[Federal Register Volume 76, Number 39 (Monday, February 28, 2011)]
[Proposed Rules]
[Pages 10948-11070]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-2696]
[[Page 10947]]
Vol. 76
Monday,
No. 39
February 28, 2011
Part II
Securities and Exchange Commission
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17 CFR Parts 240, 242, and 249
Registration and Regulation of Security-Based Swap Execution
Facilities; Proposed Rule
Federal Register / Vol. 76 , No. 39 / Monday, February 28, 2011 /
Proposed Rules
[[Page 10948]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 240, 242, and 249
[Release No. 34-63825; File No. S7-06-11]
RIN 3235-AK93
Registration and Regulation of Security-Based Swap Execution
Facilities
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule; proposed interpretation.
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SUMMARY: In accordance with Section 763 (``Section 763'') 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 (``SEC'' or ``Commission'') is proposing Regulation
SB SEF under the Securities Exchange Act of 1934 (``Exchange Act'')
that is designed to create a registration framework for security-based
swap execution facilities (``SB SEFs''); establish rules with respect
to the Dodd-Frank Act's requirement that a SB SEF must comply with the
fourteen enumerated core principles (``Core Principles'') and enforce
compliance with those principles; and implement a process for a SB SEF
to submit to the Commission proposed changes to the SB SEF's rules. The
Commission also is proposing an interpretation of the definition of
``security-based swap execution facility'' set forth in Section
3(a)(77) of the Exchange Act to provide guidance on the characteristics
of those systems or platforms that would satisfy the statutory
definition. In addition, the Commission is proposing to amend Rule 3a-1
under the Exchange Act to exempt a registered SB SEF from the Exchange
Act's definition of ``exchange'' and to add Rule 15a-12 under the
Exchange Act to exempt, subject to certain conditions, a registered SB
SEF from regulation as a broker pursuant to Section 15(b) of the
Exchange Act.
DATES: Comments should be submitted on or before April 4, 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 S7-06-11 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 St., NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number S7-06-11. 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 St., 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: Nancy J. Burke-Sanow, Assistant
Director, at (202) 551-5621; David Liu, Senior Special Counsel, at
(312) 353-6265; Constance Kiggins, Special Counsel, (202) 551-5701;
Molly Kim, Special Counsel, at (202) 551-5644; Leah Mesfin, Special
Counsel, at (202) 551-5655; Susie Cho, Special Counsel, at (202) 551-
5639; Michou Nguyen, Special Counsel, (202) 551-5634; Heidi Pilpel,
Special Counsel, (202) 551-5666; Steven Varholik, Special Counsel, at
(202) 551-5615; Sarah Schandler, Special Counsel, at (202) 551-7145;
and Iliana Lundblad, Attorney, at (202) 551-5871; Office of Market
Supervision, Division of Trading and Markets, Securities and Exchange
Commission, 100 F Street, NE., Washington, DC 20549-7010.
SUPPLEMENTARY INFORMATION: The Commission is proposing new Regulation
SB SEF under the Exchange Act governing the registration and regulation
of SB SEFs, an interpretation with respect to the definition of a SB
SEF and new Form SB SEF for applicants to register with the Commission
as SB SEFs. The Commission also is proposing certain exemptions to
facilitate the trading of security-based swaps (``SB swaps'') on SB
SEFs.
I. Introduction
On July 21, 2010, the President signed the Dodd-Frank Act into
law.\1\ The Dodd-Frank Act was enacted, among other things, to promote
the financial stability of the United States by improving
accountability and transparency of the nation's financial system.\2\
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 concerning, and to provide
the Commission and the CFTC with effective regulatory tools to oversee,
the OTC swaps markets, which have grown exponentially in recent years
and are 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 (Pub. L. 111-203, H.R. 4173).
\2\ See Public Law 111-203 Preamble.
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The Dodd-Frank Act provides that the CFTC will regulate ``swaps,''
the Commission will regulate ``security-based swaps,'' and the CFTC and
the Commission will jointly regulate ``mixed swaps.'' \3\ The Dodd-
Frank Act amends
[[Page 10949]]
the Exchange Act to require, among other things, the following with
respect to transactions in SB swaps regulated by the Commission: (1)
Transactions in SB swaps must be cleared through a clearing agency if
they are of a type that the Commission determines must be cleared,
unless an exemption from mandatory clearing applies; \4\ (2) if the SB
swap is subject to the clearing requirement, the transaction must be
executed on an exchange or on a SB SEF registered under Section 3D of
the Exchange Act or a SB SEF exempt from registration under Section
3D(e) of the Exchange Act, unless no SB SEF or exchange makes such SB
swap available for trading or the SB swap transaction is subject to the
clearing exception in Section 3C(g) of the Exchange Act; \5\ and (3)
transactions in SB swaps (whether cleared or uncleared) must be
reported to a registered security-based swap data repository (``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 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'' to
include transactions and entities that have been structured to evade
Title VII of the Dodd-Frank Act. Section 761(b) of the Dodd-Frank
Act provides that the Commission may 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 security-based swaps, for the purpose
of including transactions and entities that have been structured to
evade Title VII of the Dodd-Frank Act. Finally, Section 712(a) of
the Dodd-Frank Act provides that the Commission and CFTC, after
consultation with the Federal Reserve, shall jointly prescribe
regulations regarding ``mixed swaps,'' as may be necessary to carry
out the purposes of Title VII. To assist the Commission and the 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 have
sought comment from interested parties. See Securities Exchange Act
Release Nos. 63452 (December 7, 2010), 75 FR 80174 (December 21,
2010) (File No. S7-39-10) (proposed rulemaking regarding definitions
contained in Title VII of the Dodd-Frank Act relating to
participants). The Commission also will propose rules regarding
definitions contained in Title VII of the Dodd-Frank Act relating to
products in a separate proposed rulemaking. See also Securities
Exchange Act Release No. 62717 (August 13, 2010), 75 FR 51429
(August 20, 2010) (File No. S7-16-10) (advance joint notice of
proposed rulemaking regarding definitions contained in Title VII of
the Dodd-Frank Act).
\4\ See Public Law 111-203, Sec. 763(a) (adding Section
3C(a)(1) of the Exchange Act).
\5\ See Public Law 111-203, Sec. 763(a) (adding Section 3C(h)
of the Exchange Act). See also Public Law 111-203, Sec. 761(a)
(adding Section 3(a)(77) of the Exchange Act), defining the term
``security-based swap execution facility.'' The Dodd-Frank Act
amends the CEA to provide for a similar regulatory framework with
respect to transactions in swaps regulated by the CFTC.
\6\ See Public Law 111-203, Sec. 761(a)(75) (adding Section
3(a)(75) of the Exchange Act) (defining the term ``security-based
swap data repository''). The registration of an SDR and the
reporting of SB swaps are the subject of separate Commission
rulemakings. See Securities Exchange Act Release Nos. 63347
(November 19, 2010), 75 FR 77306 (December 10, 2010) (File No. S7-
35-10) (``SDR Release'') and 63346 (November 19, 2010), 75 FR 75208
(December 2, 2010) (File No. S7-34-10) (``Reporting and
Dissemination Release'').
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II. Regulatory Framework of Security-Based Swap Execution Facilities
Currently, SB swaps trade in the OTC market, rather than on
regulated markets. Although some SB swaps have moved to centralized
clearing, prior to the enactment of the Dodd-Frank Act, centralized
clearing of SB swaps was not required. The current market for SB swaps
is opaque, with little, if any, pre-trade transparency (the ability of
market participants to see trading interest prior to a trade being
executed) or post-trade transparency (the ability of market
participants to see transaction information after a trade is executed).
A key goal of the Dodd-Frank Act is to bring trading of SB swaps onto
regulated markets,\7\ as reflected in the statutory requirement that,
subject to certain exceptions, any SB swap subject to mandatory
clearing must be traded on a SB SEF or an exchange, unless no SB SEF or
exchange makes such SB swap available for trading.
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\7\ See Public Law 111-203, preamble.
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Section 763 of the Dodd-Frank Act amends the Exchange Act by adding
various new statutory provisions to govern the regulation of SB
SEFs.\8\ Section 3C(h) of the Exchange Act specifies that transactions
in SB swaps that are subject to the clearing requirement of Section
3C(a)(1) of the Exchange Act must be executed on an exchange or on a SB
SEF registered with the Commission (or a SB SEF exempt from
registration), unless no exchange or SB SEF makes the SB swap available
to trade (referred to as the ``mandatory trade execution requirement'')
or the SB swap transaction is subject to the clearing exception in
Section 3C(g) of the Exchange Act (``end-user exception'').\9\ Further,
Section 3D(a)(1) of the Exchange Act states that no person may operate
a facility for the trading or processing of SB swaps, unless the
facility is registered as a SB SEF or as a national securities exchange
under that section.\10\ Under Section 3D(b) of the Exchange Act, a SB
SEF registered with the Commission may make SB swaps available for
trading and facilitate trade processing of SB swaps.\11\ Section 3D(c)
of the Exchange Act requires a national securities exchange, to the
extent it also operates a SB SEF and uses the same electronic trade
execution system for listing and executing trades in SB swaps, to
identify whether electronic trading of SB swaps is taking place on or
through the exchange or the SB SEF.\12\
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\8\ See Public Law 111-203, Sec. 763 (adding Sections 3C and 3D
of the Exchange Act).
\9\ See Public Law 111-203, Sec. 763 (adding Section 3C(h) of
the Exchange Act).
\10\ See Public Law 111-203, Sec. 763(a) (adding Section
3D(a)(1) of the Exchange Act). The Commission views this requirement
as applying only to facilities that meet the definition of
``security-based swap execution facility'' in Section 3(a)(77) under
the Exchange Act. SB swaps that are not subject to the mandatory
trade execution requirement would not have to be traded on a
registered SB SEF and could be traded in the over-the-counter
(``OTC'') market for SB swaps.
\11\ See Public Law 111-203, Sec. 763(c) (adding Section 3D(b)
of the Exchange Act).
\12\ See Public Law 111-203, Sec. 763(c) (adding Section 3D(c)
of the Exchange Act).
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Section 3D(d) of the Exchange Act specifies that to be registered
and maintain registration, a SB SEF must comply with fourteen Core
Principles enumerated therein and any requirement that the Commission
may impose by rule or regulation.\13\ The Core Principles applicable to
SB SEFs are captioned: (1) Compliance with Core Principles; (2)
Compliance with Rules; (3) Security-Based Swaps Not Readily Susceptible
to Manipulation; (4) Monitoring of Trading and Trade Processing; (5)
Ability to Obtain Information; (6) Financial Integrity of Transactions;
(7) Emergency Authority; (8) Timely Publication of Trading Information;
(9) Recordkeeping and Reporting; (10) Antitrust Considerations; (11)
Conflicts of Interest; (12) Financial Resources; (13) System
Safeguards; and (14) Designation of Chief Compliance Officer.\14\ As a
result, a registered SB SEF would have certain regulatory obligations
with respect to overseeing its market and the participants that trade
on its facility. Further, Section 3D(f) of the Exchange Act states that
the Commission shall prescribe rules governing the regulation of SB
SEFs.\15\ Finally, Section 3(a)(77) of the Exchange Act defines a SB
SEF as a trading system or platform in which multiple participants have
the ability to execute or trade SB swaps by accepting bids and offers
made by multiple participants in the facility or system, through any
means of interstate commerce, including any trading facility, that: (1)
Facilitates the execution of SB swaps between persons; and (2) is not a
national securities exchange.\16\
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\13\ See Public Law 111-203, Sec. 763(c) (adding Section
3D(d)(1)(A) of the Exchange Act).
\14\ See Public Law 111-203, Sec. 763(c) (adding Section
3D(d)(1)-(14) of the Exchange Act).
\15\ See Public Law 111-203, Sec. 763(c) (adding Section 3D(f)
of the Exchange Act).
\16\ See Public Law 111-203, Sec. 761(a) (adding Section
3(a)(77) of the Exchange Act).
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As regulated markets for the trading of SB swaps, SB SEFs, as well
as exchanges that post or trade SB swaps (``SBS exchanges''), are
intended to play an important role in enhancing the transparency and
oversight of the market for SB swaps. SB SEFs should help further the
statutory objective of greater transparency and a more competitive
environment for the trading of SB swaps by providing a venue for
multiple parties to execute trades in SB swaps and also by serving as a
conduit for information regarding trading interest in SB swaps. As a
result of the Dodd-Frank Act's provisions relating to SB SEFs, the
Commission would have access to information on the trading of SB swaps
that occurs on SB SEFs and information regarding trading by their
participants. In addition, because SB SEFs would have certain
regulatory obligations arising from their Core
[[Page 10950]]
Principles, such as monitoring trading, assuring the ability to obtain
information, and establishing and enforcing rules and procedures to
ensure the financial integrity of SB swaps entered on or though the SB
SEF, these facilities can play an important role in helping to oversee
the market for SB swaps on an ongoing basis and allowing regulators to
quickly assess information regarding the potential for systemic risk
across trading venues.
The Commission is mindful that any rules that the Commission may
adopt regarding the regulation of SB SEFs could impact the incentives
for existing or prospective platforms for the trading of SB swaps to
enter or withdraw from this market. On the other hand, the rules to be
adopted by the Commission for the trading of SB swaps should be
sufficient to fulfill the objectives of the Dodd-Frank Act to promote
financial stability and transparency. The Commission also is mindful
that, both over time and as a result of Commission proposals to
implement the Dodd-Frank Act, the further development of the SB swap
market may alter some of the specific calculus for future regulation of
SB SEFs.
The Commission notes that the CFTC is proposing rules relating to
swap execution facilities (``SEFs'') as required under Section 733 of
the Dodd-Frank Act.\17\ Because there are differences between the
markets and products that the Commission and the CFTC currently
regulate, the approach that each agency may take regarding the
regulation of SB SEFs and SEFs, respectively, also may differ in
various respects. The Commission recognizes that commenters may respond
to the Commission's proposals by referring to the CFTC's proposals and
welcomes commenters' views and suggestions on the impact of any
differences between the Commission and CFTC approaches to the
regulation of SB SEFS and SEFs. The Commission is particularly
interested in whether its proposed rulemaking would result in any
duplicative or inconsistent efforts on the part of market participants
subject to both regulatory regimes or would result in gaps between
those regimes.
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\17\ See Public Law 111-203, Sec. 733 (adding Section 5h of the
CEA). See also 76 FR 1214 (January 7, 2011) (``Notice of proposed
SEF rulemaking by the CFTC'').
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Further, the Commission is aware that regulators in other countries
are considering reform of their swaps and derivatives markets and are
interested in achieving a consistent approach to swaps regulation
between the United States, Europe and other jurisdictions to mitigate
the risk of regulatory arbitrage.\18\ Although the Commission must be
guided by the requirements of the Dodd-Frank Act in crafting proposed
rules applicable to markets that trade SB swaps and the participants in
those markets, the Commission recognizes that the particular rules that
it may adopt under the Dodd-Frank Act may impact the incentives of
market participants with respect to where they choose to engage in the
trading of SB swaps.
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\18\ See, e.g., Committee of European Securities Regulators
(``CESR''), CESR Technical Advice to the European Commission in the
context of the MiFID Review and Responses to the European Commission
for Additional Information, dated October 13, 2010, available at
http://www.cesr-eu.org/index.php?page=contenu_groups&id=61&docmore=1.
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Commenters are urged to consider generally the role that regulation
may play in fostering or limiting the development of the market for SB
swaps (or, vice versa, the role that market developments may play in
changing the nature and implications of regulation) and specifically to
focus on this issue with respect to the proposals to establish a
framework for the trading of SB swaps. In addition, commenters are
urged to consider the effect of the Commission's proposals relating to
SB SEFs on the global swaps and derivatives markets and to offer
specific comments regarding how the proposals compare with the existing
or proposed regulations of other jurisdictions.
III. The Definition of Security-Based Swap Execution Facilities
Since the enactment of the Dodd-Frank Act in July 2010, the
Commission has engaged in a number of outreach programs relating to the
legislation's rulemaking mandates, including trading of SB swaps on
regulated markets.\19\ On September 15, 2010, the staff of the
Commission and of the CFTC conducted a joint roundtable to discuss
issues related to the formation and regulation of SEFs and SB SEFs
(``Roundtable'').\20\ Topics discussed at the Roundtable included the
scope of the definition of a SEF and SB SEF; registration of these
facilities; products that would trade on a SEF and SB SEF; block
trades; access to SEFs and SB SEFs; and cross-market issues.\21\ The
purpose of the Roundtable was to provide a forum for the discussion of
these issues and to assist SEC and CFTC staff as they developed
proposed rules to meet the Dodd-Frank Act's mandate to bring the
trading of swaps and SB swaps subject to the mandatory clearing
requirement onto organized markets. Panelists at the Roundtable
provided comments on their experience with the current market structure
for the trading of swaps and SB swaps and offered their views and
suggestions on ways that that structure could change as a result of the
legislation. Pursuant to the Commission's outreach, a range of
individuals and entities, including swap dealers, brokers, end-users,
academics and others, have expressed their views on a variety of
topics, such as the scope of activities or the nature of platforms that
should fall within the statutory definition of ``security-based swap
execution facility.'' \22\
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\19\ See, e.g., Implementing the Dodd-Frank Wall Street Reform
and Consumer Protection Act, Transparency, Public Input on SEC
Regulatory Initiatives under the Dodd-Frank Act Title VII--Wall
Street Transparency and Accountability, Mandatory Exchange Trading
and Swap Execution Facilities, available at http://www.sec.gov/spotlight/dodd-frank.shtml.
\20\ See Securities Exchange Release No. 62864 (September 8,
2010), 75 FR 55574 (September 13, 2010) (File No. 4-612). Webcast
available at http://www.sec.gov/news/openmeetings/2010/jac091510.shtml.
\21\ See Press Release issued by the Commission on September 8,
2010, ``SEC, CFTC To Host Joint September Roundtables On Swap and
Security-Based Swap Matters'' (File No. 2010-166), available at
http://www.sec.gov/news/press/2010/2010-166.htm.
\22\ See, e.g., http://www.sec.gov/spotlight/dodd-frank.shtml.
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Many letters from market participants advocated for a flexible
interpretation of the statutory definition of SB SEF.\23\ In their
letters, they argued that the definition of SB SEF should permit many
different types of existing and new trading and execution
platforms.\24\ Certain market participants noted that the SB swap
market is more customized and illiquid than the cash equities market
and argued that a broad range of trading models would be necessary to
address the SB swap market's unique characteristics and to allow this
market to develop properly.\25\
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\23\ See, e.g., letter from Ben Macdonald, Global Head Fixed
Income, Bloomberg LP, to Commission, dated September 22, 2010
(``Bloomberg Letter''), at 2; letter from Richard H. Baker,
President and CEO, Managed Funds Association, to Elizabeth M.
Murphy, Secretary, Commission, dated September 22, 2010 (``MFA
Letter''), at 16; letter from Ernest C. Goodrich, Jr., Managing
Director--Legal Department, and Marcelo Riffaud, Managing Director--
Legal Department, Deutsche Bank AG, to David A. Stawick, Secretary,
CFTC, and Elizabeth M. Murphy, Secretary, Commission, dated October
6, 2010 (``Deutsche Bank Letter''), at 5-6 and 8-9; and letter from
Larry Tabb, CEO and Founder, Andy Nybo, Head of Derivatives, and
Kevin C. McPartland, Senior Analyst, TABB Group, to Gary Gensler,
Chairman, CFTC, and Mary Schapiro, Chairman, Commission, dated
August 23, 2010 (``TABB Letter''), at 2.
\24\ See, e.g., Bloomberg Letter, id., at 2; MFA Letter, id., at
16; and Deutsche Bank Letter, id., at 7.
\25\ See, e.g., Bloomberg Letter, supra note 23, at 2, and
Deutsche Bank Letter, supra note 23, at 6-7. See also infra, Section
III.B for a discussion of the Commission's interpretation of the
definition of SB SEF.
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[[Page 10951]]
Although many commenters who expressed a view regarding the
definition of SB SEF favored allowing multiple platforms,\26\ some
commenters expressed concern about some types of platforms that
potentially could meet the definition of SB SEF. One commenter believed
that allowing multiple request for quote (``RFQ'') platforms,\27\
without a price mechanism that aggregates prices across platforms, to
meet the definition of SB SEF, could lead to a fragmented market, which
could discourage competition.\28\ Another commenter suggested that
permitting an RFQ platform to be treated as a SB SEF could be viewed as
preserving the status quo of a dealer-dominated market and believed
that the Dodd-Frank Act envisioned that SB swaps would be traded on a
facility akin to a limit order book platform.\29\
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\26\ See supra note 23 and accompanying text.
\27\ In referring to a RFQ platform, the Commission means a
trading platform where a customer who wishes to execute a SB swap
disseminates a request for quote to one or more dealers and one or
more of those dealers respond to the request with an executable
quote.
\28\ See, e.g., Commentary by S. ``Vish'' Viswanathan,
Professor, Fuqua School of Business, Duke University, at the
Roundtable. Webcast available at http://www.sec.gov/news/openmeetings/2010/jac091510.shtml.
\29\ See Commentary by Heather Slavkin, Senior Legal Policy
Advisor for the Office of Investment, AFL-CIO, at the Roundtable.
Webcast available at http://www.sec.gov/news/openmeetings/2010/jac091510.shtml. See also infra, Section III.B discussing the
Commission's interpretation taking into account concerns raised by
commenters.
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The Commission also received other specific views about platforms
that commenters believed should or should not be included in the
definition of SB SEF. For example, one commenter believed that
platforms that would not trade or execute SB swap transactions, such as
pure trade processing facilities, would not meet the statutory
definition of SB SEF.\30\ A market participant, however, stated that in
its view the statutory definition of SB SEF would encompass pure trade
processing facilities.\31\
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\30\ See letter from Mark D. Young, Skadden, Arps, Slate,
Meagher & Flom LLP, to David A. Stawick, Secretary, CFTC, and
Elizabeth M. Murphy, Secretary, Commission, dated September 22,
2010, at 3.
\31\ See Meetings with SEC Officials: Memorandum from the
Division of Trading and Markets regarding an August 25, 2010 Meeting
with representatives of MarkitSERV, dated September 2, 2010,
MarkitSERV PowerPoint Presentation, dated August 25, 2010 at p. 5-6,
available at http://www.sec.gov/comments/s7-16-10/s71610-96.pdf.
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The information presented at the Roundtable and received from the
public has helped to inform the proposals relating to SB SEFs that are
part of this rulemaking. The Commission is mindful that there exists a
wide range of views on the part of market participants and others about
the nature of the activities or systems that would constitute, and the
scope of activities permitted by, a SB SEF and therefore encourages
interested persons to provide their views and suggestions, as well as
any materials or data to support their positions, on this aspect of the
proposed rulemaking. The Commission believes that the prudent course is
to take where appropriate a deliberate and attentive approach to its
regulation of SB SEFs that is informed by the state of development of
SB swap trading on regulated markets. The Commission emphasizes,
however, that any actions it may take now or in the future would be
designed to further the overall objectives of the Dodd-Frank Act.?>
A. Current SB Swap Market
1. Trading Models
Unlike the markets for cash equity securities and listed options,
the market for SB swaps currently is characterized by bilateral
negotiation in the OTC swap market; is largely decentralized; many
instruments are not standardized; and many SB swaps are not centrally
cleared. The lack of uniform rules concerning the trading of SB swaps
and the one-to-one nature of trade negotiation in SB swaps has resulted
in the formation of distinct types of venues for the trading of these
securities, ranging from bilateral negotiations carried out over the
telephone, to single-dealer RFQ platforms, to multi-dealer RFQ
platforms, to central limit order books outside the United States, and
others, as more fully described below. The use of electronic media to
execute transactions in SB swaps varies greatly across trading venues,
with some venues being highly electronic whereas others rely almost
exclusively on non-electronic means such as the telephone. The reasons
for use of, or lack of use of, electronic media vary from such factors
as user preference to limitations in the existing infrastructure of
certain trading platforms. The description below of the ways in which
SB swaps may be traded is based in part on discussions with market
participants. The Commission solicits comments on the accuracy of this
description.
The Commission uses the term ``bilateral negotiation'' to refer to
the model whereby one party uses the telephone, e-mail or other
communications to contact directly a potential counterparty to
negotiate a SB swap. Once the terms are agreed, the SB swap transaction
is executed and the terms are memorialized.\32\ In a bilateral
negotiation, there may be no pre-trade or post-trade transparency
available to the marketplace because only the two parties to the
transaction are aware of the terms of the negotiation and the final
terms of the agreement. Further, no terms of the proposed transaction
are firm until the transaction is executed. However, reputational costs
generally serve as a deterrent to either party's failing to honor any
quoted terms. Dealer to customer bilateral negotiation currently is
used for all SB swap asset classes, and particularly for trading in
less liquid SB swaps, in situations where the parties prefer a
privately negotiated transaction, such as in executing block trades, or
in other circumstances in which it is not cost effective for a party to
the trade to use one of the execution methods described below.
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\32\ For further discussion, see, e.g., Securities Exchange Act
Release No. 63727 (January 14, 2011), 76 FR 3859 (January 21, 2011)
(proposing rules for the trade acknowledgement and verification of
security-based swaps).
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Another model for the trading of SB swaps is the single-dealer RFQ
electronic trading platform. In a single-dealer RFQ platform, a dealer
may post indicative quotes for SB swaps in various SB swap asset
classes that the dealer is willing to trade. Only the dealer's approved
customers would have access to the platform. When a customer wishes to
transact in a SB swap, the customer requests an executable quote, the
dealer provides one, and if customer accepts the dealer's quote, the
transaction is executed electronically. If the dealer repeatedly
responds to requests for executable quotes with quotes that are
significantly less favorable than the dealer's indicative quotes posted
on the single-dealer electronic trading platform, volume on the
platform presumably would diminish and participants may no longer
transact there. This type of platform generally provides pre-trade
transparency in the form of indicative quotes on a pricing screen, but
only from one dealer to its customer. Currently, there is no post-trade
reporting of transactions on single-dealer platforms and thus there is
no post-trade transparency.
A variant of the single-dealer model is an aggregator-type platform
that combines two or more single-dealer RFQ platforms. In such a
platform, a customer who has access to the platform, which is
determined solely at the discretion of its operator and of the dealers
involved, may see indicative quotes from multiple dealers at once
instead of seeing quotes only from one
[[Page 10952]]
dealer as in the single-dealer RFQ platform. Although a participant can
simultaneously view quotes from multiple dealers, the participant can
request a firm quote from only one dealer at a time. One feature of the
aggregated single-dealer platform as compared to the bilateral
negotiation and single-dealer models described above is the ability of
a participant in the aggregated single-dealer platform to see
indicative quotes from multiple dealers. However, customers are not
afforded an opportunity to send RFQs to multiple dealers at the same
time to promote competitive pricing. Also, like the single-dealer
electronic platform, there is no post-trade reporting of transactions
and thus there is no post-trade transparency.
A third model is the multi-dealer RFQ electronic trading
platform.\33\ In a multi-dealer RFQ system, a requester can send an RFQ
to solicit quotes on a certain SB swap from multiple dealers at the
same time. Currently, dealers on a multi-dealer RFQ platform generally
require the platform to set limits on the number of dealers to whom a
customer may send an RFQ, and also may limit which dealers may
participate on the platform. These platforms are sometimes owned by
dealers themselves. After the RFQ is submitted, the recipients have a
prescribed amount of time in which to respond to the RFQ with a quote.
Responses to the RFQ are firm. The requestor then has the opportunity
to review the responses and accept the best quote. A multi-dealer RFQ
platform provides a certain degree of pre-trade transparency, depending
on its characteristics. But to the extent that a requester is
restricted by platform rules to soliciting quotes from a limited number
of dealers, the customer's pre-trade transparency is restricted to that
number of quotes it receives in response to its RFQ. In some instances
requestors may prefer to limit the number of recipients of an RFQ as a
way to protect proprietary trading strategies as dissemination of their
interest to multiple dealers may increase hedging costs to dealers, and
thus costs to the requestors as reflected in the prices from the
dealers. Pre-trade transparency may also exist through the platform's
dissemination of composite indicative quotes to all participants prior
to trades. Post-trade transparency may exist if the platform chooses to
disseminate information regarding executed transactions.
---------------------------------------------------------------------------
\33\ The single-dealer RFQ platform is an example of a system
that permits customers to submit an RFQ to a single dealer, which is
distinct from a multi-dealer RFQ platform that permits customers to
solicit quotes from multiple dealers simultaneously instead of one
dealer. The multi-dealer RFQ platform differs from a single-dealer
aggregator platform because a participant in the aggregated single-
dealer platform may only send a request to one dealer at a time and
thus would not have the ability to interact with the bids or offers
of multiple dealers simultaneously.
---------------------------------------------------------------------------
A fourth model for the trading of SB swaps is a limit order book
system or similar system, which the Commission understands is not yet
in operation for the trading of SB swaps in the United States but
exists for the trading of SB swaps in Europe. Today, securities and
futures exchanges in the United States display a limit order book in
which firm bids and offers are posted for all participants to see, with
the identity of the parties withheld until a transaction occurs. Bids
and offers are then matched based on price-time priority or other
established parameters and trades are executed accordingly. The quotes
on a limit order book system are firm. A limit order book system may be
a more suitable model for the trading of more liquid, rather than less
liquid, SB swaps. In general, a limit order book system also provides
greater pre-trade transparency than the three platforms described above
because all participants can view bids and offers before placing their
bids and offers. However, broadly communicating trading interest,
particularly about a large trade, may increase hedging costs, and thus
costs to investors as reflected in the prices from the dealers. The
system can also provide post-trade transparency, to the extent that
participants can see the terms of executed transactions.
A fifth type of trading, which the Commission herein refers to as
``brokerage trading,'' is used by brokers to execute SB swap trades on
behalf of customers, often in larger sized transactions. In such a
system, a broker receives a request from a customer (which may be a
dealer) who seeks to execute a specific type of SB swap. The broker
then interacts with other customers to fill the request and execute the
transaction. The mode of interaction can vary depending on the size of
the trade and the type of SB swap being traded. In some cases, the
interaction is done purely by voice over the telephone, while in other
cases, the interaction is electronic or a hybrid of voice and an
electronic system. The level of automation and use of electronic means
also vary depending on the technological state and functionality of the
broker's platform.\34\ This model often is used by dealers that seek to
transact with other dealers through the use of an interdealer broker as
an intermediary. In this model, there may be pre-trade transparency to
the extent that participants are able to see bids and offers of other
participants and post-trade transparency to the extent that
participants can see the terms of executed transactions.
---------------------------------------------------------------------------
\34\ The Commission understands that a small portion of the
brokerage trading in the United States is currently highly automated
and has characteristics of a limit order book. However, while depth
of the order book may be displayed, generally there may be only one
bid or offer, and sometimes only one side of the market would be
displayed (i.e., a bid without an offer and vice versa). Because the
volume in some SB swaps may be low, the electronic systems
maintained by wholesale brokers would not necessarily include a
matching engine that would provide for price-time priority or other
execution parameters, unlike other types of electronic limit order
books. Although the wholesale brokers' systems are electronic, the
customer would need to perform some steps manually (e.g., hit the
bid or lift the offer) to execute a trade.
---------------------------------------------------------------------------
The five foregoing examples represent broadly the various types of
models for the trading of OTC swaps in existence today. These examples
may not represent every single method in existence today and the
discussion above is intended to give an overview of the models without
providing the nuances of each particular type.
2. The SB Swap Market and the Commission's Approach to SB SEF
Definitions
In the Commission's view, the diverse nature of these examples
demonstrates the extent to which, when compared with the equities
markets, certain aspects of the SB swap market are still evolving.\35\
In considering ways in which the Commission could approach the
definition of SB SEF, the Commission has sought to facilitate
competition and innovations in the SB swap market that could be used to
promote more efficient trading in organized, transparent and regulated
trading venues. The Commission does not believe it should simply
overlay the same regulatory structure that is currently in place for
equities, given important differences in the nature and maturity of the
SB swap and equities markets. However, the Commission does believe that
certain elements of equity
[[Page 10953]]
market structure may be directly relevant to the SB swap market.
---------------------------------------------------------------------------
\35\ For example, data from the Depository Trust and Clearing
Corporation covering the period from March 22, 2010 to June 20, 2010
for single name credit default swaps revealed the following: Out of
998 types of swaps (i.e., a swap based on one reference entity),
only 55 had 10 or more trades per day (34 trades being the highest),
and 827 of the swaps had 5 or fewer trades per day (531 of those
only had 2 or fewer trades per day). In the data set, ``trades per
day'' includes all tenors (e.g., duration or expiry) in swaps of the
same reference entity. See http://www.dtcc.com/downloads/products/derivserv/CDS_Snapshot_Analysis_Sep17-2010.pdf; see also http://www.dtcc.com/products/derivserv/data_table_snap0002.php and http://www.dtcc.com/products/deriserv/data_table_snapshot.php.
---------------------------------------------------------------------------
Furthermore, rather than proposing a rule that would establish a
prescribed configuration for SB SEFs that would meet the statutory
definition of SB SEF, the Commission proposes to provide baseline
principles interpreting the definition of SB SEF, consistent with the
requirements of the Exchange Act, as amended by the Dodd-Frank Act,
which any entity would need to be able to meet to register as a SB SEF.
Such an approach is designed to allow flexibility to those trading
venues that seek to register with the Commission as a SB SEF and to
permit the continued development of organized markets for the trading
of SB swaps. This more flexible approach also would allow the
Commission to monitor the market for SB swaps and propose adjustments,
as necessary, to any interpretation that it may adopt as this market
sector continues to evolve.
However, the Commission recognizes that, consistent with the Dodd-
Frank Act, the interpretation of the definition of SB SEF should: (1)
Encourage the migration of trading SB swaps from the OTC market to SB
SEFs (or exchanges), (2) provide a meaningful distinction between a SB
SEF and an OTC trading venue, (3) promote further transparency of the
SB swap market, and (4) to facilitate competition and innovation in the
SB swap markets that could be used to promote more efficient trading in
organized, transparent, and regulated trading venues. In addition, the
interpretation of the definition of SB SEF should complement other
aspects of proposed SB swap regulations, including those related to
post trade transparency, mandatory clearing, and the general
requirement that SB swaps that are subject to mandatory clearing only
be traded on an exchange or SB SEF, unless no exchange or SB SEF makes
the SB swap available to trade.
B. Scope of SB SEF Definition
As noted above, Section 3(a)(77) of the Exchange Act defines a SB
SEF as a trading system or platform in which multiple participants have
the ability to execute or trade SB swaps by accepting bids and offers
made by multiple participants in the facility or system, through any
means of interstate commerce, including any trading facility, that: (1)
Facilitates the execution of SB swaps between persons; and (2) is not a
national securities exchange.\36\
---------------------------------------------------------------------------
\36\ As discussed infra Section XXI, an entity that meets the
definition of SB SEF would be required to register as a SB SEF or a
national securities exchange (unless exempted under Section 3D(e) of
the Exchange Act if the Commission finds that the facility is
subject to comparable, comprehensive supervision and regulation on a
consolidated basis by the CFTC). A registered SB SEF would be
required to satisfy all 14 Core Principles and any rules promulgated
by the Commission, including proposed Rule 811(a)(3), which provides
for certain requirements relating trading on a SB SEF. See Public
Law 111-203, Sec. 763(c) (adding Section 3D(a)(1) and (d)(1) of the
Exchange Act).
---------------------------------------------------------------------------
A key issue noted at the Roundtable and raised by market
participants generally regarding Dodd-Frank Act implementation is the
scope of the definition of ``security-based swap execution facility.''
\37\ SB swap industry participants have expressed an interest in, and
offered their views on, the parameters of the definition of SB SEF.\38\
Such participants asserted that the interpretation of the definition of
SB SEF is a significant issue for the SB swap industry because, under
the mandatory trade execution requirement in Section 3C(h) of the
Exchange Act, a SB swap subject to mandatory clearing must be executed
on a SB SEF or on an exchange, if made available for trading. The
discussion below sets forth the Commission's preliminary view as to the
meaning of the various elements of this definition.
---------------------------------------------------------------------------
\37\ See, e.g., Bloomberg Letter, supra note 23, at 2, and MFA
Letter, supra note 23, at 16.
\38\ See supra notes 23 to 25.
---------------------------------------------------------------------------
The ``multiple participant to multiple participant'' requirement in
the definition of SB SEF prescribes that ``multiple participants have
the ability to execute or trade security-based swaps by accepting bids
and offers made by multiple participants in the facility or system.''
\39\ Consistent with this requirement, the Commission proposes to
interpret the definition of SB SEF to mean a system or platform that
allows more than one participant to interact with the trading interest
of more than one other participant on that system or platform. The
Commission notes that this definition can be satisfied by various types
of platforms, but some platforms that are currently used to trade SB
swaps in the OTC market would not meet this definition, and would not
be considered SB SEFs. As noted above, the Commission is aware that the
movement of SB swaps trading onto regulated platforms is still in an
emergent stage. Therefore, in considering ways in which the Commission
could approach the definition of SB SEF, the Commission has sought to
facilitate competition and innovations in the SB swaps market that
could be used to promote more efficient trading in organized,
transparent and regulated trading venues to support the Dodd-Frank
Act's goal of moving the trading of SB swaps onto regulated markets.
---------------------------------------------------------------------------
\39\ See Public Law 111-203, Sec. 763(a) (adding Section 3(77)
of the Exchange Act).
---------------------------------------------------------------------------
Under this proposed interpretation, if a system or platform were to
allow an individual participant (of which there must be more than one
on the system, but which do not need to be acting simultaneously) to
send, at the same time, a single RFQ to all other liquidity providing
participants on that system or platform and view responses from those
participants, the Commission believes that such a model would satisfy
the requirements of the statutory definition, even if the quote
requesting participants are acting at different times. A key element to
this model is that the SB SEF would not be able to limit the number of
liquidity providing participants from whom a participant could request
a quote on the SB SEF.\40\
---------------------------------------------------------------------------
\40\ See infra Section VIII.C.
---------------------------------------------------------------------------
The Commission further believes that the requirements of the
statutory definition would be met if the system or platform not only
provided the quote requesting participant with the ability to send a
single RFQ to all liquidity providing participants, but also provided
the quote requesting participant with the ability to choose to send an
RFQ to fewer than all liquidity providing participants. In the
Commission's view, a system or platform that affords a quote requesting
participant the ability to send an RFQ to all participants, but also
permits the quote requesting participant to choose to send an RFQ to
fewer participants, would satisfy the statutory definition because
multiple participants would have the ability to execute or trade SB
swaps by accepting bids or offers made by multiple participants. The
person exercising investment discretion for the transaction, whether it
is the participant itself or the participant's customer, would be the
person that would have the ability to choose to send the RFQ to less
than all participants, as they would be in the best position to
determine the impact on their interest of a broad or narrow
dissemination of their RFQ.\41\
---------------------------------------------------------------------------
\41\ Regardless of the number of participants to which a RFQ was
sent, the response(s) to that RFQ would be required to be included
in the composite indicative quote of the SB SEF. See infra note 152
and accompanying text.
---------------------------------------------------------------------------
Under the proposed interpretation of the definition of SB SEF, a SB
SEF would be able to offer functionality to a participant (or a
participant's customer) enabling that participant to choose to send a
single RFQ to any number of specific liquidity providing participants
on the SB SEF, including just a single liquidity provider. The
[[Page 10954]]
Commission requests comment on whether in addition to providing this
flexibility to investors initiating RFQs, the interpretation should
also set a floor for the minimum number of liquidity providers that
must be included in an RFQ (and, if so, what that minimum number should
be). Commenters should be mindful that in proposing its interpretation
of the definition of SB SEF, the Commission is trying to balance the
above-stated goal of encouraging SB swap trading to move onto regulated
markets with the goal of promoting greater transparency in the trading
of SB swaps.
On the one hand, providing investors as much choice as possible in
determining how to route an RFQ on a SB SEF may incentivize investors
to trade on a SB SEF when they otherwise might not have made that
choice. Since those investors that have a fiduciary duty must seek best
execution for a transaction, they may have a natural incentive to route
to multiple dealers. However, this incentive may be impacted by the
liquidity characteristics of the SB swap. Market participants,
including dealers and buy-side customers, have raised concerns
regarding pre-trade transparency of SB swap trades, particularly block
trades. They believe that if other market participants know the terms
of a trade prior to the time it is executed, those other market
participants could attempt to profit from the information about the
trade to the detriment of the initiator of the trade.\42\ Therefore,
particularly for illiquid SB swaps, an investor may determine that it
is in its best interest not to broadly project its trading intention,
and may choose to send a RFQ to one dealer.\43\ Other investors could
still benefit by the request because the response to that RFQ would
become part of the composite indicative quote of that SB SEF.\44\
Providing investors the choice to send a RFQ to only one dealer on a SB
SEF--as long as they have the ability to send it to more than one if
they chose to--may encourage investors to execute trades on a SB SEF
even with respect to SB swaps that are not required to be traded on a
SB SEF or an exchange, thus supporting the development of trading on
regulated platforms and venues in the United States, rather than in
other jurisdictions.
---------------------------------------------------------------------------
\42\ See discussion in Section VIII.C and D infra.
\43\ See Reporting and Dissemination Release, supra note 6, at
89-93.
\44\ See discussion of proposed Rule 811(d)(5) in Section VIII.C
infra.
---------------------------------------------------------------------------
On the other hand, requiring that all RFQs on a SB SEF be sent to
more than one dealer could force competition among dealers more than if
RFQs to a single dealer were permitted. This competition may lead to
lower spreads as dealers compete with each other on price. Further,
this competition may provide for a more robust composite indicative
quote because a greater number of responses would be incorporated into
the composite. In addition, requiring that RFQs be sent to more than
one dealer provides for the possibility that a response from a dealer
other than the one with whom the investor may have ``pre-arranged'' the
transaction will result in a better price. However, market participants
have expressed a concern that requiring a broad level of pre-trade
transparency, particularly for illiquid products, may not lead to
better prices and in certain circumstances may lead to worse prices
provided by dealers if dealer hedging is made more difficult after the
intent to trade has been projected to the entire market.
In addition, the Commission proposes to interpret the statutory
requirement that ``multiple participants have the ability to execute or
trade SB swaps by accepting bids and offers made by multiple
participants in the facility or system'' to require a SB SEF to provide
at least a basic functionality to allow any participant on the SB SEF
the ability to make and display executable bids or offers accessible to
all other participants on the SB SEF, if the participant chooses to do
so. The Commission preliminarily believes that such a requirement would
allow for increased price transparency beyond what would be found in
the bilateral OTC market, if a market participant chooses to utilize
the functionality to display a bid or offer.
Under the proposed interpretation of the definition of SB SEF
(either with or without the additional requirement for a minimum number
of liquidity providers to be included in every RFQ), the traditional
bilateral negotiation model, as described above, would not fall within
the definition of SB SEF because there would be only one party able to
seek a quote and only one party that is able to provide a quote in
response. The Commission believes that the inclusion of the phrase
``through any means of interstate commerce'' in the definition of SB
SEF would not, by itself, support the proposition that bilateral
negotiation would satisfy the definition's terms; the trading system or
platform would still need to meet the other requirements of the
definition, specifically, the requirement that multiple participants
have the ability to execute or trade SB swaps by accepting bids and
offers made by multiple participants in the facility or system
(``multiple participant to multiple participant requirement'').
Likewise, a platform where there is a single dealer interacting
with multiple customers on the other side of the transaction would not
appear to meet the ``multiple participant to multiple participant''
requirement because the dealer is only one person. This would be true
for aggregated single-dealer platforms as well, because a participant
on such a platform may only submit one request at a time and receive
only one response at a time, on a dealer-by-dealer basis.
The Commission proposes that the definition of SB SEF cannot be
satisfied by the simple aggregation of trading interest across trading
systems or platforms to meet the ``multiple participant to multiple
participant'' requirement. That is, each trading method--when viewed in
isolation--would need to individually meet the ``multiple participant
to multiple participant'' requirement on its own. Thus, an entity that
relies on a bilateral negotiation system with one participant on each
end of the telephone or similar communication system, but with several
such conversations occurring simultaneously, could not claim to meet
the definition of SB SEF by asserting that when those conversations are
viewed in the aggregate, i.e., bilateral negotiation between persons A
and B to facilitate one transaction, and bilateral negotiation between
persons C and D, to facilitate a separate transaction, that the
``multiple participant to multiple participant'' requirement is
met.\45\ Two independent single-dealer platforms also may not be
construed in the aggregate in order to meet the ``multiple participant
to multiple participant'' requirement. In each of these situations,
there is no opportunity for interaction among participants, except on a
``one participant to one participant'' basis.
---------------------------------------------------------------------------
\45\ However, as discussed further below in the discussion of
the application of the definition of SB SEF to wholesale brokers, if
person A negotiates with persons B, C and D as part of the same
transaction, the ``multiple participant to multiple participant''
requirements may be able to be met. See infra note 46 and
accompanying text.
---------------------------------------------------------------------------
However, a system or platform that provides for an auction for a
class of SB swaps to be held at a prescribed time and that allows
multiple participants to interact with each other, with trades executed
pursuant to a pre-determined algorithm, could meet the proposed
interpretation of the definition of SB SEF. In addition, the Commission
believes that a limit order book system as described above for the
trading of SB swaps could satisfy the proposed interpretation of the
definition of SB
[[Page 10955]]
SEF. Such a model generally would allow interaction between multiple
(i.e., two or more) firm orders or bids and offers. Moreover, to
satisfy the definition of SB SEF, a system or platform would not need
to be limited to only one type of trading model. An entity that wishes
to register as a SB SEF could operate different trading models for
different SB swap products, as long as each trading system or platform
on its own meets the interpretation of the definition of SB SEF that
the Commission may adopt. For example, a SB SEF could operate both a
multi-dealer RFQ mechanism for the trading of less liquid SB swaps and
a limit order book for the trading of more liquid SB swaps.
The Commission has considered whether brokerage trading, as
described above, would satisfy its proposed interpretation of the
definition of SB SEF. On the one hand, brokerage trading relies to a
certain degree on ``voice'' communication, such as telephonic
communication between the broker and its customers. On the other hand,
the wholesale broker \46\ acts as an intermediary between various
potential participants to a SB swap transaction, and may utilize
electronic systems to display trading interest with which various
participants could interact to transact in SB swaps. In some respects,
the wholesale broker's role is similar to that of a floor broker on an
exchange, in which the floor broker may use voice communication to find
trading interest on the floor that can interact with an order from its
customer. If after the wholesale broker receives a request from a
customer (of which there must be more than one, but which do not need
to be acting simultaneously) to execute a trade in a SB swap, and the
broker then submits that request to all participants on the system or
platform (or to less than all participants, if the customer has chosen
to have the request sent to less than all participants), the Commission
preliminarily believes that such a model could satisfy the Commission's
proposed interpretation of the definition of SB SEF. Thus, the
brokerage trading model may be able to satisfy the Commission's
proposed interpretation of the definition of SB SEF to the extent that
multiple participants would have access to the system or platform and
their trading interest could interact with bids and offers of multiple
other participants in that system or platform. Unless explicitly
requested by the customer, for any given transaction if a wholesale
broker typically acts only as the intermediary between a given customer
and a single counterparty to facilitate the negotiation of a bilateral
contract, the Commission does not believe this wholesale broker would
meet the proposed interpretation of the definition of SB SEF. Because
of the different variations of the wholesale broker system, however,
each system would have to be evaluated on its own merits to determine
whether it would meet the Commission's proposed interpretation of the
definition of SB SEF.
---------------------------------------------------------------------------
\46\ For purposes of this proposing release, the term
``wholesale brokers'' generally refers to brokers that intermediate
transactions in SB swaps between dealers or between dealers and end
users.
---------------------------------------------------------------------------
The Commission's proposed interpretation of the definition of SB
SEF would result in permitting to be registered as SB SEFs systems or
platforms for the trading of SB swaps with a variety of features, and
not just those systems or platforms with exchange-like features (for
example, systems requiring all trading interest to be firm and
displayed to all participants in the market). The concern with taking
the latter approach is that the market for many SB swaps is fairly
illiquid.\47\ However, in the context of SB swaps that are subject to
the mandatory clearing requirement, the Exchange Act requires that the
trading of SB swaps must occur on a SB SEF or on an exchange, if the SB
swap is made available for trading (unless certain exceptions apply).
Thus, requiring every registered SB SEF to operate like a national
securities exchange could result in (1) cleared SB swaps not being made
available to trade on an exchange or SB SEF, with the result that SB
swaps would continue to trade in the OTC SB swap market; or (2) if SB
swaps subject to mandatory clearing are made available to trade on an
exchange or SB SEF, the continued development of the SB swap market
could be hindered, if participants are unwilling to display two-sided
firm quotes to participants or if the requirement to do so results in
bid-offer spreads that are so wide as to not be economical). If the
definition of SB SEF is too narrowly construed, this could provide a
disincentive for SB swap trading activity to move from the OTC swap
market to regulated markets. A broader interpretation of the definition
of SB SEF could have the beneficial result of increasing the proportion
of trading occurring on regulated markets. Conversely, if the
definition of SB SEF is too broadly construed, the Commission's
regulatory scheme may not adequately advance the Dodd-Frank Act's goal
of greater transparency. The Commission's proposed interpretation of
the definition of SB SEF is intended to balance these concerns,
promoting transparency as well as providing incentives for market
participants to trade SB swaps on regulated markets pursuant to
Commission rules and oversight, rather than in the OTC swap market.
---------------------------------------------------------------------------
\47\ See supra note 35.
---------------------------------------------------------------------------
The Commission notes that no matter what other functionality a SB
SEF puts in place (for example, a multi-dealer electronic RFQ
mechanism), it also would be required to provide a basic functionality
to allow any participant on the SB SEF the ability to make and display
executable bids or offers accessible to all other participants on the
SB SEF, if the market participant chooses to do so.
Considering the early stage of development of the regulatory
framework for the SB swap market and the existing structure of the SB
swap market, the Commission is mindful that its interpretation of the
definition of SB SEF, and the rules it is proposing herein to implement
the Dodd-Frank Act, could have unforeseen consequences, either
beneficial or undesirable, with respect to the shape that this market
will take. In the Commission's view, it is important that the
regulatory structure will provide incentives for the trading of SB
swaps on regulated markets that are designed to foster greater
transparency and competition that are subject to Commission oversight,
while at the same time allow for the continued efficient innovation and
evolution of the SB swap market. The Commission therefore is seeking
where appropriate to take a deliberate and attentive approach to the
regulation of SB SEFs that is informed by the state of development of
the trading of SB swaps on regulated markets.
C. Request for Comments
The Commission seeks commenters' views and suggestions on its
proposed interpretation of the definition of SB SEF. Comment is
requested on whether the Commission's proposed interpretation, which
would require an RFQ to be sent to all participants but would allow the
quote requesting participant to query less than all participants, is
appropriate, or whether it is too narrow or too broad. Are there other
interpretations of the statutory definition that would promote price
transparency and competition, as well as incenting market participants
to trade on SB SEFs rather than in the OTC market? If so, please
explain. Does the proposed ability of the quote requesting participant
to choose to send a RFQ to less than all participants, raise any
concerns? Should the decision to
[[Page 10956]]
exercise the ability to choose to send a RFQ to less than all
participants be required on a transaction-by-transaction basis? Why or
why not? When should the opt-out feature be permitted other than on a
transaction-by-transaction basis? What would be the potential benefits
or costs of allowing an RFQ to be submitted to only one participant?
What would be the potential benefits or costs of requiring that an RFQ
be sent to more than one participant? If the Commission were to require
that an RFQ be sent to more than one participant, how many should be
the minimum? Should the Commission require that an RFQ be sent to two
participants? Five participants (which is the number proposed by the
CFTC)? \48\ Or some other number of participants? Which approach--
allowing a RFQ to be sent to one participant or requiring a minimum
number greater than one--would better promote transparency? Which
approach would encourage greater trading of SB swaps on SB SEFs? What
impact, if any, would the various approaches have on market
participants' incentives to trade within the United States or in other
jurisdictions? How should the Commission weigh the possibility that
trading may move to other jurisdictions in determining how best to
regulate markets within the United States? What would be the costs and
benefits to such an approach? What if only a small number of dealers
were willing to provide quotes on the platform or in a particular SB
swap?
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\48\ See Notice of proposed SEF rulemaking by the CFTC, supra
note 17 (requiring that RFQs be disseminated to at least five
participants).
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Should the proposed interpretation that affords the ability to opt
to have a RFQ sent to less than all participants be limited to block
trades? Should a proposed interpretation that affords the ability to
opt to have a RFQ sent to one participant be limited to block trades?
What would be the benefits and costs of allowing the opt-out
flexibility, to any number of participants, for block trades? For non-
block trades? Are there factors that would cause a different result for
block trades versus non-block trades? Would the flexibility for
participants to choose to send a RFQ to less than all participants,
including to just one participant, help to address concerns about the
impact of pre-trade transparency on dealers' incentives or ability to
provide competitive prices, as discussed more fully in Section VIII.C?
If so, how so? If not, why not?
The Commission also is interested in learning commenters' views on
whether the market for SB swaps would be enhanced or adversely affected
by its proposed interpretation of the definition of SB SEF and, if so,
in what ways.
Should there be a requirement that the execution of trades or the
submission of bids and offers be done electronically?
Would the proposed requirement that an SB SEF provide functionality
to allow any participant on an SB SEF to make and display executable
bids or offers accessible to all market participants on the SB SEF, if
the market participants choose to do so, be beneficial? What, if any,
impact would requiring this functionality have on access to the SB SEF,
or liquidity of the SB swaps traded on the SB SEF? Should the proposed
requirement be modified? If so, how? What would be the advantages and
disadvantages of such a proposal? Do commenters believe that market
participants would utilize this functionality? Should the Commission
require any particular method of displaying such bids or offers? For
example, should the Commission require that the SB SEF post all of
these executable bids and offers on a centralized screen visible by all
participants? What would be the advantages and disadvantages of having
such a centralized screen? What other method could be utilized to
display such bids and offers?
In addition, the Commission requests comment on the consequences of
its proposed interpretation of the definition of SB SEF on existing
platforms that may seek to register as a SB SEF and on those platforms
that would not be able to meet the proposed interpretation of the
definition of SB SEF. What kinds of changes would existing platforms
need to make to their current structure to fall within the proposed
interpretation of the definition of SB SEF? Are there existing
platforms that would not be able to restructure to meet the proposed
interpretation, e.g., single-dealer RFQ platforms? If so, what impact,
if any, would that outcome have on the market for SB swaps? Are single-
dealer platforms likely to become obsolete as trading of certain SB
swaps moves to SB SEFs? Or, are such platforms likely to continue to
exist to support the OTC market? What impact would the proposed
interpretation have on competition among existing trading platforms and
liquidity in SB swaps as trading of certain SB swaps moves to SB SEFs?
Are new platforms likely to emerge to trade SB swaps?
The Commission is interested in learning commenters' views on the
effect on the SB swap market if certain trading platforms would not
meet the proposed interpretation of the definition of SB SEF and would
not be able to register as a SB SEF, and therefore no longer would be
able to trade SB swaps that are subject to mandatory clearing and are
made available to trade on a SB SEF or an exchange. Are there any types
of trading venues so critical to the proper functioning of the SB swap
market that the Commission should consider expanding the proposed
interpretation of the definition of SB SEF so that such entities could
qualify as SB SEFs? If so, what trading platforms are they and what
kinds of conditions should they be subject to? Should any such
expansion of the proposed interpretation of the definition of SB SEF to
cover such platforms be temporary and, if so, for how long? What would
be the impact of such action on any platform that could meet an
unexpanded definition of SB SEF? Market participants have expressed
concern about the trading of illiquid SB swaps once platforms are
configured to meet the statutory definition of SB SEF, particularly in
light of the mandatory trade execution requirement. The Commission
requests comment on the effect of its proposed interpretation of the
definition of SB SEF on the trading of illiquid SB swaps. Would a
multi-dealer RFQ system as discussed above sufficiently accommodate the
trading of illiquid SB swaps? If not, what other models could meet the
statutory definition of SB SEF and accommodate the trading of illiquid
SB swaps? Would an interpretation of the definition of SB SEF that
would allow an investor to choose to send an RFQ to one participant
effectively accommodate the trading of illiquid SB swaps? Would an
interpretation of the definition of SB SEF that would require that an
RFQ be sent to more than one participant effectively accommodate the
trading of illiquid SB swaps? In responding to these questions, the
Commission requests that commenters take into account the Commission's
discussion of SB swaps that are made available to trade in Section
VIII.B below.
The discussion above contains several examples of trading models
that the Commission believes would meet the statutory definition of SB
SEF. Are there other trading models not discussed above that would meet
the statutory definition of SB SEF? The discussion above also contains
several examples of trading models that the Commission believes would
not meet the statutory definition of SB SEF. Are there other models
that should be excluded from the proposed interpretation?
The Commission seeks commenters' views on the role of wholesale
brokers in the SB swap market and its view that trading of SB swaps by
such brokers
[[Page 10957]]
potentially could satisfy the proposed interpretation of the definition
of SB SEF. As noted above, the Commission has identified bilateral
negotiation, e.g., a trade occurring between two parties via the
telephone, as a model that would not meet its proposed interpretation
of the definition of a SB SEF. The Commission understands that
wholesale brokers often act as intermediaries in executing SB swap
transactions and may engage in bilateral negotiation when they attempt
to complete an order. The Commission further understands that the
orders that wholesale brokers attempt to fill may be large and that, as
a result, they may interact with multiple participants in attempting to
execute the transactions. The Commission also understands that these
brokers may also maintain electronic systems for the display of trading
interest that their customers can access. Do commenters agree that
bilateral negotiation by wholesale brokers, by itself, should not meet
the proposed interpretation of the definition of SB SEF? Is the
Commission's view correct that there are ways in which wholesale
brokers could restructure their operations to meet the proposed
interpretation of the definition of SB SEF? How would such platforms or
systems be structured to meet the proposed interpretation? What would
be the impact on the SB swap market of any restructuring of a wholesale
broker's business to meet the Commission's proposed interpretation of
the definition of SB SEF, particularly in light of the fact that trades
in SB swaps today frequently occur through bilateral negotiation? For
those wholesale brokers that currently effect transactions in SB swaps,
would the modifications that a wholesale brokerage firm would be
required to make to satisfy the proposed interpretation of the
definition of SB SEF, the proposed rules implementing the Core
Principles, and the proposed registration requirements be too costly or
otherwise impracticable to meet so that the firm would find it
difficult to register as a SB SEF? The Commission recognizes that
wholesale brokerage activities differ from dealer to customer
activities in effecting SB swap transactions. Certain proposed
requirements discussed below, such as impartial access, may affect
wholesale brokers differently than SB SEFs that are not operated by
such brokers. Comment is requested on any such different impact on
wholesale brokers that intend to operate SB SEFs, including the costs
and benefits of such impact. Should the Commission view wholesale
brokers' SB SEF operations differently than the operations of other SB
SEFs? If so, how so?
Another example of a trading platform that could meet the proposed
interpretation of the definition of SB SEF would include a multi-dealer
RFQ model. Do commenters agree that the definition of SB SEF should
cover these types of trading platforms? If so, why? If not, why not?
Market participants also have expressed concern about any proposed
interpretation of the definition of SB SEF that would result in others
discerning their proprietary trading strategies. What would be the
impact of the Commission's proposed interpretation of the definition of
SB SEF on these concerns? Would one or more of the models discussed
above that would meet the proposed interpretation of the definition of
SB SEF provide an adequate level of comfort for these market
participants? If not, is there a model that would meet the statutory
definition of a SB SEF and yet account for these market participants'
concerns?
As noted above, the Commission recognizes that the regulatory
framework for the SB swap market is still in its early stages of
development. What would be the impact on innovation in the SB swap
market as a result of the proposed interpretation of the definition of
SB SEF?
For example, under the proposed interpretation of the definition of
a SB SEF, the SB SEF must provide a mechanism for the dissemination of
firm quotes, if any, submitted by participants in the SB SEF. This
functionality would allow a ``limit order-book'' model to emerge in
parallel with other trading models on the SB SEF, including RFQ
mechanisms, provided that each model meets all SB SEF requirements
discussed above. The proposed interpretation is based on the premise
that allowing more than one type of trading model to qualify as a SB
SEF would, among other things, provide investors with more choices as
well as encourage more types of SB swaps to trade on venues regulated
by the Commission. Is there any scenario where this flexibility could
impact competition or innovation because dealers may have their own
preferences for one model over another? If so, under what scenario
could this occur, and what consequences could result? For example,
would the concentration of trading in the SB swap market raise concerns
that, and provide incentives for, market participants that have a
significant portion of the trading volume for certain types of SB swaps
in one type of market structure to resist trading those SB swaps in a
market structure that might otherwise be more efficient for that
particular product?
The Commission also is interested in learning whether its proposed
interpretation of the definition of SB SEF would influence market
participants' decisions regarding the jurisdiction in which to execute
their SB swap trades. Would the proposed interpretation affect a market
participant's decision as to the jurisdiction in which to execute SB
swaps transactions? If so, how? What other factors might also influence
that decision, and how would those factors weigh against this factor?
The Commission seeks commenters' views on whether, the ways in which,
and to whom any migration to a different jurisdiction would be
beneficial or adverse.
Commenters are urged, when considering all questions regarding the
Commission's proposed interpretation of the definition of SB SEF, to
take into account the rules being proposed by the Commission to
implement the Core Principles, particularly the rules regarding the
treatment and interaction of trading interest on a SB SEF, as discussed
below.\49\ The 14 Core Principles set forth in Section 3D(d) of the
Exchange Act are integral to the regulation of a SB SEF. The
Commission, in Sections VIII to XXII of this release, is proposing
various rules to implement these Core Principles, as well as proposed
registration requirements. The Commission also is interested in
commenters' views on whether the Commission's proposed interpretation
of the definition of SB SEF, along with its proposed rules implementing
the Core Principles and proposed registration requirements, in the
aggregate, are too permissive, are appropriate, or are too burdensome
at this stage of development of the SB swap market. If commenters
believe that the proposals in the aggregate are too permissive, the
Commission is interested in being informed of ways in which they could
be enhanced. If commenters believe that the proposals in the aggregate
are too burdensome, the Commission is interested in being informed of
ways in which they could be modified.
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\49\ See infra Section VIII (discussing Core Principle 2 and the
requirements relating to a SB SEF's trading rules).
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The Commission is interested in learning commenters' views on
whether the combination of the proposed interpretation of the
definition of SB SEF, its proposed rules implementing the Core
Principles, and its proposed registration requirements would be too
[[Page 10958]]
onerous and thus would make it impractical or economically infeasible
for entities that currently trade SB swaps to modify their procedures,
personnel, systems or platform in order to operate as a SB SEF. If this
is the case, the Commission seeks commenters views on ways that its
proposed interpretation of the definition of SB SEF, its proposed rules
implementing the Core Principles, or its proposed registration
requirements could be modified so that entities that currently trade SB
swaps could continue to do so and at the same time the statutory
requirements of the Dodd-Frank Act relating to SB SEFs would be met. In
particular, the Commission requests comment on the question of whether
it should adopt a phased approach to the implementation and/or
application of the proposed rules, whereby certain provisions would
become operational only when certain designated timing, volume,
liquidity, or other thresholds were met.\50\ The Commission seeks
commenters' views on the steps it could take to facilitate the
transition to a more regulatory environment for those entities that
currently trade SB swaps and expect to register as SB SEFs.\51\
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\50\ See infra the discussion in Section XXV regarding a phased
approach to implementation.
\51\ See infra Section XXI.A.2 seeking commenters' views on a
possible phased-in approach to any rules that the Commission may
adopt with respect to SB SEFs.
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IV. Exemption From the Definition of Exchange for Security-Based Swap
Execution Facilities
An entity that meets the definition of SB SEF in Section 3(a)(77)
of the Exchange Act may also meet the definition of ``exchange'' set
forth in Section 3(a)(1) of the Exchange Act,\52\ certain of the terms
of which have been interpreted by the Commission in Rule 3b-16 of the
Exchange Act.\53\ The Commission believes that Congress did not intend
that entities that meet the definition of SB SEF in Section 3(a)(77) of
the Exchange Act and that comply with Section 3D of the Exchange Act
and the rules and regulations promulgated by the Commission (including
the requirement to register as a SB SEF) also would be subject to
various requirements applicable to exchanges, including registration as
a national securities exchange.\54\
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\52\ 15 U.S.C. 78c(a)(1). The term ``exchange'' means any
organization, association, or group of persons, whether incorporated
or unincorporated, which constitutes, maintains, or provides a
market place or facilities for bringing together purchasers and
sellers of securities or for otherwise performing with respect to
securities the functions commonly performed by a stock exchange as
that term is generally understood, and includes the market place and
the market facilities maintained by such exchange.
\53\ 17 CFR 240.3b-16 defines the phrase ``market place or
facilities for bringing together purchasers or sellers of securities
or for otherwise performing with respect to securities the functions
commonly performed by a stock exchange'' to mean an organization,
association or group of persons that (1) brings together the orders
for securities of multiple buyers and sellers; and (2) uses
established, non-discretionary methods (whether by providing a
trading facility or by setting rules) under which such orders
interact with each other, and the buyers and sellers entering such
orders agree to the terms of the trade.
\54\ See, e.g., Section 6 of the Exchange Act, 15 U.S.C. 78f,
which, among other things, requires a national securities exchange
to enforce compliance by its members and their associated persons
with the Exchange Act and rules and regulations thereunder, as well
as with the exchange's rules. National securities exchanges are
self-regulatory organizations (``SROs'') for purposes of the
Exchange Act and are subject to the requirements of Sections 17 and
19 of the Exchange Act, 15 U.S.C. 78q and78s. Section 17(a)(1)
requires national securities exchanges to make and keep records for
prescribed periods, and to furnish such records to the Commission as
well as any related reports. Section 19(b) requires, among other
things, SROs to file proposed rule changes with the Commission.
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Section 3(a)(77) of the Exchange Act defines a SB SEF as a trading
system or platform in which multiple participants have the ability to
execute or trade SB swaps by accepting bids and offers made by multiple
participants in the facility or system, through any means of interstate
commerce, including any trading facility, that: (1) Facilitates the
execution of SB swaps between persons; and (2) is not a national
securities exchange (emphasis added).\55\ Further, Section 3C(h) of the
Exchange Act provides that transactions involving SB swaps subject to
the clearing requirement be executed on either (1) an exchange or (2) a
SB SEF registered under Section 3D of the Exchange Act or exempt from
registration (unless no exchange or SB SEF makes the SB swap available
to trade or the SB swap transaction is subject to a clearing
exception).\56\ Finally, Section 3D(a)(1) of the Exchange Act provides
that no person may operate a facility for the trading or processing of
SB swaps, unless the facility is registered as a SB SEF or as a
national securities exchange.\57\ The Commission interprets these
provisions to mean that an entity that is registered as a SB SEF cannot
also be a national securities exchange; that an exchange and a SB SEF
registered under Section 3D of the Exchange Act (or exempt from such
registration) are separate categories of regulated entities for the
trading of SB swaps; and that an entity registered as a SB SEF would
not also be required to register as a national securities exchange.
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\55\ See Public Law 111-203, Sec. 761(a) (adding Section 3a(77)
of the Exchange Act).
\56\ See Public Law 111-203, Sec. 763(a) (adding Section 3C(h)
of the Exchange Act). The Commission notes that in this section
Congress chose to use the term ``exchange'' as opposed to ``national
securities exchange.'' An exchange only becomes a ``national
securities exchange'' upon registration with the Commission pursuant
to Section 6 of the Exchange Act.
\57\ See Public Law 111-203, Sec. 763(c) (adding Section
3D(a)(1) of the Exchange Act).
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Section 36 of the Exchange Act \58\ gives the Commission broad
authority to exempt any person, security, or transaction from any
provision of the Exchange Act and any rule or regulation thereunder.
Such an exemption may be subject to conditions. Using this authority,
the Commission is proposing to amend Rule 3a1-1 of the Exchange Act
\59\ by adding paragraph (a)(4) to exempt any SB SEF from the
definition of ``exchange,'' if such SB SEF provides a marketplace
solely for the trading of SB swaps (and no other security) and complies
with the provisions of proposed Regulation SB SEF.\60\ The effect of
this exemption would be that an entity that registers as a SB SEF would
not also have to register as a national securities exchange.
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\58\ 15 U.S.C. 78mm.
\59\ 17 CFR 240.3a1-1.
\60\ See proposed Rule 3a1-1(a)(4).
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The Commission preliminarily believes that this proposed exemption
is necessary and appropriate in the public interest and is consistent
with the protection of investors because it would effectuate the intent
of the Dodd-Frank Act, as expressed in Sections 3(a)(77), 3C(h) and
3D(a)(1) of the Exchange Act, and it would eliminate what the
Commission believes would be a largely duplicative oversight of SB
SEFs. The Commission believes that Congress specifically provided a
comprehensive regulatory framework for SB SEFs in the Exchange Act, as
amended by the Dodd-Frank Act, and therefore that such entities that
are registered as SB SEFs should not also be required to register and
be regulated as national securities exchanges. The Commission notes
that a registered SB SEF that chose to provide a marketplace for the
trading of any security other than a SB swap would not be in compliance
with the exemption in proposed Rule 3a1-1(a)(4). Also, as the SB swaps
markets continue to evolve, the Commission will continue to assess the
appropriateness of, and/or take action with respect to, the proposed
exemption from the definition of exchange.
The Commission requests comment on the proposed exemption in Rule
3a1-1(a)(4). Is the exemption necessary or appropriate? Are the
conditions to the proposed exemption appropriate or should there be any
additional
[[Page 10959]]
conditions? What are the benefits or drawbacks of the proposed
exemption?
The definition of ``security-based swap execution facility'' and
the definition of ``exchange'' (certain terms of which have been
interpreted by Rule 3b-16 under the Exchange Act) are similar in that
they both include the concept of multiple participants and multiple
buyers and sellers, respectively. However, these definitions are not
identical. It is possible that an entity that trades SB swaps would
meet the criteria of Rule 3b-16 but not the definition of SB SEF
contained in Section 3(a)(77) of the Exchange Act. If such an entity
trades SB swaps that are subject to mandatory clearing and that are
made available to trade on an exchange or SB SEF, it would be required
to register as a national securities exchange, absent a limited volume
exemption pursuant to Section 5 of the Exchange Act.\61\ Should the
Commission permit such a platform to register as a SB SEF pursuant to
Section 3D(a)(1) of the Exchange Act? \62\ Should the Commission
instead provide an exemption from the definition of exchange for such
an entity? If so, why, and what should be the conditions to any such
exemption? What would be the benefits or drawbacks of any such
exemption?
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\61\ The trading of a SB swap on an ATS when that SB swap is
subject to mandatory clearing and is made available to trade on a SB
SEF or a national securities exchange would not satisfy the
requirement of Section 3C(h) of the Exchange Act. Section 3C(h) of
the Exchange Act states that, with respect to transactions involving
SB swaps subject to the clearing requirement of subsection (a)(1) of
Section 3C of the Exchange Act, the counterparties shall (A) execute
the transaction on an exchange; or (B) execute the transaction on a
SB SEF registered under Section 3D of the Exchange Act or a SB SEF
that is exempt from registration under section 3D(e) of the Exchange
Act. Although, as noted above, Section 3C(h) uses the term
``exchange'' as opposed to ``national securities exchange,'' an ATS
would not satisfy this requirement because an ATS is exempt from the
definition of exchange pursuant to Rule 3a1-1 under the Exchange
Act.
\62\ Section 3D(a)(1) of the Exchange Act states that ``no
person may operate a facility for the trading or processing of
security-based swaps, unless the facility is registered as a
security-based swap execution facility or as a national securities
exchange under this section.'' Section 3(a)(77) of the Exchange Act
defines ``security-based swap execution facility'' to mean a trading
system or platform in which multiple participants have the ability
to execute or trade SB swaps by accepting bids and offers made by
multiple participants in the facility or system, through any means
of interstate commerce, including any trading facility, that (A)
facilitates the execution of SB swaps between persons; and (B) is
not a national securities exchange. The Commission interprets these
two provisions, taken together, to require registration as a SB SEF
or a national securities exchange for any entity that meets the
definition of SB SEF in Section 3(a)(77) of the Exchange Act.
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V. Conditional Exemption From Regulation as Brokers for Security-Based
Swap Execution Facilities
An entity that meets the definition of ``security-based swap
execution facility'' in Section 3(a)(77) of the Exchange Act also would
meet the definition of ``broker'' set forth in Section 3(a)(4) of the
Exchange Act.\63\ The term ``broker'' is generally defined to mean any
person engaged in the business of effecting transactions in securities
for the account of others.\64\ A SB SEF is defined as a trading system
or platform in which multiple participants have the ability to execute
or trade SB swaps by accepting bids and offers made by multiple
participants in the facility or system, through any means of interstate
commerce, including any trading facility, that: (A) Facilitates the
execution of SB swaps between persons; and (B) is not a national
securities exchange.\65\ A SB SEF, by facilitating the execution of SB
swaps between persons, also would be engaged in the business of
effecting transactions in securities for the account of others and
therefore would meet the statutory definition of ``broker.'' Absent an
exception or exemption, a SB SEF that effects transactions in SB swaps
would be required to register as a broker pursuant to Sections 15(a)(1)
and (b) of the Exchange Act \66\ and to comply with the reporting and
other requirements applicable to brokers under the Exchange Act and
rules and regulations thereunder.
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\63\ 15 U.S.C. 78c(a)(4).
\64\ Id. The term ``security'' in Section 3(a)(10) of the
Exchange Act includes a ``security-based swap.'' See 15 U.S.C.
78c(a)(10).
\65\ See Public Law 111-203, Sec. 761(a) (adding Section
3(a)(77) of the Exchange Act).
\66\ 15 U.S.C. 78o(a)(1) and (b). Section 15(a)(1) generally
provides that, absent an exception or exemption, a broker or dealer
that uses the mails or any means of interstate commerce to effect
transactions in, or to induce or attempt to induce the purchase or
sale of, any security must register with the Commission. Section
15(b) generally provides the manner of registration of brokers and
dealers and other requirements applicable to registered brokers and
dealers.
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As the Commission noted in its discussion regarding the exemption
from the definition of ``exchange'' for SB SEFs, the Exchange Act, as
amended by the Dodd-Frank Act, sets forth a comprehensive regulatory
framework for SB SEFs. The Commission believes that this framework
indicates that Congress did not intend for entities that meet the
definition of SB SEF in Section 3(a)(77) of the Exchange Act and that
comply with Section 3D of the Exchange Act and the rules and
regulations thereunder (including the registration as a SB SEF) also to
be subject to all of the requirements set forth in the Exchange Act and
the rules and regulations thereunder applicable to brokers.\67\ As
discussed above, the Exchange Act, as amended, establishes the
statutory structure for SB SEFs to register with the Commission and for
the Commission to adopt rules and regulations that require these
entities to comply with the Core Principles and enforce compliance with
those Core Principles and any rules or regulations that the Commission
may adopt.
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\67\ Brokers and dealers must comply with the Exchange Act
provisions and rules and regulations thereunder applicable to them.
See, e.g., Section 15 of the Exchange Act, 15 U.S.C. 78o, and rules
and regulations thereunder. For example, brokers and dealers must
comply with a number of regulations that govern their conduct, such
as rules relating to customer confirmations and disclosure of credit
terms in margin transactions. See 17 CFR 240.10b-10 and 17 CFR
240.10b-16. They also must comply with a number of financial
responsibility regulations, such as the net capital and customer
protection rules. See 17 CFR 240.15c3-1 and 17 CFR 240.15c3-3. Among
other things, registered brokers and dealers also must make and keep
current books and records relating to their business and detailing,
among other things, securities transactions, money balances, and
securities positions; keep records for required periods and furnish
copies of those records to the Commission on request; and file
certain financial reports with the Commission. See 17 CFR 240.17a-3,
17 CFR 240.17a-4, and 17 CFR 240.17a-5.
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Section 36 of the Exchange Act gives the Commission broad authority
to exempt any person, security, or transaction from provisions of the
Exchange Act and the rules thereunder.\68\ Such an exemption may be
subject to conditions.\69\ Using this authority, as well as its
authority to establish procedures regarding the registration of
brokers, the Commission is proposing Rule 15a-12 under the Exchange Act
to allow a SB SEF that is a broker solely due to its activity with
respect to SB swaps executed on or through the SB SEF to satisfy the
requirement to register as a broker by registering as a SB SEF. Such
person, however, must not engage in any activity that would require
registration as a broker other than facilitating the trading of SB
swaps on or through the SB SEF in a manner consistent with Regulation
SB SEF. For example, acting as an agent to a counterparty to a SB swap
trade or acting in a discretionary manner with respect to the execution
of a SB swap trade would indicate that such person may be acting as a
broker and, if the person is acting as a broker, it would be required
to register as such, unless an exemption or exception from registration
was available. If an entity, such as an inter-dealer broker, for
example, elects not to separate its inter-
[[Page 10960]]
dealer broker from its SB SEF or create a subsidiary for its SB SEF,
and instead chooses to operate the SB SEF as the same entity as the
broker, the inter-dealer broker would not qualify for the exemption.
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\68\ 15 U.S.C. 78mm.
\69\ See id.
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In addition, the Commission is proposing to conditionally exempt
any SB SEF from the Exchange Act and the rules and regulations
thereunder applicable to brokers, except Exchange Act Sections
15(b)(4), 15(b)(6), and 17(b).\70\ Under the proposed Rule, three key
provisions of the Exchange Act that serve as the basis for Commission
examination and enforcement of the Federal securities laws with respect
to a registered broker would continue to apply to a SB SEF that relies
on the exemption in proposed Rule 15a-12. Section 17(b) of the Exchange
Act \71\ authorizes the Commission to conduct reasonable periodic,
special, or other examinations, of ``[a]ll records'' maintained by
entities described in Section 17(a),\72\ including registered
brokers.\73\ These examinations may be conducted ``at any time, or from
time to time,'' as the Commission ``deems necessary or appropriate in
the public interest, for the protection of investors, or otherwise in
furtherance of the purposes of [the Exchange Act].'' \74\ Proposed Rule
15a-12 also would not exempt a broker that registers as a SB SEF from
the statutory disqualification provisions in Sections 15(b)(4) and (6)
of the Exchange Act, both with respect to itself and with respect to
its associated persons.\75\ Further, pursuant to proposed Rule 15a-
12(d), a broker registered under Section 15a-12(a) of the Exchange Act
that does not engage in any activity other than the facilitating and
trading of SB swaps on or through the SB SEF in a manner consistent
with Regulation SB SEF would be exempt from the Securities Investor
Protection Act (``SIPA''), including membership in the Securities
Investor Protection Corporation.\76\
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\70\ See proposed Rule 15a-12(c).
\71\ 15 U.S.C. 78q(b). See also 15 U.S.C. 78m(h)(4).
\72\ 15 U.S.C. 78q(a).
\73\ 15 U.S.C. 78q(b).
\74\ Id.
\75\ 15 U.S.C. 78o(b)(4) and (6). See also 15 U.S.C. 78c(a)(18)
(defining ``person associated with a broker or dealer'' or
``associated person of a broker or dealer'').
\76\ Section 36 of the Exchange Act gives the Commission broad
authority to exempt any person, security, or transaction from any of
the provisions of the Exchange Act. This authority would include the
ability of the Commission to grant an exemption under Section 36
from certain requirements of SIPA. See Securities Exchange Act
Release No. 40594 (October 23, 1998), 63 FR 59362, 59366, n. 31
(November 3, 1998).
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The Commission believes that the exemption in proposed Rule 15a-12
under the Exchange Act is necessary and appropriate in the public
interest and consistent with the protection of investors because it
would eliminate what the Commission believes would be unnecessary
additional regulation of SB SEFs. Because SB SEFs would be required to
register as such under Section 3D of the Exchange Act, it would be
unnecessary for them also to be subject to statutory and regulatory
provisions governing brokers, subject to certain exceptions set forth
in the proposed rule. The Commission believes that Congress
specifically provided a comprehensive regulatory framework for SB SEFs
in the Exchange Act, as amended by the Dodd-Frank Act, and therefore
that such entities generally should not also be regulated as brokers
where such regulation would be duplicative and unnecessary. As such,
the Commission preliminarily believes that the broker registration and
oversight process can be accomplished largely through the entity's
registration as a SB SEF. In this regard, the Commission also believes
that it would be unnecessary and inconsistent with the comprehensive
regulatory framework for SB SEFs to require a SB SEF, which would not
be a custodian of customer funds or securities and would not otherwise
operate as a broker, to comply with SIPA. SIPA is a comprehensive
regulatory scheme for the orderly liquidation of failed broker-dealers
and the return of customer property. If additional regulation is
developed for brokers, any application of such regulation to SB SEFs
would be proposed by rule. Any order, such as a suspension of the
registration or trading of a security pursuant to Sections 12(j) or
12(k) of the Exchange Act,\77\ if applicable to a SB SEF, would specify
that it would be applicable to a SB SEF.
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\77\ 15 U.S.C. 78l(j) and (k).
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The Commission notes that it is not exempting SB SEFs from
registration as brokers; rather, it is proposing to eliminate an
additive layer of regulation that the Commission believes is not
necessary in light of its regulatory oversight of SB SEFs. The
Commission does not believe, however, that it would be in the public
interest to exempt SB SEFs from the examination requirements of Section
17(b) of the Exchange Act, the statutory disqualification provisions of
Sections 15(b)(4) and (6) of the Exchange Act.
The Commission requests comment on all aspects of its proposed
rule. Specifically, the Commission requests comment on the scope, form,
and conditions of the proposed exemption. Is the exemption necessary?
Should the Commission add additional conditions to its exemption,
including requiring compliance with any other statutory provisions or
any other rules or regulations applicable to brokers? If so, which
ones, and why? Should the Commission exempt SB SEFs from the provisions
of SIPA? If not, why not?
The Commission seeks comment on whether there is a need for SB SEFs
to become members of a national securities association. Would it be
beneficial to require SB SEFs to become members of a national
securities association to provide an additional level of regulatory
oversight in addition to oversight by the Commission? Why or why not?
Should the proposed exemption include a condition requiring SB SEFs to
comply with Section 15(b)(8) under the Exchange Act,\78\ which requires
a registered broker to be a member of a registered national securities
association unless such broker effects transactions solely on a
national securities exchange of which it is a member? What would be the
advantages or disadvantages of such membership?
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\78\ 15 U.S.C. 78o(b)(8).
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As noted above, the proposed Rule would not apply in those
instances when the SB SEF is engaging in activity that is not solely
related to the execution of SB swaps on or through the facility, e.g.,
when the broker provides services such as acting as an agent to a
counterparty to an SB swap trade or acts in a discretionary manner with
respect to the execution of SB swap trades. In such instances, should
the broker be required to comply with all Exchange Act and Commission
requirements relating to brokers? If so, how would the broker be able
to separate its brokerage function from its activities as a SB SEF?
What potential conflict concerns would be raised, if any, if an entity
that was engaged in brokerage activity in SB swaps on a SB SEF were
affiliated with that SB SEF, or if an entity were engaging in brokerage
activity in SB swaps on a SB SEF in the same legal entity that operates
the SB SEF? If commenters believe that such activity would raise
concerns, should the Commission require the entity's brokerage
activities and its SB SEF activities to be conducted on separate legal
entities? Or, should the Commission impose requirements on the ability
of a broker to be affiliated with a SB SEF? If so, what conditions
should the Commission impose, and how would they address any potential
conflict concerns?
Are there any potential conflict concerns raised if a wholesale
broker is affiliated with a SB SEF, or is operating
[[Page 10961]]
in the same legal entity as a SB SEF? If so, what are those concerns,
and what are commenters views on whether and how such concerns should
be addressed?
What would be the effect of having SB SEFs join a registered
securities association without having a comparable SRO for security-
based swap dealers (``SB swap dealers'') or major security-based swap
participants (``major SB swap participants'')? Because SB SEFs would be
subject to regulatory obligations, should the Commission provide
guidance on the acceptable scope of any outsourcing of regulatory
matters that the SB SEF could undertake?
VI. Access to Security-Based Swap Execution Facilities
The Dodd-Frank Act does not define the categories of market
participants that may have access to trading on a registered SB SEF or
the terms of such access. For the purposes of providing guidance on
this issue and to ensure that SB SEFs grant access to their markets in
a manner that is consistent with the Core Principles in Section 3D of
the Exchange Act, the Commission is proposing Rule 809 and 811(b).
Proposed Rule 809 would set forth the categories of persons that would
be permitted to have direct access to trading on a registered SB SEF as
a participant and also the terms and conditions that the SB SEF would
need to adopt for granting such access.\79\ Proposed Rule 811(b) would
elaborate on the standards for providing impartial access.\80\ The
purpose of the proposed rules is to ensure that access to SB SEFs is
granted in a manner that strikes an appropriate balance between the
statutory requirements of impartial access (Core Principle 2) and
financial integrity of transactions (Core Principle 6) for SB SEFs.
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\79\ See proposed Rule 809.
\80\ See proposed Rule 811(b).
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The Commission understands that, currently, trades in SB swaps
occur among dealers on OTC inter-dealer markets, and between dealers
and end-user customers on single- or multi-dealer OTC dealer-to-
customer markets or through bilateral negotiations. In addition,
trading of SB swaps in these OTC markets is dominated by a small number
of large swap dealers.\81\ When a small group of market participants
dominates much of the trading in SB swaps, and exerts control over
access to the SB swaps market, it raises concerns about open access and
competition. If SB SEFs are controlled by a small group of dealers who
also dominate trading in the market for SB swaps, the dealers may have
economic incentives to exert undue influence to restrict the level of
access to SB SEFs and thus impede competition by other market
participants in order to increase their ability to maintain higher
profit margins.\82\ At the same time, in the absence of clearing or
other financial safeguards, counterparties assess the degree of credit
risk posed by each other, and enter into SB swap transactions only with
other persons deemed to have an acceptable level of credit risk.
Therefore, in the OTC market for SB swaps, open access and containing
counterparty credit risk may be viewed as competing and potentially
conflicting goals.
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\81\ See Office of the Comptroller of the Currency (``OCC''),
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 * * *.''). Several commenters on
proposed Regulation MC, however, took issue with this statistic
because the OCC data included information about U.S. dealers only.
See, e.g., Letter from Barry L. Zubrow, Executive Vice President &
Chief Risk Officer, JP Morgan Chase & Co., to Elizabeth M. Murphy,
Secretary, Commission, and David A. Stawick, Secretary, CFTC, dated
November 17, 2010.
\82\ In addition, these market participants might be motivated
to restrict the scope of SB swaps that are made available for
trading at SB SEFs if there is a strong economic incentive to keep
such SB swaps in the OTC market. Conflicts of interest concerns
relating to SB SEFs are discussed in greater depth in the release
proposing Regulation MC, which recently was published by the
Commission as part of a rulemaking mandated by Section 765 of the
Dodd-Frank Act. See Securities Exchange Act Release No. 63107
(October 14, 2010), 75 FR 65882 (October 26, 2010) (``Regulation MC
Proposing Release''). Section 765 of the Dodd-Frank Act requires the
Commission to adopt rules to mitigate specified conflicts of
interest relating to SB SEFs, security-based swap clearing agencies,
and SBS exchanges.
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The Dodd-Frank Act addresses these competing concerns in several
ways. Section 3C(a)(1) of the Exchange Act requires the mandatory
clearing of SB swaps that the Commission determines must be
cleared.\83\ With respect to trading on SB SEFs, the Dodd-Frank Act
requires SB SEFs to establish rules for both impartial access to their
markets and the financial integrity of transactions on their markets,
including with respect to clearance and settlement. Specifically, Core
Principle 2 requires SB SEFs to provide market participants with
impartial access to the market.\84\ Under Core Principle 6, SB SEFs are
required to establish and enforce rules and procedures for ensuring the
financial integrity of SB swaps entered on or through the facilities of
the SB SEF, including the clearance and settlement of SB swaps pursuant
to Section 3C(a)(1) of the Exchange Act.\85\ The Commission does not
believe that the requirement for impartial access to a SB SEF under
Core Principle 2 means that it must allow unfettered access to any and
all persons. Rather, the requirements of Core Principle 6 that SB SEFs
ensure the financial integrity of transactions on their markets,
particularly with respect to the mandatory clearing requirement, permit
SB SEF to have minimum standards for access to their markets, though
such access must be provided on an impartial basis.
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\83\ See Public Law 111-203, Sec. 763(a) (adding Section
3C(a)(1) of the Exchange Act). Section 3C(a)(1) makes it unlawful
for a person to engage in a SB swap unless the SB swap is submitted
for clearing to a registered clearing agency, if the SB swap is
required to be cleared.
\84\ See Public Law 111-203, Sec. 763(c) (adding Section
3D(d)(2) of the Exchange Act).
\85\ See Public Law 111-203, Sec. 763(c) (adding Section
3D(d)(6) of the Exchange Act). Section 3C(a)(1) makes it unlawful
for a person to engage in a SB swap unless the SB swap is submitted
for clearing to a registered clearing agency, if the SB swap is
required to be cleared. See Public Law 111-203, Sec. 763(a) (adding
Section 3C(a)(1) of the Exchange Act).
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In recognition of the challenges in striking the balance between
impartial access and financial integrity goals of the Dodd-Frank Act,
and in view of the current dominance of trading in SB swaps in the OTC
market by a small number of dealers, the Commission is proposing Rule
809 and Rule 811(b) to establish certain baseline principles for
granting access to SB SEFs in compliance with the requirements of both
Core Principles 2 and 6. Specifically, proposed Rule 809(a) through (c)
and proposed Rule 811(b) would require that SB SEFs enact and apply
objective standards for access to their markets, in compliance with the
impartial access requirement of Core Principle 2. Proposed Rule 809(a)
and (c)(1) through (4) would establish certain minimum, objective
standards for SB SEF participants, in compliance with the financial
integrity of transactions requirements of Core Principle 6.
A. Impartial Access
Proposed Rule 809(a) would provide that only registered SB swap
dealers, major SB swap participants, or brokers (as defined in section
3(a)(4) of the Exchange Act), or eligible contract participants \86\
would be eligible to
[[Page 10962]]
become participants in a SB SEF. Proposed Rule 809(b) would require a
SB SEF to permit all eligible persons that meet the requirements for
becoming a participant under Rule 809(a) and the SB SEF's rules to
become participants in the SB SEF, consistent with the requirements for
impartial access in Core Principle 2 and proposed Rule 811(b).\87\
Proposed Rule 809(b) would, however, permit a SB SEF to choose to not
permit any eligible contract participants that are not registered with
the Commission as a SB swap dealer, major SB swap participant, or
broker (as defined in section 3(a)(4) of the Act \88\) (``non-
registered ECP''), to become participants in the SB SEF. Thus, under
the proposed rule, while a SB SEF could choose to not allow any non-
registered ECPs to become participants, if the SB SEF chose to permit
such non-registered ECPs to become participants in the SB SEF, it could
not selectively prohibit certain non-registered ECPs from becoming
participants if they otherwise satisfied the SB SEF's requirements. In
effect, proposed Rule 809(b) would limit the discretion involved in
admitting participants to a SB SEF because it would impose an
affirmative requirement on SB SEFs to grant qualified persons access to
their markets as participants.\89\
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\86\ The term ``eligible contract participant'' is defined in
Section 3(a)(65) of the Exchange Act as having the same meaning as
in Section 1a of the CEA (7 U.S.C. 1a). As discussed above, this
term may be further defined by the Commission and the CFTC pursuant
to various sections of the Dodd-Frank Act. See supra note 3.
\87\ Core Principle 2 requires a SB SEF to establish and enforce
compliance with rules relating to any limitation on access to the
facility and to provide market participants with impartial access to
the market. See Public Law 111-203, Sec. 763(c) (adding Section
3D(d)(2) of the Exchange Act).
\88\ 15 U.S.C. 78c(a)(4).
\89\ This proposed requirement is analogous to the fair access
requirement for national securities exchanges under Section 6(b)(2)
of the Exchange Act, which also imposes an affirmative duty to admit
qualified broker-dealers as members. See 15 U.S.C. 78f(b)(2). ``The
rules of the exchange [must] provide that any registered broker or
dealer or natural person associated with a registered broker or
dealer may become a member of such exchange * * *.''
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Proposed Rule 809(c) would require a SB SEF to establish rules
setting forth requirements for eligible persons to become participants
in the SB SEF consistent with the SB SEF's obligations under the
Exchange Act and the rules thereunder, and includes certain enumerated
minimum standards.\90\ Proposed Rule 809(c), by requiring a SB SEF to
codify its standards for becoming a participant in its market, would
make the process of admitting participants transparent and rules-based,
and thereby more objective. In addition, such rules would have to be
consistent with proposed Rule 811(b), which would require every SB SEF
to establish fair, objective, and not unreasonably discriminatory
standards for granting impartial access to trading on the facility.\91\
Proposed Rule 811(b) would require that a SB SEF may not unreasonably
prohibit or limit any person with respect to access to the services
offered by the SB SEF by applying those standards in an unfair or
unreasonably discriminatory manner.\92\ Proposed Rule 811(b)(3) also
would require every SB SEF to make and keep records of all grants,
denials, or limitations of access and to report that information on
proposed Form SB SEF \93\ and in the annual compliance report of the
Chief Compliance Officer (``CCO'') pursuant to proposed Rule 823(c).
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\90\ See proposed Rule 809(c)(1)-(4) and infra notes 105-109 and
accompanying text for a discussion of those proposed provisions.
\91\ See proposed Rule 811(b)(1).
\92\ See proposed Rule 811(b)(2).
\93\ The Commission is proposing that SB SEFs register on Form
SB SEF. See infra Section XXII for a discussion of proposed Form SB
SEF.
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As was the case when the Commission adopted Regulation ATS,\94\
these provisions are based on the principle that qualified market
participants should have fair access to the nation's securities
markets. Under the proposal, a SB SEF would have flexibility in
establishing standards for impartial access so long as those standards
are fair and objective and do not unreasonably discriminate, and the SB
SEF does not apply the standards in an unfair or unreasonably
discriminatory manner. For example, a SB SEF could establish objective
minimum capital or credit requirements for participants, as long as
they were not designed to, and did not have the effect of, unreasonably
discriminating among persons seeking access to the SB SEF.\95\
Similarly, a SB SEF could reasonably deny access to participants based
on an unfavorable disciplinary history. Provided that these or other
standards are objective and applied consistently to all potential
participants, a SB SEF could be considered to be granting or denying
access fairly. A denial of access might be unreasonable, however, if it
were based solely, for example, on the business activities of a
prospective participant that are unrelated to trading on the SB
SEF.\96\
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\94\ 17 CFR 242.300 et seq. See Securities Exchange Act Release
No. 40760, (December 8, 1998), 63 FR 70844 (``ATS Adopting
Release'') at notes 245 to 256.
\95\ See infra Section XII for a discussion of the ability of a
SB SEF to impose higher capital requirements.
\96\ The Commission also discussed fair access at length in the
ATS Adopting Release. See supra note 94 at note 245.
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The Commission believes that impartial access to SB SEFs would work
in conjunction with rules proposed by the Commission to mitigate
conflicts of interest that could arise when a small number of market
participants, including their related persons, exercise control or
undue influence over a SB SEF either through ownership of voting
interests or participation in the governance of the SB SEF.\97\ The
Commission requests comment, however, on the extent to which both types
of rules are necessary to ensure fair access to SB SEFs.
---------------------------------------------------------------------------
\97\ See Regulation MC Proposing Release, supra note 82.
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B. Financial Integrity
As noted above, proposed Rule 809(a) would permit only persons that
are registered with the Commission as SB swap dealers, major SB swap
participants, or brokers, or persons that are eligible contract
participants (as defined in section 3(a)(65) of the Act) to become
participants of a SB SEF.\98\ Permitting registered SB swap dealers,
major SB swap participants, and brokers to become participants would
support the SB SEF's duty to ensure the financial integrity of
transactions, including the clearance and settlement of SB swaps, under
Core Principle 6.\99\ Registered SB swap dealers, major SB swap
participants, and brokers are all subject to, or would be subject to,
minimum financial responsibility requirements (including margin and net
capital requirements) and business conduct requirements as a result of
their registered status under the Exchange Act, which the Commission
believes would serve as a useful baseline for ensuring the financial
integrity of their transactions entered on SB SEFs.\100\
[[Page 10963]]
Moreover, the Commission notes that these registered persons are
subject to Commission oversight for compliance with those
requirements.\101\
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\98\ See proposed Rule 809(a). The term ``participant,'' when
used with respect to a SB SEF, would mean a person that is permitted
to directly effect transactions on the SB SEF. See proposed Rule
800.
\99\ Core Principle 6 requires SB SEFs to establish and enforce
rules and procedures for ensuring the financial integrity of SB
swaps entered on or through the facilities of the SB SEF, including
the clearance and settlement of SB swaps pursuant to Section
3C(a)(1) of the Exchange Act. See Public Law 111-203, Sec. 763(c)
(adding Section 3D(d)(6) of the Exchange Act).
\100\ The Exchange Act requires registered SB swap dealers and
major SB swap participants to comply with certain minimum financial
responsibility and business conduct requirements. See Public Law
111-203, Sec. 764(a) (adding Sections 15F(e) and (h) of the
Exchange Act). The financial responsibility and business conduct
requirements applicable to registered SB swap dealers and major SB
swap participants will be the subject of a separate rulemaking.
Likewise, the Exchange Act requires registered brokers to comply
with certain financial responsibility and business conduct
obligations under Section 15(c) of the Exchange Act and the rules
and regulations thereunder. See 15 U.S.C. 78o(c), and Rules 15c1-2,
15c1-3, 15c2-1, 15c2-5, and 15c3-1 under the Exchange Act, 17 CFR
240.15c1-2, 15c1-3, 15c2-1, 15c2-5, and 15c3-1.
\101\ The Commission's regulatory and oversight authority
includes and would include requirements to keep books and records
open to the inspection and examination authority of the Commission.
See Section 15F(f) of the Exchange Act, Public Law 111-203, Sec.
764 (adding Section 15F(f) of the Exchange Act) and Section 17(b) of
the Exchange Act, 15 U.S.C. 78q(b).
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At the same time, proposed Rule 809(a) also would permit a SB SEF
to choose to allow non-registered ECPs to become participants in the SB
SEF. If a SB SEF chooses to permit non-registered ECPs to become
participants, the SB SEF would be responsible for establishing risk
management controls and supervisory procedures reasonably designed to
manage financial, regulatory, and other risks associated with the
eligible contract participants' access under proposed Rule 809(d).
Proposed Rule 809(d) would require SB SEFs that provide direct
access to non-registered ECPs as participants to establish, document,
and maintain a system of risk management controls and supervisory
procedures reasonably designed to manage the financial, regulatory, and
other risks of direct access by eligible contract participants.\102\
The SB SEF'S risk management controls and supervisory procedures for
granting access to non-registered ECPs would be required to be
reasonably designed to ensure compliance with all regulatory
requirements. The proposed requirements for SB SEFs in proposed Rule
809(d) are based on similar requirements in Rule 15c3-5(b) and (c)(2)
under the Exchange Act for ATSs that provide access to their markets to
non-broker-dealers.\103\
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\102\ See proposed Rule 809(d)(1).
\103\ See 17 CFR 240.15c3-5(c).
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Allowing eligible contract participants to be direct participants
in a SB SEF would be consistent with the way the OTC SB swaps market
operates today. The Commission preliminarily believes that it is
reasonable and appropriate to require the SB SEF that provides direct
access to non-registered ECPs to undertake certain responsibilities to
manage the risk of those market participants accessing their market.
This proposed requirement would support the SB SEF's compliance with
the financial integrity of transaction requirement of Core Principle 6.
Participants that are SB swap dealers, major SB swap participants, and
brokers that are participants of the SB SEFs would be required to be
registered with the Commission and be subject to certain margin, net
capital, and other financial requirements that, by virtue of their
registration, are designed to curtail the market risk imposed by their
trading activities. In contrast, non-registered ECPs would not have
corresponding requirements under the Exchange Act. The proposed
requirements of Rule 809(d) are designed to reduce the risks associated
with non-registered ECPs that have direct access to SB SEFs by
requiring SB SEFs that choose to allow non-registered ECPs to be
participants to establish, document and maintain risk management
controls and supervisory procedures. Since non-registered ECPs are not
subject to capital and other financial requirements, there is a concern
that, in the absence of requiring risk management controls and
supervisory procedures, they could enter into trades that exceed
appropriate credit or capital limits for their risk capacity. The
Commission preliminarily believes that the SB SEF is best positioned to
implement the proposed controls and procedures.
The Commission preliminarily believes that proposed Rules 809(a)
and (d) would ensure that access to SB SEFs is sufficiently broad,
while at the same time imposing certain thresholds and conditions for
such access to ensure the financial integrity of transactions on the SB
SEF. The Commission preliminarily believes that the proposed limit on
eligible persons that may become participants in SB SEFs under proposed
Rule 809(a) should not have the effect of preventing interested market
participants from trading SB swaps. The Commission notes, for example,
that many dealers would likely meet the definition of SB swap dealer,
and thereby would be able to have direct access to trading SB swaps on
SB SEFs once they are registered. Many other market participants would
qualify for direct access by meeting the definition of ``eligible
contract participant'' in Section 3(a)(65) of the Act. The Commission
notes that, although SB SEFs are not required to provide access to
their markets to non-registered ECPs as participants, if a SB SEF
should provide access to non-registered ECPs to its markets as
participants, it would be required to provide such access impartially
consistent with proposed Rule 811(b). In addition, the Commission notes
that eligible contract participants that are not participants could
access a SB SEF indirectly through a participant.\104\ Therefore, the
Commission preliminarily believes that proposed Rule 809(a) would not
have an adverse effect on access to trading SB swaps on a SB SEF.
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\104\ Under the Dodd-Frank Act, transactions in SB swaps with a
market participant that is not an eligible contract participant must
be effected on a national securities exchange registered under
Section 6(b) of the Exchange Act. See Public Law 111-203, Sec.
763(e) (adding Section 6(l) of the Exchange Act). In addition, the
offer and sale of SB swaps to market participants that are not
eligible contract participants would have to be pursuant to an
effective registration statement under Section 6 of the Securities
Act of 1933. See 15 U.S.C. 77f.
---------------------------------------------------------------------------
To help ensure that access to SB SEFs is granted in a manner that
would enable the SB SEF to carry out its responsibilities under Core
Principle 6, proposed Rule 809(c)(1) and (2) also would require SB SEFs
to have rules to require a participant to, at a minimum: (1) Be a
member of, or have an arrangement with a member of, a registered
clearing agency to clear trades in SB swaps that are subject to
mandatory clearing pursuant to Section 3C(a)(1) of the Act and entered
into by the participant on the SB SEF; and (2)(i) to meet the minimum
financial responsibility requirements \105\ and recordkeeping and
reporting requirements \106\ imposed by the Commission by virtue of its
registration as a SB swap dealer, major SB swap participant, or broker,
or (ii) in the case of an eligible contract participant, meet the
recordkeeping and reporting requirements that the SB SEF shall
establish pursuant to proposed Rule 813.
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\105\ See Public Law 111-203, Sec. 764(a) (adding Sections
15F(e) of the Exchange Act) and Section 15(c) of the Exchange Act,
15 U.S.C. 78o(c). For registered brokers, see also Rule 15c3-1 under
the Exchange Act. The financial responsibility requirements
applicable to registered SB swap dealers and major SB swap
participants will be the subject of a separate rulemaking.
\106\ The Exchange Act requires registered SB swap dealers and
major SB swap participants to keep books and records of activities
related to their business and provide certain reports of those
activities. See Public Law 111-203, Sec. 764(a) (adding Section
15F(f) of the Exchange Act). The rules relating to the recordkeeping
and reporting requirements of these entities will be the subject of
a separate Commission rulemaking. Likewise, the Exchange Act and
rules and regulations thereunder require registered brokers to keep
books and records of activities related to their business and
provide certain reports of those activities. See Section 17(a) of
the Exchange Act, 15 U.S.C. 78q(a), and see, e.g., Rules 17a-3
through 17a-5 under the Exchange Act, 17 CFR 240.17a-3 through
240.17a-5.
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Requiring SB SEFs to put in place rules that require its
participants to be a clearing member of, or have arrangements with a
clearing member of, a registered clearing agency to clear trades in SB
swaps that are subject to mandatory clearing and entered by the
participant and, in the case of registered
[[Page 10964]]
SB swap dealers, major SB swap participants, or brokers, to meet the
minimum financial responsibility requirements imposed by the Commission
should strengthen the financial integrity of SB swap transactions that
occur on the SB SEFs by reducing the counterparty credit risks
associated with SB swap transactions, consistent with Core Principle
6.\107\ Furthermore, the requirement for participants to meet the
minimum recordkeeping and reporting requirements imposed by the
Commission by virtue of their registration or, in the case of non-
registered ECPs, those requirements imposed by the SB SEF, would enable
a SB SEF to obtain the necessary information to perform their functions
under Section 3D of the Exchange Act, consistent with Core Principle 5,
and to enforce its rules and procedures for ensuring the financial
integrity of SB swaps entered on the SB SEF, consistent with Core
Principle 6.\108\ The recordkeeping and reporting requirements also
should foster a SB SEF's ability to comply with its obligations to
capture information that may be used in establishing whether rule
violations have occurred under Core Principle 2 and to monitor trading
in SB swaps under Core Principle 4.\109\
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\107\ See supra note 99.
\108\ See Public Law 111-203, Sec. 763(c) (adding Sections
3D(d)(5) and (6) of the Exchange Act).
\109\ See Public Law 111-203, Sec. 763(c) (adding Sections
3D(d)(2)(B)(ii) and 3D(d)(4)(B).
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Proposed Rules 809(c)(3) and (4) would require SB SEFs to have
rules to require a participant to, at a minimum: (1) Agree to comply
with the rules, policies, and procedures of the SB SEF, and (2) consent
to disciplinary procedures of the SB SEF for violations of its rules.
The Commission notes that the cooperation of participants is critical
to the SB SEF's ability to comply with several Core Principles in
Section 3D of the Exchange Act, particularly Core Principles 2
(Compliance with Rules), 4 (Monitoring of Trading and Trade
Processing), and 6 (Financial Integrity of Transactions). For this
reason, the Commission believes that it is important for SB SEFs to
have rules conditioning access to their markets on a participant's
compliance with the SB SEF's rules and its consent to the disciplinary
procedures of the SB SEF.
The Commission requests comments on all aspects of the proposed
rules relating to access on SB SEFs. The Commission also requests
comments on whether proposed Rule 809 incorporates the appropriate
categories of persons to be allowed direct access to SB SEFs. If not,
how should the categories of such persons be altered? Should certain
proposed participants be excluded from having direct access to a SB
SEF? If so, which ones and why? Should other categories of persons also
be allowed to have direct access to a SB SEF? If so, which ones, and
why? Are there any concerns with allowing non-regulated entities to
directly access a SB SEF? What would be the benefits of allowing such
access? The Commission understands that it is the current practice for
customers to engage in transactions with dealers without
intermediation. How would the requirements of proposed Rule 809 affect
that practice? Please describe any such effects. What would be the
result of the proposed rule?
What are the benefits and drawbacks of the proposal for SB SEFs to
provide direct access to all persons that meet the requirements for
becoming a participant in their rules? Are there other alternatives
that the Commission should consider to achieve the goal of having
impartial access to SB SEFs, consistent with Core Principle 2? If so,
please explain.
Proposed Rule 809(b) would allow a SB SEF to choose not to permit
non-registered ECPs to become participants. How, if at all, would this
proposed provision affect access to SB SEFs? Should the Commission
allow SB SEFs to have the discretion to choose whether or not to permit
non-registered ECPs to become participants? Or should the Commission
mandate whether or not to require SB SEFs to allow non-registered ECPs
to become participants? If the latter, should the Commission require SB
SEFs to allow, or prohibit, non-registered ECPs from becoming
participants? What would be the effect on access of a mandate for
either option? Are SB SEFs that are capable of establishing the risk
management controls and supervisory procedures required in proposed
Rule 809(d) likely to exclude non-registered ECPs from becoming
participants to reduce competition on their markets? Would having the
flexibility to exclude non-registered ECPs from becoming participants
advance the market entry of smaller SB SEFs that do not have the
resources to comply with proposed Rule 809(d),\110\ thus increasing
opportunities for competition across SB SEFs?
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\110\ Proposed Rule 809(d) would require a SB SEF that choose to
permit non-registered ECPs to have access as participants to
establish, document, and maintain a system of risk management
controls and supervisory procedures reasonably designed to manage
the financial, regulatory, and other risks of this business activity
and to ensure compliance with all regulatory requirements.
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Are the proposed minimum standards for participants of a SB SEF, as
set forth in proposed Rule 809(c), necessary and appropriate? If not,
why not? Do the qualifications for being a participant in proposed Rule
809(c)(1) and (2) adequately address the financial integrity
requirements of Core Principle 6? Do the requirements of proposed Rule
809(c)(2) also foster the ability of SB SEFs to comply with their
obligations under Core Principles 2, 4, and 5? What other
qualifications should participants in a SB SEF be required to meet as a
threshold matter? Are there other minimum standards that the Commission
should consider requiring?
Are the requirements in proposed Rule 809(d) pertaining to risk
management controls and supervisory procedures for SB SEFs that provide
direct access to non-registered ECPs necessary or appropriate? If so,
why? If not, why not and what would be a better alternative for
addressing risks, if any, associated with providing access to non-
registered ECPs?
The Commission recently adopted new Rule 15c3-5 to require broker-
dealers to have certain risk management controls for direct and
indirect access to trading on national securities exchanges and
ATSs.\111\ Specifically, Rule 15c3-5 imposes requirements on broker-
dealers that have direct access to trading on national securities
exchanges and ATSs and to broker-dealer operators of ATSs that provide
direct access to non-broker-dealers. Proposed Rule 809(d) would
incorporate a requirement to establish, document, and maintain a system
of risk management controls and supervisory procedures reasonably
designed to manage the financial, regulatory, and other risks of their
business activity that is generally based upon the requirements of Rule
15c3-5(b) and (c)(2) as they apply to ATSs. However, proposed Rule 809
would not prescribe the specific components for the required risk
management controls and supervisory procedures that are contained in
Rule 15c3-5(c) or the other requirements in Rule 15c3-5(d) and (e).
Should proposed Rule 809(d) provide more specific requirements as to
the risk management controls and supervisory procedures that should
apply to SB SEFs that provide access to non-registered ECPs as
participants? If so, would some or all of the requirements of Rule
15c3-5(c) be appropriate for SB
[[Page 10965]]
SEFs? \112\ Please specify and explain why. If not, why not and what
would be a better alternative for SB SEFs in this context? Would the
remaining requirements of Rule 15c3-5, in paragraphs (d) and (e), be
appropriate to apply to SB SEFs that provide access to non-registered
ECPs as participants? \113\ At this time, the Commission is not
proposing to adopt rules relating to direct or indirect access to SB
SEFs for SB swap dealers, major SB swap participants, or brokers.\114\
Should the Commission adopt rules for risk management controls and
supervisory procedures for SB swap dealers, major SB swap participants,
brokers and any other participant with direct access to trading or that
may provide indirect access to trading, on a SB SEF as a participant?
If so, would the terms of Rule 15c3-5 be an appropriate guideline for
such rules? Please explain why or why not. If so, should the Commission
apply some or all of the requirements of Rule 15c3-5 to SB swap
dealers, major SB swap participants, and brokers that are participants
in a SB SEF? If only some of the requirements of Rule 15c3-5 should
apply, which ones should apply and why? Should the Commission apply
requirements similar to those in Rule 15c3-5 only when SB swap dealers,
major SB swap participants, and brokers that are participants in a SB
SEF provide indirect access to the SB SEF to non-participants? Or,
should the risk management controls and procedures required in Rule
15c3-5 also apply to their own transactions as participants of a SB SEF
(as they do for the broker-dealers with direct access under Rule 15c3-
5)? Why or why not? Or, are the terms of Rule 15c3-5 inappropriate for
SB swap dealers, major SB swap participants, brokers, or other persons
that are participants of a SB SEF? If so, why and what terms would be a
better alternative to address the risks associated with direct access
or sponsored access to SB SEFs? What other terms and conditions should
the Commission consider to mitigate the risks associated with access to
SB SEFs?
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\111\ See Securities Exchange Act Release No. 63241 (November 3,
2010), 75 FR 69792 (November 15, 2011) (File No. S7-03-10) (adopting
release for Rule 15c3-5, which governs the terms for sponsored
access or direct access on national securities exchanges and
alternative trading systems).
\112\ Rule 15c3-5(c) requires the financial risk management
controls and supervisory procedures to be reasonably designed to:
(i) Prevent the entry of orders that exceed appropriate pre-set
credit or capital thresholds and, where appropriate, more finely-
tuned by sector, security, or otherwise by rejecting orders if such
orders would exceed the applicable credit or capital thresholds; and
(ii) prevent the entry of erroneous orders, by rejecting orders that
exceed appropriate price or size parameters, on an order-by-order
basis or over a short period of time, or that indicate duplicative
orders; (iii) prevent the entry of orders unless there has been
compliance with all regulatory requirements that must be satisfied
on a pre-order entry basis or if restricted from trading those
securities; (iv) restrict access to trading systems and technology
that provide access to permit access to persons and accounts that
are pre-approved and authorized; and (v) assure that appropriate
surveillance personnel receive immediate post-trade execution
reports that result from market access. See 17 CFR 240.15c3-5(c).
\113\ Rule 15c3-5(d) requires the financial and regulatory risk
management controls and supervisory procedures to be under the
direct and exclusive control of the broker or dealer subject to the
requirements of the rule, except under certain proscribed
circumstances. Rule 15c3-5(e) imposes certain requirements
pertaining to regularly reviewing the effectiveness of the risk
management controls and supervisory procedures required by the rule
and for promptly addressing any issues. See Rule 15c3-5(d) and (e),
17 CFR 242.15c3-5(d) and (e).
\114\ The Commission notes that participants that provide
sponsored access to SB SEFs would be required to register with the
Commission as a broker under Section 15(a)(1) and (b) of the
Exchange Act.
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What would be the likely impact of having a rule like Rule 15c3-5
apply to SB swap dealers, major SB swap participants, and brokers that
are participants in SB SEFs? How would current practices for trading SB
swaps be affected by applying a rule like Rule 15c3-5 to participants
in SB SEFs? How might the evolution of the SB swaps market over time be
affected by such a rule? Would it promote or impede the establishment
of SB SEFs?
VII. Core Principle 1--Compliance With Core Principles
Section 3D(d)(1) of the Exchange Act (Core Principle 1) requires a
SB SEF, to be registered and maintain registration as a SB SEF with the
Commission, to comply with: (i) the Core Principles described in
Section 3D(d) of the Exchange Act; and (ii) any requirement that the
Commission may impose by rule or regulation.\115\ The Commission
proposes to implement the requirements of Section 3D(d)(1) of the
Exchange Act in proposed Rule 810(a) of Regulation SB SEF.
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\115\ See Public Law 111-203, Sec. 763(c) (adding Section
3D(d)(1) of the Exchange Act).
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The Commission proposes in Rule 810(b) to require a SB SEF to have
rules for the maintenance of certain standards of fairness in dealings
with participants on their markets. The proposed requirements in Rule
810(b) are derived from similar requirements that national securities
exchanges are subject to under Section 6(b) of the Exchange Act.\116\
The Commission preliminarily believes that the analogous requirements
incorporated into proposed Rule 810(b) are appropriate because SB SEFs,
like national securities exchanges, are subject to statutory
requirements to establish and enforce trading and participation rules
that will deter abuses and provide impartial access to their
markets.\117\
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\116\ 15 U.S.C. 78f(b).
\117\ See Public Law 111-203, Sec. 763(c) (adding Section
3D(d)(2)(B) of the Exchange Act).
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Proposed Rule 810(b)(1) would require a SB SEF to establish rules
that provide for the equitable allocation of reasonable dues, fees, and
other charges among its participants and any other users of its
system.\118\ This requirement is comparable to a similar requirement
for national securities exchanges in Section 6(b)(4) of the Exchange
Act.\119\ SB SEFs, like exchanges, presumably would assess dues, fees,
or other charges on the various market participants that trade on their
markets. The purpose of this proposed requirement is to ensure that SB
SEFs apply those dues, fees and other charges among participants and
any other users of their systems in ways that are fair and equitable,
and not in ways that inequitably favor, or discriminate against, one or
more classes of such persons. Thus, proposed Rule 810(b)(1) would
support the requirement in Core Principle 2 and the proposed rules
thereunder that SB SEFs must provide for impartial access to their
markets by ensuring that each market participant's access to the SB SEF
is not limited by an inequitable distribution of dues, fees, or other
charges assessed by the SB SEF.\120\ In this regard, proposed Rule
810(b)(1) also is designed to promote fair competition on SB SEFs.
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\118\ See proposed Rule 810(b)(1).
\119\ Section 6(b)(4) of the Exchange Act requires the rules of
the exchange to provide for the equitable allocation of reasonable
dues, fees, and other charges among its members and issuers and
other persons using its facilities. 15 U.S.C. 78f(b)(4).
\120\ See Public Law 111-203, Sec. 763(c) (adding Section
3D(d)(2) of the Exchange Act) and proposed Rule 811(b).
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Proposed Rule 810(b)(2) would require a SB SEF to establish rules
and systems that are not designed to permit unfair discrimination among
participants and any other persons using its system. This proposed
requirement is comparable to one of the requirements for national
securities exchanges contained in Section 6(b)(5) of the Exchange
Act.\121\ In practical terms, the proposal would compel SB SEFs to
design their rules and systems in ways that would treat the various
market participants in the SB SEF similarly, unless appropriate
considerations, consistent with the goals of the Exchange Act, provide
a justification for treating some market participants differently. Like
proposed
[[Page 10966]]
Rule 810(b)(1), proposed Rule 810(b)(2) is designed to support the
impartial access requirements of Core Principle 2 and promote fair
competition on SB SEFs.
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\121\ Section 6(b)(5) of the Exchange Act provides, in part,
that the rules of the exchange must not be designed to permit unfair
discrimination between customers, issuers, brokers, or dealers. 15
U.S.C. 78f(b)(5).
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Proposed Rule 810(b)(3) would require a SB SEF to establish rules
that promote just and equitable principles of trade.\122\ This proposed
requirement is comparable to a similar requirement for national
securities exchanges contained in Section 6(b)(5) of the Exchange
Act.\123\ The purpose of proposed Rule 810(b)(3) is to require SB SEFs
to design their rules in a manner that advances the goals of the
Exchange Act of promoting fair and competitive markets for SB swaps. SB
SEFs, by establishing rules for trading and monitoring trading among
buyers and sellers of SB swaps on their systems, could play a
significant role in the development of regulated markets for SB swaps,
which in turn would help reduce incidents of systemic risk.
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\122\ See proposed Rule 810(b)(3).
\123\ Section 6(b)(5) of the Exchange Act provides, in part,
that the rules of the exchange must be designed to promote just and
equitable principles of trade. 15 U.S.C. 78f(b)(5).
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Finally, proposed Rule 810(b)(4) would require a SB SEF to adopt
rules that, in general, would provide a fair procedure for disciplining
participants for violations of the rules of the SB SEF.\124\ This
proposed requirement is analogous to a similar requirement for national
securities exchanges in Section 6(b)(7) of the Exchange Act.\125\ A SB
SEF is required, pursuant to Section 3D(d)(2) of the Exchange Act, to
enforce compliance with any of its rules.\126\ SB SEFs may choose to
enforce rules on their markets by applying penalties and taking other
disciplinary actions against participants for violations of their
rules. Proposed Rule 810(b)(4) is designed to ensure that, when the SB
SEF pursues disciplinary action against a participant for violations of
the SB SEF's rules, the participant is afforded a fair process.
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\124\ See proposed Rule 810(b)(4).
\125\ Section 6(b)(7) of the Exchange Act requires the rules of
the exchange to provide a fair procedure for the disciplining of
members and persons associated with members. 15 U.S.C. 78f(b)(7).
\126\ 15 U.S.C. 78c-4(d)(2).
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While the Commission intends for a SB SEF to retain flexibility in
establishing its disciplinary procedures, the Commission anticipates
that such rules would have to comply with rules recently proposed under
Regulation MC,\127\ should those rules be adopted by the Commission.
Proposed Rule 702(h) under Regulation MC would require any disciplinary
process of a SB SEF to preclude any group or class of participants from
dominating or exercising disproportionate influence on the disciplinary
process. In other words, to the extent that there is more than one type
of group or class of persons that are participants in a SB SEF, the
composition of any disciplinary panel or other disciplinary body should
not allow one group or class to have representation that is out of
proportion in comparison to other groups or classes of persons that are
participants in the SB SEF. In addition, any panel or other body that
is responsible for disciplinary decisions, and any appellate body for
the reviewing of disciplinary decisions, would have to include at least
one independent director.\128\ The Commission preliminarily believes
that proposed Rule 810(b)(4) under Regulation SB SEF would supplement
and enhance the proposed requirements of Regulation MC, although the
Commission requests comment on the extent to which both sets of rules
are necessary to mitigate potential conflicts of interest with respect
to the SB SEF's disciplinary process.\129\
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\127\ See Regulation MC Proposing Release, supra note 82.
\128\ See proposed Rule 702(h) under Regulation MC, Regulation
MC Proposing Release, supra note 82.
\129\ For a discussion of further proposals to mitigate
conflicts of interest related to SB SEFs, see infra Section XVII.
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Proposed Rule 810(c) would prohibit a SB SEF from using any
confidential information it collects or receives, from or on behalf of
any person, for non-regulatory purposes. The purpose of proposed Rule
810(c) is to prevent the SB SEF from taking commercial advantage of any
confidential information that it receives in connection with its
regulatory responsibilities.
The Commission requests comments on all aspects of the proposed
Rule 810 implementing Core Principle 1. Are the provisions of proposed
Rule 810 appropriate and sufficiently clear? If not, why not and are
there preferable alternatives? What are the benefits and drawbacks of
imposing on SB SEFs proposed requirements that are comparable to those
statutory provisions that are applicable to national securities
exchanges under the Exchange Act?
Is the Commission's proposed rule that would require a SB SEF's
rules to provide for fees, dues, and other charges that are reasonable
and equitably allocated among participants and any other persons using
its system appropriate and sufficiently clear? Is this requirement
necessary? If not, why not and are there preferable alternatives to
help support the statutory goal of impartial access? Are there
circumstances under which it would not be appropriate to require the SB
SEF to allocate fees, dues, and other charges equitably? In what
instances might a SB SEF seek to differentiate among its users with
respect to fees, dues, and other charges, including discounts and
rebates? Should any of those instances be permitted or restricted?
Is the Commission's proposed rule requiring a SB SEF to establish
rules and systems that are not designed to permit unfair discrimination
among participants and any other persons using its system appropriate
and sufficiently clear? If not, what additional guidelines should the
Commission consider for determining when a rule or system would create
unfair discrimination among users of the SB SEF's system? What, if any,
existing aspects of the current market for SB swaps may lead to unfair
discrimination among market participants?
Is the Commission's proposed rule requiring a SB SEF to establish
rules to promote just and equitable principles of trade appropriate and
sufficiently clear? Are there any specific rules or practices that the
Commission should require SB SEFs to adopt for this purpose? If so,
what rules or practices, existing or otherwise, should the Commission
require? Should the Commission provide guidance on the types of rules
that it believes would promote just and equitable principles of trade?
Are there any other requirements that the Commission should impose
on a SB SEF to promote fair markets and competition? What factors would
most promote fair markets and competition in trading SB swaps, in
particular?
Is the proposed requirement that a SB SEF establish a fair
procedure for disciplining participants for violations of the rules of
the SB SEF appropriate and sufficiently clear? Are there any standards
that the Commission should require, at a minimum, for such fair
procedures? Is it sufficiently clear how SB SEFs could comply with this
requirement in light of the requirements of proposed Rule 702(h) in
Regulation MC, which would require the SB SEF to preclude any group or
class of participants from dominating or exercising disproportionate
influence on the SB SEF's disciplinary process and to have at least one
independent director on any disciplinary panel? If not, in what way is
the interaction of proposed Rule 810(b)(4) of Regulation SB SEF and
proposed Rule 702(h) of Regulation MC unclear and what steps could the
Commission take to improve these provisions? Should the Commission
provide further guidance on how SB SEFs could establish disciplinary
[[Page 10967]]
procedures that would comply with the requirements of proposed Rule
810(b)(4) in Regulation SB SEF? Are there additional measures that the
Commission should take to foster the independence of the SB SEF's
disciplinary process, such as requiring any appeals of disciplinary
actions to be considered by the SB SEF's independent directors?
Proposed Rule 810(c) would prohibit SB SEFs from using for non-
regulatory purposes any confidential information they collect or
receive in connection with their regulatory obligations. Would this
proposed rule provide sufficient protection from the improper use of
sensitive information by a SB SEF? If not, what other measures should
the Commission consider requiring SB SEFs to implement to protect the
confidentiality of the non-public information that they collect or
receive? Please provide specific suggestions and explain how such
suggestions would better address the need to keep non-public
information confidential.
VIII. Core Principle 2--Compliance With Security-Based Swap Execution
Facility Rules
Section 3D(d)(2) of the Exchange Act (Core Principle 2) states that
a SB SEF shall: (A) Establish and enforce compliance with any rule
established by such SB SEF, including (i) the terms and conditions of
the SB swaps traded or processed on or through the facility and (ii)
any limitation on access to the facility; (B) establish and enforce
trading, trade processing, and participation rules that will deter
abuses and have the capacity to detect, investigate, and enforce those
rules, including means (i) to provide market participants with
impartial access to the market and (ii) to capture information that may
be used in establishing whether rule violations have occurred; and (C)
establish rules governing the operation of the facility, including
rules specifying trading procedures to be used in entering and
executing orders traded or posted on the facility, including block
trades.\130\ The Commission is proposing to implement these statutory
requirements in proposed Rule 811(a) of Regulation SB SEF.
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\130\ See Public Law 111-203, Sec. 763(c) (adding Section
3D(d)(2) of the Exchange Act).
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The Commission believes that the primary issues raised by this Core
Principle relate to the rules that a SB SEF must establish and enforce
regarding access, the SB swaps that could trade on the system, and
surveillance, investigation and enforcement of participants' activities
on the SB SEF. In proposing Rule 811(a) of Regulation SB SEF to
implement this Core Principle, the Commission has been informed by its
experience with regulating both national securities exchanges and ATSs,
while recognizing that differences exist between the cash equities and
listed options markets and the market for SB swaps.
Much as Sections 6 and 19 of the Exchange Act \131\ require that
national securities exchanges have rules, among other things, to govern
trading, membership, and discipline of its members, the Commission
preliminarily believes that, pursuant to Section 3D(d)(2) of the
Exchange Act, SB SEFs should have similar rules. In this way,
participants would be fully informed of the rules governing various
aspects of the operation of the SB SEF and the requirements governing
trading on the system, and would recognize that there would be
consequences if they fail to comply with those rules. Below is a
discussion of the rules that, in the Commission's view, would need to
be developed and implemented by SB SEFs to comply with Core Principle
2. These proposed rules are not meant to be an exhaustive list, and the
Commission believes that a SB SEF would need to evaluate its own market
to determine the measures that are necessary to implement the Core
Principles.
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\131\ See, e.g., Sections 6(b) and 19(g) of Exchange Act, 15
U.S.C. 78f(b) and 78s(g).
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A. Denials or Limitations on Access
Core Principle 2 is in part concerned with limitations on access
and mandates that SB SEFs provide impartial access to their
markets.\132\ The Commission discusses the substantive issues relating
to access, and the rules it is proposing relating to access, in Section
VI above.\133\ The Commission believes that one of the most important
requirements of Core Principle 2 concerns the SB SEF's rules regarding
impartial access to the facility. The Commission discusses the
procedural rules it is proposing in connection with the Core Principle
2 requirement for impartial access below. As the Commission noted in
the Regulation MC Proposing Release, participants of a SB SEF might
seek to limit the number of direct participants of the SB SEF to limit
competition and increase the opportunity for higher profit
margins.\134\
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\132\ See Public Law 111-203, Sec. 763(c) (adding Section
3D(d)(2)(A)(ii) and 3D(d)(2)(B) of the Exchange Act).
\133\ See supra Section VI, notes 79 to 114.
\134\ See Regulation MC Proposing Release, supra note 82. See
also infra Section VI. As discussed further in Section XVII below,
the Commission proposed a number of requirements in Regulation MC
designed to mitigate potential conflicts of interest relating to SB
SEFs, as discussed in the Regulation MC Proposing Release. The
additional rules the Commission is proposing herein relating to
impartial access are designed to work together with proposed
Regulation MC to help mitigate potential conflicts of interest, as
identified in the Regulation MC Proposing Release. In addition, as
discussed in Section XVII, the Commission is proposing governance
rules that also are designed to help mitigate potential conflicts of
interest relating to SB SEFs.
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The Commission is proposing several procedural rules in support of
the proposed requirements for impartial access discussed above in
Section VI. First, proposed Rule 811(b)(3) would require every SB SEF
to make and keep records of all grants of access, including, for all
participants, the reasons for granting such access, and all denials or
limitations of access, including, for each applicant, the reasons for
denying or limiting access. The purpose of proposed Rule 811(b)(3) is
to ensure that Commission staff would have the ability to examine such
records upon request, pursuant to the requirements of proposed Rule 814
of Regulation SB SEF.\135\ In addition, proposed Rule 811(b)(4) would
require each SB SEF to file notice with the Commission (by filing an
annual amendment to proposed Form SB SEF \136\ and in the compliance
report required of the CCO pursuant to Core Principle 14 and proposed
Rule 823 of Regulation SB SEF), if the SB SEF prohibits or limits
access to the facility for any participant, or if the SB SEF denies
access to an applicant.\137\ In its notice, a SB SEF should inform the
Commission of the reasons for its denial of access and provide the
Commission with the contact information of the aggrieved participant or
applicant.\138\ Together, these requirements, which would provide the
Commission with information about, or access to information about, any
instances when the SB SEF has denied access to a participant or an
applicant to become a participant, should help the Commission carry out
its oversight of SB SEFs. This ability is particularly important given
the identified potential
[[Page 10968]]
conflict of interest concerns with respect to access to a SB SEF.\139\
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\135\ See infra Section VI discussing proposed Rule 814
regarding the Commission's ability to obtain information.
\136\ See infra Section XXII discussing proposed Form SB SEF.
The Commission notes that proposed Form SB SEF would be a publicly
available document, and so such notice would be publicly available.
\137\ See infra Sections XXIII and XXI for a discussion of Form
SB SEF and the responsibilities of the CCO, respectively.
\138\ The Commission could bring an enforcement action if it
believed that a SB SEF had denied or limited access in contravention
of the Exchange Act and the rules thereunder.
\139\ See Regulation MC Proposing Release, supra note 82.
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Further, under proposed Rule 811(b)(5), a SB SEF would be required
to establish a fair process for the review of any prohibition or
limitation on access with respect to a participant or any refusal to
grant access with respect to an applicant.\140\ Fair access to trading
venues for SB swaps, and consequently a fair review process, is
important, especially when a SB SEF may be the only venue for the
trading of a particular SB swap. The Commission believes that for any
such review process by a SB SEF to be fair, at a minimum, those persons
involved in the decision to prohibit, limit, or deny a participant's or
applicant's access to the SB SEF should not be involved in the review
of whether such prohibition, limitation, or denial was appropriate.
Otherwise, the purpose of the review process could be undermined. The
SB SEF's Board should consider the most appropriate body to conduct the
internal review process, whether that body is the Board itself, a
committee that is delegated this function by the Board, or some other
appropriate body.
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\140\ See proposed Rule 811(b)(5). Such a process is required
for all national securities exchanges and for ATSs that have
exceeded certain volume thresholds. See Sections 6(c) and 19(e) of
the Exchange Act (15 U.S.C. 78f(c) and 78s(e)) and Rule 301(b)(5)
(17 CFR 242.301(b)(5)) of Regulation ATS.
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The Commission requests comment on all aspects of its proposal
regarding denials or limitations of access. Is the proposed rule
requiring a SB SEF to notify the Commission annually of any
prohibition, limitation, or denial of access to its services
appropriate and sufficiently clear? Would this be useful information
for market participants and the public? Should the Commission require
notice more often than annually? Would the proposal assist in
mitigating conflicts of interest on the part of a SB SEF? If so, how
so? If not, why not?
Is the Commission's proposed rule regarding a SB SEF's review of
its denials of access appropriate and sufficiently clear? If not, why
not and what would be a better approach? Are there any measures that
the Commission could require that would result in a more meaningful
internal review process? For example, should the Commission explicitly
require that the Board or the regulatory oversight committee (``ROC'')
review all denials of or limitations on access? \141\ Would such a
proposal be useful? If so, within what time frame should the review be
completed? Are there any other requirements the Commission should
impose?
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\141\ The Commission proposed in Regulation MC to require a SB
SEF to have a ROC, and that the ROC be composed of independent
directors. See Regulation MC Proposing Release, supra note 82.
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B. Swap Review Committee
Proposed Rule 811(c) would require a SB SEF to establish and
enforce compliance with rules concerning the terms and conditions of
the SB swaps traded on the facility. To carry out this requirement, a
SB SEF would be required to establish a swap review committee \142\ to
determine the SB swaps that trade on the SB SEF, as well as the SB
swaps that should no longer trade on the SB SEF. The proposed rule
would require that the composition of the swap review committee provide
for the fair representation of participants in the SB SEF and other
market participants. Specifically, the proposed rule would require that
each class of participant and other market participants (such as the
customers of participants, including end-users and buy-side firms)
would have the right to participate in the swap review committee. The
proposed rule also would provide that the members of the swap review
committee be chosen so that no single class of participant or category
of market participant would predominate. The rules of the SB SEF also
would be required to stipulate the method by which such representation
would be chosen by the Board of the SB SEF.\143\ Having a
compositionally balanced committee should help to assure that the
process of determining those SB swaps that should trade (or no longer
should trade) would be fair and that various classes of participants in
the SB SEF, as well as other market participants, would have a voice in
those decisions.
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\142\ The swap review committee would not be required to be a
committee of the Board under the Commission's proposed rule,
although a SB SEF may choose to allow or require members of its
Board to serve on the swap review committee, as the SB SEF would
determine.
\143\ See proposed Rule 811(c)(2).
---------------------------------------------------------------------------
Proposed Rule 811(c)(3) would require the SB SEF to establish
criteria to be used by the swap review committee in determining which
SB swaps should be traded on the SB SEF. The Commission preliminarily
believes that this would allow the most flexibility by permitting a SB
SEF to choose whatever criteria it believes are important in
determining which SB swaps to trade, thereby encouraging as much
trading of SB swaps on SB SEFs as possible.
The Dodd-Frank Act requires that transactions involving SB swaps
subject to the clearing requirement of subsection (a)(1) of Section 3C
of the Exchange Act be executed on an exchange or on a registered SB
SEF unless no exchange or SB SEF makes the SB swap available to
trade.\144\ Consequently, once a SB swap is ``made available to trade''
on an exchange or a SB SEF (and is required to be cleared), it can no
longer trade in the OTC market, making the determination of what it
means for a SB swap to be ``made available to trade,'' as well as the
decision as to who makes such a determination, central to the
implementation of Title VII of the Dodd-Frank Act. The Commission has
received comments that the scope of those SB swaps that are made
available for trading would be important in this market because of the
mandatory trade execution requirement and the nature of the SB swap
market,\145\ which is relatively illiquid and has a smaller number of
market participants in comparison to the cash equities and listed
options markets.\146\
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\144\ See Section 3C(h) of the Exchange Act. The requirement in
Section 3C(h) of the Exchange Act that a SB swap that is made
available to trade on an exchange or a SB SEF shall be traded on an
exchange or SB SEF (and not in the OTC market) only applies to SB
swaps subject to mandatory clearing. Section 3C(h) of the Exchange
Act generally states that, with respect to transactions involving SB
swaps subject to the clearing requirement of paragraph (a)(1) of
Section 3C, counterparties shall: (1) Execute the transaction on an
exchange; or (2) execute the transaction on a registered SB SEF or a
SB SEF that is exempt from registration. However, these requirements
shall not apply if no exchange or SB SEF makes the SB swap available
to trade or for SB swap transactions subject to the clearing
exception in paragraph (g) of Section 3C.
In a separate proposed rulemaking, the Commission, among other
matters, is seeking comment generally on how the factors identified
in the statute relating to the mandatory clearing requirement should
be applied in making determinations as to whether particular SB
swaps are or should be required to be cleared. See Securities
Exchange Act Release No. 63557 (December 15, 2010), 75 FR 82490
(December 30, 2010) (File No. S7-44-10).
\145\ See, e.g., Commentary by Yves P. Deniz[eacute], Director &
Associate General Counsel, TIAA-CREF, at the Roundtable. Webcast
available at http://www.sec.gov/news/openmeetings/2010/jac091510.shtml.
\146\ The market for SB swaps today is concentrated in the hands
of a few dealers. See supra note 81, stating that five large
commercial banks represent 97% of the total banking industry
notional amounts.
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In the Regulation MC Proposing Release, the Commission identified
conflicts of interest that could arise when a small number of market
participants exercise control or undue influence over a SB SEF.\147\
When trading of SB swaps is dominated by a small number of
participants, those
[[Page 10969]]
participants may have competitive incentives to, among other things,
limit the number of SB swaps that are made available for trading by a
SB SEF to keep those SB swaps trading in the OTC market. This could be
true even for SB swaps that would have sufficient trading activity to
trade on a SB SEF.\148\ On the other hand, once the determination has
been made that a SB swap that is subject to mandatory clearing is
available to trade on an exchange or a SB SEF, then such SB swap can no
longer trade in the OTC market, even if trading of the SB swap on the
exchange or SB SEF were virtually nonexistent. Thus, a determination by
even one SB SEF or national securities exchange that a SB swap was
available to trade on the exchange or SB SEF could have unintended
consequences for the trading of such SB swap.
---------------------------------------------------------------------------
\147\ See Regulation MC Proposing Release, supra note 82, 75 FR
at 65890.
\148\ Id.
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In light of these competing incentives stated above, the Commission
preliminarily believes that it would be appropriate that the decision
as to when a SB swap would be considered to be ``made available to
trade'' on an exchange or a SB SEF pursuant to Section 3C(h) of the
Exchange Act should be made pursuant to objective measures established
by the Commission, rather than by one or a group of SB SEFs. Such
objective measures could provide that a SB swap that is subject to
mandatory clearing would be ``made available to trade'' unless the SB
swap fails to meet a threshold test that the Commission may adopt or,
conversely, that no SB swap would be ``made available to trade'' unless
the SB swap passed a threshold test that the Commission may adopt. In
either case, under this approach the Commission would in effect
interpret the phrase ``made available to trade'' in Section 3C(h) of
the Exchange Act as meaning something more than the decision to simply
trade, or essentially list, a SB swap on a SB SEF or an exchange.\149\
This approach would have the further effect of permitting SB swaps to
be made subject to mandatory clearing independently of whether they are
required to be traded exclusively on SB SEFs and exchanges, because
there would not be an automatic requirement that SB swaps subject to
mandatory clearing trade only on a SB SEF or exchange simply because
they are listed on one.
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\149\ Pursuant to proposed Rule 811(c), the swap review
committee of each SB SEF would be responsible for determining which
SB swaps the SB SEF permits to be traded on the SB SEF. Under the
proposed approach, however, this decision would not be the same as a
determination that such SB swap had been made available for trading
within the meaning of Section 3C(h) of the Exchange Act. The swap
review committee's decision, therefore, would not in and of itself
be the sole determinant of when a SB swap could no longer trade in
the OTC market.
---------------------------------------------------------------------------
The Commission does not, however, have sufficient data at this time
to propose the objective standards pursuant to which a determination
whether a SB swap is ``made available to trade'' would be made. The
Commission preliminarily anticipates that it will separately address
how to determine when a particular SB swap would be considered to be
``made available for trading'' on an exchange or SB SEF pursuant to the
directive of Section 3C(h) of the Exchange Act. We solicit comment in
this release, however, on how the Commission should craft an objective
standard for whether a SB swap is ``made available to trade.'' For
example, an objective determination could be based on a formula
measuring the percentage of trading in a particular SB swap that was
taking place on exchanges and SB SEFs compared to the aggregate
percentage of trading that was taking place in the SB swap on exchanges
and SB SEFs, and in the OTC market.\150\ Alternatively, such a
determination could be based on overall volume in the SB swap, wherever
executed. In addition, such a test could require that a baseline
trading threshold for each SB swap be met. For example, such a
threshold could be that, within a given measurement period, a minimum
number of transactions in the SB swap be executed or that a minimum
notional value in the SB swap be traded. There may be instances when,
because of a low total number of transactions in a SB swap, it may not
be appropriate to determine that such SB swap should be made available
to trade.
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\150\ Because all SB swap transactions would be required to be
reported to a registered SDR, whether they occur on an exchange, a
SB SEF, or in the OTC market, the Commission would have access to
complete information on trading volume regarding each SB swap.
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It also may be appropriate to utilize objective measures to
determine when a SB swap should no longer be considered to be made
available for trading. If it were determined that a SB swap should no
longer be considered to be made available for trading because, for
example, among other objective measures very little trading in such SB
swap on SB SEFs has occurred over a specified time period, such SB swap
would be able to trade in the OTC market, as well as on exchanges and
SB SEFs.
Proposed Rule 811(c)(4) would require the swap review committee to
periodically review each SB swap trading on the SB SEF to determine
whether the trading characteristics of each such SB swap justify a
change to the trading platform being used for that particular SB swap.
In making such a determination, the swap review committee would need to
consider whether (1) the liquidity in each SB swap is at an appropriate
level for the SB swap's trading platform on which it trades; and (2)
such SB swap would be more suited for trading on a different type of
platform, including a platform that provides for increased price
transparency for participants entering quotes, orders, or other trading
interest. The first review could not be earlier than 120 days after the
initiation of trading for a given SB swap.
Proposed Rule 811(c)(4) is designed to ensure that SB swaps that
are trading on the SB SEF are trading on an appropriate platform. For
example, if a SB swap is trading in an RFQ mechanism but trading in the
SB swap becomes sufficiently liquid, the SB SEF should consider moving
the SB swap to a platform with greater transparency. There could be
reasons why the SB SEF prefers not to do so, e.g., because the
predominant dealers on the market prefer to continue trading the SB
swap in the RFQ platform that does not have the same degree of
transparency and thus competition, as a limit order book. Having such
decisions made by the swap review committee, and reported promptly to
the CCO and annually to the ROC and the Board (as discussed in the next
paragraph), appear to lessen any undue influence that any one class of
participants may have in keeping the SB swap trading on a platform that
does not afford the appropriate level of price transparency for that SB
swap.
Proposed Rule 811(c)(5) would require the swap review committee to
report decisions on each SB swap promptly to the CCO and annually to
the ROC. This would include initial decisions on trading SB swaps as
well as ongoing determinations pursuant to the reviews of the swap
review committee. This would help ensure that the CCO is kept apprised
of changes in the trading of SB swaps so that trading can be properly
monitored.
The Commission requests comment on all aspects of the rules
relating to the swap review committee and its responsibilities. Is the
Commission's proposed rule concerning the composition of the swap
review committee appropriate and sufficiently clear? Should the
Commission's rule contain more detail about the requirements for the
composition of the committee? If so, what should those requirements be?
Should the
[[Page 10970]]
Commission require independent director representation on the swap
review committee?
Is the Commission's proposed Rule 811(c)(3) concerning how the SB
SEF should determine whether to trade a SB swap appropriate and
sufficiently clear? Should the Commission include any particular
factors that the SB SEF should consider, and, if so, what should those
factors be and why?
As discussed above, under the proposal the Commission would
interpret the phrase ``made available to trade'' in Section 3C(h) of
the Exchange Act as meaning something more than the decision to simply
trade, or essentially list, a SB swap on a SB SEF or an exchange. The
Commission requests comment on whether commenters agree with this
approach, or if, instead, we should consider a SB swap to be ``made
available to trade'' if it is listed on an exchange or a SB SEF in
compliance with applicable rules and regulations. What are the
advantages and disadvantages of such an approach? Would the approach be
more or less simple and cost-effective than the proposal, which would
involve the Commission in determining whether a SB swap is ``available
to trade'' and distinguishes this from the determination under proposed
Rule 811(c)(3) of whether a SB swap should be traded or listed on a SB
SEF? Does the review under proposed Rule 811(c)(3) accomplish many or
all of the Commission's regulatory objectives? Would an approach that
deems a SB swap ``available to trade'' if it is listed be more or less
susceptible to manipulation or gaming than the proposed approach? Would
an approach that deems a SB swap ``available to trade'' if it is listed
generally result in more or less trading of SB swaps on exchanges or SB
SEFs? If the Commission were to take the position that listing of a SB
swap on an exchange or a SB SEF is the same as ``made available to
trade,'' could the Commission's potential concerns about permitting SB
SEFs and exchanges to determine whether a SB swap is ``available to
trade'' be addressed through an exemptive process that could consider
potential adverse effects or unintended consequences as to particular
SB swaps? Are the Commission's potential concerns about permitting SB
SEFs and exchanges to determine whether a SB swap is ``available to
trade'' affected by the types of trading permitted on a SB SEF, such as
the ability to send an RFQ to only one or few other participants? If
the Commission were to take the position that listing of a SB swap on
an exchange or SB SEF is the same as ``made available to trade,'' the
Commission could subject SB swaps to mandatory clearing independently
of whether such SB swaps are required to be traded on SB SEFs or
exchanges by, for example, using an exemptive process or specifying, at
the time the mandatory clearing determination is made, that a SB swap
is not ``available to trade'' unless certain criteria are met. What
would be the advantages and disadvantages of such an approach compared
to the Commission's proposal?
The Commission requests comment on whether it would be appropriate
for the decision as to when a SB swap would be considered to be ``made
available to trade'' on an exchange or a SB SEF pursuant to Section
3C(h) of the Exchange Act to be made pursuant to objective measures
established by the Commission, rather than by one or a group of SB
SEFs. If not, why not? If not, is there another method that commenters
would suggest, other than having the determination made by SB SEFs? If
so, what is that method?
The Commission requests comment on the manner in which the
determination to make a particular SB swap available for trading would
be made. What would be an appropriate method or standards to determine
whether a SB swap should be made available for trading? Should the test
be based on the aggregate amount of trading in the SB swap on exchanges
and SB SEFs and in the OTC market, or on overall volume, wherever the
SB swap may be executed? What would be an appropriate volume threshold
for each alternative, and why? Should a volume threshold vary by asset
class? Is one test more appropriate for some asset classes and the
other test more appropriate for others? If so, why, and what is the
appropriate volume threshold for each asset class with each test? What
would be the appropriate measurement period for a volume threshold and
why? On what other characteristics could the test be based? Frequency
of trading? The number of SB SEFs on which the SB swap is also trading?
Should there be some minimum level of liquidity in both the OTC
market and on SB SEFs and exchanges in connection with the
determination that a SB swap has been made available to trade? If so,
what is the appropriate level of liquidity? What is a baseline
threshold that SB swaps made available to trade should meet? Should it
be based on the number of transactions, the notional value for a given
SB swap, or both, over a set time period? Or, is there another baseline
threshold that the Commission should consider? If so, what is it? Over
what time period should the activity be measured?
What would be an appropriate test to determine that a SB swap
should no longer be considered to be made available for trading?
Because such a SB swap would not be trading in the OTC market, a volume
test similar to one of the suggested tests above to determine whether a
SB swap should be considered to be made available for trading--
comparing the aggregate percentage of trading on exchanges and SB SEFs
to overall trading--may not be feasible. How little trading on SB SEFs
should be taking place before the Commission determines that the SB
swap should be permitted to trade again in the OTC market (because it
is no longer considered to be ``made available for trading'')? Is there
a specific number of trades that would make it appropriate to determine
that a SB swap is no longer considered to be made available for
trading? If so, what should that number be? Or, should a test be based
on a percentage trading volume comparison of trading activity in a SB
swap to a time period prior to when it was considered to be made
available to trade? What period of time would be appropriate to
determine if a pattern of lack of trading has set in? Should such a
determination be based on a test based on something other than trading
volume? If so, what should such a test be? How should the Commission
take into account the possibility that market participants might engage
in gaming behavior to affect the outcome of a test based on trading
frequency or volume?
Should the presumption be that no SB swap is deemed made available
to trade unless it meets the threshold established by any test that the
Commission may adopt, or should the presumption be that all SB swaps
are deemed available to trade unless they fail to meet the threshold
established by any such test? What would be the costs and benefits of
each approach?
Has the Commission correctly identified the potential conflicts
with SB SEFs that could arise in decisions to make a SB swap available
to trade? Would the proposal the Commission has outlined here help to
mitigate those conflicts? If not, why not?
How, if at all, would having the determination about what SB swaps
are made available for trading be made pursuant to an objective
formula, as the Commission is considering to propose, rather than
allowing each SB SEF to make the determination, impact the incentives
for creating a SB SEF? Would the proposal have the effect of chilling
the creation of SB SEFs because trading
[[Page 10971]]
could simply continue in the OTC market until trading meets the
objective test? If so, how should the determination of what is made
available to trade be made? How should the Commission guard against the
concern that, if a distinction is not made between ``listing'' or
``trading'' of a SB swap, and ``making available to trade,'' OTC
trading could effectively be cut off in SB swaps that were made
available to trade, even if market participants believe that they would
benefit from continued OTC trading? Is this concern mitigated if the
Commission adopts an interpretation of the definition of SB SEF that
permits an RFQ to be sent to only one other participant? Why or why
not? Under such approach, would there still remain benefits for the OTC
trading of certain types of SB swaps by market participants? If so,
what would be these benefits and under which circumstances, and for
what types of SB swaps, would this be the case? How should those
benefits, if any, be weighed with the Dodd-Frank Act's goal of moving
trading in SB swaps onto regulated markets?
Would the idea of looking at volume trading on SB SEFs and SBS
exchanges versus trading in the OTC market be subject to gaming? For
example, would it be possible for firms to avoid having SB swaps
designated as made available to trade, for example, by suppressing SB
SEF trading volume by posting inferior quotes on SB SEFs while
continuing to offer the identical product in the OTC market at a better
price? If so, what impact would such behavior have on the SB swap
market? If so, how could the Commission guard against such behavior?
If the Commission has not adopted a standard for determining when a
SB swap is made available to trade by the time a SB swap is determined
to be subject to mandatory clearing, what action, if any, should the
Commission take to clarify the impact of a SB SEF or exchange listing a
SB swap for trading on its market? Would it be necessary or appropriate
for the Commission to clarify the meaning of ``made available to
trade'' in these circumstances and, if so, what type of clarification
should the Commission provide? Commenters should address the impact, if
any, of any action or inaction by the Commission in these circumstances
on market participants and on the trading of SB swaps, including the
impact of any clarifications that commenters may propose.
Is the Commission's proposed Rule 811(c)(4) requiring review by the
swap review committee of the liquidity of SB swaps, and its potential
requirement for an SB SEF to move trading of the SB swap to a different
type of platform operated by the SB SEF that would provide for greater
pre-trade price transparency, once certain volume thresholds are met,
sufficiently clear? Is it necessary for a swap review committee to
review SB swaps trading on limit order book platforms, as well as
multiple dealer RFQ platforms? If not, why not? Should the Commission
establish a trading activity threshold that, if exceeded, would require
a SB SEF to move the trading of SB swaps to a limit order book
platform? If so, what would be the appropriate factors and threshold?
For example, should such factors include the liquidity of the SB swap?
If so, how should such liquidity be measured (e.g., average daily
trading volume, frequency of trades, size of trades)? What would be an
appropriate measurement period for any such threshold(s)? Should a
threshold vary depending on the type of SB swap? Should a threshold be
relative (e.g., based on a specified percentage of overall volume) or
absolute (e.g., based on a specific number of trades in a given
measurement period)? What are the benefits and drawbacks of mandating a
trading activity threshold that, if exceeded, would require a SB SEF to
move the trading of SB swaps to a limit order book platform?
C. Trading Procedures
Proposed Rule 811(d) would require every SB SEF to establish and
enforce rules governing the procedures for trading on the SB SEF,
including but not limited to: doing business on the SB SEF; types of
orders or other trading interest available; the manner in which trading
interest would be handled on the SB SEF, including a proposed
requirement that the rules provide for the fair treatment of all
trading interest; the manner in which price transparency for
participants entering orders, requests for quotations, responses,
quotations, or other trading interest into the system would be
promoted; the manner in which trading interest, including orders,
requests for quotations, responses, quotations, and transaction data,
would be disseminated, including whether dissemination would be only to
participants of the SB SEF or more broadly, and whether or not for a
fee; prohibited trading practices; the handling of clearly erroneous
trades; trading halts; the manner in which block trades would be
handled, if different from the handling of non-block trades; and any
other rules concerning trading on the facility. The Commission believes
that it is important for a SB SEF to have rules concerning doing
business on the SB SEF because such rules would provide participants
with a uniform set of expectations for how the SB SEF would operate.
The Commission expects that such rules would include information as
basic as the hours the SB SEF is available for trading, as well as
rules concerning the manner in which trading interest would be handled
by the SB SEF. Such rules also would help to inform participants as to
the types of orders or other trading interest that they could enter
into the system for execution. The Commission also believes that rules
concerning prohibited trading practices would be important to every SB
SEF, so that participants would be aware of the scope of allowable
behavior on the SB SEF. Such rules would help to support the
requirement in Core Principle 2 that every SB SEF would have to
establish rules that would deter abuses and have the capacity to
detect, investigate and enforce those rules.
The Commission believes that it is important to the efficient
trading on a SB SEF that the SB SEF provide for the fair treatment of
all trading interest on its market. In other words, a SB SEF should
have rules designed to enhance liquidity, including rules that are not
designed to disadvantage participants' orders, thereby causing them to
miss out on trading opportunities. Such rules might include, for
example, price/time priority or price/size priority rules.\151\ The SB
SEF would need to apply these rules consistently and fairly with regard
to all participants.
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\151\ Generally, when orders are filled in price/time priority,
if there are two orders at the same price, the order that arrived
first would be given priority. Alternatively, size may be used to
determine priority among trading interest at the same price. For
example, orders may be filled pro-rata, or in certain proportions
based on other factors the SB SEF may determine are appropriate.
See, e.g., International Securities Exchange Rule 713, Priority of
Quotes and Orders.
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In addition, as discussed in Section III above, the Commission
believes that transparency of prices on a SB SEF is a critical element
with respect to the operation of a SB SEF. Although the Commission is
not proposing to dictate a certain type of trading system or trading
rules for SB SEFs, it believes that a SB SEF would have to meet certain
basic standards to comply with the requirements that its rules provide
for the fair treatment of all trading interest and that these rules
address the manner in which price transparency for participants
entering trading interest into the system would be promoted. In this
regard, under its proposed interpretation of the definition of SB
[[Page 10972]]
SEF, if the SB SEF operates a RFQ or similar trading model, the rules
of the SB SEF should include a functionality that allows the quote
requesting participant to submit a RFQ to all participants that are
willing to respond to requests, i.e., those participants willing to
provide liquidity. The SB SEF, however, could determine to provide the
functionality for the requesting participant to choose to send the RFQ
to less than all other participants at the request of its customer or
when the participant is exercising investment discretion. In addition,
the requestor would be able to determine to whom to send the RFQ.
Further, for example, if the SB SEF operates a RFQ mechanism, the
rules of the SB SEF should specify that any response to an RFQ that is
provided to the participant submitting the RFQ should be included in
the composite indicative quote of the SB SEF.\152\ In addition, if a SB
SEF displays firm, executable trading interest, it must display such
interest to all participants.
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\152\ The composite indicative quote screen would be the quote
screen available to all participants of the SB SEF. The composite
quote shows an average quote for each SB swap available on the SB
SEF. The composite indicative quote includes both composite
indicative bids and composite indicative offers. As discussed below,
proposed Rule 811(e) would require a SB SEF that operates a RFQ
platform to create and disseminate through the SB SEF a composite
indicative quote for SB swaps traded on or through the SB SEF and to
make that screen available for viewing by all participants in the SB
SEF.
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The Commission believes that it is important to foster pre-trade
transparency to encourage greater price competition. However, the
Commission is cognizant of comments received from market participants
in the SB swap market, both from customers (``buy-side'') and liquidity
providers (``sell-side''), who are concerned about the level of pre-
trade price transparency that may be required. Some of these commenters
have expressed the concern that pre-trade price transparency could
potentially have an impact on dealers' incentives or ability to provide
competitive prices if others can use the information that would be made
available through increased pre-trade price transparency to trade ahead
of the order. The proposed rules relating to the dissemination of
trading interest are designed to increase transparency from current
levels, while at the same time recognizing the concerns that have been
voiced about the potential effects of pre-trade transparency in certain
circumstances. In this regard, proposed Rule 811(d)(5) has been drafted
to allow maximum flexibility by a SB SEF to determine the best manner
to disseminate trading interest by such SB SEF. The Commission believes
that it is important for a SB SEF to make clear to its participants, in
a rule, how trading interest would be disseminated. At the same time,
the Commission recognizes that different platforms may require
different means of disseminating trading interest, and that each SB SEF
is in the best position to determine how such dissemination should
occur on its own platform. In particular, the Commission believes that
proposed Rule 811(d)(5) would require a SB SEF to develop rules that
would incorporate responses received on an RFQ system into a composite
indicative quote that is available to all participants, and that would
not limit the number of dealers from whom a participant could request a
quote.
The Commission also believes that SB SEFs should have rules that
concern any prohibited trading practices. A SB SEF should determine
those trading practices that it believes are inappropriate to the
functioning of its market.
The Commission also believes that a SB SEF should have rules
concerning the handling of clearly erroneous trades, and that those
rules should provide for a fair and nondiscriminatory manner of
handling such trades, as well as a procedure to resolve any resulting
disputes. Although under ordinary circumstances trades that are
executed between parties should be honored, the Commission believes
that clearly erroneous execution rules are necessary because, on rare
occasions, the terms of the executed trade may indicate that an obvious
error may exist. In such instances, it could be unrealistic to expect
that the parties to the trade had come to a meeting of the minds
regarding the terms of the transaction. In such case, a clearly
erroneous transaction may have taken place. The Commission believes
that any clearly erroneous execution rule should provide for a clear
and transparent process for resolving erroneous trades and for a fair
process for hearing appeals of clearly erroneous decisions.
The Commission further believes that it is critical for a SB SEF to
have rules concerning trading halts, so that trading on the SB SEF
would not continue when trading has been halted or suspended in the
underlying security or securities pursuant to the rules or an order of
a regulatory authority with authority over the underlying security or
securities.\153\ The Commission believes that when trading has been
halted on an underlying security, it is appropriate that derivative
markets, such as the options markets and the SB swap market, also halt
trading to avoid inefficient pricing and disruptions to the market.
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\153\ The Commission notes that the options and securities
futures markets have rules providing for a trading halt in the event
that the underlying security has been paused in the equity markets.
See, e.g. Chicago Board Options Exchange Rule 43.4(b).
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Core Principle 2 requires that SB SEFs establish (and have the
capability to enforce) rules regarding trading procedures. The items
enumerated in proposed Rule 811(d) are not meant to be an exhaustive
list of rules relating to trading procedures and SB SEFs may put in
place additional types of categories of rules that they deem to be
necessary to govern the procedures for trading on the SB SEF. The
Commission preliminarily believes that each SB SEF would be in the best
position to determine precisely those rules that are necessary and
appropriate to ensure that its market functions in a fair and orderly
fashion. The rules of each SB SEF would be required to be filed as part
of the initial Form SB SEF application, as well as in connection with
the rule filing process in proposed Rules 805 and 806 of Regulation SB
SEF.\154\
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\154\ See infra Section XXIII for a discussion of the proposed
rule filing process for SB SEFs.
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The Commission requests comment on all aspects of proposed Rule
811(d). What are commenters' views on the proposed rules relating to
trading procedures? Are the Commission's proposed rules concerning
trading procedures, the need to promote pre-trade price transparency
(proposed Rule 811(d)(4)) and the rule concerning dissemination of
trading interest (proposed Rule 811(d)(5)) sufficiently clear? Would
proposed Rule 811(d)(4) make a difference in price transparency in the
SB swap market? How would it impact behavior? Are there any specific
concerns with this proposed rule? If so, what are they? Should the
proposed rule be refined? If so, how? Please provide specific
suggestions.
What are commenters' views on the proposed requirement that
responses to an RFQ must be included in the SB SEF's composite
indicative quote? Would this requirement in fact promote pre-trade
price transparency? What would be the benefits and drawbacks of the
Commission's proposal to include RFQ responses in the composite
indicative quote? Should the Commission instead require that only the
response to an RFQ accepted by the party submitting the RFQ be included
in a composite indicative quote? Should the Commission require that any
participant responding to an RFQ have
[[Page 10973]]
the ability to see other participants' responses? Would such a
requirement make a difference with respect to pre-trade price
transparency? What would be the benefits and drawbacks of such a
proposal? Should the Commission require that all requests for quote be
shown to all participants? Would such a requirement make a difference
with respect to pre-trade price transparency? What would be the
benefits and drawbacks of such proposals?
Should the Commission require a SB SEF to have a rule prohibiting
the SB SEF from disclosing to any liquidity provider that has received
an RFQ information about how many participants were queried? What would
be the impact of such a prohibition, taking into account such factors
as the type of SB swap and the size of the transaction, on the
liquidity provider's incentives in determining at what price to provide
a response? Should the participant submitting the RFQ be able to waive
any such prohibition in the exercise of its investment discretion?
For SB SEFs that choose to allow trading of uncleared SB swaps
should the Commission require such SB SEFs to have additional trading
rules related to uncleared SB swaps, such as rules for disclosing the
counterparties to such transactions or other rules related to
counterparty risks? Please provide specific suggestions.
Proposed Rule 811(e) would require a SB SEF that operates an RFQ
platform to create and disseminate through the SB SEF a composite
indicative quote for SB swaps traded on or through the SB SEF.\155\ The
composite indicative quote would need to be made available to all
participants of the SB SEF. The composite indicative quote would
include both composite indicative bids and composite indicative offers.
The Commission preliminarily believes that a composite indicative quote
would provide valuable pricing information to the participants of a SB
SEF, while at the same time not disclosing specific trading interest of
individual participants when that interest is not firm. As discussed
above, the Commission believes that including responses to an RFQ in
the composite indicative quote also may be appropriate as a means to
further increase pre-trade price transparency. A composite indicative
quote would provide some information on pricing but would take into
account concerns expressed by some market participants about
information leakage that could occur, particularly with respect to
larger sized orders.\156\ In addition, the Commission understands that
many platforms operating today in the SB swaps market create and
disseminate a composite indicative quote.
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\155\ See supra note 152 for a description of a composite
indicative quote.
\156\ See infra Section VIII.D for a discussion of block trades.
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The Commission requests comment on all aspects of proposed Rule
811(e). What are commenters' views on the proposed requirement that a
SB SEF must disseminate a composite indicative quote? What would be the
benefits or drawbacks of such a proposal? Would such a requirement
provide an increased level of pre-trade price transparency compared to
the level that is available today? Are there other measures the
Commission should impose at this time to foster pre-trade price
transparency? If so, what are they? For example, should the Commission
require a SB SEF to provide functionality to enable market participants
to post individual indicative quotes, in addition to a composite
indicative quote? What would be the advantages and disadvantages of
such a proposal?
Considering the early stage of development of the regulatory
framework for the SB swap market and the existing structure of the SB
swap market, the Commission is mindful that its interpretation of the
definition of SB SEF, and the rules it is proposing herein to implement
the Dodd-Frank Act, could have unforeseen consequences, either
beneficial or undesirable, with respect to the shape that this market
will take. In the Commission's view, it is important that the
regulatory structure will provide incentives for the trading of SB
swaps on regulated markets that are designed to foster greater
transparency and competition that are subject to Commission oversight,
while at the same time allowing for the efficient operation and
continued evolution of the SB swap market. With that in mind, should
the Commission mandate greater pre-trade price transparency at the
outset of trading of SB swaps on SB SEFs? What would be the benefits of
mandating greater pre-trade price transparency at the start of trading
of SB swaps on a SB SEF and what would be the drawbacks of such an
approach? Would the benefits outweigh the drawbacks and vice versa?
Commenters should explain their reasoning. Should the Commission
propose additional trading rules to be required of SB SEFs? If so, what
should those rules cover with regard to trading procedures?
D. Block Trades
Core Principle 2 requires a SB SEF to establish rules governing the
operation of the facility, including rules specifying trading
procedures to be used in entering and executing orders traded or posted
on the facility, including block trades.\157\ The issue of block trades
on a SB SEF has two components: (1) How should a ``block trade'' be
defined, i.e., at what threshold would a trade be considered block
size; and (2) how should block trades be handled on a SB SEF. Issues
relating to the execution, as well as the reporting, of a block trade,
have been a particular focus of market participants. Market
participants that execute block trades in SB swaps, including dealers
and buy-side customers, have raised concerns regarding pre-trade
transparency of block trades. They believe that if other market
participants know the terms of a block trade prior to the time it is
executed, those other market participants could attempt to profit from
the information about the block to the detriment of the initiator of
the block trade. If the information is disclosed before the block
trader's liquidity provider is ``on risk,'' other market participants
could buy or sell ahead of the block trade initiator, moving the market
against the block trade initiator (but not adversely affecting its
counterparty). If the liquidity provider for the block trade initiator
is ``on risk'' when the information is disclosed, other market
participants could buy or sell ahead of the liquidity provider, making
it more costly for the liquidity provider to hedge the transaction. If
the liquidity provider anticipates such price movement, front-running
by market participants could make the transaction more costly for the
block trade initiator, as the liquidity provider may provide it with
less favorable quotations in order to protect itself from the impact of
such disclosure.\158\ Some market participants also are concerned that
if a block trade were required to interact with other trading interest
on a SB SEF, there might not be enough liquidity on the SB SEF to
execute the entire block trade, leaving a portion of the block trade
unexecuted. These market participants are worried about the execution
risk of doing block trades on a SB SEF. Not having a large trade
filled, or having it filled at a disadvantageous price as a result of
having to enter into more than one trade as part of the execution
[[Page 10974]]
process, could hurt investment performance.\159\
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\157\ See Public Law 111-203, Sec. 763(c) (adding Section
3D(d)(2)(C) of the Exchange Act).
\158\ See Reporting and Dissemination Release, supra note 6, for
a discussion of the concerns surrounding post-trade transparency.
\159\ See, e.g., Hendrik Bessembinder & Kumar Venkataraman, Does
an Electronic Stock Exchange Need an Upstairs Market? J. of Fin.
Econ., Vol. 73 (2004) (``Bessembinder Paper''), finding that
execution costs of a block trade in an ``upstairs'' market are much
lower than would be if the block trade were executed in a
``downstairs'' market.
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For these reasons, market participants have urged exceptions for
the handling of block trades, including the ability to negotiate and
execute block trades without having to interact with trading interest
on the SB SEF. Market participants even have indicated a willingness to
forego available pre-trade transparency in order to keep their
proprietary block trading strategies private.
The Commission is sensitive to these concerns. However, the
Commission also is concerned that allowing the execution of block
trades on a SB SEF in a manner that is subject to less pre-trade
transparency than the minimum level that would be required by
Commission rules, for example, by allowing block trades to be executed
off of the SB SEF and then reported to the SB SEF without interacting
with trading interest on the SB SEF (i.e., using the SB SEF as a
``print facility''), could circumvent the mandatory trade execution
requirement and undermine the goals of providing for more transparent
and competitive trading on a SB SEF. Therefore, although the Commission
believes that it is permissible for a SB SEF to establish different
trading rules for block trades generally, block trades would still be
subject to the various minimum requirements that the Commission has
established with respect to pre-trade transparency\160\ and interaction
with other trading interest on the SB SEF, as discussed above.\161\
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\160\ See, for example, supra Sections III.B and VIII.C,
discussing the proposed requirement that SB SEFs that operate a RFQ
mechanism disseminate a composite indicative quote and make it
available to all participants, the aspects of the proposed
interpretation that all responses to a request for quote be included
within the composite indicative quote and that SB SEFs cannot limit
the number of liquidity providers to whom a request for quote is
sent.
\161\ See, for example, supra Section VIII.C.
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SB SEFs would have flexibility, therefore, to establish different
rules for the trading of block trades on their facilities, as long as
those rules were clear as to how block trades would be handled and
would comply with the rules being proposed today.\162\ A SB SEF could,
for example, allow a limit order book platform to use a separate multi-
dealer RFQ component to execute block trades, as long as the block
trade interacts with existing interest on the SB SEF (i.e., the limit
order book portion of the SB SEF that handles orders that are not
blocks) and otherwise complies with the proposed requirements that are
part of this rulemaking. Also, under the Commission's proposed
interpretation of the definition of SB SEF, a SB SEF that operates a
RFQ platform and that requires an RFQ to be disseminated to all
participants, could, for example, permit participants to choose to send
an RFQ to fewer than all participants, including just one. In a system
that allows participants to display firm quotes, the system (and rules)
would need to be designed to provide that a block trade, like any other
trade, would interact with the displayed orders based on a fair method.
Thus, to the extent that liquidity exists on a central limit order book
trading platform of the SB SEF, a block trade would be required to
interact with those pre-existing resting bids and offers.\163\ The
Commission also notes that, until a SB swap that is determined to be
subject to the mandatory clearing requirement and is determined to have
been made ``available to trade'' on a SB SEF or an exchange, the SB
swap could be traded in block size off a SB SEF or exchange.
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\162\ Proposed Rule 811(d) would require that a SB SEF establish
and enforce rules governing the procedures for trading on the SB SEF
including the handling of block trades if different from other
trades.
\163\ If a SB SEF operated a central limit order book and a
separate RFQ mechanism, the SB SEF's systems would be required to
ensure that any trade to be executed in the RFQ mechanism interacted
with any existing firm interest on the central limit order book at
the same or better price before interacting with interest on the RFQ
platform. For example, assume that such a SB SEF had a 5,000
notional resting order on its limit order book in SB swap A and that
a 100,000 notional RFQ in SB swap A was entered into and
disseminated to liquidity providers in the RFQ mechanism. If the
resting limit order has a price equal to or greater than the price
at which a response(s) comes back in the RFQ mechanism to execute
the RFQ order, the SB SEF system would be required to execute 5,000
of the RFQ order against the resting limit order and 95,000 against
the response(s).
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The Commission is proposing to require that a SB SEF define a
``block trade'' to have the same meaning as in Rule 900 of Regulation
SBSR relating to trade reporting.\164\ This would mean that each SB SEF
would use the same threshold for determining what constitutes a block
trade for a particular ``security-based swap instrument,'' as
calculated by a registered SDR.\165\ The Commission believes that it is
important for each SB SEF to use the same threshold for block trades to
ensure consistency and uniformity across SB SEFs.\166\ The Commission
notes, however, that until it establishes the criteria and formula for
determining a block trade pursuant to proposed Rule 907(b) of
Regulation SBSR, proposed Rule 800 of Regulation SB SEF would permit a
SB SEF to set its own criteria and formula for determining what
constitutes a block trade as long as such criteria and formula are
consistent with the Core Principles and the rules and regulations
thereunder.
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\164\ See proposed Rule 800 (defining ``block trade'' as having
the same meaning as in Rule 900 of Regulation SBSR under the
Exchange Act) and Reporting and Dissemination Release, supra note 6.
Rule 900 of Regulation SBSR would define a block trade to mean a
large notional SB swap transaction that meets the criteria set forth
in Rule 907(b) of Regulation SBSR, which states that a registered
SDR shall establish and maintain written policies and procedures for
calculating and publicizing block trade thresholds for all security-
based swap instruments reported to the registered SDR in accordance
with the criteria and formula for determining block size as
specified by the Commission.
\165\ See Reporting and Dissemination Release, supra note 6, and
proposed Rule 900 for a definition of ``security-based swap
instrument.''
\166\ The Commission notes that even if more than one registered
SDR establishes the block trade threshold for a SB swap, the
thresholds would be identical because each SDR in the same class of
SB swap would use the same data to calculate the threshold. See
Reporting and Dissemination Release, supra note 6, for a more
detailed discussion.
---------------------------------------------------------------------------
The Commission seeks comments on its proposed definition and
treatment of block trades. Should the definition of block trade have
the same meaning in the context of a SB SEF and in the context of trade
dissemination and reporting? Is there anything about pre-trade versus
post-trade transparency that warrants having different definitions of a
block trade in the context of proposed Regulation SB SEF and proposed
Regulation SBSR? \167\ Are there other definitions of block trade that
the Commission should consider? Do commenters agree with the proposed
approach to block trades on SB SEFs? Is pre-trade transparency for
block trades desirable? If so, why? If not, why not? Should SB SEFs be
permitted to have discretion regarding implementation of rules
governing the handling of block trades? For example, should block
trades be permitted to be executed in ``one participant to one
participant'' transactions and then ``printed'' on the SB SEF? If the
Commission were to adopt its proposed interpretation of the definition
of SB SEF, would such flexibility be necessary in light of the fact
that, under the proposed interpretation, a requester can choose to
[[Page 10975]]
submit an RFQ fewer than all participants, including to just one
participant? Should there be other exceptions for block trades, such as
an exception for a clean cross? \168\ What would be the benefits and
drawbacks of such proposals? Should any such proposals be subject to
any conditions, such as allowing block trades an exemption from the
minimum pre-trade transparency and order interaction requirements on a
temporary basis or not permitting ``one participant to one
participant'' transactions to be printed on a SB SEF after trading
activity in the SB swap crosses a specified liquidity threshold?
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\167\ See, e.g., Memorandum by the Staff of the Division of
Risk, Strategy and Financial Innovation of the U.S. Securities and
Exchange Commission to File No. S7-34-10, Release No. 34-63346,
dated January 13, 2011. The memorandum is submitted as a comment
letter to the Reporting and Dissemination Release, supra note 6, and
is available at: http://www.sec.gov/comments/s7-34-10/s73410-12.pdf.
\168\ See, e.g., National Stock Exchange Rule 11.12 describing
acceptable clean cross orders as a cross: (1) That is for at least
5,000 shares and has an aggregate value of at least $100,000; (2)
with a size greater than the size of the interest at each side of
the top of book; and (3) with a price equal to or better than the
Protected NBBO.
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What would be the effect of requiring block trades to interact with
existing interest on the SB SEF, to the extent firm trading interest is
available? What impact, if any, would that requirement have on price
competition occurring on the SB SEF in that particular SB swap? If
hidden trading interest were permitted on a SB SEF's trading system,
how should such interest be handled under the interaction requirement?
If block trades were required to interact with hidden trading interest,
would that encourage hidden interest and discourage displayed interest?
What would be the impact of allowing block trades to be executed off of
the SB SEF and then ``printed'' on a SB SEF, or to execute without
interaction with existing interest? What impact, if any, would that
have on price competition on the SB SEF in that particular SB swap?
What impact would such a proposal have on the incentives of market
participants to post firm interest in that SB swap? Would this proposal
create a significant disincentive for market participants to enter any
sizeable volume for execution on the SB SEF? What other requirements,
if any, should the Commission impose to promote incentives to post firm
quotes? Are there any alternative methods to provide for pre-trade
transparency for block trades without requiring block trades to
interact with other bids and offers on a SB SEF? If so, how would these
alternative methods impact the requirements and goals of the Dodd-Frank
Act? Are there alternative trading mechanisms, such as crossing
systems, that could be used to trade blocks? How would these
alternative trading mechanisms comply with the pre-trade transparency
requirements? Are there other special provisions that should apply to
block trades? If so, what are they, and why would they be appropriate?
The Commission recognizes that the SB swap market is different in
certain respects than the market for cash equities and listed options.
For example, many fewer market participants account for a significant
amount of the trading in SB swaps. In addition, there is not at this
time any direct retail participation in the SB swap market. Further,
trading in SB swaps generally is much less liquid than for many NMS
stocks and listed options. How, if at all, do these factors, or other
factors regarding the structure of the SB swap market, impact the
handling of block trades in the SB swap market, and how should they, if
at all, impact the proposed treatment of block trades on SB SEFs?
E. Trade Processing Procedures
Proposed Rule 811(f) would require a SB SEF to establish and
enforce rules concerning the reporting of trades executed on the SB SEF
to a clearing agency and procedures for the processing of transactions
in SB swaps that occur on or through the SB SEF, including, but not
limited to, procedures to resolve any disputes concerning the execution
of a trade.
The Commission believes that the types of rules contemplated by
proposed Rule 811(f) are important to contributing to the fair and
orderly functioning of any SB SEF, and to ensure that trades executed
on a SB SEF are properly transmitted to the applicable registered
clearing agency. In the Commission's view, these types of rules would
aid a SB SEF in contributing to the operation of an orderly market. The
Commission believes that the rules of the SROs could provide
appropriate models to SB SEFs concerning the types of rules that would
satisfy the requirements of this proposed rule. Alternatively, the
Commission could find the rules of other regulated entities appropriate
for use as models as well, upon review.
The Commission requests comment generally on all aspects of
proposed Rule 811(f). Is the Commission's proposed rule sufficiently
clear? Are there other aspects of trading procedures, aside from the
reporting of trades to a clearing agency and procedures for the
processing of transactions in SB swaps and for the handling of disputes
that should be addressed? If so, what additional information should be
included in such a rule? Should the Commission require SB SEFs to
compare and report confirmed trades \169\ to clearing agencies, or is
it appropriate to leave the choice to SB SEFs? Please be specific.
---------------------------------------------------------------------------
\169\ This would parallel certain reporting requirements for
locked-in trades in the equity and debt markets. A locked-in trade
is one in which all of the terms and conditions of the trade are
agreed to and accepted by the buyer and the seller. See, e.g.,
http://www.amex.com/servlet/AmexFnDictionary?pageid=display&titleid=3784.
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F. Disciplinary Rules and Procedures
Proposed Rule 811(g) would require a SB SEF to establish rules and
procedures concerning the disciplining of its participants including,
but not limited to: authorizing the SB SEF's staff to recommend and
take disciplinary action for alleged violations of the SB SEF's rules;
specifying the sanctions that may be imposed on participants for
violations of the SB SEF's rules (provided that each sanction is
commensurate with the corresponding violation); and establishing fair
and non-arbitrary procedures for any disciplinary process, and appeals
thereof.
SB SEFs are required by Section 3D(d)(2) of the Exchange Act to
enforce compliance with their rules. Proposed Rule 811(g) is designed
to require the SB SEF to have baseline rules relating to its
disciplinary process to help it carry out its statutory
responsibilities.\170\
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\170\ In fashioning their disciplinary rules, SB SEFs may be
informed by the rules on disciplinary proceedings maintained by the
national securities exchanges. See, e.g., Chicago Board Options
Exchange, Chapter XVII (Disciplinary Rules) and New York Stock
Exchange Rules 475-477 (Disciplinary Rules).
---------------------------------------------------------------------------
Proposed Rule 811(h) would require the SB SEF to make and keep
specific records of all disciplinary proceedings and sanctions imposed,
and all appeals, and to disclose disciplinary actions on an annual
amendment to Form SB SEF and on the SB SEF's annual report of the CCO
required by Section 3D(d)(14) of the Exchange Act and proposed Rule
823.\171\ While this proposed requirement also would be part of the
recordkeeping requirement of the SB SEF under Core Principle 9, the
Commission is restating it in connection with Core Principle 2, since
these records would need to be maintained and information about
disciplinary actions disclosed by the SB SEF. This information, which
could be used by the Commission to review the disciplinary process at a
SB SEF, would provide the Commission with an additional tool to
[[Page 10976]]
carry out its oversight responsibilities with respect to SB SEFs.\172\
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\171\ See infra Sections XXI (discussing Core Principle 14) and
XXIII (discussing proposed Form SB SEF). The Commission notes that
information provided on proposed Form SB SEF is public.
\172\ See Regulation MC Proposing Release, supra note 82, 75 FR
at 65912, discussing the requirement in proposed Rule 702(g) under
Regulation MC relating to compositionally balanced disciplinary
panels for SB SEFs.
---------------------------------------------------------------------------
The Commission requests comment generally on all aspects of
proposed Rule 811(h). Is the Commission's rule concerning disciplinary
rules and procedures sufficiently clear? Should the proposed rule
include greater specificity regarding the disciplinary processes for SB
SEFs, including the review of disciplinary actions? If so, what
provisions should be included in any such rule? Should participants in
the SB SEF, or customers of participants, be involved in the
disciplinary process? If so, in what regard? Should the CCO be required
to be involved in any disciplinary process?
G. Surveillance for Rule Violations
Proposed Rule 811(i) would require a SB SEF to establish rules and
procedures to assure that the information to be used to determine
whether rule violations have occurred is captured and retained in a
timely manner. Proposed Rule 811(j) would require the SB SEF to have
the capacity to capture information that may be used in establishing
whether rule violations have occurred, including through the use of
automated surveillance systems as set forth in proposed Rule
813(b),\173\ maintain appropriate resources to fulfill these
obligations, and investigate possible rule violations.
---------------------------------------------------------------------------
\173\ See infra Section X (discussing Core Principle 4). Core
Principle 4, which would be implemented in proposed Rule 813,
requires a SB SEF, among other things, to monitor trading in SB
swaps to prevent manipulation, price distortion, and disruptions of
the delivery or cash settlement process through surveillance,
compliance, and disciplinary practices and procedures, including
methods for conducting real-time monitoring of trading and
comprehensive and accurate trade reconstructions.
---------------------------------------------------------------------------
The Commission believes that, to be able to effectively carry out
its obligations to enforce compliance with its rules, a SB SEF must
have the capability to monitor trading activity to determine whether
rule violations are occurring or have occurred.\174\ The rules proposed
in Rules 811(h) and (i) are designed to require a SB SEF to have
baseline rules relating to surveillance of its market to help it carry
out its statutory responsibilities.
---------------------------------------------------------------------------
\174\ See infra Section X (discussing Core Principle 4).
---------------------------------------------------------------------------
The Commission requests comment generally on all aspects of
proposed Rule 811(i). Are the Commission's proposed rules on
surveillance of rule violations sufficiently clear? If not, what
additional information is required? Please be specific. Should SB SEFs
be required to exchange information with other SB SEFs that have listed
the same SB swaps for trading to properly surveil trading in those SB
swaps on its market? How would any exchange of information with other
SB SEFs be accomplished? Should SB SEFs have access to trading
information for similar SB swaps trading in the OTC derivatives market?
If so, how would this be accomplished? What guidelines should the
Commission use to determine what SB swaps are sufficiently similar to
require such access? Should SB SEFs be required to share information
with other regulatory authorities? For example, if a SB SEF detects
unusually high activity in a particular SB swap, what guidelines would
be appropriate for the sharing of this information with the Commission
and other regulatory authorities that regulate the underlying asset?
IX. Core Principle 3--Manipulation
Section 3D(d)(3) of the Exchange Act (Core Principle 3) provides
that a SB SEF shall permit trading only in SB swaps that are not
readily susceptible to manipulation.\175\ To implement Core Principle
3, the Commission is proposing Rule 812.
---------------------------------------------------------------------------
\175\ See Public Law 111-203, Sec. 763(c) (adding Section
3D(d)(3) of the Exchange Act).
---------------------------------------------------------------------------
Proposed Rule 812(a) would implement the requirements of Core
Principle 3. Proposed Rule 812(b) would provide that before a SB SEF
may permit the trading of a SB swap on the SB SEF, the SB SEF's swap
review committee must have determined, after taking into account all of
the terms and conditions of the SB swap and the markets for the SB swap
and any underlying security or securities, that such SB swap is not
readily susceptible to manipulation. The proposed requirement that the
swap review committee consider not only the market for the SB swap, but
also the market for any underlying security or securities is intended
to make clear that the swap review committee must consider whether an
underlying or reference security could make a SB swap readily
susceptible to manipulation.\176\ Under proposed Rule 812(c), after a
SB SEF commences trading of a SB swap, its swap review committee would
be required to periodically review trading in the SB swap. If the swap
review committee cannot determine, after taking into account all of the
terms and conditions of the SB swap, the markets for the SB swap and
any underlying security or securities, and trading in the SB swap, that
such SB swap is not readily susceptible to manipulation, the SB SEF
would be required to no longer permit the trading of the SB swap.
---------------------------------------------------------------------------
\176\ The Commission notes that it is not unusual for national
securities exchanges to include in their listing standards for
derivatively-priced securities provisions concerning the market for
the underlying components. See, e.g., Chicago Board Option Exchange
Rule 5.3 (listing standards for options contracts which include,
among other things, requirements relating to the trading volume and
number of holders of the underlying security); NYSE Arca Rule
5.2(j)(3) Commentary .01(a) (listing standards for index-based
exchange-traded funds, which include, among other things,
requirements relating to the trading volume and market value of
underlying components).
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Because Core Principle 3 permits a SB SEF to trade only SB swaps
that are not readily susceptible to manipulation, the Commission
preliminarily believes that the proposal to require every SB SEF's swap
review committee to consider the terms and conditions of the SB swap
and the markets for the SB swap and any underlying security or
securities, and make an affirmative determination that the SB swap is
not readily susceptible to manipulation before a SB SEF trades a SB
swap, and to periodically review that determination after trading
commences, is a reasonable approach to implementing the statutory
language of Core Principle 3. Further, as discussed above, proposed
Rule 811(c)(1) would require a SB SEF's swap review committee to
determine whether to trade a SB swap and whether a SB swap that has
commenced trading should continue to trade on the SB SEF.\177\ Under
proposed Rule 812, the swap review committee would be required to also
consider whether a SB swap raises manipulation concerns before trading
such product.
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\177\ Pursuant to proposed Rule 811(c)(3), a SB SEF would be
required to establish criteria that its swap review committee should
consider in determining which SB swaps should trade on the SB SEF.
See supra Section VIII.B.
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The Commission generally requests comment on all aspects of
proposed Rule 812. Additionally, the Commission requests comment as to
whether there are any types of SB swaps trading today that a SB SEF's
swap review committee should presume are not readily susceptible to
manipulation. What factors would or should a SB SEF take into
consideration when making a determination whether a SB swap would be
readily susceptible to manipulation? Should the Commission provide more
guidance regarding what being ``readily susceptible to manipulation''
means in the context of SB swaps? If so, what guidance should the
Commission provide? Should the Commission require a SB SEF to consider
objective criteria concerning
[[Page 10977]]
the underlying security or securities? If so, what should these
criteria be? \178\
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\178\ See supra note 176, noting examples of national securities
exchanges that have included in their listing standards for
derivatively-priced securities required consideration of factors
such as the trading volume, number of holders, and market value of
the underlying security or securities.
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The Commission recognizes that it might be difficult to determine
whether a particular SB swap is readily susceptible to manipulation.
Further, individual SB SEFs--as well as various market participants and
investors--may have differing views on whether a particular SB swap is
readily susceptible to manipulation. In light of the potential need for
further clarity on this question, the Commission therefore requests
comment on whether it should consider adopting a safe harbor consisting
of objective criteria for purposes of meeting the requirements of
Section 3D(d)(1) of the Exchange Act with respect to Core Principle 3.
If so, what would be appropriate objective criteria for such a safe
harbor provision? Should the criteria relate to characteristics of the
SB swap or the market for the underlying, or the procedures to be
followed by the SB SEF in making a determination as to whether an SB
swap is readily susceptible to manipulation, or a combination of both?
For example, should the Commission consider adopting a safe harbor that
includes thresholds relating to trading volume, number of holders, and/
or market value of the underlying security or securities? \179\ Should
the criteria to be included in any safe harbor be the same as or
different from any criteria that the Commission may adopt with respect
to the mandatory clearing determination or the determination of when a
SB swap is made available to trade? Commenters are requested to be as
specific as possible as to what the appropriate criteria for a safe
harbor would be.
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\179\ See supra note 176.
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Is the proposed periodic review requirement necessary or
appropriate? Should the Commission define how frequently a SB SEF must
review its determination that a SB swap is not readily susceptible to
manipulation? If so, what would be an appropriate frequency for such a
review?
X. Core Principle 4--Monitoring of Trading and Trade Processing
Section 3D(d)(4) of the Exchange Act (Core Principle 4) requires a
SB SEF to establish and enforce rules or terms and conditions defining
or specifications detailing: (i) trading procedures to be used in
entering and executing orders traded on or through the facilities of
the SB SEF; and (ii) procedures for trade processing of SB swaps on or
through the facilities of the SB SEF.\180\ This Core Principle also
requires SB SEFs to monitor trading in SB swaps to prevent
manipulation, price distortion, and disruptions of the delivery or cash
settlement process through surveillance, compliance and disciplinary
practices and procedures, including methods for conducting real-time
monitoring of trading and comprehensive and accurate trade
reconstructions.\181\ The Commission is proposing Rule 813 of
Regulation SB SEF to implement Core Principle 4. The Commission
believes that the requirements of proposed Rule 813 would aid potential
registrants in evaluating whether the rules they propose to implement
and the mechanisms they would establish to monitor trading in SB swaps
would comply with the Core Principle.
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\180\ See Public Law 111-203, Sec. 763(c) (adding Section
3D(d)(4) of the Exchange Act).
\181\ Id.
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Proposed Rule 813(a) would implement the statutory language of the
Core Principle. Proposed Rule 813(b) would require a SB SEF to have the
capacity and appropriate resources to electronically monitor trading in
SB swaps on its market by establishing an automated surveillance
system, including real time monitoring of trading and the use of
automated alerts, that is designed to detect and deter any fraudulent
or manipulative acts or practices, including insider trading or other
unlawful conduct or any violations of the rules of the SB SEF; to
detect and deter market distortions or disruptions of trading that may
impact the entry and execution of trading interest or the processing of
trading interests; to conduct real-time monitoring of trading to
provide for comprehensive and accurate trade reconstruction; and to
collect and assess data to allow the SB SEF to respond promptly to
market abuses or disruptions. The Commission preliminarily believes
that requiring a SB SEF to establish such an automated surveillance
system would enable the SB SEF to comply with the requirements of Core
Principle 4 that SB SEFs monitor trading in SB swaps to prevent price
manipulation, price distortion, and disruptions of the delivery or cash
settlement process. In addition, Core Principle 4 specifically requires
SB SEFs to have methods for conducting real-time monitoring of
trading.\182\
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\182\ Id.
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Proposed Rule 813(c) would require a SB SEF to establish and
enforce rules that require any participant that enters an order,
request for quote, or other trading interests, or executes any
transaction on the SB SEF to maintain books and records of any such
order, request for quote or other trading interests, or transaction,
and any positions in any SB swap that is the result of any such order,
request for quote, or other trading interest or transaction on the SB
SEF, and to provide prompt access to such books and records to the SB
SEF and the Commission. Finally, proposed Rule 813(d) would require a
SB SEF to establish and maintain procedures to investigate possible
rule violations, to prepare reports of the findings and recommendations
of such investigations, and to take corrective actions, as necessary.
The proposed rule's requirement that participants maintain books
and records of their activity on the SB SEF and make them available to
the SB SEF and the Commission would aid the SB SEF in detecting and
deterring fraudulent and manipulative acts with respect to trading on
its market, as well as help it to fulfill the statutory requirement in
Core Principle 4 that a SB SEF monitor trading in SB swaps, including
through comprehensive and accurate trade reconstructions. The proposed
rule also would aid the Commission in carrying out its responsibility
to oversee the SB SEF. The proposed rule's requirement that the SB SEF
establish and enforce procedures to investigate possible rule
violations and prepare reports is designed to ensure that the SB SEF
fulfills its statutory obligation under this Core Principle to prevent
manipulation, price distortions, and disruptions in the market.
The Commission requests comment on all aspects of proposed Rule
813. Is the proposed rule sufficiently clear? Do commenters believe
that SB SEFs would encounter issues in establishing an automated
surveillance system for real-time monitoring of trading and in
collecting or assessing data to allow the SB SEF to respond promptly to
market abuses or disruptions? Would proposed Rule 813(c), which would
require participants to provide access to their books and records to
the SB SEF and the Commission, be difficult for any particular group of
participants (e.g., non-registered ECPs or foreign participants) to
comply with? If so, how should the Commission modify the rule to
address any such issues?
Should SB SEFs be required to exchange information with each other
regarding trading by their mutual participants to facilitate
surveillance and investigation of potential
[[Page 10978]]
manipulative or otherwise violative activity? If so, under what
circumstances? Should SB SEFs be required to become members of the
Intermarket Surveillance Group (``ISG''),\183\ or to form a similar
group among themselves? If so, should all SB SEFs be required to join?
If not, what types of SB SEFs should be required to join? For example,
should SB SEFs be required to join if they trade a certain volume
threshold of SB swaps? If so, what should that volume threshold be?
Should SB SEFs be required to share information with other regulatory
authorities (including SROs)? For example, if a SB SEF detects an
unusually high activity in a particular SB swap, what guidelines would
be appropriate for the sharing of this information with the Commission
and the other regulatory authorities that regulate the underlying
asset?
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\183\ ISG was established in the early 1980s and is comprised of
an international group of exchanges, market centers and market
regulators. ISG states that its purpose is to effectively detect and
prevent unfair transactions across markets through market
information sharing among its members. See ISG's Web site at http://www.isgportal.org for additional information on ISG.
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XI. Core Principle 5--Ability To Obtain Information
Section 3D(d)(5) of the Exchange Act (Core Principle 5) requires a
SB SEF to establish and enforce rules that would allow the SB SEF to
obtain any necessary information to perform any of the functions
described in the Core Principles for SB SEFs, provide the information
to the Commission on request, and have the capacity to carry out such
international information-sharing agreements as the Commission may
require.\184\ To implement Core Principle 5, the Commission is
proposing Rule 814 of Regulation SB SEF.
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\184\ See Public Law 111-203, Sec. 763(c) (adding Section
3D(d)(5) of the Exchange Act).
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Proposed Rule 814(a) would require each SB SEF to establish and
enforce rules requiring its participants to furnish to the SB SEF, upon
request and in the form and manner prescribed by the SB SEF, any
information that is necessary for the SB SEF to perform its
responsibilities including, without limitation, surveillance,
investigating, examinations and discipline of participants. Such
information may include, without limitation, financial information,
books, accounts, records, files, memoranda, correspondence, and any
other information pertaining to orders, requests for quotes, responses,
quotations, or other trading interest entered and transactions executed
on or through the SB SEF.\185\ Proposed Rule 814(a) further would
require each SB SEF to establish and enforce rules requiring its
participants to cooperate with the SB SEF and any representative of the
Commission and allow access by the SB SEF and any representative of the
Commission at such reasonable times as the SB SEF or the Commission
representative may request to examine the books and records of the SB
SEF participant, or to obtain or verify other information related to
orders, requests for a quote, responses, quotations, or other trading
interest entered and transactions executed on or through, the SB SEF's
facilities. These provisions would permit a SB SEF and any
representative of the Commission to have access to any information that
the SB SEF participants are required to make, keep, and preserve
pursuant to any Commission or other rule, and should therefore assist
the SB SEF to more effectively perform its obligations, as required by
the Core Principles, and the Commission to perform its oversight
responsibilities for SB SEFs.
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\185\ The requirement that SB SEF participants make, keep and
preserve books and records is independent of proposed Rule 814. See
17 CFR 240.17a-3 and 240.17a-4, which are applicable to registered
broker-dealers. See also Public Law 111-203, Sec. 764(a) (adding
Section 15F(f)(B) of the Exchange Act, requiring each registered SB
swap dealer and major SB swap participant to keep books and records
as may be prescribed by the Commission). See also proposed Rule
809(c)(2)(i), requiring registered SB swap dealers and registered
major SB swap participants to meet the minimum recordkeeping and
reporting requirements imposed by the Commission. With respect to
eligible contract participants, proposed Rule 809(c)(2)(ii) would
require eligible contract participants to meet the recordkeeping and
reporting requirements established by the SB SEF pursuant to
proposed Rule 813.
---------------------------------------------------------------------------
Proposed Rule 814(b) would similarly require the SB SEF to
cooperate with any representative of the Commission and allow access by
any representative of the Commission to examine the books and records
required to be kept by the SB SEF pursuant to proposed Rule 818, to
obtain or verify other information related to orders, requests for
quote, responses, quotations, or other trading interest entered and
transactions executed on or through its facilities, and otherwise
provide to any representative of the Commission, upon request, such
information that the SB SEF may possess or obtain from its participants
pursuant to proposed Rule 814(a). The Commission preliminarily believes
that these provisions would be instrumental in enabling the Commission
to carry out its oversight and regulation of SB SEFs and the SB swap
market and would support the requirement in Core Principle 5 that the
SB SEF establish and enforce rules that would allow the SB SEF to
obtain any necessary information to perform any of the functions
described in the Core Principles and provide the information to the
Commission on request.
The Commission preliminarily believes that proposed Rule 814 would
reasonably clarify the statutory language of Core Principle 5, which
requires a SB SEF to have the ability to ``obtain information'' and
``provide the information to the Commission on request.'' Specifically,
the Commission believes that it is important to its ability to regulate
and oversee SB SEFs for the Commission to be able to obtain information
by specifying that SB SEFs and SB SEF participants must cooperate,
furnish information upon request, provide access to books and records,
and be subject to examination.\186\ These proposed requirements also
would enable the SB SEF to monitor participants on its system and
enforce compliance with its rules, as required by Section 3D(d) of the
Exchange Act.
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\186\ The proposed requirements are analogous to the provisions
of Section 17(b) of the Exchange Act, which provides that the
records of a national securities exchange, among other things, shall
be subject to reasonable periodic, special or other examinations by
representatives of the Commission, and Rule 17a-4(j) under the
Exchange Act, requiring exchange members, brokers and dealers to
furnish promptly copies of records that are required to be preserved
under the rule to representatives of the Commission. 15 U.S.C.
78q(b)(1) and 17 CFR 240.17a-4(j).
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Further, proposed Rule 814(b)(3) would require a SB SEF to have the
capacity to carry out such international information-sharing agreements
as the Commission may require.\187\ Proposed Rule 814(b)(4) would
require every SF SEF to certify at the time of registration on Form SB
SEF, and annually thereafter as part of the annual compliance report
described in Rule 823, that the SB SEF has the capacity to fulfill its
obligations under any international information-sharing agreements to
which it is a party as of the date of such certification.
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\187\ The Commission notes that it is not unusual for a national
securities exchange to enter into an information-sharing agreement
with a foreign exchange for the purpose of securing information in
connection with trading in securities on the foreign exchange that
could impact the trading of securities on the U.S. exchange. See,
e.g., Securities Exchange Act Release No. 59835 (April 28, 2009), 74
FR 21041 (May 6, 2009) (noting, in connection with proposed listing
standards, that NYSE Arca, Inc. had in place an information sharing
agreement with the London Metal Exchange (``LME'') for the purpose
of providing information in connection with trading in or related to
futures contracts traded on LME.
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These proposed regulations would implement the provision of Core
Principle 5 requiring SB SEFs to have the capacity to carry out such
[[Page 10979]]
international information-sharing agreements as the Commission may
require. The Commission preliminarily believes that the proposed rule
would help ensure that the SB SEF has the ability to fulfill its
regulatory and reporting responsibilities with respect to its market
place and its participants, and that the Commission has the information
necessary to fulfill its oversight and regulatory responsibilities
related to the SB swaps market. The proposed rule also would facilitate
information-sharing in the global SB swaps market.
The Commission requests comment on all aspects of proposed Rule 814
relating to the ability to obtain information. Is the proposal that a
SB SEF require its participants to furnish information upon request,
cooperate with and provide access to the SB SEF too burdensome? Is the
proposal that the SB SEF require its participants to furnish
information upon request, cooperate with and provide access to any
representative of the Commission appropriate?
Is the proposal to similarly require the SB SEF to furnish
information upon request, cooperate with and provide access to any
representative of the Commission at reasonable times as requested,
appropriate? Are there other approaches that the Commission should take
to implement the requirement that the SB SEF have the ability to obtain
information and provide it to the Commission? Is there information that
SB SEFs should be required to provide to the Commission on a regular,
periodic basis? If so, what types of information should be provided in
such a manner? How often should such information be provided?
Are there any other requirements with respect to international
information-sharing agreements that a SB SEF should be required to
comply with? Are the proposed requirements too burdensome? If so, why?
What are the costs and benefits of the proposed requirements? Should
the Commission require a SB SEF to enter into information-sharing
agreements with U.S. trading venues for SB swaps, as the Commission may
require, or as necessary or appropriate to fulfill its regulatory and
reporting responsibilities? Are there any other requirements with
respect to domestic information-sharing agreements with which a SB SEF
should be required to comply? If so, please explain.
XII. Core Principle 6--Financial Integrity of Transactions
Section 3D(d)(6) of the Exchange Act (Core Principle 6) requires
every SB SEF to establish and enforce rules and procedures for ensuring
the financial integrity of SB swaps entered on or through the
facilities of the SB SEF, including the clearance and settlement of SB
swaps pursuant to Section 3C(a)(1) of the Exchange Act.\188\ Pursuant
to Section 3C(a)(1) of the Exchange Act, SB swap transactions must be
cleared through a clearing agency registered with the Commission or a
clearing agency exempt from registration, if the Commission has
determined that the SB swap is required to be cleared.\189\
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\188\ See Public Law 111-203, Sec. 763(a) (adding Section
3C(a)(1) of the Exchange Act).
\189\ The clearing requirement in Section 3C(a) of the Exchange
Act contains certain exceptions. For example, Section 3C(g) of the
Exchange Act states that a counterparty that is not a financial
entity that is using a SB swap to hedge or mitigate commercial risk
is not subject to the clearing requirement. Section 3C(g)(1)(C)
requires each such counterparty to notify the Commission of how it
generally meets its financial obligations associated with entering
into non-cleared SB swaps. See Section 3C of the Exchange Act for
all applicable exceptions and exemptions to the clearing
requirements for SB swaps and the requirements relating to clearing
agencies of SB swaps.
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The Commission believes that it is important that SB SEFs set
specific standards designed to ensure the financial integrity of all
their participants. Proposed Rule 815(a) would implement the
requirements of Section 3D(d)(6) of the Exchange Act. Proposed Rule
815(b) would permit the rules of a SB SEF to allow a participant
trading a SB swap that will not be cleared through a registered
clearing agency to consider counterparty credit risk in selecting
potential counterparties, notwithstanding the requirements of proposed
Rule 810(b)(2).\190\ The Commission believes that these requirements,
taken together, should strengthen the financial integrity of SB swap
transactions that occur on the SB SEFs by reducing the counterparty
credit risks associated with uncleared SB swaps transactions.
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\190\ Proposed Rule 810(b)(2) would prohibit a SB SEF's rules
from unreasonably limiting any person in respect to access to the
services offered by such SB SEF in an unfair or discriminatory
manner. See supra Section VII for a discussion of proposed Rule
810(b)(2).
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As noted above,\191\ the Commission identified in the Regulation MC
Proposing Release certain conflicts of interest that may provide
incentives for certain dominant market participants to limit access by
potential competing market participants to SB SEFs. A SB SEF could put
in place participant standards, including capital requirements and
other financial requirements, in a way that would unfairly restrict
access to a SB SEF. For example, a SB SEF could have a very high
capital requirement for participation that may exclude some smaller
dealers from participation in the SB SEF. On the one hand, while
appropriate participation standards, including financial requirements,
would support this Core Principle that requires SB SEFs to have rules
and procedures for ensuring the financial integrity of SB swaps entered
on or through the facilities of the SB SEF, unduly high standards may
without justification exclude persons who are otherwise qualified to
trade on the SB SEF. On the other hand, the Commission is mindful that
broadening access could come at the expense of sound risk management
practices. Thus, lessening capital or other financial requirements to
increase participation beyond a certain level may increase the overall
risk of the SB SEF's operations.
---------------------------------------------------------------------------
\191\ See supra Section VI, discussing access to SB SEFs.
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The Commission seeks comments on all aspects of this proposed Rule
815. The Commission seeks comments on whether an SB SEF should be
prohibited from imposing higher capital requirements than the capital
requirements imposed by any rules or regulations that the Commission
may impose on participants of SB SEFs because such higher standards
could be utilized as a means to deter access to a SB SEF. If such a
prohibition were adopted, would it be appropriate for the SB SEF to
tailor capital requirements to the status of the participant on an
objective basis, e.g., having different capital requirements for a
liquidity provider with market maker obligations than a participant
without such obligations? If adopted, should such prohibition apply to
trading in cleared and uncleared SB swaps? In addition, the Commission
seeks comment on what additional safeguards, if any, would be necessary
to ensure the financial integrity of SB swap transactions executed on a
SB SEF. For swaps cleared by a registered clearing agency, should a SB
SEF be required to ensure that it has the capacity to route
transactions to the clearing agency? With respect to swaps that are not
cleared, should a SB SEF be required to have rules requiring the
transacting members to have entered into a credit arrangement for the
transaction, demonstrate an ability to exchange collateral, and have
appropriate credit filters in place?
XIII. Core Principle 7--Emergency Authority
Section 3D(d)(7) of the Exchange Act (Core Principle 7) requires SB
SEFs to adopt rules to provide for the exercise
[[Page 10980]]
of emergency authority, in consultation or cooperation with the
Commission, as is necessary and appropriate, including the authority to
liquidate or transfer open positions in any SB swap or to suspend or
curtail trading in a SB swap.\192\ The Commission is proposing Rule 816
to implement Core Principle 7.
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\192\ See Public Law 111-203, Sec. 763(c) (adding Section
3D(d)(7) of the Exchange Act).
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Proposed Rule 816(a) would require that every SB SEF establish
rules and procedures to provide for the exercise of emergency
authority, in consultation or cooperation with the Commission, as
necessary or appropriate. ``Emergency'' would be defined in proposed
Rule 800 to have the same meaning as set forth in Section 12(k)(7) of
the Exchange Act.\193\ The Commission believes that the definition of
``emergency'' in Section 12(k)(7) of the Exchange Act has the advantage
of being broad enough to cover unusual or extreme circumstances without
being unduly restrictive. The Commission also believes that the
proposed use of the Exchange Act's definition of emergency would foster
consistency among rules regarding the exercise of emergency authority
and promote the use of a consistent definition across securities
markets generally.
---------------------------------------------------------------------------
\193\ See 15 U.S.C. 78l(k)(7) (defining the term emergency to
mean ``(A) a major market disturbance characterized by or
constituting--(i) sudden and excessive fluctuations of securities
prices generally, or a substantial threat thereof, that threaten
fair and orderly markets; or (ii) a substantial disruption of the
safe or efficient operation of the national system for clearance and
settlement of transactions in securities, or a substantial threat
thereof; or (B) a major disturbance that substantially disrupts, or
threatens to substantially disrupt--(i) the functioning of
securities markets, investment companies, or any other significant
portion or segment of the securities markets; or (ii) the
transmission or processing of securities transactions.''
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Proposed Rule 816(c) would require that every SB SEF have rules
that permit the SB SEF to immediately take any or all of the following
actions during an emergency: (1) Impose or modify trading limits, price
limits, position limits, or other market restrictions, including
suspending or curtailing trading on its market in any SB swap or class
of SB swaps; (2) extend or shorten trading hours; (3) coordinate
trading halts with markets trading a security or securities underlying
any SB swap; (4) coordinate with a registered clearing agency to
liquidate or transfer positions in any open SB swap of one of its
participants; and (5) any action directed by the Commission. The
Commission preliminarily believes that the actions proposed in proposed
Rule 816(c)(1) through (4) would be important powers for a SB SEF to
have immediately without the need to seek additional authority from the
Commission when an emergency has occurred. The proposed rule would
enable a SB SEF to respond promptly during an emergency to maintain
fair and orderly markets and foster market integrity and efficiency
when ordinary authority would be insufficient.
In light of the breadth of the proposed emergency authority for SB
SEFs, proposed Rule 816 also would require that every SB SEF have rules
governing the exercise of such emergency authority. Pursuant to
proposed Rule 816(b), SB SEF rules and procedures would be required to
specify: the person or persons authorized by the SB SEF to declare an
emergency; how the SB SEF would notify the Commission and the public of
its decision to exercise its emergency authority; the processes for
decision making by facility personnel with respect to exercise of
emergency authority, including alternate lines of communication and
guidelines to avoid conflicts of interest in the exercise of such
authority; and the processes for determining that an emergency no
longer exists and notifying the Commission and the public of such
decision. The Commission believes that it is important that SB SEFs put
in place a process for exercising emergency authority in order to help
ensure that a SB SEF is prepared prior to any emergency situation and
to help ensure that a SB SEF exercises emergency authority
appropriately and uniformly.
Proposed Rule 816(d) would require every SB SEF to promptly notify
the Commission of the exercise of its emergency authority and, within
two weeks following cessation of the emergency, submit written
documentation explaining the basis for declaring an emergency, how
conflicts of interest were minimized, and the extent to which the
facility considered the effect of its emergency action on the markets
for the SB swap and any security or securities underlying the SB swap.
Proposed Rule 816(d) also would provide that, if a SB SEF implements
any rule or rule amendment in the exercise of its emergency authority,
it shall file such rule or rule amendment with the Commission pursuant
to Rule 806 prior to the implementation of such rule or rule amendment,
or, if not practicable, within 24 hours after implementation of such
rule or rule amendment. The Commission preliminarily believes that
while it is important to provide SB SEFs with the tools necessary to
react in emergency situations, requiring SB SEFs to submit a notice
and, if applicable, file a certified emergency rule or rule amendment
in accordance with proposed Rule 806, would help to deter SB SEFs from
using such tools inappropriately. In addition, requiring a SB SEF to
notify the Commission and, if applicable, file a certified emergency
rule or rule amendment, would allow the Commission to determine whether
a SB SEF acted in compliance with proposed Rule 816 and should provide
the Commission timely information with respect to the actions taken in
any emergency situation.
While some national securities exchanges have rules providing for
the exercise of emergency authority by the exchange,\194\ there is no
specific Commission rule detailing how national securities exchanges
should address the issue of emergency authority. In light of the
mandate in Core Principle 7 that SB SEFs adopt rules governing the
exercise of emergency authority, and in light of the fact that it is
likely the same entities will be registered as SB SEFs and SEFs, the
Commission's approach to implementing Core Principle 7 is guided by the
approach the CFTC has taken with respect to the CEA's requirement that
a designated contract market adopt rules to provide for the exercise of
emergency authority.\195\
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\194\ See, e.g., NYSE Rule 49 and Nasdaq Bylaws Article IX,
Section 5.
\195\ See Section 5(d) of the CEA, 7 U.S.C. 7(d) (requiring a
board of trade to adopt rules to provide for the exercise of
emergency authority, in consultation or cooperation with the CFTC,
where necessary and appropriate). See also 17 CFR part 38, Appendix
B to part 38 implementing Section 5(d) of the CEA. Appendix B to
part 38 provides, in part, that a designated contract market should
have clear procedures for the exercise of emergency authority and
should, among other things, be able to impose or modify price
limits, order the liquidation or transfer of open positions, order
the fixing of a settlement price, order a reduction in positions,
extend or shorten the expiration date or the trading hours, suspend
or curtail trading on the market, order the transfer of customer
contracts and the margin for such contracts from one member
including non-intermediated market participants of the contract
market to another, or alter the delivery terms or conditions, or, if
applicable, should provide for such actions through its agreements
with its third-party provider of clearing services.
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The Commission generally requests comment on all aspects of the
proposed rule regarding emergency authority. Additionally, the
Commission requests comments as to whether the proposed list of
emergency actions that a SB SEF may take is appropriate. Are there any
additional actions that should be included? Are there any proposed
actions that should not be included? Why or why not?
The Commission notes that it is common for a national securities
exchange to consult and cooperate with the Commission prior to
responding to highly unusual or emergency market
[[Page 10981]]
conditions and expects that a SB SEF would likely do the same before
exercising its emergency authority pursuant to proposed Rule 816.
However, the Commission requests comment on whether it should require
that a SB SEF consult and cooperate with the Commission before it takes
any emergency action. Why or why not? Is the proposed definition of
emergency appropriate? Is there another definition of emergency that
would be more appropriate? Would it be preferable for the Commission
not to define the term emergency? If not, why not? The Commission
further requests comment on whether the proposed list of rules
specifying processes for exercising emergency authority in proposed
Rule 816(b) is appropriate. Are there any additional processes that
should be included? Are there any proposed processes that should not be
included? Why or why not?
XIV. Core Principle 8--Timely Publication of Trading Information
Section 3D(d)(8) of the Exchange Act (Core Principle 8) requires SB
SEFs to make public timely information on price, trading volume, and
other trading data on SB swaps to the extent prescribed by the
Commission and to have the capacity to electronically capture and
transmit and disseminate trade information with respect to transactions
executed on or through the facility.\196\ Section 13(m)(1) of the
Exchange Act separately authorizes the Commission to make SB swap
transaction, volume and pricing data available to the public in such
form and at such times as the Commission determines appropriate to
enhance price discovery.\197\ The Commission has separately proposed
rules relating to the reporting and public dissemination of SB swap
transaction and pricing data.\198\
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\196\ See Public Law 111-203, Sec. 763(c) (adding Section
3D(d)(8) of the Exchange Act).
\197\ See Public Law 111-203, Sec. 763(i), (adding Section
13(m) of the Exchange Act).
\198\ The Commission recently proposed Regulation SBSR that
would require reporting and real-time public dissemination of
certain information regarding SB swap transactions. Proposed
Regulation SBSR identifies the SB swap information that would be
required to be reported and disseminated, establishes reporting
obligations, and specifies the time frames for reporting and
disseminating. Proposed Regulation SBSR would require a registered
SDR to publicly disseminate certain SB swap information that is
reported to it in real time. See Reporting and Dissemination
Release, supra note 6.
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To implement Core Principle 8, the Commission is proposing Rule
817. Proposed Rule 817(a) enumerates the requirements of Section
3D(d)(8) of the Exchange Act. Thus, every SB SEF would be required to:
(1) Have the capacity to electronically capture, transmit, and
disseminate information on price, trading volume, and other trading
data on all SB swaps executed on or through the SB SEF; and (2) make
public timely information on price, trading volume, and other trading
data on SB swaps, to the extent and in the manner prescribed by the
Commission. As noted, the Commission has separately proposed rules
relating to the public dissemination of SB swap transaction and pricing
data.\199\ The Commission is not at this time proposing any additional
requirements on SB SEFs relating to the public dissemination of such
data.\200\
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\199\ Id.
\200\ The rules proposed by the Commission pursuant to Section
13(m) of the Exchange Act would limit the public dissemination of SB
swap transaction information by any person other than a registered
SDR. Specifically, proposed Rule 242.902(d) of Regulation SBSR would
prohibit any person other than a registered SDR from making
available to one or more persons (other than a counterparty)
information relating to a SB swap before the earlier of: (1) 15
minutes after the time of execution of the SB swap; or (2) the time
that a registered SDR publicly disseminates a report of that SB
swap. This prohibition on dissemination to one or more persons
(other than a counterparty) during such time period would apply to
SB SEFs and its participants, as it would to all other persons. See
Reporting and Dissemination Release supra note 6.
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In addition, proposed Rule 817(b) would require that, if any SB SEF
makes available information regarding a SB swap transaction to any
person other than a counterparty to the transaction, then the SB SEF
must make that information available to all participants on terms and
conditions that are fair and reasonable and not unfairly
discriminatory. This proposed requirement is designed to prevent a SB
SEF from providing information on SB swap transactions to certain
persons (other than counterparties) and not to others, or provide such
information pursuant to different terms that are not justified. The
Commission believes that fair, reasonable, non-discriminatory access to
market information is essential to providing a level playing field for
all market participants and that the proposed requirement in Rule
817(b) would prevent developments in the SB swap market that could
undermine the goal of post-trade price transparency.
Proposed Rule 817(c) would also prohibit a SB SEF from making any
information regarding a SB swap transaction publicly available prior to
the time a SDR is permitted to do so under proposed Rule 902 of
Regulation SBSR under the Act.\201\
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\201\ The Commission recently proposed Regulation SBSR, which
would require reporting and real-time public dissemination of
certain information regarding SB swap transactions. Proposed
Regulation SBSR identifies the SB swap information that would be
required to be reported and disseminated, establishes reporting
obligations, and specifies the timeframes for reporting and
disseminating. Proposed Regulation SBSR would require a registered
SDR to publicly disseminate certain SB swap information that is
reported to it in real time. See Reporting and Dissemination Release
supra note 6.
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The Commission understands, however, that for business reasons
counterparties to a SB swap transaction may prefer to have a SB SEF act
as its reporting agent for purposes of complying with the
counterparty's responsibility under proposed Regulation SBSR to report
required transaction information to a registered SDR. Proposed Rule
817(b) therefore would permit a SB SEF, acting as agent, to report
transaction information on behalf of a counterparty responsible for
submitting transaction information to a registered SDR. Under proposed
Rule 817(c), SB SEFs would be permitted to publicly disseminate SB swap
transaction information, but could not do so prior to the time SDRs
would be permitted to do so under proposed Rule 902 of Regulation SBSR
under the Act. Thus, a SB SEF could not publicly disseminate complete
transaction reports for block trades (i.e., including the transaction
ID and the full notional size) until the times specified in Rule
902(b)(1) through (3).\202\
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\202\ As proposed, subject to some exceptions, Rule 902(b) of
Regulation SBSR would prohibit the public dissemination of the
complete transaction report of a block trade (including the
transaction ID and the full notional size): (1) Executed on or after
5:00 UTC and before 23:00 UTC of the same day, until 7:00 UTC of the
following; and (2) executed on or after 23:00 UTC and up to 5:00 UTC
of the following day, until 13:00 UTC of that following day.
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The Commission believes that its proposed rules for implementation
of Core Principle 8 would clarify the extent and manner in which SB
SEFs could make information on transactions executed on the SB SEF
available in a manner consistent with the requirements of proposed
Regulation SBSR. The Commission requests comment on all aspects of
proposed Rule 817 with respect to the timely publication of trading
information. Additionally, the Commission requests comment on whether
the proposed role of SB SEFs in the public dissemination of transaction
information is appropriate. Should SB SEF's be able to compete with
SDRs for potential customers of transaction data? How, if at all, would
the prohibition on dissemination of transaction information in proposed
Rule 902 of Regulation SBSR impact the development of the market for SB
swaps? Should the Commission prohibit
[[Page 10982]]
a SB SEF from disseminating the full size of a block trade after the
period specified in Rule 902(d), which could be after 15 minutes, but
before a SDR has disseminated the full size of the block trade? Would
such a prohibition be necessary? Or is it reasonable to expect that a
SB SEF would not disseminate block trade information before a SDR if
the SB SEF's market participants did not want dissemination of such
information? With respect to data that a SDR is required to disseminate
under proposed Rule 902 of Regulation SBSR, would proposed Rule 817(c)
be effective in ensuring that SB SEF data feeds do not have any
advantage over SDR data feeds? If not, should the proposed rule be
revised, and if so, how so? Are SB SEFs likely to sell or otherwise
disseminate market data following dissemination of data by a registered
SDR? If not, why not?
XV. Core Principle 9--Recordkeeping
Section 3D(d)(9) of the Exchange Act (Core Principle 9) requires SB
SEFs to maintain records of all activities relating to the business of
the facility, including a complete audit trail, in a form and manner
acceptable to the Commission for a period of five years. This Core
Principle also requires SB SEFs to report to the Commission, in a form
and manner acceptable to the Commission, such information as the
Commission determines to be necessary or appropriate for the Commission
to perform the duties of the Commission under the Exchange Act. In
addition, this Core Principle requires the Commission to adopt data
collection and reporting requirements for SB SEFs that are comparable
to corresponding requirements for clearing agencies and SDRs.
The Commission is proposing Rule 818 setting forth the
recordkeeping and reporting obligations of SB SEFs to implement this
Core Principle. This proposed rule is comparable to the recordkeeping
and reporting obligations of national securities exchanges and ATSs
under the Exchange Act.\203\
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\203\ See, e.g., 17 CFR 240.17a-1, 240-17a-3, and 17a-4, and 17
CFR 242.301-03.
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Proposed Rule 818(a) would require every SB SEF to keep and
preserve at least one copy of all documents, including all
correspondence, memoranda, papers, books, notices, accounts, and other
such records, including the audit trail records, as shall be made and
received in the conduct of its business. Proposed Rule 818(b) would
require SB SEFs to keep and preserve such documents and other records
for a period of not less than five years, the first two years in an
easily accessible place. Proposed Rule 818(c) would require SB SEFs to
establish and maintain the records necessary to create a meaningful
audit trail. Specifically, the Commission proposes that SB SEFs
establish and maintain accurate, time-sequenced records of all
inquiries, responses, orders, quotations or other trading interest, and
transactions that are received by, originated on, or executed on the SB
SEF.\204\ These records must include the key terms of each inquiry,
response, order, quotation or other trading interest or transaction and
must document the complete life of each inquiry, response, order,
quotation or other trading interest or transaction on the SB SEF,
including any modification, cancellation, execution, or any other
action taken with respect to such order, inquiry, response, quotation,
or transaction.\205\ Further, proposed Rules 818(e) and (f) would
require a SB SEF to report to the Commission such information as the
Commission may, from time to time, determine to be necessary for the
Commission to perform its duties under the Exchange Act, and upon
request of any representative of the Commission, to promptly furnish to
each representative copies of any documents, in such form and manner
acceptable to such representative, required to be kept and preserved by
the SB SEF pursuant to proposed Rules 818(a) and (b).
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\204\ Id.
\205\ See proposed Rule 818(c).
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The Commission would use the information required under proposed
Rules 818(a) through (c) to carry out its oversight responsibility over
SB SEFs. The records required to be kept, maintained, and provided to
the Commission under these provisions would provide an additional tool
to help the Commission to determine whether a SB SEF is operating in
compliance with the Exchange Act and the rules and regulations
thereunder. The audit trail information required to be maintained under
proposed Rule 818(c) would facilitate the ability of the SB SEF and the
Commission to examine the complete history of all trading interest
entered into and transactions executed on a SB SEF. This audit trail
information would help the SB SEF and the Commission to detect and
deter fraudulent and manipulative acts and prepare reconstructions of
activity on a SB SEF or in the SB swaps market, and generally to
understand the causes of unusual market activity.
Proposed Rule 818(d) would require a SB SEF to establish, maintain,
and enforce written policies and procedures to verify the accuracy of
the transaction data it collects and reports.\206\ This requirement is
based on the premise that transaction data is only useful if it is
accurate. If it is not accurate, then it will not enhance transparency.
The SB swaps market participants must be able to trust that the
information they receive is accurate in order to make appropriate
investment decisions. Further, a SB SEF must have accurate information
if it is to effectively carry out its obligations to surveil the market
and enforce it rules. Similarly, the Commission must be able to trust
that the information it receives is accurate so that it can oversee the
market and properly determine whether the SB SEF is carrying out its
statutory mandate.
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\206\ Nothing in proposed Regulation SBSR would prohibit a SB
SEF from serving as the reporting agent on behalf of the
counterparty with the obligation to report a trade to the SDR, if
the counterparty effected the trade on the SB SEF. See Reporting and
Dissemination Release, supra note 6.
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The Commission requests comment on all aspects of proposed Rule
818. Are the documents required to be preserved pursuant to proposed
Rule 818(a) appropriate? Are there additional documents that a SB SEF
should be required to preserve? Is the proposed time period for record
retention appropriate? Should SB SEF's be required to keep such records
for a longer or shorter period of time? Are the records required to be
preserved to maintain an audit trail pursuant to proposed Rule 818(c)
appropriate? Are there additional records that a SB SEF should be
required to keep? Should the Commission require SB SEFs to keep audit
trail records in a particular format? What are the benefits and
drawbacks of allowing each SB SEF to determine its own format to keep
audit trail records? Would allowing each SB SEF to determine its own
format for the maintenance of an audit trail hamper the Commission's
ability to analyze trading activity across multiple SB SEFs? If yes,
then how?
Is it appropriate to require SB SEFs to have policies and
procedures to verify the accuracy of transaction data? If not, why not?
In the absence of such requirements, how should the Commission ensure
the integrity of transaction data that originates on or passes through
a SB SEF? What are the specific benefits and drawbacks of any suggested
approaches?
Proposed Rules 818(e) and (f) require a SB SEF to promptly furnish
information and records required to be kept under the Rule to the
Commission upon request. What, if any, additional reports or records
should be furnished to the Commission upon request? What,
[[Page 10983]]
if any, reports or records should the Commission require on a periodic
basis? A SB SEF is required to promptly furnish information to the
Commission in a manner that is acceptable to the Commission. Are there
particular time or format constraints or challenges that the Commission
should be aware of with respect to such requests? Would the
recordkeeping and reporting requirements be overly burdensome to SB
SEFs? If so, why? Or, should the Commission require SB SEFs to provide
the Commission direct electronic access to such information and
records? Would such direct access be more or less burdensome to SB SEFs
than the proposed requirements? If so, what requirements should the
Commission consider limiting to reduce the burdens? What would be the
basis, if any, to justify reducing the recordkeeping and reporting
requirements for SB SEFs that are, as proposed, comparable to
requirements for national securities exchanges that also trade SB
swaps?
XVI. Core Principle 10--Antitrust Concerns
Section 3D(d)(10) of the Exchange Act (Core Principle 10) \207\
provides that, unless necessary or appropriate to achieve the purposes
of the Exchange Act, a SB SEF shall not: (1) Adopt any rules or take
any actions that result in any unreasonable restraint of trade, or (2)
impose any material anticompetitive burden on trading or clearing. The
Commission is proposing to implement this Core Principle in proposed
Rule 819 by incorporating the statutory language.\208\ The Commission
requests comment on all aspects of the proposed Rule 819. What do
commenters believe would be a ``material anticompetitive burden'' on
trading and clearing? Should the Commission prescribe specific rules or
offer guidance to address such situations?
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\207\ See Public Law 111-203, Sec. 763(c) (adding Section
3D(d)(10) of the Exchange Act).
\208\ As discussed further in Section XVII below, the Commission
proposed a number of requirements in Regulation MC designed to
mitigate conflicts of interest relating to SB SEFs. The additional
rules the Commission is proposing herein are designed to work
together with proposed Regulation MC to help mitigate potential
conflicts of interest, as identified in the Regulation MC Proposing
Release. In addition, as discussed in Section XVII, the Commission
is proposing governance rules that also are designed to help
mitigate potential conflicts of interest relating to SB SEFs.
The Commission notes that the statutory language of Section
3D(d)(10)(B) of the Exchange Act differs somewhat from the
requirements in the Exchange Act relating to national securities
exchanges. Section 6(b)(8) of the Exchange Act, 15 U.S.C. 78f(b)(8),
requires that the rules of a national securities exchange not impose
any burden on competition not necessary or appropriate in
furtherance of the purposes of the Exchange Act.
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XVII. Core Principle 11--Conflicts of Interest
Section 3D(d)(11) of the Exchange Act (Core Principle 11) requires
a SB SEF to establish and enforce rules to minimize conflicts of
interest in its decision-making process and establish a process for
resolving the conflicts of interest.\209\ Pursuant to this directive,
the Commission is proposing Rule 820 to mitigate conflicts of interest
through governance arrangements applicable to SB SEFs.
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\209\ See Public Law 111-203, Sec. 763(c) (adding Section
3D(d)(11) of the Exchange Act).
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The Commission recently proposed new Regulation MC as part of its
rulemaking \210\ mandated by Section 765 of the Dodd-Frank Act.\211\
Section 765 of the Dodd-Frank Act requires the Commission to adopt
rules to mitigate specified conflicts of interest relating to SB SEFs,
security-based swap clearing agencies, and SBS exchanges.\212\ As the
Commission explained in the Regulation MC Proposing Release, a conflict
of interest could arise when a small number of market participants
exercise control or influence over a SB SEF, either through ownership
of voting interests or participation in the governance of the SB SEF.
When a small group of market participants also dominate much of the
trading in SB swaps, control of a SB SEF by these participants raises a
heightened concern. Such market participants, through ownership
interest in or influence over the governance of a SB SEF, potentially
could exercise their influence to limit the number of direct
participants in the SB SEF and restrict the scope of SB swaps that are
listed for trading on a SB SEF in an effort to limit competition and
increase their ability to maintain higher profit margins.\213\ The
Commission also believes that a SB SEF's ownership and governance
structure could create an incentive for behaviors that would promote
its owners' commercial interests over its market oversight
responsibilities.\214\ Each of these potential conflicts of interest
could limit the benefits of centralized trading in the SB swap market
and potentially undermine the mandatory trading requirement in Section
3C(h) of the Exchange Act, thereby negatively affecting efficiency and
competition in the SB swap markets.\215\
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\210\ See Regulation MC Proposing Release, supra note 82.
\211\ See Public Law 111-203, Sec. 765.
\212\ Id.
\213\ See Regulation MC Proposing Release, 75 FR at 65890, supra
note 82.
\214\ The Commission notes that an entity that registers as a SB
SEF would have oversight responsibility over its market pursuant to
the Exchange Act (as amended by the Dodd-Frank Act), and rules
adopted thereunder. See Public Law 111-203, Sec. 763(c). Similarly,
all national securities exchanges, including those that may post or
make available for trading SB swaps, have oversight responsibilities
over their markets and their members pursuant to the Exchange Act.
See Section 6 of the Exchange Act, 15 U.S.C. 78(f).
\215\ See Public Law 111-203, Sec. 763(a). Section 3C(h) of the
Exchange Act imposes a mandatory trading requirement, which provides
that counterparties shall execute a transaction in a SB swap subject
to the clearing requirement of Section 3C(a)(1) on an exchange or a
registered SB SEF or a SB SEF that is exempt from registration
pursuant to Section 3D(e).
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Accordingly, the Commission proposed in Regulation MC to, among
other things, impose a 20% limit on ownership (based on interests
entitled to vote) and voting interest by any direct participants of SB
SEFs; require the board of a SB SEF be composed of a majority of
independent directors; require a fully independent nominating
committee; require a fully independent ROC; and require the SB SEF to
inform the Commission when a recommendation of the ROC is not
implemented by the board.\216\
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\216\ See Regulation MC Proposing Release, supra note 82.
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As discussed above, in this proposal, the Commission is proposing
rules relating to impartial access to SB SEFs and a review process for
those SB swaps to be traded on a SB SEF, that are designed to work
together with Regulation MC to help mitigate potential conflicts of
interest.\217\ As described in this section, the Commission also is
proposing additional governance rules that are designed to mitigate
potential conflicts of interest.\218\ The proposed rules in this
proposal--regarding both impartial access and governance--seek to
address the same conflicts of interest issues as identified in proposed
Regulation MC, but using different mechanisms. The Commission will
consider both rulemaking proposals as a whole, including how they
interact with each other, when considering how best to address these
conflicts of interest issues. As requested in detail below, in
reviewing the proposed rules, commenters are encouraged to do the same.
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\217\ See supra Sections VI and VII.
\218\ See proposed Rule 820.
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The Commission's proposal for SB SEFs is informed by the
Commission's experience with national securities exchanges.
Historically, national securities exchanges were owned by their members
and were structured as
[[Page 10984]]
not-for-profit or similar organizations.\219\ With the advent of
shareholder-owned exchanges, the Commission became concerned that the
introduction of a class of owner that does not trade on the exchange
could exacerbate the possibility that an exchange would put its
commercial interests ahead of its responsibilities as a regulator.\220\
The Commission also recognizes the potential for any person that
directly or indirectly controls an exchange or facility thereof to
direct its operation so as to cause the exchange to neglect its
regulatory obligations under the Exchange Act or to improperly
interfere with or restrict the ability of the Commission to effectively
carry out its oversight responsibilities.\221\
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\219\ A ``member'' when used with respect to a national
securities exchange means (i) any natural person permitted to effect
transactions on the floor of the exchange without the services of
another person acting as broker, (ii) any registered broker or
dealer with which such a natural person is associated, (iii) any
registered broker or dealer permitted to designate as a
representative such a natural person, and (iv) any other registered
broker or dealer which agrees to be regulated by such exchange and
with respect to which the exchange undertakes to enforce compliance
with the provisions of the Exchange Act, the rules and regulations
thereunder, and its own rules. See Section 3(a)(3)(A) of the
Exchange Act, 15 U.S.C. 78c(a)(3)(A).
\220\ See, e.g., Securities Exchange Act Release No. 62158 (May
24, 2010), 75 FR 30082 (May 28, 2010) (order approving the
demutalization of CBOE) (``Exchange Act Release No. 62158'').
\221\ Because ATSs do not have the regulatory obligations that
are required of national securities exchanges under the Exchange
Act, the Commission has not to date required ATSs to have governance
structures that are similar to those of national securities
exchanges.
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The Commission has considered the conflicts between an exchange's
regulatory responsibilities and its commercial interests in operating a
marketplace for the trading of securities.\222\ To address these types
of concerns, the Commission has approved proposed procedures,
consistent with the requirements of Section 6 of the Exchange Act,\223\
for an approach to mitigate conflicts of interest for national
securities exchanges through the Commission's review of proposals by
exchanges with respect to their ownership \224\ and governance
structures (generally from member-owned to shareholder-owned
organizations) or of applications by entities to register as national
securities exchanges.\225\ In its review, the Commission has examined
the way in which an exchange addresses certain governance principles.
Among other things, the Commission looks to assure that an exchange
provides fair representation of members in the selection of directors
and the administration of its affairs, and provide that one or more
directors be representative of issuers and investors and not be
associated with a member of the exchange, broker or dealer, consistent
with the requirement in Section 6(b)(3) of the Exchange Act.\226\
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\222\ The Commission's recognition of potential conflicts of
interest at exchanges and its approach to date in reviewing and
approving measures designed to mitigate those conflicts of interest
are a useful point of reference as the Commission identifies and
develops proposals to mitigate the conflicts of interest potentially
faced by SB SEFs as the trading of SB Swaps moves to regulated
markets. However, the Commission recognizes that a SB SEF's
regulatory obligations are not the same as a national securities
exchange's regulatory obligations.
\223\ See Section 6(b) of the Exchange Act, 15 U.S.C. 78f(b).
\224\ The Commission is not proposing rules with respect to
ownership and voting limitations for SB SEFs as part of this
rulemaking. The Commission has proposed ownership and voting
limitations for participants in a SB SEF, as well as for
participants in a SBS exchange, as part of Regulation MC. See
proposed Rule 702 of Regulation MC.
\225\ See, e.g., Exchange Act Release No. 62158, supra note 220;
Securities Exchange Act Release No. 61698 (March 12, 2010), 75 FR
13151 (March 18, 2010) (In the Matter of the Applications of EDGX
Exchange, Inc., and EGDA Exchange, Inc. for Registration as National
Securities Exchanges; Findings, Opinion, and Order of the
Commission) (``Exchange Act Release No. 61698''); Securities
Exchange Act Release No. 58375 (August 18, 2008), 73 FR 49498
(August 21, 2008) (In the Matter of the Application of BATS
Exchange, Inc. for Registration as a National Securities Exchange;
Findings, Opinion, and Order of the Commission) (``Exchange Act
Release No. 58375''); and Securities Exchange Act Release No. 53382
(February 27, 2006), 71 FR 11251 (March 6, 2006) (order approving
the merger of NYSE and Archipelago and NYSE's demutualization).
\226\ 15 U.S.C. 78f(b)(3). Specifically, Section 6(b)(3) of the
Exchange Act requires that the rules of an exchange assure a fair
representation of its members in the selection of its directors and
administration of its affairs, and must provide that one or more
directors be representative of issuers and investors and not be
associated with a member of the exchange, broker or dealer. 15
U.S.C. 78f(b)(3). Pursuant to Section 6(b)(3), the Commission has
approved SRO rules requiring that at least 20% of the directors on
the board be selected by exchange members, as well as SRO rules
requiring that exchange members be permitted to participate in the
nomination process of such representative directors, with the right
to petition for alternative candidates. See, e.g., Exchange Act
Release No. 58375, 73 FR at 49500, id .
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To complement the governance requirements proposed in Regulation
MC, the Commission proposes additional substantive requirements with
respect to the governance of SB SEFs that are designed to address the
conflict of interest concerns identified above. The Commission proposes
that SB SEF participants be provided ``fair representation'' in the
selection of directors of the SB SEF and administration of its affairs.
Thus, the proposed rule would require the rules of a SB SEF to assure a
fair representation of its participants \227\ in the selection of its
directors and administration of its affairs, but no less than 20% of
the total number of directors of the SB SEF must be selected by the SB
SEF's participants.\228\ The Commission preliminarily believes that the
proposed 20% requirement strikes a proper balance by giving SB SEF
participants a practical voice in the governance of the SB SEF and the
administration of its affairs, without undermining the overall
independence of the Board.\229\
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\227\ See proposed Rule 800 (defining the term ``participant''
as a person that is permitted to directly engage in or effect
transactions on the SB SEF).
\228\ See proposed Rule 820(a). The Commission notes that
national securities exchanges have established a 20% member director
requirement for their boards of directors. See, e.g., EDGX Exchange,
Inc. Amended and Restated Bylaws, Article III, Section 2(a)(iv) and
BATS Y-Exchange Amended and Restated by-Laws Article III, Section
2(b)(ii).
The Commission proposes to define the term ``Board'' as the
Board of Directors or Board of Governors of the SB SEF or any
equivalent body. See proposed Rule 800 under Regulation SB SEF. The
proposed definition is substantially identical to that proposed in
the Regulation MC Proposing Release with respect to SB SEFs. See
supra note 82.
\229\ Proposed Regulation MC would require that a Board of a SB
SEF be composed of a majority of independent directors. See proposed
Rule 702(c)(1) under proposed Regulation MC and the Regulation MC
Proposing Release, supra note 82.
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To ensure that SB SEF participants truly have a voice in the
selection of directors, the Commission also proposes that SB SEF
participants be permitted to participate in the nomination process of
such representative directors, with the right to petition for
alternative candidates. The proposed rule would require the rules of a
SB SEF to establish a fair process for SB SEF participants to nominate
an alternative candidate or candidates to the Board by petition and the
percentage of SB SEF participants that is necessary to put forth such
alternative candidate or candidates.\230\ A SB SEF would have some
flexibility in implementing a fair process for members to select Board
candidates.\231\ In adopting such rules, a SB SEF should endeavor to
strike an appropriate balance that provides SB SEF participants a
practical mechanism to put forth alternative candidates, without
jeopardizing the overall integrity of the nominating process. The SB
SEF participant candidates, of course, would
[[Page 10985]]
be required to satisfy all relevant eligibility criteria for directors.
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\230\ See proposed Rule 820(c).
\231\ The Commission notes that national securities exchanges
have implemented the 20% member director requirement by various
means. For example, the BATS Y-Exchange, Inc. has a separate member
nominating committee that will nominate candidates for each member
representative director position on the exchange's board. BATS
Global Markets, as the sole shareholder of BATS Y-Exchange, Inc.,
will elect those candidates nominated by the member nominating
committee as member representative directors. See BATS Y-Exchange
Amended and Restated by-Laws Article III, Section 4.
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Further, the Commission proposes that SB SEF participant-owners be
restricted in their ability to participate in the ``fair
representation'' process. The rules of a SB SEF would therefore require
the SB SEF to preclude any SB SEF participant, or any group or class of
participants, either alone or together with its related persons, that
beneficially owns, directly or indirectly, an interest in the SB SEF
from dominating or exercising disproportionate influence in the
selection of the fair representation directors if the participant or
participants may thereby dominate or exercise disproportionate
influence in the selection or appointment of the entire Board.\232\ For
example, if a group of five participants together owned the SB SEF and,
as a result of such ownership, were effectively able to select the
directors on the Board of the SB SEF, those owners would be precluded
from also being the fair representation directors on the Board. The
Commission believes that such a requirement should help mitigate any
conflicts of interest that may arise between SB SEF participants who
are also owners of the SB SEF. Given the nature of the conflict
concerns for the trading of SB swaps and the structure of the SB swaps
market--namely, the dominance by a small group of dealers and the
concerns with respect to undue influence in the operation of the SB SEF
\233\--the Commission believes that it is necessary and appropriate for
the Commission to require that a SB SEF take means to prevent a SB SEF
participant or group of participants from exerting undue influence in
the nomination and selection of the entire Board.
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\232\ See proposed Rule 820(a).
\233\ For further discussion of the current structure of the SB
swaps market, see the Regulation MC Proposing Release, supra note
82, at Section III.B.
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Finally, the Commission proposes that at least one director on the
Board of a SB SEF shall be representative of investors who are not SB
swap dealers or major SB swap participants and such director must not
be a person associated with a SB SEF participant.\234\ The Commission
believes that requiring representation by investors who are not SB swap
dealers or major SB swap participants, or associated with SB SEF
participants, would provide an important perspective to the governance
and administration of a SB SEF. Investor directors could provide unique
and different perspectives from dealers and other participants of the
SB SEF, which should enhance the ability of the Board to address issues
in an impartial fashion and consequently support the integrity of a SB
SEF's governance.
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\234\ See proposed Rule 820(b). The term ``person associated
with a participant'' is proposed to mean any partner, officer,
director, or branch manager of such participant (or any person
occupying a similar status or performing similar functions), any
person directly or indirectly controlling, controlled by, or under
common control with such participant, or any employee of such
participant. See proposed Rule 800. The proposed definition is
substantially identical to the definition of ``person associated
with a security-based swap execution facility participant'' that has
been proposed under Regulation MC. See proposed Rule 700(t) under
Regulation MC and Regulation MC Proposing Release, supra note 82.
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The Commission believes that the proposed governance requirements,
described above, are important to help ensure that all SB SEF
participants and investors have a voice in the administration and
governance of the SB SEF. The proposed requirements should reduce the
possibility that a single group of market participants has the ability
to unfairly disadvantage other market participants through the SB SEF
governance process. Moreover, the proposed requirements for SB SEFs
would be consistent with Exchange Act requirements for national
securities exchanges.\235\ The Commission believes that similar
requirements for SB SEFs would help to minimize conflicts of interest
in the SB SEF decision-making process.
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\235\ See Section 6(b)(3) of the Exchange Act, 15 U.S.C.
78f(b)(3).
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The Commission requests comments on all aspects of the proposed
rules related to governance of the SB SEF. Are there provisions of the
proposed rules that are unnecessary or are there other provisions that
should be added? If so, why? Are there aspects of the proposed rules
that would be difficult for SB SEFs to implement and, if so, why would
that be the case?
Should the Commission adopt compositional requirements to provide
certain constituencies a guaranteed voice in the selection of the SB
SEF's directors and the administration of its affairs, in addition to
those proposed? For example, the proposed ``fair representation''
requirement relates to the fair representation of a SB SEF's
participants. Should the requirement instead specifically require fair
representation of specific categories of participants, such as SB swap
dealers and major SB swap participants? Are there constituencies that
commenters believe should be entitled to representation in the election
of the Board of a SB SEF that are not addressed in this proposal?
Should the ``fair representation'' proposal be broadened to include
non-participant dealers? Would representation by non-participant
dealers be useful to help assure that SB SEFs implement rules and
procedures that are designed to provide impartial access? If commenters
believe that such representation should be required, should non-
participant dealers be provided representation in addition to any
required independent directors,\236\ or should they be a subset of
independent directors?
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\236\ See Regulation MC Proposing Release, supra note 82.
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Are the provisions relating to the ``fair representation''
requirements appropriate? Should the proposed 20% minimum threshold for
``fair representation'' be higher or lower? Do commenters agree that it
is appropriate for a SB SEF to restrict the ability of a SB SEF
participant that is also an owner to dominate or exercise influence in
the selection of ``fair representation'' directors, particularly if the
SB SEF would thereby dominate the selection or appointment of the
entire Board? If not, why not? If so, why? Is the proposed rule's
requirement that the Board include at least one investor representative
appropriate? Should SB SEFs be required to have more than one investor
representative on its Board? If so, how many, and why?
Should the Commission require a specific percentage of the total
number of SB SEF participants to put forth alternative member candidate
or candidates by petition that would be required to be set forth in the
SB SEF's rules? If so, what percentage would be appropriate? In the SRO
Governance Proposing Release, the Commission proposed a threshold of
10% as the percentage of members necessary to put forth an alternative
member candidate or candidates for the exchange board of
directors.\237\ Would a 10% threshold be appropriate for SB SEFs as
well? Should investors who are not SB SEF participants be provided with
further representation in the governance and administration of a SB SEF
beyond representation on the SB SEF Board? \238\
[[Page 10986]]
Should the Commission require SB SEFs to have a participation committee
that would, for example, determine the standards and requirements for
participant eligibility and review denials of participation
applications? If so, should there be any requirements as to the
composition of such a committee? For example, should any such committee
be required to have a majority of independent directors? Would some
other percentage of independence be appropriate for a participation
committee? Should the Commission require investor representation on a
participation committee? If so, should the Commission require a minimum
percentage of investor representation and if so what percentage and
why?
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\237\ See Securities Exchange Act Release No. 50699 (November
18, 2004), 69 FR 71126 (December 8, 2004) at 71137-71138. See also,
e.g., NASDAQ Stock Market LLC, Bylaws, Article II, Section 1(b)(ii)
stating that Nasdaq members may submit a petition in support of an
alternate candidate (i.e., candidate not selected by the nominating
committee) provided that the petition is executed by ``10% or more
of all Nasdaq Members.''
\238\ See discussion supra at Section VIII.B discussing proposed
Rule 811(c)(2), which would provide that the SB SEF must establish a
swap review committee that would provide for the fair representation
of participants of the SB SEF and other market participants, such
that each class of participant and other market participants would
be given the right to participate in such committee and no single
class of participant or category of market participant would
predominate.
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As noted above, various provisions of proposed Regulation SB SEF,
such as the impartial access requirements of proposed Rule 811(b) and
the governance requirements of proposed Rule 820 are intended to be
complementary measures, along with proposed Regulation MC, designed to
mitigate conflicts of interest for SB SEFs. The Commission seeks
commenters' views regarding the interaction of proposed Regulation SB
SEF with proposed Regulation MC. Taking into account both proposals,
commenters should address whether the proposals contained in Regulation
SB SEF would appropriately address conflicts of interest concerns or
whether they should be revised either as unnecessary or insufficient to
address conflicts of interest. Are there any redundancies or gaps for
mitigating conflicts of interest that should be addressed?
In reviewing proposed Rule 820 specifically, commenters are asked
to consider how this proposed rule would work together with Regulation
MC. Are the requirements of proposed Rule 820 and the requirements of
Regulation MC mutually supportive? Are any of the requirements of
proposed Rule 820 redundant with, or otherwise unnecessary in light of,
the proposed requirements of Regulation MC? Are there additional or
different measures that the Commission should take to mitigate
conflicts of interest? For example, should the Commission require SB
SEFs to make publicly available, or available to the Commission but not
to the public, Board and committee decisions with respect to the
listing of SB swaps? Should the Commission require that the independent
directors of the Board conduct and submit to the Commission, or make
publicly available, an annual governance self-assessment, which would
include ways in which the SB SEF addressed conflicts of interest? If
so, are there particular areas that should be the focus of any such
annual governance self-assessment? What would be the benefits and
drawbacks of any such annual governance self-assessment? Should
proposed Form SB SEF require SB SEFs to provide details about the
background of each independent director and why it believes that each
independent director qualifies as independent? \239\
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\239\ See Section XXII for a description of proposed Form SB
SEF, which would require the disclosure of certain information
relating to directors of an SB SEF. Proposed Exhibit C to Form SB
SEF would require that an applicant provide a list of the officers
and directors of the SB SEF, or persons performing similar
functions, who presently hold or have held their offices or
positions during the previous year, and a list of all standing
committees and their members, indicating the following for each:
their name and title; date of commencement and termination of term
of office or position; the type of business in which each is
primarily engaged (e.g., SB swap dealer, major SB swap participant,
inter-dealer broker, end-user etc.); and, if such person is a
director, whether such director qualifies as an ``independent
director'' pursuant to proposed Rule 800 under Regulation SB SEF and
whether such director is a member of any standing committees or
committees that have the authority to act on behalf of the Board or
the nominating committee.
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A number of commenters on Regulation MC raised concerns about the
overall approach of, and the proposed requirements in, Regulation MC
and expressed a range of views.\240\ Several other commenters on
Regulation MC, however, generally supported the overall approach to
mitigate conflicts of interest and expressed a range of views on the
proposed requirements.\241\ In particular, the Commission notes that
some commenters who have submitted comment letters on proposed
Regulation MC raised additional sources of conflicts to consider.\242\
These commenters suggested that the Commission should focus on
conflicts arising from dealers directing volume to SBS exchanges and SB
SEFs, dealer concentration of market activity, and close association of
the dealers with decision-making in SBS exchanges and SB SEFs. Namely,
the commenters believed that the Commission should address the
incentives SB SEFs and SBS exchanges may use to attract business, such
as volumetric or profit-based incentives. The commenters argued that if
arrangements to attract large liquidity providers' business are overly
generous, such arrangements may undermine any improvements made by the
proposed voting and ownership limitations and governance requirements
in Regulation MC. Do commenters agree with these concerns? If not, why
not? If so, do commenters believe that the Commission should take any
measures to mitigate these concerns? For example, should the Commission
prohibit, or take other measures with respect to, revenue sharing,
volume discounts, rebates, and other similar arrangements by a SB SEF
to attract order flow? Should SB SEFs be required to file with the
Commission any arrangements with participants, potential participants,
or other market participants that would promote the sending of order
flow to the SB SEF, such as equity incentive plans? Would such
requirements help to mitigate conflicts of interest?
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\240\ See, e.g., Letter from Nancy C. Gardner, Executive Vice
President & General Counsel, Thomson Reuters Markets, to Elizabeth
M. Murphy, Secretary, Commission, dated November 24, 2010, Letter
from Lee H. Olesky, Chief Executive Officer, and Douglas L.
Friedman, General Counsel, Tradeweb Markets LLC, to David A.
Stawick, Secretary, CFTC, dated November 17, 2010, and Letter from
Ernest C. Goodrich, Jr., Managing Director, Deutsche Bank AG, and
Marcelo Riffaud, Managing Director, Deutsche Bank AG, to Elizabeth
M. Murphy, Secretary, Commission, and David A. Stawick, Secretary,
CFTC, dated November 8, 2010.
\241\ See, e.g., Letter from U.S. Department of Justice,
Antitrust Division, In the Matter of: RIN 3235-AK47, File No. S7-27-
10, dated December 28, 2010, Letter from Mark Scanlan, Vice
President, Agriculture and Rural Policy, Independent Community
Bankers of America, to Elizabeth M. Murphy, Secretary, Commission,
dated November 26, 2010, and Letter from Laurel Leitner, Senior
Analyst, Council of Institutional Investors, to Elizabeth M. Murphy,
Secretary, Commission, dated November 19, 2010.
\242\ Letter from U.S. Senator Carl Levin, Michigan, to
Elizabeth M. Murphy, Secretary, Commission, dated December 20, 2010;
Letter from Dennis M. Kelleher, President & CEO, and Wallace C.
Turbeville, Derivatives Specialist, Better Markets, Inc. to
Elizabeth M. Murphy, Secretary, Commission, dated November 26, 2010;
Letter from U.S. Senator Sherrod Brown, Ohio, to Elizabeth M.
Murphy, Secretary, Commission, and David A. Stawick, Secretary,
CFTC, dated November 17, 2010; Letter from U.S. Senator Tom Harkin,
Iowa, to Elizabeth M. Murphy, Secretary, Commission, and David A.
Stawick, Secretary, CFTC, dated November 17, 2010; and Letter from
Americans for Financial Reform, to Elizabeth M. Murphy, Secretary,
Commission, dated November 16, 2010.
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XVIII. Core Principle 12--Financial Resources
Section 3D(d)(12)(A) of the Exchange Act (Core Principle 12)
requires SB SEFs to have adequate financial, operational, and
managerial resources to discharge each responsibility of the SB SEF, as
determined by the Commission. In addition, Section 3D(d)(12)(B) of the
Exchange Act states that the financial resources of a SB SEF shall be
considered to be adequate if the value of the financial resources (i)
enables the organization to meet its financial obligations to its
members and
[[Page 10987]]
participants notwithstanding a default by the member or participant
creating the largest financial exposure for that organization in
extreme but plausible market conditions; and (ii) exceeds the total
amount that would enable the SB SEF to cover the operating costs of the
SB SEF for a one year period, as calculated on a rolling basis. The
Commission believes that the financial strength of a SB SEF is vital to
ensure that a SB SEF can discharge its regulatory responsibilities in
accordance with the Exchange Act. Strong, viable SB SEFs will be a key
to market continuity and efficiency. Therefore, the Commission believes
that it is important to install safeguards to ensure that a SB SEF's
resources are adequate.
The Commission proposes to implement in proposed Rule 821 the
requirements of Section 3D(d)(12) of the Exchange Act. Specifically,
proposed Rule 821(a) would require every SB SEF to have adequate
financial, operational, and managerial resources to discharge each
responsibility of the SB SEF, as determined by the Commission. Proposed
Rule 821(b) would state in part that the financial resources of a SB
SEF shall be considered to be adequate if the value of the financial
resources enables the SB SEF to meet its financial obligations to
participants notwithstanding a default by the participant creating the
largest financial exposure for the SB SEF in extreme but plausible
market conditions. This requirement would help ensure that the
financial failure of one participant would not be able to destroy the
financial viability of the entire SB SEF. Proposed Rule 821(b) would
require that in making this calculation (which is required by Section
3D(d)(12)(B) of the Exchange Act), a SB SEF shall use reasonable
estimates and assumptions and not overestimate resources or
underestimate expenses, liabilities, and financial exposure. This
requirement should provide guidance to SB SEFs on the estimates they
should use to comply with the requirements of Core Principle 12.
Proposed Rule 821(b) also would state in part that the financial
resources of a SB SEF shall be considered to be adequate if the value
of the financial resources exceeds the total amount that would enable
the SB SEF to cover its operating costs for a one year period, as
calculated on a rolling basis. This test would help to ensure that a SB
SEF is in a sufficiently strong financial position to sustain
operations through unpredictable business cycles. As with the first
requirement, in making this calculation (which is required by Section
3D(d)(12)(B) of the Exchange Act), a SB SEF must use reasonable
assumptions and estimates and not overestimate resources or
underestimate expenses, liabilities, and financial exposure. Each of
these requirements would be an ongoing requirement and a SB SEF must
always be in compliance.\243\ The Commission seeks comments in general
regarding all aspects of these financial requirements.
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\243\ In addition to the requirements of proposed Rule 821, a SB
SEF would be required to submit annual financial reports in
accordance with the requirements discussed in Section XXII of this
release.
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XIX. Core Principle 13--Systems Safeguards
Section 3D(d)(13)(A) of the Exchange Act (Core Principle 13)
requires that a SB SEF shall establish and maintain a program of risk
analysis and oversight to identify and minimize sources of operations
risk, through the development of appropriate controls and procedures,
and automated systems, that: (1) Are reliable and secure and (2) have
adequate scalable capacity. Additionally, Section 3D(d)(13)(B) of this
Core Principle requires that a SB SEF establish and maintain emergency
procedures, backup facilities, and a plan for disaster recovery that
allow for: (1) Timely recovery and resumption of operations and (2) the
fulfillment of the responsibilities and obligations of the SB SEF.
Further, Section 3D(d)(13)(C) of this Core Principle requires that a SB
SEF shall periodically conduct tests to verify that the backup
resources of the SB SEF are sufficient to ensure continued: (1) Order
processing and trade matching, (2) price reporting, (3) market
surveillance, and (4) maintenance of a comprehensive and accurate audit
trail. The Commission is proposing Rule 822 to implement this Core
Principle.
The Commission is proposing Rule 822 to provide standards for SB
SEFs with regard to their automated systems' capacity, resiliency, and
security.\244\ These standards are comparable to the standards
applicable to SROs, including national securities exchanges and
clearing agencies, pursuant to the Commission's Automation Review
Policy (``ARP'') standards.\245\ Systems failures can limit access to
quotes or other trading interest, call into question the integrity of
quotes or other trading interest, and prevent market participants from
being able to post quotes or other trading interest, and thereby have a
large impact on market confidence, risk exposure, and market
efficiency. To promote the maintenance of stable and orderly SB swap
markets, the Commission believes that SB SEFs should be required to
meet the ARP capacity, resiliency and security standards.\246\
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\244\ Proposed Rule 822 is being promulgated under Section
3D(d)(13) of the Exchange Act.
\245\ See Securities Exchange Act Release Nos. 27445 (Nov. 16,
1989), 54 FR 48703, 48706-48707 (November 24, 1989) (``ARP I
Release'') and 29185 (May 9, 1991), 56 FR 22490 (May 15, 1991)
(``ARP II Release''). See also Rule 301(b)(6) of Regulation ATS, 17
CFR 242.301(b)(6) and Securities Exchange Act Release No. 40760
(Dec. 8, 1998), 63 FR 70844 (December 22, 1998).
\246\ Because SB SEFs would be an integral part of the market
for SB swaps, and therefore an integral part of the national market
system, the Commission believes that it is appropriate to model a SB
SEF's rules on system safeguards on ARP. Proposed Rule 822 will
impose data maintenance standards on SB SEFs that are comparable to
those imposed by the Commission on national securities exchanges by
applying the ARP standards to them. In addition, nearly identical
rules have been proposed by the Commission for SDRs, also applying
the ARP standards to those entities. See SDR Release, supra note 6.
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Proposed Rule 822 would require a SB SEF to establish, maintain,
and enforce written policies and procedures designed to ensure that its
systems provide adequate levels of capacity, resiliency, and security;
and submit to the Commission annual reviews of its automated systems,
systems outage notices, and prior notices of planned system changes.
These proposed requirements essentially codify and parallel the ARP
requirements that have been in place for almost twenty years.
Commission staff has found these standards to be effective in
overseeing the capacity, resiliency, and security of major automated
systems in use in the securities markets. These proposed requirements,
as applied to the market for SB swaps, are designed to prevent and
minimize the impact of systems failures that might negatively impact
the stability of this market.
A. Requirements for SB SEFs' Automated Systems
1. Policies and Procedures
Proposed Rule 822(a)(1) would require a SB SEF to establish,
maintain, and enforce written policies and procedures reasonably
designed to ensure that its systems provide adequate levels of
capacity, resiliency, and security. Such policies and procedures would
require a SB SEF to, at a minimum: (1) Establish reasonable current and
future capacity estimates; (2) conduct periodic capacity stress tests
of critical systems to determine such systems' ability to process
transactions in an accurate, timely, and efficient manner; (3) develop
and implement reasonable procedures to review and keep current its
system development and testing methodology; (4) review the
[[Page 10988]]
vulnerability of its systems and data center computer operations to
internal and external threats, physical hazards, and natural disasters;
and (5) establish adequate contingency and disaster recovery plans
which shall include plans to resume trading of SB swaps by the SB SEF
no later than the next business day following a wide-scale disruption.
In developing such contingency and disaster recovery plans, the SB SEF
would be required to take into account: (1) The extent of alternative
trading venues for the SB swaps traded by the SB SEF, including the
number of SB swaps traded on the SB SEF, the market share of the SB
SEF, and the number of participants in its SB SEF; and (2) the
necessity of geographic diversity and diversity of infrastructure
between the SB SEF's primary site and any back-up sites.
This list of proposed requirements is based on existing ARP
requirements applied to significant-volume ATSs under Rule 301(b)(6) of
Regulation ATS.\247\ In addition, Commission staff has applied these
requirements to SROs and other entities in the securities markets for a
number of years in the context of its ARP inspection program.
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\247\ See 17 CFR 242.301(b)(6)(D)(ii).
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As a general matter, the Commission preliminarily believes that, if
a SB SEF's policies and procedures satisfy industry best practices
standards, then these policies and procedures would be adequate for
purposes of proposed Rule 822(a)(1).\248\ However, in the event that
industry best practices standards of widely recognized professional
organizations are not consistent with the public interest, protection
of investors, or the maintenance of fair and orderly markets, the
Commission would have flexibility to establish such standards that a SB
SEF would be required to meet to comply with proposed Rule
822(a)(1).\249\
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\248\ Proposed Rule 822(a)(1) would require a SB SEF to
establish, maintain, and enforce written policies and procedures
reasonably designed to ensure that its systems provide adequate
levels of capacity, resiliency, and security. A SB SEF's policies
and procedures may still meet the requirement to be reasonably
designed to ensure that its systems provide adequate levels of
capacity, resiliency, and security without necessarily being
identical to industry best practices standards. However, generally
speaking, industry best practices standards would provide an
objective, easily identifiable standard.
\249\ Industry best practices standards currently are
established by organizations such as: the Information Systems Audit
and Control Foundation (``ISACF''); the Federal Financial
Institutions Examination Council's (``FFIEC''); the Institute of
Internal Auditors (``IIA''); and the SANS Institute.
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The proposed rule would require a SB SEF to quantify, in
appropriate units of measure, the limits of the SB SEF's capacity to
receive (or collect), process, store, or display the data elements
included within each function, and identify the factors (mechanical,
electronic, or other) that account for the current limitations.\250\
This would make it easier for the Commission to detect any potential
capacity constraints of a SB SEF, which, if left unaddressed, could
compromise the ability of a SB SEF to collect and maintain SB swap
data. A SB SEF's failure to clearly understand and have procedures to
address its capacity limits would increase the likelihood that it would
experience a loss or disruption of system operations.
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\250\ See proposed Rule 822(a)(1)(i).
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2. Objective Review
Proposed Rule 822(a)(2) would require a SB SEF to submit an
objective review of its systems that support or are integrally related
to the performance of its activities to the Commission, on an annual
basis, within thirty calendar days of completion. This proposed
requirement is critical to help ensure that SB SEFs have adequate
capacity, resiliency, and security and that their automated systems are
not subject to critical vulnerabilities. Proposed Rule 800 would define
``objective review'' as ``an internal or external review, performed by
competent, objective personnel following established procedures and
standards, and containing a risk assessment conducted pursuant to a
review schedule.'' \251\ The proposed definition of ``objective
review'' is based on the standard for the review of automated systems
set forth in the ARP II Release.\252\
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\251\ Proposed Rule 800 would define ``competent, objective
personnel'' as ``a recognized information technology firm or a
qualified internal department knowledgeable of information
technology systems.'' This proposed definition is based on the
standard for reviewers of automated systems set forth in the ARP II
Release. See ARP II Release, 56 FR 22490, supra note 245. Proposed
Rule 800 would define ``review schedule'' as ``a schedule in which
each element contained in paragraph (a)(1) of Rule 822 would be
assessed at specific, regular intervals.'' This proposed definition
codifies the Commission's policy set forth in the ARP II Release.
See ARP II Release, 56 FR 22490, supra note 245.
\252\ See ARP II Release, 56 FR 22490, supra note 245.
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As in the current ARP program, the Commission preliminarily
believes that a reasonable basis for determining that a review is
objective for purposes of proposed Rule 822(a)(2) is if the level of
objectivity of a SB SEF's reviewers complied with standards set by
widely recognized professional organizations.\253\ However, in the
event that industry best practices standards of widely recognized
professional organizations are not consistent with the public interest,
protection of investors, or the maintenance of fair and orderly
markets, the Commission would have flexibility to establish standards
that a SB SEF would be required to meet to comply with proposed Rule
822(a)(2).
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\253\ Such standards are currently established by organizations
such as the IIA, the Information Systems Audit and Control
Association (``ISACA'') (formerly the Electronic Data Processing
Auditors Association (``EDPAA'')), and the American Institute of
Certified Public Accountants (``AICPA'').
Proposed Rule 822(a)(2) would require a SB SEF to submit an
objective review of its systems that support or are integrally
related to the performance of its activities to the Commission, on
an annual basis, within thirty calendar days of completion. A SB
SEF's policies and procedures may still meet this requirement
without necessarily being identical to industry best practices
standards. However, generally speaking, industry best practices
standards would provide an objective, easily identifiable standard.
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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 SB
SEF to make. The Commission preliminarily believes that, as long as the
reviewer has the competence, knowledge, consistency, and objectivity
sufficient to perform the role, the review can be performed by either
recognized information technology firms or by a qualified internal
department knowledgeable of information technology systems.
Proposed Rule 822(a)(2) would further require that, where the
objective review is performed by an internal department, an objective,
external firm must assess the internal department's objectivity,
competency, and work performance with respect to the review performed
by the internal department. Proposed Rule 822(a)(2) would require that
the external firm issue a report of that review, which the SB SEF must
submit to the Commission on an annual basis, within thirty calendar
days of completion of the review.
The proposed requirement in proposed Rule 822(a)(2) that a SB SEF
submit an annual objective review to the Commission is drawn from the
ARP II Release.\254\ In addition, the proposed requirement in proposed
Rule 822(a)(2) that, where the objective review is performed by an
internal department, an objective, external firm must assess the
internal department's objectivity, competency, and work performance, is
similarly drawn from the ARP II Release.\255\
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\254\ See ARP II Release, 56 FR 22490, supra note 245.
\255\ See id.
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The proposed annual review would not be required to address each
element contained in proposed paragraphs (i) through (v) of Rule
822(a)(1) every year.
[[Page 10989]]
Rather, using its own risk assessment, a SB SEF's reviewer would review
each element on a ``review schedule,'' as defined in proposed Rule 800,
in which each element would be assessed at specific, regular intervals,
thus facilitating systematic and timely review of each element. This
should provide a reasonable and cost-effective level of assurance that
automated systems of SB SEFs are being adequately developed and managed
with respect to capacity, security, development, and contingency
planning concerns.
The proposed requirement to submit an objective review within
thirty days of completion assures the Commission will have timely
notice of the information required. The Commission has found through
its experience with the current ARP program for SROs and other entities
in the securities market that an entity generally requires
approximately thirty calendar days after completion of the review to
complete the internal review process necessary to submit an annual
review to the Commission. A shorter timeframe might not provide a SB
SEF with sufficient time to complete its internal review of the
document; a longer timeframe might serve to encourage unnecessary
delays.
3. Material Systems Outages
Under proposed paragraph (3) of Rule 822(a), a SB SEF would be
required to promptly notify the Commission in writing of material
system outages and any remedial measures that have been implemented or
are contemplated, including: (1) Immediately notifying the Commission
when a material systems outage is detected; (2) immediately notifying
the Commission when remedial measures are selected to address the
material systems outage; (3) immediately notifying the Commission when
the material systems outage is addressed; and (4) submitting to the
Commission within five business days of when the material systems
outage occurred a detailed written description and analysis of the
outage and any remedial measures that have been implemented or are
contemplated.
This paragraph would codify the procedures followed by SROs and
certain other entities under the Commission's current ARP program with
respect to providing the staff with notification of material system
outages. In particular, proposed paragraph (3) would clarify that the
Commission expects to receive immediate notification that an outage has
been detected, that remedial measures have been selected to address the
outage, and that the outage has been addressed. Proposed paragraph (3)
also would clarify that a SB SEF should submit a detailed written
description and analysis of the outage within five business days of the
occurrence of the outage.
The Commission preliminarily believes that the proposed rule would
assist the Commission in assuring that a SB SEF has diagnosed and is
taking steps to correct system disruptions, so that systems of the SB
SEF are reasonably equipped to accept and securely maintain transaction
data. The Commission preliminarily believes that requiring a SB SEF to
submit notifications of material system outages to the Commission is
essential to help ensure that the Commission can continue to
effectively oversee the SB SEF.
Proposed Rule 800 would define ``material systems outage'' as an
unauthorized intrusion into any system, or an event at a SB SEF
involving systems or procedures that results in: (1) A failure to
maintain accurate, time-sequenced records of all orders, quotations,
and transactions that are received by, or originated on, the SB SEF;
(2) a disruption of normal operations, including switchover to back-up
equipment with no possibility of near-term recovery of primary
hardware; (3) a loss of use of any system; (4) a loss of transactions;
(5) excessive back-ups or delays in processing; (6) a loss of ability
to disseminate vital information; (7) a communication of an outage
situation to other external entities; (8) a report or referral of an
event to the SB SEF's Board or senior management; (9) a serious threat
to systems operations even though systems operations were not
disrupted; (10) a queuing of data between system components or queuing
of messages to or from participants of such duration that a
participant's normal service delivery is affected; or (11) a failure to
maintain the integrity of systems that results in the entry of
erroneous or inaccurate inquiries, responses, orders, quotations, other
trading interest, transactions, or other information in the SB SEF or
the securities markets.
Based on its experience in requiring SROs and other entities to
report material systems outages in the context of the current ARP
program, the Commission preliminarily believes that this proposed
definition is appropriate for SB SEFs. The Commission preliminarily
believes that each of the events listed in paragraphs (1) through (11)
of proposed Rule 800 are significant events that warrant reporting to
the Commission because such material systems outages could negatively
impact the stability of the SB swap market. The application of the
proposed definition is relatively straightforward, and it focuses on
the types of events that the Commission preliminarily believes should
require notification to the Commission under proposed Rule 822(a)(3),
so that the Commission can respond appropriately to the event that
caused the loss or disruption.
Specifically, the Commission preliminarily believes that proposed
paragraphs (1), (2), (3), (4), and (5) of proposed Rule 800 address
events that cause a significant loss or disruption of normal system
operations sufficient to warrant notification to the Commission. In
addition, the Commission preliminarily believes that proposed paragraph
(6) of proposed Rule 800 addresses a type of event that impairs
transparency or accurate and timely regulatory reporting.
The Commission also preliminarily believes that proposed paragraphs
(7) and (8) of proposed Rule 800 are appropriate because communications
of an outage to entities outside of the SB SEF or to the SB SEF's Board
or senior management are indicia of a significant system outage
sufficient to warrant notification to the Commission. Specifically,
proposed paragraph (8)'s reference to ``a report or referral of an
event * * *'' seeks to address situations in which a SB SEF might seek
to apply an overly narrow definition of an ``outage situation'' in
proposed paragraph (7), in order to avoid reporting a problem that
nevertheless has a significant impact on the performance of the SB
SEF's systems and therefore warrants reporting to the Commission. For
example, where a SB SEF experiences a slowing, but not a stoppage, of
its ability to accept orders or quotes, and that slowing is
sufficiently significant to have been reported or referred to the SB
SEF's Board or senior management, the Commission preliminarily believes
that this situation would constitute a material system outage under
proposed paragraph (8) that must be reported to the Commission. By
including proposed paragraph (8) in the definition of ``material
systems outage,'' the Commission seeks to ensure that it is informed of
events that most entities subject to current ARP standards would
already understand should be covered under the current program. This
should permit the Commission to effectively monitor the operation of SB
SEF's automated systems. The Commission preliminarily believes that
proposed paragraphs (9) and (10) are appropriate because threats to
system operations and queuing of data are events that may
[[Page 10990]]
result in a significant disruption of normal system operations
warranting notification to the Commission.
Proposed paragraph (11) of proposed Rule 800 covers a failure to
maintain the integrity of systems that results in the entry of
erroneous or inaccurate inquiries, responses, orders, quotations, other
trading interests, transactions, or other information in a SB SEF or to
market participants. This paragraph is designed to address the unique
role of SB SEFs in the SB swaps market. In particular, it is intended
to cover such events as breakdowns in a SB SEF's internal controls that
result in the entry of erroneous orders into the market. For example,
it is possible that a SB SEF could, while in the process of testing its
systems, inadvertently retain ``test'' data in its database. This, in
turn, could result in erroneous reporting of SB swaps to the SB SEF's
participants, registered SDRs, the Commission, other regulators, and
counterparties. Counterparties may become uncertain of their positions,
leading to market disruptions. This, in turn, could erode investor
confidence in the integrity of the SB swaps market, damaging liquidity
and impeding the capital formation process. Accordingly, the Commission
preliminarily believes that this type of breakdown in a SB SEF's
systems controls should be reported to the Commission.
By including proposed paragraph (11) of proposed Rule 800 in the
definition of ``material systems outage,'' the Commission is seeking to
ensure that it is informed of events that could negatively impact the
integrity of systems that result in the entry of erroneous or
inaccurate transaction data or other information in a SB SEF or the
securities markets. This should permit the Commission to monitor
effectively the operation of each SB SEF's automated systems.
The definition of material systems outage also includes an
unauthorized intrusion into any system. This includes unauthorized
intrusions by outside parties, insiders, or parties unknown. The
Commission preliminarily believes that including this in the definition
would assist the Commission's review by requiring SB SEFs to notify the
Commission of unauthorized intrusions into systems or networks, and
should permit the Commission to continue to effectively monitor the
operation of SB SEF's automated systems. SB SEFs would need to
immediately report unauthorized intrusions regardless of whether the
intrusions were part of a cyber attack, potential criminal activity,
other unauthorized attempts to retrieve, manipulate or destroy data or
to disrupt or destroy systems or networks, or any other malicious
activity affecting data, systems, or networks. If unauthorized
intrusions were successful in breaching systems or networks, SB SEFs
would need to report these intrusions even if the parties conducting
the unauthorized intrusion were unsuccessful in achieving their
apparent goals (such as the introduction of malware or other means of
disrupting or manipulating data, systems, or networks). SB SEFs would
need to follow up on their initial reports by sending the Commission
updates on any harm to data, systems, or networks as well as any
remedial measures that the SB SEFs are contemplating or undertaking to
address the unauthorized intrusions. SB SEFs, however, would not need
to report unsuccessful attempts at unauthorized intrusions that did not
breach systems or networks.
The Commission preliminarily believes that the proposed five
business day requirement regarding submission of a written description
of material systems outages is an appropriate time period. In the
Commission's experience with the current ARP program for SROs and other
entities in the securities market, an entity generally requires
approximately five business days after the occurrence of a material
systems outage to gather all the relevant details regarding the scope
and cause of the outage. A shorter timeframe might not provide
sufficient time for the SB SEF to gather all relevant details
surrounding the outage and describe them in a written submission; a
longer timeframe might encourage unnecessary delays.
4. Material Systems Changes
Under proposed paragraph (4) of Rule 822(a), a SB SEF would be
required to notify the Commission in writing at least thirty calendar
days before implementation of any planned material systems changes.
Proposed Rule 800 would define ``material systems change'' as ``a
change to automated systems that: (1) Significantly affects existing
capacity or security; (2) in itself, raises significant capacity or
security issues, even if it does not affect other existing systems; (3)
relies upon substantially new or different technology; (4) is designed
to provide a new service or function; or (5) otherwise significantly
affects the operations of the security-based swap execution facility.''
Based on its experience in requiring SROs and other entities to
report material systems changes in the context of the current ARP
program, the Commission preliminarily believes that this proposed
definition is appropriate for SB SEFs. Each of the events listed in
paragraphs (1) through (5) are significant events that warrant
reporting to the Commission because any of those events can lead to a
material systems outage that could negatively affect the stability of
the SB swap market. The application of the proposed definition is
relatively straightforward, and it focuses on the types of events that
should require notification to the Commission under proposed Rule
822(a)(4). Specifically, the proposed paragraphs (1) through (4) are
events that concern the adequacy of capacity estimates, testing, and
security measures taken by a SB SEF, and thus are sufficiently
significant to warrant notification to the Commission. Proposed
paragraph (5) covering a change that ``otherwise significantly affects
the operations of the security-based swap execution facility'' is more
open-ended in order to require notification of other major systems
changes. Examples of changes that fall within proposed paragraph (5)
include, but are not limited to: Major systems architectural changes;
reconfigurations of systems that cause a variance greater than five
percent in throughput or storage; \256\ introduction of new business
functions or services; material changes in systems; changes to external
interfaces; changes that could increase susceptibility to major
outages; changes that could increase risks to data security; changes
that were, or will be, reported to or referred to a SB SEF's Board or
senior management; and changes that may require allocation or use of
significant resources.
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\256\ The Commission has identified the five percent threshold
as triggering the definition of ``material systems change'' in
proposed Rule 800 because, based on experience in administrating the
ARP program in the equities markets for almost twenty years, it
believes that reconfigurations that exceed five percent in
throughput or storage typically have the greatest potential to cause
significant disruptions to automated systems.
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The Commission preliminarily believes that the proposed thirty
calendar day requirement regarding pre-implementation written
notification to the Commission of planned material systems changes is
an appropriate time period. The Commission has found through its
experience with the current ARP program that this amount of time is
necessary for the Commission staff to evaluate the issues raised by a
planned material systems change. A shorter timeframe might not provide
sufficient time for the Commission staff to analyze the issues raised
by the systems change; a longer timeframe might unnecessarily delay the
covered entity in implementing the change.
[[Page 10991]]
The Commission requests comment on all aspects of proposed Rule
822(a). Should the Commission consider imposing other requirements or
standards? Should any of the proposed requirements be eliminated or
refined? If so, please explain your reasoning. Would it be appropriate
to impose the proposed systems safeguards requirements on SB SEFs only
after they account for a certain percentage of the total volume of
transactions, as measured by the aggregate total volume received by all
SB SEFs? If so, what is the appropriate volume level? Five percent? Ten
percent? Please be specific. In addition, the Commission is mindful of
the potential costs of a SB SEF's compliance with the proposed systems
safeguards and seeks commenters' views on whether there are ways to
minimize those costs while assuring adequate systems safeguards.
Would it be appropriate to delay implementing the proposed systems
safeguards requirements on SB SEFs until after a specified period of
time, such as one year after Commission approval of the SB SEF's
registration? If so, is one year an appropriate time period? If not,
what would be an appropriate time period for any delay and why? Would
it be appropriate to delay implementation of systems safeguard
requirements until either a specified time period after the
Commission's approval of the SB SEF's registration and/or a particular
volume threshold such as those discussed above is reached? If so, why?
If not, why not? Are there other circumstances in which a SB SEF should
be excepted from systems safeguards requirements? If so, commenters
should provide a rationale.
Are there factors specific to SB swap transactions that would make
applying a system that is traditionally used in the equity markets
inappropriate? What is the likely impact of these requirements on the
SB swaps market, including the impact on the incentives and behaviors
of SB SEFs, the willingness of persons to register as SB SEFs, and the
technologies used for maintaining SB swap data at the SB SEF?
Should the Commission require a SB SEF's contingency and disaster
recovery plans (required in proposed paragraph (a)(1)(v) of proposed
Rule 822) to be tested periodically to assure their effectiveness and
adequacy? \257\ Should the Commission require such contingency and
disaster recovery plans to cover at a minimum: Preparation for
contingencies through such devices as appropriate remote and on-site
hardware back-up and periodic duplication and off-site storage of data
files? Off-site storage of up-to-date, duplicative software, files and
critical forms and supplies needed for processing operations, including
a geographically diverse back-up site that does not rely on same
infrastructure components (e.g., transportation, telecommunications,
water supply, and electric power) as the SB SEF primary operations
center? Immediate availability of software modifications, detailed
procedures, organizational charts, job descriptions, and personnel for
the conduct of operations under a variety of possible contingencies?
Emergency mechanisms for establishing and maintaining communications
with participants, regulators and other entities involved? \258\
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\257\ This requirement would be similar to what is required of
clearing agencies and proposed to be required of SDRs. See Exchange
Act Release No. 16900 (June 17, 1980), 45 FR 41920 (June 20, 1980)
and SDR Release, supra note 6.
\258\ These requirements are similar to requirements related to
disaster recovery plans of clearing agencies and proposed to be
required of SDRs. See id. and SDR release, supra note 6. The
requirement for geographical diversity is currently applicable to
securities firms. See Exchange Act Release No. 47638 (April 7,
2003), 68 FR 17809 (April 11, 2003) (the ``BCP Whitepaper'').
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Should the Commission require a SB SEF's contingency and disaster
recovery plans (required in proposed paragraph (a)(1)(v) of proposed
Rule 822) to include resources, emergency procedures, and backup
facilities sufficient to enable timely recovery and resumption of its
operations following any disruption of its operations? If so, what
should the recovery time objective be? Should the SB SEF's contingency
and disaster plans and resources generally enable resumption of the SB
SEF's operations during the next business day following the disruption?
Should the Commission require a SB SEF, to the extent practicable,
coordinate its contingency and disaster recovery plans (required in
proposed paragraph (a)(1)(v) of proposed Rule 822) with those of the
SDRs, clearing agencies, SB swap dealers, and major SB swap
participants, and with those of regulators in a manner adequate to
enable effective resumption of the SB SEF's operations following a
disruption causing activation of the SB SEF's contingency and disaster
recovery plans, including participating in periodic, synchronized
testing of its contingency and disaster recovery plans?
Should the Commission require a SB SEF ensure that its contingency
and disaster recovery plans (required in proposed paragraph (a)(1)(v)
of proposed Rule 822) take into account the business continuity-
disaster recovery plans of its telecommunications, power, water, and
other essential service providers?
Should the Commission require a SB SEF to identify the potential
risks that can arise as a result of interoperability and/or
interconnectivity with other market infrastructures and venues from
which data can be submitted to the SB SEF (such as exchanges, SDRs,
clearing agencies, SB swap dealers, and major SB swap participants) and
service providers and how the SB SEF mitigates such risks?
Should the Commission require a SB SEF to abide by substantive
requirements (in addition to, or in place of, the policies and
procedures approach of proposed Rule 822(a)(1)), such as (i) having
robust system controls and safeguards to protect the data from loss and
information leakage, (ii) having high-quality safeguards and controls
regarding the transmission, handling, and protection of data to ensure
the accuracy, integrity, and confidentiality of the trade information
recorded in the SB SEF, or (iii) having reliable and secure systems and
having adequate, scalable capacity?
Should the Commission require a SB SEF to establish, maintain, and
enforce written policies and procedures reasonably designed to ensure
that the transaction data that it accepts is from the entity it
purports to be from, such as requiring robust passwords?
Are the time periods specified in proposed Rule 822(a)(2) through
(4) with respect to submission of annual reviews and written notices of
material system outages and material systems changes the correct time
periods to use? Should any of the proposed time periods be shortened or
lengthened? Should the time periods be replaced with less specific
requirements, such as ``promptly'' or ``timely''? If so, please explain
your reasoning.
Should the Commission require the notification required by proposed
Rule 822(a)(4) to be sufficiently detailed to explain the new system
development process, the new configuration of the system, its
relationship to other systems, the timeframes or schedule for
installation, any testing performed or planned, and an explanation on
the impact of the change on the SB SEF's capacity estimates,
contingency protocols and vulnerability estimates? \259\
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\259\ See ARP II Release, 56 FR 22490, supra note 245.
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Are there specific provisions in the proposed definitions that
should be eliminated or refined? Are there some events which should be
included in the
[[Page 10992]]
definitions of ``material systems outage'' and ``material systems
change'' that are not, or events that should not be included in these
definitions but are? If so, please explain your reasoning.
Are the definitions ``objective review'' and ``competent, objective
personnel'' parallel to the requirements for SROs and other entities in
the securities markets in the context of the current ARP program?
Should the objective review required in proposed Rule 822(a)(2) be done
on a regular, periodic basis, rather than on an annual basis?
The proposed requirement for an objective review focuses on a
review of the SB SEF's automated systems that support or are integrally
related to the performance of its activities. Is this an appropriate
scope, or should other aspects of the SB SEF's operations be included?
If so, which? In addition is this scope sufficiently understandable or
should it be further defined?
Is the requirement in proposed Rule 822(a)(2) for an objective,
external firm to assess the objectivity, competency, and work
performance of an internal department that performed an objective
review necessary or appropriate? If the objective review is done by an
internal department, should the Commission require that the objective
review be done by a department or persons other than those responsible
for the development or operation of the systems being tested?
Do the proposed requirements for SB SEFs establish sufficient
criteria against which an evaluation can be performed by a third party?
If not, should the Commission impose a specific framework for the SB
SEFs to use in establishing automated systems and related controls? If
so, what would the critical components of the framework include? Are
existing frameworks available that are suitable for this purpose and,
if so, which ones would be considered appropriate?
Should the Commission require the use of a specific framework by
outside or inside parties for evaluating whether SB SEFs have adequate
capacity, resiliency, and security and that their automated systems are
not subject to critical vulnerabilities? If so, what would the critical
components of the framework include? Are existing frameworks available
that are suitable for this purpose and, if so, which ones would be
considered appropriate?
For reviews performed by internal audit departments, are the
requirements for an external firm involvement appropriate? If not, what
improvements could be made to promote appropriate reviews by external
firms in these circumstances?
B. Electronic Filing
Proposed Rule 822(b) would require that every notification, review,
or description and analysis required to be submitted to the Commission
under proposed Rule 822 be submitted in an appropriate electronic
format to the Office of Market Operations at the Division of Trading
and Markets at the Commission's principal office in Washington, DC.
This proposed requirement is intended to make proposed Rule 822
consistent with electronic-reporting standards set forth in other
Commission rules under the Exchange Act, such as Rule 17a--25
(Electronic Submission of Securities Transaction Information by
Exchange Members, Brokers, and Dealers) \260\ and Rule 19b-4 (Filings
with respect to Proposed Rule Changes by Self-regulatory
Organizations).\261\
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\260\ 17 CFR 240.17a-25.
\261\ 17 CFR 240.19b-4.
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The Commission preliminarily believes that the proposed provision
would benefit SB SEFs by automating the process by which they submit
notifications, reviews, and descriptions and analyses under proposed
Rule 822 to the Commission. The Commission currently receives this type
of information from SROs and other entities in the securities market in
electronic format. Moreover, as noted above, this provision is intended
to be consistent with other Commission rules.
Proposed Rule 822(b) would require submission of notifications,
reviews, and descriptions and analyses in an ``appropriate electronic
format.'' The Commission anticipates that, if the provision is adopted,
the staff would work with SB SEFs to determine appropriate electronic
formats that could be used.
The Commission requests comment on all aspects of proposed Rule
822(b) as well as on the following specific issues. Are there specific
provisions in proposed Rule 822(b) that should be eliminated or
refined? If so, please explain your reasoning.
What is the likely impact of this requirement on the SB swap
market, including the impact on the incentives and behaviors of SB
SEFs, the willingness of persons to register as SB SEFs, and the
technologies used for reporting information to the Commission?
C. Confidential Treatment
Proposed Rule 822(c) would provide that a person who submits a
notification, review, or description and analysis pursuant to this Rule
for which he or she seeks confidential treatment should clearly mark
each page or segregable portion of each page with the words
``Confidential Treatment Requested.'' Proposed Rule 822(c) would state
that ``[a] notification, review, or description and analysis submitted
pursuant to this [Rule] will be accorded confidential treatment to the
extent permitted by law.''
The Commission would use the information collected under proposed
Rule 822 to evaluate whether SB SEFs are reasonably equipped to handle
market demand. For this reason, requiring SB SEFs to submit this
information would be critical to the Commission's ability to
effectively oversee SB SEFs.
Much of the information that the Commission expects to receive from
SB SEFs under proposed Rule 822 is, by its nature, competitively
sensitive. If the Commission were unable to afford confidential
protection to the information that it expects to receive, then the SB
SEFs may hesitate to submit the required information to the Commission.
This result could potentially undermine the Commission's ability
effectively to oversee SB SEFs, which, in turn, could undermine
investor confidence in the SB swap market.
The Freedom of Information Act (``FOIA'') provides at least two
exemptions under which the Commission has authority to grant
confidential treatment for the information submitted under proposed
Rule 822. First, FOIA Exemption 4 provides an exemption for ``trade
secrets and commercial or financial information obtained from a person
and privileged or confidential.'' \262\ As specified in proposed Rule
822(c), ``a notification, review, or description and analysis submitted
pursuant to this [Rule] will be accorded confidential treatment to the
extent permitted by law.'' The information required to be submitted to
the Commission under proposed Rule 822 may contain proprietary
information regarding automated systems that is privileged or
confidential and thus subject to protection from disclosure under
Exemption 4 of the FOIA.
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\262\ 5 U.S.C. 552(b)(4).
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Second, FOIA Exemption 8 provides an exemption for matters that are
``contained in or related to examination, operating, or condition
reports prepared by, on behalf of, or for the use of an agency
responsible for the regulation or supervision of financial
institutions.'' \263\ Similarly, Commission Rule 80(b)(8), Commission
Records and Information,
[[Page 10993]]
implementing Exemption 8, states that the Commission generally will not
publish or make available to any person matters that are ``[c]ontained
in, or related to, any examination, operating, or condition report
prepared by, on behalf of, or for the use of, the Commission, any other
Federal, State, local, or foreign governmental authority or foreign
securities authority, or any securities industry self-regulatory
organization, responsible for the regulation or supervision of
financial institutions.'' \264\
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\263\ 5 U.S.C. 552(b)(8).
\264\ 17 CFR 200.80(b)(8).
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The Commission requests comment on the following specific issues.
Are there specific provisions in proposed Rule 822(c) that should be
eliminated or refined? If so, please explain your reasoning. What is
the likely impact of this requirement on the SB swaps market, including
the impact on the incentives and behaviors of SB SEFs and the
willingness of persons to register as SB SEFs?
XX. Core Principle 14--Chief Compliance Officer
Section 3D(d)(14) of the Exchange Act (Core Principle 14), requires
registered SB SEFs to designate a CCO and requires the CCO to perform
certain duties and to file compliance reports and financial reports
annually.\265\ Proposed Rule 823 would incorporate the requirements of
Core Principle 14 and provide certain additional requirements for its
implementation.
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\265\ See Public Law 111-203, Sec. 763(c) (adding Section
3D(d)(14) of the Exchange Act).
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A. Appointment and Duties of CCO
Proposed Rule 823(a) would require a registered SB SEF to identify
on its Form SB SEF a person who has been designated by the Board to
serve as the CCO. The compensation and removal of the CCO would require
the approval of a majority of the Board.\266\ Proposed Rule 823(b)
would incorporate the duties of the CCO contained in Core Principle
14.\267\ Specifically, proposed Rule 823(b) would provide that each CCO
shall: (1) Report directly to the Board or the senior officer of the SB
SEF; (2) review the compliance of the SB SEF with respect to the Core
Principles in Section 3D of the Exchange Act and the rules and
regulations thereunder; (3) in consultation with the Board or the
senior officer, resolve any conflicts of interest that may arise; (4)
be responsible for establishing each policy and procedure that is
required to be established under Section 3D of the Exchange Act and the
rules and regulations thereunder; (5) monitor compliance with the
Exchange Act and the rules and regulations thereunder relating to its
business as a SB SEF, including each rule prescribed by the Commission
under Section 3D of the Exchange Act; (6) establish procedures for the
remediation of noncompliance issues identified by the CCO through any
(i) compliance office review, (ii) look-back, (iii) internal or
external audit finding, (iv) self-reported error, or (v) validated
complaint; and (7) establish and follow appropriate procedures for the
handling, management response, remediation, retesting, and closing of
noncompliance issues.
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\266\ See proposed Rule 823(a).
\267\ See Public Law 111-203, Sec. 763(c) (adding Section
3D(d)(14)(B) of the Exchange Act).
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The CCO would be responsible for, among other things, keeping the
SB SEF's Board or senior officer apprised of significant compliance
issues and advising of needed changes in the SB SEF's policies and
procedures. Given the critical role that a CCO is intended to play in
ensuring a SB SEF's compliance with the Exchange Act and the rules and
regulations thereunder, the Commission believes that a SB SEF's CCO
should be competent and knowledgeable regarding the Federal securities
laws and should be empowered with full responsibility and authority to
develop and enforce appropriate policies and procedures for the SB
SEF.\268\ To meet the statutory obligations, a CCO also should have a
position of sufficient seniority and authority within the SB SEF to
compel others to adhere to the SB SEF's policies and procedures. The
Commission notes, however, that the SB SEF would not be required to
hire an additional person to serve as its CCO. Instead, the SB SEF
could designate an individual already employed by the SB SEF to serve
as its CCO.
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\268\ The Commission believes that the person that is designated
by the Board to serve as the CCO should have the background and
qualifications necessary to fulfill the responsibilities of the
position.
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The Commission is concerned that a SB SEF's commercial interests
might discourage its CCO from making forthright disclosure to the Board
or the senior officer about any compliance failures. To mitigate this
potential conflict of interest, the Commission believes that the CCO
should be independent from the SB SEF's management so as not to be
conflicted in reporting or addressing any compliance failures. To
support this independence, the proposed rule would allow only a
majority of the Board to approve the CCO's compensation and to remove
the CCO from his or her responsibilities.
The Commission notes that proposed Regulation MC would require a SB
SEF to establish a fully independent ROC, which would be the Board
committee that would be responsible for monitoring a SB SEF's
regulatory program for sufficiency, effectiveness, and
independence.\269\ The Board of a SB SEF should consider the
appropriate reporting structure for the CCO, taking into account the
potential conflicts of interest between the CCO and other senior
officers of the SB SEF. Because the SB SEF would be required to have a
ROC, the Board could elect to delegate to the ROC the duty of
overseeing the CCO.
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\269\ See Regulation MC Proposing Release, supra note 82,
(proposing that the SB SEF establish a ROC composed solely of
independent directors).
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The Commission generally requests comments on all aspects of the
proposed rules relating to the appointment and duties of the CCO.
Should the Commission require a CCO to meet minimum competency
standards? If so, what background, skills and other qualifications
should a CCO be required to have? Does the proposed requirement that
the CCO report directly to the Board or the senior officer balance the
CCO's needs to work effectively with management and to have an adequate
separation of business and regulatory influence? Are there situations
when the CCO's ability to conduct his or her duties under the Exchange
Act could be compromised if he or she were required to report to the
senior officer? If so, are there steps that the SB SEF could take to
resolve differences between the CCO and the senior officer? Should the
Commission require a CCO to report to a specific senior officer? If so,
to whom and why? Would it be preferable for the CCO to report to the
Board? If so, would it be preferable for the Board to delegate the
responsibility for oversight of the CCO to its ROC?
Is the Commission's proposed requirement regarding the Board's
approval of a CCO's compensation and removal necessary or appropriate?
Absent specific requirements imposed by Federal statute or rules, in
general, the entity has the discretion to create the governance
structure that it believes best promotes compliance with applicable
laws and regulations, in accordance with the relevant laws of the
entity's jurisdiction of incorporation or formation. As noted above,
the Commission has identified potential conflict concerns between a SB
SEF's commercial interests and its regulatory obligations. To mitigate
such concerns
[[Page 10994]]
and support the independence of the CCO from management of the SB SEF,
the Commission is proposing the requirement described above.\270\ Do
commenters believe that it would be appropriate to impose this
requirement, or do commenters believe that SB SEFs would be able to
comply with their regulatory obligations without this requirement?
Would the removal of this requirement affect the ability of a CCO to
comply with the extensive duties required of the CCO under the Dodd-
Frank Act? If commenters do not agree that the proposed requirements
are necessary or appropriate, why and what would be a better
alternative, if any, to promote the independence and effectiveness of
the CCO? For example, should the required percentage of Board approval
be lower or higher? Or, should the Commission require that the CCO meet
separately with the independent directors of the SB SEF, without anyone
else present? \271\ Would such a requirement promote the independence
and effectiveness of the CCO by supporting his or her ability to speak
freely with the independent directors about any sensitive compliance
issues of concern to any of them? Do commenters believe that it would
be appropriate to impose this type of requirement, or do commenters
believe that SB SEFs would be able to comply with their regulatory
obligations without a requirement such as this?
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\270\ The Commission proposed this same requirement in its
proposal relating to the registration and regulation of security-
based swap data repositories. See SDR Release, supra note 6.
\271\ The concept of an individual with regulatory oversight
responsibilities having mandated access to the independent directors
without the presence of non-independent directors on the entity's
board is not novel, although it has not to date been specifically
mandated by the Exchange Act or rules thereunder. See, e.g., Article
IV, Sec. 7 of the Nasdaq Bylaws (requiring the Chief Regulatory
Officer of Nasdaq to meet in executive session with the Regulatory
Oversight Committee of Nasdaq, which is a fully independent
committee of the Nasdaq board).
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Should the Commission add a rule explicitly prohibiting any
officers, directors, or employees of a SB SEF from, directly or
indirectly, taking any action to coerce, manipulate, mislead, or
fraudulently influence the CCO in the performance of his other
responsibilities?
Are there any terms in proposed Rule 823(b) regarding the duties of
the CCO that should be clarified or modified (e.g., ``look-back,''
``self-reported error,'' or ``validated complaint'')? If so, which
terms and how should they be defined?
Are the duties of the CCO in proposed Rule 823(b) sufficiently
clear? Should the Commission provide further guidance or rules on how
the CCO should comply with these duties? If so, what kinds of guidance
or rules would be appropriate to adopt in this context?
Should the Commission provide guidance in its proposed rules about
the CCO's procedures for the remediation of noncompliance issues?
Should the Commission provide guidance in its proposed rules on what
would be considered ``appropriate procedures'' for the handling,
management response, remediation, retesting, and closing of
noncompliance issues? If so, what factors should the Commission take
into consideration?
Would the CCO have difficulty discharging any of the obligations
under proposed Rule 823? Would any of the CCO's obligations under
proposed Rule 823 conflict with current obligations imposed on a CCO?
If so, which ones and why? Should the Commission impose any additional
duties on the CCO that are not already enumerated in Section 3D(d)(14)
of the Exchange Act and incorporated in the proposed rule?
What is the likely impact of the Commission's proposed rule on the
SB swap market? Would the proposed rule potentially promote or impede
the establishment of SB SEFs? With respect to entities that currently
provide a marketplace for trading SB swaps and that may be required to
register under the Dodd-Frank Act, how do current practices compare to
the practices that the Commission proposes to require in this rule?
What are the incremental costs to potential SB SEFs 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 SB swaps market over time affect SB
SEFs and impact the Commission's proposed rule?
B. Annual Reports
Section 3D(d)(14)(C) of the Exchange Act requires the CCO to
prepare and sign an annual report, in accordance with rules prescribed
by the Commission.\272\ Proposed Rule 823(c) would prescribe the rules
to implement this statutory provision.\273\ Proposed Rule 823(c)(1)
would implement the requirements in Section 3D(d)(14)(C)(i) under
Exchange Act for the CCO to annually prepare and sign a report that
contains a description of: (i) The compliance of the SB SEF with
respect to the Exchange Act and the rules and regulations thereunder;
and (ii) the policies and procedures of the SB SEF (including the code
of ethics and conflicts of interest policies of the SB SEF).\274\
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\272\ See Public Law 111-203, Sec. 763(c) (adding Section
3D(d)(14)(C) of the Exchange Act).
\273\ See proposed Rule 823(c).
\274\ See Public Law 111-203, Sec. 763(c) (adding Section
3D(d)(14)(C)(i) of the Exchange Act) and proposed Rule 823(c)(1).
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The Commission also is proposing certain minimum requirements in
proposed Rule 823(c)(1) for the information that should be provided in
the CCO's annual report.\275\ The proposed minimum requirements would
provide guidance for including in the report certain key disclosures
about the SB SEF's compliance with the Core Principles. However, this
proposed provision is not intended to be an exhaustive list; any other
relevant descriptions of the SB SEF's compliance with the Exchange Act
and the policies and procedures of the SB SEF related thereto,
consistent with the broader statutory requirement in Section
3D(d)(14)(C) of the Exchange Act, also should be included in the CCO's
annual report.\276\
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\275\ See proposed Rule 823(c)(1).
\276\ See Public Law 111-203, Sec. 763(c) (adding Section
3D(d)(14)(C) of the Exchange Act).
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Proposed Rule 823(c)(1)(i) through (ii) would require the annual
report to include a description of the SB SEF's enforcement of its
policies and procedures and information on all investigations,
inspections, examinations, and disciplinary cases opened, closed, and
pending during the reporting period. Proposed Rule 823(c)(1)(iii) would
require the annual report to include a description of all grants of
access (including, for all participants, the reasons for granting such
access) and all denials or limitations of access (including, for each
applicant, the reasons for denying or limiting access), consistent with
Rule 811(b)(3). The disclosures in proposed Rule 823(c)(i) through
(iii) would provide a basis for evaluating the effectiveness of the SB
SEF's compliance program under the standards in Core Principle 2, which
generally requires the SB SEF to establish and enforce compliance with
its rules.
Proposed Rule 823(c)(1)(iv) through (v) would require the annual
report to include any material changes to the SB SEF's policies and
procedures since the date of the preceding compliance report and any
recommendation for material changes to the policies and procedures as a
result of the annual review (including the rationale for such
recommendation, and whether such policies and procedures were or will
be modified by the SB SEF to incorporate such recommendation).\277\ The
[[Page 10995]]
proposed requirements should demonstrate the kinds of compliance issues
the SB SEF is facing and how the CCO is addressing those issues.
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\277\ The term ``material change'' would be defined as a change
that a CCO would reasonably need to know in order to oversee
compliance of the SB SEF. See proposed Rule 800.
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Proposed Rule 823(c)(1)(vi) through (vii) would require the annual
report to include the results of the SB SEF's surveillance program
(including information on the number of reports and alerts generated,
and the reports and alerts that were referred for further investigation
or for an enforcement proceeding) and any complaints received on the SB
SEF's surveillance program. The proposed requirements should provide a
demonstration of the effectiveness of the SB SEF's compliance program
in detecting violations and the appropriateness of the SB SEF's
response in addressing such detected violations.
Finally, proposed Rule 823(c)(1)(viii) would require the CCO's
annual report to include any material compliance matters identified
since the date of the preceding compliance report.\278\ This proposed
requirement would indicate the most significant compliance matters that
the SB SEF is dealing with on its market. The Commission notes that
individual compliance matters may not be material when viewed in
isolation, but may collectively suggest a material compliance matter.
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\278\ The term ``material compliance matter'' would be defined
as any compliance matter that the Board would reasonably need to
know to oversee the compliance of the SB SEF and includes, without
limitation: (1) A violation of the Federal securities laws by the SB
SEF, its officers, directors, employees, or agents; (2) a violation
of the policies and procedures of the SB SEF, by the SB SEF, its
officers, directors, employees, or agents; or (3) a weakness in the
design or implementation of the SB SEF's policies and procedures.
See proposed Rule 800.
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Although the proposed rule would require only annual reviews, the
CCO should consider the need for interim reviews in response to
significant compliance events, changes in business arrangements, and
regulatory developments. For example, if there is an organizational
restructuring of a SB SEF, its CCO should evaluate whether the SB SEF's
policies and procedures are adequate to guard against potential
conflicts of interest. Additionally, if a new rule regarding SB SEFs is
adopted by the Commission, then the CCO should review its policies and
procedures to ensure compliance with the rule.
Proposed Rule 823(c)(2) would implement the requirement in Section
3D(d)(14)(C)(ii)(I) of the Exchange Act for the CCO to submit the
annual report with the appropriate financial reports of the SB SEF at
the time of filing.\279\ The proposed rule also would implement the
requirement in Section 3D(d)(14)(C)(ii)(II) of the Exchange Act that
the CCO include a certification in its report, under penalty of law,
that the report is accurate and complete.\280\
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\279\ See Public Law 111-203, Sec. 763(c) (adding Section
3D(d)(14)(C)(ii)(I) of the Exchange Act) and proposed Rule
823(c)(2).
\280\ See Public Law 111-203, Sec. 763(c) (adding Section
3D(d)(14)(C)(ii)(II) of the Exchange Act) and proposed Rule
823(c)(2).
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Under proposed Rule 823(d), the CCO would be required to submit the
annual compliance report to the Board for its review prior to the
submission of the report to the Commission.\281\ The Commission notes,
however, that the CCO should promptly bring serious compliance issues
to the attention of the full Board or the Board's independent directors
rather than wait until an annual report is prepared.
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\281\ See proposed Rule 823(d).
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The Commission generally requests comments on all aspects of the
proposed rules regarding annual compliance reports. Are the
Commission's proposed rules regarding annual compliance reports
appropriate and sufficiently clear? If not, why not and what would be a
better approach?
Are the proposed definitions of ``material change'' and ``material
compliance matter'' appropriate? If not, are they over-inclusive or
under-inclusive, and how else should these terms be defined?
Proposed Rule 823(c)(1) lists specific disclosures that would need
to be included in each annual compliance report. Are there other
specific items that should be required? For example, should disclosures
about instances when the SB SEF or the Board has not accepted the
recommendations of the swap review committee be required to be included
in the annual compliance report? Would such information be helpful to
the Commission in evaluating whether conflicts of interest are
impacting decisions about whether to trade, or how to trade, a
particular SB swap?
Should the Commission propose a timeframe for the CCO to submit his
or her annual compliance report for the review by the Board? If so,
what would be an appropriate timeframe? Should the Commission permit
the SB SEF to request an extension to file an annual compliance report
(e.g., due to substantial, undue hardship)?
If a CCO reports to the senior officer of the SB SEF rather than to
the Board, should the Commission permit the CCO to submit his or her
annual compliance report for prior review to the senior officer rather
than to the Board, in addition to the Board, or only when the SB SEF
does not have a Board? Would any of these alternatives lessen the
independence of the CCO in any way?
Should the Commission prohibit a SB SEF's Board from requiring its
CCO to make any changes to the annual compliance report? If the
Commission permits the CCO to submit his or her annual compliance
report to the senior officer for prior review, instead of to the Board
or in addition to the Board, should a similar prohibition be applied to
the senior officer? Would such a prohibition be necessary, in either
case, in light of the CCO's statutory requirement to certify that the
compliance report is accurate and complete?
Is the Commission's proposed requirement that the CCO meet
separately with the independent directors of a SB SEF appropriate? If
not, why not and what would be a better alternative?
Are the Commission's proposed minimum disclosure requirements in
the CCO's annual compliance report appropriate? If not, why not and
what would be a better alternative? Should the Commission require any
other disclosures in the CCO's annual compliance report?
Would keeping the compliance reports confidential encourage the CCO
to be more forthcoming about sensitive compliance issues or would it
likely not have any impact on the disclosure of such issues? Are there
any disadvantages to keeping the CCO's compliance report confidential?
How could the Commission address any such disadvantage? Would making
the CCO's compliance report public be useful to the public or other
regulators?
What is the likely impact of the Commission's proposed rule on the
SB swap market? Would the proposed rule potentially promote or impede
the establishment of SB SEFs? With respect to entities that currently
provide a marketplace for trading SB swaps and that may be required to
register under the Exchange Act, as amended by the Dodd-Frank Act, how
do current practices compare to the practices that the Commission
proposes to require in this rule? What would be the incremental costs
to potential SB SEFs 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 SB swaps market over time affect SB
SEFs and impact the Commission's proposed rule?
[[Page 10996]]
C. Financial Reports
Section 3D(d)(14)(C)(ii)(I) of the Exchange Act requires a
compliance report filed by the CCO to be accompanied by each
appropriate financial report of the SB SEF that is required to be
furnished to the Commission pursuant to Section 3D of the Exchange Act.
The Commission is proposing Rule 823(e), which would set forth the
appropriate financial reports that a SB SEF would be required to
include with its annual compliance reports.\282\ Proposed Rule
823(e)(1) would require the financial reports of the SB SEF to: (1) Be
a complete set of financial statements of the SB SEF that are prepared
in accordance with U.S. generally accepted accounting principles for
the most recent two fiscal years of the SB SEF; (2) be audited in
accordance with standards of the Public Company Accounting Oversight
Board (``PCAOB'') by a public accounting firm that is registered with
the PCAOB and is qualified and independent in accordance with Rule 2-01
of Regulation S-X (17 CFR 210.2-01); (3) include a report of the
registered public accounting firm that complies with paragraphs (a)
through (d) of Rule 2-02 of Regulation S-X (17 CFR 210.2-02); and (iv)
include the SB SEF's accounting policies and practices.\283\
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\282\ The financial statements required by these proposed rules
are the same as the requirements for the annual financial statements
that would be required to be submitted pursuant to Exhibits F and H
of proposed Form SB SEF. See infra Section XXII. To avoid submitting
duplicative financial statements, the CCO may represent in the
annual compliance report that the financial statements required by
proposed Rule 823(e) have been submitted to the Commission as part
of the annual update of Form SB SEF required by proposed Rule
802(f).
\283\ See proposed Rule 823(e)(1).
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Under Proposed Rule 823(e)(1)(v), if the SB SEF's financial
statements contain consolidated information of the SB SEF's
subsidiaries, then the SB SEF's financial statements also would need to
provide condensed financial information, in a financial statement
footnote, as to the financial position, changes in financial position
and results of operations of the SB SEF, as of the same dates and for
the same periods for which audited consolidated financial statements
are required.\284\ Such financial information would need not be
presented in greater detail than is required for condensed statements
by Rules 10-01(a)(2), (3), and (4) of Regulation S-X. Detailed footnote
disclosure that would normally be included with complete financial
statements may be omitted with the exception of disclosures regarding
material contingencies, long-term obligations, and guarantees.
Descriptions of significant provisions of the SB SEF's long-term
obligations, mandatory dividend or redemption requirements of
redeemable stocks, and guarantees of the SB SEF would also be required
to be provided along with a five-year schedule of maturities of debt.
If the material contingencies, long-term obligations, redeemable stock
requirements and guarantees of the SB SEF have been separately
disclosed in the consolidated statements, then they would not need to
be repeated in this schedule.\285\ This proposed requirement is
substantially similar to Rule 12-04 of Regulation S-X, which pertains
to condensed financial information of registrants.\286\
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\284\ See proposed Rule 823(e)(1)(v).
\285\ Id.
\286\ See 17 CFR 210.9-06.
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Under proposed Rule 823(e)(2), for SB SEFs with affiliated entities
(any subsidiary in which the applicant has, directly or indirectly, a
25% interest and for every entity that has, directly or indirectly, a
25% interest in the applicant), for each affiliated entity, the
financial report would also be required to include a complete set of
unconsolidated financial statements (in English) for the latest two
fiscal years and such footnotes and other disclosures as are necessary
to avoid rendering the financial statements misleading.\287\ The
Commission notes that information on affiliated entities is currently
requested for national securities exchanges \288\ and is important
information for the Commission to obtain because the financial health
of affiliated entities could potentially have an impact on the
financial condition of the SB SEF.
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\287\ See proposed Rule 823(e)(2).
\288\ See Form 1 and instructions thereunder.
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Proposed Rule 823(e)(4) also would require the financial statements
to be provided in XBRL, consistent with Rules 405(a)(1), (a)(3), (b),
(c), (d), and (e) of Regulation S-T.\289\ Specifically, information in
the financial statements would be required to be tagged \290\ using
XBRL to allow the Commission to assess and analyze effectively the SB
SEF's financial and operational condition.
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\289\ See 17 CFR 232.405 (imposing content, format, submission
and Web site posting requirements for an interactive data file, as
defined in Rule 11 of Regulation S-T).
\290\ Tagging refers to labeling fields of data electronically
so that it can be searched electronically by categories. See
proposed Rule 800.
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Finally, annual compliance reports and financial reports filed
pursuant to proposed Rule 823 would be required to be filed within 60
days after the end of the fiscal year covered by such reports.\291\
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\291\ See proposed Rule 823(f).
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The Commission notes that with respect to its other registrants,
the Commission has required, at a minimum, the proposed financial
information and in some instances, significantly more information.\292\
The Commission believes that it would be important to obtain an audited
annual financial report covering two years from each registered SB SEF
to understand the SB SEF's financial and operational condition,
particularly because SB SEFs are intended to play a pivotal role in
improving the transparency of the OTC derivatives markets.\293\ Among
other things, the financial statements could help the Commission
evaluate whether a SB SEF has adequate financial resources to comply
with its statutory obligations or is having financial difficulties. If
a SB SEF ultimately ceases doing business, it could create a
significant disruption in the OTC derivatives market. The Commission
believes that the financial information that it is seeking pertaining
to the affiliates of the SB SEF is relevant and necessary as the
financial condition of the affiliates could have an immediate or future
impact on the condition of the SB SEF.
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\292\ See, e.g., Rule 17a-5(d) under the Exchange Act, 17 CFR
240.17a-5(d).
\293\ See Public Law 111-203, Sec. 763(c) (adding Section 3D of
the Exchange Act).
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The Commission requests comments on all aspects of the proposed
rules relating to financial statements. Is the Commission's proposed
rule regarding a SB SEF's financial report appropriate and sufficiently
clear? If not, why not and what would be a better alternative? Should
the Commission permit a financial report by a SB SEF that is a foreign
private issuer to be in compliance with International Financial
Reporting Standards as an alternative to GAAP? If so, why and what are
the costs and benefits to permitting this?
Is the Commission's proposed rule requiring financial reports to
cover the most recent two fiscal years of a SB SEF appropriate? If not,
should the lookback timeframe be greater (e.g., the most recent three
fiscal years) or shorter (e.g., the most recent fiscal year)?
Is the Commission's proposed requirement regarding a SB SEF's
condensed financial information appropriate and sufficiently clear? If
not, why not and what would be a better alternative?
Is the Commission's proposed 60-day timeframe for a SB SEF to file
the annual and financial report appropriate?
[[Page 10997]]
If not, should the timeframe be shorter or longer (e.g., 30 days or 90
days)? Would a SB SEF's financial report be useful to the public or
other regulators? If so, explain.
Are the financial report requirements relating to certain
affiliates of SB SEFs too broad or overly burdensome? Are there any
terms in the Commission's proposed rule regarding a SB SEF's financial
report that need to be defined or clarified? If so, which terms?
What is the likely impact of the Commission's proposed rule on the
SB swap market? Would the proposed rule potentially promote or impede
the establishment of SB SEFs? With respect to entities that currently
provide a marketplace for trading SB swaps and that may be required to
register under the Dodd-Frank Act, how do current practices compare to
the practices that the Commission proposes to require in this rule?
What would be the incremental costs to potential SB SEFs 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 SB swaps market over time affect SB
SEFs and impact the Commission's proposed rule relating to the CCO?
XXI. Registration of Security-Based Swap Execution Facilities
As stated above, a primary goal of the Dodd-Frank Act is to improve
the transparency and oversight of the OTC derivatives market and to
guard against systemic risk in the trading of these instruments. A key
aim of the legislation is to bring the trading of mandatorily cleared
OTC derivatives onto regulated markets. In this regard, the Dodd-Frank
Act amends the Exchange Act to add new Section 3D of the Exchange
Act.\294\ Section 3D(a)(1) of the Exchange Act provides that no person
may operate a facility for the trading or processing of SB swaps,
unless the facility is registered as a SB SEF or as a national
securities exchange.\295\ Core Principle 1 for SB SEFs, as set forth in
Section 3D(d)(1)(A) of the Exchange Act,\296\ provides that, to be
registered and maintain its registration as a SB SEF, a SB SEF must
comply with the 14 Core Principles governing SB SEFs and any
requirement that the Commission may impose by rule or regulation.\297\
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\294\ See Public Law 111-203, Sec. 763(c) (adding Section 3D of
the Exchange Act).
\295\ Id.
\296\ Id.
\297\ Id.
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The Commission's rules currently provide for registration
frameworks for two types of trading venues for securities, namely
national securities exchange registration and broker-dealer
registration for ATSs. SB SEFs represent an additional category of
registered entities under the Exchange Act and the Commission
preliminarily believes that it would be appropriate to adopt a
registration process for SB SEFs that is similar to the Commission's
existing registration framework for national securities exchanges. SB
SEFs, like national securities exchanges, have regulatory obligations
pursuant to the Exchange Act.\298\ Also, pursuant to the Dodd-Frank
Act, both national securities exchanges and SB SEFs would be permitted
to trade SB swaps, although exchange trading of SB swaps is governed by
Section 6 of the Exchange Act \299\ and other provisions of the
Exchange Act relevant to SROs.\300\ The registration process for
national securities exchanges is already established, but no process
exists for SB SEFs. Thus, the Commission is proposing rules that would
require an application registration process for SB SEFs and a form for
such application, which would be subject to approval by the Commission.
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\298\ For example, pursuant to Section 3D(d)(2) of the Exchange
Act, Public Law 111-203, Sec. 763(c), a SB SEF is required to: (1)
Establish and enforce compliance with any rule established by it,
including (i) the terms and conditions of the SB swaps traded or
processed on or through the facility and (ii) any limitation on
access to the facility; (2) establish and enforce trading, trade
processing, and participation rules that will deter abuses and have
the capacity to detect, investigate, and enforce those rules,
including means (i) to provide market participants with impartial
access to the market; and (ii) to capture information that may be
used in establishing whether rule violations have occurred; and (3)
establish rules governing the operation of the facility, including
rules specifying trading procedures to be used in entering and
executing orders traded or posted on the facility, including block
trades.
\299\ 15 U.S.C. 78f.
\300\ See, e.g., Section 19 of the Exchange Act, 15 U.S.C. 78s.
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A. Initial SB SEF Registration
1. Procedures for Registration
Proposed Rule 801(a) provides that an application for the
registration of a SB SEF would need to be filed electronically in a
tagged data format \301\ with the Commission on the new proposed Form
SB SEF, in accordance with the instructions contained in the Form SB
SEF.\302\ Proposed Form SB SEF also would be used by a SB SEF for
submitting all amendments to the Form SB SEF.\303\ The Commission's
proposal contemplates the use of an online filing system through which
a SB SEF would be able to file a completed Form SB SEF, which would be
available on the Commission's Web site and accessible from any computer
with Internet access.\304\ Based on the widespread use and availability
of the Internet, the Commission believes that filing Form SB SEF in an
electronic format would be less burdensome and a more efficient filing
process for SB SEFs, the Commission, and the public.
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\301\ Proposed Rule 800 would define the term ``tag'' or
``tagged'' to mean an identifier that highlights specific
information submitted to the Commission and that is in the format
required by the EDGAR Filer Manual, as described in Rule 301 of
Regulation S-T, 17 CRF 232.301.
\302\ See proposed Rule 801(a).
\303\ See Section XXI.B infra for a discussion of the amendments
to Form SB SEF required in proposed Rule 802. An application for
registration or any amendment thereto filed pursuant to Regulation
SB SEF would 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. See proposed Rule 801(f). 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). Specifically, 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).
\304\ If the Commission adopts the rule as proposed, it is
possible that SB SEFs may be required to file Form SB SEF in paper
until such time as an electronic filing system is operational and
capable of receiving the form. In such a case, SB SEFs would be
notified as soon as the electronic system is operational to accept
filings on Form SB SEF.
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The Commission's proposal requires a Form SB SEF to be filed with
the Commission in a tagged data format. 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.\305\ Data becomes
[[Page 10998]]
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 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 SB SEF submissions.
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\305\ 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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Proposed Rule 801(a) provides that a registration application on
Form SB SEF must include information sufficient to demonstrate
compliance with the Exchange Act and rules and regulations thereunder.
The proposed rule provides that if a registration application is not
complete, the Commission will notify the applicant that the application
will not be deemed to have been submitted for purposes of the
Commission's review.\306\ Pursuant to the proposed rule, an application
on Form SB SEF would not be considered to be complete unless an
applicant has submitted, at a minimum, the Execution Page and Exhibits
as required in proposed Form SB SEF, and any other material that the
Commission may require, upon request, in order to be able to determine
whether the applicant is able to comply with the Exchange Act and rules
and regulations thereunder. Such other material may include, but is not
limited to, information regarding the applicant's system test
procedures, contingency or disaster recovery plans, and the manner in
which the applicant would conduct market and financial surveillance.
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\306\ See Proposed Rule 801(a).
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Proposed Rule 801(b) sets forth the SB SEF registration application
processes for (i) applications received during the initial
implementation phase of Regulation SB SEF, from the date of Regulation
SB SEF's effectiveness up to and including July 31, 2014 (``initial
implementation period''), and (ii) applications received after the
initial implementation period (i.e., after July 31, 2014).
Proposed Rule 801(b)(1) would provide that for applications for
registration as a SB SEF filed on Form SB SEF with the Commission on or
before July 31, 2014, within 360 days of the date of the filing of such
application (or within such longer period as to which the applicant
consents), the Commission would be required to either grant the
registration or institute proceedings to determine whether registration
should be denied. Such proceedings would include notice of the grounds
for denial under consideration and opportunity for hearing and would be
required to be concluded within 450 days after the date on which the
application for registration is furnished to the Commission. At the
conclusion of such proceedings, the Commission, by order, would be
required to grant or deny such registration. The Commission would be
able to 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
applicant consents.
Proposed Rule 801(b)(2) would provide that for applications for
registration as a SB SEF filed on Form SB SEF with the Commission after
July 31, 2014, within 180 days of the date of filing of such
application (or within such longer period as to which the applicant
consents), the Commission would be required to either grant the
registration or institute proceedings to determine whether registration
should be denied. Such proceedings would include notice of the grounds
for denial under consideration and opportunity for hearing and would be
required to be concluded within 270 days after the date on which the
application for registration is furnished to the Commission. At the
conclusion of such proceedings, the Commission, by order, would be
required to grant or deny such registration. The Commission would be
able to 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
applicant consents.
The proposed rule further provides that the Commission would grant
the registration of an applicant if it finds that the requirements of
the Exchange Act and the rules and regulations thereunder with respect
to the applicant are satisfied, and would deny such registration if it
does not make such finding.\307\
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\307\ See proposed Rule 801(b)(3).
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The proposed process for SB SEF's to apply for initial registration
would provide a mechanism for an applicant to demonstrate that it has
the operational and financial capability to operate as a SB SEF and can
comply with the Federal securities laws and the rules and regulations
thereunder, including the Core Principles, and would allow the
Commission to consider the materials provided by the SB SEF and to make
an informed determination as to whether the SB SEF complies with the
Exchange Act and the rules and regulations thereunder. In addition, the
application process would allow the Commission staff to ask questions
and, as needed, to require amendments or changes to the application or
additional information to address legal and regulatory concerns before
approving an application for registration. Further, providing a process
and timeframes for the application process would provide certainty to
applicants as to the procedural aspects of registering as a SB SEF.
As no SB SEF is currently registered with the Commission and a
number of entities have informed the Commission that they may seek to
register as a SB SEF, the Commission contemplates receiving a large
volume of applications for registration as a SB SEF within the first 3
years following any adoption of rules applicable to SB SEFs. The
proposed timeframes for the Commission to review applications for
registration as a SB SEF set forth in proposed Rule 801(b) recognize
that, as the Commission has limited resources, the Commission may
require an extended period of time to review these applications. For
applications filed after the initial implementation period, the
proposed timeframes for the Commission to review applications for
registration as a SB SEF would be decreased to mirror those set forth
in Section 19(a)(1) of the Exchange Act applicable to the review of SRO
registration applications. The Commission believes that the timeframes
for Commission review during and after the initial implementation
period are appropriate in light of the anticipated volume of
registration applications during the initial implementation period. The
Commission also believes that the temporary registration provisions of
proposed Rule 801(c), discussed below, should work in combination with
the proposed review and approval process to allow both the Commission
and entities seeking to register as SB SEFs to comply with the
provisions of the Exchange Act, as amended by the Dodd-Frank Act, in a
timely manner. In addition, the Commission notes that the process for
the Commission to review registration applications for SB SEFs would be
similar to the process for reviewing applications of other registrants
by the Commission (e.g., national securities exchanges, national
[[Page 10999]]
securities associations, and clearing agencies).\308\
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\308\ See Section 19(a)(1) of the Exchange Act, 15 U.S.C.
78s(a)(1). In addition, the Commission notes that the SEC Rules of
Practice would be applicable to the Commission's review of
registration applications for SB SEFs. See 17 CFR 201.100, et seq.
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The Commission requests comments on all aspects of the proposed
rules relating to the registration process for SB SEFs. 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? Should
timeframes be omitted from the process? Should different time periods
apply to the Commission's review of applications during the initial
implementation period? If not, why not? Should the Commission have
greater flexibility to extend the 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 application for registration?
In order to form a more complete and informed basis on which to
determine whether to grant, deny, or revoke a SB SEF's registration,
the Commission is considering whether to adopt a requirement that a SB
SEF file with the Commission, as a condition of registration or
continued registration, a review relating to the SB SEF'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 SB SEF, an independent third party, or both. This review could be
required as an exhibit to Form SB SEF at the time of registration or as
an amendment to Form SB SEF at a later date (e.g., one year after the
registration becomes effective) to allow the review to evaluate the SB
SEF's capabilities after some operational experience following
registration.
Should the Commission require a SB SEF to conduct or obtain a
review relating to the SB SEF'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 SB SEFs 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 SB SEF, 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 all SB SEFs? 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 801? 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 SB SEFs? 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 a SB SEF? Should the Commission also require that a
SB SEF certify the accuracy of the review and provide disclosure
regarding the nature of the review, findings, and conclusions? To what
extent should a SB SEF be permitted to rely on a third party that it
hired to perform the review? Should the Commission condition the
ability of a SB SEF 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 822?
2. Temporary Registration
Proposed Rule 801(c) under Regulation SB SEF would provide a method
for the Commission to grant temporary registration to SB SEFs.\309\
Specifically, for any application for registration as a SB SEF filed
with the Commission in accordance with the provisions of proposed Rule
801(a) on or before July 31, 2014 for which the SB SEF indicates on the
Execution Page that it would like to be considered for temporary
registration, the Commission could grant such temporary registration to
the SB SEF, which temporary registration would expire on the earlier
of: (1) The date that the Commission grants or denies registration of
the SB SEF; or (2) the date that the Commission rescinds the temporary
registration of the SB SEF. In considering whether to grant a request
for temporary registration, the Commission would review and consider
the information and materials provided by the SB SEF in its
registration application on Form SB SEF that the Commission believes to
be relevant, including, but not limited to: Whether the applicant's
trading system satisfies the definition of a ``security-based swap
execution facility'' in Section 3(a)(77) of the Exchange Act and any
Commission rules, interpretations or guidelines regarding such
definition; \310\ any access requirements or limitations imposed by the
SB SEF; \311\ the ownership and voting structure of the SB SEF; \312\
and any certifications made by the SB SEF, including with respect to
its capacity to function as a SB SEF and its compliance with the
Exchange Act and the rules and regulations thereunder.\313\ In
addition, the Commission would expect that SB SEFs 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. After granting a temporary
registration to a SB SEF, the Commission could rescind such temporary
registration if, upon further review, the Commission found that the
applicant did not meet the requirements for granting the registration
of a SB SEF set forth in proposed Rule 801(b)(3),\314\ or if the
conditions for revoking or canceling the registration of a SB SEF in
proposed Rules 804(d) and (e) under Regulation SB SEF were met.\315\
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\309\ See proposed Rule 801(c).
\310\ See Exhibit I, Item 1 of proposed Form SB SEF.
\311\ See Exhibit I, Item 2 and Exhibit L of proposed Form SB
SEF.
\312\ See Exhibit E of proposed Form SB SEF.
\313\ See Execution Page of proposed Form SB SEF.
\314\ See proposed Rule 801(b)(3).
\315\ See proposed Rule 804(c) and discussion infra Section
XXI.C. Proposed Rule 804(c) provides that the Commission may, by
order, cancel or revoke a SB SEF's registration if the Commission
finds that the SB SEF obtained its registration by making a false or
misleading statements with respect to any material fact, 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
and the rules and regulations thereunder.
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The Dodd-Frank Act provides that, unless otherwise provided, the
provisions of Title VII shall be effective on the later of 360 days
after the date
[[Page 11000]]
of the enactment of Title VII or not less than 60 days after the
publication of final rules or regulations implementing such
provisions.\316\ The Commission preliminarily believes that the
proposed temporary registration process for SB SEFs could serve as a
useful tool during the initial implementation period to allow the
Commission to temporarily register an applicant as a SB SEF following
an initial review of a SB SEF's application for registration where it
believes such temporary registration is appropriate. The Commission
preliminarily believes that this would be beneficial in order to allow
SB SEFs to comply with the timeframe set forth in the Dodd-Frank Act
while still giving the Commission sufficient time to review an
application more thoroughly before granting a registration that is not
limited in duration. A SB SEF that is temporarily registered with the
Commission would still need to comply with all provisions of the
Exchange Act and the rules and regulations thereunder, including
Section 3D of the Exchange Act and proposed Regulation SB SEF.
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\316\ See Public Law 111-203, Sec. 774.
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The Commission requests comments on all aspects of the proposed
rules with respect to temporary registration. Is the Commission's
proposed rule regarding temporary registration appropriate? If not, why
not? Is the Commission's proposed rule for temporary registration
sufficiently clear? If not, how can it be clarified? What is the best
method for a SB SEF to request temporary registration from the
Commission? Is it appropriate to include a check box on Form SB SEF as
proposed? Would a different method be more appropriate? Are there more
appropriate methods other than temporary registration that would allow
SB SEFs to meet the timelines for compliance set forth in the Dodd-
Frank Act? If so, what are those methods?
As discussed above, the Commission anticipates receiving a large
volume of applications for registration as a SB SEF within the first 3
years following the adoption of the proposed rules, and the ability to
grant temporary registration during such initial implementation period
could be an important tool for the Commission to allow SB SEFs to
comply with the provisions of the Exchange Act, as amended by the Dodd-
Frank Act, while providing the Commission with additional time to
conduct a thorough review of the SB SEF prior to granting permanent
registration. Should temporary registration be limited to those
registration applications filed during the initial implementation
period as proposed? If not, why not? Should the Commission be able to
grant temporary registration to any registration application,
regardless of when filed? If temporary registration should be limited
to a specific time period, would a time period other than the initial
implementation period be appropriate? If so, what time period would be
appropriate?
Should temporary registration be granted only after the filing of a
completed registration application? Should there be a separate
application for temporary registration other than proposed Form SB SEF?
Should the proposed rule specify the items the Commission must review
prior to granting temporary registration? Should temporary registration
be granted by the Commission only when certain conditions are met? If
so, what should those conditions be? Should the proposed rule specify
the findings the Commission must make in order to grant a temporary
registration? In what instances should a temporary registration be
denied? For example, should a temporary registration be denied if a
Form SB SEF is not sufficiently complete? Are there any reasons not
specified in this release upon which a temporary registration should be
rescinded?
Should the Commission be required to grant temporary registration
within a specified time frame? If so, what time period would be
appropriate? Is it appropriate to stay the time period for Commission
action on a registration application if the Commission grants a SB SEF
temporary registration? If so, should such stay be limited in duration?
What would be the appropriate time period for such stay?
Would it be feasible for a SB SEF to comply with Section 3D of the
Exchange Act and the rules and regulations thereunder within 60 days
after publication of the final rules applicable to SB SEFs? If not,
which requirement(s) would be difficult for a SB SEF to comply with
upon the effective date? Should any requirement(s) be imposed on an
incremental basis or with a phased-in approach? If so, what would be an
appropriate timeframe for such requirement(s) to be met? \317\
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\317\ See infra Section XXV for a discussion regarding a
potential phased-in approach.
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Is it essential that a SB SEF that is temporarily registered be
required to comply with all provisions of the Exchange Act and the
rules and regulations thereunder? If not, are there specific
requirements that the Commission should consider not requiring a SB SEF
to comply with during a temporary registration period? If so, what are
such requirements and for what reasons should the Commission consider
not requiring them?
3. Non-Resident Persons and Control Persons
Proposed Rule 801(d) would require each SB SEF applying for
registration with the Commission to designate and authorize on Form SB
SEF an agent in the United States, other than a Commission member,
official, or employee, to accept notice or service of process,
pleadings, or other documents in any action or proceedings brought
against the SB SEF to enforce the Federal securities laws and the rules
and regulations thereunder.\318\
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\318\ See proposed Rule 801(d).
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The Commission preliminarily believes that before granting
registration to a SB SEF, it is appropriate to obtain assurance that
such person has an agent for service of process in the United States in
order to facilitate proper notification to the SB SEF of any actions or
proceedings the Commission may wish to bring against such SB SEF.
Proposed Rule 801(e) would require any person applying for
registration on Form SB SEF that is controlled by another person \319\
to certify on Form SB SEF and provide an opinion of counsel that any
person that controls such applicant will consent to and can, as a
matter of law, (1) provide the Commission with prompt access to its
books and records, to the extent such books and records are related to
the activities of the SB SEF; and (2) submit to onsite inspection and
examination by representatives of the Commission with respect to the
activities of the SB SEF.\320\ In addition, proposed Rule 802(c) would
require any SB SEF controlled by any other person to file an amendment
to Exhibit P on Form SB SEF within 5 business days after any changes in
the legal or regulatory framework of any person that controls
[[Page 11001]]
the SB SEF that would impact the ability of or the manner in which any
such person consents to or provides the Commission prompt access to its
books and records, to the extent such books and records are related to
the activities of the SB SEF, or impacts the Commission's ability to
inspect and examine any such person with respect to the activities of
the SB SEF.\321\ Such amendment would be required to include a revised
opinion of counsel pursuant to Exhibit P describing how, as a matter of
law, any person that controls the SB SEF would continue to meet its
obligations to consent to and provide the Commission with prompt access
to its books and records, to the extent such books and records are
related to the activities of the SB SEF, and to consent to and be
subject to onsite inspection and examination by representatives of the
Commission with respect to the activities of the SB SEF under such new
legal or regulatory framework.\322\ The Commission emphasizes that the
proposed provisions would be applicable only to those books and records
or activities that are related to the activities of the SB SEF. The
Commission believes that it is important for the SB SEF to have access
to books and records that are related to the activities of a SB SEF and
to have examination and inspection authority with respect to activities
of a SB SEF, in order for a SB SEF to be able to effectively carry out
its regulatory responsibilities. Similarly, the Commission believes
that it is important for the Commission to have access to those books
and records and such examination and inspection authority so that it
may effectively conduct its oversight and regulatory responsibilities
under the Exchange Act.
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\319\ For purposes of Regulation SB SEF, proposed Rule 800 would
define the term ``control'' or any derivatives thereof as the direct
or indirect possession 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. Proposed
Rule 800 would provide that a person would be presumed to control
another person if the person: (1) Is a director, general partner, or
officer exercising executive responsibility (or having similar
status or functions); (2) directly or indirectly has the right to
vote 25% or more of a class of voting securities or has the power to
sell or direct the sale of 25% or more of a class of voting
securities; or (3) in the case of a partnership, has the right to
receive, upon dissolution, or has contributed, 25% or more of the
capital. See Instructions to Form 1.
\320\ See proposed Rule 801(e).
\321\ See proposed Rule 802(c).
\322\ Id.
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Proposed Rule 801(f) would require that any non-resident person
\323\ seeking to register as a SB SEF certify on Form SB SEF and
provide an opinion of counsel that the SB SEF can, as a matter of law,
(1) provide the Commission with prompt access to the books and records
of such SB SEF and (2) submit to onsite inspection and examination by
representatives of the Commission.\324\
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\323\ The term ``non-resident person'' would be defined to mean:
(1) 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;
(2) in the case of a corporation, one incorporated in or having its
principal place of business in any place not in the United States;
and (3) 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. See proposed Rule
800.
\324\ See proposed Rule 801(f).
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The Commission preliminarily believes that before granting
registration to a non-resident SB SEF, it is appropriate to obtain
assurance that such person is legally permitted to provide the
Commission with prompt access to its books and records and to be
subject to inspection and examination by the Commission. Similarly, the
Commission preliminarily believes that before granting registration to
a SB SEF controlled by another person, it is appropriate to obtain
assurance that the person controlling such SB SEF is legally permitted
to provide the Commission with prompt access to its books and records
related to the SB SEF and to be subject to inspection and examination
by the Commission with respect to activities of the SB SEF. The
Commission preliminarily believes that the certifications and opinions
of counsel required by proposed Rules 801(e) and (f) would be important
to confirm that each non-resident SB SEF or control person of a SB SEF
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 inspection and examination by the Commission. Certain
foreign jurisdictions may have laws that complicate the ability of
financial institutions, such as SB SEFs located in their jurisdictions,
from sharing or transferring certain information, including personal
financial data of individuals that financial institutions come to
possess from third parties (i.e., personal data relating to the
identity of market participants or their customers). Providing an
opinion of counsel that the SB SEF can provide prompt access to books
and records and can be subject to inspection and examination would
allow the Commission to better evaluate a SB SEF's ability to meet the
requirements of registration and ongoing supervision. In addition,
certain persons controlling a SB SEF may not be under the jurisdiction
of the Commission or may be non-resident persons. Providing an opinion
of counsel that such control persons have consented to and can provide
prompt access to books and records and be subject to inspection and
examination would help the Commission to monitor and oversee
individuals that control SB SEFs in cases where such individuals may
not otherwise subject to the jurisdiction of the Commission or may be
subject to foreign jurisdictions. Failure to make these certifications
or provide an opinion of counsel may be a basis for the Commission to
deny an application for registration. Similarly, if a registered non-
resident SB SEF or a registered SB SEF that is controlled by another
person becomes unable to comply with these certifications or provide
such opinions of counsel, then this may be a basis for the Commission
to revoke the SB SEF's registration.\325\
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\325\ See proposed Rule 804(d) and discussion infra Section
XXI.C.
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The Commission requests comments on all aspects of the proposed
rules relating to non-resident persons and applicants controlled by
other persons seeking to register as SB SEFs. 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
person designates to accept any notice or request for service of
process? Are there any factors that the Commission should take into
consideration to help provide effective service of process on a non-
resident person or a person controlled by another person applying for
registration as a SB SEF?
If a non-resident SB SEF that is registered in a similar capacity
in a foreign jurisdiction seeks to apply for registration as a SB SEF
with the Commission, should the registration process for the non-
resident SB SEF be any different than the Commission's proposed
registration process? For example, should the registration process
incorporate additional registration requirements for such non-resident
SB SEF? Should the Commission consider any other factors relating to a
non-resident SB SEF with respect to the Commission's registration rules
or in general?
Are there any factors that the Commission should take into
consideration to ensure that a non-resident person seeking to register
as a SB SEF can, in compliance with applicable foreign laws, provide
the Commission with access to its books and records and can submit to
inspection and examination by the Commission? Should such a non-
resident person be required to provide any additional information or
documents on proposed Form SB SEF to establish its ability to comply
with the Federal securities laws and the rules and regulations
thereunder?
Are there any factors that the Commission should take into
consideration to ensure that a person controlling a person seeking to
register as a SB SEF can provide the Commission with access to its
books
[[Page 11002]]
and records and can submit to inspection and examination by the
Commission? Should such control persons or the SB SEFs which they
control be required to provide any additional information or documents
on proposed Form SB SEF to establish the ability of the SB SEF to
comply with the Federal securities laws and the rules and regulations
thereunder? For example, should a SB SEF controlled by another person
be required to provide on proposed Form SB SEF a copy of the document
evidencing the consent by the controlling person to the books and
records and examination and inspections requirements contained in
proposed Rule 801(e)?
B. Proposed Filing Requirements for Maintaining SB SEF Registration
Proposed Rule 802 under Regulation SB SEF would require SB SEFs
registered with the Commission to submit certain amendments and updates
to Form SB SEF. Proposed Rule 803 under Regulation SB SEF would require
SB SEFs registered with the Commission to file certain supplemental
information with respect to the trading of SB swaps.
Proposed Rule 802(a) would require a SB SEF to file an amendment to
its Form SB SEF promptly, but in no event later than five business
days, after discovering that any information filed on Form SB SEF, any
statement therein, or any exhibit or amendment thereto, was inaccurate
when filed in order to correct such inaccuracies.
Proposed Rule 802(b) would require a registered SB SEF to file an
amendment on Form SB SEF with the Commission within five business days
after any action is taken that renders inaccurate, or that causes to be
incomplete, any information filed on the Execution Page of the SB SEF's
Form SB SEF, or any amendment thereto, or any information filed as part
of Exhibits C, E, G, or N,\326\ or any amendments thereto.\327\ Any
such amendments must set forth the nature and effective date of the
action taken, provide any new information, and correct any information
rendered inaccurate. Proposed Rule 802(c) would require a SB SEF that
is under the control of any other person to file an amendment to
Exhibit P to its Form SB SEF within 5 business days after any changes
in the legal or regulatory framework of any person that controls the SB
SEF that would impact the ability of or the manner in which any such
person consents to or provides the Commission prompt access to its
books and records, to the extent such books and records are related to
the activities of the SB SEF, or impacts the Commission's ability to
inspect and examine any such person with respect to the activities of
the SB SEF.\328\ Such amendment would be required to include a revised
opinion of counsel pursuant to Exhibit P describing how, as a matter of
law, any person that controls the SB SEF will continue to meet its
obligations to consent to and provide the Commission with prompt access
to its books and records, to the extent such books and records are
related to the activities of the SB SEF, and to consent to and be
subject to onsite inspection and examination by representatives of the
Commission under such new legal or regulatory framework.\329\ Proposed
Rule 802(d) would require non-resident SB SEFs to file an amendment to
Exhibit P to their Form SB SEF within five business days after any
changes in legal or regulatory framework that would impact the SB SEF's
ability to or the manner in which it provides the Commission prompt
access to its books and records or impacts the Commission's ability to
inspect and examine the SB SEF.\330\ Such amendment would be required
to include a revised opinion of counsel describing how, as a matter of
law, the entity will continue to: (1) meet its obligations to provide
the Commission with prompt access to its books and records and (2) be
subject to onsite inspection and examination by representatives of the
Commission under such new legal or regulatory framework.\331\
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\326\ These exhibits pertain to the list of officers, governors
and committees of the SB SEF (Exhibit C), ownership of the SB SEF
(Exhibit E), certain material operating agreements (Exhibit G), and
criteria for determining what securities may be traded (Exhibit N).
\327\ See proposed Rule 802(b).
\328\ See proposed Rule 802(c).
\329\ Id.
\330\ See proposed Rule 802(d).
\331\ Id.
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The Commission preliminarily believes that it is appropriate to
require the updating of only the Execution Page and Exhibits C, E, G,
and N to proposed Form SB SEF on a continuous basis. The exhibits
required to be updated pursuant to proposed Rule 802(b) are
substantially similar to the exhibits to Form 1 required to be updated
on a continuous basis by national securities exchanges pursuant to Rule
6a-2 under the Exchange Act.\332\ The Commission believes that it is
important for the Commission to receive updates to the information
included in the enumerated exhibits, namely information regarding a SB
SEF's governance, ownership, operations, and criteria used to determine
the SB swaps that may be traded on the SB SEF, on a real-time basis to
allow the Commission to effectively oversee SB SEFs to ensure
compliance with the Exchange Act. The Commission also believes that it
is important for the Commission to receive updated opinions of counsel
under Exhibit P pursuant to proposed Rules 802(c) and (d) to ensure
that the Commission can oversee and ensure compliance with the Exchange
Act of non-resident SB SEFs and control persons of SB SEFs. Although
the comparable amendments to the Form 1 for national securities
exchanges are required to be filed within 10 days pursuant to Rule 6a-
2, given the improvements in technology since the adoption of Rule 6a-
2, the Commission preliminarily believes that five business days should
provide SB SEFs sufficient time to prepare and file a Form SB SEF
amendment. In addition, the proposed time frame would ensure that the
relevant exhibits remain timely and that the Commission has up-to-date
information in a timely manner.
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\332\ 17 CFR 240.6a-2.
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Proposed Rule 802(e) also would provide that if the number of
changes to be reported in an amendment, or the number of amendments
filed, are so great that the purpose of clarity will be promoted by the
filing of a new complete Form SB SEF and exhibits, a SB SEF may elect
to, or upon request of any representative of the Commission shall, file
as an amendment a complete new Form SB SEF together with all exhibits
thereto.
Under proposed Rule 802(f), a registered SB SEF would be required
to update its Form SB SEF on an annual basis. Specifically, within 60
days of the end of its fiscal year, a registered SB SEF would be
required to file an amendment to its Form SB SEF to update the Form SB
SEF in its entirety.\333\ Each exhibit to the amended Form SB SEF would
be required to be up-to-date as of the end of the latest fiscal year of
the SB SEF.\334\ The purpose of this requirement is to provide the
Commission and the public with updated information on all the exhibits
required in the Form SB SEF, particularly those exhibits that are not
otherwise required to be updated under proposed Rules 802(b), (c) and
(d), on an annual basis. The Commission preliminarily believes that a
60-day filing deadline would give SB SEFs sufficient time in which to
file an annual amendment to Form SB SEF.
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\333\ See proposed Rule 802(f).
\334\ See id.
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[[Page 11003]]
Proposed Rule 803 would require a registered SB SEF to file with
the Commission any material relating to the trading of SB swaps
(including notices, circulars, bulletins, lists, and periodicals)
issued or made generally available to SB SEF participants. A SB SEF
would be required to file such supplementary material with the
Commission upon issuing or making the material available to SB SEF
participants.\335\ However, if such information is available
continuously on an Internet Web site controlled by the SB SEF, the SB
SEF may indicate to the Commission the location of the Web site and
certify that such information is accurate instead of filing with the
Commission.\336\
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\335\ See proposed Rule 803(a).
\336\ See proposed Rule 803(b).
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The Commission preliminarily believes that the amendments required
by proposed Rule 802 and the supplemental material required by proposed
Rule 803 would provide a useful tool for the Commission to carry out
its oversight of SB SEFs and their compliance with the Exchange Act and
the rules and regulations thereunder. Requiring SB SEFs to provide
consistent and up-to-date disclosures about significant changes in
their governance, ownership, operations and criteria used to determine
the SB swaps that may be traded on the SB SEF, and requiring non-
resident SB SEFs and SB SEFs controlled by another person to update the
opinion of counsel whenever changes in legal or regulatory framework
would impact their ability to comply with proposed Rules 801(e) and
(f), respectively, pursuant to proposed Rules 802(b), (c) and (d) would
provide the Commission with important information in monitoring whether
a SB SEF is in compliance with the Core Principles throughout its
fiscal year. Requiring a SB SEF to update its Form SB SEF and the
exhibits thereto on an annual basis pursuant to proposed Rule 802(f)
would provide updated information on the parts of the Form SB SEF that
are not required to be updated within five business days and thus
enable the Commission to have a full picture of the changes at a SB SEF
on a year-to-year basis. Requiring SB SEFs to provide to the Commission
material made available to SB SEF participants regarding the trading of
SB swaps pursuant to proposed Rule 803 would provide the Commission
with important information to monitor the trading of SB swaps on the SB
SEF and whether such trading is being conducted in compliance with the
Federal securities laws and the rules and regulations thereunder.
Providing the Commission with the necessary information it needs to
effectively regulate SB SEFs and the trading of SB swaps on SB SEFs is
especially important because SB SEFs would be new entities and SB SEFs,
and the trading of SB swaps on SB SEFs, would be newly regulated by the
Commission. The operation of SB SEFs and trading of SB swaps on SB SEFs
is likely to change as the regulated market for SB swaps and the
trading of SB swaps on trading venues regulated by the Commission
continue to develop. The proposed amendments to Form SB SEF, including
the proposed annual update, and the proposed supplemental information
filing, would help the Commission keep abreast of the changes that may
occur with respect to the trading of SB swaps on SB SEFs, and the
operation and ownership of SB SEFs, and thus should enable the
Commission to more effectively regulate the trading of SB swaps and SB
SEFs.
The Commission requests comments on all aspects of the proposed
rules relating to required amendments and updates to proposed Form SB
SEF and the required filing of supplemental information. Are the
Commission's proposed rules appropriate and sufficiently clear? If not,
why not and what would be a better alternative? Are the exhibits to
proposed Form SB SEF that would require prompt updating pursuant to
proposed Rule 802(b) appropriate? Are there other exhibits to Form SB
SEF that should be updated on a continuous basis? Are there exhibits
that should not be updated on a continuous basis? Is it appropriate to
require SB SEF's to update their registration statement annually? Would
a different time period be more appropriate? What would be the cost to
SB SEFs of the proposed rules requiring amendments?
Is the material required to be filed pursuant to proposed Rule 803
appropriate? Is there other information that the Commission should
require to be filed with respect to the trading of SB swaps? Is there
information that the Commission should not request? Should the
Commission request any information at all? Is it appropriate, in lieu
of requiring a SB SEF to file supplemental material with the Commission
pursuant to proposed Rule 803(a), to allow the SB SEF to direct the
Commission to a Web site where such information is located and certify
that the information is accurate pursuant to proposed Rule 803(b)?
Should the Commission make such an allowance for SB SEFs with respect
to required amendments pursuant to proposed Rule 802?
C. Withdrawal or Revocation of Registration of SB SEF
Proposed Rule 804 under Regulation SB SEF would permit a registered
SB SEF to withdraw from registration by filing a written notice of
withdrawal with the Commission, which notice must designate a person
associated with the SB SEF to serve as the custodian of the SB SEF's
books and records.\337\ Prior to filing a notice of withdrawal, a SB
SEF would be required to file an amended Form SB SEF to update any
inaccurate information.\338\ A notice of withdrawal from registration
filed by a SB SEF would become effective on the 60th day after the
filing thereof with the Commission, or within such longer period of
time as to which such SB SEF 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.\339\
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\337\ See proposed Rule 804(a). A notice of withdrawal filed
pursuant to proposed Rule 804 would 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. See proposed
Rule 804(c). See also supra note 303.
\338\ See proposed Rule 804(a).
\339\ See proposed Rule 804(b).
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The Commission preliminarily believes that is appropriate to
provide for a mechanism for SB SEFs to withdraw from registration. In
addition, the Commission preliminarily believes that 60 days following
notice of withdrawal is an appropriate effective date for any SB SEF
registration withdrawal. Providing a period between filing of notice of
withdrawal and the effective date of any withdrawal should enable the
Commission to allow a SB SEF to withdraw its registration with the
Commission and cease operating as a SB SEF and market participants to
react to any such withdrawal without dislocating the SB swap market or
causing any other unintended consequences with respect to the trading
of SB swaps.
Proposed Rule 804(d) would provide that the Commission may, by
order, revoke the registration of a registered SB SEF if the Commission
finds, on the record after notice and opportunity for hearing, that the
SB SEF obtained its registration by making false or misleading
statements with respect to any material fact or has violated or failed
to comply with any provision of the Federal securities laws or the
rules
[[Page 11004]]
and regulations thereunder.\340\ Pending a final determination as to
whether the registration of a SB SEF shall be revoked, the Commission
may, by order, suspend the registration of the SB SEF if such
suspension appears to the Commission, after notice and opportunity for
hearing, to be necessary or appropriate in the public interest or for
the protection of investors.\341\ The Commission believes that it is
appropriate to provide a mechanism for the Commission to revoke a SB
SEF's registration if a SB SEF obtained its registration unlawfully or
has violated the Federal securities laws or rules or regulations
thereunder.
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\340\ See proposed Rule 804(d).
\341\ Id.
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Proposed Rule 804(e) would provide that the Commission may, by
order, cancel the registration of a SB SEF if the Commission finds that
the SB SEF is no longer in existence or has ceased to do business in
the capacity specified in its application for registration.\342\ The
Commission believes that it is appropriate to provide a mechanism for
the Commission to cancel a SB SEF's registration if a SB SEF is no
longer in existence or has ceased to do business in the manner set
forth in the registration application.
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\342\ See proposed Rule 804(e).
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The Commission requests comments on all aspects of the proposed
rule relating to withdrawal or revocation of registration. Is the
Commission's proposed rule regarding the withdrawal, revocation and
cancellation of a SB SEF's registration appropriate and sufficiently
clear? If not, why not and what would be a better alternative? Should a
SB SEF be required to file an amendment on Form SB SEF before
withdrawing its registration? If not, why not and what would be a
better alternative? Should the Commission require a SB SEF to file a
form to request withdrawal of registration? If so, why and what should
the SB SEF be required to disclose in the form? Should this form be
required in lieu of or in addition to an amendment on Form SB SEF? 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? Are the findings required by the
Commission to revoke, suspend or cancel a SB SEF's registration
appropriate? Are any other instances not specified in this proposed
rule in which the Commission should revoke, suspend or cancel a SB
SEF's registration?
XXII. New Proposed Form SB SEF for the Registration of Security-Based
Swap Execution Facilities
The Commission is proposing that applications for registration as a
SB SEF, and amendments to such registration, be submitted on new
proposed Form SB SEF. Proposed Form SB SEF is similar in style and
format to the existing Form 1 for registration as a national securities
exchange. Proposed Form SB SEF, however, is tailored to solicit
information that the Commission believes would be useful for
considering whether a SB SEF meets the requirements for registration in
Section 3D of the Exchange Act, including whether the SB SEF can comply
with the Core Principles contained in Section 3D(d) of the Exchange
Act, and the rules thereunder, including proposed Regulation SB SEF.
The Execution Page to proposed Form SB SEF would require an
applicant to provide certain identifying information. The Execution
Page would include a box for the applicant to indicate whether the
applicant was seeking consideration for temporary registration pursuant
to proposed Rule 801(c). In addition, the Execution Page would require
the applicant to designate and authorize an individual, other than a
Commission official, for service of process, pleadings, or other
documents in connection with any action or proceeding against the
applicant, as required by proposed Rule 801(d).
The Execution Page to proposed Form SB SEF further would require
the applicant to certify that the statements contained therein are
current, true and complete, and that the applicant is currently in
compliance with, and is currently operating its business in a manner
consistent with, the Exchange Act and all rules and regulations
thereunder. The applicant also would be required to certify that it is
so organized, and has the capacity, to assure the prompt, accurate, and
reliable performance of its functions as a SB SEF, and that it has the
capacity to fulfill its obligations under all international
information-sharing agreements to which it is a party. In addition, the
applicant would be required to certify that any person that controls
the applicant has consented to and can, as a matter of law, (1) provide
the Commission with prompt access to its books and records, to the
extent such books and records are related to the activities of the
security-based swap execution facility; and (2) submit to onsite
inspection and examination by representatives of the Commission with
respect to the activities of the SB SEF, as required by proposed Rule
801(e). Finally, the applicant would be required to certify that, if it
is a non-resident person, it can, as a matter of law, (1) provide the
Commission with prompt access to its books and records and (2) submit
to an onsite inspection and examination by representatives of the
Commission, as required by proposed Rule 801(f).
Proposed Exhibit A to Form SB SEF would require the applicant to
provide a copy of the governing documents of the applicant, including
but not limited to a corporate charter, articles of incorporation or
association, limited liability company agreement, or partnership
agreement, with all subsequent amendments, and by-laws or corresponding
rules or instruments, whatever the name, of the applicant. This
information is intended to be used to assess the applicant's compliance
with Core Principle 1 (Compliance with Core Principles), Core Principle
2 (Compliance with Rules), and Core Principle 11 (Conflicts of
Interest). The information provided in this proposed exhibit is
designed to allow the Commission to confirm that the applicant has the
appropriate authority to operate the trading system and to regulate its
participants, and that the ownership structure is consistent with the
Exchange Act and the rules and regulations thereunder relating to the
governance of SB SEFs.
Proposed Exhibit B to Form SB SEF would require the applicant to
provide a copy of all written rulings, settled practices having the
effect of rules, stated policies and interpretations of the Board or
other committee of the applicant in respect of any provisions of the
governing documents, rules or trading practices of the applicant which
are not included in Exhibit A. This information required in proposed
Exhibit B would be critical to the Commission's ability to assess the
applicant's compliance with all of the Core Principles that require SB
SEFs to establish and enforce rules relating to a variety of matters
(e.g., Core Principle 2 (Compliance with Rules); Core Principle 4
(Monitoring of Trade and Trade Processing); Core Principle 5 (Ability
to Obtain Information); Core Principle 6 (Financial Integrity of
Transactions); Core Principle 7 (Emergency Authority); Core Principle
10 (Antitrust Considerations); and Core Principle 11 (Conflicts of
Interest)). Consequently, the Commission believes that such information
is necessary for the Commission to confirm that the applicant's rules
meet the requirements of those Core Principles and of the Exchange Act
and the rules and
[[Page 11005]]
regulations thereunder, including proposed Regulation SB SEF.
Proposed Exhibit C to Form SB SEF would require the applicant to
provide a list of the officers and directors of the SB SEF, or persons
performing similar functions, who presently hold or have held their
offices or positions during the previous year, and a list of all
standing committees and their members, indicating the following for
each: their name and title; date of commencement and termination of
term of office or position; the type of business in which each is
primarily engaged (e.g., SB swap dealer, major SB swap participant,
inter-dealer broker, end-user etc.); and, if such person is a director,
whether such director qualifies as an ``independent director'' pursuant
to proposed Rule 800 under Regulation SB SEF and whether such director
is a member of any standing committees or committees that have the
authority to act on behalf of the Board or the nominating committee.
The Commission believes that mandating SB SEFs to disclose this
information should better inform the Commission about SB SEF officers,
the persons responsible for the day-to-day operation of the SB SEF, and
SB SEF directors, the persons that comprise the Board. In addition, the
Commission believes that the information required in Exhibit C is
necessary for the Commission to determine the applicant's compliance
with the governance requirements of Core Principle 11 (Conflicts of
Interest) and the proposed rules under Regulation SB SEF relating
thereto, and would aid the Commission in ascertaining any affiliations
and relationships that would preclude directors from being considered
independent.
Proposed Exhibit D to Form SB SEF would require an applicant to
provide a chart or charts illustrating fully the internal
organizational structure of the SB SEF. The charts would need to
indicate the internal divisions or departments, the responsibilities of
each such division or department, and the reporting structure of each
division or department, including its oversight by committees or their
equivalent. The charts should be sufficiently detailed to permit the
Commission and the public to gain a complete understanding of the
manner in which the SB SEF is structured and should be able to provide
the Commission with an overview of the entity's organizational
structure. The Commission preliminarily believes that disclosure of
these organizational charts would be an important means by which to
provide the Commission with a better understanding of the governance
structure of the SB SEF and would enable the Commission to determine
the applicant's compliance with Core Principle 11 (Conflicts of
Interest) and the proposed rules under Regulation SB SEF relating
thereto. In addition, the Commission preliminary believes that these
organizational charts would inform the Commission's view on the ability
of the SB SEF to carry out its regulatory and oversight
responsibilities with respect to its markets.
Proposed Exhibit E to Form SB SEF would require an applicant to
provide certain ownership information. Specifically, Exhibit E would
require a list of each person that has a direct or indirect ownership
or voting interest in the SB SEF that equals or exceeds 5%, and a list
of all related persons of such persons that have an ownership or voting
interest in the SB SEF or that are SB SEF participants. For each of the
persons and related persons listed in the Exhibit E, an applicant would
also need to provide such person's name, title or legal status and
whether such person is a SB SEF participant; the date such title,
status or participation in a SB SEF was acquired or commenced; the
percentage ownership interest held; the type of ownership held,
including whether such ownership interest qualifies as ``beneficial
ownership'' under proposed Rule 800 or is entitled to vote; the
percentage of voting interest held; and the type of voting interest
held. The purpose of this information is to provide the Commission,
participants of the SB SEF, and investors with detailed information
about which persons or groups of persons potentially could control or
influence the SB SEF. In addition, the information proposed to be
required by Exhibit E relating to ownership of a SB SEF would provide
the Commission, as well as participants in the SB SEF, with up-to-date
information regarding a change or potential change in control of a SB
SEF. The Commission expects that the disclosure of information
concerning persons that hold ownership or voting interests of more than
5% of a SB SEF should help the Commission more effectively oversee and
regulate SB SEFs, especially if the SB SEF is owned or controlled by
persons who are not regulated by the Commission.
Proposed Exhibit F to Form SB SEF would require an applicant to
provide, for the latest two fiscal years of the applicant, audited
financial statements, which would be prepared in accordance with the
same requirements for the preparation of financial statements submitted
pursuant to the proposed rules under Regulation SB SEF relating to Core
Principle 14.\343\ The Commission preliminarily believes that this
information would enable the Commission to assess the applicant's
compliance with Core Principle 12 (Financial Resources) and the
proposed rules under Regulation SB SEF relating thereto. In addition,
the Commission believes that disclosure of audited financial statements
would permit the Commission to better understand the financial
resources and decisions of SB SEFs. The Commission preliminarily
believes that these statements should be submitted by SB SEFs pursuant
to Form SB SEF in addition to the rules relating to Core Principle 14,
because documents submitted pursuant to Form SB SEF will be disclosed
to the public. This would allow the public to be informed about the
financial position of these SB SEFs and should facilitate investor
confidence in the markets. In addition, because Exhibit F and the rules
relating to Core Principle 14 have the same requirements with respect
to the preparation and presentation of such financial statements, this
should not create an additional burden on SB SEFs.
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\343\ See supra Section XX.C for a discussion of the financial
statement requirements pursuant to Core Principle 14. See also
proposed Rule 823.
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Proposed Exhibit G to Form SB SEF would require an applicant to
provide an executed or executable copy of any agreements or contracts
entered into or to be entered into by the applicant, or a subsidiary or
an affiliate of the applicant, including partnership or limited
liability company, third-party regulatory service, or other agreements
relating to the operation of an electronic trading system to be used to
effect transactions on the SB SEF (``System'') that enable or empower
the applicant to comply with Section 3D of the Exchange Act. The
Commission believes that the provision of these material agreements
would be useful for the Commission and the public. They would enable
the Commission to understand how and through what parties the System is
being operated and to have a better understanding of the arrangements
that the SB SEF has entered into to meet its obligations under the
Exchange Act. The information required in this exhibit would allow the
Commission generally to ascertain the applicant's compliance with all
Core Principles.
Proposed Exhibit H to Form SB SEF would require an applicant to
provide unconsolidated financial statements (in English) for the latest
two fiscal years for every subsidiary in which the applicant has,
directly or indirectly, a 25% interest and every entity that has,
directly or indirectly, a 25% interest in
[[Page 11006]]
the applicant, which would be prepared in accordance with the same
requirements for the preparation of financial statements submitted
pursuant to the proposed rules under Regulation SB SEF relating to Core
Principle 14.\344\ Such financial statements would be required to
contain such footnotes and other disclosures as are necessary to avoid
rendering the financial statements misleading, and be provided in
eXtensible Business Reporting Language consistent with Rules 405(a)(1),
(a)(3), (b), (c), (d), and (e) of Regulation S-T.\345\ In addition to
the foregoing, for all other affiliates of the applicant not listed,
such information would be required to be made available to the
Commission upon request.\346\ The Commission preliminarily believes
that the information required in this exhibit would allow the
Commission to assess the SB SEF's compliance with Core Principle 12
(Financial Resources) and the proposed rules under Regulation SB SEF
relating thereto. In addition, the Commission believes that the
required financial statement would enable the Commission to better
understand the financial resources and decisions of SB SEFs and their
affiliates. Finally, while evaluating an applicant's registration
application on Form SB SEF, the Commission may determine that
additional affiliates of the applicant that do not meet the 25%
threshold may be material to the applicant's operation as a SB SEF.
Therefore, the Commission preliminarily believes that it is appropriate
to require an applicant to provide financial information regarding
other affiliates upon request of the Commission.
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\344\ See supra Section XX.C for a discussion of the financial
statement requirements pursuant to Core Principle 14. See also
proposed Rule 823.
\345\ These requirements are the same as the requirements for
the preparation of financial statements for affiliated entities that
would be submitted pursuant to the proposed rules under Regulation
SB SEF relating to Core Principle 14. See supra Section XX.C for a
discussion of the financial statement requirements pursuant to Core
Principle 14.
\346\ This requirement to provide the information for all other
affiliates of the applicant upon request is not contained in the
rules under Regulation SB SEF relating to Core Principle 14, as the
financial report submitted by the SB SEF pursuant to such rules is
an annual report, rather than a registration application.
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Proposed Exhibit I to Form SB SEF would require an applicant to
describe the manner of operation of the System. This description would
be required to include: (1) A detailed description of the manner in
which the System satisfies the definition of ``security-based swap
execution facility'' in Section 3(a)(77) of the Exchange Act and any
Commission rules, interpretations or guidelines regarding such
definition, including a description of how the System displays all
orders, quotes, requests for quote, responses, and trades in an
electronic or other form, and the timelines in which the system does
so; how trading interest interacts on the System; the ability of market
participants to see and transact with orders, quotes, requests for
quotes, and responses; and an explanation of the trade-matching
algorithm if it is based on order priority factors other than price and
time; (2) the means of access to the System, including any limitations
on access; (3) procedures governing entry and display of trading
interest in the System; (4) procedures governing the execution,
reporting, clearance and settlement of transactions in connection with
the System; (5) proposed fees; (6) procedures for ensuring compliance
with System usage guidelines and rules; (7) the hours of operation of
the System, and the date on which the applicant intends to commence
operation of the System; (8) a copy of the users' manual or equivalent
document; (9) if applicant proposes to hold funds or securities on a
regular basis, a description of the controls that would be implemented
to ensure safety of those funds or securities; and (10) the name of any
entity, other than the SB SEF, that will be involved in operation of
the System, including the execution, trading, clearing and settling of
transactions on behalf of the SB SEF, and a description of the role and
responsibilities of each entity.
The Commission believes that Exhibit I would allow the Commission
to determine if the applicant meets the definition of SB SEF under the
Exchange Act and rules and regulations hereunder, and in accordance
with the guidance set forth in Section III above. In addition, Exhibit
I would address the applicant's compliance with several Core
Principles, including Core Principle 1 (Compliance with Rules), Core
Principle 4 (Monitoring of Trade & Trade Processing), Core Principle 6
(Financial Integrity of Transactions), Core Principle 8 (Timely
Publication of Trading Information), Core Principle 9 (Recordkeeping
and Reporting), and Core Principle 13 (System Safeguards), and the
proposed rules under Regulation SB SEF relating to such Core
Principles.
Proposed Exhibit J to Form SB SEF would require an applicant to
provide a complete set of all forms pertaining to: (1) Applications for
participation or subscription to or use of the SB SEF; (2) applications
for approval as a person associated with a SB SEF participant, or user
of the SB SEF; and (3) any other similar materials. The applicant would
have to provide a table of contents listing the forms included. The
Commission believes that the information required in proposed Exhibit J
would provide the Commission with important information on the ability
of persons to directly access the SB SEF. Such information would enable
the Commission to assess the applicant's compliance with Core Principle
2 (Compliance with Rules), Core Principle 5 (Ability to Obtain
Information), and Core Principle 6 (Financial Integrity of
Transactions) and the proposed rules under Regulation SB SEF related to
such Core Principles.
Proposed Exhibit K to Form SB SEF would require an applicant to
provide a complete set of all forms of financial statements, reports,
or questionnaires required of SB SEF participants, subscribers or any
other users relating to financial responsibility or minimum capital
requirements for such participants or any other users. The applicant
also would have to provide a table of contents listing the forms
included. The Commission preliminarily believes that the information
collected in this proposed exhibit would provide the Commission with
the financial information that SB SEF's require of their participants
and users and enable the Commission to assess the applicant's
compliance with Core Principle 6 (Financial Integrity of Transactions)
and the proposed rules under Regulation SB SEF related thereto.
Proposed Exhibit L to Form SB SEF would require an applicant to
describe the applicant's criteria for participation in or use of the SB
SEF. The applicant would be required to describe conditions under which
SB SEF participants or persons associated with SB SEF participants may
be subject to suspension or termination with regard to access to the SB
SEF, and any procedures that would be involved in the suspension or
termination of a SB SEF participant or person associated with a SB SEF
participant. Proposed Exhibit L would require a SB SEF to provide a
list of all grants of access (including, for all participants, the
reasons for granting such access) and all denials or limitations of
access (including, for each applicant or participant, the reasons for
denying or limiting access). In addition, proposed Exhibit L would
require a SB SEF to provide a list of all disciplinary actions taken by
the SB SEF. The Commission preliminarily believes that proposed Exhibit
L would provide the Commission with information regarding access to,
limitations of access by, and
[[Page 11007]]
denials of access by a SB SEF, and disciplinary actions taken by a SB
SEF against participants, and would allow the Commission to ascertain
the applicant's compliance with Core Principle 2 (Compliance with
Rules) and Core Principle 4 (Monitoring of Trading and Trade
Processing) and the proposed rules under Regulation SB SEF relating to
such Core Principles.
Proposed Exhibit M to Form SB SEF would require an applicant to
provide an alphabetical list of all SB SEF participants or other users
of the SB SEF, including the following information: name; date of
acceptance as a participant or other user; principal business address
and telephone number; if participant or other user is an individual,
the name of the entity with which such individual is associated and the
relationship of such individual to the entity (e.g., partner, officer,
director, employee, etc.); a description of the type of activities
primarily engaged\347\ in by the participant or other user (e.g., SB
swap dealer, major SB swap participant, inter-dealer broker, non-broker
dealer, non-security-based swap dealer, commercial end-user, inactive
or other functions); and the class of participation or other access.
The Commission preliminarily believes that this exhibit would provide
the Commission with information relating to who has access to trading
on the SB SEF and would enable the Commission to determine whether a SB
SEF is in compliance with Core Principle 2 (Compliance with Rules),
Core Principle 6 (Financial Integrity of Transactions) and Core
Principle 11 (Conflicts of Interest) and the proposed rules under
Regulation SB SEF related to such Core Principles.
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\347\ A person would be ``primarily engaged'' in an activity or
function for purposes of this item when that activity or function is
the one in which that person is engaged for the majority of their
time. When more than one type of person at an entity engages in any
of the types of activities or functions enumerated in this item, the
applicant would be required to identify each type and state the
number of participants or other users in each.
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Proposed Exhibit N to Form SB SEF requires an applicant to provide
a description of the criteria used to determine the SB swaps that may
be traded on the SB SEF. The Commission preliminarily believes that
this requirement would provide the Commission with information
regarding the process by which a SB SEF determines what SB swaps would
be traded on the SB SEF and the factors the SB SEF would consider in
making such determination. Proposed Exhibit O to Form SB SEF requires
an applicant to provide a schedule of the SB swaps to be traded on the
SB SEF, including a description of each SB swap. The Commission
believes that proposed Exhibits N and O would enable the Commission to
determine whether a SB SEF is complying with Core Principle 2
(Compliance with Rules), Core Principle 6 (Financial Integrity of
Transactions) and Core Principle 3 (Security-based Swaps not Readily
Susceptible to Manipulation) and the proposed rules under Regulation SB
SEF relating to such Core Principles.
Proposed Exhibit P to Form SB SEF would require an applicant that
is controlled by any other person to provide an opinion of counsel that
any person that controls the SB SEF has consented to and can, as a
matter of law, (1) provide the Commission with prompt access to its
books and records, to the extent such books and records are related to
the activities of the SB SEF; and (2) submit to onsite inspection and
examination by representatives of the Commission with respect to the
activities of the SB SEF. Proposed Exhibit P to Form SB SEF also would
require an applicant that is a non-resident person to provide an
opinion of counsel that the applicant can, as a matter of law, (1)
provide the Commission with prompt access to the books and records of
such applicant and (2) submit to onsite inspection and examination by
representatives of the Commission. As discussed in Section XXI above,
these requirements would allow the Commission to better evaluate an
applicant's ability to comply with the books and records and inspection
requirements set forth in proposed Rules 801(e) and (f).
A national securities exchange that seeks to operate a SB SEF would
be required to separately register such SB SEF with the Commission as a
SB SEF pursuant to proposed Rule 801 and proposed Form SB SEF, and
would be required to comply with Section 3D of the Exchange Act, the
rules and regulations thereunder, and any other provisions of the
Exchange Act and rules thereunder applicable to SB SEFs with respect to
the operations of such SB SEF.
National securities exchanges could, under the rules the Commission
is proposing today, form subsidiaries or affiliates that operate SB
SEFs. If a national securities exchange chose to form such a subsidiary
or affiliate, the exchange itself could remain registered as a national
securities exchange, while the subsidiary or affiliate registers and
operates as a SB SEF. Section 3D(c) of the Exchange Act requires a
national securities exchange to identify whether electronic trading of
SB swaps is taking place on or through the national securities exchange
or a SB SEF to the extent that the exchange also operates a SB SEF and
uses the same electronic trade execution system for listing and
executing trades of SB swaps. The Commission notes that any subsidiary
or affiliate of a registered exchange could not integrate, or otherwise
link the SB SEF with the exchange, including using the premises or
property of such exchange for effecting or reporting a transaction,
without being considered a ``facility of the exchange.''\348\ In the
event that a national securities exchange begins trading SB swaps
either on the exchange or on a facility of the exchange, it would be
required to file rule filings under Rule 19b-4 under the Exchange Act
in connection with the trading of SB swaps on the exchange or its
facility, and such facility would have to comply with the provisions of
the Exchange Act and the rules and regulations thereunder applicable to
national securities exchanges.
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\348\ See Section 3(a)(2) of the Exchange Act, 15 U.S.C.
78c(a)(2) (defining the term ``facility of the exchange''). The
Commission gave a similar analysis regarding facilities of exchanges
with regard to ATSs in the ATS Adopting Release, supra note 94, at
note 437.
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The Commission generally requests comments on all aspects of the
proposed Form SB SEF. Is the format of the proposed Form SB SEF
appropriate and sufficiently clear? If not, why not and how could it be
improved? Are the instructions to the proposed Form SB SEF appropriate
and sufficiently clear? If not, why not and how could they be improved?
Are the defined terms included on proposed Form SB SEF appropriate and
sufficiently clear? If not, why not and how could they be improved?
Are the disclosure items contained on the Execution Page of the
proposed Form SB SEF appropriate? Are there other useful disclosure
items that should be added? If so, please describe such items and why
they should be added. Or, are there proposed items on the Execution
Page that should be deleted? If so, please describe why such items are
not necessary. Are the certifications contained on the Execution Page
of the proposed Form SB SEF appropriate? Are there other useful
certifications that the Commission should require the applicant to
make? If so, please describe such items and why they should be added.
Or, are there proposed certifications that should be deleted? If so,
please describe why such certifications are not necessary.
Are the proposed exhibits to the Form SB SEF appropriate? Would the
[[Page 11008]]
information requested adequately allow the Commission to determine
whether to grant or deny the registration of a SB SEF pursuant to
proposed Rule 801(b)? Are there other useful disclosure items that
should be added to the exhibits or added as exhibits? If so, please
describe such items and why they should be added. Are there any
registration requirements proposed by the CFTC for SEFs that the
Commission should adopt for SB SEFs? \349\ For example, should the
Commission require a SB SEF to provide a description of material
pending legal proceedings? \350\ Should the Commission require a SB SEF
to provide a description of the personnel qualifications for each
category of professional employees employed by the applicant? \351\
Should the Commission require a SB SEF to provide an analysis of the
staffing requirements necessary to carry out operations of the
applicant and the name and qualifications of each key staff person?
\352\ Is the information requested on Form SB SEF and the exhibits
thereto overly burdensome for SB SEFs? If so, how could any such
burdens be reduced? Are there proposed exhibits or items of information
in proposed exhibits that should be deleted from proposed Form SB SEF?
If so, please describe why such proposed exhibits would not be
necessary. Should certain proposed exhibits be required to be made
available to the Commission only upon request? If so, which proposed
exhibits and why? For example, should an applicant be required to
provide the information regarding SB SEF participants required by
proposed Exhibit M upon request by the Commission following the filing
of the applicant's Form SB SEF, rather than as an exhibit to the
applicant's initial filing of proposed Form SB SEF? Commenters are
requested to consider the totality of the information required by
proposed Form SB SEF in framing their responses.
---------------------------------------------------------------------------
\349\ See Notice of proposed SEF rulemaking by the CFTC Release,
supra note 17.
\350\ See proposed Exhibit H to proposed Form SEF; see also
Notice of proposed SEF rulemaking by the CFTC, supra note 17.
\351\ See proposed Exhibit E to proposed Form SEF; see also
Notice of proposed SEF rulemaking by the CFTC, supra note 17.
\352\ See proposed Exhibit F to proposed Form SEF; see also
Notice of proposed SEF rulemaking by the CFTC, supra note 17.
---------------------------------------------------------------------------
The Commission also requests that commenters address whether there
are confidentiality issues with any information required by the
proposed exhibits to proposed Form SB SEF? If so, what information
presents issues and what are the issues? Further, the Commission notes
that proposed Form SB SEF would be filed electronically and thus is
expected to be made available publicly on the Commission's Web site.
The Commission seeks comment on whether the information to be filed on
proposed Form SB SEF would be useful to the public.
XXIII. Rule Filing Processes for Changes to a SB SEF's Rules
A. Introduction
The Commission is proposing to adopt rules requiring registered SB
SEFs to comply with certain rule filing processes for any new rules or
rule amendments. Specifically, the Commission is proposing new Rules
805 and 806, which set forth, respectively, a process for the voluntary
submission of rules for Commission review and approval, and a self-
certification rule filing process.\353\ The processes proposed under
these rules are substantially similar to the two rule filing processes
that the CFTC has in its existing rules,\354\ as modified by the new
authority the CFTC has received under Section 745 of the Dodd-Frank
Act.\355\ It is important for the Commission to receive notice of
proposed rule changes to understand how each SB SEF operates and is
governed to help the Commission with its oversight of SB SEFs. The
Commission intends to coordinate efforts with the CFTC, as appropriate,
to have the processes offered in proposed Rules 805 and 806 resemble
the rule filings processes that the CFTC ultimately adopts for SEFs, in
large part to streamline and simplify compliance for joint SEF/SB SEF
entities.
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\353\ Proposed Rule 806(d) also provides a limited exception to
the certification requirement for certain kinds of filings. See
proposed Rule 806(d). See also discussion infra notes 382 to 384 and
accompanying text.
\354\ 17 CFR 40.5 and 17 CFR 40.6.
\355\ See Public Law 111-203 Sec. 745 (amending Section 5c of
the CEA, 7 U.S.C. 7a-2).
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B. Voluntary Submission of Rules for Commission Review and Approval
Proposed Rule 805 gives a registered SB SEF the option of
voluntarily submitting a proposed new rule or rule amendment for
approval by the Commission prior to its implementation. Paragraph (a)
of proposed Rule 805 would require such filings to: (1) Be filed
electronically with the Commission in a format specified by the
Commission; (2) set forth the text of the proposed rule or rule
amendment (in the case of a rule amendment, deletions and additions
must be indicated); (3) indicate the proposed effective date of the
proposed rule, any action taken or anticipated to be taken to adopt the
proposed rule by the SB SEF or by its governing board or by any
committee thereof, and the cite for the rules of the SB SEF that
authorize the adoption of the proposed rule change; (4) explain the
operation, purpose, and effect of the proposed rule, including, as
applicable, a description of the anticipated benefits to market
participants or others, any potential anticompetitive effects on market
participants or others, and how the rule fits into the SB SEF's
framework of regulation; (5) certify that the SB SEF posted a notice of
pending rule filing and a copy of the submission, concurrent with the
filing of a submission on its Web site; (6) include the documentation
relied on to establish the basis for compliance with the applicable
provisions of the Exchange Act and the Commission's regulations
thereunder, including the Core Principles; (7) provide additional
information which may be beneficial to the Commission in analyzing the
new rule or rule amendment; (8) describe briefly any substantive
opposing views expressed to the SB SEF by the Board or committee
members, participants of the SB SEF, or market participants with
respect to the new rule or rule amendment that were not incorporated
into the new rule or rule amendment; (9) identify any Commission
regulation that the Commission may need to amend, or sections of the
Exchange Act or the Commission's regulations that the Commission may
need to interpret, in order to approve the new rule or rule amendment;
(10) in the case of proposed amendments to the terms and conditions of
a SB swap product, include a written statement verifying that the
registered SB SEF has undertaken a due diligence review of the legal
conditions, including conditions relating to contractual and
intellectual property rights, that may materially affect the trading of
the product; and (11) request confidential treatment, if
appropriate.\356\
---------------------------------------------------------------------------
\356\ See proposed Rule 805(a).
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Proposed Rule 805(a) sets forth the information a SB SEF would be
required to provide the Commission when seeking Commission approval of
a proposed change to a SB SEF rule, or a proposed change to the terms
and conditions of a SB swap that has already commenced trading. Most of
the proposed items of information to be included are substantially
similar to the items of information a national securities exchange is
required to provide on Form 19b-4 \357\ when
[[Page 11009]]
seeking approval of a proposed rule change in accordance with Section
19(b) of the Exchange Act.\358\ Specifically, the requirements in
proposed Rule 805(a)(1) through (4) regarding electronic submission,
submission of proposed rule text highlighting additions and deletions,
inclusion of background information on how and why a proposed change is
authorized, and explanation of the operation, purpose, and effect of
the proposed rule change are similar to the requirements applicable to
national securities exchanges seeking to implement a proposed rule
change. Further, the requirements in proposed Rule 805(a)(7) through
(9) to include additional information beneficial to the Commission in
analyzing the new rule or rule amendment, a description of substantive
opposing views expressed to the SB SEF regarding the proposal, and to
identify any Commission regulation that the Commission may need to
amend or interpret in order to approve the new rule or rule amendment
also are similar to the requirements of Form 19b-4 applicable to
national securities exchanges. These requirements are designed to
ensure that a SB SEF seeking to implement a new or proposed rule change
provides all relevant information and context regarding the proposal
that would allow the Commission to evaluate the proposal for
consistency with the Exchange Act and rules and requirements
thereunder.
---------------------------------------------------------------------------
\357\ See 17 CFR 240.19b-4.
\358\ 15 U.S.C. 78s(b).
---------------------------------------------------------------------------
In addition, similar to the requirements for national securities
exchanges, the proposal in Rule 805(a)(5) would require a SB SEF to
certify that it has posted a notice of pending rule filing and a copy
of the submission, concurrent with the filing of a submission on its
Web site. This proposal is intended to ensure that market participants
would receive prompt notice of new requests for approval filed with the
Commission.\359\
---------------------------------------------------------------------------
\359\ Rule 19b-4(l) under the Exchange Act requires each
national securities exchange to post proposed rule changes on its
Web site within two business days of filing with the Commission. See
17 CFR 240.19b-4(l).
---------------------------------------------------------------------------
Proposed Rule 805(a)(6) also would require a SB SEF to include the
documentation relied on to establish the basis for compliance with the
applicable provisions of the Exchange Act and the Commission's
regulations thereunder, including the Core Principles. In the case of
proposed changes to the terms and conditions of a SB swap, this
provision would require, without limitation, inclusion of documentation
relied on to establish the basis for compliance with Section 3D(d)(3)
of the Exchange Act and proposed Rule 812 thereunder, which would
require a SB SEF's swap review committee to have determined, after
taking into account all of the terms and conditions of the SB swap and
the markets for the SB swap and any underlying securities, that a SB
swap proposed to be traded is not readily susceptible to
manipulation.\360\
---------------------------------------------------------------------------
\360\ See Proposed Rule 812.
---------------------------------------------------------------------------
Also with regard to proposed changes to the terms and conditions of
a SB swap, proposed Rule 805(a) would require a SB SEF to provide a
written statement verifying that it has undertaken a due diligence
review of the legal conditions, including conditions relating to
contractual and intellectual property rights, that may materially
affect the trading the product. This proposed requirement is designed
to prevent a SB SEF from seeking to trade a proprietary product of
another SB SEF or other entity. The Commission preliminarily believes
that the information to be included pursuant to proposed Rule 805(a) in
a request for approval of a new or proposed rule change or change to
the terms and conditions of a SB swap is necessary to assist the
Commission in making a reasoned determination as to whether such
proposed change is consistent with the Exchange Act.
Proposed Rule 805(b) would require the Commission to approve a new
rule or rule amendment unless the rule or rule amendment is
inconsistent with the Exchange Act or the Commission's regulations
promulgated thereunder.\361\ The Commission has coordinated with the
CFTC and the proposed standard for approval is the same as that
standard for approval under the CFTC's proposed rule approval process,
which is intended to provide consistency to market participants who may
operate a SB SEF and a SEF.
---------------------------------------------------------------------------
\361\ See proposed Rule 805(b).
---------------------------------------------------------------------------
Proposed Rule 805(c) would give the Commission a 45-day review
period, starting from the date that the filing is received by the
Commission, to consider whether the proposed rule or rule amendment is
consistent with the Exchange Act and the regulations thereunder.\362\
Unless the Commission notifies the SB SEF otherwise, the proposed rule
change would be deemed approved by the Commission at the end of the 45-
day review period (or at the end of any extension period, as
applicable), provided that: (1) The submission of the rule change
complies with the requirements of paragraph (a) of proposed Rule 805,
and (2) the SB SEF has not amended the filing during the review period,
except as requested by the Commission during that period.\363\
---------------------------------------------------------------------------
\362\ See proposed Rule 805(c).
\363\ Id. Any amendment or supplementation not requested by the
Commission would be treated as the submission of a new filing.
---------------------------------------------------------------------------
Under paragraph (d) of proposed Rule 805, the Commission would be
able to extend the review period by an additional 45 days if the
proposed rule raises novel or complex issues that require additional
time for review or is of major economic significance, the submission is
incomplete, or the requestor does not respond completely to Commission
questions in a timely manner.\364\ In this case, the Commission would
be required to notify the submitting SB SEF within the initial 45-day
review period and briefly describe the nature of the specific issues
for which additional time for review is required. In addition, the
Commission would be able to extend the review period to any period,
beyond the additional 45 days initially requested, to which the SB SEF
agrees in writing.\365\
---------------------------------------------------------------------------
\364\ See proposed Rule 805(d).
\365\ Id.
---------------------------------------------------------------------------
Under paragraph (e) of proposed Rule 805, the Commission would have
the authority to issue a notice of non-approval if it finds that the
new rule or rule amendment is or appears to be inconsistent with the
Exchange Act or the regulations thereunder.\366\ At any time during its
review under proposed Rule 805, the Commission would be able to notify
the SB SEF that it will not approve the new rule or rule amendment
because it believes that the new rule or rule amendment is inconsistent
with the Exchange Act or Commission rules or regulations thereunder.
The Commission would provide, in its notice, the nature of the issues
raised and the specific provision of the Exchange Act or the
Commission's rules or regulations with which the new rule or rule
amendment is or appears to be inconsistent. Pursuant to proposed Rule
805(f), the receipt of a notice of non-approval would not prevent the
SB SEF from subsequently submitting a revised version of the proposed
rule or rule amendment for Commission review and approval, and the
revised submission would be reviewed without prejudice.\367\ However,
the receipt of a notice of non-approval would be presumptive evidence
that the SB SEF could not truthfully submit the same, or substantially
the same, proposed rule or
[[Page 11010]]
rule amendment for self-certification under proposed Rule 806.\368\
---------------------------------------------------------------------------
\366\ See proposed Rule 805(e).
\367\ See proposed Rule 805(f)(1).
\368\ See proposed Rule 805(f)(2). See infra Section XXIII for a
discussion of the certification process.
---------------------------------------------------------------------------
Proposed Rule 805(g) would allow the Commission to provide for
expedited approval for rule changes, including rule changes to terms
and conditions of a product that are consistent with the Exchange Act
and the rules and regulations thereunder, at such time and under such
conditions as the Commission may specify in a written
notification.\369\ However, proposed Rule 805(g) would also allow the
Commission to grant expedited approval to a proposed rule or rule
amendment, at any time, and also to alter or revoke the applicability
of such a notice to any particular rule or rule amendment.
---------------------------------------------------------------------------
\369\ See proposed Rule 805(g).
---------------------------------------------------------------------------
The Commission is proposing the time periods in paragraphs 805(c)
through (g) to align its procedure for reviewing proposed rules and
rule amendments with the CFTC's procedure.\370\ The Commission believes
that a parallel procedure would be beneficial for SB SEFs and SEFs that
are dually registered. Furthermore, the Commission believes that the
proposed prior approval process would allow the SB SEF the opportunity
to achieve greater certainty about the Commission's views on whether a
new rule or rule amendment is consistent with the Exchange Act and the
rules and regulations thereunder prior to taking steps to implement the
rule or amendment.
---------------------------------------------------------------------------
\370\ See 17 CFR 40.5 and 40.6. See also Public Law 111-203,
Sec. 745 (amending Section 5c of the Commodity Exchange Act, 7
U.S.C. 7a-2). See also 75 FR 67282 (November 2, 2010) (CFTC proposal
to amend 17 CFR 40.5 and 40.6).
---------------------------------------------------------------------------
C. Self-Certification of Rules
Proposed Rule 806 would allow a SB SEF, as an alternative to
complying with proposed Rule 805, to implement a new rule or rule
amendment pursuant to self-certification.\371\ This process would
provide the Commission ten business days to review a self-certification
filing and to stay the certification within such review period, if
warranted.
---------------------------------------------------------------------------
\371\ See proposed Rule 806.
---------------------------------------------------------------------------
Specifically, under proposed Rule 806(a), a registered SB SEFs
would be required to submit the self-certification electronically at
least ten business days prior to the implementation date of the new
rule or rule amendment.\372\ The proposed rule would require that the
SB SEF publish on its Web site a notice of pending certification with
the Commission and copy of the submission concurrent with the filing of
a submission with the Commission.\373\
---------------------------------------------------------------------------
\372\ See proposed Rule 806(a)(1) and proposed Rule 806(a)(3).
Proposed Rule 806(a)(3) would provide an exception to the 10 day
requirement for new rules or rule amendments that the SB SEF seeks
to implement in the exercise of its emergency authority pursuant to
Rule 816, requiring instead that the SB SEF file such emergency rule
or rule amendment with the Commission prior to the implementation of
such rule or rule amendment, or, if not practicable, within twenty-
four hours after implementation of such emergency rule or rule
amendment.
\373\ See proposed Rule 806(a)(2). The proposed Rule would
require the SB SEF to provide such information in its submission to
the Commission, but would permit the SB SEF to redact information
that it seeks to keep confidential from the documents that it
publishes on its Web site. If, however, a determination is made
pursuant to the Freedom of Information Act that such information may
not be kept confidential, the proposed rule would require the SB SEF
to republish its filing on its Web site including such information.
---------------------------------------------------------------------------
Similar to proposed Rule 805, proposed Rule 806 would require the
submission to include certain specific items: (1) The text of the rule
(in the case of a rule amendment, deletions and additions must be
indicated); (2) the date of intended implementation; (3) a
certification by the SB SEF that the rule complies with the Exchange
Act and the Commission's regulations thereunder; (4) the documentation
relied on to establish the basis for compliance with the applicable
provisions of the Exchange Act and the Commission's regulations
thereunder, including the Core Principles; \374\ (5) a brief
explanation of any substantive opposing views expressed to the
registered SB SEF by the Board or committee members, participants, or
market participants that were not incorporated into the rule, or a
statement that no such opposing views were expressed; (6) a request for
confidential treatment, if appropriate; and (7) in the case of proposed
amendments to the terms and conditions of a SB swap, a written
statement verifying that the registered SB SEF has undertaken a due
diligence review of the legal conditions, including conditions relating
to contractual and intellectual property rights, that may materially
affect the trading the product.\375\ The proposed Rule would also
require the SB SEF to provide, if requested by Commission staff,
additional evidence, information or data that may be beneficial to the
Commission in conducting a due diligence assessment of the filing and
the SB SEF's compliance with any of the requirements of the Exchange
Act or the Commission's rules or regulations thereunder.\376\ The
proposed items of information are similar to those required by proposed
Rule 805(a) as well as those in CFTC Rule 40.6.\377\ The Commission
preliminarily believes that inclusion of the items of information set
forth in proposed Rule 806(a) would assist the Commission in
considering whether a SB SEF's implementation of a new rule, rule
amendment, or modification to the terms and conditions of a SB swap
pursuant to self-certification is appropriate and consistent with the
Exchange Act and the rules and requirements thereunder.
---------------------------------------------------------------------------
\374\ In the case of proposed changes to the terms and
conditions of a SB swap, this provision would require, without
limitation, inclusion of documentation relied on to establish the
basis for compliance with Section 3D(d)(3) of the Exchange Act and
proposed Rule 812 thereunder, which would require a SB SEF's swap
review committee to have determined, after taking into account all
of the terms and conditions of the SB swap and the markets for the
SB swap and any underlying securities, that a SB swap proposed to be
traded is not readily susceptible to manipulation. See proposed Rule
812.
\375\ See proposed Rule 806(a)(5).
\376\ See proposed Rule 806(a)(6).
\377\ See proposed Rule 805(a) and 17 CFR 40.6. See also Public
Law 111-203, Sec. 745 (amending Section 5c of the Commodity
Exchange Act, 7 U.S.C. 7a-2).
---------------------------------------------------------------------------
Under paragraph (b) of proposed Rule 806, the Commission would have
10 business days to review the submission and the self-certification
would become effective at the end of the 10 business-day period, unless
the Commission notifies the registered entity, during such 10 business-
day period, that it intends to issue a stay of the certification.\378\
Proposed Rule 806(c)(1) would provide that the Commission would be able
to stay the certification of a new rule or rule amendment by issuing a
notification to the SB SEF informing it that the Commission is staying
the certification and stating the grounds for doing so.\379\ The
proposed rule also would provide that the certification of a rule could
be stayed by the Commission on the grounds that the new rule or rule
amendment presents novel or complex issues, is accompanied by an
inadequate explanation, or is potentially inconsistent with the
Exchange Act or the Commission's regulations thereunder. Once the
Commission issues a notification of stay to the registered entity, the
Commission would have 90 days to conduct a review. A stay of a rule
certification may be appropriate, for example, where a registered
entity certifies a rule that raises unique issues not previously
reviewed by Commission staff. In addition, the Commission believes that
new rules or rule amendments may raise a number of complex issues if
they appear to have a material impact on other securities and financial
markets. Thus, such rules are more likely to be
[[Page 11011]]
subject to an extended review period to allow the Commission to
adequately identify and address complex regulatory issues.
---------------------------------------------------------------------------
\378\ See proposed Rule 806(b).
\379\ See proposed Rule 806(c)(1).
---------------------------------------------------------------------------
Proposed Rule 806(c)(2) would require the Commission to provide a
30-day public comment period within the 90-day period that the stay is
in effect and to publish a notice of the 30-day comment period on the
Commission's Web site.\380\ Unless the Commission notifies the SB SEF
that it objects to the certification within the 90-day period on the
grounds that the proposed rule is inconsistent with the Exchange Act or
the rules or regulations thereunder, the rule would become effective,
pursuant to certification, upon the expiration of the 90-day review
period.\381\ If the Commission decides to lift the stay prior to the
expiration of the 90-day review period, the Commission would notify the
SB SEF of its action and the rule would become certified at such time.
---------------------------------------------------------------------------
\380\ See proposed Rule 806(c)(2).
\381\ See proposed Rule 806(c)(3).
---------------------------------------------------------------------------
Finally, proposed Rule 806(d) would permit SB SEFs to implement
certain new rules or rule amendments on the following business day
without certification to the Commission.\382\ Pursuant to proposed Rule
806(d)(1), the rules permitted to be implemented pursuant to this
summary process would be limited to rules regarding corrections of
typographical errors, renumbering, periodic routine updates to
identifying information about approved entities and other such non-
substantive revisions of a product's terms and conditions that have no
effect on the economic characteristics of the product.\383\ Proposed
Rule 806(d)(2) would require SB SEFs to provide to the Commission
electronically, in a format to be specified by the Commission, at least
weekly, a summary notice of all rule amendments made effective
thereunder.\384\ Such notice would not be required for weeks during
which no such actions have been taken. Proposed Rule 806(e) would allow
a SB SEF to implement certain other new rules or rule amendments
without certification or notice to the Commission, provided that the SB
SEF maintains documentation regarding all changes to rules and posts
all such rule changes on its Web site.\385\ These rules and rule
amendments would be those that govern: (1) The organization and
administrative procedures of a SB SEF governing bodies such as a Board,
officers, and committees, but not any of the following: Voting
requirements; Board or committee composition requirements or
procedures; decision making procedures; use or disclosure of material
non-public information gained through the performance of official
duties, or requirements relating to conflicts of interest; or (2) the
routine, daily administration, direction and control of employees,
requirements relating to gratuity and similar funds, but not any of the
following: Guaranty; reserves; or similar funds; declaration of
holidays; and changes to facilities housing the market.
---------------------------------------------------------------------------
\382\ See proposed Rule 806(d).
\383\ See proposed Rule 806(d)(2).
\384\ See proposed Rule 806(d)(1).
\385\ See proposed Rule 806(e).
---------------------------------------------------------------------------
The Commission notes that the certification process in proposed
Rule 806 does not call for any final action by the Commission. In cases
where a SB SEF seeks final agency action, a SB SEF could choose to file
a proposed rule or rule amendment under proposed Rule 805.
The Commission intends to allow registered SB SEFs to submit
filings under proposed Rules 805 and 806 electronically through a
portal similar to the electronic rule filing system used for proposed
rule changes by national securities exchanges and national securities
associations.\386\
---------------------------------------------------------------------------
\386\ The process for submission of rule filings would be the
subject of a separate rulemaking.
---------------------------------------------------------------------------
The Commission notes that the process under proposed Rules 805 and
806 closely parallel the CFTC's Rules 40.5 and 40.6.\387\ The
Commission preliminarily believes that allowing SB SEFs to file new
rules and rule amendments in this manner would simplify the filing
process and also provide the Commission with prompt access for review.
The Commission intends to propose forms for these electronic filings as
part of a separate rulemaking.
---------------------------------------------------------------------------
\387\ See 17 CFR 40.5 and 40.6. See also Public Law 111-203,
Sec. 745 (amending Section 5c of the Commodity Exchange Act, 7
U.S.C. 7a-2). See also 75 FR 67282 (November 2, 2010) (CFTC proposal
to amend 17 CFR 40.5 and 40.6.
---------------------------------------------------------------------------
D. Request for Comment
The Commission generally requests comments on all aspects of the
proposed rules relating to the proposed rule filing process. Are the
Commission's proposed rules for the filing process for new rules and
rule amendments appropriate and sufficiently clear? If not, why not and
what would be better alternatives? Is it preferable to have a rule
filing process for SB SEFs that closely aligns to the process for SEFs
under the CFTC's rules as proposed? By doing this, would the proposed
rules achieve the goal of streamlining and simplifying the effort to
have rules implemented for entities that are both SB SEFs and SEFs? If
not, what other alternatives should the Commission consider? What other
burdens should the Commission take account of that joint SB SEF/SEF
entities would face under the proposed rules? Is the voluntary prior
approval process in proposed Rule 805 a useful option for SB SEFs? If
not, what would be a better alternative?
Does the automatic effectiveness for a rule or rule amendment
submitted under proposed Rule 806, once the review period has expired
and in the absence of non-approval, provide sufficient legal clarity
and certainty about the change? Or, would an approval order by the
Commission be more instructive or helpful? Are the time periods for
review, and extensions for review, in proposed Rule 805 appropriate? If
so, what would be more appropriate? Should the submissions for prior
approval be published by the Commission for public comment? Why or why
not?
Is the provision of a notice of non-approval to the SB SEF, as
described under proposed Rule 805(e), a sufficient means of informing
the SB SEF of the basis for non-approval? Would more information or
another form of notice be more appropriate? If so, please explain.
Should such notice of non-approval be published on the Commission's Web
site or otherwise be made publicly available? Would the proposed self-
certification process in proposed Rule 806 be a useful alternative to
the prior approval process for rule changes? Why or why not?
Are the proposed grounds for staying a certification under proposed
Rule 806(c) appropriate? If not, why not? Are there other grounds that
would also be appropriate for staying a certification? Under proposed
Rule 806 (for self-certification), would the 10 business-day review
period and, if a stay is put in place, the 90-day review period be
appropriate timeframes for Commission review and consideration? If not,
why not and what would be a better alternative? Please provide support
for any alternative suggestions.
Should the 90-day review period, subsequent to a stay of a
certification, in proposed Rule 806(c) include a 30-day public comment
period? Why or why not? Is the means for determining whether a rule or
rule amendment has been certified or objected to provided for in
proposed Rule 806(c)(3) sufficiently clear? If not, how could such
determination be made more clear? Should the Commission publish notice
of either the effective certification or the notice of an objection for
the public on its Web site or through other means?
[[Page 11012]]
Are the proposed processes for providing notice, without a
certification, for certain kinds of rule changes in proposed Rule
806(d) appropriate? If not, why not? Are the proposed rule changes that
would be eligible for notice without certification in proposed Rule
806(d) and (e) appropriate? If not, which ones should not be eligible
for these processes? Are there other kinds of rule changes that should
be eligible for these processes?
Would an electronic method for submitting all rule submissions
under proposed Rules 805 and 806 be an appropriate and efficient way of
making such submissions? If not, why not? Would an electronic system
such as the existing system for submitting rule changes by national
securities exchanges and associations, Electronic Form 19b-4 Filing
System, or ``EFFS,'' \388\ be a good model for the system for SB SEF
submissions under these proposed rules? If not, what would be a better
model for such an electronic system?
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\388\ See Securities Exchange Act Release No. 50486 (October 4,
2004), 69 FR 60287 (October 8, 2004) (File No. S7-18-04).
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XXIV. Filing Processes for Trading Security-Based Swaps
A. Introduction
The Commission is proposing to adopt rules requiring SB SEFs to
comply with certain filing processes prior to trading SB swaps.
Specifically, the Commission is proposing new Rules 807 and 808 of
Regulation SB SEF, which set forth filing processes for commencement or
continued trading of SB swaps on a SB SEF. The processes proposed under
these rules are substantially similar to the parallel processes that
the CFTC has in its existing rules, 17 CFR 40.2 and 17 CFR 40.3, as
modified by the new authority the CFTC has received under Section 745
of the Dodd-Frank Act.\389\
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\389\ See Public Law 111-203, Sec. 745 (amending Section 5c of
the Commodity Exchange Act, 7 U.S.C. 7a-2). See also 75 FR 67282
(November 2, 2010) (CFTC proposal to amend 17 CFR 40.2 and 40.3).
---------------------------------------------------------------------------
The proposed filing processes pursuant to which a SB SEF may trade
a SB swap each require that a SB SEF describe the proposed product's
``terms and conditions.'' The Commission is not proposing a definition
of ``terms and conditions,'' but requests comment on whether it should
adopt a definition of ``terms and conditions'' and, if so, what
specifically should such a definition include.\390\ Specifically,
should a Commission definition of ``terms and conditions'' refer to the
rights and obligations of the counterparties to a SB swap? Should it
include such items as: (1) Notional values; (2) relevant dates, tenor,
and day count conventions; (3) index; (4) relevant prices, rates or
coupons; (5) currency; (6) stub, premium, or initial cash flow
components along with subsequent life cycle events; (7) payment and
reset frequency; (8) business calendars; (9) accrual type; (10) spread
or points; and (11) description of the underlying security or
securities or reference asset(s)? Should it include other items that
appear in the CFTC's definition? Are there any other items that should
be included? Should the ISDA Master Agreement be referenced in a
definition? If so, why and how?
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\390\ The Commission notes that the CFTC, in 17 CFR 40.1,
defines ``terms and conditions'' as referring to a description of
the security underlying a swap, specification of cash settlement,
and the rights and obligations of the counterparties to the swap.
The CFTC's definition also notes that whenever possible, all
proposed swap terms and conditions should conform to industry
standards or those terms and conditions adopted by comparable
contracts. Further, the CFTC's definition sets forth a list of items
covered by the phrase ``terms and conditions.''
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B. Trading SB Swaps Pursuant to Certification
Proposed Rule 807 would require every SB SEF to comply with certain
submission requirements prior to trading a SB swap product if such
product has not been approved under proposed Rule 808. Pursuant to
proposed Rule 807 every submission must be filed electronically in a
form to be determined by the Commission and be received by the
Commission by the open of business on the business day preceding the
day the SB swap would commence trading. In addition, every submission
would be required to include: (1) A copy of the SB swap product's terms
and conditions; (2) the intended date on which the SB swap may begin
trading; (3) a certification by the registered SB SEF that the SB swap
to be traded complies with the Exchange Act and the rules and
regulations thereunder; (4) the documentation relied on to establish
the basis for compliance with the Exchange Act and the rules and
regulations thereunder, including the Core Principles; \391\ (5) a
written statement verifying that the registered SB SEF has undertaken a
due diligence review of the legal conditions, including legal
conditions that relate to contractual and intellectual property rights,
that may materially affect the trading of the SB swap; (6) a
certification that the registered SB SEF posted on its Web site a
notice of pending certification with the Commission and a copy of the
submission, concurrent with the filing of a submission with the
Commission; and (7) a request for confidential treatment, if
appropriate.
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\391\ As discussed in note 374 supra, this provision would
require, without limitation, inclusion of documentation relied on to
establish the basis for compliance with Section 3D(d)(3) of the
Exchange Act and proposed Rule 812 thereunder, which would require a
SB SEF's swap review committee to have determined, after taking into
account all of the terms and conditions of the SB swap and the
markets for the SB swap and any underlying securities, that a SB
swap proposed to be traded is not readily susceptible to
manipulation.
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Pursuant to proposed Rule 807(b), upon request of any
representative of the Commission, a SB SEF would be required to provide
any additional evidence, information or data demonstrating that the SB
swap product meets, initially or on a continuing basis, all of the
requirements of the Exchange Act and its rules.
Proposed Rule 807(c) would provide that the Commission would be
able to stay the certification of a SB swap by issuing a notification
to the SB SEF informing it that the Commission is staying the
certification and stating the grounds for doing so.\392\ The proposed
rule also would provide that the certification could be stayed by the
Commission on the grounds that the SB swap presents novel or complex
issues, is accompanied by an inadequate explanation, or is potentially
inconsistent with the Exchange Act or the Commission's regulations
thereunder. Once the Commission issues a notification of stay to the
registered entity, the Commission would have 90 days to conduct a
review. A stay of a certification may be appropriate, for example,
where a registered entity certifies a SB swap that raises unique issues
not previously reviewed by Commission staff.
---------------------------------------------------------------------------
\392\ See proposed Rule 807(c)(1).
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Proposed Rule 807(c) would require the Commission to provide a 30-
day public comment period within the 90-day period that the stay is in
effect and to publish a notice of the 30-day comment period on the
Commission's Web site.\393\ Unless the Commission notifies the SB SEF
that it objects to the certification within the 90-day period on the
grounds that the proposed SB swap is inconsistent with the Exchange Act
or the rules or regulations thereunder, the SB swap would become
effective, pursuant to certification, upon the expiration of the 90-day
review period.\394\ If the Commission decides to lift the stay prior to
the expiration of the 90-day review period, the Commission would notify
the SB SEF of its action
[[Page 11013]]
and the SB swap would become certified at such time.\395\
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\393\ See proposed Rule 807(c)(2).
\394\ See proposed Rule 807(c).
\395\ The stay provision in proposed Rule 807(c) is more similar
to the stay provision in proposed Rule 806 and proposed CFTC Rule
40.6 than it is to the stay provision in proposed CFTC Rule 40.2.
Proposed CFTC Rule 40.2 would permit the CFTC to stay a
certification of a SB swap during the pendency of a CFTC proceeding
for filing a false certification or during the pendency of a
petition to alter or amend the contract terms and conditions
pursuant to Section 8a(7) of the Commodity Exchange Act. The
Commission notes that the Exchange Act does not provide for
procedures analogous to those in proposed CFTC Rule 40.2, and thus
is proposing it to align proposed Rule 807 with proposed CFTC Rule
40.2.
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The Commission preliminarily believes that proposed Rule 807, which
closely parallels CFTC proposed new Rule 40.2, provides a reasonable
process pursuant to which a SB SEF may trade SB swaps through a
certification process. Any dually registered SB SEF would be following
very similar procedures for certification of swaps under CFTC proposed
new Rule 40.2. The proposed rule would give the Commission notice of
any new SB swaps for which a SB SEF would permit trading and would
allow the Commission to stay a proposed SB swap's certification in
certain circumstances. In addition, because the proposed rule closely
parallels the CFTC's proposed rule, it would provide for greater
harmonization of the regulatory process applied to SEFs and SB SEFs.
The Commission also preliminarily believes that it is appropriate
to include in any submissions under proposed Rule 807 documentation
demonstrating that the product is in compliance with the SB SEF Core
Principles--in particular, core principles that apply specifically to
products, such as Core Principle 3 concerning manipulation. The
Commission preliminarily believes that it is appropriate to require a
SB SEF to document the basis for a determination that a SB swap is not
readily susceptible to manipulation and notes that the self-
certification in proposed Rule 807 is drawn from analogous processes
that the CFTC currently has in place with respect to new financial
futures products proposed to be traded on a designated contract
market.\396\ The Commission further notes that CFTC regulations require
that prior to trading a new product, a designated contract market must
demonstrate that the terms and conditions of a proposed contract ``will
not be conducive to price manipulation or distortion.'' \397\ The
Commission also preliminarily believes that SB SEFs should be
conducting due diligence before listing a new SB swap product. In
evaluating any certification, information on such due diligence would
be essential to the Commission.
---------------------------------------------------------------------------
\396\ See 17 CFR 40.2, 40.3. See also 17 CFR 40, Appendix A to
Part 40--Guideline No. 1.
\397\ Id. The Commission understands that the CFTC expect to
propose a similar requirement for SEFs.
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The Commission preliminarily believes that SB SEFs would make use
of the certification process in the same way that registered entities
have been making use of the parallel process under the CFTC's existing
rules. The Commission understands from CFTC staff that entities
generally use the CFTC's current certification process if they
reasonably believe that the new product does not raise any novel issues
or questions. However, the Commission notes that the proposed
certification process does not include any final action of the
Commission. In cases where a SB SEF desired final agency action,
Proposed Rule 808 would be available.\398\
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\398\ See infra Section XXIV, discussing trading of SB swaps
pursuant to Commission review and approval.
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The Commission requests comment on all aspects of Proposed Rule
807. Is the proposed rule text clear? Should a SB SEF be required to
include in its certification disclosure of whether a proposed product
is or is not subject to mandatory clearing? Should a SB SEF be required
to include additional information when certifying a new SB swap
product? If so, what additional information should be included? Should
the proposed rule enumerate what additional evidence, information or
data would need to be provided pursuant to proposed paragraph (a) of
Rule 807, or what the time frame for such a request should be? Is the
proposed stay of certification process clear? Should the Commission
consider adopting another stay procedure? If so, what should that
process be?
C. Trading SB Swaps Pursuant to Commission Review and Approval
Proposed Rule 808 would permit a SB SEF to request that the
Commission approve a SB swap prior to permitting trading of the SB
swap, or if a SB swap product was initially submitted under Rule 807,
subsequent to commencement of trading of the SB swap. Under proposed
Rule 808, a submission requesting approval would be required to be
submitted electronically in a form to be determined by the Commission
and include: (1) A copy of the SB swap product's terms and conditions;
(2) the documentation relied on to establish the basis for compliance
with the Exchange Act and rules and regulations thereunder, including
the Core Principles; \399\ (3) a written statement verifying that the
registered SB SEF has undertaken a due diligence review of the legal
conditions, including legal conditions that relate to contractual and
intellectual property rights, that may materially affect the trading of
the SB swap; (4) if appropriate, a request for confidential treatment
as permitted pursuant to the applicable provisions of FOIA \400\ and
applicable Commission regulations; \401\ and (5) a certification that
the registered SB SEF has published on its Web site a notice of pending
request for approval with the Commission and a copy of the submission,
concurrent with the filing of a submission with the Commission.
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\399\ See supra note 374.
\400\ 5 U.S.C. 552.
\401\ 17 CFR 200.83.
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In addition, under proposed Rule 808(b), if requested by a
representative of the Commission, a SB SEF would be required to provide
additional evidence, information or data that demonstrates that the SB
swap product meets, initially and on a continuing basis, all of the
requirements of the Exchange Act and any applicable rules and
regulations. Under proposed Rule 808(c) the Commission would approve a
new SB swap product unless the terms and conditions of such product
were inconsistent with the Exchange Act or rules and regulations
thereunder.\402\
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\402\ The standard for approval in proposed Rule 808 would
differ from the standard for approval in proposed CFTC Rule 40.3.
Proposed CFTC Rule 40.3 provides that the CFTC shall approve a new
swap product unless the terms and conditions of such product
``violate'' the Commodity Exchange Act. See 75 FR 67282 (November 2,
2010) (CFTC proposal to amend 17 CFR 40.2-40.5). Notably, proposed
CFTC Rule 40.5 provides that the CFTC shall approve an amendment to
the terms and conditions of a swap product unless the amended
product would be ``inconsistent'' with the Commodity Exchange Act.
See id. The Commission believes that it is preferable to have the
same standard for approval in proposed Rules 805 and 808 and
therefore proposes that the standard for approval in proposed Rule
808 be the same as the standard for proposed CFTC Rule 40.5. The
Commission notes that the proposed standard is similar to the
standard for Commission approval of a proposed rule change filed
under Section 19(b)(2) of the Exchange Act. See 15 U.S.C. 78s(b)(2).
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Under proposed Rule 808(d), all products submitted for Commission
approval under the proposed section would be deemed approved by the
Commission 45 days after receipt by the Commission, or at the
conclusion of an extended period as provided under proposed Rule
808(e), provided that: (1) The submission complied with the
requirements of proposed Rule 808(a); and (2) the SB SEF making the
[[Page 11014]]
submission did not amend the terms and conditions of the proposed SB
swap product or supplement its request for approval during that period,
except in response to a request by the Commission or for correction of
typographical errors, renumbering or other non-substantive revisions.
In addition, under proposed Rule 808(d), any voluntary, substantive
amendment by the SB SEF would be treated as a new submission.
Under proposed Rule 808(e) the Commission would be able to extend
the 45-day review period for an additional 45 days, if the proposed SB
swap product raised novel or complex issues that required additional
time for review. In that event, the Commission would need to notify the
SB SEF within the initial 45 day review period and would need to
briefly describe the nature of the specific issues. Alternatively, the
SB SEF could agree to any extended review period in writing.
Under proposed Rule 808(f), the Commission could notify the SB SEF
at any time during its review of the submission that the Commission
will not or is unable to approve the proposed SB swap product. Such
notification would be required to specify the nature of the issues
raised by the proposed SB swap product and the specific provisions of
the Exchange Act rules and regulations involved.
Proposed Rule 808(g) would address the effect of non-approval by
the Commission. Under proposed paragraph (g) notification to a SB SEF
of the Commission's determination not to approve a proposed SB swap
product would not prejudice the SB SEF from subsequently submitting a
revised version of the proposed product for Commission approval or from
submitting the product as initially proposed pursuant to a supplemented
submission. However, notification to a SB SEF of the Commission's
refusal to approve SB swap would be presumptive evidence that the
entity would not be able to truthfully certify under Rule 807 that the
same, or substantially the same, SB swap complies with the Exchange Act
or the rules thereunder.
As with proposed Rule 807, proposed Rule 808 is substantially
similar to the applicable CFTC proposed rule, new proposed Rule 40.3.
The Commission believes that this approach would allow dually
registered entities to more easily comply with applicable rules and
regulations. The Commission expects that the SB SEF would include in
its submission all documentation relied upon to determine that the new
product complies with applicable core principles--in particular, core
principles that apply specifically to products, such as Core Principle
3 concerning manipulation. The Commission preliminarily believes that
it is appropriate to require a SB SEF to document the basis for a
determination that a SB swap is not readily susceptible to manipulation
and notes that the proposed certification in proposed Rule 808 is drawn
from analogous processes that the CFTC currently has in place with
respect to new financial futures products proposed to be traded on a
designated contract market.\403\ The Commission further notes that the
CFTC regulations require that prior to trading a new product, a
designated contract market must demonstrate that the terms and
conditions of a proposed contract ``will not be conducive to price
manipulation or distortion.'' \404\ The Commission also preliminarily
believes that SB SEFs should be conducting due diligence before
permitting trading of a new SB swap product. In evaluating any
certification, information on such due diligence would be essential to
the Commission.
---------------------------------------------------------------------------
\403\ See 17 CFR 40.2, 40.3. See also 17 CFR 40, Appendix A to
Part 40--Guideline No. 1.
\404\ Id.
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As noted above in the discussion concerning self-certification of
new SB swaps, the Commission preliminarily believes that SB SEFs would
use the product approval process in instances where they believe novel
or difficult issues are presented and they desire final agency action.
The Commission intends to allow registered SB SEFs to submit
filings under proposed Rules 807 and 808 electronically through a
portal similar to the electronic rule filing system used for proposed
rule changes by national securities exchanges and national securities
associations.\405\ The Commission preliminarily believes that allowing
SB SEFs to file new rules and rule amendments in this manner would
simplify the filing process and also provide the Commission with prompt
access for review. The Commission intends to propose forms for these
electronic filings as part of a separate rulemaking.
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\405\ The process for submission of rule filings will be the
subject of a separate rulemaking.
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The Commission requests comment on all aspects of proposed Rule
808. Is the process required by proposed Rule 808 clear? If not, what
elements of the process need to be added to the proposed rule? Under
what circumstances would a SB SEF that had already certified a new SB
swap product request approval of the product pursuant to the proposed
rule? Should product approval be mandatory for certain types of SB
swaps, as opposed to certification? If so, what products? Please be
specific. Is the proposed standard for approval of a SB swap
appropriate? If not, why not?
XXV. Discussion of Exemptive Authority Pursuant to Section 36 of the
Exchange Act and Compliance Matters
Pursuant to Section 36 of the Exchange Act, the Commission may
grant an exemption from any provision of Section 3D of the Exchange
Act, any rule or any provision of any rule under Regulation SB SEF, or
any provision of the definition of ``security-based swap execution
facility'' in Section 3(a)(77) of the Exchange Act and any Commission
rules regarding such definition to the extent that such exemption is
necessary or appropriate in the public interest and is consistent with
the protection of investors. Any such exemption could be subject to
conditions and could be revoked by the Commission at any time.
Generally, the Commission would consider entertaining an application
for an exemption where the exemption is necessary or appropriate in the
public interest and consistent with the protection of investors. The
Commission in its sole discretion would determine whether to grant or
deny a request for an exemption. In addition, the Commission could
revoke an exemption at any time, including if a SB SEF could no longer
demonstrate that such exemption is necessary or appropriate in the
public interest, or is consistent with the protection of investors.
The Commission requests comment on all aspects of the exemptive
authority. Would such exemptive authority be useful to facilitate the
purposes of the Dodd-Frank Act? If so, in what circumstances should the
Commission grant exemptions? Should exemptions only be granted in
limited circumstances? Should the Commission consider granting
exemptions from all rules under Regulation SB SEF or are exemptions
only warranted for specific rules or specific entities? For example,
should exemptions only be available with respect to certain Core
Principles? Should the Commission consider granting exemptions from all
provisions of Section 3(a)(77) of the Exchange Act, or should
exemptions only be available with respect to certain aspects of the
definition of ``security-based swap execution facility?'' What specific
factors should the Commission consider in determining whether to grant
an exemption? Are there cases where exemptions may not be appropriate
and should not be considered?
[[Page 11015]]
The Commission acknowledges that it may take a period of time, as
well as require the expenditure of resources, for an SB SEF to
implement a number of the requirements set forth in proposed Regulation
SB SEF, should those requirements be part of any final rules the
Commission may adopt. A potential SB SEF would not be able to determine
the final rules governing SB SEFs with which it would need to comply
until the Commission adopts those rules. While the Commission is
committed to implementing Congress's directive to require SB SEFs to
register with the Commission and comply with the Core Principles, the
Commission understands that some or all potential SB SEFs may need a
period of time in which to acquire or configure the necessary systems,
engage and train the necessary staff, and develop and implement the
necessary policies and procedures in order to comply with any final
rules that the Commission may adopt.
The Commission requests comment as to whether it should provide a
SB SEF a certain amount of time to comply with the proposed
requirements of Regulation SB SEF applicable to a registered SB SEF
once the SB SEF has become registered, and, if so, which provisions,
why, and how much time should be provided. For example, proposed Rule
820 relates to the fair representation of participants on the SB SEF's
Board. Should the Commission provide for a delayed compliance date for
this provision to allow the SB SEF sufficient time to establish the
requisite procedures relating to the election of fair representation
candidates, including through a petition process, and to align
compliance with the date of its election of other directors? \406\
Should the Commission consider a delayed compliance date for the CCO's
annual report required by proposed Rule 823, for example, if the SB
SEF's fiscal year ended shortly after the SB SEF's registration
application was approved by the Commission? Are there other proposed
rules or provisions of such rules for which a SB SEF should be provided
more time to comply after becoming registered? If so, which ones and
under what conditions should the Commission permit a delayed compliance
date? For example, would it be appropriate to delay the date for an SB
SEF to comply with the automated surveillance requirements of proposed
Rule 813, as long as the SB SEF had other means to satisfy its
surveillance obligations? If so, how long of a delay would be
appropriate?
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\406\ See Regulation MC Proposing Release, supra note 82.
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The Commission notes that, under the proposed rules, it would have
the authority to temporarily register a SB SEF and, under proposed
Regulation SB SEF, a temporarily registered SB SEF would need to comply
with Regulation SB SEF, including the rules implementing the Core
Principles. Should a phased-in compliance approach apply only with
respect to those SB SEFs that are temporarily registered with the
Commission? Should phased-in compliance be built into the temporary
registration process? Alternatively, should the Commission consider
using its Section 36 exemptive authority to exempt SB SEFs from certain
of the requirements of Regulation SB SEF on a case-by-case basis? If
commenters favor a phased-in compliance approach for certain proposed
rules, they should provide specific recommendations, a rationale for
each such recommendation, and the conditions under which any such
phased-in approach should be granted.
The Commission also seeks comment on whether it is necessary or
appropriate for SB SEFs that do not meet certain objective thresholds,
such as a trading or volume threshold, to comply with all of the
requirements of proposed Regulation SB SEF. To avoid unnecessary
barriers to entry that could preclude small SB SEFs from entering this
market and better facilitate competition and innovation in the SB swap
markets that could be used to promote more efficient trading in
organized, transparent and regulated venues, would it be necessary or
appropriate to except an SB SEF from certain requirements of proposed
Regulation SB SEF under certain conditions, e.g., if the SB SEF does
not reach a specified volume or liquidity threshold with respect to the
trading of SB swaps. For example, should a SB SEF be excepted from
provisions of proposed Rule 816 regarding emergency authority and
proposed Rule 822 regarding systems safeguards if the SB SEF does not
reach a specified volume or liquidity threshold with respect to the
trading of SB swaps? Are there circumstances when it would be
burdensome for a SB SEF to undertake electronic surveillance of SB
swaps, e.g., if the SB SEF had a low threshold of trading in SB swaps?
In that case, would it be appropriate to except the SB SEF from the
automated surveillance requirements of proposed Rule 813, as long as
the SB SEF had other means to satisfy its surveillance obligations? How
should any low volume or other liquidity-based exception be measured,
particularly at the outset of trading of SB swaps on registered SB
SEFs? Are there other conditions that should be considered in any
Commission determination that a SB SEF need not comply with certain
provisions of SB SEF and, if so, what are those conditions? In lieu of
granting exceptions from certain proposed rules under certain
conditions on an omnibus basis, should the Commission instead consider
granting exemptions from the provisions of Regulation SB SEF on a case-
by-case basis?
XXVI. General Request for Comments
The Commission seeks comment on the proposed interpretation of the
definition of SB SEF; creation of a registration framework for SB SEFs;
and establishment of rules with respect to the Dodd-Frank Act
requirement that a SB SEF must comply with the enumerated fourteen Core
Principles and enforce compliance with those principles. The Commission
particularly requests comment on possible alternatives to the proposals
in this release. The Commission also seeks comments on the general
impact the proposals would have on the market for SB swaps.
The Commission invites commenters to address whether the proposed
rules are appropriately tailored to achieve the goal of transparency,
competition, and efficiency in the SB swap market, including with
respect to the administration of the SB SEFs' regulatory activities.
The Commission also requests comment on the necessity and
appropriateness of mandating the proposed requirements set forth in
this release. The Commission seeks comment on the proposals as a whole,
including their interaction with the other provisions of the Dodd-Frank
Act. The Commission further seeks comment on whether the proposals
would help achieve the broader goals of increasing transparency and
accountability in the SB swap market.
Commenters should, where possible, provide the Commission with
empirical data to support their views. Commenters suggesting
alternative approaches should provide comprehensive proposals,
including any conditions or limitations that they believe should apply;
the reasons for their suggested approaches; and their analysis
regarding why their suggested approaches would satisfy the statutory
mandate contained in Section 763 of the Dodd-Frank Act.
In considering the proposal, the Commission requests that
commenters consider not only each individual proposal contained in
proposed Regulation SB SEF but also the totality
[[Page 11016]]
of the Commission's proposals relating to SB SEFs, including the
proposed interpretation of the definition of SB SEF, the proposed rules
relating to SB SEFs, and the proposed registration requirements for SB
SEFs. Do the proposed interpretation of the definition of SB SEF and
proposed Regulation SB SEF in their entirety provide an efficient and
effective way to implement the requirements of the Dodd-Frank Act
relating to SB SEFs? Are the proposed interpretation of the definition
of SB SEF and proposed Regulation SB SEF in their entirety properly
tailored so that a SB SEF can meet the proposed regulatory requirements
and yet be an economically viable business? Are there aspects of the
Commission's proposals relating to the regulation of SB SEFs that, when
viewed as a whole, are too burdensome, especially in light of the
nascent stage of the SB swap market? If so, what are those features and
are there ways in which they can be revised? With respect to the
proposed rules to implement the Core Principles, commenters are invited
to consider, in addition to the costs of each proposed rule, the
totality of the costs of all of the proposed rules taken as a whole.
Are there any instances in which aspects of the Commission's proposals
should not apply? For example, should a system or platform that
otherwise would meet the proposed interpretation of the definition of
SB SEF, but that does a minimal business in the SB swap market, be
exempt from all or some of the requirements of Regulation SB SEF either
temporarily or permanently? In general, are there additional steps that
the Commission could take that would implement the requirements of the
Dodd-Frank Act that apply to SB SEFs and at the same time allow the SB
swap market to continue to develop?
Title VII of the Dodd-Frank Act requires that the SEC consult and
coordinate to the extent possible with the CFTC for the purposes of
assuring regulatory consistency and comparability, to the extent
possible,\407\ and states that in adopting rules, the CFTC and SEC
shall treat functionally or economically similar products or entities
in a similar manner.\408\
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\407\ See Public Law 111-203, Sec. 712(a)(2).
\408\ See Public Law 111-203, Sec. 712(a)(7).
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The CFTC is adopting rules relating to SEFs as required under
Section 733 of the Dodd-Frank Act. Understanding that the Commission
and the CFTC regulate different products and markets, and as such,
appropriately may be proposing alternative regulatory requirements, the
Commission requests comments on the impact of any differences between
the Commission and CFTC approaches to the regulation of SB SEFs and
SEFs. Specifically, do the regulatory approaches under the Commission's
proposed rulemaking pursuant to Section 763 of the Dodd-Frank Act and
the CFTC's proposed rulemaking pursuant to Section 733 of the Dodd-
Frank Act result in duplicative or inconsistent efforts on the part of
market participants subject to both regulatory regimes or result in
gaps between those regimes? If so, in what ways do commenters believe
that such duplication, inconsistencies, or gaps should be minimized? Do
commenters believe the approaches proposed by the Commission and the
CFTC to regulate SB SEFs and SEFs are comparable? If not, why? Do
commenters believe there are approaches that would make the regulation
of these facilities more comparable? If so, what are those approaches?
Do commenters believe that it would be appropriate for the Commission
to adopt an approach proposed by the CFTC that differs from the
Commission's proposal? If so, which one? The Commission requests
commenters to provide data, to the extent possible, supporting any such
suggested approaches.
The Commission seeks comment on whether its proposed rules, either
individually or collectively, could permit regulatory arbitrage or have
the effect of driving SB swaps and other derivatives transactions to
financial centers in other jurisdictions. In this regard, how do the
proposed rules compare with comparable existing or proposed rules of
other jurisdictions? If the Commission were to adopt the proposed
rules, would market participants, end users, and others find it less
costly to transact their SB swaps and other derivatives transactions in
other jurisdictions? If so, please provide specific details on those
jurisdictions that could be regarded as having preferential regulation
for trading SB swaps and please identify all the specific rules and
circumstances that could lead to such preferences. The Commission also
seeks comment on specific actions that it could take to harmonize its
proposed rules with those of other jurisdictions consistent with the
mandates and goals of the Dodd-Frank Act.
XXVII. Paperwork Reduction Act
Certain provisions of the proposed rules contain new ``collection
of information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (``PRA'').\409\ The Commission is submitting the
proposed collection of information to the Office of Management and
Budget (``OMB'') for review in accordance with 44 U.S.C. 3507 and 5 CFR
1320.11. The title of the new collection of information is Regulation
SB SEF. As proposed, Regulation SB SEF would implement the provisions
of Title VII of the Dodd-Frank Act relating to the registration and
regulation of SB SEFs. Proposed Regulation SB SEF would include rules
regarding the registration of a prospective SB SEF on Form SB SEF,
rule-writing, reporting, recordkeeping, timely publication of trading
information, the filing of new or amended rules or new products with
the Commission, reports of the SB SEF's CCO, surveillance systems to
capture certain required information and access to SB SEFs by
ECPs.\410\ An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it displays
a currently valid OMB control number.
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\409\ 44 U.S.C. 3501 et seq.
\410\ As proposed, Regulation SB SEF would contain 24 rules that
are designated Rule 800 through Rule 823 inclusive; not all of these
proposed rules would include a collection of information. The
proposed form for registering as a SB SEF under Regulation SB SEF is
Form SB SEF. This collection of information includes any collections
of information required by proposed Form SB SEF. Unless identified
otherwise, all proposed rules referred to in this section would be
contained in Regulation SB SEF.
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A. Summary of Collection of Information
1. Registration Requirements for SB SEFs and Form SB SEF
A number of the proposed rules under Regulation SB SEF relate to
registration with the Commission by an applicant that seeks status as a
registered SB SEF. Proposed Rules 801, 802, 803, 804, and proposed Form
SB SEF each would contain requirements relating to registration with
the Commission by an applicant seeking to register as a SB SEF that
would result in a paperwork burden.
Proposed Rule 801(a) would require an applicant to apply for
registration with the Commission as a SB SEF by filing electronically,
in a tagged data format, a registration application on Form SB SEF in
accordance with the instructions contained therein. Under proposed Rule
801(d), an applicant would be required to designate and authorize on
Form SB SEF an agent in the United States to accept notice or service
of process, pleadings, or other documents in any suit, action or
proceedings brought against it to enforce the Federal securities laws
or the rules or regulations thereunder. Under
[[Page 11017]]
proposed Rule 801(e), an applicant that is controlled by any other
person \411\ would be required to certify on Form SB SEF and provide an
opinion of counsel that any person that controls such SB SEF will
consent to and can, as a matter of law, provide the Commission with
prompt access to its books and records, to the extent such books and
records are related to the activities of the SB SEF, and submit to
onsite inspection and examination by representatives of the Commission
with respect to the activities of the SB SEF. Under proposed Rule
801(f), a non-resident person applying for registration would be
required to certify on Form SB SEF and provide an opinion of counsel
that it can, as a matter of law, provide the Commission with prompt
access to its books and records and submit to onsite inspection and
examination by representatives of the Commission. In addition, proposed
Rule 814(b)(4) would require the applicant to certify at the time of
registration on Form SB SEF that the SB SEF has the capacity to fulfill
its obligations under international information sharing agreements to
which it is a party as of the date of such certification.
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\411\ See supra note 319 and accompanying text regarding the
definition of ``control.''
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Proposed Rule 802 relates to amendments to Form SB SEF. Proposed
Rule 802(a) would require a SB SEF to file an amendment to Form SB SEF
promptly, but in no case later than 5 business days, after the
discovery that any information filed on Form SB SEF, any statement
therein, or any exhibit or amendment thereto, was inaccurate when
filed. Proposed Rule 802(b) would require a SB SEF to file an
amendment, on Form SB SEF, within 5 business days after any action is
taken that renders inaccurate, or causes to be incomplete, information
filed on the Execution Page of the Form SB SEF or as part of Exhibits
C, E, G or N,\412\ or any amendments thereto. Proposed Rule 802(c)
would require a SB SEF that is controlled by any other person to file
an amendment to Exhibit P on Form SB SEF within 5 business days after
any changes in the legal or regulatory framework of any person that
controls the SB SEF that would impact the ability of or the manner in
which any such person consents to or provides the Commission prompt
access to its books and records, to the extent such books and records
relate to the activities of the SB SEF, or impacts the Commission's
ability to inspect and examine any such person with respect to the
activities of the SB SEF. Proposed Rule 802(d) would require a non-
resident SB SEF to file an amendment to Exhibit P on Form SB SEF within
5 business days after any changes in the legal or regulatory framework
that would impact the SB SEF's ability to 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 SB SEF.
Proposed Rule 802(f) would require a SB SEF to file an annual update to
Form SB SEF within 60 days of the end of its fiscal year.
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\412\ These Exhibits pertain to the list of officers, directors
and committees of the SB SEF (Exhibit C); ownership of the SB SEF
(Exhibit E); certain material operating agreements (Exhibit G); and
criteria for determining what securities may be traded (Exhibit N).
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Proposed Rule 803(a) would require a registered SB SEF to provide
to the Commission material relating to the trading of SB swaps
(including notices, circulars, bulletins, lists, and periodicals)
issued or made generally available to SB SEF participants. If the
information required to be filed pursuant to proposed Rule 803(a) is
available continuously on an Internet Web site controlled by a SB SEF,
proposed Rule 803(b) would allow the SB SEF to indicate the location of
the Web site where the information may be found and certify that the
information available at such Web site is accurate as of its date in
lieu of filing such information with the Commission pursuant to
proposed Rule 803(a).
Proposed Rule 804(a) would allow a SB SEF to withdraw from
registration by filing with the Commission a written notice of
withdrawal and an amended Form SB SEF to update any inaccurate
information.
Proposed Rules 811(b)(4) and 811(h)(2) would require a SB SEF to
report information regarding grants, denials and limitations of access
on Form SB SEF and to disclose all disciplinary actions taken annually
on its annual update to From SEF, respectively.
2. Rule-Writing Requirements for SB SEFs
A number of the proposed rules under Regulation SB SEF would
require a SB SEF to establish rules, policies and procedures with
respect to various matters. These are proposed Rules 809(c), 810(b),
811(a)(2), 811(a)(3), 811(b)(1), 811(b)(5), 811(c), 811(d), 811(f),
811(g), 811(i), 813(a), 813(c), 813(d), 814(a), 815(a), 816(a), 816(b),
818(d), 820(a), 820(c) and 822(a)(1).
Proposed Rule 809(c) would require a SB SEF to establish rules
setting forth requirements for an eligible person to become a
participant in the SB SEF. Such rules would require a participant, at a
minimum, to: (1) Be a member of, or have an arrangement with a member
of, a registered clearing agency to clear trades in the SB swaps that
are subject to mandatory clearing and entered into by the participant
on the SB SEF; (2) (i) meet the minimum financial responsibility and
recordkeeping and reporting requirements imposed by the Commission by
virtue of its registration as a SB swap dealer, major SB swap
participant, or broker; or (ii) in the case of an eligible contract
participant, meet the recordkeeping and reporting requirements that the
SB SEF would establish pursuant to proposed Rule 813; (3) agree to
comply with the rules, polices, and procedures of the SB SEF; and (4)
consent to the disciplinary procedures of the SB SEF for violations of
the SB SEF's rules.
Proposed Rule 810(b) would require a SB SEF to establish: (1) Rules
that provide for the equitable allocation of reasonable dues, fees, and
other charges among its participants and any other users of its system;
(2) rules and systems that are not designed to permit unfair
discrimination among participants and any other users of the SB SEF's
system; (3) rules that promote just and equitable principles of trade;
and (4) rules to provide, in general, a fair procedure for disciplining
participants for violations of the rules of the SB SEF.
Proposed Rule 811(a)(2) would require a SB SEF to establish and
enforce trading, trade processing, and participation rules that would
deter abuses and have the capacity to detect, investigate, and enforce
those rules, including means to provide market participants with
impartial access to the market and to capture information that may be
used in establishing whether rule violations have occurred. Proposed
Rule 811(a)(3) would require a SB SEF to establish rules governing the
operation of the SB SEF, including rules specifying trading procedures
to be used in entering and executing orders traded or posted on the SB
SEF, including block trades. Proposed Rule 811(b)(1) would require a SB
SEF to establish fair, objective and not unreasonably discriminatory
standards for granting impartial access to trading on the SB SEF.
Proposed Rule 811(b)(5) would require a SB SEF to establish a fair
process for the review of any prohibition or limitation on access with
respect to a participant or any refusal to grant access with respect to
an applicant. Proposed Rule 811(c) would require a SB SEF to establish
rules concerning the terms and conditions of the SB swaps traded on the
SB SEF and to have rules stipulating the method by which representation
on the swap
[[Page 11018]]
review committee of the SB SEF shall be chosen by the Board.
Proposed Rule 811(d) would require a SB SEF to establish rules
governing the procedures for trading on the SB SEF including, but not
limited to: (1) Doing business on the SB SEF; (2) the types of trading
interest \413\ that would be available on the SB SEF; (3) the manner in
which trading interest would be handled on the SB SEF and a requirement
for fair treatment of all trading interest; (4) the manner in which
price transparency for participants entering trading interest into the
system would be promoted; (5) the manner in which trading interest and
transaction data would be disseminated, whether to the SB SEF's
participants or otherwise, and whether for a fee or otherwise; (6)
prohibited trading practices; (7) the prevention of the entry of
orders, requests for quotations, responses, quotations, or other
trading interest that might result in a trade that is clearly erroneous
with respect to the terms of the trade, a fair and non-discriminatory
manner of handling any trade that is clearly erroneous, and resolution
of any disputes concerning a clearly erroneous trade; (8) trading halts
in any SB swap, which rules would be required to include procedures for
halting trading in a SB swap when trading has been halted or suspended
in the underlying security or securities pursuant to the rules or an
order of a regulatory authority with authority over the underlying
security or securities; (9) the manner in which block trades would be
handled, if different from the handling of non-block trades; and (10)
any other rules concerning trading on the SB SEF.
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\413\ For purposes of this PRA, references to ``trading
interest'' includes any order, request for quotation response,
quotation, or any other trading interest on the SB SEF.
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Proposed Rule 811(f) would require a SB SEF to establish rules
concerning the reporting of trades executed on the SB SEF to a clearing
agency if the transaction is subject to clearing and the procedures for
the processing of transactions in SB swaps that occur on or through the
SB SEF including, but not limited to, procedures to resolve any
disputes concerning the execution of a trade.
Proposed Rule 811(g) would require a SB SEF to establish rules and
procedures concerning the disciplining of participants including, but
not limited to, rules authorizing its staff to recommend and take
disciplinary action for violations of the rules of the SB SEF;
specifying the sanctions that may be imposed upon participants for
violations of the rules of the SB SEF such that each sanction is
commensurate with the corresponding violation; and establishing fair
and non-arbitrary procedures for any disciplinary process and appeal
thereof.
Proposed Rule 811(i) would require a SB SEF to establish rules and
procedures to assure that information to be used to determine whether
rule violations have occurred is captured and retained in a timely
manner.
Proposed Rule 813(a) would require a SB SEF to establish and
enforce rules or terms and conditions defining, or specifications
detailing trading procedures to be used in entering and executing
orders traded on or through the facilities of the SB SEF and procedures
for trade processing of SB swaps on or through the facilities of the SB
SEF. Proposed Rule 813(c) would require a SB SEF to establish rules
requiring any participant that enters any order or trading interest or
executes any transaction on the SB SEF to maintain books and records of
any such trading interest or transaction and of any position in any SB
swap that is the result of any such trading interest or transaction and
to provide prompt access to such books and records to the SB SEF and to
the Commission.
Proposed Rule 813(d) would require a SB SEF to establish and
maintain procedures to investigate possible rule violations, to prepare
reports concerning the findings and recommendations of investigations,
and to take corrective action, as necessary.
Proposed Rule 814(a) would require a SB SEF to establish and
enforce rules requiring its participants \414\ to furnish to the SB
SEF, upon request, and in the form and manner prescribed by the SB SEF,
any information necessary to permit the SB SEF to perform its
responsibilities, including, without limitation, surveillance,
investigations, examinations and discipline of participants; such
information may include, without limitation, financial information,
books, accounts, records, files, memoranda, correspondence, and any
other information pertaining to trading interest entered and
transactions executed on or through the SB SEF, and to cooperate with
and allow access by the SB SEF and representatives of the Commission.
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\414\ See supra note 227 and accompanying text regarding the
definition of ``participant.''
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Proposed Rule 815(a) would require a SB SEF to establish and
enforce rules and procedures for ensuring the financial integrity of SB
swaps entered on or through the facilities of such SB SEF, including
the clearance and settlement of SB swaps pursuant to new section
3C(a)(1) of the Exchange Act.
Proposed Rule 816(a) would require a SB SEF to establish rules and
procedures to provide for the exercise of emergency authority in
consultation or cooperation with the Commission as necessary or
appropriate. Proposed Rule 816(b) would require a SB SEF to establish
rules and procedures that would specify: (1) The person or persons
authorized by the SB SEF to declare an emergency; (2) how the SB SEF
would notify the Commission of its decision to exercise its emergency
authority; (3) how the SB SEF would notify the public of its decision
to exercise its emergency authority; (4) the processes for decision
making by the SB SEF personnel with respect to the exercise of
emergency authority, including alternate lines of communication and
guidelines to avoid conflicts of interest in the exercise of such
authority; and (5) the processes for determining that an emergency no
longer exists and notifying the Commission and the public of such
decision.
Proposed Rule 818(d) would require a SB SEF to establish, maintain,
and enforce written policies and procedures to verify the accuracy of
the transaction data that it collects and reports.
Proposed Rule 820(a) would require the rules of a SB SEF to assure
fair representation of participants in the selection of the SB SEF's
Board. Proposed Rule 820(c) would require the rules of a SB SEF to
include a fair process for participants to nominate an alternative
candidate or candidates to the Board by petition.
Proposed Rule 822(a)(1) would require a SB SEF, with respect to
those systems that support or are integrally related to the performance
of its activities, to establish, maintain, and enforce written policies
and procedures reasonably designed to ensure that its systems provide
adequate levels of capacity, resiliency, and security. These policies
and procedures would, at a minimum, require the security-based swap
execution facility to: (1) Establish reasonable current and future
capacity estimates, including quantifying in appropriate units of
measure the limits of the SB SEF's capacity to receive (or collect),
process, store or display (or disseminate for display or other use) the
data elements included within each function, and identifying the
factors (mechanical, electronic, or other) that account for the current
limitations; (2) conduct periodic capacity stress tests of critical
systems to determine such systems' ability to process transactions in
an accurate, timely, and efficient
[[Page 11019]]
manner; (3) develop and implement reasonable procedures to review and
keep current its system development and testing methodology; (4) review
the vulnerability of its systems and data center computer operations to
internal and external threats, physical hazards, and natural disasters,
and; (5) establish adequate contingency and disaster recovery plans
which shall include plans to resume trading of security-based swaps by
the SB SEF no later than the next business day following a wide-scale
disruption.
3. Reporting Requirements for SB SEFs
A number of the proposed rules under Regulation SB SEF would
require SB SEFs, SB SEF participants and other persons to report or
provide information to the Commission or to a SB SEF. Proposed Rules
814, 816(d), 818(a)(3), 818(e), 818(f), 822(a)(2), 822(a)(3), and
822(a)(4) each would contain a reporting requirement.\415\ These
requirements to report or provide information to the Commission would
result in a paperwork burden.
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\415\ In addition, proposed Rule 823 would require the SB SEF's
CCO to submit to the Commission an annual compliance report, along
with a financial report. The paperwork burden associated with the
CCO's reports, including for proposed Rules 811(b)(4) and 811(g),
and 814(b) that set forth certain items to be addressed in the CCO's
reports, is addressed separately in Section XXVII.A.7., below.
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Proposed Rule 814 addresses the ability of a SB SEF to obtain
information from its participants, and the ability of Commission
representatives to obtain information from a SB SEF and its
participants. Proposed Rule 814(a) would require a SB SEF to establish
and enforce rules requiring its participants to provide information or
documents to the SB SEF upon request. The information or documents
requested may include any information that is necessary to permit the
SB SEF to perform its regulatory responsibilities, including, without
limitation, any financial information, books, accounts, records, files,
memoranda, correspondence, and any other information pertaining to
trading interest entered and transactions executed on or through the SB
SEF. Proposed Rule 814(a) also would direct a SB SEF to require its
participants to allow access by any Commission representative to
examine the participant's books and records and to obtain or verify
information related to trading interest entered or transactions
executed on or through the SB SEF.\416\ Proposed Rule 814(b) would
direct a SB SEF to allow access by any Commission representative to
examine the SB SEF's books and records and to obtain or verify
information related to trading interest entered or transactions
executed on or through the SB SEF. Proposed Rule 814(b)(3) would
require a SB SEF to have the capacity to carry out such international
information-sharing agreements as the Commission may require.
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\416\ The Commission notes that proposed Rule 813(c)(2)
similarly requires a SB SEF to establish and enforce rules that
require any participant that enters any trading interest or executes
any transaction on the SB SEF to provide the Commission with prompt
access to its books and records. The Commission considers the prompt
access requirement of proposed Rule 813(c)(2) to be included in the
burden estimates of proposed Rule 814(a) for purposes of this PRA
analysis.
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Proposed Rule 816(d) would require a SB SEF to notify the
Commission promptly of any exercise of its emergency authority, and
within two weeks following cessation of an emergency, submit to the
Commission a report explaining the basis for declaring an emergency,
how conflicts of interest were minimized in the SB SEF's exercise of
its emergency authority, and the extent to which the SB SEF considered
the effect of its emergency action on the markets for the SB swap and
any security or securities underlying the SB swap.
Proposed Rule 818 would establish both recordkeeping and reporting
obligations for SB SEFs. Proposed Rule 818(e) would require a SB SEF to
report to the Commission such information as the Commission may, from
time to time, determine to be necessary to perform the duties of the
Commission under the Exchange Act. Proposed Rule 818(f) would require a
SB SEF to provide to any representative of the Commission, upon
request, copies of documents required to be kept and preserved pursuant
to the recordkeeping requirements of proposed Rules 818(a) and (b).
Proposed Rule 822 addresses system safeguards for the SB SEF.
Proposed Rule 822(a)(2) would require a SB SEF to submit to the
Commission on an annual basis an objective review with respect to those
systems that support or are integrally related to the performance of
the SB SEF's activities. If the objective review is performed by an
internal department, an objective, external firm would be required to
assess the internal department's objectivity, competency, and work
performance. Proposed Rule 822(a)(3) would require a SB SEF to promptly
notify the Commission in writing of material systems outages and any
remedial measures implemented or contemplated and submit to the
Commission within five business days of when the outage occurred a
written description and analysis of the outage and any remedial
measures that have been implemented or are contemplated. Proposed Rule
822(a)(4) would require a SB SEF to notify the Commission in writing at
least thirty calendar days before implementation of any planned
material systems changes.
4. Recordkeeping Required Under Regulation SB SEF
Proposed Rule 818(a) would require a SB SEF to keep and preserve at
least one copy of all documents, including all correspondence,
memoranda, papers, books, notices, accounts, and other such records,
including the audit trail records required pursuant to proposed Rule
818(c), as shall be made and received in the conduct of its business.
Proposed Rule 818(b) would require SB SEFs to keep and preserve such
documents and other records for a period of not less than five years,
the first two years in an easily accessible place. Proposed Rule 818(c)
would require SB SEFs to establish and maintain accurate, time-
sequenced records of all trading interest and transactions received by,
originated on, or executed on the SB SEF. In addition, proposed Rule
811(b)(3) would require that a SB SEF make and keep records relating to
all grants of access and the basis for such grant, and all denials or
limitations of access to the SB SEF and the reasons for such denial or
limitation. Proposed Rule 811(h) would require a SB SEF to make and
keep records relating to all disciplinary proceedings, sanctions
imposed, and appeals thereof.\417\
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\417\ The records required by proposed Rules 811(b)(3) and
811(g) would be included in the business records required to be kept
pursuant to proposed Rule 818. Therefore, the Commission
preliminarily believes that the paperwork burden for these rules
would be included in the estimated burden for proposed Rule 818. See
infra note 493 and accompanying text.
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5. Timely Publication of Trading Information Requirement for SB SEFs
Proposed Rule 817(a)(1) would require a SB SEF to have the capacity
to electronically capture, transmit, and disseminate information on
price, trading volume, and other trading data on all SB swaps executed
on or through the SB SEF.\418\
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\418\ Proposed Rule 817(a)(2) requires every SB SEF to make
public timely information on price, trading volume, and other
trading data on SB swaps to the extent required by the Commission.
The Commission notes that proposed Rule 817(a)(2) does not require a
SB SEF to make public timely information on price, trading volume,
and other trading data on SB swaps. Rather, the Commission has
proposed that other parties be responsible for timely publication of
trading information. See Reporting and Dissemination Release supra
note 6.
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[[Page 11020]]
6. Rule Filing and Product Filing Processes for SB SEFs
Proposed Rules 805 and 806 relate to the submission to the
Commission of filings of new or amended rules, while proposed Rules 807
and 808 relate to the submission to the Commission of filings to make
SB swap products available to trade. Proposed Rules 805, 806, 807, and
808 would impose a collection of information burden on SB SEFs.\419\
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\419\ The Commission expects to conduct a separate rulemaking
that would propose the form for the electronic submission of such
filings to the Commission and the procedures pertinent to such form.
Should the Commission propose any such form and associated
procedures, it would include a collection of information burden as
part of that proposed rulemaking.
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Rule Filings: Proposed Rules 805 and 806 would require a SB SEF to
submit rule filings for new rules or rule amendments, including changes
to an existing product's terms or conditions.\420\ Under proposed Rules
805(a) and 806(a), a SB SEF could submit either a voluntary request for
prior approval or a self-certified rule filing, respectively, for any
new rules or rule amendments. Under both proposed rules, a SB SEF would
be required to submit the rule filings electronically to the Commission
in a format to be specified by the Commission.\421\ Both proposed Rules
805(a) and 806(a) would require the SB SEF to include the following
information in the requisite rule filings: (1) The text of the proposed
rule or rule amendment (in the case of a rule amendment, deletions and
additions would need to be indicated); (2) the proposed effective date
or intended date of implementation, as applicable; (3) the
documentation relied on by the SB SEF to establish the basis for
compliance with the applicable provisions of the Exchange Act and the
rules and regulations thereunder (including Section 3D(d) of the
Exchange Act and the rules and regulations thereunder); (4) a
certification or written statement, as applicable, that the SB SEF has
published a notice of pending new rule or rule amendment, or a notice
of pending certification, as applicable, on the SB SEF's Web site and a
copy of the submission, concurrent with its filing with the Commission;
(5) a description of any substantive opposing views on the rule that
were expressed to the SB SEF by the Board or committee members,
participants or market participants that were not incorporated into the
rule (or, with respect to a self-certification filing under Rule
806(a), a statement that no such opposing views were expressed, if
applicable); (6) a request for confidential treatment, if appropriate;
and (7) for proposed amendments to a product's terms and conditions, a
written statement that the SB SEF has undertaken a due diligence review
of the legal conditions, including conditions relating to contractual
and intellectual property rights, that may materially affect the
trading of the product.
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\420\ Filings that relate to proposed changes to an existing SB
swap's terms or conditions would be submitted under proposed Rules
806 or 807.
\421\ See supra Section XXIII.
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In addition, for voluntary requests for prior approval rule
filings, proposed Rule 805(a) would also require SB SEFs to include:
(1) A description of any action taken or anticipated to be taken to
adopt the proposed rule by the SB SEF or its Board, or by any committee
thereof, and a citation to the rules of the SB SEF that authorize the
adoption of the proposed rule change; (2) an explanation of the
operation, purpose and effect of the proposed new rule or rule
amendment, including, as applicable, a description of the anticipated
benefits to market participants or others, any potential
anticompetitive effects on market participants or others, and how the
rule fits into the SB SEF's framework of regulation; (3) any additional
information that may be beneficial to the Commission in analyzing the
new rule or rule amendment (and if the proposed rule affects, directly
or indirectly, the application of any other rule of the SB SEF, the
pertinent text of any such rule must be set forth and the anticipated
effect described); and (4) and the identification of any Commission
rule or regulation that Commission may need to amend or interpret in
order to approve the new rule or rule amendment and, to the extent that
such an amendment or interpretation is necessary to accommodate the new
rule or rule amendment, a reasoned analysis supporting the proposed
amendment or interpretation.
For self-certification rule filings, proposed Rule 806(a) also
would require a SB SEF to include: (1) A certification by the SB SEF
that the rule complies with the Exchange Act and Commission rules and
regulations thereunder; and (2) upon request of any representative of
the Commission, additional evidence, information, or data that may be
beneficial to the Commission in conducting a due diligence assessment
of the filing and the SB SEF's compliance with any of the requirements
of the Exchange Act or the rules and regulations thereunder.
Product Filings: Proposed Rules 807 and 808 would require a SB SEF
to submit product filings prior to trading a SB swap. Under proposed
Rules 807(a) and 808(a), a SB SEF could submit either a self-certified
product submission or voluntary request for prior approval product
filing, respectively, before trading a SB swap. Under both proposed
rules, a SB SEF would be required to submit the product filings
electronically to the Commission in a format specified by the
Commission. Both proposed Rules 807(a) and 808(a) would require SB SEFs
to include the following information in the product filings: (1) A copy
of the SB swap's terms and conditions, (2) the documentation relied on
to establish the basis for compliance with the Exchange Act and rules
and regulations thereunder (including Section 3D(d) of the Exchange Act
and the rules and regulations thereunder); (3) a written statement
verifying that the SB SEF has undertaken a due diligence review of the
legal conditions, including legal conditions that relate to contractual
and intellectual property rights, that may materially affect the
trading of the SB swap; (4) a request for confidential treatment, if
appropriate; and (5) a certification that the SB SEF has published on
its Web site a notice of pending request for approval, or a notice of
pending certification, as applicable, and a copy of the submission,
concurrent with the filing of the submission with the Commission. In
addition, for self-certification product filings, proposed Rule 807(a)
also would require a SB SEF to include the following information: (1)
The intended date on which the SB swap may begin trading, and (2) a
certification by the SB SEF that the SB swap to be traded complies with
the Exchange Act and the rules and regulations thereunder, including
Section 3D(d) of the Exchange act and the rules and regulations
thereunder.
In addition, proposed Rules 807(b) and 808(b) would require a SB
SEF to provide, upon request of any representative of the Commission,
additional evidence, information, or data that demonstrates that the SB
swap meets, initially or on a continuing basis, all of the requirements
of the Exchange Act and rules and regulations thereunder.
7. Requirements Relating to the SB SEF's Chief Compliance Officer
Proposed Rule 823 addresses the obligations of the SB SEF's CCO,
including the CCO's performance of his or her statutory duties with
respect to the SB SEF and its statutory
[[Page 11021]]
requirement to prepare and submit to the Commission annual compliance
and financial reports.
Proposed Rule 823(a) would require the SB SEF's Board to designate
a CCO to perform the duties identified in proposed Rule 823(b) through
(e). Under proposed Rule 823(b)(6) and (7), the CCO would be
responsible for establishing procedures for the remediation of
noncompliance issues identified by the CCO identified through any
compliance office review, look-back, internal or external audit
finding, self-reported error or validated complaint, and establishing
appropriate procedures for the handling, management response,
remediation, retesting, and closing of noncompliance issues.
The CCO also would be required under proposed Rule 823(c) and (d)
to prepare and submit annual compliance reports to the Commission and
the SB SEF's Board containing, at a minimum: (1) A description of the
SB SEF's enforcement of its policies and procedures; (2) information on
all investigations, inspections, examinations, and disciplinary cases
opened, closed, and pending during the reporting period; (3) all grants
of access (including, for all participants, the reasons for granting
such access) and all denials or limitations of access (including for
each applicant, the reasons for denying or limiting access), consistent
with proposed Rule 811(b)(3); (4) any material changes to the policies
and procedures since the date of the preceding compliance report; (5)
any recommendation for material changes to the policies and procedures
as a result of the annual review, the rationale for such
recommendation, and whether such policies and procedures were or will
be modified by the SB SEF to incorporate such recommendation; (6) the
results of the SB SEF's surveillance program, including information on
the number of reports and alerts generated, and the reports and alerts
that were referred for further investigation or for an enforcement
proceeding; (7) any complaints received regarding the SB SEF's
surveillance program; and (8) any material compliance matters
identified since the date of the preceding compliance report.
The CCO is required under proposed Rule 823(e)(1) and (2) to submit
annually a financial report for the SB SEF and for certain affiliated
entities of the SB SEF. Among other things, the annual financial report
for the SB SEF must be audited by a registered public accounting firm
that is qualified and independent in accordance with Rule 2-01 of
Regulation S-X (17 CFR 210.2-01), be a complete set of financial
statements of the SB SEF that are prepared in accordance with U.S.
generally accepted accounting principles for the two most recent fiscal
years of the SB SEF. For certain affiliated entities (every subsidiary
in which the applicant has, directly or indirectly, a 25% interest and
for every entity that has, directly or indirectly, a 25% interest in
the applicant), the SB SEF must provide a financial report consisting
of a complete set of unconsolidated financial statements (in English)
for the latest two fiscal years and include such footnotes and other
disclosures as are necessary to avoid rendering the financial
statements misleading. As proposed, the reports for the SB SEF and for
the SB SEF's affiliated entities would be provided in XBRL consistent
with Rules 405(a)(1), (a)(3), (b), (c), (d) and (e) of Regulation S-
T.\422\ The Commission notes that these annual financial reports are
the same as those required to be produced upon registration and
annually pursuant to Exhibits F and H to proposed Form SB SEF for the
SB SEF. In addition, pursuant to Exhibit H to proposed Form SB SEF, the
Commission may request unaudited financial information for any other
affiliated entity not covered by the 25% interest threshold discussed
above.
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\422\ See 17 CFR 232.405.
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8. Surveillance Systems Requirements for SB SEFs
Several proposed rules under Regulation SB SEF would require a SB
SEF to electronically surveil its market and to maintain an automated
surveillance system. To the extent that such surveillance and systems
would require a SB SEF to collect and assess data and other
information, such rules would result in a collection of information.
Proposed Rule 811(j) would require a SB SEF to have the capacity to
capture information that may be used in establishing whether rule
violations have occurred, including through the use of automated
surveillance systems as set forth in proposed Rule 813(b). Proposed
Rule 813(a)(2) would require a SB SEF to monitor trading in SB swaps to
prevent manipulation, price distortion, and disruptions of the delivery
or cash settlement practices and procedures, including methods for
conducting real-time monitoring of trading and comprehensive and
accurate trade reconstructions. Proposed Rule 813(b) would require a SB
SEF to have the capacity and appropriate resources to electronically
monitor trading in SB swaps on its market by establishing an automated
surveillance system, including through real-time monitoring of trading
and use of automated alerts. \423\
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\423\ The collection of information burdens associated with the
audit trail provisions of proposed Rule 818(a) and (c) are discussed
in the sections of this PRA analysis relating to recordkeeping.
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9. Access by Non-Registered Eligible Contract Participants
Proposed Rule 809(d)(1) would require a SB SEF that provides direct
access to non-registered ECPs as participants to establish, document,
and maintain a system of risk management controls and supervisory
procedures reasonably designed to manage the financial, regulatory, and
other risks of this business activity.\424\ Proposed Rule 809(d)(2)
would require that the risk management controls and supervisory
procedures for granting access to ECPs as participants of the SB SEF to
be reasonably designed to ensure compliance with all regulatory
requirements.\425\
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\424\ See proposed Rule 809(d)(1). Non-registered ECPs are
eligible contract participants that are not registered with the
Commission as a SB swap dealer, major SB swap participant, or broker
(as defined in section 3(a)(4) of the Exchange Act).
\425\ See proposed Rule 809(d)(2).
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10. Composite Indicative Quote and Executable Bids and Offers
Proposed Rule 811(e) would require a SB SEF that operates an RFQ
platform to create and disseminate through the SB SEF a composite
indicative quote, made available to all participants, for SB swaps
traded on or through the SB SEF. The Commission's proposed
interpretation of SB SEF would require each SB SEF, at the minimum, to
provide any participant with the ability to make and display executable
bids or offers accessible to all participants on the SB SEF, if the
participant wishes to do so.
B. Proposed Use of Information
1. Registration Requirements for SB SEFs and Form SB SEF
As discussed above, proposed Rules 801, 802, 803 and 804 would
require an applicant to register on Form SB SEF, file certain
amendments and updates to Form SB SEF, file other supplemental
information with the Commission with respect to the trading of SB
swaps, and provide notice to the Commission of the SB SEF's withdrawal
of registration. The information collected pursuant to these proposed
rules would enhance the ability of the Commission to determine whether
to approve the registration of an entity as a SB SEF; to monitor and
oversee SB SEFs; to determine that SB
[[Page 11022]]
SEFs initially comply, and continue to operate in compliance, with the
Exchange Act, including the Core Principles applicable to SB SEFs, and
the rules and regulations thereunder; to carry out its statutorily
mandated oversight functions; and to maintain accurate and updated
information regarding SB SEFs. Because the registration information
would be publicly available, it could also be useful to SB SEF's
participants, other market participants, other regulators, and the
public generally.
2. Rule-Writing Requirements for SB SEFs
The proposed provisions of Regulation SB SEF requiring that SB SEFs
establish certain rules, policies and procedures would help SB SEFs
comply with the Exchange Act, including the Core Principles applicable
to SB SEFs, and the rules and regulations thereunder. The rules also
would be useful to the SB SEF's participants in understanding and
complying with the requirements of the SB SEF and to other market
participants, other regulators, and the public generally.
3. Reporting Requirements for SB SEFs
The information that would be collected under the proposed
provisions of Regulation SB SEF requiring SB SEFs, SB SEF participants,
and other persons to submit certain reports and provide certain
information upon request would be used by the Commission to assist in
its oversight of SB SEFs and the SB swap markets.
4. Recordkeeping Required Under Regulation SB SEF
Proposed Rule 813(c) would aid the SB SEF in detecting and
deterring fraudulent and manipulative acts with respect to trading on
its market, as well as help it to fulfill the statutory requirement in
Core Principle 4 that a SB SEF monitor trading in SB swaps, including
through comprehensive and accurate trade reconstructions. The proposed
rule also would aid the Commission in carrying out its responsibility
to oversee SB SEFs.
Proposed Rules 818(a) and (b) would help to ensure that records
exist, and thus would be available to the Commission pursuant to the
proposed reporting requirements. Access to these records would provide
a valuable tool to help the Commission carry out its oversight
responsibility over SB SEFs and the SB swap markets in general.
The audit trail information required to be maintained under the
proposed Rule 818(c) would facilitate the ability of the SB SEF and the
Commission to carry out their respective obligations under the Exchange
Act, by providing a record of the complete history of all trading
interest entered and transactions executed on the SB SEF, which data
could be used to help detect abusive or manipulative trading activity,
prepare reconstructions of activity on the SB SEF or in the SB swaps
market, and generally to understand the causes of unusual market
activity. In addition, proposed Rule 811(b)(3) would require every SB
SEF to make and keep records of all grants, denials, or limitations of
access to the SB SEF, which would provide the Commission an important
tool to help it assess whether the SB SEF is meeting its duty to
provide fair and impartial access to its facility. Further, proposed
Rule 811(h) would require the SB SEF to make and keep records
specifically of all disciplinary proceedings and appeals, which would
allow the Commission to review the disciplinary process at a SB SEF and
would provide the Commission an additional tool to carry out its
oversight responsibilities.
5. Timely Publication of Trading Information Requirement for SB SEFs
The requirement contained in proposed Rule 817 that a SB SEF have
the capacity to electronically capture, transmit, and disseminate
information on price, trading volume, and other trading data on all SB
swaps executed on or through the SB SEF, would assist the SB SEF in
carrying out its regulatory responsibilities under the Exchange Act,
including, without limitation, the proposed requirements that every SB
SEF must keep and preserve books and records of activities related to
its business, and allow access by the Commission to obtain or verify
other information related to orders entered and transactions executed
on or through the SB SEF's facilities. In addition, the Commission
believes that every SB SEF must have the capacity to capture this
information to enable the SB SEF to comply with reasonable requests to
provide information to others, including, SB SEF participants,
counterparties, registered SDRs, or regulatory authorities.
6. Rule Filing and Product Filing Processes for SB SEFs
Proposed Rules 805 and 806 would require a SB SEF to submit new
rule or rule amendments as rule filings either through a voluntary
prior approval process or a self-certification process. The information
that would be collected under these proposed rules would help ensure
compliance by the SB SEF with the provisions of the Exchange Act,
including the Core Principles applicable to SB SEFs, and the rules and
regulations thereunder, as well as assist the Commission in overseeing
the SB SEF's compliance with its regulatory obligations. This
information also would be useful to the SB SEF's participants, because
they would be subject to such new or amended rules and thus would have
an interest in learning about those rules and potentially in submitting
to the Commission comments on any proposed new or amended rules. Other
market participants, other SB SEFs, and other regulators, as well as
the public generally, may find information about proposed new or
amended rules useful.
Proposed Rules 807 and 808 would require a SB SEF to submit filings
for new products that they make available for trading either through a
self-certification process or a voluntary prior approval process. The
information that would be collected under these proposed rules would
help ensure that any SB swap that is available to trade on the SB SEF
would comply with the provisions of the Exchange Act, including the
Core Principles applicable to SB SEFs, and the rules and regulations
thereunder, as well as assist the Commission in overseeing the SB SEF's
compliance with its regulatory obligations. In particular, the
requirements of proposed Rules 807(a) and 808(a) should help the
Commission determine the SB SEF's compliance with the Core Principles
that apply specifically to products, such as Core Principle 3 which
would require a SB SEF to ensure that a SB swap trading on its facility
is not readily susceptible to manipulation. Other market participants,
other SB SEFs, and other regulators, as well as the public generally,
may find information about the new products useful.
7. Requirements Relating to the SB SEF's CCO
As discussed above, proposed Rule 823 would require that a SB SEF's
CCO establish certain policies relating to noncompliance issues as well
as prepare and submit to the Commission both an annual compliance
report and an annual financial report. The information that would be
collected under this proposed rule would help ensure compliance by SB
SEFs with the provisions of the Exchange Act, including the Core
Principles applicable to SB SEFs, and the rules and regulations
thereunder, as well as assist the Commission in overseeing the SB SEFs.
The Commission could use the annual compliance report to help it
evaluate
[[Page 11023]]
whether the SB SEF is carrying out its statutorily-mandated regulatory
obligations and, among other things, to discern the scope of any
denials of access or refusals to grant access by the SB SEF and to
obtain information on the status of the SB SEF's regulatory compliance
program. The annual financial report would provide the Commission with
important information on the financial health of the SB SEF.
8. Surveillance Systems Requirements for SB SEFs
The proposed rules requiring a SB SEF to maintain certain
surveillance systems and monitor trading would enable the SB SEFs to
have the capacity and resources to fulfill its obligations under the
Exchange Act to oversee trading on its market, and to prevent
manipulation and other unlawful activity or disruption of the market.
These systems would help the SB SEF to identify and investigate market
behavior that may be improper and bring any necessary disciplinary
actions.
9. Access by Non-Registered Eligible Contract Participants
Proposed Rule 809 would permit a SB SEF to provide access to the SB
SEF by non-registered ECPs, provided that the conditions of the
proposed rule relating to such access would be satisfied. Proposed Rule
809(d) would require a SB SEF that would permit access to non-
registered ECPs \426\ to establish, document, and maintain a system of
risk management controls and supervisory procedures reasonably designed
to manage the financial, regulatory, and other risks of this business
activity. The risk management controls and supervisory procedures for
granting access to non-registered ECPs would be required to be
reasonably designed to ensure compliance with all regulatory
requirements. Since non-registered ECPs are not directly subject to
capital or other financial requirements, there is a concern that, in
the absence of risk management controls and supervisory procedures,
they could enter into trades that exceed appropriate capital or credit
limits. The proposal relating to risk management controls and
supervisory procedures is intended to help manage these risks
associated with allowing non-registered ECPs to have direct access to
an SB SEF's market.
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\426\ See proposed Rule 809.
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10. Composite Indicative Quote and Executable Bids and Offers
As discussed above, proposed Rule 811(e) would require a SB SEF
that operates an RFQ platform to create and disseminate through the SB
SEF a composite indicative quote, made available to all participants,
for SB swaps traded on or through the SB SEF. The Commission
preliminarily believes that a composite indicative quote would provide
a certain level of pre-trade transparency for an RFQ platform. In
addition, the Commission's proposed interpretation of SB SEF would
require each SB SEF, at the minimum, to provide any participant with
the ability to make and display executable bids or offers accessible to
all participants on the SB SEF, if the participant wishes to do so. The
Commission preliminarily believes that this functionality would provide
greater access to the SB SEF for participants.
C. Respondents
The collection of information associated with the proposed
Regulation SB SEF would apply to entities seeking to register as, and
to registered, SB SEFs. In the Dodd-Frank Act, Congress incorporated
into the Exchange Act a definition of SB SEF and mandated the
registration and regulation of these new facilities.\427\ There
currently are no registered SB SEFs. Based on conversations with the
CFTC and industry sources, the Commission preliminarily believes that
approximately 10 to 20 entities could seek to register as SB SEFs and
thus be subject to the collection of information requirements of these
proposed rules. The Commission is using the higher estimate of 20 SB
SEFs for this PRA analysis.\428\
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\427\ See Public Law 111-203, Sec. 761(a) (adding Section
3(a)(77) of the Exchange Act), defining the term ``security-based
swap execution facility.'' See also Public Law 111-203, Sec. 763(c)
(adding Section 3D of the Exchange Act).
\428\ This estimate comports with the estimated number of SB
SEFs contained in the Regulation MC Proposing Release, supra note
82.
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In addition, proposed Rules 813(c) and 814(a) would impose
collection of information burdens on SB SEF participants. Based on
conversations with industry sources, the Commission preliminarily
believes that there could be a total of 275 persons that could become
SB SEF participants and would thus be subject to the collection of
information requirements of the proposed rules.\429\
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\429\ 275 = 50 (estimated number of SB swap dealers that would
be SB SEF participants) + 5 (estimated number of major SB swap
participants that would be SB SEF participants) + 10 (estimated
number brokers that would be SB SEF participants) + 210 (estimated
number of ECPs that would be SB SEF participants). The Commission
recently proposed rules to define a number of terms used in Title
VII, including, among others, ``security-based swap dealer'' and
``major security-based swap participant.'' See Securities Exchange
Act Release No. 63452 (December 7, 2010), 75 FR 80174 (December 21,
2010). As part of that proposal, the Commission preliminarily
estimated that approximately 50 entities may be required to register
as SB swap dealers under the proposed rules. See 75 FR at 80209
n.188. The Commission further estimated that no more than ten
entities would have SB swap positions large enough that they would
have to monitor whether they meet the thresholds defining a major SB
swap participant. See 75 FR at 80207-08. For purposes of these
proposed rules, the Commission conservatively assumes that there
would be a total of five major SB swap participants, while
recognizing that in fact there may be fewer than five.
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Except with regard to the collection of information burdens imposed
on SB SEF participants pursuant to proposed Rules 813(c) and 814(a), as
discussed further in the sections of this PRA discussing the reporting
and recordkeeping requirements of Regulation SB SEF, the respondents
subject to the collection of information burdens associated with
proposed Regulation SB SEF would be SB SEFs.
D. Total Annual Reporting and Recordkeeping Burden
1. Registration Requirements for SB SEFs and Form SB SEF
Initial filings on Form SB SEF by a prospective SB SEF seeking to
register with the Commission pursuant to proposed Rule 801 would be
made on a one-time basis. As discussed above, no SB SEFs currently are
registered with the Commission and the Commission preliminarily
estimates that 20 entities initially would seek to register with the
Commission as SB SEFs. The Commission's estimate regarding the initial
burden that a SB SEF would incur to file a Form SB SEF is informed by
its estimate of the number of hours necessary to complete a Form 1 for
registration of a national securities exchange. The Commission
calculated in 2010 that Form 1 takes 47 hours to complete.\430\
Although the requirements of Form 1 are not identical to the
requirements of proposed Form SB SEF, the Commission preliminarily
believes that they are substantially similar for PRA purposes. Similar
to Form 1, the information that would be required on Form SB SEF
generally would consist of copies of existing documents that would be
prepared by a SB SEF in the ordinary course of its business. As noted
above, no SB SEFs currently are registered with the Commission and no
framework for registration of SB SEFs currently exists. Therefore, the
Commission preliminarily believes that, during the initial
implementation period of
[[Page 11024]]
Regulation SB SEF, it could take a SB SEF more time to compile the
necessary documents and information required by the exhibits to Form SB
SEF than it would for an applicant to become a national securities
exchange to compile documents and information to comply with
requirements of Form 1. The procedures for registration as a national
securities exchange are well-settled and, therefore, an entity that
intends to register as national securities exchange could anticipate
the form of the documents and other information that it would need to
compile to register on Form 1.\431\ Based on these factors, the
Commission preliminarily estimates that an applicant would incur an
average burden of 100 hours to prepare and file an initial Form SB SEF,
including all exhibits thereto, except Exhibits F and H requiring
certain financial reports, and Exhibit P requiring certain opinions of
counsel, which are discussed separately below.\432\ Therefore, the
Commission preliminarily estimates that the aggregate one-time burden
for all respondents to file the initial Form SB SEF, including all
exhibits thereto, except Exhibits F and H requiring certain financial
reports and Exhibit P requiring opinions of counsel, would be 2,000
hours.\433\ The Commission preliminarily believes that SB SEFs would
prepare Form SB SEF internally. The Commission requests comment on the
accuracy of this estimate.
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\430\ See 75 FR 32824 (June 9, 2010) (outlining the most recent
Commission calculations regarding the PRA burdens for Form 1 and
Rules 6a-1 and 6a-2 under the Exchange Act).
\431\ For example, because an entity seeking to register as a
national securities exchange would know that Exhibit E to Form 1
requires an applicant to describe the manner and operation of the
electronic trading system to be used to effect transactions on the
exchange, such entity likely would prepare such a description in the
ordinary course of its business in anticipation of applying for
registration as a national securities exchange on Form 1. However,
because the requirements of Form SB SEF would be set forth for the
first time in connection with this proposed rulemaking, a SB SEF
previously may not have prepared a description of the manner and
operation of its trading system in the ordinary course of business
and would have to do so to comply with Exhibit I to Form SB SEF.
\432\ As discussed above, proposed Rule 801(d) would require a
SB SEF to designate and authorize on Form SB SEF an agent in the
U.S. to accept notice or service of process, pleadings, or other
documents in any action or proceedings brought against it to enforce
the Federal securities laws and the rules and regulations
thereunder. Proposed Rule 801(e) would require an applicant that is
controlled by any other person to certify on Form SB SEF that any
person that controls such SB SEF would consent to and could, as a
matter of law, provide the Commission with prompt access to its
books and records, to the extent such books and records are related
to the activities of the SB SEF, and submit to onsite inspection and
examination by representatives of the Commission with respect to the
activities of the SB SEF. Proposed Rule 801(f) would require a non-
resident person applying for registration to certify on Form SB SEF
that it could, as a matter of law, provide the Commission with
prompt access to its books and records and submit to onsite
inspection and examination by representatives of the Commission.
Proposed Rule 814(b)(4) would require a SB SEF to certify at the
time of registration on Form SB SEF that the SB SEF would have the
capacity to fulfill its obligations under international information
sharing agreements to which it is a party. The Commission
preliminarily believes that the burden associated with these
requirements would be included in the 100-hour burden associated
with the initial registration on Form SB SEF required by proposed
Rule 801(a). These proposed requirements currently are not included
on Form 1. In addition, proposed Rules 801(e) and (f) would require
SB SEFs that are controlled by other persons and non-resident SB
SEFs to provide certain opinions of counsel. The Commission
preliminarily believes that the burden associated with these
requirements would be included in the burden associated with Exhibit
P to Form SB SEF discussed below.
\433\ 2,000 hours = 20 (number of SB SEF respondents) x 100
hours (initial hourly burden to comply with Form SB SEF, except for
Exhibits F, H and P).
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Exhibits F and H to proposed Form SB SEF would require an applicant
to submit an annual financial report that would have to satisfy a
number of requirements, including the requirement that a registered
public accounting firm that is qualified and independent in accordance
with Rule 2-01 of Regulation S-X \434\ audit each financial report
relating to the SB SEF (unaudited for certain affiliated entities). The
Commission preliminarily believes that it is unlikely that, during the
initial implementation period of Regulation SB SEF, a SB SEF would have
prepared such reports in the ordinary course of business prior to
applying for registration on Form SB SEF. Therefore, in connection with
its efforts to register as a SB SEF with the Commission on proposed
Form SB SEF, an applicant would incur an initial burden to generate
such financial reports. Based on conversations with operators of
current trading platforms and the Commissions experience with entities
of similar size, the Commission preliminarily estimates that the
financial reports relating to the SB SEF would generally require, on
average, 500 hours per respondent to complete and cost $500,000 for
independent public accounting services per respondent.
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\434\ See 17 CFR 210.2-01.
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The Commission believes that the unaudited reports required for
certain affiliated entities and to be made available upon request by
the Commission for other affiliated entities would not be overly time
consuming to produce because, based on the Commission's experience with
Form 1 filers, a respondent's accounting system should have this
information available. Furthermore, because the information would not
have to be audited, a respondent would be able to compile the required
information using a computer and commercially available software that
it generally would own for pre-existing accounting purposes and then
would submit the information to the Commission. Based on the number of
unaudited financial statements the Commission receives from filers of
Form 1 and the substance contained in these reports, the Commission
estimates that it would take 40 hours to compile, review, and submit
these reports.
However, as proposed, all of these reports would be required to be
provided in XBRL, as required in Rules 405(a)(1), (a)(3), (b), (c), (d)
and (e) of Regulation S-T.\435\ This would create an additional burden
on respondents. The Commission preliminarily estimates, based on its
experience with other data tagging initiatives, that these requirements
would add an additional burden of an average of 54 hours and $23,000 in
outside software and other costs per respondent. Thus, for complying
with the financial statement requirements under Exhibits F and H in
connection with an initial application on proposed Form SB SEF, the
Commission estimates an aggregate total initial burden of 11,880 hours
\436\ and $10,460,000 for all respondents.\437\ The Commission solicits
comments as to the accuracy of these estimates.
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\435\ See 17 CFR 232.405.
\436\ 11,880 hours = 20 (number of SB SEF respondents) x 594
hours (500 hours for audited SB SEF financial statements + 40 hours
for unaudited financial statements of affiliated entities + 54 hours
for XBRL formatting of submission).
\437\ $10,460,000 = 20 (number of SB SEF respondents) x $523,000
($500,000 for outside accounting services for auditing SB SEF's
financial statements + $23,000 in outside software and other cost
for formatting financial statement submissions in XBRL format).
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Pursuant to the requirements of proposed Rule 801(e), Exhibit P to
proposed Form SB SEF would require an applicant that is controlled by
any other person to provide an opinion of counsel that any person that
controls such SB SEF has consented to and can, as a matter of law,
provide the Commission with prompt access to its books and records, to
the extent such books and records are related to the activities of the
SB SEF, and submit to onsite inspection and examination by
representatives of the Commission with respect to the activities of the
SB SEF. This creates an additional burden for SB SEFs controlled by
other persons. Based on similar requirements on Form 20-F, the
Commission preliminarily estimates that this additional burden would
add 1 hour and $900 in outside legal costs for each affected SB
SEF.\438\ For PRA
[[Page 11025]]
purposes and in order to provide an estimate that is not under-
inclusive, the Commission preliminarily estimates that all respondents
applying for registration as a SB SEF pursuant to proposed Rule 801, or
20 SB SEFs, may be controlled by other persons and therefore subject to
the additional burden imposed on SB SEF's controlled by other persons
by Exhibit P. Thus, the Commission preliminarily estimates a total
additional burden for all SB SEFs that are controlled by other persons
to comply with the opinion of counsel requirements of Exhibit P of 20
hours \439\ and $18,000.\440\ The Commission solicits comments as to
the accuracy of these estimates.
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\438\ See Securities Exchange Act Release No. 49616 (Apr. 26,
2004), 69 FR 24016 (Apr. 30, 2004) (outlining the Commission's
calculations regarding the PRA burdens resulting from having to
provide a legal opinion and additional disclosure required by
Instruction 3 to Item 7.B to Form 20-F). The Commission calculated
that such requirements would result in an additional burden to
affected foreign private issuers of 3 hours, of which 25%, or
approximately 1 hour, would be incurred by the foreign private
issuers themselves, and 75% would be incurred by outside firms,
including legal counsel, which would cost approximately $900 ($900 =
3 hours (estimated burden to comply with proposed Rule 801(f)) x
0.75 (portion of estimated burden incurred by outside legal counsel
x $400 (hourly rate for an outside attorney)). The Commission
preliminarily continues to estimate the hourly rate for an outside
attorney at $400 per hour, based on industry sources. See Securities
Exchange Act Release No. 62184A (May 27, 2010), 75 FR 33100 at note
505 (June 10, 2010) (``Municipal Securities Disclosure Release'').
\439\ 20 hours = 20 (number of SB SEF respondents controlled by
other persons) x 1 (hourly burden to comply with Exhibit P).
\440\ $18,000 = 20 (number of SB SEF respondents controlled by
other persons) x $900 (cost for outside legal services to comply
with Exhibit P).
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Pursuant to the requirements of proposed Rule 801(f), Exhibit P to
proposed Form SB SEF would require a non-resident SB SEF to provide an
opinion of counsel that the SB SEF can, as a matter of law, provide the
Commission with access to the books and records of the SB SEF and
submit to onsite inspection and examination by representatives of the
Commission. This creates an additional burden for non-resident SB SEFs.
Based on similar requirements on Form 20-F, the Commission
preliminarily estimates that this additional burden would add 1 hour
and $900 in outside legal costs per respondent.\441\ For PRA purposes,
the Commission preliminarily estimates that one out of the 20 estimated
persons applying for registration as a SB SEF pursuant to proposed Rule
801 may be ``non-resident'' SB SEFs and therefore subject to the
additional burden imposed on non-resident SB SEFs by Exhibit P. Thus,
the Commission preliminarily estimates a total additional burden for
all non-resident SB SEFs to comply with the opinion of counsel
requirements of Exhibit P of 1 hour \442\ and $900.\443\
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\441\ See supra note 438.
\442\ 1 hour = 1 (number of non-resident SB SEF respondents) x 1
(hourly burden to comply with Exhibit P).
\443\ $900 = 1 (number of non-resident SB SEF respondents) x
$900 (cost for outside legal services to comply with Exhibit P).
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Therefore, the Commission preliminarily estimates that the total
one-time burden for a SB SEF to prepare and file the initial Form SB
SEF, including all exhibits thereto except for Exhibit P, would be 694
hours \444\ and $523,000.\445\ In addition, SB SEFs controlled by other
persons and non-resident SB SEFs would incur an additional one-time
burden of 1 hour and $900 to prepare and file Exhibit P to proposed
Form SB SEF. This would result in a total initial burden for all SB
SEFs of 13,901 hours \446\ and $10,478,900.\447\ The Commission
requests comment on the accuracy of these estimates.
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\444\ 694 hours = 100 hours to comply with Form SB SEF except
for Exhibits F, H and P + 500 hours for audited SB SEF financial
statements + 40 hours for unaudited financial statements of
affiliated entities + 54 hours for XBRL formatting of submission.
\445\ $523,000 = $500,000 for outside accounting services for
auditing SB SEF's financial statements + $23,000 in outside software
and other cost for formatting financial statement submission in XBRL
format.
\446\ 13,901 = (20 (number of SB SEF respondents) x 694 hours
(total initial burden to comply with Form SB SEF except for Exhibit
P)) + (20 (number of SB SEF respondents controlled by other persons)
x 1 hour (total initial burden to comply with Exhibit P)) + (1
(number of non-resident SB SEF respondents) x 1 hour (total initial
burden to comply with Exhibit P).
\447\ $10,478,900 = (20 (number of SB SEF respondents) x
$523,000 (total initial cost to comply with Form SB SEF except for
Exhibit P)) + (20 (number of SB SEF respondents controlled by other
persons) x $900 (total initial cost to comply with Exhibit P)) + (1
(number of non-resident SB SEF respondents) x $900 (total initial
cost to comply with Exhibit P)).
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The Commission preliminarily estimates that each SB SEF would file
four amendments to Form SB SEF pursuant to proposed Rules 802(a) and
(b) per year, and that each SB SEF would incur an average burden of 25
hours to prepare each amendment pursuant to proposed Rules 802(a) and
(b), for a total annual burden of 100 hours. The Commission bases this
estimate on previous Commission estimates relating to amendments to
Form 1 filed by national securities exchanges pursuant to Rule 6a-2
under the Exchange Act.\448\ The Commission preliminarily believes that
SB SEFs would prepare these amendments to Form SB SEF internally.
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\448\ The Commission calculated in 2010 that national securities
exchanges file four amendments or periodic updates to Form 1 per
year, incurring an average burden of 25 hours per amendment to
comply with Rule 6a-2. See 75 FR 32824, supra note 430. While the
requirements of Rule 6a-2 are not identical to the requirements of
proposed Rules 802(a) and (b), the Commission believes that there is
sufficient similarity for PRA purposes that the burden would be
equivalent.
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The Commission preliminarily believes that two registered SB SEFs
that are controlled by other persons out of all registered SB SEFs that
are controlled by other persons per year would be required to file an
amendment to Exhibit P to Form SB SEF pursuant to proposed Rule 802(c)
due to changes in the legal or regulatory framework of any person that
controls such SB SEFs. The Commission preliminarily believes that a SB
SEF controlled by another person would incur the same burden to prepare
an amended Exhibit P as it would to prepare the initial Exhibit P.
Therefore, the Commission preliminarily estimates that a SB SEF
controlled by another person would incur an average burden of 1 hour
and $900 to prepare an amended Exhibit P pursuant to proposed Rule
802(c) per year,\449\ and that all SB SEFs controlled by other persons
would incur an aggregate burden of 2 hours \450\ and $1,800 per year
\451\ to prepare amended Exhibit Ps pursuant to proposed Rule 802(c).
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\449\ See supra note 438 and accompanying text.
\450\ 2 = 2 (number of SB SEFs controlled by other persons
required to file an amended Exhibit P pursuant to proposed Rule
802(c) per year) x 1 hour (total annual burden to file an amended
Exhibit P).
\451\ $1,800 = 2 (number of SB SEFs controlled by other persons
required to file an amended Exhibit P pursuant to proposed Rule
802(c) per year) x $900 (total annual cost burden to file an amended
Exhibit P).
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The Commission preliminarily believes that one non-resident SB SEF
would be required to file one amendment to Exhibit P to Form SB SEF
pursuant to proposed Rule 802(d) per year. The Commission preliminarily
believes that a non-resident SB SEF would incur the same burden to
prepare an amended Exhibit P as it would to prepare the initial Exhibit
P. Therefore, the Commission preliminarily estimates that a non-
resident SB SEF would incur an average burden of 1 hour and $900 to
prepare each amended Exhibit P pursuant to proposed Rule 802(d) per
year,\452\ and that this estimate represents the aggregate burden for
all non-resident SB SEFs per year.
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\452\ See supra note 441 and accompanying text.
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The Commission believes that each SB SEF would file one update to
Form SB SEF pursuant to proposed Rule 802(f) per year, and that it
would take a SB SEF a longer time to file an annual update to Form SB
SEF pursuant to proposed Rule 802(f) than it would take a SB SEF to
file an amendment to Form SB SEF pursuant to proposed Rules
[[Page 11026]]
802(a) and (b), but less time than it would take a SB SEF to prepare an
initial application on Form SB SEF. For each annual update to Form SB
SEF, the SB SEF should be able to compile and submit the information
more readily than it would take for the initial Form SB SEF submission
because the SB SEF should already have much of the information required
by the annual update in its possession. Therefore, the Commission
preliminarily estimates that each SB SEF would incur an average burden
of 50 hours to prepare each annual update to the Form SB SEF pursuant
to proposed Rule 802(f).\453\
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\453\ Proposed Rules 811(b)(4) and 811(g)(2) would require SB
SEFs to report information regarding grants, denials and limitations
of access on Form SB SEF and to disclose all disciplinary actions
taken annually on an amendment to Form SB SEF, respectively. In
addition, proposed Rule 804(a) would require that a SB SEF intending
to file a notice of withdrawal from registration as a SB SEF with
the Commission file an amended Form SB SEF to update any inaccurate
information at the time of such notice of withdrawal. The Commission
preliminarily believes that the burdens associated with these
requirements would be included in the burden associated with the
annual update to Form SB SEF required by proposed Rule 802(f).
The Commission notes that, pursuant to proposed Rules 823(e)(1)
and (2), the CCO of a SB SEF would be required to prepare annual
updates to the financial reports required by Exhibits F and H.
Therefore, the Commission preliminarily believes that any burden
resulting from the requirement to update Exhibits F and H annually
pursuant to proposed Rule 802(f) would be included in the burden
associated with proposed Rule 823(e)(1) and (2) discussed in the
sections of this PRA analysis relating to the duties of the SB SEF's
CCO.
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The Commission estimates that the annual burden for all respondents
to file amendments and periodic updates to the Form SB SEF pursuant to
proposed Rule 802 would be 3,003 hours \454\ and $2,700.\455\ The
Commission requests comment on the accuracy of its estimates.
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\454\ 3,003 hours = (20 (number of SB SEF respondents) x 4
(number of filings pursuant to proposed Rules 802(a) and (b)) x 25
hours (burden per filing)) + (2 (number of respondents) x 1 (number
of filings pursuant to proposed Rule 802(c)) x 1 hour (burden per
filing)) + (1 (number of respondents) x (1 (number of filings
pursuant to proposed Rule 802(d)) x 1 hour (burden per filing)) +
(20 (number of SB SEF respondents) x (1 (number of filings pursuant
to proposed Rule 802(f)) x 50 hours (burden per filing)).
\455\ $2,700 = (2 (number of respondents) x 1 (number of filings
pursuant to proposed Rule 802(c)) x $900 (burden per filing)) + (1
(number of respondents) x 1 (number of filings pursuant to proposed
Rule 802(d)) x $900 (burden per filing)).
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The Commission preliminarily estimates that the preparation and
filing of supplemental information pursuant to proposed Rule 803(a)
generally would involve photocopying existing documents and therefore
should take less than one-half hour per response. The Commission
similarly preliminarily estimates that where a SB SEF chooses to comply
with the requirements of proposed Rule 803(b), which relates to
supplemental information being made available continuously on the SB
SEF's Web site, instead of proposed Rule 803(a), which relates to
filing of the actual supplemental information, the response required by
proposed Rule 803(b) should take less than one-half hour as well. The
Commission preliminarily estimates that each SB SEF would make
approximately 15 filings on an annual basis pursuant to proposed Rules
803(a) and (b) combined. The Commission bases these estimates on
previous Commission estimates relating to supplemental material filed
by national securities exchanges pursuant to Rule 6a-3.\456\ Therefore,
the Commission estimates that the total annual reporting burden under
proposed Rule 803 for all SB SEFs would be 150 hours.\457\ The
Commission requests comment on the accuracy of this estimate.
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\456\ The Commission calculated in 2010 that Rule 6a-3 would
require national securities exchanges to make 25 filings per year at
a burden of 0.5 hours per filing. 75 FR 32822 (June 9, 2010)
(outlining the most recent Commission calculations regarding the PRA
burdens for Rule 6a-3). While the requirements of Rule 6a-3 are not
identical to those of proposed Rule 803, the Commission believes
that there is sufficient similarity for PRA purposes that the burden
would be equivalent. However, Rule 6a-3 contains a requirement for
national securities exchanges to file certain monthly reports, while
proposed Rule 803 contains no such requirement with respect to SB
SEFs. Therefore, the Commission preliminarily estimates that a SB
SEF would make 15 filings per year pursuant to proposed Rule 803,
rather than 25 filings as estimated in connection with Rule 6a-3.
\457\ 150 hours = 20 (number of SB SEF respondents) x 15 (number
of filings per respondent) x .5 hours (burden per filing).
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Proposed Rule 804 would require that a SB SEF provide the
Commission notice of withdrawal of registration and file an amended
Form SB SEF to update any inaccurate information at the time of such
notice of withdrawal. The Commission preliminarily estimates that one
SB SEF per year would seek to withdraw its registration with the
Commission and therefore be subject to the collection of information
requirements in proposed Rule 804. The Commission preliminarily
estimates that a SB SEF would incur an average burden of 1 hour to
prepare and file with the Commission a notice of withdrawal of
registration. The Commission preliminarily believes that the burden
incurred by a SB SEF withdrawing its registration to file an amended
Form SB SEF pursuant to proposed Rule 804 would be included in the
estimated burden under proposed Rule 802(f) requiring annual updates to
Form SB SEF. Therefore, the Commission estimates that the annual burden
for all respondents pursuant to proposed Rule 804 would be 1 hour.
The Commission preliminarily estimates that the total annual hourly
burden for all SB SEFs combined to comply with the registration
requirements under Regulation SB SEF would be 3,154 hours \458\ and the
total one time hourly burden would be 13,901 hours.\459\ The Commission
preliminarily estimates that the total annual cost burden for all SB
SEFs to comply with the registration requirements under Regulation SB
SEF would be $2,700,\460\ and the total one-time cost burden for all SB
SEFs would be $10,478,900.\461\ The Commission requests comment on the
accuracy of these estimates.
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\458\ 3,154 hours = 3,003 (estimated hourly burden to comply
with proposed Rule 802) + 150 (estimated hourly burden to comply
with proposed Rule 803) + 1 (estimated hourly burden to comply with
proposed Rule 804).
\459\ See supra note 446.
\460\ See supra note 455.
\461\ See supra note 447.
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2. Rule-Writing Requirements for SB SEFs
The proposed rules that would require a SB SEF to establish rules,
policies and procedures to meet the requirements of various proposed
rules in Regulation SB SEF are summarized in Section XXII.A.2. above.
Based on its experience with the rule-writing process conducted by
national securities exchanges and applicants to become national
securities exchanges, the Commission believes that a SB SEF would spend
an average of 10 hours to draft each rule, policy or procedure required
to be established under Regulation SB SEF and that the SB SEF would
handle this work internally. The Commission recognizes that in some
cases, the SB SEF may take longer than 10 hours to draft a particular
rule, policy or procedure, but in other cases, the SB SEF may take
fewer than 10 hours to draft a particular rule, policy or procedure.
Therefore, the Commission preliminarily believes that the 22 proposed
rules, policies and procedures that a SB SEF would be required to draft
under proposed Regulation SB SEF would carry a one-time paperwork
burden of 220 hours per respondent, for a maximum total of 4,400
hours.\462\ The estimated 220 hours per respondent also would include
the time expended for review of the draft rules, policies or procedures
by the SB SEF's management. The Commission requests
[[Page 11027]]
comment on the accuracy of this estimate.
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\462\ 4,400 hours = 20 (number of SB SEF respondents) x 220
hours (one-time burden to draft 22 proposed rules, policies and
procedures).
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The Commission preliminarily estimates that once a SB SEF has
drafted the written rules, policies and procedures that it is required
to establish pursuant to Regulation SB SEF, a SB SEF would spend
approximately 10 hours per month to review its written rules, policies
and procedures to ensure that they are up-to-date and remain in
compliance with proposed Regulation SB SEF and to prepare any necessary
new or amended rules, policies and procedures.\463\ Therefore, the
Commission preliminarily estimates that the provisions of proposed
Regulation SB SEF requiring that a SB SEF establish certain rules,
policies and procedures would result in an ongoing annual burden of 120
hours per respondent,\464\ for a total estimated ongoing annual burden
of 2,400 hours.\465\ The Commission requests comment on the accuracy of
this estimate.
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\463\ This burden estimate does not include the burden that
would be incurred by a SB SEF in connection with submitting rule
filings in connection with new rules or rule amendments to the
Commission, which burden would be included in the burden for
proposed Rules 805 and 806 discussed in the sections of this PRA
relating to the rule filing processes for SB SEFs.
\464\ 120 hours = 10 hours (monthly burden) x 12 (months per
year).
\465\ 2,400 hours = 20 (number of SB SEF respondents) x 120
hours (annual burden to update rules, policies and procedures
required by proposed Regulation SB SEF).
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3. Reporting Requirements for SB SEFs
Proposed Rule 814: Proposed Rule 814(a) would require a SB SEF to
require its participants to provide information or documents to the SB
SEF upon request. Proposed Rule 814(a) also would require the SB SEF to
require its participants to provide information or documents to any
representative of the Commission upon request.
As noted above, the Commission estimates that each SB SEF would
have 275 participants.\466\ Based on industry sources, the Commission
believes it is likely that each participant would elect to be a member
of each SB SEF. The Commission therefore estimates that each of these
estimated 275 participants would be a participant of each SB SEF. The
Commission therefore estimates that there would be a total of 275 SB
SEF participants subject to the collection of information requirements
of proposed Rule 814(a). The Commission requests comment on the
accuracy of this estimate.
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\466\ See supra note 429.
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Based on its experience in requesting information from exchanges
and exchange members for various purposes, the Commission estimates
that it would require an average of 25 hours per response for a SB SEF
participant to compile and transmit documents and information requested
pursuant to proposed Rule 814(a) and that such requests would occur a
total of 4 times each year per SB SEF participant.\467\ Thus, the
Commission estimates that the annual burden on each SB SEF participant
to report documents or information pursuant to proposed Rule 814(a)
would be 100 hours.\468\ The Commission therefore estimates that the
annual aggregate burden on SB SEF participants for all SB SEFs would be
27,500 hours.\469\ The Commission believes that this work, should it be
required, would be conducted internally. The Commission seeks comment
on these proposed estimates.
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\467\ The estimate of 4 annual requests assumes that each SB SEF
participant would receive, on average, one request for information
per calendar quarter.
\468\ 100 hours = 4 (number of requests annually) x 25 (annual
hourly burden for each participant to comply with SB SEF rules
imposed pursuant to proposed Rule 814(a)).
\469\ 27,500 hours = 4 (total number of annual requests made of
a SB SEF participant directly or indirectly) x 25 (hours per
respondent) x 275 (number of SB SEF participants required to comply
with proposed rules imposed by a SB SEF pursuant to proposed Rule
814(a)).
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Proposed Rule 814(b)(2) would require a SB SEF to provide
information or documents to any representative of the Commission upon
request. For PRA purposes, the Commission estimates that it would
request information or documents under proposed Rule 814(b)(2) two
times per year, per respondent. The amount of time that it would take
for a respondent to comply with a request would vary depending on the
nature and extent of the request. Based on its experience in requesting
information from exchanges for a variety of purposes, the Commission
estimates that it would require an average of 25 hours per response for
a SB SEF to compile and transmit documents and information requested by
the Commission, for an annual hourly burden of 50 hours per respondent.
Thus, the Commission preliminarily estimates the aggregate annual
burden on a SB SEF to comply with requests for documents or information
pursuant to proposed Rule 814(b)(2) would be 1,000 hours.\470\ The
Commission believes that this work, should it be required, would be
conducted internally. The Commission solicits comment as to the
accuracy of these estimates.
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\470\ 1,000 hours = 50 (annual hourly burden to comply with
proposed Rule 814(b)(2)) x 20 (number of SB SEF respondents).
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Proposed Rule 814(b)(3) would require a SB SEF to have the capacity
to carry out such international information-sharing agreements as the
Commission may require. If so directed by the Commission, a SB SEF
could be required to carry out one or more international-information
sharing agreements. It is difficult to estimate how many international
information-sharing agreements the Commission may direct a SB SEF to
carry out or what the reporting requirements under such agreements may
be.
The Commission estimates, for PRA purposes only, that SB SEFs would
need to carry out such an agreement, on average, once per year. The
Commission further estimates that each such agreement could require 40
hours per respondent to prepare, review and finalize. The Commission
therefore preliminarily estimates that the paperwork burden for SB SEFs
associated with having the capacity to carry out international
information-sharing agreements as the Commission may require pursuant
to proposed Rule 814(b)(3) would be 800 hours.\471\ The Commission
believes that these agreements initially would be created or reviewed
internally, but also reviewed by outside counsel. The Commission
estimates that the SB SEF's outside counsel would require 10 hours to
review these documents for a cost of $4,000 per respondent, and a total
cost of $80,000 for all respondents.\472\ The Commission solicits
comment as to the accuracy of these estimates.
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\471\ 800 hours = 40 (annual hourly burden to enter into an
international information-sharing agreement pursuant to proposed
Rule 814(b)(3) x 20 (number of SB SEF respondents). The Commission
believes there would be no separate initial burden.
\472\ These figures are based on an hourly cost of outside
counsel at $400. See Municipal Securities Disclosure Release, supra
note 438.
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In addition, the Commission preliminarily estimates that a SB SEF
would be required to provide information pursuant to an international
information-sharing agreement a total of twice per year and that,
similar to complying with a Commission request for information pursuant
to other provisions of proposed Rule 814, it would require 25 hours per
response to comply with a request for information, for a total annual
burden of 50 hours per year per SB SEF. The Commission believes that
this work, should it be required, would be conducted internally. The
Commission therefore estimates that aggregate annual paperwork burden
on SB SEFs associated with reporting under international information-
sharing agreements entered into under proposed
[[Page 11028]]
Rule 814(b)(3) would be 1,000 hours.\473\ The Commission solicits
comment as to the accuracy of these estimates.
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\473\ 1,000 hours = 50 (annual hourly burden to comply with
reporting requirements pursuant to international information-sharing
agreements x 20 (number of SB SEF respondents).
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The Commission therefore estimates the aggregate annual paperwork
burden associated with proposed Rule 814 to be 27,500 hours for SB SEF
participant respondents and 2,800 \474\ hours and $80,000 for SB SEF
respondents.
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\474\ 2,800 hours = 1,000 (aggregate burden on SB SEF
respondents to comply with proposed Rule 814(b)(2)) + 1,800 hours
(aggregate burden on SB SEF respondent to comply with proposed Rule
814(b)(3)).
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Proposed Rule 816: Proposed Rule 816 would require a SB SEF to
notify the Commission of any exercise of its emergency authority, and
within two weeks following cessation of an emergency, submit to the
Commission a report explaining the basis for declaring an emergency,
how conflicts of interest were minimized, and the extent to which the
SB SEF considered the effect of its emergency action on the markets for
the SB swap and any security or securities underlying the SB swap. The
collection of information associated with proposed Rule 816 would apply
only during and following an emergency.\475\
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\475\ Proposed Rule 816(d)(2) provides that if a SB SEF
implements any rule or rule amendment in the exercise of its
emergency authority, it must file such rule or rule amendment with
the Commission pursuant to proposed Rule 806 prior to the
implementation of such rule or rule amendment, or, if not
practicable, within 24 hours after implementation of such rule or
rule amendment. The annual hourly burden to comply with proposed
Rule 816(d)(2) is included in the estimated annual hourly burden for
a SB SEF to comply with proposed Rule 806.
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The Commission notes that emergencies in the securities markets are
rare, but when they do occur, they require significant time and
resources to address. For PRA purposes only, the Commission estimates
that a SB SEF would exercise its emergency authority once per year.
Based on its experience with national securities exchanges, the
Commission estimates that the time that would be necessary for a SB SEF
to prepare and transmit the notice and report regarding emergency
authority pursuant to proposed Rule 816 would be 40 hours per
respondent. Thus, the Commission estimates that the total annual
reporting burden associated with proposed Rule 816 would be 800
hours.\476\ The Commission believes that this work, should it be
required, would be conducted internally. The Commission solicits
comment on these estimates.
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\476\ 800 hours = 40 (annual hourly burden to comply with
proposed Rule 816) x 20 (number of SB SEF respondents).
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Proposed Rule 818: Proposed Rule 818(e) would require a SB SEF to
report to the Commission such information as the Commission may, from
time to time, determine to be necessary to perform the duties of the
Commission. For PRA purposes only, the Commission estimates that the
Commission may request such information from a SB SEF once each year.
For PRA purposes only, the Commission estimates that any request for
information would be information easily accessible to the SB SEF, but
could require an analysis of such information by the SB SEF. Based on
the Commission's experience with information requested of other
registered entities, the Commission preliminarily estimates that each
request pursuant to proposed Rule 818 would require 20 hours to
collect, review, draft any accompanying analysis or report, and
transmit, which would result in an annual hourly burden of 20 hours per
SB SEF respondent. Thus, the Commission estimates that the aggregate
annual reporting burden on SB SEFs associated with proposed Rule 818(e)
would be 400 hours.\477\ The Commission solicits comment on these
estimates.
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\477\ 400 hours = 20 (annual hourly burden to comply with
proposed Rule 818(e)) x 20 (number of SB SEF respondents). The
Commission believes there would be no separate initial burden.
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Proposed Rule 818(f) would require a SB SEF to provide to any
representative of the Commission, upon request, copies of documents
required to be kept and preserved pursuant to the recordkeeping
requirements of proposed Rule 818. For PRA purposes only, the
Commission preliminarily estimates that it would request information or
documents under proposed Rule 818(f) twice per year and would require
no more than 25 hours per response to compile and transmit, resulting
in an annual hourly burden of 50 hours per SB SEF respondent.\478\ The
Commission therefore estimates the annual aggregate paperwork burden
associated with proposed Rule 818(f) would be 1,000 hours.\479\ The
Commission solicits comment on these estimates.
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\478\ Based on its experience in requesting information from
exchanges for a variety of purposes, the Commission estimates that
it would require an average of 25 hours per response for a SB SEF to
compile and transmit documents and information requested by the
Commission.
\479\ 1,000 hours = 25 (annual hourly burden to comply with
proposed Rule 818(f)) x 20 (number of SB SEF respondents).
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The Commission therefore estimates the total annual reporting
burden on SB SEFs associated with proposed Rule 818 would be 1,400
hours.\480\
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\480\ 1,400 hours = 400 (hourly burden to comply with proposed
Rule 818(e)) + 1,000 (hourly burden to comply with proposed Rule
818(f)).
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Proposed Rule 822: Proposed Rule 822(a)(2) would require a SB SEF
to submit to the Commission an annual objective review of the
capability of SB SEF systems that support or are integrally related to
the performance of the SB SEF's activities. If the objective review is
performed by an internal department, an objective, external firm would
be required to assess the internal department's objectivity,
competency, and work performance. Based on its experience with its ARP
program, the Commission believes that the annual burden per respondent
of conducting an internal audit would be approximately 625 hours.\481\
Further, the Commission's experience with the ARP program has indicated
that an additional 200 hours per respondent per year would be required
on average to oversee and establish the independent review of these
audits. \482\ Thus, the Commission estimates the aggregate annual
burden on SB SEFs to comply with requirement to submit these reports
would be 16,500 hours.\483\ In addition, based on its experience with
the ARP program,\484\ the Commission estimates that the annual cost to
hire an objective, external firm to be approximately $90,000 per
respondent annually. For this reason, the Commission estimates the
total annual cost of hiring an objective, external firm to review
internal audits as $1,800,000 for all respondents.\485\ The Commission
solicits comment as to the accuracy of this information.
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\481\ See SDR Release, supra note 6.
\482\ Id.
\483\ 16,500 hours = 825 (annual hourly burden to comply
proposed Rule 822(a)(2)) x 20 (number of SB SEF respondents).
\484\ Under the Commission's ARP inspection program of SROs and
certain ATSs, the Commission staff conducts on-site inspections and
attends periodic technology briefings presented by SRO and ATS staff
for the Commission's ARP staff, which generally covers systems
capacity and testing, review of system vulnerability, review of
planned system development, and business continuity planning. Under
the ARP inspection program, the Commission staff also monitors
system failures and planned system changes on a daily basis.
\485\ $1,800,000 = $90,000 (annual external dollar cost per
respondent to comply with proposed Rule 822(a)(2)) x 20 (number of
SB SEF respondents).
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In addition, proposed Rule 822(a)(3) would require a SB SEF to
promptly notify the Commission in writing of material systems outages
and submit to the Commission within five business days of when the
outage occurred a written description and analysis of the outage and
any remedial measures that have been implemented or are
[[Page 11029]]
contemplated. The Commission estimates, based on its experience with
the ARP program, that the burden imposed by these requirements would be
15.4 hours on average per respondent per year, for a total estimated
burden of 308 hours per year for all respondents.\486\ The Commission
believes that this work would be conducted internally. The Commission
solicits comments as to the accuracy of this estimate.
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\486\ 308 hours = 15.4 annual hourly burden per respondent to
comply proposed Rule 822(a)(3)) x 20 (number of SB SEF respondents).
This annual hourly burden comports with the Commission's estimate
for similar proposed requirements to be imposed on SDRs to comply
with similar proposed requirements. See SDR Release, supra note 6.
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Proposed Rule 822(a)(4) would require a SB SEF to notify the
Commission in writing at least thirty calendar days before
implementation of any planned material systems changes. The Commission
estimates that there would be an average of 60 such events per
respondent per year.\487\ Based on the Commission's experience with the
ARP program, the Commission estimates that each of these notices would
require an average of 2 hours for a total burden for all respondents of
2,400 hours annually.\488\ The Commission believes that this work would
be conducted internally. The Commission solicits comments as to the
accuracy of this estimate.
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\487\ This estimate would account for any weekly maintenance
that would meet the standard of a ``material systems change,'' as
well as for any software upgrades, throughout the year, that would
meet such standard.
\488\ 2,400 hours = 60 (notices per SB SEF) x 2 (annual hourly
burden per notice) x 20 (number of SB SEF respondents). See SDR
Release, supra note 6.
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The Commission therefore preliminarily estimates that the total
annual hourly reporting burden associated with proposed Rule 822 would
be 19,208 hours \489\ and $1,800,000.\490\
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\489\ 19,208 hours = 16,500 (annual hourly burden to comply with
proposed Rule 822(a)(2)) + 308 (annual hourly burden to comply with
proposed Rule 822(a)(3)) + 2,400 (annual hourly burden to comply
with proposed Rule 822(a)(4)).
\490\ See supra note 485.
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The Commission preliminarily estimates that the total annual hourly
burden for all SB SEFs combined for reporting would be 24,208
hours.\491\ There is no one time initial hourly burden associated with
the proposed reporting requirements. The Commission preliminarily
estimates that the total annual cost burden for all SB SEFs combined
for reporting would be $1,880,000.\492\ In addition, the Commission
preliminarly estimates that the total annual hourly burden on all SB
SEF participants for reporting under proposed Regulation SB SEF would
be 28,000 hours.
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\491\ 24,208 = 2,800 (annual hourly burden to comply with
proposed Rule 814) + 800 (annual hourly burden to comply with
proposed Rule 816) + 1,400 (annual hourly burden to comply with
proposed Rule 818) + 19,208 (annual hourly burden to comply with
proposed Rule 822).
\492\ $1,880,000 = $80,000 (annual cost burden to comply with
proposed Rule 814(b)(3)) + $1,800,000 (annual cost burden to comply
with proposed Rule 822(a)(2)).
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4. Recordkeeping Required Under Regulation SB SEF
The annual recordkeeping requirements that are contained in
proposed Rules 818(a) and (b) are similar to the requirements that
apply to SROs pursuant to Rules 17a-1(a) and (b) under the Exchange
Act.\493\ The Commission currently estimates that an SRO, including a
national securities exchange, would expend approximately 50 hours per
year to comply with the collection of information requirement of Rule
17a-1.\494\ Based on the Commission's experience with Rule 17a-1(a) and
(b), the Commission believes that 50 hours would be an appropriate
estimate for the hourly burden that would apply to SB SEFs to comply
with proposed Rule 818(a) and (b). The Commission notes that SB SEFs
generally would be electronic platforms and that the vast preponderance
of its records thus should be retained electronically in the ordinary
course of its business. Therefore, the Commission preliminarily
estimates that it would take a SB SEF approximately 50 hours annually
to comply with proposed Rule 818(a) and (b) for an aggregate annual
burden of 1,000 hours.\495\ This estimated amount includes, but is not
limited to, the annual hourly burden to generate, collect, organize and
preserve all of the documents and other records required under proposed
Rule 818(a) and (b). The Commission requests comment on the accuracy of
this estimate.
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\493\ 17 CFR 240.17a-1(a) and (b). In addition, proposed Rule
811(b)(3) would require that a SB SEF make and keep records relating
to all grants and denials of access to the SB SEF and proposed Rule
811(g) would require a SB SEF to make and keep records relating to
all disciplinary proceedings. The records required by proposed Rules
811(b)(3) and 811(g) would be included in the business records
required to be kept pursuant to proposed Rule 818. Therefore, the
Commission preliminarily believes that the paperwork burden for
these rules would be included in the estimated burden for proposed
Rule 818. See supra note 417 and accompanying text.
\494\ Rule 17a-1 also states generally that SROs shall, upon the
request of any representative of the Commission, promptly furnish
copies of documents required to be kept and preserved under the
rule. See 17 CFR. 240.17a-1. The Commission's estimated burden of 50
hours per respondent reflects compliance with all of the
recordkeeping provisions of this rule. See 2010 Extension of Rule
17a-1 Supporting Statement, Office of Management and Budget,
available at http://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=201007-3235-003.
\495\ 1,000 hours = 20 (number of SB SEF respondents) x 50 hours
(annual hourly burden to comply with proposed Rule 818(a) and (b)).
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In addition, proposed Rule 818(c) would require a SB SEF to keep
certain records with respect to trading activity on and through the SB
SEF. Specifically, a SB SEF would be required to make and keep
accurate, time-sequenced records of all trading interest and
transactions that are received by, originated on, or executed on the SB
SEF. This recordkeeping rule is similar to the audit trail requirement
that applies to ATSs pursuant to Rule 302 of Regulation ATS under the
Exchange Act.\496\ The Commission currently estimates that an ATS would
expend approximately 130 hours per year to comply with the collection
of information requirements of Rule 302 of Regulation ATS. Based on the
Commission's experience with Rule 302 of Regulation ATS, which contains
the requirement that an ATS make and keep records necessary to create a
meaningful audit trail, the Commission preliminarily estimates that the
annual hourly paperwork burden for a SB SEF to comply with proposed
Rule 818(c) would be approximately 130 hours, which would result in an
aggregate annual burden of 2,600 hours.\497\ The Commission requests
comment on the accuracy of this estimate.
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\496\ Rule 302 of Regulation ATS under the Exchange Act
generally requires an ATS to keep a record of subscribers, daily
summaries of trading and time sequenced records of order information
in the ATS. See 17 CFR 242.302. The Commission's estimated burden of
130 hours per respondent reflects compliance with all of the
recordkeeping provisions of this rule. See 2010 Extension of Rule
302 Supporting Statement, Office of Management and Budget, available
at http://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=201006-3235-008.
\497\ 2,600 hours = 20 (number of SB SEF respondents) x 130
hours (annual hourly burden to comply with proposed Rule 818(c)).
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The Commission preliminarily believes that the records that a SB
SEF would have to keep and preserve to comply with proposed Rule 818
would be the same records that a SB SEF would already have to keep and
preserve in the ordinary course of its business. A SB SEF would be
required to keep and preserve these records to, among other things, pay
taxes, defend against legal actions, resolve conflicts between
participants, and generally to ensure the smooth functioning of the SB
SEF's business operations. Therefore, the Commission preliminarily
believes that, while there would be a collection of information
required by proposed
[[Page 11030]]
Rule 818 related to recordkeeping, there would not be a paperwork
burden for PRA purposes associated with the SB SEF's complying with
proposed Rule 818 aside from establishing or modifying recordkeeping
systems as noted below, because these records would be maintained in
the ordinary course of its business.\498\
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\498\ See 5 CFR 1320.3(b)(2). This section generally provides
that the time, effort, and financial resources necessary to comply
with a collection of information that would be incurred by persons
in the normal course of their activities (e.g., in compiling and
maintaining business records) are excluded from the definition of
``burden'' in the PRA if they are usual and customary.
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For purposes of the PRA, however, the Commission preliminarily
estimates that a SB SEF could incur a one-time burden to set up or
modify an existing recordkeeping system to comply with the proposed
Rule 818. Based on the Commission's experience with recordkeeping costs
and consistent with prior burden estimates for similar recordkeeping
provisions,\499\ the Commission estimates that setting up or modifying
a recordkeeping system would create an initial burden of 345 hours
\500\ and $1,800 in information technology costs per respondent to
purchase recordkeeping software,\501\ for a total initial burden of
6,900 hours \502\ and $36,000.\503\ The Commission requests comment on
the accuracy of this estimate.
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\499\ See Securities Exchange Act Release No. 59342 (February 2,
2009); 74 FR 6456 (February 9, 2009) (Amendments to Rules for
Nationally Recognized Statistical Rating Organizations) (``NRSRO
Adopting Release'').
\500\ See NRSRO Adopting Release, supra note 499, 74 FR at 6472,
n. 154 (estimated average one-time hourly burden of 345 hours for
each nationally recognized statistical ratings organization
(``NRSRO'') to implement a recordkeeping system to comply with Rule
17g-2 under the Exchange Act, 17 CFR 240.17g-2).
\501\ See NRSRO Adopting Release, id., 74 FR at 6472 (estimated
average cost of $1,800 for each NRSRO to purchase recordkeeping
software).
\502\ 6,900 hours = 345 hours (estimated hourly burden for each
SB SEF to implement a recordkeeping system) x 20 (number of SB SEF
respondents).
\503\ $36,000 = $1,800 (estimated cost to purchase recordkeeping
software) x 20 (number of SB SEF respondents).
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Additionally, the Commission preliminarily estimates that each SB
SEF may have a one-time burden to upgrade its existing systems to
ensure that the audit trail component of their systems complies with
proposed Rule 818(c). Based on industry sources, the Commission
preliminarily believes that this work would be done internally by two
programmers over the course of approximately four weeks. Therefore, the
Commission preliminarily estimates that it would take a total of 320
hours for a SB SEF to upgrade its existing systems for an aggregate
one-time hourly burden of 6,400 hours.\504\
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\504\ 6,400 hours = 320 hours (estimated one-time hourly burden
for two senior programmers working 40 hours per week for four weeks
at each SB SEF to upgrade systems to comply with proposed Rule
818(c)) x 20 (number of SB SEF respondents).
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Therefore, the Commission preliminarily believes that the total
aggregate annual hourly burden for 20 SB SEFs to comply with proposed
Rule 818(a) through (c) would be approximately 3,600 hours.\505\ The
total one time hourly burden for 20 SB SEFs to comply with proposed
Rule 818 would be approximately 13,300 hours \506\ and $36,000. The
Commission requests comment on the accuracy of this estimate.
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\505\ 3,600 hours = 1,000 hours (estimated annual hourly burden
to comply with proposed Rule 818(a) and (b)) + 2,600 hours
(estimated annual hourly burden to comply with proposed Rule
818(c)).
\506\ 13,300 hours = 6,900 hours (total estimated one-time
hourly burden for all SB SEF respondents combined to set-up or
modify recordkeeping software to comply with proposed Rule 818) +
6,400 hours (total estimated one-time hourly burden for all SB SEF
respondents combined to modify existing systems to comply with audit
trail requirements of proposed Rule 818(c)).
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As discussed above, proposed Rule 813(c)(1) would require a SB SEF
to establish rules requiring any participant that enters any trading
interest or executes any transaction on the SB SEF to maintain books
and records of any such trading interest or transaction and of any
position in any security-based swap that is the result of any such
trading interest or transaction. The Commission preliminarily believes
that proposed Rule 813(c)(1) could impose a collection of information
burden on some SB SEF participants.\507\ However, the Commission also
preliminarily believes that the records that many SB SEF participants
would have to maintain pursuant to proposed Rule 813(c)(1) would be the
same records that these participants would have to maintain under other
Commission recordkeeping provisions to the extent they are regulated
entities or in the ordinary course of their business.\508\ Therefore,
the Commission preliminarily believes that the paperwork burden for a
number of SB SEF participants is either already encompassed in the
collection of information for other recordkeeping obligations that they
must comply with or would not be required to be calculated for purposes
of this PRA analysis because such burden relates to the maintenance of
records that are usually or customarily maintained.\509\
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\507\ The Commission also notes that proposed 809(c)(2)(i) would
require non-registered ECPs to meet the recordkeeping and reporting
requirements established by the SB SEF pursuant to proposed Rule
813. The collection of information associated with 809(c)(2)(i) is
encompassed in the burden estimates for the collection of
information associated with proposed Rule 813.
\508\ Section 764 of the Dodd-Frank Act requires the Commission
to adopt rules governing reporting and recordkeeping for SB swap
dealers and major SB swap participants. See Public Law 111-203,
Sec. 764. The Commission is proposing reporting and recordkeeping
rules for SB swap dealers and major SB swap participants as part of
a separate Commission rulemaking. See also, e.g., Rules 17a-3
(records to be made by certain exchange members, brokers and
dealers) and 17a-4 (records to be preserved by certain exchange
members, brokers and dealers) under the Exchange Act, 17 CFR
240.17a-3 and 17 CFR 240.17a-4.
\509\ See 5 CFR 1320.3(b)(2).
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However, the Commission believes that proposed Rule 813(c)(1) could
impose a new obligation to maintain books and records on those ECPs
that would become participants of the SB SEF. For PRA purposes the
Commission believes that it is appropriate to estimate that all 210
ECPs would be subject to the collection of information requirement of
proposed Rule 813(c)(1).\510\ Based on the Commission's experience with
similar recordkeeping rules,\511\ the Commission preliminarily
estimates that it would take each ECP that is a SB SEF participant
approximately 40 hours on an annual basis to comply with the collection
of information requirement of proposed Rule 813(c)(1) for a total
annual burden for all ECP respondents combined of 8,400 hours.\512\ The
Commission requests comment on the accuracy of this estimate.
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\510\ See supra note 429 and accompanying text.
\511\ See, e.g., 17 CFR 240.17a-3 and 17 CFR 240.17a-4.
\512\ 8,400 hours = 210 (estimated number of ECPs that could be
subject to the collection of information under proposed Rule
813(c)(1)) x 40 hours (estimated annual burden for each ECPs to
comply with the collection of information under proposed Rule
813(c)(1)).
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For purposes of the PRA, the Commission also preliminarily
estimates that ECPs that would be SB SEF participants could incur a
one-time burden to set up or modify an existing recordkeeping system to
comply with the proposed Rule 813(c)(1). Based on the Commission's
experience with recordkeeping costs and consistent with prior burden
estimates for similar recordkeeping provisions,\513\ the Commission
estimates that setting up or modifying a recordkeeping system would
create an initial burden of 345 hours \514\ and $1,800 in information
technology costs per ECP to purchase
[[Page 11031]]
recordkeeping software,\515\ for a total initial burden of 72,450 hours
\516\ and $378,000 for all ECPs combined.\517\ The Commission requests
comment on the accuracy of this estimate.
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\513\ See NRSRO Adopting Release supra note 499.
\514\ See NRSRO Adopting Release, supra note 499, 74 FR at 6472,
n. 154 (estimated average one-time hourly burden of 345 hours for
each NRSRO to implement a recordkeeping system to comply with Rule
17g-2 under the Exchange Act).
\515\ See NRSRO Adopting Release, supra note 499, 74 FR at 6472
(estimated average cost of $1,800 for each NRSRO to purchase
recordkeeping software).
\516\ 72,450 hours = 345 hours (estimated hourly burden for each
SB SEF participant to implement a recordkeeping system) x 210
(estimated number of ECP SB SEF participants that could seek to set
up or modify a recordkeeping system to comply with proposed Rule
813(c)(1)).
\517\ $378,000 = $1,800 (estimated cost to purchase
recordkeeping software) x 210 (estimated number of ECP SB SEFs that
could seek to purchase recordkeeping software to comply with
proposed Rule 813(c)(1)).
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5. Timely Publication of Trading Information Requirement for SB SEFs
Proposed Rule 817(a) would require a SB SEF to: (1) have the
capacity to electronically capture, transmit, and disseminate
information on price, trading volume, and other trading data on all SB
swaps executed on or through the SB SEF; and (2) make public timely
information on price, trading volume, and other trading data on SB
swaps to the extent required by the Commission. The Commission notes
that proposed Rule 817(a)(1) would incorporate Section 3D(d)(8) of the
Exchange Act but would not otherwise require a SB SEF to report SB swap
transactions to a registered SDR or make public timely information on
price, trading volume, and other trading data on SB swaps. Rather, the
Commission has proposed that other parties be responsible for reporting
of SB swap transactions to a registered SDR and for the public
dissemination of certain SB swap transaction information.\518\
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\518\ See Reporting and Dissemination Release supra note 6.
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However, because proposed Rule 817(a) would require a SB SEF to
have the capacity to electronically capture, transmit, and disseminate
information on price, trading volume, and other trading data on all SB
swaps executed on or through the SB SEF so that it could make such
information public if required, the Commission preliminarily believes
that each SB SEF could have a one-time hourly burden to modify its
systems so that they have this functionality.\519\ The Commission
believes that for a SB SEF to ensure it has the capacity to
electronically capture, transmit, and disseminate information on price,
trading volume, and other trading data on all SB swaps executed on or
through the SB SEF, as required by Section 3D(d)(8) and as proposed to
be incorporated in proposed Rule 817(a), a SB SEF would need two
computer programmers, each working four weeks. This would result in a
one-time hourly burden of 320 hours \520\ per SB SEF respondent, for a
total annual burden on all SB SEFs of 6,400 hours.\521\ The Commission
solicits comment on the accuracy of these estimates.
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\519\ The Commission believes that a SB SEF would seek to ensure
that it has the capacity to electronically capture, transmit, and
disseminate information on price, trading volume, and other trading
data on all SB swaps executed on or through its facilities in the
ordinary course of its business. Therefore the Commission is not
including the one-time burden of developing and implementing systems
having the capacity to electronically capture, transmit, and
disseminate information on price, trading volume, and other trading
data on all SB swaps executed on or through the SB SEF in its
paperwork burden estimate for proposed Rule 817(a). See 5 CFR
1320.3(b)(2).
\520\ 320 hours = 2 (number of senior programmers) x 40 (hours
in a standard full-time work week) x 4 (number of weeks required).
\521\ 6,400 hours = 320 (estimated one-time hourly burden per SB
SEF respondent pursuant to proposed Rule 817(a)) x 20 (number of SB
SEF respondents).
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6. Rule Filing and Product Filing Processes for SB SEFs
Under proposed Rules 805 and 806, a SB SEF would be required to
submit rule filings for new rules or rule amendments, including changes
to a product's terms or conditions. As noted above, the Commission
estimates a total of 20 SB SEF respondents for this requirement. The
proposed rules are modeled on the rule filing and product filing
processes proposed by the CFTC.\522\ Based on the Commission staff's
consultation with CFTC staff,\523\ the Commission estimates that on
average these requirements would require 2.5 hours of work per rule
filing, with an estimated average of 60 responses per year per
respondent. This would result in a total estimated burden of 150 hours
per respondent \524\ and 3,000 hours for all the respondents
annually.\525\ Based on the Commission staff's consultation with CFTC
staff, the Commission believes that the SB SEF would handle the rule
filing process internally. The Commission solicits comments regarding
the accuracy of its estimates.
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\522\ See 75 FR 67282 (November 2, 2010) (CFTC proposal to amend
17 CFR 40.2-40.5).
\523\ See id.
\524\ 150 hours = 60 (number of responses per year per
respondent) x 2.5 hours (burden per response).
\525\ 3,000 hours = 150 hours (annual burden per respondent
pursuant to proposed Rules 805 and 806) x 20 (number of
respondents).
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Under proposed Rules 807 and 808, a SB SEF would be required to
submit filings for new products that it makes available for trading. As
outlined above, the Commission estimates a total of 20 SB SEF
respondents for this requirement. Based on the Commission staff's
consultation with CFTC staff,\526\ the Commission estimates that on
average these requirements would require 2.5 hours of work per product
filing, with an estimated average of 34 responses per year per
respondent. The Commission estimates that this would result in a total
burden of 85 hours per respondent \527\ and 1,700 hours for all the
respondents annually.\528\ Based on the Commission staff's consultation
with the CFTC staff, the Commission believes that the SB SEF would
handle product filings internally. The Commission solicits comments
regarding the accuracy of its estimates.
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\526\ See 75 FR 67282 (November 2, 2010) (CFTC proposal to amend
17 CFR 40.2-40.5).
\527\ 85 hours = 34 (number of responses per year per
respondent) x 2.5 hours (burden per response).
\528\ 1,700 hours = 85 hours (annual burden per respondent
pursuant to proposed Rules 807 and 808) x 20 (number of SB SEF
respondents).
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The Commission preliminarily estimates that the total annual hourly
burden for all SB SEFs to prepare and submit rule filings under
proposed Rules 805 and 806 would be 3,000 hours. The Commission
preliminarily estimates that the total annual hourly burden for all SB
SEFs to prepare and submit product filings under proposed Rules 807 and
808 would be 1,700 hours.
7. Requirements Relating to the SB SEF's CCO
The SB SEF's CCO would have several initial and annual paperwork
burdens under proposed Rule 823(b)(6) and (7) and also under proposed
Rule 823(c) through (e).
Under proposed Rule 823(b)(6) and (7), the CCO would be responsible
for: (1) Establishing procedures for the remediation of noncompliance
issues identified by the CCO identified through any compliance office
review, look-back, internal or external audit finding, self-reported
error or validated complaint, and (2) establishing appropriate
procedures for the handling, management response, remediation,
retesting, and closing of noncompliance issues. As noted above, the
Commission estimates a total of 20 respondents for this requirement.
Based on the Commission's paperwork burden estimates for compliance
program rules adopted under the Investment Company Act of 1940
(``ICA'') and the Investment Advisers Act of 1940,\529\ the
[[Page 11032]]
Commission estimates that, on average, the requirements of proposed
Rule 823(b)(6) and (7) would mean that each SB SEF would expend 160
hours initially \530\ to create the required two policies and
procedures, for a total estimated burden for all respondents of 3,200
hours initially.\531\ Also, due to the novel nature of the CCO
requirements in the SB SEF industry and the new requirements under the
Dodd-Frank Act, the Commission estimates that an initial one-time
burden of $40,000 in outside legal costs \532\ would be incurred per
respondent, for a total outside cost burden for all respondents of
$800,000.\533\ The Commission solicits comments regarding the accuracy
of these estimates.
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\529\ Rule 38a-1 under the ICA (17 CFR 270.38a-1) requires each
registered investment company and business development company to
adopt and implement policies and procedures reasonably designed to
prevent violations of the Federal securities laws. See Investment
Company Act Release No. IC-26299 (December 17, 2003); 68 FR 74714
(December 24, 2003) (adopting release) and see 2010 Extension of
Rule 38a-1 Supporting Statement, Office of Management and Budget,
available at: http://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=201002-3235-028 (``ICA PRA''). The ICA PRA estimates a burden of
80 hours initially for the creation of such policies and procedures.
\530\ 160 hours = 80 hours (burden per policy and procedure
requirement) x 2 (number of policy and procedure requirements).
\531\ 3,200 hours = 160 hours (initial burden per respondent) x
20 (number of SB SEF respondents).
\532\ $40,000 = $400 (estimated hourly cost for outside counsel)
x 50 hours (estimated amount of external legal work require per
policy and procedure requirement) x 2 (number of policy and
procedure requirements). The estimate of 50 hours of external legal
work is from the Commission's estimate for external legal costs for
complying with the requirements of Rule 611 of Regulation NMS for
establishing polices and procedures thereunder. See Securities
Exchange Act Release No. 51808 (June 9, 2005); 70 FR 37496 (June 29,
2005). See also 2008 Extension of Rule 611, Supporting Statement,
Office of Management and Budget, available at: http://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=200802-3235-021. The
Commission preliminarily estimates an hourly cost of outside counsel
at $400. See Municipal Securities Disclosure Release, supra note
438.
\533\ $800,000 = $40,000 (initial burden per respondent) x 20
(number of SB SEF respondents).
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A CCO also would be required under proposed Rule 823(c) and (d) to
prepare and submit an annual compliance report to the Commission and to
the SB SEF's Board. Based upon the Commission's estimates for similar
annual reviews and reports by CCOs of investment companies, the
Commission estimates that these reports would require an average of 92
hours per respondent per year.\534\ Thus, the Commission estimates a
total annual burden of 1,840 hours for all respondents.\535\ Because
the report would be submitted by the CCO, the Commission does not
expect that the SB SEF would incur any external costs. The Commission
solicits comments on the accuracy of its estimates.
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\534\ The ICA PRA estimated that CCOs of investment companies
would expend 42 hours annually to conduct the annual review and
prepare the annual compliance report under Rule 38a-1 under the ICA.
See ICA PRA supra note 529. Because proposed Rule 823 would require
slightly more than double the information that is required for CCO
annual reports under Rule 38a-1, the Commission preliminarily
estimates that the burden associated with the CCO's annual
compliance report requirements of proposed Rule 823(c) and (d) would
be 220% that of Rule 38a-1, which estimate would be approximately 92
hours.
\535\ 1,840 hours = 92 hours (annual burden per respondent) x 20
(number of SB SEF respondents).
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A CCO would be required under proposed Rule 823(e)(1) and (2) and
Exhibits F and H to proposed Form SB SEF to submit an annual financial
report that would need to satisfy a number of requirements, including
the requirement that a registered public accounting firm that is
qualified and independent in accordance with Rule 2-01 of Regulation S-
X (17 CFR 210.2-01) audit each financial report relating to the SB SEF
(unaudited for certain affiliated entities). Based on conversations
with operators of current trading platforms and the Commission's
experience with entities of similar size, the Commission preliminarily
estimates that the reports relating to the SB SEF generally would
require, on average, 500 hours per respondent to complete and cost
$500,000 for independent public accounting services per respondent. The
Commission believes that the unaudited reports required for certain
affiliated entities and available upon request by the Commission for
other affiliated entities would not be overly time consuming to produce
because, based on the Commission's experience with Form 1 filers, a
respondent's accounting system should have this information available.
Furthermore, because the information would not have to be audited, a
respondent would only have to compile the information using a computer
and commercially available software that it generally would own for
pre-existing accounting purposes and then submit the information to the
Commission. Based on the number of unaudited financial statements that
the Commission receives from filers of Form 1 and the substance in
these reports, the Commission estimates that it would take a SB SEF 40
hours to compile, review, and submit these reports. However, all of
these reports would need to be provided in XBRL, as required in Rules
405(a)(1), (a)(3), (b), (c), (d) and (e) of Regulation S-T.\536\ This
would create an additional burden on respondents. The Commission
preliminarily estimates that, based on its experience with other data
tagging initiatives, these requirements would add an additional burden
of an average of 54 hours and $23,000 in outside software and other
costs per respondent per year. Thus, for purposes of complying with the
financial statement requirements under proposed Rule 823(e)(1) and (2)
and Exhibits F and H to proposed Form SB SEF, the Commission estimates
a total annual burden of 11,880 hours \537\ and $10,460,000 for
respondents.\538\ The Commission solicits comments as to the accuracy
of this information.
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\536\ See 17 CFR 232.405.
\537\ 11,880 hours = 20 (number of SB SEF respondents) x 594
hours (500 hours for audited SB SEF financial statements + 40 hours
for unaudited financial statements of affiliated entities + 54 hours
for XBRL formatting of submission).s
\538\ $10,460,000 = 20 (number of SB SEF respondents) x $523,000
($500,000 for outside accounting services for auditing SB SEF's
financial statements + $23,000 in outside software and other cost
for formatting financial statement submission in XBRL format).
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As a result, the Commission estimates that the total burdens for
compliance with proposed Rule 823 would be: (1) Initially, for the
creation of the policies and procedures required in proposed Rule
823(b)(6) and (7), 160 hours and $40,000, per respondent, and 3,200
hours and $800,000, for all respondents; and (2) on an annual basis,
for the annual compliance report and financial reports required under
proposed Rule 823(c) through (e), 686 hours \539\ and $523,000, per
respondent, and 13,720 \540\ hours and $10,460,000,\541\ for all
respondents.
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\539\ 686 hours = 594 hours for financial report + 92 hours for
annual compliance report.
\540\ 13,720 hours = 686 hours (burden per respondent) x 20
(number of SB SEF respondents).
\541\ $10,460,000 = 20 (number of SB SEF respondents) x $523,000
($500,000 for outside accounting services for auditing SB SEF's
financial statements + $23,000 in outside software and other cost
for formatting financial statement submission in XBRL format).
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The Commission preliminarily estimates that the total annual hourly
burden for all SB SEFs combined for the CCO requirements in proposed
Rule 823 would be 13,720 hours and the total one-time hourly burden
would be 3,200. The Commission preliminarily estimates that the total
annual cost burden for all SB SEFs to comply with the CCO requirements
in proposed Rule 823 would be $10,460,000 and the total one-time cost
burden would be $800,000.
8. Surveillance Systems Requirements for SB SEFs
As discussed above, proposed Rule 813(b) requires SB SEFs to have
the capacity and resources to electronically monitor trading in SB
swaps on its market by establishing an automated surveillance system,
including through real-time monitoring of trading and use of automated
alerts, to, among other things, detect and deter fraudulent or
manipulative acts or practices, detect
[[Page 11033]]
and deter market distortions or disruptions of trading, conduct real-
time monitoring of trading to provide for comprehensive and accurate
trade reconstruction, and collect and assess data to allow SB SEFs to
respond to market abuses and disruptions.\542\
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\542\ Proposed Rule 811(i) would require a SB SEF to have the
capacity to capture information that may be used in establishing
whether rule violations have occurred, including through the use of
automated surveillance systems as set forth in proposed Rule 813(b).
Proposed Rule 813(a)(2) would require a SB SEF to monitor trading in
SB swaps to prevent manipulation, price distortion, and disruptions
of the delivery or cash settlement practices and procedures,
including methods for conducting real-time monitoring of trading and
comprehensive and accurate trade reconstructions. The Commission
preliminarily believes that the information collection burden
associated with these requirements would be included in the
information collection burden for proposed Rule 813(b).
---------------------------------------------------------------------------
Based on industry sources, the Commission preliminarily estimates
that establishing an automated surveillance system would require one
senior programmer and three additional programmers working for a year
to create and implement such a system. Assuming a 1,800 hour work year,
the Commission preliminarily estimates that the average one-time
initial burden per respondent of establishing an automated surveillance
system compliant with these requirements, would be 7,200 hours.\543\ In
addition, the Commission believes that a one-time capital expenditure
of $1,500,000 in information technology costs would be necessary to
establish such a system. This estimate is based on the Commission's
discussions with market participants currently operating platforms that
trade OTC swaps. Based on the estimated number of 20 SB SEF
respondents, the Commission estimates a total start-up cost of 144,000
hours \544\ and $30,000,000 in information technology costs.\545\ Based
on discussions with operators of current trading platforms, the
Commission further estimates that to maintain these systems, a SB SEF
would have to employ two programmer/analysts. Therefore, assuming a
1,800 hour work year, the Commission preliminarily estimates the
average ongoing annual costs of these systems to be 3,600 hours per
respondent \546\ for a total of 72,000 hours for all respondents.\547\
In addition, the Commission estimates that these systems may incur an
ongoing information technology cost of and $500,000 per respondent, for
a total ongoing annual burden of $10,000,000\548\ The Commission
solicits comments on the accuracy of its estimates.
---------------------------------------------------------------------------
\543\ 7,200 hours = 1,800 (initial hours burden per employee) x
4 (number of employees).
\544\ 144,000 hours = 7,200 hours (initial burden per
respondent) x 20 (number of SB SEF respondents).
\545\ $30,000,000 = $1,500,000 (initial cost burden per
respondent) x 20 (number of SB SEF respondents).
\546\ 3,600 hours = 1,800 (annual hours burden per employee) x 2
(number of employees).
\547\ 72,000 hours = 3,600 hours (annual burden per respondent)
x 20 (number of SB SEF respondents).
\548\ $10,000,000 = $500,000 (annual cost burden per respondent)
x 20 (number of SB SEF respondents).
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9. Access by Non-Registered Eligible Contract Participants
As discussed above, proposed Rule 809(d)(1) would require a SB SEF
that permits non-registered ECPs to be participants in the SB SEF to
establish, document, and maintain a system of risk management controls
and supervisory procedures reasonably designed to manage the financial,
regulatory, and other risks of this business activity.\549\ Proposed
Rule 809(d)(2) would require that the risk management controls and
supervisory procedures for granting access to certain ECPs as
participants of the SB SEF be reasonably designed to ensure compliance
with all regulatory requirements.\550\ The Commission notes that
proposed Rule 809(d) is modeled on recently adopted Rule 15c3-5 under
Exchange Act.\551\ The PRA analysis prepared in connection with that
rule has informed the Commission's estimates of the paperwork burdens
that would apply to SB SEFS under the proposed Rule 809(d).\552\
Although the Commission reviewed the burden estimates it prepared in
connection with Rule 15c3-5 to inform its burden estimates of the
proposed Rule 809(d), the Commission recognizes that a number of
entities that seek to become SB SEFs may not currently be regulated
entities.
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\549\ See proposed Rule 809(d)(1).
\550\ See proposed Rule 809(d)(2).
\551\ See 17 CFR.240.15c3-5. Though the Commission is relying on
the PRA estimates it prepared in connection with Rule 15c3-5 to
inform its PRA estimates for this proposed rule, the Commission
notes that some of the specific requirements, controls and
procedures in Rule 15c3-5 are not contained in the proposed Rule
809(d) for SB SEFs.
\552\ See Securities Exchange Act Release No. 63241 (November 3,
2010), 75 FR 69792 (November 15, 2010).
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The Commission preliminarily believes that proposed Rule 809(d)(1)
and (2) would impose a one-time collection of information burden on SB
SEFs to establish or modify risk management systems, if they permit
access by non-registered ECPs. The Commission preliminarily believes
that the majority of entities that would seek to become SB SEFs would
already have some risk management systems and supervisory procedures
and controls to protect the integrity of their business and to comply
with other requirements already specified, analyzed and accounted for
herein (e.g., requirements relating to surveillance systems,
recordkeeping, reporting, and the CCO). However, some entities that
seek to become SB SEFs could have to change their systems and
procedures and other entities that currently do not have such systems
and procedures could have to establish new systems and procedures to
comply with the requirement of proposed Rule 809(d).
The Commission preliminarily believes that each SB SEF would have a
one-time burden to establish or modify its technology and systems to
add the controls necessary to comply with the requirement of the
proposed Rule 809(d). The Commission estimates that each SB SEF would
spend an average of 225 hours to develop or modify their systems to
bring them into compliance with the proposed rule for a total one-time
burden for all SB SEFs combined of 4,500 hours.\553\ Based on industry
sources, the Commission preliminarily believes that the development or
modification of the required technology and systems would be performed
internally.
---------------------------------------------------------------------------
\553\ 4,500 hours = 225 (estimated average one-time burden to
set up or modify systems to comply with collection of information
under proposed Rule 809(d)) x 20 (number of SB SEF respondents).
---------------------------------------------------------------------------
The Commission also preliminarily believes that proposed Rules
809(d)(1) and (2) would impose an annual paperwork burden on each SB
SEF to maintain its risk management system. The Commission
preliminarily estimates that the ongoing annual burden for a SB SEF to
maintain its risk management system would be 172.5 hours on average for
a total annual burden for all SB SEFs combined of 3,450 hours.\554\ The
Commission believes that the ongoing burden of complying with the
proposed rule's collection of information burden would include, among
other things, updating systems to address any issues detected, updating
risk management controls to reflect changes in the SB SEF's business
model, and documenting and preserving its written description of risk
management controls. Based on industry sources, the Commission
preliminarily believes that the
[[Page 11034]]
maintenance of a SB SEF's risk management systems would performed
internally by one or more programmers.
---------------------------------------------------------------------------
\554\ 3,450 hours = 225 hours (estimated average annual burden
to establish or maintain risk management systems to comply with
collection of information under proposed Rule 809(d)) x 20 (number
of SB SEF respondents).
---------------------------------------------------------------------------
The Commission preliminarily believes that proposed Rule 809(d)
would impose a one-time legal and compliance burden on each SB SEF to
comply with the requirement to establish, document, and maintain risk
management controls and supervisory procedures. Based on the
Commission's experience with broker-dealers and ATSs, the Commission
preliminarily estimates that the average initial one-time legal and
compliance burden would be approximately 52.5 hours per SB SEF for a
total one-time legal and compliance burden for all SB SEFs combined of
1,050 hours.\555\ The Commission preliminarily estimates that one
internal compliance attorney and one internal compliance manager would
spend on average 7.5 hours each to evaluate appropriate access controls
and procedures. The Commission also preliminarily estimates that one
internal compliance attorney and one compliance manager would each
require approximately 15 hours, and the CCO would require approximately
7.5 hours, to set up or modify compliance policies and procedures to
comply with the proposed rule, which includes establishing written
policies and procedures for reviewing the overall effectiveness of risk
management controls and supervisory procedures.
---------------------------------------------------------------------------
\555\ 1,050 hours = 52.5 hours (estimated average one-time
burden to establish, document, and maintain risk management controls
and supervisory procedures to comply with collection of information
under proposed Rule 809(d)) x 20 (number of SB SEF respondents).
---------------------------------------------------------------------------
The Commission also preliminarily believes that proposed Rule
809(d) would impose an annual paperwork burden on SB SEFs to review and
document their written risk management controls and supervisory
procedures. Based on the Commission's experience with broker-dealers
and ATSs, the Commission believes that a SB SEF's ongoing annual burden
would be approximately 75 hours on average for a total annual burden
for all SB SEFs combined of 1,500 hours.\556\ This estimate includes an
average of 30 hours per year for each of an internal compliance
attorney and compliance manager, and 15 hours per year for the CCO, to
review, document and updated these policies and procedures.
---------------------------------------------------------------------------
\556\ 1,500 hours = 75 hours (estimated average annual burden to
establish, document, and maintain risk management controls and
supervisory procedures to comply with collection of information
under proposed Rules 809(d)(1) and (2)) x 20 (estimated number of SB
SEF respondents).
---------------------------------------------------------------------------
Therefore, the Commission preliminarily estimates that the total
one-time burden for all SB SEFs to comply with the collection of
information requirements of proposed Rule 809(d) would be 5,550 hours
\557\ and the total annual burden to comply with the proposed Rule
would be 4,950 hours.\558\
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\557\ See supra notes 553 and 555 and accompanying text for
calculations of total one-time burden to comply with collection of
information under proposed Rules 809(d).
\558\ See supra notes 554 and 556 and accompanying text for
calculations of total annual burden to comply with collection of
information under proposed Rules 809(d).
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10. Composite Indicative Quote and Executable Bids and Offers
Proposed Rule 811(e) would require a SB SEF that operates an RFQ
platform to create and disseminate through the SB SEF a composite
indicative quote, made available to all participants, for SB swaps
traded on or through the SB SEF and the Commission's proposed
interpretation of SB SEF would require each SB SEF, at the minimum, to
provide any participant with the ability to make and display executable
bids or offers accessible to all participants on the SB SEF, if the
participant wishes to do so. The Commission preliminarily believes that
most if not all of the respondents that operate RFQ platforms already
have systems that collect and disseminate a composite indicative quote
for other securities traded on or through the respondents' platforms.
The Commission also preliminarily believes that SB SEFs currently have
the capability to offer the executable bids and offers function to its
participants. Thus, the Commission preliminarily believes that the
composite indicative quote and the executable bids and offers
requirements would result in little or no collection of information
burden for such entities. The Commission recognizes, however, that some
SB SEFs may have a one-time burden to establish or update their systems
to collect and disseminate composite indicative quote information and
to offer the executable bids and offers function and an ongoing annual
burden to determine that such composite indicative quote mechanisms and
executable bids and offers function are operating properly. The
Commission does not know how many SB SEFs would have to establish or
update their systems to collect and disseminate composite indicative
quote information or to provide the executable bids and offer function.
Therefore, for PRA purposes the Commission estimates that all of the
estimated 20 SB SEF respondents would incur the paperwork burdens
associated with these requirements.
The Commission preliminarily believes that this work would be
performed internally by one senior programmer and one programmer. The
Commission preliminarily believes that one senior programmer and one
programmer would spend approximately 40 hours each to establish or
update the SB SEF's systems to include the composite indicative quote
and executable bids and offers functions. The total one-time burden, on
average, for a SB SEF to establish or update its system to include
these functions would be 80 hours for a total one-time burden for all
SB SEFs combined of 1,600 hours.\559\ Further, the Commission
preliminarily believes that one programmer would spend approximately 50
hours annually, on average, monitoring and updating the system to
determine that the composite indicative quote and the executable bids
and offers functions would be operating appropriately. The total annual
burden to all SB SEFs combined for monitoring and updating these
mechanisms would be 1,000 hours.\560\
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\559\ 1,600 hours = 80 hours (estimated one-time collection of
information burden to establish or update systems to comply with
proposed Rule 811(e) and the Commission's proposed interpretation of
the definition of SB SEF as it relates to executable bids and offers
functions) x 20 (estimated number of SB SEF respondents).
\560\ 1,000 hours = 50 hours (estimated annual collection of
information burden to comply with proposed Rules 811(e)) x 20
(estimated number of SB SEF respondents).
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11. Total Paperwork Burden Under Regulation SB SEF
Based on the foregoing, the Commission preliminarily believes that
the total one-time hourly burden for all SB SEFs and SB SEF
participants combined pursuant to the requirements under Regulation SB
SEF is equal to 264,801 hours \561\ and $41,692,900.\562\
---------------------------------------------------------------------------
\561\ 263,201 hours = 13,901 hours (registration) + 4,400 hours
(rule-writing) + 13,300 (SB SEF recordkeeping) + 72,450 (SB SEF
participant recordkeeping) + 6,400 (timely publication of trading
information) + 3,200 (CCO requirements) + 144,000 (surveillance
systems) + 5,550 (access by ECPs) + 1,600 (composite indicative
quote).
\562\ $41,692,900 = $10,478,900 (registration) + $36,000 (SB SEF
recordkeeping) + $378,000 (SB SEF participant recordkeeping) +
$800,000 (CCO requirements) + $30,000,000 (surveillance systems).
---------------------------------------------------------------------------
The Commission preliminarily believes that annual ongoing burden
for all SB SEFs and SB SEF participants combined pursuant to the
requirements
[[Page 11035]]
under Regulation SB SEF are equal to 165,632 hours \563\ and
$22,342,700.\564\
---------------------------------------------------------------------------
\563\ 164,632 hours = 3,154 (registration) + 2,400 hours (rule-
writing) + 24,208 hours (SB SEF reporting) + 27,500 hours (SB SEF
participant reporting) + 3,600 hours (SB SEF recordkeeping) + 8,400
hours (SB SEF participant recordkeeping) + 4,700 hours (rule and
product filings) + 13,720 hours (CCO requirements) + 72,000 hours
(surveillance systems) + 4,950 (access by ECPs) + 1,000 (composite
indicative quote).
\564\ $22,342,700 = $2,700 (registration) + $1,880,000 (SB SEF
reporting) + $10,460,000 (CCO requirements) + $10,000,000
(surveillance systems).
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E. Collection of Information Is Mandatory
The collections of information pursuant to Regulation SB SEF would
be mandatory for all registered SB SEFs and SB SEF participants, as
applicable.
F. Responses to Collection of Information Will Not Be Confidential
Other than information for which a SB SEF or a SB SEF participant
requests confidential treatment, or as may otherwise be kept
confidential by the Commission, and which may be withheld from the
public in accordance with the provisions of the Freedom of Information
Act (``FOIA''), 5 U.S.C. 522, the collection of information pursuant to
the proposed rules would not be confidential and would be publicly
available.
G. Retention Period of Recordkeeping Requirements
Although recordkeeping and retention requirements have not yet been
established for SB SEFs under the Exchange Act provisions added by the
Dodd-Frank Act, the Commission is authorized to adopt such rules under
proposed Regulation SB SEF as part of this proposed rulemaking.\565\
Proposed Rule 818 under Regulation SB SEF would require a SB SEF to
maintain records of all documents made or received by it in the conduct
of its business for a period of not less than five years, the first two
years in an easily accessible place.
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\565\ As discussed above, new Section 3D of the Exchange Act
sets forth 14 Core Principles that a SB SEF would need to satisfy,
including one relating to recordkeeping and reporting, and provides
the Commission with rulemaking authority with respect to
implementation of these Core Principles. See Public Law 111-203,
Sec. 763(c) (adding Section 3D of the Exchange Act).
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H. Request for Comment
Pursuant to 44 U.S.C. 3505(c)(2)(B), the Commission solicits
comment to:
1. Evaluate whether the proposed collection of information is
necessary for the performance of the functions of the agency, including
whether the information shall have practical utility;
2. Evaluate the accuracy of the agency's estimate of the burden of
the proposed collection of information;
3. Determine whether there are ways to enhance the quality,
utility, and clarity of the information to be collected; and
4. Minimize the burden of collection of information on those who
are to respond, including through the use of automated collection
techniques or other forms of information technology.
Persons wishing to submit comments on the collection of information
requirements should direct them to the following persons: (1) Desk
Officer for the Securities and Exchange Commission, Office of
Information and Regulatory Affairs, OMB, Room 3208, New Executive
Office Building, Washington, DC 20503; and (2) Secretary, Securities
and Exchange Commission, Station Place, 100 F Street, NE., Washington,
DC 20549-1090 with reference to File No. S7-06-11. OMB is required to
make a decision concerning the collection of information between 30 and
60 days after publication, so a comment to OMB is best assured of
having its full effect if OMB receives it within 30 days of
publication. The Commission has submitted the proposed collection of
information to OMB for approval. Requests for the materials submitted
to OMB by the Commission with regard to this collection of information
should be in writing, refer to File No. S7-06-11, and be submitted to
the Securities and Exchange Commission, Office of Investor Education
and Advocacy, Station Place, 100 F Street, NE., Washington, DC 20549-
0213.
XXVIII. Consideration of Costs and Benefits
A. Overview
To increase the transparency and oversight of the OTC derivatives
market, Title VII of the Dodd-Frank Act requires the Commission to
undertake a number of rulemakings to implement the regulatory framework
for SB swaps that is set forth in the legislation, including the
registration and regulation of SB SEFs.\566\ Pursuant to Section 763(c)
of the Dodd-Frank Act, the Commission is required to adopt rules
providing for: (1) The registration and regulation of SB SEFs; and (2)
the compliance by SB SEFs with the Core Principles set forth
thereunder.\567\ To satisfy this statutory mandate, the Commission is
proposing Regulation SB SEF, which would contain several rules setting
forth the requirements for a platform or system to register with the
Commission, and to maintain that registration, as a SB SEF, and Form SB
SEF, which would contain the application form and the materials that an
applicant would have to provide as part of the registration process. In
addition, proposed Regulation SB SEF would contain a series of rules
that are designed to implement the 14 Core Principles with which a SB
SEF is statutorily required to comply. The proposed registration form
and rules contained in Regulation SB SEF are designed to promote the
goals of the Dodd-Frank Act of having SB swaps trade on a regulated
market. In conjunction with other rulemakings proposed by the
Commission under the Dodd-Frank Act, including rule proposals relating
to SB swap trade reporting,\568\ SB swap data repositories,\569\ the
mitigation of conflicts of interest relating to SB SEFs, SBS exchanges
and SB swap clearing agencies,\570\ and SB swap anti-fraud and anti-
manipulation prohibitions,\571\ the proposed registration form and
rules governing SB SEFs are intended to lead to a more robust,
transparent, and competitive environment for the market for SB swaps.
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\566\ See Public Law 111-203 Preamble.
\567\ The Core Principles applicable to SB SEFs are captioned:
(1) Compliance with Core Principles; (2) Compliance with Rules; (3)
Security-Based Swaps Not Readily Susceptible to Manipulation; (4)
Monitoring of Trading and Trade Processing; (5) Ability to Obtain
Information; (6) Financial Integrity of Transactions; (7) Emergency
Authority; (8) Timely Publication of Trading Information; (9)
Recordkeeping and Reporting; (10) Antitrust Considerations; (11)
Conflicts of Interest; (12) Financial Resources; (13) System
Safeguards; and (14) Designation of Chief Compliance Officer.
\568\ See Reporting and Dissemination Release, supra note 6.
\569\ See SDR Release, supra note 6.
\570\ See Regulation MC Proposing Release, supra note 82.
\571\ See Prohibition Against Fraud, Manipulation, and Deception
in Connection with Security-Based Swaps, Exchange Act Rel. No.
63236, proposed on Nov. 3, 2010.
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Currently, SB swaps trade in the OTC market, rather than on
regulated markets. The existing market for SB swaps is opaque, with
little, if any, pre-trade or post-trade transparency. A key goal of the
Dodd-Frank Act is to bring more transparency to the OTC derivatives
markets and to bring the trading of SB swaps onto regulated
markets.\572\ The Commission, in drafting rules to implement the SB SEF
provisions of the Dodd-Frank Act, is proposing to put in place a
regulatory structure that will foster a transparent, fair, and
competitive market for the
[[Page 11036]]
trading of SB swaps. Considering the early stage of regulatory
development and the existing structure of the SB swaps market, however,
the Commission is mindful that the proposed rules could have unforeseen
consequences, either beneficial or undesirable, with respect to the
shape that this market will take. In the Commission's view, it is
important that the regulatory structure provides incentives for the
trading of SB swaps on regulated markets that are designed to foster
greater transparency and competition and are subject to Commission
oversight, while at the same time allowing for the continued efficient
innovation and evolution of the SB swaps market. In this regard, rather
than proposing a rule that establishes a prescribed format for the
system or platform that constitutes a SB SEF, the Commission is
proposing to provide baseline principles, consistent with the
requirements of the Exchange Act, that any potential SB SEF would need
to meet as a condition to registration as a SB SEF. Such an approach
would allow flexibility to those trading venues that plan to register
as SB SEFs and would permit the continued development of organized
markets for the trading of SB swaps. This more flexible approach also
would allow the Commission to monitor the market for SB swaps and
propose adjustments, as necessary, as this market evolves.
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\572\ See Public Law 111-203 Preamble. See also Section 3C(h) of
the Exchange Act, Public Law 111-203, requiring that, subject to
certain exceptions, any SB swap subject to mandatory clearing must
be traded on a SB SEF or an exchange.
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The Commission believes that the proposed registration form and
rules under Regulation SB SEF would create a comprehensive structure
for the registration and regulation of SB SEFs, but would also impose
costs on market participants. The Commission is sensitive to the costs
and benefits that would result from proposed Regulation SB SEF and has
identified certain costs and benefits of these proposals, as described
more fully below. The Commission requests comment on the costs and
benefits associated with the proposed registration form and rules
contained in proposed Regulation SB SEF, and its cost-benefit analysis
thereof, including identification and assessments of any costs and
benefits not discussed in this analysis. The Commission also seeks
comment on the accuracy of any of the benefits and costs it has
identified below and also welcomes comments on the accuracy of any of
its cost estimates. Finally, the Commission encourages commenters to
identify, discuss, analyze, and supply relevant data, information, or
statistics regarding any such costs or benefits.
Because the structure of the SB swaps market and the behavior of
its market participants is likely to change after the effective date of
the Dodd-Frank Act and implementation of the Commission's rules
promulgated thereunder, the impact of--and the costs and benefits that
may result from--proposed Regulation SB SEF may change over time. As
commenters review proposed Regulation SB SEF, they are urged to
consider generally the role that regulation may play in fostering or
limiting the development of the market for SB swaps.
B. Benefits
SB SEFs are expected to play a critical role in enhancing the pre-
trade transparency and oversight of the market for SB swaps. SB SEFs
should help further the statutory objective of financial stability and
greater transparency for SB swaps \573\ by providing a venue for
counterparties to execute trades in SB swaps and also by serving as a
conduit for information regarding trading interest in SB swaps. In
addition, because the proposed rules would impose certain regulatory
responsibilities on SB SEFs, such as monitoring trading, assuring the
ability to obtain information, and establishing and enforcing rules and
procedures to ensure the financial integrity of SB swaps entered on or
though the SB SEF, SB SEFs would be charged with an important role in
helping to oversee trading in the market for SB swaps on an ongoing
basis and allowing regulators to quickly assess information regarding
the potential for systemic risk across trading venues.
---------------------------------------------------------------------------
\573\ See Public Law 111-203 Preamble.
---------------------------------------------------------------------------
Broadly, the Commission anticipates that Regulation SB SEF may
bring several overarching benefits to the SB swap market. These include
the following:
Improved Transparency. The proposed rules on the registration and
regulation of SB SEFs could have significant benefits to the market for
SB swaps. The trading of SB swaps on regulated markets, i.e., SB SEFs,
should bring more transparency to the currently opaque market for SB
swaps. In addition, the Commission's proposed interpretation of the
definition of a SB SEF, combined with the proposed rules relating to
pre-trade transparency, should increase overall transparency in the
market for SB swaps. Increased pre-trade price transparency should help
alleviate informational asymmetries that may exist today in the SB
swaps markets and allow an increased number of market participants to
be able to see the trading interest of other market participants prior
to trading, which should lead to increased price competition among
market participants.\574\ The Commission preliminarily believes that
the proposed requirements with respect to pre-trade price transparency
should lead to more efficient pricing in the SB swaps market,\575\ but
is mindful that, under certain circumstances, pre-trade price
transparency could also discourage the provision of liquidity by some
market participants.\576\
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\574\ See, e.g., Ananth Madhavan, Market Microstructure: A
Practitioner's Guide, Fin. Analysts J., Vol. 58, at 38 (2002)
(nondisclosure of pre-trade price information benefits dealers by
reducing price competition).
\575\ See, e.g., Ekkehart Boehmer, et al., Lifting the Veil: An
Analysis of Pre-trade Transparency at the NYSE, J. of Fin., Vol. LX
(2005) (greater pre-trade price transparency leads to more efficient
pricing).
\576\ See, e.g., Ananth Madhavan, et al., Should Securities
Markets Be Transparent? J. of Fin. Markets, Vol. 8 (2005) (finding
that an increase in pre-trade price transparency leads to lower
liquidity and higher execution costs, because limit-order traders
are reluctant to submit orders given that their orders essentially
represent free options to other traders).
---------------------------------------------------------------------------
The Commission preliminarily believes that proposed Rule 811(e),
which would require a SB SEF that operates an RFQ platform to create
and disseminate through the SB SEF a composite indicative quote, made
available to all participants, for SB swaps traded on or through the SB
SEF, would provide a certain level of pre-trade transparency for an RFQ
platform. Displaying the composite indicative quote would include
displaying both composite indicative bids and composite indicative
offers for SB swaps traded on or through the SB SEF. As a result of
this proposal, an average indicative pricing interest would be
available to all of the SB SEF's participants. The Commission also
believes that including RFQ responses in the composite indicative quote
would be an appropriate method to inform SB SEF participants of changes
in the average level of pricing interest due to responses.\577\ At the
same time, the dissemination of a composite indicative quote would
provide a greater level of anonymity for the execution of trades on an
RFQ platform compared with the dissemination of an individual
participant's indications of interest or responses to an RFQ.
---------------------------------------------------------------------------
\577\ See supra Section VIII.C.1.
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In addition, the Commission preliminary believes that proposed Rule
817(c), which prohibits a SB SEF from making any information regarding
a SB swap transaction publicly available prior to the time that a SDR
would be permitted to disseminate the trade information, could
positively impact the market for block trades. Under proposed Rule
817(c), a SB SEF could not
[[Page 11037]]
publicly disseminate complete transaction reports for block trades
(i.e., including the transaction ID and the full notional size) prior
to the time SDRs would be permitted to do so. The Commission believes
that proposed Rule 817(c) would provide parties to block trades some
flexibility in timing their transactions. Based on discussions with
market participants, the Commission believes that parties to block
trades favor a consistent approach to the timing of the public
reporting of such trades. Therefore, the Commission preliminary
believes that parties to block trades, especially dealers, would be
able to have more flexibility in effecting a block trade and any
associated hedging transactions, because trade information about the
block could not be made publicly available by the SB SEF prior to the
time that it is permitted to be disseminated by a SDR.\578\
Furthermore, if the market participants choose to utilize this
functionality, the display of executable bids or offers should also
improve pre-trade price transparency.
---------------------------------------------------------------------------
\578\ See Reporting and Dissemination Release, supra note 6, and
proposed Rule 904(d) of Regulation SBSR. See also proposed Rule
817(c) of Regulation SB SEF.
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Improved Oversight. The proposed rules would require SB SEFs to
maintain an audit trail and surveillance systems to monitor trading.
Regulation SB SEF also would require comprehensive reporting and
recordkeeping by SB SEFs. These requirements would put in place a
structure that would provide the SB SEF with information to better
enable it to oversee trading on its market by its participants,
including detecting and deterring fraudulent and manipulative acts.
Regulation SB SEF would also provide the Commission with greater access
to information on the trading of SB swaps to support its
responsibilities to oversee the SB swaps market. Further, Regulation SB
SEF would enable the Commission to share that information with other
Federal financial regulators in instances of broad market turmoil.
This framework could in turn lead to increased confidence in a
well-regulated market among SB swaps market participants. To the extent
market participants consider a well-regulated market as significant to
their investment decisions, trust, which is a component of investor
confidence, is improved and market participants may be more willing to
participate in the SB swaps market. An increase in participation in the
SB swaps market can potentially benefit the SB swaps market as a whole.
Further, to the extent that market participants utilize SB swaps to
better manage their risk with respect to a position in underlying
securities or assets, the extent they are willing to participate in the
SB swaps market may impact their willingness to participate in the
underlying asset's market. Thus, the Commission preliminarily believes
that the proposal could benefit the securities markets overall by
encouraging a more efficient, and potentially higher, level of capital
investment.
Improved Access and Competition. Currently, the market for SB swaps
is dominated by a small group of dealers.\579\ The Dodd-Frank Act's
mandate to bring SB swaps that are subject to the mandatory clearing
requirement onto regulated markets, unless the SB swap is not made
available to trade,\580\ and proposed Regulation SB SEF, which is
intended to help implement the statutory directive, should help foster
greater competition in the trading of SB swaps by increasing access to
SB swap trading venues. The proposed rules would provide a framework to
allow a number of trading platforms or systems to register as SB SEFs
and thus more effectively compete for business in SB swaps. Proposed
Rule 809(b) would require a SB SEF's rules to permit all eligible
persons that meet the requirements for becoming a participant as set
forth in the SB SEF's rules to become participants in the SB SEF.\581\
Proposed Rule 809(b) would also give a SB SEF the option to not permit
any non-registered ECP to become participants in the SB SEF. As such,
proposed Rule 809(b) provides SB SEFs with flexibility in choosing
whether or not to provide access to non-registered ECPs. Proposed Rule
809(d) would require that, if a SB SEF chooses to permit non-registered
ECPs to become participants, it would be responsible for establishing
risk management controls and supervisory procedures reasonably designed
to manage financial, regulatory, and other risks associated with the
non-registered ECP's access. These proposed requirements should reduce
risks associated with access to SB SEFs by non-registered ECPs (e.g.,
if they enter into trades that exceed appropriate credit or capital
limits or submit erroneous orders). In addition, the Commission
preliminarily believes that a SB SEF is best positioned to implement
the proposed controls and procedures.
---------------------------------------------------------------------------
\579\ See supra note 81.
\580\ See Section 3C(h) of the Exchange Act.
\581\ Proposed Rule 809(a) would require SB SEFs to only permit
a person to become a participant in the security-based swap
execution facility if such person is registered with the Commission
as a security-based swap dealer, major security-based swap
participant, or broker (as defined in section 3(a)(4) of the Act, 15
U.S.C. 78c(a)(4)), or if such person is an eligible contract
participant (as defined in section 3(a)(65) of the Act, 15 U.S.C.
78c(a)(65)).
---------------------------------------------------------------------------
Proposed Rule 811(b)(1) would require every SB SEF to establish
fair, objective and not unreasonably discriminatory standards for
granting impartial access to trading on the SB SEF. In addition,
proposed Rule 811(b)(3)-(4) would require every SB SEF to make and keep
records of all denials, or limitations, of access to the SB SEF, and to
report such information to the Commission. These proposed requirements
would further the requirement in the Exchange Act that SB SEFs provide
market participants with impartial access.\582\ Taken together, these
proposed rules should foster greater direct access to SB SEFs by
dealers, major SB swap participants, brokers and ECPs. This impartial
access should, in turn, promote greater participation by liquidity
providers and competition on each SB SEF. Increased participation could
lead to reduced information asymmetries among market participants,
while increased competition could lead to more efficient and better
pricing in the SB swaps market. Further, a more competitive environment
should lead to lower trading costs, which may lead to increased
participation in the SB swaps market. Impartial access requirements
also would help guard against situations where certain participants in
a SB SEF (who also might be owners of the SB SEF) might seek to limit
the number of other participants in the SB SEF in order to limit
competition and increase their own profits. Thus, the impartial access
should, in turn, promote greater participation by liquidity providers
and competition on each SB SEF.
---------------------------------------------------------------------------
\582\ See Section 3D(d)(2)(B)(i) of the Exchange Act.
---------------------------------------------------------------------------
As proposed, SB SEFs would remain free to establish standards for
impartial access consistent with the requirement that they be fair and
objective and do not unfairly discriminate, and that they do not apply
the standards in an unfair or unreasonably discriminatory manner.
Therefore, SB SEFs could choose the most cost-effective methods to
ensure that all their participants and would-be participants are
evaluated on a fair and impartial basis.
To address the problem of restricting the scope of SB swaps that
trade on SB SEFs, the Commission is proposing to require that each SB
SEF have a swap review committee that would determine which SB swaps
would trade on the SB SEF, as well as the SB swaps that should no
longer trade on the SB
[[Page 11038]]
SEF.\583\ Proposed Rule 811(c)(2) would require that the composition of
the swap review committee must provide for the fair representation of
participants of the SB SEF as well as other market participants such
that each class of participant and other market participants would be
given the right to participate in such swap review committee and that
no single class of participant or category of market participant would
predominate. Having a swap review committee that provides for the fair
representation of participants and other market participants should
help assure that the process of determining those SB swaps that should
trade on the SB SEF would be fair and that various classes of
participants in the SB SEF, as well as other market participants, would
have a voice in those decisions.
---------------------------------------------------------------------------
\583\ See proposed Rule 811(c). See also Core Principle 3 and
proposed Rule 812, which permit a SB SEF to trade only SB swaps that
are not readily susceptible to manipulation. Prior to trading any SB
swap, proposed Rule 812 would require the swap review committee to
determine whether, after taking into account all of the terms and
conditions of the SB swap and the markets for the SB swap and any
underlying security or securities, that such SB swap is not readily
susceptible to manipulation. Proposed Rule 812 also would require
the swap review committee to periodically review that determination.
---------------------------------------------------------------------------
Consequently, the Commission believes that the proposed rules
requiring impartial access to trading on the SB SEF and providing for
fair representation on the swap review committee to determine which SB
swaps should be traded on SB SEFs should help mitigate the
inappropriate exercise of market power by any given market participant
or group of market participants. In addition, the Commission believes
that, in a competitive market, new SB SEFs could be created to attract
market participants that are unable to meet the objective requirements
of more exclusive SB SEFs or to trade the SB swaps other SB SEFs decide
not to trade.
The Commission also believes that its proposed interpretation of
which facilities fall within the term SB SEF, providing, at the
minimum, any participant with the ability to make and display
executable bids or offers accessible to all participants on the SB SEF,
if the market participant wishes to do so, would also improve access to
the SB SEF by participants because it provides participants an
additional method with which to execute transactions on the SB SEF.
Improved Commission and SB SEF Oversight. The Commission believes
that one of the goals of the Dodd-Frank Act is to increase the
regulatory oversight over the currently unregulated OTC derivative
markets.\584\ Proposed Regulation SB SEF would provide the means for
the Commission to gain better insight into and oversight of the market
for SB swaps. The proposed rules would provide the Commission the
ability to, among other things, review the rules of SB SEFs, obtain
data and records from SB SEFs, and inspect and examine SB SEFs, all of
which would support the Commission's oversight function over the SB
swaps market, as directed by Congress in the Dodd-Frank Act.
---------------------------------------------------------------------------
\584\ See Public Law 111-203 Preamble.
---------------------------------------------------------------------------
Specifically, proposed Rule 818(a) would require each SB SEF to
keep and preserve all documents, including all correspondence,
memoranda, papers, books, notices, accounts, and other such records
that would be made or received by it in the conduct of its business. In
addition, proposed Rule 818(c) would require SB SEFs to keep audit
trail records relating to all orders, requests for quotations,
responses, quotations, other trading interest, and transactions that
are received by, originated on, or executed on, the SB SEF. The records
required to be kept, preserved and maintained by a SB SEF under
proposed Rule 818 would help the Commission to determine whether an SB
SEF is operating in compliance with the Exchange Act and the rules and
regulations thereunder. The audit trail information required to be
maintained under proposed Rule 818(c) would facilitate the ability of
the SB SEF and the Commission to carry out their respective obligations
under the Exchange Act, by providing a record of the complete history
of all trading interest entered and transactions executed on the SB
SEF. This audit trail could be used to help detect abusive or
manipulative trading activity, prepare reconstructions of activity on
the SB SEF or in the SB swaps market, and generally to understand the
causes of unusual market activity.
Furthermore, proposed Rule 811(h) would require the SB SEF to make
and keep records specifically of all disciplinary proceedings and
appeals, which would allow the Commission to review the disciplinary
process at a SB SEF, providing the Commission an additional tool to
carry out its oversight responsibilities. The proposed registration
requirements and related proposed Form SB SEF, and the CCO's annual
compliance report, which are further discussed below, should also aid
the Commission in its oversight responsibilities. As a whole, proposed
Regulation SB SEF should facilitate the Commission's work in preparing
the semi-annual and annual public reports of SB swap data required by
Section 763 of the Dodd-Frank Act, because the Commission would be able
to obtain information about the SB swap market through its oversight of
SB SEFs.\585\
---------------------------------------------------------------------------
\585\ See Section 763(i) of the Dodd-Frank Act requiring the
Commission to provide SB swap data to the public.
---------------------------------------------------------------------------
Improved Automation. In order to comply with the requirements of
proposed Regulation SB SEF relating to recordkeeping and surveillance,
SB SEFs would need to invest in and develop automated technology
systems to store, monitor and communicate a variety of trading data,
including orders, requests for quotations, responses and quotations,
among others. The Commission preliminary believes that the proposed
rules should bring about increased automation in the SB swaps markets.
This increased automation could help market participants more
efficiently track their trading and risk exposures in SB swaps. In
addition, the automation and systems development associated with the
regulation of SB SEFs, as required by proposed Regulation SB SEF, could
provide SB swaps market participants with new platforms and tools to
execute and process transactions in SB swaps at a lower expense per
transaction. Such increased efficiency would enable participants of the
SB SEF to handle increased volumes of SB swaps with greater efficiency.
In addition to the broad benefits that the Commission anticipates
that Regulation SB SEF may bring to the SB swaps market, the Commission
preliminarily believes that its individual proposed rules may bring
particular benefits to the SB swap market. These include the following:
Interpretation of SB SEF Definition. The Commission believes that
its proposed interpretation of the scope of the definition of SB SEF
\586\ should provide sufficient flexibility for market participants in
creating and operating a variety of SB SEFs to trade SB swaps. The
Commission preliminary believes that a system or a platform which
allows a participant the ability to send an RFQ to all participants, as
well as the choice to send an RFQ to fewer than all participants, would
provide flexibility to the market, because participants would be able
to trade SB swaps by accepting bids and offers from multiple
participants, while still preserving the ability of each participant to
decide how
[[Page 11039]]
broadly or narrowly to disseminate his or her RFQ.
---------------------------------------------------------------------------
\586\ See supra Section III.B for a detailed discussion of the
proposed interpretation of the definition of SB SEF.
---------------------------------------------------------------------------
The Commission believes that this proposed interpretation would
likely encourage a greater number of SB swaps to trade on SB SEFs
because, as mentioned above, it would give requestors the flexibility
to determine how best to broadcast their interests.
The Commission believes that, rather than proposing a rule that
establishes a prescribed format for a system or platform that
constitutes a SB SEF, the better approach is to provide baseline
principles, as outlined in the proposed interpretation consistent with
the requirements of the Exchange Act, that any potential SB SEF would
need to meet as a condition to registration as a SB SEF. Such an
approach should provide flexibility to those trading venues that plan
to register as SB SEFs and would permit the continued development of
organized markets for the trading of SB swaps.
Exemptions from Definition of Exchange and Certain Regulatory
Requirements Applicable to a Broker. The proposed rules would include
exemptions for SB SEFs from the definition of ``exchange'' and from
most regulations governing brokers. Using its exemptive authority under
Section 36 of the Exchange Act, the Commission is proposing: (1) To
amend Rule 3a1-1 under the Exchange Act to exempt any SB SEF from the
definition of ``exchange,'' if such SB SEF provides a marketplace
solely for the trading of security-based swaps (and no other security)
and complies with the provisions of proposed Regulation SB SEF; \587\
and (2) new Rule 15a-12 to allow a person that meets the definition of
a SB SEF and broker, to satisfy the broker registration requirements by
registering as a SB SEF. The Commission believes that Congress
specifically provided a comprehensive regulatory framework for SB SEFs
in the Dodd-Frank Act and, therefore, SB SEFs should not also be
required to be regulated as national securities exchanges or as
brokers. Without these proposed exemptions, SB SEFs would be required
to register with the Commission not only as SB SEFs, but also as
exchanges and brokers. Given the regulatory framework for SB SEFs
required by the Exchange Act and proposed Regulation SB SEF, the
Commission preliminarily believes that requiring a SB SEF to register
in such multiple capacities would not be efficient. The Commission
believes that reducing or eliminating such inefficiency will confer an
overall benefit to the SB swaps market by reducing the costs of
complying with unnecessary rules or regulations.
---------------------------------------------------------------------------
\587\ See proposed Rule 3a1-1(a)(4).
---------------------------------------------------------------------------
Registration. The registration of SB SEFs is a requirement under
the Dodd-Frank Act.\588\ Proposed Rule 810(a) incorporates the
requirement under the Dodd-Frank Act that a SB SEF, in order to be
registered and maintain registration, comply with the Core Principles
in Section 3D(d) of the Exchange Act and any requirement that the
Commission may impose by rule or regulation. The proposed registration
process is intended to implement this requirement and assist the
Commission in overseeing and regulating the SB swaps market. The
information to be provided on proposed Form SB SEF is designed to
enable the Commission to assess whether an applicant has the capacity
and the means to perform the duties of a SB SEF and to comply with the
Core Principles and other requirements imposed on registered SB SEFs.
---------------------------------------------------------------------------
\588\ See Section 3D(a)(1) of the Exchange Act.
---------------------------------------------------------------------------
In addition, the amendments, supplemental information and notices
that the Commission proposes to require registered SB SEFs to file
pursuant to proposed Rules 802, 803 and 804 are designed to further the
ability of the Commission to efficiently monitor SB SEFs' compliance
with the provisions of the Exchange Act and to oversee the marketplace
for SB swaps and, specifically, the trading of SB swaps on SB SEFs.
Rule and Product Filings. Proposed Rules 805 and 806 set forth two
alternative filing processes for a new rule or rule amendment of a
registered SB SEF, and proposed Rules 807 and 808 set forth two
alternative filing processes for SB SEFs to submit filings for new
products that it trades. The proposed rules are intended to assist the
Commission in overseeing and regulating the trading of SB swaps and to
help ensure that SB SEFs operate in compliance with the Exchange Act.
The self-certification processes of Rules 806 and 807 require SB SEFs
to include a certification that the proposed new rule or rule amendment
or SB swap, as the case may be, complies with the Exchange Act and
Commission rules and regulations thereunder.\589\
---------------------------------------------------------------------------
\589\ See proposed Rules 806(a)(5)(iii) and 807(a)(4)(iii).
---------------------------------------------------------------------------
The information to be provided by the SB SEF under proposed Rules
805 and 806 would further the ability of the Commission to assess
whether a SB SEF has the capacity to perform the duties of a SB SEF and
to comply with the duties, Core Principles, and other requirements
imposed on registered SB SEFs, and to ensure that a registered SB SEF
continues to comply with the requirements imposed on registered SB SEFs
under the Exchange Act. In addition, proposed Rule 805(a)(4), which
would require a SB SEF to explain the anticipated benefits and
potential anticompetitive effects on market participants of a proposed
new rule or rule amendment should help foster a competitive SB swaps
market because it would require SB SEFs to disclose the positive as
well as negative aspects of the SB SEF's proposed rules.
The information to be provided by the SB SEF under proposed Rules
807 and 808 would further the ability of the Commission to obtain
information regarding SB swaps that a SB SEF intends to trade on its
market. In addition, because these processes are comparable to the
parallel processes of the CFTC, they would promote efficiency for SB
SEFs that are also registered as SEFs.
Chief Compliance Officer. The submission of the CCO's annual
compliance report and the annual financial report to the Commission as
would be required by proposed Rule 823 would help the Commission
monitor the compliance activities and financial state of SB SEFs. These
reports would also assist the Commission in carrying out its oversight
of the SB SEFs and the SB swaps market by providing the Commission the
information necessary to review instances, for example, of non-
compliance and denials of access.
Conflicts of Interest. Proposed Rule 820 sets forth certain
governance arrangements that would be required of SB SEFs. Proposed
Rule 820(a) would require the rules of a SB SEF to assure a fair
representation of its participants in the selection of its directors
and administration of its affairs. No less than 20% of the total number
of directors of the SB SEF would be required to be selected by the SB
SEF participants. Further, the Commission proposes that SB SEF
participant owners be restricted in their ability to participate in the
``fair representation'' process. In addition, proposed Rule 820(b)
would require that at least one director on the Board be representative
of investors (``investor director'') who are (1) not SB swap dealers or
major SB swap participants and (2) not associated with a participant.
Finally, proposed Rule 820(c) would require the rules of a SB SEF to
establish a fair process for SB SEF participants to nominate an
alternative candidate or candidates to the Board by petition.
[[Page 11040]]
The requirements of proposed Rule 820 are important to help ensure
that SB SEF participants and investors have a voice in the
administration and governance of the SB SEF, without jeopardizing the
overall independence of the Board.\590\ The proposed governance
requirements should also help to mitigate any conflicts of interest
that may arise between SB SEF participants who also could be owners of
the SB SEF, by reducing the possibility that a small group of market
participants would have the ability to unfairly disadvantage other
market participants through the SB SEF governance process. In order to
further mitigate conflicts of interest and achieve fairness in the
governance process of a SB SEF, the proposal would also provide for the
ability of SB SEF participants to have alternative candidates by
requiring the SB SEF to establish a fair process for SB SEFs to
nominate an alternative candidate or candidates by petition. Finally,
the Commission believes that requiring representation on the SB SEF
Board by investors who are not SB swap dealers or major SB swap
participants, or associated with SB SEF participants, would provide an
important perspective to the governance and administration of a SB SEF.
Investor directors could provide unique and different perspectives from
dealers and other participants of the SB SEF, which should enhance the
ability of the Board to address issues in an impartial fashion and
consequently support the integrity of a SB SEF's governance.
---------------------------------------------------------------------------
\590\ Proposed Rule 702(d) under Regulation MC would require the
Board of a SB SEF to have at least a majority of independent
directors. See Regulation MC Proposing Release, supra note 82.
---------------------------------------------------------------------------
C. Costs
Although the Commission believes that proposed Regulation SB SEF
would result in significant benefits to the market for SB swaps, the
Commission recognizes that the proposed registration form and rules
would also entail significant costs. Some costs are difficult to
precisely quantify and are discussed below.
The Commission is mindful that any rules it may adopt with respect
to SB SEFs under the Dodd-Frank Act may impact the incentives of market
participants with respect to where and how they trade SB swaps. The
Commission is cognizant that its proposed interpretation of the
definition of SB SEF, coupled with the level of pre-trade transparency
that would be required for trading on a SB SEF, will impact the
development of the SB swaps market. Further, if the rules proposed by
the Commission are, or are perceived to be, too costly for trading
venues to comply with, fewer entities than expected may seek to
register as SB SEFs, thus impacting competition. In addition, if the
proposed rules for trading on a SB SEF are perceived as too burdensome
by market participants, some trading of SB swaps may move to foreign
markets whose regulations are perceived to be less restrictive, thus
frustrating the goals of the Dodd-Frank Act. At the same time, if the
proposed rules relating to SB SEFs are too lenient, they may have
little or no impact on the market structure and surveillance of the SB
swaps markets, which could result in the loss of many of the benefits
discussed above and fail to achieve the goals of the Dodd-Frank Act of
greater transparency. In addition, because the trading mechanisms in
the OTC market will continue to be largely unregulated, OTC-traded SB
swaps may be perceived by some market participants to be less expensive
to trade than SB SEF-traded swaps, i.e., in the sense that they are
subject to less regulation.
In addition, SB swaps traded on SB SEFs may be perceived to be
subject to increased costs, monetary and otherwise. For example, some
industry participants have expressed their belief that any proposed
requirement of pre-trade transparency would force market participants
to reveal valuable economic information regarding their trading
interest more broadly than they may believe would be economically
prudent and could discourage participation in the SB swaps market. An
additional impact of pre-trade transparency are perceived costs
associated with front running, if customers or dealers are required to
show their trading interest before a trade is executed. These potential
costs of pre-trade transparency may change market participants' trading
strategies, which could result in them working more orders or finding
ways to attempt to hide their interest.\591\ If market participants
view the Commission's proposal as too burdensome with respect to pre-
trade transparency, dealers may be less willing to supply liquidity for
SB swaps that trade on SB SEFs or exchanges, thus impacting liquidity
and competition. On the other hand, if the requirement with respect to
pre-trade transparency is too loose, the result could be that there
would be no substantive change from the status quo, including no
benefits of alleviating informational asymmetries, increasing price
competition and supplying better executions beyond the changes in
response to the other requirements of Dodd-Frank. However, the
Commission believes that this concern depends on the degree of pre-
trade transparency required and the characteristics of the trading
market. The proposed rules are intended to provide for greater pre-
trade transparency than currently exists without requiring pre-trade
transparency in a manner that would cause participants to avoid
providing liquidity on SB SEFs.
---------------------------------------------------------------------------
\591\ See, e.g., Ananth Madhavan, Market Microstructure: A
Survey, J. of Fin. Markets, Vol. 3 (2000).
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The requirements of the proposed rules would impose the same
minimum level of pre-trade transparency and order interaction on block
trades as on non-block trades. This can potentially have an impact on
the liquidity available on those types of platforms that would provide
for block trading. Today, many block trades are transacted through
voice brokerage, without pre-trade transparency and order interaction.
Block trading enables, among other things, entities with large
exposures to certain business risks to hedge those risks. For example,
investors considering making investments in, or lenders considering
making loans to, certain corporate borrowers may seek to purchase
credit default swap (``CDS'') protection to hedge some portion of the
credit risk the investor does not want to retain. The availability of
such credit risk protection in large block transaction size may
therefore influence investment or lending decisions which in turn may
influence the cost of borrowing for corporations whose investors rely
on block size CDS.
Generally, economic studies have shown that block trades benefit
from different market structures than non-block trades.\592\ These
studies suggest that pre-trade transparency can be particularly costly
for block trades as prices are likely to move adversely if the
existence of a large unexecuted order becomes known. Other traders may
front run the block trade order or simply infer information about
future price movements from its presence, thus potentially making it
more costly for the block-initiating participant to find a counterparty
willing to trade at an acceptable price. In addition, if a block trade
interacts with other trading interest on a SB SEF, there might not be
enough liquidity on the SB SEF to execute the entire block trade,
leaving a portion of the block trade unexecuted, or requiring the block
to be broken into smaller order sizes, which also could
[[Page 11041]]
lead to increased transaction costs and a decreased willingness of
market participants to participate in block trades.
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\592\ See, e.g., Bessembinder Paper, supra note 159.
---------------------------------------------------------------------------
The Commission recognizes these potential costs and believes that
the proposal mitigates these costs, because it would allow SB SEFs
flexibility in setting their market structure and trading rules
concerning block trades. This should allow SB SEFs to create certain
trading structures, e.g., multi-dealer RFQ platforms, that cater to
block trades and others that cater to non-blocks. Moreover, under the
proposed interpretation of the definition of SB SEF, for a transaction
on an RFQ platform, the person exercising investment discretion for the
transaction, whether it is the participant itself or the participant's
customer, could choose to send the RFQ to less than all participants.
Under this proposed interpretation, market participants would have the
choice to determine how broad or how narrow to disseminate their intent
to trade blocks. The Commission further notes that, if overall trading
costs decline, then the costs of breaking up a block into smaller
parcels and spreading out those parcels by market participants seeking
to execute a block transaction may not actually increase.\593\
---------------------------------------------------------------------------
\593\ See, e.g., Amber Anand, et al., Market Crashes and
Institutional Trading, Working Paper, Social Science Research
Network (2010).
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According to industry sources consulted by Commission staff,\594\
the monetary cost of forming a SB SEF is estimated to range from
approximately $15 million to $20 million per SB SEF for the first year
of operation, if an entity were to establish a SB SEF without the
benefit of modifying an already existing trading system. The industry
sources consulted by Commission staff estimate that, for the first year
of operation, the cost of software and product development would range
from approximately $6.5 million to $10.5 million per SB SEF. The
technological costs would be expected to decline considerably during
the second and subsequent years of operation, and are estimated to be
in the range of $3 million to $4 million per year per SB SEF. For
entities that currently own and/or operate platforms for the trading of
OTC derivatives, the cost of forming a SB SEF would be more
incremental, given that these entities already have viable technology
that could be modified to comply with the requirements that the
Commission may impose for SB SEFs. According to industry sources, the
incremental costs of enhancing a trading platform to be compatible with
any SB SEF requirements established by the Commission would range from
as low as $50,000 to as much as $3 million per SB SEF, depending on the
enhancements needed to establish a platform compatible with any
Commission rules governing SB SEFs. The annual ongoing cost of
maintaining the technology and any improvements is estimated to be in
the range of $2 million to $4 million.\595\
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\594\ In discussing estimated costs with Commission staff, these
industry sources were generally familiar with the requirements of
the Dodd-Frank Act and the Core Principles and related requirements
specified therein, but were not aware of the specifics of the rules
being proposed. Thus, they were able to provide the broad general
estimates of projected costs, which are described here. More
specific estimates as to the costs associated with specific rules
are detailed further below.
\595\ Although there currently are trading systems that trade SB
swaps on an OTC basis, the Commission preliminarily believes that no
such systems are currently in operation that would comply, without
modifications, with the requirements of proposed Regulation SB SEF.
---------------------------------------------------------------------------
In addition, the regulatory requirement of complying with the
statutory Core Principles would increase the regulatory obligations of
registered SB SEFs with respect to operating as a SB SEF and with
respect to overseeing the participants that trade on their facilities.
Industry sources estimate that the cost to an SB SEF of complying with
the rules relating to surveillance and oversight they expected the
Commission to propose would be in the range of $1 million to $3 million
annually, with initial costs likely to be at the higher end of such
range, since a SB SEF would need to create the technology necessary to
monitor and surveil its market participants, as well as to create a
rule book in compliance with the Core Principles and related rules. The
ongoing annual compliance costs are estimated by industry sources to be
approximately $1 million, which would include the salary of a CCO and
at least two junior compliance personnel, expected to be attorneys.
The Commission requests comments on the accuracy of these
estimates. Specifically, the Commission requests comment on how the
Commission can most accurately estimate the cost and benefits of the
proposed rules and interpretations. Are there any important benefits
and costs not currently discussed? How would the costs and benefits
differ between operators of current platforms or systems trading SB
swaps? What are the potential costs and benefits of the pre-trade
transparency requirement, block trade requirement, order interaction
requirement and other market structure requirements included in the
proposal?
We detail below cost estimates for specifics parts of the proposed
rules. Many of these costs estimates are based on the PRA estimates of
costs and burdens from Section XXVII, as well as other costs associated
with the proposed rules.
Registration. The Commission preliminary estimates that the
aggregate initial costs to all potential SB SEF registrants to file
Form SB SEF, including all exhibits thereto, would be approximately
$13,505,940,\596\ or approximately $675,297 \597\ per SB SEF.
---------------------------------------------------------------------------
\596\ See infra note 597.
\597\ $13,505,940/20 potential SB SEF registrants = $675,297.
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The Commission estimates the initial costs (aside from the costs
associated with Exhibits F, H and P, which are separately discussed
below) associated with proposed Form SB SEF would be $32,000 per SB
SEF, or $640,000 for all potential SB SEFs.\598\ This would include the
time required to compile the information required by proposed Form SB
SEF, prepare the proposed Form SB SEF itself, and file it with the
Commission. In addition, Exhibits F and H to proposed Form SB SEF would
require an applicant to submit financial reports that would need to
satisfy a number of requirements, including the requirement that a
certified public account audit each financial report relating to the SB
SEF and a requirement that unaudited financial information be provided
for certain affiliated entities of the SB SEF.\599\ The Commission
preliminarily believes that it is unlikely that during the initial
implementation period a potential registrant would have audited
financial statements for the SB SEF in the ordinary course of business
prior to applying for registration on Form SB SEF. Therefore, in order
to register as a SB SEF with the Commission on Form SB SEF and comply
with Exhibits F and H thereto, potential registrants would incur an
initial cost to generate such financial statements. Based on
conversations with operators of current
[[Page 11042]]
trading platforms and the Commission's experience with entities of
similar size, the Commission preliminarily estimates that each
potential SB SEF registrant would incur, on average, a cost of $99,000
to complete the financial statements,\600\ and a cost of $500,000 for
independent public accounting services. In the aggregate, these costs
are estimated to be $1,980,000 \601\ and $10,000,000,\602\
respectively.\603\
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\598\ The Commission preliminarily estimates, for purposes of
its PRA, that the average initial burden imposed by proposed Form SB
SEF (other than Exhibits F, H and P of Form SB SEF) for SB SEF
registration would be 100 hours per SB SEF. See supra Section XXVII.
Assuming an hourly cost of $320 for a compliance attorney to meet
these requirements, the one-time estimated dollar cost to register
as a SB SEF would be $32,000 (100 hours x $320), or $640,000
($32,000 x 20 SB SEFs) in the aggregate. The hourly rate for the
compliance attorney is from SIFMA's Management & Professional
Earnings in the Securities Industry 2010, modified by the
Commission's staff to account for an 1800-hour work-year and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead.
\599\ See supra Section XXVII.D.1.
\600\ The Commission preliminarily estimates, for purposes of
its PRA, that the average initial burden would be 500 hours per SB
SEF. See supra Section XXVII. Assuming an hourly cost of $198 for a
senior accountant to meet these requirements, the one-time estimated
dollar cost to register as a SB SEF would be $99,000 (500 hours x
$198), or $1,980,000 ($99,000 x 20 SB SEFs) in the aggregate. The
hourly rate for the senior accountant is from SIFMA's Management &
Professional Earnings in the Securities Industry 2010, modified by
the Commission's staff to account for an 1800-hour work-year and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead.
\601\ $1,980,000 = $99,000 x 20 SB SEFs.
\602\ $10,000,000 = $500,000 x 20 SB SEFs.
\603\ See also Section XXVII.D.1.
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The Commission also estimates that it would cost approximately
$7,920 per respondent to compile, review, and submit the financial
reports for certain affiliated entities as required pursuant to Exhibit
H to proposed Form SB SEF, or $158,400 in the aggregate.\604\ All of
the financial statements required by Exhibits F and H to proposed Form
SB SEF would need to be provided in XBRL, as required in Rules
405(a)(1), (a)(3), (b), (c), (d) and (e) of Regulation S-T.\605\ This
would create an additional cost for potential SB SEF respondents. The
Commission preliminarily estimates, based on its experience with other
data tagging initiatives, that these requirements would add an
additional cost on average of approximately $12,096 \606\ and $23,000
in outside software and other costs per respondent, or $241,920 \607\
and $460,000 \608\ in the aggregate, respectively. Thus, for complying
with the financial statement requirements under Exhibits F and H to
proposed Form SB SEF, the Commission estimates a total initial cost of
approximately $642,016 per respondent \609\ and $12,840,320 in the
aggregate for all respondents.\610\
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\604\ The Commission preliminarily estimates, for purposes of
its PRA, that the average initial burden to comply with the
financial statement requirements of Exhibit H to proposed Form SB
SEF would be 40 hours per SB SEF. See supra Section XXVII. Assuming
an hourly cost of $198 for a senior accountant to meet these
requirements, the one-time estimated dollar cost per SB SEF would be
$7,920 (40 hours x $198), or $158,400 ($7,920 x 20 SB SEFs) in the
aggregate. The hourly rate for the senior accountant is from SIFMA's
Management & Professional Earnings in the Securities Industry 2010,
modified by the Commission's staff to account for an 1800-hour work-
year and multiplied by 5.35 to account for bonuses, firm size,
employee benefits and overhead.
\605\ See 17 CFR 232.405.
\606\ The Commission preliminarily estimates, for purposes of
its PRA, that the average initial burden would be 54 hours per SB
SEF. See supra Section XXVII. Assuming an hourly cost of $224 for a
programmer analyst to meet these requirements, the initial estimated
dollar cost would be $12,096 (54 hours x $224), or $241,920 ($12,096
x 20 SB SEFs) in the aggregate. The hourly rate for the programmer
analyst is from SIFMA's Management & Professional Earnings in the
Securities Industry 2010, modified by the Commission's staff to
account for an 1800-hour work-year and multiplied by 5.35 to account
for bonuses, firm size, employee benefits and overhead.
\607\ $241,920 = $12,096 x 20 SB SEFs.
\608\ $460,000 = $23,000 x 20 SB SEFs.
\609\ $99,000 + $500,000 + $7,920 + $12,096 + $23,000 =
$642,016.
\610\ $12,840,320 = $642,016 x 20 SB SEFs.
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Exhibit P to proposed Form SB SEF would require SB SEFs controlled
by other persons and non-resident SB SEFs to provide opinions of
counsel as required by Rules 801(e) and (f), respectively. Therefore,
in order to register as a SB SEF with the Commission on Form SB SEF,
potential registrants that are controlled by other persons or that are
non-resident persons would incur an initial cost to generate such
opinions of counsel. As discussed above, the Commission preliminarily
estimates that the average initial paperwork cost for each SB SEF
controlled by another person and each non-resident SB SEF to provide
the opinion of counsel required by Exhibit P would be one hour and $900
per SB SEF. As discussed above, the Commission preliminarily estimates
that all 20 estimated applicants seeking to register as SB SEFs would
be controlled by other persons and that one applicant seeking to
register as a SB SEF will be a non-resident person. Therefore, in the
aggregate, the costs to comply with Exhibit P are estimated to be
$24,400 for all SB SEFs controlled by other persons \611\ and $1,220
for all non-resident SB SEFs.\612\
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\611\ The Commission estimates that a SB SEF that is controlled
by another person will assign these responsibilities to a compliance
attorney. Assuming an hourly cost of $320 for a compliance attorney
to meet these requirements, the one-time estimated dollar cost for a
SB SEF controlled by another person to comply with Exhibit P would
be $1,220 ((1 hour x $320) + $900), or $24,400 ($1,220 x 20 SB SEFs
controlled by other persons) in the aggregate. The hourly rate for
the compliance attorney is from SIFMA's Management & Professional
Earnings in the Securities Industry 2010, modified by the
Commission's staff to account for an 1800-hour work-year and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead.
\612\ The Commission estimates that a non-resident SB SEF will
assign these responsibilities to a compliance attorney. Assuming an
hourly cost of $320 for a compliance attorney to meet these
requirements, the one-time estimated dollar cost for a non-resident
SB SEF to comply with Exhibit P would be $1,220 ((1 hour x $320) +
$900). This would also be the aggregate initial cost as the
Commission has estimated that only one non-resident person would
seek to register as a SB SEF. The hourly rate for the compliance
attorney is from SIFMA's Management & Professional Earnings in the
Securities Industry 2010, modified by the Commission's staff to
account for an 1800-hour work-year and multiplied by 5.35 to account
for bonuses, firm size, employee benefits and overhead.
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Therefore, the Commission preliminarily estimates that the total
one-time aggregate cost for all respondents to file the initial Form SB
SEF, including all exhibits thereto, would be approximately
$13,505,940.\613\
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\613\ $13,505,940 = $640,000 (costs other than Exhibits F, H and
P to Form SB SEF) + $12,840,320 (costs relating to Exhibits F and H
to Form SB SEF) + $24,400 (costs relating to Exhibit P to Form SB
SEF for SB SEFs controlled by other persons) + $1,220 (costs
relating to Exhibit P to Form SB SEF for all non-resident SB SEFs).
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After the initial year in which a SB SEF would be registered, the
Commission estimates that each registered SB SEF would submit 4
amendments to Form SB SEF on average and one annual update, at an
annual cost of $48,000 per SB SEF, or $960,000 in the aggregate.\614\
In addition, the Commission estimates that two SB SEFs controlled by
another person would each submit one amendment to Exhibit P to Form SB
SEF per year, at an annual aggregate cost of $2,440.\615\ The
Commission also estimates that one non-resident SB SEF would submit one
amendment to Exhibit P to Form SB SEF per year, at an annual cost of
$1,220.\616\
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\614\ The Commission preliminarily estimates, for purposes of
its PRA, that the average annual burden to prepare and file rule
amendments and the annual update to Form SB SEF would be 150 hours
per SB SEF. See supra Section XXVII. Assuming an hourly cost of $320
for a compliance attorney to meet these requirements, the annual
estimated dollar cost would be $48,000 (150 hours x $320), or
$960,000 ($48,000 x 20 SB SEFs) in the aggregate. The hourly rate
for the compliance attorney is from SIFMA's Management &
Professional Earnings in the Securities Industry 2010, modified by
the Commission's staff to account for an 1800-hour work-year and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead.
\615\ The Commission estimates that a SB SEF that is controlled
by another person will assign these responsibilities to a compliance
attorney. Assuming an hourly cost of $320 for a compliance attorney
to meet these requirements, the annual estimated dollar cost for a
SB SEF controlled by another person to amend Exhibit P would be
$1,220 ((1 hour x $320) + $900), or $2,440 in the aggregate ($1,220
x 2 (estimated number of SB SEFs controlled by other persons
required to amend Exhibit P per year) x 1 amendment). The hourly
rate for the compliance attorney is from SIFMA's Management &
Professional Earnings in the Securities Industry 2010, modified by
the Commission's staff to account for an 1800-hour work-year and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead.
\616\ The Commission estimates that a non-resident SB SEF will
assign these responsibilities to a compliance attorney. Assuming an
hourly cost of $320 for a compliance attorney to meet these
requirements, the annual estimated dollar cost for a non-resident SB
SEF to amend Exhibit P would be $1,220 ((1 hour x $320) + $900).
This would also be the aggregate annual cost as the Commission has
estimated that only one non-resident person would seek to register
as a SB SEF, and that such non-resident SB SEF will only file one
amendment to Exhibit P per year. The hourly rate for the compliance
attorney is from SIFMA's Management & Professional Earnings in the
Securities Industry 2010, modified by the Commission's staff to
account for an 1800-hour work-year and multiplied by 5.35 to account
for bonuses, firm size, employee benefits and overhead.
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[[Page 11043]]
In addition, proposed Rule 804 would impose costs on SB SEFs
seeking to withdraw registration. The Commission estimates that one SB
SEF would seek to withdraw its registration per year. Therefore, the
Commission estimates that the aggregate annual estimated dollar cost
for SB SEFs seeking to withdraw registration would be $320.\617\
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\617\ The Commission preliminarily estimates, for purposes of
its PRA, that the average burden for a SB SEF to withdraw its
registration would be 1 hour. See supra Section XXVII. Assuming an
hourly cost of $320 for a compliance attorney to meet these
requirements, the estimated dollar cost to withdraw the registration
of a SB SEF would be $320 (1 hour x $320). This would also be the
aggregate annual cost as the Commission has estimated that only one
SB SEF would seek to withdraw its registration as a SB SEF per year.
The hourly rate for the compliance attorney is from SIFMA's
Management & Professional Earnings in the Securities Industry 2010,
modified by the Commission's staff to account for an 1800-hour work-
year and multiplied by 5.35 to account for bonuses, firm size,
employee benefits and overhead.
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Finally, proposed Rule 803 would impose costs on SB SEFs to prepare
and file supplemental information with the Commission. The Commission
estimates that the average annual cost for a SB SEF to prepare and file
such supplemental information would be $2,400 for each SB SEF, or
$48,000 in the aggregate.\618\
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\618\ The Commission preliminarily estimates, for purposes of
its PRA, that the average annual burden to prepare and file
supplemental information would be 7.5 hours per SB SEF. See supra
Section XXVII. Assuming an hourly cost of $320 for a compliance
attorney to meet these requirements, the estimated annual dollar
cost would be $2,400 (7.5 hours x $320), or $48,000 ($2,400 x 20 SB
SEFs) in the aggregate. The hourly rate for the compliance attorney
is from SIFMA's Management & Professional Earnings in the Securities
Industry 2010, modified by the Commission's staff to account for an
1800-hour work-year and multiplied by 5.35 to account for bonuses,
firm size, employee benefits and overhead.
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Thus, the Commission estimates that the total annual aggregate cost
of making all required filings related to Form SB SEF would be
approximately $1,011,980.\619\
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\619\ $1,011,980 = $960,000 + $2,440 + $1,220 + $320 + $48,000.
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The Commission solicits comments on the costs associated with the
registration related rules and new Form SB SEF and exhibits. The
Commission specifically requests comment on initial costs associated
with completing the registration form and ongoing annual costs of
completing the required periodic and annual amendments. Please describe
and, to the extent practicable, quantify the costs associated with any
comments that are submitted. In addition, the Commission requests
comment on the following:
How can the Commission most accurately estimate the costs
and benefits arising from proposed Regulation SB SEF's registration
requirements?
What are the costs currently borne by entities covered by
the proposed registration requirements that may have been included in
the Commission's analysis?
Are there additional costs involved in complying with the
registration requirements that have not been identified? If so, what
are the types, and amounts, of such costs?
Can commenters assess the benefits of having comprehensive
and accurate registration of SB SEFs, which would provide access to
such information to the Commission and other regulators?
Would there be additional benefits from the proposed
registration requirements that have not been identified?
Rules Generally. The Commission estimates that the initial cost for
SB SEFs to comply with the rule writing requirements of Regulation SB
SEF, including to establish and submit the rules to the Commission,
would be $73,600 for each SB SEF, for an aggregate initial cost of
$1,472,000.\620\ The estimated cost would include the time expended for
drafting the rules, and for review of the draft rules, policies or
procedures by the SB SEF's senior management.
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\620\ The Commission preliminarily estimates, for purposes of
its PRA, that the average initial burden to comply with the rule-
writing requirements of Regulation SB SEF would be 230 hours per SB
SEF. See supra Section XXVII. Assuming an hourly cost of $320 for a
compliance attorney to meet these requirements, the initial
estimated dollar cost would be $73,600 (230 hours x $320), or
$1,472,000 ($73,600 x 20 SB SEFs) in the aggregate. The hourly rate
for the compliance attorney is from SIFMA's Management &
Professional Earnings in the Securities Industry 2010, modified by
the Commission's staff to account for an 1800-hour work-year and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead.
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The Commission notes that a SB SEF may choose to refine the rules,
policies or procedures that it would establish in connection with the
requirements of Regulation SB SEF. Once a SB SEF has drafted the
written rules, policies and procedures it is required to establish
pursuant to Regulation SB SEF, the Commission estimates that it would
cost a SB SEF approximately $38,400 annually to update its rules, for
an aggregate estimated ongoing annual cost for all SB SEFs of
approximately $768,000.\621\
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\621\ The Commission preliminarily estimates, for purposes of
its PRA, that the average annual burden to comply with the rule-
writing requirements of Regulation SB SEF would be 120 hours per SB
SEF. See supra Section XXVII. Assuming an hourly cost of $320 for a
compliance attorney to meet these requirements, the annual estimated
dollar cost would be $38,400 (120 hours x $320), or $768,000
($38,400 x 20 SB SEFs) in the aggregate. The hourly rate for the
compliance attorney is from SIFMA's Management & Professional
Earnings in the Securities Industry 2010, modified by the
Commission's staff to account for an 1800-hour work-year and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead.
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The Commission requests comment on the costs and benefits of the
proposed rule writing requirements discussed above, as well as any
costs and benefits not already described that could result. The
Commission also requests data to quantify any potential costs or
benefits. The Commission requests comment on the costs and benefits of
the proposed registration requirements discussed above, as well as any
costs and benefits not already described that could result. The
Commission also requests data to quantify any potential costs or
benefits. In addition, the Commission requests comment on the
following:
How can the Commission most accurately estimate the costs
and benefits arising from the proposed rule writing requirements of
Regulation SB SEF?
What are the costs currently borne by entities that may
have been included in the Commission's analysis of the costs of the
proposed rule writing requirements?
Are there additional costs involved in complying with the
rule writing requirements that have not been identified? If so, what
are the types, and amounts, of such costs?
Can commenters assess the benefits of having a
comprehensive and accurate rule writing requirement for SB SEFs, which
would provide access to such information to the Commission and other
regulators?
Would there be additional benefits from the proposed rule
writing requirements that have not been identified?
Reporting. The Commission estimates that the annual cost for SB
SEFs to comply with the reporting requirements of Regulation SB SEF
would be $387,200 per SB SEF, for an aggregate annual cost of
$7,744,000.\622\ Further,
[[Page 11044]]
the Commission estimates the total cost of hiring outside legal counsel
to review an international information sharing agreement to be $4,000
per SB SEF, for an aggregate cost of approximately $80,000 \623\ for
all SB SEFs. In addition, the Commission estimates the total annual
cost of hiring an objective, external firm to review internal audits to
be $90,000 per SB SEF, for an aggregate cost of approximately
$1,800,000 \624\ for all SB SEFs. Thus, the estimated aggregate total
annual costs associated with reporting requirements for all SB SEFs
would be approximately $9,624,000.\625\
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\622\ The Commission preliminarily estimates, for purposes of
its PRA, that the average annual costs comply with the reporting
requirements of Regulation SB SEF would be 1,210 hours per SB SEF.
See supra Section XXVII. Assuming an hourly cost of $320 for a
compliance attorney to meet these requirements, the annual estimated
dollar cost would be $387,200 (1,210 hours x $320), or $7,744,000
($387,200 x 20 SB SEFs) in the aggregate. The hourly rate for the
compliance attorney is from SIFMA's Management & Professional
Earnings in the Securities Industry 2010, modified by the
Commission's staff to account for an 1800-hour work-year and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead.
\623\ $80,000 = $4,000 x 20 SB SEFs.
\624\ $1,800,000 = $90,000 x 20 SB SEFs.
\625\ $9,624,000 = $7,744,000 + $80,000 + $1,800,000.
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The Commission estimates that the annual cost for SB SEF
participants to comply with the reporting requirements of Regulation SB
SEF would be $32,000 per SB SEF participant, for an aggregate annual
cost of $8,800,000.\626\
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\626\ The Commission preliminarily estimates, for purposes of
its PRA, that the average annual costs to comply with the reporting
requirements of Regulation SB SEF would be 100 hours per SB SEF
participant, with an estimated 275 SB SEF participants in total for
a total of 27,500 hours. See supra Section XXVII. Assuming an hourly
cost of $320 for a compliance attorney to meet these requirements,
the annual estimated dollar cost would be $32,000 (100 hours x
$320), or $8,800,000 ($32,000 x 275 SB SEF participants) in the
aggregate. The hourly rate for the compliance attorney is from
SIFMA's Management & Professional Earnings in the Securities
Industry 2010, modified by the Commission's staff to account for an
1800-hour work-year and multiplied by 5.35 to account for bonuses,
firm size, employee benefits and overhead.
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The Commission requests comment on the costs and benefits of the
proposed reporting requirements discussed above, as well as any costs
and benefits not already described that could result. The Commission
also requests data to quantify any potential costs or benefits. In
addition, the Commission requests comment on the following:
How can the Commission most accurately estimate the costs
and benefits arising from proposed reporting requirements?
What are the costs currently borne by entities that may
have been included in the Commission's analysis of the costs of the
proposed reporting requirements?
Are there additional costs involved in complying with the
reporting requirements that have not been identified? If so, what are
the types, and amounts, of such costs?
Can commenters assess the benefits of having comprehensive
and accurate reporting requirements for SB SEFs, which would provide
access to such information to the Commission and other regulators?
Would there be additional benefits from the proposed
reporting requirements that have not been identified?
Recordkeeping. The Commission estimates that the annual cost for SB
SEFs to comply with the recordkeeping requirements of proposed Rule
818(a)-(b) would be similar to the annual cost for national securities
exchanges to comply with comparable rules. The Commission estimates
that the annual cost would be $16,000 per SB SEF, for an aggregate
annual cost of $320,000.\627\ This figure includes, but is not limited
to, the annual hourly burden to generate, collect, organize and
preserve all of the documents and other records required under proposed
Rule 818(a) and (b).
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\627\ The Commission preliminarily estimates, for purposes of
its PRA, that the average annual burden to comply with the
recordkeeping requirements of proposed Rule 818(a)-(b) would be 50
hours per SB SEF. See supra Section XXVII. Assuming an hourly cost
of $320 for a compliance attorney to meet these requirements, the
annual estimated dollar cost would be $16,000 (50 hours x $320), or
$320,000 ($16,000 x 20 SB SEFs) in the aggregate. The hourly rate
for the compliance attorney is from SIFMA's Management &
Professional Earnings in the Securities Industry 2010, modified by
the Commission's staff to account for an 1800-hour work-year and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead.
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In addition, proposed Rule 818(c) would require a SB SEF to keep
certain records with respect to trading activity on and through the SB
SEF. Specifically, a SB SEF must make and keep accurate, time-sequenced
records of all inquiries, responses, orders, quotations, other trading
interest and transactions that are received by, originated on, or
executed on the SB SEF. The Commission estimates that the annual cost
to comply with this requirement would be $41,600 per SB SEF, for an
aggregate annual cost of $832,000.\628\
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\628\ The Commission preliminarily estimates, for purposes of
its PRA, that the average annual burden to comply with the
recordkeeping requirements of proposed Rule 818(c) would be 130
hours per SB SEF. See supra Section XXVII. Assuming an hourly cost
of $320 for a compliance attorney to meet these requirements, the
annual estimated dollar cost would be $41,600 (130 hours x $320), or
$832,000 ($41,600 x 20 SB SEFs) in the aggregate. The hourly rate
for the compliance attorney is from SIFMA's Management &
Professional Earnings in the Securities Industry 2010, modified by
the Commission's staff to account for an 1800-hour work-year and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead.
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The Commission preliminarily estimates that a SB SEF could incur a
one-time cost to set up or modify an existing recordkeeping system to
comply with proposed Rule 818. Based on the Commission's experience
with recordkeeping costs, and consistent with prior cost estimates for
similar recordkeeping provisions,\629\ the Commission estimates that
setting up or modifying a recordkeeping system would cost $106,680 per
SB SEF, for an aggregate total of $2,133,600.\630\
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\629\ See Securities Exchange Act Release No. 59342 (February 2,
2009); 74 FR 6456 (February 9, 2009) (Amendments to Rules for
Nationally Recognized Statistical Rating Organizations) (``NRSRO
Adopting Release'').
\630\ The Commission estimates it would take 345 hours for a
senior programmer to set up or modify a recordkeeping system for a
cost of $104,880 per SB SEF (345 hours x $304), or $2,097,600
($104,880 x 20 SB SEFs). In addition, the Commission estimates a
cost of $1,800 per SB SEF in information technology expenses to
purchase recordkeeping software for a total initial cost of $36,000
for all SB SEFs. The total costs would be $106,680 ($104,880 +
$1,800) per SB SEF or a total of $2,133,600 ($106,680 x 20 SB SEFs)
for all SB SEFs. The hourly rate for the senior programmer is from
SIFMA's Management & Professional Earnings in the Securities
Industry 2010, modified by the Commission's staff to account for an
1800-hour work-year and multiplied by 5.35 to account for bonuses,
firm size, employee benefits and overhead.
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Additionally, the Commission preliminarily estimates that each SB
SEF may have a one-time burden to upgrade its existing systems to
ensure that the audit trail component of its systems complies with
proposed Rule 818(c). Based on industry sources, the Commission
preliminarily believes that this work would be done internally by two
programmers over the course of approximately four weeks. The Commission
preliminarily estimates that it would cost a total of $97,280 per SB
SEF, or $1,945,600 in the aggregate for all SB SEFs.\631\
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\631\ The Commission estimates that it would take 160 hours for
two senior programmers to set up or modify a recordkeeping system
for a cost of $97,280 per SB SEF (160 hours x 2 programmers x $304),
or $1,945,600 ($97,280 x 20 SB SEFs) for all SB SEFs. The hourly
rate for the senior programmer is from SIFMA's Management &
Professional Earnings in the Securities Industry 2010, modified by
the Commission's staff to account for an 1800-hour work-year and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead.
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As discussed above, proposed Rule 809(d) would require a SB SEF
that permits non-registered ECPs to be participants in the SB SEF to
establish, document, and maintain a system of risk management controls
and supervisory procedures reasonably designed to manage the financial,
regulatory, and other risks of this business activity. Based on
conversations with industry
[[Page 11045]]
sources, the Commission preliminarily believes that the majority of
entities that would seek to become SB SEFs already would have risk
management systems and supervisory procedures and controls to protect
the integrity of their business and to comply with other requirements
already specified and accounted for herein. The Commission also
believes that only a small number of entities would have to establish
completely new systems and procedures to comply with the requirement of
proposed Rule 809(d).
The Commission estimates that each SB SEF would spend an average of
$68,400 to modify its risk management systems to bring them into
compliance with the proposed Rule for a total one-time cost of
$1,368,000 for all SB SEFs combined,\632\ and a total annual ongoing
burden of $1,048,800 on all SB SEFs to maintain their systems.\633\ The
Commission preliminarily believes that proposed Rule 809(d) also would
impose a one-time legal and compliance cost of $330,300 on all SB SEFs
to comply with the requirement to establish, document, and maintain
compliance policies and supervisory procedures,\634\ and an annual cost
of $482,700 on all SB SEFs to review their written compliance policies
and supervisory procedures.\635\
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\632\ The Commission preliminarily estimates, for purposes of
its PRA, that the average one-time cost to comply with proposed Rule
809(d) would require one senior programmer working 225 hours. See
supra Section XXVII. Assuming an hourly cost of $304 for a senior
programmer the one-time cost would be $68,400 (225 hours x $304), or
$1,368,000 ($68,400 x 20) in the aggregate. The hourly rate for the
senior programmer is from SIFMA's Management & Professional Earnings
in the Securities Industry 2010, modified by the Commission's staff
to account for an 1800-hour work-year and multiplied by 5.35 to
account for bonuses, firm size, employee benefits and overhead.
\633\ The Commission preliminarily estimates, for purposes of
its PRA, that the ongoing cost to comply with proposed Rule 809(d)
would require one senior programmer working 172.5 hours annually.
See supra Section XXVII. Assuming an hourly cost of $304 for a
senior programmer, the cost would be $52,440 (172.5 hours x $304),
or $1,048,800 ($52,440 x 20 SB SEFs) in the aggregate. The hourly
rate for the senior programmer is from SIFMA's Management &
Professional Earnings in the Securities Industry 2010, modified by
the Commission's staff to account for an 1800-hour work-year and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead.
\634\ The Commission preliminarily estimates, for purposes of
its PRA, that the average one-time cost to comply with proposed Rule
809(d) would require one compliance attorney and one compliance
manager to spend 7.5 hours each to evaluate appropriate access
thresholds. The Commission also preliminarily estimates that one
compliance attorney and one compliance manager would each require
approximately 15 hours, and the CCO would require approximately 7.5
hours, to set up or modify compliance policies and procedures to
comply with the proposed rule. See supra Section XXVII. Assuming an
hourly cost of $320 for a compliance attorney, $423 for the CCO, and
$273 for a compliance manager the cost for each SB SEF would be
$16,515 = 7,200 (22.5 hours x $320) + $3,172.5 (7.5 hours x $423) +
$6,142.5 (22.5 hours x $273), for a total of $330,300 for all SB
SEFs ($16,515 x 20). The hourly rate for the compliance attorney,
compliance manager and CCO are from SIFMA's Management &
Professional Earnings in the Securities Industry 2010, modified by
the Commission's staff to account for an 1800-hour work-year and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead.
\635\ The Commission preliminarily estimates, for purposes of
its PRA, that the ongoing cost to comply with proposed Rule 809(d)
would require an average of 30 hours per year for each of an
compliance attorney and compliance manager, and 15 hours per year
for the CCO, to review and document their written compliance
policies and supervisory procedures. Assuming an hourly cost of $320
for a compliance attorney, $423 for the CCO, and $273 for a
compliance manager, the cost for each SB SEF would be 24,135 =
$9,600 (30 hours x $320) + $6,345 (15 hours x $423) + $8,190 (30
hours x $273), for a total of $482,700 for all SB SEFs ($24,135 x 20
SB SEFs). The hourly rate for the compliance attorney, compliance
manager and CCO are from SIFMA's Management & Professional Earnings
in the Securities Industry 2010, modified by the Commission's staff
to account for an 1800-hour work-year and multiplied by 5.35 to
account for bonuses, firm size, employee benefits and overhead.
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Therefore, the Commission preliminarily estimates that the total
one-time burden for all SB SEFs to comply with the collection of
information requirements of proposed Rule 809(d) would be
$1,698,300,\636\ and the total annual burden for all SB SEFs to comply
with the proposed Rule would be $1,531,500.\637\
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\636\ $1,698,300 = $1,368,000 + $330,300. See supra notes 632
and 634 (discussing the average one-time costs to comply with Rule
809(d)).
\637\ $1,531,500 = $1,048,800 + $482,700. See supra notes 633
and 635 (discussing the ongoing costs to comply with Rule 809(d)).
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The Commission requests comment on the costs and benefits of the
proposed recordkeeping requirements discussed above, as well as any
costs and benefits not already described that could result. The
Commission also requests data to quantify any potential costs or
benefits. In addition, the Commission requests comment on the
following:
How can the Commission most accurately estimate the costs
and benefits arising from the proposed recordkeeping requirements?
What are the costs currently borne by entities that may
have been included in the Commission's analysis of the costs of the
proposed recordkeeping requirements?
Are there additional costs involved in complying with the
recordkeeping requirements that have not been identified? If so, what
are the types, and amounts, of such costs?
Can commenters assess the benefits of having comprehensive
and accurate recordkeeping requirements for SB SEFs, which would
provide access to such information to the Commission and other
regulators?
Are the Commission's estimates concerning what it would
cost to implement and maintain technology systems to comply with the
recordkeeping requirements accurate? If not, what would the costs, in
both time and dollar figures, be? Please provide data.
Would there be additional benefits from the proposed
recordkeeping requirements that have not been identified?
Publication of Trading Information. For the requirement in proposed
Rule 817(a) that a SB SEF have the capacity to electronically capture,
transmit, and disseminate information on price, trading volume, and
other trading data on all SB swaps executed on or through the SB SEF,
the Commission preliminarily estimates that a SB SEF would incur a one-
time cost of $92,416 per SB SEF, or $1,848,320 in the aggregate.\638\
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\638\ The Commission preliminarily estimates, for purposes of
its PRA, that the average one-time cost to comply with proposed Rule
817(a) would require two senior programmers working 160 hours, for a
total of 320 hours. See supra Section XXVII. Assuming an hourly cost
of $304 for a senior programmer, the one-time cost would be $92,416
(320 hours x $304), or $1,848,320 ($92,416 x 20 SB SEFs) in the
aggregate. The hourly rate for the senior programmer and programmer
analyst are from SIFMA's Management & Professional Earnings in the
Securities Industry 2010, modified by the Commission's staff to
account for an 1800-hour work-year and multiplied by 5.35 to account
for bonuses, firm size, employee benefits and overhead.
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The Commission requests comment on the costs and benefits of the
requirements discussed above, as well as any costs and benefits not
already described that could result. The Commission also requests data
to quantify any potential costs or benefits. In addition, the
Commission requests comment on the following:
How can the Commission most accurately estimate the costs
and benefits arising from the proposed publication of trading
information requirements?
What are the costs currently borne by entities that may
have been included in the Commission's analysis of the costs of the
proposed publication of trading information requirements?
Are there additional costs involved in complying with the
publication of trading information requirements that have not been
identified? If so, what are the types, and amounts, of such costs?
Can commenters assess the benefits of having these
requirements for SB SEFs, which would provide access to such
information to the Commission and other regulators?
[[Page 11046]]
Would there be additional benefits from the proposed
publication of trading information requirements that have not been
identified?
Composite Indicative Quote and Executable Bids and Offers. For the
two requirements: (1) The requirement in proposed Rule 811(e) that a SB
SEF operating a RFQ platform create and disseminate through the SB SEF
a composite indicative quote, made available to all participants, for
SB swaps traded on or through the SB SEF; and (2) the requirement
imposed by the Commission's proposed interpretation of the definition
of SB SEF that each SB SEF, at a minimum, provide any participant with
the ability to make and display executable bids or offers accessible to
all participants on the SB SEF, if the participant wishes to do so, the
Commission preliminarily estimates that a SB SEF would incur a one-time
cost of $21,120 per SB SEF, or $422,400 in the aggregate.\639\ Further,
the Commission preliminarily estimates that each SB SEF would incur a
recurring annual cost of $11,200 to monitor and update its systems to
determine if its composite indicative quote and executable bid and
offer functionalities operate appropriately.\640\
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\639\ The Commission preliminarily estimates, for purposes of
its PRA, that the average one-time cost to comply with the above
requirements would require one senior programmer and one programmer
analyst working 40 hours each. See supra Section XXVII. Assuming an
hourly cost of $304 for a senior programmer and $224 for a
programmer analyst, the one-time cost would be $21,120 ((40 hours x
$304) + (40 hours x $224)), or $422,400 ($21,120 x 20 SB SEFs) in
the aggregate. The hourly rate for the senior programmer and
programmer analyst are from SIFMA's Management & Professional
Earnings in the Securities Industry 2010, modified by the
Commission's staff to account for an 1800-hour work-year and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead.
\640\ The Commission preliminarily estimates, for purposes of
its PRA, that the average annual cost to comply with the above
requirements would require one programmer analyst working 50 hours.
See supra Section XXVII. Assuming an hourly cost of $224 for a
programmer analyst the one-time cost would be $11,200 (50 hours x
$224), or $224,000 ($11,200 x 20 SB SEFs) in the aggregate. The
hourly rate for the senior programmer and programmer analyst are
from SIFMA's Management & Professional Earnings in the Securities
Industry 2010, modified by the Commission's staff to account for an
1800-hour work-year and multiplied by 5.35 to account for bonuses,
firm size, employee benefits and overhead.
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The Commission requests comment on the costs and benefits of
collecting and disseminating a composite indicative quote and of
allowing participants to disseminate executable bids and offers
discussed above, as well as any costs and benefits not already
described that could result. The Commission also requests data to
quantify any potential costs or benefits. In addition, the Commission
requests comment on the following:
How can the Commission most accurately estimate the costs
and benefits arising from the proposed requirements to collect and
disseminate a composite indicative quote and executable bids and
offers?
What are the costs currently borne by entities that may
have been included in the Commission's analysis of the costs of the
proposed dissemination of a composite indicative quote?
Are there additional costs involved in complying with the
requirements to collect and disseminate a composite indicative quote
and providing the ability for participants to disseminate executable
bids and offer that have not been identified? What are the types, and
amounts, of the costs?
Can commenters assess the benefits of collecting and
disseminating a composite indicative quote for SB SEFs and of SB SEFs
providing participants the ability to disseminate executable bids and
offers?
Rule and Product Filings. The Commission estimates that the annual
cost for SB SEFs to comply with the proposed rule and product filing
requirements of proposed Rules 805 through 808 would be $75,200 per SB
SEF, for an aggregate annual cost of $1,504,000.\641\ These estimated
costs entail preparing, reviewing and submitting the filings to the
Commission. Based on the Commission staff's consultation with CFTC
staff, the Commission believes that SB SEFs would handle the rule and
product filing processes internally.
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\641\ Based on the Commission staff's consultation with CFTC
staff, the Commission preliminarily estimates for purposes of its
PRA that the average annual burden to comply with the rule filing
requirements of Rules 805 and 806 would be 150 hours, and the
average annual burden to comply with the product filing requirements
of Rules 807 and 808 would be 85 hours per SB SEF. See supra Section
XXVII. Assuming an hourly cost of $320 for a compliance attorney to
meet these requirements, the annual estimated dollar cost would be
$75,200 (235 hours x $320), or $1,504,000 ($75,200 x 20 SB SEFs) in
the aggregate. The hourly rate for the compliance attorney is from
SIFMA's Management & Professional Earnings in the Securities
Industry 2010, modified by the Commission's staff to account for an
1800-hour work-year and multiplied by 5.35 to account for bonuses,
firm size, employee benefits and overhead.
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The Commission requests comment on the costs and benefits of the
proposed rule and product filing requirements discussed above, as well
as any costs and benefits not already described that could result. The
Commission also requests data to quantify any potential costs or
benefits. In addition, the Commission requests comment on the
following:
How can the Commission most accurately estimate the costs
and benefits arising from the proposed rule and product filing
requirements?
What are the costs currently borne by entities that may
have been included in the Commission's analysis of the costs of the
proposed rule and product filing requirements?
Are there additional costs involved in complying with the
rule and product filing requirements that have not been identified? If
so, what are the types, and amounts, of such costs?
Can commenters assess the benefits of having comprehensive
and accurate rules and product filing requirements for SB SEFs, which
would provide access to such information to the Commission and other
regulators?
Would there be additional benefits from the proposed rule
and product filing requirements that have not been identified?
Chief Compliance Officer. The Commission estimates that the initial
cost for SB SEFs to comply with the CCO requirements of proposed Rule
823(b)(6) and (7), which relate to the handling of noncompliance
issues, would be $91,200 per SB SEF, for an aggregate annual cost of
$1,824,000.\642\ A CCO also would be required under proposed Rule
823(c) and (d) to prepare and submit an annual compliance report to the
Commission and to the SB SEF's Board. The Commission estimates that the
annual cost for SB SEFs to comply with this requirement is $29,440 per
SB SEF, for an aggregate annual cost of $588,800.\643\ Proposed Rule
823(e)(1)
[[Page 11047]]
and (2) and Exhibits F and H to proposed Form SB SEF also require the
CCO to submit an annual financial report. Based on conversations with
operators of current trading platforms and the Commission's experience
with entities of similar size, the Commission preliminarily estimates
that each SB SEF would incur, on average, a cost of $99,500 to complete
the reports,\644\ and a cost of $500,000 for independent public
accounting services. In the aggregate, these costs are estimated to be
$1,980,000 and $10,000,000, respectively.\645\ The Commission also
estimates that it would cost approximately $7,920 per respondent to
compile, review, and submit the financial reports for certain
affiliated entities or $158,400 in the aggregate.\646\ However, all of
these reports would need to be provided in XBRL, as required by Rules
405(a)(1), (a)(3), (b), (c), (d) and (e) of Regulation S-T.\647\ This
would create an additional cost for SB SEFs. The Commission
preliminarily estimates, based on its experience with other data
tagging initiatives, that these requirements would add an additional
cost on average of approximately $12,096 \648\ and $23,000 in outside
software and other costs per respondent, or $241,920 and $460,000 in
the aggregate, respectively. Thus, the Commission estimates a total
initial cost of approximately $762,656 per respondent \649\ and
$15,253,120 in the aggregate for all respondents.\650\
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\642\ The Commission preliminarily estimates, for purposes of
its PRA, that the average initial burden to comply with the CCO
requirements of proposed Rule 823(b)(6) and (7) would be 160 hours.
Also, due to the novel nature of the CCO requirements in the SB SEF
industry and the new requirements under the Dodd-Frank Act, the
Commission estimates that there would be an initial one-time burden
of $40,000 per SB SEF in outside legal costs. See supra Section
XXVII. Assuming an hourly cost of $320 for a compliance attorney to
meet these requirements, the annual estimated dollar cost would be
$51,200 (160 hours x $320) plus $40,000, for a total of $91,200, or
$1,824,000 ($91,200 x 20 SB SEFs) in the aggregate. The hourly rate
for the compliance attorney is from SIFMA's Management &
Professional Earnings in the Securities Industry 2010, modified by
the Commission's staff to account for an 1800-hour work-year and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead.
\643\ The Commission preliminarily estimates, for purposes of
its PRA, that the average initial burden to comply with the CCO
requirements of proposed Rule 823(c) and (d) would be 92 hours. See
supra Section XXVII. Assuming an hourly cost of $320 for a
compliance attorney to meet these requirements, the annual estimated
dollar cost would be $29,440 (92 hours x $320) or $588,800 ($29,440
x 20 SB SEFs) in the aggregate. The hourly rate for the compliance
attorney is from SIFMA's Management & Professional Earnings in the
Securities Industry 2010, modified by the Commission's staff to
account for an 1800-hour work-year and multiplied by 5.35 to account
for bonuses, firm size, employee benefits and overhead.
\644\ The Commission preliminarily estimates, for purposes of
its PRA, that the average initial burden would be 500 hours per SB
SEF. See supra Section XXVII. Assuming an hourly cost of $198 for a
senior accountant to meet these requirements, the one-time estimated
dollar cost to register a SB SEF would be $99,000 (500 hours x
$198), or $1,980,000 ($99,000 x 20 SB SEFs) in the aggregate. The
hourly rate for the senior accountant is from SIFMA's Management &
Professional Earnings in the Securities Industry 2010, modified by
the Commission's staff to account for an 1800-hour work-year and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead.
\645\ Id. See also Section XXVII.D.1.
\646\ The Commission preliminarily estimates, for purposes of
its PRA, that the average initial burden would be 40 hours per SB
SEF. See supra Section XXVII. Assuming an hourly cost of $198 for a
senior accountant to meet these requirements, the one-time estimated
dollar cost per SB SEF would be $7,920 (40 hours x $198), or
$158,400 ($7,920 x 20 SB SEFs) in the aggregate. The hourly rate for
the senior accountant is from SIFMA's Management & Professional
Earnings in the Securities Industry 2010, modified by the
Commission's staff to account for an 1800-hour work-year and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead.
\647\ See 17 CFR 232.405.
\648\ The Commission preliminarily estimates, for purposes of
its PRA, that the average initial burden would be 54 hours per SB
SEF. See supra Section XXVII. Assuming an hourly cost of $224 for a
programmer analyst to meet these requirements, the initial estimated
dollar cost would be $12,096 (54 hours x $224), or $241,920 ($12,096
x 20 SB SEFs) in the aggregate. The hourly rate for the programmer
analyst is from SIFMA's Management & Professional Earnings in the
Securities Industry 2010, modified by the Commission's staff to
account for an 1800-hour work-year and multiplied by 5.35 to account
for bonuses, firm size, employee benefits and overhead.
\649\ $762,656 = $91,200 + $29,440 + $99,000 + $500,000 + $7,920
+ $12,096 + $23,000.
\650\ $15,253,120 = 20 (number of SB SEFs) x $762,656.
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The Commission requests comment on the costs and benefits of the
proposed CCO requirements discussed above, as well as any costs and
benefits not already described that could result. The Commission also
requests data to quantify any potential costs or benefits. In addition,
the Commission requests comment on the following:
How can the Commission most accurately estimate the costs
and benefits arising from the proposed CCO requirements?
What are the costs currently borne by entities that may
have been included in the Commission's analysis of the cost of the
proposed CCO requirements?
Are there additional costs involved in complying with the
CCO requirements that have not been identified? If so, what are the
types, and amounts, of such costs?
Can commenters assess the benefits of having comprehensive
and accurate CCO requirements for SB SEFs, which would provide access
to such information to the Commission and other regulators?
Would there be additional benefits from the proposed CCO
requirements that have not been identified?
Conflicts of Interest. As described above, proposed Rule 820 sets
forth certain governance arrangements that would be required of SB
SEFs. A SB SEF may need to revise the composition of its Board, if the
Board currently is not composed of at least 20% SB SEF participants. A
SB SEF could comply with the 20% participant director requirement by
decreasing the size of its Board and allowing some non-participant
directors to resign, maintaining the current size of its Board and
replacing some non-participant directors with participant directors, or
by increasing the size of its Board and electing additional participant
directors. In any event, unless a SB SEF currently complies with
proposed Rule 820, it would incur the cost of adding new directors or
replacing existing directors. A SB SEF may also need to design or
modify its governance processes to preclude any participant, either
alone or together with its related persons, that beneficially owns an
interest in the SB SEF from dominating or exercising disproportionate
influence in the selection of participant directors, if such
participant could thereby dominate or exercise disproportionate
influence in the selection or appointment of the entire Board. The
Commission estimates a cost per SB SEF of $4,800, or $96,000 in the
aggregate for all SB SEFs to revise the relevant governing
documents.\651\
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\651\ The Commission preliminarily estimates, for purposes of
its PRA, that it would take a compliance attorney approximately 15
hours to revise the relevant governing documents. Assuming an hourly
cost of $320 for a compliance attorney to meet these requirements,
the one-time estimated dollar cost would be $4,800 (15 hours x $320)
or $96,000 ($4,800 x 20 SB SEFs) in the aggregate. The hourly rate
for the senior programmer and programmer analyst are from SIFMA's
Management & Professional Earnings in the Securities Industry 2010,
modified by the Commission's staff to account for an 1800-hour work-
year and multiplied by 5.35 to account for bonuses, firm size,
employee benefits and overhead.
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A SB SEF may also need to revise the composition of its Board to
include at least one director that is representative of investors who
are not SB swap dealers or major SB swap participants, and are not
associated with a participant. In this regard, SB SEFs could face
difficulties in locating qualified individuals to serve as investor
directors, particularly because SB swaps trading is complex and some
potential candidates may decline to serve as a director if they believe
that they lack sufficient expertise. There could also be costs in
educating investor directors to become familiar with the manner in
which SB swaps are traded and the overall market for SB swaps, as well
as the new regulatory structure that would govern them, which could
slow Board or committee processes at least initially.
The Commission preliminarily believes that the cost of securing an
investor director to serve on the Board of the SB SEF could range from
a relatively low cost for those entities that have the contacts and
resources to be able to search for one or more investor directors on
their own; to a moderate cost for those entities that can undertake the
search on their own but would incur some expenditures, such as placing
advertisements in national media; to a higher cost for those entities
that must secure the services of a recruitment firm that specializes in
the placement of outside directors. The Commission preliminarily
estimates that those SB SEFs that must rely on a recruitment specialist
could incur a cost of approximately $68,000 per director,\652\
[[Page 11048]]
or $1,360,000 in the aggregate, if all SB SEFs utilized a recruitment
firm.\653\
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\652\ The Commission is basing this estimate on a recent study
noting that the retainer fee for outside directors is on average
$67,624 (rounded to $68,000). See http://www.hewittassociates.com/_MetaBasicCMAssetCache_/Assets/Articles/2010/2010_Outside_Director_Compensation.pdf. The Commission believes that this amount
could serve as a proxy for the amount of any fee to be charged by a
recruitment firm that would conduct a national search for a director
that meets the requirements of proposed Rule 820(c)(2).
\653\ $1,360,000 = 20 (number of SB SEFs) x $68,000.
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The Commission requests comment on the costs and benefits of the
proposed conflicts requirements discussed above, as well as any costs
and benefits not already described that could result. The Commission
also requests data to quantify any potential costs or benefits. In
addition, the Commission requests comment on the following:
How can the Commission most accurately estimate the costs
and benefits arising from the proposed conflicts requirements?
What are the costs currently borne by entities that may
have been included in the Commission's analysis of the costs of the
proposed conflicts requirements?
Are there additional costs involved in complying with the
governance requirements that have not been identified? If so, what are
the types, and amounts, of such costs?
Can commenters assess the benefits of having governance
requirements for SB SEFs?
Would there be additional benefits from the proposed
conflicts requirements that have not been identified?
Surveillance. The Commission preliminarily estimates that
establishing an automated surveillance system in compliance with
proposed Rules 811 and 813 would require an initial cost of $3,256,800
per SB SEF, or $65,136,000 in the aggregate. The initial cost per SB
SEF includes $1,756,800 in initial programming costs per SB SEF \654\
as well as a one-time capital expenditure per SB SEF of $1.5 million in
information technology costs that would be necessary to establish such
a system. This capital expenditure estimate is based on the
Commission's discussions with market participants currently operating
platforms that trade OTC swaps.
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\654\ The Commission preliminarily estimates, for purposes of
its PRA, that establishing an automated surveillance system would
require one senior programmer and three additional programmers
working for 1,800 hours each to create and implement such a system.
See supra Section XXVII. Assuming an hourly cost of $304 for a
senior programmer and $224 for a programmer analyst to meet these
requirements, the initial estimated dollar cost would be $1,756,800
= (1,800 hours x $304) + ((1,800 hours x $224) x 3), or $35,136,000
($1,756,800 x 20 SB SEFs) in the aggregate. The hourly rate for the
senior programmer and programmer analyst are from SIFMA's Management
& Professional Earnings in the Securities Industry 2010, modified by
the Commission's staff to account for an 1800-hour work-year and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead.
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The Commission preliminarily estimates that the ongoing annual
costs associated with the automated surveillance system required by
proposed Rules 811 and 813 would be $1,306,400 per SB SEF, or
$26,128,000 in the aggregate. The annual cost per SB SEF includes
$806,400 in annual programming costs per SB SEF \655\ as well as an
ongoing annual information technology cost of $500,000 per SB SEF.
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\655\ The Commission preliminarily estimates, for purposes of
its PRA, that the average annual burden to comply with the automated
surveillance system requirements of proposed Rules 811 and 813 would
require two programmer analysts working for 1,800 hours per SB SEF.
See supra Section XXVII. Assuming an hourly cost of $224 for a
programmer analyst to meet these requirements, the initial estimated
dollar cost would be $806,400 (1,800 hours x $224 x 2), or
$16,128,000 ($806,400 x 20 SB SEFs) in the aggregate. The hourly
rate for the programmer analyst is from SIFMA's Management &
Professional Earnings in the Securities Industry 2010, modified by
the Commission's staff to account for an 1800-hour work-year and
multiplied by 5.35 to account for bonuses, firm size, employee
benefits and overhead.
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The Commission requests comment on the costs and benefits of the
proposed surveillance system requirements discussed above, as well as
any costs and benefits not already described that could result. The
Commission also requests data to quantify any potential costs or
benefits. In addition, the Commission requests comment on the
following:
How can the Commission most accurately estimate the costs
and benefits arising from the proposed surveillance system
requirements?
What are the costs currently borne by entities that may
have been included in the Commission's analysis of the costs of the
proposed surveillance system requirements?
Are there additional costs involved in complying with the
surveillance system requirements that have not been identified? If so,
what are the types, and amounts, of such costs?
Can commenters assess the benefits of having comprehensive
and accurate surveillance system requirements for SB SEFs, which would
provide access to such information to the Commission and other
regulators?
Would there be additional benefits from the proposed
surveillance system requirements that have not been identified?
D. General Request for Comments on Regulation SB SEF
The Commission requests comment on any other aspect of the
costs and benefits associated with Regulation SB SEF.
Would the obligations imposed on reporting parties by
proposed Regulation SB SEF be a significant enough barrier to entry to
cause some firms not to enter the SB swaps market? If so, how many
firms might decline to enter the market? How can the cost of their not
entering the market be tabulated? How should the Commission weigh such
costs, if any, against the anticipated benefits from increased
transparency to the SB swaps market from the proposal, as discussed
above?
How many entities would be affected by proposed Regulation
SB SEF?
XXIX. Consideration of Burden on Competition, and Promotion of
Efficiency, Competition and Capital Formation
Section 3(f) of the Exchange Act \656\ requires the Commission,
whenever it engages in rulemaking and is required to consider or
determine whether an action is necessary or appropriate in the public
interest, to consider, in addition to the protection of investors,
whether the action would promote efficiency, competition, and capital
formation. In addition, Section 23(a)(2) of the Exchange Act \657\
requires the Commission, when adopting rules under the Exchange Act, to
consider the impact of any such rules on competition. Section 23(a)(2)
of the Exchange Act also prohibits the Commission from adopting any
rule that would impose a burden on competition not necessary or
appropriate in furtherance of the purposes of the Exchange Act.\658\
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\656\ 15 U.S.C. 78c(f).
\657\ 15 U.S.C. 78w(a)(2).
\658\ Id.
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The Commission preliminarily believes that the regulation of SB
SEFs, as required by the Dodd-Frank Act and proposed to be implemented
under Regulation SB SEF, would promote efficiency, competition, and
capital formation.
Promotion of Efficiency. The Commission preliminarily believes that
the regulation of SB SEFs, as required by the Dodd-Frank Act and
proposed to be implemented under Regulation SB SEF, would promote
efficiency by encouraging innovation, automation, and reduction of
informational asymmetries.
[[Page 11049]]
The proposed rules are designed to be flexible and to foster
innovation in the SB swaps market, particularly with respect to the
trading of SB swaps by a diverse group of market participants. The
Commission formulated the proposed rules, along with the proposed
interpretation of the definition of SB SEF in a manner that would allow
entities that seek to become SB SEFs to structure diverse platforms for
the trading of SB swaps, subject to certain baseline requirements.
These proposed baseline requirements are meant to permit access by a
wide group of market participants to a range of SB swaps in keeping
with the mandate of the Dodd-Frank Act. Thus, the Commission believes
that the trading of SB swaps could evolve to its most efficient
structure while also meeting the statutory and regulatory requirements
relating to such activity.
The Commission preliminarily believes that the proposed
requirements with respect to pre-trade price transparency could lead to
more efficient pricing in the SB swaps market. The proposed rules are
designed to result in an increase in pre-trade price transparency for
SB swaps, which should aid market participants in evaluating current
market prices for SB swaps, thereby furthering more efficient price
discovery. Price transparency, coupled with the potential increase in
the number of market participants with access to trading in SB swaps,
could further decrease the spread in quoted prices, and thus could lead
to higher efficiency in the trading of these securities.
Some industry participants, however, have expressed concerns to the
Commission that pre-trade price transparency could force market
participants to reveal more information about trading interest than
they believe would be economically desirable. To the extent that market
participants consider that pre-trade price transparency requirements
are too burdensome and choose not to participate in the market, thereby
foregoing any potential economic benefits that may have resulted from
purchasing a particular SB swap, market efficiency could be harmed for
less liquid instruments and for large blocks of SB swaps.
The Commission preliminarily believes that automation and systems
development that would be associated with the regulation of SB SEFs, as
required by proposed Regulation SB SEF, would provide market
participants with new platforms and tools to execute and process
transactions in SB swaps, which could result in lower trading costs and
thus could lead to more efficient trading of SB swaps.
The Commission also believes that the proposed exemptions for SB
SEFs from regulation as national securities exchanges or as brokers
would eliminate what would be largely an additive oversight of SB SEFs
and therefore would promote efficiency, because SB SEFs would not have
to expend resources to comply with these regulatory obligations from
which they would be exempt.
Promotion of Competition. The Commission preliminary believes that
the regulation of SB SEFs, as required by the Dodd-Frank Act and
proposed to be implemented under Regulation SB SEF, could promote
competition. The proposed rules that would require SB SEFs to establish
fair, objective and not unreasonably discriminatory standards for
granting impartial access to trading on the SB SEF would foster greater
access to SB SEFs by SB swap dealers, major SB swap participants,
brokers, and ECPs. The resulting increase in the number of participants
who could access venues for the trading of SB swaps would allow a range
of market participants to compete for business on the SB SEF through
price competition or other dimensions of service. The proposed pre-
trade transparency requirements, including the proposed requirement to
create and disseminate a composite indicative quote, could further
promote price competition by making available information about trading
interest before execution of the trade, thereby allowing participants
to improve upon current quotes.
The Dodd-Frank Act's mandate to bring SB swaps that are subject to
the mandatory clearing requirement and that are made available to trade
onto regulated markets as well as the proposed interpretation of the
definition of SB SEF, and proposed Regulation SB SEF that are intended
to further implement the statutory directive, should help foster
greater competition in the trading of SB swaps. The trading of SB swaps
on regulated markets, and the Commission's proposals to institute rules
for such trading, should allow diverse trading platforms or systems to
register as SB SEFs and to compete for business in the SB swap market.
The Commission proposes to initially permit temporary registration
of SB SEFs while it considers each applicant's full registration
application, as long as the applicant meets certain requirements for
temporary registration. This proposed temporary registration should
help alleviate burdens associated with starting up a SB SEF and promote
competition by reducing barriers to entry, because entry into the SB
swap market would not be delayed by procedural matters, such as the
timing of Commission review of the applicant's full registration
submission. In addition, the Commission would have the opportunity to
observe the SB SEF in operation before it grants permanent registration
to the SB SEF, thereby helping to ensure that the SB SEF promotes
desirable competition.
Promotion of Capital Formation. The Commission preliminary believes
that the regulation of SB SEFs, as required by the Dodd-Frank Act and
as proposed to be implemented under Regulation SB SEF, would promote
capital formation because the proposed interpretation of the definition
of SB SEF, along with the elements of proposed Rule 811 that relate to
pre-trade price transparency, are intended to provide a flexible
approach as to the parameters of what can be traded on a SB SEF. As a
result, entities that currently provide a platform or system for OTC
derivatives trading should be able to leverage off of their current
trading platforms when developing a SB SEF-compatible trading platform.
These entities would have various options available to them when
developing their systems or platforms to comply with the Commission's
proposed rulemaking. This flexible feature of the proposals should help
promote capital formation because resources would be invested in a more
efficient manner to improve upon or expand the features of those that
plan to register as a SB SEF.
In addition, proposed Regulation SB SEF would provide the
Commission with information relating to trading, recordkeeping, and
surveillance of SB SEFs, as well as access to the books and records of
SB SEFs. A well-regulated SB swap market, where the Commission has
access to information about SB swap transactions, would increase the
Commission's ability to assess risks in the SB swap market. In
addition, the proposals would provide for various safeguards to help
promote market integrity, including proposed Rule 809 relating to
access to the SB SEF and proposed Rule 822 relating to systems
safeguards. Proposed Regulation SB SEF also is intended to support the
statutorily-mandated regulatory obligations of SB SEFs through proposed
Rule 823 relating to the duties of the CCO, among other proposed rules.
Any resulting increase in market integrity would likely increase market
participants' confidence in the soundness and fairness of the SB swap
market. Such increased confidence likely would stimulate financial
investment in SB swaps by corporate
[[Page 11050]]
entities and others that may find that more transparent venues for the
trading of SB swaps would allow them to purchase SB swaps to offset
business risks and to meet hedging objectives. Further, to the extent
that market participants utilize SB swaps to better manage portfolio
risks with respect to positions in underlying securities, the extent
that they are willing to participate in the SB swap market may impact
their willingness to participate in the underlying asset's market.
Therefore, the Commission preliminarily believes that the proposed
rules would help encourage capital formation.
Burden on Competition. Based on discussions with industry
participants, the Commission preliminarily believes that the start-up
costs to become a SB SEF for those entities that currently own and/or
operate a platform for the trading of OTC swaps would be moderate.
According to these industry participants, any needed modifications to
their systems or operations as a result of the Commission's proposals
generally would entail the expenditure of resources chiefly on
regulatory and compliance matters and on enhancing electronic systems
to support both the operational and regulatory aspects of a SB SEF. A
trading platform that currently trades OTC swaps would need to make
some adjustments to its systems and structure to trade SB swaps in
compliance with proposed Regulation SB SEF. The Commission
preliminarily believes that the development and registration of, and
introduction of trading in SB swaps by, a SB SEF would result in some
barriers to entry that otherwise would not exist. This is particularly
the case because, prior to the enactment of the Dodd-Frank Act, there
were no statutory provisions mandating the trading of certain SB swaps
on regulated markets.
The Commission requests comment on all aspects of this analysis
and, in particular, on whether proposed Regulation SB SEF and the
proposed interpretation of the definition of SB SEF would place a
burden on competition, as well as the effect of the proposals on
efficiency, competition, and capital formation. Commenters are
requested to provide empirical data and other factual support for their
views, if possible.
XXX. Consideration of Impact on the Economy
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996, or ``SBREFA,'' the Commission must advise the OMB as to
whether proposed Regulation SB SEF constitutes a ``major'' rule. Under
SBREFA, a rule is considered ``major'' where, if adopted, it results or
is likely to result in: (1) An annual effect on the economy of $100
million or more (either in the form of an increase or a decrease); (2)
a major increase in costs or prices for consumers or individual
industries; or (3) a significant adverse effect on competition,
investment or innovation. If a rule is ``major,'' its effectiveness
will generally be delayed for 60 days pending Congressional review.
The Commission requests comment on the potential impact of proposed
Regulation SB SEF on the economy on an annual basis, on the costs or
prices for consumers or individual industries, and any potential effect
on competition, investment, or innovation. Commenters are requested to
provide empirical data and other factual support for their views to the
extent possible.
XXXI. Regulatory Flexibility Act Certification
The Regulatory Flexibility Act (``RFA'') \659\ requires Federal
agencies, in promulgating rules, to consider the impact of those rules
on small entities. Section 603(a) \660\ of the Administrative Procedure
Act,\661\ as amended by the RFA, generally requires the Commission to
undertake a regulatory flexibility analysis of all proposed rules, or
proposed rule amendments, to determine the impact of such rulemaking on
``small entities.'' \662\ Section 605(b) of the RFA states that this
requirement shall not apply to any proposed rule or proposed rule
amendment, which if adopted, would not have a significant economic
impact on a substantial number of small entities.\663\
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\659\ 5 U.S.C. 601 et seq.
\660\ 5 U.S.C. 603(a).
\661\ 5 U.S.C. 551 et seq.
\662\ Although Section 601(b) of the RFA defines the term
``small entity,'' the statute permits agencies to formulate their
own definitions. The Commission has adopted definitions for the term
``small entity'' for the purposes of Commission rulemaking in
accordance with the RFA. Those definitions, as relevant to this
proposed rulemaking, are set forth in Rule 0-10, 17 CFR 240.0-10.
See Securities Exchange Act Release No. 18451 (January 28, 1982), 47
FR 5215 (February 4, 1982) (File No. AS-305).
\663\ See 5 U.S.C. 605(b).
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A. Security-Based Swap Execution Facilities
The proposed rules and form under Regulation SB SEF would apply to
all entities that seek to register with the Commission as a SB SEF and
thus to operate as a SB SEF in compliance with Regulation SB SEF. In
the Dodd-Frank Act, Congress defined for the first time the scope of a
SB SEF and mandated the registration of these new entities. Based on
its understanding of the market and conversations with industry
sources, the Commission preliminarily believes that approximately 20 SB
SEFs could be subject to the requirements of proposed Regulation SB
SEF.
For purposes of Commission rulemaking in connection with the RFA, a
small entity includes: (1i) When used with reference to an ``issuer''
or a ``person,'' other than an investment company, an ``issuer'' or
``person'' that, on the last day of its most recent fiscal year, had
total assets of $5 million or less,\664\ or (2) a broker-dealer with
total capital (net worth plus subordinated liabilities) of less than
$500,000 on the date in the prior fiscal year as of which its audited
financial statements were prepared pursuant to Rule 17a-5(d) under the
Exchange Act,\665\ or, if not required to file such statements, a
broker-dealer with total capital (net worth plus subordinated
liabilities) of less than $500,000 on the last day of the preceding
fiscal year (or in the time that it has been in business, if shorter);
and is not affiliated with any person (other than a natural person)
that is not a small business or small organization.\666\ Under the
standards adopted by the Small Business Administration (``SBA''),
entities in financial investments and related activities \667\ are
considered small entities if they have $7 million or less in annual
receipts.
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\664\ See 17 CFR 240.0-10(a).
\665\ See 17 CFR 240.17a-5(d).
\666\ See 17 CFR 240.0-10(c).
\667\ These entities would include firms involved in investment
banking and securities dealing, securities brokerage, commodity
contracts dealing, commodity contracts brokerage, securities and
commodity exchanges, miscellaneous intermediation, portfolio
management, providing investment advice, trust, fiduciary and
custody activities, and miscellaneous financial investment
activities. See SBA's Table of Small Business Size Standards,
Subsector 523.
---------------------------------------------------------------------------
Based on the Commission's existing information about the SB swap
market and the entities likely to register as SB SEFs, the Commission
preliminarily believes that the entities likely to register as SB SEFs
would not be considered small entities. The Commission preliminarily
believes that most, if not all, of the SB SEFs would be large business
entities or subsidiaries of large business entities, and that all SB
SEFs would have assets in excess of $5 million and annual receipts in
excess of $7,000,000. Therefore, the Commission preliminarily believes
that none of the potential SB SEFs would be considered small entities.
[[Page 11051]]
B. SB SEF Participants
The proposed rules under Regulation SB SEF also would impose
requirements on participants of SB SEFs, i.e., SB swap dealers, major
SB swap participants, brokers and non-registered ECPs. Among other
requirements relating to participants, SB SEFs would be required to
establish and enforce rules that require its participants to maintain
books and records of any trading interest, transaction, or position in
any SB swap pertinent to their activity on the SB SEF and to provide
prompt access to those books and records to the SB SEF and to the
Commission. Based on conversations with industry sources, the
Commission preliminarily believes that there could be a total of 275
persons that could become SB SEF participants and thus would thus be
subject to the requirements of the proposed rules.\668\
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\668\ See supra Section XXVII.C.
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For purposes of Commission rulemaking in connection with the RFA, a
small entity includes: (1) When used with reference to an ``issuer'' or
a ``person,'' other than an investment company, an ``issuer'' or
``person'' that, on the last day of its most recent fiscal year, had
total assets of $5 million or less,\669\ or (2) a broker-dealer with
total capital (net worth plus subordinated liabilities) of less than
$500,000 on the date in the prior fiscal year as of which its audited
financial statements were prepared pursuant to Rule 17a-5(d) under the
Exchange Act,\670\ or, if not required to file such statements, a
broker-dealer with total capital (net worth plus subordinated
liabilities) of less than $500,000 on the last day of the preceding
fiscal year (or in the time that it has been in business, if shorter);
and is not affiliated with any person (other than a natural person)
that is not a small business or small organization.\671\ Under the
standards adopted by the SBA, small entities in the finance and
insurance industry include the following: (1) For entities in credit
intermediation and related activities,\672\ entities with $175 million
or less in assets or, (2) for non-depository credit intermediation and
certain other activities,\673\ $7 million or less in annual receipts;
(3) for entities in financial investments and related activities,\674\
entities with $7 million or less in annual receipts; (4) for insurance
carriers and entities in related activities,\675\ entities with $7
million or less in annual receipts; and (5) for funds, trusts, and
other financial vehicles,\676\ entities with $7 million or less in
annual receipts.
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\669\ See 17 CFR 240.0-10(a).
\670\ See 17 CFR 240.17a-5(d).
\671\ See 17 CFR 240.0-10(c).
\672\ This includes commercial banks, savings institutions,
credit unions, firms involved in other depository credit
intermediation, credit card issuing, sales financing, consumer
lending, real estate credit, and international trade financing. See
SBA's Table of Small Business Size Standards, Subsector 522.
\673\ This includes firms involved in secondary market
financing, all other non-depository credit intermediation, mortgage
and nonmortgage loan brokers, financial transactions processing,
reserve, and clearing house activities, and other activities related
to credit intermediation. See SBA's Table of Small Business Size
Standards, Subsector 522.
\674\ This includes firms involved in investment banking and
securities dealing, securities brokerage, commodity contracts
dealing, commodity contracts brokerage, securities and commodity
exchanges, miscellaneous intermediation, portfolio management,
providing investment advice, trust, fiduciary and custody
activities, and miscellaneous financial investment activities. See
SBA's Table of Small Business Size Standards, Subsector 523.
\675\ This includes direct life insurance carriers, direct
health and medical insurance carriers, direct property and casualty
insurance carriers, direct title insurance carriers, other direct
insurance (except life, health and medical) carriers, reinsurance
carriers, insurance agencies and brokerages, claims adjusting, third
party administration of insurance and pension funds, and all other
insurance related activities. See SBA's Table of Small Business Size
Standards, Subsector 524.
\676\ This includes pension funds, health and welfare funds,
other insurance funds, open-end investment funds, trusts, estates,
and agency accounts, real estate investment trusts and other
financial vehicles. See SBA's Table of Small Business Size
Standards, Subsector 525.
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Based on feedback from industry participants about the SB swap
market, the Commission preliminarily believes that the entities that
will be participants of SB SEFs, whether SB swap dealers, major SB swap
participants, registered brokers or non-registered ECPs, would exceed
the thresholds defining ``small entities'' set out above. Thus, the
Commission believes it is unlikely that proposed Regulation SB SEF, as
it would affect SB SEF participants, would have a significant economic
impact on any small entity.
C. Certification
For the foregoing reasons, the Commission certifies that the
proposed rules and form under Regulation SB SEF would not have a
significant economic impact on a substantial number of small entities
for purposes of the RFA. The Commission requests comments regarding
this certification. The Commission requests that commenters describe
the nature of any impact on small entities and provide empirical data
to illustrate the extent of the impact.
XXXII. Statutory Authority and Text of Proposed Amendments
Pursuant to the Exchange Act, 15 U.S.C. 78a et seq., and
particularly, Sections 3, 6, 15, 19, 23(a), 30(b), 30(c) and 36 (15
U.S.C. 78c, 78f, 78o, 78s, 78w(a), 78dd(b), 78dd(c) and 78mm), thereof,
and Section 763 of the Dodd-Frank Act (15 U.S.C. 78c-4), the Commission
is proposing to adopt Sec. 240.15a-12, Regulation SB SEF and Form SB
SEF under the Exchange Act and to amend Sec. 240.3a1-1 under the
Exchange Act.
List of Subjects in 17 CFR Parts 240, 242 and 249
Securities, brokers, reporting and recordkeeping requirements.
For the reasons stated in the preamble, the Commission is proposing
to amend Title 17, Chapter II of the Code of the Federal Regulations as
follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
1. The general authority citation for Part 240 is revised and the
following citation is added in numerical order to read as follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i,
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 78p, 78q,
78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37,
80b-3, 80b-4, 80b-11, and 7201 et seq; 18 U.S.C. 1350 and 12 U.S.C.
5221(e)(3), unless otherwise noted.
* * * * *
Sec. 240.15a-12 also issued under 15 U.S.C. 78c-4.
* * * * *
2. Section 240.3a1-1 is amended by adding paragraph (a)(4) and
revising paragraph (b) introductory text to read as follows:
Sec. 240.3a1-1 Exemption from the definition of ``Exchange'' under
Section 3(a)(1) of the Act.
(a) * * *
(4) Is a security-based swap execution facility, as that term is
defined in section 3(a)(77) of the Act (15 U.S.C. 78c(a)(77)), that:
(i) Is in compliance with Regulation SB SEF (17 CFR 242.800 through
242.823); and
(ii) Does not serve as a marketplace for transactions in securities
other than security-based swaps.
(b) Notwithstanding paragraph (a)(1), (a)(2), or (a)(3) of this
section, an organization, association, or group of persons shall not be
exempt under this section from the definition of ``exchange,'' if:
* * * * *
3. Add Sec. 240.15a-12 to read as follows:
[[Page 11052]]
Sec. 240.15a-12 Conditional exemption from the regulation of brokers
registered as security-based swap execution facilities.
(a) A security-based swap execution facility (as that term is
defined in section 3(a)(77) of the Act (15 U.S.C. 78c(a)(77))) may
register as a broker under section 15(a)(1) and (b) of the Act (15
U.S.C. 78o(a)(1) and (b)) by registering as a security-based swap
execution facility, if such security-based swap execution facility does
not engage in any activity other than facilitating the trading of
security-based swaps on or through the security-based swap execution
facility in a manner consistent with Regulation SB SEF (17 CFR 242.800
through 242.823).
(b) Except for the provisions of the Act specified in paragraph (c)
of this section, a broker registered under paragraph (a) of this
section that does not engage in any activity other than facilitating
the trading of security-based swaps on or through the security-based
swap execution facility in a manner consistent with the Regulation SB
SEF (17 CFR 242.800 through 242.823) shall be exempt from the
requirements of the Act and the rules and regulations thereunder that,
by their terms, require, prohibit, restrict, limit, condition, or
affect activities of a broker unless those requirements of the Act or
any rule, regulation, or order thereunder specifies that it applies to
a security-based swap execution facility.
(c) The following provisions of the Act shall apply to a broker
that is a security-based swap execution facility:
(1) Section 15(b)(4) of the Act (15 U.S.C. 78o(b)(4));
(2) Section 15(b)(6) of the Act (15 U.S.C. 78o(b)(6)); and
(3) Section 17(b) of the Act (15 U.S.C. 78q(b)).
(d) A broker registered under paragraph (a) of this section that
does not engage in any activity other than facilitating the trading of
security-based swaps on or through the security-based swap execution
facility in a manner consistent with Regulation SB SEF (17 CFR 242.800
through 242.823) shall be exempt from the Securities Investor
Protection Act.
PART 242--REGULATIONS M, SHO, ATS, AC, NMS, AND SB SEF AND CUSTOMER
MARGIN REQUIREMENTS FOR SECURITY FUTURES
4. The authority citation for part 242 is amended by adding the
following citation to read as follows:
Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78g(c)(2),
78i(a), 78j, 78k-1(c), 78l, 78m, 78n, 78o(b), 78o(c), 78o(g),
78q(a), 78q(b), 78q(h), 78w(a), 78dd-1, 78mm, 80a-23, 80a-29, and
80a-37.
Sections 242.800 through 242.823 are also issued under sec. 943,
Pub. L. 111-203, Section 763.
5. The heading for part 242 is revised to read as set forth above.
6. Add Sec. Sec. 242.800 through 242.823 to read as follows:
* * * * *
Sec.
242.800 Definitions.
242.801 Application for registration as a security-based swap
execution facility.
242.802 Amendments to application.
242.803 Supplemental material to be filed by security-based swap
execution facilities.
242.804 Withdrawal from or revocation of registration for security-
based swap execution facilities.
242.805 Voluntary submission of rules for Commission review and
approval.
242.806 Self-certification of rules.
242.807 Trading security-based swaps pursuant to certification.
242.808 Trading security-based swaps pursuant to Commission review
and approval.
242.809 Access to security-based swap execution facilities.
242.810 Compliance with core principles.
242.811 Compliance with rules.
242.812 Security-based swaps not readily susceptible to
manipulation.
242.813 Monitoring of trading and trade processing.
242.814 Ability to obtain information.
242.815 Financial integrity of transactions.
242.816 Emergency authority.
242.817 Timely publication of trading information.
242.818 Recordkeeping and reporting.
242.819 Antitrust considerations.
242.820 Conflicts of interest.
242.821 Financial resources.
242.822 System safeguards.
242.823 Designation of Chief Compliance Officer of security-based
swap execution facility.
* * * * *
Sec. 242.800 Definitions.
Terms used in this Regulation SB SEF (17 CFR 242.800 through
242.823) that appear in section 3 of the Act (15 U.S.C. 78c) have the
same meaning as in section 3 of the Act (15 U.S.C. 78c) and the rules
or regulations thereunder. In addition, the following definitions shall
apply:
The term affiliate means any person that, directly or indirectly,
controls, is controlled by, or is under common control with, the
person.
The terms beneficial ownership, beneficially owns, or any
derivative thereof have the same meaning, with respect to any security
or other ownership interest, as set forth in Sec. 240.13d-3 of this
chapter, as if (and whether or not) such security or other ownership
interest were a voting equity security registered under section 12 of
the Act (15 U.S.C. 78l); provided that to the extent any person is a
member of a group within the meaning of section 13(d)(3) under the Act
(15 U.S.C. 78m(d)(3)) and Sec. 240.13d-5(b) of this chapter, 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.
The term block trade has the same meaning as Sec. 242.900,
provided however that until the Commission sets the criteria and
formula for determining what constitutes a block trade under Sec.
242.907(b), a security-based swap execution facility may set its own
criteria and formula for determining what constitutes a block trade as
long as such criteria and formula comply with the Core Principles
relating to security-based swap execution facilities in section 3D of
the Act (15 U.S.C. 78c-4) and the rules and regulations thereunder.
The term Board means the Board of Directors or Board of Governors
of the security-based swap execution facility or any equivalent body.
The term competent, objective personnel means a recognized
information technology firm or a qualified internal department
knowledgeable of information technology systems.
The term control, controlled by, or any derivative thereof, for
purposes of Sec. Sec. 242.800 through 823, means 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. For purposes of
Sec. Sec. 242.800 through 823, a person is presumed to control another
person if the person:
(1) Is a director, general partner, or officer exercising executive
responsibility (or having similar status or functions);
(2) Directly or indirectly has the right to vote 25 percent or more
of a class of voting securities or has the power to sell or direct the
sale of 25 percent or more of a class of voting securities; or
(3) In the case of a partnership, has the right to receive, upon
dissolution, or has contributed, 25 percent or more of the capital.
The term director means any member of the Board.
The term EDGAR Filer Manual has the same meaning as set forth in
Sec. 232.11 of this chapter.
The term emergency has the same meaning as set forth in section
12(k)(7) of the Act (15 U.S.C. 78l(k)(7)).
[[Page 11053]]
The term immediate family member means a person's spouse, parents,
children and siblings, whether by blood, marriage or adoption, or
anyone residing in such person's home.
The term independent director means:
(1) A director who has no material relationship with:
(i) The security-based swap execution facility or any affiliate of
the security-based swap execution facility; or
(ii) A participant or any affiliate of a participant.
(2) A director is not an independent director if any of the
following circumstances exists:
(i) The director, or an immediate family member, is employed by or
otherwise has a material relationship with the security-based swap
execution facility or any affiliate thereof, or within the past three
years, was employed by or otherwise had a material relationship with
the security-based swap execution facility or any affiliate thereof;
(ii) (A) The director is a participant or, within the past three
years, was employed by or affiliated with a participant or any
affiliate thereof; or
(B) The director has an immediate family member that is, or within
the past three years was, an executive officer of a participant or any
affiliate thereof;
(iii) The director, or an immediate family member, has received
during any twelve month period, within the past three years, payments
that reasonably could affect the independent judgment or decision-
making of the director from the security-based swap execution facility
or any affiliate thereof or from a participant or any affiliate
thereof, other than the following:
(A) Compensation for Board or Board committee services;
(B) Compensation to an immediate family member who is not an
executive officer of the security-based swap execution facility or any
affiliate thereof or of a participant or any affiliate thereof; or
(C) Pension and other forms of deferred compensation for prior
services, not contingent on continued service;
(iv) The director, or an immediate family member, is a partner in,
or controlling shareholder or executive officer of, any organization to
or from which the security-based swap execution facility or any
affiliate thereof made or received payments for property or services in
the current or any of the past three full fiscal years that exceed two
percent of the recipient's consolidated gross revenues for that year,
other than the following:
(A) Payments arising solely from investments in the securities of
the security-based swap execution facility or any affiliate thereof; or
(B) Payments under non-discretionary charitable contribution
matching programs;
(v) The director, or an immediate family member, is, or within the
past three years was, employed as an executive officer of another
entity where any executive officers of the security-based swap
execution facility serve on that entity's compensation committee;
(vi) The director, or an immediate family member, is a current
partner of the outside auditor of the security-based swap execution
facility or any affiliate thereof, or was a partner or employee of the
outside auditor of the security-based swap execution facility or any
affiliate thereof who worked on the audit of the security-based swap
execution facility or any affiliate thereof, at any time within the
past three years; or
(vii) In the case of a director that is a member of the audit
committee of the security-based swap execution facility, such director
(other than in his or her capacity as a member of the audit committee,
the Board, or any other Board committee), accepts, directly or
indirectly, any consulting, advisory, or other compensatory fee from
the security-based swap execution facility or any affiliate thereof or
a participant or any affiliate thereof, other than fixed amounts of
pension and other forms of deferred compensation for prior service,
provided such compensation is not contingent in any way on continued
service.
The term material change means a change that a Chief Compliance
Officer would reasonably need to know in order to oversee compliance of
the security-based swap execution facility.
The term material compliance matter means any compliance matter
that the Board would reasonably need to know to oversee the compliance
of the security-based swap execution facility and includes, without
limitation:
(1) A violation of the Federal securities laws by the security-
based swap execution facility, its officers, directors, employees, or
agents;
(2) A violation of the policies and procedures of the security-
based swap execution facility by the security-based swap execution
facility, its officers, directors, employees, or agents; or
(3) A weakness in the design or implementation of the security-
based swap execution facility's policies and procedures.
The term material systems change means a change to automated
systems that:
(1) Significantly affects existing capacity or security;
(2) In itself, raises significant capacity or security issues, even
if it does not affect other existing systems;
(3) Relies upon substantially new or different technology;
(4) Is designed to provide a new service or function; or
(5) Otherwise significantly affects the operations of the security-
based swap execution facility.
The term material systems outage means an unauthorized intrusion
into any system or an event at a security-based swap execution facility
that causes a problem in systems or procedures that results in:
(1) A failure to maintain accurate, time-sequenced records of all
orders, quotations, and transactions that are received by, or
originated on, the security-based swap execution facility;
(2) A disruption of normal operations, including switchover to
back-up equipment with no possibility of near-term recovery of primary
hardware;
(3) A loss of use of any system;
(4) A loss of transactions;
(5) Excessive back-ups or delays in executing trades;
(6) A loss of ability to disseminate vital information;
(7) A communication of an outage situation to other external
entities;
(8) A report or referral of an event to the Board or senior
management of the security-based swap execution facility;
(9) A serious threat to systems operations even though systems
operations were not disrupted;
(10) A queuing of data between system components or queuing of
messages to or from participants of such duration that a participant's
normal activity with the security-based swap execution facility is
affected; or
(11) A failure to maintain the integrity of systems that results in
the entry of erroneous or inaccurate inquiries, responses, orders,
quotations, other trading interest, transactions, or other information
in the security-based swap execution facility or the securities markets
as a whole.
The term non-resident person means:
(1) 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;
(2) In the case of a corporation, one incorporated in or having its
principal place of business in any place not in the United States; and
(3) 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.
[[Page 11054]]
The term objective review means an internal or external review,
performed by competent, objective personnel following established audit
procedures and standards, and containing a risk assessment conducted
pursuant to a review schedule.
The term participant when used with respect to a security-based
swap execution facility means a person that is permitted to directly
effect transactions on the security-based swap execution facility.
The term person associated with a participant means any partner,
officer, director, or branch manager of such participant (or any person
occupying a similar status or performing similar functions), any person
directly or indirectly controlling, controlled by, or under common
control with such participant, or any employee of such participant.
The term related person when used with respect to a participant
means:
(1) Any affiliate of a participant;
(2) Any person associated with a participant;
(3) Any immediate family member of a participant, or any immediate
family member of the spouse of such participant, who, in each case, has
the same home as the person or who is a director or officer of the
security-based swap execution facility or any of its parents or
subsidiaries; or
(4) Any immediate family member of a person associated with a
participant, 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 participant or who is a director or officer of the security-
based swap execution facility or any of its parents or subsidiaries.
The term review schedule means a schedule in which each element
contained in Sec. 242.822(a)(1) would be assessed at specific, regular
intervals.
The term tagged means having an identifier that highlights specific
information submitted to the Commission that is in the format required
by the EDGAR Filer Manual, as described in Section 301 of Regulation S-
T (17 CFR 232.301).
Sec. 242.801 Application for registration as a security-based swap
execution facility.
(a) An application for registration as a security-based swap
execution facility shall be filed electronically in a tagged data
format with the Commission on Form SB SEF (referenced in Sec. 249.1700
of this chapter), in accordance with the instructions contained
therein. The application must include information sufficient to
demonstrate compliance with the Act and rules and regulations
thereunder. Form SB SEF consists of instructions, an Execution Page,
and a list of Exhibits that the Commission requires in order to be able
to determine whether an applicant is able to comply with the Act and
rules and regulations thereunder. An application on Form SB SEF will
not be considered to be complete unless the applicant has submitted, at
a minimum, the Execution Page and Exhibits as required in Form SB SEF,
and any other material that the Commission may require, upon request,
in order to be able to determine whether an applicant is able to comply
with the Act and rules and regulations thereunder. If the application
is not complete, the Commission shall notify the applicant that the
application will not be deemed to have been submitted for purposes of
the Commission's review.
(b)(1) In connection with an application for registration furnished
to the Commission under paragraph (a) of this section on or before July
31, 2014, within 360 days of the date of the filing of such application
(or within such longer period as to which the applicant consents), the
Commission shall:
(i) By order grant registration; or
(ii) Institute proceedings to determine whether registration should
be denied. Such proceedings shall include notice of the grounds for
denial under consideration and opportunity for hearing and shall be
concluded within 450 days after the date on which the application for
registration is furnished to the Commission under paragraph (a) of this
section. At the conclusion of such proceedings, the Commission, by
order, shall grant or deny such registration. 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 applicant consents.
(2) In connection with an application for registration furnished to
the Commission under paragraph (a) of this section after July 31, 2014,
within 180 days of the date of the filing of such application (or
within such longer period as to which the applicant consents), the
Commission shall:
(i) By order grant registration; or
(ii) Institute proceedings to determine whether registration should
be denied. Such proceedings shall include notice of the grounds for
denial under consideration and opportunity for hearing and shall be
concluded within 270 days after the date on which the application for
registration is furnished to the Commission under paragraph (a) of this
section. At the conclusion of such proceedings, the Commission, by
order, shall grant or deny such registration. 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 applicant consents.
(3) The Commission shall grant the registration of a security-based
swap execution facility if the Commission finds that the requirements
of the Act and the rules and regulations thereunder with respect to the
applicant are satisfied. The Commission shall deny the registration of
a security-based swap execution facility if it does not make such
finding.
(c) For any application for registration as a security-based swap
execution facility filed pursuant to paragraph (a) of this section on
Form SB SEF (referenced in Sec. 249.1700 of this chapter) on or before
July 31, 2014, for which the applicant indicates that it would like to
be considered for temporary registration pursuant to this paragraph
(c), the Commission may grant temporary registration of the security-
based swap execution facility that shall expire on the earlier of:
(1) The date that the Commission grants or denies registration of
the security-based swap execution facility; or
(2) The date that the Commission rescinds the temporary
registration of the security-based swap execution facility.
(d) A security-based swap execution facility shall designate and
authorize on Form SB SEF (referenced in Sec. 249.1700 of this chapter)
an agent in the United States, other than a Commission member,
official, or employee, who shall accept any notice or service of
process, pleadings, or other documents in any suit, action or
proceedings brought against the security-based swap execution facility
to enforce the Federal securities laws or the rules or regulations
thereunder.
(e) Any person applying for registration pursuant to paragraph (a)
of this section that is controlled by any other person shall certify on
its Form SB SEF (referenced in Sec. 249.1700 of this chapter) and
provide an opinion of counsel that any such person that controls such
security-based swap execution facility will consent to and can, as a
matter of law:
(1) Provide the Commission with prompt access to its books and
records, to the extent such books and records are related to the
activities of the security-based swap execution facility; and
[[Page 11055]]
(2) Submit to onsite inspection and examination by representatives
of the Commission with respect to the activities of the security-based
swap execution facility.
(f) Any non-resident person applying for registration pursuant to
paragraph (a) of this section shall certify on its Form SB SEF
(referenced in Sec. 249.1700 of this chapter) and provide an opinion
of counsel that the security-based swap execution facility can, as a
matter of law:
(1) Provide the Commission with prompt access to the books and
records of such security-based swap execution facility; and
(2) Submit to onsite inspection and examination by representatives
of the Commission.
(g) An application for registration or any amendment thereto that
is filed pursuant to Regulation SB SEF (referenced in Sec. 249.1700 of
this chapter) shall be considered a ``report'' filed with the
Commission for purposes of sections 18(a) and 32(a) of the Act (15
U.S.C. 78r(a) and 78ff(a)) and the rules and regulations thereunder.
Sec. 242.802 Amendments to application.
(a) After the discovery that any information filed on Form SB SEF
(referenced in Sec. 249.1700 of this chapter), any statement therein,
or any Exhibit or amendment thereto, was inaccurate when filed, the
security-based swap execution facility shall file with the Commission
an amendment correcting such inaccuracy promptly, but in no event later
than 5 business days after such discovery.
(b)(1) The security-based swap execution facility shall file
electronically with the Commission an amendment to Form SB SEF
(referenced in Sec. 249.1700 of this chapter), on Form SB SEF, within
5 business days after any action is taken that renders inaccurate, or
that causes to be incomplete, any of the following:
(i) Information filed on the Execution Page of Form SB SEF
(referenced in Sec. 249.1700 of this chapter), or amendment thereto;
or
(ii) Information filed as part of Exhibits C, E, G or N, or any
amendments thereto.
(2) An amendment required under this paragraph (b) shall set forth
the nature and effective date of the action taken and shall provide any
new information and correct any information rendered inaccurate.
(c) Any security-based swap execution facility that is controlled
by any other person shall file electronically with the Commission an
amendment to Exhibit P to Form SB SEF (referenced in Sec. 249.1700 of
this chapter) on Form SB SEF, within 5 business days after any changes
in the legal or regulatory framework of any person that controls the
security-based swap execution facility that would impact the ability of
or the manner in which any such person consents to or provides the
Commission prompt access to its books and records, to the extent such
books and records are related to the activities of the security-based
swap execution facility, or impacts the Commission's ability to inspect
and examine any such person with respect to the activities of the
security-based swap execution facility. The amendment shall include a
revised opinion of counsel pursuant to Exhibit P describing how, as a
matter of law, any person that controls the security-based swap
execution facility will continue to meet its obligations to consent to
and provide the Commission with prompt access to its books and records,
to the extent such books and records are related to the activities of
the security-based swap execution facility, and to consent to and be
subject to onsite inspection and examination by representatives of the
Commission with respect to the activities of the security-based swap
execution facility under such new legal or regulatory framework.
(d) A non-resident security-based swap execution facility shall
file electronically with the Commission an amendment to Exhibit P to
Form SB SEF, on Form SB SEF (referenced in Sec. 249.1700 of this
chapter), within 5 business days after any changes in legal or
regulatory framework that would impact the security-based swap
execution facility's ability to or the manner in which it provides the
Commission prompt access to its books and records or impacts the
Commission's ability to inspect and examine the security-based swap
execution facility. The amendment shall include a revised opinion of
counsel pursuant to Exhibit P describing how, as a matter of law, the
entity will continue to meet its obligations to provide the Commission
with prompt access to its books and records and to be subject to onsite
inspection and examination by representatives of the Commission under
such new legal or regulatory framework.
(e) Whenever the number of changes to be reported in an amendment,
or the number of amendments filed, are so great that the purpose of
clarity will be promoted by the filing of a complete new statement and
exhibits, a security-based swap execution facility may, at its
election, or shall, upon request of any representative of the
Commission, file as an amendment a complete new statement together with
all exhibits which are prescribed to be filed in connection with Form
SB SEF (referenced in Sec. 249.1700 of this chapter).
(f) Within 60 days of the end of its fiscal year, a security-based
swap execution facility shall file an amendment to its Form SB SEF
(referenced in Sec. 249.1700 of this chapter), which shall update the
Form SB SEF in its entirety. Each exhibit to the amended Form SB SEF
shall be up to date as of the end of the latest fiscal year of the
security-based swap execution facility.
Sec. 242.803 Supplemental material to be filed by security-based swap
execution facilities.
(a) A registered security-based swap execution facility, or a
security-based swap execution facility exempted from such registration
pursuant to section 3D(e) of the Act (15 U.S.C. 78c-4(e)), shall file
electronically with the Commission any material relating to the trading
of security-based swaps (including notices, circulars, bulletins,
lists, and periodicals) issued or made generally available to
participants. Such material shall be filed with the Commission upon
issuing or making such material available to the participants.
(b) If the information required to be filed under paragraph (a) of
this section is available continuously on an Internet Web site
controlled by a security-based swap execution facility, in lieu of
filing such information with the Commission, such security-based swap
execution facility may:
(1) Indicate the location of the Internet Web site where such
information may be found; and
(2) Certify that the information available at such location is
accurate as of its date.
Sec. 242.804 Withdrawal from or revocation of registration for
security-based swap execution facilities.
(a) A registered security-based swap execution facility may
withdraw from registration by filing a written notice of withdrawal
with the Commission. The security-based swap execution facility shall
designate on its notice of withdrawal a person associated with the
security-based swap execution facility to serve as the custodian of the
security-based swap execution facility's books and records. Prior to
filing a notice of withdrawal, a security-based swap execution facility
shall file an amended Form SB SEF (referenced in Sec. 249.1700 of this
chapter) to update any inaccurate information.
(b) A notice of withdrawal from registration filed by a security-
based
[[Page 11056]]
swap execution facility shall become effective for all matters (except
as provided in this paragraph (b)) on the 60th day after the filing
thereof with the Commission, within such longer period of time as to
which such security-based swap execution facility consents or 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.
(c) A notice of withdrawal 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 Act (15 U.S.C. 78r(a) and 78ff(a)),
and the rules and regulations thereunder.
(d) If the Commission finds, on the record after notice and
opportunity for hearing, that any registered security-based swap
execution facility has obtained its registration by making any false or
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. 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, to be necessary or appropriate in
the public interest or for the protection of investors.
(e) If the Commission finds that a registered security-based swap
execution facility 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.
Sec. 242.805 Voluntary submission of rules for Commission review and
approval.
(a) Request for approval of rules. A registered security-based swap
execution facility may request that the Commission approve a new rule
or rule amendment prior to implementation of the new rule or rule
amendment or, if the request was initially submitted under Sec.
242.806 or 242.807, subsequent to implementation of the new rule or
rule amendment. A request for approval shall:
(1) Be filed electronically with the Commission in a format
specified by the Commission;
(2) Set forth the text of the new rule or rule amendment (in the
case of a rule amendment, deletions and additions must be indicated);
(3) Describe the proposed effective date of the new rule or rule
amendment and any action taken or anticipated to be taken to adopt the
proposed rule by the registered security-based swap execution facility
or by its Board, or by any committee thereof, and cite the rules of the
registered security-based swap execution facility that authorize the
adoption of the proposed rule change;
(4) Explain the operation, purpose, and effect of the new rule or
rule amendment, including, as applicable, a description of the
anticipated benefits to market participants or others, any potential
anticompetitive effects on market participants or others, and how the
rule fits into the registered security-based swap execution facility's
framework of regulation;
(5) Certify that the registered security-based swap execution
facility has published on its Web site a notice of pending new rule or
rule amendment with the Commission and a copy of the submission,
concurrent with the filing of the submission with the Commission;
(6) Include the documentation relied on to establish the basis for
compliance with the applicable provisions of the Act and Commission
rules and regulations thereunder, including section 3D(d) of the Act
(15 U.S.C. 78c-4(d)) and the rules and regulations thereunder;
(7) Provide additional information that may be beneficial to the
Commission in analyzing the new rule or rule amendment. If a proposed
rule affects, directly or indirectly, the application of any other rule
of the registered security-based swap execution facility, the pertinent
text of any such rule must be set forth and the anticipated effect
described;
(8) Describe briefly any substantive opposing views expressed to
the registered security-based swap execution facility by the Board or
committee members, participants, or market participants with respect to
the new rule or rule amendment that were not incorporated into the new
rule or rule amendment;
(9) Identify any Commission rule or regulation that the Commission
may need to amend, or sections of the Act or the rules or regulations
thereunder that the Commission may need to interpret, in order to
approve the new rule or rule amendment. To the extent that such an
amendment or interpretation is necessary to accommodate a new rule or
rule amendment, the submission should include a reasoned analysis
supporting the proposed amendment or interpretation;
(10) In the case of proposed amendments to the terms and conditions
of a security-based swap, include a written statement verifying that
the registered security-based swap execution facility has undertaken a
due diligence review of the legal conditions, including conditions
relating to contractual and intellectual property rights, that may
materially affect the trading of the security-based swap; and
(11) A request for confidential treatment, if appropriate, as
permitted pursuant to the applicable provisions of the Freedom of
Information Act, 5 U.S.C. 552, and Commission rules and regulations
thereunder, 17 CFR 200.83.
(b) Standard for review and approval. The Commission shall approve
a new rule or rule amendment unless the new rule or rule amendment is
inconsistent with the Act or Commission rules or regulations.
(c) Forty-five day review. (1) All rules submitted for Commission
approval under paragraph (a) of this section shall be deemed approved
by the Commission 45 days after receipt by the Commission, or at the
conclusion of such extended period as provided under paragraph (d) of
this section, unless the registered security-based swap execution
facility is notified otherwise within the applicable period, if:
(i) The submission complies with the requirements of paragraph (a)
of this section; and
(ii) The registered security-based swap execution facility does not
amend the new rule or rule amendment or supplement the submission,
except as requested by the Commission, during the pendency of the
review period. Any amendment or supplementation not requested by the
Commission will be treated as the submission of a new filing under this
section.
(d) Extension of time for review. The Commission may further extend
the review period in paragraph (c) of this section for any approval
request for:
(1) An additional 45 days, if the new rule or rule amendment raises
novel or complex issues that require additional time for review, is of
major economic significance, the submission is incomplete, or the
requestor does not respond completely to the Commission's questions in
a timely manner, in which case, the Commission shall notify the
submitting registered security-based swap execution facility within the
initial 45-day review period and shall briefly describe the nature of
the specific issues for which additional time for review shall be
required; or
[[Page 11057]]
(2) Any period, beyond the additional 45 days provided in paragraph
(d)(1) of this section, to which the registered security-based swap
execution facility agrees in writing.
(e) Notice of non-approval. Any time during its review under this
section, the Commission may notify the registered security-based swap
execution facility that it will not, or is unable to, approve the new
rule or rule amendment. This notification will briefly specify the
nature of the issues raised and the specific provision of the Act or
Commission rules or regulations, including the form or content
requirements of this section, with which the new rule or rule amendment
is inconsistent or appears to be inconsistent with the Commission rules
or regulations.
(f) Effect of non-approval. (1) Notification to a registered
security-based swap execution facility under paragraph (e) of this
section shall not prevent the registered security-based swap execution
facility from subsequently submitting a revised version of the new rule
or rule amendment for the Commission's review and approval or from
submitting the new rule or rule amendment as initially proposed in a
supplemented submission. The revised submission will be reviewed
without prejudice.
(2) Notification to a registered security-based swap execution
facility under paragraph (e) of this section of the Commission's
determination not to approve the new rule or rule amendment of the
registered security-based swap execution facility shall be presumptive
evidence that the registered security-based swap execution facility may
not truthfully certify the same, or substantially the same, proposed
rule or rule amendment under Sec. 242.806.
(g) Expedited approval. Notwithstanding the provisions of paragraph
(c) of this section, a new rule or rule amendment, including proposed
changes to the terms and conditions of a security-based swap, that is
consistent with the Act and Commission rules and regulations and with
standards approved or established by the Commission may be approved by
the Commission at such time and under such conditions as the Commission
shall specify in the written notification; provided, however, that the
Commission may, at any time, alter or revoke the applicability of such
a notice to any particular product or rule amendment.
Sec. 242.806 Self-certification of rules.
(a) Required certification. A registered security-based swap
execution facility shall comply with the following conditions prior to
implementing any rule that has not obtained Commission approval under
Sec. 242.805:
(1) The registered security-based swap execution facility has filed
its submission electronically in a format specified by the Commission.
(2) The registered security-based swap execution facility has
provided to the Commission a certification that it published on its Web
site a notice of pending certification with the Commission and a copy
of the submission, concurrent with the filing of a submission with the
Commission. Information that the registered security-based swap
execution facility seeks to keep confidential may be redacted from the
documents published on its Web site but must be republished consistent
with any determination made pursuant to the applicable provisions of
the Freedom of Information Act, 5 U.S.C. 552, and Commission rules and
regulations thereunder, 17 CFR 200.83.
(3) The Commission has received the submission not later than the
opening of business on the business day that is 10 business days prior
to the registered security-based swap execution facility's proposed
implementation of the rule or rule amendment; provided, however, that
if a security-based swap execution facility implements any rule or rule
amendment in the exercise of its emergency authority pursuant to Sec.
242.816, it shall file such rule or rule amendment with the Commission
pursuant to this paragraph (a) prior to the implementation of such rule
or rule amendment, or, if not practicable, within 24 hours after
implementation of such emergency rule or rule amendment.
(4) The Commission has not stayed the submission pursuant to
paragraph (c) of this section.
(5) The rule submission includes:
(i) The text of the rule (in the case of a rule amendment,
deletions, and additions must be indicated);
(ii) The date of intended implementation;
(iii) A certification by the registered security-based swap
execution facility that the rule complies with the Act and Commission
rules and regulations thereunder;
(iv) The documentation relied on to establish the basis for
compliance with the applicable provisions of the Act and Commission
rules and regulations thereunder, including section 3D(d) of the Act
(15 U.S.C. 78c-4(d)) and the rules and regulations thereunder;
(v) A brief explanation of any substantive opposing views expressed
to the registered security-based swap execution facility by the Board
or committee members, participants, or market participants that were
not incorporated into the rule, or a statement that no such opposing
views were expressed;
(vi) A request for confidential treatment, if appropriate, as
permitted pursuant to the applicable provisions of the Freedom of
Information Act, 5 U.S.C. 552, and Commission rules and regulations
thereunder, 17 CFR 200.83; and
(vii) For amendments to the terms and conditions of a security-
based swap, a written statement verifying that the registered security-
based swap execution facility has undertaken a due diligence review of
the legal conditions, including conditions relating to contractual and
intellectual property rights, that may materially affect the trading of
the product.
(6) The registered security-based swap execution facility has
provided, upon request of any representative of the Commission,
additional evidence, information, or data that may be beneficial to the
Commission in conducting a due diligence assessment of the filing and
the registered security-based swap execution facility's compliance with
any of the requirements of the Act or Commission rules or regulations
thereunder.
(b) Review by the Commission. The Commission shall have 10 business
days to review the new rule or rule amendment before the new rule or
rule amendment is deemed certified and can be made effective, unless
the Commission notifies the registered security-based swap execution
facility during the 10-business day review period that it intends to
issue a stay of the certification under paragraph (c) of this section.
(c) Stay. (1) Stay of certification of new rule or rule amendment.
The Commission may stay the certification of a new rule or rule
amendment submitted pursuant to paragraph (a) of this section by
issuing a notification informing the registered security-based swap
execution facility that the Commission is staying the certification of
the new rule or rule amendment on the grounds that the new rule or rule
amendment presents novel or complex issues that require additional time
to analyze, the new rule or rule amendment is accompanied by an
inadequate explanation, or the new rule or rule amendment is
potentially inconsistent with the Act or Commission rules or
regulations
[[Page 11058]]
thereunder. The Commission will have 90 days from the date of the
notification to conduct a review.
(2) Public comment. The Commission shall provide a 30-day comment
period within the 90-day review period while the stay is in effect as
described in paragraph (c)(1) of this section. The Commission shall
publish a notice of the 30-day comment period on the Commission's Web
site. Comments from the public shall be submitted as specified in that
notice.
(3) Expiration of a stay of certification of new rule or rule
amendment. A new rule or rule amendment subject to a stay pursuant to
paragraph (c) of this section shall become effective, pursuant to the
certification, at the expiration of the 90-day review period described
in paragraph (c)(1) of this section unless the Commission withdraws the
stay prior to that time or the Commission notifies the registered
security-based swap execution facility during the 90-day review period
that it objects to the certification on the grounds that the new rule
or rule amendment is inconsistent with the Act or Commission rules or
regulations thereunder.
(d) Notwithstanding paragraph (a) of this section, a registered
security-based swap execution facility may place the following new
rules or rule amendments into effect on the following business day
without certification to the Commission if the following conditions are
met:
(1) The rule is limited to corrections of typographical errors,
renumbering, periodic routine updates to identifying information about
approved entities, and other such non-substantive revisions of the
terms and conditions of a security-based swap that have no effect on
the economic characteristics of the security-based swap; and
(2) The registered security-based swap execution facility provides
to the Commission at least weekly a summary notice of all rule
amendments made effective pursuant to this paragraph during the
preceding week. Such notice must be labeled ``Weekly Notification of
Rule Amendments'' and need not be filed for weeks during which no such
actions have been taken. One copy of each such submission shall be
furnished electronically in a format specified by the Commission.
(e) Notwithstanding paragraph (a) of this section, a registered
security-based swap execution facility may place the following new
rules or rule amendments into effect without certification or notice to
the Commission if the following conditions are met:
(1) The rule governs:
(i) Administrative procedures. The organization and administrative
procedures of a security-based swap execution facility's governing
bodies, such as the Board, officers, and committees, but not any of the
following: Voting requirements, Board or committee composition
requirements or procedures, decision making procedures, use or
disclosure of material non-public information gained through the
performance of official duties, or requirements relating to conflicts
of interest; or
(ii) Administration. The routine, daily administration, direction
and control of employees, requirements relating to gratuity and similar
funds, but not any of the following: Guaranty, reserves, or similar
funds; declaration of holidays; and changes to facilities housing the
market; and
(2) The registered security-based swap execution facility maintains
documentation regarding all changes to rules and posts all such rule
changes on its Web site.
Sec. 242.807 Trading security-based swaps pursuant to certification.
(a) A registered security-based swap execution facility shall
comply with the submission requirements of this section prior to
trading a security-based swap that has not been approved under Sec.
242.808. A submission shall comply with the following conditions:
(1) The registered security-based swap execution facility has filed
its submission electronically in a format specified by the Commission;
(2) The Commission has received the submission by the opening of
business on the business day preceding the day on which the security-
based swap would begin trading;
(3) The Commission has not stayed the submission pursuant to
paragraph (c) of this section; and
(4) The submission includes:
(i) A copy of the terms and conditions of the security-based swap;
(ii) The intended date on which the security-based swap may begin
trading;
(iii) A certification by the registered security-based swap
execution facility that the security-based swap to be traded complies
with the Act and Commission rules and regulations thereunder;
(iv) The documentation relied on to establish the basis for
compliance with the Act and the rules and regulations thereunder,
including section 3D(d) of the Act (15 U.S.C. 78c-4(d)) and the rules
and regulations thereunder;
(v) A written statement verifying that the registered security-
based swap execution facility has undertaken a due diligence review of
the legal conditions, including legal conditions that relate to
contractual and intellectual property rights, that may materially
affect the trading of the security-based swap;
(vi) A certification that the registered security-based swap
execution facility published on its Web site a notice of pending
certification with the Commission and a copy of the submission,
concurrent with the filing of the submission with the Commission.
Information that the registered security-based swap execution facility
seeks to keep confidential may be redacted from the documents published
on its Web site, but must be republished consistent with any
determination made pursuant to the applicable provisions of the Freedom
of Information Act, 5 U.S.C. 552, and Commission rules and regulations
thereunder, 17 CFR 200.83; and
(vii) A request for confidential treatment, if appropriate, as
permitted pursuant to the applicable provisions of the Freedom of
Information Act, 5 U.S.C. 552, and Commission rules and regulations
thereunder, 17 CFR 200.83.
(b) A registered security-based swap execution facility, upon
request of any representative of the Commission, shall provide any
additional evidence, information, or data that demonstrates that the
security-based swap meets, initially or on a continuing basis, all of
the requirements of the Act and Commission rules and regulations
thereunder.
(c) Stay. (1) The Commission may stay the certification of a
security-based swap pursuant to paragraph (a) of this section by
issuing a notification informing the registered security-based swap
execution facility that the Commission is staying the certification on
the grounds that the security-based swap proposed to begin trading
presents novel or complex issues that require additional time to
analyze, the certification is accompanied by an inadequate explanation
or the proposed security-based swap is potentially inconsistent with
the Act or Commission rules or regulations thereunder. The Commission
will have 90 days from the date of the notification to conduct the
review.
(2) Public comment. The Commission shall provide a 30-day comment
period, within the 90-day review period while the stay is in effect as
described in paragraph (c)(1) of this section. The Commission shall
publish a notice of the 30-day comment period on the Commission's Web
site. Comments from the public shall be submitted as specified in that
notice.
[[Page 11059]]
(3) Expiration of a stay. A proposed security-based swap subject to
a stay pursuant to paragraph (c) of this section shall become
effective, pursuant to the certification, at the expiration of the 90-
day review period described in paragraph (c)(1) of this section unless
the Commission withdraws the stay prior to that time or the Commission
notifies the registered security-based swap execution facility during
the 90-day review period that it objects to the proposed certification
on the grounds that it is inconsistent with the Act or Commission rules
or regulations thereunder.
Sec. 242.808 Trading security-based swaps pursuant to Commission
review and approval.
(a) A registered security-based swap execution facility may request
that the Commission approve a security-based swap prior to trading such
security-based swap or, if a security-based swap was initially
submitted under Sec. 242.807, subsequent to the commencement of
trading such security-based swap. A submission requesting approval
shall be filed electronically with the Commission in a format specified
by the Commission and include:
(1) A copy of the terms and conditions of the security-based swap;
(2) The documentation relied on to establish the basis for
compliance with the Act and rules and regulations thereunder, including
section 3D(d) of the Act (15 U.S.C. 78c-4(d)) and the rules and
regulations thereunder;
(3) A written statement verifying that the registered security-
based swap execution facility has undertaken a due diligence review of
the legal conditions, including legal conditions that relate to
contractual and intellectual property rights, that may materially
affect the trading of the security-based swap;
(4) A request for confidential treatment, if appropriate, as
permitted pursuant to the applicable provisions of the Freedom of
Information Act, 5 U.S.C. 552, and Commission rules and regulations
thereunder, 17 CFR 200.83;
(5) A certification that the registered security-based swap
execution facility has published on its Web site a notice of pending
request for approval with the Commission and a copy of the submission,
concurrent with the filing of a submission with the Commission.
Information that the registered security-based swap execution facility
seeks to keep confidential may be redacted from the documents published
on its Web site, but must be republished consistent with any
determination made pursuant to the applicable provisions of the Freedom
of Information Act, 5 U.S.C. 552, and Commission rules or regulations
thereunder, 17 CFR 200.83; and
(b) A registered security-based swap execution facility, upon
request of any representative of the Commission, shall provide
additional evidence, information, or data that demonstrates that the
security-based swap meets, initially or on a continuing basis, all of
the requirements of the Act and Commission rules or regulations
thereunder.
(c) Standard for review and approval. The Commission shall approve
a security-based swap unless the terms and conditions of such security-
based swap are inconsistent with the Act or Commission rules or
regulations thereunder.
(d) Forty-five day review. All security-based swaps submitted for
Commission approval under this section shall be deemed approved by the
Commission 45 days after receipt by the Commission or at the conclusion
of an extended period as provided under paragraph (e) of this section,
unless the registered security-based swap execution facility is
notified otherwise within the applicable period, if:
(1) The submission complies with the requirements of paragraph (a)
of this section; and
(2) The registered security-based swap execution facility making
the submission does not amend the terms and conditions of the security-
based swap or supplement its request for approval during that period,
except as requested by the Commission to correct typographical errors,
renumber, or make other non-substantive revisions, during that period.
Any voluntary, substantive amendment by the registered security-based
swap execution facility shall be treated as a new submission under this
section.
(e) Extension of time. The Commission may extend the 45-day review
period in paragraph (d) of this section for:
(1) An additional 45 days, if the proposed security-based swap
raises novel or complex issues that require additional time for review,
in which case the Commission shall notify the registered security-based
swap execution facility within the initial 45-day review period and
shall briefly describe the nature of the specific issues for which
additional time for review is required; or
(2) Any extended review period to which the registered security-
based swap execution facility agrees in writing.
(f) Notice of non-approval. The Commission at any time during its
review under this section may notify the registered security-based swap
execution facility that it will not, or is unable to, approve the
security-based swap. This notification will briefly specify the nature
of the issues raised and the specific provision of the Act or
Commission rules or regulations thereunder, including the form or
content requirements of paragraph (a) of this section, with which the
security-based swap is inconsistent, appears to be inconsistent, or is
potentially inconsistent.
(g) Effect of non-approval. (1) Notification to a registered
security-based swap execution facility under paragraph (f) of this
section of the Commission's determination not to approve a security-
based swap shall not prejudice the registered security-based swap
execution facility from subsequently submitting a revised version of
the security-based swap for Commission approval or from submitting the
security-based swap as initially proposed pursuant to a supplemented
submission.
(2) Notification to a registered security-based swap execution
facility under paragraph (f) of this section of the Commission's
inability to approve the security-based swap shall be presumptive
evidence that the registered security-based swap execution facility may
not truthfully certify under Sec. 242.807 that the same, or
substantially the same, security-based swap complies with the Act or
Commission rules and regulations thereunder.
Sec. 242.809 Access to security-based swap execution facilities.
(a) A security-based swap execution facility shall permit a person
to become a participant in the security-based swap execution facility
only if such person is registered with the Commission as a security-
based swap dealer, major security-based swap participant, or broker (as
defined in section 3(a)(4) of the Act, 15 U.S.C. 78c(a)(4)), or if such
person is an eligible contract participant (as defined in section
3(a)(65) of the Act, 15 U.S.C. 78c(a)(65)).
(b) A security-based swap execution facility shall permit all
eligible persons that meet the requirements for becoming a participant
in the security-based swap execution facility under paragraph (a) of
this section and the security-based swap execution facility's rules to
become participants of the security-based swap execution facility,
consistent with the requirements for providing impartial access in
section 3D(d)(6) of the Act (15 U.S.C. 78c-4(d)(6)) and Sec.
242.811(b); provided, however, that a security-based
[[Page 11060]]
swap execution facility may choose to not permit any eligible contract
participants that are not registered with the Commission as a security-
based swap dealer, major security-based swap participant, or broker (as
defined in section 3(a)(4) of the Act, 15 U.S.C. 78c(a)(4)) to become
participants in the security-based swap execution facility.
(c) A security-based swap execution facility shall establish rules
setting forth requirements for an eligible person to become a
participant in the security-based swap execution facility consistent
with the security-based swap execution facility's obligations under the
Act and the rules and regulations thereunder. Such rules must require a
participant, at a minimum, to:
(1) Be a member of, or have an arrangement with a member of, a
registered clearing agency to clear trades in the security-based swaps
that are subject to mandatory clearing pursuant to section 3C(a)(1) of
the Act (15 U.S.C. 78c-3(a)(1)) and entered into by the participant on
the security-based swap execution facility;
(2)(i) Meet the minimum financial responsibility and recordkeeping
and reporting requirements imposed by the Commission by virtue of its
registration as a security-based swap dealer, major security-based swap
participant, or broker; or
(ii) In the case of an eligible contract participant that is not
registered with the Commission as a security-based swap dealer, major
security-based swap participant, or broker, meet the recordkeeping and
reporting requirements that the security-based swap execution facility
shall establish pursuant to Sec. 242.813;
(3) Agree to comply with the rules, policies, and procedures of the
security-based swap execution facility; and
(4) Consent to the disciplinary procedures of the security-based
execution facility for violations of the security-based swap execution
facility's rules.
(d)(1) A security-based swap execution facility that permits an
eligible contract participant that is not registered as a security-
based swap dealer, major security-based swap participant or broker to
become a participant in the security-based swap execution facility
pursuant to this section shall establish, document, and maintain a
system of risk management controls and supervisory procedures
reasonably designed to manage the financial, regulatory, and other
risks of this business activity.
(2) The risk management controls and supervisory procedures for
granting access to eligible contract participants that are not
registered as a security-based swap dealer, major security-based swap
participant, or broker as participants of the security-based swap
execution facility shall be reasonably designed to ensure compliance
with all regulatory requirements.
Sec. 242.810 Compliance with core principles.
(a) To be registered, and maintain registration, as a security-
based swap execution facility, a security-based swap execution facility
shall comply with:
(1) The Core Principles described in section 3D of the Act (15
U.S.C. 78c-4) and the rules and regulations thereunder; and
(2) The requirements of this rule and any other requirement that
the Commission may impose by rule or regulation.
(b) A security-based swap execution facility shall establish:
(1) Rules that provide for the equitable allocation of reasonable
dues, fees, and other charges among its participants and any other
users of its system;
(2) Rules and systems that are not designed to permit unfair
discrimination among its participants and any other persons using its
system;
(3) Rules that promote just and equitable principles of trade; and
(4) Rules to provide, in general, a fair procedure for disciplining
participants for violations of the rules of the security-based swap
execution facility.
(c) A security-based swap execution facility shall not use for non-
regulatory purposes any confidential information it collects or
receives, from or on behalf of any person, in connection with the
security-based swap execution facility's regulatory obligations.
Sec. 242.811 Compliance with rules.
(a) A security-based swap execution facility shall:
(1) Establish and enforce compliance with any rule established by
such security-based swap execution facility, including:
(i) The terms and conditions of the security-based swaps traded or
processed on or through the security-based swap execution facility; and
(ii) Any limitation on access to the security-based swap execution
facility;
(2) Establish and enforce trading, trade processing, and
participation rules that will deter abuses and have the capacity to
detect, investigate, and enforce those rules, including means:
(i) To provide market participants with impartial access to the
market; and
(ii) To capture information that may be used in establishing
whether rule violations have occurred; and
(3) Establish rules governing the operation of the security-based
swap execution facility, including rules specifying trading procedures
to be used in entering and executing orders traded or posted on the
security-based swap execution facility, including block trades.
(b) A security-based swap execution facility shall:
(1) Establish fair, objective, and not unreasonably discriminatory
standards for granting impartial access to trading on the security-
based swap execution facility, which standards shall include a
requirement that each participant of the security-based swap execution
facility submit to the oversight (including the disciplinary procedures
of paragraph (g) of this section) of the security-based swap execution
facility, with respect to the participant's trading on the facility, as
a condition of becoming a participant in such security-based swap
execution facility;
(2) Not unreasonably prohibit or limit any person in respect to
access to the services offered by such security-based swap execution
facility by applying the standards established under paragraph (b)(1)
of this section in an unfair or unreasonably discriminatory manner;
(3) Make and keep records of:
(i) All grants of access, including, for all participants, the
basis for granting such access; and
(ii) All denials or limitations of access for each applicant or
participant (as applicable), and the reasons for denying or limiting
access;
(4) Report the information required regarding grants, denials, and
limitations of access on Form SB SEF (referenced in Sec. 249.1700 of
this chapter) and in the annual compliance report of the Chief
Compliance Officer pursuant to Sec. 242.823(c); and
(5) Establish a fair process for the review of any prohibition or
limitation on access with respect to a participant or any refusal to
grant access with respect to an applicant.
(c) A security-based swap execution facility shall establish and
enforce compliance with rules concerning the terms and conditions of
the security-based swaps traded on the security-based swap execution
facility.
(1) A security-based swap execution facility shall establish a swap
review committee to determine:
(i) The security-based swaps that shall trade on the security-based
swap execution facility; and
(ii) The security-based swaps that shall no longer trade on the
security-based swap execution facility.
(2) The composition of the swap review committee shall provide for
the
[[Page 11061]]
fair representation of participants of the security-based swap
execution facility and other market participants, such that each class
of participant and other market participants shall be given the right
to participate in such swap review committee and that no single class
of participant or category of market participant shall predominate. The
rules of the security-based swap execution facility shall stipulate the
method by which such representation shall be chosen by the Board.
(3) The security-based swap execution facility shall establish
criteria that the swap review committee shall consider in determining
which security-based swaps shall trade on the security-based swap
execution facility.
(4) The swap review committee shall periodically review, on at
least a quarterly basis, each security-based swap trading on the
security-based swap execution facility to determine whether the trading
characteristics of each security-based swap justify a change to the
trading platform for each such security-based swap. In addition to the
factors set forth in paragraph (c)(3) of this section in making such a
determination, the swap review committee shall consider whether:
(i) The liquidity in each security-based swap is at an appropriate
level for the security-based swap's trading platform on which it
trades; and
(ii) Such security-based swap would be more suited for trading on a
different type of platform, including a platform that provides for
increased price transparency for participants entering orders, requests
for quotations, responses, quotations, or other trading interest. The
first review shall not be earlier than 120 days after the initiation of
trading for a given security-based swap.
(5) The swap review committee shall report decisions on each
security-based swap promptly to the Chief Compliance Officer and
annually to the regulatory oversight committee.
(d) A security-based swap execution facility shall establish and
enforce rules governing the procedures for trading on the security-
based swap execution facility, including, but not limited to, rules
concerning:
(1) Doing business on the security-based swap execution facility;
(2) The types of orders, requests for quotations, responses,
quotations, or other trading interest that will be available on the
security-based swap execution facility;
(3) The manner in which trading interest, including orders,
requests for quotations, responses, or quotations will be handled on
the security-based swap execution facility. The rules of a security-
based swap execution facility shall provide for fair treatment of all
trading interest;
(4) The manner in which price transparency for participants
entering orders, requests for quotations, responses, quotations, or
other trading interest into the system will be promoted;
(5) The manner in which trading interest, including orders,
requests for quotations, responses, quotations, and transaction data
will be disseminated, whether to participants of the security-based
swap execution facility or otherwise, and whether for a fee or
otherwise;
(6) Prohibited trading practices;
(7) The prevention of the entry of orders, requests for quotations,
responses, quotations, or other trading interest that may result in a
trade that is clearly erroneous with respect to the terms of the trade;
the fair and non-discriminatory manner of handling any trade that is
clearly erroneous; and the resolution of any disputes concerning a
clearly erroneous trade;
(8) Trading halts in any security-based swap, which rules shall
include procedures for halting trading in a security-based swap when
trading has been halted or suspended in the underlying security or
securities pursuant to the rules or an order of a regulatory authority
with authority over the underlying security or securities;
(9) The manner in which block trades will be handled, if different
from the handling of non-block trades; and
(10) Any other rules concerning trading on the security-based swap
execution facility.
(e) A security-based swap execution facility that operates a
request-for-quote platform shall create and disseminate through the
security-based swap execution facility a composite indicative quote for
security-based swaps traded on or through such system, which shall be
made available to all participants. The composite indicative quote
shall include both composite indicative bids and composite indicative
offers.
(f) A security-based swap execution facility shall establish and
enforce rules concerning:
(1) The reporting of trades executed on the security-based swap
execution facility to a clearing agency, if the transaction is subject
to clearing; and
(2) The procedures for the processing of transactions in security-
based swaps that occur on or though the security-based swap execution
facility, including, but not limited to, procedures to resolve any
disputes concerning the execution of a trade.
(g) A security-based swap execution facility shall establish rules
and procedures concerning the disciplining of participants, including,
but not limited to, rules:
(1) Authorizing its staff to recommend and take disciplinary action
for violations of the rules of the security-based swap execution
facility;
(2) Specifying the sanctions that may be imposed upon participants
for violations of the rules of the security-based swap execution
facility such that each sanction is commensurate with the corresponding
violation; and
(3) Establishing fair and non-arbitrary procedures for any
disciplinary process and appeal thereof.
(h) A security-based swap execution facility shall:
(1) Make and keep records of all disciplinary proceedings,
sanctions imposed, and appeals thereof; and
(2) Disclose all disciplinary actions taken annually on an
amendment to Form SB SEF and in the security-based swap execution
facility's annual compliance report of the Chief Compliance Officer
required pursuant to Sec. 242.823(c). Such report shall include
information summarizing any disciplinary action taken and the reasons
for such action.
(i) A security-based swap execution facility shall establish rules
and procedures to assure that information to be used to determine
whether rule violations have occurred is captured and retained in a
timely manner.
(j) A security-based swap execution facility shall:
(1) Have the capacity to capture information that may be used in
establishing whether rule violations have occurred, including through
the use of automated surveillance systems as set forth in Sec.
242.813(b);
(2) Maintain appropriate resources to fulfill its obligations under
this section; and
(3) Investigate possible rule violations.
Sec. 242.812 Security-based swaps not readily susceptible to
manipulation.
(a) A security-based swap execution facility shall permit trading
only in security-based swaps that are not readily susceptible to
manipulation.
(b) Prior to permitting the trading of any security-based swap, a
security-based swap execution facility's swap review committee shall
have determined, after taking into account all of the terms and
conditions of the security-based swap and the markets for the security-
based swap and any underlying security or securities, that such
security-based swap is not readily susceptible to manipulation.
[[Page 11062]]
(c) Periodic Review. The rules of a security-based swap execution
facility shall require that, after commencement of trading of a
security-based swap, the swap review committee shall periodically
review the trading in the security-based swap. If the swap review
committee cannot determine, after taking into account all of the terms
and conditions of the security-based swap, the markets for the
security-based swap and any underlying security or securities, and the
trading in the security-based swap, that such security-based swap is
not readily susceptible to manipulation, the security-based swap
execution facility shall no longer permit the trading of such security-
based swap.
Sec. 242.813 Monitoring of trading and trade processing.
(a) A security-based swap execution facility shall:
(1) Establish and enforce rules, terms and conditions defining, or
specifications detailing:
(i) Trading procedures to be used in entering and executing orders
traded on or through the facilities of the security-based swap
execution facility; and
(ii) Procedures for trade processing of security-based swaps on or
through the facilities of the security-based swap execution facility;
and
(2) Monitor trading in security-based swaps to prevent
manipulation, price distortion, and disruptions of the delivery or cash
settlement practices and procedures, including methods for conducting
real-time monitoring of trading and comprehensive and accurate trade
reconstructions.
(b) A security-based swap execution facility shall have the
capacity and appropriate resources to electronically monitor trading in
security-based swaps on its market by establishing an automated
surveillance system, including through real-time monitoring of trading
and use of automated alerts, that is designed to:
(1) Detect and deter any fraudulent or manipulative acts or
practices, including insider trading or other unlawful conduct or any
violation of the rules of the security-based swap execution facility
that has occurred or is occurring;
(2) Detect and deter market distortions or disruptions of trading
that may impact the entry and execution of trading interests or the
processing of trading interests on or through the security-based swap
execution facility;
(3) Conduct real-time monitoring of trading to provide for
comprehensive and accurate trade reconstruction; and
(4) Collect and assess data to allow the security-based swap
execution facility to respond promptly to market abuses or disruptions.
(c) A security-based swap execution facility shall establish and
enforce rules that require any participant that enters any order,
request for quotation, response, quotation, or other trading interest,
or executes any transaction on the security-based swap execution
facility, to:
(1) Maintain books and records of any such order, request for
quotation, response, quotation or other trading interest, or
transaction, and of any position in any security-based swap that is the
result of any such order, request for quotation, response, quotation,
other trading interest, or transaction; and
(2) Provide prompt access to such books and records to the
security-based swap execution facility and to the Commission.
(d) A security-based swap execution facility shall establish and
maintain procedures to investigate possible rule violations, to prepare
reports concerning the findings and recommendations of any such
investigations, and to take corrective action, as necessary.
Sec. 242.814 Ability to obtain information.
(a) A security-based swap execution facility shall establish and
enforce rules requiring its participants to:
(1) Furnish to the security-based swap execution facility, upon
request, and in the form and manner prescribed by the security-based
swap execution facility, any information necessary to permit the
security-based swap execution facility to perform its responsibilities
under this section, including, without limitation, surveillance,
investigations, examinations and discipline of participants; such
information may include, without limitation, financial information,
books, accounts, records, files, memoranda, correspondence, and any
other information pertaining to orders, requests for quotations,
responses, quotations, or other trading interest entered and
transactions executed on or through the security-based swap execution
facility;
(2) Cooperate with the security-based swap execution facility and
allow access by the security-based swap execution facility, at such
reasonable times as the security-based swap execution facility may
request, to examine the books and records of the participant or to
obtain or verify information related to orders, requests for quotation,
responses, quotations, or other trading interest entered and
transactions executed on or through its facilities; and
(3) Cooperate with any representative of the Commission and allow
access by any representative of the Commission, at such reasonable
times as any representative of the Commission may request, to examine
the books and records of the participant or to obtain or verify other
information related to orders, requests for quotation, responses,
quotations, or other trading interest entered and transactions executed
on or through its facilities.
(b) A security-based swap execution facility shall:
(1) Cooperate with any representative of the Commission and allow
access by any representative of the Commission, at such reasonable
times as any representative of the Commission may request, to:
(i) Examine the books and records required to be kept by the
security-based swap execution facility pursuant to Sec. 242.818; and
(ii) Obtain or verify other information related to orders, requests
for quotations, responses, quotations, or other trading interest
entered and transactions executed on or through its facilities;
(2) Upon request of any representative of the Commission, promptly
furnish to the possession of such representative copies of any
documents, in such form and manner acceptable to such representative,
that the security-based swap execution facility possesses or has access
to pursuant to paragraph (a) of this section;
(3) Have the capacity to carry out such international information-
sharing agreements as the Commission may require; and
(4) Certify at the time of registration on Form SB SEF, and
annually thereafter as part of the annual compliance report described
in Sec. 242.823, that the security-based swap execution facility has
the capacity to fulfill its obligations under any international
information-sharing agreements to which it is a party as of the date of
such certification.
Sec. 242.815 Financial integrity of transactions.
(a) A security-based swap execution facility shall establish and
enforce rules and procedures for ensuring the financial integrity of
security-based swaps entered on or through the facilities of such
security-based swap execution facility, including the clearance and
settlement of security-based swaps pursuant to section 3C(a)(1) of the
Act (15 U.S.C. 78c-3(a)(1)).
(b) Notwithstanding the requirements of Sec. 242.810(b)(2), the
rules of a security-based swap execution facility relating to the
trading on the security-based swap execution facility, of
[[Page 11063]]
security-based swaps that will not be cleared at a registered clearing
agency may permit a participant to take into account counterparty
credit risk.
Sec. 242.816 Emergency authority.
(a) A security-based swap execution facility shall establish rules
and procedures to provide for the exercise of emergency authority, in
consultation or cooperation with the Commission, as necessary or
appropriate, which rules and procedures shall include the items set
forth in paragraphs (b) and (c) of this section.
(b) A security-based swap execution facility shall establish rules
and procedures that specify:
(1) The person or persons authorized by the security-based swap
execution facility to declare an emergency;
(2) How the security-based swap execution facility will notify the
Commission of its decision to exercise its emergency authority;
(3) How the security-based swap execution facility will notify the
public of its decision to exercise its emergency authority;
(4) The processes for decision-making by the security-based swap
execution facility personnel with respect to the exercise of emergency
authority, including alternate lines of communication and guidelines to
avoid conflicts of interest in the exercise of such authority; and
(5) The processes for determining that an emergency no longer
exists and notifying the Commission and the public of such decision.
(c) A security-based swap execution facility shall have rules
permitting the security-based swap execution facility to immediately
take any or all of the following actions during an emergency:
(1) Impose or modify trading limits, price limits, position limits,
or other market restrictions, including suspending or curtailing
trading on its market in any security-based swap or class of security-
based swaps;
(2) Extend or shorten trading hours;
(3) Coordinate trading halts with markets trading a security or
securities underlying any security-based swap;
(4) Coordinate with a registered clearing agency to liquidate or
transfer positions in any open security-based swap of one of its
participants; and
(5) Any action, if so directed by the Commission.
(d)(1) A security-based swap execution facility shall promptly
notify the Commission of the exercise of its emergency authority,
followed by submission of written documentation within two weeks
following cessation of the emergency explaining the basis for declaring
an emergency, how conflicts of interest were minimized, and the extent
to which the security-based swap execution facility considered the
effect of its emergency action on the markets for the security-based
swap and any security or securities underlying the security-based swap;
(2) If a security-based swap execution facility implements any rule
or rule amendment in the exercise of its emergency authority, it shall
file such rule or rule amendment with the Commission pursuant to Sec.
242.806 prior to the implementation of such rule or rule amendment or,
if not practicable, within 24 hours after implementation of such rule
or rule amendment.
Sec. 242.817 Timely publication of trading information.
(a) A security-based swap execution facility shall:
(1) Have the capacity to electronically capture, transmit, and
disseminate information on price, trading volume, and other trading
data on all security-based swaps executed on or through the security-
based swap execution facility; and
(2) Make public timely information on price, trading volume, and
other trading data on security-based swaps to the extent and in the
manner prescribed by the Commission.
(b) If any security-based swap execution facility makes available
information regarding a security-based swap transaction to any party
other than a counterparty to the transaction, then the security-based
swap execution facility must make that information available to all
participants on terms and conditions that are fair and reasonable and
not unfairly discriminatory; provided however, that nothing in this
paragraph shall prohibit a security-based swap execution facility from
acting as the agent of a reporting party, as defined in Sec. 242.900 (
), for purposes of reporting required information directly to a
registered security-based swap data repository.
(c) A security-based swap execution facility shall not make any
information regarding a security-based swap transaction publicly
available prior to the time a security-based swap data repository is
permitted to publicly disseminate such information under Sec. 242.902.
Sec. 242.818 Recordkeeping and reporting.
(a) A security-based swap execution facility shall keep and
preserve at least one copy of all documents, including all
correspondence, memoranda, papers, books, notices, accounts, and other
such records (including the audit trail records required pursuant to
the provisions of paragraph (c) of this section) as shall be made or
received by it in the conduct of its business.
(b) A security-based swap execution facility shall keep and
preserve all such documents and other records for a period of not less
than five years, the first two years in an easily accessible place.
(c) A security-based swap execution facility shall establish and
maintain accurate, time-sequenced records of all orders, requests for
quotations, responses, quotations, other trading interest, and
transactions that are received by, originated on, or executed on the
security-based swap execution facility. These records shall include the
key terms of each order, request for quotation, response, quotation,
other trading interest, or transaction and shall document the complete
life of each order, request for quotation, response, quotation, other
trading interest, or transaction on the security-based swap execution
facility, including any modification, cancellation, execution, or any
other action taken with respect to such order, request for quotation,
response, quotation, other trading interest, or transaction.
(d) A security-based swap execution facility shall establish,
maintain, and enforce written policies and procedures to verify the
accuracy of the transaction data that it collects and reports.
(e) A security-based swap execution facility shall report to the
Commission, in a form and manner acceptable to the Commission, such
information as the Commission may, from time to time, determine to be
necessary to perform the duties of the Commission under the Act.
(f) A security-based swap execution facility shall, upon request of
any representative of the Commission, promptly furnish to the
possession of such representative copies of any documents, in such form
and manner acceptable to such representative, required to be kept and
preserved by it pursuant to paragraphs (a) and (b) of this section.
Sec. 242.819 Antitrust considerations.
Unless necessary or appropriate to achieve compliance with the Act
and the rules and regulations thereunder, a security-based swap
execution facility shall not:
(a) Adopt any rule or take any action that results in any
unreasonable restraint of trade; or
(b) Impose any material anticompetitive burden on trading or
clearing.
[[Page 11064]]
Sec. 242.820 Conflicts of interest.
For additional rules relating to the mitigation of conflicts of
interest of security-based swap execution facilities, see Sec.
242.702.
(a) The rules of a security-based swap execution facility shall
assure a fair representation of its participants in the selection of
its directors and administration of its affairs, but no less than 20
percent of the total number of directors of the security-based swap
execution facility must be selected by the participants; provided,
however, that the security-based swap execution facility shall preclude
any participant, or any group or class of participants, either alone or
together with its related persons, that beneficially owns, directly or
indirectly, an interest in the security-based swap execution facility
from dominating or exercising disproportionate influence in the
selection of such directors if the participant may thereby dominate or
exercise disproportionate influence in the selection or appointment of
the entire Board.
(b) At least one director on the Board shall be representative of
investors who are not security-based swap dealers or major security-
based swap participants, and such director must not be a person
associated with a participant.
(c) The rules of a security-based swap execution facility must
establish a fair process for participants to nominate an alternative
candidate or candidates to the Board by petition and shall specify the
percentage of the participants that is necessary to put forth such
alternative candidate or candidates, which percentage shall not be
unreasonable.
Sec. 242.821 Financial resources.
(a) A security-based swap execution facility shall have adequate
financial, operational, and managerial resources to discharge each
responsibility of the security-based swap execution facility, as
determined by the Commission.
(b) The financial resources of a security-based swap execution
facility shall be considered to be adequate if, when using reasonable
estimates and assumptions and not overestimating resources or
underestimating expenses, liabilities, and financial exposure, the
value of the financial resources:
(1) Enables the security-based swap execution facility to meet its
financial obligations to participants, notwithstanding a default by the
participant creating the largest financial exposure for the security-
based swap execution facility in extreme but plausible market
conditions; and
(2) Exceeds the total amount that would enable the security-based
swap execution facility to cover its operating costs for a one-year
period, as calculated on a rolling basis.
Sec. 242.822 System safeguards.
(a) Requirements for security-based swap execution facilities. A
security-based swap execution facility, with respect to those systems
that support or are integrally related to the performance of its
activities, shall:
(1) Establish, maintain, and enforce written policies and
procedures reasonably designed to ensure that its systems provide
adequate levels of capacity, resiliency, and security. These policies
and procedures shall, at a minimum, require the security-based swap
execution facility to:
(i) Establish reasonable current and future capacity estimates,
including quantifying in appropriate units of measure the limits of the
security-based swap execution facility's capacity to receive (or
collect), process, store, or display (or disseminate for display or
other use) the data elements included within each function, and
identifying the factors (mechanical, electronic, or other) that account
for the current limitations;
(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;
(v) Establish adequate contingency and disaster recovery plans that
shall include plans to resume trading of security-based swaps by the
security-based swap execution facility no later than the next business
day following a wide-scale disruption. In developing such plans, the
security-based swap execution facility shall take into account:
(A) The extent of alternative trading venues for the security-based
swaps traded by the security-based swap execution facility, including
the number of security-based swaps traded on the security-based swap
execution facility, the market share of the security-based swap
execution facility, and the number of participants on the security-
based swap execution facility; and
(B) The necessity of geographic diversity and diversity of
infrastructure between the security-based swap execution facility's
primary site and any back-up sites.
(2) On an annual basis, submit an objective review to the
Commission within 30 calendar days of completion. Where the objective
review is performed by an internal department, an objective, external
firm shall assess the internal department's objectivity, competency,
and work performance with respect to the review performed by the
internal department. The external firm must issue a report of the
objective review, which the security-based swap execution facility must
submit to the Commission on an annual basis, within 30 calendar days of
completion of the review;
(3) Promptly notify the Commission in writing of material systems
outages and any remedial measures that have been implemented or are
contemplated. Prompt notification includes the following:
(i) Immediately notify the Commission when a material systems
outage is detected;
(ii) Immediately notify the Commission when remedial measures are
selected to address the material systems outage;
(iii) Immediately notify the Commission when the material systems
outage is addressed; and
(iv) Submit to the Commission within five business days of when the
material systems outage occurred a more detailed written description
and analysis of the outage and any remedial measures that have been
implemented or are contemplated.
(4) Notify the Commission in writing at least 30 calendar days
before implementation of any planned material systems changes.
(b) Electronic filing. A security-based swap execution facility
shall submit a notification, review, or description and analysis that
is required to be submitted to the Commission pursuant to this section
in an appropriate electronic format. Any such notification, review, or
description and analysis shall be submitted to the Division of Trading
and Markets, Office of Market Operations, at the principal office of
the Commission in Washington, DC. Any such notification, review, or
description and analysis shall be considered submitted when an
electronic version is received at the Division of Trading and Markets
at the principal office of the Commission in Washington, DC.
(c) Confidential treatment. A person who submits a notification,
review, or description and analysis pursuant to this section for which
such person seeks confidential treatment shall clearly mark each page
or segregable portion of
[[Page 11065]]
each page with the words ``Confidential Treatment Requested.'' A
notification, review, or description and analysis submitted pursuant to
this section will be accorded confidential treatment to the extent
permitted by law.
Sec. 242.823 Designation of Chief Compliance Officer of security-
based swap execution facility.
(a) In general. Each security-based swap execution facility shall
identify on Form SB SEF (referenced in Sec. 249.1700 of this chapter)
a person who has been designated by the Board to serve as a Chief
Compliance Officer of the security-based swap execution facility. The
compensation and removal of the Chief Compliance Officer shall require
the approval of a majority of the Board.
(b) Duties. Each Chief Compliance Officer designated by a
registered security-based swap execution facility shall:
(1) Report directly to the Board or the senior officer of the
security-based swap execution facility;
(2) Review the compliance of the security-based swap execution
facility with the Core Principles described in section 3D of the Act
(15 U.S.C. 78c-4) and the rules and regulations thereunder;
(3) In consultation with the Board or the senior officer of the
security-based swap execution facility, resolve any conflicts of
interest that may arise;
(4) Be responsible for establishing and administering each policy
and procedure that is required to be established pursuant to section 3D
of the Act (15 U.S.C. 78c-4) and the rules and regulations thereunder;
(5) Monitor compliance with the Act and the rules and regulations
thereunder relating to its business as a security-based swap execution
facility, including each rule prescribed by the Commission under
section 3D of the Act (15 U.S.C. 78c-4);
(6) Establish procedures for the remediation of noncompliance
issues identified by the Chief Compliance Officer through any:
(i) Compliance office review;
(ii) Look-back;
(iii) Internal or external audit finding;
(iv) Self-reported error; or
(v) Validated complaint; and
(7) Establish and follow appropriate procedures for the handling,
management response, remediation, retesting, and closing of
noncompliance issues.
(c) Annual Reports. (1) In general. The Chief Compliance Officer
shall annually prepare and sign a report that contains a description of
the compliance of the registered security-based swap execution facility
with respect to the Act and the rules and regulations thereunder and
each policy and procedure of the security-based swap execution facility
(including the code of ethics and conflicts of interest policies of the
security-based swap execution facility). Each compliance report shall
also contain, at a minimum, a description of:
(i) The security-based swap execution facility's enforcement of its
policies and procedures;
(ii) Information on all investigations, inspections, examinations,
and disciplinary cases opened, closed, and pending during the reporting
period;
(iii) All grants of access (including, for all participants, the
reasons for granting such access) and all denials or limitations of
access (including, for each applicant, the reasons for denying or
limiting access), consistent with Sec. 242.811(b)(3);
(iv) Any material changes to the policies and procedures since the
date of the preceding compliance report;
(v) Any recommendation for material changes to the policies and
procedures as a result of the annual review, the rationale for such
recommendation, and whether such policies and procedures were or will
be modified by the security-based swap execution facility to
incorporate such recommendation;
(vi) The results of the security-based swap execution facility's
surveillance program, including information on the number of reports
and alerts generated, and the reports and alerts that were referred for
further investigation or for an enforcement proceeding;
(vii) Any complaints received regarding the security-based swap
execution facility's surveillance program; and
(viii) Any material compliance matters identified since the date of
the preceding compliance report.
(2) Requirements. A financial report of the security-based swap
execution facility shall be filed with the Commission as described in
paragraph (e) of this section and shall accompany a compliance report
as described in paragraph (c)(1) of this section. The compliance report
shall include a certification that, under penalty of law, the
compliance report is accurate and complete. The compliance report shall
also be filed in a tagged data format in accordance with the
instructions contained in the EDGAR Filer Manual, as described in Sec.
232.301 of this chapter.
(d) The Chief Compliance Officer shall submit the annual compliance
report to the Board for its review prior to the submission of the
report to the Commission.
(e) Financial report. With each annual compliance report, the Chief
Compliance Officer shall also prepare and submit to the Commission a
financial report of the security-based swap execution facility. Each
financial report filed with a compliance report shall:
(1) For the financial statements relating to the security-based
swap execution facility:
(i) Be a complete set of financial statements of the security-based
swap execution facility that are prepared in accordance with U.S.
generally accepted accounting principles for the two most recent fiscal
years of the security-based swap execution facility;
(ii) Be audited in accordance with standards of the Public Company
Accounting Oversight Board by a registered public accounting firm that
is qualified and independent in accordance with Sec. 210.2-01 of this
chapter;
(iii) Include a report of the registered public accounting firm
that complies with paragraphs (a) through (d) of Sec. 210.2-02 of this
chapter;
(iv) Include the accounting policies and practices of the security-
based swap execution facility; and
(v) If the security-based swap execution facility's financial
statements contain consolidated information of the security-based swap
execution facility's subsidiaries, then the security-based swap
execution facility's financial statement must provide condensed
financial information, in a financial statement footnote, as to the
financial position, changes in financial position, and results of
operations of the security-based swap execution facility, as of the
same dates and for the same periods for which audited consolidated
financial statements are required. Such financial information need not
be presented in greater detail than is required for condensed
statements by Sec. 210.10-01(a)(2), (3), and (4) of this chapter.
Detailed footnote disclosure that would normally be included with
complete financial statements may be omitted with the exception of
disclosures regarding material contingencies, long-term obligations,
and guarantees. Descriptions of significant provisions of the security-
based swap execution facility's long-term obligations, mandatory
dividend or redemption requirements of redeemable stocks, and
guarantees of the security-based swap execution facility shall be
provided along with a five-year schedule of maturities of debt. If the
material contingencies, long-term obligations, redeemable stock
requirements, and guarantees of the security-based swap
[[Page 11066]]
execution facility have been separately disclosed in the consolidated
statements, then they need not be repeated in this schedule.
(2) For the financial statements of a security-based swap execution
facility's affiliated entities (any subsidiary in which the applicant
has, directly or indirectly, a 25% interest and for any entity that
has, directly or indirectly, a 25% interest in the applicant):
(i) Be a complete set of unconsolidated financial statements (in
English) for the latest two fiscal years; and
(ii) Include such footnotes and other disclosures as are necessary
to avoid rendering the financial statements misleading.
(3) All financial statements must be provided in eXtensible
Business Reporting Language consistent with Sec. 232.405 (a)(1),
(a)(3), (b), (c), (d), and (e) of this chapter; and
(4) If the financial report required by Sec. 242.823(e) is
submitted to the Commission on Form SB SEF (referenced in Sec.
249.1700 of this chapter) pursuant to Sec. 242.802(f) at the same time
that the Chief Compliance Officer submits the annual compliance report
required by Sec. 242.823(c) and the Chief Compliance Officer
represents in the annual compliance report that the financial report
has been submitted on Form SB SEF pursuant to Sec. 242.802(f), the
Chief Compliance Officer need not also submit the financial report as
part of the annual compliance report.
(f) Reports filed pursuant to paragraphs (c) and (e) of this
section shall be filed within 60 days after the end of the fiscal year
covered by such reports.
PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934
7. The general authority citation for Part 249 continues to read in
part as follows:
Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; and 18
U.S.C. 1350 unless otherwise noted.
Subpart O--[Removed and reserved]
8. Remove and reserve Subpart O to Part 249.
9. Add Subpart R (consisting of Sec. 249.1700) to Part 249 to read
as follows:
Subpart R--Forms for Security-Based Swap Execution Facilities
Sec. 249.1700 Form SB SEF, form for application for registration as a
security-based swap execution facility and for amendments to the
registration form of a registered security-based swap execution
facility.
Note: Form SB SEF does not appear in the Code of Federal
Regulations.
FORM SB SEF
APPLICATION FOR, AND AMENDMENTS TO APPLICATION FOR, REGISTRATION AS A
SECURITY-BASED SWAP EXECUTION FACILITY
FORM SB SEF INSTRUCTIONS
A. GENERAL INSTRUCTIONS
1. Form SB SEF (referenced in 17 CFR 249.1700) is the form for the
application for, and amendment to application for, registration as a
security-based swap execution facility (``SB SEF'') pursuant to Section
3D of the Securities Exchange Act of 1934 (15 U.S.C. 78c-4) (``Exchange
Act'') and the rules of Regulation SB SEF thereunder.
2. UPDATING--An applicant or registered SB SEF must file amendments to
its Form SB SEF in accordance with 17 CFR 242.802 and 804, as
applicable.
3. CONTACT EMPLOYEE--The individual listed on the Execution Page (Page
1) of this Form SB SEF as the contact employee must be authorized to
receive all contact information, communications, and mailings, and is
responsible for disseminating such information within the applicant's
organization.
4. FORMAT
Attach an Execution Page (Page 1) with original manual
signatures.
Please type all information.
Use only the current version of this Form SB SEF or a
reproduction.
5. If the information called for by any Exhibit is available in printed
form, the printed material may be filed, provided it does not exceed
8\1/2\ x 11 inches in size.
6. If any Exhibit required is inapplicable, a statement to that effect
shall be furnished in lieu of such Exhibit.
7. A SB SEF that is filing this Form SB SEF as an application may not
satisfy the requirements to provide certain information by means of an
Internet web page. However, all materials must be filed with the
Securities and Exchange Commission (``SEC'' or ``Commission'')
electronically, unless the Commission requests that the materials be
filed in paper.
8. WHERE TO FILE AND NUMBER OF COPIES--Submit one original and two
copies of this Form SB SEF to: SEC, Division of Trading and Markets,
Office of Market Supervision, 100 F Street, N.E., Washington, DC 20549-
7010.
9. PAPERWORK REDUCTION ACT DISCLOSURE
This Form SB SEF requires an applicant seeking to register
as a SB SEF to provide the Commission with certain information
regarding the operation of the SB SEF.
Sec. Sec. 242.802 and 242.804 also require registered SB
SEFs to update certain information on this Form SB SEF on a periodic
basis and the entire Form SB SEF annually.
An agency may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it displays
a currently valid control number. Sections 3(a)(77), 3C(h), 3D(a),
3D(d), 3D(e), 3D(f) and 23(a) of the Exchange Act authorize the
Commission to collect information on this Form SB SEF from SB SEFs. See
15 U.S.C. Sec. Sec. 78c(a)(77), 78e, 78c-4(h), 78c-4(a), 78c-4(d),
78c-4(e), 78c-4(f) and 78w(a).
Any member of the public may direct to the Commission any
comments concerning the accuracy of the burden estimate on the facing
page of this Form SB SEF and any suggestions for reducing this burden.
This Form SB SEF is designed to enable the Commission to
determine whether a SB SEF applying for registration is in compliance
with the provisions of Section 3D of the Exchange Act (15 U.S.C. 78c-4)
and the rules under Regulation SB SEF thereunder.
It is estimated that a SB SEF will spend approximately 694
hours and $523,000 completing the initial application on Form SB SEF
pursuant to 17 CFR 242.801. It is estimated that each SB SEF controlled
by another person and each non-resident SB SEF will spend approximately
an additional 1 hour and $900 to complete Exhibit P to the initial
application on this Form SB SEF. It is also estimated that each SB SEF
will spend approximately 25 hours to prepare each periodic amendment to
its Form SB SEF pursuant to 17 CFR 242.802(a) and (b) and approximately
50 hours to prepare each annual update to its Form SB
[[Page 11067]]
SEF pursuant to 17 CFR 242.802(f). It is estimated that each SB SEF
controlled by another person and each non-resident SB SEF will spend
approximately 1 hour and $900 to prepare each amendment to its Form SB
SEF pursuant to 17 CFR 242.802(c) and (d), respectively.
It is mandatory that an applicant seeking to register as a
SB SEF file this Form SB SEF with the Commission. It is also mandatory
that registered SB SEFs file amendments to this Form SB SEF under 17
CFR 242.802 and 804.
No assurance of confidentiality is given by the Commission
with respect to the responses made in this Form SB SEF. The public has
access to the information contained in this Form SB SEF.
This collection of information has been reviewed by the
Office of Management and Budget (``OMB'') in accordance with the
clearance requirements of 44 U.S.C. Sec. 3507. The applicable Privacy
Act system of records is SEC-2 and the routine uses of the records are
set forth at 40 FR 39255 (August 27, 1975) and 41 FR 5318 (February 5,
1976).
FORM SB SEF INSTRUCTIONS
B. EXPLANATION OF TERMS
APPLICANT--The entity or organization filing an application for
registration as a security-based swap execution facility, or amending
any such application, on this Form SB SEF.
AFFILIATE--Shall have the same meaning as set forth in 17 CFR 242.800.
BOARD--Shall have the same meaning as set forth in 17 CFR 242.800.
CONTROL--Shall have the same meaning as set forth in 17 CFR 242.800.
EXCHANGE ACT--The Securities Exchange Act of 1934 (15 U.S.C. 78a et
seq.).
NON-RESIDENT PERSON--Shall have the same meaning as set forth in 17 CFR
242.800.
PARTICIPANT--Shall have the same meaning as set forth in 17 CFR
242.800.
PERSON--Shall have the same meaning as set forth in section 3(a)(9) of
the Exchange Act (15 U.S.C. 78c(a)(9)).
PERSON ASSOCIATED WITH A PARTICIPANT--Shall have the same meaning as
set forth in 17 CFR 242.800.
RELATED PERSON--Shall have the same meaning as set forth in 17 CFR
242.800.
SECURITY-BASED SWAP--Shall have the same meaning as set forth in
section 3(a)(68) of the Exchange Act (15 U.S.C. 78c(a)(68)) or any
rules or regulations thereunder.
SECURITY-BASED SWAP DEALER--Shall have the same meaning as set forth in
section 3(a)(71) of the Exchange Act (15 U.S.C. 78c(a)(71)) or any
rules or regulations thereunder.
SECURITY-BASED SWAP EXECUTION FACILITY--Shall have the same meaning as
set forth in section 3(a)(77) of the Exchange Act (15 U.S.C.
78c(a)(77)) or any rules or regulations thereunder.
REGISTERED SECURITY-BASED SWAP EXECUTION FACILITY--Shall mean any
security-based swap execution facility registered pursuant to Section
3D(a) of the Exchange Act (15 U.S.C. 78c-4(a)) and the rules of
Regulation SB SEF thereunder.
FORM SB SEF
Execution Page
UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
APPLICATION FOR, AND AMENDMENTS TO APPLICATION FOR, REGISTRATION AS A
SECURITY-BASED SWAP EXECUTION FACILITY
WARNING: Failure to keep this form current and to file accurate
supplementary information on a timely basis, or the failure to keep
accurate books and records or otherwise to comply with the provisions
of law applying to the conduct of the applicant, would violate the
federal securities laws and may result in disciplinary, administrative,
or criminal action.
INTENTIONAL MISSTATEMENTS OR OMISSIONS OF FACTS MAY CONSTITUTE CRIMINAL
VIOLATIONS
--APPLICATION FOR REGISTRATION
-- AMENDMENT
If this is an APPLICATION, indicate if the applicant requests
consideration for temporary registration pursuant to Rule 801(c) of
Regulation SB SEF under the Exchange Act:
----YES
----NO
If this is an AMENDMENT to an application, or to an effective
registration (including an annual amendment), list all items that are
amended:
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1. State the name of the applicant:------------------------------------
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2. Provide the applicant's primary street address (Do not use a P.O.
Box):
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(Number and Street)
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(City) (State) (Zip Code)
3. Provide the applicant's mailing address (if different):
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(Number and Street)
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(City) (State) (Zip Code)
4. Provide the applicant's business telephone and facsimile number:
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(Telephone) (Facsimile)
5. Provide the name, title, and telephone number of a contact employee:
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(Name) (Title) (Telephone)
6. Provide the name and address of counsel for the applicant:
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(Name)
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(Number and Street)
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(City) (State) (Zip Code)
7. Provide the date applicant's fiscal year ends:
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8. Indicate legal status of applicant: -- Corporation -- Sole
Proprietor- ship -- Partnership -- Limited Liability Company -- Other
(specify):
If other than a sole proprietor, indicate the date and place where
the applicant obtained its legal status (e.g. state where incorporated,
place where partnership agreement was filed or where the applicant
entity was formed), and the statute under which the applicant was
organized:
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(Date) (MM/DD/YYYY)
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State/Country of formation:
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(Statute under which the applicant was organized)
9. Applicant understands and consents that any notice or service of
process, pleadings, or other documents in connection with any action or
proceeding against the applicant may be effectuated by certified mail
to the officer specified or person named below at the U.S. address
given. Such officer or person cannot be a Commission member, official
or employee.
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(Name of Person or, if the Applicant is a Corporation, Title of
Officer)
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(Name of the Applicant or Applicable Entity)
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(Number and Street)
[[Page 11068]]
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(City) (State) (Zip Code)
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(Telephone)
EXECUTION: The undersigned, being first duly sworn, deposes and says
that he/she has executed this form on behalf of, and with the authority
of, said applicant. The undersigned and applicant represent that the
information and statements contained herein, including exhibits,
schedules, or other documents attached hereto, and other information
filed herewith, all of which are made a part hereof, are current, true,
and complete. It is understood that all required items and exhibits are
considered integral parts of this form and that the submission of any
amendment represents that all unamended items and Exhibits remain true,
current, and complete as previously filed. The applicant and the
undersigned certify that the applicant is currently in compliance with,
and is currently operating its business in a manner consistent with,
the Exchange Act and all rules and regulations thereunder. The
applicant and the undersigned certify that the applicant is so
organized, and has the capacity, to assure the prompt, accurate, and
reliable performance of its functions as a security-based swap
execution facility. The applicant and the undersigned certify that the
applicant has the capacity to fulfill its obligations under all
international information-sharing agreements to which it is a party. If
the applicant is controlled by another person, the applicant and the
undersigned certify that any person that controls the applicant has
consented to and can, as a matter of law, (i) provide the Commission
with prompt access to its books and records, to the extent such books
and records are related to the activities of the security-based swap
execution facility; and (ii) submit to onsite inspection and
examination by representatives of the Commission with respect to the
activities of the security-based swap execution facility. If the
applicant is a non-resident person, the applicant and the undersigned
further represent that the applicant can, as a matter of law, (i)
provide the Commission with prompt access to the applicant's books and
records and (ii) submit to an onsite inspection and examination by
representatives of the Commission.
Date:
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(MM/DD/YY)
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(Name of applicant)
By:
(Signature)
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(Printed Name and Title)
Subscribed and sworn before me this
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day of
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(Month)
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(Year)
by
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(Notary Public)
My Commission expires--------------------------------------------------
County of--------------------------------------------------------------
State of---------------------------------------------------------------
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This page must always be completed in full with original, manual
signature and notarization. Affix notary stamp or seal where
applicable.
FORM SB SEF
UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
APPLICATION FOR, AND AMENDMENTS TO APPLICATION FOR, REGISTRATION AS A
SECURITY-BASED SWAP EXECUTION FACILITY PURSUANT TO SECTION 3D OF THE
EXCHANGE ACT
DO NOT WRITE BELOW THIS LINE--FOR OFFICIAL USE ONLY
EXHIBITS
File all Exhibits with an application for registration as a security-
based swap execution facility pursuant to Section 3D of the Exchange
Act and Rule 801 of Regulation SB SEF thereunder, or with amendments to
such applications pursuant to Rule 802 and 804 of Regulation SB SEF.
For each exhibit, include the name of the applicant, the date upon
which the exhibit was filed, and the date as of which the information
is accurate (if different from the date of the filing). If any Exhibit
required is inapplicable, a statement to that effect shall be furnished
in lieu of such Exhibit.
Exhibit A A copy of the governing documents of the applicant, including
but not limited to, a corporate charter, articles of incorporation or
association, limited liability company agreement, or partnership
agreement, with all subsequent amendments, and by-laws or corresponding
rules or instruments, whatever the name, of the applicant.
Exhibit B A copy of all written rulings, settled practices having the
effect of rules, stated policies, and interpretations of the Board or
other committee of the applicant in respect of any provisions of the
governing documents, rules, or trading practices of the applicant which
are not included in Exhibit A.
Exhibit C A list of the officers and directors, or persons performing
similar functions who presently hold or have held their offices or
positions during the previous year, and a list of all standing
committees and their members (including the nominating committee,
regulatory oversight committee, and all committees that have the
authority to act on behalf of the Board or the nominating committee),
indicating the following for each:
1. Name;
2. Title;
3. Dates of commencement and termination of term of office or
position;
4. Type of business in which each is primarily engaged (e.g.,
security-based swap dealer, major security-based swap participant,
inter-dealer broker, end-user, etc.);
5. If a director, whether such person qualifies as an ``independent
director'' pursuant to Rule 800 of Regulation SB SEF; and
6. If a director, whether such person is a member of any standing
committees, committees that have the authority to act on behalf of the
Board, or the nominating committee.
Exhibit D A chart or charts illustrating fully the internal
organizational structure of the applicant. The chart or charts should
indicate the internal divisions or departments; the responsibilities of
each such division or department; and the reporting structure of each
division or department, including its oversight by committees (or their
equivalent).
Exhibit E A list of all persons that have either, direct or indirect,
ownership or voting interest in the security based swap execution
facility that equals or exceeds 5% and a list of all related persons of
such persons; provided that a related person (1) has ownership or
voting interest in the security-based swap execution facility; or (2)
is a participant. For each of the persons and related persons listed in
this Exhibit E, please provide the following:
1. Full legal name;
[[Page 11069]]
2. Title or legal status;
3. Whether such person or related person is a participant;
4. Date that title, legal status, or participation in a security-
based swap execution facility was acquired or commenced;
5. Percentage of ownership interest held;
6. Type of ownership interest held, including whether the ownership
interest is ``beneficial ownership'' as defined in Rule 800 of
Regulation SB SEF or is entitled to vote;
7. Percentage of voting interest held; and
8. Type of voting interest held.
Exhibit F For the latest two fiscal years of the applicant, financial
statements that shall: (1) Be a complete set of financial statements of
the applicant that are prepared in accordance with U.S. generally
accepted accounting principles for the most recent fiscal year of the
applicant; (2) be audited in accordance with standards of the Public
Company Accounting Oversight Board by a registered public accounting
firm that is qualified and independent in accordance with Rule 2-01 of
Regulation S-X (17 CFR 210.2-01); (3) include a report of the
registered public accounting firm that complies with paragraphs (a)
through (d) of Rule 2-02 of Regulation S-X (17 CFR 210.2-02); (4)
include the accounting policies and practices of the applicant; (4) if
the applicant's financial statements contain consolidated information
of a subsidiary of the applicant, then the applicant's financial
statement must provide condensed financial information, in a financial
statement footnote, as to the financial position, changes in financial
position, and results of operations of the applicant, as of the same
dates and for the same periods for which audited consolidated financial
statements are required. Such financial information need not be
presented in greater detail than is required for condensed statements
by Rules 10-01(a)(2), (3), and (4) of Regulation S-X (17 CFR 210.10-
01). Detailed footnote disclosure that would normally be included with
complete financial statements may be omitted with the exception of
disclosures regarding material contingencies, long-term obligations,
and guarantees. Descriptions of significant provisions of the
applicant's long-term obligations, mandatory dividend or redemption
requirements of redeemable stocks, and guarantees of the applicant
shall be provided along with a five-year schedule of maturities of
debt. If the material contingencies, long-term obligations, redeemable
stock requirements, and guarantees of the applicant have been
separately disclosed in the consolidated statements, then they need not
be repeated in this schedule; and (5) be provided in eXtensible
Business Reporting Language consistent with Rules 405 (a)(1), (a)(3),
(b), (c), (d), and (e) of Regulation S-T (17 CFR 232.11).
Exhibit G An executed or executable copy of any agreements or contracts
entered into or to be entered into by the applicant, or a subsidiary or
an affiliate of the applicant, including partnership or limited
liability company, third-party regulatory service, or other agreements
relating to the operation of an electronic trading system to be used to
effect transactions on the security-based swap execution facility
(``System''), that enable or empower the applicant to comply with
Section 3D of the Exchange Act (15 U.S.C. 78c-4).
Exhibit H For each of the applicant's affiliated entities (every
subsidiary in which the applicant has, directly or indirectly, a 25%
interest and for every entity that has, directly or indirectly, a 25%
interest in the applicant) provide a complete set of unconsolidated
financial statements (in English) for the latest two fiscal years and
include such footnotes and other disclosures as are necessary to avoid
rendering the financial statements misleading. The financial statements
shall be provided in eXtensible Business Reporting Language consistent
with Rules 405 (a)(1), (a)(3), (b), (c), (d), and (e) of Regulation S-T
(17 CFR 232.11). In addition to the foregoing, for all other affiliates
of the applicant not listed in the paragraph above, the information
required by the paragraph above shall be made available upon request.
Exhibit I Describe the manner of operation of the System. This
description should include the following:
1. A detailed description of the manner in which the System
satisfies the definition of ``security-based swap execution facility''
in Section 3(a)(77) of the Exchange Act and any Commission rules,
interpretations, or guidelines regarding such definition, including a
description of how the System displays all orders, quotes, requests for
quote, responses, and trades in an electronic or other form, and the
timelines in which the System does so; how orders interact on the
System, the ability of market participants to see and transact with
orders, quotes, requests for quotes, and responses; and an explanation
of the trade-matching algorithm if it is based on order priority
factors other than price and time;
2. The means of access to the System, including any limitations on
access;
3. Procedures governing entry and display of quotations and orders
in the System;
4. Procedures governing the execution, reporting, clearance and
settlement of transactions in connection with the System;
5. Proposed fees;
6. Procedures for ensuring compliance with System usage guidelines
and rules;
7. The hours of operation of the System and the date on which the
applicant intends to commence operation of the System;
8. A copy of the users' manual or equivalent document;
9. If the applicant proposes to hold funds or securities on a
regular basis, describe the controls that will be implemented to ensure
safety of those funds or securities; and
10. The name of any entity, other than the security-based swap
execution facility, that will be involved in operation of the System,
including the execution, trading, clearing and settling of transactions
on behalf of the security-based swap execution facility, and a
description of the role and responsibilities of each entity.
Exhibit J A complete set of all forms pertaining to:
1. Application for participation or use of the security-based swap
execution facility.
2. Application for approval as a person associated with a
participant or other user of the security-based swap execution
facility.
3. Any other similar materials.
Provide a table of contents listing the forms included in this Exhibit
J.
Exhibit K A complete set of all forms of financial statements, reports,
or questionnaires required of participants or any other users of the
security-based swap execution facility relating to financial
responsibility or minimum capital requirements for such participants or
any other users. Provide a table
[[Page 11070]]
of contents listing the forms included in this Exhibit K.
Exhibit L Describe the applicant's criteria for participation in or use
of the security-based swap execution facility. Provide a list of all
grants of access (including, for all participants, the reasons for
granting such access) and all denials or limitations of access
(including, for each applicant or participant, the reasons for denying
or limiting access). Describe conditions under which participants or
persons associated with participants may be subject to suspension or
termination with regard to access to the security-based swap execution
facility. Describe any procedures that will be involved in the
suspension or termination of a participant or person associated with a
participant. Provide a list of all disciplinary actions taken.
Exhibit M Provide an alphabetical list of all participants or other
users of the security-based swap execution facility, including the
following information:
1. Name;
2. Date of acceptance as a participant or other user;
3. Principal business address and telephone number;
4. If participant or other user is an individual, the name of the
entity with which such individual is associated and the relationship of
such individual to the entity (e.g., partner, officer, director,
employee, etc.);
5. Describe the type of activities primarily engaged in by the
participant or other user (e.g., security-based swap dealer, major
security-based swap participant, inter-dealer broker, other market
maker, non-broker dealer, non-security-based swap dealer, commercial
end-user, inactive or other functions). A person shall be ``primarily
engaged'' in an activity or function for purposes of this item when
that activity or function is the one in which that person is engaged
for the majority of their time. When more than one type of person at an
entity engages in any of the types of activities or functions
enumerated in this item, identify each and state the number of
participants, or other users in each; and
6. The class of participation or other access.
Exhibit N Provide a brief description of the criteria used to determine
what securities may be traded on the security-based swap execution
facility.
Exhibit O Provide a schedule of the security-based swaps to be traded
on the security-based swap execution facility, including for each a
description of the security-based swap.
Exhibit P (1) If the applicant is controlled by another person, provide
an opinion of counsel that any person that controls the applicant has
consented to and can, as a matter of law, (i) provide the Commission
with prompt access to its books and records, to the extent such books
and records are related to the activities of the security-based swap
execution facility; and (ii) submit to onsite inspection and
examination by representatives of the Commission with respect to the
activities of the security-based swap execution facility.
(2) If the applicant is a non-resident person, provide an opinion
of counsel that the applicant can, as a matter of law, (i) provide the
Commission with prompt access to the books and records of such
applicant and (ii) submit to onsite inspection and examination by
representatives of the Commission.
By the Commission.
Dated: February 2, 2011.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-2696 Filed 2-25-11; 8:45 am]
BILLING CODE 8011-01-P