Rules Relating to Security-Based Swap Execution and Registration and Regulation of Security-Based Swap Execution Facilities

AGENCY:

Securities and Exchange Commission.

ACTION:

Proposed rule; withdrawal of proposed rules.

SUMMARY:

The Securities and Exchange Commission (“SEC” or “Commission”) is proposing a set of rules (“Regulation SE”) and forms under the Securities Exchange Act of 1934 (“SEA”) that would create a regime for the registration and regulation of security-based swap execution facilities (“SBSEFs”) and address other issues relating to security-based swap (“SBS”) execution generally. One of the rules being proposed as part of Regulation SE would implement part of the Dodd-Frank Act, which is intended to mitigate conflicts of interest at SBSEFs and national securities exchanges that trade SBS (“SBS exchanges”). Other rules being proposed as part of Regulation SE would address the cross-border application of the SEA's trading venue registration requirements and the trade execution requirement for SBS. In addition, the Commission is proposing to amend an existing rule to exempt, from the SEA definition of “exchange,” certain registered clearing agencies as well as registered SBSEFs that provide a market place only for SBS. The Commission also is proposing a new rule that, while affirming that an SBSEF would be a broker under the SEA, would exempt a registered SBSEF from certain broker requirements. Finally, the Commission is proposing certain new rules and amendments to its Rules of Practice to allow persons who are aggrieved by certain actions by an SBSEF to apply for review by the Commission. The Commission also is withdrawing all previously proposed rules regarding these subjects.

DATES:

Comments should be received on or before June 10, 2022. As of May 11, 2022, the SEC is withdrawing or partially withdrawing the following previously proposed rules (see SUPPLEMENTARY INFORMATION for details): SEA Release No. 63825 (76 FR 10948, published on February 28, 2011); SEA Release No. 63107 (75 FR 65581, published on October 26, 2010); and SEA Release No. 69490 (78 FR 30968, published on May 23, 2013).

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/submitcomments.htm ); or

• Send an email to rule-comments@sec.gov. Please include File No. S7-14-22 on the subject line.

Paper Comments

• Send paper comments to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-14-22. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method of submission. The Commission will post all comments on the Commission's internet website ( http://www.sec.gov/rules/proposed.shtml ). Comments are also available for website viewing and printing in the Commission's Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Operating conditions may limit access to the Commission's public reference room. All comments received will be posted without change. Persons submitting comments are cautioned that the Commission does not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make publicly available.

Studies, memoranda, or other substantive items may be added by the Commission or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on the Commission's website. To ensure direct electronic receipt of such notifications, sign up through the “Stay Connected” option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT:

Michael Gaw, Assistant Director, at (202) 551-5602; David Liu, Special Counsel, at (312) 353-6265; Leah Mesfin, Special Counsel, at (202) 551-5655; Michou Nguyen, Special Counsel, at (202) 551-7768; Geoffrey Pemble, Special Counsel, at (202) 551-5628; or Mark Sater, Counsel, at (202) 551-4729; all of whom are in the Division of Trading and Markets, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

The Commission is proposing new 17 CFR 242.800 through 242.835 to create a regime for the registration and regulation of SBSEFs and address other issues relating to SBS execution generally. Regulation SE would consist of 17 CFR 242.800 through 242.835 (proposed Rules 800 through 835). Key rules within Regulation SE would include Rule 803, which would establish a process for SBSEF registration; Rules 804 to 810, which would establish procedures for rule and product filings by SBSEFs; Rule 815, which would establish permissible execution methods for SBS that are subject to the SEA's trade execution requirement; Rule 816, which would set out a procedure for SBSEFs to make an SBS available to trade and establish certain exemptions from the trade execution requirement; Rules 818 to 831, which would implement the 14 Core Principles for SBSEFs set forth in section 3D(d) of the SEA; Rules 832 to 833, which would address cross-border matters; and Rule 834, which would impose requirements addressing conflicts of interest involving SBSEFs and SBS exchanges, as required by section 765 of the Dodd-Frank Act.

In addition to the rules described above, the Commission is also proposing 17 CFR 249.2001 (Form SBSEF), which is the form that an entity would use to register with the Commission as an SBSEF; 17 CFR 249.2002 (a submission cover sheet), which would be required to accompany filings with the Commission made by SBSEFs for rule and rule amendments and for product listings; amendments to 17 CFR 232.405 (Rule 405 of Regulation S-T) to require various SBSEF filings to be provided in Inline eXtensible Business Reporting Language (“Inline XBRL”), a structured data language; amendments to 17 CFR 240.3a1-1 (Rule 3a1-1 under the SEA) to exempt from the SEA definition of “exchange” certain registered clearing agencies as well as registered SBSEFs that provide a market place only for SBS; 17 CFR 240.15a-12 (Rule 15a-12 under the SEA) that, while affirming that an SBSEF also would be a broker under the SEA, would exempt a registered SBSEF from certain broker requirements; to sunset an existing exemption from the requirement to register as a clearing agency for an entity performing the functions of an SBSEF but that is not yet registered as such; and certain new rules and amendments to 17 CFR part 201 (the Commission's Rules of Practice) to allow persons who are aggrieved by certain actions by an SBSEF to apply for review by the Commission.

The Commission also is withdrawing all previously proposed rules, rule amendments, and interpretations regarding these subjects in view of the length of time that has passed since they were issued and significant changes to the swap and SBS markets that have taken place during that time.

Table of Contents

I. Background

II. Relation to the SEF Market

III. Approach to the Commission's Proposed Requirements Relating to Security-Based Swap Execution

IV. Introductory Provisions of Regulation SE

A. Rule 800—Scope

B. Rule 801—Applicable Provisions

C. Rule 802—Definitions

V. Registration of SBSEFs

A. Rule 803—Requirements and Procedures for Registration

B. Form SBSEF

C. Abbreviated Registration Procedures for CFTC-Registered SEFs

VI. Rule and Product Filings by SBSEFs

A. Rule 804—Listing Products for Trading by Certification

B. Rule 805—Voluntary Submission of New Products for Commission Review and Approval

C. Rule 806—Voluntary Submission of Rules for Commission Review and Approval

D. Rule 807—Self-Certification of Rules

E. Submission Cover Sheet and Instructions

F. Rule 808—Availability of Public Information

G. Rule 809—Staying of Certification and Tolling of Review Period Pending Jurisdictional Determination

H. Rule 810—Product Filings by SBSEFs That Are Not Yet Registered and by Dormant SBSEFs

VII. Miscellaneous Requirements

A. Rule 811—Information Relating to SBSEF Compliance

1. Harmonization With § 37.5

2. Harmonization With § 1.60

B. Rule 812—Enforceability

C. Rule 813—Prohibited Use of Data Collected for Regulatory Purposes

D. Rule 814—Entity Operating Both a National Securities Exchange and SBSEF

E. Rule 815—Methods of Execution for Required and Permitted Transactions

F. Rule 816—Trade Execution Requirement and Exemptions Therefrom

1. Process for an SBSEF To Make an SBS Product Available To Trade

2. Exemptions From Trade Execution Requirement

G. Rule 817—Trade Execution Compliance Schedule

VIII. Implementation of Core Principles

A. Rule 818—Core Principle 1—Compliance With Core Principles

B. Rule 819—Core Principle 2—Compliance With Rules

1. Rules Modelled on Subpart C of Part 37

2. Provisions of Rule 819 Adapted From Other SEF Requirements

a. Rule 819(h)—Activities of SBSEF's Employees, Governing Board Members, Committee Members, and Consultants

b. Rule 819(i)—Service on SBSEF Governing Boards or Committees by Persons With Disciplinary Histories

c. Rule 819(j)—Notification of Final Disciplinary Action Involving Financial Harm to a Customer

d. Rule 819(k)—Designation of Agent for Non-U.S. Member

C. Rule 820—Core Principle 3—SBS Not Readily Susceptible to Manipulation

D. Rule 821—Core Principle 4—Monitoring of Trading and Trade Processing

E. Rule 822—Core Principle 5—Ability To Obtain Information

F. Rule 823—Core Principle 6—Financial Integrity of Transactions

G. Rule 824—Core Principle 7—Emergency Authority

H. Rule 825—Core Principle 8—Timely Publication of Trading Information

I. Rule 826—Core Principle 9—Recordkeeping and Reporting

J. Rule 827—Core Principle 10—Antitrust Considerations

K. Rule 828—Core Principle 11—Conflicts of Interest

L. Rule 829—Core Principle 12—Financial Resources

M. Rule 830—Core Principle 13—System Safeguards

N. Rule 831—Core Principle 14—Designation of Chief Compliance Officer

IX. Cross-Border Rules

A. Rule 832—Cross-Border Mandatory Trade Execution

B. Rule 833—Cross-Border Exemptions

1. Exemptions for Foreign SBS Trading Venues

2. Exemptions Relating to the Trade Execution Requirement

X. Rule 834—Implementation of Section 765 of the Dodd-Frank Act and Governance of SBSEFs and SBS Exchanges

XI. Rule 835—Notice to Commission by SBSEF of Final Disciplinary Action, Denial or Conditioning of Membership, or Denial or Limitation of Access

XII. Amendments to Existing Rule 3a1-1 Under the SEA—Exemptions From the Definition of “Exchange”

XIII. Rule 15a-12—SBSEFs as Registered Brokers; Relief From Certain Broker Requirements

XIV. Proposed Sunsetting of Temporary Exemption From SEA Definition of “Clearing Agency” for Unregistered SBSEFs

XV. Electronic Filings Under Regulation SE

XVI. Amendments to Commission's Rules of Practice for Appeals of SBSEF Actions

A. Amendment to Rule 101

B. Amendment to Rule 202

C. Amendment to Rule 210

D. Amendment to Rule 401

E. Rule 442—Right to Appeal

F. Rule 443— Sua Sponte Review by Commission

G. Amendment to Rule 450

H. Amendment to Rule 460

I. Request for Comment

XVII. Conclusion

XVIII. Compliance Schedule

XIX. Economic Analysis

A. Introduction

B. Economic Baseline

1. Available Data From the SBS Market

2. SBS Market Activity and Participants

a. SBS Entities

b. Other SBS Market Participants

c. SBS Market Participant Domiciles

3. Distribution of Rransaction Size

4. Other Markets and Regulatory Frameworks

5. Number of Entities That Likely Will Register as SBSEFs

6. SBS Trading on Platforms

7. Global Regulatory Efforts

8. Trading Models

C. Benefits, Costs, and Reasonable Alternatives

1. Overarching Benefits of the Proposal

2. Benefits Associated With Specific Proposed Rules

3. Costs

a. Registration Requirements for SBSEFs and Form SBSEF

b. Ongoing Compliance With Other Requirements That Are Similar to the Remainder of Part 37

c. Rule and Product Filing Processes for SBSEFs

d. Proposed Rules 809, 811, 819, 826, 833, 834, and 835

e. Assessment Costs

f. Structured Data Costs

4. Reasonable Alternatives

D. Effects on Efficiency, Competition, and Capital Formation

1. Competition

2. Capital Formation

3. Efficiency

E. Request for Comment

XX. Paperwork Reduction Act

A. Summary of Collection of Information

B. Proposed Use of Information

1. Registration Requirements and Form SBSEF

2. Requirements for SBSEFs To Establish Rules

3. Reporting Requirements for SBSEFs

4. Recordkeeping Required Under Regulation SE

5. Timely Publication of Trading Information Requirement for SBSEFs

6. Rule Filing and Product Filing Processes for SBSEFs

7. Requirements Relating to the CCO

8. Surveillance Systems Requirements for SBSEFs

C. Respondents

D. Total Annual Reporting and Recordkeeping Burden

1. Overview

2. Aggregate Burdens for Rules Modelled After CFTC Part 37 Rules

a. Registration requirements for SBSEFs and Form SBSEF

b. Ongoing Compliance With Other Requirements That Are Similar to the Remainder of Part 37

3. Aggregate Burdens for Rules Modelled on CFTC Part 40 Rules

a. Rule and Product Filing Processes for SBSEFs

b. Burdens Related to Rules Modelled After Other Part 40 Rules

i. Rule 802

ii. Rule 809

4. Aggregate Burdens for Rules Modelled After CFTC Rules Other Than Parts 37 and 40

a. Rule 811(d)

b. Rule 819(h)

c. Rule 819(i)

d. Rule 819(j)

e. Rule 819(k)

f. Rule 826(f)

g. Rule 834

5. Miscellaneous Burdens

a. Rule 833

b. Rule 835

6. Total Paperwork Burden Under Proposed Regulation SE

E. Collection of Information Is Mandatory

F. Responses to Collection of Information Will Not Be Confidential

G. Retention Period of Recordkeeping Requirements

H. Request for Comment

XXI. Regulatory Flexibility Certification

A. SBSEFs

B. Persons Requesting an Exemption Order Pursuant to Rule 833

C. SBS Exchanges

D. Certification

XXII. Consideration of Impact on Economy

Statutory Authority

I. Background

Section 3D of the SEA, enacted as part of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), provides for the registration and regulation of SBSEFs. Section 3D(a)(1) provides that no person may operate a facility for the trading or processing of SBS, unless the facility is registered as an SBSEF or as a national securities exchange. Section 3D(d) enumerates 14 Core Principles with which SBSEFs must comply. Section 3D(f) requires the Commission to prescribe rules governing the regulation of SBSEFs.

Section 765 of the Dodd-Frank Act directs the Commission to adopt rules to mitigate conflicts of interest with respect to clearing agencies that clear SBS (“SBS clearing agencies”), SBSEFs, and national securities exchanges that post or make available for trading SBS (“SBS exchanges”). In October 2010, the Commission published for comment proposed Regulation MC to implement section 765.

In February 2011, the Commission published for comment: (1) Proposed Regulation SBSEF that would govern the registration and regulation of SBSEFs, including rules to implement the 14 Core Principles and rules requiring SBSEFs to submit filings with the Commission to list SBS and to establish or amend rules; (2) proposed Form SBSEF for an entity to register with the Commission as an SBSEF; (3) a proposed interpretation of the definition of “security-based swap execution facility”; and (4) proposed exemptions for registered SBSEFs relating to their status also as “exchanges” and “brokers.” On May 23, 2013, the Commission issued a proposing release to address various cross-border aspects of its proposed Title VII rules —which included a proposed rule on the application of Title VII's “trade execution requirement” to cross-border SBS transactions and a proposed interpretation of when the SBSEF registration requirements would apply to a foreign venue that trades SBS (a “foreign SBS trading venue”) —and reopened the comment period for various proposed rulemaking releases and policy statements under Title VII, including the 2011 SBSEF Proposal.

In view of the passage of time since these earlier proposals were issued and the significant market and regulatory developments affecting swaps and SBS over those years, the Commission is issuing this new proposal relating to the registration and regulation of SBSEFs and to SBS execution generally. Accordingly, the Regulation MC Proposal, the 2011 SBSEF Proposal, and the elements of the Cross-Border Proposing Release relating to the trade execution requirement and the registration status of foreign SBS trading venues are withdrawn. The proposed rules discussed below supersede all previous Commission proposals on these subjects.

II. Relation to the SEF Market

The economic baseline for establishing a registration and regulatory regime for SBSEFs and SBS execution generally has changed considerably since the Commission issued the 2011 SBSEF Proposal. In June 2013, the Commodity Futures Trading Commission (“CFTC”) adopted rules (in 17 CFR chapter I) under Title VII of the Dodd-Frank Act for swap execution facilities (“SEFs”). The swap market has grown and matured within the framework established by the CFTC's rules. In 2018, the CFTC proposed to make fundamental changes to the SEF regulatory structure. However, according to the CFTC, “[s]everal commenters expressed concern over the magnitude of changes” in the proposal. In 2021, the CFTC ultimately declined to finalize the 2018 SEF Proposal and elected instead “to improve the SEF framework through targeted rulemakings that address distinct issues.” Accordingly, the CFTC withdrew the unadopted portions of its 2018 proposal. Currently, the CFTC has no proposals outstanding to further amend its SEF rules.

Because of the close relationship between the swap and SBS markets, an analysis of swap trading on CFTC-registered SEFs offers insights into the potential development of SBS trading on SEC-registered SBSEFs. Currently, there are 20 non-dormant entities registered with the CFTC as SEFs. In 2021, volume in index credit default swaps (“CDS”) traded on CFTC-registered SEFs was distributed as follows: One SEF had the largest share of index CDS volume (in notional amount) at $8 trillion (69%); one SEF had the second largest share at $2.1 trillion (18%); and the remaining 13% of volume was shared among five other SEFs. As discussed in section XIX below, only a small fraction of SBS trading occurs on platforms currently. Further, some trading occurs on platforms that do not include CFTC-registered SEFs.

Based on research from publicly available sources as well as discussions with CFTC-registered SEFs, the Commission understands that the SBS market—both on organized platforms that are potential SBSEF registrants and on a purely over-the-counter (“OTC”) basis—is a small fraction of the overall swap market. Furthermore, the single-name CDS market, which falls under SEC jurisdiction, is smaller than the index CDS market, which falls under CFTC jurisdiction. Because the swap markets are larger than the SBS markets, the opportunities for revenue capture from swap execution are much larger than from SBS execution. In view of the SBS market's size relative to the swap market, the Commission is sensitive to the economic impact that its final rules for SBSEFs could have.

The entities that are most likely to register with the Commission as SBSEFs are those already registered with the CFTC as SEFs. These entities have made substantial investments in systems, policies, and procedures to comply with and adapt to the regulatory system developed by the CFTC. To the extent that the Commission harmonizes its SBSEF rules with the CFTC's SEF rules, dually registered entities could utilize their existing systems, policies, and procedures to comply with the Commission's SBSEF rules, and SEF market participants would face no or only incremental changes to trade SBS as well as swaps on those facilities, and to comply with the Commission's rules regarding SBS trading. To the extent that the Commission establishes different or additive requirements, dually registered entities and their market participants might need to incur costs and burdens to modify their systems, policies, and procedures to comply with the SEC-specific rules. As indicated below, the Commission seeks comment on such costs and burdens in light of the CFTC's SEF rules. Accordingly, as discussed below, the Commission is proposing to take the general approach of harmonizing closely with analogous CFTC SEF rules, except where differences in the SEC's statutory authority relative to the CFTC's statutory authority or differences in the SBS market relative to the swap market necessitate differences between the Commission's rules and the CFTC's, or where the Commission preliminarily believes that the benefits of deviating from the CFTC's rules would otherwise justify the burdens and costs associated with imposing different or additional requirements than the corresponding CFTC rule. Throughout this release, the Commission will seek comment on the accuracy of these assumptions. In particular, the Commission seeks comment on the following:

1. How many CFTC-registered SEFs do you believe will seek to register with the Commission as SBSEFs? Please explain.

2. Are there any entities that will seek to register with the Commission as SBSEFs but not register with the CFTC as SEFs? If so, please explain and estimate how many.

3. For SEFs that will likely seek registration with the Commission as SBSEFs, please estimate the size of their swaps business versus the anticipated size of their SBS business, using any metric(s) that you believe would be illustrative ( e.g., number of products listed, trade count, aggregate notional size traded, number of counterparties trading swaps versus SBS, etc. ).

4. Please provide any information or market data that you believe would be illustrative regarding current SBS trading activity on entities that are not likely to register with the Commission as SBSEFs, and thus would have to cease SBS trading upon the compliance date of the Commission's SBSEF rules. Do you believe that this activity would migrate to registered SBSEFs or would it migrate instead to the bilateral OTC market?

5. What types of products do you anticipate could be listed by registered SBSEFs ( e.g., CDS on individual corporate bonds, CDS on individual sovereign bonds, CDS on individual securitized bonds, swaps on securities options, swaps on narrow-based securities indexes, total return swaps on individual cash equities or crypto/digital asset securities, etc. )?

In the remainder of this release, the Commission describes its proposed registration and regulation regime for SBSEFs and SBS execution generally, and seeks comment on all aspects of its proposal. You are invited in particular to provide data and analysis regarding the economic and Paperwork Reduction Act (“PRA”) implications of this proposal. For example, the Commission seeks comment on the following:

6. If, in a particular area, the Commission were to harmonize closely with a CFTC rule, to what extent would this reduce, or perhaps eliminate entirely, any incremental costs or burdens on dually registered SEF/SBSEFs and their members?

7. Should the Commission impose any different or additive requirements? For example, are there any statutory or market differences that would create benefits from different or additive requirements? If the Commission imposes different or additive requirements, what would be the impact on dually registered SEF/SBSEFs and their members?

8. Are there provisions of the CFTC's rules the Commission should not incorporate, even if the Commission were to opt for harmonization with the CFTC's rules in other areas? In other words, are there areas where not harmonizing with a CFTC rule would reduce burdens on SBSEFs and/or their members? If so, please explain, with particular regard to the economic impacts and/or PRA burdens.

9. Do you believe that the Commission should adopt different or additive requirements for SBSEFs, even if there is no analog to such provisions in the CFTC's SEF rules? If so, please explain, with particular regards to the economic impacts and/or PRA burdens. For example, do you believe that the SEC-specific provision would impose additional costs or burdens on SBSEFs and/or their members that are nevertheless appropriate in view of new and additional benefits? Or do you believe that an SEC-specific provision would be appropriate because it would relieve costs or burdens that are imposed on the swap business by a CFTC rule that is unnecessary or inappropriate in the SBS market?

10. If the Commission ultimately adopts SBSEF rules that are closely harmonized with the CFTC's SEF rules, do you believe this could result in ambiguities or potential conflicts between the SEC's SBSEF rules and the other SEC rules (pertaining, for example, to exchanges or alternative trading systems)? If so, please indicate where this might occur and suggest ways that the Commission could reduce these ambiguities or potential conflicts.

III. Approach to the Commission's Proposed Requirements Relating to Security-Based Swap Execution

Most of the rules proposed in this release are designed to implement provisions of section 3D of the SEA, which is nearly identical to section 5h of the CEA. As described in detail throughout this release, when the Commission is proposing a rule to implement a provision of section 3D of the SEA, that rule generally will harmonize as closely as practicable with the analogous CFTC rule, unless a reason exists to do otherwise. Indeed, many of the rules proposed herein are adapted from the CFTC rules, with only minor changes to reflect differences in the Commission's statutory authority ( e.g., using the term “security-based swap” instead of “swap,” cross-referencing provisions of the SEA rather than the CEA, etc. ). The Commission seeks to minimize occasions where differences in the wording between an SEC and a CFTC rule leads affected persons to believe that there is a difference in policy outcome, where no difference in outcome is intended.

In cases where the Commission preliminarily believes that a reason exists for a proposed SEC rule to differ from an analogous CFTC rule, that reason is described and alternate rule language is proposed and explained. Here too, the Commission might be in general agreement with the policy behind the CFTC's rule, but it might not be practicable to closely track the CFTC rule language, for reasons that are specific to each instance and which will be discussed herein.

In proposing these rules, the Commission acknowledges that, in the abstract, there are a variety of ways of implementing a Core Principle or other policy goal where the benefits could justify the costs. Indeed, the Commission's 2011 SBSEF Proposal includes many such alternate ways that differ from the CFTC's current rules. But the CFTC's rules for SEF—and swap execution more generally—have significantly reshaped the swap market, and indirectly the SBS market. The fundamental principles of the CFTC's regulatory regime for SEFs and swap execution generally have established the existing environment, and any rules proposed by the SEC to implement the regulatory regime for SBSEFs and SBS execution more generally must be considered against the CFTC's regulatory regime. SEFs and swap market participants have invested significant resources in systems, policies, and procedures to comply with the CFTC's SEF rules. The Commission believes that the CFTC's rules are reasonably designed to implement section 5h of the CEA, which is nearly identical to section 3D of the SEA, and have been effective in practice in facilitating fair, transparent, and competitive trading on SEFs. By proposing similar rules for SEC-registered SBSEFs, the Commission seeks to obtain comparable regulatory benefits as the CFTC while minimizing costs imposed on SEF/SBSEFs and their members to the greatest extent practicable.

The Commission recognizes that an entity might elect to register as an SBSEF with the SEC but not as a SEF with the CFTC. In such case, an SEC-only registrant would not have any familiarity with the CFTC's rules and would not have made any investments in systems, policies, and procedures to comply with them. Nevertheless, because the Commission preliminarily believes that most if not all entities that will seek SBSEF registration with the SEC are or will also be registered as SEFs with the CFTC, such dual registrants would benefit from harmonized rules. Furthermore, if the Commission adopts these rules substantially as proposed, it likely would be unnecessary to establish and apply one set of rules for dual registrants and a different set for SEC-only SBSEFs.

Proposed Regulation SE follows the basic structure of part 37 of the CFTC's rules (17 CFR part 37). In the CFTC's rules, subpart A of part 37 (General Provisions) consists of §§ 37.1 to 37.12. Subparts B to P of part 37 implement the 15 Core Principles for SEFs set forth in the CEA and consist of §§ 37.100 et seq. to 37.1500 et seq. Proposed Rules 800 to 817 of Regulation SE are modelled on the “General Provisions” in subpart A, while proposed Rules 818 to 831 would implement the 14 Core Principles for SBSEFs set forth in the SEA. Proposed Rules 832 to 833 address cross-border matters that have no direct counterpart in the CFTC's rules applicable to SEFs. Proposed Rule 834 is designed to implement section 765 of the Dodd-Frank Act, which requires the Commission to adopt rules addressing conflicts of interest involving SBSEFs and SBS exchanges, as well as to harmonize with certain of the CFTC's governance rules. Proposed Rule 835 is designed to facilitate reviews of final disciplinary actions, denials or conditioning of membership, and denials or limitations of access by SBSEFs. In addition, the Commission is proposing a new subpart V to part 249 of the Commission's rules, entitled “Forms for use by security-based swap execution facilities,” that would include proposed § 249.2001, setting forth Form SBSEF and its instructions, which would be used to register with the Commission as an SBSEF; and proposed § 249.2002, setting forth the submission cover sheet (with instructions) that would be required to accompany filings with the Commission made by SBSEFs for rule and rule amendments, product listings, and determinations to make an SBS available to trade.

Many parts of proposed Rules 800 to 817 are very similar in substance to §§ 37.1 to 37.12. Other parts of proposed Rules 800 to 817 are derived from CFTC rules that are referenced in subpart A of part 37 but located outside of part 37. For example, § 37.4 is a short rule entitled “Procedures for listing products and implementing rules.” Section 37.4 does not itself lay out the specific filing procedures for new products and new rules, but directs a SEF, after it has registered with the CFTC, to make such filings pursuant to part 40 (Provisions common to registered entities ). Key rules in part 40 include §§ 40.2 (Listing products for trading by certification), 40.3 (Voluntary submission of new products for Commission review and approval), 40.5 (Voluntary submission of rules for Commission review and approval), and 40.6 (Self-certification of rules).

To promote oversight of the SBS market and to assess that SBSEFs continue to operate in a manner consistent with the SEA, the Commission preliminarily believes that it would be appropriate to establish procedures whereby SBSEFs would submit filings to the Commission to list SBS products and to establish new rules, and that it would be appropriate to harmonize with the procedures that the CFTC applies to SEFs. These procedures are well articulated and well understood by SEFs, and appear to provide an effective process for establishing new rules and listing products. Therefore, the Commission is proposing Rules 804, 805, 806, and 807 that are closely modelled on relevant provisions of §§ 40.2, 40.3, 40.5, and 40.6, respectively. To implement such rules for SBSEFs and the SBS market, the Commission identifies only those parts of the CFTC rules that are most germane to the SBS market and adapts the wording accordingly. In the detailed discussions of each of these proposed rules, the Commission seeks comment on whether its proposed rule is appropriately tailored for the SBS market, particularly for dually registered SEF/SBSEFs that would be complying with substantially similar filing procedures under CFTC rules, or whether the proposed rule incorporates a part of the CFTC rule that is not relevant to the SBS market or should have incorporated additional or different language that is more relevant.

Regulation SE includes proposed rules modelled on CFTC rules found in Parts 16, 36, 37, 40, 45, and elsewhere. In some cases, these disparate CFTC rules from outside part 37 that the Commission is proposing to adapt into Regulation SE use different terms than in part 37 for what appears to be the same concept. To promote uniformity within Regulation SE, the Commission is proposing certain definitions for use throughout the regulation—in a dedicated definitions rule, proposed Rule 802—that will sometimes require the replacement of a term used in the CFTC version of a rule with a different, newly defined term in the proposed SEC version. Any such changes in defined terms are noted below. Proposed Rule 802 also includes terms derived from the SEA and certain SEC rules thereunder.

Part 37 of the CFTC's rules includes an appendix B, which sets out guidance and acceptable practices for demonstrating compliance with several of the rules that implement the Core Principles for SEFs. These provisions are, by their terms, non-binding. The Commission preliminarily believes that all of the provisions of Regulation SE should be enforceable. Therefore, the Commission is proposing to adapt some of the guidance and acceptable practices found in appendix B as proposed rule text in Regulation SE. As a result, some of the rules proposed in Regulation SE are a blend of the CFTC rule text with language adapted from the guidance and/or acceptable practices. Instances where this occurs in a particular rule will be noted below. The Commission requests comment on its overall approach to incorporating relevant portions of the part 37 guidance and acceptable practices into Regulation SE, as well as comment on how they are adapted in specific rules.

In various places in the CFTC's SEF rules, the CFTC has delegated to its staff authority to perform various functions relating to SEFs on the CFTC's behalf. The Commission has not adapted any of these provisions into proposed Regulation SE and is not proposing any delegation-of-authority rules. The Commission may address delegations of its authority in the adopting release for Regulation SE.

Finally, in developing this proposal, the Commission has consulted and coordinated with the CFTC and the prudential regulators, in accordance with the consultation mandate of the Dodd-Frank Act. The Commission also has consulted and coordinated with foreign regulatory authorities through Commission staff participation in numerous bilateral and multilateral discussions with foreign regulatory authorities addressing the regulation of OTC derivatives markets. Through these multilateral and bilateral discussions and the Commission staff's participation in various international task forces and working groups, the Commission has gathered information about foreign regulatory reform efforts and their effect on and relationship with the U.S. regulatory regime. The Commission has taken and will continue to take these discussions into consideration in developing rules, forms, and interpretations for implementing Title VII of the Dodd-Frank Act.

IV. Introductory Provisions of Regulation SE

A. Rule 800—Scope

Proposed Rule 800 is based on § 37.1 of the CFTC's rules, which provides that part 37 applies to every SEF that is registered or applying to become registered as a SEF under section 5h of the CEA. Section 37.1 further provides that the rule does not affect the eligibility of SEFs to operate under the provisions of part 38 or 49 of the CFTC's rules.

Proposed Rule 800 would provide that the provisions of Regulation SE would apply to every SBSEF that is registered or is applying to become registered as an SBSEF under section 3D of the SEA.

B. Rule 801—Applicable Provisions

Proposed Rule 801 is based on § 37.2 of the CFTC's rules, which provides that a SEF shall comply with the requirements of part 37 and all other applicable CFTC regulations, including § 1.60 and part 9, and including any related definitions and cross-referenced sections. Proposed Rule 801 would require an SBSEF to comply with the requirements of Regulation SE and all other applicable Commission rules, including any related definitions and cross-referenced sections.

C. Rule 802—Definitions

Proposed Rule 802 would set forth definitions of terms that are used in multiple rules in proposed Regulation SE. The majority of such terms are adapted from a CFTC rule. Other terms are taken from section 3 of the SEA or from a Commission rule under the SEA. Where appropriate, the definition is discussed below in the context of the proposed rule where it is used.

In particular, paragraph (w) of proposed Rule 802 which would define the term “security-based swap execution facility” by cross-referencing the definition of that term provided in section 3(a)(77) of the SEA, but with one carve-out. An entity that is registered with the Commission as a clearing agency pursuant to section 17A of the SEA and limits its SBSEF functions to operation of a trading session that is designed to further the accuracy of end-of-day valuations would be exempt from the definition of “security-based swap execution facility.” This provision would codify a series of exemptions granted by the Commission to SBS clearing agencies that operate “forced trading” sessions. As part of the clearing and risk management process, an SBS clearing agency must establish an end-of-day valuation for any SBS in which any of its members has a cleared position and will calculate margin based on that variation. Certain SBS clearing agencies utilize a valuation mechanism whereby they require clearing members to submit indicative quotes for those SBS products, and can require them to trade as a way to promote accurate quote submissions. The precise means by which the clearing agency matches quotes from different clearing members could cause the clearing agency to fall within the SEA definition of “exchange.” The Commission previously has found that it was necessary or appropriate in the public interest and consistent with the protection of investors to exempt clearing agencies that engage in this activity from the definition of “exchange.” The Commission is now proposing to codify this exemption with respect to the both exchange and SBSEF registration.

The Commission preliminarily believes that it is necessary or appropriate in the public interest, and is consistent with the protection of investors, to exempt a registered clearing agency from the definition of “security-based swap execution facility” that utilizes a forced trading functionality for SBS. Such an entity would continue to be registered as a clearing agency and subject to the requirements of section 17A of the SEA. Furthermore, a registered clearing agency is a self-regulatory organization (“SRO”); therefore, all of its rules—including those governing the forced trading session—would have to be submitted to the Commission pursuant to section 19 of the SEA. The Commission preliminarily believes, therefore, that codification of the exemption from the definitions of “exchange” and “security-based swap execution facility” would preserve the status quo and eliminate a largely duplicative and unnecessary set of regulatory requirements. This exemption would cover only the forced-trading functionality of an SBS clearing agency; any other exchange or SBSEF activity in which a clearing agency might engage could subject the clearing agency to the SEA provisions and the Commission's rules thereunder applying to exchanges or SBSEFs.

The Commission seeks comment on the following:

11. Do you believe that any definitions in proposed Rule 802 should be revised or clarified? If so, please indicate which one(s) and provide any suggested revisions or clarifications.

12. Are there any terms used in proposed Regulation SE that are not defined in proposed Rule 802 but which you believe should be defined? If so, which term(s) and how would you define them?

13. Do you agree with the proposed definition of “security-based swap execution facility”? In particular, do you believe that registered clearing agencies that operate forced trading sessions for SBS should be exempted from the definition of “security-based swap execution facility” entirely? Or do you believe instead that such entities should fall within the definition of “security-based swap execution facility” but be exempted from some or all registration and regulatory requirements that otherwise would apply to SBSEFs? Why?

V. Registration of SBSEFs

Section 3D(a)(1) of the SEA provides that no person may operate a facility for the trading or processing of SBS unless the facility is registered as an SBSEF or as a national securities exchange. After issuing the 2011 SBSEF Proposal, the Commission granted temporary exemptions pursuant to section 36(a)(1) of the SEA to entities that meet the definition of “security-based swap execution facility” from having to register with the Commission as an SBSEF or national securities exchange (“Temporary SBSEF Exemptions”). The Temporary SBSEF Exemptions will expire on the compliance date for the Commission's final SBSEF rules.

A. Rule 803—Requirements and Procedures for Registration

Rule 803 of Regulation SE is closely modelled on § 37.3 of the CFTC's rules and would set forth a process for registration with the Commission as an SBSEF.

Section 37.3(a)(1) provides that any person operating a facility that offers a trading system or platform in which more than one market participant has the ability to execute or trade swaps with more than one other market participant on the system or platform shall register the facility as a swap execution facility under this part or as a designated contract market (“DCM”) under part 38 of this chapter. Paragraph (a)(1) of proposed Rule 803 would track the language of § 37.3(a)(1) closely, except that a person meeting these criteria would be directed to register the facility under relevant provisions of the SEA rather than the CEA ( i.e., to register as an SBSEF under proposed Rule 803 or as a national securities exchange pursuant to section 6 of the SEA).

A person that registers with the Commission as a national securities exchange pursuant to section 6 of the SEA does not fall within the statutory definition of “security-based swap execution facility” and thus would not need to register as an SBSEF under proposed Rule 803. Furthermore, as discussed below, a person that registers as an SBSEF under proposed Rule 803 and provides a market place for no securities other than SBS would be exempt from the definition of “exchange” and would not need to register as such pursuant to section 6 of the SEA. The SEA definitions of “exchange” and “security-based swap execution facility” overlap substantially. The Commission preliminarily believes that it is appropriate to subject a trading venue for SBS to only one regulatory regime. Thus, under proposed Regulation SE, if a trading venue for SBS elects to register as a national securities exchange, it would not fall within the statutory definition of “security-based swap execution facility” and would not have to register as an SBSEF. If a trading venue for SBS elects to register as an SBSEF under proposed Rule 803 and provides a market place for no securities other than SBS, it would not—pursuant to a proposed amendment to Rule 3a1-1—fall within the statutory definition of “exchange” and would not have to register as an exchange.

Section 37.3(a)(2) of the CFTC's rules sets out the minimum trading functionality that must be offered by a SEF. A SEF must, at a minimum, offer an “order book.” Section 37.3(a)(3) defines “order book” to mean an electronic trading facility, as that term is defined in section 1a(16) of the CEA; a trading facility, as that term is defined in section 1a(51) of the CEA; or a trading system or platform in which all market participants in the trading system or platform have the ability to enter multiple bids and offers, observe or receive bids and offers entered by other market participants, and transact on such bids and offers.

Paragraph (a)(2) of proposed Rule 803, like § 37.3(a)(2), would require an SBSEF, at a minimum, to offer an order book. The Commission is proposing, like § 37.3(a)(3), to define “order book” in Rule 802 to mean an electronic trading facility, a trading facility, or a trading system or platform in which all market participants in the trading system or platform have the ability to enter multiple bids and offers, observe or receive bids and offers entered by other market participants, and transact on such bids and offers. Section 37.3(a)(3) defines “trading facility” and “electronic trading facility” by cross-referencing definitions of those terms in the CEA. Rather than cross-referencing the CEA, the Commission is proposing instead to adapt the CEA definitions of those terms directly into Rule 802. The Commission preliminarily believes that it should harmonize as closely as possible with the CFTC on foundational terms such as “trading facility,” “electronic trading facility,” and “order book” because the CFTC's reliance on these terms over several years has created understanding of what type of functionality a SEF must offer. The Commission seeks to avoid a scenario where differences with the CFTC regarding these key definitions results in an entity's functionality being allowed under one agency's regime but disallowed under the other's.

Under § 37.3(a)(4), a SEF is not required to provide an order book for certain package transactions, although the SEF must provide an order book for a Required Transaction when such Required Transaction is not executed as part of a package transaction. Paragraph (a)(3) of proposed Rule 803 is closely modelled on § 37.3(a)(4) and would provide a narrow exception to allow an SBSEF not to offer an order book for the SBS component(s) of a package transaction that contains a mix of products that both are and are not subject to the trade execution requirement.

Paragraph (b) of proposed Rule 803 is closely modelled on § 37.3(b) and would set out procedures for full registration of an SBSEF. Paragraph (b)(1), like § 37.3(b)(1), would provide that an applicant requesting registration must:

(i) File electronically a complete Form SBSEF or any successor forms, and all information and documentation described in such forms with the Commission using the EDGAR system as an Interactive Data File in accordance with Rule 405 of Regulation S-T; and

(ii) Provide to the Commission, upon the Commission's request, any additional information and documentation necessary to review an application.

Paragraph (b)(2) of proposed Rule 803, like § 37.3(b)(2), would provide that an applicant requesting registration as an SBSEF must identify with particularity any information in the application that will be subject to a request for confidential treatment pursuant to Rule 24b-2 under the SEA. Paragraph (b)(2) also would provide that, as set forth in proposed Rule 808, certain information provided in an application shall be made publicly available.

Paragraph (b)(3) of proposed Rule 803 would address amendments to the SBSEF registration application. Like § 37.3(b)(3), proposed Rule 803(b)(3) would provide that an applicant amending a pending application or requesting an amendment to an order of registration shall file an amended application electronically with the Commission using the EDGAR system as an Interactive Data File in accordance with Rule 405 of Regulation S-T. Subsequent to being registered, an SBSEF would be required to submit rule and product filings under Rule 806 or 807, as well as provide other updates as may be required pursuant to other rules for SBSEFs.

Paragraph (b)(4) of proposed Rule 803 would address the effect of an incomplete application. Like § 37.3(b)(4), proposed Rule 803(b)(4) would provide that, if an application is incomplete, the Commission shall notify the applicant that its application will not be deemed to have been submitted for purposes of the Commission's review.

Paragraph (b)(5) of proposed Rule 803 would establish the Commission review period for an application to register as an SBSEF. Proposed Rule 803(b)(5) is closely modelled on § 37.3(b)(5) and would require the Commission to approve or deny an application for registration as an SBSEF within 180 days of the filing of the application. Proposed Rule 803(b)(5) would further provide that, if the Commission notifies the person that its application is materially incomplete and specifies the deficiencies in the application, the running of the 180-day period would be stayed from the time of such notification until the application is resubmitted in completed form. In such case, the Commission would have not less than 60 days to approve or deny the application from the time the application is resubmitted in completed form.

Paragraph (b)(6)(i) of proposed Rule 803, like § 37.3(b)(6)(i), would provide that the Commission shall issue an order granting registration upon a Commission determination, in its own discretion, that the applicant has demonstrated compliance with the SEA and the Commission's rules applicable to SBSEFs. Paragraph (b)(6)(i) would allow the Commission to issue an order granting registration, subject to conditions. Paragraph (b)(6)(ii) of proposed Rule 803, modelled on § 37.3(b)(6)(ii), would provide that the Commission may issue an order denying registration upon a Commission determination, in its own discretion, that the applicant has not demonstrated compliance with the SEA and the Commission's rules applicable to SBSEFs. If the Commission denies an application under proposed Rule 803(b)(6)(ii), it would be required to specify the grounds for the denial.

Paragraph (c) of § 37.3, which allows the CFTC to grant SEFs temporary registration under certain conditions, was adopted with a sunset provision that generally terminated the applicability of the paragraph two years after it became effective in August 2013. Because this provision is now obsolete, the Commission is not proposing an equivalent provision in Regulation SE.

Paragraph (c) of proposed Rule 803, like § 37.3(d), would address reinstatement of a dormant registration. Proposed Rule 803(c) would provide that a dormant SBSEF may reinstate its registration under the procedures of proposed Rule 803(b). Proposed Rule 803(c) would further provide that the applicant may rely upon previously submitted materials if such materials accurately describe the dormant SBSEF's conditions at the time that it applies for reinstatement of its registration.

Paragraph (d) of proposed Rule 803, like § 37.3(e), would set out procedures for an SBSEF to request a transfer of registration. Paragraph (d)(1), which is closely modelled on § 37.3(e)(1), would provide that an SBSEF seeking to transfer its registration from its current legal entity to a new legal entity as a result of a corporate change shall file a request for approval to transfer such registration with the Commission in the form and manner specified by the Commission. Paragraph (d)(2), modelled on § 37.3(e)(2), would provide that a request for transfer of registration shall be filed no later than three months prior to the anticipated corporate change; or in the event that the SBSEF could not have known of the anticipated change three months prior to the anticipated change, as soon as it knows of such change.

Paragraph (d)(3) of proposed Rule 803, like § 37.3(e)(3), would require an SBSEF's request for transfer of registration to include the following:

• The underlying agreement that governs the corporate change;

• A description of the corporate change, including the reason for the change and its impact on the SBSEF, including its governance and operations, and its impact on the rights and obligations of members;

• A discussion of the transferee's ability to comply with the SEA, including the core principles applicable to SBSEFs and the Commission's rules thereunder;
• The governing documents of the transferee, including, but not limited to, articles of incorporation and bylaws;
• The transferee's rules marked to show changes from the current rules of the SBSEF;
• A representation by the transferee that it:

○ Will be the surviving entity and successor-in-interest to the transferor SBSEF and will retain and assume, without limitation, all of the assets and liabilities of the transferor;

○ Will assume responsibility for complying with all applicable provisions of the SEA and the Commission's rules thereunder;

○ Will assume, maintain, and enforce all rules implementing and complying with the core principles applicable to SBSEFs, including the adoption of the transferor's rulebook, as amended in the request, and that any such amendments will be submitted to the Commission pursuant to proposed Rules 806 or 807;

○ Will comply with all regulatory responsibilities except if otherwise indicated in the request, and will maintain and enforce all regulatory programs; and

○ Will notify members of all changes to the transferor's rulebook prior to the transfer and will further notify members of the concurrent transfer of the registration to the transferee upon Commission approval and issuance of an order permitting this transfer.

• A representation by the transferee that upon the transfer:

○ It will assume responsibility for and maintain compliance with core principles for all SBS previously made available for trading through the transferor, whether by certification or approval; and

○ None of the proposed rule changes will affect the rights and obligations of any member.

Paragraph (d)(4) of proposed Rule 803, modelled on § 37.3(e)(4), would provide that, upon review of a request for transfer of registration, the Commission, as soon as practicable, shall issue an order either approving or denying the request.

Paragraph (e) of proposed Rule 803, like § 37.3(f), would provide that an applicant for registration as an SBSEF may withdraw its application by filing a withdrawal request electronically with the Commission using the EDGAR system as an Interactive Data File in accordance with Rule 405 of Regulation S-T. Proposed Rule 803(e) would further provide that withdrawal of an application for registration shall not affect any action taken or to be taken by the Commission based upon actions, activities, or events occurring during the time that the application was pending with the Commission.

Paragraph (f) of proposed Rule 803, like § 37.3(g), would provide that an SBSEF may request that its registration be vacated by filing a vacation request electronically with the Commission using the EDGAR system and must be provided as an Interactive Data File in accordance with Rule 405 of Regulation S-T at least 90 days prior to the date that the vacation is requested to take effect. Section 37.3(g) provides that a registration may be vacated under section 7 of the CEA. Since the Commission does not operate under the CEA, the Commission is proposing to adapt relevant language from section 7 of the CEA directly into proposed Rule 803(f). Thus, proposed Rule 803(f) would continue as follows, with language taken from section 7 italicized and language taken from § 37.3(g) in regular text: “ Upon receipt of such request, the Commission shall promptly order the vacation to be effective upon the date named in the request and send a copy of the request and its order to all other security-based swap execution facilities, SBS exchanges, and registered clearing agencies that clear security-based swaps. Vacation of registration shall not affect any action taken or to be taken by the Commission based upon actions, activities, or events occurring during the time that the security-based swap execution facility was registered by the Commission. From and after the date upon which the vacation became effective the said security-based swap execution facility can thereafter be registered again by applying to the Commission in the manner provided in paragraph (b) of this section for an original application.”

The Commission seeks comment on the following:

14. Do you believe in general that the Commission should closely harmonize the rules for SBSEF registration with the CFTC's rules for SEF registration? Why or why not?

15. In particular, do you agree with the language that the Commission is proposing to adapt from § 37.3 (Requirements and procedures for registration) into Rule 803? If not, what language would you delete or revise, and why?

16. Do you believe that the Commission should harmonize the application procedures and timeframes in proposed Rule 803 with § 37.3 of the CFTC's rules? Why or why not? Are there aspects of § 37.3 that you believe are not necessary or appropriate to incorporate into Rule 803? If so, please describe. Are there different or additional requirements that the Commission should include in Rule 803 that are not included in § 37.3? If so, please describe.

17. Do you believe that any provisions of § 37.3(c) relating to temporary registration are still relevant and should be adapted into Rule 803? If so, which provisions and why?

18. Do you believe in general that proposed Rule 803 should include provisions relating to vacation of an SBSEF registration? If so, do you agree with the specific language adapted by the Commission from section 7 of the CEA and § 37.3(g) into proposed Rule 803(f)? If not, how would you revise that language?

B. Form SBSEF

As new § 249.2001, the Commission is proposing Form SBSEF, the application form for an entity to register with the Commission as an SBSEF. The proposed form would also be used for submitting any updates, corrections, or supplemental information to a pending application for registration. Proposed Form SBSEF is closely modelled on the CFTC's Form SEF for entities that seek to register with the CFTC as SEFs, with only minor changes to remove the concept of post-registration amendments, as the proposed rule would not require any amendments to Form SBSEF post-registration. The exhibits being proposed along with Form SBSEF are very similar to the exhibits in Form SEF. Like with Form SEF, each applicant submitting a Form SBSEF would be required to provide the Commission with documents and descriptions pertaining to its business organization, financial resources, and compliance program, including various documents describing the applicant's legal and financial status. An applicant would be required to disclose any affiliates and provide a brief description of the nature of the affiliation, and submit copies of any agreements between the SBSEF and third parties that would assist the applicant in complying with its duties under the SEA. In addition, an applicant would be required to demonstrate operational capability through documentation, including technical manuals and third-party service provider agreements.

Under proposed Rule 803(b)(1), an applicant for SBSEF registration would be required to complete Form SBSEF and provide, upon the Commission's request, any additional necessary information and documentation in order review the application. The determination as to when an application submission is complete would be at the sole discretion of the Commission. The Commission would review Form SBSEF and, at the conclusion of its review, by order either: (i) Grant registration; (ii) deny the application for registration; or (iii) grant registration subject to certain conditions. After an applicant is granted registration, any updates or amendments to the information contained in its Form SBSEF by an active SBSEF would be required to be submitted as rules or rule amendments under proposed Rule 806 or 807 or as may be required by other rules in Regulation SE.

The CFTC's process for registering SEFs appears well understood by the industry and well designed for being adapted to the SBS market. Therefore, the Commission is using the CFTC's process as a basis for its own process for registering SBSEFs. Assuming that most if not all SBSEFs will be dually registered as SEFs, the Commission preliminarily believes that it is not necessary to require the same registrant to provide relevant information in one manner to the Commission if the CFTC requires it in a different manner.

The Commission seeks comment on the following:

19. Are there parts of Form SEF that you believe are not necessary or appropriate to incorporate into Form SBSEF? If so, please describe.

20. Are there different or additional requirements that the Commission should include in Form SBSEF that are not included in Form SEF? If so, please describe. What would be the benefits and costs of requiring that information in Form SBSEF that is not required by the CFTC in Form SEF?

C. Abbreviated Registration Procedures for CFTC-Registered SEFs

Many of the entities that will seek registration with the Commission as SBSEFs are already registered with the CFTC as SEFs. Entities that seek dual registration presumably see efficiencies in utilizing the same systems, policies, and procedures to trade both swaps and SBS. As noted throughout this release, the Commission seeks to harmonize the SBSEF regulatory regime as closely as practicable with the CFTC's SEF regulatory regime, achieving similar regulatory benefits as the CFTC regime while imposing only marginal costs on dually-registered SEF/SBSEFs and their members. If the Commission ultimately adopts SBSEF rules that are closely harmonized with those of the CFTC, SEFs that seek dual registration with the SEC would likely need to make only minor adjustments to their rules and trading procedures to support trading of SBS in addition to the trading of swaps. The Commission preliminarily believes that whether an entity is registered as a SEF and in good standing with the CFTC is relevant when considering its application to register as an SBSEF, and that an abbreviated registration for CFTC-registered SEFs is appropriate. Furthermore, the Commission is preliminarily considering that, after adopting final rules establishing a registration process for SBSEFs, it could exercise its exemptive authority under section 36(a)(1) of the SEA to relax or eliminate entirely certain of the registration requirements for entities that are already registered as SEFs with the CFTC.

The Commission seeks comment on the following:

21. Do you believe in general that the Commission should utilize its authority under section 36(a)(1) of the SEA to establish an abbreviated procedure for entities wishing to register as SBSEFs that are already registered with the CFTC as SEFs? Why or why not?

22. If so, what registration requirements should the Commission relax or eliminate entirely for entities seeking dual registration?

VI. Rule and Product Filings by SBSEFs

Unlike section 19(b) of the SEA, which sets out a process whereby national securities exchanges and other SROs submit filings to the Commission to add, delete, or amend rules (including rules to list products), section 3D of the SEA does not set out an equivalent process for SBSEFs. It can be expected, however, that an SBSEF will seek to change its rules over time in order, for example, to implement new trading methodologies and to expand its product offerings, with the intent to make its market more attractive to participants. The Commission preliminarily believes, therefore, that some review process is necessary to assess whether such changes to an SBSEF's rules and product offerings are consistent with section 3D of the SEA and the Commission's rules thereunder. The Commission preliminarily believes that the CFTC's filing procedures are an appropriate model on which to base its own filing procedures. Furthermore, because of the likelihood that most if not all SBSEFs will be dually registered with the CFTC as SEFs and that many rule changes for a dual registrant will affect both its SBS and swap trading businesses, close harmonization with the CFTC's filing procedures would allow a dual registrant to make a similar filing to each agency, allowing each agency to carry out its oversight functions while minimizing the burdens on dual registrants.

Parts 37 and 40 of the CFTC's rules set out processes whereby SEFs may establish or amend rules and list products. In short, these processes allow a SEF to voluntarily submit a rule, rule amendment, or new product for CFTC review and approval, or to “self-certify” that a rule, rule amendment, or new product meets applicable standards under the CEA and the CFTC's rules thereunder without obtaining CFTC approval, although the CFTC retains the ability, in certain circumstances, to stay the self-certification for further review before it may become effective. Using its general authority to impose any requirement on SBSEFs and to prescribe rules governing the regulation of SBSEFs, the Commission is proposing to establish similar filing processes for registered SBSEFs in proposed Rules 804 to 810 of Regulation SE.

A. Rule 804—Listing Products for Trading by Certification

Proposed Rule 804 is modelled on § 40.2 of the CFTC's rules and would set forth procedures by which an SBSEF may list a product via certification.

§ 40.2(a) specifies the filing requirements for DCMs and SEFs to certify a product for listing. Paragraph (a) of proposed Rule 804 would adapt these requirements for SBSEFs, with one exception, as explained in the next paragraph. Paragraph (a)(1) of proposed Rule 804 would require an SBSEF to file its submission electronically with the Commission using the EDGAR system as an Interactive Data File in accordance with Rule 405 of Regulation S-T.

Paragraph (a)(2) of proposed Rule 804 would provide that the Commission must receive the submission by the open of business on the business day that is ten business days preceding the product's listing. By contrast, the parallel provision in § 40.2(a) provides that a DCM or SEF must file the self-certification only one business day before listing the product. The Commission preliminarily believes that a ten-business-day review period for self-certified SBS products before they can be listed strikes a reasonable balance between allowing SBSEFs to bring new products to market quickly while affording the Commission staff a reasonable period in which to assess them prior to listing. The Commission is concerned that one business day would not provide the SEC staff sufficient time to review a new product, especially a novel or complex product that might be difficult to analyze. As discussed below, the Commission is proposing that it could stay a product for reasons similar to those in the CFTC's stay provision. If a product does warrant a stay, the Commission also would need sufficient time to go through the administrative steps of formally issuing the stay. The proposed ten-business-day review period for self-certified products accords with the CFTC's ten-business-day review period for self-certified rules, which the Commission is proposing to replicate in Rule 807(a)(3).

Paragraph (a)(3) of proposed Rule 804 would require a self-certification to include:

(1) A copy of the submission cover sheet;

(2) A copy of the product's rules, including all rules related to its terms and conditions;

(3) The intended listing date;

(4) A certification by the SBSEF that the product to be listed complies with the SEA and the Commission's rules thereunder;

(5) A concise explanation and analysis of the product and its compliance with applicable provisions of the SEA, including core principles, and the Commission's rules thereunder. This explanation and analysis shall either be accompanied by the documentation relied upon to establish the basis for compliance with applicable law, or incorporate information contained in such documentation, with appropriate citations to data sources;

(6) A certification that the SBSEF posted a notice of pending product certification with the Commission and a copy of the submission, concurrent with the filing of a submission with the Commission, on the SBSEF's website; and

(7) A request for confidential treatment, if appropriate, as permitted pursuant to SEA Rule 24b-2.

Paragraph (b) of proposed Rule 804, modelled on § 40.2(b), would provide that, if requested by Commission staff, an SBSEF shall provide any additional evidence, information, or data that demonstrates that the SBS meets, initially or on a continuing basis, the requirements of the SEA or the Commission's rules or policies thereunder.

Section 40.2(c) provides that the CFTC may stay the listing of a contract pursuant to paragraph (a) of this section during the pendency of CFTC proceedings 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 CEA. The SEA does not include the CEA's provisions regarding altering or amending the terms and conditions of an SBS listed by an SBSEF like the authority granted to the CFTC with respect to products listed by SEFs, such that the Commission would be able to stay the listing of an SBS that it believes may be inconsistent with the SEA, pending proceedings to exercise that authority. Nor are proceedings for false certification of an SBS contemplated by the SEA. For this reason, in lieu of harmonizing with § 40.2(c), the Commission is proposing, in Rule 804(c), a provision that would allow the Commission to stay the certification of a new product in the same manner that proposed Rule 807(c)—which, as described below, is itself based on § 40.6(c) of the CFTC rules—would allow the Commission to stay the self-certifications of a new rule or rule amendment.

Thus, paragraph (c)(1) of proposed Rule 804 would provide that the Commission may stay the certification of a new product by issuing a notification informing the SBSEF that the Commission is staying the certification on the grounds that the product presents novel or complex issues that require additional time to analyze, is accompanied by an inadequate explanation, or is potentially inconsistent with the SEA or the Commission's rules thereunder. Under paragraph (c)(1), the Commission would have an additional 90 days from the date of the notification to conduct the review. Paragraph (c)(2) would require the Commission to provide a 30-day comment period during that 90 days, and to publish a notice of the 30-day comment period on the Commission's website. Comments from the public could be submitted as specified in that notice. Paragraph (c)(3) would provide that the product that had been stayed would become effective, pursuant to the certification, at the expiration of the 90-day review period, unless the Commission withdraws the stay prior to that time, or the Commission notifies the SBSEF during the 90-day time period that it objects to the proposed certification on the grounds that the proposed product is inconsistent with the SEA or the Commission's rules.

Paragraph (d) of § 40.2 provides that a DCM or SEF may submit a class certification of swaps based on an “excluded commodity,” subject to certain conditions. The proposed rules do not provide for class certification of any SBS although, as noted below, the Commission seeks commenters' views on whether the concept of class certification would be appropriate for SBSEFs.

The Commission preliminarily believes that proposed Regulation SE should allow SBSEFs to introduce new SBS products to their market places as speedily as practicable while affording the Commission an effective mechanism to assess their consistency with section 3D of the SEA. The Commission preliminarily believes that the CFTC's self-certification procedures are well articulated and well understood by SEFs, and that harmonizing with these procedures for new product filings by SBSEF would yield comparable regulatory benefits while minimizing burdens on SBSEFs. At the same time, the Commission preliminarily believes that, for the reasons noted above, a ten-business-day pre-listing review period is more appropriate than a one-business-day review period for self-certified SBS products.

The Commission seeks comment on the following:

23. Do you believe in general that Regulation SE should include a rule that allows SBSEFs to list products for trading by certification? Why or why not?

24. In particular, should the Commission establish a procedure for listing SBS products for trading by certification by harmonizing closely with § 40.2 of the CFTC's rules? Why or why not?

25. Do you agree with the ten-business-day pre-listing review period for self-certified products in proposed Rule 804(a)(2) instead of the CFTC's one-business-day review period? Why or why not? What economic harm might an SBSEF and/or its members suffer if the Commission ultimately adopted a review period other than one business day? If you believe that the Commission should adopt a review period of greater than one day (but other than ten), please explain.

26. Do you believe that the Commission should adapt the concept of class certification from § 40.2(d) into proposed Rule 804? Why or why not? If so, how do you believe a “class” should be defined for purposes of listing SBS products on an SBSEF? Should there be any conditions for class certification? If so, what conditions and why?

27. Are there any provisions of proposed Rule 804 that the Commission has adapted from § 40.2 that you believe would be inappropriate, or would not create any benefit, in a Commission rule to establish procedures for SBSEFs to list SBS products for trading by certification? If so, please identify any such provision, explain why it would be inappropriate or unnecessary for SBSEFs, and what economic benefit that you believe would result from omitting it from the Commission's final rule.

28. Do you believe that proposed Rule 804(c), relating to stays of product certifications, mirroring the Commission's proposed provisions relating to stays of self-certifications of new rules, is appropriate and workable? Why or why not? If not, what alternatives, if any, should be considered to enable the Commission to stay product certifications that it believes pose issues with respect to consistency with the SEA?

B. Rule 805—Voluntary Submission of New Products for Commission Review and Approval

Proposed Rule 805 is closely modelled on § 40.3 of the CFTC's rules and would set forth procedures by which an SBSEF may voluntarily submit new SBS products for Commission review and approval.

Section 40.3(a) provides that a SEF or DCM may request the CFTC to approve a new or dormant product prior to listing it for trading, and sets out the filing requirements. Paragraph (a) of proposed Rule 805 would adapt these requirements for SBSEFs. First, an SBSEF would be required to file its submission electronically with the Commission using the EDGAR system as an Interactive Data File in accordance with Rule 405 of Regulation S-T. The filing also would have to include a copy of the submission cover sheet, a copy of the rules that set forth the terms and conditions of the SBS to be listed, and an explanation and analysis of the product and its compliance with applicable provisions of the SEA, including the Core Principles and the Commission's rules thereunder. The submission also would have to describe any agreements or contracts entered into with other parties that enable the SBSEF to carry out its responsibilities.

Furthermore, paragraph (a) of proposed Rule 805, modelled on § 40.3(a), would require the SBSEF to include, if requested by Commission staff, additional evidence, information, or data demonstrating that the SBS meets, initially or on a continuing basis, the requirements of the SEA, or other requirement for registration under the SEA, or the Commission's rules or policies thereunder. The SBSEF would be required to submit the requested information by the open of business on the date that is two business days from the date of request by Commission staff, or at the conclusion of such extended period agreed to by Commission staff after timely receipt of a written request from the SBSEF. Paragraph (a) of proposed Rule 805, like § 40.3(a), would permit the submitting SBSEF to include a request for confidential treatment regarding portions of its application. Finally, paragraph (a) of proposed Rule 805, like § 40.3(a), would require the SBSEF to certify that it posted a notice of its request for Commission approval of the new product and a copy of the submission, concurrent with the filing of a submission with the Commission, on the SBSEF's website.

Paragraph (a) of proposed Rule 805 would omit two provisions in § 40.3(a). First, § 40.3(a)(6) requires the submitting entity to include the certifications required in § 41.22 for product approval of a commodity that is a security future or a security futures product, as defined in sections 1a(44) or 1a(45) of the CEA, respectively. The Commission is not adapting this provision into proposed Regulation SE because it pertains to security futures and security futures products, not to swaps or SBS. Second, § 40.3(a)(8) requires the submitting entity to include a filing fee. The Commission is not proposing to charge SBSEFs filing fees for submitting new product proposals.

Paragraph (b) of proposed Rule 805, like § 40.3(b), would provide that the Commission shall approve a new product unless the terms and conditions of the product violate the SEA or the Commission's rules thereunder.

Paragraph (c) of proposed Rule 805, modelled on § 40.3(c), would provide that a product submitted for Commission approval under Rule 805 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 proposed Rule 805(d), unless notified otherwise within the applicable period, if the submission complies with the requirements of Rule 805(a) and the SBSEF does not amend the terms or conditions of the product or supplement the request for approval, except as requested by the Commission or for correction of typographical errors, renumbering, or other non-substantive revisions, during that period. Paragraph (c) also would provide that any voluntary, substantive amendment by the SBSEF would be treated as a new submission under Rule 805.

Paragraph (d) of proposed Rule 805, modelled on § 40.3(d), would provide that the Commission may extend the 45-day review period in paragraph (c) for an additional 45 days, if the product raises novel or complex issues that require additional time to analyze, in which case the Commission shall notify the SBSEF within the initial 45-day review period and briefly describe the nature of the specific issue(s) for which additional time for review is required. Paragraph (d) also would provide that the Commission may extend the 45-day review period for any length of time to which the SBSEF agrees in writing.

Paragraph (e) of proposed Rule 805 would provide that the Commission, at any time during its review, may notify the SBSEF that it will not, or is unable to, approve the product. This notification would have to briefly specify the nature of the issues raised and the specific provision of the SEA or the Commission's rules thereunder, including the form or content requirements of proposed Rule 805(a), that the product violates, appears to violate, or potentially violates but which cannot be ascertained from the submission. Paragraph (f) of proposed Rule 805, like § 40.3(f), would provide that such notification of the Commission's determination not to approve a product does not prejudice the SBSEF from subsequently submitting a revised version of the product for Commission approval, or from submitting the product as initially proposed pursuant to a supplemented submission. Furthermore, such notification would be presumptive evidence that the entity may not truthfully certify under proposed Rule 804 that the same, or substantially the same, product does not violate the SEA or the Commission's rules thereunder.

The Commission preliminarily believes that it is reasonable and appropriate to supplement the product certification procedures in proposed Rule 804 by also including in Regulation SE, as proposed Rule 805, procedures for voluntary submission of new products for Commission review and approval. The Commission preliminarily believes that providing this approval process, as the CFTC does, can be valuable to an SBSEF seeking the Commission's concurrence that a new product is in compliance with the SEA prior to listing it. The Commission preliminarily believes that the CFTC's procedures in this regard are well articulated and well understood by SEFs, and that closely harmonizing with these procedures would yield comparable regulatory benefits while minimizing burdens on SBSEFs.

The Commission requests comment on the following:

29. Do you believe in general that Regulation SE should include a rule setting forth procedures for an SBSEF to voluntarily submit new SBS products for Commission review and approval? Why or why not?

30. In particular, should the Commission adopt procedures for voluntary submission of new SBS products for Commission review and approval by harmonizing closely with § 40.3 of the CFTC's rules? Why or why not?

31. Are there any provisions of § 40.3 that are adapted into proposed Rule 805 that you believe would be inappropriate, or would not create any benefit, in a Commission rule applying to SBSEFs? If so, please identify any such provision, explain why it would be inappropriate or unnecessary for SBSEFs, and what economic benefit that you believe would result from omitting it from the Commission's final rule.

C. Rule 806—Voluntary Submission of Rules for Commission Review and Approval

Proposed Rule 806 is closely modelled on § 40.5 of the CFTC's rules and would set forth procedures by which an SBSEF may voluntarily submit rules, rule amendments, or dormant rules for Commission review and approval.

Section 40.5(a) provides that a registered entity, including a SEF, may request that the CFTC approve a new rule, rule amendment, or dormant rule and sets out the filing requirements. Paragraph (a) of proposed Rule 805 would adapt these requirements for SBSEFs. First, an SBSEF would be required to file its submission electronically with the Commission using the EDGAR system as an Interactive Data File in accordance with Rule 405 of Regulation S-T. The filing also would have to include a copy of the submission cover sheet and set forth the text of the rule or rule amendment (in the case of a rule amendment, deletions and additions must be indicated). Further, the SBSEF would be required to describe the proposed effective date of the rule or rule amendment and any action taken or anticipated to be taken to adopt the proposed rule by the SBSEF or by its governing board or by any committee thereof, and cite the rules of the SBSEF that authorize the adoption of the proposed rule. The SBSEF also would be required to provide an explanation and analysis of the operation, purpose, and effect of the proposed rule or rule amendment and its compliance with applicable provisions of the SEA, including the core principles relating to SBSEFs and the Commission's rules thereunder, and, 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 SBSEF's framework of regulation.

Moreover, the SBSEF would be required to provide additional information which 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 SBSEF, the pertinent text of any such rule would have to be set forth and the anticipated effect described. The SBSEF also would be required to provide a brief explanation of any substantive opposing views expressed to the SBSEF by governing board or committee members, members of the SBSEF, or market participants that were not incorporated into the rule, or a statement that no such opposing views were expressed.

The SBSEF could request confidential treatment for portions of its submission, as permitted by SEA Rule 24b-2. Finally, the SBSEF would have to certify that it posted a notice of the pending rule with the Commission and a copy of the submission, concurrent with the filing of a submission with the Commission, on the SBSEF's website.

Paragraph (b) of proposed Rule 806, modelled on § 40.5(b), would provide that the Commission shall approve a new rule or rule amendment unless the rule or rule amendment is inconsistent with the SEA or the Commission's rules thereunder. Paragraph (c) of proposed Rule 806, like § 40.5(c), would provide that a rule or rule amendment submitted for Commission approval under Rule 806 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 SBSEF is notified otherwise within the applicable period, if the submission complies with the requirements of proposed Rule 806(a) and the SBSEF does not amend the proposed rule or supplemented the submission, except as requested by the Commission, during the pendency of the review period, other than for correction of typographical errors, renumbering, or other non-substantive revisions. Paragraph (c) also would provide that any amendment or supplementation not requested by the Commission would be treated as the submission of a new filing under Rule 806.

Paragraph (d) of proposed Rule 806, modelled on § 40.5(d), would provide that the Commission may further extend the review period in paragraph (c) for an additional 45 days, if the proposed rule or rule amendment 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, in which case the Commission shall notify the submitting SBSEF 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. Paragraph (d) also would allow an extension to which the SBSEF agrees in writing.

Paragraph (e) of proposed Rule 806, like § 40.5(e), would provide that, at any time during its review, the Commission may notify the SBSEF that it will not, or is unable to, approve the new rule or rule amendment. This notification would have to briefly specify the nature of the issues raised and the specific provision of the SEA or the Commission's rules thereunder, including the form or content requirements of proposed Rule 806, with which the new rule or rule amendment is inconsistent or appears to be inconsistent with the SEA or the Commission's rules thereunder. Paragraph (f) of proposed Rule 806, like § 40.5(f), would provide that such notification to an SBSEF would not prevent the SBSEF from subsequently submitting a revised version of the proposed rule or rule amendment for Commission review and approval or from submitting the new rule or rule amendment as initially proposed in a supplemented submission. Paragraph (f) would further provide that the revised submission would be reviewed without prejudice. Finally, paragraph (f) would provide that such notification to an SBSEF of the Commission's determination not to approve a proposed rule or rule amendment shall be presumptive evidence that the SBSEF may not truthfully certify the same, or substantially the same, proposed rule or rule amendment under proposed Rule 807(a).

Paragraph (g) of proposed Rule 806, like § 40.5(g), would provide that, notwithstanding Rule 806(c), changes to a proposed rule or a rule amendment, including changes to terms and conditions of a product that are consistent with the SEA and the Commission's rules thereunder, 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.

The Commission preliminarily believes that Regulation SE should afford the Commission a means for assessing whether SBSEF rules and rule amendments are consistent with section 3D of the SEA, and that it is appropriate to achieve this aim by aligning closely with the CFTC's process for voluntary rule-approval submission in § 40.5. The CFTC's procedures are well articulated and well understood by SEFs, and closely harmonizing with these procedures should yield comparable regulatory benefits while minimizing burdens on SBSEFs. As with the process for seeking Commission approval of new products, the Commission preliminarily believes that providing a process for voluntarily seeking Commission approval of rules, rule amendments, and dormant rules—as the CFTC does—can be valuable to an SBSEF seeking the Commission's concurrence that the rule change is consistent with the SEA prior to implementing it. Moreover, for dually registered SEF/SBSEFs, it is likely that certain rules will apply to member behavior generally—and not to one product market ( e.g., swaps or SBS) exclusively—and so will have to be filed with both the SEC and CFTC. Closely harmonizing the SEC's filing procedures with § 40.5 would allow dually registered entities to submit the same (or substantially the same) filing to both agencies for review and approval. The Commission preliminarily believes that it is not necessary to require SBSEFs to make a substantially different type of filing to the SEC than to the CFTC for the same underlying rule.

The Commission seeks comment on the following:

32. Do you believe in general that Regulation SE should include a rule establishing procedures for an SBSEF to voluntarily submit rules and rule amendments for Commission review and approval? Why or why not?

33. In particular, should the Commission adopt procedures for voluntary submission of rules and rule amendments for Commission review and approval by harmonizing closely with § 40.5 of the CFTC's rules? Why or why not?

34. Are there any provisions of § 40.5 that are adapted into proposed Rule 806 that you believe would be inappropriate, or would not create any benefit, in a Commission rule applying to SBSEFs? If so, please identify any such provision, explain why it would be inappropriate or unnecessary for SBSEFs, and what economic benefit that you believe would result from omitting it from the Commission's final rule.

D. Rule 807—Self-Certification of Rules

Proposed Rule 807 is closely modelled on § 40.6 of the CFTC's rules and would set forth procedures by which an SBSEF may self-certify changes to its rules. Paragraph (a) of proposed Rule 807, modelled on § 40.6(a), would set forth the conditions that an SBSEF must comply with before implementing a rule or rule amendment via self-certification. Like § 40.6(a), proposed Rule 807(a) would permit an SBSEF to implement a rule or rule amendment without obtaining the Commission's prior approval under Rule 806, but only if it “self-certifies” the rule or rule amendment in compliance with the conditions set forth in Rule 807. Rule 807(a) also would permit an SBSEF to self-certify a rule or rule amendment that the Commission had previously approved under Rule 806, or that the SBSEF had previously self-certified under this Rule 807, but that in the interim had become a dormant rule ( i.e., unimplemented for 12 consecutive calendar months).

Paragraph (a)(1) of proposed Rule 807 would require the SBSEF to file its submission electronically with the Commission using the EDGAR system as an Interactive Data File in accordance with Rule 405 of Regulation S-T. Paragraph (a)(2) would require the SBSEF to provide a certification that the SBSEF posted a notice of the self-certification with the Commission and a copy of the submission, concurrent with the filing of a submission with the Commission, on the SBSEF's website. Paragraph (a)(3) would provide that the Commission must have received the submission not later than the open of business on the business day that is ten business days before the SBSEF's implementation of the rule or rule amendment. Paragraph (a)(4) would provide that the SBSEF may not implement the rule or rule amendment if the Commission has stayed it pursuant to proposed Rule 807(c), discussed below.

Section 40.6(a)(5) sets forth an additional condition that the rule or rule amendment is not a rule or rule amendment of a DCM that materially changes a term or condition of a contract for future delivery of an agricultural commodity enumerated in section 1a(4) of the CEA or an option on such a contract or commodity in a delivery month having open interest. Because this provision applies to DCMs that trade contracts for future delivery of agricultural commodities, it is not germane to the SBS markets; therefore, the Commission is not adapting this condition into proposed Rule 807.

Section 40.6(a)(6) sets out procedures for emergency rule certifications, which the Commission is proposing to adapt into paragraph (a)(5) of Rule 807. Paragraph (a)(5)(i) would require a new rule or rule amendment that establishes standards for responding to an emergency to be submitted pursuant to Rule 807(a). Paragraph (a)(5)(ii) would provide that a rule or rule amendment implemented under procedures of the governing board to respond to an emergency shall, if practicable, be filed with the Commission prior to implementation or, if not practicable, be filed with the Commission at the earliest possible time after implementation, but in no event more than 24 hours after implementation. In addition, paragraph (a)(5)(ii) would provide that any such submission be subject to the certification and stay provisions of proposed Rules 807(b) and (c), described below.

Paragraph (a)(6) of proposed Rule 807, modelled on § 40.6(a)(7), would set out the required elements for a rule submission under Rule 807. These requirements would include a copy of the submission cover sheet (in the case of a rule or rule amendment that responds to an emergency, “Emergency Rule Certification” should be noted in the description section of the submission cover sheet); the text of the rule (in the case of a rule amendment, deletions and additions must be indicated); the date of intended implementation; a certification by the SBSEF that the rule complies with the SEA and the Commission's rules thereunder; a concise explanation and analysis of the operation, purpose, and effect of the proposed rule or rule amendment and its compliance with applicable provisions of the SEA, including Core Principles relating to SBSEFs and the Commission's rules thereunder; and a brief explanation of any substantive opposing views expressed to the SBSEF by governing board or committee members, members of the SBSEF, or market participants, that were not incorporated into the rule, or a statement that no such opposing views were expressed. Paragraph (a)(6)(vii) also would permit the SBSEF to request confidential treatment for portions of its submission.

Paragraph (a)(7) of proposed Rule 807, like § 40.6(a)(8), would require an SBSEF 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 SBSEF's compliance with any of the requirements of the SEA or the Commission's rules or policies thereunder.

Paragraph (b) of proposed Rule 807, modelled on § 40.6(b), would give the Commission ten business days to review the new rule or rule amendment before it is deemed certified and can be made effective, unless the Commission notifies the SBSEF during that ten-business-day review period that it intends to issue a stay of the certification under proposed Rule 807(c).

Paragraph (c)(1) of proposed Rule 807, modelled on § 40.6(c)(1), would provide that the Commission may stay the certification of a new rule or rule amendment by issuing a notification informing the SBSEF that the Commission is staying the certification on the grounds that it presents novel or complex issues that require additional time to analyze, is accompanied by an inadequate explanation, or is potentially inconsistent with the SEA or the Commission's rules thereunder. In addition, paragraph (c)(1) would afford the Commission an additional 90 days from the date of the notification to conduct the review.

Paragraph (c)(2) of proposed Rule 807, modelled on § 40.6(c)(2), would require the Commission to provide a 30-day comment period within the 90-day period in which the stay is in effect. The Commission would be required to publish a notice of the 30-day comment period on the Commission's internet website, and comments from the public could be submitted as specified in that notice.

Paragraph (c)(3) of proposed Rule 807, modelled on § 40.6(c)(3), would provide that the new rule or rule amendment subject to the stay shall become effective, pursuant to the certification, at the expiration of the 90-day review period, unless the Commission withdraws the stay prior to that time, or the Commission notifies the SBSEF during the 90-day period that it objects to the proposed certification on the grounds that the proposed rule or rule amendment is inconsistent with the SEA or the Commission's rules thereunder.

Section 40.6(c)(4), relating to rules or rule amendments already implemented by a SEF (as opposed to rules or rule amendments that are the subject of a new submission) provides: “The Commission may stay the effectiveness of an implemented rule during the pendency of Commission proceedings for filing a false certification or during the pendency of a petition to alter or amend the rule pursuant to section 8a(7) of the Act. The decision to stay the effectiveness of a rule in such circumstances shall not be delegable to any employee of the Commission.” As previously noted, the SEA does not provide the Commission explicit authority to alter or amend the terms and conditions of an SBS like the authority granted to the CFTC with respect to swaps, and does not contemplate proceedings for a false certification. Hence the Commission is not proposing a provision corresponding to § 40.6(c)(4).

Section 40.6(d) of the CFTC's rules allows a registered entity to place certain rules or rule amendments into effect even without a self-certification, if certain enumerated conditions are met. Certain types of these rules or rule amendments must be disclosed on a “Weekly Notification of Rule Amendments,” pursuant to § 40.6(d)(1) and (2), while others can be put into effect without any notification to the CFTC at all, pursuant to § 40.6(d)(3). Paragraph (d) of proposed Rule 807, modelled on § 40.6(d), would provide that certain kinds of rules or rule amendments may be put into effect by an SBSEF without certification to the Commission if similar enumerated conditions are met. Some would be subject to a Weekly Notification of Rule Amendments, which is closely modelled on the CFTC notification; others would not be subject to any notification requirement.

Under paragraph (d)(2) of proposed Rule 807, the following types of rules could be put into effect by an SBSEF without self-certification, so long as they are disclosed on the Weekly Notice of Rule Amendments:

• Non-substantive revisions. Corrections of typographical errors, renumbering, periodic routine updates to identifying information about the SBSEF, and other such non-substantive revisions of a product's terms and conditions that have no effect on the economic characteristics of the product;

• Fees. Fees or fee changes, other than fees or fee changes associated with market making or trading incentive programs, that total $1.00 or more per contract, and are established by an independent third party or are unrelated to delivery, trading, clearing, or dispute resolution.

• Survey lists. Changes to lists of banks, brokers, dealers, or other entities that provide price or cash market information to an independent third party and that are incorporated by reference as product terms;

• Approved brands. Changes in lists of approved brands or markings pursuant to previously certified or Commission approved standards or criteria;

• Trading months. The initial listing of trading months, which may qualify for implementation without notice, within the currently established cycle of trading months; or

• Minimum tick. Reductions in the minimum price fluctuation (or `tick').

Under paragraph (d)(3)(ii) of proposed Rule 807, the following types of rules could be put into effect by an SBSEF without self-certification and without having to be disclosed on the Weekly Notice of Rule Amendments:

• Transfer of membership or ownership. Procedures and forms for the purchase, sale, or transfer of membership or ownership, but not including qualifications for membership or ownership, any right or obligation of membership or ownership, or dues or assessments;

• Administrative procedures. The organization and administrative procedures of governing bodies such as a governing board, officers, and committees, but not voting requirements, governing 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;

• Administration. The routine daily administration, direction, and control of employees, requirements relating to gratuity and similar funds, but not guaranty, reserves, or similar funds; declaration of holidays; and changes to facilities housing the market, trading floor, or trading area;

• Standards of decorum. Standards of decorum or attire or similar provisions relating to admission to the floor, badges, or visitors, but not the establishment of penalties for violations of such rules;

• Fees. Fees or fee changes, other than fees or fee changes associated with market making or trading incentive programs that are less than $1.00 or relate to matters such as dues, badges, telecommunication services, booth space, real-time quotations, historical information, publications, software licenses, or other matters that are administrative in nature.

• Trading months. The initial listing of trading months which are within the currently established cycle of trading months.

Paragraphs (d)(2) and (3) of proposed Rule 807, which enumerate the types of rule and rule amendments that an SBSEF could put into effect without a self-certification, are adapted from the types of rules enumerated in § 40.6(d)(2) and (3). However, the Commission is not adapting into proposed Rules 807(d)(2) and (d)(3) the other types of rules enumerated in § 40.6(d)(2) and (3).

The Commission preliminarily believes that Regulation SE should afford the Commission a mechanism to assess new SBSEF rules and rule amendments for consistency with section 3D of the SEA, and to permit SBSEFs to submit new rules and rule amendments using a self-certification process closely aligned with the § 40.6. The CFTC's procedures are well articulated and well understood by SEFs, and closely harmonizing with these procedures should yield comparable regulatory benefits while minimizing burdens on SBSEFs. It is likely that certain rules of dually registered SEF/SBSEFs will apply to member behavior generally—and not to one product market ( e.g., swaps or SBS) exclusively—and so will have to be filed with both the SEC and CFTC. Closely harmonizing the SEC's filing procedures with the CFTC's would allow dually registered entities to submit the same (or substantially the same) filing to both agencies for review. The Commission preliminarily believes that it is not necessary to require SBSEFs to make a substantially different type of filing to the SEC than to the CFTC for the same underlying rule.

The Commission requests comment on the following:

35. Do you believe in general that Regulation SE should include a rule establishing procedures for an SBSEF to establish rules via self-certification? Why or why not?

36. In particular, should the Commission adopt procedures for self-certification of rules by harmonizing closely with § 40.6 of the CFTC's rules? Why or why not?

37. Are there any provisions of § 40.6 that are adapted into proposed Rule 807 that you believe would be inappropriate, or would not create any benefit, in a Commission rule applying to SBSEFs? If so, please identify any such provision, explain why it would be inappropriate or unnecessary for SBSEFs, and what economic benefit that you believe would result from omitting it from the Commission's final rule.

38. Do you disagree with the specific language that the Commission is proposing? If so, what revisions to the language would you suggest?

39. Do you agree with the proposed list of the types of rules and rule amendments that the Commission would allow an SBSEF to make effective without a self-certification? Are there any types that you believe should be added to that list? If so, which types and why? Are there any types that you believe should be removed from that list? If so, which types and why?

E. Submission Cover Sheet and Instructions

As new § 249.2002, the Commission is proposing a submission cover sheet and instructions that an SBSEF would be required to use in conjunction with filings submitted pursuant to proposed Rules 804 through 807, 809, and 816. These are modelled on the cover sheet and instructions used by SEFs in conjunction with their analogous filings with the CFTC.

The same cover sheet and instructions would be used for a new rule, rule amendment, or new product filing, with the SBSEF checking the appropriate box to indicate which of these types the filing represents. The SBSEF also would be required to check boxes to indicate whether the submission was seeking approval by the Commission or whether it was being filed as a certification by the SBSEF; and to identify the specific provision in the Commission's rules pursuant to which the filing was being submitted. The submission cover sheet also would include a box that the SBSEF would check if it intends to submit a request for a joint interpretation from the Commission and the CFTC regarding whether the product is a swap, an SBS, or mixed swap pursuant to SEA Rule 3a68-2. Finally, the cover sheet would include a check box by which an SBSEF could indicate that it was requesting confidential treatment of materials in the submission.

The cover sheet would divide the rules and rule amendment filings into two categories: One for general rules of the SBSEF and the other for rules relating to the terms and conditions of a product. Additional boxes would need to be checked if a filing under the terms-and-conditions category concerned specifically a determination by the SBSEF that a particular SBS was now to be considered MAT (“made-available-to-trade”); or if the filing concerned the delisting of an SBS with no open interest. The cover sheet would need to be used in conjunction with the weekly notifications that SBSEFs would be required to file pursuant to Rule 807(d) for certain changes that do not need to be approved or certified, as discussed above.

Paragraph (a) of the submission cover sheet instructions would provide that a properly completed submission cover sheet must accompany all rule and product submissions submitted electronically to the Commission by an SBSEF, using the EDGAR system and must be provided as an Interactive Data File in accordance with Rule 405 of Regulation S-T. Per paragraph (a), a properly completed submission cover sheet would include all of the following:

1. The name and platform ID of the SBSEF.

2. The date of the filing.

3. An indication as to whether the filing is a new rule, rule amendment, or new product.

4. For rule filings, the rule number(s) being adopted or, in the case of rule amendments, the number of the rule(s) being modified.

5. For rule or rule amendment filings, a description of the new rule or rule amendment, including a discussion of its expected impact on the SBSEF, its members, and the overall market. The instructions will state that the narrative should describe the substance of the submission with enough specificity to characterize all material aspects of the filing.

Paragraph (b) of the proposed submission cover sheet instructions would state that a submission must comply with all applicable filing requirements for proposed rules, rule amendments, or products, and that the filing of the submission cover sheet would not obviate the SBSEF's responsibility to comply with applicable filing requirements.

Paragraph (c) of the proposed submission cover sheet would state that checking the box marked “confidential treatment requested” would not obviate the submitter's responsibility to comply with all applicable requirements for requesting confidential treatment under SEA Rule 24b-2 and would not substitute for notice or full compliance with such requirements.

The Commission contemplates establishing a system for electronic completion of the cover sheet and attachment of the submissions required by proposed Rules 804, 805, 806, 807, and 809, and will advise affected persons regarding its use by public announcement in advance of the effective date of these rules.

The Commission seeks comment on the following:

40. Do you agree in general that the submission cover sheet and instructions for SBSEF filings should be harmonized with the CFTC's? Why or why not?

41. Do you agree with the specific language proposed in the cover sheet and instructions? If not, how should the language be revised? Is there any information not included in the proposed cover sheet and instructions that you believe should be included?

42. Do you agree with the requirement for an SBSEF to report its platform ID on the cover sheet? Should the disclosure of standard identifiers such as the LEI, the Financial Instrument Global Identifier (“FIGI”), and the Unique Product Identifier (“UPI”) be included in an SBSEF's other reporting obligations under the proposed rules?

43. Are any of the instructions in the submission cover sheet unclear? If so, what matters do you believe require clarification?

F. Rule 808—Availability of Public Information

Section 40.8 of the CFTC's rules is entitled “Availability of public information.” § 40.8(a) provides that any part of an application to register as a SEF (among other CFTC-registered entities) that is not covered by a request for confidential treatment will be made publicly available. Section 40.8(a) also sets out the sections of an application to register as a SEF that shall be made publicly available. Section 40.8(c) provides that rule and new product filings by a SEF, whether made under the self-certification procedures or pursuant to CFTC review and approval, will be treated as public information unless accompanied by a request for confidential treatment. Section 40.8(c) includes procedures for such requests for confidential treatment. Section 40.8(d) provides that CFTC staff will not consider confidential treatment requests for information that is required to be made public under the CEA, and that the terms and conditions of a product submitted to the CFTC shall be made publicly available at the time of submission.

Proposed Rule 808 is closely modelled on § 40.8. Section 40.8(a) does not provide a list of the exhibits required to be made public, but rather refers to a general description of items required to be made public. For purposes of clarity and ease of reference, however, the Commission is proposing to list the specific corresponding exhibits in proposed Rule 808 that would be made publicly available. Therefore, paragraph (a) of proposed Rule 808 would provide that the Commission shall make publicly available on its website the following parts of an application to register as an SBSEF, unless confidential treatment is obtained pursuant to SEA Rule 24b-2: the transmittal letter and first page of the application cover sheet; Exhibit C; Exhibit G; Exhibit L; and Exhibit M.

Paragraph (b) of proposed Rule 808, adapted from § 40.8(c), would provide that the Commission shall make publicly available on its website, unless confidential treatment is obtained pursuant to SEA Rule 24b-2, an SBSEF's filing of new products pursuant to the self-certification procedures of proposed Rule 804, new products for Commission review and approval pursuant to proposed Rule 805, new rules and rule amendments for Commission review and approval pursuant to proposed Rule 806, and new rules and rule amendments pursuant to the self-certification procedures of proposed Rule 807. Paragraph (c), adapted from § 40.8(d), would provide that the terms and conditions of a product submitted to the Commission pursuant to any of proposed Rules 804 through 807 shall be made publicly available at the time of submission unless confidential treatment is obtained pursuant to SEA Rule 24b-2.

The Commission preliminarily believes that it would be appropriate to include in proposed Regulation SE a rule similar to § 40.8 that would clarify how SBSEFs may request confidential treatment for their filings, and what information contained in those filings would be publicly available by the Commission. The Commission preliminarily believes that the items enumerated in proposed Rule 808 are not of the type that typically would constitute confidential information.

The Commission requests comment on the following:

44. Do you believe in general that Regulation SE should include a rule modelled on § 40.8? Why or why not?

45. In particular, do you agree with the specific language proposed by the Commission to adapt § 40.8 into proposed Rule 808? If not, how would you revise that language?

46. Are there any provisions of § 40.8 that are adapted into proposed Rule 808 that you believe would be inappropriate, or would not create any benefit, in a Commission rule applying to SBSEFs? If so, please identify any such provision, explain why it would be inappropriate or unnecessary for SBSEFs, and what economic benefit that you believe would result from omitting it from the Commission's final rule.

47. Do you prefer the Commission's proposed approach of listing specific exhibits or the CFTC's approach of providing in the rule only a general description of items required to be made public? If the former, are there any additional exhibits that you believe should be enumerated in Rule 808 that should be made publicly available? If so, which exhibits and why?

G. Rule 809—Staying of Certification and Tolling of Review Period Pending Jurisdictional Determination

Section 40.12 of the CFTC's rules is entitled “Staying of certification and tolling of review period pending jurisdictional determination” and reflects the process described in section 718 of the Dodd-Frank Act, which is entitled “Determining Status of Novel Derivative Products.” Section 718 of the Dodd-Frank Act sets forth a mechanism for addressing a situation where a person wishes to list or trade a novel derivative product that may have elements of both securities and contracts of sale of a commodity for future delivery (or options on such contracts or options on commodities)— i.e., it is unclear whether the product is a security under the jurisdiction of the SEC or a future under the jurisdiction of the CFTC. Section 718(a) provides that the SEC or the CFTC may request that the other agency issue a determination as to the classification of that product, and section 718(b) provides that the CFTC and SEC may petition for the judicial review of any such determination. Section 40.12 provides that if a SEF (among other registered entities) certifies, submits for approval, or otherwise files a proposal to list or trade such a novel derivative product, the product certification shall be stayed or the approval review period shall be tolled until a final determination order is issued under section 718.

Proposed Rule 809 is loosely modelled on § 40.12, but modified to focus on the products and jurisdictional problems that are more likely to be relevant to SBSEFs. An SBSEF might seek to list a product where it is unclear whether the product is a swap or an SBS. While section 718 of the Dodd-Frank Act addresses situations where it is unclear if a product is a security or a future, the SEC and the CFTC have adopted separate rules—SEA Rule 3a68-2 and § 1.8, respectively—governing requests for interpretation regarding a product that might be an SBS, a swap, or a mixed swap. Accordingly, the Commission believes that it would be appropriate for proposed Rule 809 to reflect the process set forth in SEA Rule 3a68-2. Nonetheless, the objective of proposed Rule 809 would be consistent with the objective of § 40.12—to provide for a stay or tolling of a product filing where it is unclear whether the product is under the jurisdiction of the SEC or the CFTC.

Paragraph (a) of proposed Rule 809, modelled on § 40.12(b), would provide that a product certification made by an SBSEF pursuant to proposed Rule 804 shall be stayed, or the review period for a product that has been submitted for Commission approval by an SBSEF pursuant to proposed Rule 805 shall be tolled, upon request for a joint interpretation of whether the product is a swap, SBS, or mixed swap made pursuant to Rule 3a68-2 under the SEA by the SBSEF, the SEC, or the CFTC. Paragraph (b) is modelled on § 40.12(b)(1) and would require the SEC to provide the SBSEF with a written notice of the stay or tolling pending issuance of a joint interpretation by the SEC and CFTC. Paragraph (c) is modelled on § 40.12(b)(2) and would provide that the stay shall be withdrawn, or the approval review period shall resume, if a joint interpretation finding that the SEC has jurisdiction over the product is issued.

The Commission preliminarily believes that it is appropriate for Regulation SE to include a mechanism for the staying or tolling of a filing by an SBSEF where it is unclear whether the product is a swap or an SBS—should an SBSEF ever seek to list such a product. Although proposed Rule 809 would deviate from § 40.12 in that it would apply where it is unclear whether a product is swap or an SBS, rather than where it is unclear whether the product is a security or a future, the Commission preliminarily believes that modifying the scope of proposed Rule 809, in relation to § 40.12, would appropriately address the jurisdictional questions that are more likely to arise from a product listed by an SBSEF.

The Commission seeks comment on the following:

48. Do you believe in general that Regulation SE should include a rule setting out a procedure for staying a product certification or tolling a product review period if a request for a joint interpretation regarding the classification of the product is made pursuant to SEA Rule 3a68-2? Why or why not?

49. In particular, do you agree with the specific language proposed by the Commission to adapt § 40.12 into proposed Rule 809? If not, how would you revise that language?

50. Do you agree that Rule 809 should apply to a product that might be an SBS or a swap, rather than to a product that might be a security or a future? Why or why not?

51. Are there any provisions of § 40.12 that are adapted into proposed Rule 809 that you believe would be inappropriate, or would not create any benefit, in a Commission rule applying to SBSEFs? If so, please identify any such provision, explain why it would be inappropriate or unnecessary for SBSEFs, and what economic benefit that you believe would result from omitting it from the Commission's final rule.

H. Rule 810—Product Filings by SBSEFs That Are Not Yet Registered and by Dormant SBSEFs

Part 37 directs SEFs to submit product filings via self-certification or for CFTC review and approval, using § 40.2 or § 40.3, respectively. However, these sections cannot be utilized by an entity that has submitted an application for SEF registration but has not yet been registered, or by a dormant SEF that has submitted an application to reinstate its registration. Under § 37.4, either entity may submit a swap's terms and conditions before being registered or having its registration reinstated, and the CFTC will consider the swap listing request as part of the application for registration or reinstatement, respectively.

Proposed Rule 810 is closely modelled on § 37.4. Paragraph (a) of proposed Rule 810 is closely modelled on § 37.4(a) and would provide that an applicant for registration as an SBSEF may submit an SBS's terms and conditions prior to listing the product as part of its application for registration. Paragraph (b) is closely modelled on § 37.4(b) and would provide that any SBS terms and conditions or rules submitted as part of an application for registration shall be considered for approval by the Commission at the time the Commission issues the SBSEF's order of registration. Paragraph (c) is closely modelled on § 37.4(c) and would provide that, after the Commission issues the order of registration, the SBSEF shall submit an SBS's terms and conditions, including amendments to such terms and conditions, new rules, or rule amendments pursuant to the procedures in proposed Rules 804 to 807. Paragraph (d) is closely modelled on § 37.4(d), would provide that any SBS terms and conditions or rules submitted as part of an application to reinstate the registration of a dormant SBSEF shall be considered for approval by the Commission at the time the Commission approves the reinstatement of registration of the dormant SBSEF.

The Commission preliminarily believes that it is appropriate for Regulation SE to include provisions that address new products submitted as part of an SBSEF registration by an entity that has not yet been registered, or by a dormant SBSEF seeking reinstatement of its registration, and that these provisions should align with the CFTC's provisions as closely as possible.

The Commission seeks comment on the following:

52. Do you believe in general that Regulation SE should include a rule setting out how dormant SBSEFs and applicants for SBSEF registration can submit new products? Why or why not?

53. In particular, do you agree with the specific language proposed by the Commission to adapt § 37.4 into proposed Rule 810? If not, how would you revise that language?

54. Are there any provisions of § 37.4 that are adapted into proposed Rule 810 that you believe would be inappropriate, or would not create any benefit, in a Commission rule applying to SBSEFs? If so, please identify any such provision, explain why it would be inappropriate or unnecessary for SBSEFs, and what economic benefit that you believe would result from omitting it from the Commission's final rule.

VII. Miscellaneous Requirements

Sections 37.5 to 37.12 of the CFTC's rules impose miscellaneous requirements on SEFs. The Commission seeks to impose similar requirements on SBSEFs in proposed Rules 811 to 817 of Regulation SE.

A. Rule 811—Information Relating to SBSEF Compliance

1. Harmonization With § 37.5

Paragraphs (a) to (c) of proposed Rule 811 are modelled on § 37.5, which is entitled “Information regarding swap execution facility compliance.” Section 37.5 provides that the CFTC may request various types of information from a SEF, and that the SEF must supply the information to the CFTC in a form and manner specified by the CFTC. Paragraph (a) of § 37.5 requires a SEF, at the CFTC's request, to provide information related to its business as a SEF. Paragraph (b) states that a SEF may be required to provide a written demonstration, containing supporting data, information, and documents that it is in compliance with one or more core principles or with its other obligations under the CEA. Paragraph (c) sets out procedures for a SEF to notify the CFTC of any transfer of 50% or more of the equity interest in the SEF.

Proposed Rules 811(a) to (c) are closely modelled on § 37.5. Paragraph (a) of proposed Rule 811 is closely modelled on § 37.5(a) and would provide that, upon the Commission's request, an SBSEF shall file with the Commission information related to its business as an SBSEF in the form and manner, and within the timeframe, specified by the Commission. Paragraph (b) is closely modelled on § 37.5(b) and would provide that, upon the Commission's request, an SBSEF shall file with the Commission a written demonstration, containing supporting data, information, and documents, that it is in compliance with one or more Core Principles or with its other obligations under the SEA or the Commission's rules thereunder, as the Commission specifies in its request. Also, under proposed Rule 811(b), the SBSEF would be required to file such written demonstration in the form and manner, and within the timeframe, specified by the Commission.

Paragraph (c)(1) of proposed Rule 811 is closely modelled on § 37.5(c)(1) and would provide that an SBSEF shall file with the Commission a notification of any transaction involving the direct or indirect transfer of 50% or more of the equity interest in the SBSEF. Also, under proposed Rule 811(c)(1), the Commission could, upon receiving such notification, request supporting documentation of the transaction. Paragraph (c)(2) is closely modelled on § 37.5(c)(2) and would provide that the equity interest transfer notice shall be filed with the Commission in a form and manner specified by the Commission at the earliest possible time, but in no event later than the open of business ten business days following the date upon which the SBSEF enters into a firm obligation to transfer the equity interest. Paragraph (c)(3) is closely modelled on § 37.5(c)(3), would provide that, notwithstanding the foregoing, if any aspect of an equity interest transfer requires an SBSEF to file a rule, the SBSEF shall comply with the applicable rule filing requirements of proposed Rule 806 or 807.

Paragraph (c)(4) of proposed Rule 811 is closely modelled on § 37.5(c)(4) and would provide that, upon a transfer of an equity interest of 50% or more in an SBSEF, the SBSEF shall file with the Commission, in a form and manner specified by the Commission, a certification that the SBSEF meets all of the requirements of section 3D of the SEA and the Commission rules thereunder, no later than two business days following the date on which the equity interest of 50% or more was acquired.

The Commission preliminarily believes that it is appropriate for Regulation SE to include provisions requiring an SBSEF to provide the Commission with the information described above. Information about its business as an SBSEF and transfers of 50% of its equity would promote understanding of its operations and ownership, which should facilitate oversight of the SBSEF; therefore, the Commission preliminarily believes that it should, similar to the CFTC, clarify that it may request such information from an SBSEF. In addition, should questions about compliance arise, the Commission should be able to obtain from an SBSEF supporting data, information, and documents that the SBSEF is in compliance with relevant obligations under the SEA. By modelling its proposed requirements on existing CFTC rules, the Commission seeks to obtain comparable regulatory benefits while imposing only marginal additional burdens on dually registered entities that are already subject to similar obligations.

The Commission requests comment on the following:

55. Do you believe in general that Regulation SE should include a rule that would require an SBSEF to provide the Commission with information about its business or its compliance with the SEA, as well as information regarding transfers of 50% or more of its equity interest? Why or why not?

56. In particular, do you agree with the specific language proposed by the Commission to adapt § 37.5 into proposed Rule 811? If not, how would you revise that language?

57. Are there any provisions of § 37.5 that are adapted into proposed Rule 811 that you believe would be inappropriate, or would not create any benefit, in a Commission rule applying to SBSEFs? If so, please identify any such provision, explain why it would be inappropriate or unnecessary for SBSEFs, and what economic benefit that you believe would result from omitting it from the Commission's final rule.

2. Harmonization With § 1.60

Paragraph (d) of proposed Rule 811 is not modelled on § 37.5 but rather on § 1.60 of the CFTC's rules, which is entitled “Pending legal proceedings.” Because it is conceptually similar to § 37.5 in that it requires another type of information relevant to the regulatory oversight of a SEF, the Commission is proposing to adapt this provision into Rule 811.

Section 1.60 requires a SEF (among other entities) to provide the CFTC with copies of any legal proceeding to which it is a party, or to which its property or assets is subject. Paragraph (d) of proposed Rule 811 would adapt paragraphs (a), (c), and (e) of § 1.60 to apply to SBSEFs.

Paragraph (d)(1) of proposed Rule 811 is closely modelled on § 1.60(a) and would provide that an SBSEF shall submit to the Commission a copy of the complaint, any dispositive or partially dispositive decision, any notice of appeal filed concerning such decision, and such further documents as the Commission may thereafter request filed in any material legal proceeding to which the SBSEF is a party or its property or assets is subject. Paragraph (d)(2) is closely modelled on § 1.60(c) and would provide that an SBSEF shall submit to the Commission a copy of the complaint, any dispositive or partially dispositive decision, any notice of appeal filed concerning such decision, and such further documents as the Commission may thereafter request filed in any material legal proceeding instituted against any officer, director, or other official of the SBSEF from conduct in such person's capacity as an official of the SBSEF and alleging violations of the SEA or any rule, regulation, or order thereunder; the constitution, bylaws, or rules of the SBSEF; or the applicable provisions of State law relating to the duties of officers, directors, or other officials of business organizations.

Paragraph (d)(3) of proposed Rule 811 is loosely modelled on § 1.60(e) and would provide that documents required by Rule 811(d) to be submitted to the Commission shall be submitted electronically in a form and manner specified by the Commission within ten days after the initiation of the legal proceedings to which they relate, after the date of issuance, or after receipt by the SBSEF of the notice of appeal, as the case may be.

Paragraph (d)(4) of proposed Rule 811 is closely modelled on the final two sentences of § 1.60(e) and would provide that, for purposes of Rule 811(d), a “material legal proceeding” includes but is not limited to actions involving alleged violations of the SEA or the Commission rules thereunder, and that a legal proceeding is not “material” for the purposes of Rule 811 if the proceeding is not in a Federal or State court or if the Commission is a party.

The Commission preliminarily believes that, to properly oversee an SBSEF, the Commission needs to be aware of any pending legal proceedings involving the SBSEF or any officer, director, or other official of the SBSEF from conduct in such person's capacity as an official of the SBSEF. The Commission preliminarily believes, furthermore, that § 1.60 provides an established and well understood mechanism for obtaining this information, and therefore is using § 1.60 as the model for proposed Rule 811(d).

The Commission seeks comment on the following:

58. Do you believe in general that Regulation SE should include a rule that would require an SBSEF to provide the Commission with information about its pending legal proceedings? Why or why not?

59. In particular, do you agree with the specific language proposed by the Commission to adapt § 1.60 into proposed Rule 811? If not, how would you revise that language?

60. Are there any provisions of § 1.60 that are adapted into proposed Rule 811 that you believe would be inappropriate, or would not create any benefit, in a Commission rule applying to SBSEFs? If so, please identify any such provision, explain why it would be inappropriate or unnecessary for SBSEFs, and what economic benefit that you believe would result from omitting it from the Commission's final rule.

B. Rule 812—Enforceability

Section 37.6(a) of the CFTC's rules provides that a transaction entered into on or pursuant to the rules of a SEF shall not be void, voidable, subject to rescission, otherwise invalidated, or rendered unenforceable as a result of a violation by the SEF of the Core Principles or the part 37 rules thereunder. Section 37.6(a) also provides generally that such a transaction would not be void or voidable as a result of a CFTC or other proceeding to alter or supplement a rule, term, or trading rule or procedure. Section 37.6(b) requires a SEF to provide each counterparty to a transaction that is entered into on or pursuant to the rules of the SEF with a written record of all of the terms of the transaction which shall legally supersede any previous agreement and serve as a confirmation of the transaction. Furthermore, under § 37.6(b), the confirmation of all terms of the transaction must take place at the same time as execution, provided that specific customer identifiers for accounts included in bunched orders need not be included in confirmations if certain conditions are met.

Proposed Rule 812 generally is modelled on § 37.6, but omits certain of its detailed provisions. Paragraph (a) of proposed Rule 812, which is based on § 37.6(a)(1), would provide that a transaction on or pursuant to the rules of an SBSEF cannot be invalidated as a result of a violation by the SBSEF of section 3D of the SEA or the Commission's rules thereunder. An SBS executed on an SBSEF should not be invalidated by the SBSEF's violation of any of the securities laws, given that swaps executed on SEFs are afforded the same legal certainty under § 37.6(a).

Paragraph (b) of proposed Rule 812 is modelled on the first sentence of § 37.6(b) and would provide that an SBSEF shall, as soon as technologically practicable after the time of execution of a transaction entered into on or pursuant to the rules of the facility, provide a written record to each counterparty of all of the terms of the transaction that were agreed to on the facility, which shall legally supersede any previous agreement regarding such terms. The Commission preliminarily believes that it would be appropriate to require an SBSEF to inform counterparties as soon as technologically practicable after they have effected a trade on or pursuant the rules of the SBSEF, and to provide them with a written record of the terms to which they have agreed. The Commission also preliminarily believes that it would be appropriate to require that this written record legally supersede any previous agreement regarding the terms that were agreed to on the SBSEF. The Commission recognizes, however, that there may be other terms of an uncleared SBS transaction that are specified in one or more agreements previously negotiated between the counterparty pair (relating, e.g., to credit support). Because agreements between counterparty pairs likely are not known or easily obtained by an SBSEF, the Commission is not including a requirement that the SBSEF provide a written record of any such terms.

The Commission seeks comment on the following:

61. Do you believe in general that Regulation SE should include a rule regarding enforceability of contracts entered into on an SBSEF that is modelled on § 37.6? Why or why not?

62. In particular, do you agree with the specific language proposed by the Commission to adapt § 37.6 into proposed Rule 812? If not, how would you revise that language?

63. Are there any provisions of § 37.6 that the Commission is proposing to adapt into Rule 812 that you believe would be inappropriate, or fail to create any benefit, in a Commission rule applicable to SBSEFs? If so, please identify any such provision, explain why it would be inappropriate or unnecessary for SBSEFs, and what economic benefit that you believe would result from omitting it from the Commission's final rule.

64. Do you believe that any of the provisions of § 37.6 for which the Commission has not proposed an analog warrant inclusion? If so, which one(s) and why?

65. Rule 15Fi-2(f)(1) under the SEA provides SBS dealers and major SBS participants with an exception from the trade acknowledgment and verification requirements for SBS transactions “executed on [an SBSEF] or national securities exchange, provided that the rules, procedures or processes of the [SBSEF] or national securities exchange provide for the acknowledgment and verification of all terms of the security-based swap transaction no later than the time required by [Rule 15Fi-2(b) and (d)(2)]” (emphasis added). Proposed Rule 812(b) would require an SBSEF to provide a written record only of the terms of the transaction that are agreed to on the SBSEF. As a result, if the Commission were to adopt Rule 812(b) substantially as proposed, the exception in Rule 15Fi-2(f)(1) would not be available where the counterparty pair has agreed to other terms of the SBS transaction away from the SBSEF. Do you agree with this result? If not, how would an SBSEF be able to provide a record of all terms of an SBS transaction effected on or pursuant to the rules of the SBSEF when there are one or more pre-existing agreements between the counterparty pair where the counterparties agree to additional terms?

C. Rule 813—Prohibited Use of Data Collected for Regulatory Purposes

Section 37.7 of the CFTC's rules provides that a SEF shall not use for business or marketing purposes any proprietary data or personal information that it collects or receives from or on behalf of any person for the purpose of fulfilling its regulatory obligations. The SEF may use data or information for business or marketing purposes if the person consents, but the SEF may not condition access to the SEF on the person's providing such consent. Finally, § 37.7 provides that a SEF, where necessary for regulatory purposes, may share such data or information with another SEF or a DCM.

Proposed Rule 813 is modelled on § 37.7. Persons who trade on an SBSEF may have to provide proprietary data or personal information to the SBSEF from time to time to allow the SBSEF to carry out its regulatory obligations. The Commission preliminarily believes, in general, that an SBSEF using that information for business or marketing purposes would be a misappropriation, because the SBSEF's powers to compel production of that information by its members is for regulatory purposes, not for the benefit of the SBSEF's business interests. While a member of the SBSEF could consent to the SBSEF using this information for business or marketing purposes, the Commission preliminarily believes that access to the SBSEF should not be conditioned on such consent being given. The Commission preliminarily believes that § 37.7 is well understood by market participants and well designed for adaptation to the SBS market to deter such misappropriation. Therefore, the Commission preliminarily believes that close harmonization with § 37.7 is appropriate.

The Commission seeks comment on the following:

66. Do you believe in general that Regulation SE should include a rule that prohibits an SBSEF from using for business or marketing purposes any proprietary data or personal information that it collects or receives from or on behalf of any person for the purpose of fulfilling its regulatory obligations? Why or why not?

67. In particular, do you agree with the specific language proposed by the Commission to adapt § 37.7 into proposed Rule 813? If not, how would you revise that language?

68. Are there any provisions of § 37.7 that are adapted into proposed Rule 813 that you believe would be inappropriate, or would not create any benefit, in a Commission rule applying to SBSEFs? If so, please identify any such provision, explain why it would be inappropriate or unnecessary for SBSEFs, and what economic benefit that you believe would result from omitting it from the Commission's final rule.

D. Rule 814—Entity Operating Both a National Securities Exchange and SBSEF

Section 37.8 of the CFTC's rules applies to a board of trade that operates both a DCM and a SEF. Paragraph (a) of § 37.8 requires the board of trade to separately register the DCM and the SEF with the CFTC under the respective rules for each type of market. Paragraph (b) requires a board of trade that operates both types of market and that uses the same electronic trade execution system for executing and trading swaps on both markets to clearly identify to market participants whether an execution of a swap took place on the DCM or on the SEF.

Proposed Rule 814 is modelled on § 37.8. Paragraph (a) of proposed Rule 814 would provide that an entity intending to operate both a national securities exchange and an SBSEF shall separately register the two facilities pursuant to section 6 of the SEA and Rule 803 thereunder. Paragraph (b), although adapted generally from § 37.8(b), draws its specific language from section 3D(c) of the SEA. Section 3D(c) contemplates that a single entity may operate both a national securities exchange and an SBSEF, and would provide that a national securities exchange shall, to the extent that the exchange also operates an SBSEF and uses the same electronic trade execution system for listing and executing trades of SBS on or through the exchange and the facility, identify whether electronic trading of SBS is taking place on or through the national securities exchange or the SBSEF. Proposed Rule 814(b) copies section 3D(c) of the SEA verbatim.

The Commission preliminarily believes that it is appropriate for proposed Regulation SE to include a rule that clarifies the registration status of an entity that operates both an exchange and an SBSEF, and that broadly parallels § 37.8.

The Commission seeks comment on the following:

69. Do you believe in general that Regulation SE should include a rule that clarifies the registration status of an entity that operates both an exchange and an SBSEF? Why or why not?

70. In particular, do you agree with the specific language proposed by the Commission in Rule 814? If not, how would you revise that language?

71. Do you believe that more detailed rules are necessary to address the extent to which an entity should keep separate its exchange and its SBSEF or, conversely, areas where overlapping functionality or personnel should expressly be allowed? If so, please discuss.

E. Rule 815—Methods of Execution for Required and Permitted Transactions

A key goal of the Dodd-Frank Act is to bring trading of swaps and SBS onto regulated markets, as reflected in the statutory requirements for mandatory clearing and mandatory trade execution of certain swap and SBS products. If the relevant agency makes a mandatory clearing determination regarding a product, the product becomes subject to mandatory trade execution if at least one DCM/exchange or SEF/SBSEF makes the product “available to trade.” The legislative history of the Dodd-Frank Act indicates that exchange trading is a mechanism to “provide pre- and post-trade transparency for end users, market participants, and regulators.” Exchange trading also enhances market efficiency by allowing multiple market participants the opportunity to compete for individual transactions on price, in contrast to the bilateral, dealer-driven market that prevailed before the Dodd-Frank Act. The Dodd-Frank Act does not require, however, that all products be subject to mandatory clearing and/or mandatory trade execution, and does not impose any execution requirements for transactions in such products. Section 37.9 of the CFTC's rules addresses these issues using the concepts of “Required Transaction” and “Permitted Transaction.” The Commission is proposing Rule 815 of Regulation SE to adapt § 37.9 for SBSEFs.

Section 37.9(a) defines a “Required Transaction” as any transaction involving a swap that is subject to the trade execution requirement in section 2(h)(8) of the CEA, subject to certain exceptions. Section 37.9(c) defines a “Permitted Transaction” as the obverse of a Required Transaction: Any transaction involving a swap that is not subject to the CEA's trade execution requirement. Section 37.9(c) provides that a SEF may offer any method of execution for a Permitted Transaction. In addition, § 37.9(a) provides that a Required Transaction that is not a block trade must generally be executed by a SEF using an order book or a request-for-quote (“RFQ”) system.

Under § 37.9(a)(3), a SEF that offers an RFQ system in connection with a Required Transaction must, at the same time that the requester receives the first responsive bid or offer, communicate to the requester any firm bid or offer pertaining to the same instrument resting on any of the SEF's order books. In addition, the SEF must provide the requester with the ability to execute against such firm resting bids or offers along with any responsive orders. Finally, the SEF must ensure that its trading protocols provide each of its market participants with equal priority in receiving requests for quotes and in transmitting and displaying for execution responsive orders.

Section 37.9(b) establishes a time-delay requirement for a Required Transaction on an order book. Under the rule, a SEF must require that a broker or dealer who seeks to either execute against its customer's order or to execute two of its customers' orders against each other through the SEF's order book (following some form of pre-arrangement or pre-negotiation of such orders) be subject to at least a 15-second time delay between the entry of those two orders into the order book, such that one side of the potential transaction is disclosed and made available to other market participants before the second side of the potential transaction, whether for the broker's or dealer's own account or for the second customer, is submitted for execution.

Paragraphs (a) through (c) of proposed Rule 815 are modelled on paragraphs (a) through (c) of § 37.9. Proposed Rule 815(a)(1), based on § 37.9(a)(1), would define “Required Transaction” as “any transaction involving a security-based swap that is subject to the trade execution requirement in section 3C(h) of the Act.” Proposed Rule 815(a)(2), based on § 37.9(a)(2), would specify execution methods for Required Transactions. Proposed Rule 815(a)(3), based on § 37.9(a)(3), would define an RFQ system as “a trading system or platform in which a market participant transmits a request for a quote to buy or sell a specific instrument to no less than three market participants in the trading system or platform, to which all such market participants may respond” and specify other requirements for an RFQ system to be recognized as such under the rule. The three market participants could not be affiliates of or controlled by the requester and shall not be affiliates of or controlled by each other. Also, an SBSEF that offers an RFQ system in connection with a Required Transaction would be required, at the same time that the requester receives the first responsive bid or offer, to communicate to the requester any firm bid or offer pertaining to the same SBS resting on any of the SBSEF's order books. In addition, the SBSEF would be required to provide the requester with the ability to execute against such firm resting bids or offers along with any responsive orders. Finally, the SBSEF would be required to ensure that its trading protocols provide each of its members with equal priority in receiving requests for quotes and in transmitting and displaying for execution responsive orders.

Paragraph (b) of proposed Rule 815 is modelled on § 37.9(b) and would provide for a time delay requirement for Required Transactions on an order book. Section 37.9(b) recognizes that there are situations where a broker or dealer might seek to trade against a customer order (a “facilitation cross”) or cross two customer orders (a “customer cross”) where the product being traded is subject to mandatory trade execution. Under § 37.9(b), the broker or dealer must expose customer orders on the SEF order book for a required minimum period so that other market participants have the opportunity to offer a better price than the broker or dealer had intended for the cross. Proposed Rule 815(b) closely follows the order-handling requirements of § 37.9(b) for facilitation and customer crosses that are Required Transactions.

The Commission preliminarily believes that the CFTC's rules relating to Required Transactions are reasonably designed to promote price competition in products that are subject to the trade execution requirement. The Commission recognizes that, when considering rules for SBS that are subject to mandatory clearing and mandatory trade execution, additional or different criteria could plausibly achieve the goal of promoting price competition. It is debatable, for example, whether slightly different standards—such as RFQ-to-4 or RFQ-to-2 in lieu of RFQ-to-3, or a 30-second book-exposure requirement instead of 15 seconds—might promote these ends more effectively. However, the Commission's determination to propose rules that are closely modelled on those in § 37.9 reflects the baseline established by the CFTC rules. Most if not all SBSEFs will be dually registered with the CFTC as SEFs, and most if not all market participants in the SBS market will likely be participants in the swap market. The Commission appreciates that different or additive requirements—particularly for the key concept of a “Required Transaction”—could introduce complexity and confusion if one set of trading protocols applied to Required Transactions for SBS but different protocols—ones that have been understood and utilized for many years—applied to Required Transactions for swap transactions.

Under both the CEA and SEA, Core Principle 2 requires a SEF/SBSEF to specify trading procedures to be used in entering and executing orders on the facility, including block trades. The CFTC implements this provision by excepting block trades from the required execution methods in § 37.9(a)(2). That rule cross-references § 43.2, which defines the term “block trade” for purposes of public dissemination of swap transactions.

The Commission preliminarily believes that it should adopt an approach to block trades in Regulation SE that closely aligns with the approach taken by the CFTC. The purpose of having a block exception to the required methods of execution is to balance the promotion of price competition and all-to-all trading against the potential costs to market participants who wish to trade large orders. Forcing a market participant who seeks liquidity to expose a large order to a SEF/SBSEF order book or to utilize RFQ-to-3 could cause the market to move against the liquidity requester before it can obtain an execution. Under the CFTC's rules, a block trade in a product that is subject to mandatory trade execution may be traded on-SEF using flexible means of execution on the SEF's non-order-book trading system or platform, or away from a SEF's trading system or platform, provided that it is executed pursuant to the SEF's rules and procedures.

Proposed Rule 815(a)(2) would exclude block trades from the required execution methods using language closely modelled on § 37.9(a)(2). The Commission also preliminary believes that it should align the definition of “block trade” in proposed Regulation SE as closely as possible to the CFTC's definition. Therefore, the proposed definition—located in proposed Rule 802 of Regulation SE—is based on the four-pronged definition found in § 43.2(a), but with one modification. The third prong of the CFTC definition characterizes a block trade in a particular swap as having “a notional or principal amount at or above the appropriate minimum block size applicable to such swap.” Appendix F to the CFTC's part 43 divides swap asset classes into a number of categories, and sets forth a minimum block size threshold to each category. SBS are not within the CFTC's jurisdiction, so the CFTC has never considered what an appropriate minimum block size threshold would be for any SBS asset class. In this respect, there is no threshold for the SEC to harmonize with, so the Commission is proposing to establish a threshold tailored specifically for the SBS market.

For the third prong of the “block trade” definition, the Commission is proposing that the SBS is based on a single credit instrument (or issuer of credit instruments) or a narrow-based index of credit instruments (or issuers of credit instruments) having a notional size of $5 million or greater. The Commission previously employed a $5 million block threshold for credit SBS as a condition to one prong of its no-action statement regarding Regulation SBSR. In imposing that condition, the Commission noted that the Financial Industry Regulatory Authority (“FINRA”) applies a $5 million cap when disseminating transaction reports of economically similar cash debt securities.

The proposed definition of “block trade” in Rule 802 does not include any equity SBS. In this regard, the Commission's approach follows the CFTC's; appendix F to the CFTC's part 43 does not include a block threshold for any type of equity swap. Accordingly, no equity swap may qualify for the exception to required means of execution for block trades provided in § 37.9(a)(2), and no equity SBS could qualify for the exception to required means of execution for block trades in proposed Rule 815(a)(2).

Paragraphs (d) and (e) of § 37.9 provide additional exceptions that allow for flexible methods of execution for what would otherwise be Required Transactions. The Commission would include similar exceptions in proposed Rules 815(d) and (e).

Paragraph (d) of § 37.9 allows for flexible methods of execution for package transactions that meet certain enumerated criteria. § 37.9(d)(1) defines “package transaction” as two or more component transactions executed between two or more counterparties where at least one component is a Required Transaction, execution of each component is contingent upon the execution of all other components, and the component transactions are priced or quoted together as one economic transaction with simultaneous (or near-simultaneous) execution of all components. Section 37.9(d)(2) provides that a Required Transaction that is executed as a component of a package transaction that includes a component swap that is subject exclusively to the CFTC's jurisdiction, but is not subject to mandatory clearing, may be executed on a SEF using any method of execution as if it were a Permitted Transaction. Section 37.9(d)(3) provides that a Required Transaction that is executed as a component of a package transaction that includes a component that is not a swap may be executed on a SEF using any method of execution as if it were a Permitted Transaction. Section 37.9(d)(3) further states that this general exception, which allows flexible means of execution for certain package transactions, shall not apply to a Required Transaction that is executed as a component of a package transaction in which all other non-swap components are U.S. Treasury securities; a Required Transaction that is executed as a component of a package transaction in which all other non-swap components are contracts for the purchase or sale of a commodity for future delivery; a Required Transaction that is executed as a component of a package transaction in which all other non-swap components are agency mortgage-backed securities; or a Required Transaction that is executed as a component of a package transaction that includes a component transaction that is the issuance of a bond in a primary market.

Proposed Rule 815(d) is closely modelled on § 37.9(d) and is designed to balance the goal of promoting transparency in the SBS market through required methods of execution against the market efficiency of allowing multiple instruments to trade as a package using flexible methods of execution. A rule that was too lenient could subvert the goal of promoting transparency and competition through all-to-all trading, while a rule that was too strict could cause market participants to break the package into its individual components, thereby increasing transaction costs and reducing the economic purpose and efficiency of the package transaction. The Commission preliminarily believes that the CFTC has struck an appropriate balance between these competing policy goals in § 37.9(d), and is therefore proposing to align its own rule closely with the CFTC's. The Commission recognizes, however, that the kinds of packages described in § 37.9(d)(3) might be used only in the swap market and might not be utilized in the SBS market. The Commission seeks comment on that matter below.

Section 37.9(e) sets out procedures for resolution of operational and clerical error trades, which could be for swaps that otherwise would be subject to required means of execution. Section 37.9(e)(1) defines the terms “correcting trade,” “error trade,” and “offsetting trade” that are used in the rule. Section 37.9(e)(2) requires a SEF to maintain rules and procedures that facilitate the resolution of error trades and sets forth certain requirements designed to promote resolution in a fair, transparent, and consistent manner. As their names suggest, these types of trades are necessary to reverse errors. They are not conducted for the purpose of competitive price discovery and thus the pre-trade transparency goals for SEF/SBSEF trading are not implicated.

Proposed Rule 815(e) is modelled on § 37.9(e), although definitions of the terms “correcting trade,” “error trade,” and “offsetting trade” would be included in proposed Rule 802 rather than in proposed Rule 815(e). A fair and orderly market needs rules to address error trades when they occur, and such rules should be fair, transparent, and consistent. The market might need to make correcting trades or offsetting trades to reverse the effect of the original error trade. The CFTC's rules for addressing error trades are well articulated and well understood by the market, so the Commission preliminarily believes that they serve as an appropriate model for the Commission's rules. Furthermore, because most if not all SBSEFs also will be registered with the CFTC as SEFs, close harmonization in this regard would allow dually registered entities to employ the same procedures for addressing error trades, whether they arise in the context of swap trading or SBS trading.

Section 37.9(f) addresses counterparty anonymity and is widely referred to as the prohibition on “post-trade name give-up.” Section 37.9(f) generally prohibits any person, directly or indirectly (including through a third-party service provider), from disclosing the identity of a counterparty to a swap that is executed anonymously on a SEF and intended to be cleared, and requires the SEF to establish and maintain rules to that effect. Section 37.9(f) provides that “executed anonymously” as used in the rule includes a swap that is pre-arranged or pre-negotiated anonymously, including by a SEF participant. Finally, § 37.9(f) provides that, where a package transaction includes a component swap that is not intended to be cleared, disclosing the identity of a counterparty would not violate § 37.9.

Proposed Rule 815(f) is modelled on § 37.9(f). The Commission preliminarily agrees with the CFTC that prohibiting post-trade name give-up is reasonably necessary to facilitate and promote trading on SEFs. The practice of requiring disclosure of one counterparty's name to the other counterparty ( i.e., “name give-up”) increases the risk of information leakage and can deter participation by liquidity seekers on SEFs and SBSEFs. The Commission preliminarily believes, like the CFTC, that prohibiting post-trade name give-up will promote pre-trade price transparency by encouraging a greater number, and a more diverse set, of market participants to anonymously post bids and offers on regulated markets. Therefore, the Commission preliminarily that it should incorporate the same prohibition into Regulation SE.

The Commission seeks comment on the following:

72. Do you believe in general that the CFTC's concepts of “Required Transactions” and “Permitted Transactions” should be incorporated into proposed Regulation SE? Why or why not?

73. In particular, do you believe that the execution methods set forth in § 37.9 for Required Transactions are appropriate for SBSEFs and the SBS market? Why or why not? Do you observe differences between swap and SBS products that warrant different or additional criteria for Required Transactions on SBSEFs? If so, please describe those differences, and suggest and justify any different execution methods for Required Transactions in SBS that you believe appropriate.

74. Do you believe that proposed Rule 815 should harmonize with the CFTC rule for handling facilitation and customer crosses in products subject to the trade execution requirement? Why or why not? If not, please suggest and justify any different order-handling requirements that you believe appropriate.

75. Do you agree in general with excepting block trades from the required methods of execution? Why or why not?

76. Do you agree in general with the Commission's proposed approach of adapting the CFTC definition of “block trade” from § 43.2 for SBSEFs? Why or why not?

77. Do you agree in particular with the $5 million prong of the SEC's proposed definition of “block trade”? Why or why not? Do you believe that a threshold other than $5 million would be appropriate? If so, what numerical threshold and why? Do you believe that there should be different thresholds for different asset classes (or sub-asset classes)? If so, please discuss.

78. Do you believe in general that the Commission, like the CFTC in § 37.9(d), should allow for flexible means of execution for an SBS subject to the trade execution requirement when it is part of a package trade? Why or why not?

79. If so, do you believe that the exceptions to required methods of execution for package transactions set forth in proposed Rule 815(d) are appropriate? Why or why not? Are there aspects of the CFTC's criteria that are not relevant for the SBS market and should be omitted? If so, which provision(s) and why? Are there different types of packages that involve SBS that are not prevalent in the swap market that should be incorporated into the SEC's exceptions? If so, please describe these packages and suggest an appropriate way to characterize them in Rule 815(d).

80. Do you agree with how the Commission is proposing to harmonize with the § 37.9(d)(3)'s “exceptions to the exception” for package trades in proposed Rule 815(d)(3)? Why or why not? Are the kinds of packages described in § 37.9(d)(3) unique to the swap market? If there are other types of package transactions involving SBS that you believe should be subject to required means of execution despite allowing other types of packages to use flexible means of execution, please describe these types of packages and explain why you believe they should nevertheless be subject to required means of execution.

81. Do you believe in general that the Commission, like the CFTC in § 37.9(e), should allow for flexible means of execution for products that otherwise would be subject to the trade execution requirement when an SBSEF is performing a correcting, error, or offsetting trade? Why or why not?

82. If so, do you believe that the SEC's proposed definitions for these terms, which are closely modelled on the CFTC's definitions, are appropriate? Why or why not? If not, what alternative definition(s) would you suggest, and why?

83. Do you agree in general that the SEC rules for SBSEFs, like the CFTC rules for SEFs, should prohibit post-trade name give-up? Why or why not? If so, do you agree with the manner in which the Commission is proposing to implement it ( i.e., close harmonization with § 37.9(f))? Why or why not?

F. Rule 816—Trade Execution Requirement and Exemptions Therefrom

Section 3C of the SEA sets out a procedure whereby an SBS becomes subject to mandatory clearing. Section 3C(h) of the SEA provides that, if a transaction involving an SBS is subject to the mandatory clearing requirement, the counterparties shall execute the transaction on an exchange, on an SBSEF registered under section 3D of the SEA, or on an SBSEF that is exempt from registration under section 3D(e) of the SEA, unless no exchange or SBSEF makes the SBS available to trade or if the SBS transaction is subject to an exception from the clearing requirement under section 3C(g) of the SEA. This obligation under section 3C(h) is commonly referred to as the “trade execution requirement.” Proposed Rule 816 of Regulation SE would establish procedures for an SBSEF to make an SBS available to trade (assuming it is also subject to the clearing requirement), thereby activating the trade execution requirement with respect to that SBS. Proposed Rule 816 also would include three proposed exemptions from the trade execution requirement.

1. Process for an SBSEF To Make an SBS Product Available To Trade

Paragraphs (a) through (d) of proposed Rule 816 are modelled on § 37.10 of the CFTC's rules and would establish a process whereby an SBS product is “made available to trade” (“MAT”) by an SBSEF. An SBSEF may list an SBS that is subject to mandatory clearing, but listing the product does not by itself subject the product to the trade execution requirement in section 3C(h) of the SEA. Only if a product that is subject to mandatory clearing is listed and MAT would the SBS then become subject to the trade execution requirement. A MAT determination would have to be made and filed by an SBSEF pursuant to proposed Rule 816 to trigger the trade execution requirement, similar to the MAT process of § 37.10.

Paragraph (a)(1) of proposed Rule 816, like § 37.10(a)(1), would provide that an SBSEF that makes an SBS available to trade in accordance with paragraph (b) of this section, must submit to the Commission its determination with respect to such SBS as a rule, pursuant to the procedures under proposed Rule 806 or 807. Paragraph (a)(2), modelled on § 37.10(a)(2), would provide that an SBSEF that makes an SBS available to trade must demonstrate that it lists or offers that SBS for trading on its trading system or platform.

Paragraph (b) of proposed Rule 816 would set out the factors that an SBSEF must consider when making a MAT determination for an SBS product. Proposed Rule 816(b) would incorporate the same six factors enumerated in § 37.10(b): (1) Whether there are ready and willing buyers and sellers; (2) The frequency or size of transactions; (3) The trading volume; (4) The number and types of market participants; (5) The bid/ask spread; and (6) The usual number of resting firm or indicative bids and offers.

Paragraph (c) of proposed Rule 816, modelled on § 37.10(c), would provide that, upon a determination that an SBS is MAT on an SBSEF or SBS exchange, all other SBSEFs and SBS exchanges shall comply with the requirements of section 3C(h) of the SEA in listing or offering such SBS for trading. Paragraph (d) of proposed Rule 816, like § 37.10(d), would provide that the Commission may issue a determination that an SBS is no longer MAT upon determining that no SBSEF or SBS exchange lists such SBS for trading.

The Commission preliminarily believes that it is appropriate for Regulation SE to establish a mechanism whereby an SBSEF can MAT an SBS product, and that this mechanism should align with the CFTC's as closely as possible. The CFTC's procedures are well articulated and well understood by SEFs, so the Commission preliminarily believes that closely harmonizing with these procedures would yield comparable regulatory benefits while minimizing burdens on SBSEFs. In particular, the Commission preliminarily believes that the criteria for MAT consideration are equally applicable to the SEF and SBSEF markets, and thus the Commission is not proposing any different or additional criteria that would have to be considered by an SBSEF when it wishes to MAT an SBS product.

The Commission seeks comment on the following:

84. Do you believe in general that Regulation SE should establish a process whereby an SBSEF can MAT an SBS product that harmonizes closely with § 37.10? Why or why not?

85. In particular, do you object to any of the specific language choices made to adapt § 37.10 into proposed Rules 816(a) to (d)? If so, what alternative language would you suggest?

86. Are there any provisions of § 37.10 that are adapted into proposed Rules 816(a) to (d) that you believe would be inappropriate, or would not create any benefit, in a Commission rule applying to SBSEFs? If so, please identify any such provision, explain why it would be inappropriate or unnecessary for SBSEFs, and what economic benefit that you believe would result from omitting it from the Commission's final rule.

2. Exemptions From Trade Execution Requirement

Paragraph (e) of proposed Rule 816 has no analog in § 37.10, but instead is adapted from § 36.1, which sets out certain exemptions from the trade execution requirement. The exemptions incorporated into § 36.1 result from the CFTC's many years of experience in administering the CEA's trade execution requirement. The Commission preliminarily believes that it should borrow from the CFTC's experience and incorporate the same exemptions into Regulation SE.

Paragraph (e)(1) of proposed Rule 816, modelled on § 36.1(a), would provide that an SBS transaction that is executed as a component of a package transaction that also includes a component transaction that is the issuance of a bond in a primary market is exempt from the trade execution requirement in section 3C(h) of the SEA. In addition, paragraph (e)(1), like § 36.1(a), would provide that, for purposes of paragraph (e), a package transaction would consist of two or more component transactions executed between two or more counterparties where at least one component transaction is subject to the trade execution requirement in section 3C(h) of the SEA; execution of each component transaction is contingent upon the execution of all other component transactions; and the component transactions are priced or quoted together as one economic transaction with simultaneous or near-simultaneous execution of all components.

For the same reasons identified by the CFTC, the Commission, pursuant to section 36(a)(1) of the SEA, preliminarily believes that it is necessary or appropriate in the public interest, and is consistent with the protection of investors, to exempt SBS from the trade execution requirement in section 3C(h) of the SEA if the criteria in proposed Rule 816(e)(1) are met.

Section 36.1(b) provides that section 2(h)(8) of the CEA does not apply to a swap transaction that qualifies for the exception under section 2(h)(7) of the CEA or an exception or exemption under part 50 of the CFTC's rules, and for which the associated requirements are met. The Commission is proposing to adapt § 36.1(b) as paragraph (e)(2) of proposed Rule 816, to provide that section 3C(h) of the SEA does not apply to an SBS transaction that qualifies for an exception under section 3C(g) of the SEA, or any exemption from the clearing requirement that is granted by the Commission, for which the associated requirements are met. Unlike the CFTC, the Commission does not have a specific rule to cite to regarding exemptions from the clearing requirement, so proposed Rule 816(e)(2) would refer only generally to such exemptions.

When adopting § 36.1(b), the CFTC found that exempting swaps that qualified for an exemption from or exception to the clearing requirement was consistent with its authority under section 4(c) of the CEA. The CFTC also noted Congress's intent to link the clearing requirement with the trade execution requirement, so that a swap that was exempted or excepted from the former also should be exempted from the latter. For the same reasons identified by the CFTC, the Commission, pursuant to section 36(a)(1) of the SEA, preliminarily believes that it is necessary or appropriate in the public interest, and is consistent with the protection of investors, to exempt an SBS from the trade execution requirement in section 3C(h) of the SEA if the SBS qualifies for an exception under section 3C(g) of the SEA, or benefits from any exemption from the clearing requirement that is granted by the Commission, for which the associated requirements are met.

Section 36.1(c) provides that section 2(h)(8) of the CEA does not apply to a swap transaction that is executed between counterparties that have eligible affiliate counterparty status pursuant to paragraph (a) of § 50.52 of the CFTC's rules, which provides an exception from the clearing requirement for inter-affiliate swaps, subject to conditions. Counterparties to a swap that have eligible affiliate counterparty status may rely on the § 36.1(c) even if they clear the swap transaction. The Commission is proposing to adapt § 36.1(c) as paragraph (e)(3) of proposed Rule 816 to provide that section 3C(h) of the SEA does not apply to an SBS transaction that is executed between counterparties that qualify as “eligible affiliate counterparties.” Since the Commission does not have an equivalent to § 50.52 to reference, the Commission is proposing instead to define the term “eligible affiliate counterparties” directly in proposed Rule 816(e)(3).

Counterparties would be “eligible affiliate counterparties” for purposes of proposed Rule 816(e)(3) if: (i) One counterparty, directly or indirectly, holds a majority ownership interest in the other counterparty, and the counterparty that holds the majority interest in the other counterparty reports its financial statements on a consolidated basis under Generally Accepted Accounting Principles or International Financial Reporting Standards, and such consolidated financial statements include the financial results of the majority-owned counterparty; or (ii) a third party, directly or indirectly, holds a majority ownership interest in both counterparties, and the third party reports its financial statements on a consolidated basis under Generally Accepted Accounting Principles or International Financial Reporting Standards, and such consolidated financial statements include the financial results of both of the counterparties. In addition, for purposes of proposed Rule 816(e)(3), a counterparty or third party directly or indirectly would hold a majority ownership interest if it directly or indirectly holds a majority of the equity securities of an entity, or the right to receive upon dissolution, or the contribution of, a majority of the capital of a partnership. These definitions closely are modelled on the equivalent definitions used in § 50.52, which are incorporated into § 36.1(c).

When adopting § 36.1(c), the CFTC noted that it was codifying previously issued no-action relief. The CFTC also stated that these transactions are not intended to be arm's-length, market-facing, or competitively executed under any circumstance, irrespective of the type of swap involved. Therefore, these transactions would not contribute to the price discovery process if executed on a SEF or DCM. The CFTC recognized the efficiency benefits associated with entering into inter-affiliate swaps via internal processes and acknowledged that applying the trade execution requirement to such transactions could inhibit affiliated counterparties from efficiently executing these types of transactions for risk management, operational, and accounting purposes. The CFTC concluded, therefore, that—as with the exemptions set forth in § 36.1(a) and (b)—granting an exemption from the trade execution requirement for swap transactions that are executed between counterparties that have eligible affiliate counterparty status was consistent with its exemptive authority under the CEA, regardless of whether the swap is submitted to clearing. For the same reasons identified by the CFTC, the Commission, pursuant to section 36(a)(1) of the SEA, preliminarily believes that it is appropriate to exempt from the trade execution requirement an SBS that is executed between counterparties that qualify as eligible affiliate counterparties, even if the counterparties clear the SBS transaction. The Commission also preliminarily believes that it is appropriate in the public interest to adapt into proposed Rule 816 the definition of “eligible affiliate counterparties” used in the CFTC's rules because this term is generally well understood by market participants. Furthermore, the Commission preliminarily believes that market participants should be permitted to apply the same standard for determining whether an inter-affiliate swap or SBS will be exempt from the trade execution requirement.

The Commission seeks comment on the following:

87. Do you believe in general that Regulation SE should incorporate similar exemptions from the trade execution requirement that the CFTC provides in § 36.1? Why or why not?

88. In particular, do you object to any of the specific language choices made to adapt § 36.1 into proposed Rule 816(e)? If so, what alternative language would you suggest?

89. Do you believe that the exemption in proposed Rule 816(e)(1) is even necessary? In other words, do market participants engage in package transactions involving SBS and new issuance bonds of the type described in § 36.1(a), or do these types of packages involve only IRS and thus would not be applicable to the SBS market?

90. Are there any other provisions of § 36.1 that are adapted into proposed Rule 816(e) that you believe would be inappropriate, or would not create any benefit, in a Commission rule applying to SBSEFs? If so, please identify any such provision, explain why it would be inappropriate or unnecessary for SBSEFs, and what economic benefit that you believe would result from omitting it from the Commission's final rule.

91. Are there any types of SBS that you believe should be exempt from the trade execution requirement that have no analog in the swap market and thus are not reflected in the CFTC's list of exemptions to the CEA trade execution requirement in § 36.1? If so, please describe and justify any potential exemptions that you believe should be added to proposed Rule 816(e).

G. Rule 817—Trade Execution Compliance Schedule

Proposed Rule 817 is modelled on § 37.12 of the CFTC's rules, which is designed to inform market participants of the precise date on which the trade execution requirement for a particular product commences. Section 37.12(a) provides that a swap becomes subject to the trade execution requirement upon the later of the applicable deadline established under the compliance schedule provided under § 50.25(b) or 30 days after the available-to-trade determination submission or certification for that swap is, respectively, deemed approved under § 40.5 or deemed certified under § 40.6.

The Commission does not have a close equivalent to § 50.25(b). However, Rule 3Ca-1 under the SEA provides that the Commission may determine, following a submission from a clearing agency, that an SBS (or a group, category, type, or class of SBS) must be cleared. This determination could follow a stay of the clearing requirement for additional review. Accordingly, paragraph (a) of proposed Rule 817 would provide that an SBS transaction shall be subject to the requirements of section 3C(h) of the SEA upon the later of (1) a determination by the Commission that the SBS is required to be cleared as set forth in section 3C(a) or any later compliance date that the Commission may establish as a term or condition of such determination or following a stay and review of such determination pursuant to section 3C(c) of the SEA and Rule 3Ca-1 thereunder; and (2) 30 days after the available-to-trade determination submission or certification for that SBS is, respectively, deemed approved under Rule 806 or deemed certified under Rule 807.

Paragraph (b) of proposed Rule 817, modelled on § 37.12(b), would provide that a counterparty may voluntarily comply with the trade execution requirement sooner than required by paragraph (a).

The Commission seeks comment on the following:

92. Do you believe in general that Regulation SE should include a trade execution compliance schedule similar to that in § 37.12? Why or why not?

93. In particular, do you agree with the language that the Commission is proposing to adapt from § 37.12 into Rule 817? If not, what alternative language would you suggest, and why?

VIII. Implementation of Core Principles

Section 3D(d) of the SEA sets forth 14 Core Principles with which SBSEFs must comply. These provisions, with one exception, correspond to the 15 Core Principles for SEFs set forth in section 5h(f) of the CEA.

The Commission preliminarily believes generally that it would be appropriate to closely harmonize with the CFTC rules that implement the SEF Core Principles, although there are some instances where close harmonization is not practicable. Where there are substantive differences between an existing CFTC rule and an SEC-proposed rule, the Commission will note and discuss the proposed difference and seek comment. The Commission also will note when there is not, or at least not intended to be, a difference between the SEC rule and the analogous CFTC rule.

Part 37 of the CFTC's rules includes an appendix B, setting forth “Guidance on, and Acceptable Practices in, Compliance with Core Principles.” The introduction to appendix B provides that the guidance for the Core Principle is illustrative only and “is not intended to be used as a mandatory checklist.” Where the CFTC includes guidance and/or accepted practices pertaining to a Core Principle for SEFs, the Commission will explain how (if at all) the Commission proposes to incorporate the substance of these statements into Regulation SE.

A. Rule 818—Core Principle 1—Compliance With Core Principles

Core Principle 1 requires an SBSEF, to be registered and maintain registration as an SBSEF, to comply with the Core Principles and any requirement that the Commission may impose by rule or regulation. Core Principle 1 also provides that an SBSEF shall have reasonable discretion in establishing the manner in which it complies with the Core Principles. CEA Core Principle 1 is substantively identical.

The CFTC implemented Core Principle 1 for SEFs in subpart B of part 37. Section 37.100 repeats the statutory text of SEF Core Principle 1. There are no other rules in subpart B. Proposed Rule 818 also would repeat the statutory text of the Core Principle.

The Commission seeks comment on the following:

94. Do you agree with how the Commission is proposing to implement SEA Core Principle 1? Why or why not?

B. Rule 819—Core Principle 2—Compliance With Rules

Core Principle 2 requires an SBSEF to establish and enforce compliance with any rule that is established by the SBSEF, including the terms and conditions of the SBS that it trades or processes, and any limitation on access to the SBSEF. It further requires the SBSEF to establish and enforce trading, trade processing, and participation rules that will deter abuses, and to have the capacity to detect, investigate, and enforce those rules, including the 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. Finally, Core Principle 2 requires an SBSEF 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. Core Principle 2 for SEFs is substantively identical, except that it includes an additional paragraph requiring a SEF to provide in its rules that, when a swap dealer or major swap participant enters into or facilitates a swap that is subject to the mandatory clearing requirement, the swap dealer or major swap participant shall be responsible for compliance with the trade execution requirement.

1. Rules Modelled on Subpart C of Part 37

The CFTC implemented Core Principle 2 for SEFs in subpart C of part 37. Section 37.200 of subpart C repeats the statutory text of CEA Core Principle 2, including the paragraph not present in SEA Core Principle 2 pertaining to swaps subject to the mandatory clearing requirement. Section 37.201 requires a SEF to establish rules governing the operation of the facility, including, but not limited to, rules specifying trading procedures to be followed by members and market participants when entering and executing orders traded or posted on the SEF. Section 37.201 also requires a SEF to establish and impartially enforce compliance with the SEF's rules, including, but not limited to the terms and conditions of any swaps traded or processed on or through the SEF, access to the SEF, trade practice rules, audit trail requirements, disciplinary rules, and mandatory trading requirements.

Section 37.202 imposes access requirements on SEFs. Section 37.202(a) requires a SEF to provide any eligible contract participant (“ECP”) and any independent software vendor with impartial access to its market(s) and market services, including any indicative quote screens or any similar pricing data displays. Furthermore, the SEF must have criteria governing access that are impartial, transparent, and applied in a fair and nondiscriminatory manner; procedures whereby ECPs provide the SEF with written or electronic confirmation of their status as ECPs before obtaining access; and comparable fee structures for ECPs and independent software vendors receiving comparable access to, or services from, the SEF. Section 37.202(b) requires a SEF, before granting any ECP access to its facilities, to require that the ECP consent to its jurisdiction. Section 37.202(c) requires the SEF to establish and impartially enforce rules governing any decision to allow, deny, suspend, or permanently bar access to the SEF, including when such decisions are made as part of a disciplinary or emergency action taken by the SEF.

Section 37.203 requires a SEF to establish and enforce trading, trade processing, and participation rules that will deter abuses and to have the capacity to detect, investigate, and enforce those rules. Section 37.203 includes lengthy and detailed provisions relating to that goal. Section 37.203(a) requires a SEF to prohibit, among other things, front-running, wash trading, pre-arranged trading (except for block trades), fraudulent trading, money passes, and any other trading practices that the SEF deems to be abusive. Section 37.203(b) requires the SEF to have arrangements and resources to collect information and documents on both a routine and non-routine basis, including the authority to examine books and records kept by the SEF's members. Section 37.203(c) requires the SEF to have sufficient compliance staff and resources to ensure that it can conduct effective audit trail reviews, trade practice surveillance, market surveillance, and real-time market monitoring. Section 37.203(d) requires the SEF to maintain an automated trade surveillance system capable of detecting potential trade practice violations, and imposes certain performance requirements on that system. Section 37.203(e) requires the SEF to conduct real-time market monitoring of all trading activity to identify any market or system anomalies, and to have the authority to adjust trade prices or cancel trades when necessary to mitigate market disrupting events caused by system malfunctions. Section 37.203(f) requires the SEF to establish and maintain procedures that require its compliance staff to conduct investigations of possible rule violations and imposes various requirements relating to those investigations.

Section 37.204 allows a SEF to contract with a regulatory services provider to assist in complying with the supervisory functions noted above. Section 37.204 also imposes requirements on the SEF's relationship with the regulatory services provider and provides that the SEF must retain exclusive authority in all substantive decisions made by its regulatory service provider, including decisions involving the cancellation of trades, the issuance of disciplinary charges against members or market participants, and denials of access.

Section 37.205 requires a SEF to capture and retain all audit trail data necessary to detect, investigate, and prevent customer and market abuses. Such data shall be sufficient to reconstruct all indications of interest, requests for quotes, orders, and trades within a reasonable period of time and to provide evidence of any violations of the rules of the swap execution facility. Section 37.205 includes lengthy and detailed provisions relating to the elements of an acceptable audit trail program, requirements for the transaction history database, electronic analysis capability, and safe storage capability. Furthermore, § 37.205 requires a SEF to enforce its audit trail and recordkeeping requirements through at least annual reviews of all members to verify their compliance, and to establish a program for effective enforcement of its audit trail and recordkeeping requirements. An effective program must identify members subject to the SEF's recordkeeping rules that have failed to maintain high levels of compliance with such requirements, and impose meaningful sanctions when deficiencies are found.

Section 37.206 requires a SEF to establish trading, trade processing, and participation rules that will deter abuses and have the capacity to enforce such rules through prompt and effective disciplinary action, including suspension or expulsion of members or market participants that violate the SEF's rules. Accordingly, § 37.206 requires the SEF to establish disciplinary panels and procedures for disciplinary hearings that meet certain enumerated requirements, and provides that disciplinary sanctions imposed by the SEF shall be commensurate with the violations committed and shall be clearly sufficient to deter recidivism or similar violations by other market participants.

Appendix B to part 37 includes detailed guidance to facilitate compliance with the rules that implement CEA Core Principle 2. The guidance addresses, for example, the use of warning letters by SEF compliance staff, potential conflicts of interest of the SEF's enforcement staff, the serving of notices of charges, a respondent's right to representation, providing sufficient time to answer a charge, consequences of a respondent admitting to or failing to deny a charge, right to a hearing, settlement offers, right of appeal and appeal procedures, final decisions, summary fines for violations of rules relating to the failure to timely submit accurate records required for clearing or verifying each day's transactions, and emergency disciplinary actions.

Proposed Rule 819 would implement Core Principle 2 and is adapted from subpart C of part 37. Paragraph (a) of proposed Rule 819, like § 37.200, would repeat the statutory text of Core Principle 2. Paragraph (b) is closely modelled on § 37.201 and would require an SBSEF to specify trading procedures (including for block trades, if offered) and to establish and impartially enforce compliance with the rules of the SBSEF.

Paragraph (c) of proposed Rule 819 is closely modelled on § 37.202 and would require an SBSEF to provide any ECP and any independent software vendor with impartial access to its market(s) and market services, including any indicative quote screens or any similar pricing data displays. An SBSEF also would be required, among other things, to establish comparable fee structures for ECPs and independent software vendors receiving comparable access to, or services from the SBSEF, and to establish and impartially enforce rules governing any decision to allow, deny, suspend, or permanently bar an ECP's access to the SBSEF, including when a decision is made as part of a disciplinary or emergency action taken by the SBSEF.

Paragraph (d) of proposed Rule 819 is closely modelled on § 37.203. Paragraph (d)(1) of proposed Rule 819 would require an SBSEF to prohibit abusive trading practices generally, enumerating certain practices in particular. Paragraph (d)(2) would require an SBSEF to have arrangements and resources for effective enforcement of its rules, including the authority to collect information and documents on both a routine and non-routine basis and to supervise its market to determine whether a rule violation has occurred. Paragraph (d)(3) would require an SBSEF to establish and maintain sufficient compliance staff and resources to ensure that it can conduct effective audit trail reviews, trade practice surveillance, market surveillance, and real-time market monitoring. Paragraph (d)(4) would require an SBSEF to maintain an automated trade surveillance system that meets certain criteria. Paragraph (d)(5) would require real-time market monitoring of all trading activity on the SBSEF. The SBSEF also would be required to adjust trade prices or cancel trades when necessary to mitigate market disrupting events caused by malfunctions in its system(s) or platform(s) or errors in orders submitted by members. Paragraph (d)(6) is modelled on § 37.203(f), again using the same structure and rule text. Like § 37.203(f), proposed Rule 819(d)(6) would address investigations and investigation reports and includes provisions relating to procedures, timeliness, when a reasonable basis does or does not exist for finding a violation, and warning letters.

Paragraph (e) of proposed Rule 819 is modelled on § 37.204 and would allow an SBSEF to contract with a regulatory services provider. If it does so, the SBSEF would have to ensure that such provider has the capacity and resources necessary to provide timely and effective regulatory services, retain sufficient compliance staff to supervise the quality and effectiveness of the regulatory services provided on its behalf, hold regular meetings with the regulatory service provider, and conduct periodic reviews of the adequacy and effectiveness of services provided on its behalf. The SBSEF would at all times remain responsible for the performance of any regulatory services received and retain exclusive authority in all substantive decisions made by its regulatory service provider. Proposed Rule 819(e)(1) makes a slight modification to § 37.204(a)'s list of entities that can serve as a regulatory service provider.

Paragraph (f) of proposed Rule 819 is modelled on § 37.205, using the same paragraph structure and rule text. Paragraph (f) would require an SBSEF to capture and retain all audit trail data necessary to detect, investigate, and prevent customer and market abuses and impose other requirements on the SBSEF's audit trail pertaining to the records that must be kept, electronic analysis capability, safe-storage capability, and enforcement of the audit trail requirements.

Paragraph (g) of proposed Rule 819 is based on § 37.206 and would generally track all of its rule text, but includes additional language derived from the appendix B guidance that is interwoven throughout. In converting the guidance to proposed rule text, the Commission preliminarily believes that grouping conceptually related items together would yield the most coherent and readable ruleset, instead of incorporating the guidance into a stand-alone section of the rules. Accordingly, paragraph (g)(1)(i) of proposed Rule 819 is taken from § 37.206(a) and would require an SBSEF to establish and maintain sufficient enforcement staff and resources to effectively and promptly prosecute possible rule violations within the disciplinary jurisdiction of the SBSEF. Paragraphs (g)(1)(ii) through (iv) are taken from the appendix B guidance and would provide, respectively, that:

• The enforcement staff of an SBSEF shall not include members or other persons whose interests conflict with their enforcement duties.

• A member of the enforcement staff shall not operate under the direction or control of any person or persons with trading privileges at the SBSEF.
• The enforcement staff of an SBSEF may operate as part of the SBSEF's compliance department.

Paragraph (g)(2) of proposed Rule 819 is modelled on § 37.206(b) and would require an SBSEF to establish one or more disciplinary panels that are authorized to fulfill their obligations under Rule 819. Section 37.206(b) provides that disciplinary panels must meet the composition requirements of part 40. To help ensure fairness and prevent special treatment or preference of any person or member and to provide for consistency of the makeup of members of SBSEF major disciplinary committees and hearing panels, the Commission is proposing instead to require the disciplinary panels established under proposed Rule 819(g)(2) to meet the composition requirements of proposed Rule 834(d), which would apply to each major disciplinary committee and hearing panel of an SBSEF.

Paragraphs (g)(3) through (8) of proposed Rule 819 have no parallel in § 37.206 itself, but derive from the guidance in appendix B pertaining to § 37.206, following the paragraph structure and wording of the guidance closely. Paragraph (g)(3) would impose procedural requirements relating to the notice of charges made to a respondent. Paragraph (g)(4) would provide that a respondent has a right to representation. Paragraph (g)(5) would provide that a respondent must be given adequate time to respond to any charges. Paragraph (g)(6) would state that the rules of an SBSEF may provide that, if a respondent admits or fails to deny any of the charges, a disciplinary panel may find that the violations alleged in the notice of charges have been committed. Paragraph (g)(6) would further state that, if the SBSEF's rules so provide, then: (i) The disciplinary panel may impose a sanction for each violation found to have been committed; (ii) The disciplinary panel shall promptly notify the respondent in writing of any sanction to be imposed and shall advise the respondent that the respondent may request a hearing on such sanction within the period of time, which shall be stated in the notice; and (iii) The rules of the SBSEF may provide that, if a respondent fails to request a hearing within the period of time stated in the notice, the respondent will be deemed to have accepted the sanction.

Paragraph (g)(7) of proposed Rule 819 would provide that, where a respondent has requested a hearing on a charge that is denied, or on a sanction set by the disciplinary panel, the respondent shall be given an opportunity for a hearing in accordance with the rules of the security-based swap execution facility. Paragraph (g)(8) would address settlement offers.

Paragraph (g)(9) of proposed Rule 819 returns to the text of § 37.206(c) for provisions regarding hearings. Paragraph (g)(9)(i) is modelled on § 37.206(c)(1) and would require an SBSEF to have rules requiring a hearing to be fair, conducted before members of the disciplinary panel, and promptly convened after reasonable notice to the respondent. The Commission is proposing an additional provision, which derives from the guidance, that an SBSEF need not apply the formal rules of evidence for a hearing; nevertheless, the procedures for the hearing may not be so informal as to deny a fair hearing.

Paragraphs (g)(9)(ii) through (vi) of proposed Rule 819 are also adapted from the guidance. Paragraph (g)(9)(ii) would bar a member of the disciplinary panel for the hearing from having a financial, personal, or other direct interest in the matter under consideration. Paragraph (g)(9)(iii) would address the respondent's access to evidence in the SBSEF's possession. Paragraph (g)(9)(iv) would provide that the SBSEF's enforcement and compliance staffs shall be parties to the hearing, and the enforcement staff shall present their case on those charges and sanctions that are the subject of the hearing. Paragraph (g)(9)(v) would provide that the respondent shall be entitled to appear personally at the hearing, to cross-examine any persons appearing as witnesses at the hearing, to call witnesses, and to present such evidence as may be relevant to the charges. Paragraph (g)(9)(vi) would provide that the SBSEF shall require persons within its jurisdiction who are called as witnesses to participate in the hearing and produce evidence.

Paragraph (g)(9)(vii) of proposed Rule 819 is modelled on the text of § 37.206(c)(2) and would require that, if the respondent has requested a hearing, a copy of the hearing shall be made and shall become a part of the record of the proceeding. Paragraph (g)(9)(vii) would not require the record to be transcribed unless the transcript is requested by Commission staff or the respondent, the decision is appealed pursuant to the rules of the SBSEF, or the decision is reviewed by the Commission pursuant to § 201.442. In all other instances, a summary record of a hearing is permitted.

Paragraph (g)(10) of proposed Rule 819 is modelled on § 37.206(d) and would provide that, promptly following a hearing conducted in accordance with the rules of the SBSEF, the disciplinary panel shall render a written decision based upon the weight of the evidence contained in the record of the proceeding and shall provide a copy to the respondent. The written decision would have to include six enumerated elements, all of which are closely modelled on those in § 37.206(d).

Paragraph (g)(11) of proposed Rule 819 would address emergency disciplinary actions and is drawn from the appendix B guidance. It would provide that an SBSEF may impose a sanction, including suspension, or take other summary action against a person or entity subject to its jurisdiction upon a reasonable belief that such immediate action is necessary to protect the best interest of the market place. Furthermore, any emergency disciplinary action would have to be taken in accordance with an SBSEF's procedures that provide for notice (if practicable), rights for representation in all proceedings, an opportunity for a hearing as soon as reasonably practicable, and the rendering of a written decision promptly following the hearing based upon the weight of the evidence contained in the record. Proposed Rule 819(g)(11) seeks to balance the need to allow an SBSEF to take summary action against the need to afford due process to respondents.

Paragraph (g)(12) of proposed Rule 819 also is drawn from the appendix B guidance and provides that, if the rules of the SBSEF permit appeals, the SBSEF shall establish an appellate panel that is authorized to hear appeals. The composition of the panel would have to be consistent with proposed Rule 834(d) and could not include any members of the SBSEF's compliance staff or any person involved in adjudicating any other stage of the same proceeding. Promptly following the appeal or review proceeding, the appellate panel would be required to issue a written decision and to provide a copy to the respondent.

Paragraph (g)(13) of proposed Rule 819 is adapted partly from § 37.206(e) and partly from the appendix B guidance. Paragraph (g)(13)(i) is drawn from § 37.206(e) and would provide that all disciplinary sanctions imposed by an SBSEF or its disciplinary panels shall be commensurate with the violations committed and shall be clearly sufficient to deter recidivism or similar violations by other members. All disciplinary sanctions, including sanctions imposed pursuant to an accepted settlement offer, would be required to take into account the respondent's disciplinary history. In the event of demonstrated customer harm, any disciplinary sanction would also be required to include full customer restitution, except where the amount of restitution or to whom it should be provided cannot be reasonably determined. Paragraph (g)(13)(i) is adapted from the guidance and would allow an SBSEF to adopt a summary fine schedule for violations of rules relating to the failure to timely submit accurate records required for clearing or verifying each day's transactions.

The Commission preliminarily believes that combining text from § 37.206 with the associated guidance from appendix B provides a logical set of procedures for addressing Core Principle 2 (Compliance with Rules), from requirements relating to enforcement staff generally (proposed Rule 819(g)(1)); to the composition of disciplinary panels and notices of charges (proposed Rules 819(g)(1) and (g)(2)); to rights to representation (proposed Rule 819(g)(4)), answer to charges and admission or failure to deny charges (proposed Rules 819(g)(5) and (g)(6)), denial of charges and right to a hearing (proposed Rule 819(g)(7)), settlement offers (proposed Rule 819(g)(8)); and, finally, hearings (proposed Rule 819(g)(9)), decisions (proposed Rule 819(g)(10)), emergency disciplinary actions (proposed Rule 819(g)(11)), right to appeal (proposed Rule 819(g)(12)), and disciplinary sanctions (proposed Rule 819(g)(13)).

The Commission recognizes that a set of rules that govern compliance and enforcement matters for SBSEFs could, in the abstract, differ in a number of details from the rules adopted by the CFTC in subpart C of part 37 and still plausibly satisfy the requirements of Core Principle 2. However, in light of the baseline set by the CFTC's rules, the Commission is concerned that implementing rules for SBSEFs having major or even minor differences with the rules applicable to SEFs could increase compliance costs and cause confusion for dually registered SEF/SBSEFs and market participants. This would particularly be the case if a potential violation involved a rule that was not specific to the swap or SBS market, but rather involved member conduct generally. No regulatory purpose would be served if the SEF/SBSEF had to pursue one cause of action against a member pursuant to a CFTC rule and a slightly different cause of action pursuant to an SEC rule, for the same underlying facts.

The Commission seeks comment on the following:

95. Do you agree generally with the manner in which the Commission is proposing to implement Core Principle 2? Why or why not?

96. In particular, do you agree with the proposed access requirements in Rule 819(c)? Why or why not? Do you see differences between the swap and SBS markets that warrant different requirements for access to a SEF than to an SBSEF? If so, please describe.

97. Do you see differences between the swap and SBS markets that warrant different audit trail requirements or trade surveillance capability for SBSEFs than for SEFs? If so, please describe.

98. Do you believe that SBSEFs, like SEFs, should be able to utilize regulatory service providers? What entities currently serve as regulatory service providers for SEFs? Do you believe that the types of regulatory service providers that could be utilized by SBSEFs under proposed Rule 819(e)(1) are appropriate? If not, what other regulatory service providers should be permitted?

99. Do you agree with how the Commission is proposing to implement requirements for disciplinary procedures and sanctions in proposed Rule 819(g)? Why or why not?

100. In particular, do you agree with the manner in which the Commission is proposing to incorporate significant portions of the appendix B guidance into proposed Rule 819(g)? Why or why not? Are there provisions from the guidance that the Commission is proposing to incorporate that you believe should be revised or omitted entirely? If so, please describe. Are there provisions from the guidance that the Commission has not proposed to incorporate but that you believe should be incorporated? If so, please describe.

101. Do existing SEFs treat the appendix B guidance as if it were mandatory? By converting the non-binding guidance applicable to SEFs into formal rules that would apply to SBSEFs, would dually registered entities be compelled to deviate from their present practices? If so, please describe.

102. Do you believe that proposed Rule 819(g)(12) should be revised to require an SBSEF to permit appeals of enforcement decisions to an appellate panel established by the SBSEF, despite the fact that neither subpart C of part 37 nor the CFTC's associated guidance requires appeals? Why or why not?

2. Provisions of Rule 819 Adapted From Other SEF Requirements

Proposed Rule 819 includes four paragraphs—(h), (i), (j), and (k)—that are not derived from subpart C of part 37, which directly implements CEA Core Principle 2, or from the associated guidance in appendix B to part 37. Instead, these four paragraphs are modelled on requirements for SEFs located in other parts of the CFTC's rules. Because these requirements fall under the general heading of “Compliance with Rules,” the Commission is proposing them as part of Rule 819, which implements SEA Core Principle 2.

a. Rule 819(h)—Activities of SBSEF's Employees, Governing Board Members, Committee Members, and Consultants

Paragraph (h) of proposed Rule 819 generally would prohibit persons who are employees of an SBSEF, or who otherwise might have access to confidential information because of their role with the SBSEF, from improperly utilizing that information. Proposed Rule 819(h) is modelled on § 1.59 of the CFTC's rules, which requires an SRO (which term, under § 1.3 of the CFTC regulations, includes a SEF) to place restrictions on trading by its governing board members, committee members, consultants, and employees and to prohibit any such person from disclosing any material, non-public information obtained as a result of their official duties with the SRO.

In particular, § 1.59(b)(1)(i) requires an SRO to maintain in effect rules that, at a minimum, prohibit employees of the SRO from trading, directly or indirectly, in:

• Any “commodity interest” traded on or cleared by the employing contract market, SEF, or clearing organization;

• Any “related commodity interest”;

• A commodity interest traded on a contract market or SEF or cleared by a DCO other than the employing SRO if the employee has access to material, non-public information concerning such commodity interest;
• A commodity interest traded on or cleared by a “linked exchange” if the employee has access to material, non-public information concerning such commodity interest.

The Commission is proposing to adapt § 1.59(b)(1) into Regulation SE in a simplified way. The Commission preliminarily believes that, in the SBS market, the policy goals of the rule can be achieved without the complexities of the CFTC definitions of “commodity interest” and “related commodity interest.” Paragraph (h)(2)(i) of proposed Rule 819 would require an SBSEF to maintain in effect rules that, at a minimum, prohibit an employee of the SBSEF from trading, directly or indirectly, any “covered interest.” Proposed Rule (h)(1)(i) would define “covered interest” to mean, with respect to an SBSEF: An SBS that trades on the SBSEF; a security of an issuer that has issued a security that underlies an SBS that is listed on the SBSEF; or a derivative based on a security that falls within the immediately preceding prong. The Commission preliminarily believes that the opportunity to observe order submission and trading in an SBS on an SBSEF could yield material non-public information about the future performance not just of that SBS, but of all securities issued by that entity. The single-name CDS market, in particular, is a market for assessing the creditworthiness of particular issuers. Non-public information derived from activity on the SBSEF pertaining to the market's assessment of an issuer's creditworthiness is likely to be material to the markets for that issuer's cash securities as well as to markets for derivatives based on the issuer's cash securities ( e.g., single-stock options).

Paragraph (h)(2)(ii), modelled on § 1.59(b)(1)(ii), would prohibit an SBSEF employee from disclosing to any other person any material non-public information which such employee obtains as a result of their employment at the SBSEF, and where such employee has or should have a reasonable expectation that the information disclosed may assist another person in trading any covered interest. In addition, paragraph (h)(2)(ii), like § 1.59(b)(1)(ii), would provide an exception for disclosures made in the course of an employee's duties, or disclosures made to another SBSEF, court of competent jurisdiction, or representative of any agency or department of the Federal or State government acting in their official capacity.

Paragraph (h)(3) of Rule 819, modelled on § 1.59(b)(2), would allow an SBSEF to adopt rules setting forth circumstances under which exemptions from the employee trading prohibition may be granted. In particular, paragraph (h)(3) would include the following possible carve-outs from the employee trading prohibition: (1) Participation by an employee in a “pooled investment vehicle” where the employee has no direct or indirect control with respect to transactions executed for or on behalf of such vehicle; (2) trading by an employee in a derivative based on such a pooled investment vehicle; (3) trading by an employee in a derivative based on an index in which no covered interest constitutes more than 10% of the index; and (4) trading by an employee under circumstances enumerated in rules which the SBSEF determines are not contrary to applicable law, the public interest, or just and equitable principles of trade. The first and the fourth carve-outs listed above are comparable to those listed in § 1.59(b)(2). The Commission is proposing to include the second and third carve-outs to permit an SBSEF employee to trade derivatives that provide indirect exposure to a covered interest where the exposure to the covered interest is sufficiently diluted. In such cases, it would be unlikely that the employee would be using material non-public information about the covered interest to gain an unfair advantage when trading the derivative.

The Commission is proposing to depart from the CFTC definition of “pooled investment vehicle” to adapt it for the SBS and securities markets. Proposed Rule (h)(1)(ii) would define “pooled investment vehicle” to mean an investment company registered under the Investment Company Act of 1940 in which no covered interest constitutes more than 10% of the investment company's assets. Thus, under this definition, if an SBSEF were to list a single-name CDS on company XYZ, a “pooled investment vehicle” would include a broad-based mutual fund or ETF that contains a security issued by company XYZ, assuming that the XYZ security does not exceed 10% of the fund's holdings. The proposed 10% limit on a covered interest's composition of the fund is designed to permit SBSEF employees to trade most index-based mutual funds and ETFs that contain covered interests, except those where a component of the fund becomes sufficiently large that material non-public information about an issuer derived from activity on the SBSEF could provide an unfair advantage to an SBSEF employee when trading that fund.

Finally, the Commission notes that, under proposed Rule 819(h)(3)—as with § 1.59(b)(2)—the exemptions from the trading restrictions would not be automatically available to SBSEF employees. Proposed Rule 819(h)(3) still would require the SBSEF to adopt rules that set forth circumstances under which exemptions from the trading prohibition may be granted. Furthermore, proposed Rule 819(h)(3), which is modelled on § 1.59(b)(2), would state that any exemption must be administered by the SBSEF “on a case-by-case basis.”

Paragraph (h)(4) of proposed Rule 819, like § 1.59(d), would address prohibited conduct not just of employees of an SBSEF, but also of governing board members, committee members, and consultants of the SBSEF. Paragraph (h)(4)(i)(A) is modelled on § 1.59(d)(1)(i) and would prohibit any employee, governing board member, committee member, or consultant of the SBSEF from trading for such person's own account, or for or on behalf of any other account, in any covered interest on the basis of any material, non-public information obtained through special access related to the performance of such person's official duties as an employee, governing board member, committee member, or consultant. Paragraph (h)(4)(i)(B), modelled on § 1.59(d)(1)(ii), would prohibit any employee, governing board member, committee member, or consultant of the SBSEF from disclosing for any purpose inconsistent with the performance of such person's official duties as an employee, governing board member, committee member, or consultant any material, non-public information obtained through special access related to the performance of such duties. Paragraph (h)(4)(ii), modelled on § 1.59(d)(2), would provide that no person shall trade for such person's own account, or for or on behalf of any other account, in any covered interest on the basis of any material, non-public information that such person knows was obtained in violation of paragraph (h)(4) of this section from an employee, governing board member, committee member, or consultant.

The Commission preliminarily believes that persons who have professional duties with an SBSEF should not trade on material non-public information derived from the SBSEF or improperly disclose that information to third parties, and therefore that harmonizing with the comparable CFTC rule as closely as practicable, taking into account the difference in products subject to the respective jurisdictions of the SEC and CFTC, is an appropriate means of furthering that policy goal. If the Commission adopts Rule 819(h) in substantially the same form as proposed herein, dually registered SEF/SBSEFs would be able to utilize the same rules and procedures for complying with Rule 819(h) as they do for § 1.59. The Commission recognizes that the scope of assets under restriction would differ in Rule 819(h) than in § 1.59, as reflected in the SEC's use of the term “covered interest” rather than “commodity interest” in the analogous CFTC provisions, as well as the significant differences in the potential exemptions from the trading restriction (including in the “pooled investment vehicle” definition). Nevertheless, SBS are different from swaps, so the material non-public information that can be obtained from observing order submission and SBS trading on an SBSEF is different from the material non-public information that can be obtained from observing order submission and swap trading on a SEF. The Commission preliminarily believes, therefore, that it is appropriate for Rule 819(h) to utilize a definition of “covered interest” to denote the scope of the trading restrictions in the proposed rule—and a definition of “pooled investment vehicle” to denote the scope of one of the potential exemptions from those restrictions—that is customized for the SBS and securities markets.

The Commission seeks comment on the following:

103. Do you believe in general that the Commission should incorporate into Regulation SE a rule that restricts how persons with official duties at an SBSEF may utilize information that they obtain in the course of their official duties? Why or why not?

104. Do you agree with the specific language proposed by the Commission to adapt § 1.59 into proposed Rule 819(h)? If not, how would you revise the proposed rule?

105. In particular, do you agree with the Commission's proposed definition of “covered interest”? Why or why not? Do you believe that the term “covered interest” should be expanded to include securities underlying an index swap and other securities issued by an issuer whose securities underlie an index swap that trade on a dually registered SEF/SBSEF? Why or why not?

106. Do you agree with the proposed potential exemptions from the trading restrictions in proposed Rule 819(h)(3)? For example, do you believe in general that an SBSEF should be permitted to allow its employees, governing board members, committee members, and consultants to hold covered interests through pooled investment vehicles? Why or why not?

107. Do you agree with the Commission's proposed definition of “pooled investment vehicle”? Why or why not? Do you agree with the Commission's proposed requirement that no covered interest may constitute more than 10% of the pooled investment vehicle? Why or why not? If you believe another threshold would be more appropriate, please justify that threshold.

108. Are there additional provisions of § 1.59 that the Commission has omitted but which you believe should be incorporated into Regulation SE? If so, which provisions and why?

b. Rule 819(i)—Service on SBSEF Governing Boards or Committees by Persons With Disciplinary Histories

Paragraph (i) of proposed Rule 819 would bar persons with specified disciplinary histories from serving on the governing board or committees of an SBSEF and impose certain other duties on the SBSEF associated with that fundamental requirement. Proposed Rule 819(i) is modelled on § 1.63 of the CFTC's rules, which imposes similar requirements in connection with SROs (which term, under the CEA, includes SEFs).

Section 1.63(b) requires each SRO to maintain in effect rules that render a person ineligible to serve on its disciplinary committees, arbitration panels, oversight panels, or governing board who meets any of six enumerated criteria. These criteria generally relate to a disciplinary offense having been committed by that person within the past three years. While § 1.63(b) requires the SRO to implement rules imposing a bar, § 1.63(c) in addition imposes a bar on such persons directly, stating that no person may serve on a disciplinary committee, arbitration panel, oversight panel or governing board of an SRO if such person is subject to any of the conditions listed in § 1.63(b). Section 1.63(d) requires an SRO to maintain, keep current, and provide to the CFTC and the public a list of the rule violations which constitute disciplinary offenses that would trigger the bar in § 1.63. Section 1.63(e) requires an SRO to submit to the CFTC, within 30 days of the end of each calendar year, a certified list of any persons who have been removed from its disciplinary committees, arbitration panels, oversight panels, or governing board pursuant to § 1.63 during the prior year.

Paragraph (i) of proposed Rule 819 is closely modelled on § 1.63. Paragraph (i)(1), like § 1.63(b), would require an SBSEF to maintain rules that render a person ineligible to serve on its disciplinary committees, arbitration panels, oversight panels, or governing boards who falls into any of six enumerated criteria, all of which are modelled closely on the criteria in § 1.63(b). Paragraph (i)(2), modelled on § 1.63(c), would impose a direct bar on any person from serving on a disciplinary committee, arbitration panel, oversight panel, or governing board of an SBSEF who meets any of the six criteria enumerated in proposed Rule 819(i)(1). Paragraph (i)(3), modelled on § 1.63(d), would require an SBSEF to submit to the Commission a schedule listing the rule violations which constitute disciplinary offenses that would trigger the bar and, to the extent necessary to reflect revisions, would have to submit an amended schedule within 30 days of the end of each calendar year. The SBSEF would be required to maintain and keep current this schedule and post it on its website so that it is in a public place designed to provide notice to members and otherwise ensure its availability to the general public. Paragraph (i)(4), like § 1.63(e), would require an SBSEF to submit to the Commission within 30 days of the end of each calendar year a certified list of any persons who have been removed from its disciplinary committees, arbitration panels, oversight panels, or governing board pursuant to Rule 819(i) during the prior year. Paragraph (i)(5), modelled on § 1.63(f), would provide that, whenever an SBSEF finds by final decision that a person has committed a disciplinary offense and such finding makes such person ineligible to serve on that SBSEF's disciplinary committees, arbitration panels, oversight panels, or governing board, the SBSEF shall inform the Commission of that finding and the length of the ineligibility, in a form and manner specified by the Commission.

Paragraph (i)(6) of proposed Rule 819(i) would define the terms “arbitration panel,” “disciplinary offense,” and “final decision” which are used in proposed Rule 819(i). These definitions are closely modelled on those provided in § 1.63(a).

The Commission preliminarily believes that it is appropriate to bar persons with inappropriate disciplinary histories from serving on the disciplinary committees, arbitration panels, oversight panels, or governing board of an SBSEF, and that closely modelling a rule in Regulation SE on § 1.63 would be an appropriate means of furthering that policy goal. The requirements of § 1.63 should be well understood by SEFs, who have been complying with them for several years, and incorporating similar requirements into Regulation SE should impose few if any additional costs on dually registered SEF/SBSEFs. The Commission preliminarily believes, in particular, that establishing criteria for the bar that are as similar as possible to the CFTC's criteria would avoid a situation where a person is ineligible under one agency's rules to serve on a disciplinary committee, arbitration panel, oversight panel, or the governing board, but would be eligible under the other agency's rules.

The Commission seeks comment on the following:

109. Do you believe in general that Regulation SE should include a rule that prohibits persons having an inappropriate disciplinary history from serving on the disciplinary committees, arbitration panels, oversight panels, or governing board of an SBSEF? Why or why not?

110. In particular, do you agree with the specific language proposed by the Commission to adapt § 1.63 into proposed Rule 819(i)? If not, how would you revise the rule?

111. Are there additional provisions of § 1.63 that the Commission has not adapted into proposed Rule 819(i) but which you believe should be incorporated? If so, which provisions and why?

112. Proposed Rule 819(i)(1)(iv) would require an SBSEF to have rules that render a person ineligible to serve on its disciplinary committees, arbitration panels, oversight panels, or governing board if that person is subject to an agreement with the Commission, an SBSEF, or an SRO not to apply for registration with the Commission or membership in any SRO. Should similar agreements with any other types of entities be included in the ineligibility provision of proposed Rule 819(i)(1)(iv)? For example, should registered futures associations such as the NFA be included in this list? Why or why not?

c. Rule 819(j)—Notification of Final Disciplinary Action Involving Financial Harm to a Customer

Paragraph (j) of proposed Rule 819 is a modified version of § 1.67 of the CFTC's rules. Section 1.67(b) provides, in relevant part, that upon any final disciplinary action in which a contract market or SEF finds that a member has committed a rule violation that involved a transaction for a customer, whether executed or not, and that resulted in harm to the customer, the contract market or SEF must promptly provide notice of the disciplinary action to the futures commission merchant or other registrant. The futures commission merchant or other registrant that receives the notice must promptly provide written notice of the disciplinary action to the customer as disclosed on its books and records. Such written notice must include the principal facts of the disciplinary action and a statement that the contract market or SEF has found that the member has committed a rule violation that involved a transaction for the customer, whether executed or not, and that resulted in financial harm to the customer.

Paragraph (j)(1) of proposed Rule 819 is designed to replicate for SBSEFs the fundamental duty of § 1.67 and would provide that, upon any final disciplinary action in which an SBSEF finds that a member has committed a rule violation that involved a transaction for a customer, whether executed or not, and that resulted in financial harm to the customer, the SBSEF must promptly provide written notice of the disciplinary action to the member. In addition, the SBSEF would be required to have established a rule pursuant to Rule 806 or 807 that requires a member that receives such a notice to promptly provide that notice to the customer, as disclosed on the member's books and records. Paragraph (j)(2) would provide that the written notice must include the principal facts of the disciplinary action and a statement that the SBSEF has found that the member has committed a rule violation that involved a transaction for the customer, whether executed or not, and that resulted in financial harm to the customer.

Paragraph (j)(3) of proposed Rule 819 would provide definitions for two terms used in Rule 819(j). The proposed definition for “final disciplinary action” is closely modelled on the CFTC's definition in § 1.67(a). The proposed definition of “customer” is only loosely modelled on the definition of “customer” provided in § 1.3, which includes complexities deriving from the CEA that the Commission does not believe are necessary or appropriate to adapt into a rule that applies to SBSEFs. The Commission is proposing to define “customer” in proposed Rule 819(j)(3)(i) as a person that utilizes an agent in connection with trading on an SBSEF.

The Commission preliminarily believes that, if an SBSEF member commits a rule violation that involved a transaction for the customer and financial harm to the customer results, the customer should be apprised of that fact. The Commission preliminarily believes, therefore, that closely modelling a rule in Regulation SE on § 1.67 would be an appropriate means of furthering that policy goal. The requirements of § 1.67 should be well understood by SEFs, who have been complying with them for several years, and incorporating similar requirements into Regulation SE should impose lower compliance costs on dually registered SEF/SBSEFs.

The Commission seeks comment on the following:

113. Do you believe in general that Regulation SE should include a rule designed to provide a customer of an SBSEF member notice if the member commits a violation of an SBSEF rule that results in harm to the customer? Why or why not?

114. In particular, do you agree with the specific language proposed by the Commission to adapt § 1.67 into proposed Rule 819(j)? If not, how would you revise that language?

115. Do you agree with the proposed definition of “customer” in proposed Rule 819(j)? If not, how would you revise it?

d. Rule 819(k)—Designation of Agent for Non-U.S. Member

Paragraph (k) of proposed Rule 819 would require non-U.S. persons who trade on an SBSEF to have an agent for service process, which could be an agent of its own choosing or, by default, the SBSEF. Proposed Rule 819(k) is modelled on § 15.05(i) of the CFTC's rules, which concerns the designation of agents for foreign persons participating on “reporting markets,” a category in the CFTC's rules that includes SEFs. With respect to SEFs, § 15.05(i) provides that a SEF that permits a foreign trader to effect contracts, agreements, or transactions on the SEF shall be deemed to be the agent of the foreign trader with respect to any such contracts, agreements, or transactions executed by the foreign trader. § 15.05(i) further provides that service or delivery of any communication issued by or on behalf of the CFTC to the SEF shall constitute valid and effective service upon the foreign trader, and that a SEF that has been served with, or to which there has been delivered, a communication issued by or on behalf of the CFTC to a foreign trader shall transmit the communication promptly and in a manner which is reasonable under the circumstances, or in a manner specified by the CFTC in the communication, to the foreign trader.

Paragraph (i)(1) of § 15.05 provides, with respect to SEFs, that it shall be unlawful for a SEF to permit a foreign trader to effect contracts on the SEF unless the SEF has informed the foreign trader of the requirements of § 15.05. Paragraph (i)(2) of § 15.05 permits a foreign trader to appoint its own agent for service of process if it provides a copy of the agency agreement to the SEF, and the SEF files the agreement with the CFTC. Paragraph (i)(3) of § 15.05 provides that the foreign trader would have to notify the CFTC immediately if that agreement is no longer in effect.

Paragraph (k)(1) of proposed Rule 819 is modelled on § 15.05(i) and would provide that an SBSEF that admits a non-U.S. person as a member shall be deemed to be the agent of the “non-U.S. member” with respect to any SBS executed by the non-U.S. member. Under proposed Rule 819(k)(1), service or delivery of any communication issued by or on behalf of the Commission to the SBSEF shall constitute valid and effective service upon the non-U.S. member. If an SBSEF is served with a communication issued by or on behalf of the Commission to a non-U.S. member, the SBSEF would be required to transmit the communication to the non-U.S. member. Paragraph (k)(2) of proposed Rule 819 is modelled on § 15.05(i)(1) and would provide that it shall be unlawful for an SBSEF to permit a non-U.S. member to execute SBS transactions on the facility unless the SBSEF informs the non-U.S. member in writing of the requirements of proposed Rule 819(k).

Paragraph (k)(3) of proposed Rule 819 is modelled on § 15.05(i)(2) and would permit a non-U.S. member of an SBSEF to utilize an agent for service of process other than the SBSEF. The non-U.S. member would have to provide a copy of its agreement with the alternate agent to the SBSEF, and the SBSEF would then have to file the agreement with the Commission, before executing any transaction on the SBSEF. Paragraph (k)(4) of proposed Rule 819, modelled on § 15.05(i)(3), would require the non-U.S. member to notify the Commission if the agency agreement is no longer in effect.

The Commission preliminarily believes that, for an SBSEF to have an effective regulatory program and thereby comply with Core Principle 2 (Compliance with Rules), the SBSEF must have jurisdiction over all of its members, including members who are not U.S. persons. Proposed Rule 819(k) would further an SBSEF's ability to ensure compliance by its non-U.S. members with its rules by requiring each non-U.S. member of the SBSEF to have an agent for service of process, whether an agent of its own choosing that has been disclosed to the SBSEF and the Commission or, as a default, the SBSEF itself. This would eliminate any question of how to provide valid notice to a non-U.S. member of any proceedings involving potential rule violations.

The Commission preliminarily believes that the CFTC has adequately addressed these concerns with § 15.05(i), and therefore that proposed Rule 819 should include provisions adapted from § 15.05(i) for application to SBSEFs. If the Commission ultimately adopts Rule 819(k) in the same or similar form as it is proposed, non-U.S. members of dually registered SEF/SBSEFs that trade both swaps and SBS should already be in compliance with these requirements.

The Commission seeks comment on the following:

116. Do you believe in general that Regulation SE should include a provision making an SBSEF the default agent for service of process for its non-U.S. members? Why or why not?

117. Do you agree with the specific language proposed by the Commission to adapt § 15.05(i) into proposed Rule 819(k)? If not, how would you revise the rule?

118. Are there additional provisions of § 15.05 that the Commission has omitted but which you believe should be incorporated into proposed Rule 819(k)? If so, which provisions and why?

119. Do you anticipate that SBSEFs will have any non-U.S. members? Do you believe that proposed Rule 819(k) will even be necessary?

120. Do you agree with the proposed definition of “non-U.S. member” in Rule 802? If not, how would you revise it?

C. Rule 820—Core Principle 3—SBS Not Readily Susceptible to Manipulation

Core Principle 3 provides that an SBSEF may permit trading only in SBS that are not readily susceptible to manipulation. CEA Core Principle 3 for SEFs is substantively identical.

The CFTC implemented Core Principle 3 in subpart D of part 37. Section 37.300 of subpart D repeats the statutory text of CEA Core Principle 3. § 37.301 provides that, for a SEF to demonstrate its compliance with the core principle, it must, at the time it submits a new swap contract pursuant to part 40, provide the applicable information as set forth in appendix C to part 38 (Demonstration of Compliance That a Contract is not Readily Susceptible to Manipulation). Section 37.301 also states that a SEF may refer to the guidance provided in appendix B of part 37, which provides in relevant part that, when identifying a reference price, a SEF should either calculate its own reference price using suitable and well-established acceptable methods or carefully select a reliable third-party index.

Proposed Rule 820 would implement Core Principle 3. Although, like § 37.300, proposed Rule 820 repeats the statutory text of the Core Principle, the Commission preliminarily believes that it is not necessary or appropriate to harmonize with the CFTC guidance referenced in § 37.301, as this guidance was developed for products other than SBS.

The Commission seeks comment on the following:

121. Do you agree with how the Commission is proposing to implement Core Principle 3? Why or why not? If not, what other rules would you suggest?

D. Rule 821—Core Principle 4—Monitoring of Trading and Trade Processing

Core Principle 4 requires an SBSEF to establish and enforce rules or terms and conditions defining or specifications detailing: (1) Trading procedures to be used in entering and executing orders traded on or through the facilities of the SBSEF; and (2) procedures for trade processing of SBS on or through the facilities of the SBSEF. Core Principle 4 also requires an SBSEF to monitor trading in SBS 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. CEA Core Principle 4 for SEFs is substantively identical.

The CFTC implemented Core Principle 4 in subpart E of part 37. Section 37.401 of subpart E provides that a SEF must collect and evaluate data on its market participants' market activity; demonstrate an effective program for conducting real-time monitoring to detect and resolve abnormalities; demonstrate the ability to comprehensively and accurately reconstruct daily trading; and demonstrate that it has access to sufficient information to assess whether trading in the swaps on its market, in the index or instruments used as a reference price, or other underlying instruments is being used to affect prices on its market. Sections 37.402 and 37.403 impose additional requirements for physical-delivery swaps and cash-settled swaps, respectively. Section 37.404(a) requires a SEF to demonstrate that it has access to sufficient information to assess whether trading in swaps listed on its market, in the index or instrument used as a reference price, or in the underlying commodity for its listed swaps is being used to affect prices on its market. Section 37.404(b) requires a SEF to have rules that require its market participants to keep records of their trading, including records of their activity in the index or instrument used as a reference price, the underlying commodity, and related derivatives markets, and make such records available, upon request, to the SEF or, if applicable, to its regulatory service provider, and the CFTC. Section 37.405 requires a SEF to establish and maintain risk control mechanisms to prevent and reduce the potential risk of market disruptions, including, but not limited to, market restrictions that pause or halt trading under market conditions prescribed by the SEF. Section 37.406 requires a SEF to have the ability to reconstruct all trading on its facility, and requires that all audit-trail data and reconstructions shall be made available to the CFTC in a form, manner, and time that is acceptable to the CFTC. Section 37.407 requires a SEF to comply with subpart E of part 37 through a dedicated regulatory department or by contracting with a regulatory services provider. Section 37.408 provides that SEFs may refer to the guidance in appendix B to part 37 to demonstrate compliance with subpart E of part 37.

Proposed Rule 821 would implement Core Principle 4 and is closely modelled on the rules in subpart E of part 37. The Commission preliminarily believes that the CFTC has implemented Core Principle 4 for SEFs in an appropriate way, and that closely harmonizing with the CFTC rule would yield comparable regulatory benefits while imposing only marginal additional costs. The Commission does not observe any differences between the swap and SBS markets sufficient to warrant a different approach to how a SEF/SBSEF should monitor trading and trade processing.

As noted above, the Commission preliminarily believes, in attempting to harmonize with the CFTC's regulatory regime for SEFs, that it would be preferable to adapt the CFTC's guidance and acceptable practices from appendix B to part 37 into formal rules, where appropriate. Although the Commission considered proposing a stand-alone rule that adapts the guidance pertaining to Core Principle 4, the Commission is proposing instead to weave concepts—and, in some cases, specific language—from the guidance together with the CFTC's original rule text, as the guidance itself follows the structure of the rule. The Commission illustrates its approach in the following proposed rules, where the analogous CFTC rule language is in plain text and language adapted from the guidance is italicized:

• Proposed Rule 821(b)(3): An SBSEF shall: “Demonstrate an effective program for conducting real-time monitoring of trading for the purpose of detecting and resolving abnormalities. A security-based swap execution facility shall employ automated alerts to detect abnormal price movements and unusual trading volumes in real time and instances or threats of manipulation, price distortion, and disruptions on at least a T+1 basis. The T+1 detection and analysis should incorporate any additional data that becomes available on a T+1 basis, including the trade reconstruction data .”

• Proposed Rule 821(d)(2): “For cash-settled security-based swaps listed on the security-based swap execution facility where the reference price is formulated and computed by the security-based swap execution facility, the security-based swap execution facility shall demonstrate that it monitors the continued appropriateness of its methodology for deriving that price and shall promptly amend any methodologies that result, or are likely to result, in manipulation, price distortions, or market disruptions, or impose new methodologies to resolve the threat of disruptions or distortions .”

• Proposed Rule 821(d)(3): “For cash-settled security-based swaps listed on the security-based swap execution facility where the reference price relies on a third-party index or instrument, including an index or instrument traded on another venue, the security-based swap execution facility shall demonstrate that it monitors for pricing abnormalities in the index or instrument used to calculate the reference price and shall conduct due diligence to ensure that the reference price is not susceptible to manipulation .”

• Proposed Rule 821(e)(1): “A security-based swap execution facility shall demonstrate that it has access to sufficient information to assess whether trading in security-based swaps listed on its market, in the index or instrument used as a reference price, or in the underlying asset for its listed security-based swaps is being used to affect prices on its market. The security-based swap execution facility shall demonstrate that it can obtain position and trading information directly from members that conduct substantial trading on its facility or through an information-sharing agreement with other venues or a third-party regulatory service provider. If the position and trading information is not available directly from its members but is available through information-sharing agreements with other trading venues or a third-party regulatory service provider, the security-based swap execution facility should cooperate in such information-sharing agreements .”

• Proposed Rule 821(e)(2): “A security-based swap execution facility shall have rules that require its members to keep records of their trading, including records of their activity in the underlying asset, and related derivatives markets, and make such records available, upon request, to the security-based swap execution facility or, if applicable, to its regulatory service provider and the Commission. The security-based swap execution facility may limit the application of this requirement to only those members that conduct substantial trading on its facility .”

• Proposed Rule 821(f): “A security-based swap execution facility shall establish and maintain risk control mechanisms to prevent and reduce the potential risk of market disruptions, including, but not limited to, market restrictions that pause or halt trading under market conditions prescribed by the security-based swap execution facility. Such risk control mechanisms shall be designed to avoid market disruptions without unduly interfering with that market's price discovery function. The security-based swap execution facility may choose from among controls that include: pre-trade limits on order size, price collars or bands around the current price, message throttles, daily price limits, and intraday position limits related to financial risk to the clearing member, or design other types of controls, as well as clear error-trade and order-cancellation policies. Within the specific array of controls that are selected, the security-based swap execution facility shall set the parameters for those controls, so that the specific parameters are reasonably likely to serve the purpose of preventing market disruptions and price distortions .”

The Commission also is proposing a stand-alone provision derived from the appendix B guidance as Rule 821(b)(5), which would provide than an SBSEF must have rules in place that allow it to intervene to prevent or reduce market disruptions. Once a threatened or actual disruption is detected, the security-based swap execution facility shall take steps to prevent the market disruption or reduce its severity.

Finally, in several instances in subpart E of part 37, the CFTC uses the term “commodity” with respect to the swap underlier. In proposed Rule 821, the Commission is proposing instead to use the more generic term “asset” to refer to the underlier.

The Commission seeks comment on the following:

122. Do you agree in general with the Commission's approach to implementing Core Principle 4? Why or why not? In particular, do agree with how the Commission is proposing to adapt the CFTC guidance on Core Principle 4 by converting appropriate parts of it into a formal rule? Why or why not?

123. In particular, is there any language that the Commission is proposing to adapt from subpart E of part 37 into proposed Rule 821 that you believe is not appropriate? If so, how would you revise it?

124. Are there any aspects of proposed Rule 821 that derive from the guidance that you believe are inappropriate for the Commission to incorporate into its own rules, or that you believe the Commission is proposing to incorporate inappropriately? If so, please discuss.

125. Are there any aspects of the CFTC's guidance that you believe should also be incorporated into the SEC rule but are not present in proposed Rule 821? If so, please describe.

E. Rule 822—Core Principle 5—Ability To Obtain Information

Core Principle 5 requires an SBSEF to establish and enforce rules that will allow the SBSEF to obtain any necessary information to perform any of the functions described in the Core Principles, 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. CEA Core Principle 5 for SEFs is substantively identical.

The CFTC implemented Core Principle 5 in subpart F of part 37. Section 37.500 of subpart F repeats the statutory text of Core Principle 5. Section 37.501 requires a SEF to establish and enforce rules that will allow the SEF to have the ability and authority to obtain sufficient information to allow it to fully perform its operational, risk management, governance, and regulatory functions and any requirements under the rule, including the capacity to carry out international information-sharing agreements as the Commission may require. Section 37.502 requires a SEF to have rules that allow it to collect information on a routine basis, allow for the collection of non-routine data from its market participants, and allow for its examination of books and records kept by the market participants on its facility. Section 37.503 requires a SEF to provide information in its possession to the CFTC upon request, in a form and manner that the CFTC approves. Section 37.504 requires a SEF to share information with other regulatory organizations, data repositories, and third-party data reporting services as required by the CFTC or as otherwise necessary and appropriate to fulfill its self-regulatory and reporting responsibilities. Section 37.504 further provides that appropriate information-sharing agreements can be established with such entities or the CFTC can act in conjunction with the SEF to carry out such information sharing.

Proposed Rule 822 would implement Core Principle 5 and is substantively identical to subpart F of part 37. Paragraph (a) of proposed Rule 822 repeats the statutory text of Core Principle 5. Paragraph (b), modelled on § 37.501, would require that an SBSEF establish and enforce rules that will allow the SBSEF to have the ability and authority to obtain sufficient information to allow it to fully perform its operational, risk management, governance, and regulatory functions and any requirements under Regulation SE. Paragraph (c), like § 37.502, would require an SBSEF to have rules that allow it to collect information on a routine basis, allow for the collection of non-routine data from its members, and allow for its examination of books and records kept by members on its facility. Paragraph (d), like § 37.503, would require that an SBSEF provide information in its possession to the Commission upon request, in a form and manner specified by the Commission. Finally, paragraph (e), like § 37.504, would require an SBSEF to share information with other regulatory organizations, data repositories, and third-party data reporting services as required by the Commission or as otherwise necessary and appropriate to fulfill its regulatory and reporting responsibilities, and that appropriate information-sharing agreements can be established with such entities, or the Commission can act in conjunction with the SBSEF to carry out such information sharing.

The Commission preliminarily believes that closely harmonizing with the CFTC's rules associated with CEA Core Principle 5 would appropriately implement SEA Core Principle 5. By harmonizing with the CFTC's approach, a SEF/SBSEF could have the same information-collection rules and information-sharing agreements. The Commission could thus obtain comparable regulatory benefits while imposing few if any additional costs on SEF/SBSEFs.

The Commission seeks comment on the following:

126. Do you agree generally with how the Commission is proposing to implement Core Principle 5? Why or why not?

127. In particular, do you believe that closely harmonizing with subpart F of the CFTC's rules is appropriate? Why or why not? If not, please identify any provision(s) in the CFTC rules that you believe should not be adapted for SBSEFs and explain your reasoning.

F. Rule 823—Core Principle 6—Financial Integrity of Transactions

SEA Core Principle 6 requires an SBSEF to establish and enforce rules and procedures for ensuring the financial integrity of SBS entered on or through the facilities of the SBSEF, including the clearance and settlement of SBS pursuant to section 3C(a)(1) of the SEA. CEA Core Principle 7 for SEFs is substantively identical to SEA Core Principle 6.

The CFTC implemented CEA Core Principle 7 in subpart H of part 37. Section 37.700 of subpart H repeats the statutory text of Core Principle 7. Section 37.701 provides that transactions executed on or through the SEF that are required to be cleared or are voluntarily cleared by the counterparties shall be cleared through a registered or exempt DCO. Section 37.702 requires a SEF to provide for the financial integrity of its transactions by establishing minimum financial standards for its members, which shall at a minimum require members to be ECPs. Section 37.702 further requires a SEF to provide for the financial integrity of its transactions by ensuring that the SEF, for transactions cleared by a DCO, has the capacity to route transactions to the DCO in a manner acceptable to the DCO; and by coordinating with each DCO to which it submits transactions for clearing in the development of rules and procedures to facilitate prompt and efficient transaction processing. Section 37.703 requires a SEF to monitor its members to ensure that they continue to qualify as ECPs.

Proposed Rule 823 would implement SEA Core Principle 6 and is substantively identical to subpart H of part 37. Paragraph (a) of proposed Rule 823 repeats the statutory text of the Core Principle. Paragraph (b), like § 37.701, would require that transactions executed on or through the SBSEF that are required to be cleared under section 3C(a)(1) of the SEA or are voluntarily cleared by the counterparties shall be cleared through a registered clearing agency or a clearing agency that has obtained an exemption from clearing agency registration to provide central counterparty services for SBS. Paragraph (c), like § 37.702, would require an SBSEF to provide for the financial integrity of its transactions by establishing minimum financial standards for its members, which shall, at a minimum, require that each member qualify as an ECP. In addition, for transactions cleared by a registered clearing agency, an SBSEF must provide for the financial integrity of its transactions by ensuring that it has the capacity to route transactions to the registered clearing agency in a manner acceptable to the clearing agency for purposes of clearing, and by coordinating with each registered clearing agency to which it submits transactions for clearing, in the development of rules and procedures to facilitate prompt and efficient transaction processing. Finally, paragraph (d), like § 37.703, would require that an SBSEF monitor its members to ensure that they continue to qualify as ECPs.

The Commission preliminarily believes that closely harmonizing with the CFTC's rules associated with CEA Core Principle 7 would appropriately implement SEA Core Principle 6. By harmonizing with the CFTC's approach, a SEF/SBSEF could have the same financial standards and requirements for its members, and develop the same processes for submitting swaps and SBS for clearing, thus promoting efficiency among its respective SEF and SBSEF operations. The Commission could thus obtain comparable regulatory benefits while imposing few if any additional costs on SEF/SBSEFs.

The Commission seeks comment on the following:

128. Do you agree generally with how the Commission is proposing to implement Core Principle 6? Why or why not?

129. In particular, do you believe that closely harmonizing with subpart H of the CFTC's rules is appropriate? Why or why not? If not, please identify any provision(s) in the CFTC rules that you believe should not be adapted for SBSEFs and explain your reasoning.

130. Are there any differences in the SBS market relative to the swap market that warrant imposing different or additive requirements with respect to the rules for implementing SEA Core Principle 6? If so, please explain.

G. Rule 824—Core Principle 7—Emergency Authority

SEA Core Principle 7 requires an SBSEF to adopt rules to provide for the exercise of emergency authority, in consultation or cooperation with the Commission, as is necessary and appropriate, including the authority to liquidate or transfer open positions in any SBS or to suspend or curtail trading in an SBS. CEA Core Principle 8 for SEFs is substantively identical.

The CFTC implemented Core Principle 8 for SEFs in subpart I of part 37. Section 37.800 of subpart I repeats the statutory text of the Core Principle. Section 37.801 provides that a SEF “may refer” to the guidance in appendix B to part 37 “to demonstrate to the Commission compliance with [Core Principle 8].” Paragraph (a)(1) of that guidance states that a SEF should have rules that authorize it to take certain actions in the event of an emergency. Furthermore, a SEF should have the authority to intervene as necessary to maintain markets with fair and orderly trading and to prevent or address manipulation or disruptive trading practices, whether the need for intervention arises exclusively from the SEF's market or as part of a coordinated, cross-market intervention. A SEF should have the flexibility and independence to address market emergencies in an effective and timely manner consistent with the nature of the emergency, as long as all such actions taken by the SEF are made in good faith to protect the integrity of the markets. However, the SEF should also have rules that allow it to take market actions as may be directed by the CFTC. Additionally, in situations where a swap is traded on more than one platform, emergency action to liquidate or transfer open interest shall be as directed, or agreed to, by the CFTC or its staff. The SEF's rules should include procedures and guidelines for decision-making and implementation of emergency intervention that avoid conflicts of interest, and include alternate lines of communication and approval procedures to address emergencies associated with real time events. To address perceived market threats, the SEF should have rules that allow it to take emergency actions, including imposing or modifying position limits, imposing or modifying price limits, imposing or modifying intraday market restrictions, imposing special margin requirements, ordering the liquidation or transfer of open positions in any contract, ordering the fixing of a settlement price, extending or shortening the expiration date or the trading hours, suspending or curtailing trading in any contract, transferring customer contracts and the margin, or altering any contract's settlement terms or conditions, or, if applicable, providing for the carrying out of such actions through its agreements with its third-party provider of clearing or regulatory services.

Paragraph (a)(2) of the guidance provides that a SEF should promptly notify the CFTC of its exercise of emergency action, explaining its decision-making process, the reasons for using its emergency authority, and how conflicts of interest were minimized, including the extent to which the SEF considered the effect of its emergency action on the underlying markets and on markets that are linked or referenced to the contracts traded on its facility, including similar markets on other trading venues. Furthermore, information on all regulatory actions carried out pursuant to a SEF's emergency authority should be included in a timely submission of a certified rule pursuant to part 40.

Proposed Rule 824 would implement SEA Core Principle 7 and is closely modelled on subpart I of part 37 and the guidance for CEA Core Principle 8 in appendix B to part 37. Paragraph (a) of proposed Rule 824 would repeat the statutory text of the Core Principle. Paragraph (b) of proposed Rule 824 would incorporate much of the language in paragraph (a)(1) of the CFTC's guidance on CEA Core Principle 8. Under paragraph (b), an SBSEF would be required to adopt rules that are reasonably designed to:

(1) Allow the SBSEF to intervene as necessary to maintain markets with fair and orderly trading and to prevent or address manipulation or disruptive trading practices, whether the need for intervention arises exclusively from the SBSEF's market or as part of a coordinated, cross-market intervention;

(2) Have the flexibility and independence to address market emergencies in an effective and timely manner consistent with the nature of the emergency, as long as all such actions taken by the SBSEF are made in good faith to protect the integrity of the markets;

(3) Take market actions as may be directed by the Commission, including, in situations where an SBS is traded on more than one platform, emergency action to liquidate or transfer open interest as directed, or agreed to, by the Commission or the Commission's staff;

(4) Include procedures and guidelines for decision-making and implementation of emergency intervention that avoid conflicts of interest;

(5) Include alternate lines of communication and approval procedures to address emergencies associated with real-time events;

(6) Allow the SBSEF, to address perceived market threats, to impose or modify position limits, impose or modify price limits, impose or modify intraday market restrictions, impose special margin requirements, order the liquidation or transfer of open positions in any contract, order the fixing of a settlement price, extend or shorten the expiration date or the trading hours, suspend or curtail trading in any contract, transfer customer contracts and the margin, or alter any contract's settlement terms or conditions, or, if applicable, provide for the carrying out of such actions through its agreements with its third-party provider of clearing or regulatory services.

Paragraph (c) of proposed Rule 824 is based on paragraph (a)(2) of the CFTC's guidance on CEA Core Principle 8 and would require an SBSEF to promptly notify the Commission of its exercise of emergency action, explaining its decision-making process, the reasons for using its emergency authority, and how conflicts of interest were minimized, including the extent to which the SBSEF considered the effect of its emergency action on the underlying markets and on markets that are linked or referenced to the contracts traded on its facility, including similar markets on other trading venues. In addition, proposed Rule 824(c) would require information on all regulatory actions carried out pursuant to an SBSEF's emergency authority to be included in a timely submission of a certified rule pursuant to Rule 807.

The Commission preliminarily believes that adapting the CFTC's guidance associated with CEA Core Principle 8 into proposed Rule 824 would appropriately implement SEA Core Principle 7. In particular, the Commission preliminarily agrees with the CFTC's principles-based approach to emergency situations, requiring SEF/SBSEFs to establish rules ex ante that generally would facilitate emergency actions but providing flexibility and independence with regard to specific actions that might be necessary. The Commission also preliminarily believes, as reflected in proposed Rule 824(c), that an SBSEF that exercises its emergency authority should be required to promptly notify the Commission of such exercise and to explain the basis for its actions. By harmonizing with the CFTC's approach, the Commission's intent is that, in many or even all instances, the SEF/SBSEF could file the same information regarding the situation to both agencies, rather than having to prepare one submission for the SEC and a different submission for the CFTC.

The Commission seeks comment on the following:

131. Do you agree generally with the Commission's approach to implementing SEA Core Principle 7? Why or why not?

132. In particular, do you agree with how the Commission is proposing to adapt the guidance from appendix B to part 37 regarding CEA Core Principle 8? Is there language adapted from the guidance into proposed Rule 824 that you believe should be omitted or revised? If so, please describe.

H. Rule 825—Core Principle 8—Timely Publication of Trading Information

SEA Core Principle 8 requires an SBSEF to make public timely information on price, trading volume, and other trading data on SBS 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. CEA Core Principle 9 is substantively identical to SEA Core Principle 8.

The CFTC implemented CEA Core Principle 9 in subpart J of part 37. Section 37.900 of subpart J repeats the statutory language of the Core Principle. § 37.901 provides that, with respect to swaps traded on or through a SEF, the SEF shall report specified swap data as provided in parts 43 and 45 of the CFTC's rules. Section 37.901 also requires the SEF to comply with part 16 of the CFTC's rules, which requires a “reporting market” (which term includes a SEF) to provide certain reports to the CFTC regarding trading activity on the SEF and to make certain of that information publicly available without charge.

Proposed Rule 825 would implement SEA Core Principle 8 and is closely modelled on subpart J of part 37. Paragraph (a) of proposed Rule 825, like § 37.900, repeats the statutory language of the Core Principle. While § 37.901 provides that a SEF shall report swap transaction data pursuant to Parts 43 and 45 of the CFTC's rules, paragraph (b) of proposed Rule 825 would direct SBSEFs to report SBS transaction data in a manner specified in the SEC's Regulation SBSR.

In addition, the Commission preliminarily believes that it would be appropriate to incorporate requirements for SBSEFs that are modelled on the requirements for SEFs in the CFTC's part 16. Unlike part 16, however, the Commission is not proposing to require SBSEFs to submit any information directly to the Commission. Rather, the Commission is proposing in paragraph (c) of Rule 825 to require only the publication, on an SBSEF's website, of a “Daily Market Data Report.” The data fields that the Commission is proposing to require for the Daily Market Data Report approximate, although they are not the same as, those required by part 16. The Commission preliminarily believes that the differences in the product markets ( i.e., SBS vs. swaps and futures products) necessitate certain adaptations in the data fields so as to render the reports published by SBSEFs meaningful to SBS market participants and market observers.

Under proposed Rule 825(c)(1), the Daily Market Data Report for a business day would be required to contain the following information for each tenor of each SBS traded on that SBSEF during that business day:

(i) The trade count (including block trades but excluding error trades, correcting trades, and offsetting trades);

(ii) The total notional amount traded (including block trades but excluding error trades, correcting trades, and offsetting trades );

(iii) The number of block trades;

(iv) The total notional amount of block trades;

(v) The opening and closing price;

(vi) The price that is used for settlement purposes, if different from the closing price; and

(vii) The lowest price of a sale or offer, whichever is lower, and the highest price of a sale or bid, whichever is higher, that the SBSEF reasonably determines accurately reflects market conditions. Bids and offers vacated or withdrawn shall not be used in making this determination. A bid is vacated if followed by a higher bid or price and an offer is vacated if followed by a lower offer or price.

Paragraph (c)(2) of proposed Rule 825 would require an SBSEF to provide certain explanatory information regarding data presented on the Daily Market Data Report:

(i) The method used by the SBSEF in determining nominal prices and settlement prices; and

(ii) If discretion is used by the SBSEF in determining the opening and/or closing ranges or the settlement prices, an explanation that certain discretion may be employed by the SBSEF and a description of the manner in which that discretion may be employed. Discretionary authority would have to be noted explicitly in each case in which it is applied (for example, by use of an asterisk or footnote).

Paragraph (c)(3) of proposed Rule 825 would set out various requirements regarding the form and manner by which an SBSEF makes available its Daily Market Data Report. Paragraph (c)(3)(i) would require the SBSEF to post on its website its Daily Market Data Report in a downloadable and machine-readable format using the most recent versions of the associated XML schema and PDF renderer as published on the Commission's website. This proposed requirement is similar to existing Commission requirements for broker-dealer reports on order routing and execution and is designed to allow the Daily Market Data Report to be automatically recognized and processed by a variety of software applications, thus making it immediately available for users to search, aggregate, compare, and analyze. This should enable SBS market participants and other market observers to obtain timely and consistent information on price, trading volume, and other SBSEF trading data in a manner that would facilitate search capabilities, and statistical and comparative analyses across SBSEFs and date ranges. In addition, requiring SBSEFs to use a PDF renderer as specified by the Commission would provide a corresponding human-readable version of the machine-readable data, allowing end users without access to analytical software to read the disclosed information.

Paragraph (c)(3)(ii) of proposed Rule 825 would require the SBSEF to make available its Daily Market Data Report without fees or other charges. Paragraph (c)(3)(iii) would prohibit the SBSEF from imposing any encumbrances on access or usage restrictions with respect to the Daily Market Data Report. Paragraph (c)(3)(iv) would prohibit the SBSEF from requiring a user to agree to any terms before being allowed to view or download the Daily Market Data Report, such as by waiving any requirements of proposed Rule 825(c)(3). Paragraph (c)(3)(iv) would further provide that any such waiver agreed to by a user would be null and void. The Commission preliminarily believes that proposed Rule 825(c)(3) could be subverted if an SBSEF could, for example, require that users—as a condition to viewing or downloading the Daily Market Data Report—waive any of the protections afforded under proposed Rule 825(c)(3).

Proposed Rule 825(c)(3) is designed to promote wide use of the SBS trading information contained in the Daily Market Data Report by prohibiting an SBSEF from imposing any financial, legal, or operational burdens on that use. The approach taken in proposed Rule 825(c)(3) is similar to the approach taken by the Commission in Regulation SBSR, which uses the term “widely accessible” to prohibit registered SDRs from charging fees for or imposing usage restrictions on the SBS transaction data that they are required to publicly disseminate under Regulation SBSR. When adopting the definition of “widely accessible,” the Commission noted that a registered SDR has a monopoly position over the SBS transaction information that it publicly disseminates and stated that “there would be no other source from which the user could freely obtain this transaction information.” The Commission preliminarily believes that a registered SBSEF is similarly situated, because it is the sole source of information about SBS trading activity on its market. The Commission also stated that the prohibition on usage restrictions encompasses an SDR-imposed restriction on bulk redistribution by third parties of the regulatorily mandated transaction data that the registered SDR publicly disseminates. For the same reasons, the proposed prohibition against an SBSEF imposing any usage restrictions on its Daily Market Data Report necessarily would encompass a prohibition on bulk redistribution of the Daily Market Data Report or any information contained therein. The Commission seeks to encourage market observers to access the Daily Market Data Report and scrub, reconfigure, aggregate, analyze, repurpose, or otherwise add value to the information contained in the report as they see fit.

Paragraph (c)(4) of proposed Rule 825 would require the SBSEF to publish the Daily Market Data Report on its website no later than the SBSEF's commencement of trading on the next business day after the day to which the information pertains. Proposed Rule 825(c)(4) is designed to require an SBSEF to provide its market data in a timely fashion so that it can be assessed and utilized by the next business day. Finally, paragraph (c)(5) would require the SBSEF to keep each Daily Market Data Report available on its website in the same location as all other Daily Market Data Reports for no less than one year after the date of first publication. Proposed Rule 825(c)(5) is designed to allow market observers to consult a reasonable number of previous reports on the SBSEF's website; the reports would be of less utility if an SBSEF could take down reports shortly after they are posted.

The Commission seeks comment on the following:

133. Do you agree in general with the Commission's approach for implementing SEA Core Principle 8? Why or why not?

134. Do you agree with the adaptions that the Commission is proposing to the CFTC's part 16 for inclusion in proposed Rule 825(c)? In particular, do you concur with the Commission's proposal to require only the Daily Market Data Report (to be published on the SBSEF's website) and not to require any daily reports to the Commission? Why or why not? If not, what market data do you believe should be reported directly to the Commission, and why?

135. Do you agree with the fields proposed by the Commission for the Daily Market Data Report in paragraphs (c)(1) and (2) of proposed Rule 825? If not, which fields do you believe are not appropriate, and why?

136. Do you believe that any of the fields should be defined differently or more precisely? If so, please explain.

137. Do you believe that the Commission should require additional fields? If so, what fields and why?

138. Do you agree with the proposed requirement in Rule 825(c)(3) that the Daily Market Data Report should be available free of charge and without usage restrictions or encumbrances? Why or why not? Are there any clarifications that you would recommend to help promote free and unencumbered access to and use of the Daily Market Data Report and any information contained therein? If so, please discuss.

139. Do you agree with the proposed requirement that the Daily Market Data Report should be made available in a downloadable and machine-readable format using the most recent version of the associated XML schema and PDF renderer as published on the Commission's website? Why or why not? Is there some other format that the Commission should require? If so, what format and why?

140. Do you agree with the proposed requirement in Rule 825(c)(4) that an SBSEF must publish the Daily Market Data Report on its website no later than the SBSEF's commencement of trading on the next business day after the day to which the information pertains? Why or why not? What is the current practice for the approximate time of day at which CFTC reporting markets make available their daily market data?

141. Do you agree with the proposed requirement in Rule 825(c)(5) that an SBSEF keep each Daily Market Data Report available on its website in the same location as all other Daily Market Data Reports for no less than one year after the date of first publication? Why or why not? Do you believe that a longer or shorter period would be appropriate? If so, please explain.

I. Rule 826—Core Principle 9—Recordkeeping and Reporting

SEA Core Principle 9 sets forth recordkeeping and reporting obligations for SBSEFs. Core Principle 9 requires an SBSEF 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. The Core Principle further requires an SBSEF 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 its duties. Finally, under Core Principle 9, the Commission must adopt data collection and reporting requirements for SBSEFs that are comparable to requirements for clearing agencies and SBS data repositories. CEA Core Principle 10 for SEFs, although it includes an additional clause not present in the equivalent SEA Core Principle 9, is substantively identical.

The CFTC implemented Core Principle 10 for SEFs in subpart K of part 37. Section 37.1000 of subpart K repeats the statutory language of the Core Principle. Section 37.1001 requires a SEF to maintain records of all activities relating to the business of the facility, in a form and manner acceptable to the CFTC, for a period of at least five years, and that a SEF shall maintain such records, including a complete audit trail for all swaps executed on or subject to the rules of the SEF, investigatory files, and disciplinary files. Section 37.1001 does not itself set forth detailed record retention requirements. Instead, § 37.1001 directs SEFs to maintain the required records in accordance with § 1.31 and part 45 of the CFTC's rules.

Section 1.31 imposes on “records entities” (which term includes SEFs) various requirements relating to record retention and production. Section 1.31(a) sets out definitions of terms used throughout § 1.31. Section 1.31(b) sets out the duration of retention for different types of records. In particular, a records entity must keep regulatory records of any swap from the date that the regulatory record was created until at least five years after the termination, maturity, expiration, transfer, assignment, or novation of such swap. Section 1.31(c) sets out the required form and manner of retention. Section 1.31(d) provides that a records entity must, at its own expense, produce or make regulatory records accessible for inspection to CFTC staff or to the U.S. Department of Justice, and includes other details regarding production requests.

Section 45.2 imposes various recordkeeping, retention, and retrieval requirements applicable to SEFs (among others) to support trade reporting. Section 45.2(a), among other things, requires a SEF to keep all records required by part 37. Section 45.2(c) sets out a record retention requirement. Section 45.2(d) imposes requirements on the form of retention. § 45.2(e) imposes requirements on record retrievability. Section 45.2(h) imposes requirements for record inspection; in particular, all records required to be kept by § 45.2 shall be open to inspection upon request by any representative of the CFTC, the U.S. Department of Justice, the SEC, or by any representative of a prudential regulatory as authorized by the CFTC.

To implement SEA Core Principle 9, the Commission is proposing Rule 826, which would roughly approximate §§ 1.31 and 45.2 while also drawing on concepts from the books and records requirements applicable to brokers, SEC-registered SROs, and other SEC-registered entities.

Paragraph (a) of proposed Rule 826 repeats the statutory text of the Core Principle. Paragraph (b) would require an SBSEF to keep full, complete, and systematic records, together with all pertinent data and memoranda, of all activities relating to its business with respect to SBS. Under paragraph (b), such records would be required to include, without limitation, the audit trail information required under proposed Rule 819(f) and all other records that an SBSEF is required to create or obtain under Regulation SE.

Paragraph (c) of proposed Rule 826 would require an SBSEF to keep records of any SBS from the date of execution until the termination, maturity, expiration, transfer, assignment, or novation date of the transaction, and for a period of not less than five years, the first two years in an easily accessible place, after such date. Paragraph (c) also would require an SBSEF to keep each record (other than a record of an SBS noted in the previous sentence) for a period of not less than five years, the first two years in an easily accessible place, from the date on which the record was created. The proposed five-year retention requirements are consistent with section 3D(d) of the SEA and are modelled on the requirements for SEFs in §§ 1.31 and 45.2. The proposed requirement that the records be kept “in an easily accessible place” for the first two years derives from an analogous requirement in the Commission's principal books and records rule for exchange members, brokers, and dealers.

Paragraph (d)(1) of proposed Rule 826 would require an SBSEF to retain all records in a form and manner that ensures the authenticity and reliability of such records in accordance with the Act and the Commission's rules thereunder. Paragraph (d)(2) would require an SBSEF, upon request of any representative of the Commission, to promptly furnish to the representative legible, true, complete, and current copies of any records required to be kept and preserved under Rule 826. Paragraph (d)(3) would provide that an electronic record shall be retained in a form and manner that allows for prompt production at the request of any representative of the Commission. Paragraph (d)(3) also would include provisions modelled on § 1.31(c)(2) requiring an SBSEF that maintains electronic records to establish appropriate systems and controls that ensure the authenticity and reliability of electronic records, including, without limitation:

(A) Systems that maintain the security, signature, and data as necessary to ensure the authenticity of the information contained in electronic records and to monitor compliance with the SEA and the Commission's rules thereunder;

(B) Systems that ensure that the SBSEF is able to produce electronic records in accordance with Rule 826, and ensure the availability of such electronic records in the event of an emergency or other disruption of the SBSEF's electronic record retention systems; and

(C) The creation and maintenance of an up-to-date inventory that identifies and describes each system that maintains information necessary for accessing or producing electronic records.

Sections 1.31 and 43.2 include provisions that govern inspection and production of records. While the Commission believes that its rules for SBSEFs also should address those topics, the Commission does not believe that adapting a CFTC rule would be the most appropriate way to do so. Paragraph (e) of proposed Rule 826 would provide instead that, because a registered SBSEF is also a registered broker, all records required to be kept by an SBSEF pursuant to Rule 826 would be subject to examination by any representative of the Commission pursuant to section 17(b) of the SEA. As noted above, section 17(b) is the source of the Commission's examination authority for registered brokers (among other types of registered entities). Proposed Rule 826(e) is designed only to remind SBSEFs of this statutory authority and does not seek to limit or expand that authority using the Commission's powers over SBSEFs in section 3D of the SEA.

Proposed Rule 826 includes a paragraph (f) that is not modelled on any provision of § 1.31 or 43.2, but rather on § 1.37(c) of the CFTC's rules, which provides: “Each designated contract market and swap execution facility shall keep a record in permanent form, which shall show the true name, address, and principal occupation or business of any foreign trader executing transactions on the facility or exchange. In addition, upon request, a designated contract market or swap execution facility shall provide to the Commission information regarding the name of any person guaranteeing such transactions or exercising any control over the trading of such foreign trader.” Proposed Rule 826(f) is modelled closely on § 1.37(c), except that it uses the term “non-U.S. member” rather than “foreign trader.”

The recordkeeping and reporting requirements proposed in Rule 826 are designed to be generally consistent with the requirements applicable to SEFs and with the Commission's requirements under section 17(a) of the SEA. The Commission preliminarily believes that proposed Rule 826 would therefore achieve similar regulatory benefits as the CFTC rules applicable to SEFs while imposing only marginal costs, since dually registered SEF/SBSEFs are familiar with the CFTC requirements and have invested in systems, policies, and procedures to comply with them. The Commission intends that the same systems, policies, and procedures could be used to comply with parallel SEC requirements.

The Commission seeks comment on the following:

142. Do you agree in general with the Commission's approach to implementing SEA Core Principle 9? Why or why not?

143. Do you believe that the Commission should subject registered SBSEFs to section 17(a) of the SEA and the Commission's rules thereunder? Why or why not? If not, are there nevertheless specific provisions of the Commission's rules under section 17(a) that you believe should nevertheless be incorporated into Rule 826 using the Commission's statutory authority over SBSEFs in section 3D of the SEA? If so, which provision(s) and why?

144. Are there any provisions of proposed Rule 826 that are significantly different from, or even in conflict with, any recordkeeping requirements imposed on SEFs by any CFTC rule? If so, please discuss and suggest how you would resolve any such conflict.

145. Are there any provisions of § 1.31 or § 45.2 that the Commission has not proposed to incorporate into proposed Rule 826 that you believe should be applied to SBSEFs? If so, which provision(s) and why?

146. Are there any recordkeeping provisions elsewhere in the CFTC rules that the Commission has not proposed to incorporate into proposed Rule 826 that you believe should be applied to SBSEFs? If so, which provision(s) and why?

147. Do you believe that the Commission should adapt § 1.37 into proposed Rule 826(f)? Why or why not? Do you believe that the Commission's proposed term “non-U.S. member” used in Rule 826(f) is an appropriate substitute for “foreign trader” used in § 1.37? Why or why not?

J. Rule 827—Core Principle 10—Antitrust Considerations

SEA Core Principle 10 provides that, unless necessary or appropriate to achieve the purposes of the SEA, an SBSEF 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. CEA Core Principle 11 is substantively identical.

The CFTC implemented CEA Core Principle 11 in subpart L of part 37. Section 37.1100 of subpart L repeats the statutory text of Core Principle 11. Section 37.1101 provides that a SEF “may refer” to the guidance in appendix B to part 37 to demonstrate compliance with Core Principle 11. The guidance states that an entity seeking registration as a SEF may request that the CFTC consider, under the provisions of section 15(b) of the CEA, any of the entity's rules—including trading protocols or policies, and including both operational rules and the terms or conditions of products listed for trading—at the time of registration or thereafter. The guidance further states that the CFTC intends to apply CEA section 15(b) to its consideration of issues under CEA Core Principle 11 in a manner consistent with that previously applied to contract markets.

Proposed Rule 827 would implement SEA Core Principle 10 and, like § 37.1100, reiterates the statutory text of the Core Principle. The Commission is not adapting the guidance from appendix B pertaining to CEA Core Principle 11 into a proposed rule.

The Commission seeks comment on the following:

148. Do you agree with how the Commission is proposing to implement SEA Core Principle 10? Why or why not?

K. Rule 828—Core Principle 11—Conflicts of Interest

SEA Core Principle 11 requires an SBSEF to establish and enforce rules to minimize conflicts of interest in its decision-making process and to establish a process for resolving the conflicts of interest. CEA Core Principle 12 is substantively identical.

The CFTC implemented CEA Core Principle 12 in subpart M of part 37. Section 37.1200 of subpart M repeats the statutory text of Core Principle 12. There are no other provisions in subpart M, nor is there any guidance or acceptable practices associated with Core Principle 12 in appendix B to part 37.

Proposed Rule 828 would implement SEA Core Principle 11. Paragraph (a) of proposed Rule 828, like § 37.1200, repeats the statutory text of the Core Principle. Paragraph (b) would direct an SBSEF to comply with the requirements of proposed Rule 834, which, as discussed below, would implement section 765 of the Dodd-Frank Act for both SBSEFs and SBS exchanges.

The Commission seeks comment on the following:

149. Do you agree with how the Commission is proposing to implement SEA Core Principle 11 in Rule 828? Why or why not?

150. The Commission is proposing to subject SBS exchanges and SBSEFs to the same conflicts-of-interest requirements, in Rule 834. Therefore, proposed Rule 828 cross-references proposed Rule 834 rather than enumerating conflicts-of-interest requirements for SBSEFs separate from those for SBS exchanges. Do you believe that this is an appropriate way to structure the proposed rules? Why or why not? Are there any conflicts-of-interest requirements that you believe should be applied to SBSEFs but not to SBS exchanges? If so, what requirement(s) and why?

L. Rule 829—Core Principle 12—Financial Resources

SEA Core Principle 12 has a paragraph (A) that requires an SBSEF to have adequate financial, operational, and managerial resources to discharge each responsibility of the SBSEF, as determined by the Commission. Paragraph (B) of SEA Core Principle 12 provides that the financial resources of an SBSEF shall be considered to be adequate if the value of the financial resources: (i) Enables the organization to meet its financial obligations to its members and participants notwithstanding a default by the member or participant creating the largest financial exposure for that organization in extreme but plausible market conditions; and (ii) exceeds the amount that would enable the SBSEF to cover operating costs of the SBSEF for a one-year period, as calculated on a rolling basis. CEA Core Principle 13 for SEFs is substantively identical with respect to paragraphs (A) and (B)(ii) of SEA Core Principle 12, but lacks an equivalent to paragraph (B)(i) of SEA Core Principle 12.

The CFTC implemented CEA Core Principle 13 for SEFs in subpart N of part 37. Section 37.1300 of subpart N repeats the statutory text of CEA Core Principle 13. Section 37.1301 provides that financial resources shall be considered adequate if their value exceeds the total amount that would enable a SEF to cover its projected operating costs necessary for the SEF to comply with section 5h of the CEA and applicable CFTC regulations for a one-year period, calculated on a rolling basis. Section 37.1302 describes the types of financial resources that may satisfy the requirements of § 37.1301. Section 37.1303 provides that the financial resources allocated by the SEF to meet the financial resources requirements shall include unencumbered, liquid financial assets equal to at least the greater of three months of projected operating costs or the projected costs needed to wind down the SEF's operations. If a SEF lacks sufficient unencumbered, liquid financial assets, it may satisfy this obligation by obtaining a committed line of credit in an amount at least equal to the deficiency. Section 37.1304 requires a SEF, each fiscal quarter, to make a reasonable calculation of its projected operating costs and wind-down costs in order to determine its applicable obligations under this section. It further provides that the SEF shall have reasonable discretion in determining the methodology used to compute such amounts, provided that the CFTC may review the methodology and require changes as appropriate. Section 37.1305 provides that, no less than each fiscal quarter, a SEF must compute the current market value of each financial resource used to meet its obligations under §§ 37.1301 and 37.1303 and that reductions in value to reflect market and credit risk (“haircuts”) shall be applied as appropriate.

Section 37.1306 addresses reporting to the CFTC. Paragraph (a) of § 37.1306 provides that, each fiscal quarter, or at any time upon CFTC request, a SEF shall report the amount of financial resources necessary to meet the requirements of §§ 37.1301 and 37.1303 and the market value of each financial resource available, and provide the CFTC with financial statements, including the balance sheet, income statement, and statement of cash flows of the SEF, prepared in accordance with U.S. generally acceptable accounting principles (“GAAP”). Paragraph (a) further provides that the financial statements of a SEF that is not domiciled in the United States and is not otherwise required to prepare financial statements in accordance with U.S. GAAP may instead prepare its financial statements in accordance with either International Financial Reporting Standards issued by the International Accounting Standards Board or a comparable international standard as the CFTC may otherwise accept in its discretion. Paragraph (b) provides that the calculations required under paragraph (a) shall be made as of the last business day of the SEF's fiscal quarter. Paragraph (c) requires the SEF to provide the CFTC with sufficient documentation to explain its methodology for computing its financial requirements under §§ 37.1301 and 37.1303. Further, paragraph (c) of § 37.1306 requires that the documentation must allow the CFTC to reliably determine, without additional requests for information, that the SEF has made reasonable calculations pursuant to § 37.1304. Paragraph (d) of § 37.1306 provides that these reports and supporting documentation shall be filed within 40 calendar days of the end of the SEF's first three fiscal quarters, and within 90 calendar days of the end of the SEF's fourth fiscal quarter, or at such later time as the CFTC may permit. Paragraph (e) requires a SEF to provide notice to the CFTC no later than 48 hours after it knows or reasonably should know that it no longer meets its obligations under §§ 37.1301 and 37.1303.

Proposed Rule 829 would implement SEA Core Principle 12 and is based closely on subpart N of part 37. Because this Core Principle relates to the business operations of the trading venue, very few modifications are necessary to adapt the CFTC rule to apply to SBSEFs. Therefore, proposed Rule 829 is closely modelled on the rules in subpart N.

However, one slight difference in the rule text stems from the Commission's global approach to adapting the CFTC's guidance and acceptable practices from appendix B to part 37 into formal rules, where appropriate. Although the Commission considered proposing a separate rule that adapts the guidance in appendix B pertaining to CEA Core Principle 13, the Commission is proposing instead to weave the concepts and some of the specific language from the CFTC guidance relating to financial resources into paragraph (e) of proposed Rule 829, as the guidance relates only to that portion of the proposed rule. Proposed Rule 829(e) begins by incorporating the provisions of § 37.1304 regarding computation of costs to meet the financial resources requirement. Proposed Rule 829(e) then appends language based on the CFTC guidance concerning the following topics, all of which relate to computation of costs: (i) Reasonableness of calculating projected operating costs and what may be excluded from such calculation; (ii) proration of expenses; and (iii) allocation of expenses among affiliates.

Another non-substantive difference between proposed Rule 829 and subpart N of part 37 is the requirement in proposed Rule 829(g)(6) for an SBSEF to submit reports and documentation to the Commission using the EDGAR system as an Interactive Data File, in accordance with Rule 405 of Regulation S-T. The Commission is proposing this requirement here and in other locations to implement the Inline XBRL and EDGAR electronic filing requirements for various documents that would have to be provided to the Commission under proposed Regulation SE.

The Commission preliminarily believes that the CFTC has implemented its equivalent Core Principle in an appropriate way, and that closely harmonizing with the CFTC rule would provide comparable regulatory benefits while imposing only marginal additional costs. Given that most if not all entities that will seek to register with the SEC as SBSEFs are already registered with the CFTC as SEFs, these entities already have in place the processes and controls to designed to comply with subpart N. Furthermore, the Commission recognizes that the swap business of a dually registered SEF/SBSEF is likely to be much larger than its SBS business. Therefore, the greatest risk to a dually registered entity is likely to arise from the swap business rather than the SBS business, so it would be logical for the SEC to defer to the CFTC's approach for ensuring that SEFs have adequate financial resources. Different or additive requirements imposed by the SEC could increase costs for SEF/SBSEFs while generating benefits that are marginal at best. The Commission does not observe any differences in the SBS market relative to the swap market that warrant imposing different or additive financial resource requirements on SBSEFs.

The Commission seeks comment on the following:

151. Do you agree in general with the Commission's approach to implementing SEA Core Principle 12? Why or why not?

152. In particular, do you agree with how the Commission is proposing to adapt the language of subpart N of part 37 into proposed Rule 829? If not, how would you revise that language?

153. How does the anticipated size of the SBS trading business on dually registered SEF/SBSEFs relative to the size of swap trading business affect your view of the financial resource requirements that the SEC should impose on dually registered entities? Do you agree that there would be only marginal additional costs imposed on dually registered entities to provide the same financial information at the same times to both the SEC and CFTC (pursuant to proposed Rule 829 and subpart N, respectively)? Why or why not?

154. Are there provisions of subpart N that the SEC should not incorporate, even if you believe that the SEC should harmonize with the majority of subpart N? In other words, are there areas where omitting a subpart N provision would reduce burdens on SBSEFs and/or their members without lessening any regulatory benefits? If so, please explain, with particular regard to the economic impacts and/or PRA burdens.

155. Should the Commission adopt different or additive financial resource requirements for SBSEFs, even if there are no analogous provisions in subpart N? If so, please explain, with particular regards to the economic impacts and/or PRA burdens. For example, do you believe that the SEC-specific provision would impose additional costs or burdens on SBSEFs and/or their members that are nevertheless appropriate in view of new and additional benefits? Or do you believe that the SEC-specific provision would be appropriate because it would relieve costs or burdens that are imposed on SEFs by subpart N that, in your view, are unnecessary or inappropriate for SBSEFs?

156. Do you agree with how the Commission is proposing to adapt the CFTC guidance pertaining to its equivalent Core Principle by converting it into formal rule text? Why or why not? Would adapting the CFTC guidance into the Commission's rules necessitate any changes in how financial resources are calculated?

M. Rule 830—Core Principle 13—System Safeguards

Paragraph (A) of SEA Core Principle 13 provides that an SBSEF must establish and maintain a program of risk analysis and oversight to identify and minimize sources of operational risk, through the development of appropriate controls and procedures, and automated systems, that are reliable and secure and that have adequate scalable capacity. Paragraph (B) requires that an SBSEF also must establish and maintain emergency procedures, backup facilities, and a plan for disaster recovery that allow for the timely recovery and resumption of operations; and the fulfillment of the responsibilities and obligations of the SBSEF. Finally, paragraph (C) of SEA Core Principle 13 requires an SBSEF to periodically conduct tests to verify that the backup resources of the SBSEF are sufficient to ensure continued order processing and trade matching; price reporting; market surveillance; and maintenance of a comprehensive and accurate audit trail. CEA Core Principle 14 is substantively identical to SEA Core Principle 13.

Subpart O of part 37 is entitled “System Safeguards” and implements CEA Core Principle 14. Section 37.1400 of subpart O repeats the statutory text of the Core Principle. § 37.1401 sets forth detailed requirements for a SEF to comply with the Core Principle. Paragraph (a) of § 37.1401 requires a SEF's program of risk analysis and oversight to address enterprise risk management and governance, information security, business continuity-disaster recovery planning and resources, capacity and performance planning, systems operations, systems development and quality assurance, and physical security and operational controls. Paragraph (b) provides that, in addressing the categories of risk analysis and oversight required under paragraph (a), a SEF shall follow generally accepted standards and best practices with respect to the development, operation, reliability, security, and capacity of automated systems. Paragraph (c) requires a SEF to maintain a business continuity-disaster recovery plan and business continuity-disaster recovery resources, emergency procedures, and backup facilities that satisfy several enumerated criteria. Paragraph (d) explains how a SEF that is not determined by the CFTC to be a critical financial market may satisfy its requirement to be able to resume its operations and resume its ongoing fulfillment of its responsibilities and obligations during the next business day following any disruption of its operations.

Paragraph (e) of § 37.1401 requires a SEF to notify the CFTC promptly of all electronic trading halts and material system malfunctions; cyber security incidents or targeted threats that actually or potentially jeopardize automated system operation, reliability, security, or capacity; and activations of SEF's business continuity-disaster recovery plan. Paragraph (f) requires the SEF to provide CFTC staff timely advance notice of all material planned changes to automated systems that may impact the reliability, security, or adequate scalable capacity of such systems; and planned changes to the SEF's program of risk analysis and oversight. Paragraph (g) sets forth recordkeeping requirements related to the SEF's system safeguards. Paragraph (h) requires the SEF to conduct testing and review of its automated systems and business continuity-disaster recovery capabilities and provides several definitions for terms used in paragraph (h). Paragraph (h) also requires the SEF to conduct “vulnerability testing,” “external penetration testing,” “internal penetration testing,” “controls testing,” “security incident response plan testing,” and “enterprise technology risk assessment” subject to various enumerated criteria.

Paragraph (i) of § 37.1401 provides that the SEF, to the extent practicable, shall coordinate its business continuity-disaster recovery plan with those of the market participants that it depends upon to provide liquidity, in a manner adequate to enable effective resumption of activity in its markets following a disruption causing activation of the SEF's business continuity-disaster recovery plan. Paragraph (i) also requires the SEF to initiate and coordinate periodic, synchronized testing of its business continuity-disaster recovery plan with those of the market participants it depends upon to provide liquidity; and to ensure that its business continuity-disaster recovery plan takes into account the business continuity-disaster recovery plans of its telecommunications, power, water, and other essential service providers.

Paragraph (j) of § 37.1401 provides that part 40 of the CFTC's rules shall govern the obligations of those registered entities that the CFTC has determined to be critical financial markets, with respect to maintenance and geographic dispersal of disaster recovery resources sufficient to meet a same-day recovery time objective in the event of a wide-scale disruption. Paragraph (k) sets forth criteria for the scope for all system safeguard testing and assessment required under the rule. Paragraph ( l ) requires that both the senior management and the board of directors of the SEF shall receive and review reports setting forth the results of the testing and assessment required by the rule. Paragraph (m) requires the SEF to identify and document the vulnerabilities and deficiencies in its systems revealed by testing and assessment, conduct and document an appropriate analysis of the risks presented by such vulnerabilities and deficiencies, and remediate in a timely manner given the nature and magnitude of the associated risk.

Proposed Rule 830 is closely modelled on subpart O of part 37 of the CFTC's rules, except in one aspect. Subpart O includes language relating to “critical financial markets,” which is a designation applied by the CFTC to certain of its registrants that would subject them to more stringent requirements, although the CFTC has not yet adopted any such requirements. A similar concept in the SEC's rules is “SCI entity.” When adopting Regulation SCI, the Commission considered whether it should apply Regulation SCI to SBSEFs, among other entities, and determined not to do so. Because SBSEFs are not SCI entities and the corresponding CFTC rule has not imposed additional requirements on critical financial markets, the Commission preliminarily believes that it is not necessary or appropriate to adapt into Rule 830 the language of subpart O applicable to critical financial markets.

The Commission preliminarily believes that subpart O is reasonably designed to promote SEF operational capability, and that the most appropriate way to implement SEA Core Principle 13 would be to closely harmonize with the CFTC's rules that implement the corresponding Core Principle. As with SEA Core Principle 12 (Financial resources), the Commission recognizes that the swap business of a dually registered SEF/SBSEF is likely to be much larger than its SBS business. Therefore, the greatest operational risk to a dually registered entity is likely to arise from the swap business rather than the SBS business, so it would be logical for the SEC to defer to the CFTC's approach for ensuring that SEFs have adequate system safeguards and business continuity protocols. Different or additive requirements imposed by the SEC could increase costs for SEF/SBSEFs while generating benefits that are marginal at best. The Commission does not observe any differences in the SBS market relative to the swap market that warrant imposing different or additive operational capability requirements on SBSEFs.

The Commission seeks comment on the following:

157. Do you agree in general with how the Commission is proposing to implement SEA Core Principle 13 in proposed Rule 830? Why or why not?

158. In particular, do you believe that close harmonization with subpart O of the CFTC's rules is appropriate? If not, is there another framework for system safeguards that would be more appropriate for SBSEFs? What would be the economic impact of the SEC adopting different or additive system safeguard requirements in the case of dually registered SEF/SBSEFs?

159. As noted above, the Commission previously determined not to subject SBSEFs to Regulation SCI. Do you see any changes in the SBS market that should cause the Commission to revisit that decision?

160. Do you believe it is appropriate to omit from Rule 830 the provisions of subpart O relating to critical financial markets? Why or why not?

161. Are there provisions of subpart O that the SEC should not incorporate, even if the SEC opts to harmonize with most of subpart O? In other words, are there areas where omitting a subpart O provision would reduce burdens on SBSEFs and/or their members without lessening any regulatory benefits? If so, please explain, with particular regard to the economic impacts and/or PRA burdens.

162. Should the Commission adopt different or additive system safeguard requirements for SBSEFs, even if there is no analog to such provisions in subpart O? If so, please explain, with particular regards to the economic impacts and/or PRA burdens. For example, do you believe that the SEC-specific provision would impose additional costs or burdens on SBSEFs and/or their market participants that are nevertheless appropriate in view of new and additional benefits? Or do you believe that the SEC-specific provision would be appropriate because it would relieve costs or burdens that are imposed on SEFs by subpart O that, in your view, are unnecessary or inappropriate for SBSEFs?

N. Rule 831—Core Principle 14—Designation of Chief Compliance Officer

SEA Core Principle 14 requires each registered SBSEF to designate a chief compliance officer (“CCO”), and requires the CCO to review the SBSEF's compliance with the Core Principles, resolve conflicts of interest, be responsible for establishing and administering policies and procedures required under the Core Principles, establish procedures for the remediation of noncompliance, prepare and sign an annual report that describes the SBSEF's compliance, certify that the report is accurate and complete, and submit the report to the Commission. CEA Core Principle 15 for SEFs is substantively identical.

The CFTC implemented CEA Core Principle 15 in subpart P of part 37. Section 37.1500 of subpart P repeats the statutory text of CEA Core Principle 15. Section 37.1501(a) sets forth definitions for the terms “board of directors” and “senior officer.” Section 37.1501(b)(1) provides that the position of CCO shall carry with it the authority and resources to develop, in consultation with the board of directors or senior officer, and enforce the SEF's policies and procedures, and that the CCO shall have supervisory authority over all staff acting at the direction of the CCO. Section 37.1501(b)(2) through (4) include provisions relating to the qualifications of the CCO, appointment and removal of the CCO, and compensation of the CCO. Section 37.1501(b)(5) through (6) state that the CCO must meet with the SEF's board of directors or senior officer at least annually, and the CCO must provide any information regarding the SEF's self-regulatory program as requested by the board of directors or the senior officer.

Section 37.1501(c) sets out the duties of the CCO, including overseeing and reviewing the SEF's compliance with the Core Principles; taking reasonable steps, in consultation with the board of directors or senior officer, to resolve any material conflicts of interest; establishing and administering written policies and procedures reasonably designed to prevent violations of the CEA and the rules of the CFTC; taking reasonable steps to ensure compliance with the CEA and CFTC rules; establishing procedures reasonably designed to handle, respond, remediate, retest, and resolve noncompliance issues identified by the CCO; establishing and administering a compliance manual and a written code of ethics for the SEF; supervising the self-regulatory program of the SEF with respect to trade practice surveillance, market surveillance, real-time market monitoring, compliance with audit trail requirements, enforcement and disciplinary proceedings, audits, examinations, and other regulatory responsibilities; and supervising the effectiveness and sufficiency of any regulatory services provided to the SEF by a regulatory service provider.

Section 37.1501(d) requires the CCO to prepare and sign an annual compliance report that covers the prior fiscal year. The report must contain, at a minimum: A description and self-assessment of the effectiveness of the SEF's written policies and procedures, code of ethics, and conflict of interest policies; any material changes made to compliance policies and procedures during the coverage period for the report and any areas of improvement or recommended changes to the compliance program; a description of the financial, managerial, and operational resources set aside for compliance with the CEA and applicable CFTC regulations; any material non-compliance matters identified and an explanation of the corresponding action taken to resolve them; and CCO certification that the annual compliance report is accurate and complete.

Section 37.1501(e) requires the CCO to provide the annual compliance report to the SEF's board of directors or a senior officer for review before submitting it to the CFTC, and the board or the senior office may not require the CCO to make any changes to the report. Section 37.1501(e) further provides that the annual compliance report shall be submitted electronically to the CFTC not later than 90 calendar days after the end of the SEF's fiscal year and concurrently with the fourth-quarter financial report pursuant to § 37.1306. Section 37.1501(e) also addresses amendments to and requests for extensions for the annual compliance report.

Section 37.1501(f) requires the SEF to maintain all records demonstrating compliance with the duties of the CCO and the preparation and submission of annual compliance report, consistent with §§ 37.1000 and 37.1001. Finally, appendix B to part 37 includes “acceptable practices” regarding the qualifications of a CCO and the SEF's discretion in choosing one, as well as the need to be vigilant regarding conflicts of interest when appointing a CCO.

Proposed Rule 831 would implement SEA Core Principle 14 and is closely modelled on subpart P of part 37, with two minor substantive exceptions. The first relates to disqualification of the CCO. Section 37.1501(b)(2)(ii) states: “No individual disqualified from registration pursuant to sections 8a(2) or 8a(3) of the [CEA] may serve as a chief compliance officer.” The Commission preliminarily believes that SBSEFs, like SEFs, should be subject to a rule setting out criteria for disqualification of the CCO. However, the SEC cannot cross-reference provisions of the CEA, since the CEA does not apply to SBSEFs. The Commission consulted Sections 8a(2) and 8a(3) of the CEA, but believes they are not easily adaptable into a rule applicable to SBSEFs and their CCOs. The Commission is proposing instead, in Rule 831(c)(2), that no individual that would be disqualified from serving on an SBSEF's governing board or committees pursuant to the criteria set forth in § 242.819(i) may serve as the CCO. As noted above, the disqualification criteria in proposed Rule 819(i) are adapted from § 1.63 of the CFTC's rules. Second, the Commission has adapted the acceptable practices pertaining to CEA Core Principle 15 into paragraph (c) of proposed Rule 831.

The Commission preliminarily believes that the CFTC has implemented CEA Core Principle 14 for SEFs in an appropriate way, and that closely harmonizing with subpart P of part 37 would yield comparable regulatory benefits while imposing only marginal additional costs. The Commission recognizes that the swap business of a dually registered SEF/SBSEF is likely to be much larger than its SBS business. Therefore, the greatest compliance risks to a dually registered entity are likely to arise from the swap business rather than the SBS business, so it would be logical for the SEC to harmonize with the CFTC's rules regarding the CCO. There are strong economic incentives for a dually registered entity to appoint the same individual to serve as the CCO for both the swap and SBS businesses, and for the CCO to carry out their functions under a similar set of rules. Different or additive requirements imposed by the SEC could increase costs for SEF/SBSEFs while generating benefits that are marginal at best. The Commission does not observe any differences in the SBS market relative to the swap market that warrant imposing different or additive CCO requirements on SBSEFs relating to the CCO.

The Commission seeks comment on the following:

163. Do you agree in general with how the Commission is proposing to implement SEA Core Principle 14? Why or why not?

164. In particular, do you agree that close harmonization with subpart P is appropriate? Are there provisions of subpart P that the SEC should not incorporate, even if the SEC opts to harmonize with most of subpart P? In other words, are there areas where omitting a subpart P provision would reduce burdens on SBSEFs and/or their members without lessening any regulatory benefits? If so, please explain, with particular regard to the economic impacts and/or PRA burdens.

165. Should the Commission adopt different or additive CCO requirements for SBSEFs, even if there is no analog to such provisions in subpart P? If so, please explain, with particular regards to the economic impacts and/or PRA burdens. For example, do you believe that the SEC-specific provision would impose additional costs or burdens on SBSEFs and/or their members that are nevertheless appropriate in view of new and additional benefits? Or do you believe that the SEC-specific provision would be appropriate because it would relieve costs or burdens that are imposed on SEFs by subpart P that, in your view, are unnecessary or inappropriate for SBSEFs?

166. Do you agree with how the Commission is proposing to adapt the acceptable practices from appendix B relating to CEA Core Principle 15 into proposed Rule 831(c)? Why or why not?

167. Do you agree with proposed Rule 831(c)(2) using a cross-reference to proposed Rule 819(i) to incorporate disqualification criteria for the CCO? Why or why not? If not, what alternate standard would you suggest for the disqualification criteria, and why?

IX. Cross-Border Rules

A. Rule 832—Cross-Border Mandatory Trade Execution

As noted above, section 3C(h) of the SEA provides that an SBS that is subject to mandatory clearing can become subject to the trade execution requirement. The trade execution requirement, like other provisions of the SEA, is subject to jurisdictional constraints which are particularly germane in light of the global nature of the SBS market, where there is frequent interaction among counterparties domiciled in different jurisdictions. Proposed Rule 832 of Regulation SE is designed to address when the SEA's trade execution requirement applies to a cross-border SBS transaction.

Paragraph (a) of proposed Rule 832 would provide that the trade execution requirement set forth in section 3C(h) of the SEA shall not apply to an SBS unless at least one counterparty to the SBS is a “covered person” as defined in paragraph (b). Paragraph (b) of proposed Rule 832 would define the term “covered person,” with respect to a particular security-based swap, as any person that is a U.S. person; a non-U.S. person whose performance under an SBS is guaranteed by a U.S. person; or a non-U.S. person who, in connection with its SBS dealing activity, uses U.S. personnel located in a U.S. branch or office, or personnel of an agent of such non-U.S. person located in a U.S. branch or office, to arrange, negotiate, or execute a transaction.

Thus, a particular SBS would fall within the jurisdictional reach of section 3C(h) of the SEA if at least one side had a connection to the United States of a type specified in paragraph (b)(1), (2), or (3) of proposed Rule 832. The trade execution requirement would not apply to an SBS transaction—even if the SBS were subject to mandatory clearing and MAT—if neither side had a connection to the United States of a type specified in proposed Rule 832.

Proposed Rule 832 is consistent with the Commission's territorial approach to applying Title VII requirements in other contexts. The Commission previously has stated that Title VII requirements “apply to all SBS transactions that exist in whole or in part within the United States, unless an exception applies.” Relevant activity need not occur wholly within the United States or solely between U.S. persons in order for Title VII requirements to apply. For example, under Rule 908(a)(1) of Regulation SBSR, the Title VII requirements for regulatory reporting and public dissemination apply to an SBS transaction even if only one counterparty to the transaction is a U.S. person. As the Commission previously stated, “any security-based swap executed by a U.S. person exists at least in part within the United States.” This is true even if a transaction is effected through the foreign branch of a U.S. person, because “a foreign branch has no separate existence from the U.S. person itself.”

The Commission also has found it consistent with the territorial approach to apply Title VII requirements where one counterparty of an SBS transaction is a non-U.S. person whose performance under an SBS is guaranteed by a U.S. person. As the Commission stated when applying this criterion to Title VII reporting: “A security-based swap with a U.S.-person indirect counterparty [ i.e., guarantor] is economically equivalent to a security-based swap with a U.S.-person direct counterparty, and both kinds of security-based swaps exist, at least in part, within the United States . . . [T]he presence of a U.S. guarantor facilitates the activity of the non-U.S. person who is guaranteed and, as a result, the security-based swap activity of the non-U.S. person cannot reasonably be isolated from the U.S. person's activity in providing the guarantee.”

Finally, the Commission also has found it consistent with the territorial approach to apply Title VII requirements where one counterparty is a non-U.S.-person who, in connection with its SBS dealing activity, uses U.S. personnel located in a U.S. branch or office, or personnel of an agent of such non-U.S. person located in a U.S. branch or office, to arrange, negotiate, or execute (“ANE”) the transaction. As the Commission previously stated when applying the ANE criterion to Title VII requirements for regulatory reporting and public dissemination: “when a foreign dealing entity uses U.S. personnel to arrange, negotiate, or execute a transaction in a dealing capacity, that transaction occurs at least in part within the United States and is relevant to the U.S. security-based swap market.” Declining to apply Title VII requirements to SBS transactions of foreign dealing entities that use U.S. personnel to engage in ANE transactions would allow such entities “to exit the Title VII regulatory regime without exiting the U.S. market.”

The Commission recognizes the difficulties that can arise when a binary requirement, such as the trade execution requirement, applies in two separate jurisdictions. In other words, if the counterparties to a cross-border SBS are subject to a trade execution requirement under the rules of each of their jurisdictions, the counterparties could violate the rules of one jurisdiction by executing the SBS in one jurisdiction but not the other, or in a manner that is consistent with the rules of one jurisdiction but potentially not of the other jurisdiction. The following section, regarding proposed Rule 833, will discuss conditions for allowing an SBS to trade on foreign venues not registered with the Commission, notwithstanding the SBS being subject to the SEA's trade execution requirement and proposed Rule 832.

The Commission seeks comment on the following:

168. Of the SBS products that, in your view, are plausible candidates for mandatory clearing and mandatory trade execution under the SEA, how frequently do these products trade on foreign SBS trading venues? Do you believe that the SBS market is sufficiently regionalized such that cross-border application of the trade execution requirement might not be a significant issue?

169. Do you believe that the proposed text of Rule 832 is sufficiently clear? If not, what aspects do you believe require clarification?

B. Rule 833—Cross-Border Exemptions

1. Exemptions for Foreign SBS Trading Venues

As noted above in discussing proposed Rule 832, the swap and SBS markets are global in nature, and counterparties domiciled in different jurisdictions frequently trade with each other. Proposed Rule 832 is designed to answer the question of when the trade execution requirement would apply to an individual cross-border SBS transaction. There might be instances where covered persons (as defined in proposed Rule 832) wish to be members of a foreign trading venue for SBS (a “foreign SBS trading venue”). Having members who are covered persons, as defined in Rule 832, with respect to SBS transacted on that venue, whether or not the SBS that they trade are subject to the SEA's trade execution requirement, could require the foreign SBS trading venue to register with the Commission as a national securities exchange or SBSEF. In addition, because a foreign SBS trading venue would be facilitating the execution of SBS between persons, the foreign SBS trading venue also might be required to register with the Commission as a broker.

A foreign SBS trading venue with members who are covered persons, as defined in Rule 832, with respect to SBS transacted on that venue and that wishes to avoid having to register in one or more of these capacities could request that the Commission grant it an exemption under section 36(a)(1) of the SEA by submitting an application pursuant to SEA Rule 0-12. Proposed Rule 833(a) would provide that such an application, relating to the status of the foreign SBS trading venue under the SEA, may state that the application also is submitted pursuant to Rule 833(a). In such case, the Commission would consider the submission as an application to exempt the foreign SBS trading venue, with respect to its providing a market place for SBS, from the definition of “exchange” in section 3(a)(1) of the SEA; the definition of “security-based swap execution facility” in section 3(a)(77) of the SEA; the definition of “broker” in section 3(a)(4) of the SEA; and section 3D(a)(1) of the SEA. Because a foreign SBS trading venue that obtains an order under SEA section 36 and proposed Rule 833(a) would be exempt from these definitions and from section 3D(a)(1) of the SEA, the foreign SBS trading venue would not be required to register with the Commission as a national securities exchange, SBSEF, or broker, or comply with other requirements applicable to such entities under the SEA or Commission rules thereunder.

Under section 5h(g) of the CEA, the CFTC may exempt, conditionally or unconditionally, a SEF from registration if the CFTC finds that the SEF is subject to comparable, comprehensive supervision and regulation on a consolidated basis by the SEC, a prudential regulator, or the appropriate governmental authorities in the home country of the facility. The CFTC has exercised this authority to grant exemptions from SEF registration to swap trading venues in the European Union, Japan, and Singapore.

Proposed Rule 833(a) would set forth how interested parties could make similar requests for exemptive relief with respect to foreign SBS trading venues. For example, Rule 833(a) lists four separate provisions of the SEA that the Commission believes generally would have to be addressed in an exemption request relating to a foreign SBS trading venue's status under the SEA. A foreign SBS trading venue that was exempted solely from section 3D(a)(1) of the SEA, for example, might still be subject to various requirements under the SEA by virtue of falling within one or more of the above-noted definitions. The exemptive framework set out in proposed Rule 833(a) is designed to avoid this result.

As with applications for other exemptive relief under section 36 of the SEA, an applicant requesting a Rule 833(a) exemption would be required to submit a complete application pursuant to SEA Rule 0-12. To issue a Rule 833(a) exemption, like any other exemption issued pursuant to section 36, the Commission would be required to find that the exemption is necessary or appropriate in the public interest, and consistent with the protection of investors. As contemplated by section 36(a)(1), the Commission may subject a Rule 833(a) exemption to any conditions that it deems appropriate.

Proposed Rule 833(a) is designed to address only activities relating to providing a market place for SBS and would not extend to trading in any other type of security or to other activities with respect to SBS. A foreign SBS trading venue covered by an exemption order under Rule 833(a) might offer trading in other types of securities; however, the exemption order would permit covered persons to trade only SBS on that trading venue without causing the trading venue to have to register with the Commission as an exchange or SBSEF. The exemption order would not address any registration obligations that might arise from any other type of exchange activity by the foreign trading venue.

The Commission also emphasizes that a Rule 833(a) exemption would not have any impact on section 6( l ) of the SEA, which makes it unlawful for any person to effect a transaction in an SBS with or for a person that is not an ECP, unless such transaction is effected on a national securities exchange registered pursuant to section 6(b) of the SEA. Because a foreign SBS trading venue covered by a Rule 833(a) exemption would not be registered as a national securities exchange, the foreign SBS trading venue would not be permitted to effect SBS transactions with or for a covered person that is not an ECP.

2. Exemptions Relating to the Trade Execution Requirement

Proposed Rule 833(b) would address requests for exemptive relief relating to the application of the trade execution requirement under section 3C(h) of the SEA to transactions executed on a foreign SBS trading venue. Pursuant to section 3C(h) of the SEA, an SBS that is subject to the trade execution requirement must be executed on an exchange, on an SBSEF registered under section 3D of the SEA, or on an SBSEF that is exempt from registration under section 3D(e) of the SEA. As a result, a covered person (as defined in proposed Rule 832) would not be permitted to execute an SBS that is subject to the trade execution requirement on a foreign SBS trading venue unless that venue has registered with the Commission as a national securities exchange or an SBSEF, or has received an exemption under section 3D(e) of the SEA.

A covered person seeking to execute such an SBS on a foreign SBS trading venue that does not fall within one of these categories could request that the Commission grant an exemption from this requirement under section 36(a)(1) of the SEA by submitting an application, as with Rule 833(a), pursuant to SEA Rule 0-12. Proposed Rule 833(b)(1) would provide that such an application, relating to the application of the trade execution requirement to SBS executed on a foreign SBS trading venue, may state that the application also is submitted pursuant to proposed Rule 833(b). Proposed Rule 833(b) is intended to clarify how interested parties could make requests for exemptive relief from the trade execution requirement for SBS traded on one or more foreign SBS trading venues.

To issue a Rule 833(b) exemption, like with any other section 36 exemption, the Commission would be required to find that the exemption is necessary or appropriate in the public interest, and consistent with the protection of investors. Furthermore, as contemplated by section 36(a)(1), the Commission may subject a Rule 833(b) exemption to any conditions that it deems appropriate.

Proposed Rule 833(b)(2) would provide that, in considering whether to issue a Rule 833(b) exemption, the Commission may consider: (i) The extent to which the SBS traded in the foreign jurisdiction covered by the request are subject to a trade execution requirement comparable to that in section 3C(h) of the SEA and the Commission's rules thereunder; (ii) the extent to which trading venues in the foreign jurisdiction covered by the request are subject to regulation and supervision comparable to that under the SEA, including section 3D of the SEA, and the Commission's rules thereunder; (iii) whether the foreign trading venue or venues where covered persons intend to trade SBS have received an exemption order contemplated by proposed Rule 833(a); and (iv) any other factor that the Commission believes is relevant for assessing whether the exemption is in the public interest and consistent with the protection of investors.

The first factor listed above is intended to highlight the Commission's preliminary belief that, to grant an exemption from the SEA's trade execution requirement to allow SBS subject to that requirement to trade in a foreign jurisdiction on one or more venues not registered with the Commission, there should be a comparable trade execution requirement in that jurisdiction. As part of any analysis regarding the comparability of the trade execution requirement, the Commission could consider not only whether the relevant SBS must be executed on a trading venue in the foreign jurisdiction, but also the permissible execution means for mandatory trade execution in the foreign jurisdiction. In general, the Commission preliminarily believes that a trade execution requirement in a foreign jurisdiction would not be comparable to the trade execution requirement under the SEA if the foreign jurisdiction's rules did not require SBS products subject to that requirement to be executed through means comparable to Required Transactions as described in proposed Rule 815 ( e.g., if the foreign jurisdiction allowed the use of single-dealer platforms to discharge any mandatory trading execution requirement in that jurisdiction).

Under the second factor listed above, the Commission could consider whether the trading venues in the foreign jurisdiction are subject to regulation and supervision comparable to that under the SEA, including section 3D of the SEA and the Commission's rules thereunder. The Commission preliminarily believes that the goals of Title VII regarding trade execution could be subverted if it were to allow covered persons to trade SBS subject to the SEA's trade execution requirement on foreign trading venues that are not subject to rules designed to foster comparable levels of pre- and post-trade transparency, access, and liquidity.

The Commission also believes that it would be important to consider whether the foreign trading venue or venues where covered persons intend to trade SBS have received an exemption order contemplated by proposed Rule 833(a). The fact that covered persons are executing SBS on a foreign trading venue typically would require the venue to register with the Commission as a national securities exchange or SBSEF.

Finally, the fourth factor listed above would emphasize that these considerations are not exhaustive. The Commission may consider any other factor that it believes is relevant for assessing whether the Rule 833(b) exemption is in the public interest and consistent with the protection of investors.

The Commission seeks comment on the following:

170. Do you believe in general that the Commission should establish a rule for granting exemptions regarding a foreign SBS trading venue's status under the SEA and mandatory trade execution of cross-border SBS transactions? Why or why not?

171. Do you disagree with any of the specific language proposed in Rule 833? If so, how would you revise it?

172. Do you expect that there are foreign SBS trading venues that would seek an exemption under proposed Rule 833(a)? If so, how many?

173. Do you agree with the factors that the Commission is proposing to consider for a Rule 833(b) exemption? Are there are any that you would eliminate or revise? If so, which ones and why? Are there any criteria that you believe should be added? If so, what and why?

174. Are there any conditions or limitations that should be included in the rule? If so, what conditions or limitations would you suggest, and why?

X. Rule 834—Implementation of Section 765 of the Dodd-Frank Act and Governance of SBSEFs and SBS Exchanges

Section 765(a) of the Dodd-Frank Act provides in relevant part that, to mitigate conflicts of interest, the Commission “shall adopt rules which may include numerical limits on the control of, or the voting rights with respect to” any clearing agency that clears SBS, or on the control of any SBSEF or SBS exchange by certain bank holding companies, certain nonbank financial companies, an affiliate of such a bank holding company or nonbank financial company, an SBS dealer, major SBS participant, or person associated with an SBS dealer or major SBS participant. Section 765(b) states that the purpose of the statutory provision is “to improve the governance of, or to mitigate systemic risk, promote competition, or mitigate conflicts of interest in connection with” an SBS dealer or major SBS participant's conduct of business with, a clearing agency, SBSEF, or SBS exchange and in which such SBS dealer or major SBS participant “has a material debt or equity investment.” Finally, section 765(c) provides in relevant part that, in adopting rules pursuant to section 765, the Commission shall consider any conflicts of interest arising from the amount of equity owned by a single investor, the ability to vote, cause the vote of, or withhold votes entitled to be cast on any matters by the holders of the ownership interest.

In 2010, the Commission proposed Regulation MC to implement section 765. In view of the significant amount of time that has elapsed and the significant evolution in the swap and SBS markets since the proposal of Regulation MC, the Commission hereby withdraws that proposal. The Commission is now proposing Rule 834 of Regulation SE to implement section 765 of the Dodd-Frank Act with respect to SBSEFs and SBS exchanges.

The Commission, in accordance with section 765 of the Dodd-Frank Act, has reviewed the potential for conflicts of interest arising from an SBS dealer or major SBS participant having voting rights in an SBSEF or SBS exchange in which it is a member. The Commission preliminarily believes that, to satisfy the requirements of section 765, it is appropriate to impose a cap on the size of the voting rights that an individual member of an SBSEF or SBS exchange may own or direct. Accordingly, paragraph (b) of proposed Rule 834 would bar an SBSEF or SBS exchange from permitting any of its members, either alone or together with any officer, principal, or employee of the member, to:

(1) Own, directly or indirectly, 20% or more of any class of voting securities or of other voting interest in the SBSEF or SBS exchange; or

(2) Directly or indirectly vote, cause the voting of, or give any consent or proxy with respect to the voting of, any interest that exceeds 20% of the voting power of any class of securities or of other ownership interest in the SBSEF or SBS exchange.

The 20% cap in proposed Rule 834(b) attempts to balance competing policy interests. On the one hand, execution venues need capital, expertise, and liquidity to establish and grow. Historically, market participants who become members of an execution venue are a source of all three components, and any person contributing capital to a new venture might reasonably expect to have a voting interest commensurate with the amount of capital contributed. The Commission considered proposing a cap in voting interest below 20%, but preliminarily believes that too low of a cap, even if imposed in the name of eliminating conflicts of interest, could have the unintended effect of retarding the development of execution venues for SBS altogether, if market participants who become members have no (or substantially limited) ability to vote their equity interest.

On the other hand, allowing a member of an SBSEF or SBS exchange too large of a voting interest could undermine the public policy benefits of having transparent, fair, and regulated markets for the trading of SBS. A member of an SBSEF or SBS exchange with a sufficiently large voting interest could exercise undue influence over the rules and policies applicable to members, the venue's access criteria, decisions regarding access, and disciplinary matters, among other things. In particular, members who are SBS dealers and conduct a significant amount of business in the bilateral OTC market have incentives to restrict the scope of SBS that an SBSEF or SBS exchange makes eligible for trading. Trading in a market with robust order competition and pre-trade transparency reduces search costs for end users and liquidity seekers, and reduces the information and bargaining asymmetry of end users and liquidity seekers relative to SBS dealers. An SBS dealer with a large voting interest in an SBSEF or SBS exchange, if it perceived that trading on the regulated venue was diminishing the rents obtained from its bilateral OTC business, might seek to utilize its voting influence in a number of ways to degrade the capability of the regulated venue, thus making the OTC market by comparison a more attractive option.

The Commission preliminarily believes that capping a member's voting interest at 20% strikes a reasonable balance between these competing interests. It would allow a single member to make an investment in an SBSEF or SBS exchange significant enough to give it a 20% voting interest, while reserving at least 80% to unrelated parties. The Commission preliminarily believes that the 20% cap would still afford an SBS dealer or major SBS participant that has made an investment in an SBSEF or SBS exchange a reasonable commercial means of monitoring and protecting that investment. But requiring 80% of the voting power to reside with unrelated parties would reduce the likelihood that the large member could tilt the playing field in its favor. In proposing this 20% threshold in Rule 834, the Commission is informed by long experience with handling questions of member influence over national securities exchanges raised in applications to register with the Commission on Form 1 and in governance rule filings made on SEA Form 19b-4.

Proposed Rule 834(b) would cover both direct and indirect voting interests. The 20% cap could be circumvented if, for example, a member placed its voting interest in an SBSEF or SBS exchange of 20% or more in a shell company or other affiliate and directed how the shell company or affiliate casts those votes. Accordingly, proposed Rule 834(b) would look through the non-member entities holding interests in SBSEFs and SBS exchanges to consider whether any member could indirectly control 20% or more of the voting interest through the non-member entity having the direct interest. Furthermore, proposed Rule 834(b) would look through the corporate structure of the SBSEF or SBS exchange to consider whether any member could indirectly have 20% or more of the voting interest in the underlying trading venue. For example, an SBSEF or SBS exchange could be wholly owned by a holding company. In such a case, the voting restriction in proposed Rule 834(b) would apply to the voting interest in the parent holding company held by a member of the child SBSEF or SBS exchange, since a direct voting interest of 20% or more in the parent would equate to an indirect voting interest of 20% or more in child trading venue.

Similar to its approach to indirect voting interest, proposed Rule 834(b) would aggregate the voting interest of the member itself with the voting interest held by any officer, principal, or employee of the member for purposes of determining compliance with the 20% cap. Without this provision, the member—or an officer, principal, or employee of the member—could split the voting interest held in the SBSEF or SBS exchange across multiple persons who would likely be voting that interest in concert.

Paragraph (c) of proposed Rule 834 would include requirements designed to reinforce the 20% cap in paragraph (b). Paragraph (c) would require the rules of each SBSEF and SBS exchange to be reasonably designed, and have an effective mechanism, to:

(1) Deny effect to the portion of any voting interest held by a member in excess of the 20% limitation;

(2) Compel a member who possesses a voting interest in excess of the 20% limitation to divest enough of that voting interest to come within that limit; and

(3) Obtain information relating to its ownership and voting interests owned or controlled, directly or indirectly, by its members.

Under paragraph (c)(1) of proposed Rule 834, if a member of an SBSEF or SBS exchange managed to evade the 20% voting restriction ( e.g., by disguising its voting interest through one or more shell companies), the SBSEF or SBS exchange would be required to deny the effect of any part of the vote in excess of the 20% restriction when the evasion is discovered. This could, in close cases, cause the SBSEF or SBS exchange to have to reverse the outcome of a vote because of the invalidation of the part of the vote in excess of the 20% threshold. In addition, the Commission preliminarily believes—as reflected in paragraph (c)(2) of proposed Rule 834—that an SBSEF or SBS exchange should, if it discovers that a member has managed to evade the 20% voting restriction, compel the member to divest enough of that voting interest to come within the 20% limit. Finally, the Commission preliminarily believes—as reflected in paragraph (c)(3) of proposed Rule 834—that an SBSEF or SBS exchange must have an effective means of obtaining information about the ownership and voting interests owned or controlled, directly or indirectly, by its members. Proposed Rule 834(c)(3) is designed to promote compliance with proposed Rule 834(b) by requiring an SBSEF or SBS exchange to actively obtain information about the ownership and voting interests owned or controlled, directly or indirectly, by its members. The Commission preliminarily believes that ignorance of a member holding a voting interest in excess of the proposed 20% limitation should not excuse a violation of Rule 834(b). Furthermore, the information obtained by an SBSEF or SBS exchange under proposed Rule 834(c)(3) should assist with any remedial actions necessary under proposed Rules 834(c)(1) and (c)(2).

Paragraph (d) of proposed Rule 834 is designed to mitigate conflicts of interest in the disciplinary process of an SBSEF or SBS exchange and would provide as follows: “Each security-based swap execution facility and SBS exchange shall ensure that its disciplinary processes preclude any member, or group or class of its members, from dominating or exercising disproportionate influence on the disciplinary process. Each major disciplinary committee or hearing panel thereof shall include sufficient different groups or classes of its members so as to ensure fairness and to prevent special treatment or preference for any person or member in the conduct of the responsibilities of the committee or panel.” Proposed Rule 834(d) recognizes that one way that a conflict of interest could manifest itself is in the disciplinary process. Therefore, the Commission is proposing, as the first sentence of proposed Rule 834(d), that each SBSEF and SBS exchange should “preclude any member, or group or class of its members, from dominating or exercising disproportionate influence on the disciplinary process.”

The second sentence of proposed Rule 834(d) is adapted from § 1.64 of the CFTC's rules, which addresses the composition of various SRO governing boards and major disciplinary committees. Section 1.64(c)(4) requires an SRO (which term, under the CEA, includes a SEF) to maintain in effect rules that “each major disciplinary committee or hearing panel [of the SRO] include sufficient different membership interests so as to ensure fairness and to prevent special treatment or preference for any person in the conduct of a committee's or the panel's responsibilities.” Proposed Rule 834(d) reflects the Commission's preliminary belief that an SBSEF or SBS exchange should be mindful of its different membership interests, and how they are represented on disciplinary committees and hearing panels in particular matters, to avoid potential conflicts of interest.

To further implement section 765 and promote good governance generally for SBSEFs and SBS exchanges, the Commission is proposing additional requirements in Rule 834 that are closely modelled on §§ 1.64 and 1.69 of the CFTC's rules.

Section 1.64(b) requires an SRO to maintain in effect standards and procedures that ensure that 20% or more of the regular voting members of the SRO's governing board are persons who are knowledgeable of futures trading or financial regulation or are otherwise capable of contributing to governing board deliberations. Section 1.64(b) also requires an SRO to maintain in effect standards and procedures that ensure that 20% or more of the regular voting members of the governing board are not: Members of the SRO; currently salaried employees of the SRO; primarily performing services for the SRO in a capacity other than as a member of the SRO's governing board; or officers, principals, or employees of a firm which holds a membership at the SRO either in its own name or through an employee on behalf of the firm.

Paragraph (e) of proposed Rule 834 is closely modelled on § 1.64(b). Paragraph (e)(1)(i) would require each SBSEF and SBS exchange to ensure that 20% or more of the persons who are eligible to vote routinely on matters being considered by the governing board (excluding those members who are eligible to vote only in the case of a tie vote by the governing board) are persons who are knowledgeable of SBS trading or financial regulation, or otherwise capable of contributing to governing board deliberations. Paragraphs (e)(1)(ii) through (v) of proposed Rule 834 are based on four of the prongs in § 1.64(b)(1)(ii) which provide that 20% or more of the persons who are eligible to vote routinely on matters being considered by the governing board (excluding those members who are eligible to vote only in the case of a tie vote by the governing board) must not be: Members of the SBSEF or SBS exchange; salaried employees of the SBSEF or SBS exchange; primarily performing services for the SBSEF or SBS exchange in a capacity other than as a member of the governing board; or officers, principals, or employees of a firm which holds a membership at the SBSEF or SBS exchange, either in its own name or through an employee on behalf of the firm.

Paragraph (e)(2) of proposed Rule 834, modelled on § 1.64(b)(3), would require each SBSEF and SBS exchange to ensure that membership of its governing board includes a diversity of groups or classes of its members.

The Commission is not adapting the detailed provisions of § 1.64(c) into proposed Rule 834. However, the key principle of § 1.64(c)—that each major disciplinary committee or hearing panel should include sufficient different membership interests so as to ensure fairness and to prevent special treatment or preference in the conduct of the committee's or panel's responsibilities, which is located in paragraph § 1.64(c)—is being adapted into proposed Rule 834(d), as discussed above.

Paragraph (f) of proposed Rule 834 is based closely on § 1.64(d) and would require each SBSEF and SBS exchange to submit to the Commission, within 30 days after each governing board election, a list of the governing board's members, the groups or classes of members that they represent, and how the composition of the governing board otherwise meets the requirements of Rule 834. This provision would provide the Commission information to help it assess an SBSEF's compliance with Rule 834.

Paragraph (g) of proposed Rule 834 is modelled on § 1.69, which requires an SRO to further address the avoidance of conflicts of interest in the execution of its self-regulatory functions. Section 1.69(b)(1)(i) requires an SRO to maintain in effect rules that require a member of its governing board, disciplinary committee, or oversight panel to abstain from such body's deliberations and voting on any matter involving a named party in interest, where such member: Is a named party in interest; is an employer, employee, or fellow employee of a named party in interest; is associated with a named party in interest through a “broker association”; has any other significant, ongoing business relationship with a named party in interest; or has a family relationship with a named party in interest.

Section 1.69(b)(1)(ii) requires an SRO to maintain in effect rules that require each member of its governing board, disciplinary committee, or oversight panel to disclose to the appropriate SRO staff, before consideration of any matter involving a named party in interest, whether the member has one of the relationships listed in § 1.69(b)(1)(i) with a named party in interest. Section 1.69(b)(1)(iii) requires the SRO to establish procedures for determining whether a member of its governing board, disciplinary committees, or oversight committees is subject to a conflicts restriction in any matter involving a named party in interest.

Section 1.69(b)(2)(i) requires a member of the SRO's governing board, disciplinary committee, or oversight committee to abstain from such body's deliberations and voting on any significant action, if the member knowingly has a direct and substantial financial interest in the result of the vote based upon either exchange or non-exchange positions that could reasonably be expected to be affected by the action. Section 1.69(b)(2)(ii) requires a member of the SRO's governing board, disciplinary committee, or oversight committee, before consideration of any significant action, to disclose to the appropriate SRO staff that position information, although this requirement does not apply to members who choose to abstain from deliberations and voting on the subject significant action. Section 1.69(b)(2)(iii) requires an SRO to establish procedures for determining whether any member of its governing board, disciplinary committees, or oversight committees is subject to a conflicts restriction under § 1.69 in any significant action. Such determination is required to include a review of various types of positions enumerated in the rule, including: “Any other types of positions, whether maintained at that self-regulatory organization or elsewhere, held in the member's personal accounts or the proprietary accounts of the member's affiliated firm that the self-regulatory organization reasonably expects could be affected by the significant action.” Section 1.69(b)(2)(iv) sets out the sources that the SRO should review in determining a member's positions, including a catch-all provision in paragraph (b)(2)(iv)(C) for “[a]ny other source of information that is held by and reasonably available to the self-regulatory organization.”

Section 1.69(b)(3)(i) provides that an SRO governing board, disciplinary committee, or oversight panel may permit a member to participate in deliberations prior to a vote on a significant action for which that member otherwise would be required to abstain, if such participation would be consistent with the public interest and the member recuses from voting on such action. Section 1.69(b)(3)(ii) requires the deliberating body, when determining whether to permit the exception contemplated in paragraph (b)(3)(i), to consider whether the member's participation in deliberations is necessary for the deliberating body to achieve a quorum in the matter; and whether the member has unique or special expertise, knowledge, or experience in the matter under consideration. Section 1.69(b)(3)(iii) requires the deliberating body also to consider, when determining whether to permit an exception to “fully consider the position information which is the basis for the member's direct and substantial financial interest in the result of a vote on a significant action.”

Section 1.69(b)(4) requires an SRO's governing board, disciplinary committees, and oversight panels to reflect in their minutes or otherwise document that the conflicts determination procedures required under § 1.69 have been followed. Such records also must include: The names of all members who attended the meeting in person or who otherwise were present by electronic means; the name of any member who voluntarily recused himself or herself or was required to abstain from deliberations and/or voting on a matter and the reason for the recusal or abstention, if stated; and information on the position information that was reviewed for each member.

Proposed Rule 834(g) closely follows the paragraph structure and language of § 1.69, with a few minor exceptions (beyond modifying the rule's application to SBSEFs and SBS exchanges, rather than, in the CFTC original, all SROs). First, paragraph (g)(1)(i)(A) of proposed Rule 834 is based closely on § 1.69(b)(1)(i) and would set out the types of relationships with the named party of interest that would create a conflict of interest for a member of the governing board, disciplinary committee, or oversight panel. Paragraph (g)(1)(i)(A), however, would incorporate only four of the five prongs in § 1.69(b)(1)(i). Second, § 1.69(b)(2)(iii) sets out five types of financial positions that could be held by a member of the governing board, disciplinary committee, or oversight panel that an SRO must review to ascertain if there is a conflicts restriction in a significant action. Proposed Rule 834(g)(1)(ii)(C) is a simplified version of § 1.69(b)(2)(iii); it would not include the five prongs set forth in § 1.69(b)(2)(iii), but rather would incorporate only the final, catch-all prong (“Such determination must include a review of any positions, whether maintained at that security-based swap execution facility, SBS exchange, or elsewhere, held in the member's personal accounts or the proprietary accounts of the member's affiliated firm that the security-based swap execution facility or SBS exchange reasonably expects could be affected by the significant action”). Third, proposed Rule 834(g)(1)(ii)(C) would omit a requirement in § 1.69(b)(2)(iv) that an SRO, when making a determination of whether a conflict of interest exists, must take into consideration “[t]he most recent large trader reports and clearing records available to the self-regulatory organization.” These types of reports may not be as prevalent in the securities and SBS markets as the swaps markets. The Commission believes that the final, catch-all prong in § 1.69(b)(2)(iv)—“Any other source of information that is held by and reasonably available to the self-regulatory organization”—would suffice, and is proposing it as Rule 834(g)(1)(ii)(C)( 2 ).

Proposed Rule 834(h) would require each SBSEF and SBS exchange to maintain in effect various rules that would be required under proposed Rule 834. An SBSEF would be required to file such rules under proposed Rule 806 or 807 of Regulation SE; an SBS exchange would be required to file such rules under existing SEA Rule 19b-4. Proposed Rule 834(h) is loosely modelled on various provisions in §§ 1.64 and 1.69 providing that the SRO rules required under those CFTC rules must be filed with the CFTC pursuant to relevant provisions of the CEA and the CFTC's rules thereunder.

The Commission preliminarily believes that §§ 1.64 and 1.69 are reasonably designed to promote good governance of trading venues and is therefore proposing to adapt them into Rule 834. These CFTC rules identify various instances of potential conflicts of interest that might involve a member of the governing board or an important committee of a SEF, and require proactive measures to address those conflicts. The Commission preliminarily believes that SBSEFs and SBS exchanges should have the same types of rules because the same types of conflicts that arise with SEFs could arise with SBS trading venues. Furthermore, various provisions of §§ 1.64 and 1.69 would further the policy goals of section 765 of the Dodd-Frank Act. For example, proposed Rule 834(e)(1)(ii), modelled on § 1.64(b)(1)(ii)(A), would require that at least 20% of the regular voting members of the governing board of an SBSEF or SBS exchange not be members, and proposed Rule 834(e)(1)(v), which is modelled on § 1.64(b)(1)(ii)(D), would require that at least 20% of the regular voting members of the governing board not be persons affiliated with members. These requirements, by reserving at least 20% of the governing board's seats for persons not associated with any member of an SBSEF or SBS exchange, would reduce the possibility that a combination of members who are SBS dealers or major SBS participants could create a conflict of interest for the SBSEF or SBS exchange.

In addition, proposed Rule 834(d), which incorporates language from § 1.64(c), would require each major disciplinary committee or hearing panel thereof to include sufficient different groups or classes of its members so as to ensure fairness and to prevent special treatment or preference for any person or member. The Commission preliminarily believes that it is appropriate to impose such a requirement on SBSEFs and SBS exchanges to further lessen the potential for members of an SBSEF or SBS exchange who are SBS dealers or major SBS participants from benefitting from a conflict of interest. Furthermore, proposed Rule 834(e), which is modelled on § 1.64(d), would require an SBSEF or SBS exchange to submit to the Commission, within 30 days after each governing board election, a list of the governing board's members, the groups or classes of members that they represent, and how the composition of the governing board otherwise meets the requirements of Rule 834. Proposed Rule 834(e) is designed to reinforce the other requirements of the rule by causing each SBSEF and SBS exchange to actively consider how the composition of its governing board comports with Rule 834, and to make an accurate representation to the Commission regarding such compliance.

The Commission preliminarily believes that § 1.69 also includes provisions that would further the policy goals of section 765 and is, therefore, proposing to adapt them into Rule 834. Under proposed Rule 834(b), an SBSEF or SBS exchange generally may not permit any member to hold 20% or more of the voting interest in that trading venue. Nothing in proposed Rule 834, however, would prohibit a member—including an SBS dealer or major SBS participant (or a person associated with such a member, such as a firm principal)—from serving on a governing board, disciplinary committee, or oversight panel of an SBSEF or SBS exchange. Section 1.69 is designed to address various types of conflicts of interest that might involve members of a governing board, disciplinary committee, or oversight panel. For example, § 1.69 specifies when a member must abstain from the body's deliberations and voting because the member has a relationship to the named party in interest or because the member has “a direct and substantial financial interest in the result of the vote.” Furthermore, § 1.69 requires a member to disclose its relationships to a named party in interest and provide position information to the SRO so that the SRO can assess whether the member has a conflict, and also requires the SRO to follow its own procedures for determining whether a conflict exists. Because these provisions further the goals of section 765—to mitigate conflicts of interest created by an SBS dealer or major SBS participant that holds an interest in an SBSEF or SBS exchange—and because they are reasonably designed to promote good governance more generally, the Commission is proposing to incorporate them into Rule 834.

The Commission recognizes that promulgating rules under section 765 alone will not result in a highly competitive market for SBS. There could be other ways for anticompetitive forces to impede the growth of SBS trading on transparent, regulated platforms other than by misuse of a large voting interest in the trading venue. For example, a large SBS dealer or coalition of SBS dealers, even absent any voting interest in any SBSEF or SBS exchange, could threaten to move their business elsewhere unless given an unfair advantage by the trading venue. A large SBS dealer or coalition of SBS dealers also could conspire to shut out end users who sought to trade more actively on these transparent, regulated venues rather than continuing to trade in the bilateral OTC markets. The Commission will be alert to any such anticompetitive practices and consider appropriate prophylactic measures. At present, the Commission believes that adopting rules under section 765 is a necessary and appropriate first step to guard against conflicts of interest arising on SBSEFs and SBS exchanges.

The Commission seeks comment on the following:

175. In general, do you agree with how the Commission is proposing to implement section 765 of the Dodd-Frank Act? Why or why not?

176. In particular, do you believe that the 20% ownership cap in proposed Rule 834(b) is appropriate? Why or why not? Do you believe that a different numerical threshold would be appropriate? If so, what numerical threshold and why?

177. Do you believe that there are other means (such as ownership of non-voting equity, holding a sizeable amount of the debt issuance, etc. ) by which an SBS dealer or major SBS participant could exercise an undue influence over an SBSEF or SBS exchange of which it is a member? If so, please discuss whether and how these other means should be incorporated into Rule 834.

178. Do you believe that proposed Rule 834(b) is sufficiently clear about when a member would be deemed to have an indirect 20% voting interest in an SBSEF or SBS exchange? If not, please provide other scenarios where you believe the Commission should offer clarification.

179. Do you agree in general with the Commission's proposal to adapt the major provisions of § 1.64 into Rule 834? Why or why not?

180. Are there provisions of § 1.64 that the Commission has incorporated into proposed Rule 834 that you think inappropriate? If so, what provisions and why?

181. Conversely, are there provisions of § 1.64 that the Commission has not incorporated into proposed Rule 834 that you think should be incorporated? If so, what provisions and why? Specifically, do you believe that the Commission should incorporate a definition of “membership interest”—as the CFTC does in § 1.64(a)(4)—to more precisely delineate the different interests that an SBSEF or SBS exchange should take into account?

182. Do you agree in general with the Commission's proposal to incorporate the major provisions of § 1.69 into Rule 834? Why or why not?

183. Are there provisions of § 1.69 that the Commission has incorporated into proposed Rule 834 that you think inappropriate? If so, what provisions and why?

184. Do you believe generally that the same rules for mitigating conflicts of interest should apply to both SBSEFs and SBS exchanges, or should different restrictions apply to each type of trading venue? If you believe different restrictions should apply, please explain why and what different restrictions you believe should be incorporated into Rule 834?

185. Are there any proposed requirements in Rule 834 that existing national securities exchanges, which could in the future elect to list SBS and thereby become SBS exchanges, would find difficult to comply with? Would any of the requirements proposed in Rule 834 conflict with their existing rules? If so, please describe.

186. Are there other types of conflict of interest that SBS dealers and major SBS participants might enjoy as members of an SBSEF or SBS exchange? If so, discuss how any such conflict could be addressed via Commission rulemaking.

187. Do you believe that SBS dealers and major SBS participants can exercise anticompetitive influence over one or more SBSEFs or SBS exchanges even if not members of those trading venues? If so, what additional measures would you recommend to combat that anticompetitive influence?

XI. Rule 835—Notice to Commission by SBSEF of Final Disciplinary Action, Denial or Conditioning of Membership, or Denial or Limitation of Access

The Commission is also proposing new Rule 835 to require an SBSEF to provide the Commission notice of a final disciplinary action, a final action with respect to a denial or conditioning of membership, or a final action with respect to a denial or limitation of access. Such notice is designed to ensure that the Commission is kept aware of significant disciplinary actions, denials or conditionings of membership, or denials or limitations on access by SBSEFs that could be the subject of an aggrieved person's request for review by the Commission. The requirement to provide notice to the Commission also would obligate an SBSEF to be cognizant of, and make records for, each such instance, and such records would become a necessary part of the record should the aggrieved person seek Commission review of the SBSEF's action.

Specifically, paragraph (a) of proposed Rule 835 would provide that, if an SBSEF issues a final disciplinary action against a member, or takes a final action with respect to a denial or conditioning of membership, or a final action with respect to a denial or limitation of access of a person to any services offered by the SBSEF, the SBSEF shall file a notice of such action with the Commission within 30 days and serve a copy on the affected person. Proposed Rule 835(a) uses the phrase “final disciplinary action against a member ” (emphasis added) because an SBSEF may utilize its disciplinary authority under Core Principle 2 (Compliance with Rules) in section 3D of the SEA only with respect to its members; but uses the phrase “denies or limits access of a person ” (emphasis added) because the person whose access is denied or limited might not be a member. For example, a person that is denied membership by an SBSEF would fall under this category.

Paragraph (b)(1) of proposed Rule 835 would provide that, for purposes of paragraph (a), a disciplinary action would not be considered final unless: (1) The affected person has sought an adjudication or hearing with respect to the matter, or otherwise exhausted their administrative remedies at the SBSEF; and (2) the disciplinary action is not a summary action permitted under proposed Rule 819(g)(13)(ii). In addition, paragraph (b)(2) of proposed Rule 835 would provide that, for purposes of paragraph (a), a disposition of a matter with respect to a denial or conditioning of membership, or a denial or limitation of access, would not be considered final unless such person has sought an adjudication or hearing, or otherwise exhausted their administrative remedies at the SBSEF with respect to such matter. The Commission preliminarily believes that it is appropriate to exclude disciplinary actions that are summary actions under an SBSEF's summary fine schedule because the Commission expects such summary actions, if applicable, to comprise lesser disciplinary actions that do not warrant appeal. The CFTC has parallel procedures relating to review of SEF disciplinary actions also excludes summary actions under an SEF's summary fine schedule.

Paragraph (c) of proposed Rule 835 would provide that the notice required under Rule 835(a) must include the name of the member or the associated person and last known address, as reflected in the SBSEF's records, of the member or associated person, as well as the name of the person, committee, or other organizational unit of the SBSEF that initiated the disciplinary action or access restriction. In the case of a final disciplinary action, the notice would be required to include a description of the acts or practices, or omissions to act, upon which the sanction is based, including, as appropriate, the specific rules that the SBSEF has found to have been violated; a statement describing the respondent's answer to the charges; and a statement of the sanction imposed and the reasons for such sanction. In the case of a denial or conditioning of membership or a denial or limitation of access, the notice would be required to include: The financial or operating difficulty of the prospective member or member (as the case may be) upon which the SBSEF determined that the prospective member or member could not be permitted to do, or continue to do, business with safety to investors, creditors, other members, or the SBSEF; the pertinent failure to meet qualification requirements or other prerequisites for membership or access and the basis upon which the SBSEF determined that the person concerned could not be permitted to have membership or access with safety to investors, creditors, other members, or the SBSEF; or the default of any delivery of funds or securities to a clearing agency by the member. Finally, the notice must include the effective date of such final disciplinary action, denials or conditioning of membership, or denial or limitation of access, as well as any other information that the SBSEF may deem relevant.

The Commission seeks comment on the following:

188. Do you agree with the proposed definition of “final disciplinary action” in proposed Rule 835? Why or why not? If not, how would you revise the definition? Do you think it would be appropriate to exclude disciplinary actions that are summary actions under an SBSEF's summary fine schedule from such definition? Why or why not?

189. Do you agree with how the proposed rules and rule amendments address when an aggrieved party may seek Commission review of a denial or conditioning of membership, or a denial or limitation of access? Why or why not? If not, how would you revise those provisions?

190. In particular, do the proposed rules contain sufficient detail to address all types of denials or conditionings of membership or denials or limitations on access? Are there particular scenarios that commenters believe the Commission should address in Rule 835? If so, please describe in detail.

191. Are the contents of the required notice to the Commission in proposed Rule 835 appropriate? Do you believe these would provide the Commission with enough detail regarding final disciplinary actions, denials or conditionings of membership, and denials or limitations on access? If not, what other information should be required in the notice?

XII. Amendments to Existing Rule3a1-1 Under the SEA—Exemptions From the Definition of “Exchange”

An entity that meets the definition of “security-based swap execution facility” also would likely meet the definition of “exchange” set forth in section 3(a)(1) of the SEA and the interpretation of that definition set forth in Rule 3b-16 thereunder. Thus, absent an exemption, an entity needing to register with the Commission as an SBSEF also would likely need to register with the Commission as a national securities exchange. The Commission previously has stated that it “believes that Congress specifically provided a comprehensive regulatory framework for SBSEFs in the [SEA], as amended by the Dodd Frank Act, and therefore that such entities that are registered as SBSEFs should not also be required to register and be regulated as national securities exchanges.”

Therefore, the Commission is proposing to exercise its authority under section 36(a)(1) of the SEA to exempt an SBSEF from the definition of “exchange”—and thus the obligation to register as a national securities exchange—if it provides a market place solely for the trading of SBS (and no other securities) and has registered with the Commission as an SBSEF. To effect this exemption, the Commission is proposing to amend Rule 3a1-1 under the SEA by adding new paragraph (a)(4).

The proposed amendment provides that an entity that has registered with the Commission as an SBSEF pursuant to proposed Rule 803 and provides a market place for no securities other than SBS would not fall within the definition of “exchange,” and thus would not be subject to the requirement in section 5 of the SEA to register as a national securities exchange or obtain a low-volume exemption. Section 5 also provides that a broker or dealer may not “us[e] any facility of an exchange within or subject to the jurisdiction of the United States to effect any transaction in a security, or to report any such transaction, unless such exchange (1) is registered as a national securities exchange . . . or (2) is exempted from such registration . . . by reason of the limited volume of transactions effected on such exchange.” Brokers and dealers who are members of a registered SBSEF would not be in violation of section 5 by effecting or reporting any SBS transactions on that SBSEF, because an SBSEF that qualifies for the exemption under proposed Rule 3a1-1(a)(4) would not be an exchange within the meaning of section 5.

In addition, the Commission is proposing a new paragraph (a)(5) to existing Rule 3a1-1 under the SEA which would provide that an organization, association, or group of persons shall be exempt from the definition of the term “exchange” if such organization, association, or group of persons has registered with the Commission as a clearing agency pursuant to section 17A of the SEA and limits its exchange functions to operation of a trading session that is designed to further the accuracy of end-of-day valuations. As noted above, this provision would codify a series of exemptions that the Commission has granted over several years to SBS clearing agencies that operate “forced trading” sessions. As part of the clearing and risk management processes, an SBS clearing agency must establish an end-of-day valuation for any SBS in which any of its members has a cleared position. Certain SBS clearing agencies utilize a valuation mechanism whereby they require clearing members to submit indicative quotes for those SBS products, and can require them to trade as a way to promote accurate submissions. The precise means by which the clearing agency matches quotes from different clearing members could cause the clearing agency to fall within the definition of “exchange” in section 3(a)(1) of the SEA. The Commission previously has found that it was necessary or appropriate in the public interest and consistent with the protection of investors to exempt clearing agencies that engage in this activity from the definition of “exchange.” The Commission is now proposing to codify this exemption. This exemption would cover only the forced-trading session of an SBS clearing agency; any other exchange activity that a clearing agency might engage in could remain subject to the SEA provisions and the Commission's rules thereunder applying to exchanges.

Finally, the Commission is proposing to amend the introductory language of existing paragraph (b) of Rule 3a1-1, which states: “Notwithstanding paragraph (a) of this rule, an organization, association, or group of persons shall not be exempt under this rule from the definition of `exchange' if . . .” Paragraph (b) then sets out procedural and substantive criteria for the Commission to retract an exemption under paragraph (a) of Rule 3a1-1 if an exchange's share of the market in any one of the specified classes of securities exceeds a defined threshold. The Commission is proposing to amend the introductory language of paragraph (b) of Rule 3a1-1 to cover only paragraphs (a)(1) through (3), not paragraph (a) as a whole.

The changed language is designed to clarify that the retraction provisions would not apply to organizations, associations, or groups of persons who fall within proposed Rule 3a1-1(a)(4) or (a)(5). Thus, even if a registered SBSEF were to grow very large, Rule 3a1-1(b), as proposed to be amended, would not afford a basis for the Commission to retract an SBSEF's exemption from the definition of “exchange” under proposed Rule 3a1-1(a)(4), which would force the SBSEF to register as a national securities exchange (to avoid being a registered exchange). The Commission preliminarily believes that, in adopting section 3D of the SEA, Congress gave the Commission a mechanism to regulate SBSEFs of any size. Nothing in section 3D suggests that, if an SBSEF were to grow above a certain size, the Commission should be able to withdraw that entity's ability to operate as an SBSEF and instead compel it to register as a national securities exchange.

Finally, the Commission preliminarily believes that it is not necessary to apply the retraction provisions in Rule 3a1-1(b) to registered clearing agencies that engage in forced trading sessions and are covered by proposed Rule 3a1-1(a)(5). SBS transactions effected using this functionality are designed to facilitate the clearance and settlement process by rendering more accurate the daily valuation that is used to calculate margin requirements. The entities that utilize this functionality are already registered with the Commission—as clearing agencies—and carry out these operations under rules that have been approved by the Commission. This trading functionality is not effected for the purpose of conducting open-market transactions between parties who are seeking to increase or decrease their positions for investment or hedging purposes. Therefore, the Commission preliminarily believes that it would not be appropriate to apply the retraction provisions of Rule 3a1-1(b) to clearing agencies that would be covered by proposed Rule 3a1-1(a)(5), as this would force these clearing agencies also to register as national securities exchanges.

The Commission seeks comment on the following:

192. Do you agree in general with the Commission's proposal to exempt from the statutory definition of “exchange” any registered SBSEF that provides a market place for no securities other than SBS and any SBS clearing agency that engages in forced trading sessions? Why or why not?

193. Do you agree with the particular language of proposed paragraphs (a)(4) and (a)(5) of Rule 3a1-1? If not, how would you amend the language?

194. Do you agree with the Commission's preliminary view, reflected in the proposed new introductory language to paragraph (b) of Rule 3a1-1, that entities qualifying for an exemption from the definition of “exchange” under proposed paragraphs (a)(4) and (a)(5) of Rule 3a1-1 should not be subject to the retraction provisions of Rule 3a1-1(b)? Why or why not?

XIII. Rule 15a-12—SBSEFs as Registered Brokers; Relief From Certain Broker Requirements

An SBSEF, by facilitating the execution of SBS between persons, also is engaged in the business of effecting transactions in securities for the account of others and therefore meets the SEA definition of “broker.” Absent an exception or exemption, an SBSEF—in addition to being subject to the registration and regulatory requirements for SBSEFs—also would be required to register with the Commission as a broker pursuant to sections 15(a) and 15(b) of the SEA and would be subject to all regulatory requirements applicable to brokers. For example, brokers and dealers must comply with a number of rules that govern their conduct, including those relating to customer confirmations and disclosure of credit terms in margin transactions.

The Commission is proposing a new Rule 15a-12 under the SEA that would deem registration with the Commission as an SBSEF also to constitute registration as a broker, and would exempt a registered SBSEF from many broker requirements in light of the SBSEF regulatory regime to which it would also be subject.

One statutory provision from which a registered SBSEF would be exempted is section 17(a) of the SEA, which requires a registered broker (among other types of registered entity) to make and keep records as prescribed by Commission rule. Because SBSEFs are required to make and keep records as prescribed by Commission rule under section 3D(d)(9) of the SEA, imposing section 17(a) on SBSEFs would be redundant. By contrast, one statutory provision that would continue to apply to registered SBSEFs in their dual capacity as registered brokers would be section 17(b) of the SEA.

In addition, under section 15(b)(8) of the SEA, it is unlawful for any registered broker or dealer to effect transactions in securities unless it is a member of an SRO. Brokers and dealers also must comply with a number of financial responsibility regulations, such as the net capital and customer protection rules. A registered broker or dealer also must make and keep current books and records relating to its 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.

The Commission preliminarily believes that Congress did not intend to subject SBSEFs that act only as SBSEFs to a dual regulatory regime. Therefore, using its authority under section 36(a)(1) of the SEA and its authority to establish procedures regarding the registration of brokers, the Commission is proposing new Rule 15a-12 under the SEA that would allow an SBSEF that is a broker, solely due to its activity with respect to SBS executed on or through the SBSEF, to satisfy the requirement to register as a broker by registering as an SBSEF. Proposed Rule 15a-12(b) would provide that such an entity, if it registered as an SBSEF pursuant proposed Rule 803, would be deemed also to have registered with the Commission pursuant to sections 15(a) and (b) of the SEA. The Commission is not proposing to exempt SBSEFs from registration as brokers; rather, given the registration and regulatory requirements being proposed for SBSEFs through Regulation SE, it is proposing to eliminate a separate registration process for broker/SBSEFs and much of the additive layer of regulation for brokers that the Commission preliminarily believes is not necessary in light of the regulatory regime for SBSEFs.

Proposed Rule 15a-12 could not be utilized by an SBSEF that engaged in other types of brokerage activity. Paragraph (a) of proposed Rule 15a-12 would define the term “SBSEF-B” to mean an SBSEF that does not engage in any securities activity other than facilitating the trading of SBS on or through the SBSEF. Thus, an SBSEF that acts as agent to SBS counterparties or that acts in a discretionary manner with respect to the execution of SBS transactions, could not avail itself of proposed Rule 15a-12. Also, if an inter-dealer broker elects not to separate its inter-dealer broker functions from its SBSEF (by, for example, housing them in separate legal entities), and instead chooses to operate the SBSEF in the same legal entity as the inter-dealer broker, the entity could not avail itself of proposed Rule 15a-12 because it would not be an SBSEF-B under the rule.

Paragraphs (c) to (e) of proposed Rule 15a-12 would set out the scope of broker requirements from which an SBSEF-B would be exempted and which broker requirements would continue to apply. Paragraph (c) would provide that an SBSEF-B would be exempt from any provision of the SEA or the Commission's rules thereunder applicable to brokers that by its terms requires, prohibits, restricts, limits, conditions, or affects the activities of a broker, unless such provision specifies that it applies to an SBSEF. Paragraph (d) of proposed Rule 15a-12 would provide that, notwithstanding paragraph (c), an SBSEF-B would still be subject to sections 15(b)(4), 15(b)(6), and 17(b) of the SEA.

Sections 15(b)(4) and 15(b)(6) of the SEA serve as the basis for enforcing the Federal securities laws against registered brokers. Section 15(b)(4) provides that the Commission, upon the making of specified findings, shall censure; place limitations on the activities, functions, or operations of; suspend for a period not exceeding 12 months; or revoke the registration of any broker or dealer. Similarly, section 15(b)(6) of the SEA requires the Commission, upon the making of specified findings, to censure, place limitations on, suspend, or bar such person an associated person. Section 17(b) of the SEA is the legal basis under which the Commission may examine registered brokers for compliance with the Federal securities laws. Section 17(b) authorizes the Commission to conduct reasonable periodic, special, or other examinations of all records maintained by entities described in section 17(a), including registered brokers. 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 SEA. Proposed Rule 15a-12 would specify that these examination and statutory disqualification provisions pertaining to registered brokers continue to apply, despite Rule 15a-12 exempting an SBSEF-B from other broker requirements under the SEA.

Finally, paragraph (e) of proposed Rule 15a-12 would exempt an SBSEF-B from the Securities Investor Protection Act (“SIPA”). SIPA established the Securities Investor Protection Corporation (“SIPC”), which oversees the liquidation of member firms that close when a member firm is bankrupt or in financial trouble, and customer assets are missing. SIPC protection is funded by assessments made on member firms.

Section 2 of SIPA states that, unless otherwise provided, the SEA shall apply as if SIPA constituted an amendment to, and was included as a section of, the SEA. An SBSEF-B, by definition, would operate only as an SBSEF. The Commission preliminarily believes that it would not be equitable to require an SBSEF-B to become a member of SIPC and pay SIPC assessments, since the SBSEF-B would not have brokerage customers and would not hold any customer funds or securities. Accordingly, under section 36(a)(1) of the SEA, the Commission preliminarily believes that it is necessary or appropriate in the public interest, and is consistent with the protection of investors, to exempt SBSEF-Bs from any requirement under SIPA, including the requirement to pay assessments to the SIPC insurance fund. The Commission is proposing to codify this exemption as Rule 15a-12(e).

The Commission seeks comment on the following:

195. Do you agree in principle with proposed Rule 15a-12? Why or why not?

196. Do you agree with the specific language of proposed Rule 15a-12? If not, how would you revise the rule language, and why?

197. Are there any provisions listed in paragraph (d) of proposed Rule 15a-12 to which an SBSEF-B should not be subject? If so, what provisions and why? Are there any other provisions or broker requirements to which an SBSEF-B should be subject (and thus added to paragraph (d) of proposed Rule 15a-12)? If so, what provisions or requirements and why?

198. Do you believe that it is appropriate to exempt SBSEF-Bs from SIPA, as reflected in proposed Rule 15a-12(e)? Why or why not?

XIV. Proposed Sunsetting of Temporary Exemption From SEA Definition of “Clearing Agency” for Unregistered SBSEFs

In 2020, the Commission adopted Rule 17Ad-24 under the SEA to exempt from the definition of “clearing agency” in section 3(a)(23) of the SEA certain entities, including a registered SBSEF, that would be deemed to be a clearing agency solely by reason of (a) functions performed by such institution as part of customary dealing activities or providing facilities for comparison of data respecting the terms of settlement of securities transactions effected on such registered SBSEF, respectively; or (b) acting on behalf of a clearing agency or participant therein in connection with the furnishing by the clearing agency of services to its participants or the use of services of the clearing agency by its participants. In adopting the rule, the Commission explained that an entity performing such functions that triggers the requirement to register as a clearing agency—but that is not yet registered with the Commission as an SBSEF—could rely on a temporary exemption from the requirement to register as a clearing agency that the Commission issued in 2011. The Commission preliminarily believes that, if it adopts a framework for the registration of SBSEFs, the 2011 Temporary Exemption would no longer be necessary because entities carrying out the functions of SBSEFs would be able to register with the Commission as such, thereby falling within the exemption from the definition of “clearing agency” in existing Rule 17Ad-24.

The Commission seeks comment on the following:

199. Should the Commission sunset the 2011 Temporary Exemption to coincide with the compliance date for Regulation SE, if adopted? If not, what timeline for sunsetting the 2011 Temporary Exemption would be appropriate?

XV. Electronic Filings Under Regulation SE

Various provisions of proposed Regulation SE would require registered SBSEFs (or SBSEF applicants) to file specified information electronically with the Commission using the Electronic Data Gathering, Analysis, and Retrieval (“EDGAR”) system in Inline XBRL, a structured, machine-readable data language. Such provisions include:

• Proposed Rule 803(b)(1)(i) and (b)(3), regarding filings of, and amendments to, a Form SBSEF application.
• Proposed Rules 803(e) and 803(f), regarding requests to withdraw or vacate an application for registration.
• Proposed Rule 804(a)(1), regarding filings for listing products for trading by certification.
• Proposed Rule 805(a)(1), regarding filings for voluntary submission of new products for Commission review and approval.
• Proposed Rule 806(a)(1), regarding filings for voluntary submission of rules for Commission review and approval.
• Proposed Rule 807(a)(1), regarding filings for self-certification of rules.

• Proposed Rule 807(d), regarding filings of weekly notifications to the Commission of rules and rule amendments that were not required to be certified.

• Proposed Rule 829(g)(6), regarding submission to the Commission of reports related to financial resources and related documentation.
• Proposed Rule 831(j)(2), regarding submission to the Commission of the annual compliance report of SBSEF's CCO.

Requiring SBSEFs to file this information in EDGAR would provide the Commission and the public with a centralized, publicly accessible electronic database for the information, thereby facilitating its use. EDGAR would also enable technical validation of the disclosures, thus potentially reducing the incidence of non-discretionary errors ( e.g., including text for a disclosure that should contain only numbers). Moreover, requiring Inline XBRL tagging of the reported disclosures, which would specifically comprise Inline XBRL block text tags for any narrative disclosures, as well as detail tags for individual data points, would make the disclosures more easily available and accessible to, and reusable by, market participants and the Commission for retrieval, aggregation, and comparison across different SBSEFs and time periods, as compared to an unstructured PDF, HTML, or ASCII format requirement for the reports.

The Commission seeks comment on the following:

200. Would EDGAR be an appropriate system for these filings? Or should the Commission use its Electronic Form Filing System/SRO Rule Tracking System (“EFFS/SRTS”) or another file transfer system instead? Would requiring these materials to be filed in EDGAR, EFFS/SRTS, or another file transfer system be more beneficial for SBSEFs and other market participants? If so, why? How would the use of these different systems impact the usability and accessibility of the materials for data users? Is there another method of electronic submission that is preferable? If so, please identify that method, why you believe it should be used, and the estimated costs of such system for filers.

201. Should all filings be made through the same electronic system, or would different filing systems be appropriate for different types of filings? If the latter, please discuss.

202. Would Inline XBRL be an appropriate data language for these filings? Or should the Commission use a different structured data language? If so, which data language should be required, and why? Would requiring a different structured data language be more beneficial for SBSEFs and other market participants? How would the use of a different data language impact the usability and accessibility of the materials for data users? What time or expense is associated with your recommended structured data language? Would a particular structured data language require any filers or users to license commercial software they otherwise would not, and, if so, at what expense?

XVI. Amendments to Commission's Rules of Practice for Appeals of SBSEF Actions

As noted above, SEA Core Principle 2 directs an SBSEF to exercise regulatory powers over its market. Under proposed Rule 819 of Regulation SE, an SBSEF could take a variety of disciplinary actions against a member that is found to violate the SBSEF's rules, including fining the member, limiting the member's access, or barring the member entirely. SEA Core Principle 2 also requires an SBSEF to establish rules governing access to its market. An SBSEF could apply those rules in such a way as to limit a person's access to the SBSEF or to deny access entirely. The Commission preliminarily believes that general principles of due process necessitate an appeals procedure for final disciplinary actions taken by an SBSEF, for denials or conditionings of membership, and for limitations or denials of access. Accordingly, the Commission is proposing a number of amendments to its Rules of Practice to allow for such appeals, and notes that the CFTC has similar procedures with respect to SEFs.

A. Amendment to Rule 101

Existing Rule 101 of the Commission's Rules of Practice sets out definitions for several terms used in the Rules of Practice. In particular, existing Rule 101(a)(9) defines “proceeding” with respect to applications of review of actions by a variety of entities that are subject to the Commission's jurisdiction. The Commission is proposing a new paragraph (a)(9)(ix) of Rule 101 that would provide that an application for a review of a determination (such as a final disciplinary action or a limitation or denial of access to any service) by an SBSEF would be a “proceeding” and thereby trigger applicability of the Rules of Practice.

B. Amendment to Rule 202

Existing Rule 202 of the Commission's Rules of Practice permits a party in certain proceedings before the Commission to make a motion to specify certain procedures with respect to such proceeding. Rule 202(a) excludes certain types of proceedings, including enforcement or disciplinary proceedings, proceedings to review a determination by an SRO, and proceedings to review a determination of the PCAOB. Because the Commission is proposing new Rules 442 and 443, which set out specific procedures with respect to proceedings to review a determination of an SBSEF, the Commission is proposing to revise Rule 202(a) to add such SBSEF-related proceedings to the list of exclusions.

C. Amendment to Rule 210

Existing Rule 210 of the Commission's Rules of Practice sets out Commission rules with respect to parties, limited participants, and amici curiae in various proceedings before the Commission. Paragraph (a)(1) of Rule 210 states that persons shall not be granted leave to become a party or non-party participant on a limited basis in an enforcement or disciplinary proceeding, a proceeding to review a determination by an SRO, or a proceeding to review a determination by the PCAOB, except as authorized by paragraph (c) of Rule 210 (which permits limited instances in which persons may participate for Commission disciplinary and enforcement proceedings). Because the Commission is proposing new Rules 442 and 443, which set out specific procedures with respect to proceedings to review a determination of an SBSEF, the Commission is proposing to revise Rule 210 to exclude proceedings to review a determination by an SBSEF among those types of proceedings from which persons may be granted leave to become a party or a non-party participant on a limited basis.

D. Amendment to Rule 401

The Commission is proposing to amend existing Rule 401 of its Rules of Practice by adding a new paragraph (f). New paragraph (f)(1) of existing Rule 401 would permit any person aggrieved by a stay of action by an SBSEF entered in accordance with proposed Rule 442(c) to make a motion to lift the stay. The Commission could also, at any time, on its own motion determine whether to lift the automatic stay. New paragraph (f)(2) would provide that the Commission may lift a stay summarily, without notice and opportunity for hearing. Finally, new paragraph (f)(3) would provide that the Commission may expedite consideration of a motion to lift a stay of action by an SBSEF, consistent with the Commission's other responsibilities. Where consideration is expedited, persons opposing the lifting of the stay could file a statement in opposition within two days of service of the motion requesting lifting of the stay unless the Commission, by written order, specifies a different period.

The Commission preliminarily believes that it is appropriate to allow persons affected by certain stays of action by an SBSEF the opportunity to make a motion to request the lifting of the stay. As discussed below, pursuant to proposed Rule 442, an aggrieved person could file an application for review with the Commission with respect to a final disciplinary action, a final action with respect to a denial or conditioning of membership, or a final action with respect to a denial or limitation of access. The filing of such application would operate as a stay of the SBSEF's determination. The Commission preliminarily believes that, because of this automatic stay procedure, an aggrieved person or the SBSEF itself should be afforded a mechanism by which it could request the Commission to lift the stay, in addition to the Commission's ability under proposed Rule 401(f)(2) to lift a stay summarily, without notice and opportunity of hearing.

E. Rule 442—Right To Appeal

Proposed new Rule 442 would establish the right to an appeal to the Commission of certain determinations made by an SBSEF, and set out certain procedural matters relating to any such appeal. Paragraph (a) of proposed Rule 442 would provide that an application for review by the Commission may be filed by any person who is aggrieved by a determination of an SBSEF with respect to any: (1) Final disciplinary action, as defined in proposed Rule 835(b)(1); (2) final action with respect to a denial or conditioning of membership, as defined in proposed Rule 835(b)(2); or (3) final action with respect to a denial or limitation of access to any service offered by the SBSEF, as defined in proposed Rule 835(b)(2). Paragraph (b) of proposed Rule 442 would set forth the procedure in such cases. Specifically, an aggrieved person could file an application for review with the Commission (pursuant to existing Rule 151) within 30 days after the notice filed by the SBSEF with the Commission pursuant to proposed Rule 835 is received by the aggrieved person, and must serve the application on the SBSEF at the same time. Paragraph (c) of proposed Rule 442 would provide that filing an application for review with the Commission pursuant to proposed Rule 835(b) would operate as a stay of the SBSEF's determination, unless the Commission otherwise orders either pursuant to a motion filed in accordance with proposed Rule 401(f) or upon its own motion. The Commission preliminarily believes that it is appropriate for the filing of an application for review to operate as an automatic stay of the SBSEF's determination, because such determination could have the effect of significantly or even permanently damaging an aggrieved person's business while the Commission was conducting a review, which could take substantial time. In addition, the Commission is proposing in Rule 401(f) a procedure whereby a person aggrieved by such stay, including the SBSEF, could request that the Commission lift the stay. The proposed rules also contain certain requirements relating to certification of the record and service of the index. Specifically, within 14 days after receipt of an application for review, an SBSEF would be required to certify and file with the Commission one unredacted copy of the record upon which it took the complained-of action. The SBSEF would be required to file electronically with the Commission one copy of an index of such record, and serve one copy of the index on each party, subject to the requirements in proposed Rule 442(d)(2) relating to sensitive personal information; if applicable, such filings would have to be certified that they have complied with such requirements relating to sensitive personal information. The Commission believes these requirements are appropriate to ensure that sensitive personal information is not improperly or inadvertently disseminated by an SBSEF as part of its filing of the record relating to the appeal review.

F. Rule 443—Sua Sponte Review by Commission

New proposed Rule 443 would provide that the Commission, on its own initiative, could order review of any determination by an SBSEF (which would include a final disciplinary action, a final action with respect to a denial or conditioning of membership, or a final action with respect to a denial or limitation of access to any services) that could be subject to an application for review pursuant to proposed Rule 442(a) within 40 days after the SBSEF filed notice thereof.

Proposed Rule 443 would further provide that the Commission could at any time before issuing its decision raise or consider any matter that it deems material, whether or not raised by the parties. If the Commission did so, under proposed Rule 443 the Commission would give notice to the parties and an opportunity for supplemental briefing with respect to issues not briefed by the parties, where the Commission believes that such briefing could significantly aid the decisional process. The Commission preliminarily believes that it is appropriate that it have the ability to review any determination filed by an SBSEF that could be subject to an application for review under proposed Rule 442(a), even without an appeal of such determination by an aggrieved party, should it believe that further consideration is warranted. Therefore, the proposed rule would provide the Commission authority to obtain additional information through supplemental briefings, as needed.

G. Amendment to Rule 450

Existing Rule 450 of the Commission's Rules of Practice sets out requirements for briefs filed with the Commission. Rule 450(a) sets out a briefing schedule, and paragraph (a)(2) provides that the briefing schedule order shall be issued within 21 days, or such longer time as provided by the Commission, of receipt by the Commission of various types of appeals. The Commission is proposing to amend Rule 450(a)(2) by adding a new paragraph (iv) providing that the 21 days would be triggered by “[r]eceipt by the Commission of an index to the record of a determination by a security-based swap execution facility filed pursuant to § 201.442(d).”

H. Amendment to Rule 460

Existing Rule 460 of the Commission's Rules of Practice states that the Commission shall determine each matter on the basis of the record. Rule 460(a) defines the contents of the record with respect to various types of action. The Commission is proposing a new paragraph (a)(4) of Rule 460 that would state that, in a proceeding for a final decision before the Commission reviewing a determination of an SBSEF, the record shall consist of: (i) The record certified by the SBSEF pursuant to § 201.442(d); (ii) any application for review; and (iii) any submissions, moving papers, and briefs filed on appeal or review.

I. Request for Comment

The Commission requests comment on all aspects of its proposed rules and rule amendments to provide for applications for review by the Commission of an SBSEF's final disciplinary action or denial or limitation of access. In particular:

203. Do you agree in general that final disciplinary action and denials or limitations of access by an SBSEF be afforded a review process under the Commission's Rules of Practice? Why or why not?

204. Should aggrieved parties be permitted to submit a motion for a stay of an action by an SBSEF under proposed Rule 401(f)? Do you believe that there may be instances in which a motion for a stay may be necessary? Why or why not? Are there any particular provisions that should be added or should not be included in such a process? If so, please describe.

205. Are the provisions relating to SBSEFs under proposed Rule 442 appropriate? Are there additional requirements that should be included or items that should be omitted? Are the provisions relating to sensitive personal information and exceptions under proposed paragraph (d)(2) appropriate? Why or why not?

206. Is it appropriate for the Commission to be able to review determinations of an SBSEF sua sponte under proposed Rule 443? Why or why not?

XVII. Conclusion

The Commission requests comment on all aspects of proposed Regulation SE, including any provision of a proposed rule about which the Commission did not ask a specific question above. In addition, the Commission seeks commenters' views on whether Regulation SE should address any other aspects of SBSEFs or SBS execution generally where the Commission has not proposed a specific rule. In particular:

207. Are there any other CFTC rules, or provisions of the CEA itself, relating to SEFs that you believe should be adapted by the Commission to apply to SBSEFs? If so, which rules or provisions and why?

208. Are there any other requirements that the Commission should apply to SBSEF members, or which the Commission should require SBSEFs to apply to their members? If so, what requirements and why? What would be the legal basis for those additional requirements?

XVIII. Compliance Schedule

To facilitate the efficient registration of SBSEFs and compliance with Regulation SE, the Commission intends to include a compliance schedule along with any final rules, if adopted. To assist it in developing an appropriate compliance schedule, the Commission seeks comment on the following matters:

209. If the Commission were to substantially harmonize its SBSEF rules and registration procedures with those of the CFTC, as proposed, how long would respondents need to submit a Form SBSEF to the Commission after Regulation SE and Form SBSEF are adopted (assuming that the applicant is not registered as a SEF with the CFTC)?

210. Please provide your view of the optimal compliance schedule(s) and explain your rationale.

211. Should the compliance date for foreign SBS trading venues that seek an exemption order under Rule 833(a) coincide with the date by which SBSEF applicants would have to be registered by the Commission? If you believe that such foreign SBS trading venues should have a different compliance date, what date should that be and why?

XIX. Economic Analysis

A. Introduction

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 SBS that is set forth in the legislation, including among other things, (1) the registration and regulation of SBSEFs; and (2) mitigating conflicts of interest with respect to SBSEFs, SBS exchanges, and SBS clearing agencies. To satisfy these statutory mandates, the Commission is proposing Regulation SE and associated forms that would create a regime for the registration and regulation of SBSEFs and address other issues relating to SBS execution generally. One of the rules being proposed as part of Regulation SE, Rule 834, would implement section 765 of the Dodd-Frank Act, which is intended to mitigate conflicts of interest at SBSEFs and SBS exchanges. Other rules being proposed as part of Regulation SE would address the cross-border application of the SEA's trading venue registration requirements and the trade execution requirement for SBS.

In addition, the Commission is proposing to amend existing Rule 3a1-1 under the SEA to exempt, from the SEA definition of “exchange,” registered SBSEFs that provide a market place for no securities other than SBS and certain registered clearing agencies. The Commission also is proposing new Rule 15a-12 under the SEA that, while affirming that an SBSEF also would be a broker under the SEA, would exempt a registered SBSEF from certain broker requirements. The Commission also is proposing certain new rules and amendments to its Rules of Practice to allow persons who are aggrieved by certain determinations by an SBSEF to apply for review by the Commission. The Commission also is withdrawing all previously proposed rules regarding these subjects.

Currently, SBS trade in the OTC market, rather than on regulated markets. The existing market for SBS is opaque, with little, if any, pre-trade transparency. With limited transparency, the information asymmetry between liquidity providers ( i.e., SBS dealers) and end users could be significant. Specifically, liquidity providers may observe information about the trading process ( e.g., trading interest, quotes, order flows, and trades) that end users typically cannot observe. The SBS market also is decentralized such that market participants incur search costs to locate other market participants in order to trade.

While the SBS market is decentralized, it also is interconnected and global in scope. SBS dealers can have hundreds of counterparties, consisting of end users and other SBS dealers. Trading venues may serve hundreds of participants, consisting of SBS dealers and end users. SBS transactions arranged, negotiated, or executed by personnel located in the U.S. may involve wholly foreign counterparties. Furthermore, U.S. persons may choose to trade SBSs on foreign venues, which are subject to OTC derivatives regulations imposed by local regulatory authorities.

The Commission is mindful of the economic effects, including the costs and benefits, of the proposal. Section 3(f) of the SEA, 15 U.S.C. 78c(f), directs the Commission, when engaging in rulemaking where it 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 will promote efficiency, competition, and capital formation. In addition, section 23(a)(2) of the SEA 15 U.S.C. 78w(a)(2), requires the Commission, when making rules under the SEA, to consider the impact that the rules would have on competition, and 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 SEA.

The analysis below addresses the likely economic effects of the proposal, including its anticipated and estimated benefits and costs and its likely effects on efficiency, competition, and capital formation. The Commission also discusses the potential economic effects of certain alternatives to the approaches taken in this release.

B. Economic Baseline

To assess the economic effects of the proposed rules and amendments, the Commission is using as the baseline the SBS market as it currently exists, including applicable rules the Commission has already adopted, but excluding rules the Commission has proposed but not yet finalized. The analysis includes provisions of the SEA, as amended by the Dodd-Frank Act, that currently govern the SBS market, and rules adopted by the Commission thereunder, including in the Intermediary Definitions Adopting Release, the Cross-Border Adopting Release, the SDR Rules and Core Principles Adopting Release, the Regulation SBSR Adopting Release I, the Registration Adopting Release, the ANE Adopting Release, the Business Conduct Adopting Release, the Trade Acknowledgement and Verification Adopting Release, the Regulation SBSR Adopting Release II, the Rule of Practice 194 Adopting Release, the Capital, Margin, and Segregation Adopting Release, the Recordkeeping and Reporting Adopting Release, the Risk Mitigation Adopting Release, the Cross-Border Amendments Adopting Release, and the Clearing Exemption Adopting Release. The baseline also includes the Temporary SBSEF Exemptions and the CFTC rules that apply to CFTC-registered SEFs. The following sections discuss available data from the SBS market; SBS activity and market participants; distribution of transaction size; other markets and existing regulatory frameworks; number of entities that likely will register as SBSEFs; SBS trading on platforms; global regulatory efforts; and trading models.

1. Available Data From the SBS Market

The Commission's understanding of the market is informed, in part, by available data on SBS transactions, though the Commission acknowledges that limitations in the data limit the extent to which it is possible to quantitatively characterize the market. Since these data do not cover the entire market, the Commission has analyzed market activity using a sample of transaction data that includes only certain segments of the market. The Commission believes, however, that the data underlying this analysis provides reasonably comprehensive information regarding single-name CDS transactions and the composition of the participants in the single-name CDS market.

Specifically, the analysis of the current state of the SBS market is based on data obtained from the DTCC Derivatives Repository Limited Trade Information Warehouse (“TIW”), especially data regarding the activity of market participants in the single-name CDS market during the period from 2008 to 2020. Although SBS are not limited to single-name CDS, single-name CDS contracts make up a majority of SBS, and we believe that the single-name CDS data are sufficiently representative of the market to inform our analysis of the current SBS market. According to data published by the Bank for International Settlements (“BIS”), as of December 2020, the global notional amount outstanding in single-name CDS was approximately $3.5 trillion, in multi-name index CDS was approximately $4.5 trillion, and in multi-name, non-index CDS was approximately $347 billion. The total gross market value outstanding in single-name CDS was approximately $77 billion, and in multi-name CDS instruments was approximately $125 billion. The global notional amount outstanding in equity forwards and swaps as of December 2020 was $3.6 trillion, with total gross market value of $321 billion.

The data available from TIW does not encompass those CDS transactions that both: (i) Do not involve U.S. counterparties; and (ii) are based on non-U.S. reference entities. Notwithstanding this limitation, the TIW single-name CDS data should provide sufficient information to permit the Commission to identify the types of market participants active in the SBS market and the general pattern of dealing within that market.

In addition to the TIW single-name CDS data, the Commission uses data on SBS transactions reported to registered security-based swap data repositories (SDRs) to describe the baseline. Beginning on November 8, 2021, market participants are required to report SBS transactions to registered SDRs pursuant to Regulation SBSR. The Commission uses data on SBS transactions in the credit, equity, and interest rate asset classes that were executed between November 8, 2021 and February 28, 2022 to quantify the extent of SBS trading on platforms.

2. SBS Market Activity and Participants

a. SBS Entities

Final SBS Entity registration rules have been adopted and compliance was required as of November 1, 2021. As of January 3, 2022, 44 entities had registered with the Commission as SBS dealers and no entity had registered as a major SBS participant.

Firms that act as SBS dealers play a central role in the SBS market. Based on an analysis of 2020 single-name CDS data in TIW, accounts of registered SBS dealer firms intermediated transactions with a gross notional amount of approximately $1.99 trillion, with approximately 55% of the gross notional intermediated by the top five SBS dealer accounts.

These SBS dealers transact with hundreds or thousands of counterparties. Approximately 8% of accounts of SBS dealer firms observable in TIW have entered into SBS with over 1,000 unique counterparty accounts as of year-end 2020. Another 23% of these accounts transacted with 500 to 1,000 unique counterparty accounts; 38% transacted with 100 to 500 unique accounts; and 31% of these accounts intermediated SBS with fewer than 100 unique counterparties in 2020. The median SBS dealer account transacted with 276 unique accounts (with an average of approximately 416 unique accounts). Non-SBS dealer counterparties transacted almost exclusively with these SBS dealers. In 2020, the median non-SBS dealer counterparty transacted with 1.3 SBS dealer accounts (with an average of approximately 2.5 SBS dealer accounts).

b. Other SBS Market Participants

In addition to SBS dealers, thousands of other participants appear as counterparties to SBS transactions in our sample, including but not limited to: Investment companies, pension funds, private funds, sovereign entities, and industrial companies. The Commission observes that most non-SBS dealer users of SBS do not engage in trading directly, but trade through banks, investment advisers, or other types of firms acting as SBS dealers or agents. Based on an analysis of the counterparties to trades reported to the TIW, there are 2,321 entities that engaged directly in trading between November 2006 and December 2020.

As shown in Table 1 below, close to three-quarters of these entities (DTCC-defined “firms” shown in TIW, which we refer to here as “transacting agents”) were identified as investment advisers, of which approximately 40% (about 32% of all transacting agents) were registered as investment advisers under the Investment Advisers Act. Although investment advisers are the vast majority of transacting agents, the transactions they executed account for only 14.2% of all single-name CDS trading activity reported to the TIW, measured by number of transaction-sides (each transaction has two transaction sides, i.e., two transaction counterparties). The vast majority of transactions (82.1%) measured by number of transaction-sides were executed by ISDA-recognized SBS dealers.

Principal holders of CDS risk exposure are represented by “accounts” in the TIW. The staff's analysis of these accounts in TIW shows that the 2,321 transacting agents classified in Table 1 represent 15,187 principal risk holders. Table 2 below classifies these principal risk holders by their counterparty type and whether they are represented by a registered or unregistered investment adviser. For instance, banks in Table 1 allocated transactions across 370 accounts, of which 35 were represented by investment advisers. In the remaining instances, banks traded for their own accounts. Meanwhile, ISDA-recognized SBS dealers in Table 1 allocated transactions across 104 accounts. Private funds are the largest type of account holders that the Commission was able to classify, and although not verified through a recognized database, most of the funds we were not able to classify appear to be private funds.

c. SBS Market Participant Domiciles

As depicted in Figure 1 below, domiciles of new accounts participating in the SBS market have shifted over time. It is unclear whether these shifts represent changes in the types of participants active in this market, changes in reporting, or changes in transaction volumes in particular underliers. For example, the percentage of new entrants that are foreign accounts increased from 24.4% in the first quarter of 2008 to approximately 50% in the last quarter of 2020, which might reflect an increase in participation by foreign account holders in the SBS market, though the total number of new entrants that are foreign accounts decreased from 112 in the first quarter of 2008 to 38 in the last quarter of 2020. Additionally, the percentage of the subset of new entrants that are foreign accounts managed by U.S. persons increased from 4.6% in the first quarter of 2008 to 11.8% in the last quarter of 2020, and the absolute number changed from 21 to 9, which also might reflect more specifically the flexibility with which market participants can restructure their market participation in response to regulatory intervention, competitive pressures, and other incentives. At the same time, apparent changes in the percentage of new accounts with foreign domiciles might also reflect improvements in reporting by market participants to TIW, an increase in the percentage of transactions between U.S. and non-U.S. counterparties, and/or increased transactions in single-name CDS on U.S. reference entities by foreign persons.

Figure 2 below describes the percentage of global, notional transaction volume in North American corporate single-name CDS reported to TIW between January 2011 and December 2020, separated by whether transactions are between two ISDA-recognized SBS dealers (“interdealer transactions”) or whether a transaction has at least one non-SBS dealer counterparty. Figure 2 also shows that the portion of the notional volume of North American corporate single-name CDS represented by interdealer transactions has remained fairly constant through 2015, before falling from approximately 68% in 2015 to under 40% in 2020. This fall corresponds to the availability of clearing to non-SBS dealers. Interdealer transactions continue to represent a significant fraction of trading activity, even as notional volume has declined over the past ten years, from just under $2 trillion in 2011 to less than $500 billion in 2020.

The high level of interdealer trading activity reflects the central position of a small number of SBS dealers, each of which intermediates trades with many hundreds of counterparties. While the Commission is unable to quantify the current level of trading costs for single-name CDS, these SBS dealers appear to enjoy market power as a result of their small number and the large proportion of order flow that they privately observe.

Against this backdrop of declining North American corporate single-name CDS activity, about half of the trading activity in North American corporate single-name CDS reflected in the set of data that the Commission analyzed was between counterparties domiciled in the United States and counterparties domiciled abroad, as shown in Figure 3 below. Using the self-reported registered office location of the TIW accounts as a proxy for domicile, the Commission estimates that only 13% of the global transaction volume by notional volume between 2008 and 2020 was between two U.S.-domiciled counterparties, compared to 49% entered into between one U.S.-domiciled counterparty and a foreign-domiciled counterparty, and 38% entered into between two foreign-domiciled counterparties.

If the Commission instead considers the number of cross-border transactions from the perspective of the domicile of the corporate group ( e.g., by classifying a foreign bank branch or foreign subsidiary of a U.S. entity as domiciled in the United States), the percentages shift significantly. Under this approach, the fraction of transactions entered into between two U.S.-domiciled counterparties increases to 35%, and to 50% for transactions entered into between a U.S.-domiciled counterparty and a foreign-domiciled counterparty. By contrast, the proportion of activity between two foreign-domiciled counterparties drops from 38% to 15%. This change in respective shares based on different classifications suggests that the activity of foreign subsidiaries of U.S. firms and foreign branches of U.S. banks accounts for a higher percentage of SBS activity than U.S. subsidiaries of foreign firms and U.S. branches of foreign banks. It also demonstrates that financial groups based in the United States are involved in an overwhelming majority (approximately 85%) of all reported transactions in North American corporate single-name CDS.

Financial groups based in the United States are also involved in a majority of interdealer transactions in North American corporate single-name CDS. Of the 2020 transactions on North American corporate single-name CDS between two ISDA-recognized SBS dealers and their branches or affiliates, 81% of transaction notional volume involved at least one account of an entity with a U.S. parent. The Commission notes, in addition, that a majority of North American corporate single-name CDS transactions occur in the interdealer market or between SBS dealers and foreign non-SBS dealers, with the remaining portion of the market consisting of transactions between SBS dealers and U.S.-person non-SBS dealers. Specifically, 81% of North American corporate single-name CDS transactions involved either two ISDA-recognized SBS dealers or an ISDA-recognized SBS dealer and a foreign non-SBS dealer. Approximately 19% of such transactions involved an ISDA-recognized SBS dealer and a U.S.-person non-SBS dealer.

3. Distribution of Transaction Size

In proposing the definition of a block trade, the Commission has considered the distribution of transaction size in the single-name CDS market, which the Commission believes is representative of the market for SBS based on a single credit instrument (or issuer of credit instruments) or a narrow-based index of credit instruments (or issuers of credit instruments). Table 3 reports the total number of newly initiated price-forming CDS transactions referencing North American corporate single-name reference entities. The table also reports the number and percentage of such transactions with a size (notional amount) of at least $5 million. These statistics are reported for each year between 2011 and 2020 and for the entire ten-year period.

Overall, the number of newly initiated price-forming transactions exhibited a declining trend between 2011 and 2020. The number of such transactions decreased from around 180,000 in 2011 to around 90,000 in 2019, with an uptick to around 127,000 transactions in 2020. The number of newly initiated price-forming transactions with a notional size of at least $5 million also exhibits a declining trend between 2011 and 2020, but without an uptick in 2020. As a percentage of all newly initiated price-forming transactions, those with a notional size of at least $5 million fell from 88% to 23% between 2011 and 2020.

4. Other Markets and Regulatory Frameworks

The numerous financial markets are integrated, often attracting the same market participants that trade across corporate bond, swap, and SBS markets, among others. This is notwithstanding the fact that the SBS market is a small fraction of the swap market and the single-name CDS market, which falls under SEC jurisdiction, is smaller than the index CDS market, which falls under CFTC jurisdiction. For example, persons who register as SBS dealers and major SBS participants are likely also to be engaged in swap activity. In part, this overlap reflects the relationship between single-name CDS contracts, which are SBS, and index CDS contracts, which may be swaps or SBS. A single-name CDS contract covers default events for a single reference entity or reference security. Index CDS contracts and related products make payouts contingent on the default of index components and allow participants in these instruments to gain exposure to the credit risk of the basket of reference entities that comprise the index, which is a function of the credit risk of the index components. A default event for a reference entity that is an index component will result in payoffs on both single-name CDS written on the reference entity and index CDS written on indices that contain the reference entity. Because of this relationship between the payoffs of single-name CDS and index CDS products, the prices of these products depend upon one another, creating hedging opportunities across these markets.

These hedging opportunities mean that participants that are active in one market are likely to be active in the other. Commission staff analysis of approximately 4149 TIW accounts that participated in the market for single-name CDS in 2020 revealed that approximately 3096 of those accounts, or 75%, also participated in the market for index CDS. Of the accounts that participated in both markets, data regarding transactions in 2020 suggest that, conditional on an account transacting in notional volume of index CDS in the top third of accounts, the probability of the same account landing in the top third of accounts in terms of single-name CDS notional volume is approximately 61%; by contrast, the probability of the same account landing in the bottom third of accounts in terms of single-name CDS notional volume is only 11%. As a result of cross-market participation, informational efficiency, pricing and liquidity may spill over across markets.

Of the 44 registered SBS dealers, 41 are dually registered with the CFTC as swap dealers and are therefore subject to CFTC requirements for entities registered with the CFTC as swap dealers. Further, of the 44 registered SBS dealers, 27 have a prudential regulator.

5. Number of Entities That Likely Will Register as SBSEFs

Entities that will seek to register with the Commission as SBSEFs are likely to be SEFs that are active in the index CDS market. Currently, 20 SEFs have permanent or temporary registration with the CFTC. Of these SEFs, eight list index CDS for trading. If these SEFs were to list single-name CDS or other SBS for trading, they would be required to register as SBSEFs with the Commission. In 2021, index CDS volume on U.S. SEFs was distributed as follows: One SEF had the largest share of index CDS volume (in notional amount) at $8 trillion (69%); one SEF had the second largest share at $2.1 trillion (18%); and the remaining 13% of volume was shared among the other five SEFs. The Commission preliminarily believes that the number of SBSEF registrants most likely falls between two and eight, but acknowledges uncertainty around the upper end of this estimate. The Commission preliminarily believes that the likely number of SBSEF registrants would be five. The Commission invites commenters to provide feedback on the number of entities that will register as SBSEFs.

6. SBS Trading on Platforms

By analyzing SBS transactions reported to registered SDRs, the Commission has obtained a preliminarily estimate of the extent of SBS trading on platforms. Of the new transactions in credit SBS executed between November 8, 2021 and February 28, 2022, 6,131 were executed on platforms (2% of all new transactions in credit SBS transactions). During the same period, 44 new transactions in equity SBS were executed on platforms (less than 0.01% of all new transactions in equity SBS transactions), while no new transactions in interest rate SBS were executed on platforms. These observations suggest that the vast majority of SBS trading continues to be conducted bilaterally in the OTC market. The Commission invites commenters to provide feedback on the extent of SBS trading on platforms.

The Commission preliminarily identifies 11 platforms on which new SBS transactions were executed between November 8, 2021 and February 28, 2022. Of these 11 platforms, ten are foreign SBS trading venues and one is a U.S. SBS trading venue that is affiliated with a CFTC-registered SEF. Of the new transactions in credit SBS executed between November 8, 2021 and February 28, 2022, 2,126 were executed on non-U.S. platforms and involved at least one counterparty that is a U.S. person or a non-U.S. person whose performance under the SBS is guaranteed by a U.S. person (0.7% of all new transactions in credit SBS transactions). During the same period, 30 new transactions in equity SBS were executed on a non-U.S. platform and involved at least one counterparty that is a U.S. person or a non-U.S. person whose performance under the SBS is guaranteed by a U.S. person (less than 0.01% of all new transactions in equity SBS transactions).

7. Global Regulatory Efforts

In 2009, the G20 leaders—whose membership includes the United States, 18 other countries, and the European Union—addressed global improvements in the OTC derivatives market. They expressed their view on a variety of issues relating to OTC derivatives contracts. In subsequent summits, the G20 leaders have returned to OTC derivatives regulatory reform and encouraged international consultation in developing standards for these markets.

Foreign legislative and regulatory efforts have generally focused on five areas: (1) Moving standardized OTC derivatives onto organized trading platforms; (2) requiring central clearing of OTC derivatives; (3) requiring post-trade reporting of transaction data to trade repositories; (4) establishing or enhancing capital requirements for non-centrally cleared OTC derivatives transactions; and (5) establishing or enhancing margin and other risk mitigation requirements for non-centrally-cleared OTC derivatives transactions. The rules being proposed in this release concern the registration and regulation of SBSEFs, a type of organized trading platform.

As of the end of 2021, platform trading requirements were in force in 12 foreign jurisdictions while seven jurisdictions were in the process of proposing legislation or rules to implement platform trading requirements. Seven foreign jurisdictions have made determinations with respect to the specific OTC derivatives that are required to be traded on platforms.

8. Trading Models

Unlike the markets for cash equity securities and listed options, the market for SBS currently is characterized by bilateral negotiation in the OTC swap market; is largely decentralized; has many non-standardized instruments; and has many SBS that are not centrally cleared. The lack of uniform rules concerning the trading of SBS and the one-to-one nature of trade negotiation in SBS has resulted in different models for the trading of these securities, ranging from bilateral negotiations carried out over the telephone, to RFQ systems ( e.g., single-dealer and multi-dealer RFQ platforms) and central limit order books outside the United States, as more fully described below. The use of electronic media to execute transactions in SBS varies greatly across trading models, with some models 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 SBS 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, email, or other communications to contact directly a potential counterparty to negotiate an SBS transaction. Once the terms are agreed, the SBS transaction is executed and the terms are memorialized. In a bilateral negotiation, there might be no pre-trade or post-trade transparency available to the market place 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 SBS asset classes, and particularly for trading in less liquid SBS, in situations where the parties prefer a privately negotiated transaction, such as for a large notional transaction, 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.

Another model for the trading of SBS is the RFQ system. An RFQ system typically allows market participants to obtain quotes for a particular SBS by simultaneously sending messages to one or more potential respondents (SBS dealers). The initiating participant is typically required to provide information related to the request in a message, which may include the name of the initiating participant, SBS identifier, side, and size. SBS dealers that observe the initiating participant's request have the option to respond to the request with a price quote. These respondents are often, though not always, pre-selected. The initiating participant can then select among the respondents by either accepting one of multiple responses or rejecting all responses, usually within a “good for” time period. After the initiating participant and a respondent agree on the terms of the trade, the trade will then proceed to post-trade processing.

RFQ systems provide a certain degree of pre-trade transparency in that the initiating participant can observe the quotes it receives (if any) in response to its RFQ. The number of quotes received depends, in part, on the number of respondents that are invited to participate in the RFQ. As the Commission discussed elsewhere, several factors may influence the number of respondents that are invited to participate in an RFQ. First, the RFQ system itself may limit the total number of respondents that can be selected for a single RFQ, typically to five counterparties. This limitation may encourage SBS dealers to respond to RFQs, since it reduces the number of other SBS dealers they would compete with in any give request session. Second, the initiating participant may have an incentive to limit the degree of information leakage. If the trade the initiating participant is seeking to complete with the help of the RFQ is not completely filled in that one session, and other participants know this, quotes the initiating participant receives elsewhere may be affected, including in subsequent RFQ sessions. Third, respondents and initiators both have an incentive to limit price impact because of the expense it will add to the offsetting trade that must follow. Specifically, an SBS dealer who takes a position to fill a customer order through an RFQ will often subsequently offset that position in the interdealer market. If a large number of SBS dealers are invited to participate in an RFQ, this would lead to widespread knowledge that the SBS dealer with the winning bid will now try to offset that position, which could impact the prices available to that dealer in the interdealer market.

A third model for the trading of SBS is a limit order book system or similar system, which the Commission understands is not yet in operation for the trading of SBS in the United States but exists for the trading of SBS 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. In general, a limit order book system also provides greater pre- trade transparency than the two models described above, because participants can view bids and offers before placing their bids and offers. However, broadly communicating trading interest, particularly about a large trade, might increase hedging costs, and thus costs to investors, as reflected in the prices from the SBS dealers. The system can also provide post-trade transparency, to the extent that participants can see the terms of executed transactions.

The three models described above represent broadly the types of trading of SBS in the OTC market today. These examples may not represent every method in existence today, but the discussion above is intended to give an overview of the models without providing the nuances of each particular type.

C. Benefits, Costs, and Reasonable Alternatives

This section discusses the benefits and costs of the proposal. The section also discusses a number of alternatives that the Commission considered when formulating the proposed rules and amendments.

The Commission's consideration of the benefits and costs of the proposal takes into account the connection between the trade execution requirement and the mandatory clearing requirement mandated by Congress. The Dodd-Frank Act amends the SEA to require, among other things, the following with respect to SBS transactions: (1) Transactions in SBS must be cleared through a clearing agency if they are required to be cleared; and (2) if the SBS is subject to the clearing requirement, the transaction must be executed on an exchange or on an SBSEF registered under section 3D of the SEA or an SBSEF exempt from registration under section 3D(e) of the SEA, unless no SBSEF or exchange makes such SBS available for trading or the SBS is subject to the clearing exception in section 3C(g) of the SEA. The benefits and costs associated with the trade execution requirement would not materialize unless and until the Commission makes mandatory clearing determinations, i.e., determining what SBS transactions must be cleared by a clearing agency.

The Commission preliminarily believes that the general approach to proposing requirements relating to SBS execution could mitigate costs associated with the proposal. As discussed in section III, the Commission's approach is to harmonize as closely as practicable with analogous CFTC rules for SEFs, unless a reason exists to do otherwise in a particular area. Based on the Commission's preliminarily belief that SBSEF registrants likely would be registered SEFs that have established systems and policies and procedures to comply with CFTC rules, the Commission's general approach likely would result in compliance costs for registered SBSEFs that are lower than compliance costs that would have resulted had the Commission chosen not to follow the CFTC's approach.

In assessing the economic impact of the proposed rules, the Commission considers the broader costs and benefits associated with the application of the proposed rules, including the costs and benefits of applying the substantive Title VII requirements to the trading of SBS. The Commission's analysis also considers “assessment” costs— i.e., those that arise from current and future market participants expending resources to assess how they will be affected by Regulation SE, and could incur expenses in making this assessment even if they ultimately are not subject to rules for which they made an assessment.

Many of the benefits and costs discussed below are difficult to quantify. These benefits and costs would depend on how potential SBSEFs and their prospective members respond to the proposed rules, if adopted by the Commission. If potential SBSEFs perceive the costs associated with operating registered SBSEFs to be high, such that few or no entities come forward to register as SBSEFs, there could be no triggering of the trade execution requirement, which depends on MAT determinations made by registered SBSEFs (or exchanges). Under this scenario, the future state of the SBS market likely would not differ from the current baseline and the potential costs and benefits discussed below would not materialize. An alternative scenario is that prospective SBSEFs perceive the costs associated with operating registered SBSEFs to be high but nevertheless register as SBSEFs because they expect to be able to pass on such costs to their members to help maintain the commercial viability of operating a registered SBSEF. MAT determinations by registered SBSEFs would move trading of the products covered by the determinations onto SBSEFs, which could generate benefits and costs associated with increased pre-trade transparency, in addition to benefits and costs associated with the operation of regulated markets. A third possibility is that entities come forward to register as SBSEFs because they perceive the associated costs of operating SBSEFs to be low in light of the close harmonization of the proposed rules with analogous CFTC SEF rules. If these registered SBSEFs do not make MAT determinations and thus do not trigger the trade execution requirement, the benefits and costs associated with increased pre-trade transparency likely would not arise. If SBSEF trading is limited because of an absence of MAT determinations, the benefits and costs associated with the operation of regulated markets potentially would be limited as well. A fourth possibility is that entities do come forward to register as SBSEFs because they perceive the associated costs of operating SBSEFs to be low and these registered SBSEFs make MAT determinations and trigger the trade execution requirement. Under this scenario, the benefits and costs associated with increased pre-trade transparency and regulated markets likely would arise. The Commission does not have the data to determine which of the above possibilities will prevail should the proposed rules be adopted.

The Commission has attempted to quantify economic effects where possible, but much of the discussion of economic effects is necessarily qualitative. The Commission requests comment and, with regard to any comments, such comments are of greatest assistance if they are accompanied by supporting data and analysis of the issues addressed.

1. Overarching Benefits of the Proposal

Broadly, the Commission anticipates that proposed Regulation SE may bring several overarching benefits to the SBS market.

Improved Transparency. The proposal would enable the Commission to obtain information about SBSEFs, thereby facilitating the Commission's oversight of these entities.

In addition, the proposed requirements relating to pre-trade transparency would increase pre-trade transparency in the market for SBS. Increased pre-trade price transparency should allow an increased number of market participants to better see the trading interest of other market participants prior to trading, which should lead to increased price competition among market participants. The Commission preliminarily believes that the proposed requirements with respect to pre-trade price transparency should lead to more efficient pricing in the SBS market.

Evidence from the swap market suggests that an increase in pre-trade transparency is associated with improved liquidity and reduced transaction costs. The Commission is not aware of any difference between the swap market and the SBS market that would cause the empirical findings regarding the impact of pre-trade price transparency on liquidity and transaction costs not to carry over into the SBS market, when implemented. The Commission is mindful that, under certain circumstances, pre-trade price transparency could also discourage the provision of liquidity by some market participants. However, the Commission preliminarily believes that by proposing two execution methods for Required Transactions (limit order book and RFQ-to-3), market participants have flexibility in the degree of pre-trade transparency they wish to employ, which should attenuate potential concerns associated with the exposure of pre-trade trading interest.

Improved oversight of trading. Regulation SE would require, among other things, that SBSEFs maintain an audit trail and automated trade surveillance system; conduct real-time market monitoring; establish and enforce rules for information collection; and comply with reporting and recordkeeping requirements. These requirements are designed to provide an SBSEF with sufficient information to oversee trading on its market, including detecting and deterring abusive trading practices.

This framework could enhance investor protection and increase confidence in a well-regulated market among SBS market participants, which could in turn make them more willing to increase their participation or entice new participants. An increase in participation in the SBS market would, all else being equal, benefit the SBS market as a whole. Further, to the extent that market participants utilize SBS to better manage their risk with respect to a position in underlying securities or assets, their participation in the SBS market could impact their willingness to participate in the underlying asset markets. 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 SBS market is dominated by a small group of SBS dealers. A mandatory clearing determination by the Commission, followed by a MAT determination by one or more SBSEFs or exchanges, should help foster greater competition in the trading of SBS by promoting greater order interaction and increasing access to and participation on SBSEFs. The proposed rules would provide a framework for allowing a number of trading venues to register as SBSEFs and thus more effectively compete for business in SBS. Furthermore, proposed Rule 827 is designed to promote competition generally by prohibiting an SBSEF from adopting any rules or taking any actions that unreasonably restrain trade, or imposing any material anticompetitive burden on trading or clearing. In addition, proposed Rule 819(c) would, among other things, require an SBSEF to provide any ECP with impartial access to its market(s) and market services.

The proposed new rules and amendments to the Commission's Rules of Practice would allow persons who are aggrieved by a final disciplinary action, a final action with respect to a denial or conditioning of membership, or a final action with respect to a denial or limitation of access by an SBSEF to seek an application for review by the Commission. These proposed rules and amendments are designed to improve access to SBSEFs by creating a procedure for making appeals to the Commission, thereby limiting the ability of an SBSEF to make a disciplinary action, denial or conditioning of membership, or denial or limitation of access without any recourse by the affected party. Taken together, these proposed rules and amendments should foster greater access to SBSEFs by SBS market participants, which in turn could promote greater participation by liquidity providers on SBSEFs. Increased participation could increase competition in liquidity provision and lower trading costs, which may lead to increased participation in the SBS market.

Improved Commission oversight. One of the goals of the Dodd-Frank Act is to increase regulatory oversight of SBS trading relative to the existing OTC SBS market. The proposal would provide the means for the Commission to gain better insight into and oversight of SBSEFs and the SBS market by, among other things, allowing the Commission to review new rules, rule amendments, and product listings by SBSEFs and to obtain other relevant information from SBSEFs.

Additionally, proposed Rule 826(b) would require every SBSEF to keep full, complete, and systematic records of all activities relating to its business with respect to SBS. In addition, proposed Rule 819(f) would require an SBSEF to capture and retain a full audit trail of activity on its facility. The records required to be kept by an SBSEF would help the Commission to determine whether an SBSEF is operating in compliance with the SEA and the Commission's rules thereunder. The audit trail data required to be captured and retained would facilitate the ability of the SBSEF and the Commission to carry out their respective obligations under the SEA, by facilitating the detection of abusive or manipulative trading activity, allowing reconstructions of activity on the SBSEF, and generally understanding the causes of both specific trading events and general market activity.

Furthermore, proposed Rule 835 would require an SBSEF to provide the Commission notice of a final disciplinary action, a final action with respect to a denial or conditioning of membership, or a final action with respect to a denial or limitation of access, which would allow the Commission to review the SBSEF's disciplinary process and exercise of its regulatory powers, providing the Commission an additional tool to carry out its oversight responsibilities. The proposed registration requirements and related proposed Form SBSEF, and the CCO's annual compliance report, which are further discussed below, would also help the Commission with its oversight responsibilities.

Improved automation. To comply with the requirements of proposed Regulation SE relating to recordkeeping and surveillance, an SBSEF potentially would need to invest in and develop automated technology systems to store, monitor, and communicate a variety of trading data, including orders, RFQs, RFQ responses, and quotations. The proposed rules should promote increased automation in the SBS market, although CFTC-registered SEFs that plan to register as SBSEFs are already deploying automated systems that could be supplemented to support an SBS business. In addition, the automation and systems development associated with the regulation of SBSEFs could provide SBS market participants with new platforms and tools to execute and process transactions in SBS at a lower expense per transaction. Such increased efficiency could enable members of the SBSEF to handle increased volumes of SBS with greater efficiency.

2. Benefits Associated With Specific Proposed Rules

In addition to the broad benefits that the Commission anticipates as a result of proposed Regulation SE, individual rules could bring particular benefits to the SBS market. These include the following:

Registration requirements and Form SBSEF. SBSEF registration is required under the Dodd-Frank Act. Proposed Rule 818(a) incorporates the requirement under the Dodd-Frank Act that an SBSEF, in order to be registered and maintain registration, must comply with the Core Principles in section 3D(d) of the SEA and the Commission's rules thereunder. The registration process described in proposed Rule 803 would implement this statutory requirement and assist the Commission in overseeing and regulating the SBS market. The information to be provided on proposed Form SBSEF is designed to enable the Commission to assess whether an applicant has the capacity and the means to perform the duties of an SBSEF and to comply with the Core Principles and other requirements imposed on SBSEFs. Proposed Rule 803 is closely modelled on analogous CFTC registration requirements for SEFs. The choice to align the Commission's registration requirements for SBSEFs with the CFTC's requirements for SEFs is designed to achieve the abovementioned benefits while imposing only marginal costs on SBSEF registrants, who likely are SEFs.

Proposed exemptions (proposed Rule 833, proposed Rule 816(e), proposed amendments to Rule 3a1-1, and proposed Rule 15a-12). Proposed Rule 833 is designed to preserve access to foreign markets by “covered persons” (as defined in proposed Rule 832). As discussed in section XIX(B)(6), an analysis of SBS transaction data indicates that certain trades executed on foreign SBS trading venues involve at least one counterparty that is a covered person. Absent the proposed rule, these trading venues might elect to avoid having members that are covered persons if those venues do not wish to register with the Commission in some capacity (such as an exchange or SBSEF). In addition, covered persons would not be permitted to execute SBS that are subject to the trade execution requirement on these venues if the venues do not register with the Commission in some capacity (such as an exchange or SBSEF) or obtain an appropriate exemption. This would limit access to foreign SBS trading venues by covered persons, potentially making it harder for them to locate counterparties and obtain liquidity for SBS that trade on those venues. This in turn could increase their trading costs, because they might spend more time and effort to locate counterparties or because they have less bargaining power relative to the remaining pool of potential counterparties with which they could trade. To the extent that a foreign SBS trading venue can obtain a Rule 833(a) exemption, it could continue to provide members that are covered persons with access to and liquidity on its market. Furthermore, a Rule 833(b) exemption would allow covered persons to continue accessing foreign SBS trading venues to execute SBS that are subject to the SEA's trade execution requirement.

Currently, all trading venues that trade SBS—whether domestic or foreign—are exempt from having to register as a national securities exchange or SBSEF on account of the SBS trading business. This exemption expires when the Commission's rules for registering and regulating SBSEFs come into force. Thus, removal of the existing exemption would merely restore the status quo ante, where the SEA itself, as amended by the Dodd-Frank Act, requires entities meeting the definition of “security-based swap execution facility” or “exchange” and falling within the territorial jurisdiction of the SEA to register with the Commission. By offering foreign SBS trading venues the possibility of an exemption from the definitions of “security-based swap execution facility” and “exchange” as well as from section 3D(a)(1) of the SEA, proposed Rule 833(a) would allow foreign SBS trading venues to operate in conditions similar to the current baseline (if the Commission ultimately grants an exemption under Rule 833(a)).

Currently, market participants that trade SBS that would be covered by proposed Rule 816(e) do not trade these products on registered exchanges or registered SBSEFs. Proposed Rule 816(e), by providing exemptions from the trade execution requirement for these SBS, would preserve the status quo for these SBS.

Proposed paragraph (a)(4) of Rule 3a1-1 would provide that an entity that has registered with the Commission as an SBSEF and provides a market place for no securities other than SBS would not fall within the definition of “exchange” and thus would not be subject to the requirement in section 5 of the SEA to register as a national securities exchange (or obtain a low-volume exemption). The Commission preliminarily believes that the benefit of the proposed amendment would be to clarify to prospective SBSEF applicants that, if they register with the Commission as SBSEFs, they would not face duplicative registration and regulatory requirements as exchanges. In addition, proposed paragraph (a)(5) of Rule 3a1-1 would codify a series of exemptions that the Commission has granted over several years to SBS clearing agencies that operate “forced trading” sessions. Because the proposed amendment is intended to codify existing exemptions, the Commission preliminarily believes that any associated economic effects would be minimal.

Proposed new Rule 15a-12 is designed to minimize overlapping compliance burdens for SBSEFs, which are also brokers under the SEA, that restrict their activity to engaging in the business of operating an SBSEF (and no other broker activities). Absent the proposed rule, such SBSEFs (defined as “SBSEF-Bs” for purposes of Rule 15a-12) would need to register as SBSEFs and be subject to the SBSEF regulatory regime, in addition to registering as brokers and being subject to the broker regulatory regime. Proposed Rule 15a-12 would allow an SBSEF-B to satisfy the requirement to register as a broker by registering as an SBSEF under proposed Rule 803, and would exempt an SBSEF-B from SIPA and other broker requirements, except for sections 15(b)(4), 15(b)(6), and 17(b) of the SEA. As a result of the proposed rule, SBSEF-Bs could avoid incurring what the Commission preliminarily believes to be duplicative and unnecessary compliance burdens. Each SBSEF-B could save an estimated $324,849 in initial broker registration costs and $59,063 in annual ongoing costs of meeting broker registration requirements. In deriving these estimates, the Commission assumes that the activities an SBSEF-B performs to register and maintain registration as a broker do not overlap with those that it performs to register and maintain registration as an SBSEF-B. If there is an overlap in such activities, the estimated cost savings could be smaller. Each SBSEF-B could save an estimated $823 in ongoing costs associated with satisfying broker minimum capital requirements. The estimated aggregate initial and annual ongoing savings are $1,624,245 and $299,430, respectively.

Rule and product filings. Proposed Rules 806 and 807 would set forth alternative filing processes for a new rule or rule amendment of a registered SBSEF, and proposed Rules 804 and 805 would set forth alternative filing processes for an SBSEF to file an SBS product that it wishes to list. Proposed Rule 810 would address new product filings by an entity that has applied for SBSEF registration but has not yet been registered, or by a dormant SBSEF seeking reinstatement of its registration. The self-certification processes of Rules 804 and 807 would require SBSEFs to include a certification that the product, rule, or rule amendment, as the case may be, complies with the SEA and Commission rules thereunder. The information to be provided by the SBSEF under proposed Rules 804, 805, and 810 would further the ability of the Commission to obtain information regarding SBS that an SBSEF intends to list on its market. The proposed rules would assist the Commission in overseeing and regulating the trading of SBS and to help ensure that SBSEFs operate in compliance with the SEA.

In addition, proposed Rule 806(a)(5), which would require an SBSEF to explain the anticipated benefits and potential anticompetitive effects on market participants of a proposed new rule or rule amendment potentially could help foster a competitive SBS market because it could prompt SBSEFs to consider the positive as well as negative aspects of their proposed rules or rule amendments. Proposed Rule 808 is designed to facilitate the public's ability to obtain information from SBSEF applications as well as rule and product filings. Proposed Rule 808(a) would specify the parts of an SBSEF application that shall be made publicly available unless confidential treatment is obtained pursuant to SEA Rule 24b-2. Proposed Rule 808(b) would provide that an SBSEF's rule and product filings shall be made publicly available unless confidential treatment is obtained pursuant to SEA Rule 24b-2. Proposed Rule 808(c) would provide that the terms and conditions of a product submitted to the Commission pursuant to any of proposed Rules 804 through 807 shall be made publicly available at the time of submission unless confidential treatment is obtained pursuant to SEA Rule 24b-2.

Proposed Rule 809 would provide a mechanism for the staying or tolling of a filing by an SBSEF relating to a product while the appropriate jurisdictional classification of that product is determined. The proposed rule is designed to provide regulatory certainty for SBSEFs and market participants who may be interested in trading products whose classification as an SBS subject to SEC jurisdiction or a swap subject to CFTC jurisdiction is unclear. In particular, proposed Rule 809 would help ensure that determinations regarding whether the SEC or CFTC appropriately has jurisdiction over a product are made before the product is traded.

The Commission's election to model proposed Rules 804 through 810 closely on analogous rules in part 40 of the CFTC's rules that apply to SEFs (and other registered entities) is designed to promote efficiency. Utilizing the same processes for rule and product filings, with which dually registered SEF/SBSEFs are familiar, would impose only minimal burdens on such entities while obtaining the similar regulatory benefits as the CFTC rules. In some cases, where a new rule or rule amendment affects both the swap and SBS business of a dually registered entity, the same or a very similar filing could be made to each of the CFTC and SEC, in lieu of having to make different filings to support the same rule change.

Chief Compliance Officer. Proposed Rule 831 would, among other things, require the CCO of an SBSEF to submit an annual compliance report and annual financial report to the Commission. These reports would assist the Commission in carrying out its oversight of the SBSEFs and the SBS market by providing the Commission with information about the compliance activities and financial state of SBSEFs. Furthermore, by requiring an SBSEF to designate an individual as the CCO and making the CCO responsible for ensuring compliance with the SEA and the Commission's rules thereunder, proposed Rule 831 would promote regulatory compliance on SBSEFs and the SBS market generally. This in turn would further the goal of moving SBS trading away from opaque and unregulated OTC markets and onto transparent and regulated markets by promoting effective regulation of the latter.

Conflicts of Interest. Proposed Rule 831 would, among other things, require the CCO to resolve material conflicts of interest that may arise in consultation with the governing board or the senior officers of the SBSEF. Proposed Rule 828(a) would require an SBSEF 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. Proposed Rule 828(b) would require an SBSEF to comply with the requirements of proposed Rule 834 which is designed to implement section 765 of the Dodd-Frank Act with respect to SBSEFs and SBS exchanges. Proposed Rule 834 would, among other things, impose a 20% cap on the voting interest held by an individual member of an SBSEF or SBS exchange, mitigate conflicts of interest in the disciplinary process of an SBSEF or SBS exchange, set forth certain minimum requirements for the composition of the governing board of an SBSEF or SBS exchange, set forth reporting requirements related to governing board elections, and address the avoidance of conflicts of interest in the execution of regulatory functions by an SBSEF or SBS exchange.

The Commission preliminarily believes that the proposed rules would mitigate conflicts of interest between an SBSEF or SBS exchange and its members as discussed in section X. Relative to the bilateral OTC SBS market, SBSEFs and SBS exchanges promote competition between liquidity providers, potentially forcing them to lower their prices for supplying liquidity ( e.g., narrowing bid-ask spread) and reducing their profits from liquidity provision. However, if SBS dealers or major SBS participants were able to restrict access to such venues by, for example, exercising their voting interest in an SBSEF or SBS exchange, they could stifle competition in SBSEFs and SBS exchanges and preserve their profits from liquidity provision. The proposal, by mitigating such conflicts of interest could help ensure access to SBSEFs and SBS exchanges and in turn increase competition in liquidity provision and lower transaction costs. The Commission preliminarily believes that proposed Rules 834(e), (f), and (g) also may promote good governance at SBSEFs and SBS exchanges. To the extent that improved governance result in more effective oversight by SBSEFs and SBS exchanges of their markets, market participants may benefit. These benefits could be limited to the extent that prospective SBSEFs and SBS exchanges already have rules in place that comply with the proposed rules.

Structured Data Requirement. Proposed Rule 825(c)(3) would require an SBSEF to publish a Daily Market Data Report on its website without charge or usage restrictions and in a downloadable and machine-readable format using the most recent version of the associated XML schema and PDF renderer as published on the Commission's website. The Commission preliminarily believes that requiring the Daily Market Data Report to be provided in a structured, machine-readable format (using a Commission-created XML schema) would facilitate the use of the price, trading volume, and other trading data on the report by end users such as SBS market participants and market observers. By including a structured data requirement, the information in the report would be made available in a consistent and openly accessible manner that would allow for automatic processing by software applications, thus enabling search capabilities and statistical and comparative analyses across SBSEFs and date ranges. Absent a structured data requirement, any SBS market participants and market observers seeking to use the data would have to spend time manually collecting and entering the data into a format that allows for analysis, thus increasing the time needed to analyze the data and potentially leading to data errors. Alternatively, data users could choose to subscribe to a service provider specializing in such a data aggregation and comparison process. Under that scenario, data users would be unable to access the posted data on as timely a basis as they would if the disclosures were machine-readable upon posting, and users would also incur monetary costs in paying for the aggregated data.

Proposed Regulation SE would require SBSEFs to file documents required under various provisions in the EDGAR system using Inline XBRL, a structured (machine-readable) data language. Requiring a centralized filing location and a machine-readable data language for the filings would facilitate access, retrieval, analysis, and comparison of the disclosed information across different SBSEFs and time periods by the Commission and the public, thus potentially augmenting the informational benefits of the various disclosure requirements discussed herein. Also, because EDGAR provides basic technical validation capabilities, the use of EDGAR could reduce the incidence of technical errors ( e.g., letters instead of numbers in a field requiring only numbers) and thereby improve the quality of the disclosures.

Unlike the XML schema that would be used for Daily Market Data Reports, Inline XBRL would provide the ability to tag detailed facts within narrative text blocks, and is thus likely more well-suited to accommodate the other filings required under proposed Regulation SE, many of which require narrative discussions ( e.g., the explanation and analysis of the product and its compliance with applicable provisions of the SEA for a product filing required under Rule 804). In addition, certain proposed SBSEF disclosures consist of financial information ( e.g., the financial statements of the SBSEF required under Exhibit I to Form SBSEF), and Inline XBRL is designed specifically for the accurate capture and communication of financial information, among other uses.

3. Costs

Although the Commission preliminarily believes that proposed Regulation SE would benefit the SBS market, the Commission recognizes that the proposed Regulation SE also would entail certain 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 SBSEFs under the Dodd-Frank Act may impact the incentives of market participants with respect to where and how they trade SBS. 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 SBSEFs, which would not further the goal of moving a greater percentage of SBS trading from opaque and unregulated OTC markets to transparent and regulated trading venues. In addition, if the proposed rules for trading on an SBSEF are perceived as too burdensome by market participants, SBS trading may continue in the OTC market absent a mandatory clearing determination and a triggering of the mandatory trade execution requirement, thus frustrating the goals of the Dodd-Frank Act. At the same time, if the proposed rules relating to SBSEFs are too lenient, they may have little or no impact on the market structure and surveillance of the SBS market relative to the status quo, which could result in the loss of many of the benefits discussed above and fail to achieve the goals of the Dodd-Frank Act.

In addition, SBS traded on SBSEFs may be perceived to be subject to increased costs, monetary and otherwise. For example, the proposed requirements related to pre-trade transparency could cause 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 SBS market. An additional impact of pre-trade transparency are perceived costs associated with front running, if customers or SBS 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. If market participants view the Commission's proposal as too burdensome with respect to pre-trade transparency, SBS dealers may be less willing to supply liquidity for SBS that trade on SBSEFs or exchanges, thus adversely affecting liquidity and competition. However, such effects could be mitigated by MAT determinations that would require SBS trading to occur on SBSEFs or exchanges. On the other hand, if the proposed requirements with respect to pre-trade transparency are 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 the Dodd-Frank Act. This actual impact would depend 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 SBSEFs.

The Commission preliminarily believes that there would be transaction costs, such as fees and connectivity costs, that trading counterparties would incur in executing or trading SBS subject to the trade execution requirement on SBSEFs. Likewise, although unregulated trading venues exist in today's OTC derivatives market, the Commission does not have information regarding what, if any, fees and connectivity costs are associated with transacting on these unregulated trading venues. The Commission invites commenters to provide feedback on the likely fees and costs associated with transacting on SBSEFs as well as fees and costs associated with transacting on unregulated trading venues that exist in today's OTC derivatives market.

As discussed in section XIX(B), the Commission preliminarily believes that prospective SBSEF registrants are likely to be CFTC-registered SEFs that are active in the index CDS market. Because the proposed rules are harmonized as closely as practicable with analogous CFTC rules for SEFs, unless a reason exists to do otherwise in a particular area, the Commission preliminarily believes that much of the systems, policies, and procedures that are used to support SEF trading also could be used to support SBSEF trading. The prospective SBSEF registrants likely would incur marginal costs associated with listing SBS products on their venues and making limited changes to their systems, policies, and procedures to comply with proposed SEC rules that differ slightly from analogous CFTC rules. The Commission preliminarily estimates the one-time costs associated with such changes to systems, policies, and procedures would range between $25,000 and $1.5 million per SBSEF, depending on the changes needed. The annual ongoing costs of maintaining the technology ( e.g., ensuring any necessary technological updates and improvements are made) and applying the technology to ongoing compliance requirements are estimated to be in the range of $1 million to $2 million. The Commission invites commenters to provide feedback on the costs that SEFs may incur should they register as SBSEFs.

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 XX.

a. Registration Requirements for SBSEFs and Form SBSEF

The Commission preliminarily believes that the proposed registration provisions would impose costs on entities that seek registration as SBSEFs. The Commission preliminarily estimates that initial filings on Form SBSEF by prospective SBSEFs seeking to register with the Commission pursuant to proposed Rule 803 would result in aggregate initial costs of $94,400 for prospective SBSEFs.

b. Ongoing Compliance With Other Requirements That Are Similar to the Remainder of Part 37

As discussed in section XX(D)(2)(b), the Commission preliminarily estimates the aggregate annual paperwork burden for SBSEFs to comply with all of the proposed SBSEF rules that have analogs in part 37 to be 1935 hours. These burdens are estimated to impose aggregate ongoing annual costs of $123,840 on SBSEFs.

c. Rule and Product Filing Processes for SBSEFs

The Commission preliminarily estimates that the aggregate ongoing annual costs incurred by all SBSEFs to prepare and submit rule and product filings under proposed Rules 804, 805, 806, and 807 (including the cover sheet) would be $31,200.

d. Proposed Rules 809, 811, 819, 826, 829, 833, 834, and 835

The Commission preliminarily estimates the aggregate ongoing annual costs incurred by SBSEFs to comply with proposed Rule 809 would be $108.

The Commission preliminarily estimates the aggregate ongoing annual costs incurred by SBSEFs to comply with requests for documents or information pursuant to proposed Rule 811(d) would be $88.

The Commission preliminarily estimates the aggregate ongoing annual costs incurred by SBSEFs to comply with proposed Rule 819(i) would be $25,546.

The Commission preliminarily estimates the aggregate ongoing annual costs incurred by SBSEFs to comply with proposed Rule 819(j) would be $1,135.

The Commission preliminarily estimates the aggregate ongoing annual costs incurred by SBSEFs to update information required by proposed Rule 826(f) would be $152. The Commission preliminarily estimates that interested parties would incur aggregate one-time costs of $108,960 in the first year and $72,640 in each subsequent year to submit exemption requests under one or both paragraphs of proposed Rule 833.

The Commission preliminarily estimates that SBSEFs and SBS exchanges would incur aggregate one-time costs of $47,880 associated with drafting and implementing rules to comply with proposed Rules 834(b) and (c).

The Commission preliminarily estimates that SBSEFs and SBS exchanges would incur aggregate ongoing annual costs of $640 to comply with proposed Rules 834(d), 834(e), and 834(f).

The Commission preliminarily estimates that SBSEFs and SBS exchanges would incur aggregate one-time costs of $1,024 to comply with proposed Rule 834(g).

The Commission preliminarily estimates that SBSEFs would incur aggregate ongoing annual costs of $20,430 to comply with proposed Rule 835.

The Commission preliminarily believes that SBSEFs likely would incur costs to comply with the financial resources requirement of proposed Rule 829(b). Assuming that SBSEFs satisfy this requirement by holding financial resources in the form of their own capital pursuant to proposed Rule 829(c)(1), the Commission preliminarily estimates that SBSEFs would incur an aggregate annual cost of capital of $33,377. SBSEFs could lower this cost if their capital consists of financial assets that generate a return that would serve to offset the cost of capital. However, this cost mitigation is potentially limited by proposed Rule 829(d), which would require an SBSEF to include among the financial resources it holds, a certain amount of unencumbered, liquid financial assets ( i.e., cash and/or highly liquid securities), that tend to generate little or no return.

e. Assessment Costs

The Commission preliminarily believes that 87 entities likely would incur assessment costs as a result of proposed Rule 832, based on an analysis of counterparties to U.S. single-name CDS. Such costs would be related primarily to the identification of the counterparty status and origination location of the transaction to determine whether the trade execution requirement would apply. The Commission preliminarily believes that market participants would request representations from their transaction counterparties to determine the U.S.-person status of their counterparties. In addition, if the transaction is guaranteed by a U.S. person, the guarantee would be part of the trading documentation and, therefore, the existence of the guarantee would be a readily ascertainable fact. Similarly, market participants would be able to rely on their counterparties' representations as to whether a transaction is arranged, negotiated or executed by a person within the United States. Therefore, the Commission preliminarily believes that the assessment costs associated with proposed Rule 832 should be limited to the costs of establishing a compliance policy and procedure of requesting and collecting representations from trading counterparties and maintaining the collected representations as part of the market participants' recordkeeping procedures. The Commission preliminarily believes that such assessment costs would be approximately $18,160 per entity. The Commission preliminarily believes that requesting and collecting representations would be part of the standardized transaction process reflected in the policies and procedures regarding SBS transactions and trading practices and should not result in separate assessment costs.

The Commission also considers the likelihood that market participants could implement systems to keep track of counterparty status for purposes of future trading of SBS that are similar to, if not the same as, the systems implemented by market participants for purposes of assessing SBS dealer or major SBS participant status. Implementation of such a system would involve one-time programming costs of $14,802 per entity. Therefore, the Commission estimates the total one-time costs per entity associated with proposed Rule 832 could be $32,962 and the aggregate one-time costs could be $2,867,694. To the extent that market participants have incurred costs relating to similar or the same assessments with respect to counterparty status and transaction location for other Title VII requirements, their assessment costs with respect to proposed Rule 832 may be less.

f. Structured Data Costs

The Commission preliminarily believes that SBSEFs would likely incur limited costs to comply with the proposed requirement in Rule 825(c)(3) to publish Daily Market Data Reports using the most recent versions of the associated XML schema and PDF renderer as published on the Commission's website. Because SBSEFs are required to use a structured format to fulfill their reporting requirements under Regulation SBSR, the compliance cost associated with the Rule 825(c)(3) requirement would be limited to the cost prospective SBSEF registrants would incur to update their systems to incorporate the Commission's XML schema for Daily Market Data Reports. Such costs are included among the costs for prospective SBSEF registrants in making limited changes to their systems, policies, and procedures to comply with proposed SEC rules that differ slightly from analogous CFTC rules, as discussed in further detail above.

With respect to the proposed Inline XBRL requirement for other documents required under proposed Regulation SE, the Commission preliminarily believes that SBSEFs would incur initial Inline XBRL implementation costs (such as the cost of training in-house staff to prepare filings in Inline XBRL, and the cost to license Inline XBRL filing preparation software from vendors) and ongoing Inline XBRL compliance burdens that would result from the proposed tagging requirement, because prospective SBSEF registrants are not currently subject to Inline XBRL requirements. Similarly, because prospective SBSEF registrants are not currently subject to EDGAR requirements, the Commission preliminarily believes they will incur a one-time compliance burden of submitting a Form ID as required by Rule 10(b) of Regulation S-T. The aforementioned costs are included among the costs for prospective SBSEF registrants in making limited changes to their systems, policies, and procedures to comply with proposed SEC rules that differ slightly from analogous CFTC rules, as discussed in further detail above.

4. Reasonable Alternatives

The Commission considered a number of alternatives when formulating the proposed rules and amendments.

In developing proposed Regulation SE, the Commission considered the alternative of not harmonizing its rules with analogous CFTC rules. As discussed in sections II and XIX(B), the entities that are most likely to register with the Commission as SBSEFs are those already registered with the CFTC as SEFs. These entities have made substantial investments in systems, policies, and procedures to comply with and adapt to the regulatory system developed by the CFTC. Under the proposed approach of harmonizing with CFTC rules to the extent possible, dually registered entities could utilize their existing systems, policies, and procedures to comply with the Commission's SBSEF rules, and SEF market participants would face no or only incremental changes to trade SBS as well as swaps on those facilities, and to comply with the Commission's rules regarding SBS trading. Under the alternative approach whereby the Commission establishes different or additive requirements, dually registered entities and their market participants might need to incur costs and burdens to modify their systems, policies, and procedures to comply with the SEC-specific rules. Further, proposed requirements that are significantly different from the rules that apply to the swap market could cause SEFs to question whether it is economically viable to enter the SBS market and to register with the Commission as SBSEFs. The Commission preliminary believes that the proposed approach would deliver to the SBS market the regulatory benefits generated by the CFTC regulatory framework and help promote the trading of SBS on regulated platforms, while imposing only limited costs on SBSEFs. The Commission preliminarily believes that this trade-off is preferable to the trade-off associated with the alternative approach.

In formulating the proposed definition of “block trade,” the Commission considered the alternative of harmonizing the third prong of the proposed definition with the third prong of the CFTC definition of “block trade.” The third prong of the CFTC definition characterizes a block trade in a particular swap as having “a notional or principal amount at or above the appropriate minimum block size applicable to such swap.” As discussed in section VII(E), because SBS are not within the CFTC's jurisdiction, the CFTC has never considered what an appropriate minimum block size threshold would be for any SBS asset class. There is no CFTC-defined threshold with which to harmonize when formulating the third prong of the proposed definition of “block trade.” Accordingly, the Commission preliminarily believes that establishing a threshold tailored specifically for the SBS market is preferable to the alternative.

In formulating proposed Rule 804(a)(2), the Commission considered the alternative of proposing a one-business-day review of a self-certified SBS product before an SBSEF could list the product. This alternative would harmonize with the parallel provision in § 40.2(a). The Commission preliminarily believes that a ten-business-day review period for self-certified SBS products before they can be listed strikes a reasonable balance between allowing SBSEFs to bring new products to market quickly while affording the Commission staff a reasonable period in which to assess them. The proposed ten-business-day review period for self-certified products also accords with the CFTC's ten-business-day review period for self-certified rules, which the Commission is proposing to replicate in Rule 807(a)(3). Thus, the Commission preliminarily believes the proposed approach is preferable to the alternative.

In formulating proposed Rule 825(c), which would require an SBSEF to publish a “Daily Market Data Report” on its website, the Commission considered the alternative of requiring SBSEFs to submit the information in such reports directly to the Commission. The Commission believes that the regulatory data that it is receiving pursuant to Regulation SBSR would generate the same information as that contained in such reports. Thus, the Commission preliminarily believes that the proposed approach is preferable to the alternative because it would relieve SBSEFs of the need to send daily reports to Commission while preserving the Commission's ability to be informed about SBSEF market activity via the regulatory data it receives pursuant to Regulation SBSR.

The Commission also considered the alternative of requiring a structured data language other than Inline XBRL for SBSEF filings. For example, the Commission could create an XML-based data language ( i.e., an XML schema) specific to SBSEF filings, similar to the XML schema to be used for Daily Market Data Reports under proposed Rule 825. The Commission preliminarily believes, however, that Inline XBRL would be more suitable for SBSEF filings to the Commission. As noted, unlike an XML schema that would be used under this alternative, Inline XBRL would provide the ability to tag detailed facts within narrative text blocks, and is thus likely more well-suited to accommodate the other filings required under proposed Regulation SE, many of which require narrative discussions ( e.g., the explanation and analysis of the product and its compliance with applicable provisions of the SEA for a product filing required under Rule 804). In addition, certain proposed SBSEF disclosures consist of financial information ( e.g., the financial statements of the SBSEF required under Exhibit I to Form SBSEF), and Inline XBRL is designed specifically for the accurate capture and communication of financial information, among other uses.

Another alternative that the Commission considered is to require that an exemption order under proposed Rule 833(a) could apply to a foreign trading venue only if it traded SBS and no other types of securities. Under this alternative, an exemption order would be unavailable to a foreign trading venue that trades SBS and other types of securities. The Commission preliminarily believes, however, that this alternative is unnecessary. Other jurisdictions might have market structures where it is common to trade SBS and other types of securities on the same trading venue. The Commission preliminarily believes that it would be inequitable to disqualify such jurisdictions ex ante from qualifying for a Rule 833(a) exemption.

In connection with the proposed amendments to Rule 3a1-1, the Commission considered the alternative of applying the retraction provisions of Rule 3a1-1(b) to SBSEFs and clearing agencies that are covered by proposed paragraphs (a)(4) and (a)(5), respectively, of Rule 3a1-1. Under this alternative, if a registered SBSEF or a registered clearing agency were to grow above a certain size, its exemption under proposed paragraph (a)(4) or (a)(5), respectively, could be retracted, forcing it to register as a national securities exchange.

The Commission preliminarily believes that, in adopting section 3D of the SEA, Congress gave the Commission a mechanism to regulate SBSEFs of any size. Nothing in section 3D suggests that, if an SBSEF were to grow above a certain size, the Commission should be able to withdraw that entity's ability to operate as an SBSEF and instead compel it to register as a national securities exchange. The Commission preliminarily believes that it is not necessary to apply the retraction provisions in Rule 3a1-1(b) to registered clearing agencies that engage in forced trading sessions and are covered by proposed Rule 3a1-1(a)(5). SBS transactions effected using this functionality are designed to facilitate the clearance and settlement process, and forced trading sessions are carried out by registered clearing agencies under rules that have been approved by the Commission. This trading functionality is not effected for the purpose of conducting open-market transactions. Therefore, the Commission preliminarily believes that it would not be appropriate to apply the retraction provisions of Rule 3a1-1(b) to clearing agencies that would be covered by proposed Rule 3a1-1(a)(5), as this would force these clearing agencies also to register as national securities exchanges. For the above reasons, the Commission preliminarily believes that the proposed approach is preferable to this alternative.

In connection with proposed Rule 15a-12, the Commission considered the alternative of not exempting SBSEF-Bs from section 17(a) of the SEA, which requires a registered broker (among other types of registered entity) to make and keep records as prescribed by Commission rule. This approach would subject SBSEF-Bs to the full scope of the Commission's books and records rules under section 17(a). The Commission is proposing instead to utilize proposed Rule 15a-12 to exempt SBSEF-Bs from section 17(a), among other provisions applying to brokers, and instead to subject SBSEF-Bs to proposed new Rule 826, which derives its statutory authority from Core Principle 9 in section 3D of the SEA. This approach would allow the Commission to tailor a books and records rule specifically to the limited business as an SBSEF-B and to better harmonize with the books and records requirements of the CFTC to which the SBSEF-B would likely also be subject.

D. Effects on Efficiency, Competition, and Capital Formation

Proposed Regulation SE and the other proposed rules and rule amendments would likely affect competition, capital formation, and efficiency in various ways discussed below.

1. Competition

As discussed earlier, currently, the SBS market is dominated by a small group of SBS dealers. A mandatory clearing determination by the Commission, followed by a MAT determination by one or more SBSEFs, should help foster greater competition in the trading of SBS by promoting greater order interaction and increasing participation on SBSEFs. Further, proposed rules that improve access to SBSEFs by market participants could increase participation and competition in liquidity provision in the SBS market. To the extent that increased competition in liquidity provision reduces the price of liquidity provision ( e.g., bid-ask spread), market participants could benefit in terms of lower transaction costs.

2. Capital Formation

The Commission preliminary believes that the proposal could promote capital formation by helping to improve regulatory oversight and market integrity. Regulation SE would require, among other things, that SBSEFs maintain an audit trail and automated trade surveillance system; conduct real-time market monitoring; establish and enforce rules for information collection; and comply with reporting and recordkeeping requirements. These requirements are designed to provide an SBSEF with sufficient information to oversee trading on its market, including detecting and deterring abusive trading practices. The proposed audit trail and recordkeeping and reporting requirements, by providing the Commission access to information about SBSEFs, would increase the Commission's ability to assess risks in the SBS market and to oversee the market, which all else being equal should reduce the amount of risky or abusive behavior in the SBS market. Further, proposed Rule 831, the proposed requirements relating to the CCO, would promote regulatory compliance on SBSEFs and the SBS market generally. In addition, the proposal would provide for various safeguards to help promote market integrity, including proposed Rule 819(c) relating to impartial access to the SBSEF and proposed Rule 830 relating to systems safeguards. Any resulting increase in regulatory oversight and market integrity likely would increase market participants' confidence in the soundness and fairness of SBSEFs, which in turn could spill over into increased confidence in the soundness and fairness of the SBS market more broadly. Such increased confidence could lead to the greater use of SBS, particularly those traded on SBSEFs, by corporate entities to hedge their business risks and investors to hedge their portfolio risks with respect to positions in underlying securities. To the extent that corporate entities can improve their hedging efficiency with SBS, they may divert resources from precautionary savings into productive assets, thereby promoting capital formation. To the extent that investors can improve their hedging efficiency with SBS, they may be more willing to invest in the underlying securities, which should facilitate capital raising and formation by issuers. Therefore, the Commission preliminarily believes that the proposed rules would help encourage capital formation.

By reducing the risk of trading disruptions on SBSEFs, proposed Rules 829 and 830 could lead to the greater use of SBS traded on SBSEFs. This in turn could promote capital formation as discussed above.

3. Efficiency

The Commission preliminarily believes that the proposed requirements with respect to pre-trade price transparency could lead to more efficient pricing in the SBS market. The proposed rules are designed to increase pre-trade price transparency for SBS, which should aid market participants in evaluating current market prices for SBS, thereby furthering more efficient price discovery. Price transparency, coupled with increased competition in liquidity provision as discussed above, could further decrease the spread in quoted prices, and thus could lead to higher efficiency in the trading of these securities.

The Commission recognizes the possibility that pre-trade price transparency could cause market participants to reveal more information about trading interest than they believe would be economically desirable. If market participants consider that pre-trade price transparency requirements are too burdensome and choose not to participate in the market, market efficiency could be reduced insofar as these market participants forgo any potential economic benefits that may have resulted from transacting in the SBS market. The Commission preliminarily believes that several factors mitigate such concerns. First, pursuant to proposed Rule 815(c)(2), an SBSEF may offer any execution method for Permitted Transactions. Thus, a market participant engaging in a Permitted Transaction may choose to use an execution method that reveals only the desired amount of information about trading interest. Second, pursuant to proposed Rule 815(a)(2), and as discussed earlier, an SBSEF would be required to offer two execution methods for Required Transactions (limit order book and RFQ-to-3). Thus, market participants have flexibility in the degree of pre-trade transparency they wish to employ, which should attenuate potential concerns associated with revealing too much information about trading interest.

The Commission preliminarily believes that the proposed Rules 829 and 830 may reduce the risk of trading disruptions on SBSEFs that may otherwise prevent market participants from impounding information into SBS prices through market activity ( e.g., order submission), and thus could improve the price efficiency in the SBS market.

F. Request for Comment

The Commission is requesting comment regarding the economic analysis set forth herein. To the extent possible, the Commission requests that market participants and other commenters provide supporting data and analysis with respect to the benefits, costs, and effects on competition, efficiency, and capital formation of adopting the proposed rules and amendments or any reasonable alternatives. In addition, the Commission asks commenters to consider the following questions:

212. What additional qualitative or quantitative information should the Commission include as part of the baseline for its economic analysis of the proposed rules and amendments?

213. What additional information can the Commission use to estimate the costs and benefits of implementing the proposed rules and amendments?

214. Has the Commission considered all relevant aspects of the proposed rules and amendments? Has the Commission accurately described the costs and benefits of the proposed rules and amendments? Why or why not? Please identify any other benefits associated with the proposed rules and amendments in detail. Please identify any costs associated with the proposed rules and amendments that the Commission has not identified. If possible, please provide quantification or data that would enable a quantification of such effects.

215. What are the economic effects of the discussed reasonable alternatives? Are there any additional reasonable alternatives that the Commission should include? If so, please identify such alternatives and any economic effects associated with such alternatives. If possible, please provide data that would enable a quantification of such effects.

216. The Commission preliminarily estimates that five CFTC-registered SEFs likely would register as SBSEFs. How many entities do you believe will seek to register with the Commission as SBSEFs? Of these, how many would be CFTC-registered SEFs seeking to be dually-registered SEF/SBSEFs and how many would be standalone SBSEFs?

217. Are SBS products being traded on unregistered SBSEFs? If so, please provide data on (1) the types of SBS that are being traded on unregistered SBSEFs; and (2) the volume of such SBS that are being traded on unregistered SBSEFs.

218. Does the Commission's description of SBS trade execution practices accurately capture the trade execution practices currently used in the trading of SBS? If not, please identify and describe the execution practices that are currently used to trade SBS.

219. What costs would CFTC-registered SEFs incur if they elect to register and operate as SBSEFs under proposed Regulation SE? Would these entities incur costs associated with the de novo formation of an SBSEF? Alternatively, would they incur costs associated with listing SBS products on their venues and making limited changes to their systems, policies, and procedures to the extent that the proposed rules differ from analogous CFTC rules? Are there other costs that have not been identified?

220. What would be the likely fees and costs associated with transacting on SBSEFs? What are the fees and costs associated with transacting on unregulated trading venues that exist in today's OTC derivatives market?

XX. 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”). 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(d) and 5 CFR 1320.11. The title of the new collection of information is “Regulation SE.” As proposed, Regulation SE would create a regime for the registration and regulation of SBSEFs and address other issues relating to SBS execution.

In addition, the Commission is proposing to amend Rule 3a-1 under the SEA to exempt a registered SBSEF from the statutory definition of “exchange.” Furthermore, the Commission is proposing new Rule 15a-12 under the SEA that, while affirming that an SBSEF also would be a broker under the SEA, would exempt a registered SBSEF from certain broker requirements under the SEA.

Proposed Regulation SE would include rules regarding the registration of a prospective SBSEF on Form SBSEF, the filing of new or amended rules or new products with the Commission, and rules harmonizing the Commission's SBSEF regime with the CFTC's parallel SEF regime. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the agency displays a currently valid OMB control number.

A. Summary of Collection of Information

The proposed rules and rule amendments would include a collection of information within the meaning of the PRA for SBSEFs that would be required to comply with Regulation SE and file a Form SBSEF with the Commission. In addition, proposed Rule 833 would include a collection of information within the meaning of the PRA for persons that wish to seek an exemption order under that rule, and proposed Rule 834 would include a collection of information within the meaning of the PRA for SBS exchanges (in addition to SBSEFs).

Many of the proposed rules that comprise Regulation SE are modelled after analogous CFTC rules with only minor edits to reflect differences between the statutory regimes of the two agencies. Entities that are most likely to register with the Commission as SBSEFs are those already registered with the CFTC as SEFs. Such entities have made substantial investments in systems, policies, and procedures to comply with and adapt to the regulatory system developed by the CFTC. Harmonization would allow such dually-registered entities to utilize their existing systems, policies, and procedures to comply with the Commission's SBSEF rules, and SEF members would likely face only marginal additional burdens to trade SBS as well as swaps on those SEF/SBSEFs. In light of these factors, the Commission has based many of its paperwork burden estimates on CFTC burden estimates calculated for analogous CFTC rules. The CFTC estimated PRA burdens by aggregating the burdens produced by a group of related rules, as explained more fully in section XX(D) below. In most cases, the Commission has modelled its methodology, assumptions, and calculations on those of the CFTC, while making adjustments that reflect differences between the scale of the market for swaps relative to the market for SBS, such as the estimated number of SBSEFs, number of SBS market participants, and number of SBS transactions, as necessary.

The following is a summary of the rules contained in proposed Regulation SE. The paperwork burdens associated with proposed Regulation SE are discussed in section XX(D) below.

B. Proposed Use of Information

1. Registration Requirements and Form SBSEF

Proposed Regulation SE would impose various requirements relating to SBSEF registration, which are set forth in proposed Rule 803.

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 an SBSEF; to monitor and oversee SBSEFs; to determine that SBSEFs initially comply, and continue to operate in compliance, with the SEA, including the Core Principles applicable to SBSEFs; to carry out its statutorily mandated oversight functions; and to maintain accurate and updated information regarding SBSEFs. Because the registration information would be publicly available, it could also be useful to an SBSEF's members, other market participants, other regulators, and the public generally.

2. Requirements for SBSEFs To Establish Rules

Various provisions of proposed Regulation SE would require SBSEFs to establish certain rules, policies, and procedures to comply with applicable requirements of the SEA and the Commission's rules thereunder. The rules also would help an SBSEF's members to understand and comply with requirements of the SBSEF.

3. Reporting Requirements for SBSEFs

Various provisions of proposed Regulation SE would require SBSEFs and certain other persons to submit reports or provide specified information. This information generally would be used by the Commission in its oversight of SBSEFs and the SBS markets; certain of the information to be collected could be used by market participants to confirm their SBS transactions.

4. Recordkeeping Required Under Regulation SE

Proposed Regulation SE would require an SBSEF to keep specified records. The audit trail information required to be maintained under proposed Regulation SE would aid the SBSEF 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 an SBSEF monitor trading in SBS, including through comprehensive and accurate trade reconstructions. In addition, Commission access to these records would provide a valuable tool to help the Commission carry out its oversight responsibility over SBSEFs and the SBS markets in general.

5. Timely Publication of Trading Information Requirement for SBSEFs

Proposed Regulation SE would impose certain publication burdens on SBSEFs in proposed Rule 825.

The requirement contained in proposed Rule 825 that an SBSEF have the capacity to electronically capture, transmit, and disseminate information on price, trading volume, and other trading data on all SBS executed on or through the SBSEF would assist the SBSEF in carrying out its regulatory responsibilities under the SEA and enable the SBSEF to comply with reasonable requests to provide information to others. Furthermore, proposed Rule 825 would require an SBSEF to publish a Daily Market Data Report that is designed to provide market observers with a daily snapshot of market activity on the SBSEF.

6. Rule Filing and Product Filing Processes for SBSEFs

Proposed Regulation SE would establish various filing requirements applicable to SBSEFs. Proposed Rules 804 and 805 would provide mechanisms for an SBSEF to submit filings for new products that they seek to list either through a self-certification process or by voluntarily requesting approval of the Commission, respectively. Proposed Rules 806 and 807 would require an SBSEF to submit new rule or rule amendments either through a self-certification process or by voluntarily requesting approval of the Commission, respectively.

Proposed Rule 808 would address the public availability of certain information in an application to register as an SBSEF and SBSEF filings made under the self-certification procedures or pursuant to Commission review and approval. Proposed Rule 809 would establish procedures for addressing a situation where an SBSEF wishes to list a product and it is unclear whether the product is an SBS or swap ( i.e., whether it properly falls under the jurisdiction of the SEC or the CFTC). Proposed Rule 810 would provide that an applicant for registration as an SBSEF may submit for Commission review and approval an SBS's terms and conditions or rules prior to listing the product as part of its application for registration.

The information that would be collected under proposed Rules 804 and 805 would help the Commission assess whether an SBS listed by an SBSEF complies with relevant provisions of the SEA. In addition, this information would assist the Commission in overseeing the SBSEF's compliance with its regulatory obligations generally and to learn about developments in the SBS product market. Proposed Rules 804 and 805 also would provide a mechanism whereby market participants, other SBSEFs, other regulators, and the public generally could learn what products an SBSEF intends to list, and to obtain information regarding such products.

The information that would be collected under proposed Rules 806 and 807 would help the Commission assess whether a new rule or rule amendment of an SBSEF complies with relevant provisions of the SEA, and assist the Commission in overseeing the SBSEF's compliance with its regulatory obligations generally. Proposed Rules 806 and 807 also would provide a mechanism whereby an SBSEF's members (and prospective members) could learn what new rules or rule amendments the SBSEF intends to apply in its market.

The information collected under proposed Rules 809 and 810 would help the Commission assess an SBSEF's compliance with relevant provisions of the SEA, and assist the Commission in overseeing the SBSEF's compliance with its regulatory obligations. This information also would be useful to the SBSEF's members, because they would be subject to such new or amended rules or products and thus would have an interest in learning about those rules or products. Other market participants, other SBSEFs, and other regulators, as well as the public generally, may find information about proposed new or amended rules or products useful.

7. Requirements Relating to the CCO

Proposed Regulation SE includes Rule 831 that would set out requirements relating to an SBSEF's CCO.

The information that would be collected under proposed Rule 831 would help ensure compliance by SBSEFs with relevant provisions of the SEA and assist the Commission in overseeing SBSEFs generally. The Commission could use the annual compliance report to help it evaluate whether an SBSEF 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 SBSEF and to obtain information on the status of the SBSEF's regulatory compliance program. The SBSEF's fourth-quarter financial report would provide the Commission with important information on the financial health of the SBSEF.

8. Surveillance Systems Requirements for SBSEFs

The proposed rules that would require an SBSEF to maintain surveillance systems and to monitor trading are designed to promote compliance by an SBSEF with its obligations under the SEA to oversee trading on its market, and to prevent manipulation and other unlawful activity or disruption of its market.

C. Respondents

The respondents subject to the collection of information burdens associated with proposed Regulation SE would be: (1) SBSEFs (and entities wishing to register with the Commission as SBSEFs); (2) in the case of Rule 833, persons that seek an exemption order under that rule; and (3) in the case of Rule 834, SBS exchanges.

Currently there are no registered SBSEFs. Based on the number of SEFs registered with the CFTC that trade index CDS (the closest analog to single-name CDS, which is likely to be the product most frequently traded on SEC-registered SBSEFs) and general industry information, the Commission preliminarily estimates that five entities will seek to register as SBSEFs and thus become subject to the collection of information requirements of these proposed rules.

The Commission preliminarily estimates that three persons would request exemption orders under one or both paragraphs of proposed Rule 833. The CFTC has granted three exemptions similar to those contemplated by proposed Rule 833, which suggests that the number of jurisdictions having organized trading venues for swap and SBS products that overlap with products traded on similar venues in the United States is not large.

The Commission preliminarily estimates that three entities will operate as SBS exchanges. These are likely to be existing national securities exchanges that, in the future, seek to list SBS and thereby become SBS exchanges.

The Commission considered whether any provision of proposed Regulation SE would impose any burdens (as defined in the PRA) on SBSEF members, but has determined that they would not.

D. Total Annual Reporting and Recordkeeping Burden

1. Overview

The CFTC, based on experience gained in developing rules for SEFs and regulating the SEF market, over the years has developed, refined, and received approval from OMB for paperwork burden hours estimates, both for SEF rules directly as well as for ancillary rules on which various rules in proposed Regulation SE are modelled. Those estimates are presented in the form of aggregate totals for compliance with:

• Part 37 of the CFTC regulations regarding initial registration requirements applicable to SEFs;

• Part 37 regarding other requirements applicable to SEFs, including the statutory Core Principles;

• Part 40 of the CFTC regulations regarding requirements applicable to SEFs (and other CFTC-registered entities); and

• §§ 1.60(a), 1.60(c), 1.60(e), 36.1, 1.59, 1.63, 1.67, 15.05, 1.37(c), 1.64, and 1.69 regarding requirements applicable to SEFs (and other CFTC-registered entities).

The rules applicable to SBSEFs would be, with limited exceptions discussed above, substantively similar to those applicable to SEFs. Therefore, the Commission is basing its preliminary estimates for the paperwork burdens for SBSEFs on the CFTC's paperwork burden calculations for analog rules that apply to SEFs, which have been approved by OMB. However, in certain cases, the paperwork burdens estimated by the CFTC are scaled down for SBSEFs to account for the likelihood that there will be fewer SBSEFs than SEFs and the SBS business of dually registered SEF/SBSEFs is likely to be smaller than the swap business.

Although there are minor differences between the CFTC rules and the proposed Commission rules, the Commission does not believe it needs to substantially deviate from the CFTC's estimates of aggregated burden hours for compliance (beyond scaling back the CFTC's estimates to account for fewer SBSEFs than SEFs, and the smaller size of the SBS market relative to the swap market). These minor differences between the CFTC's existing rules for SEFs and the Commission's proposed rules for SBSEFs are prompted, in some cases, by minor differences between the statutory provisions that apply to SEFs under the CEA and the statutory provisions that apply to SBSEFs under the SEA, or, in other cases, by differences between the swap market and SBS market. In either case, however, the Commission preliminarily anticipates that the burdens on SBSEFs would be substantially similar to the burdens set out in the CFTC estimates, which serve as the basis for the Commission's estimates. Furthermore, the Commission preliminarily believes that basing the burden estimates for SBSEFs on the CFTC's estimates for SEFs would be more accurate than using burden hours estimates for any other entity that the Commission currently regulates ( e.g., national securities exchanges) because SBSEFs share many more similarities with SEFs than they do with any other SEC-registered entities.

The Commission anticipates that most if not all entities that seek to register with the Commission as SBSEFs will also register, or will already be registered, with the CFTC as SEFs. With a few exceptions, the rules being proposed by the Commission are adapted from existing rules of the CFTC. With these proposed rules, the Commission intends to obtain comparable regulatory benefits as the CFTC rules while imposing only marginal additional burdens on SEF/SBSEFs. However, for purposes of its PRA analysis, the Commission will estimate the burdens as if a respondent were subject only to the Commission's rules. The Commission requests comments on its entire proposed approach to estimating burden hours.

2. Aggregate Burdens for Rules Modelled After CFTC Part 37 Rules

a. Registration Requirements for SBSEFs and Form SBSEF

A submission by an entity wishing to register with the Commission as an SBSEF would be required to be made on Form SBSEF, pursuant to proposed Rule 803, on a one-time basis. The Commission preliminarily estimates that five entities initially would seek to register with the Commission as SBSEFs. The Commission estimates the burdens of proposed Rule 803 and Form SBSEF to be 1,475 hours. These entities would incur initial, one-time burdens, because once an entity is registered as an SBSEF, its registration obligations are complete. The Commission's estimate regarding the initial burden that an entity would incur to file a Form SBSEF is informed by the estimates made by the CFTC for the completion of Form SEF and compliance with § 37.3 of the CFTC regulations (which governs registration of SEFs). Proposed Form SBSEF would request almost exactly the same information as required by Form SEF. Proposed Rule 803 is substantially similar to § 37.3. The CFTC has estimated that the initial compliance burden associated with its registration requirements in § 37.3 and Form SEF to be 295 hours per SEF applicant. For purposes of calculating burden hours, the CFTC considered the entire SEF application process to constitute a single information collection; the Commission is utilizing the same approach for SBSEFs. The Commission preliminarily believes that SBSEFs would prepare Form SBSEF internally. The Commission requests comment on the accuracy of this estimate.

b. Ongoing Compliance With Other Requirements That Are Similar to the Remainder of Part 37

The Commission preliminarily estimates the aggregate ongoing annual hour burden for compliance with all of the proposed SBSEF rules that have analogs in part 37 to be 1,935 hours. The CFTC has estimated that the compliance burden for all of the sections of part 37 combined, other than the initial burden of 295 hours per SEF for registration-related compliance discussed above, to be an ongoing annual burden of 387 hours per SEF. With exception of § 37.600, which implements a CEA Core Principle for SEFs relating to position limits that is not in the SEA, every other section of part 37 has an analog in proposed Regulation SE that is substantively similar. Therefore, the Commission preliminarily estimates that the aggregate CFTC estimate of 387 hours per SEF per year serves as a reasonable estimate for the annual hourly burden on each SBSEF.

As discussed in more detail below, certain SBSEF rules proposed in Regulation SE are derived from other parts of the CFTC rules ( e.g., part 40) and the burdens for those section will be based on the appropriate burden hours of the corresponding CFTC part. For reference, the following table lists all sections of part 37 and the corresponding proposed SBSEF rule. Please see above for more detailed descriptions of a particular proposed SBSEF rule.

3. Aggregate Burdens for Rules Modelled on CFTC Part 40 Rules

A number of rules contained in Proposed Regulation SE are modelled after rules in part 40 of the CFTC's rules, including §§ 40.2 (Listing products for trading by certification), 40.3 (Voluntary submission of new products for Commission review and approval), 40.5 (Voluntary submission of rules for Commission review and approval), and 40.6 (Self-certification of rules). The Commission is proposing Rules 804, 805, 806, and 807—which are closely modelled on §§ 40.2, 40.3, 40.5, and 40.6, respectively—in order to harmonize with the procedures that the CFTC applies to SEFs with respect to establishing new rules and listing products. In addition, proposed Rule 808 is modelled after § 40.8 and would provide that certain information in a Form SBSEF application or a rule or product filing would be made publicly available, notwithstanding the SBSEF's request for confidential treatment. Proposed Rule 809 is loosely modelled after § 40.12 and would set forth a mechanism for a tolling of the period for consideration of a product pending the issuance by the SEC and the CFTC of joint interpretation clarifying which agency has jurisdiction over the product.

a. Rule and Product Filing Processes for SBSEFs

Under proposed Rules 804 and 805, an SBSEF would be required to submit filings for new products that it seeks to list. Under proposed Rules 806 and 807, an SBSEF would be required to submit rule filings for new rules or rule amendments, including changes to a product's terms or conditions. The Commission's estimate regarding the burdens that an SBSEF would incur to comply with the proposed rule and product filing processes in proposed Rules 804, 805, 806, and 807 is informed by the estimates made by the CFTC for compliance with §§ 40.2, 40.3, 40.5, and 40.6, the burden hours for which have been approved by OMB. The Commission is estimating a total of five SBSEF respondents. The Commission preliminarily estimates that the aggregate ongoing annual hourly burden for all SBSEFs to prepare and submit rule and product filings under proposed Rules 804, 805, 806, and 807 (including the cover sheet) would be 300 hours.

Based on the CFTC's experience with SEFs, the Commission estimates that on average an SBSEF would incur an ongoing annual burden of 2 hours of work per rule or product filing. Although the CFTC estimated an average of 100 responses per year per respondent, the Commission believes that an estimate of 30 responses is appropriate given the more limited scope of the SBS market, as opposed to the swap market. This would result in a total estimated ongoing annual burden of 60 hours per respondent and 300 hours for all the respondents annually. The Commission solicits comments regarding the accuracy of its estimates.

b. Burdens Related to Rules Modelled After Other Part 40 Rules

i. Rule 802

Certain definitions contained in proposed Rule 802 are modelled after provisions of part 40. These definitions would not result in any paperwork burden.

ii. Rule 809

Proposed Rule 809 is loosely modelled on § 40.12 of the CFTC's rules and would apply in situations where an SBSEF wishes to list a product and it is unclear whether the product should be classified as an SBS subject to the jurisdiction of the SEC or a swap subject to the jurisdiction of the CFTC. Proposed Rule 809 would provide that a product certification made by an SBSEF pursuant to proposed Rule 804 shall be stayed, or the review period for a product that has been submitted for Commission approval by an SBSEF pursuant to proposed Rule 805 shall be tolled, upon request for a joint interpretation of whether the product is a swap, SBS, or mixed swap made pursuant to Rule 3a68-2 under the SEA by the SBSEF, the SEC, or the CFTC.

Proposed Rule 809 itself does not include a process for determining whether the SEC or CFTC has jurisdiction over a product. Proposed Rule 809 would enable the SEC to stay or toll the product filing while the SEC and CFTC consider a joint interpretation under existing SEA Rule 3a68-2, the burden hours of which have already been approved by OMB. The only burden imposed on an SBSEF under Rule 809 would be checking a box on the submission cover sheet if the SBSEF intends to request a joint interpretation from the Commission and the CFTC pursuant to SEA Rule 3a68-2. The Commission preliminarily estimates that each such indication would impose a burden of 0.25 hours. Furthermore, the Commission preliminarily estimates that each SBSEF would make one such indication per year. Accordingly, the aggregate ongoing annual burden for all SBSEFs to comply with Rule 809 would be 1.25 hours. 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.

4. Aggregate Burdens for Rules Modelled After CFTC Rules Other Than Parts 37 and 40

The proposed rules similar to rules of the CFTC other than part 37 and part 40 are proposed Rules 811(d), 816(e), 819(h), 819(i), 819(j), 819(k), 826(f), and 834. These proposed rules generate various categories of burdens for SBSEFs or market participants.

a. Rule 811(d)

Section 1.60 of the CFTC's rules requires a SEF to provide the CFTC with copies of any legal proceeding to which it is a party, or to which its property or assets is subject.

Paragraph (d) of proposed Rule 811 would adapt paragraphs (a), (c), and (e) of § 1.60 to apply to SBSEFs. Paragraph (d)(1) would require an SBSEF to provide the Commission a copy of the complaint, any dispositive or partially dispositive decision, any notice of appeal filed concerning such decision, and such further documents as the Commission may thereafter request filed in any material legal proceeding to which the SBSEF is a party or its property or assets is subject. Paragraph (d)(2) would require an SBSEF to provide notices of similar actions against any officer, director, or other official of the SBSEF from conduct in such person's capacity as an official of the SBSEF alleging violations of certain enumerated actions.

The Commission preliminarily estimates that an SBSEF would provide the information required by proposed Rule 811(d) once per year, and that each submission would take 0.20 hours. Thus, the Commission preliminarily estimates that the aggregate ongoing annual burden for all SBSEFs to comply with requests for documents or information pursuant to proposed Rule 811(d) would be 1 hour. The Commission is basing its estimate on the CFTC estimate included in its submission to OMB for § 1.60 of the CFTC's rules, for which the CFTC estimated that each of the 79 entities to which the rule applies makes, on average, one submission of documents to the Commission per year. The CFTC further estimated that the time required to prepare one submission is approximately 0.20 hour, totaling 15.8 hours (79 × 0.20) annually.

For PRA purposes, the Commission preliminarily believes that it is reasonable to apply the CFTC's approach to proposed Rule 811(d). 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.

b. Rule 819(h)

Paragraph (h) of proposed Rule 819 generally would prohibit persons who are employees of an SBSEF, or who otherwise might have access to confidential information because of their role with the SBSEF, from improperly utilizing that information. Proposed Rule 819(h) is modelled on § 1.59 of the CFTC's rules. The Commission does not believe that this proposed rule would result in a paperwork burden.

c. Rule 819(i)

Paragraph (i) of proposed Rule 819 would bar persons with specified disciplinary histories from serving on the governing board or committees of an SBSEF, and impose certain other duties on the SBSEF associated with that fundamental requirement. Proposed Rule 819(i) is modelled on § 1.63 of the CFTC's rules.

The Commission preliminarily estimates that an SBSEF would provide the information required by proposed Rule 819(i) once per year, and that each submission would take 79.83 hours. Thus, the Commission preliminarily estimates that the aggregate ongoing annual burden for all SBSEFs to comply with proposed Rule 819(i) would be 399.15 hours. The Commission is basing its estimate on the one that the CFTC included in its submission to OMB for its adoption of § 1.63, where the CFTC estimated that each respondent would make, on average, one submission to the CFTC per year. The CFTC further estimated that the time required to prepare one submission is approximately 79.83 hours.

For PRA purposes, the Commission preliminarily believes that it is reasonable to apply the CFTC's approach to proposed Rule 819(i), and that this work would be conducted internally. The Commission solicits comment as to the accuracy of these estimates.

d. Rule 819(j)

Paragraph (j) of proposed Rule 819 is modelled on § 1.67 of the CFTC's rules. Rule 819(j)(1) would provide that, upon any final disciplinary action in which an SBSEF finds that a member has committed a rule violation that involved a transaction for a customer, whether executed or not, and that resulted in financial harm to the customer, the SBSEF must promptly provide written notice of the disciplinary action to the member.

The Commission preliminarily estimates that an SBSEF would need 0.5 hours to prepare a notice and provide it to a member. This estimate is based on a previous Commission estimate for the time that it would take to prepare and submit a simple notice. The Commission estimates that these notices would occur once per year at each SBSEF, resulting in an aggregate ongoing annual burden to comply with proposed Rule 819(j) of 2.5 hours. 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.

e. Rule 819(k)

Paragraph (k) of proposed Rule 819 would require non-U.S. persons who trade on an SBSEF to have an agent for service process, which could be an agent of its own choosing or, by default, the SBSEF. Proposed Rule 819(k) is modelled on provisions of § 15.05 of the CFTC's rules that apply to SEFs. The Commission does not believe that this proposed rule would result in a paperwork burden.

f. Rule 826(f)

Proposed Rule 826(f) is modelled on § 1.37(c) and would require an SBSEF to keep a record in permanent form, which shall show the true name, address, and principal occupation or business of any non-U.S. member that executes transactions on the SBSEF and must, upon request, provide to the Commission information regarding the name of any person guaranteeing such transactions or exercising any control over the trading of such non-U.S. member.

The Commission preliminarily estimates that each SBSEF would need to update information required by Rule 826(f) once per year and that each submission would take 0.4 hours. Thus, the Commission preliminarily estimates that the aggregate ongoing annual burden for all SBSEFs to comply with requests for documents or information pursuant to proposed Rule 826(f) would be 2 hours. The Commission is basing its estimate on the estimate included by the CFTC in its submission to OMB regarding § 1.37(c), where the CFTC estimated that it would take a SEF 0.4 hours to prepare each record in accordance with § 1.37(c).

For PRA purposes, the Commission preliminarily believes that it is reasonable to apply the CFTC's approach to proposed Rule 826(f). 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.

g. Rule 834

Proposed Rule 834 of Regulation SE would implement section 765 of the Dodd-Frank Act with respect to SBSEFs and SBS exchanges and, in addition, adapt certain CFTC rules that are designed to mitigate conflicts of interest at SEFs (and other CFTC-registered entities). Proposed Rule 834 would provide that each SBSEF and SBS exchange must create and maintain rules to mitigate conflicts of interest between SBSEFs and SBS exchanges and their members, including by prohibiting members from owning 20% or more of the voting rights of an SBSEF or SBS exchange and from exercising disproportionate influence in disciplinary proceedings. Proposed Rule 834 also would require each SBSEF and SBS exchange to submit to the Commission after every governing board election a list of each governing board's members, the groups they represent, and how the composition of the board complies with the requirements of Rule 834. Establishing such rules and submitting such lists to the Commission would result in a paperwork burden for SBSEFs and SBS exchanges.

The Commission preliminarily estimates that proposed Rules 834(b) and (c) together would have an initial, one-time paperwork burden of 15 hours per entity associated with drafting and implementing any such rules, for an aggregate one-time paperwork burden of 120 hours. Proposed Rules 834(b) and (c) are substantially similar to proposed Rule 702(c) of Regulation MC. In its PRA analysis for proposed Rule 702(c), the Commission estimated that there would be a one-time paperwork burden of 15 hours per entity associated with drafting and implementation of any such rules by each SBSEF or SBS exchange.

Additionally, the Commission preliminarily estimates that proposed Rule 834(d), proposed Rule 834(e), and proposed Rule 834(f), combined, would result in an aggregate ongoing annual paperwork burden of 10 hours. Proposed Rules 834(d), (e), and (f) are substantially similar to proposed Rule 702(h) in Regulation MC in 2010 and CFTC § 1.64(c)(4), CFTC § 1.64(b), and CFTC § 1.64(d), respectively. The Commission is basing its estimate on the CFTC's estimate that Rules 1.41(d), 1.63, 1.64, and 1.67 would result in an average annual paperwork burden of 1.25 hours per response that was included in its submission to OMB.

The Commission preliminarily estimates that proposed Rule 834(g) would have an aggregate ongoing annual burden of 16 hours. Proposed Rule 834(g) is substantially similar to § 1.69 of the CFTC's rules, and the Commission is basing its estimate on the CFTC's estimate for § 1.69 of 2 hours per response that was included in its submission to OMB.

The Commission does not believe that proposed Rule 834(h) would result in a paperwork burden not already included in the above estimates. Proposed Rule 834(h) collates into a single rule the requirements for an SBSEF to file rules to comply with proposed Rule 834. As it has already described the paperwork burdens of proposed Rules 834(b) through (g), the Commission does not believe that proposed Rule 834(h) would result in a separate paperwork burden not already included above. Thus, the total aggregate ongoing annual burden is estimated at 26 hours.

5. Miscellaneous Burdens

a. Rule 833

Proposed Rule 833 would describe how exemptions could be obtained for foreign SBS trading venues from the SEA definitions of “exchange,” “security-based swap execution facility,” and “broker” and how SBS executed on a foreign trading venue could become exempt from the SEA's trade execution requirement. Based on the CFTC's experience in the SEF market, the Commission preliminarily estimates that there would be three requests for an exemption order under either or both paragraphs (a) and (b) of Rule 833 in the first year and 2 requests in each subsequent year; and that each submission would require an initial, one-time burden of 80 hours. Once an exemption has been granted to an applicant, no further action is required. The Commission preliminarily estimates the burden to submit an exemption request under one or both paragraphs of proposed Rule 833 would be 240 hours in the first year and 160 hours in each subsequent year. The Commission solicits comment as to the accuracy of these estimates.

b. Rule 835

Proposed Rule 835 would provide that, if an SBSEF issues a final disciplinary action against a member, takes final action with respect to a denial or conditioning membership, or takes final action with respect to a denial or limitation of access of a person to any services offered by the SBSEF, the SBSEF shall file a notice of such action with the Commission within 30 days and serve a copy on the affected person.

The Commission preliminarily estimates that it would take 0.5 hours to prepare this notice and provide it to the Commission and the affected person. This estimate is based on a previous Commission estimate for the time that it would take to prepare and submit a simple notice. The Commission preliminarily believes that it would take an additional 0.25 hours to create and serve a copy of that notice on the affected person. The Commission estimates that these notices would occur once per month at each SBSEF, resulting in an aggregate annual burden to comply with proposed Rule 835 of 45 hours. 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.

6. Total Paperwork Burden Under Proposed Regulation SE

Based on the foregoing, the Commission preliminarily estimates that the total one-time burden for all SBSEFs, persons that seek an exemption order under proposed Rule 833, and SBS exchanges combined pursuant to the requirements under Regulation SE is equal to 1,995 hours. The Commission preliminarily estimates that annual ongoing burden for all SBSEFs, persons that seek an exemption order under proposed Rule 833, and SBS exchanges combined pursuant to the requirements under Regulation SE is equal to 2,711.9 hours.

E. Collection of Information Is Mandatory

The collections of information imposed on SBSEFs throughout Regulation SE would be mandatory for registered SBSEFs. The collection of information with respect to proposed Rule 833 would be mandatory for persons that seek an exemption order under Rule 833. The collection of information with respect to proposed Rule 834 would be mandatory for SBS exchanges.

F. Responses to Collection of Information Will Not Be Confidential

The collection of information required under Regulation SE would generally not be kept confidential, unless confidential treatment is requested and granted by the Commission pursuant to Rule 24b-2 under the SEA.

G. Retention Period of Recordkeeping Requirements

Although recordkeeping and retention requirements have not yet been established for SBSEFs, the Commission is authorized to adopt such rules under section 3D of the SEA. Proposed Rule 826 under Regulation SE would implement section 3D(d)(9) of the SEA to require an SBSEF to maintain records, for a minimum of five years, of all activities relating to the business of the SBSEF, including a complete audit trail.

H. Request for Comment

The Commission solicits comment on all aspects of its PRA estimates regarding the above, particularly the following:

221. Please provide any data or analysis bearing on whether the proposed collection of information is necessary for the proper performance of the functions of the agency, including whether the information shall have practical utility.

222. Do you believe that the Commission's estimate of the burden of the proposed collections of information is accurate? Why or why not? If not, what aspects (in your view) require adjustment? To the extent possible, please provide data to support your contention.

223. Do you believe that there are ways to enhance the quality, utility, and clarity of the information proposed to be collected? If so, please describe.

224. Do you believe that there are ways to minimize the burden of collection of information on respondents, including through the use of automated collection techniques or other forms of information technology? If so, please describe.

225. Do you believe that the proposed rules and amendments would have any effects on any other collection of information not previously identified in this section? If so, please describe and quantify to the extent feasible.

Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments to: (1) Evaluate whether the proposed collection of information is necessary for the proper performance of the functions of the Commission, including whether the information will have practical utility; (2) evaluate the accuracy of the Commission'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) determine whether there are ways to minimize the burden of the 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 OMB Desk Officer for the Securities and Exchange Commission, MBX.OMB.OIRA.SEC_desk_officer@omb.eop.gov, and should send a copy to Vanessa A. Countryman, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090 with reference to File No. S7-14-22. OMB is required to make a decision concerning the collection of information between 30 and 60 days after publication; therefore, a comment to OMB is best assured of having its full effect if OMB receives it within 30 days of publication. 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. S7-14-22, and be submitted to the Securities and Exchange Commission, Office of FOIA Services, 100 F Street NE, Washington, DC 20549-2736. As OMB is required to make a decision concerning the collection of information between 30 and 60 days after publication, a comment to OMB is best assured of having its full effect if OMB receives it within 30 days of publication.

XXI. Regulatory Flexibility Act Certification

The Regulatory Flexibility Act (“RFA”) requires Federal agencies, in promulgating rules, to consider the impact of those rules on small entities. Section 603(a) of the Administrative Procedure Act, 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.” 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.

A. SBSEFs

Most of proposed Regulation SE, and the related rules and rule amendments, would apply to registered SBSEFs (or entities that are seeking to register with the Commission as SBSEFs). In the Dodd-Frank Act, Congress defined SBSEFs as a new type of trading venue for SBS and mandated the registration of these entities. Based on its understanding of the market, and review of and consultation with industry sources, the Commission preliminarily estimates that five entities will seek to register as SBSEFs and thus would be subject to Regulation SE and the related rules and rule amendments.

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; 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 SEA, 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 business 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. Under the standards adopted by the Small Business Administration (“SBA”), entities in financial investments and related activities are considered small entities if they have $41.5 million or less in annual receipts.

The Commission preliminarily believes that most, if not all, SBSEFs would be large business entities or subsidiaries of large business entities, and that every SBSEF (or its parent entity) would have assets in excess of $5 million and annual receipts in excess of $41,500,000. Therefore, the Commission preliminarily believes that none of the potential SBSEFs would be considered small entities.

B. Persons Requesting an Exemption Order Pursuant to Rule 833

Proposed Rule 833 would describe how foreign SBS trading venues could become exempt from the SEA definitions of “exchange,” “security-based swap execution facility,” and “broker” and how SBS executed on a foreign trading venue could become exempt from the SEA's trade execution requirement. Based on the fact that the CFTC has granted similar exemptions with respect to three foreign jurisdictions, the Commission preliminarily estimates that there would be three requests under one or both paragraphs of proposed Rule 833 in the first year and two in each subsequent year. These requests would likely be submitted by foreign SBS trading venues, foreign authorities that license and regulate those trading venues, or covered persons (as defined in proposed Rule 832) who are members of such trading venues.

Based on the Commission's existing information about the SBS market, the Commission preliminarily believes that no person likely to request an exemption order pursuant to proposed Rule 833 would be considered a small entity. The Commission preliminarily believes that most, if not all, of the persons requesting exemptions would be large business entities or subsidiaries of large business entities, and on its own, or through its parent entity, would have assets in excess of $5 million (or in the case of a broker-dealer, total capital of less than $500,000) and annual receipts in excess of $41,500,000. Therefore, the Commission preliminarily believes that they would not be considered small entities.

C. SBS Exchanges

Certain rules under proposed Regulation SE would apply to SBS exchanges. Currently, there are no SBS exchanges. However, the Commission preliminarily estimates that there could be up to three entities would be considered SBS exchanges and would thus be subject to certain requirements of proposed Regulation SE.

For purposes of Commission rulemaking in connection with the RFA, a small entity includes, when used with reference to an exchange, an exchange that has been exempted from the reporting requirements of Rule 601 of Regulation NMS and is not affiliated with any person (other than a natural person) that is not a small business or small organization. Under the standards adopted by the SBA, entities involved in financial investments and related activities are considered small entities if they have $41.5 million or less in annual receipts.

Based on these definitions and the Commission's existing information about national securities exchanges, the Commission preliminarily believes that the entities likely to be considered SBS exchanges would not be considered small entities. Under the standard requiring exemption from the reporting requirements of Rule 601 under the SEA, none of the exchanges subject to the proposed Regulation SE is a “small entity” for the purposes of the RFA. In addition, the Commission preliminarily believes that any SBS exchange would have annual receipts in excess of $41,500,000. Therefore, the Commission preliminarily believes that no potential SBS exchange would be considered small entities.

D. Certification

For the foregoing reasons, the Commission certifies that the proposed rules, form, and cover sheet under Regulation SE and the related rules and rule amendments, if adopted, would not have a significant economic impact on a substantial number of small entities for purposes of the RFA. The Commission invites commenters to address whether the proposed rules would have a significant economic impact on a substantial number of small entities, and, if so, what would be the nature of any impact on small entities. The Commission requests that commenters provide empirical data to illustrate the extent of the impact.

XXII. Consideration of Impact on the Economy

For purposes of the Small Business Regulatory Enforcement Fairness Act of 1996, (“SBREFA”), the Commission requests comment on the potential effect of the proposed Regulation SE, and related proposed rules and rule amendments under the SEA, on the United States economy on an annual basis. The Commission also requests comment on any potential increases in 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.

Statutory Authority

Pursuant to the SEA (particularly Sections 3(b), 3C, 3D, and 36 thereof, 15 U.S.C. 78c, 78c-3, 78c-4, and 78mm, respectively) and the Dodd-Frank Act (particularly section 765 thereof, 15 U.S.C. 8343), the Commission is proposing to amend §§ 201.101, 201.202, 201.210, 201.401, 201.450, 201.460, 232.405, and 240.3a1-1 of chapter II of title 17 of the Code of Federal Regulations and is proposing new §§ 201.442, 201.443, 240.15a-12, and 242.800 through 242.835, as set forth below.

List of Subjects

17 CFR Part 201

• Administrative practice and procedure

17 CFR Part 232

• Administrative practice and procedure
• Confidential business information
• Incorporation by reference
• Reporting and recordkeeping requirements
• Securities

17 CFR Part 240

• Brokers
• Dealers
• Registration
• Securities

17 CFR 242 and 249

• Brokers
• Security-based swap execution facilities
• 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 201—RULES OF PRACTICE

1. The authority citation for part 201, subpart D, is revised to read as follows:

Authority: 15 U.S.C. 77f, 77g, 77h, 77h-1, 77j, 77s, 77u, 78c(b), 78c-4, 78d-1, 78d-2, 78l, 78m, 78n, 78o(d), 78o-3, 78s, 78u-2, 78u-3, 78v, 78w, 77sss, 77ttt, 80a-8, 80a-9, 80a-37, 80a-38, 80a-39, 80a-40, 80a-41, 80a-44, 80b-3, 80b-9, 80b-11, 80b-12, 7202, 7215, and 7217.

2. Amend § 201.101 by adding paragraph (a)(9)(ix) to read as follows:

(a) * * *

(9) * * *

(ix) By the filing, pursuant to § 201.442, of an application for review of a determination of a security-based swap execution facility;

3. Amend § 201.202 by revising paragraph (a) to read as follows:

4. Amend § 201.210 by revising the paragraph (a) heading, paragraph (a)(1), paragraph (b) heading, paragraph (b)(1), and paragraph (c) introductory text to read as follows:

5. Amend § 201.401 by adding paragraph (f) to read as follows:

6. Add § 201.442 to read as follows:

7. Add § 201.443 to read as follows:

8. Amend § 201.450, by redesignating paragraphs (a)(2)(iv) and (a)(2)(v) as paragraphs (a)(2)(v) and (a)(2)(vi) and adding new paragraph (a)(2)(iv).

The addition reads as follows:

9. Amend § 201.460 by adding paragraph (a)(4) to read as follows:

PART 232—GENERAL RULES AND REGULATIONS FOR ELECTRONIC FILINGS

10. The general authority citation for part 232 continues to read as follows:

Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s(a), 77z-3, 77sss(a), 78c(b), 78 l, 78m, 78n, 78o(d), 78w(a), 78 ll, 80a-6(c), 80a-8, 80a-29, 80a-30, 80a-37, 7201 et seq.; and 18 U.S.C. 1350, unless otherwise noted.

11. Amend § 232.405 by:

a. Revising the introductory text and paragraphs (a)(2) and (4);

b. Adding paragraph (b)(1)(iii); and

c. Revising Note 1 to § 232.405.

The revisions and addition read as follows:

PART 240—GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934

12. The general authority citation for part 240 continues to read as follows:

Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 78g, 78i, 78j, 78j-1, 78k, 78k-1, 78 l, 78m, 78n, 78n-1, 78o, 78o-4, 78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78 ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350; Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.

13. Amend § 240.3a1-1 by adding paragraphs (a)(4) and (5) and revising paragraph (b) introductory text to read as follows:

14. Add § 240.15a-12 to read as follows:

PART 242—REGULATIONS M, SHO, ATS, AC, NMS, AND SE AND CUSTOMER MARGIN REQUIREMENTS FOR SECURITY FUTURES

15. The general authority citation for part 242 is revised and an authority citation for §§ 242.800 through 242.835 is added to read as follows:

Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78c-4, 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, 80a-37, and 8343.

Sections 242.800 through 242.835 are also issued under sec. 943, Pub. L. 111-203, Section 763.

16. The heading for part 242 is revised to read as set forth above.

17. Sections 242.800 through 242.835 are added to read as follows:

PART 249—FORMS, SECURITIES EXCHANGE ACT OF 1934

18. 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.; 12 U.S.C. 5461 et seq.; 18 U.S.C. 1350; Sec. 953(b), Pub. L. 111-203, 124 Stat. 1904; Sec. 102(a)(3), Pub. L. 112-106, 126 Stat. 309 (2012); Sec. 107, Pub. L. 112-106, 126 Stat. 313 (2012), Sec. 72001, Pub. L. 114-94, 129 Stat. 1312 (2015), and secs. 2 and 3, Pub. L. 116-222, 134 Stat. 1063 (2020), unless otherwise noted.

19. Add § 249.2001 to read as follows:

Appendix A

Note: Form SBSEF will not appear in the Code of Federal Regulations.

Appendix B

19. Add § 249.2002 to read as follows: