had a reasonable belief that the SB SEF had
performed an accurate confirmation. However, the SDR would not comply
with Exchange Act Section 13(n)(5)(B), proposed Rule 13n-4(b)(3), and
this proposed rule if the confirmation proves to be inaccurate and the
SDR had reason to know that its reliance on the SB SEF for providing
accurate confirmations was unreasonable. If an SBS is transacted by two
commercial end-users and is not electronically traded or cleared, and
is reported to the SDR by one of those end-users, the SDR may not have
any other entity that it can reasonably rely on, and may have to
contact each of the counterparties itself to substantiate the accuracy
of the transaction data.\111\
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\111\ The Commission preliminarily believes that an SDR should
make reasonable accommodations, including consideration of any cost
burdens, for a non-reporting counterparty of an SBS transaction in
connection with any follow-up by the SDR regarding the accuracy of
the counterparty's SBS transaction. These accommodations could, for
example, include providing means for non-reporting counterparties to
substantiate the accuracy of the transaction data without having to
incur significant systems or technology costs.
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Transaction data may vary in terms of reliability. Some transaction
data may have been affirmed by counterparties to an SBS, but not
confirmed.\112\ Some transaction data may have been confirmed
informally by the back-offices of the counterparties, but not be
considered authoritative. Other transaction data may have gone through
an electronic confirmation process and be considered authoritative by
the counterparties. In order for regulators to determine whether an SDR
has reasonable policies and procedures for satisfying itself that the
transaction data that has been submitted to the SDR is accurate, the
SDR must document the processes used by third parties to substantiate
the accuracy of the transaction data.
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\112\ In a separate proposal relating to implementation of
Section 763(i) of the Dodd-Frank Act (adding Exchange Act Section
13(m)), the Commission is considering rules requiring an SDR to
publicly disseminate certain SBS data that has been affirmed by the
parties but has not necessarily been confirmed. See Regulation SBSR
Release (proposed Rule 902), supra note 9. Any comments regarding
the public dissemination proposed rules should be submitted in
connection with that proposal.
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Proposed Rule 13n-5(b)(1)(iv) would require SDRs to record promptly
the transaction data that it receives.\113\ It is important that SDRs
keep up-to-date records so that regulators and parties to SBSs will
have access to accurate and current information.\114\
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\113\ In a separate proposal, the Commission is proposing rules
prescribing the data elements that an SDR is required to accept for
each SBS in association with requirements under Section 763(i) of
the Dodd-Frank Act, adding Exchange Act Section 13(n)(4)(A),
relating to standard setting and data identification. See Regulation
SBSR Release (proposed Rule 901), supra note 9. Any comments
regarding the data elements should be submitted in connection with
that proposal.
\114\ See, e.g., CPSS-IOSCO, supra note 55 (``A [trade
repository] should promptly record the trade information it receives
from its participants. * * * Ideally, a [trade repository] should
record to its central registry information it receives from its
participants in real-time, and at a minimum, within one business
day.'').
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Request for Comment
The Commission requests comment on the following specific issues:
What is the likely impact of these requirements on the SBS
market, including the impact on the incentives and behaviors of SDRs,
the willingness of persons to register as SDRs, and the technologies
used for reporting SBSs to the SDR?
With respect to entities that currently perform repository
services for SBSs or other instruments, how do current practices
compare to the practices that the Commission proposes to require in
this rule? What are the incremental costs to potential SDRs in
connection with adding to or revising their current practices in order
to implement the Commission's proposed rule?
Should the Commission require an SDR to have any
particular substantive requirements in its policies and procedures,
such as requirements pertaining to robust passwords for persons
reporting transaction data?
Does the definition of ``asset class'' in proposed Rule
13n-5(a)(3) provide sufficient guidance and clarity to entities that
may register as SDRs and to other market participants?
Should the Commission require an SDR to accept all SBSs of
a given asset class? If not, what other mechanism should the Commission
use to prevent ``orphaned'' SBSs? How should the Commission address
SBSs that do not clearly belong to a particular asset class or that
could arguably belong to more than one asset class? Should the
Commission allow an SDR that accepts SBSs in one asset class to accept
an SBS that arguably belongs to that asset class, but which could also
belong to a second asset class, without requiring the SDR to then
accept all SBSs in the second asset class?
Will the requirement of proposed Rule 13n-5(b)(1)(ii)
materially add to the costs of SDRs? How does this proposed requirement
affect the possible business models under which an SDR may operate or
the commercial viability of SDRs in general? Does it make any
particular business model more or less attractive?
Should the Commission impose other requirements that may
increase access to an SDR, including:
[cir] Any other requirements that may prevent an SDR from rejecting
those SBSs that are customized to such a degree that they are not in
the SDR's economic interest to accept them because the SDR will not be
able to perform downstream processing on the SBSs and may incur costs
in obtaining the information to calculate positions; and
[cir] Requiring an SDR to employ technologies that accommodate a
wide range of technological capabilities among persons that desire to
report data to the SDR or other requirements that may prevent an SDR
from rejecting SBSs from less sophisticated persons that do not engage
in the volume of SBSs necessary to make it economically practicable to
invest in technologies that are industry standards?
Should the Commission require an SDR itself to
substantiate the accuracy of the transaction data that has been
submitted to the SDR?
Should the Commission require an SDR to have any
particular substantive requirements in its policies and procedures
relating to these rules?
Should the Commission give more guidance as to what
constitutes reasonable reliance on a third party? For example, would it
be reasonable to rely on documents provided by the party to an SBS that
reports the SBS to an SDR? What if that party is a clearing agency that
became a party to the SBS as the central counterparty?
Where an SDR relies on a third party to provide
confirmations, should the Commission give more guidance as
[[Page 77329]]
to the oversight by the SDR of the third party? For example, how often
should the SDR review the third party's confirmation procedures? Would
annually be sufficient?
Where an SDR is unable to reasonably satisfy itself that
the transaction data is accurate, should the SDR reject the SBS? Should
that SBS instead be reported to the Commission pursuant to Exchange Act
Section 13A(a)(1)(B) and the rules and regulations promulgated
thereunder?
Should the Commission give more guidance as to whether an
SDR (or the entity that it reasonably relies on) needs to get an
affirmative response from both counterparties when it attempts to
satisfy itself that the transaction data is accurate? Alternatively,
should the SDR submit the transaction data to a counterparty, and
require a response only if the counterparty disagrees with the
transaction data? Would this answer change if the SBS is cleared or if
the counterparty is an end-user?
Should the Commission give more guidance as to whether
receipt by an SDR of a confirmation under Exchange Act Section
15F(i)(2) and the rules promulgated thereunder would be sufficient to
fulfill the SDR's duties under Exchange Act Section 13(n)(5)(B),
proposed Rule 13n-4(b)(3), and this proposed rule?
Should the term ``promptly'' be defined or should the
Commission use another term such as ``as soon as technologically
practicable after the time at which the data has been submitted''?
Should an SDR be required to record transaction data
promptly after execution of a transaction or promptly after
confirmation of the transaction?
b. Positions
Proposed Rule 13n-5(b)(2) would require every SDR to establish,
maintain, and enforce written policies and procedures reasonably
designed to calculate positions for all persons with open SBSs for
which the SDR maintains records. Position data is required to be
provided by an SDR to certain entities pursuant to Exchange Act Section
13(n)(5)(G).\115\ Position information is important to regulators for
risk, enforcement, and examination purposes. In addition, having a
readily available source of position information can be useful to
counterparties themselves in evaluating their own risk. While much of
the information necessary for an SDR to calculate positions (as defined
in subsection (a)(2) of this proposed rule) will be reported to the SDR
as transaction data, some information may not. For example, credit
events for credit default swaps or events that result in the
termination or adjustment to an equity swap may not be reported.\116\
In order to meet its obligation to calculate positions, an SDR could
require reporting parties to report such events or it could have a
system that will monitor for and collect such information. In order for
the positions to be calculated accurately, the SDR will need to
promptly incorporate recently reported transaction data and collected
unreported data. It is important that the SDR keep up-to-date records
so that relevant authorities and parties to the SBS will have access to
accurate and current information.\117\
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\115\ See also proposed Rule 13n-4(b)(9).
\116\ In a separate proposal, the Commission is proposing rules
prescribing the data elements that an SDR is required to accept for
each SBS in association with requirements under Section 763(i) of
the Dodd-Frank Act, adding Exchange Act Section 13(n)(4)(A),
relating to standard setting and data identification. See Regulation
SBSR Release (proposed Rule 901), supra note 9. The proposed
definition of ``life cycle event'' in proposed Regulation SBSR
states, ``Notwithstanding the above, a life cycle event shall not
include the scheduled expiration of the security-based swap, a
previously described and anticipated interest rate adjustment (such
as a quarterly interest rate adjustment), or other event that does
not result in any change to the contractual terms of the security-
based swap.'' See Regulation SBSR Release (proposed Rule 900), supra
note 9. In order to calculate positions, SDRs may need this
information, which would not be required to be reported to it. Any
comments regarding the data elements should be submitted in
connection with that proposal.
\117\ See, e.g., CPSS-IOSCO, supra note 55 (``Ideally, a [trade
repository] should record to its central registry information it
receives from its participants in real-time, and at a minimum,
within one business day.'').
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Request for Comment
The Commission requests comment on the following specific issues:
Should the Commission specify particular standards or
procedures for calculating positions?
What information will an SDR need to obtain in order to
calculate positions and how difficult will it be to obtain?
What is the likely impact of this requirement on the SBS
market, including the impact on the incentives and behaviors of SDRs,
the willingness of persons to register as SDRs, and the technologies
used for reporting SBSs to the SDR?
With respect to entities that currently perform repository
services for SBSs or other instruments, how do current practices
compare to the practices that the Commission proposes to require in
this rule? What are the incremental costs to potential SDRs in
connection with adding to or revising their current practices in order
to implement the Commission's proposed rule?
The Commission understands that clearing agencies
typically produce market values on cleared SBSs. However, many types of
SBSs may not be cleared in the near term. Should the Commission require
SDRs to calculate market values of each position at least daily and
provide them to the Commission? In your comment, please consider the
following:
[cir] What would be the benefits and burdens of such a requirement?
[cir] Should the requirement to calculate market values of
positions be limited to certain types of SBSs, such as SBSs for which
the counterparties have agreed that the transaction information
maintained by the SDR is the primary record of the trade to the
exclusion of any records held by the counterparties?
[cir] Should ``market value'' be defined, and if so, how?
[cir] Will the information necessary for calculating market values
of the positions already be at the SDR? What information besides
transaction data and positions will be required for the SDR to
calculate the market values of positions? Would SDRs be able to obtain
the necessary information to calculate market values? Why or why not?
How could the SDR obtain the necessary information?
[cir] To the extent that other entities, such as SB SEFs, SBS
dealers, or clearing agencies, already perform such calculations, would
it be sufficient for the SDR to obtain the market values from such
entity?
[cir] How frequently should such valuations be performed? Would
daily valuation be too onerous for SDRs? What about weekly or monthly
valuation?
[cir] Would market values be meaningful in assessing risk without
knowing the margin calls and collateral posted? Should SDRs also be
required to maintain margin call and collateral information?
[cir] How long should the SDR be required to maintain such market
values? Would five years be adequate? What about the same time period
as the Commission requires for positions?
c. Maintain Accurate Data
Proposed Rule 13n-5(b)(3) would require every SDR to establish,
maintain, and enforce written policies and procedures reasonably
designed to ensure that the transaction data and positions that it
maintains are accurate. Maintaining accurate records is a core
[[Page 77330]]
function of an SDR.\118\ Maintaining accurate records requires
diligence on the part of an SDR; SBSs can be amended, assigned, or
terminated and positions change upon the occurrence of new events (such
as corporate actions). Therefore, it is important that an SDR has
policies and procedures to ensure reasonably the accuracy of the
transaction data and positions that it maintains. These policies and
procedures could include portfolio reconciliation.\119\
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\118\ See Section II, Role, Regulation, and Business Models of
SDRs, of this release.
\119\ See, e.g., ISDA Operations Committee, Process Working
Group, Recommended Practices for Portfolio Reconciliation, version
4.7 (Feb. 2006) (describing recommended practices for portfolio
reconciliation).
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Request for Comment
The Commission requests comment on the following specific issues:
Should the Commission specify particular standards or
procedures for maintaining accurate data, such as portfolio
reconciliation and payment reconciliation?
What is the likely impact of this requirement on the SBS
market, including the impact on the incentives and behaviors of SDRs,
the willingness of persons to register as SDRs, and the technologies
used for maintaining SBSs at the SDR?
With respect to entities that currently perform repository
services for SBSs or other instruments, how do current practices
compare to the practices that the Commission proposes to require in
this rule? What are the incremental costs to potential SDRs in
connection with adding to or revising their current practices in order
to implement the Commission's proposed rule?
If portfolio reconciliation and/or payment reconciliation
is required, how often would it be done, and what should it entail?
Would the following definition of portfolio reconciliation be
sufficient: ``a means of ensuring that the SDR's record of security-
based swaps are synchronized with those of a person with open security-
based swaps maintained by the SDR''? If not, how should the term be
defined?
d. Data Retention
Proposed Rule 13n-5(b)(4) would require SDRs to maintain the
transaction data for not less than five years after the applicable SBS
expires and historical positions for not less than five years (i) in a
place and format that is readily accessible to the Commission and other
persons with authority to access or view such information; and (ii) in
an electronic format that is non-rewriteable and non-erasable. A five-
year retention period is the current requirement for the records of
clearing agencies and other registered entities, and is the statutory
requirement for SB SEFs.\120\ Since an SBS transaction is ongoing, the
transaction data should be maintained for the duration of the SBS and
for five years after it expires. Positions are not tied to any
particular SBS transaction; therefore, the Commission proposes to
require positions, as required to be calculated pursuant to proposed
Rule 13n-5(b)(2), to be maintained for five years, similar to the
record retention requirement for clearing agencies.\121\
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\120\ See Exchange Act Rule 17a-1, 17 CFR 240.17a-1 (for
national securities exchanges, national securities associations,
clearing agencies and the MSRB); Exchange Act Section 3D(d)(9),
Public Law 111-203, Sec. 763(c) (for SB SEFs).
\121\ See Exchange Act Rule 17a-1, 17 CFR 240.17a-1 (requiring
clearing agencies to retain data for five years).
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Alternatively, the Commission is considering requiring SDRs to
``maintain transaction data for not less than five years after the
applicable security-based swap expires or ten years after the
applicable security-based swap is executed, whichever is greater, and
historical positions for not less than five years.'' Some SBSs are, in
practice, of very short duration due to various reasons, including
being novated upon being submitted for clearing or being terminated
through portfolio compression. By requiring SDRs to retain data of all
SBSs for at least ten years after execution, regulators would be able
to use the data of the SBSs for analytical studies.
The Commission proposes that the transaction data and positions be
in a place and format that is readily accessible to the Commission and
other persons with authority to access or view such information. The
Commission preliminarily believes that this proposed requirement would
ensure that SDRs maintain the information in an organized and
accessible manner so that users can easily obtain the data that they
need. The Commission also preliminarily believes that this proposed
requirement would ensure that the information is maintained in a common
and easily accessible format, such as a language commonly used in
financial markets.\122\
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\122\ An example of such a format is Financial products Markup
Language (``FpML''). FpML is based on XML (eXtensible Markup
Language), the standard meta-language for describing data shared
between applications.
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The proposed requirement for information to be in an electronic
format that is non-rewriteable and non-erasable is consistent with the
record retention format applicable to electronic broker-dealer
records.\123\ This proposed requirement would prevent the maintained
information from being modified or removed without detection.\124\
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\123\ See Exchange Act Rule 17a-4(f)(2)(ii)(A), 17 CFR 240.17a-
4(f)(2)(ii)(A). In Exchange Act Release No. 47806 (May 7, 2003), 68
FR 25281 (May 12, 2003), the Commission stated, among other things,
that a broker-dealer would not violate Exchange Act Rule 17a-
4(f)(2)(ii)(A) ``if it used an electronic storage system that
prevents the overwriting, erasing or otherwise altering of a record
during its required retention period through the use of integrated
hardware and software control codes.'' The Commission is proposing
to incorporate this interpretation into proposed Rule 13n-5(b)(4).
\124\ Records made or kept by an SDR, other than transaction
data and positions, will be governed by proposed Rule 13n-7, as
discussed in Section III.G of this release.
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Request for Comment
The Commission requests comment on the following specific issues:
Is the appropriate time period for the Commission to
require an SDR to maintain transaction data at least five years after
the applicable SBS expires and for positions at least five years? For
transaction data, would ten years after expiration of the applicable
SBS be more appropriate and why? \125\ What would be the benefits and
burdens associated with each of these time periods? Are there other
retention periods that would be more appropriate?
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\125\ The European Commission has recently proposed that trade
repositories maintain reported data ``for at least ten years
following the termination of the relevant contracts.'' See European
Commission, Proposal for a regulation of the European Parliament and
of the Council on OTC derivatives, central counterparties and trade
repositories (2010) (available at http://ec.europa.eu/internal_market/financial-markets/docs/derivatives/20100915_proposallowbar;en.pdf).
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Should the Commission require SDRs to maintain transaction
data for five years after the applicable SBS expires or ten years after
the applicable SBS is executed, whichever is greater? What if the
Commission required SDRs to maintain transaction data for five years
after the applicable SBS expires or eight years after the applicable
SBS is executed, whichever is greater? What would be the benefits and
burdens associated with each of these time periods?
Should the Commission instead require an SDR to maintain
the transaction data and positions for an indefinite period? What would
be the benefits and burdens of requiring an SDR to maintain such
information indefinitely?
Should the Commission have additional requirements
regarding access to the transaction data and positions, such as
requiring such
[[Page 77331]]
information be maintained on a server in the United States?
What is the likely impact of these requirements on the SBS
market, including the impact on the incentives and behaviors of SDRs,
the willingness of persons to register as SDRs, and the technologies
used for reporting and maintaining transaction data?
With respect to entities that currently perform repository
services for SBSs or other instruments, how do current practices
compare to the practices that the Commission proposes to require in
this rule? What are the incremental costs to potential SDRs in
connection with adding to or revising their current practices in order
to implement the Commission's proposed rule?
Should the Commission require such information be kept in
a particular format that is accessible to the Commission, such as in
FpML? Alternatively, if the Commission does not want to specify a
particular technology, should it require such information be maintained
in ``a global standard for data modeling'' or other standard? Should
the Commission require that all SDRs maintain such information in the
same format?
Should the Commission require that SDRs establish and
maintain effective interoperability and interconnectivity with other
SDRs, market infrastructures, and venues?
Should the Commission specifically require the SDR to
organize and index accurately the transaction data and positions so
that the Commission and other users of such information are easily able
to obtain the specific information that they require?
Is the proposed requirement that transaction data and
positions be kept in a non-rewriteable and non-erasable format too
restrictive? Are there other alternatives for protecting the accuracy
of such information over the time period that such information is
required to be maintained?
Should the Commission require SDRs to verify automatically
the quality and accuracy of the storage media recording process? Should
the Commission require SDRs to serialize the original and, if
applicable, duplicate units of storage media, and time-date for the
required period of retention the information placed on such electronic
storage media? Should the Commission require SDRs to have in place an
audit system providing for accountability regarding inputting of
records required to be maintained and preserved pursuant to this
section and inputting of any changes made to every original and
duplicate record maintained and preserved thereby? \126\
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\126\ These requirements are consistent with the broker-dealer
retention requirements. See Exchange Act Rule 17a-4(f), 17 CFR
240.17a-4(f).
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e. Controls To Prevent Invalidation
Proposed Rule 13n-5(b)(5) would require every SDR to establish,
maintain, and enforce written policies and procedures reasonably
designed to prevent any provision in a valid SBS from being invalidated
or modified through the procedures or operations of the SDR. Based on
staff discussions with market participants, the Commission understands
that SDRs, through their process of substantiating the accuracy of the
data or in their user agreements, may, and without the knowledge of the
counterparties, cause the modification of terms of an SBS. SBSs can be
highly negotiated between the counterparties, and the Commission
preliminarily believes these terms should not be modified or
invalidated without the full consent of the counterparties.
Request for Comment
The Commission requests comment on the following specific issues:
Should the Commission establish more specific requirements
to avoid contract invalidation by an SDR?
What is the practical effect of this proposed requirement?
Are such modifications actually occurring?
What is the likely impact of this requirement on the SBS
market, including the impact on the incentives and behaviors of SDRs
and the willingness of persons to register as SDRs?
With respect to entities that currently perform repository
services for SBSs or other instruments, how do current practices
compare to the practices that the Commission proposes to require in
this rule? What are the incremental costs to potential SDRs in
connection with adding to or revising their current practices in order
to implement the Commission's proposed rule?
f. Dispute Resolution Procedures
Proposed Rule 13n-5(b)(6) would require every SDR to establish
procedures and provide facilities reasonably designed to effectively
resolve disputes over the accuracy of the transaction data and
positions maintained by the SDR.\127\ The data maintained by the SDR
will be used by regulators to make assessments about counterparties,
such as whether the counterparty is a major SBS participant. The
counterparties also will use this data, and in some cases the data
maintained by the SDR may be considered by the counterparties to be the
legal record of the SBS. Counterparties, therefore, should have the
ability to dispute the accuracy of the data regarding their SBSs held
at the SDR. Providing the means to resolve such disputes should enhance
data quality and integrity.
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\127\ In a separate proposal, the Commission is proposing rules
regarding the correction of errors in SBS information maintained by
an SDR in association with requirements under Section 763(i) of the
Dodd-Frank Act. See Regulation SBSR Release (proposed Rules 905 and
907(a)(3)), supra note 9. Any comments regarding those proposed
rules should be submitted in connection with that proposal.
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Request for Comment
The Commission requests comment on the following specific issues:
Should the Commission require an SDR to have any
particular requirements in its dispute resolution procedures under this
rule?
Is dispute resolution a necessary service that must be
provided by an SDR?
What is the likely impact of this requirement on the SBS
market, including the impact on the incentives and behaviors of SDRs
and the willingness of persons to register as SDRs?
With respect to entities that currently perform repository
services for SBSs or other instruments, how do current practices
compare to the practices that the Commission proposes to require in
this rule? What are the incremental costs to potential SDRs in
connection with adding to or revising their current practices in order
to implement the Commission's proposed rule?
g. Data Preservation After an SDR Ceases To Do Business
Proposed Rule 13n-5(b)(7) would require an SDR, if it ceases to do
business, or ceases to be registered pursuant to Exchange Act Section
13(n) and the rules and regulations thereunder, to continue to
preserve, maintain, and make accessible the transaction data and
historical positions required to be collected, maintained, and
preserved by the rule in the manner required by the Exchange Act and
the rules and regulations thereunder (including in a place and format
that is readily accessible to the Commission and other persons with
authority to access or view such information, in an electronic format
that is non-rewriteable and non-erasable, and in a manner that protects
confidentiality and accuracy)
[[Page 77332]]
for the remainder of the period required by this rule (that is, not
less than five years after the applicable SBS expires for transaction
data and not less than five years for historical positions).\128\ Given
the importance of the records maintained by an SDR to the functioning
of the SBS market, if an SDR ceases to do business, this could cause
serious disruptions in the market should the information it maintains
become unavailable.
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\128\ This proposed requirement is based on Exchange Act Rule
17a-4(g), 17 CFR 240.17a-4(g), which applies to broker-dealer books
and records.
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Request for Comment
The Commission requests comment on the following specific issues:
Should the Commission propose other requirements that
might be necessary or useful in protecting the information maintained
by an SDR if the SDR ceases to do business?
What is the likely impact of this requirement on the SBS
market, including the impact on the incentives and behaviors of SDRs,
the willingness of persons to register as SDRs, and the technologies
used for maintaining SBS data at the SDR?
h. Plan for Data Preservation
Proposed Rule 13n-5(b)(8) would require an SDR to make and keep
current a plan to ensure that the transaction data and positions that
are recorded in the SDR continue to be maintained in accordance with
proposed Rule 13n-5(b)(7), which shall include procedures for
transferring the transaction data and positions to the Commission or
its designee (including another registered SDR). Given the importance
of the records maintained by an SDR to the functioning of the SBS
market, if an SDR ceases to do business, the absence of a plan to
transfer information could cause serious disruptions. The Commission
preliminarily expects that an SDR's plan would establish procedures and
mechanisms so that another entity would be in the position to maintain
this information after the SDR ceases to do business.
Request for Comment
The Commission requests comment on the following specific issues:
Should the Commission propose other requirements that
might be necessary or useful in protecting the information maintained
by an SDR if the SDR ceases to do business?
To what extent does this requirement provide additional
protections beyond those of proposed Rule 13n-5(b)(7)?
What is the likely impact of this requirement on the SBS
market, including the impact on the incentives and behaviors of SDRs,
the willingness of persons to register as SDRs, and the technologies
used for maintaining SBS data at the SDR?
With respect to entities that currently perform repository
services for SBSs or other instruments, how do current practices
compare to the practices that the Commission proposes to require in
this rule? What are the incremental costs to potential SDRs in
connection with adding to or revising their current practices in order
to implement the Commission's proposed rule?
F. Proposed Rule Regarding Automated Systems
The Commission is proposing Rule 13n-6 under the Exchange Act to
provide standards for SDRs with regard to their automated systems'
capacity, resiliency, and security.\129\ The standards being proposed
under this rule are comparable to the standards applicable to self-
regulatory organizations (``SROs''), including exchanges and clearing
agencies,\130\ and certain other entities, including significant-volume
alternative trading systems (``ATSs'') \131\ and market information
dissemination systems,\132\ pursuant to the Commission's Automation
Review Policy (``ARP'') standards. To promote the maintenance of a
stable and orderly SBS market, the Commission preliminarily believes
that SDRs should be required to meet the same capacity, resiliency, and
security standards applicable to SROs and certain other entities under
the Commission's current ARP program.\133\
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\129\ Proposed Rule 13n-6 is being promulgated under Exchange
Act Sections 13(n)(4)(B), 13(n)(7)(D), and 13(n)(9). See Public Law
111-203, Sec. 763(i).
\130\ See Exchange Act Release No. 27445 (Nov. 16, 1989), 54 FR
48703 (Nov. 24, 1989) (``ARP I Release''); Exchange Act Release No.
29185 (May 9, 1991), 56 FR 22490 (May 15, 1991) (``ARP II
Release'').
\131\ See Rule 301(b)(6) of Regulation ATS, 17 CFR
242.301(b)(6); Exchange Act Release No. 40760 (Dec. 8, 1998), 63 FR
70844 (Dec. 22, 1998).
\132\ See ARP II Release, 56 FR 22490, supra note 130 (the
Commission's ARP policies ``encompass SRO systems that disseminate
transaction and quotation information''); See also ARP I Release, 54
FR 48703, supra note 130 (discussing that ``the SROs have developed
and continue to enhance automated systems for the dissemination of
transaction and quotation information'').
\133\ Clearing agencies are SROs and are therefore subject to
the Commission's Automation Review Policies. The Dodd-Frank Act
requires that the data maintenance standards of SDRs ``shall be
comparable to the data standards imposed by the Commission on
clearing agencies in connection with their clearing of security-
based swaps.'' Exchange Act Section 13(n)(4)(C), Public Law 111-203,
Sec. 763(i). Proposed Rule 13n-6 will impose data maintenance
standards on SDRs that are comparable to those imposed by the
Commission on clearing agencies by applying the ARP standards to
them.
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Systems failures can limit access to data, call into question the
integrity of data, and prevent market participants from being able to
report transaction data, and thereby have a large impact on market
confidence, risk exposure, and market efficiency. Proposed Rule 13n-6
would require an SDR to establish, maintain, and enforce written
policies and procedures reasonably designed to ensure that its systems
provide adequate levels of capacity, resiliency, and security; and
submit to the Commission annual reviews of its automated systems,
systems outage notices, and prior notices of planned system changes.
These proposed requirements essentially codify and parallel the ARP
requirements that have been in place for almost twenty years. The staff
has found these standards to be effective in overseeing the capacity,
resiliency, and security of major automated systems in use in the
securities markets. These proposed requirements as applied to the SBS
market are designed to prevent and minimize the impact of systems
failures that might negatively impact the stability of the SBS market.
1. Requirements for SDRs' Automated Systems
a. Policies and Procedures
Proposed Rule 13n-6(b)(1) would require an SDR to ``establish,
maintain, and enforce written policies and procedures reasonably
designed to ensure that its systems provide adequate levels of
capacity, resiliency, and security. Such policies and procedures shall,
at a minimum:
(i) Establish reasonable current and future capacity estimates;
(ii) Conduct periodic capacity stress tests of critical systems to
determine such systems' ability to process transactions in an accurate,
timely, and efficient manner;
(iii) Develop and implement reasonable procedures to review and
keep current its system development and testing methodology;
(iv) Review the vulnerability of its systems and data center
computer operations to internal and external threats, physical hazards,
and natural disasters; and
(v) Establish adequate contingency and disaster recovery plans.''
This list of proposed requirements is based on existing ARP
requirements applied to significant-volume ATSs
[[Page 77333]]
under Rule 301(b)(6) of Regulation ATS.\134\ In addition, the
Commission has applied these requirements to SROs and other entities in
the securities markets for a number of years in the context of its ARP
inspection program.
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\134\ See 17 CFR 242.301(b)(6).
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As a general matter, the Commission preliminarily believes that, if
an SDR's policies and procedures satisfy industry best practices
standards, then these policies and procedures would be adequate for
purposes of proposed Rule 13n-6(b)(1). However, in the unlikely event
that industry best practices standards of widely recognized
professional organizations are not consistent with the public interest,
protection of investors, or the maintenance of fair and orderly
markets, the Commission staff would have flexibility to establish such
standards.\135\
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\135\ Industry best practices standards currently are
established by organizations such as: The Information Systems Audit
and Control Foundation (``ISACF''); the Federal Financial
Institutions Examination Council's (``FFIEC''); the Institute of
Internal Auditors (``IIA''); and the SANS Institute.
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The proposed rule would require an SDR to quantify, in appropriate
units of measure the limits of the SDR's capacity to receive (or
collect), process, store, or display the data elements included within
each function, and identify the factors (mechanical, electronic, or
other) that account for the current limitations.\136\ This will make it
easier for the Commission to detect any potential capacity constraints
of an SDR, which, if left unaddressed, could compromise the ability of
an SDR to collect and maintain SBS data. An SDR's failure to clearly
understand and have procedures to address its capacity limits would
increase the likelihood that it would experience a loss or disruption
of system operations.
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\136\ Use of such appropriate units of measure is required in
proposed Form SDR Item 31. See also Form SIP, Item 27 for
SIPs. 17 CFR 249.1001.
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b. Objective Review of Automated Systems
Proposed Rule 13n-6(b)(2) would require an SDR to submit an
objective review of its systems that support or are integrally related
to the performance of its activities to the Commission, on an annual
basis, within thirty calendar days of completion. This proposed
requirement is drawn from the ARP II Release.\137\ This proposed
requirement is critical to help ensure that SDRs have adequate
capacity, resiliency, and security and that their automated systems are
not subject to critical vulnerabilities. Proposed Rule 13n-6(a)(3)
would define ``objective review'' as ``an internal or external review,
performed by competent, objective personnel following established
procedures and standards, and containing a risk assessment conducted
pursuant to a review schedule.'' \138\ The proposed definition of
``objective review'' in proposed Rule 13n-6(a)(3) is based on the
standard for the review of automated systems set forth in the ARP II
Release.\139\
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\137\ See ARP II Release, 56 FR 22490, supra note 130.
\138\ Proposed Rule 13n-6(a)(4) would define ``competent,
objective personnel'' as ``a recognized information technology firm
or a qualified internal department knowledgeable of information
technology systems.'' This proposed definition is based on the
standard for reviewers of automated systems set forth in the ARP II
Release. See ARP II Release, 56 FR 22490, supra note 130. Proposed
Rule 13n-6(a)(5) would define ``review schedule'' as ``a schedule in
which each element contained in subsection (b)(1) of this Rule 13n-6
would be assessed at specific, regular intervals.'' This proposed
definition codifies the Commission's policy set forth in the ARP II
Release. See ARP II Release, 56 FR 22490, supra note 130.
\139\ See ARP II Release, 56 FR 22490, supra note 130.
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As in the current ARP program, the Commission staff preliminarily
believes that a reasonable basis for determining that a review is
objective for purposes of proposed Rule 13n-6 is if the level of
objectivity of an SDR's reviewers complied with standards set by widely
recognized professional organizations.\140\ However, in the unlikely
event that industry best practices standards of widely recognized
professional organizations are not consistent with the public interest,
protection of investors, or the maintenance of fair and orderly
markets, the Commission staff would have flexibility to establish such
standards.
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\140\ Such standards are currently established by organizations
such as the IIA, the Information Systems Audit and Control
Association (``ISACA'') (formerly the Electronic Data Processing
Auditors Association (``EDPAA'')), and the American Institute of
Certified Public Accountants (``AICPA'').
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The decision on which type of reviewer, an internal department or
an external firm, should perform the review is a decision for each SDR
to make. The Commission preliminarily believes that, as long as the
reviewer has the competence, knowledge, consistency, and objectivity
sufficient to perform the role, the review can be performed by either
recognized information technology firms or by a qualified internal
department knowledgeable of information technology systems.
Proposed Rule 13n-6(b)(2) would further require that, where the
objective review is performed by an internal department, an objective,
external firm must assess the internal department's objectivity,
competency, and work performance with respect to the review performed
by the internal department. Proposed Rule 13n-6(b)(2) would require
that the external firm issue a report of that review, which the SDR
must submit to the Commission on an annual basis, within thirty
calendar days of completion of the review.
The proposed requirement in proposed Rule 13n-6(b)(2) that an SDR
submit an annual objective review to the Commission is drawn from the
ARP II Release.\141\ In addition, the proposed requirement in proposed
Rule 13n-6(b)(2) that, where the objective review is performed by an
internal department, an objective, external firm must assess the
internal department's objectivity, competency, and work performance, is
similarly drawn from the ARP II Release.\142\
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\141\ See ARP II Release, 56 FR 22490, supra note 130.
\142\ See id.
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The proposed annual review would not be required to address each
element contained in proposed subsections (i)-(v) of Rule 13n-6(b)(1)
every year. Rather, using its own risk assessment, an SDR's reviewer
would review each element on a ``review schedule,'' as defined in
proposed Rule 13n-6(a)(5), in which each element would be assessed at
specific, regular intervals, thus facilitating systematic and timely
review of each element. This should provide a reasonable and cost-
effective level of assurance that automated systems of SDRs are being
adequately developed and managed with respect to capacity, security,
development, and contingency planning concerns.
The proposed requirement to submit an objective review within
thirty days of completion assures the Commission will have timely
notice of the information required. The Commission has found through
its experience with the current ARP program for SROs and other entities
in the securities market that an entity generally requires
approximately thirty calendar days after completion of the review to
complete the internal review process necessary to submit an annual
review to the Commission. A shorter timeframe might not provide an SDR
with sufficient time to complete its internal review of the document; a
longer timeframe might serve to encourage unnecessary delays.
c. Material Systems Outages
Under proposed subsection (3) of Rule 13n-6(b), an SDR would be
required to promptly notify the Commission of material systems outages
and any remedial measures that have been implemented or are
contemplated,
[[Page 77334]]
including (i) immediately notifying the Commission when a material
systems outage is detected; (ii) immediately notifying the Commission
when remedial measures are selected to address the material systems
outage; (iii) immediately notifying the Commission when the material
systems outage is addressed; and (iv) submitting to the Commission
within five business days of when the material systems outage occurred
a detailed written description and analysis of the outage and any
remedial measures that have been implemented or are contemplated.
This subsection would codify the procedures followed by SROs and
certain other entities under the Commission's current ARP program in
providing the staff with notification of material system outages. In
particular, proposed subsection (3) would clarify that the Commission
expects to receive immediate notification that an outage has been
detected, that remedial measures have been selected to address the
outage, and that the outage has been addressed. Proposed subsection (3)
would also clarify that an SDR should submit a detailed written
description and analysis of the outage within five business days of the
occurrence of the outage.
The Commission preliminarily believes that the proposed rule would
assist the Commission in assuring that an SDR has diagnosed and is
taking steps to correct system disruptions, so that systems of the SDR
are reasonably equipped to accept and securely maintain transaction
data. The Commission preliminarily believes that requiring an SDR to
submit notifications of material system outages to the Commission is
essential to help ensure that the Commission can continue to
effectively oversee the SDR.
Proposed Rule 13n-6(a)(1) would define ``material systems outage''
as an unauthorized intrusion into any system, or an event at an SDR
involving systems or procedures that results in (i) a failure to
maintain service level agreements or constraints;\143\ (ii) a
disruption of normal operations, including switchover to back-up
equipment with no possibility of near-term recovery of primary
hardware; (iii) a loss of use of any system; (iv) a loss of
transactions; (v) excessive back-ups or delays in processing; (vi) a
loss of ability to disseminate transaction data, or positions;\144\
(vii) a communication of an outage situation to other external
entities; (viii) a report or referral of an event to the SDR's board or
senior management; (ix) a serious threat to systems operations even
though systems operations were not disrupted; (x) a queuing of data
between system components or queuing of messages to or from customers
of such duration that a customer's normal service delivery is affected;
or (xi) a failure to maintain the integrity of systems that results in
the entry of erroneous or inaccurate transaction data or other
information in the SDR or the securities markets.
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\143\ A service level agreement is a contract between a third
party that manages and distributes software-based services and a
customer, which commits the third party to a required level of
service. A service level agreement should contain a specified level
of service, support options, enforcement or penalty provisions for
services not provided, a guaranteed level of system performance
regarding downtime or uptime, a specified level of customer support,
and indicate what software or hardware will be provided and for what
fee.
\144\ Proposed Rule 13n-6(a)(6) would give the term
``transaction data'' the same meaning as in proposed Rule 13n-
5(a)(1). Proposed Rule 13n-6(a)(7) would give the term ``position''
the same meaning as in proposed Rule 13n-5(a)(2). See Section
III.E.1 of this release for the discussion of these definitions.
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Based on its experience in requiring SROs and other entities to
report material systems outages in the context of the current ARP
program, the Commission preliminarily believes that this definition is
appropriate for SDRs. The Commission preliminarily believes that each
of the events listed in paragraphs (i) through (xii) of proposed Rule
13n-6(a)(1) are significant events that warrant reporting to the
Commission because such material systems outages could negatively
impact the stability of the SBS market. The application of the proposed
definition is relatively straightforward, and it focuses on the types
of events that the Commission preliminarily believes should require
notification to the Commission under proposed Rule 13n-6(b)(3), so that
the Commission can respond appropriately to the event that caused the
loss or disruption.
Specifically, the Commission preliminarily believes that proposed
subsections (i), (ii), (iii), (iv), and (v) address events that cause a
significant loss or disruption of normal system operations sufficient
to warrant notification to the Commission. In addition, the Commission
preliminarily believes that proposed subsection (vi) addresses a type
of event that impairs transparency or accurate and timely regulatory
reporting.
The Commission also preliminarily believes that proposed
subsections (vii) and (viii) are appropriate because communications of
an outage to entities outside of the SDR, the board, or senior
management are indicia of a significant system outage sufficient to
warrant notification to the Commission. Specifically, proposed
subsection (viii)'s reference to ``a report or referral of an event * *
* '' seeks to address situations in which an SDR might seek to apply an
overly narrow definition of an ``outage situation'' in proposed
subsection (vii), in order to avoid reporting a problem that
nevertheless has a significant impact on the performance of the SDR's
systems and therefore warrants reporting to the Commission. For
example, where an SDR experiences a slowing, but not a stoppage, of its
ability to accept transaction data, and that slowing of data acceptance
is sufficiently significant to have been reported or referred to the
SDR's board or senior management, the Commission preliminarily believes
that this situation would constitute a material system outage under
proposed subsection (viii) that must be reported to the Commission. By
including proposed subsection (viii) in the definition of ``material
system outage,'' the Commission seeks to ensure that it is informed of
events that most entities subject to current ARP standards would
already understand should be covered under the current program. This
should permit the Commission to effectively monitor the operation of
SDRs' automated systems. The Commission preliminarily believes that
proposed subsections (ix) and (x) are appropriate because threats to
system operations and queuing of data are events that may result in a
significant disruption of normal system operations warranting
notification to the Commission.
Subsection (xi) covers a failure to maintain the integrity of
systems that results in the entry of erroneous or inaccurate
transaction data or other information in an SDR or to market
participants. This subsection is designed to address the unique role of
SDRs in the SBS market. In particular, it is intended to cover such
events as breakdowns in an SDR's internal controls that result in the
entry of erroneous orders into the market. For example, it is possible
that an SDR could, while in the process of testing its systems,
inadvertently retain ``test'' data in its database. This, in turn,
could result in erroneous reporting of SBSs to the Commission, other
regulators, and counterparties. Counterparties may become uncertain of
their positions, leading to market disruptions. This, in turn, could
erode investor confidence in the integrity of the SBS market, damaging
liquidity and impeding the capital formation process. Accordingly, the
Commission preliminarily believes that this type of breakdown in an
SDR's
[[Page 77335]]
systems controls should be reported to the Commission.
By including proposed subsection (xi) in the definition of
``material system outage,'' the Commission is seeking to ensure that it
is informed of events that could negatively impact the integrity of
systems that result in the entry of erroneous or inaccurate transaction
data or other information in an SDR or the securities markets. This
should permit the Commission to monitor effectively the operation of
each SDR's automated systems.
The definition of material systems outage also includes an
unauthorized intrusion by outside persons, insiders, or unknown
persons, into any system. The Commission preliminarily believes that
this provision would permit the Commission to effectively monitor the
operation of SDR's automated systems by requiring SDRs to notify the
Commission of unauthorized intrusions into systems or networks. SDRs
would need to immediately report unauthorized intrusions regardless of
whether the intrusions were part of a cyber attack; potential criminal
activity; other unauthorized attempts to retrieve, manipulate, or
destroy data or to disrupt or destroy systems or networks; or any other
malicious activity affecting data, systems, or networks. If
unauthorized intrusions were successful in breaching systems or
networks, SDRs would need to report these intrusions even if the
parties conducting the unauthorized intrusion were unsuccessful in
achieving their apparent goals (such as the introduction of malware or
other means of disrupting or manipulating data, systems, or networks).
SDRs would need to supplement their initial reports by sending the
Commission updates on any harm to data, systems, or networks as well as
any remedial measures that the SDRs are contemplating or undertaking to
address the unauthorized intrusions. SDRs, however, would not need to
report unsuccessful attempts at unauthorized intrusions that did not
breach systems or networks.
The Commission preliminarily believes that the proposed five
business day requirement regarding submission of a written description
of material system outages is an appropriate time period. In the
Commission's experience with the current ARP program for SROs and other
entities in the securities market, an entity generally requires
approximately five business days after the occurrence of a material
system outage to gather all the relevant details regarding the scope
and cause of the outage. A shorter timeframe might not provide
sufficient time for the SDR to gather all relevant details surrounding
the outage and describe them in a written submission; a longer
timeframe might encourage unnecessary delays.
d. Material Systems Changes
Under proposed subsection (4) of Rule 13n-6(b), an SDR would be
required to notify the Commission in writing at least thirty calendar
days before implementation of any planned material systems changes.
This proposed requirement is drawn from the ARP II Release.\145\
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\145\ See ARP II Release, 56 FR 22490, supra note 130.
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Proposed Rule 13n-6(a)(2) would define ``material systems change''
as ``a change to automated systems that: (i) Significantly affects
existing capacity or security; (ii) in itself, raises significant
capacity or security issues, even if it does not affect other existing
systems; (iii) relies upon substantially new or different technology;
(iv) is designed to provide a new service or function; or (v) otherwise
significantly affects the operations of the security-based swap data
repository.'' Based on its experience in requiring SROs and other
entities to report material systems changes in the context of the
current ARP program, the Commission preliminarily believes that this
definition is appropriate for SDRs. Each of the events listed in
paragraphs (i) through (v) are significant events that warrant
reporting to the Commission because any of those events can lead to a
material systems outage that could negatively affect the stability of
the SBS market. The application of the proposed definition is
relatively straightforward, and it focuses on the types of events that
should require notification to the Commission under proposed Rule 13n-
6(b)(2). Specifically, the proposed subsections (i)--(iv) are events
that concern the adequacy of capacity estimates, testing, and security
measures taken by an SDR, and thus are sufficiently significant to
warrant notification to the Commission. Proposed subsection (v)
covering a change that ``otherwise significantly affects the operations
of the security-based swap data repository'' is more open-ended in
order to require notification of other major systems changes. Examples
of changes that fall within proposed subsection (v) include, but are
not limited to: major systems architectural changes; reconfigurations
of systems that cause a variance greater than five percent in
throughput or storage;\146\ introduction of new business functions or
services; material changes in systems; changes to external interfaces;
changes that could increase susceptibility to major outages; changes
that could increase risks to data security; changes that were, or will
be, reported to or referred to an SDR's board or senior management; and
changes that may require allocation or use of significant resources.
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\146\ The Commission has identified the five percent threshold
as triggering the definition of ``material systems change'' in
proposed Rule 13n-6(a)(2) because, based on experience in
administrating the ARP program in the equities markets for almost
twenty years, it believes that reconfigurations that exceed five
percent in throughput or storage typically have the greatest
potential to cause significant disruptions to automated systems.
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The Commission preliminarily believes that the proposed thirty
calendar day requirement regarding pre-implementation written
notification to the Commission of planned material systems changes is
an appropriate time period. The Commission has found through its
experience with the current ARP program that this amount of time is
necessary for the Commission staff to evaluate the issues raised by a
planned material systems change. A shorter timeframe might not provide
sufficient time for the Commission staff to analyze the issues raised
by the systems change; a longer timeframe might unnecessarily delay the
covered entity in implementing the change.
Request for Comment
The Commission requests comment on the following specific issues:
Should the Commission consider imposing other requirements
or standards? Should any of the proposed requirements be eliminated or
refined? If so, please explain your reasoning.
Are there factors specific to SBS transactions that would
make applying a system that is traditionally used in the equity markets
inappropriate?
What is the likely impact of these requirements on the SBS
market, including the impact on the incentives and behaviors of SDRs,
the willingness of persons to register as SDRs, and the technologies
used for maintaining SBS data at the SDR?
With respect to entities that currently perform repository
services for SBSs or other instruments, how do current practices
compare to the practices that the Commission proposes to require in
this rule? What are the incremental costs to potential SDRs in
connection with adding to or revising their current practices in order
to implement the Commission's proposed rule?
Should the Commission expressly require by rule:
[cir] An SDR's contingency and disaster recovery plans (required in
proposed paragraph (b)(1)(v)) to be tested
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periodically to assure their effectiveness and adequacy? \147\
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\147\ This requirement would be similar to what is required of
clearing agencies. See Exchange Act Release No. 16900 (June 17,
1980), 45 FR 41920 (June 20, 1980).
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[cir] An SDR's contingency and disaster recovery plans (required in
proposed paragraph (b)(1)(v)) to cover at a minimum:
Preparation for contingencies through such devices as
appropriate remote and on-site hardware back-up and periodic
duplication and off-site storage of data files?
Off-site storage of up-to-date, duplicative software,
files and critical forms and supplies need for processing operations,
including a geographically diverse back-up site that does not rely on
same infrastructure components (e.g., transportation,
telecommunications, water supply, and electric power) as the SDR
primary operations center?
Immediate availability of software modifications, detailed
procedures, organizational charts, job descriptions, and personnel for
the conduct of operations under a variety of possible contingencies?
Emergency mechanisms for establishing and maintaining
communications with participants, regulators and other entities
involved? \148\
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\148\ These requirements are similar to requirements related to
disaster recovery plans of clearing agencies. See id. The
requirement for geographical diversity is currently applicable to
securities firms. See Exchange Act Release No. 47638 (April 7,
2003), 68 FR 17809 (April 11, 2003) (the ``BCP Whitepaper'').
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[cir] An SDR's contingency and disaster recovery plans (required in
proposed paragraph (b)(1)(v)) to include resources, emergency
procedures, and backup facilities sufficient to enable timely recovery
and resumption of its operations and resumption of its ongoing
fulfillment of its duties and obligations as an SDR, including, without
limitation, the duties set forth in Rule 13n-4, following any
disruption of its operations? \149\ If so, what should the recovery
time objective be? Should the SDR's contingency and disaster plans
(required in proposed paragraph (b)(1)(v)) and resources generally
enable resumption of the SDR's operations and resumption of ongoing
fulfillment of the SDR's duties and obligations during the next
business day following the disruption?
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\149\ For example, the BCP Whitepaper requires clearing and
settlement organizations to have a recovery time objective of
``within the business day on which the disruption occurs with the
overall goal of achieving recovery and resumption with two hours
after an event.''
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[cir] An SDR, to the extent practicable, to coordinate its
contingency and disaster recovery plans (required in proposed paragraph
(b)(1)(v)) with those of the SB SEFs, SBS markets, clearing agencies,
SBS dealers, and major SBS participants who report transaction data to
the SDR, and with those of regulators identified in Exchange Act
Section 13(n)(5)(G), with a view to enabling effective resumption of
the SDR's operations, including programs for periodic, synchronized
testing of these plans?
[cir] An SDR, in developing its contingency and disaster recovery
plans, to take into account the business continuity-disaster recovery
plans of its telecommunications, power, water, and other essential
service providers?
[cir] An SDR, if it offers services in addition to acting as a SDR,
to establish, maintain, and enforce written policies and procedures
reasonably designed to assure that the additional services do not
adversely impact the operational reliability of its core function as an
SDR? \150\
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\150\ See, e.g., CPSS-IOSCO, supra note 55 (``Where a [trade
repository] offers services in addition to its record keeping
function, or considers doing so, it should ensure that it has
adequate resources to do so effectively and that the additional
service will not adversely impact the operational reliability of its
core function of record keeping'').
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[cir] An SDR to identify the potential risks that can arise as a
result of interoperability and/or interconnectivity with other market
infrastructures and venues from which data can be submitted to the SDR
(such as exchanges, SB SEFs, clearing agencies, SBS dealers, and major
SBS participants) and service providers and how the SDR mitigates such
risks? \151\
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\151\ See, e.g., id. (Trade repositories ``should evaluate the
potential sources of risks that can arise, and ensure that the risks
that can arise in the design and operation of [domestic or cross-
border links with other trade repositories, market infrastructures
or service providers] are managed prudently on an ongoing basis.'').
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[cir] An SDR to abide by substantive requirements (in addition to,
or in place of, the policies and procedures approach of proposed Rule
13n-6(b)(1)), such as (i) having robust system controls and safeguards
to protect the data from loss and information leakage, (ii) having
high-quality safeguards and controls regarding the transmission,
handling, and protection of data to ensure the accuracy, integrity, and
confidentiality of the trade information recorded in the SDR, or (iii)
having reliable and secure systems and having adequate, scalable
capacity? and
[cir] An SDR to establish, maintain, and enforce written policies
and procedures reasonably designed to ensure that the transaction data
that it accepts is from the entity it purports to be from, such as
requiring robust passwords?
Are the time periods specified in proposed Rule 13n-
6(b)(2)-(4) with respect to submission of annual reviews and written
notices of material system outages and material systems changes the
correct time periods to use? Should any of the proposed time periods be
shortened or lengthened? Should the time periods be replaced with less
specific requirements, such as ``promptly'' or ``timely''? If so,
please explain your reasoning.
Should the Commission require the notification required by
proposed Rule 13n-6(b)(4) to be sufficiently detailed to explain the
new system development process, the new configuration of the system,
its relationship to other systems, the timeframes or schedule for
installation, any testing performed or planned, and an explanation on
the impact of the change on the SDR's capacity estimates, contingency
protocols and vulnerability estimates? \152\
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\152\ See ARP II Release, 56 FR 22490, supra note 130.
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Are there specific provisions in the proposed definitions
that should be eliminated or refined? Are there some events which
should be included in the definitions of ``material systems outage''
and ``material systems change'' that are not, or events that should not
be included in these definitions but are? If so, please explain your
reasoning.
Should the Commission require the use of a specific
framework by outside or inside parties for evaluating whether SDRs have
adequate capacity, resiliency, and security and that their automated
systems are not subject to critical vulnerabilities? If so, what would
the critical components of the framework include? Are existing
frameworks available that are suitable for this purpose and, if so,
which ones would be considered appropriate?
Are the definitions ``objective review'' and ``competent,
objective personnel'' parallel to the requirements for SROs and other
entities in the securities markets in the context of the current ARP
program?
Should the objective review required in proposed Rule 13n-
6(b)(2) be done on a regular, periodic basis, rather than on an annual
basis?
Is the requirement in proposed Rule 13n-6(b)(2) for an
objective, external firm to assess the objectivity, competency, and
work performance of an internal department that performed an objective
review necessary or appropriate? If the objective review is done by an
internal department, should the Commission require that it be done by a
department or persons other than
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those responsible for the development or operation of the systems being
tested?
2. Electronic Filing
Proposed Rule 13n-6(c) would require that every notification,
review, or description and analysis required to be submitted to the
Commission under proposed Rule 13n-6 (other than those required under
proposed Rule 13n-6(b)(3)(i), (ii), and (iii), which can be verbal) be
submitted in an appropriate electronic format to the Office of Market
Operations at the Division of Trading and Markets at the Commission's
principal office in Washington, DC. This proposed requirement is
intended to make proposed Rule 13n-6 consistent with electronic-
reporting standards set forth in other Commission rules under the
Exchange Act, such as Rule 17a-25 (Electronic Submission of Securities
Transaction Information by Exchange Members, Brokers, and Dealers)
\153\ and Rule 19b-4 (Filings with respect to Proposed Rule Changes by
Self-regulatory Organizations).\154\
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\153\ 17 CFR 240.17a-25.
\154\ 17 CFR 240.19b-4.
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The Commission preliminarily believes that the proposed provision
would benefit SDRs by automating the process by which they submit
notifications, reviews, and descriptions and analyses under proposed
Rule 13n-6 to the Commission. The Commission currently receives this
type of information from SROs and other entities in the securities
market in electronic format. Moreover, as noted above, this provision
is intended to be consistent with other Commission rules.
Proposed Rule 13n-6(c) would require submission of notifications,
reviews, and descriptions and analyses in an ``appropriate electronic
format.'' The Commission anticipates that, if the provision is adopted,
the staff would work with SDRs to determine appropriate electronic
formats that could be used.
Request for Comment
The Commission requests comment on the following specific issues: