Securities and Exchange Commission: Vol. 76 Monday, No. 39 February 28, 2011

Vol.
76 Monday,
No. 39 February 28, 2011
Part II
Securities and Exchange Commission
17 CFR Parts 240, 242, and 249

Registration and Regulation of Security-Based Swap Execution Facilities;
Proposed Rule
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10948 Federal Register / Vol. 76, No. 39 / Monday, February 28, 2011 / Proposed Rules
SECURITIES AND EXCHANGE • Use the Federal eRulemaking Portal I. Introduction

COMMISSION (http://www.regulations.gov). Follow the On July 21, 2010, the President signed
instructions for submitting comments. the Dodd-Frank Act into law.1 The
17 CFR Parts 240, 242, and 249 Dodd-Frank Act was enacted, among
Paper Comments
[Release No. 34–63825; File No. S7–06–11]
other things, to promote the financial
• Send paper comments in triplicate stability of the United States by
RIN 3235–AK93 to Elizabeth M. Murphy, Secretary, improving accountability and
Securities and Exchange Commission, transparency of the nation’s financial
Registration and Regulation of 100 F St., NE., Washington, DC 20549– system.2 Title VII of the Dodd-Frank Act
Security-Based Swap Execution 1090. provides the Commission and the
Facilities Commodity Futures Trading
All submissions should refer to File Commission (‘‘CFTC’’) with the
AGENCY: Securities and Exchange Number S7–06–11. This file number authority to regulate over-the-counter
Commission. should be included on the subject line (‘‘OTC’’) derivatives in light of the recent
ACTION: Proposed rule; proposed if e-mail is used. To help us process and financial crisis, which demonstrated the
interpretation. review your comments more efficiently, need for enhanced regulation of the
please use only one method. The OTC derivatives market. The Dodd-
SUMMARY: In accordance with Section Commission will post all comments on Frank Act is intended to strengthen the
763 (‘‘Section 763’’) of Title VII (‘‘Title the Commission’s Internet Web site existing regulatory structure concerning,
VII’’) of the Dodd-Frank Wall Street (http://www.sec.gov/rules/ and to provide the Commission and the
Reform and Consumer Protection Act of proposed.shtml). Comments are also CFTC with effective regulatory tools to
2010 (‘‘Dodd-Frank Act’’), the Securities available for Web site viewing and oversee, the OTC swaps markets, which
and Exchange Commission (‘‘SEC’’ or printing in the Commission’s Public have grown exponentially in recent
‘‘Commission’’) is proposing Regulation Reference Room, 100 F St., NE., years and are capable of affecting
SB SEF under the Securities Exchange Washington, DC 20549 on official significant sectors of the U.S. economy.
Act of 1934 (‘‘Exchange Act’’) that is business days between the hours of 10 The Dodd-Frank Act provides that the
designed to create a registration a.m. and 3 p.m. All comments received CFTC will regulate ‘‘swaps,’’ the
framework for security-based swap will be posted without change; the Commission will regulate ‘‘security-
execution facilities (‘‘SB SEFs’’); Commission does not edit personal based swaps,’’ and the CFTC and the
establish rules with respect to the Dodd- identifying information from Commission will jointly regulate ‘‘mixed
Frank Act’s requirement that a SB SEF submissions. You should submit only swaps.’’ 3 The Dodd-Frank Act amends
must comply with the fourteen information that you wish to make
enumerated core principles (‘‘Core available publicly. 1 The Dodd-Frank Wall Street Reform and
Principles’’) and enforce compliance Consumer Protection Act (Pub. L. 111–203, H.R.
FOR FURTHER INFORMATION CONTACT: 4173).
with those principles; and implement a
process for a SB SEF to submit to the Nancy J. Burke-Sanow, Assistant 2 See Public Law 111–203 Preamble.
3 Section 712(d) of the Dodd-Frank Act provides
Commission proposed changes to the SB Director, at (202) 551–5621; David Liu,
that the Commission and the CFTC, in consultation
SEF’s rules. The Commission also is Senior Special Counsel, at (312) 353– with the Board of Governors of the Federal Reserve
proposing an interpretation of the 6265; Constance Kiggins, Special System (‘‘Federal Reserve’’), shall further define the
definition of ‘‘security-based swap Counsel, (202) 551–5701; Molly Kim, terms ‘‘swap,’’ ‘‘security-based swap,’’ ‘‘swap dealer,’’
Special Counsel, at (202) 551–5644; ‘‘security-based swap dealer,’’ ‘‘major swap
execution facility’’ set forth in Section participant,’’ ‘‘major security-based swap
3(a)(77) of the Exchange Act to provide Leah Mesfin, Special Counsel, at (202) participant,’’ ‘‘eligible contract participant,’’ and
guidance on the characteristics of those 551–5655; Susie Cho, Special Counsel, ‘‘security-based swap agreement.’’ These terms are
systems or platforms that would satisfy at (202) 551–5639; Michou Nguyen, defined in Sections 721 and 761 of the Dodd-Frank
Special Counsel, (202) 551–5634; Heidi Act and, with respect to the term ‘‘eligible contract
the statutory definition. In addition, the participant,’’ in Section 1a(18) of the Commodity
Commission is proposing to amend Rule Pilpel, Special Counsel, (202) 551–5666; Exchange Act (‘‘CEA’’), 7 U.S.C. 1a(18), as re-
3a–1 under the Exchange Act to exempt Steven Varholik, Special Counsel, at designated and amended by Section 721 of the
a registered SB SEF from the Exchange (202) 551–5615; Sarah Schandler, Dodd-Frank Act. Further, Section 721(c) of the
Special Counsel, at (202) 551–7145; and Dodd-Frank Act requires the CFTC to adopt a rule
Act’s definition of ‘‘exchange’’ and to to further define the terms ‘‘swap,’’ ‘‘swap dealer,’’
add Rule 15a–12 under the Exchange Iliana Lundblad, Attorney, at (202) 551– ‘‘major swap participant,’’ and ‘‘eligible contract
Act to exempt, subject to certain 5871; Office of Market Supervision, participant’’ to include transactions and entities that
conditions, a registered SB SEF from Division of Trading and Markets, have been structured to evade Title VII of the Dodd-
Securities and Exchange Commission, Frank Act. Section 761(b) of the Dodd-Frank Act
regulation as a broker pursuant to provides that the Commission may adopt a rule to
Section 15(b) of the Exchange Act. 100 F Street, NE., Washington, DC further define the terms ‘‘security-based swap,’’
20549–7010. ‘‘security-based swap dealer,’’ ‘‘major security-based
DATES: Comments should be submitted swap participant,’’ and ‘‘eligible contract
on or before April 4, 2011. SUPPLEMENTARY INFORMATION: The participant,’’ with regard to security-based swaps,
ADDRESSES: Comments may be Commission is proposing new for the purpose of including transactions and
Regulation SB SEF under the Exchange entities that have been structured to evade Title VII
submitted by any of the following of the Dodd-Frank Act. Finally, Section 712(a) of
methods: Act governing the registration and the Dodd-Frank Act provides that the Commission
regulation of SB SEFs, an interpretation and CFTC, after consultation with the Federal
Electronic Comments with respect to the definition of a SB Reserve, shall jointly prescribe regulations
SEF and new Form SB SEF for regarding ‘‘mixed swaps,’’ as may be necessary to
• Use the Commission’s Internet carry out the purposes of Title VII. To assist the
comment form (http://www.sec.gov/ applicants to register with the Commission and the CFTC in further defining the
rules/proposed.shtml); or Commission as SB SEFs. The terms specified above, and to prescribe regulations
• Send an e-mail to rule- Commission also is proposing certain regarding ‘‘mixed swaps’’ as may be necessary to
exemptions to facilitate the trading of carry out the purposes of Title VII, the Commission
[email protected]. Please include File and the CFTC have sought comment from interested
Number S7–06–11 on the subject line; security-based swaps (‘‘SB swaps’’) on parties. See Securities Exchange Act Release Nos.
or SB SEFs. 63452 (December 7, 2010), 75 FR 80174 (December
Federal Register / Vol. 76, No. 39 / Monday, February 28, 2011 / Proposed Rules 10949
the Exchange Act to require, among key goal of the Dodd-Frank Act is to requirement that the Commission may
other things, the following with respect bring trading of SB swaps onto regulated impose by rule or regulation.13 The Core
to transactions in SB swaps regulated by markets,7 as reflected in the statutory Principles applicable to SB SEFs are
the Commission: (1) Transactions in SB requirement that, subject to certain captioned: (1) Compliance with Core
swaps must be cleared through a exceptions, any SB swap subject to Principles; (2) Compliance with Rules;
clearing agency if they are of a type that mandatory clearing must be traded on a (3) Security-Based Swaps Not Readily
the Commission determines must be SB SEF or an exchange, unless no SB Susceptible to Manipulation; (4)
cleared, unless an exemption from SEF or exchange makes such SB swap Monitoring of Trading and Trade
mandatory clearing applies; 4 (2) if the available for trading. Processing; (5) Ability to Obtain
SB swap is subject to the clearing Section 763 of the Dodd-Frank Act Information; (6) Financial Integrity of
requirement, the transaction must be amends the Exchange Act by adding Transactions; (7) Emergency Authority;
executed on an exchange or on a SB SEF various new statutory provisions to (8) Timely Publication of Trading
registered under Section 3D of the govern the regulation of SB SEFs.8 Information; (9) Recordkeeping and
Exchange Act or a SB SEF exempt from Section 3C(h) of the Exchange Act Reporting; (10) Antitrust
registration under Section 3D(e) of the specifies that transactions in SB swaps Considerations; (11) Conflicts of
Exchange Act, unless no SB SEF or that are subject to the clearing Interest; (12) Financial Resources; (13)
exchange makes such SB swap available requirement of Section 3C(a)(1) of the System Safeguards; and (14) Designation
for trading or the SB swap transaction Exchange Act must be executed on an of Chief Compliance Officer.14 As a
is subject to the clearing exception in exchange or on a SB SEF registered with result, a registered SB SEF would have
Section 3C(g) of the Exchange Act; 5 and the Commission (or a SB SEF exempt certain regulatory obligations with
(3) transactions in SB swaps (whether from registration), unless no exchange respect to overseeing its market and the
cleared or uncleared) must be reported or SB SEF makes the SB swap available participants that trade on its facility.
to a registered security-based swap data to trade (referred to as the ‘‘mandatory Further, Section 3D(f) of the Exchange
repository (‘‘SDR’’) or the Commission.6 trade execution requirement’’) or the SB Act states that the Commission shall
swap transaction is subject to the prescribe rules governing the regulation
II. Regulatory Framework of Security- clearing exception in Section 3C(g) of of SB SEFs.15 Finally, Section 3(a)(77) of
Based Swap Execution Facilities the Exchange Act (‘‘end-user the Exchange Act defines a SB SEF as
Currently, SB swaps trade in the OTC exception’’).9 Further, Section 3D(a)(1) a trading system or platform in which
market, rather than on regulated of the Exchange Act states that no multiple participants have the ability to
markets. Although some SB swaps have person may operate a facility for the execute or trade SB swaps by accepting
moved to centralized clearing, prior to trading or processing of SB swaps, bids and offers made by multiple
the enactment of the Dodd-Frank Act, unless the facility is registered as a SB participants in the facility or system,
centralized clearing of SB swaps was SEF or as a national securities exchange through any means of interstate
not required. The current market for SB under that section.10 Under Section commerce, including any trading
swaps is opaque, with little, if any, pre- 3D(b) of the Exchange Act, a SB SEF facility, that: (1) Facilitates the
trade transparency (the ability of market registered with the Commission may execution of SB swaps between persons;
participants to see trading interest prior make SB swaps available for trading and and (2) is not a national securities
to a trade being executed) or post-trade facilitate trade processing of SB exchange.16
transparency (the ability of market swaps.11 Section 3D(c) of the Exchange As regulated markets for the trading of
participants to see transaction Act requires a national securities SB swaps, SB SEFs, as well as
information after a trade is executed). A exchange, to the extent it also operates exchanges that post or trade SB swaps
a SB SEF and uses the same electronic (‘‘SBS exchanges’’), are intended to play
21, 2010) (File No. S7–39–10) (proposed rulemaking trade execution system for listing and an important role in enhancing the
regarding definitions contained in Title VII of the executing trades in SB swaps, to transparency and oversight of the
Dodd-Frank Act relating to participants). The
Commission also will propose rules regarding identify whether electronic trading of market for SB swaps. SB SEFs should
definitions contained in Title VII of the Dodd-Frank SB swaps is taking place on or through help further the statutory objective of
Act relating to products in a separate proposed the exchange or the SB SEF.12 greater transparency and a more
rulemaking. See also Securities Exchange Act Section 3D(d) of the Exchange Act competitive environment for the trading
Release No. 62717 (August 13, 2010), 75 FR 51429
(August 20, 2010) (File No. S7–16–10) (advance specifies that to be registered and of SB swaps by providing a venue for
joint notice of proposed rulemaking regarding maintain registration, a SB SEF must multiple parties to execute trades in SB
definitions contained in Title VII of the Dodd-Frank comply with fourteen Core Principles swaps and also by serving as a conduit
Act). enumerated therein and any for information regarding trading
4 See Public Law 111–203, § 763(a) (adding
Section 3C(a)(1) of the Exchange Act).

interest in SB swaps. As a result of the
7 See Public Law 111–203, preamble. Dodd-Frank Act’s provisions relating to
8 See Public Law 111–203, § 763 (adding Sections
Section 3C(h) of the Exchange Act). See also Public SB SEFs, the Commission would have
3C and 3D of the Exchange Act).
Law 111–203, § 761(a) (adding Section 3(a)(77) of
9 See Public Law 111–203, § 763 (adding Section
access to information on the trading of
the Exchange Act), defining the term ‘‘security- SB swaps that occurs on SB SEFs and
based swap execution facility.’’ The Dodd-Frank Act 3C(h) of the Exchange Act).
amends the CEA to provide for a similar regulatory 10 See Public Law 111–203, § 763(a) (adding information regarding trading by their
framework with respect to transactions in swaps Section 3D(a)(1) of the Exchange Act). The participants. In addition, because SB
regulated by the CFTC. Commission views this requirement as applying SEFs would have certain regulatory
6 See Public Law 111–203, § 761(a)(75) (adding only to facilities that meet the definition of
obligations arising from their Core
Section 3(a)(75) of the Exchange Act) (defining the ‘‘security-based swap execution facility’’ in Section
term ‘‘security-based swap data repository’’). The 3(a)(77) under the Exchange Act. SB swaps that are
13 See Public Law 111–203, § 763(c) (adding
registration of an SDR and the reporting of SB not subject to the mandatory trade execution
swaps are the subject of separate Commission requirement would not have to be traded on a Section 3D(d)(1)(A) of the Exchange Act).
rulemakings. See Securities Exchange Act Release registered SB SEF and could be traded in the over- 14 See Public Law 111–203, § 763(c) (adding
Nos. 63347 (November 19, 2010), 75 FR 77306 the-counter (‘‘OTC’’) market for SB swaps. Section 3D(d)(1)–(14) of the Exchange Act).
11 See Public Law 111–203, § 763(c) (adding 15 See Public Law 111–203, § 763(c) (adding
(December 10, 2010) (File No. S7–35–10) (‘‘SDR
Release’’) and 63346 (November 19, 2010), 75 FR Section 3D(b) of the Exchange Act). Section 3D(f) of the Exchange Act).
75208 (December 2, 2010) (File No. S7–34–10) 12 See Public Law 111–203, § 763(c) (adding 16 See Public Law 111–203, § 761(a) (adding
(‘‘Reporting and Dissemination Release’’). Section 3D(c) of the Exchange Act). Section 3(a)(77) of the Exchange Act).
Principles, such as monitoring trading, mitigate the risk of regulatory issues.21 The purpose of the Roundtable
assuring the ability to obtain arbitrage.18 Although the Commission was to provide a forum for the
information, and establishing and must be guided by the requirements of discussion of these issues and to assist
enforcing rules and procedures to the Dodd-Frank Act in crafting proposed SEC and CFTC staff as they developed
ensure the financial integrity of SB rules applicable to markets that trade SB proposed rules to meet the Dodd-Frank
swaps entered on or though the SB SEF, swaps and the participants in those Act’s mandate to bring the trading of
these facilities can play an important markets, the Commission recognizes swaps and SB swaps subject to the
role in helping to oversee the market for that the particular rules that it may mandatory clearing requirement onto
SB swaps on an ongoing basis and adopt under the Dodd-Frank Act may organized markets. Panelists at the
allowing regulators to quickly assess impact the incentives of market Roundtable provided comments on their
information regarding the potential for participants with respect to where they experience with the current market
systemic risk across trading venues. choose to engage in the trading of SB structure for the trading of swaps and
The Commission is mindful that any swaps. SB swaps and offered their views and
rules that the Commission may adopt Commenters are urged to consider suggestions on ways that that structure
regarding the regulation of SB SEFs generally the role that regulation may could change as a result of the
could impact the incentives for existing play in fostering or limiting the legislation. Pursuant to the
or prospective platforms for the trading development of the market for SB swaps Commission’s outreach, a range of
of SB swaps to enter or withdraw from (or, vice versa, the role that market individuals and entities, including swap
this market. On the other hand, the rules developments may play in changing the dealers, brokers, end-users, academics
to be adopted by the Commission for the nature and implications of regulation) and others, have expressed their views
trading of SB swaps should be sufficient and specifically to focus on this issue on a variety of topics, such as the scope
to fulfill the objectives of the Dodd- with respect to the proposals to of activities or the nature of platforms
Frank Act to promote financial stability establish a framework for the trading of that should fall within the statutory
and transparency. The Commission also SB swaps. In addition, commenters are definition of ‘‘security-based swap
is mindful that, both over time and as urged to consider the effect of the execution facility.’’ 22
a result of Commission proposals to Commission’s proposals relating to SB Many letters from market participants
implement the Dodd-Frank Act, the SEFs on the global swaps and advocated for a flexible interpretation of
further development of the SB swap derivatives markets and to offer specific the statutory definition of SB SEF.23 In
market may alter some of the specific comments regarding how the proposals their letters, they argued that the
calculus for future regulation of SB compare with the existing or proposed definition of SB SEF should permit
SEFs. regulations of other jurisdictions. many different types of existing and
The Commission notes that the CFTC new trading and execution platforms.24
is proposing rules relating to swap III. The Definition of Security-Based
Swap Execution Facilities Certain market participants noted that
execution facilities (‘‘SEFs’’) as required the SB swap market is more customized
under Section 733 of the Dodd-Frank Since the enactment of the Dodd- and illiquid than the cash equities
Act.17 Because there are differences Frank Act in July 2010, the Commission market and argued that a broad range of
between the markets and products that has engaged in a number of outreach trading models would be necessary to
the Commission and the CFTC currently programs relating to the legislation’s address the SB swap market’s unique
regulate, the approach that each agency rulemaking mandates, including trading characteristics and to allow this market
may take regarding the regulation of SB of SB swaps on regulated markets.19 On to develop properly.25
SEFs and SEFs, respectively, also may September 15, 2010, the staff of the
differ in various respects. The Commission and of the CFTC conducted 21 See Press Release issued by the Commission on
Commission recognizes that a joint roundtable to discuss issues September 8, 2010, ‘‘SEC, CFTC To Host Joint
commenters may respond to the related to the formation and regulation September Roundtables On Swap and Security-
Commission’s proposals by referring to of SEFs and SB SEFs (‘‘Roundtable’’).20 Based Swap Matters’’ (File No. 2010–166), available
at http://www.sec.gov/news/press/2010/2010-
the CFTC’s proposals and welcomes Topics discussed at the Roundtable 166.htm.
commenters’ views and suggestions on included the scope of the definition of 22 See, e.g., http://www.sec.gov/spotlight/dodd-
the impact of any differences between a SEF and SB SEF; registration of these frank.shtml.
the Commission and CFTC approaches facilities; products that would trade on 23 See, e.g., letter from Ben Macdonald, Global
to the regulation of SB SEFS and SEFs. a SEF and SB SEF; block trades; access Head Fixed Income, Bloomberg LP, to Commission,
dated September 22, 2010 (‘‘Bloomberg Letter’’), at
The Commission is particularly to SEFs and SB SEFs; and cross-market 2; letter from Richard H. Baker, President and CEO,
interested in whether its proposed Managed Funds Association, to Elizabeth M.
rulemaking would result in any 18 See, e.g., Committee of European Securities Murphy, Secretary, Commission, dated September
duplicative or inconsistent efforts on the Regulators (‘‘CESR’’), CESR Technical Advice to the 22, 2010 (‘‘MFA Letter’’), at 16; letter from Ernest C.
European Commission in the context of the MiFID Goodrich, Jr., Managing Director—Legal
part of market participants subject to Review and Responses to the European Commission Department, and Marcelo Riffaud, Managing
both regulatory regimes or would result for Additional Information, dated October 13, 2010, Director—Legal Department, Deutsche Bank AG, to
in gaps between those regimes. available at http://www.cesr-eu.org/index.php David A. Stawick, Secretary, CFTC, and Elizabeth
Further, the Commission is aware that ?page=contenu_groups&id=61&docmore=1. M. Murphy, Secretary, Commission, dated October
19 See, e.g., Implementing the Dodd-Frank Wall 6, 2010 (‘‘Deutsche Bank Letter’’), at 5–6 and 8–9;
regulators in other countries are Street Reform and Consumer Protection Act, and letter from Larry Tabb, CEO and Founder, Andy
considering reform of their swaps and Transparency, Public Input on SEC Regulatory Nybo, Head of Derivatives, and Kevin C.
derivatives markets and are interested in Initiatives under the Dodd-Frank Act Title VII— McPartland, Senior Analyst, TABB Group, to Gary
achieving a consistent approach to Wall Street Transparency and Accountability, Gensler, Chairman, CFTC, and Mary Schapiro,
Mandatory Exchange Trading and Swap Execution Chairman, Commission, dated August 23, 2010
swaps regulation between the United Facilities, available at (‘‘TABB Letter’’), at 2.
States, Europe and other jurisdictions to http://www.sec.gov/spotlight/dodd-frank.shtml. 24 See, e.g., Bloomberg Letter, id., at 2; MFA
20 See Securities Exchange Release No. 62864 Letter, id., at 16; and Deutsche Bank Letter, id., at
17 See Public Law 111–203, § 733 (adding Section (September 8, 2010), 75 FR 55574 (September 13, 7.
5h of the CEA). See also 76 FR 1214 (January 7, 2010) (File No. 4–612). Webcast available at http:// 25 See, e.g., Bloomberg Letter, supra note 23, at 2,
2011) (‘‘Notice of proposed SEF rulemaking by the www.sec.gov/news/openmeetings/2010/ and Deutsche Bank Letter, supra note 23, at 6–7.
CFTC’’). jac091510.shtml. See also infra, Section III.B for a discussion of the
Although many commenters who Commission is mindful that there exists terms are memorialized.32 In a bilateral
expressed a view regarding the a wide range of views on the part of negotiation, there may be no pre-trade
definition of SB SEF favored allowing market participants and others about the or post-trade transparency available to
multiple platforms,26 some commenters nature of the activities or systems that the marketplace because only the two
expressed concern about some types of would constitute, and the scope of parties to the transaction are aware of
platforms that potentially could meet activities permitted by, a SB SEF and the terms of the negotiation and the
the definition of SB SEF. One therefore encourages interested persons final terms of the agreement. Further, no
commenter believed that allowing to provide their views and suggestions, terms of the proposed transaction are
multiple request for quote (‘‘RFQ’’) as well as any materials or data to firm until the transaction is executed.
platforms,27 without a price mechanism support their positions, on this aspect of However, reputational costs generally
that aggregates prices across platforms, the proposed rulemaking. The serve as a deterrent to either party’s
to meet the definition of SB SEF, could Commission believes that the prudent failing to honor any quoted terms.
lead to a fragmented market, which course is to take where appropriate a Dealer to customer bilateral negotiation
could discourage competition.28 deliberate and attentive approach to its currently is used for all SB swap asset
Another commenter suggested that regulation of SB SEFs that is informed classes, and particularly for trading in
permitting an RFQ platform to be by the state of development of SB swap less liquid SB swaps, in situations
treated as a SB SEF could be viewed as trading on regulated markets. The where the parties prefer a privately
preserving the status quo of a dealer- Commission emphasizes, however, that negotiated transaction, such as in
dominated market and believed that the any actions it may take now or in the executing block trades, or in other
Dodd-Frank Act envisioned that SB future would be designed to further the circumstances in which it is not cost
swaps would be traded on a facility akin overall objectives of the Dodd-Frank effective for a party to the trade to use
to a limit order book platform.29 Act. one of the execution methods described
The Commission also received other below.
specific views about platforms that A. Current SB Swap Market Another model for the trading of SB
commenters believed should or should 1. Trading Models swaps is the single-dealer RFQ
not be included in the definition of SB electronic trading platform. In a single-
SEF. For example, one commenter Unlike the markets for cash equity dealer RFQ platform, a dealer may post
believed that platforms that would not securities and listed options, the market indicative quotes for SB swaps in
trade or execute SB swap transactions, for SB swaps currently is characterized various SB swap asset classes that the
such as pure trade processing facilities, by bilateral negotiation in the OTC swap dealer is willing to trade. Only the
would not meet the statutory definition market; is largely decentralized; many dealer’s approved customers would
of SB SEF.30 A market participant, instruments are not standardized; and have access to the platform. When a
however, stated that in its view the many SB swaps are not centrally customer wishes to transact in a SB
statutory definition of SB SEF would cleared. The lack of uniform rules swap, the customer requests an
encompass pure trade processing concerning the trading of SB swaps and executable quote, the dealer provides
facilities.31 the one-to-one nature of trade one, and if customer accepts the dealer’s
The information presented at the negotiation in SB swaps has resulted in quote, the transaction is executed
Roundtable and received from the the formation of distinct types of venues electronically. If the dealer repeatedly
public has helped to inform the for the trading of these securities, responds to requests for executable
proposals relating to SB SEFs that are ranging from bilateral negotiations quotes with quotes that are significantly
part of this rulemaking. The carried out over the telephone, to single- less favorable than the dealer’s
dealer RFQ platforms, to multi-dealer indicative quotes posted on the single-
Commission’s interpretation of the definition of SB RFQ platforms, to central limit order dealer electronic trading platform,
SEF. books outside the United States, and volume on the platform presumably
26 See supra note 23 and accompanying text.
others, as more fully described below. would diminish and participants may
27 In referring to a RFQ platform, the Commission
means a trading platform where a customer who

The use of electronic media to execute no longer transact there. This type of
wishes to execute a SB swap disseminates a request transactions in SB swaps varies greatly platform generally provides pre-trade
for quote to one or more dealers and one or more across trading venues, with some transparency in the form of indicative
of those dealers respond to the request with an venues being highly electronic whereas
executable quote.
quotes on a pricing screen, but only
28 See, e.g., Commentary by S. ‘‘Vish’’
others rely almost exclusively on non- from one dealer to its customer.
Viswanathan, Professor, Fuqua School of Business, electronic means such as the telephone. Currently, there is no post-trade
Duke University, at the Roundtable. Webcast The reasons for use of, or lack of use of, reporting of transactions on single-
available at http://www.sec.gov/news/ electronic media vary from such factors dealer platforms and thus there is no
openmeetings/2010/jac091510.shtml.
29 See Commentary by Heather Slavkin, Senior
as user preference to limitations in the post-trade transparency.
Legal Policy Advisor for the Office of Investment, existing infrastructure of certain trading A variant of the single-dealer model is
AFL–CIO, at the Roundtable. Webcast available at platforms. The description below of the an aggregator-type platform that
http://www.sec.gov/news/openmeetings/2010/ ways in which SB swaps may be traded combines two or more single-dealer
jac091510.shtml. See also infra, Section III.B is based in part on discussions with
discussing the Commission’s interpretation taking
RFQ platforms. In such a platform, a
into account concerns raised by commenters. market participants. The Commission customer who has access to the
30 See letter from Mark D. Young, Skadden, Arps, solicits comments on the accuracy of platform, which is determined solely at
Slate, Meagher & Flom LLP, to David A. Stawick, this description. the discretion of its operator and of the
Secretary, CFTC, and Elizabeth M. Murphy, The Commission uses the term dealers involved, may see indicative
Secretary, Commission, dated September 22, 2010,
at 3.
‘‘bilateral negotiation’’ to refer to the quotes from multiple dealers at once
31 See Meetings with SEC Officials: Memorandum model whereby one party uses the instead of seeing quotes only from one
from the Division of Trading and Markets regarding telephone, e-mail or other
an August 25, 2010 Meeting with representatives of communications to contact directly a 32 For further discussion, see, e.g., Securities
MarkitSERV, dated September 2, 2010, MarkitSERV Exchange Act Release No. 63727 (January 14, 2011),
PowerPoint Presentation, dated August 25, 2010 at
potential counterparty to negotiate a SB 76 FR 3859 (January 21, 2011) (proposing rules for
p. 5–6, available at http://www.sec.gov/comments/ swap. Once the terms are agreed, the SB the trade acknowledgement and verification of
s7-16-10/s71610-96.pdf. swap transaction is executed and the security-based swaps).
dealer as in the single-dealer RFQ dissemination of composite indicative This model often is used by dealers that
platform. Although a participant can quotes to all participants prior to trades. seek to transact with other dealers
simultaneously view quotes from Post-trade transparency may exist if the through the use of an interdealer broker
multiple dealers, the participant can platform chooses to disseminate as an intermediary. In this model, there
request a firm quote from only one information regarding executed may be pre-trade transparency to the
dealer at a time. One feature of the transactions. extent that participants are able to see
aggregated single-dealer platform as A fourth model for the trading of SB bids and offers of other participants and
compared to the bilateral negotiation swaps is a limit order book system or post-trade transparency to the extent
and single-dealer models described similar system, which the Commission that participants can see the terms of
above is the ability of a participant in understands is not yet in operation for executed transactions.
the aggregated single-dealer platform to the trading of SB swaps in the United The five foregoing examples represent
see indicative quotes from multiple States but exists for the trading of SB broadly the various types of models for
dealers. However, customers are not swaps in Europe. Today, securities and the trading of OTC swaps in existence
afforded an opportunity to send RFQs to futures exchanges in the United States today. These examples may not
multiple dealers at the same time to display a limit order book in which firm represent every single method in
promote competitive pricing. Also, like bids and offers are posted for all existence today and the discussion
the single-dealer electronic platform, participants to see, with the identity of above is intended to give an overview of
there is no post-trade reporting of the parties withheld until a transaction the models without providing the
transactions and thus there is no post- occurs. Bids and offers are then matched nuances of each particular type.
trade transparency. based on price-time priority or other
A third model is the multi-dealer RFQ established parameters and trades are 2. The SB Swap Market and the
electronic trading platform.33 In a multi- executed accordingly. The quotes on a Commission’s Approach to SB SEF
dealer RFQ system, a requester can send limit order book system are firm. A limit Definitions
an RFQ to solicit quotes on a certain SB order book system may be a more In the Commission’s view, the diverse
swap from multiple dealers at the same suitable model for the trading of more nature of these examples demonstrates
time. Currently, dealers on a multi- liquid, rather than less liquid, SB swaps. the extent to which, when compared
dealer RFQ platform generally require In general, a limit order book system with the equities markets, certain
the platform to set limits on the number also provides greater pre-trade aspects of the SB swap market are still
of dealers to whom a customer may transparency than the three platforms evolving.35 In considering ways in
send an RFQ, and also may limit which described above because all participants which the Commission could approach
dealers may participate on the platform. can view bids and offers before placing the definition of SB SEF, the
These platforms are sometimes owned their bids and offers. However, broadly Commission has sought to facilitate
by dealers themselves. After the RFQ is communicating trading interest, competition and innovations in the SB
submitted, the recipients have a particularly about a large trade, may swap market that could be used to
prescribed amount of time in which to increase hedging costs, and thus costs to promote more efficient trading in
respond to the RFQ with a quote. investors as reflected in the prices from organized, transparent and regulated
Responses to the RFQ are firm. The the dealers. The system can also provide trading venues. The Commission does
requestor then has the opportunity to post-trade transparency, to the extent not believe it should simply overlay the
review the responses and accept the best that participants can see the terms of same regulatory structure that is
quote. A multi-dealer RFQ platform executed transactions. currently in place for equities, given
provides a certain degree of pre-trade A fifth type of trading, which the important differences in the nature and
transparency, depending on its Commission herein refers to as maturity of the SB swap and equities
characteristics. But to the extent that a ‘‘brokerage trading,’’ is used by brokers markets. However, the Commission does
requester is restricted by platform rules to execute SB swap trades on behalf of believe that certain elements of equity
to soliciting quotes from a limited customers, often in larger sized
number of dealers, the customer’s pre- transactions. In such a system, a broker sometimes only one side of the market would be
trade transparency is restricted to that receives a request from a customer displayed (i.e., a bid without an offer and vice
number of quotes it receives in response (which may be a dealer) who seeks to versa). Because the volume in some SB swaps may
execute a specific type of SB swap. The be low, the electronic systems maintained by
to its RFQ. In some instances requestors wholesale brokers would not necessarily include a
may prefer to limit the number of broker then interacts with other matching engine that would provide for price-time
recipients of an RFQ as a way to protect customers to fill the request and execute priority or other execution parameters, unlike other
proprietary trading strategies as the transaction. The mode of interaction types of electronic limit order books. Although the
can vary depending on the size of the wholesale brokers’ systems are electronic, the
dissemination of their interest to customer would need to perform some steps
multiple dealers may increase hedging trade and the type of SB swap being manually (e.g., hit the bid or lift the offer) to
costs to dealers, and thus costs to the traded. In some cases, the interaction is execute a trade.
requestors as reflected in the prices from done purely by voice over the 35 For example, data from the Depository Trust
the dealers. Pre-trade transparency may telephone, while in other cases, the and Clearing Corporation covering the period from
interaction is electronic or a hybrid of March 22, 2010 to June 20, 2010 for single name
also exist through the platform’s credit default swaps revealed the following: Out of
voice and an electronic system. The 998 types of swaps (i.e., a swap based on one
33 The single-dealer RFQ platform is an example level of automation and use of reference entity), only 55 had 10 or more trades per
of a system that permits customers to submit an electronic means also vary depending day (34 trades being the highest), and 827 of the
RFQ to a single dealer, which is distinct from a on the technological state and swaps had 5 or fewer trades per day (531 of those
multi-dealer RFQ platform that permits customers only had 2 or fewer trades per day). In the data set,
to solicit quotes from multiple dealers functionality of the broker’s platform.34 ‘‘trades per day’’ includes all tenors (e.g., duration
simultaneously instead of one dealer. The multi- or expiry) in swaps of the same reference entity. See
dealer RFQ platform differs from a single-dealer 34 The Commission understands that a small http://www.dtcc.com/downloads/products/
aggregator platform because a participant in the portion of the brokerage trading in the United States derivserv/CDS_Snapshot_Analysis_Sep17-2010.pdf;
aggregated single-dealer platform may only send a is currently highly automated and has see also http://www.dtcc.com/products/derivserv/
request to one dealer at a time and thus would not characteristics of a limit order book. However, data_table_snap0002.php and http://
have the ability to interact with the bids or offers while depth of the order book may be displayed, www.dtcc.com/products/deriserv/
of multiple dealers simultaneously. generally there may be only one bid or offer, and data_table_snapshot.php.
market structure may be directly A key issue noted at the Roundtable regulated trading venues to support the
relevant to the SB swap market. and raised by market participants Dodd-Frank Act’s goal of moving the
Furthermore, rather than proposing a generally regarding Dodd-Frank Act trading of SB swaps onto regulated
rule that would establish a prescribed implementation is the scope of the markets.
configuration for SB SEFs that would definition of ‘‘security-based swap Under this proposed interpretation, if
meet the statutory definition of SB SEF, execution facility.’’ 37 SB swap industry a system or platform were to allow an
the Commission proposes to provide participants have expressed an interest individual participant (of which there
baseline principles interpreting the in, and offered their views on, the must be more than one on the system,
definition of SB SEF, consistent with parameters of the definition of SB but which do not need to be acting
the requirements of the Exchange Act, SEF.38 Such participants asserted that simultaneously) to send, at the same
as amended by the Dodd-Frank Act, the interpretation of the definition of SB time, a single RFQ to all other liquidity
which any entity would need to be able SEF is a significant issue for the SB providing participants on that system or
to meet to register as a SB SEF. Such an swap industry because, under the platform and view responses from those
approach is designed to allow flexibility mandatory trade execution requirement participants, the Commission believes
to those trading venues that seek to in Section 3C(h) of the Exchange Act, a that such a model would satisfy the
register with the Commission as a SB SB swap subject to mandatory clearing requirements of the statutory definition,
SEF and to permit the continued must be executed on a SB SEF or on an even if the quote requesting participants
development of organized markets for exchange, if made available for trading. are acting at different times. A key
the trading of SB swaps. This more The discussion below sets forth the element to this model is that the SB SEF
flexible approach also would allow the Commission’s preliminary view as to would not be able to limit the number
Commission to monitor the market for the meaning of the various elements of of liquidity providing participants from
SB swaps and propose adjustments, as this definition. whom a participant could request a
necessary, to any interpretation that it The ‘‘multiple participant to multiple quote on the SB SEF.40
may adopt as this market sector participant’’ requirement in the The Commission further believes that
continues to evolve. definition of SB SEF prescribes that the requirements of the statutory
However, the Commission recognizes ‘‘multiple participants have the ability to definition would be met if the system or
that, consistent with the Dodd-Frank execute or trade security-based swaps platform not only provided the quote
Act, the interpretation of the definition by accepting bids and offers made by requesting participant with the ability to
of SB SEF should: (1) Encourage the multiple participants in the facility or send a single RFQ to all liquidity
migration of trading SB swaps from the system.’’ 39 Consistent with this providing participants, but also
OTC market to SB SEFs (or exchanges), requirement, the Commission proposes provided the quote requesting
(2) provide a meaningful distinction to interpret the definition of SB SEF to participant with the ability to choose to
between a SB SEF and an OTC trading send an RFQ to fewer than all liquidity
mean a system or platform that allows
venue, (3) promote further transparency providing participants. In the
more than one participant to interact
of the SB swap market, and (4) to Commission’s view, a system or
with the trading interest of more than
facilitate competition and innovation in platform that affords a quote requesting
one other participant on that system or
the SB swap markets that could be used participant the ability to send an RFQ to
platform. The Commission notes that
to promote more efficient trading in all participants, but also permits the
this definition can be satisfied by
organized, transparent, and regulated quote requesting participant to choose
various types of platforms, but some
trading venues. In addition, the to send an RFQ to fewer participants,
platforms that are currently used to
interpretation of the definition of SB would satisfy the statutory definition
trade SB swaps in the OTC market
SEF should complement other aspects because multiple participants would
would not meet this definition, and have the ability to execute or trade SB
of proposed SB swap regulations, would not be considered SB SEFs. As
including those related to post trade swaps by accepting bids or offers made
noted above, the Commission is aware by multiple participants. The person
transparency, mandatory clearing, and that the movement of SB swaps trading
the general requirement that SB swaps exercising investment discretion for the
onto regulated platforms is still in an transaction, whether it is the participant
that are subject to mandatory clearing emergent stage. Therefore, in itself or the participant’s customer,
only be traded on an exchange or SB considering ways in which the would be the person that would have
SEF, unless no exchange or SB SEF Commission could approach the the ability to choose to send the RFQ to
makes the SB swap available to trade. definition of SB SEF, the Commission less than all participants, as they would
B. Scope of SB SEF Definition has sought to facilitate competition and be in the best position to determine the
innovations in the SB swaps market that impact on their interest of a broad or
As noted above, Section 3(a)(77) of could be used to promote more efficient
the Exchange Act defines a SB SEF as narrow dissemination of their RFQ.41
trading in organized, transparent and Under the proposed interpretation of
a trading system or platform in which
the definition of SB SEF, a SB SEF
multiple participants have the ability to exchange (unless exempted under Section 3D(e) of would be able to offer functionality to
execute or trade SB swaps by accepting the Exchange Act if the Commission finds that the
facility is subject to comparable, comprehensive a participant (or a participant’s
bids and offers made by multiple
supervision and regulation on a consolidated basis customer) enabling that participant to
participants in the facility or system, by the CFTC). A registered SB SEF would be choose to send a single RFQ to any
through any means of interstate required to satisfy all 14 Core Principles and any number of specific liquidity providing
commerce, including any trading rules promulgated by the Commission, including

proposed Rule 811(a)(3), which provides for certain participants on the SB SEF, including
facility, that: (1) Facilitates the
requirements relating trading on a SB SEF. See just a single liquidity provider. The
execution of SB swaps between persons; Public Law 111–203, § 763(c) (adding Section
and (2) is not a national securities 3D(a)(1) and (d)(1) of the Exchange Act). 40 See infra Section VIII.C.
exchange.36 37 See, e.g., Bloomberg Letter, supra note 23, at 2, 41 Regardless of the number of participants to
and MFA Letter, supra note 23, at 16. which a RFQ was sent, the response(s) to that RFQ
36 As discussed infra Section XXI, an entity that 38 See supra notes 23 to 25.
would be required to be included in the composite
meets the definition of SB SEF would be required 39 See Public Law 111–203, § 763(a) (adding indicative quote of the SB SEF. See infra note 152
to register as a SB SEF or a national securities Section 3(77) of the Exchange Act). and accompanying text.
Commission requests comment on among dealers more than if RFQs to a facility or system (‘‘multiple participant
whether in addition to providing this single dealer were permitted. This to multiple participant requirement’’).
flexibility to investors initiating RFQs, competition may lead to lower spreads Likewise, a platform where there is a
the interpretation should also set a floor as dealers compete with each other on single dealer interacting with multiple
for the minimum number of liquidity price. Further, this competition may customers on the other side of the
providers that must be included in an provide for a more robust composite transaction would not appear to meet
RFQ (and, if so, what that minimum indicative quote because a greater the ‘‘multiple participant to multiple
number should be). Commenters should number of responses would be participant’’ requirement because the
be mindful that in proposing its incorporated into the composite. In dealer is only one person. This would
interpretation of the definition of SB addition, requiring that RFQs be sent to be true for aggregated single-dealer
SEF, the Commission is trying to more than one dealer provides for the platforms as well, because a participant
balance the above-stated goal of possibility that a response from a dealer on such a platform may only submit one
encouraging SB swap trading to move other than the one with whom the request at a time and receive only one
onto regulated markets with the goal of investor may have ‘‘pre-arranged’’ the response at a time, on a dealer-by-dealer
promoting greater transparency in the transaction will result in a better price. basis.
trading of SB swaps. However, market participants have The Commission proposes that the
On the one hand, providing investors expressed a concern that requiring a definition of SB SEF cannot be satisfied
as much choice as possible in broad level of pre-trade transparency, by the simple aggregation of trading
determining how to route an RFQ on a particularly for illiquid products, may interest across trading systems or
SB SEF may incentivize investors to not lead to better prices and in certain platforms to meet the ‘‘multiple
trade on a SB SEF when they otherwise circumstances may lead to worse prices participant to multiple participant’’
might not have made that choice. Since provided by dealers if dealer hedging is requirement. That is, each trading
those investors that have a fiduciary made more difficult after the intent to method—when viewed in isolation—
duty must seek best execution for a trade has been projected to the entire would need to individually meet the
transaction, they may have a natural market. ‘‘multiple participant to multiple
incentive to route to multiple dealers. In addition, the Commission proposes participant’’ requirement on its own.
However, this incentive may be to interpret the statutory requirement Thus, an entity that relies on a bilateral
impacted by the liquidity characteristics that ‘‘multiple participants have the negotiation system with one participant
of the SB swap. Market participants, ability to execute or trade SB swaps by on each end of the telephone or similar
including dealers and buy-side accepting bids and offers made by communication system, but with several
customers, have raised concerns multiple participants in the facility or such conversations occurring
regarding pre-trade transparency of SB system’’ to require a SB SEF to provide simultaneously, could not claim to meet
swap trades, particularly block trades. at least a basic functionality to allow the definition of SB SEF by asserting
They believe that if other market any participant on the SB SEF the that when those conversations are
participants know the terms of a trade ability to make and display executable viewed in the aggregate, i.e., bilateral
prior to the time it is executed, those bids or offers accessible to all other negotiation between persons A and B to
other market participants could attempt participants on the SB SEF, if the facilitate one transaction, and bilateral
to profit from the information about the participant chooses to do so. The negotiation between persons C and D, to
trade to the detriment of the initiator of Commission preliminarily believes that facilitate a separate transaction, that the
the trade.42 Therefore, particularly for such a requirement would allow for ‘‘multiple participant to multiple
illiquid SB swaps, an investor may increased price transparency beyond participant’’ requirement is met.45 Two
determine that it is in its best interest what would be found in the bilateral independent single-dealer platforms
not to broadly project its trading OTC market, if a market participant also may not be construed in the
intention, and may choose to send a chooses to utilize the functionality to aggregate in order to meet the ‘‘multiple
RFQ to one dealer.43 Other investors display a bid or offer. participant to multiple participant’’
Under the proposed interpretation of requirement. In each of these situations,
could still benefit by the request
the definition of SB SEF (either with or there is no opportunity for interaction
because the response to that RFQ would
without the additional requirement for a among participants, except on a ‘‘one
become part of the composite indicative
minimum number of liquidity providers participant to one participant’’ basis.
quote of that SB SEF.44 Providing to be included in every RFQ), the However, a system or platform that
investors the choice to send a RFQ to traditional bilateral negotiation model, provides for an auction for a class of SB
only one dealer on a SB SEF—as long as described above, would not fall swaps to be held at a prescribed time
as they have the ability to send it to within the definition of SB SEF because and that allows multiple participants to
more than one if they chose to—may there would be only one party able to interact with each other, with trades
encourage investors to execute trades on seek a quote and only one party that is executed pursuant to a pre-determined
a SB SEF even with respect to SB swaps able to provide a quote in response. The algorithm, could meet the proposed
that are not required to be traded on a Commission believes that the inclusion interpretation of the definition of SB
SB SEF or an exchange, thus supporting of the phrase ‘‘through any means of SEF. In addition, the Commission
the development of trading on regulated interstate commerce’’ in the definition of believes that a limit order book system
platforms and venues in the United SB SEF would not, by itself, support the as described above for the trading of SB
States, rather than in other jurisdictions. proposition that bilateral negotiation swaps could satisfy the proposed
On the other hand, requiring that all would satisfy the definition’s terms; the
RFQs on a SB SEF be sent to more than interpretation of the definition of SB
trading system or platform would still
one dealer could force competition need to meet the other requirements of 45 However, as discussed further below in the
42 See
the definition, specifically, the discussion of the application of the definition of SB
discussion in Section VIII.C and D infra. SEF to wholesale brokers, if person A negotiates
43 See
requirement that multiple participants
Reporting and Dissemination Release, with persons B, C and D as part of the same
supra note 6, at 89–93. have the ability to execute or trade SB transaction, the ‘‘multiple participant to multiple
44 See discussion of proposed Rule 811(d)(5) in swaps by accepting bids and offers participant’’ requirements may be able to be met.
Section VIII.C infra. made by multiple participants in the See infra note 46 and accompanying text.
SEF. Such a model generally would explicitly requested by the customer, for proposed interpretation of the definition
allow interaction between multiple (i.e., any given transaction if a wholesale of SB SEF is intended to balance these
two or more) firm orders or bids and broker typically acts only as the concerns, promoting transparency as
offers. Moreover, to satisfy the intermediary between a given customer well as providing incentives for market
definition of SB SEF, a system or and a single counterparty to facilitate participants to trade SB swaps on
platform would not need to be limited the negotiation of a bilateral contract, regulated markets pursuant to
to only one type of trading model. An the Commission does not believe this Commission rules and oversight, rather
entity that wishes to register as a SB SEF wholesale broker would meet the than in the OTC swap market.
could operate different trading models proposed interpretation of the definition The Commission notes that no matter
for different SB swap products, as long of SB SEF. Because of the different what other functionality a SB SEF puts
as each trading system or platform on its variations of the wholesale broker in place (for example, a multi-dealer
own meets the interpretation of the system, however, each system would electronic RFQ mechanism), it also
definition of SB SEF that the have to be evaluated on its own merits would be required to provide a basic
Commission may adopt. For example, a to determine whether it would meet the functionality to allow any participant on
SB SEF could operate both a multi- Commission’s proposed interpretation the SB SEF the ability to make and
dealer RFQ mechanism for the trading of the definition of SB SEF. display executable bids or offers
of less liquid SB swaps and a limit order The Commission’s proposed accessible to all other participants on
book for the trading of more liquid SB interpretation of the definition of SB the SB SEF, if the market participant
swaps. SEF would result in permitting to be chooses to do so.
The Commission has considered registered as SB SEFs systems or Considering the early stage of
whether brokerage trading, as described platforms for the trading of SB swaps development of the regulatory
above, would satisfy its proposed with a variety of features, and not just framework for the SB swap market and
interpretation of the definition of SB those systems or platforms with the existing structure of the SB swap
SEF. On the one hand, brokerage trading exchange-like features (for example, market, the Commission is mindful that
relies to a certain degree on ‘‘voice’’ systems requiring all trading interest to its interpretation of the definition of SB
communication, such as telephonic be firm and displayed to all participants SEF, and the rules it is proposing herein
communication between the broker and in the market). The concern with taking to implement the Dodd-Frank Act,
its customers. On the other hand, the the latter approach is that the market for could have unforeseen consequences,
wholesale broker 46 acts as an many SB swaps is fairly illiquid.47 either beneficial or undesirable, with
intermediary between various potential However, in the context of SB swaps respect to the shape that this market
participants to a SB swap transaction, that are subject to the mandatory will take. In the Commission’s view, it
and may utilize electronic systems to clearing requirement, the Exchange Act is important that the regulatory
display trading interest with which requires that the trading of SB swaps structure will provide incentives for the
various participants could interact to must occur on a SB SEF or on an trading of SB swaps on regulated
transact in SB swaps. In some respects, exchange, if the SB swap is made markets that are designed to foster
the wholesale broker’s role is similar to available for trading (unless certain greater transparency and competition
that of a floor broker on an exchange, in exceptions apply). Thus, requiring every that are subject to Commission
which the floor broker may use voice registered SB SEF to operate like a oversight, while at the same time allow
communication to find trading interest national securities exchange could for the continued efficient innovation
on the floor that can interact with an result in (1) cleared SB swaps not being and evolution of the SB swap market.
order from its customer. If after the made available to trade on an exchange The Commission therefore is seeking
wholesale broker receives a request from or SB SEF, with the result that SB swaps where appropriate to take a deliberate
a customer (of which there must be would continue to trade in the OTC SB and attentive approach to the regulation
more than one, but which do not need swap market; or (2) if SB swaps subject of SB SEFs that is informed by the state
to be acting simultaneously) to execute to mandatory clearing are made of development of the trading of SB
a trade in a SB swap, and the broker available to trade on an exchange or SB swaps on regulated markets.
then submits that request to all SEF, the continued development of the C. Request for Comments
participants on the system or platform SB swap market could be hindered, if
participants are unwilling to display The Commission seeks commenters’
(or to less than all participants, if the views and suggestions on its proposed
customer has chosen to have the request two-sided firm quotes to participants or
if the requirement to do so results in interpretation of the definition of SB
sent to less than all participants), the SEF. Comment is requested on whether
Commission preliminarily believes that bid-offer spreads that are so wide as to
not be economical). If the definition of the Commission’s proposed
such a model could satisfy the interpretation, which would require an
Commission’s proposed interpretation SB SEF is too narrowly construed, this
could provide a disincentive for SB RFQ to be sent to all participants but
of the definition of SB SEF. Thus, the would allow the quote requesting
swap trading activity to move from the
brokerage trading model may be able to participant to query less than all
OTC swap market to regulated markets.
satisfy the Commission’s proposed participants, is appropriate, or whether
A broader interpretation of the
interpretation of the definition of SB it is too narrow or too broad. Are there
definition of SB SEF could have the
SEF to the extent that multiple other interpretations of the statutory
beneficial result of increasing the
participants would have access to the definition that would promote price
proportion of trading occurring on
system or platform and their trading transparency and competition, as well

regulated markets. Conversely, if the
interest could interact with bids and as incenting market participants to trade
definition of SB SEF is too broadly
offers of multiple other participants in on SB SEFs rather than in the OTC
construed, the Commission’s regulatory
that system or platform. Unless scheme may not adequately advance the market? If so, please explain. Does the
46 For purposes of this proposing release, the term
Dodd-Frank Act’s goal of greater proposed ability of the quote requesting
‘‘wholesale brokers’’ generally refers to brokers that transparency. The Commission’s participant to choose to send a RFQ to
intermediate transactions in SB swaps between less than all participants, raise any
dealers or between dealers and end users. 47 See supra note 35. concerns? Should the decision to
exercise the ability to choose to send a proposed interpretation of the definition register as a SB SEF, and therefore no
RFQ to less than all participants be of SB SEF and, if so, in what ways. longer would be able to trade SB swaps
required on a transaction-by-transaction Should there be a requirement that that are subject to mandatory clearing
basis? Why or why not? When should the execution of trades or the and are made available to trade on a SB
the opt-out feature be permitted other submission of bids and offers be done SEF or an exchange. Are there any types
than on a transaction-by-transaction electronically? of trading venues so critical to the
basis? What would be the potential Would the proposed requirement that proper functioning of the SB swap
benefits or costs of allowing an RFQ to an SB SEF provide functionality to market that the Commission should
be submitted to only one participant? allow any participant on an SB SEF to consider expanding the proposed
What would be the potential benefits or make and display executable bids or interpretation of the definition of SB
costs of requiring that an RFQ be sent offers accessible to all market SEF so that such entities could qualify
to more than one participant? If the participants on the SB SEF, if the as SB SEFs? If so, what trading
Commission were to require that an market participants choose to do so, be platforms are they and what kinds of
RFQ be sent to more than one beneficial? What, if any, impact would conditions should they be subject to?
participant, how many should be the requiring this functionality have on Should any such expansion of the
minimum? Should the Commission access to the SB SEF, or liquidity of the proposed interpretation of the definition
require that an RFQ be sent to two SB swaps traded on the SB SEF? Should of SB SEF to cover such platforms be
participants? Five participants (which is the proposed requirement be modified? temporary and, if so, for how long?
the number proposed by the CFTC)? 48 If so, how? What would be the What would be the impact of such
Or some other number of participants? advantages and disadvantages of such a action on any platform that could meet
Which approach—allowing a RFQ to be proposal? Do commenters believe that an unexpanded definition of SB SEF?
sent to one participant or requiring a market participants would utilize this Market participants have expressed
minimum number greater than one— functionality? Should the Commission concern about the trading of illiquid SB
would better promote transparency? require any particular method of swaps once platforms are configured to
Which approach would encourage displaying such bids or offers? For meet the statutory definition of SB SEF,
greater trading of SB swaps on SB SEFs? example, should the Commission particularly in light of the mandatory
What impact, if any, would the various require that the SB SEF post all of these trade execution requirement. The
approaches have on market participants’ executable bids and offers on a Commission requests comment on the
incentives to trade within the United centralized screen visible by all effect of its proposed interpretation of
States or in other jurisdictions? How participants? What would be the the definition of SB SEF on the trading
should the Commission weigh the advantages and disadvantages of having of illiquid SB swaps. Would a multi-
possibility that trading may move to such a centralized screen? What other dealer RFQ system as discussed above
other jurisdictions in determining how method could be utilized to display sufficiently accommodate the trading of
best to regulate markets within the such bids and offers? illiquid SB swaps? If not, what other
United States? What would be the costs In addition, the Commission requests models could meet the statutory
and benefits to such an approach? What comment on the consequences of its definition of SB SEF and accommodate
if only a small number of dealers were proposed interpretation of the definition the trading of illiquid SB swaps? Would
willing to provide quotes on the of SB SEF on existing platforms that an interpretation of the definition of SB
platform or in a particular SB swap? may seek to register as a SB SEF and on SEF that would allow an investor to
Should the proposed interpretation those platforms that would not be able choose to send an RFQ to one
that affords the ability to opt to have a to meet the proposed interpretation of participant effectively accommodate the
RFQ sent to less than all participants be the definition of SB SEF. What kinds of trading of illiquid SB swaps? Would an
limited to block trades? Should a changes would existing platforms need interpretation of the definition of SB
proposed interpretation that affords the to make to their current structure to fall SEF that would require that an RFQ be
ability to opt to have a RFQ sent to one within the proposed interpretation of sent to more than one participant
participant be limited to block trades? the definition of SB SEF? Are there effectively accommodate the trading of
What would be the benefits and costs of existing platforms that would not be illiquid SB swaps? In responding to
allowing the opt-out flexibility, to any able to restructure to meet the proposed these questions, the Commission
number of participants, for block trades? interpretation, e.g., single-dealer RFQ requests that commenters take into
For non-block trades? Are there factors platforms? If so, what impact, if any, account the Commission’s discussion of
that would cause a different result for would that outcome have on the market SB swaps that are made available to
for SB swaps? Are single-dealer trade in Section VIII.B below.
block trades versus non-block trades?
platforms likely to become obsolete as The discussion above contains several
Would the flexibility for participants to
trading of certain SB swaps moves to SB examples of trading models that the
choose to send a RFQ to less than all
SEFs? Or, are such platforms likely to Commission believes would meet the
participants, including to just one
continue to exist to support the OTC statutory definition of SB SEF. Are there
participant, help to address concerns
market? What impact would the other trading models not discussed
about the impact of pre-trade
proposed interpretation have on above that would meet the statutory
transparency on dealers’ incentives or
competition among existing trading definition of SB SEF? The discussion
ability to provide competitive prices, as
platforms and liquidity in SB swaps as above also contains several examples of
discussed more fully in Section VIII.C?
trading of certain SB swaps moves to SB trading models that the Commission
If so, how so? If not, why not?

The Commission also is interested in SEFs? Are new platforms likely to believes would not meet the statutory
learning commenters’ views on whether emerge to trade SB swaps? definition of SB SEF. Are there other
The Commission is interested in models that should be excluded from
the market for SB swaps would be
learning commenters’ views on the the proposed interpretation?
enhanced or adversely affected by its
effect on the SB swap market if certain The Commission seeks commenters’
48 See Notice of proposed SEF rulemaking by the trading platforms would not meet the views on the role of wholesale brokers
CFTC, supra note 17 (requiring that RFQs be proposed interpretation of the definition in the SB swap market and its view that
disseminated to at least five participants). of SB SEF and would not be able to trading of SB swaps by such brokers
potentially could satisfy the proposed operations of other SB SEFs? If so, how that might otherwise be more efficient
interpretation of the definition of SB so? for that particular product?
SEF. As noted above, the Commission Another example of a trading platform The Commission also is interested in
has identified bilateral negotiation, e.g., that could meet the proposed learning whether its proposed
a trade occurring between two parties interpretation of the definition of SB interpretation of the definition of SB
via the telephone, as a model that would SEF would include a multi-dealer RFQ SEF would influence market
not meet its proposed interpretation of model. Do commenters agree that the participants’ decisions regarding the
the definition of a SB SEF. The definition of SB SEF should cover these jurisdiction in which to execute their SB
Commission understands that wholesale types of trading platforms? If so, why? swap trades. Would the proposed
brokers often act as intermediaries in If not, why not? interpretation affect a market
executing SB swap transactions and Market participants also have participant’s decision as to the
may engage in bilateral negotiation expressed concern about any proposed jurisdiction in which to execute SB
when they attempt to complete an order. interpretation of the definition of SB swaps transactions? If so, how? What
The Commission further understands SEF that would result in others other factors might also influence that
that the orders that wholesale brokers discerning their proprietary trading decision, and how would those factors
attempt to fill may be large and that, as strategies. What would be the impact of weigh against this factor? The
the Commission’s proposed Commission seeks commenters’ views
a result, they may interact with multiple
interpretation of the definition of SB on whether, the ways in which, and to
participants in attempting to execute the
SEF on these concerns? Would one or whom any migration to a different
transactions. The Commission also
more of the models discussed above that jurisdiction would be beneficial or
understands that these brokers may also
would meet the proposed interpretation adverse.
maintain electronic systems for the of the definition of SB SEF provide an Commenters are urged, when
display of trading interest that their adequate level of comfort for these considering all questions regarding the
customers can access. Do commenters market participants? If not, is there a Commission’s proposed interpretation
agree that bilateral negotiation by model that would meet the statutory of the definition of SB SEF, to take into
wholesale brokers, by itself, should not definition of a SB SEF and yet account account the rules being proposed by the
meet the proposed interpretation of the for these market participants’ concerns? Commission to implement the Core
definition of SB SEF? Is the As noted above, the Commission Principles, particularly the rules
Commission’s view correct that there recognizes that the regulatory regarding the treatment and interaction
are ways in which wholesale brokers framework for the SB swap market is of trading interest on a SB SEF, as
could restructure their operations to still in its early stages of development. discussed below.49 The 14 Core
meet the proposed interpretation of the What would be the impact on Principles set forth in Section 3D(d) of
definition of SB SEF? How would such innovation in the SB swap market as a the Exchange Act are integral to the
platforms or systems be structured to result of the proposed interpretation of regulation of a SB SEF. The
meet the proposed interpretation? What the definition of SB SEF? Commission, in Sections VIII to XXII of
would be the impact on the SB swap For example, under the proposed this release, is proposing various rules
market of any restructuring of a interpretation of the definition of a SB to implement these Core Principles, as
wholesale broker’s business to meet the SEF, the SB SEF must provide a well as proposed registration
Commission’s proposed interpretation mechanism for the dissemination of requirements. The Commission also is
of the definition of SB SEF, particularly firm quotes, if any, submitted by interested in commenters’ views on
in light of the fact that trades in SB participants in the SB SEF. This whether the Commission’s proposed
swaps today frequently occur through functionality would allow a ‘‘limit interpretation of the definition of SB
bilateral negotiation? For those order-book’’ model to emerge in parallel SEF, along with its proposed rules
wholesale brokers that currently effect with other trading models on the SB implementing the Core Principles and
transactions in SB swaps, would the SEF, including RFQ mechanisms,
proposed registration requirements, in
modifications that a wholesale provided that each model meets all SB
the aggregate, are too permissive, are
brokerage firm would be required to SEF requirements discussed above. The
appropriate, or are too burdensome at
make to satisfy the proposed proposed interpretation is based on the
this stage of development of the SB
interpretation of the definition of SB premise that allowing more than one
swap market. If commenters believe that
SEF, the proposed rules implementing type of trading model to qualify as a SB
the proposals in the aggregate are too
the Core Principles, and the proposed SEF would, among other things, provide
permissive, the Commission is
registration requirements be too costly investors with more choices as well as
interested in being informed of ways in
or otherwise impracticable to meet so encourage more types of SB swaps to
which they could be enhanced. If
that the firm would find it difficult to trade on venues regulated by the
commenters believe that the proposals
register as a SB SEF? The Commission Commission. Is there any scenario
in the aggregate are too burdensome, the
recognizes that wholesale brokerage where this flexibility could impact
Commission is interested in being
activities differ from dealer to customer competition or innovation because
informed of ways in which they could
activities in effecting SB swap dealers may have their own preferences
be modified.
transactions. Certain proposed for one model over another? If so, under
The Commission is interested in
requirements discussed below, such as what scenario could this occur, and
learning commenters’ views on whether
impartial access, may affect wholesale what consequences could result? For
the combination of the proposed

brokers differently than SB SEFs that are example, would the concentration of
interpretation of the definition of SB
not operated by such brokers. Comment trading in the SB swap market raise
SEF, its proposed rules implementing
is requested on any such different concerns that, and provide incentives
the Core Principles, and its proposed
impact on wholesale brokers that intend for, market participants that have a
registration requirements would be too
to operate SB SEFs, including the costs significant portion of the trading volume
and benefits of such impact. Should the for certain types of SB swaps in one 49 See infra Section VIII (discussing Core
Commission view wholesale brokers’ SB type of market structure to resist trading Principle 2 and the requirements relating to a SB
SEF operations differently than the those SB swaps in a market structure SEF’s trading rules).
onerous and thus would make it Commission believes that Congress did registered under Section 3D of the
impractical or economically infeasible not intend that entities that meet the Exchange Act (or exempt from such
for entities that currently trade SB definition of SB SEF in Section 3(a)(77) registration) are separate categories of
swaps to modify their procedures, of the Exchange Act and that comply regulated entities for the trading of SB
personnel, systems or platform in order with Section 3D of the Exchange Act swaps; and that an entity registered as
to operate as a SB SEF. If this is the case, and the rules and regulations a SB SEF would not also be required to
the Commission seeks commenters promulgated by the Commission register as a national securities
views on ways that its proposed (including the requirement to register as exchange.
interpretation of the definition of SB a SB SEF) also would be subject to Section 36 of the Exchange Act 58
SEF, its proposed rules implementing various requirements applicable to gives the Commission broad authority to
the Core Principles, or its proposed exchanges, including registration as a exempt any person, security, or
registration requirements could be national securities exchange.54 transaction from any provision of the
modified so that entities that currently Section 3(a)(77) of the Exchange Act Exchange Act and any rule or regulation
trade SB swaps could continue to do so defines a SB SEF as a trading system or thereunder. Such an exemption may be
and at the same time the statutory platform in which multiple participants subject to conditions. Using this
requirements of the Dodd-Frank Act have the ability to execute or trade SB authority, the Commission is proposing
relating to SB SEFs would be met. In swaps by accepting bids and offers to amend Rule 3a1–1 of the Exchange
particular, the Commission requests made by multiple participants in the Act 59 by adding paragraph (a)(4) to
comment on the question of whether it facility or system, through any means of exempt any SB SEF from the definition
should adopt a phased approach to the interstate commerce, including any of ‘‘exchange,’’ if such SB SEF provides
implementation and/or application of trading facility, that: (1) Facilitates the a marketplace solely for the trading of
the proposed rules, whereby certain execution of SB swaps between persons; SB swaps (and no other security) and
provisions would become operational and (2) is not a national securities complies with the provisions of
only when certain designated timing, exchange (emphasis added).55 Further, proposed Regulation SB SEF.60 The
volume, liquidity, or other thresholds Section 3C(h) of the Exchange Act effect of this exemption would be that
were met.50 The Commission seeks provides that transactions involving SB an entity that registers as a SB SEF
commenters’ views on the steps it could swaps subject to the clearing would not also have to register as a
take to facilitate the transition to a more requirement be executed on either (1) an national securities exchange.
regulatory environment for those exchange or (2) a SB SEF registered The Commission preliminarily
entities that currently trade SB swaps under Section 3D of the Exchange Act believes that this proposed exemption is
and expect to register as SB SEFs.51 or exempt from registration (unless no necessary and appropriate in the public
exchange or SB SEF makes the SB swap interest and is consistent with the
IV. Exemption From the Definition of available to trade or the SB swap protection of investors because it would
Exchange for Security-Based Swap transaction is subject to a clearing effectuate the intent of the Dodd-Frank
Execution Facilities exception).56 Finally, Section 3D(a)(1) of Act, as expressed in Sections 3(a)(77),
An entity that meets the definition of the Exchange Act provides that no 3C(h) and 3D(a)(1) of the Exchange Act,
SB SEF in Section 3(a)(77) of the person may operate a facility for the and it would eliminate what the
Exchange Act may also meet the trading or processing of SB swaps, Commission believes would be a largely
definition of ‘‘exchange’’ set forth in unless the facility is registered as a SB duplicative oversight of SB SEFs. The
Section 3(a)(1) of the Exchange Act,52 SEF or as a national securities Commission believes that Congress
certain of the terms of which have been exchange.57 The Commission interprets specifically provided a comprehensive
interpreted by the Commission in Rule these provisions to mean that an entity regulatory framework for SB SEFs in the
3b–16 of the Exchange Act.53 The that is registered as a SB SEF cannot Exchange Act, as amended by the Dodd-
also be a national securities exchange; Frank Act, and therefore that such
50 See infra the discussion in Section XXV that an exchange and a SB SEF entities that are registered as SB SEFs
regarding a phased approach to implementation. should not also be required to register
51 See infra Section XXI.A.2 seeking commenters’ 54 See, e.g., Section 6 of the Exchange Act, 15
and be regulated as national securities
views on a possible phased-in approach to any rules U.S.C. 78f, which, among other things, requires a exchanges. The Commission notes that
that the Commission may adopt with respect to SB national securities exchange to enforce compliance
SEFs. by its members and their associated persons with a registered SB SEF that chose to
52 15 U.S.C. 78c(a)(1). The term ‘‘exchange’’ means the Exchange Act and rules and regulations provide a marketplace for the trading of
any organization, association, or group of persons, thereunder, as well as with the exchange’s rules. any security other than a SB swap
whether incorporated or unincorporated, which National securities exchanges are self-regulatory
organizations (‘‘SROs’’) for purposes of the Exchange
would not be in compliance with the
constitutes, maintains, or provides a market place
or facilities for bringing together purchasers and Act and are subject to the requirements of Sections exemption in proposed Rule 3a1–
sellers of securities or for otherwise performing 17 and 19 of the Exchange Act, 15 U.S.C. 78q 1(a)(4). Also, as the SB swaps markets
with respect to securities the functions commonly and78s. Section 17(a)(1) requires national securities continue to evolve, the Commission will
performed by a stock exchange as that term is exchanges to make and keep records for prescribed
periods, and to furnish such records to the
continue to assess the appropriateness
generally understood, and includes the market
place and the market facilities maintained by such Commission as well as any related reports. Section of, and/or take action with respect to,
exchange. 19(b) requires, among other things, SROs to file the proposed exemption from the
53 17 CFR 240.3b–16 defines the phrase ‘‘market proposed rule changes with the Commission. definition of exchange.
place or facilities for bringing together purchasers The Commission requests comment
or sellers of securities or for otherwise performing Section 3a(77) of the Exchange Act).
on the proposed exemption in Rule 3a1–

with respect to securities the functions commonly
performed by a stock exchange’’ to mean an Section 3C(h) of the Exchange Act). The 1(a)(4). Is the exemption necessary or
organization, association or group of persons that Commission notes that in this section Congress appropriate? Are the conditions to the
(1) brings together the orders for securities of chose to use the term ‘‘exchange’’ as opposed to proposed exemption appropriate or
multiple buyers and sellers; and (2) uses ‘‘national securities exchange.’’ An exchange only
becomes a ‘‘national securities exchange’’ upon
should there be any additional
established, non-discretionary methods (whether by
providing a trading facility or by setting rules) registration with the Commission pursuant to
58 15 U.S.C. 78mm.
under which such orders interact with each other, Section 6 of the Exchange Act.
57 See Public Law 111–203, § 763(c) (adding 59 17 CFR 240.3a1–1.
and the buyers and sellers entering such orders
agree to the terms of the trade. Section 3D(a)(1) of the Exchange Act). 60 See proposed Rule 3a1–1(a)(4).
conditions? What are the benefits or V. Conditional Exemption From requirements set forth in the Exchange
drawbacks of the proposed exemption? Regulation as Brokers for Security- Act and the rules and regulations
The definition of ‘‘security-based Based Swap Execution Facilities thereunder applicable to brokers.67 As
swap execution facility’’ and the An entity that meets the definition of discussed above, the Exchange Act, as
definition of ‘‘exchange’’ (certain terms ‘‘security-based swap execution facility’’ amended, establishes the statutory
of which have been interpreted by Rule in Section 3(a)(77) of the Exchange Act structure for SB SEFs to register with
also would meet the definition of the Commission and for the
3b–16 under the Exchange Act) are
‘‘broker’’ set forth in Section 3(a)(4) of Commission to adopt rules and
similar in that they both include the
the Exchange Act.63 The term ‘‘broker’’ regulations that require these entities to
concept of multiple participants and
is generally defined to mean any person comply with the Core Principles and
multiple buyers and sellers,
engaged in the business of effecting enforce compliance with those Core
respectively. However, these definitions Principles and any rules or regulations
are not identical. It is possible that an transactions in securities for the account
of others.64 A SB SEF is defined as a that the Commission may adopt.
entity that trades SB swaps would meet Section 36 of the Exchange Act gives
the criteria of Rule 3b–16 but not the trading system or platform in which
multiple participants have the ability to the Commission broad authority to
definition of SB SEF contained in exempt any person, security, or
Section 3(a)(77) of the Exchange Act. If execute or trade SB swaps by accepting
bids and offers made by multiple transaction from provisions of the
such an entity trades SB swaps that are Exchange Act and the rules
participants in the facility or system,
subject to mandatory clearing and that thereunder.68 Such an exemption may
through any means of interstate
are made available to trade on an be subject to conditions.69 Using this
commerce, including any trading
exchange or SB SEF, it would be authority, as well as its authority to
facility, that: (A) Facilitates the
required to register as a national establish procedures regarding the
execution of SB swaps between persons;
securities exchange, absent a limited and (B) is not a national securities registration of brokers, the Commission
volume exemption pursuant to Section exchange.65 A SB SEF, by facilitating is proposing Rule 15a–12 under the
5 of the Exchange Act.61 Should the the execution of SB swaps between Exchange Act to allow a SB SEF that is
Commission permit such a platform to persons, also would be engaged in the a broker solely due to its activity with
register as a SB SEF pursuant to Section business of effecting transactions in respect to SB swaps executed on or
3D(a)(1) of the Exchange Act? 62 Should securities for the account of others and through the SB SEF to satisfy the
the Commission instead provide an therefore would meet the statutory requirement to register as a broker by
exemption from the definition of definition of ‘‘broker.’’ Absent an registering as a SB SEF. Such person,
exchange for such an entity? If so, why, exception or exemption, a SB SEF that however, must not engage in any
and what should be the conditions to effects transactions in SB swaps would activity that would require registration
any such exemption? What would be be required to register as a broker as a broker other than facilitating the
the benefits or drawbacks of any such pursuant to Sections 15(a)(1) and (b) of trading of SB swaps on or through the
exemption? the Exchange Act 66 and to comply with SB SEF in a manner consistent with
the reporting and other requirements Regulation SB SEF. For example, acting
61 The trading of a SB swap on an ATS when that
applicable to brokers under the as an agent to a counterparty to a SB
SB swap is subject to mandatory clearing and is Exchange Act and rules and regulations swap trade or acting in a discretionary
made available to trade on a SB SEF or a national
securities exchange would not satisfy the thereunder. manner with respect to the execution of
requirement of Section 3C(h) of the Exchange Act. As the Commission noted in its a SB swap trade would indicate that
Section 3C(h) of the Exchange Act states that, with discussion regarding the exemption such person may be acting as a broker
respect to transactions involving SB swaps subject from the definition of ‘‘exchange’’ for SB and, if the person is acting as a broker,
to the clearing requirement of subsection (a)(1) of
Section 3C of the Exchange Act, the counterparties SEFs, the Exchange Act, as amended by it would be required to register as such,
shall (A) execute the transaction on an exchange; the Dodd-Frank Act, sets forth a unless an exemption or exception from
or (B) execute the transaction on a SB SEF comprehensive regulatory framework registration was available. If an entity,
registered under Section 3D of the Exchange Act or for SB SEFs. The Commission believes such as an inter-dealer broker, for
a SB SEF that is exempt from registration under
section 3D(e) of the Exchange Act. Although, as that this framework indicates that example, elects not to separate its inter-
noted above, Section 3C(h) uses the term Congress did not intend for entities that
67 Brokers and dealers must comply with the
‘‘exchange’’ as opposed to ‘‘national securities meet the definition of SB SEF in Section
exchange,’’ an ATS would not satisfy this Exchange Act provisions and rules and regulations
3(a)(77) of the Exchange Act and that thereunder applicable to them. See, e.g., Section 15
requirement because an ATS is exempt from the
definition of exchange pursuant to Rule 3a1–1 comply with Section 3D of the Exchange of the Exchange Act, 15 U.S.C. 78o, and rules and
under the Exchange Act. Act and the rules and regulations regulations thereunder. For example, brokers and
62 Section 3D(a)(1) of the Exchange Act states that thereunder (including the registration as dealers must comply with a number of regulations
‘‘no person may operate a facility for the trading or that govern their conduct, such as rules relating to
a SB SEF) also to be subject to all of the customer confirmations and disclosure of credit
processing of security-based swaps, unless the
facility is registered as a security-based swap terms in margin transactions. See 17 CFR 240.10b–
63 15 U.S.C. 78c(a)(4).
execution facility or as a national securities 10 and 17 CFR 240.10b–16. They also must comply
64 Id. The term ‘‘security’’ in Section 3(a)(10) of with a number of financial responsibility
exchange under this section.’’ Section 3(a)(77) of the
Exchange Act defines ‘‘security-based swap the Exchange Act includes a ‘‘security-based swap.’’ regulations, such as the net capital and customer
execution facility’’ to mean a trading system or See 15 U.S.C. 78c(a)(10). protection rules. See 17 CFR 240.15c3–1 and 17
platform in which multiple participants have the 65 See Public Law 111–203, § 761(a) (adding CFR 240.15c3–3. Among other things, registered
ability to execute or trade SB swaps by accepting Section 3(a)(77) of the Exchange Act). brokers and dealers also must make and keep
bids and offers made by multiple participants in the 66 15 U.S.C. 78o(a)(1) and (b). Section 15(a)(1) current books and records relating to their business
facility or system, through any means of interstate generally provides that, absent an exception or and detailing, among other things, securities
commerce, including any trading facility, that (A) exemption, a broker or dealer that uses the mails transactions, money balances, and securities
facilitates the execution of SB swaps between or any means of interstate commerce to effect positions; keep records for required periods and
persons; and (B) is not a national securities transactions in, or to induce or attempt to induce furnish copies of those records to the Commission
exchange. The Commission interprets these two the purchase or sale of, any security must register on request; and file certain financial reports with
provisions, taken together, to require registration as with the Commission. Section 15(b) generally the Commission. See 17 CFR 240.17a–3, 17 CFR
a SB SEF or a national securities exchange for any provides the manner of registration of brokers and 240.17a–4, and 17 CFR 240.17a–5.
68 15 U.S.C. 78mm.
entity that meets the definition of SB SEF in Section dealers and other requirements applicable to
3(a)(77) of the Exchange Act. registered brokers and dealers. 69 See id.
dealer broker from its SB SEF or create under the Exchange Act is necessary Commission add additional conditions
a subsidiary for its SB SEF, and instead and appropriate in the public interest to its exemption, including requiring
chooses to operate the SB SEF as the and consistent with the protection of compliance with any other statutory
same entity as the broker, the inter- investors because it would eliminate provisions or any other rules or
dealer broker would not qualify for the what the Commission believes would be regulations applicable to brokers? If so,
exemption. unnecessary additional regulation of SB which ones, and why? Should the
In addition, the Commission is SEFs. Because SB SEFs would be Commission exempt SB SEFs from the
proposing to conditionally exempt any required to register as such under provisions of SIPA? If not, why not?
SB SEF from the Exchange Act and the Section 3D of the Exchange Act, it The Commission seeks comment on
rules and regulations thereunder would be unnecessary for them also to whether there is a need for SB SEFs to
applicable to brokers, except Exchange be subject to statutory and regulatory become members of a national securities
Act Sections 15(b)(4), 15(b)(6), and provisions governing brokers, subject to association. Would it be beneficial to
17(b).70 Under the proposed Rule, three certain exceptions set forth in the require SB SEFs to become members of
key provisions of the Exchange Act that proposed rule. The Commission a national securities association to
serve as the basis for Commission believes that Congress specifically provide an additional level of regulatory
examination and enforcement of the provided a comprehensive regulatory oversight in addition to oversight by the
Federal securities laws with respect to framework for SB SEFs in the Exchange Commission? Why or why not? Should
a registered broker would continue to Act, as amended by the Dodd-Frank Act, the proposed exemption include a
apply to a SB SEF that relies on the and therefore that such entities condition requiring SB SEFs to comply
exemption in proposed Rule 15a–12. generally should not also be regulated as with Section 15(b)(8) under the
Section 17(b) of the Exchange Act 71 brokers where such regulation would be Exchange Act,78 which requires a
authorizes the Commission to conduct duplicative and unnecessary. As such, registered broker to be a member of a
reasonable periodic, special, or other the Commission preliminarily believes registered national securities association
examinations, of ‘‘[a]ll records’’ that the broker registration and unless such broker effects transactions
maintained by entities described in oversight process can be accomplished solely on a national securities exchange
Section 17(a),72 including registered largely through the entity’s registration of which it is a member? What would
brokers.73 These examinations may be as a SB SEF. In this regard, the be the advantages or disadvantages of
conducted ‘‘at any time, or from time to Commission also believes that it would such membership?
time,’’ as the Commission ‘‘deems be unnecessary and inconsistent with As noted above, the proposed Rule
necessary or appropriate in the public the comprehensive regulatory would not apply in those instances
interest, for the protection of investors, framework for SB SEFs to require a SB when the SB SEF is engaging in activity
or otherwise in furtherance of the SEF, which would not be a custodian of that is not solely related to the
purposes of [the Exchange Act].’’ 74 customer funds or securities and would execution of SB swaps on or through the
Proposed Rule 15a–12 also would not not otherwise operate as a broker, to facility, e.g., when the broker provides
exempt a broker that registers as a SB comply with SIPA. SIPA is a services such as acting as an agent to a
SEF from the statutory disqualification comprehensive regulatory scheme for counterparty to an SB swap trade or acts
provisions in Sections 15(b)(4) and (6) the orderly liquidation of failed broker- in a discretionary manner with respect
of the Exchange Act, both with respect dealers and the return of customer to the execution of SB swap trades. In
to itself and with respect to its property. If additional regulation is such instances, should the broker be
associated persons.75 Further, pursuant developed for brokers, any application required to comply with all Exchange
to proposed Rule 15a–12(d), a broker of such regulation to SB SEFs would be Act and Commission requirements
registered under Section 15a–12(a) of proposed by rule. Any order, such as a relating to brokers? If so, how would the
the Exchange Act that does not engage suspension of the registration or trading broker be able to separate its brokerage
in any activity other than the facilitating of a security pursuant to Sections 12(j) function from its activities as a SB SEF?
and trading of SB swaps on or through or 12(k) of the Exchange Act,77 if What potential conflict concerns would
the SB SEF in a manner consistent with applicable to a SB SEF, would specify be raised, if any, if an entity that was
Regulation SB SEF would be exempt that it would be applicable to a SB SEF. engaged in brokerage activity in SB
from the Securities Investor Protection The Commission notes that it is not swaps on a SB SEF were affiliated with
Act (‘‘SIPA’’), including membership in exempting SB SEFs from registration as that SB SEF, or if an entity were
the Securities Investor Protection brokers; rather, it is proposing to engaging in brokerage activity in SB
Corporation.76 eliminate an additive layer of regulation swaps on a SB SEF in the same legal
The Commission believes that the that the Commission believes is not entity that operates the SB SEF? If
exemption in proposed Rule 15a–12 necessary in light of its regulatory commenters believe that such activity
oversight of SB SEFs. The Commission would raise concerns, should the
70 See proposed Rule 15a–12(c). does not believe, however, that it would Commission require the entity’s
71 15 U.S.C. 78q(b). See also 15 U.S.C. 78m(h)(4). be in the public interest to exempt SB brokerage activities and its SB SEF
72 15 U.S.C. 78q(a).
73 15 U.S.C. 78q(b).
SEFs from the examination activities to be conducted on separate
74 Id.
requirements of Section 17(b) of the legal entities? Or, should the
75 15 U.S.C. 78o(b)(4) and (6). See also 15 U.S.C. Exchange Act, the statutory Commission impose requirements on
78c(a)(18) (defining ‘‘person associated with a disqualification provisions of Sections the ability of a broker to be affiliated
broker or dealer’’ or ‘‘associated person of a broker 15(b)(4) and (6) of the Exchange Act. with a SB SEF? If so, what conditions
or dealer’’). The Commission requests comment should the Commission impose, and
76 Section 36 of the Exchange Act gives the
Commission broad authority to exempt any person,

on all aspects of its proposed rule. how would they address any potential
security, or transaction from any of the provisions Specifically, the Commission requests conflict concerns?
of the Exchange Act. This authority would include comment on the scope, form, and Are there any potential conflict
the ability of the Commission to grant an exemption conditions of the proposed exemption. concerns raised if a wholesale broker is
under Section 36 from certain requirements of
SIPA. See Securities Exchange Act Release No.
Is the exemption necessary? Should the affiliated with a SB SEF, or is operating
40594 (October 23, 1998), 63 FR 59362, 59366, n.
31 (November 3, 1998). 77 15 U.S.C. 78l(j) and (k). 78 15 U.S.C. 78o(b)(8).
in the same legal entity as a SB SEF? If small group of market participants market.84 Under Core Principle 6, SB
so, what are those concerns, and what dominates much of the trading in SB SEFs are required to establish and
are commenters views on whether and swaps, and exerts control over access to enforce rules and procedures for
how such concerns should be the SB swaps market, it raises concerns ensuring the financial integrity of SB
addressed? about open access and competition. If swaps entered on or through the
What would be the effect of having SB SB SEFs are controlled by a small group facilities of the SB SEF, including the
SEFs join a registered securities of dealers who also dominate trading in clearance and settlement of SB swaps
association without having a the market for SB swaps, the dealers pursuant to Section 3C(a)(1) of the
comparable SRO for security-based may have economic incentives to exert Exchange Act.85 The Commission does
swap dealers (‘‘SB swap dealers’’) or undue influence to restrict the level of not believe that the requirement for
major security-based swap participants access to SB SEFs and thus impede impartial access to a SB SEF under Core
(‘‘major SB swap participants’’)? Because competition by other market Principle 2 means that it must allow
SB SEFs would be subject to regulatory participants in order to increase their unfettered access to any and all persons.
obligations, should the Commission ability to maintain higher profit Rather, the requirements of Core
provide guidance on the acceptable margins.82 At the same time, in the Principle 6 that SB SEFs ensure the
scope of any outsourcing of regulatory absence of clearing or other financial financial integrity of transactions on
matters that the SB SEF could safeguards, counterparties assess the their markets, particularly with respect
undertake? degree of credit risk posed by each to the mandatory clearing requirement,
other, and enter into SB swap permit SB SEF to have minimum
VI. Access to Security-Based Swap
transactions only with other persons standards for access to their markets,
Execution Facilities
deemed to have an acceptable level of though such access must be provided on
The Dodd-Frank Act does not define an impartial basis.
credit risk. Therefore, in the OTC
the categories of market participants In recognition of the challenges in
market for SB swaps, open access and
that may have access to trading on a striking the balance between impartial
containing counterparty credit risk may
registered SB SEF or the terms of such access and financial integrity goals of
be viewed as competing and potentially
access. For the purposes of providing the Dodd-Frank Act, and in view of the
conflicting goals.
guidance on this issue and to ensure current dominance of trading in SB
that SB SEFs grant access to their The Dodd-Frank Act addresses these swaps in the OTC market by a small
markets in a manner that is consistent competing concerns in several ways. number of dealers, the Commission is
with the Core Principles in Section 3D Section 3C(a)(1) of the Exchange Act proposing Rule 809 and Rule 811(b) to
of the Exchange Act, the Commission is requires the mandatory clearing of SB establish certain baseline principles for
proposing Rule 809 and 811(b). swaps that the Commission determines granting access to SB SEFs in
Proposed Rule 809 would set forth the must be cleared.83 With respect to compliance with the requirements of
categories of persons that would be trading on SB SEFs, the Dodd-Frank Act both Core Principles 2 and 6.
permitted to have direct access to requires SB SEFs to establish rules for Specifically, proposed Rule 809(a)
trading on a registered SB SEF as a both impartial access to their markets through (c) and proposed Rule 811(b)
participant and also the terms and and the financial integrity of would require that SB SEFs enact and
conditions that the SB SEF would need transactions on their markets, including apply objective standards for access to
to adopt for granting such access.79 with respect to clearance and their markets, in compliance with the
Proposed Rule 811(b) would elaborate settlement. Specifically, Core Principle impartial access requirement of Core
on the standards for providing impartial 2 requires SB SEFs to provide market Principle 2. Proposed Rule 809(a) and
access.80 The purpose of the proposed participants with impartial access to the (c)(1) through (4) would establish
rules is to ensure that access to SB SEFs certain minimum, objective standards
is granted in a manner that strikes an proposed Regulation MC, however, took issue with for SB SEF participants, in compliance
appropriate balance between the this statistic because the OCC data included with the financial integrity of
statutory requirements of impartial information about U.S. dealers only. See, e.g., Letter
from Barry L. Zubrow, Executive Vice President &
transactions requirements of Core
access (Core Principle 2) and financial Chief Risk Officer, JP Morgan Chase & Co., to Principle 6.
integrity of transactions (Core Principle Elizabeth M. Murphy, Secretary, Commission, and
6) for SB SEFs. David A. Stawick, Secretary, CFTC, dated A. Impartial Access
The Commission understands that, November 17, 2010. Proposed Rule 809(a) would provide
82 In addition, these market participants might be
currently, trades in SB swaps occur motivated to restrict the scope of SB swaps that are
that only registered SB swap dealers,
among dealers on OTC inter-dealer made available for trading at SB SEFs if there is a major SB swap participants, or brokers
markets, and between dealers and end- strong economic incentive to keep such SB swaps (as defined in section 3(a)(4) of the
user customers on single- or multi- in the OTC market. Conflicts of interest concerns Exchange Act), or eligible contract
relating to SB SEFs are discussed in greater depth
dealer OTC dealer-to-customer markets in the release proposing Regulation MC, which
participants 86 would be eligible to
or through bilateral negotiations. In recently was published by the Commission as part
addition, trading of SB swaps in these of a rulemaking mandated by Section 765 of the 84 See Public Law 111–203, § 763(c) (adding
OTC markets is dominated by a small Dodd-Frank Act. See Securities Exchange Act Section 3D(d)(2) of the Exchange Act).
Release No. 63107 (October 14, 2010), 75 FR 65882 85 See Public Law 111–203, § 763(c) (adding
number of large swap dealers.81 When a (October 26, 2010) (‘‘Regulation MC Proposing Section 3D(d)(6) of the Exchange Act). Section
Release’’). Section 765 of the Dodd-Frank Act 3C(a)(1) makes it unlawful for a person to engage
79 See proposed Rule 809. requires the Commission to adopt rules to mitigate in a SB swap unless the SB swap is submitted for
80 See proposed Rule 811(b). specified conflicts of interest relating to SB SEFs, clearing to a registered clearing agency, if the SB
81 See Office of the Comptroller of the Currency security-based swap clearing agencies, and SBS swap is required to be cleared. See Public Law 111–
(‘‘OCC’’), Quarterly Report on Bank Trading and exchanges. 203, § 763(a) (adding Section 3C(a)(1) of the
Derivatives Activities, First Quarter 2010 83 See Public Law 111–203, § 763(a) (adding Exchange Act).
(‘‘Derivatives activity in the U.S. banking system Section 3C(a)(1) of the Exchange Act). Section 86 The term ‘‘eligible contract participant’’ is
continues to be dominated by a small group of large 3C(a)(1) makes it unlawful for a person to engage defined in Section 3(a)(65) of the Exchange Act as
financial institutions. Five large commercial banks in a SB swap unless the SB swap is submitted for having the same meaning as in Section 1a of the
represent 97% of the total banking industry clearing to a registered clearing agency, if the SB CEA (7 U.S.C. 1a). As discussed above, this term
notional amounts * * *.’’). Several commenters on swap is required to be cleared. Continued
become participants in a SB SEF. with proposed Rule 811(b), which The Commission believes that
Proposed Rule 809(b) would require a would require every SB SEF to establish impartial access to SB SEFs would work
SB SEF to permit all eligible persons fair, objective, and not unreasonably in conjunction with rules proposed by
that meet the requirements for becoming discriminatory standards for granting the Commission to mitigate conflicts of
a participant under Rule 809(a) and the impartial access to trading on the interest that could arise when a small
SB SEF’s rules to become participants in facility.91 Proposed Rule 811(b) would number of market participants,
the SB SEF, consistent with the require that a SB SEF may not including their related persons, exercise
requirements for impartial access in unreasonably prohibit or limit any control or undue influence over a SB
Core Principle 2 and proposed Rule person with respect to access to the SEF either through ownership of voting
811(b).87 Proposed Rule 809(b) would, services offered by the SB SEF by interests or participation in the
however, permit a SB SEF to choose to applying those standards in an unfair or governance of the SB SEF.97 The
not permit any eligible contract unreasonably discriminatory manner.92 Commission requests comment,
participants that are not registered with Proposed Rule 811(b)(3) also would however, on the extent to which both
the Commission as a SB swap dealer, require every SB SEF to make and keep types of rules are necessary to ensure
major SB swap participant, or broker (as records of all grants, denials, or fair access to SB SEFs.
defined in section 3(a)(4) of the Act 88) limitations of access and to report that B. Financial Integrity
(‘‘non-registered ECP’’), to become information on proposed Form SB
participants in the SB SEF. Thus, under SEF 93 and in the annual compliance As noted above, proposed Rule 809(a)
the proposed rule, while a SB SEF could report of the Chief Compliance Officer would permit only persons that are
choose to not allow any non-registered (‘‘CCO’’) pursuant to proposed Rule registered with the Commission as SB
ECPs to become participants, if the SB 823(c). swap dealers, major SB swap
SEF chose to permit such non-registered participants, or brokers, or persons that
ECPs to become participants in the SB As was the case when the are eligible contract participants (as
SEF, it could not selectively prohibit Commission adopted Regulation ATS,94 defined in section 3(a)(65) of the Act) to
certain non-registered ECPs from these provisions are based on the become participants of a SB SEF.98
becoming participants if they otherwise principle that qualified market Permitting registered SB swap dealers,
satisfied the SB SEF’s requirements. In participants should have fair access to major SB swap participants, and brokers
effect, proposed Rule 809(b) would limit the nation’s securities markets. Under to become participants would support
the discretion involved in admitting the proposal, a SB SEF would have the SB SEF’s duty to ensure the
participants to a SB SEF because it flexibility in establishing standards for financial integrity of transactions,
would impose an affirmative impartial access so long as those including the clearance and settlement
requirement on SB SEFs to grant standards are fair and objective and do of SB swaps, under Core Principle 6.99
qualified persons access to their markets not unreasonably discriminate, and the Registered SB swap dealers, major SB
as participants.89 SB SEF does not apply the standards in swap participants, and brokers are all
Proposed Rule 809(c) would require a an unfair or unreasonably subject to, or would be subject to,
SB SEF to establish rules setting forth discriminatory manner. For example, a minimum financial responsibility
requirements for eligible persons to SB SEF could establish objective requirements (including margin and net
become participants in the SB SEF minimum capital or credit requirements capital requirements) and business
consistent with the SB SEF’s obligations for participants, as long as they were not conduct requirements as a result of their
under the Exchange Act and the rules designed to, and did not have the effect registered status under the Exchange
thereunder, and includes certain of, unreasonably discriminating among Act, which the Commission believes
enumerated minimum standards.90 persons seeking access to the SB SEF.95 would serve as a useful baseline for
Proposed Rule 809(c), by requiring a SB Similarly, a SB SEF could reasonably ensuring the financial integrity of their
SEF to codify its standards for becoming deny access to participants based on an transactions entered on SB SEFs.100
a participant in its market, would make unfavorable disciplinary history.
the process of admitting participants Provided that these or other standards 97 See Regulation MC Proposing Release, supra
transparent and rules-based, and are objective and applied consistently to note 82.
98 See proposed Rule 809(a). The term
thereby more objective. In addition, all potential participants, a SB SEF
‘‘participant,’’ when used with respect to a SB SEF,
such rules would have to be consistent could be considered to be granting or would mean a person that is permitted to directly
denying access fairly. A denial of access effect transactions on the SB SEF. See proposed
may be further defined by the Commission and the might be unreasonable, however, if it Rule 800.
CFTC pursuant to various sections of the Dodd- were based solely, for example, on the 99 Core Principle 6 requires SB SEFs to establish
Frank Act. See supra note 3. and enforce rules and procedures for ensuring the
87 Core Principle 2 requires a SB SEF to establish
business activities of a prospective
financial integrity of SB swaps entered on or
and enforce compliance with rules relating to any participant that are unrelated to trading through the facilities of the SB SEF, including the
limitation on access to the facility and to provide on the SB SEF.96 clearance and settlement of SB swaps pursuant to
market participants with impartial access to the Section 3C(a)(1) of the Exchange Act. See Public
market. See Public Law 111–203, § 763(c) (adding 91 See Law 111–203, § 763(c) (adding Section 3D(d)(6) of
Section 3D(d)(2) of the Exchange Act). proposed Rule 811(b)(1).
92 See
the Exchange Act).
88 15 U.S.C. 78c(a)(4). proposed Rule 811(b)(2). 100 The Exchange Act requires registered SB swap
93 The Commission is proposing that SB SEFs
89 This proposed requirement is analogous to the dealers and major SB swap participants to comply
fair access requirement for national securities register on Form SB SEF. See infra Section XXII for with certain minimum financial responsibility and
exchanges under Section 6(b)(2) of the Exchange a discussion of proposed Form SB SEF. business conduct requirements. See Public Law
94 17 CFR 242.300 et seq. See Securities Exchange

Act, which also imposes an affirmative duty to 111–203, § 764(a) (adding Sections 15F(e) and (h) of
admit qualified broker-dealers as members. See 15 Act Release No. 40760, (December 8, 1998), 63 FR the Exchange Act). The financial responsibility and
U.S.C. 78f(b)(2). ‘‘The rules of the exchange [must] 70844 (‘‘ATS Adopting Release’’) at notes 245 to business conduct requirements applicable to
provide that any registered broker or dealer or 256. registered SB swap dealers and major SB swap
natural person associated with a registered broker 95 See infra Section XII for a discussion of the
participants will be the subject of a separate
or dealer may become a member of such exchange ability of a SB SEF to impose higher capital rulemaking. Likewise, the Exchange Act requires
* * *.’’ requirements. registered brokers to comply with certain financial
90 See proposed Rule 809(c)(1)–(4) and infra notes 96 The Commission also discussed fair access at responsibility and business conduct obligations
105–109 and accompanying text for a discussion of length in the ATS Adopting Release. See supra note under Section 15(c) of the Exchange Act and the
those proposed provisions. 94 at note 245. rules and regulations thereunder. See 15 U.S.C.
Moreover, the Commission notes that participants of the SB SEFs would be through a participant.104 Therefore, the
these registered persons are subject to required to be registered with the Commission preliminarily believes that
Commission oversight for compliance Commission and be subject to certain proposed Rule 809(a) would not have an
with those requirements.101 margin, net capital, and other financial adverse effect on access to trading SB
At the same time, proposed Rule requirements that, by virtue of their swaps on a SB SEF.
809(a) also would permit a SB SEF to registration, are designed to curtail the To help ensure that access to SB SEFs
choose to allow non-registered ECPs to market risk imposed by their trading is granted in a manner that would
become participants in the SB SEF. If a activities. In contrast, non-registered enable the SB SEF to carry out its
SB SEF chooses to permit non-registered ECPs would not have corresponding responsibilities under Core Principle 6,
ECPs to become participants, the SB requirements under the Exchange Act. proposed Rule 809(c)(1) and (2) also
SEF would be responsible for would require SB SEFs to have rules to
The proposed requirements of Rule
establishing risk management controls require a participant to, at a minimum:
809(d) are designed to reduce the risks
and supervisory procedures reasonably (1) Be a member of, or have an
designed to manage financial, associated with non-registered ECPs that
arrangement with a member of, a
regulatory, and other risks associated have direct access to SB SEFs by
registered clearing agency to clear trades
with the eligible contract participants’ requiring SB SEFs that choose to allow
in SB swaps that are subject to
access under proposed Rule 809(d). non-registered ECPs to be participants to
mandatory clearing pursuant to Section
Proposed Rule 809(d) would require establish, document and maintain risk 3C(a)(1) of the Act and entered into by
SB SEFs that provide direct access to management controls and supervisory the participant on the SB SEF; and (2)(i)
non-registered ECPs as participants to procedures. Since non-registered ECPs to meet the minimum financial
establish, document, and maintain a are not subject to capital and other responsibility requirements 105 and
system of risk management controls and financial requirements, there is a recordkeeping and reporting
supervisory procedures reasonably concern that, in the absence of requiring requirements 106 imposed by the
designed to manage the financial, risk management controls and Commission by virtue of its registration
regulatory, and other risks of direct supervisory procedures, they could as a SB swap dealer, major SB swap
access by eligible contract enter into trades that exceed appropriate participant, or broker, or (ii) in the case
participants.102 The SB SEF’S risk credit or capital limits for their risk of an eligible contract participant, meet
management controls and supervisory capacity. The Commission preliminarily the recordkeeping and reporting
procedures for granting access to non- believes that the SB SEF is best requirements that the SB SEF shall
registered ECPs would be required to be positioned to implement the proposed establish pursuant to proposed Rule
reasonably designed to ensure controls and procedures. 813.
compliance with all regulatory Requiring SB SEFs to put in place
requirements. The proposed The Commission preliminarily
believes that proposed Rules 809(a) and rules that require its participants to be
requirements for SB SEFs in proposed a clearing member of, or have
Rule 809(d) are based on similar (d) would ensure that access to SB SEFs
is sufficiently broad, while at the same arrangements with a clearing member
requirements in Rule 15c3–5(b) and of, a registered clearing agency to clear
(c)(2) under the Exchange Act for ATSs time imposing certain thresholds and
trades in SB swaps that are subject to
that provide access to their markets to conditions for such access to ensure the
mandatory clearing and entered by the
non-broker-dealers.103 financial integrity of transactions on the
participant and, in the case of registered
Allowing eligible contract SB SEF. The Commission preliminarily
participants to be direct participants in believes that the proposed limit on 104 Under the Dodd-Frank Act, transactions in SB
a SB SEF would be consistent with the eligible persons that may become swaps with a market participant that is not an
way the OTC SB swaps market operates participants in SB SEFs under proposed eligible contract participant must be effected on a
today. The Commission preliminarily Rule 809(a) should not have the effect national securities exchange registered under
Section 6(b) of the Exchange Act. See Public Law
believes that it is reasonable and of preventing interested market 111–203, § 763(e) (adding Section 6(l) of the
appropriate to require the SB SEF that participants from trading SB swaps. The Exchange Act). In addition, the offer and sale of SB
provides direct access to non-registered Commission notes, for example, that swaps to market participants that are not eligible
ECPs to undertake certain contract participants would have to be pursuant to
many dealers would likely meet the an effective registration statement under Section 6
responsibilities to manage the risk of definition of SB swap dealer, and of the Securities Act of 1933. See 15 U.S.C. 77f.
those market participants accessing thereby would be able to have direct 105 See Public Law 111–203, § 764(a) (adding
their market. This proposed requirement access to trading SB swaps on SB SEFs Sections 15F(e) of the Exchange Act) and Section
would support the SB SEF’s compliance once they are registered. Many other 15(c) of the Exchange Act, 15 U.S.C. 78o(c). For
with the financial integrity of registered brokers, see also Rule 15c3–1 under the
market participants would qualify for Exchange Act. The financial responsibility
transaction requirement of Core direct access by meeting the definition requirements applicable to registered SB swap
Principle 6. Participants that are SB of ‘‘eligible contract participant’’ in dealers and major SB swap participants will be the
swap dealers, major SB swap Section 3(a)(65) of the Act. The subject of a separate rulemaking.
106 The Exchange Act requires registered SB swap
participants, and brokers that are Commission notes that, although SB dealers and major SB swap participants to keep
SEFs are not required to provide access books and records of activities related to their
78o(c), and Rules 15c1–2, 15c1–3, 15c2–1, 15c2–5, business and provide certain reports of those
and 15c3–1 under the Exchange Act, 17 CFR to their markets to non-registered ECPs
activities. See Public Law 111–203, § 764(a) (adding
240.15c1–2, 15c1–3, 15c2–1, 15c2–5, and 15c3–1. as participants, if a SB SEF should Section 15F(f) of the Exchange Act). The rules
101 The Commission’s regulatory and oversight

provide access to non-registered ECPs to relating to the recordkeeping and reporting
authority includes and would include requirements its markets as participants, it would be requirements of these entities will be the subject of
to keep books and records open to the inspection a separate Commission rulemaking. Likewise, the
and examination authority of the Commission. See required to provide such access
Exchange Act and rules and regulations thereunder
Section 15F(f) of the Exchange Act, Public Law impartially consistent with proposed require registered brokers to keep books and records
111–203, § 764 (adding Section 15F(f) of the Rule 811(b). In addition, the of activities related to their business and provide
Exchange Act) and Section 17(b) of the Exchange Commission notes that eligible contract certain reports of those activities. See Section 17(a)
Act, 15 U.S.C. 78q(b). of the Exchange Act, 15 U.S.C. 78q(a), and see, e.g.,
102 See proposed Rule 809(d)(1). participants that are not participants Rules 17a–3 through 17a–5 under the Exchange Act,
103 See 17 CFR 240.15c3–5(c). could access a SB SEF indirectly 17 CFR 240.17a–3 through 240.17a–5.
SB swap dealers, major SB swap not, how should the categories of such Are the proposed minimum standards
participants, or brokers, to meet the persons be altered? Should certain for participants of a SB SEF, as set forth
minimum financial responsibility proposed participants be excluded from in proposed Rule 809(c), necessary and
requirements imposed by the having direct access to a SB SEF? If so, appropriate? If not, why not? Do the
Commission should strengthen the which ones and why? Should other qualifications for being a participant in
financial integrity of SB swap categories of persons also be allowed to proposed Rule 809(c)(1) and (2)
transactions that occur on the SB SEFs have direct access to a SB SEF? If so, adequately address the financial
by reducing the counterparty credit which ones, and why? Are there any integrity requirements of Core Principle
risks associated with SB swap concerns with allowing non-regulated 6? Do the requirements of proposed
transactions, consistent with Core entities to directly access a SB SEF? Rule 809(c)(2) also foster the ability of
Principle 6.107 Furthermore, the What would be the benefits of allowing SB SEFs to comply with their
requirement for participants to meet the such access? The Commission obligations under Core Principles 2, 4,
minimum recordkeeping and reporting understands that it is the current and 5? What other qualifications should
requirements imposed by the practice for customers to engage in participants in a SB SEF be required to
Commission by virtue of their transactions with dealers without meet as a threshold matter? Are there
registration or, in the case of non- intermediation. How would the other minimum standards that the
registered ECPs, those requirements requirements of proposed Rule 809 Commission should consider requiring?
imposed by the SB SEF, would enable affect that practice? Please describe any Are the requirements in proposed
a SB SEF to obtain the necessary such effects. What would be the result Rule 809(d) pertaining to risk
information to perform their functions of the proposed rule? management controls and supervisory
under Section 3D of the Exchange Act, What are the benefits and drawbacks procedures for SB SEFs that provide
consistent with Core Principle 5, and to of the proposal for SB SEFs to provide direct access to non-registered ECPs
enforce its rules and procedures for direct access to all persons that meet the necessary or appropriate? If so, why? If
ensuring the financial integrity of SB requirements for becoming a participant not, why not and what would be a better
swaps entered on the SB SEF, consistent in their rules? Are there other alternative for addressing risks, if any,
with Core Principle 6.108 The alternatives that the Commission should associated with providing access to non-
recordkeeping and reporting consider to achieve the goal of having registered ECPs?
requirements also should foster a SB impartial access to SB SEFs, consistent The Commission recently adopted
SEF’s ability to comply with its with Core Principle 2? If so, please new Rule 15c3–5 to require broker-
obligations to capture information that explain. dealers to have certain risk management
may be used in establishing whether Proposed Rule 809(b) would allow a controls for direct and indirect access to
SB SEF to choose not to permit non- trading on national securities exchanges
rule violations have occurred under
registered ECPs to become participants. and ATSs.111 Specifically, Rule 15c3–5
Core Principle 2 and to monitor trading
How, if at all, would this proposed imposes requirements on broker-dealers
in SB swaps under Core Principle 4.109
Proposed Rules 809(c)(3) and (4) provision affect access to SB SEFs? that have direct access to trading on
would require SB SEFs to have rules to Should the Commission allow SB SEFs national securities exchanges and ATSs
require a participant to, at a minimum: to have the discretion to choose whether and to broker-dealer operators of ATSs
(1) Agree to comply with the rules, or not to permit non-registered ECPs to that provide direct access to non-broker-
policies, and procedures of the SB SEF, become participants? Or should the dealers. Proposed Rule 809(d) would
and (2) consent to disciplinary Commission mandate whether or not to incorporate a requirement to establish,
require SB SEFs to allow non-registered document, and maintain a system of risk
procedures of the SB SEF for violations
ECPs to become participants? If the management controls and supervisory
of its rules. The Commission notes that
latter, should the Commission require procedures reasonably designed to
the cooperation of participants is critical
SB SEFs to allow, or prohibit, non- manage the financial, regulatory, and
to the SB SEF’s ability to comply with
registered ECPs from becoming other risks of their business activity that
several Core Principles in Section 3D of
participants? What would be the effect is generally based upon the
the Exchange Act, particularly Core
on access of a mandate for either requirements of Rule 15c3–5(b) and
Principles 2 (Compliance with Rules), 4
option? Are SB SEFs that are capable of (c)(2) as they apply to ATSs. However,
(Monitoring of Trading and Trade
establishing the risk management proposed Rule 809 would not prescribe
Processing), and 6 (Financial Integrity of
controls and supervisory procedures the specific components for the required
Transactions). For this reason, the
required in proposed Rule 809(d) likely risk management controls and
Commission believes that it is important
to exclude non-registered ECPs from supervisory procedures that are
for SB SEFs to have rules conditioning
becoming participants to reduce contained in Rule 15c3–5(c) or the other
access to their markets on a participant’s
competition on their markets? Would requirements in Rule 15c3–5(d) and (e).
compliance with the SB SEF’s rules and
having the flexibility to exclude non- Should proposed Rule 809(d) provide
its consent to the disciplinary
registered ECPs from becoming more specific requirements as to the risk
procedures of the SB SEF.
The Commission requests comments participants advance the market entry of management controls and supervisory
on all aspects of the proposed rules smaller SB SEFs that do not have the procedures that should apply to SB
relating to access on SB SEFs. The resources to comply with proposed Rule SEFs that provide access to non-
Commission also requests comments on 809(d),110 thus increasing opportunities registered ECPs as participants? If so,
would some or all of the requirements
whether proposed Rule 809 incorporates for competition across SB SEFs?

the appropriate categories of persons to of Rule 15c3–5(c) be appropriate for SB
110 Proposed Rule 809(d) would require a SB SEF
be allowed direct access to SB SEFs. If
that choose to permit non-registered ECPs to have 111 See Securities Exchange Act Release No.
access as participants to establish, document, and 63241 (November 3, 2010), 75 FR 69792 (November
107 See supra note 99. maintain a system of risk management controls and 15, 2011) (File No. S7–03–10) (adopting release for
108 See Public Law 111–203, § 763(c) (adding supervisory procedures reasonably designed to Rule 15c3–5, which governs the terms for
Sections 3D(d)(5) and (6) of the Exchange Act). manage the financial, regulatory, and other risks of sponsored access or direct access on national
109 See Public Law 111–203, § 763(c) (adding this business activity and to ensure compliance securities exchanges and alternative trading
Sections 3D(d)(2)(B)(ii) and 3D(d)(4)(B). with all regulatory requirements. systems).
SEFs? 112 Please specify and explain SEF provide indirect access to the SB that will deter abuses and provide
why. If not, why not and what would be SEF to non-participants? Or, should the impartial access to their markets.117
a better alternative for SB SEFs in this risk management controls and Proposed Rule 810(b)(1) would
context? Would the remaining procedures required in Rule 15c3–5 also require a SB SEF to establish rules that
requirements of Rule 15c3–5, in apply to their own transactions as provide for the equitable allocation of
paragraphs (d) and (e), be appropriate to participants of a SB SEF (as they do for reasonable dues, fees, and other charges
apply to SB SEFs that provide access to the broker-dealers with direct access among its participants and any other
non-registered ECPs as participants? 113 under Rule 15c3–5)? Why or why not? users of its system.118 This requirement
At this time, the Commission is not Or, are the terms of Rule 15c3–5 is comparable to a similar requirement
proposing to adopt rules relating to inappropriate for SB swap dealers, for national securities exchanges in
direct or indirect access to SB SEFs for major SB swap participants, brokers, or Section 6(b)(4) of the Exchange Act.119
SB swap dealers, major SB swap other persons that are participants of a SB SEFs, like exchanges, presumably
participants, or brokers.114 Should the SB SEF? If so, why and what terms would assess dues, fees, or other charges
Commission adopt rules for risk would be a better alternative to address on the various market participants that
management controls and supervisory the risks associated with direct access or trade on their markets. The purpose of
procedures for SB swap dealers, major sponsored access to SB SEFs? What this proposed requirement is to ensure
SB swap participants, brokers and any other terms and conditions should the that SB SEFs apply those dues, fees and
other participant with direct access to Commission consider to mitigate the other charges among participants and
trading or that may provide indirect risks associated with access to SB SEFs? any other users of their systems in ways
access to trading, on a SB SEF as a What would be the likely impact of that are fair and equitable, and not in
participant? If so, would the terms of having a rule like Rule 15c3–5 apply to ways that inequitably favor, or
Rule 15c3–5 be an appropriate guideline SB swap dealers, major SB swap discriminate against, one or more
for such rules? Please explain why or participants, and brokers that are classes of such persons. Thus, proposed
why not. If so, should the Commission participants in SB SEFs? How would Rule 810(b)(1) would support the
apply some or all of the requirements of current practices for trading SB swaps requirement in Core Principle 2 and the
Rule 15c3–5 to SB swap dealers, major be affected by applying a rule like Rule proposed rules thereunder that SB SEFs
SB swap participants, and brokers that 15c3–5 to participants in SB SEFs? How must provide for impartial access to
are participants in a SB SEF? If only might the evolution of the SB swaps their markets by ensuring that each
some of the requirements of Rule 15c3– market over time be affected by such a market participant’s access to the SB
5 should apply, which ones should rule? Would it promote or impede the SEF is not limited by an inequitable
apply and why? Should the Commission establishment of SB SEFs? distribution of dues, fees, or other
apply requirements similar to those in charges assessed by the SB SEF.120 In
Rule 15c3–5 only when SB swap VII. Core Principle 1—Compliance this regard, proposed Rule 810(b)(1) also
dealers, major SB swap participants, With Core Principles is designed to promote fair competition
and brokers that are participants in a SB Section 3D(d)(1) of the Exchange Act on SB SEFs.
(Core Principle 1) requires a SB SEF, to Proposed Rule 810(b)(2) would
112 Rule 15c3–5(c) requires the financial risk
be registered and maintain registration require a SB SEF to establish rules and
management controls and supervisory procedures systems that are not designed to permit
to be reasonably designed to: (i) Prevent the entry as a SB SEF with the Commission, to
of orders that exceed appropriate pre-set credit or comply with: (i) the Core Principles unfair discrimination among
capital thresholds and, where appropriate, more described in Section 3D(d) of the participants and any other persons
finely-tuned by sector, security, or otherwise by
Exchange Act; and (ii) any requirement using its system. This proposed
rejecting orders if such orders would exceed the requirement is comparable to one of the
applicable credit or capital thresholds; and (ii) that the Commission may impose by
prevent the entry of erroneous orders, by rejecting rule or regulation.115 The Commission requirements for national securities
orders that exceed appropriate price or size proposes to implement the requirements exchanges contained in Section 6(b)(5)
parameters, on an order-by-order basis or over a
of Section 3D(d)(1) of the Exchange Act of the Exchange Act.121 In practical
short period of time, or that indicate duplicative terms, the proposal would compel SB
orders; (iii) prevent the entry of orders unless there in proposed Rule 810(a) of Regulation
has been compliance with all regulatory SB SEF. SEFs to design their rules and systems
requirements that must be satisfied on a pre-order in ways that would treat the various
entry basis or if restricted from trading those
The Commission proposes in Rule market participants in the SB SEF
securities; (iv) restrict access to trading systems and 810(b) to require a SB SEF to have rules similarly, unless appropriate
technology that provide access to permit access to for the maintenance of certain standards considerations, consistent with the goals
persons and accounts that are pre-approved and of fairness in dealings with participants
authorized; and (v) assure that appropriate of the Exchange Act, provide a
surveillance personnel receive immediate post-
on their markets. The proposed justification for treating some market
trade execution reports that result from market requirements in Rule 810(b) are derived participants differently. Like proposed
access. See 17 CFR 240.15c3–5(c). from similar requirements that national
113 Rule 15c3–5(d) requires the financial and
securities exchanges are subject to 117 See Public Law 111–203, § 763(c) (adding
regulatory risk management controls and under Section 6(b) of the Exchange
supervisory procedures to be under the direct and Section 3D(d)(2)(B) of the Exchange Act).
exclusive control of the broker or dealer subject to Act.116 The Commission preliminarily 118 See proposed Rule 810(b)(1).
the requirements of the rule, except under certain believes that the analogous 119 Section 6(b)(4) of the Exchange Act requires
proscribed circumstances. Rule 15c3–5(e) imposes requirements incorporated into the rules of the exchange to provide for the
certain requirements pertaining to regularly equitable allocation of reasonable dues, fees, and
proposed Rule 810(b) are appropriate
reviewing the effectiveness of the risk management other charges among its members and issuers and
controls and supervisory procedures required by because SB SEFs, like national other persons using its facilities. 15 U.S.C. 78f(b)(4).
the rule and for promptly addressing any issues. securities exchanges, are subject to 120 See Public Law 111–203, § 763(c) (adding
See Rule 15c3–5(d) and (e), 17 CFR 242.15c3–5(d) statutory requirements to establish and Section 3D(d)(2) of the Exchange Act) and proposed
and (e). enforce trading and participation rules Rule 811(b).
114 The Commission notes that participants that 121 Section 6(b)(5) of the Exchange Act provides,
provide sponsored access to SB SEFs would be in part, that the rules of the exchange must not be
required to register with the Commission as a designed to permit unfair discrimination between
broker under Section 15(a)(1) and (b) of the Section 3D(d)(1) of the Exchange Act). customers, issuers, brokers, or dealers. 15 U.S.C.
Exchange Act. 116 15 U.S.C. 78f(b). 78f(b)(5).
Rule 810(b)(1), proposed Rule 810(b)(2) participants from dominating or be appropriate to require the SB SEF to
is designed to support the impartial exercising disproportionate influence on allocate fees, dues, and other charges
access requirements of Core Principle 2 the disciplinary process. In other words, equitably? In what instances might a SB
and promote fair competition on SB to the extent that there is more than one SEF seek to differentiate among its users
SEFs. type of group or class of persons that are with respect to fees, dues, and other
Proposed Rule 810(b)(3) would participants in a SB SEF, the charges, including discounts and
require a SB SEF to establish rules that composition of any disciplinary panel rebates? Should any of those instances
promote just and equitable principles of or other disciplinary body should not be permitted or restricted?
trade.122 This proposed requirement is allow one group or class to have Is the Commission’s proposed rule
comparable to a similar requirement for representation that is out of proportion requiring a SB SEF to establish rules
national securities exchanges contained in comparison to other groups or classes and systems that are not designed to
in Section 6(b)(5) of the Exchange of persons that are participants in the permit unfair discrimination among
Act.123 The purpose of proposed Rule SB SEF. In addition, any panel or other participants and any other persons
810(b)(3) is to require SB SEFs to design body that is responsible for disciplinary using its system appropriate and
their rules in a manner that advances decisions, and any appellate body for sufficiently clear? If not, what
the goals of the Exchange Act of the reviewing of disciplinary decisions, additional guidelines should the
promoting fair and competitive markets would have to include at least one Commission consider for determining
for SB swaps. SB SEFs, by establishing independent director.128 The when a rule or system would create
rules for trading and monitoring trading Commission preliminarily believes that unfair discrimination among users of
among buyers and sellers of SB swaps proposed Rule 810(b)(4) under the SB SEF’s system? What, if any,
on their systems, could play a Regulation SB SEF would supplement existing aspects of the current market
significant role in the development of and enhance the proposed requirements for SB swaps may lead to unfair
regulated markets for SB swaps, which of Regulation MC, although the discrimination among market
in turn would help reduce incidents of Commission requests comment on the participants?
systemic risk. extent to which both sets of rules are Is the Commission’s proposed rule
Finally, proposed Rule 810(b)(4) necessary to mitigate potential conflicts requiring a SB SEF to establish rules to
would require a SB SEF to adopt rules of interest with respect to the SB SEF’s promote just and equitable principles of
that, in general, would provide a fair disciplinary process.129 trade appropriate and sufficiently clear?
procedure for disciplining participants Proposed Rule 810(c) would prohibit Are there any specific rules or practices
for violations of the rules of the SB a SB SEF from using any confidential that the Commission should require SB
SEF.124 This proposed requirement is information it collects or receives, from SEFs to adopt for this purpose? If so,
analogous to a similar requirement for or on behalf of any person, for non- what rules or practices, existing or
national securities exchanges in Section regulatory purposes. The purpose of otherwise, should the Commission
6(b)(7) of the Exchange Act.125 A SB proposed Rule 810(c) is to prevent the require? Should the Commission
SEF is required, pursuant to Section SB SEF from taking commercial provide guidance on the types of rules
3D(d)(2) of the Exchange Act, to enforce advantage of any confidential that it believes would promote just and
compliance with any of its rules.126 SB information that it receives in equitable principles of trade?
SEFs may choose to enforce rules on connection with its regulatory Are there any other requirements that
their markets by applying penalties and responsibilities. the Commission should impose on a SB
taking other disciplinary actions against The Commission requests comments SEF to promote fair markets and
participants for violations of their rules. on all aspects of the proposed Rule 810 competition? What factors would most
Proposed Rule 810(b)(4) is designed to implementing Core Principle 1. Are the promote fair markets and competition in
ensure that, when the SB SEF pursues provisions of proposed Rule 810 trading SB swaps, in particular?
disciplinary action against a participant appropriate and sufficiently clear? If Is the proposed requirement that a SB
for violations of the SB SEF’s rules, the not, why not and are there preferable SEF establish a fair procedure for
participant is afforded a fair process. alternatives? What are the benefits and disciplining participants for violations
While the Commission intends for a drawbacks of imposing on SB SEFs of the rules of the SB SEF appropriate
SB SEF to retain flexibility in proposed requirements that are and sufficiently clear? Are there any
establishing its disciplinary procedures, comparable to those statutory provisions standards that the Commission should
the Commission anticipates that such that are applicable to national securities require, at a minimum, for such fair
rules would have to comply with rules exchanges under the Exchange Act? procedures? Is it sufficiently clear how
recently proposed under Regulation Is the Commission’s proposed rule SB SEFs could comply with this
MC,127 should those rules be adopted by that would require a SB SEF’s rules to requirement in light of the requirements
the Commission. Proposed Rule 702(h) provide for fees, dues, and other charges of proposed Rule 702(h) in Regulation
under Regulation MC would require any that are reasonable and equitably MC, which would require the SB SEF to
disciplinary process of a SB SEF to allocated among participants and any preclude any group or class of
preclude any group or class of other persons using its system participants from dominating or
appropriate and sufficiently clear? Is exercising disproportionate influence on
122 See proposed Rule 810(b)(3). this requirement necessary? If not, why the SB SEF’s disciplinary process and to
123 Section 6(b)(5) of the Exchange Act provides, not and are there preferable alternatives have at least one independent director
in part, that the rules of the exchange must be to help support the statutory goal of on any disciplinary panel? If not, in
designed to promote just and equitable principles

of trade. 15 U.S.C. 78f(b)(5). impartial access? Are there what way is the interaction of proposed
124 See proposed Rule 810(b)(4). circumstances under which it would not Rule 810(b)(4) of Regulation SB SEF and
125 Section 6(b)(7) of the Exchange Act requires proposed Rule 702(h) of Regulation MC
the rules of the exchange to provide a fair procedure 128 See proposed Rule 702(h) under Regulation
unclear and what steps could the
for the disciplining of members and persons MC, Regulation MC Proposing Release, supra note
associated with members. 15 U.S.C. 78f(b)(7).
Commission take to improve these
82.
126 15 U.S.C. 78c–4(d)(2). 129 For a discussion of further proposals to provisions? Should the Commission
127 See Regulation MC Proposing Release, supra mitigate conflicts of interest related to SB SEFs, see provide further guidance on how SB
note 82. infra Section XVII. SEFs could establish disciplinary
procedures that would comply with the on the SB SEF. In proposing Rule 811(a) The Commission is proposing several
requirements of proposed Rule 810(b)(4) of Regulation SB SEF to implement this procedural rules in support of the
in Regulation SB SEF? Are there Core Principle, the Commission has proposed requirements for impartial
additional measures that the been informed by its experience with access discussed above in Section VI.
Commission should take to foster the regulating both national securities First, proposed Rule 811(b)(3) would
independence of the SB SEF’s exchanges and ATSs, while recognizing require every SB SEF to make and keep
disciplinary process, such as requiring that differences exist between the cash records of all grants of access, including,
any appeals of disciplinary actions to be equities and listed options markets and for all participants, the reasons for
considered by the SB SEF’s independent the market for SB swaps. granting such access, and all denials or
directors? Much as Sections 6 and 19 of the limitations of access, including, for each
Proposed Rule 810(c) would prohibit Exchange Act 131 require that national applicant, the reasons for denying or
SB SEFs from using for non-regulatory securities exchanges have rules, among limiting access. The purpose of
purposes any confidential information other things, to govern trading, proposed Rule 811(b)(3) is to ensure that
they collect or receive in connection membership, and discipline of its Commission staff would have the ability
with their regulatory obligations. Would members, the Commission preliminarily to examine such records upon request,
this proposed rule provide sufficient believes that, pursuant to Section
protection from the improper use of pursuant to the requirements of
3D(d)(2) of the Exchange Act, SB SEFs proposed Rule 814 of Regulation SB
sensitive information by a SB SEF? If should have similar rules. In this way,
not, what other measures should the SEF.135 In addition, proposed Rule
participants would be fully informed of
Commission consider requiring SB SEFs 811(b)(4) would require each SB SEF to
the rules governing various aspects of
to implement to protect the file notice with the Commission (by
the operation of the SB SEF and the
confidentiality of the non-public filing an annual amendment to
requirements governing trading on the
information that they collect or receive? proposed Form SB SEF 136 and in the
system, and would recognize that there
Please provide specific suggestions and compliance report required of the CCO
would be consequences if they fail to
explain how such suggestions would comply with those rules. Below is a pursuant to Core Principle 14 and
better address the need to keep non- discussion of the rules that, in the proposed Rule 823 of Regulation SB
public information confidential. Commission’s view, would need to be SEF), if the SB SEF prohibits or limits
developed and implemented by SB SEFs access to the facility for any participant,
VIII. Core Principle 2—Compliance or if the SB SEF denies access to an
With Security-Based Swap Execution to comply with Core Principle 2. These
proposed rules are not meant to be an applicant.137 In its notice, a SB SEF
Facility Rules should inform the Commission of the
exhaustive list, and the Commission
Section 3D(d)(2) of the Exchange Act believes that a SB SEF would need to reasons for its denial of access and
(Core Principle 2) states that a SB SEF evaluate its own market to determine provide the Commission with the
shall: (A) Establish and enforce the measures that are necessary to contact information of the aggrieved
compliance with any rule established by implement the Core Principles. participant or applicant.138 Together,
such SB SEF, including (i) the terms and these requirements, which would
conditions of the SB swaps traded or A. Denials or Limitations on Access provide the Commission with
processed on or through the facility and Core Principle 2 is in part concerned information about, or access to
(ii) any limitation on access to the with limitations on access and mandates information about, any instances when
facility; (B) establish and enforce that SB SEFs provide impartial access to the SB SEF has denied access to a
trading, trade processing, and their markets.132 The Commission participant or an applicant to become a
participation rules that will deter abuses discusses the substantive issues relating participant, should help the
and have the capacity to detect, to access, and the rules it is proposing Commission carry out its oversight of
investigate, and enforce those rules, relating to access, in Section VI SB SEFs. This ability is particularly
including means (i) to provide market above.133 The Commission believes that important given the identified potential
participants with impartial access to the one of the most important requirements
market and (ii) to capture information of Core Principle 2 concerns the SB MC designed to mitigate potential conflicts of
that may be used in establishing SEF’s rules regarding impartial access to interest relating to SB SEFs, as discussed in the
whether rule violations have occurred; the facility. The Commission discusses Regulation MC Proposing Release. The additional
and (C) establish rules governing the the procedural rules it is proposing in rules the Commission is proposing herein relating
operation of the facility, including rules to impartial access are designed to work together
connection with the Core Principle 2 with proposed Regulation MC to help mitigate
specifying trading procedures to be used requirement for impartial access below. potential conflicts of interest, as identified in the
in entering and executing orders traded As the Commission noted in the Regulation MC Proposing Release. In addition, as
or posted on the facility, including Regulation MC Proposing Release, discussed in Section XVII, the Commission is
block trades.130 The Commission is proposing governance rules that also are designed
participants of a SB SEF might seek to to help mitigate potential conflicts of interest
proposing to implement these statutory limit the number of direct participants relating to SB SEFs.
requirements in proposed Rule 811(a) of of the SB SEF to limit competition and 135 See infra Section VI discussing proposed Rule
Regulation SB SEF. increase the opportunity for higher 814 regarding the Commission’s ability to obtain
The Commission believes that the information.
profit margins.134 136 See infra Section XXII discussing proposed
primary issues raised by this Core
Form SB SEF. The Commission notes that proposed
Principle relate to the rules that a SB
131 See, e.g., Sections 6(b) and 19(g) of Exchange

Form SB SEF would be a publicly available
SEF must establish and enforce Act, 15 U.S.C. 78f(b) and 78s(g). document, and so such notice would be publicly
regarding access, the SB swaps that 132 See Public Law 111–203, § 763(c) (adding available.
could trade on the system, and Section 3D(d)(2)(A)(ii) and 3D(d)(2)(B) of the 137 See infra Sections XXIII and XXI for a
Exchange Act). discussion of Form SB SEF and the responsibilities
surveillance, investigation and 133 See supra Section VI, notes 79 to 114. of the CCO, respectively.
enforcement of participants’ activities 134 See Regulation MC Proposing Release, supra 138 The Commission could bring an enforcement
note 82. See also infra Section VI. As discussed action if it believed that a SB SEF had denied or
130 See Public Law 111–203, § 763(c) (adding further in Section XVII below, the Commission limited access in contravention of the Exchange Act
Section 3D(d)(2) of the Exchange Act). proposed a number of requirements in Regulation and the rules thereunder.
conflict of interest concerns with a proposal be useful? If so, within what to the clearing requirement of
respect to access to a SB SEF.139 time frame should the review be subsection (a)(1) of Section 3C of the
Further, under proposed Rule completed? Are there any other Exchange Act be executed on an
811(b)(5), a SB SEF would be required requirements the Commission should exchange or on a registered SB SEF
to establish a fair process for the review impose? unless no exchange or SB SEF makes
of any prohibition or limitation on the SB swap available to trade.144
access with respect to a participant or B. Swap Review Committee
Consequently, once a SB swap is ‘‘made
any refusal to grant access with respect Proposed Rule 811(c) would require a available to trade’’ on an exchange or a
to an applicant.140 Fair access to trading SB SEF to establish and enforce SB SEF (and is required to be cleared),
venues for SB swaps, and consequently compliance with rules concerning the it can no longer trade in the OTC
a fair review process, is important, terms and conditions of the SB swaps market, making the determination of
especially when a SB SEF may be the traded on the facility. To carry out this what it means for a SB swap to be ‘‘made
only venue for the trading of a particular requirement, a SB SEF would be available to trade,’’ as well as the
SB swap. The Commission believes that required to establish a swap review decision as to who makes such a
for any such review process by a SB SEF committee 142 to determine the SB determination, central to the
to be fair, at a minimum, those persons swaps that trade on the SB SEF, as well implementation of Title VII of the Dodd-
involved in the decision to prohibit, as the SB swaps that should no longer Frank Act. The Commission has
limit, or deny a participant’s or trade on the SB SEF. The proposed rule received comments that the scope of
applicant’s access to the SB SEF should would require that the composition of those SB swaps that are made available
not be involved in the review of the swap review committee provide for for trading would be important in this
whether such prohibition, limitation, or the fair representation of participants in market because of the mandatory trade
denial was appropriate. Otherwise, the the SB SEF and other market execution requirement and the nature of
purpose of the review process could be participants. Specifically, the proposed the SB swap market,145 which is
undermined. The SB SEF’s Board rule would require that each class of relatively illiquid and has a smaller
should consider the most appropriate participant and other market number of market participants in
body to conduct the internal review participants (such as the customers of comparison to the cash equities and
process, whether that body is the Board participants, including end-users and listed options markets.146
itself, a committee that is delegated this buy-side firms) would have the right to In the Regulation MC Proposing
function by the Board, or some other participate in the swap review Release, the Commission identified
appropriate body. committee. The proposed rule also conflicts of interest that could arise
The Commission requests comment would provide that the members of the when a small number of market
on all aspects of its proposal regarding swap review committee be chosen so participants exercise control or undue
denials or limitations of access. Is the that no single class of participant or influence over a SB SEF.147 When
proposed rule requiring a SB SEF to category of market participant would trading of SB swaps is dominated by a
notify the Commission annually of any predominate. The rules of the SB SEF small number of participants, those
prohibition, limitation, or denial of also would be required to stipulate the
access to its services appropriate and method by which such representation 144 See Section 3C(h) of the Exchange Act. The
sufficiently clear? Would this be useful would be chosen by the Board of the SB requirement in Section 3C(h) of the Exchange Act
information for market participants and SEF.143 Having a compositionally that a SB swap that is made available to trade on
an exchange or a SB SEF shall be traded on an
the public? Should the Commission balanced committee should help to exchange or SB SEF (and not in the OTC market)
require notice more often than assure that the process of determining only applies to SB swaps subject to mandatory
annually? Would the proposal assist in those SB swaps that should trade (or no clearing. Section 3C(h) of the Exchange Act
mitigating conflicts of interest on the longer should trade) would be fair and generally states that, with respect to transactions
involving SB swaps subject to the clearing
part of a SB SEF? If so, how so? If not, that various classes of participants in requirement of paragraph (a)(1) of Section 3C,
why not? the SB SEF, as well as other market counterparties shall: (1) Execute the transaction on
Is the Commission’s proposed rule participants, would have a voice in an exchange; or (2) execute the transaction on a
regarding a SB SEF’s review of its those decisions. registered SB SEF or a SB SEF that is exempt from
denials of access appropriate and registration. However, these requirements shall not
Proposed Rule 811(c)(3) would apply if no exchange or SB SEF makes the SB swap
sufficiently clear? If not, why not and require the SB SEF to establish criteria available to trade or for SB swap transactions
what would be a better approach? Are to be used by the swap review subject to the clearing exception in paragraph (g) of
there any measures that the Commission committee in determining which SB Section 3C.
could require that would result in a swaps should be traded on the SB SEF. In a separate proposed rulemaking, the
Commission, among other matters, is seeking
more meaningful internal review The Commission preliminarily believes comment generally on how the factors identified in
process? For example, should the that this would allow the most the statute relating to the mandatory clearing
Commission explicitly require that the flexibility by permitting a SB SEF to requirement should be applied in making
Board or the regulatory oversight choose whatever criteria it believes are determinations as to whether particular SB swaps
are or should be required to be cleared. See
committee (‘‘ROC’’) review all denials of important in determining which SB Securities Exchange Act Release No. 63557
or limitations on access? 141 Would such swaps to trade, thereby encouraging as (December 15, 2010), 75 FR 82490 (December 30,
much trading of SB swaps on SB SEFs 2010) (File No. S7–44–10).
139 See Regulation MC Proposing Release, supra 145 See, e.g., Commentary by Yves P. Denizé,
as possible.
note 82. Director & Associate General Counsel, TIAA–CREF,
The Dodd-Frank Act requires that
140 See proposed Rule 811(b)(5). Such a process at the Roundtable. Webcast available at http://
is required for all national securities exchanges and transactions involving SB swaps subject www.sec.gov/news/openmeetings/2010/
for ATSs that have exceeded certain volume jac091510.shtml.
thresholds. See Sections 6(c) and 19(e) of the 142 The swap review committee would not be 146 The market for SB swaps today is concentrated
Exchange Act (15 U.S.C. 78f(c) and 78s(e)) and Rule required to be a committee of the Board under the in the hands of a few dealers. See supra note 81,
301(b)(5) (17 CFR 242.301(b)(5)) of Regulation ATS. Commission’s proposed rule, although a SB SEF stating that five large commercial banks represent
141 The Commission proposed in Regulation MC may choose to allow or require members of its 97% of the total banking industry notional
to require a SB SEF to have a ROC, and that the Board to serve on the swap review committee, as amounts.
ROC be composed of independent directors. See the SB SEF would determine. 147 See Regulation MC Proposing Release, supra
Regulation MC Proposing Release, supra note 82. 143 See proposed Rule 811(c)(2). note 82, 75 FR at 65890.
participants may have competitive would not be an automatic requirement trading on the SB SEF to determine
incentives to, among other things, limit that SB swaps subject to mandatory whether the trading characteristics of
the number of SB swaps that are made clearing trade only on a SB SEF or each such SB swap justify a change to
available for trading by a SB SEF to keep exchange simply because they are listed the trading platform being used for that
those SB swaps trading in the OTC on one. particular SB swap. In making such a
market. This could be true even for SB The Commission does not, however, determination, the swap review
swaps that would have sufficient have sufficient data at this time to committee would need to consider
trading activity to trade on a SB SEF.148 propose the objective standards whether (1) the liquidity in each SB
On the other hand, once the pursuant to which a determination swap is at an appropriate level for the
determination has been made that a SB whether a SB swap is ‘‘made available SB swap’s trading platform on which it
swap that is subject to mandatory to trade’’ would be made. The trades; and (2) such SB swap would be
clearing is available to trade on an Commission preliminarily anticipates more suited for trading on a different
exchange or a SB SEF, then such SB that it will separately address how to type of platform, including a platform
swap can no longer trade in the OTC determine when a particular SB swap that provides for increased price
market, even if trading of the SB swap would be considered to be ‘‘made transparency for participants entering
on the exchange or SB SEF were available for trading’’ on an exchange or quotes, orders, or other trading interest.
virtually nonexistent. Thus, a SB SEF pursuant to the directive of The first review could not be earlier
determination by even one SB SEF or Section 3C(h) of the Exchange Act. We than 120 days after the initiation of
national securities exchange that a SB solicit comment in this release, trading for a given SB swap.
swap was available to trade on the however, on how the Commission Proposed Rule 811(c)(4) is designed to
exchange or SB SEF could have should craft an objective standard for ensure that SB swaps that are trading on
unintended consequences for the whether a SB swap is ‘‘made available the SB SEF are trading on an
trading of such SB swap. to trade.’’ For example, an objective appropriate platform. For example, if a
In light of these competing incentives determination could be based on a SB swap is trading in an RFQ
stated above, the Commission formula measuring the percentage of mechanism but trading in the SB swap
preliminarily believes that it would be trading in a particular SB swap that was becomes sufficiently liquid, the SB SEF
appropriate that the decision as to when taking place on exchanges and SB SEFs should consider moving the SB swap to
a SB swap would be considered to be compared to the aggregate percentage of a platform with greater transparency.
‘‘made available to trade’’ on an trading that was taking place in the SB There could be reasons why the SB SEF
exchange or a SB SEF pursuant to swap on exchanges and SB SEFs, and in prefers not to do so, e.g., because the
Section 3C(h) of the Exchange Act the OTC market.150 Alternatively, such predominant dealers on the market
should be made pursuant to objective a determination could be based on prefer to continue trading the SB swap
measures established by the overall volume in the SB swap, in the RFQ platform that does not have
Commission, rather than by one or a wherever executed. In addition, such a the same degree of transparency and
group of SB SEFs. Such objective test could require that a baseline trading thus competition, as a limit order book.
measures could provide that a SB swap threshold for each SB swap be met. For Having such decisions made by the
that is subject to mandatory clearing example, such a threshold could be that, swap review committee, and reported
would be ‘‘made available to trade’’ within a given measurement period, a promptly to the CCO and annually to
unless the SB swap fails to meet a minimum number of transactions in the the ROC and the Board (as discussed in
threshold test that the Commission may SB swap be executed or that a minimum the next paragraph), appear to lessen
adopt or, conversely, that no SB swap notional value in the SB swap be traded. any undue influence that any one class
would be ‘‘made available to trade’’ There may be instances when, because of participants may have in keeping the
unless the SB swap passed a threshold of a low total number of transactions in SB swap trading on a platform that does
test that the Commission may adopt. In a SB swap, it may not be appropriate to not afford the appropriate level of price
either case, under this approach the determine that such SB swap should be transparency for that SB swap.
Commission would in effect interpret made available to trade. Proposed Rule 811(c)(5) would
the phrase ‘‘made available to trade’’ in It also may be appropriate to utilize require the swap review committee to
Section 3C(h) of the Exchange Act as objective measures to determine when a report decisions on each SB swap
meaning something more than the SB swap should no longer be considered promptly to the CCO and annually to
decision to simply trade, or essentially to be made available for trading. If it the ROC. This would include initial
list, a SB swap on a SB SEF or an were determined that a SB swap should decisions on trading SB swaps as well
exchange.149 This approach would have no longer be considered to be made as ongoing determinations pursuant to
the further effect of permitting SB swaps available for trading because, for the reviews of the swap review
to be made subject to mandatory example, among other objective committee. This would help ensure that
clearing independently of whether they measures very little trading in such SB the CCO is kept apprised of changes in
are required to be traded exclusively on swap on SB SEFs has occurred over a the trading of SB swaps so that trading
SB SEFs and exchanges, because there specified time period, such SB swap can be properly monitored.
would be able to trade in the OTC The Commission requests comment
148 Id. market, as well as on exchanges and SB on all aspects of the rules relating to the
149 Pursuant to proposed Rule 811(c), the swap SEFs. swap review committee and its
review committee of each SB SEF would be Proposed Rule 811(c)(4) would responsibilities. Is the Commission’s
responsible for determining which SB swaps the SB require the swap review committee to proposed rule concerning the
SEF permits to be traded on the SB SEF. Under the
proposed approach, however, this decision would periodically review each SB swap composition of the swap review
not be the same as a determination that such SB committee appropriate and sufficiently
swap had been made available for trading within 150 Because all SB swap transactions would be clear? Should the Commission’s rule
the meaning of Section 3C(h) of the Exchange Act. required to be reported to a registered SDR, whether contain more detail about the
The swap review committee’s decision, therefore, they occur on an exchange, a SB SEF, or in the OTC
would not in and of itself be the sole determinant market, the Commission would have access to
requirements for the composition of the
of when a SB swap could no longer trade in the complete information on trading volume regarding committee? If so, what should those
OTC market. each SB swap. requirements be? Should the
Commission require independent available to trade,’’ the Commission Commission should consider? If so,
director representation on the swap could subject SB swaps to mandatory what is it? Over what time period
review committee? clearing independently of whether such should the activity be measured?
Is the Commission’s proposed Rule SB swaps are required to be traded on What would be an appropriate test to
811(c)(3) concerning how the SB SEF SB SEFs or exchanges by, for example, determine that a SB swap should no
should determine whether to trade a SB using an exemptive process or longer be considered to be made
swap appropriate and sufficiently clear? specifying, at the time the mandatory available for trading? Because such a SB
Should the Commission include any clearing determination is made, that a swap would not be trading in the OTC
particular factors that the SB SEF SB swap is not ‘‘available to trade’’ market, a volume test similar to one of
should consider, and, if so, what should unless certain criteria are met. What the suggested tests above to determine
those factors be and why? would be the advantages and whether a SB swap should be
As discussed above, under the disadvantages of such an approach considered to be made available for
proposal the Commission would compared to the Commission’s trading—comparing the aggregate
interpret the phrase ‘‘made available to proposal? percentage of trading on exchanges and
trade’’ in Section 3C(h) of the Exchange The Commission requests comment SB SEFs to overall trading—may not be
Act as meaning something more than on whether it would be appropriate for feasible. How little trading on SB SEFs
the decision to simply trade, or the decision as to when a SB swap should be taking place before the
essentially list, a SB swap on a SB SEF would be considered to be ‘‘made Commission determines that the SB
or an exchange. The Commission available to trade’’ on an exchange or a swap should be permitted to trade again
requests comment on whether SB SEF pursuant to Section 3C(h) of the in the OTC market (because it is no
commenters agree with this approach, Exchange Act to be made pursuant to longer considered to be ‘‘made available
or if, instead, we should consider a SB objective measures established by the for trading’’)? Is there a specific number
swap to be ‘‘made available to trade’’ if Commission, rather than by one or a of trades that would make it appropriate
it is listed on an exchange or a SB SEF group of SB SEFs. If not, why not? If to determine that a SB swap is no longer
in compliance with applicable rules and not, is there another method that considered to be made available for
regulations. What are the advantages commenters would suggest, other than trading? If so, what should that number
and disadvantages of such an approach? having the determination made by SB be? Or, should a test be based on a
Would the approach be more or less SEFs? If so, what is that method? percentage trading volume comparison
simple and cost-effective than the The Commission requests comment of trading activity in a SB swap to a time
proposal, which would involve the on the manner in which the period prior to when it was considered
Commission in determining whether a determination to make a particular SB to be made available to trade? What
SB swap is ‘‘available to trade’’ and swap available for trading would be period of time would be appropriate to
distinguishes this from the made. What would be an appropriate determine if a pattern of lack of trading
determination under proposed Rule method or standards to determine has set in? Should such a determination
811(c)(3) of whether a SB swap should whether a SB swap should be made be based on a test based on something
be traded or listed on a SB SEF? Does available for trading? Should the test be other than trading volume? If so, what
the review under proposed Rule based on the aggregate amount of should such a test be? How should the
811(c)(3) accomplish many or all of the trading in the SB swap on exchanges Commission take into account the
Commission’s regulatory objectives? and SB SEFs and in the OTC market, or possibility that market participants
Would an approach that deems a SB on overall volume, wherever the SB might engage in gaming behavior to
swap ‘‘available to trade’’ if it is listed be swap may be executed? What would be affect the outcome of a test based on
more or less susceptible to manipulation an appropriate volume threshold for trading frequency or volume?
or gaming than the proposed approach? each alternative, and why? Should a Should the presumption be that no SB
Would an approach that deems a SB volume threshold vary by asset class? Is swap is deemed made available to trade
swap ‘‘available to trade’’ if it is listed one test more appropriate for some asset unless it meets the threshold established
generally result in more or less trading classes and the other test more by any test that the Commission may
of SB swaps on exchanges or SB SEFs? appropriate for others? If so, why, and adopt, or should the presumption be
If the Commission were to take the what is the appropriate volume that all SB swaps are deemed available
position that listing of a SB swap on an threshold for each asset class with each to trade unless they fail to meet the
exchange or a SB SEF is the same as test? What would be the appropriate threshold established by any such test?
‘‘made available to trade,’’ could the measurement period for a volume What would be the costs and benefits of
Commission’s potential concerns about threshold and why? On what other each approach?
permitting SB SEFs and exchanges to characteristics could the test be based? Has the Commission correctly
determine whether a SB swap is Frequency of trading? The number of SB identified the potential conflicts with
‘‘available to trade’’ be addressed SEFs on which the SB swap is also SB SEFs that could arise in decisions to
through an exemptive process that trading? make a SB swap available to trade?
could consider potential adverse effects Should there be some minimum level Would the proposal the Commission has
or unintended consequences as to of liquidity in both the OTC market and outlined here help to mitigate those
particular SB swaps? Are the on SB SEFs and exchanges in conflicts? If not, why not?
Commission’s potential concerns about connection with the determination that How, if at all, would having the
permitting SB SEFs and exchanges to a SB swap has been made available to determination about what SB swaps are
determine whether a SB swap is trade? If so, what is the appropriate made available for trading be made
‘‘available to trade’’ affected by the types level of liquidity? What is a baseline pursuant to an objective formula, as the
of trading permitted on a SB SEF, such threshold that SB swaps made available Commission is considering to propose,
as the ability to send an RFQ to only one to trade should meet? Should it be based rather than allowing each SB SEF to
or few other participants? If the on the number of transactions, the make the determination, impact the
Commission were to take the position notional value for a given SB swap, or incentives for creating a SB SEF? Would
that listing of a SB swap on an exchange both, over a set time period? Or, is there the proposal have the effect of chilling
or SB SEF is the same as ‘‘made another baseline threshold that the the creation of SB SEFs because trading
could simply continue in the OTC swaps, and its potential requirement for to have rules concerning doing business
market until trading meets the objective an SB SEF to move trading of the SB on the SB SEF because such rules would
test? If so, how should the swap to a different type of platform provide participants with a uniform set
determination of what is made available operated by the SB SEF that would of expectations for how the SB SEF
to trade be made? How should the provide for greater pre-trade price would operate.
Commission guard against the concern transparency, once certain volume The Commission expects that such
that, if a distinction is not made thresholds are met, sufficiently clear? Is rules would include information as
between ‘‘listing’’ or ‘‘trading’’ of a SB it necessary for a swap review basic as the hours the SB SEF is
swap, and ‘‘making available to trade,’’ committee to review SB swaps trading available for trading, as well as rules
OTC trading could effectively be cut off on limit order book platforms, as well as concerning the manner in which trading
in SB swaps that were made available to multiple dealer RFQ platforms? If not, interest would be handled by the SB
trade, even if market participants why not? Should the Commission SEF. Such rules also would help to
believe that they would benefit from establish a trading activity threshold inform participants as to the types of
continued OTC trading? Is this concern that, if exceeded, would require a SB orders or other trading interest that they
mitigated if the Commission adopts an SEF to move the trading of SB swaps to could enter into the system for
interpretation of the definition of SB a limit order book platform? If so, what execution. The Commission also
SEF that permits an RFQ to be sent to would be the appropriate factors and believes that rules concerning
only one other participant? Why or why threshold? For example, should such prohibited trading practices would be
not? Under such approach, would there factors include the liquidity of the SB important to every SB SEF, so that
still remain benefits for the OTC trading swap? If so, how should such liquidity participants would be aware of the
of certain types of SB swaps by market be measured (e.g., average daily trading scope of allowable behavior on the SB
participants? If so, what would be these volume, frequency of trades, size of SEF. Such rules would help to support
benefits and under which trades)? What would be an appropriate the requirement in Core Principle 2 that
circumstances, and for what types of SB measurement period for any such every SB SEF would have to establish
swaps, would this be the case? How threshold(s)? Should a threshold vary rules that would deter abuses and have
should those benefits, if any, be depending on the type of SB swap? the capacity to detect, investigate and
weighed with the Dodd-Frank Act’s goal Should a threshold be relative (e.g., enforce those rules.
of moving trading in SB swaps onto based on a specified percentage of The Commission believes that it is
regulated markets? overall volume) or absolute (e.g., based important to the efficient trading on a
Would the idea of looking at volume on a specific number of trades in a given SB SEF that the SB SEF provide for the
trading on SB SEFs and SBS exchanges measurement period)? What are the fair treatment of all trading interest on
versus trading in the OTC market be benefits and drawbacks of mandating a its market. In other words, a SB SEF
subject to gaming? For example, would trading activity threshold that, if should have rules designed to enhance
it be possible for firms to avoid having exceeded, would require a SB SEF to liquidity, including rules that are not
SB swaps designated as made available move the trading of SB swaps to a limit designed to disadvantage participants’
to trade, for example, by suppressing SB order book platform? orders, thereby causing them to miss out
SEF trading volume by posting inferior on trading opportunities. Such rules
quotes on SB SEFs while continuing to C. Trading Procedures might include, for example, price/time
offer the identical product in the OTC Proposed Rule 811(d) would require priority or price/size priority rules.151
market at a better price? If so, what every SB SEF to establish and enforce The SB SEF would need to apply these
impact would such behavior have on rules governing the procedures for rules consistently and fairly with regard
the SB swap market? If so, how could trading on the SB SEF, including but not to all participants.
the Commission guard against such limited to: doing business on the SB In addition, as discussed in Section III
behavior? SEF; types of orders or other trading above, the Commission believes that
If the Commission has not adopted a interest available; the manner in which transparency of prices on a SB SEF is a
standard for determining when a SB trading interest would be handled on critical element with respect to the
swap is made available to trade by the the SB SEF, including a proposed operation of a SB SEF. Although the
time a SB swap is determined to be requirement that the rules provide for Commission is not proposing to dictate
subject to mandatory clearing, what the fair treatment of all trading interest; a certain type of trading system or
action, if any, should the Commission the manner in which price transparency trading rules for SB SEFs, it believes
take to clarify the impact of a SB SEF for participants entering orders, requests that a SB SEF would have to meet
or exchange listing a SB swap for for quotations, responses, quotations, or certain basic standards to comply with
trading on its market? Would it be other trading interest into the system the requirements that its rules provide
necessary or appropriate for the would be promoted; the manner in for the fair treatment of all trading
Commission to clarify the meaning of which trading interest, including orders, interest and that these rules address the
‘‘made available to trade’’ in these requests for quotations, responses, manner in which price transparency for
circumstances and, if so, what type of quotations, and transaction data, would participants entering trading interest
clarification should the Commission be disseminated, including whether into the system would be promoted. In
provide? Commenters should address dissemination would be only to this regard, under its proposed
the impact, if any, of any action or participants of the SB SEF or more interpretation of the definition of SB
inaction by the Commission in these broadly, and whether or not for a fee;
circumstances on market participants prohibited trading practices; the 151 Generally, when orders are filled in price/time
handling of clearly erroneous trades; priority, if there are two orders at the same price,
and on the trading of SB swaps, the order that arrived first would be given priority.
including the impact of any trading halts; the manner in which Alternatively, size may be used to determine
clarifications that commenters may block trades would be handled, if priority among trading interest at the same price.
propose. different from the handling of non-block For example, orders may be filled pro-rata, or in
certain proportions based on other factors the SB
Is the Commission’s proposed Rule trades; and any other rules concerning SEF may determine are appropriate. See, e.g.,
811(c)(4) requiring review by the swap trading on the facility. The Commission International Securities Exchange Rule 713, Priority
review committee of the liquidity of SB believes that it is important for a SB SEF of Quotes and Orders.
SEF, if the SB SEF operates a RFQ or disseminate trading interest by such SB believes that when trading has been
similar trading model, the rules of the SEF. The Commission believes that it is halted on an underlying security, it is
SB SEF should include a functionality important for a SB SEF to make clear to appropriate that derivative markets,
that allows the quote requesting its participants, in a rule, how trading such as the options markets and the SB
participant to submit a RFQ to all interest would be disseminated. At the swap market, also halt trading to avoid
participants that are willing to respond same time, the Commission recognizes inefficient pricing and disruptions to
to requests, i.e., those participants that different platforms may require the market.
willing to provide liquidity. The SB different means of disseminating trading Core Principle 2 requires that SB SEFs
SEF, however, could determine to interest, and that each SB SEF is in the establish (and have the capability to
provide the functionality for the best position to determine how such enforce) rules regarding trading
requesting participant to choose to send dissemination should occur on its own procedures. The items enumerated in
the RFQ to less than all other platform. In particular, the Commission proposed Rule 811(d) are not meant to
participants at the request of its believes that proposed Rule 811(d)(5) be an exhaustive list of rules relating to
customer or when the participant is would require a SB SEF to develop rules trading procedures and SB SEFs may
exercising investment discretion. In that would incorporate responses put in place additional types of
addition, the requestor would be able to received on an RFQ system into a categories of rules that they deem to be
determine to whom to send the RFQ. composite indicative quote that is necessary to govern the procedures for
Further, for example, if the SB SEF available to all participants, and that trading on the SB SEF. The Commission
operates a RFQ mechanism, the rules of would not limit the number of dealers preliminarily believes that each SB SEF
the SB SEF should specify that any from whom a participant could request would be in the best position to
response to an RFQ that is provided to a quote. determine precisely those rules that are
the participant submitting the RFQ The Commission also believes that SB necessary and appropriate to ensure that
should be included in the composite SEFs should have rules that concern any its market functions in a fair and orderly
indicative quote of the SB SEF.152 In prohibited trading practices. A SB SEF fashion. The rules of each SB SEF
addition, if a SB SEF displays firm, should determine those trading would be required to be filed as part of
executable trading interest, it must practices that it believes are the initial Form SB SEF application, as
display such interest to all participants. inappropriate to the functioning of its well as in connection with the rule
The Commission believes that it is market. filing process in proposed Rules 805
important to foster pre-trade The Commission also believes that a and 806 of Regulation SB SEF.154
transparency to encourage greater price SB SEF should have rules concerning The Commission requests comment
competition. However, the Commission the handling of clearly erroneous trades, on all aspects of proposed Rule 811(d).
is cognizant of comments received from and that those rules should provide for What are commenters’ views on the
market participants in the SB swap a fair and nondiscriminatory manner of proposed rules relating to trading
market, both from customers (‘‘buy- handling such trades, as well as a procedures? Are the Commission’s
side’’) and liquidity providers (‘‘sell- procedure to resolve any resulting proposed rules concerning trading
side’’), who are concerned about the disputes. Although under ordinary procedures, the need to promote pre-
level of pre-trade price transparency circumstances trades that are executed trade price transparency (proposed Rule
that may be required. Some of these between parties should be honored, the 811(d)(4)) and the rule concerning
commenters have expressed the concern Commission believes that clearly dissemination of trading interest
that pre-trade price transparency could erroneous execution rules are necessary (proposed Rule 811(d)(5)) sufficiently
potentially have an impact on dealers’ because, on rare occasions, the terms of clear? Would proposed Rule 811(d)(4)
incentives or ability to provide the executed trade may indicate that an make a difference in price transparency
competitive prices if others can use the obvious error may exist. In such in the SB swap market? How would it
information that would be made instances, it could be unrealistic to impact behavior? Are there any specific
available through increased pre-trade expect that the parties to the trade had concerns with this proposed rule? If so,
price transparency to trade ahead of the come to a meeting of the minds what are they? Should the proposed rule
order. The proposed rules relating to the regarding the terms of the transaction. In be refined? If so, how? Please provide
dissemination of trading interest are such case, a clearly erroneous specific suggestions.
designed to increase transparency from transaction may have taken place. The What are commenters’ views on the
current levels, while at the same time Commission believes that any clearly proposed requirement that responses to
recognizing the concerns that have been erroneous execution rule should an RFQ must be included in the SB
voiced about the potential effects of pre- provide for a clear and transparent SEF’s composite indicative quote?
trade transparency in certain process for resolving erroneous trades Would this requirement in fact promote
circumstances. In this regard, proposed and for a fair process for hearing appeals pre-trade price transparency? What
Rule 811(d)(5) has been drafted to allow of clearly erroneous decisions. would be the benefits and drawbacks of
maximum flexibility by a SB SEF to The Commission further believes that the Commission’s proposal to include
determine the best manner to it is critical for a SB SEF to have rules RFQ responses in the composite
concerning trading halts, so that trading indicative quote? Should the
152 The composite indicative quote screen would
on the SB SEF would not continue Commission instead require that only
be the quote screen available to all participants of when trading has been halted or
the SB SEF. The composite quote shows an average
the response to an RFQ accepted by the
quote for each SB swap available on the SB SEF. suspended in the underlying security or party submitting the RFQ be included in
The composite indicative quote includes both securities pursuant to the rules or an a composite indicative quote? Should
composite indicative bids and composite indicative order of a regulatory authority with the Commission require that any
offers. As discussed below, proposed Rule 811(e) authority over the underlying security
would require a SB SEF that operates a RFQ
participant responding to an RFQ have
platform to create and disseminate through the SB or securities.153 The Commission
SEF a composite indicative quote for SB swaps security has been paused in the equity markets. See,
traded on or through the SB SEF and to make that 153 The Commission notes that the options and e.g. Chicago Board Options Exchange Rule 43.4(b).
screen available for viewing by all participants in securities futures markets have rules providing for 154 See infra Section XXIII for a discussion of the
the SB SEF. a trading halt in the event that the underlying proposed rule filing process for SB SEFs.
the ability to see other participants’ sized orders.156 In addition, the D. Block Trades
responses? Would such a requirement Commission understands that many Core Principle 2 requires a SB SEF to
make a difference with respect to pre- platforms operating today in the SB establish rules governing the operation
trade price transparency? What would swaps market create and disseminate a of the facility, including rules specifying
be the benefits and drawbacks of such composite indicative quote. trading procedures to be used in
a proposal? Should the Commission The Commission requests comment entering and executing orders traded or
require that all requests for quote be posted on the facility, including block
on all aspects of proposed Rule 811(e).
shown to all participants? Would such trades.157 The issue of block trades on
What are commenters’ views on the
a requirement make a difference with a SB SEF has two components: (1) How
proposed requirement that a SB SEF
respect to pre-trade price transparency? should a ‘‘block trade’’ be defined, i.e.,
must disseminate a composite
What would be the benefits and at what threshold would a trade be
drawbacks of such proposals? indicative quote? What would be the
benefits or drawbacks of such a considered block size; and (2) how
Should the Commission require a SB should block trades be handled on a SB
SEF to have a rule prohibiting the SB proposal? Would such a requirement
provide an increased level of pre-trade SEF. Issues relating to the execution, as
SEF from disclosing to any liquidity well as the reporting, of a block trade,
provider that has received an RFQ price transparency compared to the
level that is available today? Are there have been a particular focus of market
information about how many participants. Market participants that
participants were queried? What would other measures the Commission should
impose at this time to foster pre-trade execute block trades in SB swaps,
be the impact of such a prohibition, including dealers and buy-side
taking into account such factors as the price transparency? If so, what are they?
For example, should the Commission customers, have raised concerns
type of SB swap and the size of the regarding pre-trade transparency of
transaction, on the liquidity provider’s require a SB SEF to provide
functionality to enable market block trades. They believe that if other
incentives in determining at what price market participants know the terms of a
to provide a response? Should the participants to post individual
block trade prior to the time it is
participant submitting the RFQ be able indicative quotes, in addition to a
executed, those other market
to waive any such prohibition in the composite indicative quote? What
participants could attempt to profit from
exercise of its investment discretion? would be the advantages and
the information about the block to the
For SB SEFs that choose to allow disadvantages of such a proposal? detriment of the initiator of the block
trading of uncleared SB swaps should Considering the early stage of trade. If the information is disclosed
the Commission require such SB SEFs development of the regulatory before the block trader’s liquidity
to have additional trading rules related framework for the SB swap market and provider is ‘‘on risk,’’ other market
to uncleared SB swaps, such as rules for the existing structure of the SB swap participants could buy or sell ahead of
disclosing the counterparties to such market, the Commission is mindful that the block trade initiator, moving the
transactions or other rules related to
its interpretation of the definition of SB market against the block trade initiator
counterparty risks? Please provide
SEF, and the rules it is proposing herein (but not adversely affecting its
specific suggestions.
to implement the Dodd-Frank Act, counterparty). If the liquidity provider
Proposed Rule 811(e) would require a
could have unforeseen consequences, for the block trade initiator is ‘‘on risk’’
SB SEF that operates an RFQ platform
either beneficial or undesirable, with when the information is disclosed, other
to create and disseminate through the
respect to the shape that this market market participants could buy or sell
SB SEF a composite indicative quote for
will take. In the Commission’s view, it ahead of the liquidity provider, making
SB swaps traded on or through the SB
is important that the regulatory it more costly for the liquidity provider
SEF.155 The composite indicative quote
structure will provide incentives for the to hedge the transaction. If the liquidity
would need to be made available to all
trading of SB swaps on regulated provider anticipates such price
participants of the SB SEF. The
markets that are designed to foster movement, front-running by market
composite indicative quote would
greater transparency and competition participants could make the transaction
include both composite indicative bids
that are subject to Commission more costly for the block trade initiator,
and composite indicative offers. The
oversight, while at the same time as the liquidity provider may provide it
Commission preliminarily believes that
allowing for the efficient operation and with less favorable quotations in order
a composite indicative quote would
continued evolution of the SB swap to protect itself from the impact of such
provide valuable pricing information to
market. With that in mind, should the disclosure.158 Some market participants
the participants of a SB SEF, while at
Commission mandate greater pre-trade also are concerned that if a block trade
the same time not disclosing specific
price transparency at the outset of were required to interact with other
trading interest of individual
trading of SB swaps on SB SEFs? What trading interest on a SB SEF, there
participants when that interest is not
would be the benefits of mandating might not be enough liquidity on the SB
firm. As discussed above, the
greater pre-trade price transparency at SEF to execute the entire block trade,
Commission believes that including
the start of trading of SB swaps on a SB leaving a portion of the block trade
responses to an RFQ in the composite
SEF and what would be the drawbacks unexecuted. These market participants
indicative quote also may be
of such an approach? Would the are worried about the execution risk of
appropriate as a means to further
benefits outweigh the drawbacks and doing block trades on a SB SEF. Not
increase pre-trade price transparency. A
vice versa? Commenters should explain having a large trade filled, or having it
composite indicative quote would
their reasoning. Should the Commission filled at a disadvantageous price as a

provide some information on pricing
propose additional trading rules to be result of having to enter into more than
but would take into account concerns
required of SB SEFs? If so, what should one trade as part of the execution
expressed by some market participants
about information leakage that could those rules cover with regard to trading 157 See Public Law 111–203, § 763(c) (adding
occur, particularly with respect to larger procedures? Section 3D(d)(2)(C) of the Exchange Act).
158 See Reporting and Dissemination Release,
155 See supra note 152 for a description of a 156 See infra Section VIII.D for a discussion of supra note 6, for a discussion of the concerns
composite indicative quote. block trades. surrounding post-trade transparency.
process, could hurt investment order book platform to use a separate threshold for determining what
performance.159 multi-dealer RFQ component to execute constitutes a block trade for a particular
For these reasons, market participants block trades, as long as the block trade ‘‘security-based swap instrument,’’ as
have urged exceptions for the handling interacts with existing interest on the SB calculated by a registered SDR.165 The
of block trades, including the ability to SEF (i.e., the limit order book portion of Commission believes that it is important
negotiate and execute block trades the SB SEF that handles orders that are for each SB SEF to use the same
without having to interact with trading not blocks) and otherwise complies with threshold for block trades to ensure
interest on the SB SEF. Market the proposed requirements that are part consistency and uniformity across SB
participants even have indicated a of this rulemaking. Also, under the SEFs.166 The Commission notes,
willingness to forego available pre-trade Commission’s proposed interpretation however, that until it establishes the
transparency in order to keep their of the definition of SB SEF, a SB SEF criteria and formula for determining a
proprietary block trading strategies that operates a RFQ platform and that block trade pursuant to proposed Rule
private. requires an RFQ to be disseminated to 907(b) of Regulation SBSR, proposed
The Commission is sensitive to these all participants, could, for example, Rule 800 of Regulation SB SEF would
concerns. However, the Commission permit participants to choose to send an permit a SB SEF to set its own criteria
also is concerned that allowing the RFQ to fewer than all participants, and formula for determining what
execution of block trades on a SB SEF including just one. In a system that constitutes a block trade as long as such
in a manner that is subject to less pre- allows participants to display firm criteria and formula are consistent with
trade transparency than the minimum quotes, the system (and rules) would the Core Principles and the rules and
level that would be required by need to be designed to provide that a regulations thereunder.
Commission rules, for example, by block trade, like any other trade, would The Commission seeks comments on
allowing block trades to be executed off interact with the displayed orders based its proposed definition and treatment of
of the SB SEF and then reported to the on a fair method. Thus, to the extent block trades. Should the definition of
SB SEF without interacting with trading that liquidity exists on a central limit block trade have the same meaning in
interest on the SB SEF (i.e., using the SB order book trading platform of the SB the context of a SB SEF and in the
SEF as a ‘‘print facility’’), could SEF, a block trade would be required to context of trade dissemination and
circumvent the mandatory trade interact with those pre-existing resting reporting? Is there anything about pre-
execution requirement and undermine bids and offers.163 The Commission also trade versus post-trade transparency
the goals of providing for more notes that, until a SB swap that is that warrants having different
transparent and competitive trading on determined to be subject to the definitions of a block trade in the
a SB SEF. Therefore, although the mandatory clearing requirement and is context of proposed Regulation SB SEF
Commission believes that it is determined to have been made and proposed Regulation SBSR? 167 Are
permissible for a SB SEF to establish ‘‘available to trade’’ on a SB SEF or an there other definitions of block trade
different trading rules for block trades exchange, the SB swap could be traded that the Commission should consider?
generally, block trades would still be in block size off a SB SEF or exchange. Do commenters agree with the proposed
subject to the various minimum The Commission is proposing to approach to block trades on SB SEFs? Is
requirements that the Commission has require that a SB SEF define a ‘‘block pre-trade transparency for block trades
established with respect to pre-trade trade’’ to have the same meaning as in desirable? If so, why? If not, why not?
transparency160 and interaction with Rule 900 of Regulation SBSR relating to Should SB SEFs be permitted to have
other trading interest on the SB SEF, as trade reporting.164 This would mean discretion regarding implementation of
discussed above.161 that each SB SEF would use the same rules governing the handling of block
SB SEFs would have flexibility,
trades? For example, should block
therefore, to establish different rules for 163 If a SB SEF operated a central limit order book
trades be permitted to be executed in
the trading of block trades on their and a separate RFQ mechanism, the SB SEF’s
systems would be required to ensure that any trade ‘‘one participant to one participant’’
facilities, as long as those rules were
to be executed in the RFQ mechanism interacted transactions and then ‘‘printed’’ on the
clear as to how block trades would be with any existing firm interest on the central limit SB SEF? If the Commission were to
handled and would comply with the order book at the same or better price before
adopt its proposed interpretation of the
rules being proposed today.162 A SB interacting with interest on the RFQ platform. For
example, assume that such a SB SEF had a 5,000 definition of SB SEF, would such
SEF could, for example, allow a limit
notional resting order on its limit order book in SB flexibility be necessary in light of the
swap A and that a 100,000 notional RFQ in SB fact that, under the proposed
159 See, e.g., Hendrik Bessembinder & Kumar
swap A was entered into and disseminated to
Venkataraman, Does an Electronic Stock Exchange liquidity providers in the RFQ mechanism. If the
interpretation, a requester can choose to
Need an Upstairs Market? J. of Fin. Econ., Vol. 73 resting limit order has a price equal to or greater
(2004) (‘‘Bessembinder Paper’’), finding that than the price at which a response(s) comes back 165 See Reporting and Dissemination Release,
execution costs of a block trade in an ‘‘upstairs’’ in the RFQ mechanism to execute the RFQ order, supra note 6, and proposed Rule 900 for a
market are much lower than would be if the block the SB SEF system would be required to execute definition of ‘‘security-based swap instrument.’’
trade were executed in a ‘‘downstairs’’ market. 5,000 of the RFQ order against the resting limit 166 The Commission notes that even if more than
160 See, for example, supra Sections III.B and
order and 95,000 against the response(s). one registered SDR establishes the block trade
VIII.C, discussing the proposed requirement that SB 164 See proposed Rule 800 (defining ‘‘block trade’’ threshold for a SB swap, the thresholds would be
SEFs that operate a RFQ mechanism disseminate a as having the same meaning as in Rule 900 of identical because each SDR in the same class of SB
composite indicative quote and make it available to Regulation SBSR under the Exchange Act) and swap would use the same data to calculate the
all participants, the aspects of the proposed Reporting and Dissemination Release, supra note 6. threshold. See Reporting and Dissemination
interpretation that all responses to a request for Rule 900 of Regulation SBSR would define a block Release, supra note 6, for a more detailed
quote be included within the composite indicative trade to mean a large notional SB swap transaction discussion.
quote and that SB SEFs cannot limit the number of that meets the criteria set forth in Rule 907(b) of 167 See, e.g., Memorandum by the Staff of the
liquidity providers to whom a request for quote is Regulation SBSR, which states that a registered SDR Division of Risk, Strategy and Financial Innovation
sent. shall establish and maintain written policies and of the U.S. Securities and Exchange Commission to
161 See, for example, supra Section VIII.C.
procedures for calculating and publicizing block File No. S7–34–10, Release No. 34–63346, dated
162 Proposed Rule 811(d) would require that a SB trade thresholds for all security-based swap January 13, 2011. The memorandum is submitted as
SEF establish and enforce rules governing the instruments reported to the registered SDR in a comment letter to the Reporting and
procedures for trading on the SB SEF including the accordance with the criteria and formula for Dissemination Release, supra note 6, and is
handling of block trades if different from other determining block size as specified by the available at: http://www.sec.gov/comments/s7-34-
trades. Commission. 10/s73410-12.pdf.
submit an RFQ fewer than all other special provisions that should confirmed trades 169 to clearing
participants, including to just one apply to block trades? If so, what are agencies, or is it appropriate to leave the
participant? Should there be other they, and why would they be choice to SB SEFs? Please be specific.
exceptions for block trades, such as an appropriate?
exception for a clean cross? 168 What The Commission recognizes that the F. Disciplinary Rules and Procedures
would be the benefits and drawbacks of SB swap market is different in certain Proposed Rule 811(g) would require a
such proposals? Should any such respects than the market for cash SB SEF to establish rules and
proposals be subject to any conditions, equities and listed options. For procedures concerning the disciplining
such as allowing block trades an example, many fewer market
exemption from the minimum pre-trade of its participants including, but not
participants account for a significant
transparency and order interaction limited to: authorizing the SB SEF’s staff
amount of the trading in SB swaps. In
requirements on a temporary basis or to recommend and take disciplinary
addition, there is not at this time any
not permitting ‘‘one participant to one direct retail participation in the SB action for alleged violations of the SB
participant’’ transactions to be printed swap market. Further, trading in SB SEF’s rules; specifying the sanctions
on a SB SEF after trading activity in the swaps generally is much less liquid than that may be imposed on participants for
SB swap crosses a specified liquidity for many NMS stocks and listed options. violations of the SB SEF’s rules
threshold? How, if at all, do these factors, or other (provided that each sanction is
What would be the effect of requiring factors regarding the structure of the SB commensurate with the corresponding
block trades to interact with existing swap market, impact the handling of violation); and establishing fair and
interest on the SB SEF, to the extent block trades in the SB swap market, and non-arbitrary procedures for any
firm trading interest is available? What how should they, if at all, impact the disciplinary process, and appeals
impact, if any, would that requirement proposed treatment of block trades on thereof.
have on price competition occurring on SB SEFs? SB SEFs are required by Section
the SB SEF in that particular SB swap?
E. Trade Processing Procedures 3D(d)(2) of the Exchange Act to enforce
If hidden trading interest were
compliance with their rules. Proposed
permitted on a SB SEF’s trading system, Proposed Rule 811(f) would require a
how should such interest be handled Rule 811(g) is designed to require the SB
SB SEF to establish and enforce rules SEF to have baseline rules relating to its
under the interaction requirement? If concerning the reporting of trades
block trades were required to interact disciplinary process to help it carry out
executed on the SB SEF to a clearing its statutory responsibilities.170
with hidden trading interest, would that agency and procedures for the
encourage hidden interest and processing of transactions in SB swaps Proposed Rule 811(h) would require
discourage displayed interest? What that occur on or through the SB SEF, the SB SEF to make and keep specific
would be the impact of allowing block including, but not limited to, records of all disciplinary proceedings
trades to be executed off of the SB SEF procedures to resolve any disputes and sanctions imposed, and all appeals,
and then ‘‘printed’’ on a SB SEF, or to concerning the execution of a trade. and to disclose disciplinary actions on
execute without interaction with The Commission believes that the an annual amendment to Form SB SEF
existing interest? What impact, if any, types of rules contemplated by proposed and on the SB SEF’s annual report of the
would that have on price competition Rule 811(f) are important to contributing CCO required by Section 3D(d)(14) of
on the SB SEF in that particular SB to the fair and orderly functioning of the Exchange Act and proposed Rule
swap? What impact would such a any SB SEF, and to ensure that trades 823.171 While this proposed
proposal have on the incentives of executed on a SB SEF are properly requirement also would be part of the
market participants to post firm interest
transmitted to the applicable registered recordkeeping requirement of the SB
in that SB swap? Would this proposal
clearing agency. In the Commission’s SEF under Core Principle 9, the
create a significant disincentive for
view, these types of rules would aid a Commission is restating it in connection
market participants to enter any sizeable
SB SEF in contributing to the operation with Core Principle 2, since these
volume for execution on the SB SEF?
of an orderly market. The Commission records would need to be maintained
What other requirements, if any, should
believes that the rules of the SROs could and information about disciplinary
the Commission impose to promote
provide appropriate models to SB SEFs actions disclosed by the SB SEF. This
incentives to post firm quotes? Are there
concerning the types of rules that would information, which could be used by the
any alternative methods to provide for
satisfy the requirements of this Commission to review the disciplinary
pre-trade transparency for block trades
proposed rule. Alternatively, the process at a SB SEF, would provide the
without requiring block trades to
Commission could find the rules of Commission with an additional tool to
interact with other bids and offers on a
other regulated entities appropriate for
SB SEF? If so, how would these
use as models as well, upon review.
alternative methods impact the 169 This would parallel certain reporting
The Commission requests comment requirements for locked-in trades in the equity and
requirements and goals of the Dodd-
generally on all aspects of proposed debt markets. A locked-in trade is one in which all
Frank Act? Are there alternative trading of the terms and conditions of the trade are agreed
Rule 811(f). Is the Commission’s
mechanisms, such as crossing systems, to and accepted by the buyer and the seller. See,
proposed rule sufficiently clear? Are
that could be used to trade blocks? How e.g., http://www.amex.com/servlet/
there other aspects of trading AmexFnDictionary?pageid=display&titleid=3784.
would these alternative trading
procedures, aside from the reporting of 170 In fashioning their disciplinary rules, SB SEFs
mechanisms comply with the pre-trade
trades to a clearing agency and may be informed by the rules on disciplinary

transparency requirements? Are there proceedings maintained by the national securities
procedures for the processing of
exchanges. See, e.g., Chicago Board Options
168 See, e.g., National Stock Exchange Rule 11.12 transactions in SB swaps and for the Exchange, Chapter XVII (Disciplinary Rules) and
describing acceptable clean cross orders as a cross: handling of disputes that should be New York Stock Exchange Rules 475–477
(1) That is for at least 5,000 shares and has an addressed? If so, what additional (Disciplinary Rules).
aggregate value of at least $100,000; (2) with a size information should be included in such 171 See infra Sections XXI (discussing Core
greater than the size of the interest at each side of Principle 14) and XXIII (discussing proposed Form
the top of book; and (3) with a price equal to or
a rule? Should the Commission require SB SEF). The Commission notes that information
better than the Protected NBBO. SB SEFs to compare and report provided on proposed Form SB SEF is public.
carry out its oversight responsibilities additional information is required? proposed Rule 812(c), after a SB SEF
with respect to SB SEFs.172 Please be specific. Should SB SEFs be commences trading of a SB swap, its
The Commission requests comment required to exchange information with swap review committee would be
generally on all aspects of proposed other SB SEFs that have listed the same required to periodically review trading
Rule 811(h). Is the Commission’s rule SB swaps for trading to properly surveil in the SB swap. If the swap review
concerning disciplinary rules and trading in those SB swaps on its market? committee cannot determine, after
procedures sufficiently clear? Should How would any exchange of taking into account all of the terms and
the proposed rule include greater information with other SB SEFs be conditions of the SB swap, the markets
specificity regarding the disciplinary accomplished? Should SB SEFs have for the SB swap and any underlying
processes for SB SEFs, including the access to trading information for similar security or securities, and trading in the
review of disciplinary actions? If so, SB swaps trading in the OTC derivatives SB swap, that such SB swap is not
what provisions should be included in market? If so, how would this be readily susceptible to manipulation, the
any such rule? Should participants in accomplished? What guidelines should SB SEF would be required to no longer
the SB SEF, or customers of the Commission use to determine what permit the trading of the SB swap.
participants, be involved in the SB swaps are sufficiently similar to
disciplinary process? If so, in what require such access? Should SB SEFs be Because Core Principle 3 permits a SB
regard? Should the CCO be required to required to share information with other SEF to trade only SB swaps that are not
be involved in any disciplinary process? regulatory authorities? For example, if a readily susceptible to manipulation, the
SB SEF detects unusually high activity Commission preliminarily believes that
G. Surveillance for Rule Violations the proposal to require every SB SEF’s
in a particular SB swap, what guidelines
Proposed Rule 811(i) would require a would be appropriate for the sharing of swap review committee to consider the
SB SEF to establish rules and this information with the Commission terms and conditions of the SB swap
procedures to assure that the and other regulatory authorities that and the markets for the SB swap and
information to be used to determine regulate the underlying asset? any underlying security or securities,
whether rule violations have occurred is and make an affirmative determination
captured and retained in a timely IX. Core Principle 3—Manipulation that the SB swap is not readily
manner. Proposed Rule 811(j) would Section 3D(d)(3) of the Exchange Act susceptible to manipulation before a SB
require the SB SEF to have the capacity (Core Principle 3) provides that a SB SEF trades a SB swap, and to
to capture information that may be used SEF shall permit trading only in SB periodically review that determination
in establishing whether rule violations swaps that are not readily susceptible to after trading commences, is a reasonable
have occurred, including through the manipulation.175 To implement Core approach to implementing the statutory
use of automated surveillance systems Principle 3, the Commission is language of Core Principle 3. Further, as
as set forth in proposed Rule 813(b),173 proposing Rule 812. discussed above, proposed Rule
maintain appropriate resources to fulfill Proposed Rule 812(a) would 811(c)(1) would require a SB SEF’s swap
these obligations, and investigate implement the requirements of Core review committee to determine whether
possible rule violations. Principle 3. Proposed Rule 812(b) would to trade a SB swap and whether a SB
The Commission believes that, to be provide that before a SB SEF may swap that has commenced trading
able to effectively carry out its permit the trading of a SB swap on the should continue to trade on the SB
obligations to enforce compliance with SB SEF, the SB SEF’s swap review SEF.177 Under proposed Rule 812, the
its rules, a SB SEF must have the committee must have determined, after swap review committee would be
capability to monitor trading activity to taking into account all of the terms and required to also consider whether a SB
determine whether rule violations are conditions of the SB swap and the swap raises manipulation concerns
occurring or have occurred.174 The rules markets for the SB swap and any before trading such product.
proposed in Rules 811(h) and (i) are underlying security or securities, that
such SB swap is not readily susceptible The Commission generally requests
designed to require a SB SEF to have comment on all aspects of proposed
baseline rules relating to surveillance of to manipulation. The proposed
requirement that the swap review Rule 812. Additionally, the Commission
its market to help it carry out its requests comment as to whether there
statutory responsibilities. committee consider not only the market
for the SB swap, but also the market for are any types of SB swaps trading today
The Commission requests comment
any underlying security or securities is that a SB SEF’s swap review committee
generally on all aspects of proposed
intended to make clear that the swap should presume are not readily
Rule 811(i). Are the Commission’s
review committee must consider susceptible to manipulation. What
proposed rules on surveillance of rule
whether an underlying or reference factors would or should a SB SEF take
violations sufficiently clear? If not, what
security could make a SB swap readily into consideration when making a
172 See Regulation MC Proposing Release, supra susceptible to manipulation.176 Under determination whether a SB swap
note 82, 75 FR at 65912, discussing the requirement would be readily susceptible to
in proposed Rule 702(g) under Regulation MC 175 See Public Law 111–203, § 763(c) (adding manipulation? Should the Commission
relating to compositionally balanced disciplinary Section 3D(d)(3) of the Exchange Act). provide more guidance regarding what
panels for SB SEFs. 176 The Commission notes that it is not unusual
being ‘‘readily susceptible to
173 See infra Section X (discussing Core Principle
for national securities exchanges to include in their manipulation’’ means in the context of
4). Core Principle 4, which would be implemented listing standards for derivatively-priced securities
in proposed Rule 813, requires a SB SEF, among provisions concerning the market for the underlying SB swaps? If so, what guidance should
other things, to monitor trading in SB swaps to components. See, e.g., Chicago Board Option the Commission provide? Should the
prevent manipulation, price distortion, and Exchange Rule 5.3 (listing standards for options Commission require a SB SEF to
disruptions of the delivery or cash settlement contracts which include, among other things,
process through surveillance, compliance, and
consider objective criteria concerning
requirements relating to the trading volume and
disciplinary practices and procedures, including number of holders of the underlying security);
methods for conducting real-time monitoring of NYSE Arca Rule 5.2(j)(3) Commentary .01(a) (listing 177 Pursuant to proposed Rule 811(c)(3), a SB SEF
trading and comprehensive and accurate trade standards for index-based exchange-traded funds, would be required to establish criteria that its swap
reconstructions. which include, among other things, requirements review committee should consider in determining
174 See infra Section X (discussing Core Principle relating to the trading volume and market value of which SB swaps should trade on the SB SEF. See
4). underlying components). supra Section VIII.B.
the underlying security or securities? If SB SEF; and (ii) procedures for trade that require any participant that enters
so, what should these criteria be? 178 processing of SB swaps on or through an order, request for quote, or other
The Commission recognizes that it the facilities of the SB SEF.180 This Core trading interests, or executes any
might be difficult to determine whether Principle also requires SB SEFs to transaction on the SB SEF to maintain
a particular SB swap is readily monitor trading in SB swaps to prevent books and records of any such order,
susceptible to manipulation. Further, manipulation, price distortion, and request for quote or other trading
individual SB SEFs—as well as various disruptions of the delivery or cash interests, or transaction, and any
market participants and investors—may settlement process through surveillance, positions in any SB swap that is the
have differing views on whether a compliance and disciplinary practices result of any such order, request for
particular SB swap is readily and procedures, including methods for quote, or other trading interest or
susceptible to manipulation. In light of conducting real-time monitoring of transaction on the SB SEF, and to
the potential need for further clarity on trading and comprehensive and accurate provide prompt access to such books
this question, the Commission therefore trade reconstructions.181 The and records to the SB SEF and the
requests comment on whether it should Commission is proposing Rule 813 of Commission. Finally, proposed Rule
consider adopting a safe harbor Regulation SB SEF to implement Core 813(d) would require a SB SEF to
consisting of objective criteria for Principle 4. The Commission believes establish and maintain procedures to
purposes of meeting the requirements of that the requirements of proposed Rule investigate possible rule violations, to
Section 3D(d)(1) of the Exchange Act 813 would aid potential registrants in prepare reports of the findings and
with respect to Core Principle 3. If so, evaluating whether the rules they recommendations of such
what would be appropriate objective propose to implement and the investigations, and to take corrective
criteria for such a safe harbor provision? mechanisms they would establish to actions, as necessary.
Should the criteria relate to monitor trading in SB swaps would The proposed rule’s requirement that
characteristics of the SB swap or the comply with the Core Principle. participants maintain books and records
market for the underlying, or the Proposed Rule 813(a) would of their activity on the SB SEF and make
procedures to be followed by the SB implement the statutory language of the them available to the SB SEF and the
SEF in making a determination as to Core Principle. Proposed Rule 813(b) Commission would aid the SB SEF in
whether an SB swap is readily would require a SB SEF to have the detecting and deterring fraudulent and
susceptible to manipulation, or a capacity and appropriate resources to manipulative acts with respect to
combination of both? For example, electronically monitor trading in SB trading on its market, as well as help it
should the Commission consider swaps on its market by establishing an to fulfill the statutory requirement in
adopting a safe harbor that includes automated surveillance system, Core Principle 4 that a SB SEF monitor
thresholds relating to trading volume, including real time monitoring of trading in SB swaps, including through
number of holders, and/or market value trading and the use of automated alerts, comprehensive and accurate trade
of the underlying security or that is designed to detect and deter any reconstructions. The proposed rule also
securities? 179 Should the criteria to be fraudulent or manipulative acts or would aid the Commission in carrying
included in any safe harbor be the same practices, including insider trading or out its responsibility to oversee the SB
as or different from any criteria that the other unlawful conduct or any SEF. The proposed rule’s requirement
Commission may adopt with respect to violations of the rules of the SB SEF; to that the SB SEF establish and enforce
the mandatory clearing determination or detect and deter market distortions or procedures to investigate possible rule
the determination of when a SB swap is disruptions of trading that may impact violations and prepare reports is
made available to trade? Commenters the entry and execution of trading designed to ensure that the SB SEF
are requested to be as specific as interest or the processing of trading fulfills its statutory obligation under this
possible as to what the appropriate interests; to conduct real-time Core Principle to prevent manipulation,
criteria for a safe harbor would be. monitoring of trading to provide for price distortions, and disruptions in the
Is the proposed periodic review comprehensive and accurate trade market.
requirement necessary or appropriate? reconstruction; and to collect and assess The Commission requests comment
Should the Commission define how data to allow the SB SEF to respond on all aspects of proposed Rule 813. Is
frequently a SB SEF must review its promptly to market abuses or the proposed rule sufficiently clear? Do
determination that a SB swap is not disruptions. The Commission commenters believe that SB SEFs would
readily susceptible to manipulation? If preliminarily believes that requiring a encounter issues in establishing an
so, what would be an appropriate SB SEF to establish such an automated automated surveillance system for real-
frequency for such a review? surveillance system would enable the time monitoring of trading and in
SB SEF to comply with the collecting or assessing data to allow the
X. Core Principle 4—Monitoring of SB SEF to respond promptly to market
Trading and Trade Processing requirements of Core Principle 4 that SB
SEFs monitor trading in SB swaps to abuses or disruptions? Would proposed
Section 3D(d)(4) of the Exchange Act prevent price manipulation, price Rule 813(c), which would require
(Core Principle 4) requires a SB SEF to distortion, and disruptions of the participants to provide access to their
establish and enforce rules or terms and delivery or cash settlement process. In books and records to the SB SEF and the
conditions defining or specifications addition, Core Principle 4 specifically Commission, be difficult for any
detailing: (i) trading procedures to be requires SB SEFs to have methods for particular group of participants (e.g.,
used in entering and executing orders non-registered ECPs or foreign
conducting real-time monitoring of

traded on or through the facilities of the trading.182 participants) to comply with? If so, how
Proposed Rule 813(c) would require a should the Commission modify the rule
178 See supra note 176, noting examples of
SB SEF to establish and enforce rules to address any such issues?
national securities exchanges that have included in Should SB SEFs be required to
their listing standards for derivatively-priced exchange information with each other
securities required consideration of factors such as
the trading volume, number of holders, and market Section 3D(d)(4) of the Exchange Act). regarding trading by their mutual
value of the underlying security or securities. 181 Id. participants to facilitate surveillance
179 See supra note 176. 182 Id. and investigation of potential
manipulative or otherwise violative through the SB SEF.185 Proposed Rule and enforce rules that would allow the
activity? If so, under what 814(a) further would require each SB SB SEF to obtain any necessary
circumstances? Should SB SEFs be SEF to establish and enforce rules information to perform any of the
required to become members of the requiring its participants to cooperate functions described in the Core
Intermarket Surveillance Group with the SB SEF and any representative Principles and provide the information
(‘‘ISG’’),183 or to form a similar group of the Commission and allow access by to the Commission on request.
among themselves? If so, should all SB the SB SEF and any representative of The Commission preliminarily
SEFs be required to join? If not, what the Commission at such reasonable believes that proposed Rule 814 would
types of SB SEFs should be required to times as the SB SEF or the Commission reasonably clarify the statutory language
join? For example, should SB SEFs be representative may request to examine of Core Principle 5, which requires a SB
required to join if they trade a certain the books and records of the SB SEF SEF to have the ability to ‘‘obtain
volume threshold of SB swaps? If so, participant, or to obtain or verify other information’’ and ‘‘provide the
what should that volume threshold be? information related to orders, requests information to the Commission on
Should SB SEFs be required to share for a quote, responses, quotations, or request.’’ Specifically, the Commission
information with other regulatory other trading interest entered and believes that it is important to its ability
authorities (including SROs)? For transactions executed on or through, the to regulate and oversee SB SEFs for the
example, if a SB SEF detects an SB SEF’s facilities. These provisions Commission to be able to obtain
unusually high activity in a particular would permit a SB SEF and any information by specifying that SB SEFs
SB swap, what guidelines would be representative of the Commission to and SB SEF participants must
appropriate for the sharing of this have access to any information that the cooperate, furnish information upon
information with the Commission and SB SEF participants are required to request, provide access to books and
the other regulatory authorities that make, keep, and preserve pursuant to records, and be subject to
regulate the underlying asset? any Commission or other rule, and examination.186 These proposed
should therefore assist the SB SEF to requirements also would enable the SB
XI. Core Principle 5—Ability To Obtain more effectively perform its obligations, SEF to monitor participants on its
Information as required by the Core Principles, and system and enforce compliance with its
Section 3D(d)(5) of the Exchange Act the Commission to perform its oversight rules, as required by Section 3D(d) of
(Core Principle 5) requires a SB SEF to responsibilities for SB SEFs. the Exchange Act.
establish and enforce rules that would Proposed Rule 814(b) would similarly Further, proposed Rule 814(b)(3)
allow the SB SEF to obtain any require the SB SEF to cooperate with would require a SB SEF to have the
necessary information to perform any of any representative of the Commission capacity to carry out such international
the functions described in the Core and allow access by any representative information-sharing agreements as the
Principles for SB SEFs, provide the of the Commission to examine the books Commission may require.187 Proposed
information to the Commission on and records required to be kept by the Rule 814(b)(4) would require every SF
request, and have the capacity to carry SB SEF pursuant to proposed Rule 818, SEF to certify at the time of registration
out such international information- to obtain or verify other information on Form SB SEF, and annually
sharing agreements as the Commission related to orders, requests for quote, thereafter as part of the annual
may require.184 To implement Core responses, quotations, or other trading compliance report described in Rule
Principle 5, the Commission is interest entered and transactions 823, that the SB SEF has the capacity to
proposing Rule 814 of Regulation SB executed on or through its facilities, and fulfill its obligations under any
SEF. otherwise provide to any representative international information-sharing
Proposed Rule 814(a) would require of the Commission, upon request, such agreements to which it is a party as of
information that the SB SEF may the date of such certification.
each SB SEF to establish and enforce
These proposed regulations would
rules requiring its participants to possess or obtain from its participants
implement the provision of Core
furnish to the SB SEF, upon request and pursuant to proposed Rule 814(a). The
Principle 5 requiring SB SEFs to have
in the form and manner prescribed by Commission preliminarily believes that
the capacity to carry out such
the SB SEF, any information that is these provisions would be instrumental
necessary for the SB SEF to perform its in enabling the Commission to carry out 186 The proposed requirements are analogous to
responsibilities including, without its oversight and regulation of SB SEFs the provisions of Section 17(b) of the Exchange Act,
limitation, surveillance, investigating, and the SB swap market and would which provides that the records of a national
examinations and discipline of support the requirement in Core securities exchange, among other things, shall be
subject to reasonable periodic, special or other
participants. Such information may Principle 5 that the SB SEF establish examinations by representatives of the Commission,
include, without limitation, financial and Rule 17a–4(j) under the Exchange Act,
information, books, accounts, records, 185 The requirement that SB SEF participants requiring exchange members, brokers and dealers to
files, memoranda, correspondence, and make, keep and preserve books and records is furnish promptly copies of records that are required
independent of proposed Rule 814. See 17 CFR to be preserved under the rule to representatives of
any other information pertaining to 240.17a–3 and 240.17a–4, which are applicable to the Commission. 15 U.S.C. 78q(b)(1) and 17 CFR
orders, requests for quotes, responses, registered broker-dealers. See also Public Law 111– 240.17a–4(j).
quotations, or other trading interest 203, § 764(a) (adding Section 15F(f)(B) of the 187 The Commission notes that it is not unusual
entered and transactions executed on or Exchange Act, requiring each registered SB swap for a national securities exchange to enter into an
dealer and major SB swap participant to keep books information-sharing agreement with a foreign
and records as may be prescribed by the exchange for the purpose of securing information in
183 ISG was established in the early 1980s and is

Commission). See also proposed Rule 809(c)(2)(i), connection with trading in securities on the foreign
comprised of an international group of exchanges, requiring registered SB swap dealers and registered exchange that could impact the trading of securities
market centers and market regulators. ISG states major SB swap participants to meet the minimum on the U.S. exchange. See, e.g., Securities Exchange
that its purpose is to effectively detect and prevent recordkeeping and reporting requirements imposed Act Release No. 59835 (April 28, 2009), 74 FR
unfair transactions across markets through market by the Commission. With respect to eligible 21041 (May 6, 2009) (noting, in connection with
information sharing among its members. See ISG’s contract participants, proposed Rule 809(c)(2)(ii) proposed listing standards, that NYSE Arca, Inc.
Web site at http://www.isgportal.org for additional would require eligible contract participants to meet had in place an information sharing agreement with
information on ISG. the recordkeeping and reporting requirements the London Metal Exchange (‘‘LME’’) for the purpose
184 See Public Law 111–203, § 763(c) (adding established by the SB SEF pursuant to proposed of providing information in connection with trading
Section 3D(d)(5) of the Exchange Act). Rule 813. in or related to futures contracts traded on LME.
international information-sharing to establish and enforce rules and unfairly restrict access to a SB SEF. For
agreements as the Commission may procedures for ensuring the financial example, a SB SEF could have a very
require. The Commission preliminarily integrity of SB swaps entered on or high capital requirement for
believes that the proposed rule would through the facilities of the SB SEF, participation that may exclude some
help ensure that the SB SEF has the including the clearance and settlement smaller dealers from participation in the
ability to fulfill its regulatory and of SB swaps pursuant to Section SB SEF. On the one hand, while
reporting responsibilities with respect to 3C(a)(1) of the Exchange Act.188 appropriate participation standards,
its market place and its participants, Pursuant to Section 3C(a)(1) of the including financial requirements, would
and that the Commission has the Exchange Act, SB swap transactions support this Core Principle that requires
information necessary to fulfill its must be cleared through a clearing SB SEFs to have rules and procedures
oversight and regulatory responsibilities agency registered with the Commission for ensuring the financial integrity of SB
related to the SB swaps market. The or a clearing agency exempt from swaps entered on or through the
proposed rule also would facilitate registration, if the Commission has facilities of the SB SEF, unduly high
information-sharing in the global SB determined that the SB swap is required standards may without justification
swaps market. to be cleared.189 exclude persons who are otherwise
The Commission requests comment The Commission believes that it is qualified to trade on the SB SEF. On the
on all aspects of proposed Rule 814 important that SB SEFs set specific other hand, the Commission is mindful
relating to the ability to obtain standards designed to ensure the that broadening access could come at
information. Is the proposal that a SB financial integrity of all their the expense of sound risk management
SEF require its participants to furnish participants. Proposed Rule 815(a) practices. Thus, lessening capital or
information upon request, cooperate would implement the requirements of other financial requirements to increase
with and provide access to the SB SEF Section 3D(d)(6) of the Exchange Act. participation beyond a certain level may
too burdensome? Is the proposal that the Proposed Rule 815(b) would permit the increase the overall risk of the SB SEF’s
SB SEF require its participants to rules of a SB SEF to allow a participant operations.
furnish information upon request, trading a SB swap that will not be The Commission seeks comments on
cooperate with and provide access to cleared through a registered clearing all aspects of this proposed Rule 815.
any representative of the Commission agency to consider counterparty credit The Commission seeks comments on
appropriate? risk in selecting potential whether an SB SEF should be
Is the proposal to similarly require the counterparties, notwithstanding the prohibited from imposing higher capital
SB SEF to furnish information upon requirements of proposed Rule requirements than the capital
request, cooperate with and provide 810(b)(2).190 The Commission believes requirements imposed by any rules or
access to any representative of the that these requirements, taken together, regulations that the Commission may
Commission at reasonable times as should strengthen the financial integrity impose on participants of SB SEFs
requested, appropriate? Are there other of SB swap transactions that occur on because such higher standards could be
approaches that the Commission should the SB SEFs by reducing the utilized as a means to deter access to a
take to implement the requirement that counterparty credit risks associated with SB SEF. If such a prohibition were
the SB SEF have the ability to obtain uncleared SB swaps transactions. adopted, would it be appropriate for the
information and provide it to the As noted above,191 the Commission SB SEF to tailor capital requirements to
Commission? Is there information that identified in the Regulation MC the status of the participant on an
SB SEFs should be required to provide Proposing Release certain conflicts of objective basis, e.g., having different
to the Commission on a regular, interest that may provide incentives for capital requirements for a liquidity
periodic basis? If so, what types of certain dominant market participants to provider with market maker obligations
information should be provided in such limit access by potential competing than a participant without such
a manner? How often should such market participants to SB SEFs. A SB obligations? If adopted, should such
information be provided? SEF could put in place participant prohibition apply to trading in cleared
Are there any other requirements with standards, including capital and uncleared SB swaps? In addition,
respect to international information- requirements and other financial the Commission seeks comment on
sharing agreements that a SB SEF requirements, in a way that would what additional safeguards, if any,
should be required to comply with? Are would be necessary to ensure the
the proposed requirements too 188 See Public Law 111–203, § 763(a) (adding financial integrity of SB swap
burdensome? If so, why? What are the Section 3C(a)(1) of the Exchange Act). transactions executed on a SB SEF. For
189 The clearing requirement in Section 3C(a) of
costs and benefits of the proposed swaps cleared by a registered clearing
the Exchange Act contains certain exceptions. For
requirements? Should the Commission example, Section 3C(g) of the Exchange Act states
agency, should a SB SEF be required to
require a SB SEF to enter into that a counterparty that is not a financial entity that ensure that it has the capacity to route
information-sharing agreements with is using a SB swap to hedge or mitigate commercial transactions to the clearing agency?
U.S. trading venues for SB swaps, as the risk is not subject to the clearing requirement. With respect to swaps that are not
Section 3C(g)(1)(C) requires each such counterparty
Commission may require, or as to notify the Commission of how it generally meets
cleared, should a SB SEF be required to
necessary or appropriate to fulfill its its financial obligations associated with entering have rules requiring the transacting
regulatory and reporting into non-cleared SB swaps. See Section 3C of the members to have entered into a credit
responsibilities? Are there any other Exchange Act for all applicable exceptions and arrangement for the transaction,
exemptions to the clearing requirements for SB
requirements with respect to domestic demonstrate an ability to exchange
swaps and the requirements relating to clearing

information-sharing agreements with agencies of SB swaps. collateral, and have appropriate credit
which a SB SEF should be required to 190 Proposed Rule 810(b)(2) would prohibit a SB filters in place?
comply? If so, please explain. SEF’s rules from unreasonably limiting any person
in respect to access to the services offered by such XIII. Core Principle 7—Emergency
XII. Core Principle 6—Financial SB SEF in an unfair or discriminatory manner. See Authority
Integrity of Transactions supra Section VII for a discussion of proposed Rule
810(b)(2). Section 3D(d)(7) of the Exchange Act
Section 3D(d)(6) of the Exchange Act 191 See supra Section VI, discussing access to SB (Core Principle 7) requires SB SEFs to
(Core Principle 6) requires every SB SEF SEFs. adopt rules to provide for the exercise
of emergency authority, in consultation without the need to seek additional amendment in accordance with
or cooperation with the Commission, as authority from the Commission when an proposed Rule 806, would help to deter
is necessary and appropriate, including emergency has occurred. The proposed SB SEFs from using such tools
the authority to liquidate or transfer rule would enable a SB SEF to respond inappropriately. In addition, requiring a
open positions in any SB swap or to promptly during an emergency to SB SEF to notify the Commission and,
suspend or curtail trading in a SB maintain fair and orderly markets and if applicable, file a certified emergency
swap.192 The Commission is proposing foster market integrity and efficiency rule or rule amendment, would allow
Rule 816 to implement Core Principle 7. when ordinary authority would be the Commission to determine whether a
Proposed Rule 816(a) would require insufficient. SB SEF acted in compliance with
that every SB SEF establish rules and In light of the breadth of the proposed proposed Rule 816 and should provide
procedures to provide for the exercise of emergency authority for SB SEFs, the Commission timely information
emergency authority, in consultation or proposed Rule 816 also would require with respect to the actions taken in any
cooperation with the Commission, as that every SB SEF have rules governing emergency situation.
necessary or appropriate. ‘‘Emergency’’ the exercise of such emergency While some national securities
would be defined in proposed Rule 800 authority. Pursuant to proposed Rule exchanges have rules providing for the
to have the same meaning as set forth in 816(b), SB SEF rules and procedures exercise of emergency authority by the
Section 12(k)(7) of the Exchange Act.193 would be required to specify: the person exchange,194 there is no specific
The Commission believes that the or persons authorized by the SB SEF to Commission rule detailing how national
definition of ‘‘emergency’’ in Section declare an emergency; how the SB SEF securities exchanges should address the
12(k)(7) of the Exchange Act has the would notify the Commission and the issue of emergency authority. In light of
advantage of being broad enough to public of its decision to exercise its the mandate in Core Principle 7 that SB
cover unusual or extreme circumstances emergency authority; the processes for SEFs adopt rules governing the exercise
without being unduly restrictive. The decision making by facility personnel of emergency authority, and in light of
Commission also believes that the with respect to exercise of emergency the fact that it is likely the same entities
proposed use of the Exchange Act’s authority, including alternate lines of will be registered as SB SEFs and SEFs,
definition of emergency would foster communication and guidelines to avoid the Commission’s approach to
consistency among rules regarding the conflicts of interest in the exercise of implementing Core Principle 7 is guided
exercise of emergency authority and such authority; and the processes for by the approach the CFTC has taken
promote the use of a consistent determining that an emergency no with respect to the CEA’s requirement
definition across securities markets longer exists and notifying the that a designated contract market adopt
generally. Commission and the public of such rules to provide for the exercise of
Proposed Rule 816(c) would require decision. The Commission believes that emergency authority.195
that every SB SEF have rules that permit it is important that SB SEFs put in place The Commission generally requests
the SB SEF to immediately take any or a process for exercising emergency comment on all aspects of the proposed
all of the following actions during an authority in order to help ensure that a rule regarding emergency authority.
emergency: (1) Impose or modify trading SB SEF is prepared prior to any Additionally, the Commission requests
limits, price limits, position limits, or emergency situation and to help ensure comments as to whether the proposed
other market restrictions, including that a SB SEF exercises emergency list of emergency actions that a SB SEF
suspending or curtailing trading on its authority appropriately and uniformly. may take is appropriate. Are there any
market in any SB swap or class of SB Proposed Rule 816(d) would require additional actions that should be
swaps; (2) extend or shorten trading every SB SEF to promptly notify the included? Are there any proposed
hours; (3) coordinate trading halts with Commission of the exercise of its actions that should not be included?
markets trading a security or securities emergency authority and, within two Why or why not?
underlying any SB swap; (4) coordinate weeks following cessation of the The Commission notes that it is
with a registered clearing agency to emergency, submit written common for a national securities
liquidate or transfer positions in any documentation explaining the basis for exchange to consult and cooperate with
open SB swap of one of its participants; declaring an emergency, how conflicts the Commission prior to responding to
and (5) any action directed by the of interest were minimized, and the highly unusual or emergency market
Commission. The Commission extent to which the facility considered
preliminarily believes that the actions the effect of its emergency action on the 194 See, e.g., NYSE Rule 49 and Nasdaq Bylaws
proposed in proposed Rule 816(c)(1) markets for the SB swap and any Article IX, Section 5.
through (4) would be important powers security or securities underlying the SB 195 See Section 5(d) of the CEA, 7 U.S.C. 7(d)
for a SB SEF to have immediately swap. Proposed Rule 816(d) also would (requiring a board of trade to adopt rules to provide
provide that, if a SB SEF implements for the exercise of emergency authority, in
consultation or cooperation with the CFTC, where
192 See Public Law 111–203, § 763(c) (adding any rule or rule amendment in the necessary and appropriate). See also 17 CFR part
Section 3D(d)(7) of the Exchange Act). exercise of its emergency authority, it 38, Appendix B to part 38 implementing Section
193 See 15 U.S.C. 78l(k)(7) (defining the term
shall file such rule or rule amendment 5(d) of the CEA. Appendix B to part 38 provides,
emergency to mean ‘‘(A) a major market disturbance with the Commission pursuant to Rule in part, that a designated contract market should
characterized by or constituting—(i) sudden and have clear procedures for the exercise of emergency
excessive fluctuations of securities prices generally, 806 prior to the implementation of such authority and should, among other things, be able
or a substantial threat thereof, that threaten fair and rule or rule amendment, or, if not to impose or modify price limits, order the
orderly markets; or (ii) a substantial disruption of practicable, within 24 hours after liquidation or transfer of open positions, order the
the safe or efficient operation of the national system implementation of such rule or rule fixing of a settlement price, order a reduction in
for clearance and settlement of transactions in positions, extend or shorten the expiration date or
securities, or a substantial threat thereof; or (B) a
amendment. The Commission the trading hours, suspend or curtail trading on the
major disturbance that substantially disrupts, or preliminarily believes that while it is market, order the transfer of customer contracts and
threatens to substantially disrupt—(i) the important to provide SB SEFs with the the margin for such contracts from one member
functioning of securities markets, investment tools necessary to react in emergency including non-intermediated market participants of
companies, or any other significant portion or the contract market to another, or alter the delivery
segment of the securities markets; or (ii) the
situations, requiring SB SEFs to submit terms or conditions, or, if applicable, should
transmission or processing of securities a notice and, if applicable, file a provide for such actions through its agreements
transactions.’’ certified emergency rule or rule with its third-party provider of clearing services.
conditions and expects that a SB SEF capacity to electronically capture, The Commission understands,
would likely do the same before transmit, and disseminate information however, that for business reasons
exercising its emergency authority on price, trading volume, and other counterparties to a SB swap transaction
pursuant to proposed Rule 816. trading data on all SB swaps executed may prefer to have a SB SEF act as its
However, the Commission requests on or through the SB SEF; and (2) make reporting agent for purposes of
comment on whether it should require public timely information on price, complying with the counterparty’s
that a SB SEF consult and cooperate trading volume, and other trading data responsibility under proposed
with the Commission before it takes any on SB swaps, to the extent and in the Regulation SBSR to report required
emergency action. Why or why not? Is manner prescribed by the Commission. transaction information to a registered
the proposed definition of emergency As noted, the Commission has SDR. Proposed Rule 817(b) therefore
appropriate? Is there another definition separately proposed rules relating to the would permit a SB SEF, acting as agent,
of emergency that would be more public dissemination of SB swap to report transaction information on
appropriate? Would it be preferable for transaction and pricing data.199 The behalf of a counterparty responsible for
the Commission not to define the term Commission is not at this time submitting transaction information to a
emergency? If not, why not? The proposing any additional requirements registered SDR. Under proposed Rule
Commission further requests comment on SB SEFs relating to the public 817(c), SB SEFs would be permitted to
on whether the proposed list of rules dissemination of such data.200 publicly disseminate SB swap
specifying processes for exercising In addition, proposed Rule 817(b) transaction information, but could not
emergency authority in proposed Rule would require that, if any SB SEF makes do so prior to the time SDRs would be
816(b) is appropriate. Are there any available information regarding a SB permitted to do so under proposed Rule
additional processes that should be swap transaction to any person other 902 of Regulation SBSR under the Act.
included? Are there any proposed than a counterparty to the transaction, Thus, a SB SEF could not publicly
processes that should not be included? then the SB SEF must make that disseminate complete transaction
Why or why not? information available to all participants reports for block trades (i.e., including
on terms and conditions that are fair the transaction ID and the full notional
XIV. Core Principle 8—Timely and reasonable and not unfairly
Publication of Trading Information size) until the times specified in Rule
discriminatory. This proposed 902(b)(1) through (3).202
Section 3D(d)(8) of the Exchange Act requirement is designed to prevent a SB The Commission believes that its
(Core Principle 8) requires SB SEFs to SEF from providing information on SB proposed rules for implementation of
make public timely information on swap transactions to certain persons Core Principle 8 would clarify the
price, trading volume, and other trading (other than counterparties) and not to extent and manner in which SB SEFs
data on SB swaps to the extent others, or provide such information could make information on transactions
prescribed by the Commission and to pursuant to different terms that are not executed on the SB SEF available in a
have the capacity to electronically justified. The Commission believes that manner consistent with the
capture and transmit and disseminate fair, reasonable, non-discriminatory requirements of proposed Regulation
trade information with respect to access to market information is essential SBSR. The Commission requests
transactions executed on or through the to providing a level playing field for all comment on all aspects of proposed
facility.196 Section 13(m)(1) of the market participants and that the Rule 817 with respect to the timely
Exchange Act separately authorizes the proposed requirement in Rule 817(b) publication of trading information.
Commission to make SB swap would prevent developments in the SB Additionally, the Commission requests
transaction, volume and pricing data swap market that could undermine the comment on whether the proposed role
available to the public in such form and goal of post-trade price transparency. of SB SEFs in the public dissemination
at such times as the Commission Proposed Rule 817(c) would also of transaction information is
determines appropriate to enhance price prohibit a SB SEF from making any appropriate. Should SB SEF’s be able to
discovery.197 The Commission has information regarding a SB swap compete with SDRs for potential
separately proposed rules relating to the transaction publicly available prior to customers of transaction data? How, if at
reporting and public dissemination of the time a SDR is permitted to do so all, would the prohibition on
SB swap transaction and pricing data.198 under proposed Rule 902 of Regulation dissemination of transaction
To implement Core Principle 8, the SBSR under the Act.201 information in proposed Rule 902 of
Commission is proposing Rule 817.
Regulation SBSR impact the
Proposed Rule 817(a) enumerates the 199 Id.
development of the market for SB
requirements of Section 3D(d)(8) of the 200 The rules proposed by the Commission
pursuant to Section 13(m) of the Exchange Act swaps? Should the Commission prohibit
Exchange Act. Thus, every SB SEF
would limit the public dissemination of SB swap
would be required to: (1) Have the transaction information by any person other than a Regulation SBSR identifies the SB swap
registered SDR. Specifically, proposed Rule information that would be required to be reported
196 See Public Law 111–203, § 763(c) (adding 242.902(d) of Regulation SBSR would prohibit any and disseminated, establishes reporting obligations,
Section 3D(d)(8) of the Exchange Act). person other than a registered SDR from making and specifies the timeframes for reporting and
197 See Public Law 111–203, § 763(i), (adding available to one or more persons (other than a disseminating. Proposed Regulation SBSR would
Section 13(m) of the Exchange Act). counterparty) information relating to a SB swap require a registered SDR to publicly disseminate
198 The Commission recently proposed Regulation before the earlier of: (1) 15 minutes after the time certain SB swap information that is reported to it
SBSR that would require reporting and real-time of execution of the SB swap; or (2) the time that in real time. See Reporting and Dissemination
public dissemination of certain information a registered SDR publicly disseminates a report of Release supra note 6.
regarding SB swap transactions. Proposed that SB swap. This prohibition on dissemination to 202 As proposed, subject to some exceptions, Rule
Regulation SBSR identifies the SB swap one or more persons (other than a counterparty) 902(b) of Regulation SBSR would prohibit the
information that would be required to be reported during such time period would apply to SB SEFs public dissemination of the complete transaction
and disseminated, establishes reporting obligations, and its participants, as it would to all other persons. report of a block trade (including the transaction ID
and specifies the time frames for reporting and See Reporting and Dissemination Release supra and the full notional size): (1) Executed on or after
disseminating. Proposed Regulation SBSR would note 6. 5:00 UTC and before 23:00 UTC of the same day,
require a registered SDR to publicly disseminate 201 The Commission recently proposed Regulation until 7:00 UTC of the following; and (2) executed
certain SB swap information that is reported to it SBSR, which would require reporting and real-time on or after 23:00 UTC and up to 5:00 UTC of the
in real time. See Reporting and Dissemination public dissemination of certain information following day, until 13:00 UTC of that following
Release, supra note 6. regarding SB swap transactions. Proposed day.
a SB SEF from disseminating the full years, the first two years in an easily to verify the accuracy of the transaction
size of a block trade after the period accessible place. Proposed Rule 818(c) data it collects and reports.206 This
specified in Rule 902(d), which could be would require SB SEFs to establish and requirement is based on the premise
after 15 minutes, but before a SDR has maintain the records necessary to create that transaction data is only useful if it
disseminated the full size of the block a meaningful audit trail. Specifically, is accurate. If it is not accurate, then it
trade? Would such a prohibition be the Commission proposes that SB SEFs will not enhance transparency. The SB
necessary? Or is it reasonable to expect establish and maintain accurate, time- swaps market participants must be able
that a SB SEF would not disseminate sequenced records of all inquiries, to trust that the information they receive
block trade information before a SDR if responses, orders, quotations or other is accurate in order to make appropriate
the SB SEF’s market participants did not trading interest, and transactions that investment decisions. Further, a SB SEF
want dissemination of such are received by, originated on, or must have accurate information if it is
information? With respect to data that a executed on the SB SEF.204 These to effectively carry out its obligations to
SDR is required to disseminate under records must include the key terms of surveil the market and enforce it rules.
proposed Rule 902 of Regulation SBSR, each inquiry, response, order, quotation Similarly, the Commission must be able
would proposed Rule 817(c) be effective or other trading interest or transaction to trust that the information it receives
in ensuring that SB SEF data feeds do and must document the complete life of is accurate so that it can oversee the
not have any advantage over SDR data each inquiry, response, order, quotation market and properly determine whether
feeds? If not, should the proposed rule or other trading interest or transaction the SB SEF is carrying out its statutory
be revised, and if so, how so? Are SB on the SB SEF, including any mandate.
SEFs likely to sell or otherwise modification, cancellation, execution, or The Commission requests comment
disseminate market data following any other action taken with respect to on all aspects of proposed Rule 818. Are
dissemination of data by a registered such order, inquiry, response, quotation, the documents required to be preserved
SDR? If not, why not? or transaction.205 Further, proposed pursuant to proposed Rule 818(a)
Rules 818(e) and (f) would require a SB appropriate? Are there additional
XV. Core Principle 9—Recordkeeping documents that a SB SEF should be
SEF to report to the Commission such
Section 3D(d)(9) of the Exchange Act information as the Commission may, required to preserve? Is the proposed
(Core Principle 9) requires SB SEFs to from time to time, determine to be time period for record retention
maintain records of all activities relating necessary for the Commission to appropriate? Should SB SEF’s be
to the business of the facility, including perform its duties under the Exchange required to keep such records for a
a complete audit trail, in a form and Act, and upon request of any longer or shorter period of time? Are the
manner acceptable to the Commission representative of the Commission, to records required to be preserved to
for a period of five years. This Core promptly furnish to each representative maintain an audit trail pursuant to
Principle also requires SB SEFs to report copies of any documents, in such form proposed Rule 818(c) appropriate? Are
to the Commission, in a form and and manner acceptable to such there additional records that a SB SEF
manner acceptable to the Commission, representative, required to be kept and should be required to keep? Should the
such information as the Commission preserved by the SB SEF pursuant to Commission require SB SEFs to keep
determines to be necessary or proposed Rules 818(a) and (b). audit trail records in a particular
appropriate for the Commission to The Commission would use the format? What are the benefits and
perform the duties of the Commission information required under proposed drawbacks of allowing each SB SEF to
under the Exchange Act. In addition, Rules 818(a) through (c) to carry out its determine its own format to keep audit
this Core Principle requires the oversight responsibility over SB SEFs. trail records? Would allowing each SB
Commission to adopt data collection The records required to be kept, SEF to determine its own format for the
and reporting requirements for SB SEFs maintained, and provided to the maintenance of an audit trail hamper
that are comparable to corresponding Commission under these provisions the Commission’s ability to analyze
requirements for clearing agencies and would provide an additional tool to trading activity across multiple SB
SDRs. help the Commission to determine SEFs? If yes, then how?
The Commission is proposing Rule whether a SB SEF is operating in Is it appropriate to require SB SEFs to
818 setting forth the recordkeeping and compliance with the Exchange Act and have policies and procedures to verify
reporting obligations of SB SEFs to the rules and regulations thereunder. the accuracy of transaction data? If not,
implement this Core Principle. This The audit trail information required to why not? In the absence of such
proposed rule is comparable to the be maintained under proposed Rule requirements, how should the
recordkeeping and reporting obligations 818(c) would facilitate the ability of the Commission ensure the integrity of
of national securities exchanges and SB SEF and the Commission to examine transaction data that originates on or
ATSs under the Exchange Act.203 the complete history of all trading passes through a SB SEF? What are the
Proposed Rule 818(a) would require interest entered into and transactions specific benefits and drawbacks of any
every SB SEF to keep and preserve at executed on a SB SEF. This audit trail suggested approaches?
least one copy of all documents, information would help the SB SEF and Proposed Rules 818(e) and (f) require
including all correspondence, the Commission to detect and deter a SB SEF to promptly furnish
memoranda, papers, books, notices, fraudulent and manipulative acts and information and records required to be
accounts, and other such records, prepare reconstructions of activity on a kept under the Rule to the Commission
including the audit trail records, as shall SB SEF or in the SB swaps market, and upon request. What, if any, additional
be made and received in the conduct of generally to understand the causes of reports or records should be furnished
its business. Proposed Rule 818(b) unusual market activity. to the Commission upon request? What,
would require SB SEFs to keep and Proposed Rule 818(d) would require a
206 Nothing in proposed Regulation SBSR would
preserve such documents and other SB SEF to establish, maintain, and
prohibit a SB SEF from serving as the reporting
records for a period of not less than five enforce written policies and procedures agent on behalf of the counterparty with the
obligation to report a trade to the SDR, if the
203 See, e.g., 17 CFR 240.17a–1, 240–17a–3, and 204 Id.
counterparty effected the trade on the SB SEF. See
17a–4, and 17 CFR 242.301–03. 205 See proposed Rule 818(c). Reporting and Dissemination Release, supra note 6.
if any, reports or records should the or offer guidance to address such Each of these potential conflicts of
Commission require on a periodic basis? situations? interest could limit the benefits of
A SB SEF is required to promptly centralized trading in the SB swap
XVII. Core Principle 11—Conflicts of
furnish information to the Commission market and potentially undermine the
Interest
in a manner that is acceptable to the mandatory trading requirement in
Commission. Are there particular time Section 3D(d)(11) of the Exchange Act Section 3C(h) of the Exchange Act,
or format constraints or challenges that (Core Principle 11) requires a SB SEF to thereby negatively affecting efficiency
the Commission should be aware of establish and enforce rules to minimize and competition in the SB swap
with respect to such requests? Would conflicts of interest in its decision- markets.215
the recordkeeping and reporting making process and establish a process Accordingly, the Commission
requirements be overly burdensome to for resolving the conflicts of interest.209 proposed in Regulation MC to, among
SB SEFs? If so, why? Or, should the Pursuant to this directive, the other things, impose a 20% limit on
Commission require SB SEFs to provide Commission is proposing Rule 820 to ownership (based on interests entitled
the Commission direct electronic access mitigate conflicts of interest through to vote) and voting interest by any direct
to such information and records? Would governance arrangements applicable to participants of SB SEFs; require the
such direct access be more or less SB SEFs. board of a SB SEF be composed of a
burdensome to SB SEFs than the The Commission recently proposed majority of independent directors;
proposed requirements? If so, what new Regulation MC as part of its require a fully independent nominating
requirements should the Commission rulemaking 210 mandated by Section 765 committee; require a fully independent
consider limiting to reduce the burdens? of the Dodd-Frank Act.211 Section 765 of ROC; and require the SB SEF to inform
the Dodd-Frank Act requires the the Commission when a
What would be the basis, if any, to
Commission to adopt rules to mitigate recommendation of the ROC is not
justify reducing the recordkeeping and
specified conflicts of interest relating to implemented by the board.216
reporting requirements for SB SEFs that As discussed above, in this proposal,
are, as proposed, comparable to SB SEFs, security-based swap clearing
agencies, and SBS exchanges.212 As the the Commission is proposing rules
requirements for national securities relating to impartial access to SB SEFs
exchanges that also trade SB swaps? Commission explained in the
Regulation MC Proposing Release, a and a review process for those SB swaps
XVI. Core Principle 10—Antitrust conflict of interest could arise when a to be traded on a SB SEF, that are
Concerns small number of market participants designed to work together with
exercise control or influence over a SB Regulation MC to help mitigate
Section 3D(d)(10) of the Exchange Act potential conflicts of interest.217 As
SEF, either through ownership of voting
(Core Principle 10) 207 provides that, described in this section, the
interests or participation in the
unless necessary or appropriate to Commission also is proposing
governance of the SB SEF. When a small
achieve the purposes of the Exchange additional governance rules that are
group of market participants also
Act, a SB SEF shall not: (1) Adopt any designed to mitigate potential conflicts
dominate much of the trading in SB
rules or take any actions that result in of interest.218 The proposed rules in this
swaps, control of a SB SEF by these
any unreasonable restraint of trade, or proposal—regarding both impartial
participants raises a heightened
(2) impose any material anticompetitive access and governance—seek to address
concern. Such market participants,
burden on trading or clearing. The the same conflicts of interest issues as
through ownership interest in or
Commission is proposing to implement identified in proposed Regulation MC,
influence over the governance of a SB
this Core Principle in proposed Rule but using different mechanisms. The
SEF, potentially could exercise their
819 by incorporating the statutory Commission will consider both
influence to limit the number of direct
language.208 The Commission requests rulemaking proposals as a whole,
participants in the SB SEF and restrict
comment on all aspects of the proposed including how they interact with each
the scope of SB swaps that are listed for
Rule 819. What do commenters believe other, when considering how best to
trading on a SB SEF in an effort to limit
would be a ‘‘material anticompetitive address these conflicts of interest issues.
competition and increase their ability to
burden’’ on trading and clearing? Should As requested in detail below, in
maintain higher profit margins.213 The
the Commission prescribe specific rules reviewing the proposed rules,
Commission also believes that a SB
commenters are encouraged to do the
SEF’s ownership and governance
207 See Public Law 111–203, § 763(c) (adding same.
Section 3D(d)(10) of the Exchange Act).
structure could create an incentive for The Commission’s proposal for SB
208 As discussed further in Section XVII below, behaviors that would promote its SEFs is informed by the Commission’s
the Commission proposed a number of owners’ commercial interests over its experience with national securities
requirements in Regulation MC designed to mitigate market oversight responsibilities.214 exchanges. Historically, national
conflicts of interest relating to SB SEFs. The
additional rules the Commission is proposing 209 See Public Law 111–203, § 763(c) (adding
securities exchanges were owned by
herein are designed to work together with proposed their members and were structured as
Section 3D(d)(11) of the Exchange Act).
Regulation MC to help mitigate potential conflicts 210 See Regulation MC Proposing Release, supra
of interest, as identified in the Regulation MC
Proposing Release. In addition, as discussed in note 82. members pursuant to the Exchange Act. See Section
Section XVII, the Commission is proposing
211 See Public Law 111–203, § 765. 6 of the Exchange Act, 15 U.S.C. 78(f).
212 Id. 215 See Public Law 111–203, § 763(a). Section
governance rules that also are designed to help
mitigate potential conflicts of interest relating to SB 213 See Regulation MC Proposing Release, 75 FR 3C(h) of the Exchange Act imposes a mandatory
SEFs. at 65890, supra note 82. trading requirement, which provides that
The Commission notes that the statutory language 214 The Commission notes that an entity that counterparties shall execute a transaction in a SB
of Section 3D(d)(10)(B) of the Exchange Act differs registers as a SB SEF would have oversight swap subject to the clearing requirement of Section
somewhat from the requirements in the Exchange responsibility over its market pursuant to the 3C(a)(1) on an exchange or a registered SB SEF or
Act relating to national securities exchanges. Exchange Act (as amended by the Dodd-Frank Act), a SB SEF that is exempt from registration pursuant
Section 6(b)(8) of the Exchange Act, 15 U.S.C. and rules adopted thereunder. See Public Law 111– to Section 3D(e).
216 See Regulation MC Proposing Release, supra
78f(b)(8), requires that the rules of a national 203, § 763(c). Similarly, all national securities
securities exchange not impose any burden on exchanges, including those that may post or make note 82.
217 See supra Sections VI and VII.
competition not necessary or appropriate in available for trading SB swaps, have oversight
furtherance of the purposes of the Exchange Act. responsibilities over their markets and their 218 See proposed Rule 820.
not-for-profit or similar (generally from member-owned to its directors and administration of its
organizations.219 With the advent of shareholder-owned organizations) or of affairs, but no less than 20% of the total
shareholder-owned exchanges, the applications by entities to register as number of directors of the SB SEF must
Commission became concerned that the national securities exchanges.225 In its be selected by the SB SEF’s
introduction of a class of owner that review, the Commission has examined participants.228 The Commission
does not trade on the exchange could the way in which an exchange addresses preliminarily believes that the proposed
exacerbate the possibility that an certain governance principles. Among 20% requirement strikes a proper
exchange would put its commercial other things, the Commission looks to balance by giving SB SEF participants a
interests ahead of its responsibilities as assure that an exchange provides fair practical voice in the governance of the
a regulator.220 The Commission also representation of members in the SB SEF and the administration of its
recognizes the potential for any person selection of directors and the affairs, without undermining the overall
that directly or indirectly controls an administration of its affairs, and provide independence of the Board.229
exchange or facility thereof to direct its that one or more directors be To ensure that SB SEF participants
operation so as to cause the exchange to representative of issuers and investors truly have a voice in the selection of
neglect its regulatory obligations under and not be associated with a member of
the Exchange Act or to improperly directors, the Commission also proposes
the exchange, broker or dealer, that SB SEF participants be permitted to
interfere with or restrict the ability of consistent with the requirement in
the Commission to effectively carry out participate in the nomination process of
Section 6(b)(3) of the Exchange Act.226 such representative directors, with the
its oversight responsibilities.221 To complement the governance
The Commission has considered the right to petition for alternative
requirements proposed in Regulation candidates. The proposed rule would
conflicts between an exchange’s
MC, the Commission proposes require the rules of a SB SEF to establish
regulatory responsibilities and its
additional substantive requirements a fair process for SB SEF participants to
commercial interests in operating a
with respect to the governance of SB nominate an alternative candidate or
marketplace for the trading of
SEFs that are designed to address the candidates to the Board by petition and
securities.222 To address these types of
conflict of interest concerns identified the percentage of SB SEF participants
concerns, the Commission has approved
above. The Commission proposes that that is necessary to put forth such
proposed procedures, consistent with
SB SEF participants be provided ‘‘fair alternative candidate or candidates.230
the requirements of Section 6 of the
representation’’ in the selection of A SB SEF would have some flexibility
Exchange Act,223 for an approach to
mitigate conflicts of interest for national directors of the SB SEF and in implementing a fair process for
securities exchanges through the administration of its affairs. Thus, the members to select Board candidates.231
Commission’s review of proposals by proposed rule would require the rules of In adopting such rules, a SB SEF should
exchanges with respect to their a SB SEF to assure a fair representation endeavor to strike an appropriate
ownership 224 and governance structures of its participants 227 in the selection of balance that provides SB SEF
participants a practical mechanism to
219 A
SEFs as part of this rulemaking. The Commission put forth alternative candidates, without
‘‘member’’ when used with respect to a
has proposed ownership and voting limitations for
national securities exchange means (i) any natural
participants in a SB SEF, as well as for participants jeopardizing the overall integrity of the
person permitted to effect transactions on the floor nominating process. The SB SEF
in a SBS exchange, as part of Regulation MC. See
of the exchange without the services of another
person acting as broker, (ii) any registered broker or
proposed Rule 702 of Regulation MC. participant candidates, of course, would
225 See, e.g., Exchange Act Release No. 62158,
dealer with which such a natural person is
associated, (iii) any registered broker or dealer supra note 220; Securities Exchange Act Release
No. 61698 (March 12, 2010), 75 FR 13151 (March directly engage in or effect transactions on the SB
permitted to designate as a representative such a SEF).
natural person, and (iv) any other registered broker 18, 2010) (In the Matter of the Applications of
228 See proposed Rule 820(a). The Commission
or dealer which agrees to be regulated by such EDGX Exchange, Inc., and EGDA Exchange, Inc. for
exchange and with respect to which the exchange Registration as National Securities Exchanges; notes that national securities exchanges have
undertakes to enforce compliance with the Findings, Opinion, and Order of the Commission) established a 20% member director requirement for
provisions of the Exchange Act, the rules and (‘‘Exchange Act Release No. 61698’’); Securities their boards of directors. See, e.g., EDGX Exchange,
regulations thereunder, and its own rules. See Exchange Act Release No. 58375 (August 18, 2008), Inc. Amended and Restated Bylaws, Article III,
Section 3(a)(3)(A) of the Exchange Act, 15 U.S.C. 73 FR 49498 (August 21, 2008) (In the Matter of the Section 2(a)(iv) and BATS Y-Exchange Amended
78c(a)(3)(A). Application of BATS Exchange, Inc. for Registration and Restated by-Laws Article III, Section 2(b)(ii).
220 See, e.g., Securities Exchange Act Release No. as a National Securities Exchange; Findings, The Commission proposes to define the term
62158 (May 24, 2010), 75 FR 30082 (May 28, 2010) Opinion, and Order of the Commission) (‘‘Exchange ‘‘Board’’ as the Board of Directors or Board of
(order approving the demutalization of CBOE) Act Release No. 58375’’); and Securities Exchange Governors of the SB SEF or any equivalent body.
(‘‘Exchange Act Release No. 62158’’). Act Release No. 53382 (February 27, 2006), 71 FR See proposed Rule 800 under Regulation SB SEF.
221 Because ATSs do not have the regulatory 11251 (March 6, 2006) (order approving the merger The proposed definition is substantially identical to
obligations that are required of national securities of NYSE and Archipelago and NYSE’s that proposed in the Regulation MC Proposing
exchanges under the Exchange Act, the Commission demutualization). Release with respect to SB SEFs. See supra note 82.
229 Proposed Regulation MC would require that a
has not to date required ATSs to have governance 226 15 U.S.C. 78f(b)(3). Specifically, Section
structures that are similar to those of national 6(b)(3) of the Exchange Act requires that the rules Board of a SB SEF be composed of a majority of
securities exchanges. of an exchange assure a fair representation of its independent directors. See proposed Rule 702(c)(1)
222 The Commission’s recognition of potential members in the selection of its directors and under proposed Regulation MC and the Regulation
conflicts of interest at exchanges and its approach administration of its affairs, and must provide that MC Proposing Release, supra note 82.
to date in reviewing and approving measures one or more directors be representative of issuers 230 See proposed Rule 820(c).
designed to mitigate those conflicts of interest are and investors and not be associated with a member 231 The Commission notes that national securities
a useful point of reference as the Commission of the exchange, broker or dealer. 15 U.S.C. exchanges have implemented the 20% member
identifies and develops proposals to mitigate the 78f(b)(3). Pursuant to Section 6(b)(3), the director requirement by various means. For
conflicts of interest potentially faced by SB SEFs as Commission has approved SRO rules requiring that example, the BATS Y-Exchange, Inc. has a separate
the trading of SB Swaps moves to regulated at least 20% of the directors on the board be member nominating committee that will nominate
markets. However, the Commission recognizes that selected by exchange members, as well as SRO rules candidates for each member representative director
a SB SEF’s regulatory obligations are not the same requiring that exchange members be permitted to position on the exchange’s board. BATS Global
as a national securities exchange’s regulatory participate in the nomination process of such Markets, as the sole shareholder of BATS Y-
obligations. representative directors, with the right to petition Exchange, Inc., will elect those candidates
223 See Section 6(b) of the Exchange Act, 15 for alternative candidates. See, e.g., Exchange Act nominated by the member nominating committee as
U.S.C. 78f(b). Release No. 58375, 73 FR at 49500, id . member representative directors. See BATS Y-
224 The Commission is not proposing rules with 227 See proposed Rule 800 (defining the term Exchange Amended and Restated by-Laws Article
respect to ownership and voting limitations for SB ‘‘participant’’ as a person that is permitted to III, Section 4.
be required to satisfy all relevant Commission believes that requiring Should the ‘‘fair representation’’
eligibility criteria for directors. representation by investors who are not proposal be broadened to include non-
Further, the Commission proposes SB swap dealers or major SB swap participant dealers? Would
that SB SEF participant-owners be participants, or associated with SB SEF representation by non-participant
restricted in their ability to participate participants, would provide an dealers be useful to help assure that SB
in the ‘‘fair representation’’ process. The important perspective to the governance SEFs implement rules and procedures
rules of a SB SEF would therefore and administration of a SB SEF. Investor that are designed to provide impartial
require the SB SEF to preclude any SB directors could provide unique and access? If commenters believe that such
SEF participant, or any group or class of different perspectives from dealers and representation should be required,
participants, either alone or together other participants of the SB SEF, which should non-participant dealers be
with its related persons, that should enhance the ability of the Board provided representation in addition to
beneficially owns, directly or indirectly, to address issues in an impartial fashion any required independent directors,236
an interest in the SB SEF from and consequently support the integrity or should they be a subset of
dominating or exercising of a SB SEF’s governance. independent directors?
disproportionate influence in the The Commission believes that the Are the provisions relating to the ‘‘fair
selection of the fair representation proposed governance requirements, representation’’ requirements
directors if the participant or described above, are important to help appropriate? Should the proposed 20%
participants may thereby dominate or ensure that all SB SEF participants and minimum threshold for ‘‘fair
exercise disproportionate influence in investors have a voice in the representation’’ be higher or lower? Do
the selection or appointment of the commenters agree that it is appropriate
administration and governance of the
entire Board.232 For example, if a group for a SB SEF to restrict the ability of a
SB SEF. The proposed requirements
of five participants together owned the SB SEF participant that is also an owner
should reduce the possibility that a
SB SEF and, as a result of such to dominate or exercise influence in the
single group of market participants has
ownership, were effectively able to selection of ‘‘fair representation’’
the ability to unfairly disadvantage
select the directors on the Board of the directors, particularly if the SB SEF
other market participants through the
SB SEF, those owners would be would thereby dominate the selection or
SB SEF governance process. Moreover,
precluded from also being the fair appointment of the entire Board? If not,
the proposed requirements for SB SEFs
representation directors on the Board. why not? If so, why? Is the proposed
would be consistent with Exchange Act
The Commission believes that such a rule’s requirement that the Board
requirement should help mitigate any requirements for national securities include at least one investor
conflicts of interest that may arise exchanges.235 The Commission believes representative appropriate? Should SB
between SB SEF participants who are that similar requirements for SB SEFs SEFs be required to have more than one
also owners of the SB SEF. Given the would help to minimize conflicts of investor representative on its Board? If
nature of the conflict concerns for the interest in the SB SEF decision-making so, how many, and why?
trading of SB swaps and the structure of process. Should the Commission require a
the SB swaps market—namely, the The Commission requests comments specific percentage of the total number
dominance by a small group of dealers on all aspects of the proposed rules of SB SEF participants to put forth
and the concerns with respect to undue related to governance of the SB SEF. Are alternative member candidate or
influence in the operation of the SB there provisions of the proposed rules candidates by petition that would be
SEF 233—the Commission believes that that are unnecessary or are there other required to be set forth in the SB SEF’s
it is necessary and appropriate for the provisions that should be added? If so, rules? If so, what percentage would be
Commission to require that a SB SEF why? Are there aspects of the proposed appropriate? In the SRO Governance
take means to prevent a SB SEF rules that would be difficult for SB SEFs Proposing Release, the Commission
participant or group of participants from to implement and, if so, why would that proposed a threshold of 10% as the
exerting undue influence in the be the case? percentage of members necessary to put
nomination and selection of the entire Should the Commission adopt forth an alternative member candidate
Board. compositional requirements to provide or candidates for the exchange board of
Finally, the Commission proposes certain constituencies a guaranteed directors.237 Would a 10% threshold be
that at least one director on the Board voice in the selection of the SB SEF’s appropriate for SB SEFs as well? Should
of a SB SEF shall be representative of directors and the administration of its investors who are not SB SEF
investors who are not SB swap dealers affairs, in addition to those proposed? participants be provided with further
or major SB swap participants and such For example, the proposed ‘‘fair representation in the governance and
director must not be a person associated representation’’ requirement relates to administration of a SB SEF beyond
with a SB SEF participant.234 The the fair representation of a SB SEF’s representation on the SB SEF Board? 238
participants. Should the requirement
232 See proposed Rule 820(a). 236 See Regulation MC Proposing Release, supra
instead specifically require fair
233 For further discussion of the current structure note 82.
of the SB swaps market, see the Regulation MC
representation of specific categories of 237 See Securities Exchange Act Release No.
Proposing Release, supra note 82, at Section III.B. participants, such as SB swap dealers 50699 (November 18, 2004), 69 FR 71126
234 See proposed Rule 820(b). The term ‘‘person and major SB swap participants? Are (December 8, 2004) at 71137–71138. See also, e.g.,
associated with a participant’’ is proposed to mean there constituencies that commenters NASDAQ Stock Market LLC, Bylaws, Article II,
any partner, officer, director, or branch manager of Section 1(b)(ii) stating that Nasdaq members may
such participant (or any person occupying a similar

believe should be entitled to submit a petition in support of an alternate
status or performing similar functions), any person representation in the election of the candidate (i.e., candidate not selected by the
directly or indirectly controlling, controlled by, or Board of a SB SEF that are not nominating committee) provided that the petition is
under common control with such participant, or addressed in this proposal? executed by ‘‘10% or more of all Nasdaq Members.’’
any employee of such participant. See proposed 238 See discussion supra at Section VIII.B
Rule 800. The proposed definition is substantially discussing proposed Rule 811(c)(2), which would
identical to the definition of ‘‘person associated Regulation MC and Regulation MC Proposing provide that the SB SEF must establish a swap
with a security-based swap execution facility Release, supra note 82. review committee that would provide for the fair
participant’’ that has been proposed under 235 See Section 6(b)(3) of the Exchange Act, 15 representation of participants of the SB SEF and
Regulation MC. See proposed Rule 700(t) under U.S.C. 78f(b)(3). Continued
Should the Commission require SB Commission require that the MC raised additional sources of
SEFs to have a participation committee independent directors of the Board conflicts to consider.242 These
that would, for example, determine the conduct and submit to the Commission, commenters suggested that the
standards and requirements for or make publicly available, an annual Commission should focus on conflicts
participant eligibility and review governance self-assessment, which arising from dealers directing volume to
denials of participation applications? If would include ways in which the SB SBS exchanges and SB SEFs, dealer
so, should there be any requirements as SEF addressed conflicts of interest? If concentration of market activity, and
to the composition of such a committee? so, are there particular areas that should close association of the dealers with
For example, should any such be the focus of any such annual decision-making in SBS exchanges and
committee be required to have a governance self-assessment? What SB SEFs. Namely, the commenters
majority of independent directors? would be the benefits and drawbacks of believed that the Commission should
Would some other percentage of any such annual governance self- address the incentives SB SEFs and SBS
independence be appropriate for a assessment? Should proposed Form SB exchanges may use to attract business,
participation committee? Should the SEF require SB SEFs to provide details such as volumetric or profit-based
Commission require investor about the background of each incentives. The commenters argued that
representation on a participation independent director and why it if arrangements to attract large liquidity
committee? If so, should the believes that each independent director providers’ business are overly generous,
Commission require a minimum qualifies as independent? 239 such arrangements may undermine any
percentage of investor representation A number of commenters on improvements made by the proposed
and if so what percentage and why? Regulation MC raised concerns about voting and ownership limitations and
As noted above, various provisions of the overall approach of, and the governance requirements in Regulation
proposed Regulation SB SEF, such as proposed requirements in, Regulation MC. Do commenters agree with these
the impartial access requirements of MC and expressed a range of views.240 concerns? If not, why not? If so, do
proposed Rule 811(b) and the Several other commenters on Regulation commenters believe that the
governance requirements of proposed MC, however, generally supported the Commission should take any measures
Rule 820 are intended to be overall approach to mitigate conflicts of to mitigate these concerns? For example,
complementary measures, along with interest and expressed a range of views should the Commission prohibit, or take
proposed Regulation MC, designed to on the proposed requirements.241 In other measures with respect to, revenue
mitigate conflicts of interest for SB particular, the Commission notes that sharing, volume discounts, rebates, and
SEFs. The Commission seeks some commenters who have submitted other similar arrangements by a SB SEF
commenters’ views regarding the comment letters on proposed Regulation to attract order flow? Should SB SEFs be
interaction of proposed Regulation SB required to file with the Commission
SEF with proposed Regulation MC. 239 See Section XXII for a description of proposed
any arrangements with participants,
Taking into account both proposals, Form SB SEF, which would require the disclosure potential participants, or other market
of certain information relating to directors of an SB
commenters should address whether the SEF. Proposed Exhibit C to Form SB SEF would participants that would promote the
proposals contained in Regulation SB require that an applicant provide a list of the sending of order flow to the SB SEF,
SEF would appropriately address officers and directors of the SB SEF, or persons such as equity incentive plans? Would
conflicts of interest concerns or whether performing similar functions, who presently hold or
have held their offices or positions during the
such requirements help to mitigate
they should be revised either as previous year, and a list of all standing committees conflicts of interest?
unnecessary or insufficient to address and their members, indicating the following for
conflicts of interest. Are there any each: their name and title; date of commencement XVIII. Core Principle 12—Financial
redundancies or gaps for mitigating and termination of term of office or position; the Resources
type of business in which each is primarily engaged
conflicts of interest that should be (e.g., SB swap dealer, major SB swap participant, Section 3D(d)(12)(A) of the Exchange
addressed? inter-dealer broker, end-user etc.); and, if such Act (Core Principle 12) requires SB SEFs
In reviewing proposed Rule 820 person is a director, whether such director qualifies to have adequate financial, operational,
specifically, commenters are asked to as an ‘‘independent director’’ pursuant to proposed and managerial resources to discharge
Rule 800 under Regulation SB SEF and whether
consider how this proposed rule would such director is a member of any standing each responsibility of the SB SEF, as
work together with Regulation MC. Are committees or committees that have the authority determined by the Commission. In
the requirements of proposed Rule 820 to act on behalf of the Board or the nominating addition, Section 3D(d)(12)(B) of the
and the requirements of Regulation MC committee. Exchange Act states that the financial
240 See, e.g., Letter from Nancy C. Gardner,
mutually supportive? Are any of the Executive Vice President & General Counsel,
resources of a SB SEF shall be
requirements of proposed Rule 820 Thomson Reuters Markets, to Elizabeth M. Murphy, considered to be adequate if the value
redundant with, or otherwise Secretary, Commission, dated November 24, 2010, of the financial resources (i) enables the
unnecessary in light of, the proposed Letter from Lee H. Olesky, Chief Executive Officer, organization to meet its financial
and Douglas L. Friedman, General Counsel,
requirements of Regulation MC? Are Tradeweb Markets LLC, to David A. Stawick,
obligations to its members and
there additional or different measures Secretary, CFTC, dated November 17, 2010, and
that the Commission should take to Letter from Ernest C. Goodrich, Jr., Managing 242 Letter from U.S. Senator Carl Levin, Michigan,
mitigate conflicts of interest? For Director, Deutsche Bank AG, and Marcelo Riffaud, to Elizabeth M. Murphy, Secretary, Commission,
Managing Director, Deutsche Bank AG, to Elizabeth dated December 20, 2010; Letter from Dennis M.
example, should the Commission M. Murphy, Secretary, Commission, and David A. Kelleher, President & CEO, and Wallace C.
require SB SEFs to make publicly Stawick, Secretary, CFTC, dated November 8, 2010. Turbeville, Derivatives Specialist, Better Markets,
available, or available to the 241 See, e.g., Letter from U.S. Department of Inc. to Elizabeth M. Murphy, Secretary,
Commission but not to the public, Board Justice, Antitrust Division, In the Matter of: RIN Commission, dated November 26, 2010; Letter from
3235–AK47, File No. S7–27–10, dated December 28, U.S. Senator Sherrod Brown, Ohio, to Elizabeth M.
and committee decisions with respect to 2010, Letter from Mark Scanlan, Vice President, Murphy, Secretary, Commission, and David A.
the listing of SB swaps? Should the Agriculture and Rural Policy, Independent Stawick, Secretary, CFTC, dated November 17,
Community Bankers of America, to Elizabeth M. 2010; Letter from U.S. Senator Tom Harkin, Iowa,
other market participants, such that each class of Murphy, Secretary, Commission, dated November to Elizabeth M. Murphy, Secretary, Commission,
participant and other market participants would be 26, 2010, and Letter from Laurel Leitner, Senior and David A. Stawick, Secretary, CFTC, dated
given the right to participate in such committee and Analyst, Council of Institutional Investors, to November 17, 2010; and Letter from Americans for
no single class of participant or category of market Elizabeth M. Murphy, Secretary, Commission, dated Financial Reform, to Elizabeth M. Murphy,
participant would predominate. November 19, 2010. Secretary, Commission, dated November 16, 2010.
participants notwithstanding a default Act), a SB SEF must use reasonable the integrity of quotes or other trading
by the member or participant creating assumptions and estimates and not interest, and prevent market
the largest financial exposure for that overestimate resources or underestimate participants from being able to post
organization in extreme but plausible expenses, liabilities, and financial quotes or other trading interest, and
market conditions; and (ii) exceeds the exposure. Each of these requirements thereby have a large impact on market
total amount that would enable the SB would be an ongoing requirement and a confidence, risk exposure, and market
SEF to cover the operating costs of the SB SEF must always be in efficiency. To promote the maintenance
SB SEF for a one year period, as compliance.243 The Commission seeks of stable and orderly SB swap markets,
calculated on a rolling basis. The comments in general regarding all the Commission believes that SB SEFs
Commission believes that the financial aspects of these financial requirements. should be required to meet the ARP
strength of a SB SEF is vital to ensure capacity, resiliency and security
that a SB SEF can discharge its XIX. Core Principle 13—Systems standards.246
regulatory responsibilities in accordance Safeguards Proposed Rule 822 would require a
with the Exchange Act. Strong, viable Section 3D(d)(13)(A) of the Exchange SB SEF to establish, maintain, and
SB SEFs will be a key to market Act (Core Principle 13) requires that a enforce written policies and procedures
continuity and efficiency. Therefore, the SB SEF shall establish and maintain a designed to ensure that its systems
Commission believes that it is important program of risk analysis and oversight to provide adequate levels of capacity,
to install safeguards to ensure that a SB identify and minimize sources of resiliency, and security; and submit to
SEF’s resources are adequate. operations risk, through the the Commission annual reviews of its
The Commission proposes to development of appropriate controls automated systems, systems outage
implement in proposed Rule 821 the and procedures, and automated systems, notices, and prior notices of planned
requirements of Section 3D(d)(12) of the that: (1) Are reliable and secure and (2) system changes. These proposed
Exchange Act. Specifically, proposed have adequate scalable capacity. requirements essentially codify and
Rule 821(a) would require every SB SEF Additionally, Section 3D(d)(13)(B) of parallel the ARP requirements that have
to have adequate financial, operational, this Core Principle requires that a SB been in place for almost twenty years.
and managerial resources to discharge SEF establish and maintain emergency Commission staff has found these
each responsibility of the SB SEF, as procedures, backup facilities, and a plan standards to be effective in overseeing
determined by the Commission. for disaster recovery that allow for: (1) the capacity, resiliency, and security of
Proposed Rule 821(b) would state in Timely recovery and resumption of major automated systems in use in the
part that the financial resources of a SB operations and (2) the fulfillment of the securities markets. These proposed
SEF shall be considered to be adequate responsibilities and obligations of the requirements, as applied to the market
if the value of the financial resources SB SEF. Further, Section 3D(d)(13)(C) of for SB swaps, are designed to prevent
enables the SB SEF to meet its financial this Core Principle requires that a SB and minimize the impact of systems
obligations to participants SEF shall periodically conduct tests to failures that might negatively impact the
notwithstanding a default by the verify that the backup resources of the stability of this market.
participant creating the largest financial SB SEF are sufficient to ensure A. Requirements for SB SEFs’
exposure for the SB SEF in extreme but continued: (1) Order processing and Automated Systems
plausible market conditions. This trade matching, (2) price reporting, (3)
requirement would help ensure that the market surveillance, and (4) 1. Policies and Procedures
financial failure of one participant maintenance of a comprehensive and Proposed Rule 822(a)(1) would
would not be able to destroy the accurate audit trail. The Commission is require a SB SEF to establish, maintain,
financial viability of the entire SB SEF. proposing Rule 822 to implement this and enforce written policies and
Proposed Rule 821(b) would require that Core Principle. procedures reasonably designed to
in making this calculation (which is The Commission is proposing Rule ensure that its systems provide adequate
required by Section 3D(d)(12)(B) of the 822 to provide standards for SB SEFs levels of capacity, resiliency, and
Exchange Act), a SB SEF shall use with regard to their automated systems’ security. Such policies and procedures
reasonable estimates and assumptions capacity, resiliency, and security.244 would require a SB SEF to, at a
and not overestimate resources or These standards are comparable to the minimum: (1) Establish reasonable
underestimate expenses, liabilities, and standards applicable to SROs, including current and future capacity estimates;
financial exposure. This requirement (2) conduct periodic capacity stress tests
national securities exchanges and
should provide guidance to SB SEFs on of critical systems to determine such
clearing agencies, pursuant to the
the estimates they should use to comply systems’ ability to process transactions
Commission’s Automation Review
with the requirements of Core Principle in an accurate, timely, and efficient
Policy (‘‘ARP’’) standards.245 Systems
12. manner; (3) develop and implement
Proposed Rule 821(b) also would state failures can limit access to quotes or
other trading interest, call into question reasonable procedures to review and
in part that the financial resources of a keep current its system development
SB SEF shall be considered to be 243 In addition to the requirements of proposed and testing methodology; (4) review the
adequate if the value of the financial Rule 821, a SB SEF would be required to submit
resources exceeds the total amount that annual financial reports in accordance with the 246 Because SB SEFs would be an integral part of
would enable the SB SEF to cover its requirements discussed in Section XXII of this the market for SB swaps, and therefore an integral
operating costs for a one year period, as release. part of the national market system, the Commission
244 Proposed Rule 822 is being promulgated under

calculated on a rolling basis. This test believes that it is appropriate to model a SB SEF’s
Section 3D(d)(13) of the Exchange Act. rules on system safeguards on ARP. Proposed Rule
would help to ensure that a SB SEF is 245 See Securities Exchange Act Release Nos. 822 will impose data maintenance standards on SB
in a sufficiently strong financial 27445 (Nov. 16, 1989), 54 FR 48703, 48706–48707 SEFs that are comparable to those imposed by the
position to sustain operations through (November 24, 1989) (‘‘ARP I Release’’) and 29185 Commission on national securities exchanges by
unpredictable business cycles. As with (May 9, 1991), 56 FR 22490 (May 15, 1991) (‘‘ARP applying the ARP standards to them. In addition,
II Release’’). See also Rule 301(b)(6) of Regulation nearly identical rules have been proposed by the
the first requirement, in making this ATS, 17 CFR 242.301(b)(6) and Securities Exchange Commission for SDRs, also applying the ARP
calculation (which is required by Act Release No. 40760 (Dec. 8, 1998), 63 FR 70844 standards to those entities. See SDR Release, supra
Section 3D(d)(12)(B) of the Exchange (December 22, 1998). note 6.
vulnerability of its systems and data capacity to receive (or collect), process, that industry best practices standards of
center computer operations to internal store, or display the data elements widely recognized professional
and external threats, physical hazards, included within each function, and organizations are not consistent with the
and natural disasters; and (5) establish identify the factors (mechanical, public interest, protection of investors,
adequate contingency and disaster electronic, or other) that account for the or the maintenance of fair and orderly
recovery plans which shall include current limitations.250 This would make markets, the Commission would have
plans to resume trading of SB swaps by it easier for the Commission to detect flexibility to establish standards that a
the SB SEF no later than the next any potential capacity constraints of a SB SEF would be required to meet to
business day following a wide-scale SB SEF, which, if left unaddressed, comply with proposed Rule 822(a)(2).
disruption. In developing such could compromise the ability of a SB The decision on which type of
contingency and disaster recovery SEF to collect and maintain SB swap reviewer, an internal department or an
plans, the SB SEF would be required to data. A SB SEF’s failure to clearly external firm, should perform the
take into account: (1) The extent of understand and have procedures to review is a decision for each SB SEF to
alternative trading venues for the SB address its capacity limits would make. The Commission preliminarily
swaps traded by the SB SEF, including increase the likelihood that it would believes that, as long as the reviewer has
the number of SB swaps traded on the experience a loss or disruption of the competence, knowledge,
SB SEF, the market share of the SB SEF, system operations. consistency, and objectivity sufficient to
and the number of participants in its SB perform the role, the review can be
2. Objective Review performed by either recognized
SEF; and (2) the necessity of geographic
diversity and diversity of infrastructure Proposed Rule 822(a)(2) would information technology firms or by a
between the SB SEF’s primary site and require a SB SEF to submit an objective qualified internal department
any back-up sites. review of its systems that support or are knowledgeable of information
This list of proposed requirements is integrally related to the performance of technology systems.
based on existing ARP requirements its activities to the Commission, on an Proposed Rule 822(a)(2) would further
applied to significant-volume ATSs annual basis, within thirty calendar require that, where the objective review
under Rule 301(b)(6) of Regulation days of completion. This proposed is performed by an internal department,
ATS.247 In addition, Commission staff requirement is critical to help ensure an objective, external firm must assess
has applied these requirements to SROs that SB SEFs have adequate capacity, the internal department’s objectivity,
and other entities in the securities resiliency, and security and that their competency, and work performance
markets for a number of years in the automated systems are not subject to with respect to the review performed by
context of its ARP inspection program. critical vulnerabilities. Proposed Rule the internal department. Proposed Rule
As a general matter, the Commission 800 would define ‘‘objective review’’ as 822(a)(2) would require that the external
preliminarily believes that, if a SB SEF’s ‘‘an internal or external review, firm issue a report of that review, which
policies and procedures satisfy industry performed by competent, objective the SB SEF must submit to the
best practices standards, then these personnel following established Commission on an annual basis, within
policies and procedures would be procedures and standards, and thirty calendar days of completion of
adequate for purposes of proposed Rule containing a risk assessment conducted the review.
pursuant to a review schedule.’’ 251 The The proposed requirement in
822(a)(1).248 However, in the event that
proposed definition of ‘‘objective proposed Rule 822(a)(2) that a SB SEF
industry best practices standards of
submit an annual objective review to the
widely recognized professional review’’ is based on the standard for the
Commission is drawn from the ARP II
organizations are not consistent with the review of automated systems set forth in
Release.254 In addition, the proposed
public interest, protection of investors, the ARP II Release.252
As in the current ARP program, the requirement in proposed Rule 822(a)(2)
or the maintenance of fair and orderly
Commission preliminarily believes that that, where the objective review is
markets, the Commission would have
performed by an internal department, an
flexibility to establish such standards a reasonable basis for determining that
objective, external firm must assess the
that a SB SEF would be required to meet a review is objective for purposes of
internal department’s objectivity,
to comply with proposed Rule proposed Rule 822(a)(2) is if the level of
competency, and work performance, is
822(a)(1).249 objectivity of a SB SEF’s reviewers
similarly drawn from the ARP II
The proposed rule would require a SB complied with standards set by widely
Release.255
SEF to quantify, in appropriate units of recognized professional The proposed annual review would
measure, the limits of the SB SEF’s organizations.253 However, in the event not be required to address each element
250 See
contained in proposed paragraphs (i)
247 See 17 CFR 242.301(b)(6)(D)(ii). proposed Rule 822(a)(1)(i).
248 Proposed 251 Proposed Rule 800 would define ‘‘competent,
through (v) of Rule 822(a)(1) every year.
Rule 822(a)(1) would require a SB
SEF to establish, maintain, and enforce written objective personnel’’ as ‘‘a recognized information
policies and procedures reasonably designed to technology firm or a qualified internal department (formerly the Electronic Data Processing Auditors
ensure that its systems provide adequate levels of knowledgeable of information technology systems.’’ Association (‘‘EDPAA’’)), and the American Institute
capacity, resiliency, and security. A SB SEF’s This proposed definition is based on the standard of Certified Public Accountants (‘‘AICPA’’).
policies and procedures may still meet the for reviewers of automated systems set forth in the Proposed Rule 822(a)(2) would require a SB SEF
requirement to be reasonably designed to ensure ARP II Release. See ARP II Release, 56 FR 22490, to submit an objective review of its systems that
that its systems provide adequate levels of capacity, supra note 245. Proposed Rule 800 would define support or are integrally related to the performance
resiliency, and security without necessarily being ‘‘review schedule’’ as ‘‘a schedule in which each of its activities to the Commission, on an annual
identical to industry best practices standards. element contained in paragraph (a)(1) of Rule 822 basis, within thirty calendar days of completion. A
However, generally speaking, industry best would be assessed at specific, regular intervals.’’ SB SEF’s policies and procedures may still meet
practices standards would provide an objective, This proposed definition codifies the Commission’s this requirement without necessarily being identical
easily identifiable standard. policy set forth in the ARP II Release. See ARP II to industry best practices standards. However,
249 Industry best practices standards currently are Release, 56 FR 22490, supra note 245. generally speaking, industry best practices
established by organizations such as: the 252 See ARP II Release, 56 FR 22490, supra note standards would provide an objective, easily
Information Systems Audit and Control Foundation 245. identifiable standard.
254 See ARP II Release, 56 FR 22490, supra note
(‘‘ISACF’’); the Federal Financial Institutions 253 Such standards are currently established by
Examination Council’s (‘‘FFIEC’’); the Institute of organizations such as the IIA, the Information 245.
Internal Auditors (‘‘IIA’’); and the SANS Institute. Systems Audit and Control Association (‘‘ISACA’’) 255 See id.
Rather, using its own risk assessment, a clarify that a SB SEF should submit a the stability of the SB swap market. The
SB SEF’s reviewer would review each detailed written description and application of the proposed definition is
element on a ‘‘review schedule,’’ as analysis of the outage within five relatively straightforward, and it focuses
defined in proposed Rule 800, in which business days of the occurrence of the on the types of events that the
each element would be assessed at outage. Commission preliminarily believes
specific, regular intervals, thus The Commission preliminarily should require notification to the
facilitating systematic and timely review believes that the proposed rule would Commission under proposed Rule
of each element. This should provide a assist the Commission in assuring that 822(a)(3), so that the Commission can
reasonable and cost-effective level of a SB SEF has diagnosed and is taking respond appropriately to the event that
assurance that automated systems of SB steps to correct system disruptions, so caused the loss or disruption.
SEFs are being adequately developed that systems of the SB SEF are Specifically, the Commission
and managed with respect to capacity, reasonably equipped to accept and preliminarily believes that proposed
security, development, and contingency securely maintain transaction data. The paragraphs (1), (2), (3), (4), and (5) of
planning concerns. Commission preliminarily believes that proposed Rule 800 address events that
The proposed requirement to submit requiring a SB SEF to submit cause a significant loss or disruption of
an objective review within thirty days of notifications of material system outages normal system operations sufficient to
completion assures the Commission will to the Commission is essential to help warrant notification to the Commission.
have timely notice of the information ensure that the Commission can In addition, the Commission
required. The Commission has found continue to effectively oversee the SB preliminarily believes that proposed
through its experience with the current SEF. paragraph (6) of proposed Rule 800
ARP program for SROs and other Proposed Rule 800 would define addresses a type of event that impairs
entities in the securities market that an ‘‘material systems outage’’ as an transparency or accurate and timely
entity generally requires approximately unauthorized intrusion into any system, regulatory reporting.
thirty calendar days after completion of or an event at a SB SEF involving The Commission also preliminarily
the review to complete the internal systems or procedures that results in: (1) believes that proposed paragraphs (7)
review process necessary to submit an A failure to maintain accurate, time- and (8) of proposed Rule 800 are
annual review to the Commission. A sequenced records of all orders, appropriate because communications of
shorter timeframe might not provide a quotations, and transactions that are an outage to entities outside of the SB
SB SEF with sufficient time to complete received by, or originated on, the SB SEF or to the SB SEF’s Board or senior
its internal review of the document; a SEF; (2) a disruption of normal management are indicia of a significant
longer timeframe might serve to operations, including switchover to system outage sufficient to warrant
encourage unnecessary delays. back-up equipment with no possibility notification to the Commission.
of near-term recovery of primary Specifically, proposed paragraph (8)’s
3. Material Systems Outages hardware; (3) a loss of use of any reference to ‘‘a report or referral of an
Under proposed paragraph (3) of Rule system; (4) a loss of transactions; (5) event * * *’’ seeks to address situations
822(a), a SB SEF would be required to excessive back-ups or delays in in which a SB SEF might seek to apply
promptly notify the Commission in processing; (6) a loss of ability to an overly narrow definition of an
writing of material system outages and disseminate vital information; (7) a ‘‘outage situation’’ in proposed
any remedial measures that have been communication of an outage situation to paragraph (7), in order to avoid
implemented or are contemplated, other external entities; (8) a report or reporting a problem that nevertheless
including: (1) Immediately notifying the referral of an event to the SB SEF’s has a significant impact on the
Commission when a material systems Board or senior management; (9) a performance of the SB SEF’s systems
outage is detected; (2) immediately serious threat to systems operations and therefore warrants reporting to the
notifying the Commission when even though systems operations were Commission. For example, where a SB
remedial measures are selected to not disrupted; (10) a queuing of data SEF experiences a slowing, but not a
address the material systems outage; (3) between system components or queuing stoppage, of its ability to accept orders
immediately notifying the Commission of messages to or from participants of or quotes, and that slowing is
when the material systems outage is such duration that a participant’s sufficiently significant to have been
addressed; and (4) submitting to the normal service delivery is affected; or reported or referred to the SB SEF’s
Commission within five business days (11) a failure to maintain the integrity of Board or senior management, the
of when the material systems outage systems that results in the entry of Commission preliminarily believes that
occurred a detailed written description erroneous or inaccurate inquiries, this situation would constitute a
and analysis of the outage and any responses, orders, quotations, other material system outage under proposed
remedial measures that have been trading interest, transactions, or other paragraph (8) that must be reported to
implemented or are contemplated. information in the SB SEF or the the Commission. By including proposed
This paragraph would codify the securities markets. paragraph (8) in the definition of
procedures followed by SROs and Based on its experience in requiring ‘‘material systems outage,’’ the
certain other entities under the SROs and other entities to report Commission seeks to ensure that it is
Commission’s current ARP program material systems outages in the context informed of events that most entities
with respect to providing the staff with of the current ARP program, the subject to current ARP standards would
notification of material system outages. Commission preliminarily believes that already understand should be covered
In particular, proposed paragraph (3) this proposed definition is appropriate under the current program. This should
would clarify that the Commission for SB SEFs. The Commission permit the Commission to effectively
expects to receive immediate preliminarily believes that each of the monitor the operation of SB SEF’s
notification that an outage has been events listed in paragraphs (1) through automated systems. The Commission
detected, that remedial measures have (11) of proposed Rule 800 are significant preliminarily believes that proposed
been selected to address the outage, and events that warrant reporting to the paragraphs (9) and (10) are appropriate
that the outage has been addressed. Commission because such material because threats to system operations
Proposed paragraph (3) also would systems outages could negatively impact and queuing of data are events that may
result in a significant disruption of or destroy systems or networks, or any for SB SEFs. Each of the events listed in
normal system operations warranting other malicious activity affecting data, paragraphs (1) through (5) are
notification to the Commission. systems, or networks. If unauthorized significant events that warrant reporting
Proposed paragraph (11) of proposed intrusions were successful in breaching to the Commission because any of those
Rule 800 covers a failure to maintain the systems or networks, SB SEFs would events can lead to a material systems
integrity of systems that results in the need to report these intrusions even if outage that could negatively affect the
entry of erroneous or inaccurate the parties conducting the unauthorized stability of the SB swap market. The
inquiries, responses, orders, quotations, intrusion were unsuccessful in application of the proposed definition is
other trading interests, transactions, or achieving their apparent goals (such as relatively straightforward, and it focuses
other information in a SB SEF or to the introduction of malware or other on the types of events that should
market participants. This paragraph is means of disrupting or manipulating require notification to the Commission
designed to address the unique role of data, systems, or networks). SB SEFs under proposed Rule 822(a)(4).
SB SEFs in the SB swaps market. In would need to follow up on their initial Specifically, the proposed paragraphs
particular, it is intended to cover such reports by sending the Commission (1) through (4) are events that concern
events as breakdowns in a SB SEF’s updates on any harm to data, systems, the adequacy of capacity estimates,
internal controls that result in the entry or networks as well as any remedial testing, and security measures taken by
of erroneous orders into the market. For measures that the SB SEFs are a SB SEF, and thus are sufficiently
example, it is possible that a SB SEF contemplating or undertaking to address significant to warrant notification to the
could, while in the process of testing its the unauthorized intrusions. SB SEFs, Commission. Proposed paragraph (5)
systems, inadvertently retain ‘‘test’’ data however, would not need to report covering a change that ‘‘otherwise
in its database. This, in turn, could unsuccessful attempts at unauthorized significantly affects the operations of the
result in erroneous reporting of SB intrusions that did not breach systems security-based swap execution facility’’
swaps to the SB SEF’s participants, or networks. is more open-ended in order to require
registered SDRs, the Commission, other The Commission preliminarily
notification of other major systems
regulators, and counterparties. believes that the proposed five business
Counterparties may become uncertain of day requirement regarding submission changes. Examples of changes that fall
their positions, leading to market of a written description of material within proposed paragraph (5) include,
disruptions. This, in turn, could erode systems outages is an appropriate time but are not limited to: Major systems
investor confidence in the integrity of period. In the Commission’s experience architectural changes; reconfigurations
the SB swaps market, damaging with the current ARP program for SROs of systems that cause a variance greater
liquidity and impeding the capital and other entities in the securities than five percent in throughput or
formation process. Accordingly, the market, an entity generally requires storage; 256 introduction of new business
Commission preliminarily believes that approximately five business days after functions or services; material changes
this type of breakdown in a SB SEF’s the occurrence of a material systems in systems; changes to external
systems controls should be reported to outage to gather all the relevant details interfaces; changes that could increase
the Commission. regarding the scope and cause of the susceptibility to major outages; changes
By including proposed paragraph (11) outage. A shorter timeframe might not that could increase risks to data
of proposed Rule 800 in the definition provide sufficient time for the SB SEF security; changes that were, or will be,
of ‘‘material systems outage,’’ the to gather all relevant details reported to or referred to a SB SEF’s
Commission is seeking to ensure that it surrounding the outage and describe Board or senior management; and
is informed of events that could them in a written submission; a longer changes that may require allocation or
negatively impact the integrity of timeframe might encourage unnecessary use of significant resources.
systems that result in the entry of delays. The Commission preliminarily
erroneous or inaccurate transaction data believes that the proposed thirty
or other information in a SB SEF or the 4. Material Systems Changes
calendar day requirement regarding pre-
securities markets. This should permit Under proposed paragraph (4) of Rule implementation written notification to
the Commission to monitor effectively 822(a), a SB SEF would be required to the Commission of planned material
the operation of each SB SEF’s notify the Commission in writing at systems changes is an appropriate time
automated systems. least thirty calendar days before period. The Commission has found
The definition of material systems implementation of any planned material through its experience with the current
outage also includes an unauthorized systems changes. Proposed Rule 800 ARP program that this amount of time
intrusion into any system. This includes would define ‘‘material systems change’’ is necessary for the Commission staff to
unauthorized intrusions by outside as ‘‘a change to automated systems that: evaluate the issues raised by a planned
parties, insiders, or parties unknown. (1) Significantly affects existing capacity material systems change. A shorter
The Commission preliminarily believes or security; (2) in itself, raises timeframe might not provide sufficient
that including this in the definition significant capacity or security issues, time for the Commission staff to analyze
would assist the Commission’s review even if it does not affect other existing the issues raised by the systems change;
by requiring SB SEFs to notify the systems; (3) relies upon substantially a longer timeframe might unnecessarily
Commission of unauthorized intrusions new or different technology; (4) is delay the covered entity in
into systems or networks, and should designed to provide a new service or implementing the change.
permit the Commission to continue to function; or (5) otherwise significantly
effectively monitor the operation of SB affects the operations of the security- 256 The Commission has identified the five
SEF’s automated systems. SB SEFs based swap execution facility.’’ percent threshold as triggering the definition of
would need to immediately report Based on its experience in requiring ‘‘material systems change’’ in proposed Rule 800
unauthorized intrusions regardless of SROs and other entities to report because, based on experience in administrating the
whether the intrusions were part of a material systems changes in the context ARP program in the equities markets for almost
twenty years, it believes that reconfigurations that
cyber attack, potential criminal activity, of the current ARP program, the exceed five percent in throughput or storage
other unauthorized attempts to retrieve, Commission preliminarily believes that typically have the greatest potential to cause
manipulate or destroy data or to disrupt this proposed definition is appropriate significant disruptions to automated systems.
The Commission requests comment contingencies through such devices as recovery plans of its
on all aspects of proposed Rule 822(a). appropriate remote and on-site telecommunications, power, water, and
Should the Commission consider hardware back-up and periodic other essential service providers?
imposing other requirements or duplication and off-site storage of data Should the Commission require a SB
standards? Should any of the proposed files? Off-site storage of up-to-date, SEF to identify the potential risks that
requirements be eliminated or refined? duplicative software, files and critical can arise as a result of interoperability
If so, please explain your reasoning. forms and supplies needed for and/or interconnectivity with other
Would it be appropriate to impose the processing operations, including a market infrastructures and venues from
proposed systems safeguards geographically diverse back-up site that which data can be submitted to the SB
requirements on SB SEFs only after they does not rely on same infrastructure SEF (such as exchanges, SDRs, clearing
account for a certain percentage of the components (e.g., transportation, agencies, SB swap dealers, and major SB
total volume of transactions, as telecommunications, water supply, and swap participants) and service providers
measured by the aggregate total volume electric power) as the SB SEF primary and how the SB SEF mitigates such
received by all SB SEFs? If so, what is operations center? Immediate risks?
the appropriate volume level? Five availability of software modifications, Should the Commission require a SB
percent? Ten percent? Please be detailed procedures, organizational SEF to abide by substantive
specific. In addition, the Commission is charts, job descriptions, and personnel requirements (in addition to, or in place
mindful of the potential costs of a SB for the conduct of operations under a of, the policies and procedures
SEF’s compliance with the proposed variety of possible contingencies? approach of proposed Rule 822(a)(1)),
systems safeguards and seeks Emergency mechanisms for establishing such as (i) having robust system controls
commenters’ views on whether there are and maintaining communications with and safeguards to protect the data from
ways to minimize those costs while participants, regulators and other loss and information leakage, (ii) having
assuring adequate systems safeguards. entities involved? 258 high-quality safeguards and controls
Would it be appropriate to delay Should the Commission require a SB regarding the transmission, handling,
implementing the proposed systems SEF’s contingency and disaster recovery and protection of data to ensure the
safeguards requirements on SB SEFs plans (required in proposed paragraph accuracy, integrity, and confidentiality
until after a specified period of time, (a)(1)(v) of proposed Rule 822) to of the trade information recorded in the
such as one year after Commission include resources, emergency SB SEF, or (iii) having reliable and
approval of the SB SEF’s registration? If procedures, and backup facilities secure systems and having adequate,
so, is one year an appropriate time sufficient to enable timely recovery and scalable capacity?
period? If not, what would be an resumption of its operations following Should the Commission require a SB
appropriate time period for any delay any disruption of its operations? If so, SEF to establish, maintain, and enforce
and why? Would it be appropriate to what should the recovery time objective written policies and procedures
delay implementation of systems be? Should the SB SEF’s contingency reasonably designed to ensure that the
safeguard requirements until either a and disaster plans and resources transaction data that it accepts is from
specified time period after the generally enable resumption of the SB the entity it purports to be from, such
Commission’s approval of the SB SEF’s SEF’s operations during the next as requiring robust passwords?
registration and/or a particular volume business day following the disruption? Are the time periods specified in
threshold such as those discussed above Should the Commission require a SB proposed Rule 822(a)(2) through (4)
is reached? If so, why? If not, why not? SEF, to the extent practicable, with respect to submission of annual
Are there other circumstances in which coordinate its contingency and disaster reviews and written notices of material
a SB SEF should be excepted from recovery plans (required in proposed system outages and material systems
systems safeguards requirements? If so, paragraph (a)(1)(v) of proposed Rule changes the correct time periods to use?
commenters should provide a rationale. 822) with those of the SDRs, clearing Should any of the proposed time
Are there factors specific to SB swap agencies, SB swap dealers, and major SB periods be shortened or lengthened?
transactions that would make applying swap participants, and with those of Should the time periods be replaced
a system that is traditionally used in the regulators in a manner adequate to with less specific requirements, such as
equity markets inappropriate? What is enable effective resumption of the SB ‘‘promptly’’ or ‘‘timely’’? If so, please
the likely impact of these requirements SEF’s operations following a disruption explain your reasoning.
on the SB swaps market, including the causing activation of the SB SEF’s Should the Commission require the
impact on the incentives and behaviors contingency and disaster recovery notification required by proposed Rule
of SB SEFs, the willingness of persons plans, including participating in 822(a)(4) to be sufficiently detailed to
to register as SB SEFs, and the periodic, synchronized testing of its explain the new system development
technologies used for maintaining SB contingency and disaster recovery process, the new configuration of the
swap data at the SB SEF? plans? system, its relationship to other systems,
Should the Commission require a SB Should the Commission require a SB the timeframes or schedule for
SEF’s contingency and disaster recovery SEF ensure that its contingency and installation, any testing performed or
plans (required in proposed paragraph disaster recovery plans (required in planned, and an explanation on the
(a)(1)(v) of proposed Rule 822) to be proposed paragraph (a)(1)(v) of impact of the change on the SB SEF’s
tested periodically to assure their proposed Rule 822) take into account capacity estimates, contingency
effectiveness and adequacy? 257 Should protocols and vulnerability
the business continuity-disaster

the Commission require such estimates? 259
contingency and disaster recovery plans 258 These requirements are similar to Are there specific provisions in the
to cover at a minimum: Preparation for requirements related to disaster recovery plans of proposed definitions that should be
clearing agencies and proposed to be required of eliminated or refined? Are there some
257 This requirement would be similar to what is SDRs. See id. and SDR release, supra note 6. The
required of clearing agencies and proposed to be requirement for geographical diversity is currently events which should be included in the
required of SDRs. See Exchange Act Release No. applicable to securities firms. See Exchange Act
16900 (June 17, 1980), 45 FR 41920 (June 20, 1980) Release No. 47638 (April 7, 2003), 68 FR 17809 259 See ARP II Release, 56 FR 22490, supra note
and SDR Release, supra note 6. (April 11, 2003) (the ‘‘BCP Whitepaper’’). 245.
definitions of ‘‘material systems outage’’ B. Electronic Filing should clearly mark each page or
and ‘‘material systems change’’ that are Proposed Rule 822(b) would require segregable portion of each page with the
not, or events that should not be that every notification, review, or words ‘‘Confidential Treatment
included in these definitions but are? If description and analysis required to be Requested.’’ Proposed Rule 822(c) would
so, please explain your reasoning. submitted to the Commission under state that ‘‘[a] notification, review, or
Are the definitions ‘‘objective review’’ proposed Rule 822 be submitted in an description and analysis submitted
and ‘‘competent, objective personnel’’ appropriate electronic format to the pursuant to this [Rule] will be accorded
parallel to the requirements for SROs Office of Market Operations at the confidential treatment to the extent
and other entities in the securities Division of Trading and Markets at the permitted by law.’’
markets in the context of the current Commission’s principal office in The Commission would use the
ARP program? Should the objective Washington, DC. This proposed information collected under proposed
review required in proposed Rule requirement is intended to make Rule 822 to evaluate whether SB SEFs
822(a)(2) be done on a regular, periodic proposed Rule 822 consistent with are reasonably equipped to handle
basis, rather than on an annual basis? electronic-reporting standards set forth market demand. For this reason,
The proposed requirement for an requiring SB SEFs to submit this
in other Commission rules under the
objective review focuses on a review of information would be critical to the
Exchange Act, such as Rule 17a–-25
the SB SEF’s automated systems that Commission’s ability to effectively
(Electronic Submission of Securities
support or are integrally related to the oversee SB SEFs.
Transaction Information by Exchange
performance of its activities. Is this an Much of the information that the
Members, Brokers, and Dealers) 260 and
appropriate scope, or should other Commission expects to receive from SB
Rule 19b–4 (Filings with respect to
aspects of the SB SEF’s operations be SEFs under proposed Rule 822 is, by its
Proposed Rule Changes by Self-
included? If so, which? In addition is nature, competitively sensitive. If the
regulatory Organizations).261
this scope sufficiently understandable The Commission preliminarily Commission were unable to afford
or should it be further defined? believes that the proposed provision confidential protection to the
Is the requirement in proposed Rule information that it expects to receive,
would benefit SB SEFs by automating
822(a)(2) for an objective, external firm then the SB SEFs may hesitate to submit
the process by which they submit
to assess the objectivity, competency, the required information to the
notifications, reviews, and descriptions
and work performance of an internal Commission. This result could
and analyses under proposed Rule 822
department that performed an objective potentially undermine the
to the Commission. The Commission
review necessary or appropriate? If the Commission’s ability effectively to
currently receives this type of
objective review is done by an internal oversee SB SEFs, which, in turn, could
information from SROs and other
department, should the Commission undermine investor confidence in the
entities in the securities market in
require that the objective review be SB swap market.
electronic format. Moreover, as noted
done by a department or persons other The Freedom of Information Act
above, this provision is intended to be
than those responsible for the (‘‘FOIA’’) provides at least two
consistent with other Commission rules.
development or operation of the systems Proposed Rule 822(b) would require exemptions under which the
being tested? submission of notifications, reviews, Commission has authority to grant
Do the proposed requirements for SB confidential treatment for the
and descriptions and analyses in an
SEFs establish sufficient criteria against information submitted under proposed
‘‘appropriate electronic format.’’ The
which an evaluation can be performed Commission anticipates that, if the Rule 822. First, FOIA Exemption 4
by a third party? If not, should the provision is adopted, the staff would provides an exemption for ‘‘trade secrets
Commission impose a specific work with SB SEFs to determine and commercial or financial information
framework for the SB SEFs to use in appropriate electronic formats that obtained from a person and privileged
establishing automated systems and could be used. or confidential.’’ 262 As specified in
related controls? If so, what would the The Commission requests comment proposed Rule 822(c), ‘‘a notification,
critical components of the framework on all aspects of proposed Rule 822(b) review, or description and analysis
include? Are existing frameworks as well as on the following specific submitted pursuant to this [Rule] will be
available that are suitable for this issues. Are there specific provisions in accorded confidential treatment to the
purpose and, if so, which ones would be proposed Rule 822(b) that should be extent permitted by law.’’ The
considered appropriate? eliminated or refined? If so, please information required to be submitted to
Should the Commission require the explain your reasoning. the Commission under proposed Rule
use of a specific framework by outside What is the likely impact of this 822 may contain proprietary
or inside parties for evaluating whether requirement on the SB swap market, information regarding automated
SB SEFs have adequate capacity, including the impact on the incentives systems that is privileged or
resiliency, and security and that their and behaviors of SB SEFs, the confidential and thus subject to
automated systems are not subject to willingness of persons to register as SB protection from disclosure under
critical vulnerabilities? If so, what SEFs, and the technologies used for Exemption 4 of the FOIA.
would the critical components of the reporting information to the Second, FOIA Exemption 8 provides
framework include? Are existing Commission? an exemption for matters that are
frameworks available that are suitable ‘‘contained in or related to examination,
for this purpose and, if so, which ones C. Confidential Treatment operating, or condition reports prepared
would be considered appropriate? Proposed Rule 822(c) would provide by, on behalf of, or for the use of an
For reviews performed by internal that a person who submits a agency responsible for the regulation or
audit departments, are the requirements notification, review, or description and supervision of financial institutions.’’ 263
for an external firm involvement analysis pursuant to this Rule for which Similarly, Commission Rule 80(b)(8),
appropriate? If not, what improvements he or she seeks confidential treatment Commission Records and Information,
could be made to promote appropriate
reviews by external firms in these 260 17 CFR 240.17a–25. 262 5 U.S.C. 552(b)(4).
circumstances? 261 17 CFR 240.19b–4. 263 5 U.S.C. 552(b)(8).
implementing Exemption 8, states that established under Section 3D of the remove the CCO from his or her
the Commission generally will not Exchange Act and the rules and responsibilities.
publish or make available to any person regulations thereunder; (5) monitor The Commission notes that proposed
matters that are ‘‘[c]ontained in, or compliance with the Exchange Act and Regulation MC would require a SB SEF
related to, any examination, operating, the rules and regulations thereunder to establish a fully independent ROC,
or condition report prepared by, on relating to its business as a SB SEF, which would be the Board committee
behalf of, or for the use of, the including each rule prescribed by the that would be responsible for
Commission, any other Federal, State, Commission under Section 3D of the monitoring a SB SEF’s regulatory
local, or foreign governmental authority Exchange Act; (6) establish procedures program for sufficiency, effectiveness,
or foreign securities authority, or any for the remediation of noncompliance and independence.269 The Board of a SB
securities industry self-regulatory issues identified by the CCO through SEF should consider the appropriate
organization, responsible for the any (i) compliance office review, (ii) reporting structure for the CCO, taking
regulation or supervision of financial look-back, (iii) internal or external audit into account the potential conflicts of
institutions.’’ 264 finding, (iv) self-reported error, or (v) interest between the CCO and other
The Commission requests comment validated complaint; and (7) establish senior officers of the SB SEF. Because
on the following specific issues. Are and follow appropriate procedures for the SB SEF would be required to have
there specific provisions in proposed the handling, management response, a ROC, the Board could elect to delegate
Rule 822(c) that should be eliminated or remediation, retesting, and closing of to the ROC the duty of overseeing the
refined? If so, please explain your noncompliance issues. CCO.
reasoning. What is the likely impact of The CCO would be responsible for, The Commission generally requests
this requirement on the SB swaps among other things, keeping the SB comments on all aspects of the proposed
market, including the impact on the SEF’s Board or senior officer apprised of rules relating to the appointment and
incentives and behaviors of SB SEFs significant compliance issues and duties of the CCO. Should the
and the willingness of persons to advising of needed changes in the SB Commission require a CCO to meet
register as SB SEFs? SEF’s policies and procedures. Given minimum competency standards? If so,
XX. Core Principle 14—Chief the critical role that a CCO is intended what background, skills and other
Compliance Officer to play in ensuring a SB SEF’s qualifications should a CCO be required
compliance with the Exchange Act and to have? Does the proposed requirement
Section 3D(d)(14) of the Exchange Act that the CCO report directly to the Board
the rules and regulations thereunder,
(Core Principle 14), requires registered or the senior officer balance the CCO’s
the Commission believes that a SB SEF’s
SB SEFs to designate a CCO and needs to work effectively with
CCO should be competent and
requires the CCO to perform certain management and to have an adequate
duties and to file compliance reports knowledgeable regarding the Federal
securities laws and should be separation of business and regulatory
and financial reports annually.265 influence? Are there situations when the
Proposed Rule 823 would incorporate empowered with full responsibility and
authority to develop and enforce CCO’s ability to conduct his or her
the requirements of Core Principle 14 duties under the Exchange Act could be
and provide certain additional appropriate policies and procedures for
the SB SEF.268 To meet the statutory compromised if he or she were required
requirements for its implementation. to report to the senior officer? If so, are
obligations, a CCO also should have a
A. Appointment and Duties of CCO position of sufficient seniority and there steps that the SB SEF could take
authority within the SB SEF to compel to resolve differences between the CCO
Proposed Rule 823(a) would require a
others to adhere to the SB SEF’s policies and the senior officer? Should the
registered SB SEF to identify on its
Form SB SEF a person who has been and procedures. The Commission notes, Commission require a CCO to report to
designated by the Board to serve as the however, that the SB SEF would not be a specific senior officer? If so, to whom
CCO. The compensation and removal of required to hire an additional person to and why? Would it be preferable for the
the CCO would require the approval of serve as its CCO. Instead, the SB SEF CCO to report to the Board? If so, would
a majority of the Board.266 Proposed could designate an individual already it be preferable for the Board to delegate
Rule 823(b) would incorporate the employed by the SB SEF to serve as its the responsibility for oversight of the
duties of the CCO contained in Core CCO. CCO to its ROC?
The Commission is concerned that a Is the Commission’s proposed
Principle 14.267 Specifically, proposed
Rule 823(b) would provide that each SB SEF’s commercial interests might requirement regarding the Board’s
CCO shall: (1) Report directly to the discourage its CCO from making approval of a CCO’s compensation and
Board or the senior officer of the SB forthright disclosure to the Board or the removal necessary or appropriate?
SEF; (2) review the compliance of the senior officer about any compliance Absent specific requirements imposed
SB SEF with respect to the Core failures. To mitigate this potential by Federal statute or rules, in general,
Principles in Section 3D of the conflict of interest, the Commission the entity has the discretion to create
Exchange Act and the rules and believes that the CCO should be the governance structure that it believes
regulations thereunder; (3) in independent from the SB SEF’s best promotes compliance with
consultation with the Board or the management so as not to be conflicted applicable laws and regulations, in
senior officer, resolve any conflicts of in reporting or addressing any accordance with the relevant laws of the
interest that may arise; (4) be compliance failures. To support this entity’s jurisdiction of incorporation or
responsible for establishing each policy independence, the proposed rule would formation. As noted above, the
and procedure that is required to be allow only a majority of the Board to Commission has identified potential
approve the CCO’s compensation and to conflict concerns between a SB SEF’s
264 17 CFR 200.80(b)(8). commercial interests and its regulatory
265 See Public Law 111–203, § 763(c) (adding 268 The Commission believes that the person that obligations. To mitigate such concerns
Section 3D(d)(14) of the Exchange Act). is designated by the Board to serve as the CCO
266 See proposed Rule 823(a).
should have the background and qualifications 269 See Regulation MC Proposing Release, supra
267 See Public Law 111–203, § 763(c) (adding necessary to fulfill the responsibilities of the note 82, (proposing that the SB SEF establish a ROC
Section 3D(d)(14)(B) of the Exchange Act). position. composed solely of independent directors).
and support the independence of the should comply with these duties? If so, conflicts of interest policies of the SB
CCO from management of the SB SEF, what kinds of guidance or rules would SEF).274
the Commission is proposing the be appropriate to adopt in this context? The Commission also is proposing
requirement described above.270 Do Should the Commission provide certain minimum requirements in
commenters believe that it would be guidance in its proposed rules about the proposed Rule 823(c)(1) for the
appropriate to impose this requirement, CCO’s procedures for the remediation of information that should be provided in
or do commenters believe that SB SEFs noncompliance issues? Should the the CCO’s annual report.275 The
would be able to comply with their Commission provide guidance in its proposed minimum requirements would
regulatory obligations without this proposed rules on what would be provide guidance for including in the
requirement? Would the removal of this considered ‘‘appropriate procedures’’ for report certain key disclosures about the
requirement affect the ability of a CCO the handling, management response, SB SEF’s compliance with the Core
to comply with the extensive duties remediation, retesting, and closing of Principles. However, this proposed
required of the CCO under the Dodd- noncompliance issues? If so, what provision is not intended to be an
Frank Act? If commenters do not agree factors should the Commission take into exhaustive list; any other relevant
that the proposed requirements are consideration? descriptions of the SB SEF’s compliance
necessary or appropriate, why and what Would the CCO have difficulty with the Exchange Act and the policies
would be a better alternative, if any, to discharging any of the obligations under and procedures of the SB SEF related
promote the independence and proposed Rule 823? Would any of the thereto, consistent with the broader
effectiveness of the CCO? For example, CCO’s obligations under proposed Rule statutory requirement in Section
should the required percentage of Board 823 conflict with current obligations 3D(d)(14)(C) of the Exchange Act, also
approval be lower or higher? Or, should imposed on a CCO? If so, which ones should be included in the CCO’s annual
the Commission require that the CCO and why? Should the Commission report.276
meet separately with the independent impose any additional duties on the Proposed Rule 823(c)(1)(i) through (ii)
directors of the SB SEF, without anyone CCO that are not already enumerated in would require the annual report to
else present? 271 Would such a Section 3D(d)(14) of the Exchange Act include a description of the SB SEF’s
requirement promote the independence and incorporated in the proposed rule? enforcement of its policies and
and effectiveness of the CCO by What is the likely impact of the procedures and information on all
supporting his or her ability to speak Commission’s proposed rule on the SB investigations, inspections,
freely with the independent directors swap market? Would the proposed rule examinations, and disciplinary cases
about any sensitive compliance issues of potentially promote or impede the opened, closed, and pending during the
concern to any of them? Do commenters establishment of SB SEFs? With respect reporting period. Proposed Rule
believe that it would be appropriate to to entities that currently provide a 823(c)(1)(iii) would require the annual
impose this type of requirement, or do marketplace for trading SB swaps and report to include a description of all
commenters believe that SB SEFs would that may be required to register under grants of access (including, for all
be able to comply with their regulatory the Dodd-Frank Act, how do current participants, the reasons for granting
obligations without a requirement such practices compare to the practices that such access) and all denials or
as this? the Commission proposes to require in limitations of access (including, for each
Should the Commission add a rule this rule? What are the incremental applicant, the reasons for denying or
explicitly prohibiting any officers, costs to potential SB SEFs in connection limiting access), consistent with Rule
directors, or employees of a SB SEF with adding to or revising their current 811(b)(3). The disclosures in proposed
from, directly or indirectly, taking any practices in order to implement the Rule 823(c)(i) through (iii) would
action to coerce, manipulate, mislead, or Commission’s proposed rule? provide a basis for evaluating the
fraudulently influence the CCO in the How might the evolution of the SB effectiveness of the SB SEF’s
performance of his other swaps market over time affect SB SEFs compliance program under the
responsibilities? and impact the Commission’s proposed standards in Core Principle 2, which
Are there any terms in proposed Rule rule? generally requires the SB SEF to
823(b) regarding the duties of the CCO establish and enforce compliance with
that should be clarified or modified B. Annual Reports its rules.
(e.g., ‘‘look-back,’’ ‘‘self-reported error,’’ Section 3D(d)(14)(C) of the Exchange Proposed Rule 823(c)(1)(iv) through
or ‘‘validated complaint’’)? If so, which Act requires the CCO to prepare and (v) would require the annual report to
terms and how should they be defined? sign an annual report, in accordance include any material changes to the SB
Are the duties of the CCO in proposed with rules prescribed by the SEF’s policies and procedures since the
Rule 823(b) sufficiently clear? Should Commission.272 Proposed Rule 823(c) date of the preceding compliance report
the Commission provide further would prescribe the rules to implement and any recommendation for material
guidance or rules on how the CCO this statutory provision.273 Proposed changes to the policies and procedures
Rule 823(c)(1) would implement the as a result of the annual review
270 The Commission proposed this same
requirements in Section 3D(d)(14)(C)(i) (including the rationale for such
requirement in its proposal relating to the
registration and regulation of security-based swap under Exchange Act for the CCO to recommendation, and whether such
data repositories. See SDR Release, supra note 6. annually prepare and sign a report that policies and procedures were or will be
271 The concept of an individual with regulatory
contains a description of: (i) The modified by the SB SEF to incorporate
oversight responsibilities having mandated access compliance of the SB SEF with respect such recommendation).277 The
to the independent directors without the presence

of non-independent directors on the entity’s board to the Exchange Act and the rules and
is not novel, although it has not to date been regulations thereunder; and (ii) the
Section 3D(d)(14)(C)(i) of the Exchange Act) and
specifically mandated by the Exchange Act or rules policies and procedures of the SB SEF proposed Rule 823(c)(1).
thereunder. See, e.g., Article IV, Sec. 7 of the
Nasdaq Bylaws (requiring the Chief Regulatory
(including the code of ethics and 275 See proposed Rule 823(c)(1).
Officer of Nasdaq to meet in executive session with
272 See Public Law 111–203, § 763(c) (adding Section 3D(d)(14)(C) of the Exchange Act).
the Regulatory Oversight Committee of Nasdaq,
which is a fully independent committee of the Section 3D(d)(14)(C) of the Exchange Act). 277 The term ‘‘material change’’ would be defined
Nasdaq board). 273 See proposed Rule 823(c). as a change that a CCO would reasonably need to
proposed requirements should the SB SEF at the time of filing.279 The officer rather than to the Board, in
demonstrate the kinds of compliance proposed rule also would implement addition to the Board, or only when the
issues the SB SEF is facing and how the the requirement in Section SB SEF does not have a Board? Would
CCO is addressing those issues. 3D(d)(14)(C)(ii)(II) of the Exchange Act any of these alternatives lessen the
Proposed Rule 823(c)(1)(vi) through that the CCO include a certification in independence of the CCO in any way?
(vii) would require the annual report to its report, under penalty of law, that the Should the Commission prohibit a SB
include the results of the SB SEF’s report is accurate and complete.280 SEF’s Board from requiring its CCO to
surveillance program (including Under proposed Rule 823(d), the CCO make any changes to the annual
information on the number of reports would be required to submit the annual compliance report? If the Commission
and alerts generated, and the reports compliance report to the Board for its permits the CCO to submit his or her
and alerts that were referred for further review prior to the submission of the annual compliance report to the senior
investigation or for an enforcement report to the Commission.281 The officer for prior review, instead of to the
proceeding) and any complaints Commission notes, however, that the Board or in addition to the Board,
received on the SB SEF’s surveillance CCO should promptly bring serious should a similar prohibition be applied
program. The proposed requirements compliance issues to the attention of the to the senior officer? Would such a
should provide a demonstration of the full Board or the Board’s independent prohibition be necessary, in either case,
effectiveness of the SB SEF’s directors rather than wait until an in light of the CCO’s statutory
compliance program in detecting annual report is prepared. requirement to certify that the
violations and the appropriateness of The Commission generally requests compliance report is accurate and
the SB SEF’s response in addressing comments on all aspects of the proposed complete?
such detected violations. rules regarding annual compliance Is the Commission’s proposed
Finally, proposed Rule 823(c)(1)(viii) reports. Are the Commission’s proposed requirement that the CCO meet
would require the CCO’s annual report rules regarding annual compliance separately with the independent
to include any material compliance reports appropriate and sufficiently directors of a SB SEF appropriate? If
matters identified since the date of the clear? If not, why not and what would
not, why not and what would be a better
preceding compliance report.278 This be a better approach?
alternative?
proposed requirement would indicate Are the proposed definitions of
‘‘material change’’ and ‘‘material Are the Commission’s proposed
the most significant compliance matters minimum disclosure requirements in
that the SB SEF is dealing with on its compliance matter’’ appropriate? If not,
are they over-inclusive or under- the CCO’s annual compliance report
market. The Commission notes that appropriate? If not, why not and what
individual compliance matters may not inclusive, and how else should these
terms be defined? would be a better alternative? Should
be material when viewed in isolation, the Commission require any other
Proposed Rule 823(c)(1) lists specific
but may collectively suggest a material disclosures in the CCO’s annual
disclosures that would need to be
compliance matter. compliance report?
Although the proposed rule would included in each annual compliance
report. Are there other specific items Would keeping the compliance
require only annual reviews, the CCO reports confidential encourage the CCO
should consider the need for interim that should be required? For example,
should disclosures about instances to be more forthcoming about sensitive
reviews in response to significant compliance issues or would it likely not
compliance events, changes in business when the SB SEF or the Board has not
accepted the recommendations of the have any impact on the disclosure of
arrangements, and regulatory such issues? Are there any
developments. For example, if there is swap review committee be required to
be included in the annual compliance disadvantages to keeping the CCO’s
an organizational restructuring of a SB compliance report confidential? How
SEF, its CCO should evaluate whether report? Would such information be
helpful to the Commission in evaluating could the Commission address any such
the SB SEF’s policies and procedures disadvantage? Would making the CCO’s
are adequate to guard against potential whether conflicts of interest are
impacting decisions about whether to compliance report public be useful to
conflicts of interest. Additionally, if a the public or other regulators?
new rule regarding SB SEFs is adopted trade, or how to trade, a particular SB
swap? What is the likely impact of the
by the Commission, then the CCO Commission’s proposed rule on the SB
Should the Commission propose a
should review its policies and swap market? Would the proposed rule
timeframe for the CCO to submit his or
procedures to ensure compliance with potentially promote or impede the
her annual compliance report for the
the rule. establishment of SB SEFs? With respect
Proposed Rule 823(c)(2) would review by the Board? If so, what would
be an appropriate timeframe? Should to entities that currently provide a
implement the requirement in Section marketplace for trading SB swaps and
3D(d)(14)(C)(ii)(I) of the Exchange Act the Commission permit the SB SEF to
request an extension to file an annual that may be required to register under
for the CCO to submit the annual report the Exchange Act, as amended by the
with the appropriate financial reports of compliance report (e.g., due to
substantial, undue hardship)? Dodd-Frank Act, how do current
If a CCO reports to the senior officer practices compare to the practices that
know in order to oversee compliance of the SB SEF.
See proposed Rule 800. of the SB SEF rather than to the Board, the Commission proposes to require in
278 The term ‘‘material compliance matter’’ would should the Commission permit the CCO this rule? What would be the
be defined as any compliance matter that the Board to submit his or her annual compliance incremental costs to potential SB SEFs
would reasonably need to know to oversee the report for prior review to the senior in connection with adding to or revising
compliance of the SB SEF and includes, without
limitation: (1) A violation of the Federal securities
their current practices in order to
laws by the SB SEF, its officers, directors,
279 See Public Law 111–203, § 763(c) (adding implement the Commission’s proposed
employees, or agents; (2) a violation of the policies Section 3D(d)(14)(C)(ii)(I) of the Exchange Act) and rule?
and procedures of the SB SEF, by the SB SEF, its proposed Rule 823(c)(2).
How might the evolution of the SB
officers, directors, employees, or agents; or (3) a
weakness in the design or implementation of the SB Section 3D(d)(14)(C)(ii)(II) of the Exchange Act) and swaps market over time affect SB SEFs
SEF’s policies and procedures. See proposed Rule proposed Rule 823(c)(2). and impact the Commission’s proposed
800. 281 See proposed Rule 823(d). rule?
C. Financial Reports material contingencies, long-term the fiscal year covered by such
Section 3D(d)(14)(C)(ii)(I) of the obligations, and guarantees. reports.291
Exchange Act requires a compliance Descriptions of significant provisions of The Commission notes that with
report filed by the CCO to be the SB SEF’s long-term obligations, respect to its other registrants, the
accompanied by each appropriate mandatory dividend or redemption Commission has required, at a
financial report of the SB SEF that is requirements of redeemable stocks, and minimum, the proposed financial
required to be furnished to the guarantees of the SB SEF would also be information and in some instances,
Commission pursuant to Section 3D of required to be provided along with a significantly more information.292 The
the Exchange Act. The Commission is five-year schedule of maturities of debt. Commission believes that it would be
proposing Rule 823(e), which would set If the material contingencies, long-term important to obtain an audited annual
forth the appropriate financial reports obligations, redeemable stock financial report covering two years from
that a SB SEF would be required to requirements and guarantees of the SB each registered SB SEF to understand
include with its annual compliance SEF have been separately disclosed in the SB SEF’s financial and operational
reports.282 Proposed Rule 823(e)(1) the consolidated statements, then they condition, particularly because SB SEFs
would require the financial reports of would not need to be repeated in this are intended to play a pivotal role in
the SB SEF to: (1) Be a complete set of schedule.285 This proposed requirement improving the transparency of the OTC
financial statements of the SB SEF that is substantially similar to Rule 12–04 of derivatives markets.293 Among other
are prepared in accordance with U.S. Regulation S–X, which pertains to things, the financial statements could
generally accepted accounting condensed financial information of help the Commission evaluate whether
principles for the most recent two fiscal registrants.286 a SB SEF has adequate financial
years of the SB SEF; (2) be audited in Under proposed Rule 823(e)(2), for SB resources to comply with its statutory
accordance with standards of the Public SEFs with affiliated entities (any obligations or is having financial
Company Accounting Oversight Board subsidiary in which the applicant has, difficulties. If a SB SEF ultimately
(‘‘PCAOB’’) by a public accounting firm directly or indirectly, a 25% interest ceases doing business, it could create a
that is registered with the PCAOB and and for every entity that has, directly or significant disruption in the OTC
is qualified and independent in indirectly, a 25% interest in the derivatives market. The Commission
accordance with Rule 2–01 of applicant), for each affiliated entity, the believes that the financial information
Regulation S–X (17 CFR 210.2–01); (3) financial report would also be required that it is seeking pertaining to the
include a report of the registered public to include a complete set of affiliates of the SB SEF is relevant and
accounting firm that complies with unconsolidated financial statements (in necessary as the financial condition of
paragraphs (a) through (d) of Rule 2–02 English) for the latest two fiscal years the affiliates could have an immediate
of Regulation S–X (17 CFR 210.2–02); and such footnotes and other or future impact on the condition of the
and (iv) include the SB SEF’s disclosures as are necessary to avoid SB SEF.
accounting policies and practices.283 rendering the financial statements The Commission requests comments
Under Proposed Rule 823(e)(1)(v), if misleading.287 The Commission notes on all aspects of the proposed rules
the SB SEF’s financial statements that information on affiliated entities is relating to financial statements. Is the
contain consolidated information of the currently requested for national Commission’s proposed rule regarding a
SB SEF’s subsidiaries, then the SB SEF’s securities exchanges 288 and is SB SEF’s financial report appropriate
financial statements also would need to important information for the and sufficiently clear? If not, why not
provide condensed financial Commission to obtain because the and what would be a better alternative?
information, in a financial statement financial health of affiliated entities Should the Commission permit a
footnote, as to the financial position, could potentially have an impact on the financial report by a SB SEF that is a
changes in financial position and results financial condition of the SB SEF. foreign private issuer to be in
of operations of the SB SEF, as of the compliance with International Financial
same dates and for the same periods for Proposed Rule 823(e)(4) also would
Reporting Standards as an alternative to
which audited consolidated financial require the financial statements to be
GAAP? If so, why and what are the costs
statements are required.284 Such provided in XBRL, consistent with
and benefits to permitting this?
financial information would need not be Rules 405(a)(1), (a)(3), (b), (c), (d), and
Is the Commission’s proposed rule
presented in greater detail than is (e) of Regulation S–T.289 Specifically,
requiring financial reports to cover the
required for condensed statements by information in the financial statements
most recent two fiscal years of a SB SEF
Rules 10–01(a)(2), (3), and (4) of would be required to be tagged 290 using
appropriate? If not, should the lookback
Regulation S–X. Detailed footnote XBRL to allow the Commission to assess
timeframe be greater (e.g., the most
disclosure that would normally be and analyze effectively the SB SEF’s
recent three fiscal years) or shorter (e.g.,
included with complete financial financial and operational condition.
the most recent fiscal year)?
statements may be omitted with the Finally, annual compliance reports Is the Commission’s proposed
exception of disclosures regarding and financial reports filed pursuant to requirement regarding a SB SEF’s
proposed Rule 823 would be required to condensed financial information
282 The financial statements required by these be filed within 60 days after the end of appropriate and sufficiently clear? If
proposed rules are the same as the requirements for
the annual financial statements that would be
not, why not and what would be a better
285 Id.
required to be submitted pursuant to Exhibits F and alternative?
286 See 17 CFR 210.9–06.

H of proposed Form SB SEF. See infra Section XXII. Is the Commission’s proposed 60-day
287 See proposed Rule 823(e)(2).
To avoid submitting duplicative financial timeframe for a SB SEF to file the
statements, the CCO may represent in the annual 288 See Form 1 and instructions thereunder.
compliance report that the financial statements 289 See 17 CFR 232.405 (imposing content, format,
annual and financial report appropriate?
required by proposed Rule 823(e) have been submission and Web site posting requirements for
submitted to the Commission as part of the annual 291 See proposed Rule 823(f).
an interactive data file, as defined in Rule 11 of
update of Form SB SEF required by proposed Rule Regulation S–T). 292 See,e.g., Rule 17a–5(d) under the Exchange
802(f). 290 Tagging refers to labeling fields of data Act, 17 CFR 240.17a–5(d).
283 See proposed Rule 823(e)(1).
electronically so that it can be searched 293 See Public Law 111–203, § 763(c) (adding
284 See proposed Rule 823(e)(1)(v). electronically by categories. See proposed Rule 800. Section 3D of the Exchange Act).
If not, should the timeframe be shorter two types of trading venues for SB SEF.303 The Commission’s proposal
or longer (e.g., 30 days or 90 days)? securities, namely national securities contemplates the use of an online filing
Would a SB SEF’s financial report be exchange registration and broker-dealer system through which a SB SEF would
useful to the public or other regulators? registration for ATSs. SB SEFs represent be able to file a completed Form SB
If so, explain. an additional category of registered SEF, which would be available on the
Are the financial report requirements entities under the Exchange Act and the Commission’s Web site and accessible
relating to certain affiliates of SB SEFs Commission preliminarily believes that from any computer with Internet
too broad or overly burdensome? Are it would be appropriate to adopt a access.304 Based on the widespread use
there any terms in the Commission’s registration process for SB SEFs that is and availability of the Internet, the
proposed rule regarding a SB SEF’s similar to the Commission’s existing Commission believes that filing Form
financial report that need to be defined registration framework for national SB SEF in an electronic format would be
or clarified? If so, which terms? securities exchanges. SB SEFs, like less burdensome and a more efficient
What is the likely impact of the national securities exchanges, have filing process for SB SEFs, the
Commission’s proposed rule on the SB regulatory obligations pursuant to the Commission, and the public.
swap market? Would the proposed rule Exchange Act.298 Also, pursuant to the The Commission’s proposal requires a
potentially promote or impede the Dodd-Frank Act, both national Form SB SEF to be filed with the
establishment of SB SEFs? With respect securities exchanges and SB SEFs Commission in a tagged data format. As
to entities that currently provide a would be permitted to trade SB swaps, part of the Commission’s longstanding
marketplace for trading SB swaps and although exchange trading of SB swaps efforts to increase transparency and the
that may be required to register under is governed by Section 6 of the usefulness of information, the
the Dodd-Frank Act, how do current Exchange Act 299 and other provisions of Commission has been implementing
practices compare to the practices that the Exchange Act relevant to SROs.300 data-tagging of information contained in
the Commission proposes to require in The registration process for national electronic filings to improve the
this rule? What would be the securities exchanges is already accuracy of financial information and
incremental costs to potential SB SEFs established, but no process exists for SB facilitate its analysis.305 Data becomes
in connection with adding to or revising SEFs. Thus, the Commission is
their current practices in order to proposing rules that would require an 303 See Section XXI.B infra for a discussion of the
application registration process for SB amendments to Form SB SEF required in proposed

implement the Commission’s proposed Rule 802. An application for registration or any
rule? SEFs and a form for such application, amendment thereto filed pursuant to Regulation SB
How might the evolution of the SB which would be subject to approval by SEF would be considered a ‘‘report’’ filed with the
swaps market over time affect SB SEFs the Commission. Commission for purposes of Sections 18(a) and
32(a) of the Exchange Act and the rules and
and impact the Commission’s proposed A. Initial SB SEF Registration regulations thereunder. See proposed Rule 801(f).
rule relating to the CCO? Exchange Act Sections 18(a) and 32(a) set forth the
1. Procedures for Registration potential liability for a person who makes, or causes
XXI. Registration of Security-Based to be made, any false or misleading statement in
Swap Execution Facilities Proposed Rule 801(a) provides that an any ‘‘report’’ filed with the Commission (e.g., Form
application for the registration of a SB SDR). Specifically, Exchange Act Section 18(a)
As stated above, a primary goal of the SEF would need to be filed provides, in part, that ‘‘[a]ny person who shall make
Dodd-Frank Act is to improve the electronically in a tagged data format 301 or cause to be made any statement in any * * *
transparency and oversight of the OTC report * * * which statement was at the time and
with the Commission on the new in the light of the circumstances under which it was
derivatives market and to guard against proposed Form SB SEF, in accordance made false or misleading with respect to any
systemic risk in the trading of these with the instructions contained in the material fact, shall be liable to any person (not
instruments. A key aim of the legislation Form SB SEF.302 Proposed Form SB SEF knowing that such statement was false or
is to bring the trading of mandatorily misleading) who, in reliance upon such statement,
also would be used by a SB SEF for shall have purchased or sold a security at a price
cleared OTC derivatives onto regulated submitting all amendments to the Form which was affected by such statement, for damages
markets. In this regard, the Dodd-Frank caused by such reliance, unless the person sued
Act amends the Exchange Act to add 298 For example, pursuant to Section 3D(d)(2) of shall prove that he acted in good faith and had no
the Exchange Act, Public Law 111–203, § 763(c), a knowledge that such statement was false or
new Section 3D of the Exchange Act.294 misleading.’’ 15 U.S.C. 78r(a). Exchange Act Section
SB SEF is required to: (1) Establish and enforce
Section 3D(a)(1) of the Exchange Act compliance with any rule established by it, 32(a) provides, in part, that ‘‘[a]ny person who
provides that no person may operate a including (i) the terms and conditions of the SB willfully and knowingly makes, or causes to be
facility for the trading or processing of swaps traded or processed on or through the facility made, any statement in any * * * report * * *
and (ii) any limitation on access to the facility; (2) which statement was false or misleading with
SB swaps, unless the facility is respect to any material fact, shall upon conviction
establish and enforce trading, trade processing, and
registered as a SB SEF or as a national participation rules that will deter abuses and have be fined not more than $5,000,000, or imprisoned
securities exchange.295 Core Principle 1 the capacity to detect, investigate, and enforce those not more than 20 years, or both, except that when
for SB SEFs, as set forth in Section rules, including means (i) to provide market such person is a person other than a natural person,
participants with impartial access to the market; a fine not exceeding $25,000,000 may be imposed.’’
3D(d)(1)(A) of the Exchange Act,296 and (ii) to capture information that may be used in 15 U.S.C. 78ff(a).
provides that, to be registered and establishing whether rule violations have occurred; 304 If the Commission adopts the rule as
maintain its registration as a SB SEF, a and (3) establish rules governing the operation of proposed, it is possible that SB SEFs may be
SB SEF must comply with the 14 Core the facility, including rules specifying trading required to file Form SB SEF in paper until such
procedures to be used in entering and executing time as an electronic filing system is operational
Principles governing SB SEFs and any orders traded or posted on the facility, including and capable of receiving the form. In such a case,
requirement that the Commission may block trades. SB SEFs would be notified as soon as the electronic
impose by rule or regulation.297 299 15 U.S.C. 78f.

system is operational to accept filings on Form SB
The Commission’s rules currently 300 See, e.g., Section 19 of the Exchange Act, 15 SEF.
provide for registration frameworks for U.S.C. 78s. 305 See Regulation S–T, 17 CFR 232. See also
301 Proposed Rule 800 would define the term ‘‘tag’’ Securities Act Release No. 8891 (Feb. 6, 2008), 73
or ‘‘tagged’’ to mean an identifier that highlights FR 10592 (Feb. 27, 2008); Securities Act Release No.
specific information submitted to the Commission 9002 (Jan. 30, 2009), 74 FR 6776 (Feb. 10, 2009);
Section 3D of the Exchange Act). and that is in the format required by the EDGAR Securities Act Release No. 9006 (Feb. 11, 2009), 74
295 Id.
Filer Manual, as described in Rule 301 of FR 7748 (Feb. 19, 2009); Exchange Act Release No.
296 Id. Regulation S–T, 17 CRF 232.301. 61050 (Nov. 23, 2009), 74 FR 63832 (Dec. 4, 2009);
297 Id. 302 See proposed Rule 801(a). Continued
machine-readable when it is labeled, or (or within such longer period as to the Core Principles, and would allow
tagged, using a computer markup which the applicant consents), the the Commission to consider the
language that can be processed by Commission would be required to either materials provided by the SB SEF and
software programs for analysis. Such grant the registration or institute to make an informed determination as to
computer markup languages use proceedings to determine whether whether the SB SEF complies with the
standard sets of definitions, or registration should be denied. Such Exchange Act and the rules and
‘‘taxonomies,’’ that translate text-based proceedings would include notice of the regulations thereunder. In addition, the
information in Commission filings into grounds for denial under consideration application process would allow the
structured data that can be retrieved, and opportunity for hearing and would Commission staff to ask questions and,
searched, and analyzed through be required to be concluded within 450 as needed, to require amendments or
automated means. Requiring the days after the date on which the changes to the application or additional
information to be tagged in a machine- application for registration is furnished information to address legal and
readable format using a data standard to the Commission. At the conclusion of regulatory concerns before approving an
that is freely available, consistent, and such proceedings, the Commission, by application for registration. Further,
compatible with the tagged data formats order, would be required to grant or providing a process and timeframes for
already in use for Commission filings deny such registration. The Commission the application process would provide
would enable the Commission to review would be able to extend the time for certainty to applicants as to the
and analyze effectively Form SB SEF conclusion of such proceedings for up procedural aspects of registering as a SB
submissions. to 90 days if it finds good cause for such SEF.
Proposed Rule 801(a) provides that a extension and publishes its reasons for As no SB SEF is currently registered
registration application on Form SB SEF so finding or for such longer period as with the Commission and a number of
must include information sufficient to to which the applicant consents. entities have informed the Commission
demonstrate compliance with the Proposed Rule 801(b)(2) would that they may seek to register as a SB
Exchange Act and rules and regulations provide that for applications for SEF, the Commission contemplates
thereunder. The proposed rule provides registration as a SB SEF filed on Form receiving a large volume of applications
that if a registration application is not SB SEF with the Commission after July for registration as a SB SEF within the
complete, the Commission will notify 31, 2014, within 180 days of the date of first 3 years following any adoption of
the applicant that the application will filing of such application (or within rules applicable to SB SEFs. The
not be deemed to have been submitted such longer period as to which the proposed timeframes for the
for purposes of the Commission’s applicant consents), the Commission Commission to review applications for
review.306 Pursuant to the proposed would be required to either grant the registration as a SB SEF set forth in
rule, an application on Form SB SEF registration or institute proceedings to proposed Rule 801(b) recognize that, as
would not be considered to be complete determine whether registration should the Commission has limited resources,
unless an applicant has submitted, at a be denied. Such proceedings would the Commission may require an
minimum, the Execution Page and include notice of the grounds for denial extended period of time to review these
Exhibits as required in proposed Form under consideration and opportunity for applications. For applications filed after
SB SEF, and any other material that the hearing and would be required to be the initial implementation period, the
Commission may require, upon request, concluded within 270 days after the proposed timeframes for the
in order to be able to determine whether date on which the application for Commission to review applications for
the applicant is able to comply with the registration is furnished to the
registration as a SB SEF would be
Exchange Act and rules and regulations Commission. At the conclusion of such
decreased to mirror those set forth in
thereunder. Such other material may proceedings, the Commission, by order,
Section 19(a)(1) of the Exchange Act
include, but is not limited to, would be required to grant or deny such
applicable to the review of SRO
information regarding the applicant’s registration. The Commission would be
registration applications. The
system test procedures, contingency or able to extend the time for conclusion
Commission believes that the
disaster recovery plans, and the manner of such proceedings for up to 90 days
timeframes for Commission review
in which the applicant would conduct if it finds good cause for such extension
during and after the initial
market and financial surveillance. and publishes its reasons for so finding
implementation period are appropriate
Proposed Rule 801(b) sets forth the SB or for such longer period as to which the
applicant consents. in light of the anticipated volume of
SEF registration application processes registration applications during the
for (i) applications received during the The proposed rule further provides
that the Commission would grant the initial implementation period. The
initial implementation phase of Commission also believes that the
Regulation SB SEF, from the date of registration of an applicant if it finds
that the requirements of the Exchange temporary registration provisions of
Regulation SB SEF’s effectiveness up to proposed Rule 801(c), discussed below,
and including July 31, 2014 (‘‘initial Act and the rules and regulations
thereunder with respect to the applicant should work in combination with the
implementation period’’), and (ii) proposed review and approval process
applications received after the initial are satisfied, and would deny such
registration if it does not make such to allow both the Commission and
implementation period (i.e., after July entities seeking to register as SB SEFs to
31, 2014). finding.307
The proposed process for SB SEF’s to comply with the provisions of the
Proposed Rule 801(b)(1) would Exchange Act, as amended by the Dodd-
provide that for applications for apply for initial registration would
provide a mechanism for an applicant to Frank Act, in a timely manner. In

registration as a SB SEF filed on Form addition, the Commission notes that the
SB SEF with the Commission on or demonstrate that it has the operational
and financial capability to operate as a process for the Commission to review
before July 31, 2014, within 360 days of registration applications for SB SEFs
the date of the filing of such application SB SEF and can comply with the
Federal securities laws and the rules would be similar to the process for
and regulations thereunder, including reviewing applications of other
Investment Company Release No. 29132 (Feb. 23,
2010), 75 FR 10060 (Mar. 4, 2010). registrants by the Commission (e.g.,
306 See Proposed Rule 801(a). 307 See proposed Rule 801(b)(3). national securities exchanges, national
securities associations, and clearing what would the critical components of could grant such temporary registration
agencies).308 the framework include? Are existing to the SB SEF, which temporary
The Commission requests comments frameworks available that are suitable registration would expire on the earlier
on all aspects of the proposed rules for this purpose and, if so, which ones of: (1) The date that the Commission
relating to the registration process for would be considered appropriate? grants or denies registration of the SB
SB SEFs. Is the Commission’s proposed Should the review resemble a report, SEF; or (2) the date that the Commission
registration process appropriate and audit, or something else? rescinds the temporary registration of
sufficiently clear? If not, why not and Should the Commission require the the SB SEF. In considering whether to
what would be a better alternative? Are SB SEF, an independent third party, or grant a request for temporary
the timeframes in the proposed some other entity to conduct the registration, the Commission would
registration process appropriate? If not, review? What are examples of such a review and consider the information
why not and what would be more review? Should the Commission require and materials provided by the SB SEF
appropriate timeframes? Should a review on a case-by-case basis or for in its registration application on Form
timeframes be omitted from the process? all SB SEFs? Should the Commission SB SEF that the Commission believes to
Should different time periods apply to require that the review be filed with the be relevant, including, but not limited
the Commission’s review of applications Commission? If not, why not? If so, to: Whether the applicant’s trading
during the initial implementation should it be required to be filed with the system satisfies the definition of a
period? If not, why not? Should the Commission as a condition of ‘‘security-based swap execution facility’’
Commission have greater flexibility to registration pursuant to proposed Rule in Section 3(a)(77) of the Exchange Act
extend the timeframes? 801? If not, why not? When should the and any Commission rules,
Are the proposed factors in Commission require the filing of any interpretations or guidelines regarding
determining whether the Commission review? Would conducting or obtaining such definition; 310 any access
should grant or deny an application for a review, or filing such review with the requirements or limitations imposed by
registration appropriate and sufficiently Commission, impose impracticable the SB SEF; 311 the ownership and
clear? If not, why not? Should the burdens and costs on SB SEFs? Please voting structure of the SB SEF; 312 and
Commission take into consideration any explain the burdens and quantify the any certifications made by the SB SEF,
other factors in determining whether to costs of such a review. including with respect to its capacity to
grant or deny an application for If the Commission were to adopt a function as a SB SEF and its compliance
registration? rule requiring a review by an with the Exchange Act and the rules and
In order to form a more complete and independent third party, should the rule regulations thereunder.313 In addition,
informed basis on which to determine specify some minimum standard of the Commission would expect that SB
whether to grant, deny, or revoke a SB review or the types of review that SEFs registered on a temporary
SEF’s registration, the Commission is should be performed? If so, what should registration basis demonstrate that they
considering whether to adopt a the standards be? Should there be have the capacity and resources to
requirement that a SB SEF file with the minimum qualification standards for the comply with their regulatory obligations
Commission, as a condition of independent third party? Are there any on an ongoing basis as their business
registration or continued registration, a particular types of third party service evolves. After granting a temporary
review relating to the SB SEF’s providers that should not be permitted registration to a SB SEF, the
operational capacity and ability to meet to conduct a review of a SB SEF? Commission could rescind such
its regulatory obligations. The Should the Commission also require temporary registration if, upon further
Commission could require such a that a SB SEF certify the accuracy of the review, the Commission found that the
review to be in the form of a report review and provide disclosure regarding applicant did not meet the requirements
conducted by the SB SEF, an the nature of the review, findings, and for granting the registration of a SB SEF
independent third party, or both. This conclusions? To what extent should a set forth in proposed Rule 801(b)(3),314
review could be required as an exhibit SB SEF be permitted to rely on a third or if the conditions for revoking or
to Form SB SEF at the time of party that it hired to perform the canceling the registration of a SB SEF in
registration or as an amendment to Form review? Should the Commission proposed Rules 804(d) and (e) under
SB SEF at a later date (e.g., one year condition the ability of a SB SEF to rely Regulation SB SEF were met.315
after the registration becomes effective) on a third party’s review? Would a The Dodd-Frank Act provides that,
to allow the review to evaluate the SB review by an independent third party be unless otherwise provided, the
SEF’s capabilities after some operational necessary in light of the CCO’s annual provisions of Title VII shall be effective
experience following registration. compliance report or proposed Rule on the later of 360 days after the date
Should the Commission require a SB 822?
SEF to conduct or obtain a review 310 See Exhibit I, Item 1 of proposed Form SB
relating to the SB SEF’s operational 2. Temporary Registration SEF.
311 See Exhibit I, Item 2 and Exhibit L of proposed
capacity and ability to meet its Proposed Rule 801(c) under
Form SB SEF.
regulatory obligations? If not, why not? Regulation SB SEF would provide a 312 See Exhibit E of proposed Form SB SEF.
If so, how should the Commission method for the Commission to grant 313 See Execution Page of proposed Form SB SEF.
define the nature and scope of this temporary registration to SB SEFs.309 314 See proposed Rule 801(b)(3).
review? Should the Commission Specifically, for any application for 315 See proposed Rule 804(c) and discussion infra
identify a specific framework for SB registration as a SB SEF filed with the Section XXI.C. Proposed Rule 804(c) provides that
SEFs or independent third parties to Commission in accordance with the the Commission may, by order, cancel or revoke a
SB SEF’s registration if the Commission finds that
follow when conducting a review? If so, provisions of proposed Rule 801(a) on the SB SEF obtained its registration by making a
or before July 31, 2014 for which the SB false or misleading statements with respect to any
308 See Section 19(a)(1) of the Exchange Act, 15
SEF indicates on the Execution Page material fact, is no longer in existence, has ceased
U.S.C. 78s(a)(1). In addition, the Commission notes that it would like to be considered for to do business in the capacity specified in its
that the SEC Rules of Practice would be applicable application for registration, or has violated or failed
to the Commission’s review of registration temporary registration, the Commission to comply with any provision of the Federal
applications for SB SEFs. See 17 CFR 201.100, et securities laws and the rules and regulations
seq. 309 See proposed Rule 801(c). thereunder.
of the enactment of Title VII or not less proposed? If not, why not? Should the during a temporary registration period?
than 60 days after the publication of Commission be able to grant temporary If so, what are such requirements and
final rules or regulations implementing registration to any registration for what reasons should the
such provisions.316 The Commission application, regardless of when filed? If Commission consider not requiring
preliminarily believes that the proposed temporary registration should be limited them?
temporary registration process for SB to a specific time period, would a time
3. Non-Resident Persons and Control
SEFs could serve as a useful tool during period other than the initial
Persons
the initial implementation period to implementation period be appropriate?
allow the Commission to temporarily If so, what time period would be Proposed Rule 801(d) would require
register an applicant as a SB SEF appropriate? each SB SEF applying for registration
following an initial review of a SB SEF’s Should temporary registration be with the Commission to designate and
application for registration where it granted only after the filing of a authorize on Form SB SEF an agent in
believes such temporary registration is completed registration application? the United States, other than a
appropriate. The Commission Should there be a separate application Commission member, official, or
preliminarily believes that this would for temporary registration other than employee, to accept notice or service of
be beneficial in order to allow SB SEFs proposed Form SB SEF? Should the process, pleadings, or other documents
to comply with the timeframe set forth proposed rule specify the items the in any action or proceedings brought
in the Dodd-Frank Act while still giving Commission must review prior to against the SB SEF to enforce the
the Commission sufficient time to granting temporary registration? Should Federal securities laws and the rules
review an application more thoroughly temporary registration be granted by the and regulations thereunder.318
before granting a registration that is not Commission only when certain The Commission preliminarily
limited in duration. A SB SEF that is conditions are met? If so, what should believes that before granting registration
temporarily registered with the those conditions be? Should the to a SB SEF, it is appropriate to obtain
Commission would still need to comply proposed rule specify the findings the assurance that such person has an agent
with all provisions of the Exchange Act Commission must make in order to for service of process in the United
and the rules and regulations grant a temporary registration? In what States in order to facilitate proper
thereunder, including Section 3D of the instances should a temporary notification to the SB SEF of any actions
Exchange Act and proposed Regulation registration be denied? For example, or proceedings the Commission may
SB SEF. should a temporary registration be wish to bring against such SB SEF.
The Commission requests comments denied if a Form SB SEF is not Proposed Rule 801(e) would require
on all aspects of the proposed rules with sufficiently complete? Are there any any person applying for registration on
respect to temporary registration. Is the reasons not specified in this release Form SB SEF that is controlled by
Commission’s proposed rule regarding upon which a temporary registration another person 319 to certify on Form SB
temporary registration appropriate? If should be rescinded? SEF and provide an opinion of counsel
not, why not? Is the Commission’s Should the Commission be required that any person that controls such
proposed rule for temporary registration to grant temporary registration within a applicant will consent to and can, as a
sufficiently clear? If not, how can it be specified time frame? If so, what time matter of law, (1) provide the
clarified? What is the best method for a period would be appropriate? Is it Commission with prompt access to its
SB SEF to request temporary registration appropriate to stay the time period for books and records, to the extent such
from the Commission? Is it appropriate Commission action on a registration books and records are related to the
to include a check box on Form SB SEF application if the Commission grants a activities of the SB SEF; and (2) submit
as proposed? Would a different method SB SEF temporary registration? If so, to onsite inspection and examination by
be more appropriate? Are there more should such stay be limited in duration? representatives of the Commission with
appropriate methods other than What would be the appropriate time respect to the activities of the SB
temporary registration that would allow period for such stay? SEF.320 In addition, proposed Rule
SB SEFs to meet the timelines for Would it be feasible for a SB SEF to 802(c) would require any SB SEF
compliance set forth in the Dodd-Frank comply with Section 3D of the Exchange controlled by any other person to file an
Act? If so, what are those methods? Act and the rules and regulations amendment to Exhibit P on Form SB
As discussed above, the Commission thereunder within 60 days after SEF within 5 business days after any
anticipates receiving a large volume of publication of the final rules applicable changes in the legal or regulatory
applications for registration as a SB SEF to SB SEFs? If not, which requirement(s) framework of any person that controls
within the first 3 years following the would be difficult for a SB SEF to 318 See proposed Rule 801(d).
adoption of the proposed rules, and the comply with upon the effective date? 319 For purposes of Regulation SB SEF, proposed
ability to grant temporary registration Should any requirement(s) be imposed Rule 800 would define the term ‘‘control’’ or any
during such initial implementation on an incremental basis or with a derivatives thereof as the direct or indirect
period could be an important tool for phased-in approach? If so, what would possession of the power to direct or cause the
the Commission to allow SB SEFs to be an appropriate timeframe for such direction of the management and policies of a
comply with the provisions of the person, whether through the ownership of voting
requirement(s) to be met? 317 securities, by contract, or otherwise. Proposed Rule
Exchange Act, as amended by the Dodd- Is it essential that a SB SEF that is 800 would provide that a person would be
Frank Act, while providing the temporarily registered be required to presumed to control another person if the person:
Commission with additional time to comply with all provisions of the (1) Is a director, general partner, or officer
conduct a thorough review of the SB exercising executive responsibility (or having

Exchange Act and the rules and similar status or functions); (2) directly or indirectly
SEF prior to granting permanent regulations thereunder? If not, are there has the right to vote 25% or more of a class of
registration. Should temporary specific requirements that the voting securities or has the power to sell or direct
registration be limited to those the sale of 25% or more of a class of voting
Commission should consider not securities; or (3) in the case of a partnership, has
registration applications filed during the requiring a SB SEF to comply with the right to receive, upon dissolution, or has
initial implementation period as contributed, 25% or more of the capital. See
317 See infra Section XXV for a discussion Instructions to Form 1.
316 See Public Law 111–203, § 774. regarding a potential phased-in approach. 320 See proposed Rule 801(e).
the SB SEF that would impact the The Commission preliminarily for registration. Similarly, if a registered
ability of or the manner in which any believes that before granting registration non-resident SB SEF or a registered SB
such person consents to or provides the to a non-resident SB SEF, it is SEF that is controlled by another person
Commission prompt access to its books appropriate to obtain assurance that becomes unable to comply with these
and records, to the extent such books such person is legally permitted to certifications or provide such opinions
and records are related to the activities provide the Commission with prompt of counsel, then this may be a basis for
of the SB SEF, or impacts the access to its books and records and to the Commission to revoke the SB SEF’s
Commission’s ability to inspect and be subject to inspection and registration.325
examine any such person with respect examination by the Commission. The Commission requests comments
to the activities of the SB SEF.321 Such Similarly, the Commission preliminarily on all aspects of the proposed rules
amendment would be required to believes that before granting registration relating to non-resident persons and
include a revised opinion of counsel to a SB SEF controlled by another applicants controlled by other persons
pursuant to Exhibit P describing how, as person, it is appropriate to obtain seeking to register as SB SEFs. Is the
a matter of law, any person that controls assurance that the person controlling Commission’s proposed rule regarding
the SB SEF would continue to meet its such SB SEF is legally permitted to service of process appropriate and
obligations to consent to and provide provide the Commission with prompt sufficiently clear? If not, why not and
the Commission with prompt access to access to its books and records related what would be a better alternative?
its books and records, to the extent such to the SB SEF and to be subject to Should the Commission impose any
books and records are related to the inspection and examination by the minimum requirements on the agent
activities of the SB SEF, and to consent Commission with respect to activities of whom a person designates to accept any
to and be subject to onsite inspection notice or request for service of process?
the SB SEF. The Commission
and examination by representatives of Are there any factors that the
preliminarily believes that the
the Commission with respect to the Commission should take into
certifications and opinions of counsel
activities of the SB SEF under such new consideration to help provide effective
required by proposed Rules 801(e) and
legal or regulatory framework.322 The service of process on a non-resident
(f) would be important to confirm that
Commission emphasizes that the person or a person controlled by another
each non-resident SB SEF or control
proposed provisions would be person applying for registration as a SB
person of a SB SEF has taken the
applicable only to those books and SEF?
necessary steps to be in the position to If a non-resident SB SEF that is
records or activities that are related to
provide the Commission with prompt registered in a similar capacity in a
the activities of the SB SEF. The
access to its books and records and to foreign jurisdiction seeks to apply for
Commission believes that it is important
be subject to inspection and registration as a SB SEF with the
for the SB SEF to have access to books
examination by the Commission. Commission, should the registration
and records that are related to the
Certain foreign jurisdictions may have process for the non-resident SB SEF be
activities of a SB SEF and to have
laws that complicate the ability of any different than the Commission’s
examination and inspection authority
financial institutions, such as SB SEFs proposed registration process? For
with respect to activities of a SB SEF,
in order for a SB SEF to be able to located in their jurisdictions, from example, should the registration process
effectively carry out its regulatory sharing or transferring certain incorporate additional registration
responsibilities. Similarly, the information, including personal requirements for such non-resident SB
Commission believes that it is important financial data of individuals that SEF? Should the Commission consider
for the Commission to have access to financial institutions come to possess any other factors relating to a non-
those books and records and such from third parties (i.e., personal data resident SB SEF with respect to the
examination and inspection authority so relating to the identity of market Commission’s registration rules or in
that it may effectively conduct its participants or their customers). general?
oversight and regulatory responsibilities Providing an opinion of counsel that the Are there any factors that the
under the Exchange Act. SB SEF can provide prompt access to Commission should take into
Proposed Rule 801(f) would require books and records and can be subject to consideration to ensure that a non-
that any non-resident person 323 seeking inspection and examination would resident person seeking to register as a
to register as a SB SEF certify on Form allow the Commission to better evaluate SB SEF can, in compliance with
SB SEF and provide an opinion of a SB SEF’s ability to meet the applicable foreign laws, provide the
counsel that the SB SEF can, as a matter requirements of registration and ongoing Commission with access to its books
of law, (1) provide the Commission with supervision. In addition, certain persons and records and can submit to
prompt access to the books and records controlling a SB SEF may not be under inspection and examination by the
of such SB SEF and (2) submit to onsite the jurisdiction of the Commission or Commission? Should such a non-
inspection and examination by may be non-resident persons. Providing resident person be required to provide
representatives of the Commission.324 an opinion of counsel that such control any additional information or
persons have consented to and can documents on proposed Form SB SEF to
321 See proposed Rule 802(c). provide prompt access to books and establish its ability to comply with the
322 Id. records and be subject to inspection and Federal securities laws and the rules
323 The term ‘‘non-resident person’’ would be examination would help the and regulations thereunder?
defined to mean: (1) In the case of an individual, Commission to monitor and oversee Are there any factors that the
one who resides in or has his principal place of individuals that control SB SEFs in
business in any place not in the United States; (2) Commission should take into
in the case of a corporation, one incorporated in or cases where such individuals may not consideration to ensure that a person
having its principal place of business in any place otherwise subject to the jurisdiction of controlling a person seeking to register
not in the United States; and (3) in the case of a the Commission or may be subject to as a SB SEF can provide the
partnership or other unincorporated organization or foreign jurisdictions. Failure to make
association, one having its principal place of Commission with access to its books
business in any place not in the United States. See these certifications or provide an
proposed Rule 800. opinion of counsel may be a basis for 325 See proposed Rule 804(d) and discussion infra
324 See proposed Rule 801(f). the Commission to deny an application Section XXI.C.
and records and can submit to the SB SEF that would impact the operations, and criteria used to
inspection and examination by the ability of or the manner in which any determine the SB swaps that may be
Commission? Should such control such person consents to or provides the traded on the SB SEF, on a real-time
persons or the SB SEFs which they Commission prompt access to its books basis to allow the Commission to
control be required to provide any and records, to the extent such books effectively oversee SB SEFs to ensure
additional information or documents on and records are related to the activities compliance with the Exchange Act. The
proposed Form SB SEF to establish the of the SB SEF, or impacts the Commission also believes that it is
ability of the SB SEF to comply with the Commission’s ability to inspect and important for the Commission to receive
Federal securities laws and the rules examine any such person with respect updated opinions of counsel under
and regulations thereunder? For to the activities of the SB SEF.328 Such Exhibit P pursuant to proposed Rules
example, should a SB SEF controlled by amendment would be required to 802(c) and (d) to ensure that the
another person be required to provide include a revised opinion of counsel Commission can oversee and ensure
on proposed Form SB SEF a copy of the pursuant to Exhibit P describing how, as compliance with the Exchange Act of
document evidencing the consent by the a matter of law, any person that controls non-resident SB SEFs and control
controlling person to the books and the SB SEF will continue to meet its persons of SB SEFs. Although the
records and examination and obligations to consent to and provide comparable amendments to the Form 1
inspections requirements contained in the Commission with prompt access to for national securities exchanges are
proposed Rule 801(e)? its books and records, to the extent such required to be filed within 10 days
books and records are related to the pursuant to Rule 6a–2, given the
B. Proposed Filing Requirements for
activities of the SB SEF, and to consent improvements in technology since the
Maintaining SB SEF Registration
to and be subject to onsite inspection adoption of Rule 6a–2, the Commission
Proposed Rule 802 under Regulation and examination by representatives of preliminarily believes that five business
SB SEF would require SB SEFs the Commission under such new legal days should provide SB SEFs sufficient
registered with the Commission to or regulatory framework.329 Proposed time to prepare and file a Form SB SEF
submit certain amendments and updates Rule 802(d) would require non-resident amendment. In addition, the proposed
to Form SB SEF. Proposed Rule 803 SB SEFs to file an amendment to Exhibit time frame would ensure that the
under Regulation SB SEF would require P to their Form SB SEF within five relevant exhibits remain timely and that
SB SEFs registered with the business days after any changes in legal the Commission has up-to-date
Commission to file certain supplemental or regulatory framework that would information in a timely manner.
information with respect to the trading impact the SB SEF’s ability to or the
of SB swaps. Proposed Rule 802(e) also would
manner in which it provides the provide that if the number of changes to
Proposed Rule 802(a) would require a Commission prompt access to its books
SB SEF to file an amendment to its be reported in an amendment, or the
and records or impacts the number of amendments filed, are so
Form SB SEF promptly, but in no event Commission’s ability to inspect and
later than five business days, after great that the purpose of clarity will be
examine the SB SEF.330 Such promoted by the filing of a new
discovering that any information filed amendment would be required to
on Form SB SEF, any statement therein, complete Form SB SEF and exhibits, a
include a revised opinion of counsel SB SEF may elect to, or upon request of
or any exhibit or amendment thereto, describing how, as a matter of law, the
was inaccurate when filed in order to any representative of the Commission
entity will continue to: (1) meet its shall, file as an amendment a complete
correct such inaccuracies. obligations to provide the Commission
Proposed Rule 802(b) would require a new Form SB SEF together with all
with prompt access to its books and exhibits thereto.
registered SB SEF to file an amendment records and (2) be subject to onsite
on Form SB SEF with the Commission Under proposed Rule 802(f), a
inspection and examination by
within five business days after any registered SB SEF would be required to
representatives of the Commission
action is taken that renders inaccurate, update its Form SB SEF on an annual
under such new legal or regulatory
or that causes to be incomplete, any basis. Specifically, within 60 days of the
framework.331
information filed on the Execution Page end of its fiscal year, a registered SB
The Commission preliminarily
of the SB SEF’s Form SB SEF, or any SEF would be required to file an
believes that it is appropriate to require
amendment thereto, or any information amendment to its Form SB SEF to
the updating of only the Execution Page
filed as part of Exhibits C, E, G, or N,326 update the Form SB SEF in its
and Exhibits C, E, G, and N to proposed
or any amendments thereto.327 Any entirety.333 Each exhibit to the amended
Form SB SEF on a continuous basis. The
such amendments must set forth the exhibits required to be updated Form SB SEF would be required to be
nature and effective date of the action pursuant to proposed Rule 802(b) are up-to-date as of the end of the latest
taken, provide any new information, substantially similar to the exhibits to fiscal year of the SB SEF.334 The
and correct any information rendered Form 1 required to be updated on a purpose of this requirement is to
inaccurate. Proposed Rule 802(c) would continuous basis by national securities provide the Commission and the public
require a SB SEF that is under the exchanges pursuant to Rule 6a–2 under with updated information on all the
control of any other person to file an the Exchange Act.332 The Commission exhibits required in the Form SB SEF,
amendment to Exhibit P to its Form SB particularly those exhibits that are not
believes that it is important for the
SEF within 5 business days after any otherwise required to be updated under
Commission to receive updates to the
changes in the legal or regulatory proposed Rules 802(b), (c) and (d), on an
information included in the enumerated

framework of any person that controls annual basis. The Commission
exhibits, namely information regarding
preliminarily believes that a 60-day
a SB SEF’s governance, ownership,
326 These exhibits pertain to the list of officers, filing deadline would give SB SEFs
governors and committees of the SB SEF (Exhibit 328 See proposed Rule 802(c).
sufficient time in which to file an
C), ownership of the SB SEF (Exhibit E), certain annual amendment to Form SB SEF.
329 Id.
material operating agreements (Exhibit G), and
330 See proposed Rule 802(d).
criteria for determining what securities may be
traded (Exhibit N). 331 Id. 333 See proposed Rule 802(f).
327 See proposed Rule 802(b). 332 17 CFR 240.6a–2. 334 See id.
Proposed Rule 803 would require a laws and the rules and regulations amendments pursuant to proposed Rule
registered SB SEF to file with the thereunder. 802?
Commission any material relating to the Providing the Commission with the
necessary information it needs to C. Withdrawal or Revocation of
trading of SB swaps (including notices,
effectively regulate SB SEFs and the Registration of SB SEF
circulars, bulletins, lists, and
periodicals) issued or made generally trading of SB swaps on SB SEFs is Proposed Rule 804 under Regulation
available to SB SEF participants. A SB especially important because SB SEFs SB SEF would permit a registered SB
SEF would be required to file such would be new entities and SB SEFs, and SEF to withdraw from registration by
supplementary material with the the trading of SB swaps on SB SEFs, filing a written notice of withdrawal
Commission upon issuing or making the would be newly regulated by the with the Commission, which notice
material available to SB SEF Commission. The operation of SB SEFs must designate a person associated with
participants.335 However, if such and trading of SB swaps on SB SEFs is the SB SEF to serve as the custodian of
information is available continuously on likely to change as the regulated market the SB SEF’s books and records.337 Prior
an Internet Web site controlled by the for SB swaps and the trading of SB to filing a notice of withdrawal, a SB
SB SEF, the SB SEF may indicate to the swaps on trading venues regulated by SEF would be required to file an
Commission the location of the Web site the Commission continue to develop. amended Form SB SEF to update any
and certify that such information is The proposed amendments to Form SB inaccurate information.338 A notice of
accurate instead of filing with the SEF, including the proposed annual withdrawal from registration filed by a
Commission.336 update, and the proposed supplemental SB SEF would become effective on the
information filing, would help the 60th day after the filing thereof with the
The Commission preliminarily
Commission keep abreast of the changes Commission, or within such longer
believes that the amendments required
that may occur with respect to the period of time as to which such SB SEF
by proposed Rule 802 and the
trading of SB swaps on SB SEFs, and the consents or which the Commission, by
supplemental material required by
operation and ownership of SB SEFs, order, may determine as necessary or
proposed Rule 803 would provide a
and thus should enable the Commission appropriate in the public interest or for
useful tool for the Commission to carry
to more effectively regulate the trading the protection of investors, or within
out its oversight of SB SEFs and their
of SB swaps and SB SEFs. such shorter period of time as the
compliance with the Exchange Act and The Commission requests comments
the rules and regulations thereunder. Commission may determine.339
on all aspects of the proposed rules
Requiring SB SEFs to provide consistent relating to required amendments and The Commission preliminarily
and up-to-date disclosures about updates to proposed Form SB SEF and believes that is appropriate to provide
significant changes in their governance, the required filing of supplemental for a mechanism for SB SEFs to
ownership, operations and criteria used information. Are the Commission’s withdraw from registration. In addition,
to determine the SB swaps that may be proposed rules appropriate and the Commission preliminarily believes
traded on the SB SEF, and requiring sufficiently clear? If not, why not and that 60 days following notice of
non-resident SB SEFs and SB SEFs what would be a better alternative? Are withdrawal is an appropriate effective
controlled by another person to update the exhibits to proposed Form SB SEF date for any SB SEF registration
the opinion of counsel whenever that would require prompt updating withdrawal. Providing a period between
changes in legal or regulatory pursuant to proposed Rule 802(b) filing of notice of withdrawal and the
framework would impact their ability to appropriate? Are there other exhibits to effective date of any withdrawal should
comply with proposed Rules 801(e) and Form SB SEF that should be updated on enable the Commission to allow a SB
(f), respectively, pursuant to proposed a continuous basis? Are there exhibits SEF to withdraw its registration with
Rules 802(b), (c) and (d) would provide that should not be updated on a the Commission and cease operating as
the Commission with important continuous basis? Is it appropriate to a SB SEF and market participants to
information in monitoring whether a SB require SB SEF’s to update their react to any such withdrawal without
SEF is in compliance with the Core registration statement annually? Would dislocating the SB swap market or
Principles throughout its fiscal year. a different time period be more causing any other unintended
Requiring a SB SEF to update its Form appropriate? What would be the cost to consequences with respect to the
SB SEF and the exhibits thereto on an SB SEFs of the proposed rules requiring trading of SB swaps.
annual basis pursuant to proposed Rule amendments? Proposed Rule 804(d) would provide
802(f) would provide updated Is the material required to be filed that the Commission may, by order,
information on the parts of the Form SB pursuant to proposed Rule 803 revoke the registration of a registered SB
SEF that are not required to be updated appropriate? Is there other information SEF if the Commission finds, on the
within five business days and thus that the Commission should require to record after notice and opportunity for
enable the Commission to have a full be filed with respect to the trading of SB hearing, that the SB SEF obtained its
picture of the changes at a SB SEF on swaps? Is there information that the registration by making false or
a year-to-year basis. Requiring SB SEFs Commission should not request? Should misleading statements with respect to
to provide to the Commission material the Commission request any any material fact or has violated or
made available to SB SEF participants information at all? Is it appropriate, in failed to comply with any provision of
regarding the trading of SB swaps lieu of requiring a SB SEF to file the Federal securities laws or the rules
pursuant to proposed Rule 803 would supplemental material with the
provide the Commission with important Commission pursuant to proposed Rule 337 See proposed Rule 804(a). A notice of
information to monitor the trading of SB 803(a), to allow the SB SEF to direct the withdrawal filed pursuant to proposed Rule 804
swaps on the SB SEF and whether such Commission to a Web site where such would be considered a ‘‘report’’ filed with the
trading is being conducted in information is located and certify that Commission for purposes of Sections 18(a) and
32(a) of the Exchange Act and the rules and
compliance with the Federal securities the information is accurate pursuant to regulations thereunder. See proposed Rule 804(c).
proposed Rule 803(b)? Should the See also supra note 303.
335 See proposed Rule 803(a). Commission make such an allowance 338 See proposed Rule 804(a).
336 See proposed Rule 803(b). for SB SEFs with respect to required 339 See proposed Rule 804(b).
and regulations thereunder.340 Pending XXII. New Proposed Form SB SEF for as required by proposed Rule 801(e).
a final determination as to whether the the Registration of Security-Based Finally, the applicant would be required
registration of a SB SEF shall be Swap Execution Facilities to certify that, if it is a non-resident
revoked, the Commission may, by order, The Commission is proposing that person, it can, as a matter of law, (1)
suspend the registration of the SB SEF applications for registration as a SB SEF, provide the Commission with prompt
if such suspension appears to the and amendments to such registration, be access to its books and records and (2)
Commission, after notice and submitted on new proposed Form SB submit to an onsite inspection and
opportunity for hearing, to be necessary SEF. Proposed Form SB SEF is similar examination by representatives of the
or appropriate in the public interest or in style and format to the existing Form Commission, as required by proposed
for the protection of investors.341 The 1 for registration as a national securities Rule 801(f).
Commission believes that it is Proposed Exhibit A to Form SB SEF
exchange. Proposed Form SB SEF,
appropriate to provide a mechanism for would require the applicant to provide
however, is tailored to solicit
the Commission to revoke a SB SEF’s a copy of the governing documents of
information that the Commission
registration if a SB SEF obtained its the applicant, including but not limited
believes would be useful for considering
registration unlawfully or has violated to a corporate charter, articles of
whether a SB SEF meets the incorporation or association, limited
the Federal securities laws or rules or requirements for registration in Section liability company agreement, or
regulations thereunder. 3D of the Exchange Act, including partnership agreement, with all
Proposed Rule 804(e) would provide whether the SB SEF can comply with subsequent amendments, and by-laws or
that the Commission may, by order, the Core Principles contained in Section corresponding rules or instruments,
cancel the registration of a SB SEF if the 3D(d) of the Exchange Act, and the rules whatever the name, of the applicant.
Commission finds that the SB SEF is no thereunder, including proposed This information is intended to be used
longer in existence or has ceased to do Regulation SB SEF. to assess the applicant’s compliance
business in the capacity specified in its The Execution Page to proposed Form with Core Principle 1 (Compliance with
application for registration.342 The SB SEF would require an applicant to Core Principles), Core Principle 2
Commission believes that it is provide certain identifying information. (Compliance with Rules), and Core
appropriate to provide a mechanism for The Execution Page would include a Principle 11 (Conflicts of Interest). The
the Commission to cancel a SB SEF’s box for the applicant to indicate information provided in this proposed
registration if a SB SEF is no longer in whether the applicant was seeking exhibit is designed to allow the
existence or has ceased to do business consideration for temporary registration Commission to confirm that the
in the manner set forth in the pursuant to proposed Rule 801(c). In applicant has the appropriate authority
registration application. addition, the Execution Page would to operate the trading system and to
require the applicant to designate and regulate its participants, and that the
The Commission requests comments authorize an individual, other than a
on all aspects of the proposed rule ownership structure is consistent with
Commission official, for service of the Exchange Act and the rules and
relating to withdrawal or revocation of process, pleadings, or other documents regulations thereunder relating to the
registration. Is the Commission’s in connection with any action or governance of SB SEFs.
proposed rule regarding the withdrawal, proceeding against the applicant, as Proposed Exhibit B to Form SB SEF
revocation and cancellation of a SB required by proposed Rule 801(d). would require the applicant to provide
SEF’s registration appropriate and The Execution Page to proposed Form a copy of all written rulings, settled
sufficiently clear? If not, why not and SB SEF further would require the practices having the effect of rules,
what would be a better alternative? applicant to certify that the statements stated policies and interpretations of the
Should a SB SEF be required to file an contained therein are current, true and Board or other committee of the
amendment on Form SB SEF before complete, and that the applicant is applicant in respect of any provisions of
withdrawing its registration? If not, why currently in compliance with, and is the governing documents, rules or
not and what would be a better currently operating its business in a trading practices of the applicant which
alternative? Should the Commission manner consistent with, the Exchange are not included in Exhibit A. This
require a SB SEF to file a form to request Act and all rules and regulations information required in proposed
withdrawal of registration? If so, why thereunder. The applicant also would be Exhibit B would be critical to the
and what should the SB SEF be required required to certify that it is so organized, Commission’s ability to assess the
to disclose in the form? Should this and has the capacity, to assure the applicant’s compliance with all of the
form be required in lieu of or in prompt, accurate, and reliable Core Principles that require SB SEFs to
addition to an amendment on Form SB performance of its functions as a SB establish and enforce rules relating to a
SEF? Is the proposed effective date of 60 SEF, and that it has the capacity to variety of matters (e.g., Core Principle 2
days from the filing of the notice of fulfill its obligations under all (Compliance with Rules); Core Principle
withdrawal with the Commission international information-sharing 4 (Monitoring of Trade and Trade
appropriate? If not, would an earlier or agreements to which it is a party. In Processing); Core Principle 5 (Ability to
later date be more appropriate? Are the addition, the applicant would be Obtain Information); Core Principle 6
findings required by the Commission to required to certify that any person that (Financial Integrity of Transactions);
revoke, suspend or cancel a SB SEF’s controls the applicant has consented to Core Principle 7 (Emergency Authority);
registration appropriate? Are any other and can, as a matter of law, (1) provide Core Principle 10 (Antitrust
instances not specified in this proposed the Commission with prompt access to Considerations); and Core Principle 11
rule in which the Commission should its books and records, to the extent such (Conflicts of Interest)). Consequently,
revoke, suspend or cancel a SB SEF’s books and records are related to the the Commission believes that such
registration? activities of the security-based swap information is necessary for the
execution facility; and (2) submit to Commission to confirm that the
340 See proposed Rule 804(d). onsite inspection and examination by applicant’s rules meet the requirements
341 Id. representatives of the Commission with of those Core Principles and of the
342 See proposed Rule 804(e). respect to the activities of the SB SEF, Exchange Act and the rules and
regulations thereunder, including enable the Commission to determine the to Core Principle 14.343 The
proposed Regulation SB SEF. applicant’s compliance with Core Commission preliminarily believes that
Proposed Exhibit C to Form SB SEF Principle 11 (Conflicts of Interest) and this information would enable the
would require the applicant to provide the proposed rules under Regulation SB Commission to assess the applicant’s
a list of the officers and directors of the SEF relating thereto. In addition, the compliance with Core Principle 12
SB SEF, or persons performing similar Commission preliminary believes that (Financial Resources) and the proposed
functions, who presently hold or have these organizational charts would rules under Regulation SB SEF relating
held their offices or positions during the inform the Commission’s view on the thereto. In addition, the Commission
previous year, and a list of all standing ability of the SB SEF to carry out its believes that disclosure of audited
committees and their members, regulatory and oversight responsibilities financial statements would permit the
indicating the following for each: their with respect to its markets. Commission to better understand the
name and title; date of commencement financial resources and decisions of SB
and termination of term of office or Proposed Exhibit E to Form SB SEF
SEFs. The Commission preliminarily
position; the type of business in which would require an applicant to provide believes that these statements should be
each is primarily engaged (e.g., SB swap certain ownership information. submitted by SB SEFs pursuant to Form
dealer, major SB swap participant, inter- Specifically, Exhibit E would require a SB SEF in addition to the rules relating
dealer broker, end-user etc.); and, if list of each person that has a direct or to Core Principle 14, because documents
such person is a director, whether such indirect ownership or voting interest in submitted pursuant to Form SB SEF will
director qualifies as an ‘‘independent the SB SEF that equals or exceeds 5%, be disclosed to the public. This would
director’’ pursuant to proposed Rule 800 and a list of all related persons of such allow the public to be informed about
under Regulation SB SEF and whether persons that have an ownership or the financial position of these SB SEFs
such director is a member of any voting interest in the SB SEF or that are and should facilitate investor
standing committees or committees that SB SEF participants. For each of the confidence in the markets. In addition,
have the authority to act on behalf of the persons and related persons listed in the because Exhibit F and the rules relating
Board or the nominating committee. The Exhibit E, an applicant would also need to Core Principle 14 have the same
Commission believes that mandating SB to provide such person’s name, title or requirements with respect to the
SEFs to disclose this information should legal status and whether such person is preparation and presentation of such
better inform the Commission about SB a SB SEF participant; the date such title, financial statements, this should not
SEF officers, the persons responsible for status or participation in a SB SEF was create an additional burden on SB SEFs.
the day-to-day operation of the SB SEF, acquired or commenced; the percentage Proposed Exhibit G to Form SB SEF
and SB SEF directors, the persons that ownership interest held; the type of would require an applicant to provide
comprise the Board. In addition, the ownership held, including whether an executed or executable copy of any
Commission believes that the such ownership interest qualifies as agreements or contracts entered into or
information required in Exhibit C is ‘‘beneficial ownership’’ under proposed to be entered into by the applicant, or
necessary for the Commission to Rule 800 or is entitled to vote; the a subsidiary or an affiliate of the
determine the applicant’s compliance percentage of voting interest held; and applicant, including partnership or
with the governance requirements of the type of voting interest held. The limited liability company, third-party
Core Principle 11 (Conflicts of Interest) purpose of this information is to provide regulatory service, or other agreements
and the proposed rules under the Commission, participants of the SB relating to the operation of an electronic
Regulation SB SEF relating thereto, and SEF, and investors with detailed trading system to be used to effect
would aid the Commission in information about which persons or transactions on the SB SEF (‘‘System’’)
ascertaining any affiliations and groups of persons potentially could that enable or empower the applicant to
relationships that would preclude control or influence the SB SEF. In comply with Section 3D of the Exchange
directors from being considered addition, the information proposed to be Act. The Commission believes that the
independent. required by Exhibit E relating to provision of these material agreements
Proposed Exhibit D to Form SB SEF ownership of a SB SEF would provide would be useful for the Commission and
would require an applicant to provide a the Commission, as well as participants the public. They would enable the
chart or charts illustrating fully the in the SB SEF, with up-to-date Commission to understand how and
internal organizational structure of the information regarding a change or through what parties the System is
SB SEF. The charts would need to potential change in control of a SB SEF. being operated and to have a better
indicate the internal divisions or The Commission expects that the understanding of the arrangements that
departments, the responsibilities of each disclosure of information concerning the SB SEF has entered into to meet its
such division or department, and the persons that hold ownership or voting obligations under the Exchange Act. The
reporting structure of each division or interests of more than 5% of a SB SEF information required in this exhibit
department, including its oversight by should help the Commission more would allow the Commission generally
committees or their equivalent. The effectively oversee and regulate SB to ascertain the applicant’s compliance
charts should be sufficiently detailed to SEFs, especially if the SB SEF is owned with all Core Principles.
permit the Commission and the public or controlled by persons who are not Proposed Exhibit H to Form SB SEF
to gain a complete understanding of the regulated by the Commission. would require an applicant to provide
manner in which the SB SEF is unconsolidated financial statements (in
structured and should be able to provide Proposed Exhibit F to Form SB SEF
would require an applicant to provide, English) for the latest two fiscal years
the Commission with an overview of the for every subsidiary in which the
entity’s organizational structure. The for the latest two fiscal years of the
applicant, audited financial statements, applicant has, directly or indirectly, a
Commission preliminarily believes that 25% interest and every entity that has,
disclosure of these organizational charts which would be prepared in accordance
with the same requirements for the directly or indirectly, a 25% interest in
would be an important means by which
to provide the Commission with a better preparation of financial statements 343 See supra Section XX.C for a discussion of the
understanding of the governance submitted pursuant to the proposed financial statement requirements pursuant to Core
structure of the SB SEF and would rules under Regulation SB SEF relating Principle 14. See also proposed Rule 823.
the applicant, which would be prepared guidelines regarding such definition, similar materials. The applicant would
in accordance with the same including a description of how the have to provide a table of contents
requirements for the preparation of System displays all orders, quotes, listing the forms included. The
financial statements submitted pursuant requests for quote, responses, and trades Commission believes that the
to the proposed rules under Regulation in an electronic or other form, and the information required in proposed
SB SEF relating to Core Principle 14.344 timelines in which the system does so; Exhibit J would provide the
Such financial statements would be how trading interest interacts on the Commission with important information
required to contain such footnotes and System; the ability of market on the ability of persons to directly
other disclosures as are necessary to participants to see and transact with access the SB SEF. Such information
avoid rendering the financial statements orders, quotes, requests for quotes, and would enable the Commission to assess
misleading, and be provided in responses; and an explanation of the the applicant’s compliance with Core
eXtensible Business Reporting Language trade-matching algorithm if it is based Principle 2 (Compliance with Rules),
consistent with Rules 405(a)(1), (a)(3), on order priority factors other than price Core Principle 5 (Ability to Obtain
(b), (c), (d), and (e) of Regulation S–T.345 and time; (2) the means of access to the Information), and Core Principle 6
In addition to the foregoing, for all other System, including any limitations on (Financial Integrity of Transactions) and
affiliates of the applicant not listed, access; (3) procedures governing entry the proposed rules under Regulation SB
such information would be required to and display of trading interest in the SEF related to such Core Principles.
be made available to the Commission System; (4) procedures governing the Proposed Exhibit K to Form SB SEF
upon request.346 The Commission execution, reporting, clearance and would require an applicant to provide a
preliminarily believes that the settlement of transactions in connection complete set of all forms of financial
information required in this exhibit with the System; (5) proposed fees; (6) statements, reports, or questionnaires
would allow the Commission to assess procedures for ensuring compliance required of SB SEF participants,
the SB SEF’s compliance with Core with System usage guidelines and rules; subscribers or any other users relating to
Principle 12 (Financial Resources) and (7) the hours of operation of the System, financial responsibility or minimum
the proposed rules under Regulation SB and the date on which the applicant capital requirements for such
SEF relating thereto. In addition, the intends to commence operation of the participants or any other users. The
Commission believes that the required System; (8) a copy of the users’ manual applicant also would have to provide a
financial statement would enable the or equivalent document; (9) if applicant table of contents listing the forms
Commission to better understand the proposes to hold funds or securities on included. The Commission
financial resources and decisions of SB a regular basis, a description of the preliminarily believes that the
SEFs and their affiliates. Finally, while controls that would be implemented to information collected in this proposed
evaluating an applicant’s registration ensure safety of those funds or exhibit would provide the Commission
application on Form SB SEF, the securities; and (10) the name of any with the financial information that SB
Commission may determine that entity, other than the SB SEF, that will SEF’s require of their participants and
additional affiliates of the applicant that be involved in operation of the System, users and enable the Commission to
do not meet the 25% threshold may be including the execution, trading, assess the applicant’s compliance with
material to the applicant’s operation as clearing and settling of transactions on Core Principle 6 (Financial Integrity of
a SB SEF. Therefore, the Commission behalf of the SB SEF, and a description Transactions) and the proposed rules
preliminarily believes that it is of the role and responsibilities of each under Regulation SB SEF related
appropriate to require an applicant to entity. thereto.
provide financial information regarding The Commission believes that Exhibit Proposed Exhibit L to Form SB SEF
other affiliates upon request of the I would allow the Commission to would require an applicant to describe
Commission. determine if the applicant meets the the applicant’s criteria for participation
Proposed Exhibit I to Form SB SEF definition of SB SEF under the in or use of the SB SEF. The applicant
would require an applicant to describe Exchange Act and rules and regulations would be required to describe
the manner of operation of the System. hereunder, and in accordance with the conditions under which SB SEF
This description would be required to guidance set forth in Section III above. participants or persons associated with
include: (1) A detailed description of In addition, Exhibit I would address the SB SEF participants may be subject to
the manner in which the System applicant’s compliance with several suspension or termination with regard
satisfies the definition of ‘‘security-based Core Principles, including Core to access to the SB SEF, and any
swap execution facility’’ in Section Principle 1 (Compliance with Rules), procedures that would be involved in
3(a)(77) of the Exchange Act and any Core Principle 4 (Monitoring of Trade & the suspension or termination of a SB
Commission rules, interpretations or Trade Processing), Core Principle 6 SEF participant or person associated
(Financial Integrity of Transactions), with a SB SEF participant. Proposed
344 See supra Section XX.C for a discussion of the Core Principle 8 (Timely Publication of Exhibit L would require a SB SEF to
financial statement requirements pursuant to Core Trading Information), Core Principle 9 provide a list of all grants of access
Principle 14. See also proposed Rule 823. (including, for all participants, the
345 These requirements are the same as the
(Recordkeeping and Reporting), and
requirements for the preparation of financial Core Principle 13 (System Safeguards), reasons for granting such access) and all
statements for affiliated entities that would be and the proposed rules under denials or limitations of access
submitted pursuant to the proposed rules under Regulation SB SEF relating to such Core (including, for each applicant or
Regulation SB SEF relating to Core Principle 14. See Principles. participant, the reasons for denying or
supra Section XX.C for a discussion of the financial

statement requirements pursuant to Core Principle
Proposed Exhibit J to Form SB SEF limiting access). In addition, proposed
14. would require an applicant to provide a Exhibit L would require a SB SEF to
346 This requirement to provide the information complete set of all forms pertaining to: provide a list of all disciplinary actions
for all other affiliates of the applicant upon request (1) Applications for participation or taken by the SB SEF. The Commission
is not contained in the rules under Regulation SB subscription to or use of the SB SEF; (2) preliminarily believes that proposed
SEF relating to Core Principle 14, as the financial
report submitted by the SB SEF pursuant to such
applications for approval as a person Exhibit L would provide the
rules is an annual report, rather than a registration associated with a SB SEF participant, or Commission with information regarding
application. user of the SB SEF; and (3) any other access to, limitations of access by, and
denials of access by a SB SEF, and description of each SB swap. The securities exchange or a SB SEF to the
disciplinary actions taken by a SB SEF Commission believes that proposed extent that the exchange also operates a
against participants, and would allow Exhibits N and O would enable the SB SEF and uses the same electronic
the Commission to ascertain the Commission to determine whether a SB trade execution system for listing and
applicant’s compliance with Core SEF is complying with Core Principle 2 executing trades of SB swaps. The
Principle 2 (Compliance with Rules) (Compliance with Rules), Core Principle Commission notes that any subsidiary
and Core Principle 4 (Monitoring of 6 (Financial Integrity of Transactions) or affiliate of a registered exchange
Trading and Trade Processing) and the and Core Principle 3 (Security-based could not integrate, or otherwise link
proposed rules under Regulation SB Swaps not Readily Susceptible to the SB SEF with the exchange,
SEF relating to such Core Principles. Manipulation) and the proposed rules including using the premises or
Proposed Exhibit M to Form SB SEF under Regulation SB SEF relating to property of such exchange for effecting
would require an applicant to provide such Core Principles. or reporting a transaction, without being
an alphabetical list of all SB SEF Proposed Exhibit P to Form SB SEF considered a ‘‘facility of the
participants or other users of the SB would require an applicant that is exchange.’’348 In the event that a
SEF, including the following controlled by any other person to national securities exchange begins
information: name; date of acceptance provide an opinion of counsel that any trading SB swaps either on the exchange
as a participant or other user; principal person that controls the SB SEF has or on a facility of the exchange, it would
business address and telephone number; consented to and can, as a matter of law, be required to file rule filings under
if participant or other user is an (1) provide the Commission with Rule 19b–4 under the Exchange Act in
individual, the name of the entity with prompt access to its books and records, connection with the trading of SB swaps
which such individual is associated and to the extent such books and records are on the exchange or its facility, and such
the relationship of such individual to related to the activities of the SB SEF; facility would have to comply with the
the entity (e.g., partner, officer, director, and (2) submit to onsite inspection and provisions of the Exchange Act and the
employee, etc.); a description of the type examination by representatives of the rules and regulations thereunder
of activities primarily engaged347 in by Commission with respect to the applicable to national securities
the participant or other user (e.g., SB activities of the SB SEF. Proposed exchanges.
swap dealer, major SB swap participant, Exhibit P to Form SB SEF also would The Commission generally requests
inter-dealer broker, non-broker dealer, require an applicant that is a non- comments on all aspects of the proposed
non-security-based swap dealer, resident person to provide an opinion of Form SB SEF. Is the format of the
commercial end-user, inactive or other counsel that the applicant can, as a proposed Form SB SEF appropriate and
functions); and the class of participation matter of law, (1) provide the sufficiently clear? If not, why not and
or other access. The Commission Commission with prompt access to the how could it be improved? Are the
preliminarily believes that this exhibit books and records of such applicant and instructions to the proposed Form SB
would provide the Commission with (2) submit to onsite inspection and SEF appropriate and sufficiently clear?
information relating to who has access examination by representatives of the If not, why not and how could they be
to trading on the SB SEF and would Commission. As discussed in Section improved? Are the defined terms
enable the Commission to determine XXI above, these requirements would included on proposed Form SB SEF
whether a SB SEF is in compliance with allow the Commission to better evaluate appropriate and sufficiently clear? If
Core Principle 2 (Compliance with an applicant’s ability to comply with the not, why not and how could they be
Rules), Core Principle 6 (Financial books and records and inspection improved?
requirements set forth in proposed Are the disclosure items contained on
Integrity of Transactions) and Core
Rules 801(e) and (f). the Execution Page of the proposed
Principle 11 (Conflicts of Interest) and
A national securities exchange that Form SB SEF appropriate? Are there
the proposed rules under Regulation SB
seeks to operate a SB SEF would be other useful disclosure items that
SEF related to such Core Principles.
Proposed Exhibit N to Form SB SEF required to separately register such SB should be added? If so, please describe
requires an applicant to provide a SEF with the Commission as a SB SEF such items and why they should be
pursuant to proposed Rule 801 and added. Or, are there proposed items on
description of the criteria used to
proposed Form SB SEF, and would be the Execution Page that should be
determine the SB swaps that may be
required to comply with Section 3D of deleted? If so, please describe why such
traded on the SB SEF. The Commission
the Exchange Act, the rules and items are not necessary. Are the
preliminarily believes that this
regulations thereunder, and any other certifications contained on the
requirement would provide the
provisions of the Exchange Act and Execution Page of the proposed Form
Commission with information regarding
rules thereunder applicable to SB SEFs SB SEF appropriate? Are there other
the process by which a SB SEF
with respect to the operations of such useful certifications that the
determines what SB swaps would be
SB SEF. Commission should require the
traded on the SB SEF and the factors the National securities exchanges could, applicant to make? If so, please describe
SB SEF would consider in making such under the rules the Commission is such items and why they should be
determination. Proposed Exhibit O to proposing today, form subsidiaries or added. Or, are there proposed
Form SB SEF requires an applicant to affiliates that operate SB SEFs. If a certifications that should be deleted? If
provide a schedule of the SB swaps to national securities exchange chose to so, please describe why such
be traded on the SB SEF, including a form such a subsidiary or affiliate, the certifications are not necessary.
347 A person would be ‘‘primarily engaged’’ in an

exchange itself could remain registered Are the proposed exhibits to the Form
activity or function for purposes of this item when
as a national securities exchange, while SB SEF appropriate? Would the
that activity or function is the one in which that the subsidiary or affiliate registers and
person is engaged for the majority of their time. operates as a SB SEF. Section 3D(c) of 348 See Section 3(a)(2) of the Exchange Act, 15
When more than one type of person at an entity the Exchange Act requires a national U.S.C. 78c(a)(2) (defining the term ‘‘facility of the
engages in any of the types of activities or functions exchange’’). The Commission gave a similar analysis
enumerated in this item, the applicant would be
securities exchange to identify whether regarding facilities of exchanges with regard to
required to identify each type and state the number electronic trading of SB swaps is taking ATSs in the ATS Adopting Release, supra note 94,
of participants or other users in each. place on or through the national at note 437.
information requested adequately allow Commission notes that proposed Form action taken or anticipated to be taken
the Commission to determine whether SB SEF would be filed electronically to adopt the proposed rule by the SB
to grant or deny the registration of a SB and thus is expected to be made SEF or by its governing board or by any
SEF pursuant to proposed Rule 801(b)? available publicly on the Commission’s committee thereof, and the cite for the
Are there other useful disclosure items Web site. The Commission seeks rules of the SB SEF that authorize the
that should be added to the exhibits or comment on whether the information to adoption of the proposed rule change;
added as exhibits? If so, please describe be filed on proposed Form SB SEF (4) explain the operation, purpose, and
such items and why they should be would be useful to the public. effect of the proposed rule, including, as
added. Are there any registration applicable, a description of the
XXIII. Rule Filing Processes for
requirements proposed by the CFTC for anticipated benefits to market
Changes to a SB SEF’s Rules
SEFs that the Commission should adopt participants or others, any potential
for SB SEFs? 349 For example, should A. Introduction anticompetitive effects on market
the Commission require a SB SEF to The Commission is proposing to participants or others, and how the rule
provide a description of material adopt rules requiring registered SB SEFs fits into the SB SEF’s framework of
pending legal proceedings? 350 Should to comply with certain rule filing regulation; (5) certify that the SB SEF
the Commission require a SB SEF to processes for any new rules or rule posted a notice of pending rule filing
provide a description of the personnel amendments. Specifically, the and a copy of the submission,
qualifications for each category of Commission is proposing new Rules 805 concurrent with the filing of a
professional employees employed by and 806, which set forth, respectively, a submission on its Web site; (6) include
the applicant? 351 Should the process for the voluntary submission of the documentation relied on to establish
Commission require a SB SEF to rules for Commission review and the basis for compliance with the
provide an analysis of the staffing approval, and a self-certification rule applicable provisions of the Exchange
requirements necessary to carry out filing process.353 The processes Act and the Commission’s regulations
operations of the applicant and the proposed under these rules are thereunder, including the Core
name and qualifications of each key substantially similar to the two rule Principles; (7) provide additional
staff person? 352 Is the information filing processes that the CFTC has in its information which may be beneficial to
requested on Form SB SEF and the existing rules,354 as modified by the the Commission in analyzing the new
exhibits thereto overly burdensome for new authority the CFTC has received rule or rule amendment; (8) describe
SB SEFs? If so, how could any such under Section 745 of the Dodd-Frank briefly any substantive opposing views
burdens be reduced? Are there proposed Act.355 It is important for the expressed to the SB SEF by the Board
exhibits or items of information in Commission to receive notice of or committee members, participants of
proposed exhibits that should be proposed rule changes to understand the SB SEF, or market participants with
deleted from proposed Form SB SEF? If how each SB SEF operates and is respect to the new rule or rule
so, please describe why such proposed governed to help the Commission with amendment that were not incorporated
exhibits would not be necessary. Should its oversight of SB SEFs. The into the new rule or rule amendment;
certain proposed exhibits be required to Commission intends to coordinate (9) identify any Commission regulation
be made available to the Commission efforts with the CFTC, as appropriate, to that the Commission may need to
only upon request? If so, which have the processes offered in proposed amend, or sections of the Exchange Act
proposed exhibits and why? For Rules 805 and 806 resemble the rule or the Commission’s regulations that the
example, should an applicant be filings processes that the CFTC Commission may need to interpret, in
required to provide the information ultimately adopts for SEFs, in large part order to approve the new rule or rule
regarding SB SEF participants required to streamline and simplify compliance amendment; (10) in the case of proposed
by proposed Exhibit M upon request by for joint SEF/SB SEF entities. amendments to the terms and
the Commission following the filing of conditions of a SB swap product,
B. Voluntary Submission of Rules for include a written statement verifying
the applicant’s Form SB SEF, rather Commission Review and Approval
than as an exhibit to the applicant’s that the registered SB SEF has
Proposed Rule 805 gives a registered undertaken a due diligence review of
initial filing of proposed Form SB SEF?
SB SEF the option of voluntarily the legal conditions, including
Commenters are requested to consider
submitting a proposed new rule or rule conditions relating to contractual and
the totality of the information required
amendment for approval by the intellectual property rights, that may
by proposed Form SB SEF in framing
Commission prior to its materially affect the trading of the
their responses.
implementation. Paragraph (a) of product; and (11) request confidential
The Commission also requests that
proposed Rule 805 would require such treatment, if appropriate.356
commenters address whether there are Proposed Rule 805(a) sets forth the
confidentiality issues with any filings to: (1) Be filed electronically with
the Commission in a format specified by information a SB SEF would be required
information required by the proposed to provide the Commission when
exhibits to proposed Form SB SEF? If the Commission; (2) set forth the text of
the proposed rule or rule amendment seeking Commission approval of a
so, what information presents issues proposed change to a SB SEF rule, or a
and what are the issues? Further, the (in the case of a rule amendment,
deletions and additions must be proposed change to the terms and
349 See Notice of proposed SEF rulemaking by the indicated); (3) indicate the proposed conditions of a SB swap that has already
effective date of the proposed rule, any commenced trading. Most of the
CFTC Release, supra note 17.

350 See proposed Exhibit H to proposed Form proposed items of information to be
SEF; see also Notice of proposed SEF rulemaking 353 Proposed Rule 806(d) also provides a limited included are substantially similar to the
by the CFTC, supra note 17. exception to the certification requirement for items of information a national
351 See proposed Exhibit E to proposed Form SEF; certain kinds of filings. See proposed Rule 806(d). securities exchange is required to
see also Notice of proposed SEF rulemaking by the See also discussion infra notes 382 to 384 and
CFTC, supra note 17. accompanying text. provide on Form 19b–4 357 when
352 See proposed Exhibit F to proposed Form SEF; 354 17 CFR 40.5 and 17 CFR 40.6.
356 See proposed Rule 805(a).
see also Notice of proposed SEF rulemaking by the 355 See Public Law 111–203 § 745 (amending
CFTC, supra note 17. Section 5c of the CEA, 7 U.S.C. 7a–2). 357 See 17 CFR 240.19b–4.
seeking approval of a proposed rule Exchange Act and proposed Rule 812 the review period, except as requested
change in accordance with Section 19(b) thereunder, which would require a SB by the Commission during that
of the Exchange Act.358 Specifically, the SEF’s swap review committee to have period.363
requirements in proposed Rule 805(a)(1) determined, after taking into account all Under paragraph (d) of proposed Rule
through (4) regarding electronic of the terms and conditions of the SB 805, the Commission would be able to
submission, submission of proposed swap and the markets for the SB swap
extend the review period by an
rule text highlighting additions and and any underlying securities, that a SB
additional 45 days if the proposed rule
deletions, inclusion of background swap proposed to be traded is not
information on how and why a readily susceptible to manipulation.360 raises novel or complex issues that
proposed change is authorized, and Also with regard to proposed changes require additional time for review or is
explanation of the operation, purpose, to the terms and conditions of a SB of major economic significance, the
and effect of the proposed rule change swap, proposed Rule 805(a) would submission is incomplete, or the
are similar to the requirements require a SB SEF to provide a written requestor does not respond completely
applicable to national securities statement verifying that it has to Commission questions in a timely
exchanges seeking to implement a undertaken a due diligence review of manner.364 In this case, the Commission
proposed rule change. Further, the the legal conditions, including would be required to notify the
requirements in proposed Rule 805(a)(7) conditions relating to contractual and submitting SB SEF within the initial 45-
through (9) to include additional intellectual property rights, that may day review period and briefly describe
information beneficial to the materially affect the trading the product. the nature of the specific issues for
Commission in analyzing the new rule This proposed requirement is designed which additional time for review is
or rule amendment, a description of to prevent a SB SEF from seeking to required. In addition, the Commission
substantive opposing views expressed to trade a proprietary product of another would be able to extend the review
the SB SEF regarding the proposal, and SB SEF or other entity. The Commission period to any period, beyond the
to identify any Commission regulation preliminarily believes that the additional 45 days initially requested, to
that the Commission may need to information to be included pursuant to which the SB SEF agrees in writing.365
amend or interpret in order to approve proposed Rule 805(a) in a request for
approval of a new or proposed rule Under paragraph (e) of proposed Rule
the new rule or rule amendment also are
change or change to the terms and 805, the Commission would have the
similar to the requirements of Form
conditions of a SB swap is necessary to authority to issue a notice of non-
19b–4 applicable to national securities
exchanges. These requirements are assist the Commission in making a approval if it finds that the new rule or
designed to ensure that a SB SEF reasoned determination as to whether rule amendment is or appears to be
seeking to implement a new or proposed such proposed change is consistent with inconsistent with the Exchange Act or
rule change provides all relevant the Exchange Act. the regulations thereunder.366 At any
information and context regarding the Proposed Rule 805(b) would require time during its review under proposed
proposal that would allow the the Commission to approve a new rule Rule 805, the Commission would be
Commission to evaluate the proposal for or rule amendment unless the rule or able to notify the SB SEF that it will not
consistency with the Exchange Act and rule amendment is inconsistent with the approve the new rule or rule
rules and requirements thereunder. Exchange Act or the Commission’s amendment because it believes that the
In addition, similar to the regulations promulgated thereunder.361 new rule or rule amendment is
requirements for national securities The Commission has coordinated with inconsistent with the Exchange Act or
exchanges, the proposal in Rule the CFTC and the proposed standard for Commission rules or regulations
805(a)(5) would require a SB SEF to approval is the same as that standard for thereunder. The Commission would
certify that it has posted a notice of approval under the CFTC’s proposed provide, in its notice, the nature of the
pending rule filing and a copy of the rule approval process, which is issues raised and the specific provision
submission, concurrent with the filing intended to provide consistency to of the Exchange Act or the
of a submission on its Web site. This market participants who may operate a Commission’s rules or regulations with
proposal is intended to ensure that SB SEF and a SEF. which the new rule or rule amendment
market participants would receive Proposed Rule 805(c) would give the is or appears to be inconsistent.
prompt notice of new requests for Commission a 45-day review period, Pursuant to proposed Rule 805(f), the
approval filed with the Commission.359 starting from the date that the filing is receipt of a notice of non-approval
Proposed Rule 805(a)(6) also would received by the Commission, to consider would not prevent the SB SEF from
require a SB SEF to include the whether the proposed rule or rule subsequently submitting a revised
documentation relied on to establish the amendment is consistent with the version of the proposed rule or rule
basis for compliance with the applicable Exchange Act and the regulations amendment for Commission review and
provisions of the Exchange Act and the thereunder.362 Unless the Commission approval, and the revised submission
Commission’s regulations thereunder, notifies the SB SEF otherwise, the would be reviewed without
including the Core Principles. In the proposed rule change would be deemed prejudice.367 However, the receipt of a
case of proposed changes to the terms approved by the Commission at the end
and conditions of a SB swap, this notice of non-approval would be
of the 45-day review period (or at the presumptive evidence that the SB SEF
provision would require, without end of any extension period, as
limitation, inclusion of documentation could not truthfully submit the same, or
applicable), provided that: (1) The
relied on to establish the basis for substantially the same, proposed rule or
submission of the rule change complies
compliance with Section 3D(d)(3) of the with the requirements of paragraph (a) 363 Id. Any amendment or supplementation not
of proposed Rule 805, and (2) the SB requested by the Commission would be treated as
358 15 U.S.C. 78s(b).
359 Rule 19b–4(l) under the Exchange Act requires
SEF has not amended the filing during the submission of a new filing.
364 See proposed Rule 805(d).
each national securities exchange to post proposed
360 See Proposed Rule 812. 365 Id.
rule changes on its Web site within two business
361 See proposed Rule 805(b). 366 See proposed Rule 805(e).
days of filing with the Commission. See 17 CFR
240.19b–4(l). 362 See proposed Rule 805(c). 367 See proposed Rule 805(f)(1).
rule amendment for self-certification proposed rule would require that the SB that may be beneficial to the
under proposed Rule 806.368 SEF publish on its Web site a notice of Commission in conducting a due
Proposed Rule 805(g) would allow the pending certification with the diligence assessment of the filing and
Commission to provide for expedited Commission and copy of the submission the SB SEF’s compliance with any of the
approval for rule changes, including concurrent with the filing of a requirements of the Exchange Act or the
rule changes to terms and conditions of submission with the Commission.373 Commission’s rules or regulations
a product that are consistent with the Similar to proposed Rule 805, thereunder.376 The proposed items of
Exchange Act and the rules and proposed Rule 806 would require the information are similar to those required
regulations thereunder, at such time and submission to include certain specific by proposed Rule 805(a) as well as those
under such conditions as the items: (1) The text of the rule (in the in CFTC Rule 40.6.377 The Commission
Commission may specify in a written case of a rule amendment, deletions and preliminarily believes that inclusion of
notification.369 However, proposed Rule additions must be indicated); (2) the the items of information set forth in
805(g) would also allow the date of intended implementation; (3) a proposed Rule 806(a) would assist the
Commission to grant expedited approval certification by the SB SEF that the rule Commission in considering whether a
to a proposed rule or rule amendment, complies with the Exchange Act and the SB SEF’s implementation of a new rule,
at any time, and also to alter or revoke Commission’s regulations thereunder; rule amendment, or modification to the
the applicability of such a notice to any (4) the documentation relied on to terms and conditions of a SB swap
particular rule or rule amendment. establish the basis for compliance with pursuant to self-certification is
The Commission is proposing the the applicable provisions of the appropriate and consistent with the
time periods in paragraphs 805(c) Exchange Act and the Commission’s Exchange Act and the rules and
through (g) to align its procedure for regulations thereunder, including the requirements thereunder.
reviewing proposed rules and rule Core Principles; 374 (5) a brief Under paragraph (b) of proposed Rule
amendments with the CFTC’s explanation of any substantive opposing 806, the Commission would have 10
procedure.370 The Commission believes views expressed to the registered SB business days to review the submission
that a parallel procedure would be SEF by the Board or committee and the self-certification would become
beneficial for SB SEFs and SEFs that are members, participants, or market effective at the end of the 10 business-
dually registered. Furthermore, the participants that were not incorporated day period, unless the Commission
Commission believes that the proposed into the rule, or a statement that no such notifies the registered entity, during
prior approval process would allow the opposing views were expressed; (6) a such 10 business-day period, that it
SB SEF the opportunity to achieve request for confidential treatment, if intends to issue a stay of the
greater certainty about the appropriate; and (7) in the case of certification.378 Proposed Rule 806(c)(1)
Commission’s views on whether a new proposed amendments to the terms and would provide that the Commission
rule or rule amendment is consistent conditions of a SB swap, a written would be able to stay the certification of
with the Exchange Act and the rules and statement verifying that the registered a new rule or rule amendment by
regulations thereunder prior to taking SB SEF has undertaken a due diligence issuing a notification to the SB SEF
steps to implement the rule or review of the legal conditions, including informing it that the Commission is
amendment. conditions relating to contractual and staying the certification and stating the
intellectual property rights, that may grounds for doing so.379 The proposed
C. Self-Certification of Rules materially affect the trading the rule also would provide that the
Proposed Rule 806 would allow a SB product.375 The proposed Rule would certification of a rule could be stayed by
SEF, as an alternative to complying with also require the SB SEF to provide, if the Commission on the grounds that the
proposed Rule 805, to implement a new requested by Commission staff, new rule or rule amendment presents
rule or rule amendment pursuant to self- additional evidence, information or data novel or complex issues, is
certification.371 This process would accompanied by an inadequate
provide the Commission ten business amendment with the Commission prior to the explanation, or is potentially
days to review a self-certification filing implementation of such rule or rule amendment, or, inconsistent with the Exchange Act or
if not practicable, within twenty-four hours after the Commission’s regulations
and to stay the certification within such implementation of such emergency rule or rule
review period, if warranted. amendment.
thereunder. Once the Commission
Specifically, under proposed Rule 373 See proposed Rule 806(a)(2). The proposed issues a notification of stay to the
Rule would require the SB SEF to provide such registered entity, the Commission would
806(a), a registered SB SEFs would be
information in its submission to the Commission, have 90 days to conduct a review. A
required to submit the self-certification but would permit the SB SEF to redact information stay of a rule certification may be
electronically at least ten business days that it seeks to keep confidential from the
appropriate, for example, where a
prior to the implementation date of the documents that it publishes on its Web site. If,
however, a determination is made pursuant to the registered entity certifies a rule that
new rule or rule amendment.372 The
Freedom of Information Act that such information raises unique issues not previously
may not be kept confidential, the proposed rule reviewed by Commission staff. In
368 See proposed Rule 805(f)(2). See infra Section
would require the SB SEF to republish its filing on
XXIII for a discussion of the certification process. its Web site including such information.
addition, the Commission believes that
369 See proposed Rule 805(g). 374 In the case of proposed changes to the terms new rules or rule amendments may raise
370 See 17 CFR 40.5 and 40.6. See also Public Law
and conditions of a SB swap, this provision would a number of complex issues if they
111–203, § 745 (amending Section 5c of the require, without limitation, inclusion of appear to have a material impact on
Commodity Exchange Act, 7 U.S.C. 7a–2). See also documentation relied on to establish the basis for other securities and financial markets.
75 FR 67282 (November 2, 2010) (CFTC proposal compliance with Section 3D(d)(3) of the Exchange
to amend 17 CFR 40.5 and 40.6). Act and proposed Rule 812 thereunder, which
Thus, such rules are more likely to be
371 See proposed Rule 806. would require a SB SEF’s swap review committee
376 See proposed Rule 806(a)(6).
372 See proposed Rule 806(a)(1) and proposed to have determined, after taking into account all of
Rule 806(a)(3). Proposed Rule 806(a)(3) would the terms and conditions of the SB swap and the 377 See proposed Rule 805(a) and 17 CFR 40.6.
provide an exception to the 10 day requirement for markets for the SB swap and any underlying See also Public Law 111–203, § 745 (amending
new rules or rule amendments that the SB SEF securities, that a SB swap proposed to be traded is Section 5c of the Commodity Exchange Act, 7
seeks to implement in the exercise of its emergency not readily susceptible to manipulation. See U.S.C. 7a–2).
authority pursuant to Rule 816, requiring instead proposed Rule 812. 378 See proposed Rule 806(b).
that the SB SEF file such emergency rule or rule 375 See proposed Rule 806(a)(5). 379 See proposed Rule 806(c)(1).
subject to an extended review period to the following: Voting requirements; what other alternatives should the
allow the Commission to adequately Board or committee composition Commission consider? What other
identify and address complex regulatory requirements or procedures; decision burdens should the Commission take
issues. making procedures; use or disclosure of account of that joint SB SEF/SEF
Proposed Rule 806(c)(2) would material non-public information gained entities would face under the proposed
require the Commission to provide a 30- through the performance of official rules? Is the voluntary prior approval
day public comment period within the duties, or requirements relating to process in proposed Rule 805 a useful
90-day period that the stay is in effect conflicts of interest; or (2) the routine, option for SB SEFs? If not, what would
and to publish a notice of the 30-day daily administration, direction and be a better alternative?
comment period on the Commission’s control of employees, requirements Does the automatic effectiveness for a
Web site.380 Unless the Commission relating to gratuity and similar funds, rule or rule amendment submitted
notifies the SB SEF that it objects to the but not any of the following: Guaranty; under proposed Rule 806, once the
certification within the 90-day period reserves; or similar funds; declaration of review period has expired and in the
on the grounds that the proposed rule is holidays; and changes to facilities absence of non-approval, provide
inconsistent with the Exchange Act or housing the market. sufficient legal clarity and certainty
the rules or regulations thereunder, the The Commission notes that the about the change? Or, would an
rule would become effective, pursuant certification process in proposed Rule approval order by the Commission be
to certification, upon the expiration of 806 does not call for any final action by more instructive or helpful? Are the
the 90-day review period.381 If the the Commission. In cases where a SB time periods for review, and extensions
Commission decides to lift the stay prior SEF seeks final agency action, a SB SEF for review, in proposed Rule 805
to the expiration of the 90-day review could choose to file a proposed rule or appropriate? If so, what would be more
period, the Commission would notify rule amendment under proposed Rule appropriate? Should the submissions for
the SB SEF of its action and the rule 805. prior approval be published by the
would become certified at such time. The Commission intends to allow Commission for public comment? Why
Finally, proposed Rule 806(d) would registered SB SEFs to submit filings or why not?
permit SB SEFs to implement certain under proposed Rules 805 and 806
Is the provision of a notice of non-
new rules or rule amendments on the electronically through a portal similar to
approval to the SB SEF, as described
following business day without the electronic rule filing system used for
under proposed Rule 805(e), a sufficient
certification to the Commission.382 proposed rule changes by national
means of informing the SB SEF of the
Pursuant to proposed Rule 806(d)(1), the securities exchanges and national
basis for non-approval? Would more
rules permitted to be implemented securities associations.386
information or another form of notice be
pursuant to this summary process The Commission notes that the
more appropriate? If so, please explain.
would be limited to rules regarding process under proposed Rules 805 and
Should such notice of non-approval be
corrections of typographical errors, 806 closely parallel the CFTC’s Rules
published on the Commission’s Web
renumbering, periodic routine updates 40.5 and 40.6.387 The Commission
site or otherwise be made publicly
to identifying information about preliminarily believes that allowing SB
available? Would the proposed self-
approved entities and other such non- SEFs to file new rules and rule
certification process in proposed Rule
substantive revisions of a product’s amendments in this manner would
806 be a useful alternative to the prior
terms and conditions that have no effect simplify the filing process and also
approval process for rule changes? Why
on the economic characteristics of the provide the Commission with prompt
or why not?
product.383 Proposed Rule 806(d)(2) access for review. The Commission
intends to propose forms for these Are the proposed grounds for staying
would require SB SEFs to provide to the a certification under proposed Rule
Commission electronically, in a format electronic filings as part of a separate
rulemaking. 806(c) appropriate? If not, why not? Are
to be specified by the Commission, at there other grounds that would also be
least weekly, a summary notice of all D. Request for Comment appropriate for staying a certification?
rule amendments made effective Under proposed Rule 806 (for self-
thereunder.384 Such notice would not be The Commission generally requests
comments on all aspects of the proposed certification), would the 10 business-
required for weeks during which no day review period and, if a stay is put
such actions have been taken. Proposed rules relating to the proposed rule filing
process. Are the Commission’s proposed in place, the 90-day review period be
Rule 806(e) would allow a SB SEF to appropriate timeframes for Commission
implement certain other new rules or rules for the filing process for new rules
and rule amendments appropriate and review and consideration? If not, why
rule amendments without certification not and what would be a better
or notice to the Commission, provided sufficiently clear? If not, why not and
what would be better alternatives? Is it alternative? Please provide support for
that the SB SEF maintains any alternative suggestions.
documentation regarding all changes to preferable to have a rule filing process
for SB SEFs that closely aligns to the Should the 90-day review period,
rules and posts all such rule changes on subsequent to a stay of a certification, in
its Web site.385 These rules and rule process for SEFs under the CFTC’s rules
as proposed? By doing this, would the proposed Rule 806(c) include a 30-day
amendments would be those that public comment period? Why or why
govern: (1) The organization and proposed rules achieve the goal of
streamlining and simplifying the effort not? Is the means for determining
administrative procedures of a SB SEF whether a rule or rule amendment has
to have rules implemented for entities
governing bodies such as a Board, been certified or objected to provided

officers, and committees, but not any of that are both SB SEFs and SEFs? If not,
for in proposed Rule 806(c)(3)
380 See
386 The process for submission of rule filings sufficiently clear? If not, how could
proposed Rule 806(c)(2).
381 See proposed Rule 806(c)(3).
would be the subject of a separate rulemaking. such determination be made more clear?
387 See 17 CFR 40.5 and 40.6. See also Public Law
382 See proposed Rule 806(d). Should the Commission publish notice
111–203, § 745 (amending Section 5c of the
383 See proposed Rule 806(d)(2).
Commodity Exchange Act, 7 U.S.C. 7a–2). See also
of either the effective certification or the
384 See proposed Rule 806(d)(1).
75 FR 67282 (November 2, 2010) (CFTC proposal notice of an objection for the public on
385 See proposed Rule 806(e). to amend 17 CFR 40.5 and 40.6. its Web site or through other means?
Are the proposed processes for Commission definition of ‘‘terms and diligence review of the legal conditions,
providing notice, without a certification, conditions’’ refer to the rights and including legal conditions that relate to
for certain kinds of rule changes in obligations of the counterparties to a SB contractual and intellectual property
proposed Rule 806(d) appropriate? If swap? Should it include such items as: rights, that may materially affect the
not, why not? Are the proposed rule (1) Notional values; (2) relevant dates, trading of the SB swap; (6) a
changes that would be eligible for notice tenor, and day count conventions; (3) certification that the registered SB SEF
without certification in proposed Rule index; (4) relevant prices, rates or posted on its Web site a notice of
806(d) and (e) appropriate? If not, which coupons; (5) currency; (6) stub, pending certification with the
ones should not be eligible for these premium, or initial cash flow Commission and a copy of the
processes? Are there other kinds of rule components along with subsequent life submission, concurrent with the filing
changes that should be eligible for these cycle events; (7) payment and reset of a submission with the Commission;
processes? frequency; (8) business calendars; (9) and (7) a request for confidential
Would an electronic method for accrual type; (10) spread or points; and treatment, if appropriate.
submitting all rule submissions under (11) description of the underlying Pursuant to proposed Rule 807(b),
proposed Rules 805 and 806 be an security or securities or reference upon request of any representative of
appropriate and efficient way of making asset(s)? Should it include other items the Commission, a SB SEF would be
such submissions? If not, why not? that appear in the CFTC’s definition? required to provide any additional
Would an electronic system such as the Are there any other items that should be evidence, information or data
existing system for submitting rule included? Should the ISDA Master demonstrating that the SB swap product
changes by national securities Agreement be referenced in a meets, initially or on a continuing basis,
exchanges and associations, Electronic definition? If so, why and how? all of the requirements of the Exchange
Form 19b–4 Filing System, or Act and its rules.
B. Trading SB Swaps Pursuant to Proposed Rule 807(c) would provide
‘‘EFFS,’’ 388 be a good model for the Certification
system for SB SEF submissions under that the Commission would be able to
these proposed rules? If not, what Proposed Rule 807 would require stay the certification of a SB swap by
would be a better model for such an every SB SEF to comply with certain issuing a notification to the SB SEF
electronic system? submission requirements prior to informing it that the Commission is
trading a SB swap product if such staying the certification and stating the
XXIV. Filing Processes for Trading product has not been approved under grounds for doing so.392 The proposed
Security-Based Swaps proposed Rule 808. Pursuant to rule also would provide that the
A. Introduction proposed Rule 807 every submission certification could be stayed by the
must be filed electronically in a form to Commission on the grounds that the SB
The Commission is proposing to be determined by the Commission and swap presents novel or complex issues,
adopt rules requiring SB SEFs to comply be received by the Commission by the is accompanied by an inadequate
with certain filing processes prior to open of business on the business day explanation, or is potentially
trading SB swaps. Specifically, the preceding the day the SB swap would inconsistent with the Exchange Act or
Commission is proposing new Rules 807 commence trading. In addition, every the Commission’s regulations
and 808 of Regulation SB SEF, which submission would be required to thereunder. Once the Commission
set forth filing processes for include: (1) A copy of the SB swap issues a notification of stay to the
commencement or continued trading of product’s terms and conditions; (2) the registered entity, the Commission would
SB swaps on a SB SEF. The processes intended date on which the SB swap have 90 days to conduct a review. A
proposed under these rules are may begin trading; (3) a certification by stay of a certification may be
substantially similar to the parallel the registered SB SEF that the SB swap appropriate, for example, where a
processes that the CFTC has in its to be traded complies with the Exchange registered entity certifies a SB swap that
existing rules, 17 CFR 40.2 and 17 CFR Act and the rules and regulations raises unique issues not previously
40.3, as modified by the new authority thereunder; (4) the documentation reviewed by Commission staff.
the CFTC has received under Section relied on to establish the basis for Proposed Rule 807(c) would require
745 of the Dodd-Frank Act.389 compliance with the Exchange Act and the Commission to provide a 30-day
The proposed filing processes the rules and regulations thereunder, public comment period within the 90-
pursuant to which a SB SEF may trade including the Core Principles; 391 (5) a day period that the stay is in effect and
a SB swap each require that a SB SEF written statement verifying that the to publish a notice of the 30-day
describe the proposed product’s ‘‘terms registered SB SEF has undertaken a due comment period on the Commission’s
and conditions.’’ The Commission is not Web site.393 Unless the Commission
proposing a definition of ‘‘terms and a swap, specification of cash settlement, and the notifies the SB SEF that it objects to the
conditions,’’ but requests comment on rights and obligations of the counterparties to the
certification within the 90-day period
whether it should adopt a definition of swap. The CFTC’s definition also notes that
whenever possible, all proposed swap terms and on the grounds that the proposed SB
‘‘terms and conditions’’ and, if so, what conditions should conform to industry standards or swap is inconsistent with the Exchange
specifically should such a definition those terms and conditions adopted by comparable Act or the rules or regulations
include.390 Specifically, should a contracts. Further, the CFTC’s definition sets forth
a list of items covered by the phrase ‘‘terms and thereunder, the SB swap would become
388 See Securities Exchange Act Release No.
conditions.’’ effective, pursuant to certification, upon
391 As discussed in note 374 supra, this provision
the expiration of the 90-day review
50486 (October 4, 2004), 69 FR 60287 (October 8,

would require, without limitation, inclusion of period.394 If the Commission decides to
2004) (File No. S7–18–04). documentation relied on to establish the basis for
389 See Public Law 111–203, § 745 (amending
compliance with Section 3D(d)(3) of the Exchange lift the stay prior to the expiration of the
Section 5c of the Commodity Exchange Act, 7 Act and proposed Rule 812 thereunder, which 90-day review period, the Commission
U.S.C. 7a–2). See also 75 FR 67282 (November 2, would require a SB SEF’s swap review committee
2010) (CFTC proposal to amend 17 CFR 40.2 and
would notify the SB SEF of its action
to have determined, after taking into account all of
40.3). the terms and conditions of the SB swap and the
390 The Commission notes that the CFTC, in 17 392 See proposed Rule 807(c)(1).
markets for the SB swap and any underlying
393 See proposed Rule 807(c)(2).
CFR 40.1, defines ‘‘terms and conditions’’ as securities, that a SB swap proposed to be traded is
referring to a description of the security underlying not readily susceptible to manipulation. 394 See proposed Rule 807(c).
and the SB swap would become or distortion.’’ 397 The Commission also basis for compliance with the Exchange
certified at such time.395 preliminarily believes that SB SEFs Act and rules and regulations
The Commission preliminarily should be conducting due diligence thereunder, including the Core
believes that proposed Rule 807, which before listing a new SB swap product. Principles; 399 (3) a written statement
In evaluating any certification, verifying that the registered SB SEF has
closely parallels CFTC proposed new
information on such due diligence undertaken a due diligence review of
Rule 40.2, provides a reasonable process
would be essential to the Commission. the legal conditions, including legal
pursuant to which a SB SEF may trade The Commission preliminarily conditions that relate to contractual and
SB swaps through a certification believes that SB SEFs would make use intellectual property rights, that may
process. Any dually registered SB SEF of the certification process in the same materially affect the trading of the SB
would be following very similar way that registered entities have been swap; (4) if appropriate, a request for
procedures for certification of swaps making use of the parallel process under confidential treatment as permitted
under CFTC proposed new Rule 40.2. the CFTC’s existing rules. The pursuant to the applicable provisions of
The proposed rule would give the Commission understands from CFTC FOIA 400 and applicable Commission
Commission notice of any new SB staff that entities generally use the regulations; 401 and (5) a certification
swaps for which a SB SEF would permit CFTC’s current certification process if that the registered SB SEF has published
trading and would allow the they reasonably believe that the new on its Web site a notice of pending
Commission to stay a proposed SB product does not raise any novel issues request for approval with the
swap’s certification in certain or questions. However, the Commission Commission and a copy of the
circumstances. In addition, because the notes that the proposed certification submission, concurrent with the filing
proposed rule closely parallels the process does not include any final of a submission with the Commission.
CFTC’s proposed rule, it would provide action of the Commission. In cases In addition, under proposed Rule
for greater harmonization of the where a SB SEF desired final agency 808(b), if requested by a representative
regulatory process applied to SEFs and action, Proposed Rule 808 would be of the Commission, a SB SEF would be
SB SEFs. available.398 required to provide additional evidence,
The Commission requests comment information or data that demonstrates
The Commission also preliminarily on all aspects of Proposed Rule 807. Is that the SB swap product meets,
believes that it is appropriate to include the proposed rule text clear? Should a initially and on a continuing basis, all
in any submissions under proposed SB SEF be required to include in its of the requirements of the Exchange Act
Rule 807 documentation demonstrating certification disclosure of whether a and any applicable rules and
that the product is in compliance with proposed product is or is not subject to regulations. Under proposed Rule 808(c)
the SB SEF Core Principles—in mandatory clearing? Should a SB SEF the Commission would approve a new
particular, core principles that apply be required to include additional SB swap product unless the terms and
specifically to products, such as Core information when certifying a new SB conditions of such product were
Principle 3 concerning manipulation. swap product? If so, what additional inconsistent with the Exchange Act or
The Commission preliminarily believes information should be included? Should rules and regulations thereunder.402
that it is appropriate to require a SB SEF the proposed rule enumerate what Under proposed Rule 808(d), all
to document the basis for a additional evidence, information or data products submitted for Commission
determination that a SB swap is not would need to be provided pursuant to approval under the proposed section
readily susceptible to manipulation and proposed paragraph (a) of Rule 807, or would be deemed approved by the
notes that the self-certification in what the time frame for such a request Commission 45 days after receipt by the
proposed Rule 807 is drawn from should be? Is the proposed stay of Commission, or at the conclusion of an
analogous processes that the CFTC certification process clear? Should the extended period as provided under
Commission consider adopting another proposed Rule 808(e), provided that: (1)
currently has in place with respect to
stay procedure? If so, what should that The submission complied with the
new financial futures products proposed
process be? requirements of proposed Rule 808(a);
to be traded on a designated contract
market.396 The Commission further C. Trading SB Swaps Pursuant to and (2) the SB SEF making the
notes that CFTC regulations require that Commission Review and Approval
399 See supra note 374.
prior to trading a new product, a Proposed Rule 808 would permit a SB 400 5 U.S.C. 552.
designated contract market must SEF to request that the Commission 401 17 CFR 200.83.
demonstrate that the terms and approve a SB swap prior to permitting 402 The standard for approval in proposed Rule
conditions of a proposed contract ‘‘will trading of the SB swap, or if a SB swap 808 would differ from the standard for approval in
not be conducive to price manipulation product was initially submitted under proposed CFTC Rule 40.3. Proposed CFTC Rule
40.3 provides that the CFTC shall approve a new
Rule 807, subsequent to commencement swap product unless the terms and conditions of
395 The stay provision in proposed Rule 807(c) is of trading of the SB swap. Under such product ‘‘violate’’ the Commodity Exchange
more similar to the stay provision in proposed Rule proposed Rule 808, a submission Act. See 75 FR 67282 (November 2, 2010) (CFTC
806 and proposed CFTC Rule 40.6 than it is to the requesting approval would be required proposal to amend 17 CFR 40.2–40.5). Notably,
stay provision in proposed CFTC Rule 40.2. proposed CFTC Rule 40.5 provides that the CFTC
Proposed CFTC Rule 40.2 would permit the CFTC to be submitted electronically in a form shall approve an amendment to the terms and
to stay a certification of a SB swap during the to be determined by the Commission conditions of a swap product unless the amended
pendency of a CFTC proceeding for filing a false and include: (1) A copy of the SB swap product would be ‘‘inconsistent’’ with the
certification or during the pendency of a petition to product’s terms and conditions; (2) the Commodity Exchange Act. See id. The Commission
alter or amend the contract terms and conditions believes that it is preferable to have the same
pursuant to Section 8a(7) of the Commodity documentation relied on to establish the standard for approval in proposed Rules 805 and
Exchange Act. The Commission notes that the 808 and therefore proposes that the standard for
Exchange Act does not provide for procedures 397 Id. The Commission understands that the
approval in proposed Rule 808 be the same as the
analogous to those in proposed CFTC Rule 40.2, CFTC expect to propose a similar requirement for standard for proposed CFTC Rule 40.5. The
and thus is proposing it to align proposed Rule 807 SEFs. Commission notes that the proposed standard is
with proposed CFTC Rule 40.2. 398 See infra Section XXIV, discussing trading of similar to the standard for Commission approval of
396 See 17 CFR 40.2, 40.3. See also 17 CFR 40, SB swaps pursuant to Commission review and a proposed rule change filed under Section 19(b)(2)
Appendix A to Part 40—Guideline No. 1. approval. of the Exchange Act. See 15 U.S.C. 78s(b)(2).
submission did not amend the terms principles that apply specifically to product approval be mandatory for
and conditions of the proposed SB swap products, such as Core Principle 3 certain types of SB swaps, as opposed
product or supplement its request for concerning manipulation. The to certification? If so, what products?
approval during that period, except in Commission preliminarily believes that Please be specific. Is the proposed
response to a request by the it is appropriate to require a SB SEF to standard for approval of a SB swap
Commission or for correction of document the basis for a determination appropriate? If not, why not?
typographical errors, renumbering or that a SB swap is not readily susceptible
other non-substantive revisions. In XXV. Discussion of Exemptive
to manipulation and notes that the
addition, under proposed Rule 808(d), Authority Pursuant to Section 36 of the
proposed certification in proposed Rule
any voluntary, substantive amendment Exchange Act and Compliance Matters
808 is drawn from analogous processes
by the SB SEF would be treated as a that the CFTC currently has in place Pursuant to Section 36 of the
new submission. with respect to new financial futures Exchange Act, the Commission may
Under proposed Rule 808(e) the products proposed to be traded on a grant an exemption from any provision
Commission would be able to extend designated contract market.403 The of Section 3D of the Exchange Act, any
the 45-day review period for an Commission further notes that the CFTC rule or any provision of any rule under
additional 45 days, if the proposed SB regulations require that prior to trading Regulation SB SEF, or any provision of
swap product raised novel or complex a new product, a designated contract the definition of ‘‘security-based swap
issues that required additional time for market must demonstrate that the terms execution facility’’ in Section 3(a)(77) of
review. In that event, the Commission and conditions of a proposed contract the Exchange Act and any Commission
would need to notify the SB SEF within ‘‘will not be conducive to price rules regarding such definition to the
the initial 45 day review period and manipulation or distortion.’’ 404 The extent that such exemption is necessary
would need to briefly describe the Commission also preliminarily believes or appropriate in the public interest and
nature of the specific issues. that SB SEFs should be conducting due is consistent with the protection of
Alternatively, the SB SEF could agree to diligence before permitting trading of a investors. Any such exemption could be
any extended review period in writing. new SB swap product. In evaluating any subject to conditions and could be
Under proposed Rule 808(f), the certification, information on such due revoked by the Commission at any time.
Commission could notify the SB SEF at diligence would be essential to the Generally, the Commission would
any time during its review of the Commission. consider entertaining an application for
submission that the Commission will As noted above in the discussion an exemption where the exemption is
not or is unable to approve the proposed concerning self-certification of new SB necessary or appropriate in the public
SB swap product. Such notification swaps, the Commission preliminarily interest and consistent with the
would be required to specify the nature believes that SB SEFs would use the protection of investors. The Commission
of the issues raised by the proposed SB product approval process in instances in its sole discretion would determine
swap product and the specific where they believe novel or difficult whether to grant or deny a request for
provisions of the Exchange Act rules issues are presented and they desire an exemption. In addition, the
and regulations involved. final agency action.
Proposed Rule 808(g) would address Commission could revoke an exemption
The Commission intends to allow at any time, including if a SB SEF could
the effect of non-approval by the
registered SB SEFs to submit filings no longer demonstrate that such
Commission. Under proposed paragraph
under proposed Rules 807 and 808 exemption is necessary or appropriate
(g) notification to a SB SEF of the
electronically through a portal similar to in the public interest, or is consistent
Commission’s determination not to
the electronic rule filing system used for with the protection of investors.
approve a proposed SB swap product
proposed rule changes by national The Commission requests comment
would not prejudice the SB SEF from
securities exchanges and national on all aspects of the exemptive
subsequently submitting a revised
securities associations.405 The authority. Would such exemptive
version of the proposed product for
Commission approval or from Commission preliminarily believes that authority be useful to facilitate the
submitting the product as initially allowing SB SEFs to file new rules and purposes of the Dodd-Frank Act? If so,
proposed pursuant to a supplemented rule amendments in this manner would in what circumstances should the
submission. However, notification to a simplify the filing process and also Commission grant exemptions? Should
SB SEF of the Commission’s refusal to provide the Commission with prompt exemptions only be granted in limited
approve SB swap would be presumptive access for review. The Commission circumstances? Should the Commission
evidence that the entity would not be intends to propose forms for these consider granting exemptions from all
able to truthfully certify under Rule 807 electronic filings as part of a separate rules under Regulation SB SEF or are
that the same, or substantially the same, rulemaking. exemptions only warranted for specific
SB swap complies with the Exchange The Commission requests comment rules or specific entities? For example,
Act or the rules thereunder. on all aspects of proposed Rule 808. Is should exemptions only be available
As with proposed Rule 807, proposed the process required by proposed Rule with respect to certain Core Principles?
Rule 808 is substantially similar to the 808 clear? If not, what elements of the Should the Commission consider
applicable CFTC proposed rule, new process need to be added to the granting exemptions from all provisions
proposed Rule 40.3. The Commission proposed rule? Under what of Section 3(a)(77) of the Exchange Act,
believes that this approach would allow circumstances would a SB SEF that had or should exemptions only be available
dually registered entities to more easily already certified a new SB swap product with respect to certain aspects of the
comply with applicable rules and request approval of the product definition of ‘‘security-based swap
regulations. The Commission expects pursuant to the proposed rule? Should execution facility?’’ What specific
that the SB SEF would include in its 403 See 17 CFR 40.2, 40.3. See also 17 CFR 40,
factors should the Commission consider
submission all documentation relied Appendix A to Part 40—Guideline No. 1.
in determining whether to grant an
upon to determine that the new product 404 Id. exemption? Are there cases where
complies with applicable core 405 The process for submission of rule filings will exemptions may not be appropriate and
principles—in particular, core be the subject of a separate rulemaking. should not be considered?
The Commission acknowledges that it obligations? If so, how long of a delay particularly at the outset of trading of
may take a period of time, as well as would be appropriate? SB swaps on registered SB SEFs? Are
require the expenditure of resources, for The Commission notes that, under the there other conditions that should be
an SB SEF to implement a number of proposed rules, it would have the considered in any Commission
the requirements set forth in proposed authority to temporarily register a SB determination that a SB SEF need not
Regulation SB SEF, should those SEF and, under proposed Regulation SB comply with certain provisions of SB
requirements be part of any final rules SEF, a temporarily registered SB SEF SEF and, if so, what are those
the Commission may adopt. A potential would need to comply with Regulation conditions? In lieu of granting
SB SEF would not be able to determine SB SEF, including the rules exceptions from certain proposed rules
the final rules governing SB SEFs with implementing the Core Principles. under certain conditions on an omnibus
which it would need to comply until the Should a phased-in compliance basis, should the Commission instead
Commission adopts those rules. While approach apply only with respect to consider granting exemptions from the
the Commission is committed to those SB SEFs that are temporarily provisions of Regulation SB SEF on a
registered with the Commission? Should case-by-case basis?
implementing Congress’s directive to
phased-in compliance be built into the
require SB SEFs to register with the XXVI. General Request for Comments
temporary registration process?
Commission and comply with the Core The Commission seeks comment on
Alternatively, should the Commission
Principles, the Commission understands consider using its Section 36 exemptive the proposed interpretation of the
that some or all potential SB SEFs may authority to exempt SB SEFs from definition of SB SEF; creation of a
need a period of time in which to certain of the requirements of registration framework for SB SEFs; and
acquire or configure the necessary Regulation SB SEF on a case-by-case establishment of rules with respect to
systems, engage and train the necessary basis? If commenters favor a phased-in the Dodd-Frank Act requirement that a
staff, and develop and implement the compliance approach for certain SB SEF must comply with the
necessary policies and procedures in proposed rules, they should provide enumerated fourteen Core Principles
order to comply with any final rules that specific recommendations, a rationale and enforce compliance with those
the Commission may adopt. for each such recommendation, and the principles. The Commission particularly
The Commission requests comment as conditions under which any such requests comment on possible
to whether it should provide a SB SEF phased-in approach should be granted. alternatives to the proposals in this
a certain amount of time to comply with The Commission also seeks comment release. The Commission also seeks
the proposed requirements of on whether it is necessary or comments on the general impact the
Regulation SB SEF applicable to a appropriate for SB SEFs that do not proposals would have on the market for
registered SB SEF once the SB SEF has meet certain objective thresholds, such SB swaps.
as a trading or volume threshold, to The Commission invites commenters
become registered, and, if so, which
comply with all of the requirements of to address whether the proposed rules
provisions, why, and how much time
proposed Regulation SB SEF. To avoid are appropriately tailored to achieve the
should be provided. For example,
unnecessary barriers to entry that could goal of transparency, competition, and
proposed Rule 820 relates to the fair efficiency in the SB swap market,
preclude small SB SEFs from entering
representation of participants on the SB including with respect to the
this market and better facilitate
SEF’s Board. Should the Commission administration of the SB SEFs’
competition and innovation in the SB
provide for a delayed compliance date swap markets that could be used to regulatory activities. The Commission
for this provision to allow the SB SEF promote more efficient trading in also requests comment on the necessity
sufficient time to establish the requisite organized, transparent and regulated and appropriateness of mandating the
procedures relating to the election of venues, would it be necessary or proposed requirements set forth in this
fair representation candidates, including appropriate to except an SB SEF from release. The Commission seeks
through a petition process, and to align certain requirements of proposed comment on the proposals as a whole,
compliance with the date of its election Regulation SB SEF under certain including their interaction with the
of other directors? 406 Should the conditions, e.g., if the SB SEF does not other provisions of the Dodd-Frank Act.
Commission consider a delayed reach a specified volume or liquidity The Commission further seeks comment
compliance date for the CCO’s annual threshold with respect to the trading of on whether the proposals would help
report required by proposed Rule 823, SB swaps. For example, should a SB achieve the broader goals of increasing
for example, if the SB SEF’s fiscal year SEF be excepted from provisions of transparency and accountability in the
ended shortly after the SB SEF’s proposed Rule 816 regarding emergency SB swap market.
registration application was approved authority and proposed Rule 822 Commenters should, where possible,
by the Commission? Are there other regarding systems safeguards if the SB provide the Commission with empirical
proposed rules or provisions of such SEF does not reach a specified volume data to support their views. Commenters
rules for which a SB SEF should be or liquidity threshold with respect to suggesting alternative approaches
provided more time to comply after the trading of SB swaps? Are there should provide comprehensive
becoming registered? If so, which ones circumstances when it would be proposals, including any conditions or
and under what conditions should the burdensome for a SB SEF to undertake limitations that they believe should
Commission permit a delayed electronic surveillance of SB swaps, e.g., apply; the reasons for their suggested
compliance date? For example, would it if the SB SEF had a low threshold of approaches; and their analysis regarding
be appropriate to delay the date for an trading in SB swaps? In that case, would why their suggested approaches would
SB SEF to comply with the automated it be appropriate to except the SB SEF satisfy the statutory mandate contained
surveillance requirements of proposed from the automated surveillance in Section 763 of the Dodd-Frank Act.
Rule 813, as long as the SB SEF had requirements of proposed Rule 813, as In considering the proposal, the
other means to satisfy its surveillance long as the SB SEF had other means to Commission requests that commenters
satisfy its surveillance obligations? How consider not only each individual
406 See Regulation MC Proposing Release, supra should any low volume or other proposal contained in proposed
note 82. liquidity-based exception be measured, Regulation SB SEF but also the totality
of the Commission’s proposals relating Commission and CFTC approaches to Commission is submitting the proposed
to SB SEFs, including the proposed the regulation of SB SEFs and SEFs. collection of information to the Office of
interpretation of the definition of SB Specifically, do the regulatory Management and Budget (‘‘OMB’’) for
SEF, the proposed rules relating to SB approaches under the Commission’s review in accordance with 44 U.S.C.
SEFs, and the proposed registration proposed rulemaking pursuant to 3507 and 5 CFR 1320.11. The title of the
requirements for SB SEFs. Do the Section 763 of the Dodd-Frank Act and new collection of information is
proposed interpretation of the definition the CFTC’s proposed rulemaking Regulation SB SEF. As proposed,
of SB SEF and proposed Regulation SB pursuant to Section 733 of the Dodd- Regulation SB SEF would implement
SEF in their entirety provide an efficient Frank Act result in duplicative or the provisions of Title VII of the Dodd-
and effective way to implement the inconsistent efforts on the part of market Frank Act relating to the registration
requirements of the Dodd-Frank Act participants subject to both regulatory and regulation of SB SEFs. Proposed
relating to SB SEFs? Are the proposed regimes or result in gaps between those Regulation SB SEF would include rules
interpretation of the definition of SB regimes? If so, in what ways do regarding the registration of a
SEF and proposed Regulation SB SEF in commenters believe that such prospective SB SEF on Form SB SEF,
their entirety properly tailored so that a duplication, inconsistencies, or gaps rule-writing, reporting, recordkeeping,
SB SEF can meet the proposed should be minimized? Do commenters timely publication of trading
regulatory requirements and yet be an believe the approaches proposed by the information, the filing of new or
economically viable business? Are there Commission and the CFTC to regulate amended rules or new products with the
aspects of the Commission’s proposals SB SEFs and SEFs are comparable? If Commission, reports of the SB SEF’s
relating to the regulation of SB SEFs not, why? Do commenters believe there CCO, surveillance systems to capture
that, when viewed as a whole, are too are approaches that would make the certain required information and access
burdensome, especially in light of the regulation of these facilities more to SB SEFs by ECPs.410 An agency may
nascent stage of the SB swap market? If comparable? If so, what are those not conduct or sponsor, and a person is
so, what are those features and are there approaches? Do commenters believe not required to respond to, a collection
ways in which they can be revised? that it would be appropriate for the of information unless it displays a
With respect to the proposed rules to Commission to adopt an approach currently valid OMB control number.
implement the Core Principles, proposed by the CFTC that differs from
commenters are invited to consider, in the Commission’s proposal? If so, which A. Summary of Collection of
addition to the costs of each proposed one? The Commission requests Information
rule, the totality of the costs of all of the commenters to provide data, to the 1. Registration Requirements for SB
proposed rules taken as a whole. Are extent possible, supporting any such SEFs and Form SB SEF
there any instances in which aspects of suggested approaches.
the Commission’s proposals should not The Commission seeks comment on A number of the proposed rules under
apply? For example, should a system or whether its proposed rules, either Regulation SB SEF relate to registration
platform that otherwise would meet the individually or collectively, could with the Commission by an applicant
proposed interpretation of the definition permit regulatory arbitrage or have the that seeks status as a registered SB SEF.
of SB SEF, but that does a minimal effect of driving SB swaps and other Proposed Rules 801, 802, 803, 804, and
business in the SB swap market, be derivatives transactions to financial proposed Form SB SEF each would
exempt from all or some of the centers in other jurisdictions. In this contain requirements relating to
requirements of Regulation SB SEF regard, how do the proposed rules registration with the Commission by an
either temporarily or permanently? In compare with comparable existing or applicant seeking to register as a SB SEF
general, are there additional steps that proposed rules of other jurisdictions? If that would result in a paperwork
the Commission could take that would the Commission were to adopt the burden.
implement the requirements of the proposed rules, would market Proposed Rule 801(a) would require
Dodd-Frank Act that apply to SB SEFs participants, end users, and others find an applicant to apply for registration
and at the same time allow the SB swap it less costly to transact their SB swaps with the Commission as a SB SEF by
market to continue to develop? and other derivatives transactions in filing electronically, in a tagged data
Title VII of the Dodd-Frank Act other jurisdictions? If so, please provide format, a registration application on
requires that the SEC consult and specific details on those jurisdictions Form SB SEF in accordance with the
coordinate to the extent possible with that could be regarded as having instructions contained therein. Under
the CFTC for the purposes of assuring preferential regulation for trading SB proposed Rule 801(d), an applicant
regulatory consistency and swaps and please identify all the would be required to designate and
comparability, to the extent possible,407 specific rules and circumstances that authorize on Form SB SEF an agent in
and states that in adopting rules, the could lead to such preferences. The the United States to accept notice or
CFTC and SEC shall treat functionally Commission also seeks comment on service of process, pleadings, or other
or economically similar products or specific actions that it could take to documents in any suit, action or
entities in a similar manner.408 harmonize its proposed rules with those proceedings brought against it to enforce
The CFTC is adopting rules relating to of other jurisdictions consistent with the the Federal securities laws or the rules
SEFs as required under Section 733 of mandates and goals of the Dodd-Frank or regulations thereunder. Under
the Dodd-Frank Act. Understanding that Act.
410 As proposed, Regulation SB SEF would
the Commission and the CFTC regulate
different products and markets, and as XXVII. Paperwork Reduction Act contain 24 rules that are designated Rule 800
through Rule 823 inclusive; not all of these
such, appropriately may be proposing Certain provisions of the proposed proposed rules would include a collection of
alternative regulatory requirements, the rules contain new ‘‘collection of information. The proposed form for registering as a
Commission requests comments on the information’’ requirements within the SB SEF under Regulation SB SEF is Form SB SEF.
meaning of the Paperwork Reduction This collection of information includes any
impact of any differences between the collections of information required by proposed
Act of 1995 (‘‘PRA’’).409 The Form SB SEF. Unless identified otherwise, all
407 See Public Law 111–203, § 712(a)(2). proposed rules referred to in this section would be
408 See Public Law 111–203, § 712(a)(7). 409 44 U.S.C. 3501 et seq. contained in Regulation SB SEF.
proposed Rule 801(e), an applicant that SB SEF, or impacts the Commission’s at a minimum, to: (1) Be a member of,
is controlled by any other person 411 ability to inspect and examine any such or have an arrangement with a member
would be required to certify on Form SB person with respect to the activities of of, a registered clearing agency to clear
SEF and provide an opinion of counsel the SB SEF. Proposed Rule 802(d) trades in the SB swaps that are subject
that any person that controls such SB would require a non-resident SB SEF to to mandatory clearing and entered into
SEF will consent to and can, as a matter file an amendment to Exhibit P on Form by the participant on the SB SEF; (2) (i)
of law, provide the Commission with SB SEF within 5 business days after any meet the minimum financial
prompt access to its books and records, changes in the legal or regulatory responsibility and recordkeeping and
to the extent such books and records are framework that would impact the SB reporting requirements imposed by the
related to the activities of the SB SEF, SEF’s ability to or the manner in which Commission by virtue of its registration
and submit to onsite inspection and it provides the Commission with as a SB swap dealer, major SB swap
examination by representatives of the prompt access to its books and records participant, or broker; or (ii) in the case
Commission with respect to the or impacts the Commission’s ability to of an eligible contract participant, meet
activities of the SB SEF. Under inspect and examine the SB SEF. the recordkeeping and reporting
proposed Rule 801(f), a non-resident Proposed Rule 802(f) would require a requirements that the SB SEF would
person applying for registration would SB SEF to file an annual update to Form establish pursuant to proposed Rule
be required to certify on Form SB SEF SB SEF within 60 days of the end of its 813; (3) agree to comply with the rules,
and provide an opinion of counsel that fiscal year. polices, and procedures of the SB SEF;
it can, as a matter of law, provide the Proposed Rule 803(a) would require a and (4) consent to the disciplinary
Commission with prompt access to its registered SB SEF to provide to the procedures of the SB SEF for violations
books and records and submit to onsite Commission material relating to the of the SB SEF’s rules.
inspection and examination by trading of SB swaps (including notices, Proposed Rule 810(b) would require a
representatives of the Commission. In circulars, bulletins, lists, and SB SEF to establish: (1) Rules that
addition, proposed Rule 814(b)(4) periodicals) issued or made generally provide for the equitable allocation of
would require the applicant to certify at available to SB SEF participants. If the reasonable dues, fees, and other charges
the time of registration on Form SB SEF information required to be filed among its participants and any other
that the SB SEF has the capacity to pursuant to proposed Rule 803(a) is users of its system; (2) rules and systems
fulfill its obligations under international available continuously on an Internet that are not designed to permit unfair
information sharing agreements to Web site controlled by a SB SEF, discrimination among participants and
which it is a party as of the date of such proposed Rule 803(b) would allow the any other users of the SB SEF’s system;
certification. SB SEF to indicate the location of the (3) rules that promote just and equitable
Proposed Rule 802 relates to Web site where the information may be principles of trade; and (4) rules to
amendments to Form SB SEF. Proposed found and certify that the information provide, in general, a fair procedure for
Rule 802(a) would require a SB SEF to available at such Web site is accurate as disciplining participants for violations
file an amendment to Form SB SEF of its date in lieu of filing such of the rules of the SB SEF.
promptly, but in no case later than 5 information with the Commission Proposed Rule 811(a)(2) would
business days, after the discovery that pursuant to proposed Rule 803(a). require a SB SEF to establish and
any information filed on Form SB SEF, Proposed Rule 804(a) would allow a enforce trading, trade processing, and
any statement therein, or any exhibit or SB SEF to withdraw from registration by participation rules that would deter
amendment thereto, was inaccurate filing with the Commission a written abuses and have the capacity to detect,
when filed. Proposed Rule 802(b) would notice of withdrawal and an amended investigate, and enforce those rules,
require a SB SEF to file an amendment, Form SB SEF to update any inaccurate including means to provide market
on Form SB SEF, within 5 business days information. participants with impartial access to the
after any action is taken that renders Proposed Rules 811(b)(4) and market and to capture information that
inaccurate, or causes to be incomplete, 811(h)(2) would require a SB SEF to may be used in establishing whether
information filed on the Execution Page report information regarding grants, rule violations have occurred. Proposed
of the Form SB SEF or as part of denials and limitations of access on Rule 811(a)(3) would require a SB SEF
Exhibits C, E, G or N,412 or any Form SB SEF and to disclose all to establish rules governing the
amendments thereto. Proposed Rule disciplinary actions taken annually on operation of the SB SEF, including rules
802(c) would require a SB SEF that is its annual update to From SEF, specifying trading procedures to be used
controlled by any other person to file an respectively. in entering and executing orders traded
amendment to Exhibit P on Form SB or posted on the SB SEF, including
2. Rule-Writing Requirements for SB block trades. Proposed Rule 811(b)(1)
SEF within 5 business days after any SEFs
changes in the legal or regulatory would require a SB SEF to establish fair,
framework of any person that controls A number of the proposed rules under objective and not unreasonably
the SB SEF that would impact the Regulation SB SEF would require a SB discriminatory standards for granting
ability of or the manner in which any SEF to establish rules, policies and impartial access to trading on the SB
such person consents to or provides the procedures with respect to various SEF. Proposed Rule 811(b)(5) would
Commission prompt access to its books matters. These are proposed Rules require a SB SEF to establish a fair
and records, to the extent such books 809(c), 810(b), 811(a)(2), 811(a)(3), process for the review of any
and records relate to the activities of the 811(b)(1), 811(b)(5), 811(c), 811(d), prohibition or limitation on access with
811(f), 811(g), 811(i), 813(a), 813(c), respect to a participant or any refusal to

411 See supra note 319 and accompanying text 813(d), 814(a), 815(a), 816(a), 816(b), grant access with respect to an
regarding the definition of ‘‘control.’’ 818(d), 820(a), 820(c) and 822(a)(1). applicant. Proposed Rule 811(c) would
412 These Exhibits pertain to the list of officers, Proposed Rule 809(c) would require a require a SB SEF to establish rules
directors and committees of the SB SEF (Exhibit C); SB SEF to establish rules setting forth concerning the terms and conditions of
ownership of the SB SEF (Exhibit E); certain
material operating agreements (Exhibit G); and
requirements for an eligible person to the SB swaps traded on the SB SEF and
criteria for determining what securities may be become a participant in the SB SEF. to have rules stipulating the method by
traded (Exhibit N). Such rules would require a participant, which representation on the swap
review committee of the SB SEF shall be such that each sanction is settlement of SB swaps pursuant to new
chosen by the Board. commensurate with the corresponding section 3C(a)(1) of the Exchange Act.
Proposed Rule 811(d) would require a violation; and establishing fair and non- Proposed Rule 816(a) would require a
SB SEF to establish rules governing the arbitrary procedures for any disciplinary SB SEF to establish rules and
procedures for trading on the SB SEF process and appeal thereof. procedures to provide for the exercise of
including, but not limited to: (1) Doing Proposed Rule 811(i) would require a emergency authority in consultation or
business on the SB SEF; (2) the types of SB SEF to establish rules and cooperation with the Commission as
trading interest 413 that would be procedures to assure that information to necessary or appropriate. Proposed Rule
available on the SB SEF; (3) the manner be used to determine whether rule 816(b) would require a SB SEF to
in which trading interest would be violations have occurred is captured establish rules and procedures that
handled on the SB SEF and a and retained in a timely manner. would specify: (1) The person or
requirement for fair treatment of all Proposed Rule 813(a) would require a persons authorized by the SB SEF to
trading interest; (4) the manner in which SB SEF to establish and enforce rules or declare an emergency; (2) how the SB
price transparency for participants terms and conditions defining, or SEF would notify the Commission of its
entering trading interest into the system specifications detailing trading decision to exercise its emergency
would be promoted; (5) the manner in procedures to be used in entering and authority; (3) how the SB SEF would
which trading interest and transaction executing orders traded on or through notify the public of its decision to
data would be disseminated, whether to the facilities of the SB SEF and exercise its emergency authority; (4) the
the SB SEF’s participants or otherwise, procedures for trade processing of SB processes for decision making by the SB
and whether for a fee or otherwise; (6) swaps on or through the facilities of the SEF personnel with respect to the
prohibited trading practices; (7) the SB SEF. Proposed Rule 813(c) would exercise of emergency authority,
prevention of the entry of orders, require a SB SEF to establish rules including alternate lines of
requests for quotations, responses, requiring any participant that enters any communication and guidelines to avoid
quotations, or other trading interest that order or trading interest or executes any conflicts of interest in the exercise of
might result in a trade that is clearly transaction on the SB SEF to maintain such authority; and (5) the processes for
erroneous with respect to the terms of books and records of any such trading determining that an emergency no
the trade, a fair and non-discriminatory interest or transaction and of any longer exists and notifying the
manner of handling any trade that is Commission and the public of such
position in any SB swap that is the
clearly erroneous, and resolution of any decision.
result of any such trading interest or
disputes concerning a clearly erroneous Proposed Rule 818(d) would require a
transaction and to provide prompt SB SEF to establish, maintain, and
trade; (8) trading halts in any SB swap, access to such books and records to the
which rules would be required to enforce written policies and procedures
SB SEF and to the Commission. to verify the accuracy of the transaction
include procedures for halting trading Proposed Rule 813(d) would require a
in a SB swap when trading has been data that it collects and reports.
SB SEF to establish and maintain Proposed Rule 820(a) would require
halted or suspended in the underlying procedures to investigate possible rule the rules of a SB SEF to assure fair
security or securities pursuant to the violations, to prepare reports concerning representation of participants in the
rules or an order of a regulatory the findings and recommendations of selection of the SB SEF’s Board.
authority with authority over the investigations, and to take corrective Proposed Rule 820(c) would require the
underlying security or securities; (9) the action, as necessary. rules of a SB SEF to include a fair
manner in which block trades would be Proposed Rule 814(a) would require a process for participants to nominate an
handled, if different from the handling SB SEF to establish and enforce rules alternative candidate or candidates to
of non-block trades; and (10) any other requiring its participants 414 to furnish the Board by petition.
rules concerning trading on the SB SEF. to the SB SEF, upon request, and in the Proposed Rule 822(a)(1) would
Proposed Rule 811(f) would require a form and manner prescribed by the SB require a SB SEF, with respect to those
SB SEF to establish rules concerning the SEF, any information necessary to systems that support or are integrally
reporting of trades executed on the SB permit the SB SEF to perform its related to the performance of its
SEF to a clearing agency if the responsibilities, including, without activities, to establish, maintain, and
transaction is subject to clearing and the limitation, surveillance, investigations, enforce written policies and procedures
procedures for the processing of examinations and discipline of reasonably designed to ensure that its
transactions in SB swaps that occur on participants; such information may systems provide adequate levels of
or through the SB SEF including, but include, without limitation, financial capacity, resiliency, and security. These
not limited to, procedures to resolve any information, books, accounts, records, policies and procedures would, at a
disputes concerning the execution of a files, memoranda, correspondence, and minimum, require the security-based
trade. any other information pertaining to swap execution facility to: (1) Establish
Proposed Rule 811(g) would require a trading interest entered and transactions reasonable current and future capacity
SB SEF to establish rules and executed on or through the SB SEF, and estimates, including quantifying in
procedures concerning the disciplining to cooperate with and allow access by appropriate units of measure the limits
of participants including, but not the SB SEF and representatives of the of the SB SEF’s capacity to receive (or
limited to, rules authorizing its staff to Commission. collect), process, store or display (or
recommend and take disciplinary action disseminate for display or other use) the
Proposed Rule 815(a) would require a
for violations of the rules of the SB SEF; data elements included within each
SB SEF to establish and enforce rules
specifying the sanctions that may be function, and identifying the factors
and procedures for ensuring the
imposed upon participants for (mechanical, electronic, or other) that
financial integrity of SB swaps entered
violations of the rules of the SB SEF account for the current limitations; (2)
on or through the facilities of such SB
413 For purposes of this PRA, references to
SEF, including the clearance and conduct periodic capacity stress tests of
‘‘trading interest’’ includes any order, request for
critical systems to determine such
quotation response, quotation, or any other trading 414 See supra note 227 and accompanying text systems’ ability to process transactions
interest on the SB SEF. regarding the definition of ‘‘participant.’’ in an accurate, timely, and efficient
manner; (3) develop and implement Proposed Rule 814(b) would direct a SB of when the outage occurred a written
reasonable procedures to review and SEF to allow access by any Commission description and analysis of the outage
keep current its system development representative to examine the SB SEF’s and any remedial measures that have
and testing methodology; (4) review the books and records and to obtain or been implemented or are contemplated.
vulnerability of its systems and data verify information related to trading Proposed Rule 822(a)(4) would require a
center computer operations to internal interest entered or transactions executed SB SEF to notify the Commission in
and external threats, physical hazards, on or through the SB SEF. Proposed writing at least thirty calendar days
and natural disasters, and; (5) establish Rule 814(b)(3) would require a SB SEF before implementation of any planned
adequate contingency and disaster to have the capacity to carry out such material systems changes.
recovery plans which shall include international information-sharing
plans to resume trading of security- agreements as the Commission may 4. Recordkeeping Required Under
based swaps by the SB SEF no later than require. Regulation SB SEF
the next business day following a wide- Proposed Rule 816(d) would require a Proposed Rule 818(a) would require a
scale disruption. SB SEF to notify the Commission SB SEF to keep and preserve at least one
promptly of any exercise of its copy of all documents, including all
3. Reporting Requirements for SB SEFs emergency authority, and within two correspondence, memoranda, papers,
A number of the proposed rules under weeks following cessation of an books, notices, accounts, and other such
Regulation SB SEF would require SB emergency, submit to the Commission a records, including the audit trail records
SEFs, SB SEF participants and other report explaining the basis for declaring required pursuant to proposed Rule
persons to report or provide information an emergency, how conflicts of interest 818(c), as shall be made and received in
to the Commission or to a SB SEF. were minimized in the SB SEF’s the conduct of its business. Proposed
Proposed Rules 814, 816(d), 818(a)(3), exercise of its emergency authority, and Rule 818(b) would require SB SEFs to
818(e), 818(f), 822(a)(2), 822(a)(3), and the extent to which the SB SEF keep and preserve such documents and
822(a)(4) each would contain a reporting considered the effect of its emergency other records for a period of not less
requirement.415 These requirements to action on the markets for the SB swap than five years, the first two years in an
report or provide information to the and any security or securities easily accessible place. Proposed Rule
Commission would result in a underlying the SB swap. 818(c) would require SB SEFs to
paperwork burden. Proposed Rule 818 would establish establish and maintain accurate, time-
Proposed Rule 814 addresses the both recordkeeping and reporting sequenced records of all trading interest
ability of a SB SEF to obtain information obligations for SB SEFs. Proposed Rule and transactions received by, originated
from its participants, and the ability of 818(e) would require a SB SEF to report on, or executed on the SB SEF. In
Commission representatives to obtain to the Commission such information as addition, proposed Rule 811(b)(3)
information from a SB SEF and its the Commission may, from time to time, would require that a SB SEF make and
participants. Proposed Rule 814(a) determine to be necessary to perform keep records relating to all grants of
would require a SB SEF to establish and the duties of the Commission under the access and the basis for such grant, and
enforce rules requiring its participants Exchange Act. Proposed Rule 818(f) all denials or limitations of access to the
to provide information or documents to would require a SB SEF to provide to SB SEF and the reasons for such denial
the SB SEF upon request. The any representative of the Commission, or limitation. Proposed Rule 811(h)
information or documents requested upon request, copies of documents would require a SB SEF to make and
may include any information that is required to be kept and preserved keep records relating to all disciplinary
necessary to permit the SB SEF to pursuant to the recordkeeping proceedings, sanctions imposed, and
perform its regulatory responsibilities, requirements of proposed Rules 818(a) appeals thereof.417
including, without limitation, any and (b).
financial information, books, accounts, Proposed Rule 822 addresses system 5. Timely Publication of Trading
records, files, memoranda, safeguards for the SB SEF. Proposed Information Requirement for SB SEFs
correspondence, and any other Rule 822(a)(2) would require a SB SEF
Proposed Rule 817(a)(1) would
information pertaining to trading to submit to the Commission on an
require a SB SEF to have the capacity
interest entered and transactions annual basis an objective review with
to electronically capture, transmit, and
executed on or through the SB SEF. respect to those systems that support or
disseminate information on price,
Proposed Rule 814(a) also would direct are integrally related to the performance
trading volume, and other trading data
a SB SEF to require its participants to of the SB SEF’s activities. If the
on all SB swaps executed on or through
allow access by any Commission objective review is performed by an
the SB SEF.418
representative to examine the internal department, an objective,
participant’s books and records and to external firm would be required to 417 The records required by proposed Rules
obtain or verify information related to assess the internal department’s 811(b)(3) and 811(g) would be included in the
trading interest entered or transactions objectivity, competency, and work business records required to be kept pursuant to
performance. Proposed Rule 822(a)(3) proposed Rule 818. Therefore, the Commission
executed on or through the SB SEF.416 preliminarily believes that the paperwork burden
would require a SB SEF to promptly for these rules would be included in the estimated
415 In addition, proposed Rule 823 would require notify the Commission in writing of burden for proposed Rule 818. See infra note 493
the SB SEF’s CCO to submit to the Commission an material systems outages and any and accompanying text.
annual compliance report, along with a financial remedial measures implemented or 418 Proposed Rule 817(a)(2) requires every SB SEF
report. The paperwork burden associated with the to make public timely information on price, trading
CCO’s reports, including for proposed Rules
contemplated and submit to the
volume, and other trading data on SB swaps to the
811(b)(4) and 811(g), and 814(b) that set forth Commission within five business days extent required by the Commission. The
certain items to be addressed in the CCO’s reports, Commission notes that proposed Rule 817(a)(2)
is addressed separately in Section XXVII.A.7., transaction on the SB SEF to provide the does not require a SB SEF to make public timely
below. Commission with prompt access to its books and information on price, trading volume, and other
416 The Commission notes that proposed Rule records. The Commission considers the prompt trading data on SB swaps. Rather, the Commission
813(c)(2) similarly requires a SB SEF to establish access requirement of proposed Rule 813(c)(2) to be has proposed that other parties be responsible for
and enforce rules that require any participant that included in the burden estimates of proposed Rule timely publication of trading information. See
enters any trading interest or executes any 814(a) for purposes of this PRA analysis. Reporting and Dissemination Release supra note 6.
6. Rule Filing and Product Filing into the rule (or, with respect to a self- Product Filings: Proposed Rules 807
Processes for SB SEFs certification filing under Rule 806(a), a and 808 would require a SB SEF to
Proposed Rules 805 and 806 relate to statement that no such opposing views submit product filings prior to trading a
the submission to the Commission of were expressed, if applicable); (6) a SB swap. Under proposed Rules 807(a)
filings of new or amended rules, while request for confidential treatment, if and 808(a), a SB SEF could submit
proposed Rules 807 and 808 relate to appropriate; and (7) for proposed either a self-certified product
the submission to the Commission of amendments to a product’s terms and submission or voluntary request for
filings to make SB swap products conditions, a written statement that the prior approval product filing,
available to trade. Proposed Rules 805, SB SEF has undertaken a due diligence respectively, before trading a SB swap.
806, 807, and 808 would impose a review of the legal conditions, including Under both proposed rules, a SB SEF
collection of information burden on SB conditions relating to contractual and would be required to submit the product
SEFs.419 intellectual property rights, that may filings electronically to the Commission
Rule Filings: Proposed Rules 805 and materially affect the trading of the in a format specified by the
806 would require a SB SEF to submit product. Commission. Both proposed Rules
rule filings for new rules or rule In addition, for voluntary requests for 807(a) and 808(a) would require SB
amendments, including changes to an prior approval rule filings, proposed SEFs to include the following
existing product’s terms or Rule 805(a) would also require SB SEFs information in the product filings: (1) A
conditions.420 Under proposed Rules to include: (1) A description of any copy of the SB swap’s terms and
805(a) and 806(a), a SB SEF could action taken or anticipated to be taken conditions, (2) the documentation relied
to adopt the proposed rule by the SB on to establish the basis for compliance
submit either a voluntary request for
SEF or its Board, or by any committee with the Exchange Act and rules and
prior approval or a self-certified rule
thereof, and a citation to the rules of the regulations thereunder (including
filing, respectively, for any new rules or
SB SEF that authorize the adoption of Section 3D(d) of the Exchange Act and
rule amendments. Under both proposed
the proposed rule change; (2) an the rules and regulations thereunder);
rules, a SB SEF would be required to
explanation of the operation, purpose (3) a written statement verifying that the
submit the rule filings electronically to
and effect of the proposed new rule or SB SEF has undertaken a due diligence
the Commission in a format to be
rule amendment, including, as review of the legal conditions, including
specified by the Commission.421 Both
applicable, a description of the legal conditions that relate to
proposed Rules 805(a) and 806(a) would
anticipated benefits to market contractual and intellectual property
require the SB SEF to include the
participants or others, any potential rights, that may materially affect the
following information in the requisite trading of the SB swap; (4) a request for
rule filings: (1) The text of the proposed anticompetitive effects on market
participants or others, and how the rule confidential treatment, if appropriate;
rule or rule amendment (in the case of and (5) a certification that the SB SEF
a rule amendment, deletions and fits into the SB SEF’s framework of
regulation; (3) any additional has published on its Web site a notice
additions would need to be indicated); of pending request for approval, or a
(2) the proposed effective date or information that may be beneficial to
notice of pending certification, as
intended date of implementation, as the Commission in analyzing the new
applicable, and a copy of the
applicable; (3) the documentation relied rule or rule amendment (and if the
submission, concurrent with the filing
on by the SB SEF to establish the basis proposed rule affects, directly or
of the submission with the Commission.
for compliance with the applicable indirectly, the application of any other
In addition, for self-certification product
provisions of the Exchange Act and the rule of the SB SEF, the pertinent text of
filings, proposed Rule 807(a) also would
rules and regulations thereunder any such rule must be set forth and the
require a SB SEF to include the
(including Section 3D(d) of the anticipated effect described); and (4)
following information: (1) The intended
Exchange Act and the rules and and the identification of any
date on which the SB swap may begin
regulations thereunder); (4) a Commission rule or regulation that
trading, and (2) a certification by the SB
certification or written statement, as Commission may need to amend or SEF that the SB swap to be traded
applicable, that the SB SEF has interpret in order to approve the new complies with the Exchange Act and the
published a notice of pending new rule rule or rule amendment and, to the rules and regulations thereunder,
or rule amendment, or a notice of extent that such an amendment or including Section 3D(d) of the Exchange
pending certification, as applicable, on interpretation is necessary to act and the rules and regulations
the SB SEF’s Web site and a copy of the accommodate the new rule or rule thereunder.
submission, concurrent with its filing amendment, a reasoned analysis In addition, proposed Rules 807(b)
with the Commission; (5) a description supporting the proposed amendment or and 808(b) would require a SB SEF to
of any substantive opposing views on interpretation. provide, upon request of any
the rule that were expressed to the SB For self-certification rule filings, representative of the Commission,
SEF by the Board or committee proposed Rule 806(a) also would require additional evidence, information, or
members, participants or market a SB SEF to include: (1) A certification data that demonstrates that the SB swap
participants that were not incorporated by the SB SEF that the rule complies meets, initially or on a continuing basis,
with the Exchange Act and Commission all of the requirements of the Exchange
419 The Commission expects to conduct a separate rules and regulations thereunder; and Act and rules and regulations
rulemaking that would propose the form for the (2) upon request of any representative of thereunder.
electronic submission of such filings to the

Commission and the procedures pertinent to such
the Commission, additional evidence,
information, or data that may be 7. Requirements Relating to the SB
form. Should the Commission propose any such
form and associated procedures, it would include beneficial to the Commission in SEF’s Chief Compliance Officer
a collection of information burden as part of that conducting a due diligence assessment Proposed Rule 823 addresses the
proposed rulemaking.
420 Filings that relate to proposed changes to an
of the filing and the SB SEF’s obligations of the SB SEF’s CCO,
existing SB swap’s terms or conditions would be compliance with any of the including the CCO’s performance of his
submitted under proposed Rules 806 or 807. requirements of the Exchange Act or the or her statutory duties with respect to
421 See supra Section XXIII. rules and regulations thereunder. the SB SEF and its statutory
requirement to prepare and submit to be a complete set of financial statements including through real-time monitoring
the Commission annual compliance and of the SB SEF that are prepared in of trading and use of automated alerts.
financial reports. accordance with U.S. generally accepted 423
Proposed Rule 823(a) would require accounting principles for the two most
the SB SEF’s Board to designate a CCO 9. Access by Non-Registered Eligible
recent fiscal years of the SB SEF. For
to perform the duties identified in certain affiliated entities (every Contract Participants
proposed Rule 823(b) through (e). Under subsidiary in which the applicant has, Proposed Rule 809(d)(1) would
proposed Rule 823(b)(6) and (7), the directly or indirectly, a 25% interest require a SB SEF that provides direct
CCO would be responsible for and for every entity that has, directly or access to non-registered ECPs as
establishing procedures for the indirectly, a 25% interest in the participants to establish, document, and
remediation of noncompliance issues applicant), the SB SEF must provide a maintain a system of risk management
identified by the CCO identified through financial report consisting of a complete controls and supervisory procedures
any compliance office review, look- set of unconsolidated financial reasonably designed to manage the
back, internal or external audit finding, statements (in English) for the latest two financial, regulatory, and other risks of
self-reported error or validated fiscal years and include such footnotes this business activity.424 Proposed Rule
complaint, and establishing appropriate and other disclosures as are necessary to 809(d)(2) would require that the risk
procedures for the handling, avoid rendering the financial statements management controls and supervisory
management response, remediation, misleading. As proposed, the reports for procedures for granting access to ECPs
retesting, and closing of noncompliance the SB SEF and for the SB SEF’s as participants of the SB SEF to be
issues. affiliated entities would be provided in reasonably designed to ensure
The CCO also would be required XBRL consistent with Rules 405(a)(1), compliance with all regulatory
under proposed Rule 823(c) and (d) to (a)(3), (b), (c), (d) and (e) of Regulation requirements.425
prepare and submit annual compliance S–T.422 The Commission notes that
reports to the Commission and the SB these annual financial reports are the 10. Composite Indicative Quote and
SEF’s Board containing, at a minimum: same as those required to be produced Executable Bids and Offers
(1) A description of the SB SEF’s upon registration and annually pursuant Proposed Rule 811(e) would require a
enforcement of its policies and to Exhibits F and H to proposed Form SB SEF that operates an RFQ platform
procedures; (2) information on all SB SEF for the SB SEF. In addition, to create and disseminate through the
investigations, inspections, pursuant to Exhibit H to proposed Form SB SEF a composite indicative quote,
examinations, and disciplinary cases SB SEF, the Commission may request made available to all participants, for SB
opened, closed, and pending during the unaudited financial information for any swaps traded on or through the SB SEF.
reporting period; (3) all grants of access other affiliated entity not covered by the The Commission’s proposed
(including, for all participants, the 25% interest threshold discussed above. interpretation of SB SEF would require
reasons for granting such access) and all each SB SEF, at the minimum, to
denials or limitations of access 8. Surveillance Systems Requirements
provide any participant with the ability
(including for each applicant, the for SB SEFs
to make and display executable bids or
reasons for denying or limiting access), Several proposed rules under offers accessible to all participants on
consistent with proposed Rule 811(b)(3); Regulation SB SEF would require a SB the SB SEF, if the participant wishes to
(4) any material changes to the policies SEF to electronically surveil its market do so.
and procedures since the date of the and to maintain an automated
preceding compliance report; (5) any surveillance system. To the extent that B. Proposed Use of Information
recommendation for material changes to such surveillance and systems would 1. Registration Requirements for SB
the policies and procedures as a result require a SB SEF to collect and assess SEFs and Form SB SEF
of the annual review, the rationale for data and other information, such rules
such recommendation, and whether would result in a collection of As discussed above, proposed Rules
such policies and procedures were or information. 801, 802, 803 and 804 would require an
will be modified by the SB SEF to Proposed Rule 811(j) would require a applicant to register on Form SB SEF,
incorporate such recommendation; (6) SB SEF to have the capacity to capture file certain amendments and updates to
the results of the SB SEF’s surveillance information that may be used in Form SB SEF, file other supplemental
program, including information on the establishing whether rule violations information with the Commission with
number of reports and alerts generated, have occurred, including through the respect to the trading of SB swaps, and
and the reports and alerts that were use of automated surveillance systems provide notice to the Commission of the
referred for further investigation or for as set forth in proposed Rule 813(b). SB SEF’s withdrawal of registration. The
an enforcement proceeding; (7) any Proposed Rule 813(a)(2) would require a information collected pursuant to these
complaints received regarding the SB SB SEF to monitor trading in SB swaps proposed rules would enhance the
SEF’s surveillance program; and (8) any to prevent manipulation, price ability of the Commission to determine
material compliance matters identified distortion, and disruptions of the whether to approve the registration of
since the date of the preceding delivery or cash settlement practices an entity as a SB SEF; to monitor and
compliance report. and procedures, including methods for oversee SB SEFs; to determine that SB
The CCO is required under proposed conducting real-time monitoring of
423 The collection of information burdens
Rule 823(e)(1) and (2) to submit trading and comprehensive and accurate
associated with the audit trail provisions of

annually a financial report for the SB trade reconstructions. Proposed Rule proposed Rule 818(a) and (c) are discussed in the
SEF and for certain affiliated entities of 813(b) would require a SB SEF to have sections of this PRA analysis relating to
the SB SEF. Among other things, the the capacity and appropriate resources recordkeeping.
annual financial report for the SB SEF to electronically monitor trading in SB 424 See proposed Rule 809(d)(1). Non-registered
must be audited by a registered public ECPs are eligible contract participants that are not
swaps on its market by establishing an registered with the Commission as a SB swap
accounting firm that is qualified and automated surveillance system, dealer, major SB swap participant, or broker (as
independent in accordance with Rule 2– defined in section 3(a)(4) of the Exchange Act).
01 of Regulation S–X (17 CFR 210.2–01), 422 See 17 CFR 232.405. 425 See proposed Rule 809(d)(2).
SEFs initially comply, and continue to SB SEF and the Commission to carry out the provisions of the Exchange Act,
operate in compliance, with the their respective obligations under the including the Core Principles applicable
Exchange Act, including the Core Exchange Act, by providing a record of to SB SEFs, and the rules and
Principles applicable to SB SEFs, and the complete history of all trading regulations thereunder, as well as assist
the rules and regulations thereunder; to interest entered and transactions the Commission in overseeing the SB
carry out its statutorily mandated executed on the SB SEF, which data SEF’s compliance with its regulatory
oversight functions; and to maintain could be used to help detect abusive or obligations. This information also
accurate and updated information manipulative trading activity, prepare would be useful to the SB SEF’s
regarding SB SEFs. Because the reconstructions of activity on the SB participants, because they would be
registration information would be SEF or in the SB swaps market, and subject to such new or amended rules
publicly available, it could also be generally to understand the causes of and thus would have an interest in
useful to SB SEF’s participants, other unusual market activity. In addition, learning about those rules and
market participants, other regulators, proposed Rule 811(b)(3) would require potentially in submitting to the
and the public generally. every SB SEF to make and keep records Commission comments on any proposed
of all grants, denials, or limitations of new or amended rules. Other market
2. Rule-Writing Requirements for SB access to the SB SEF, which would participants, other SB SEFs, and other
SEFs provide the Commission an important regulators, as well as the public
The proposed provisions of tool to help it assess whether the SB generally, may find information about
Regulation SB SEF requiring that SB SEF is meeting its duty to provide fair proposed new or amended rules useful.
SEFs establish certain rules, policies and impartial access to its facility. Proposed Rules 807 and 808 would
and procedures would help SB SEFs Further, proposed Rule 811(h) would require a SB SEF to submit filings for
comply with the Exchange Act, require the SB SEF to make and keep new products that they make available
including the Core Principles applicable records specifically of all disciplinary for trading either through a self-
to SB SEFs, and the rules and proceedings and appeals, which would certification process or a voluntary prior
regulations thereunder. The rules also allow the Commission to review the approval process. The information that
would be useful to the SB SEF’s disciplinary process at a SB SEF and would be collected under these
participants in understanding and would provide the Commission an proposed rules would help ensure that
complying with the requirements of the additional tool to carry out its oversight any SB swap that is available to trade on
SB SEF and to other market responsibilities. the SB SEF would comply with the
participants, other regulators, and the provisions of the Exchange Act,
5. Timely Publication of Trading including the Core Principles applicable
public generally. Information Requirement for SB SEFs to SB SEFs, and the rules and
3. Reporting Requirements for SB SEFs The requirement contained in regulations thereunder, as well as assist
The information that would be proposed Rule 817 that a SB SEF have the Commission in overseeing the SB
collected under the proposed provisions the capacity to electronically capture, SEF’s compliance with its regulatory
of Regulation SB SEF requiring SB SEFs, transmit, and disseminate information obligations. In particular, the
SB SEF participants, and other persons on price, trading volume, and other requirements of proposed Rules 807(a)
to submit certain reports and provide trading data on all SB swaps executed and 808(a) should help the Commission
certain information upon request would on or through the SB SEF, would assist determine the SB SEF’s compliance
be used by the Commission to assist in the SB SEF in carrying out its regulatory with the Core Principles that apply
its oversight of SB SEFs and the SB responsibilities under the Exchange Act, specifically to products, such as Core
swap markets. including, without limitation, the Principle 3 which would require a SB
proposed requirements that every SB SEF to ensure that a SB swap trading on
4. Recordkeeping Required Under SEF must keep and preserve books and its facility is not readily susceptible to
Regulation SB SEF records of activities related to its manipulation. Other market
Proposed Rule 813(c) would aid the business, and allow access by the participants, other SB SEFs, and other
SB SEF in detecting and deterring Commission to obtain or verify other regulators, as well as the public
fraudulent and manipulative acts with information related to orders entered generally, may find information about
respect to trading on its market, as well and transactions executed on or through the new products useful.
as help it to fulfill the statutory the SB SEF’s facilities. In addition, the
requirement in Core Principle 4 that a 7. Requirements Relating to the SB
Commission believes that every SB SEF
SB SEF monitor trading in SB swaps, SEF’s CCO
must have the capacity to capture this
including through comprehensive and information to enable the SB SEF to As discussed above, proposed Rule
accurate trade reconstructions. The comply with reasonable requests to 823 would require that a SB SEF’s CCO
proposed rule also would aid the provide information to others, establish certain policies relating to
Commission in carrying out its including, SB SEF participants, noncompliance issues as well as prepare
responsibility to oversee SB SEFs. counterparties, registered SDRs, or and submit to the Commission both an
Proposed Rules 818(a) and (b) would regulatory authorities. annual compliance report and an annual
help to ensure that records exist, and financial report. The information that
thus would be available to the 6. Rule Filing and Product Filing would be collected under this proposed
Commission pursuant to the proposed Processes for SB SEFs rule would help ensure compliance by
reporting requirements. Access to these Proposed Rules 805 and 806 would SB SEFs with the provisions of the
records would provide a valuable tool to require a SB SEF to submit new rule or Exchange Act, including the Core
help the Commission carry out its rule amendments as rule filings either Principles applicable to SB SEFs, and
oversight responsibility over SB SEFs through a voluntary prior approval the rules and regulations thereunder, as
and the SB swap markets in general. process or a self-certification process. well as assist the Commission in
The audit trail information required to The information that would be collected overseeing the SB SEFs. The
be maintained under the proposed Rule under these proposed rules would help Commission could use the annual
818(c) would facilitate the ability of the ensure compliance by the SB SEF with compliance report to help it evaluate
whether the SB SEF is carrying out its operates an RFQ platform to create and Except with regard to the collection of
statutorily-mandated regulatory disseminate through the SB SEF a information burdens imposed on SB
obligations and, among other things, to composite indicative quote, made SEF participants pursuant to proposed
discern the scope of any denials of available to all participants, for SB Rules 813(c) and 814(a), as discussed
access or refusals to grant access by the swaps traded on or through the SB SEF. further in the sections of this PRA
SB SEF and to obtain information on the The Commission preliminarily believes discussing the reporting and
status of the SB SEF’s regulatory that a composite indicative quote would recordkeeping requirements of
compliance program. The annual provide a certain level of pre-trade Regulation SB SEF, the respondents
financial report would provide the transparency for an RFQ platform. In subject to the collection of information
Commission with important information addition, the Commission’s proposed burdens associated with proposed
on the financial health of the SB SEF. interpretation of SB SEF would require Regulation SB SEF would be SB SEFs.
each SB SEF, at the minimum, to
8. Surveillance Systems Requirements D. Total Annual Reporting and
provide any participant with the ability
for SB SEFs Recordkeeping Burden
to make and display executable bids or
The proposed rules requiring a SB offers accessible to all participants on 1. Registration Requirements for SB
SEF to maintain certain surveillance the SB SEF, if the participant wishes to SEFs and Form SB SEF
systems and monitor trading would do so. The Commission preliminarily Initial filings on Form SB SEF by a
enable the SB SEFs to have the capacity believes that this functionality would prospective SB SEF seeking to register
and resources to fulfill its obligations provide greater access to the SB SEF for with the Commission pursuant to
under the Exchange Act to oversee participants. proposed Rule 801 would be made on
trading on its market, and to prevent
C. Respondents a one-time basis. As discussed above, no
manipulation and other unlawful
SB SEFs currently are registered with
activity or disruption of the market. The collection of information
the Commission and the Commission
These systems would help the SB SEF associated with the proposed Regulation
preliminarily estimates that 20 entities
to identify and investigate market SB SEF would apply to entities seeking
initially would seek to register with the
behavior that may be improper and to register as, and to registered, SB SEFs.
Commission as SB SEFs. The
bring any necessary disciplinary In the Dodd-Frank Act, Congress
Commission’s estimate regarding the
actions. incorporated into the Exchange Act a
initial burden that a SB SEF would
definition of SB SEF and mandated the
9. Access by Non-Registered Eligible incur to file a Form SB SEF is informed
registration and regulation of these new
Contract Participants by its estimate of the number of hours
facilities.427 There currently are no necessary to complete a Form 1 for
Proposed Rule 809 would permit a SB registered SB SEFs. Based on
SEF to provide access to the SB SEF by registration of a national securities
conversations with the CFTC and exchange. The Commission calculated
non-registered ECPs, provided that the industry sources, the Commission in 2010 that Form 1 takes 47 hours to
conditions of the proposed rule relating preliminarily believes that complete.430 Although the requirements
to such access would be satisfied. approximately 10 to 20 entities could of Form 1 are not identical to the
Proposed Rule 809(d) would require a seek to register as SB SEFs and thus be requirements of proposed Form SB SEF,
SB SEF that would permit access to subject to the collection of information the Commission preliminarily believes
non-registered ECPs 426 to establish, requirements of these proposed rules. that they are substantially similar for
document, and maintain a system of risk The Commission is using the higher PRA purposes. Similar to Form 1, the
management controls and supervisory estimate of 20 SB SEFs for this PRA information that would be required on
procedures reasonably designed to analysis.428 Form SB SEF generally would consist of
manage the financial, regulatory, and In addition, proposed Rules 813(c) copies of existing documents that would
other risks of this business activity. The and 814(a) would impose collection of be prepared by a SB SEF in the ordinary
risk management controls and information burdens on SB SEF course of its business. As noted above,
supervisory procedures for granting participants. Based on conversations no SB SEFs currently are registered with
access to non-registered ECPs would be with industry sources, the Commission the Commission and no framework for
required to be reasonably designed to preliminarily believes that there could registration of SB SEFs currently exists.
ensure compliance with all regulatory be a total of 275 persons that could Therefore, the Commission
requirements. Since non-registered ECPs become SB SEF participants and would preliminarily believes that, during the
are not directly subject to capital or thus be subject to the collection of initial implementation period of
other financial requirements, there is a information requirements of the
concern that, in the absence of risk proposed rules.429 participant.’’ See Securities Exchange Act Release
management controls and supervisory No. 63452 (December 7, 2010), 75 FR 80174
procedures, they could enter into trades 427 See Public Law 111–203, § 761(a) (adding (December 21, 2010). As part of that proposal, the
that exceed appropriate capital or credit Section 3(a)(77) of the Exchange Act), defining the Commission preliminarily estimated that
term ‘‘security-based swap execution facility.’’ See approximately 50 entities may be required to
limits. The proposal relating to risk also Public Law 111–203, § 763(c) (adding Section register as SB swap dealers under the proposed
management controls and supervisory 3D of the Exchange Act). rules. See 75 FR at 80209 n.188. The Commission
procedures is intended to help manage 428 This estimate comports with the estimated further estimated that no more than ten entities
these risks associated with allowing number of SB SEFs contained in the Regulation MC would have SB swap positions large enough that
Proposing Release, supra note 82. they would have to monitor whether they meet the
non-registered ECPs to have direct
429 275 = 50 (estimated number of SB swap thresholds defining a major SB swap participant.
access to an SB SEF’s market. dealers that would be SB SEF participants) + 5 See 75 FR at 80207–08. For purposes of these
(estimated number of major SB swap participants proposed rules, the Commission conservatively
10. Composite Indicative Quote and assumes that there would be a total of five major
that would be SB SEF participants) + 10 (estimated
Executable Bids and Offers number brokers that would be SB SEF participants) SB swap participants, while recognizing that in fact
+ 210 (estimated number of ECPs that would be SB there may be fewer than five.
As discussed above, proposed Rule
SEF participants). The Commission recently 430 See 75 FR 32824 (June 9, 2010) (outlining the
811(e) would require a SB SEF that proposed rules to define a number of terms used in most recent Commission calculations regarding the
Title VII, including, among others, ‘‘security-based PRA burdens for Form 1 and Rules 6a-1 and 6a-2
426 See proposed Rule 809. swap dealer’’ and ‘‘major security-based swap under the Exchange Act).
Regulation SB SEF, it could take a SB preliminarily estimates that the computer and commercially available
SEF more time to compile the necessary aggregate one-time burden for all software that it generally would own for
documents and information required by respondents to file the initial Form SB pre-existing accounting purposes and
the exhibits to Form SB SEF than it SEF, including all exhibits thereto, then would submit the information to
would for an applicant to become a except Exhibits F and H requiring the Commission. Based on the number
national securities exchange to compile certain financial reports and Exhibit P of unaudited financial statements the
documents and information to comply requiring opinions of counsel, would be Commission receives from filers of Form
with requirements of Form 1. The 2,000 hours.433 The Commission 1 and the substance contained in these
procedures for registration as a national preliminarily believes that SB SEFs reports, the Commission estimates that
securities exchange are well-settled and, would prepare Form SB SEF internally. it would take 40 hours to compile,
therefore, an entity that intends to The Commission requests comment on review, and submit these reports.
register as national securities exchange the accuracy of this estimate. However, as proposed, all of these
could anticipate the form of the Exhibits F and H to proposed Form reports would be required to be
documents and other information that it SB SEF would require an applicant to provided in XBRL, as required in Rules
would need to compile to register on submit an annual financial report that 405(a)(1), (a)(3), (b), (c), (d) and (e) of
Form 1.431 Based on these factors, the would have to satisfy a number of Regulation S–T.435 This would create an
Commission preliminarily estimates requirements, including the requirement additional burden on respondents. The
that an applicant would incur an that a registered public accounting firm Commission preliminarily estimates,
average burden of 100 hours to prepare that is qualified and independent in based on its experience with other data
and file an initial Form SB SEF, accordance with Rule 2–01 of tagging initiatives, that these
including all exhibits thereto, except Regulation S–X 434 audit each financial requirements would add an additional
Exhibits F and H requiring certain report relating to the SB SEF (unaudited burden of an average of 54 hours and
financial reports, and Exhibit P for certain affiliated entities). The $23,000 in outside software and other
requiring certain opinions of counsel, Commission preliminarily believes that costs per respondent. Thus, for
which are discussed separately it is unlikely that, during the initial complying with the financial statement
below.432 Therefore, the Commission implementation period of Regulation SB requirements under Exhibits F and H in
SEF, a SB SEF would have prepared connection with an initial application
431 For example, because an entity seeking to such reports in the ordinary course of on proposed Form SB SEF, the
register as a national securities exchange would business prior to applying for
know that Exhibit E to Form 1 requires an applicant
Commission estimates an aggregate total
to describe the manner and operation of the
registration on Form SB SEF. Therefore, initial burden of 11,880 hours 436 and
electronic trading system to be used to effect in connection with its efforts to register $10,460,000 for all respondents.437 The
transactions on the exchange, such entity likely as a SB SEF with the Commission on Commission solicits comments as to the
would prepare such a description in the ordinary proposed Form SB SEF, an applicant
course of its business in anticipation of applying for accuracy of these estimates.
registration as a national securities exchange on
would incur an initial burden to Pursuant to the requirements of
Form 1. However, because the requirements of generate such financial reports. Based proposed Rule 801(e), Exhibit P to
Form SB SEF would be set forth for the first time on conversations with operators of proposed Form SB SEF would require
in connection with this proposed rulemaking, a SB current trading platforms and the
SEF previously may not have prepared a
an applicant that is controlled by any
description of the manner and operation of its
Commissions experience with entities of other person to provide an opinion of
trading system in the ordinary course of business similar size, the Commission counsel that any person that controls
and would have to do so to comply with Exhibit preliminarily estimates that the such SB SEF has consented to and can,
I to Form SB SEF. financial reports relating to the SB SEF
432 As discussed above, proposed Rule 801(d)
as a matter of law, provide the
would generally require, on average, 500 Commission with prompt access to its
would require a SB SEF to designate and authorize
on Form SB SEF an agent in the U.S. to accept hours per respondent to complete and books and records, to the extent such
notice or service of process, pleadings, or other cost $500,000 for independent public books and records are related to the
documents in any action or proceedings brought accounting services per respondent. activities of the SB SEF, and submit to
against it to enforce the Federal securities laws and The Commission believes that the
the rules and regulations thereunder. Proposed Rule onsite inspection and examination by
801(e) would require an applicant that is controlled
unaudited reports required for certain representatives of the Commission with
by any other person to certify on Form SB SEF that affiliated entities and to be made respect to the activities of the SB SEF.
any person that controls such SB SEF would available upon request by the This creates an additional burden for SB
consent to and could, as a matter of law, provide Commission for other affiliated entities
the Commission with prompt access to its books SEFs controlled by other persons. Based
and records, to the extent such books and records would not be overly time consuming to on similar requirements on Form 20–F,
are related to the activities of the SB SEF, and produce because, based on the the Commission preliminarily estimates
submit to onsite inspection and examination by Commission’s experience with Form 1
representatives of the Commission with respect to that this additional burden would add 1
filers, a respondent’s accounting system
the activities of the SB SEF. Proposed Rule 801(f) hour and $900 in outside legal costs for
should have this information available.
would require a non-resident person applying for each affected SB SEF.438 For PRA
registration to certify on Form SB SEF that it could, Furthermore, because the information
as a matter of law, provide the Commission with would not have to be audited, a 435 See 17 CFR 232.405.
prompt access to its books and records and submit respondent would be able to compile 436 11,880 hours = 20 (number of SB SEF
to onsite inspection and examination by
representatives of the Commission. Proposed Rule the required information using a respondents) × 594 hours (500 hours for audited SB
814(b)(4) would require a SB SEF to certify at the SEF financial statements + 40 hours for unaudited
time of registration on Form SB SEF that the SB SEF controlled by other persons and non-resident SB financial statements of affiliated entities + 54 hours
would have the capacity to fulfill its obligations SEFs to provide certain opinions of counsel. The for XBRL formatting of submission).
437 $10,460,000 = 20 (number of SB SEF
under international information sharing agreements Commission preliminarily believes that the burden
to which it is a party. The Commission associated with these requirements would be respondents) × $523,000 ($500,000 for outside
preliminarily believes that the burden associated included in the burden associated with Exhibit P accounting services for auditing SB SEF’s financial
with these requirements would be included in the to Form SB SEF discussed below. statements + $23,000 in outside software and other
100-hour burden associated with the initial 433 2,000 hours = 20 (number of SB SEF cost for formatting financial statement submissions
registration on Form SB SEF required by proposed respondents) x 100 hours (initial hourly burden to in XBRL format).
Rule 801(a). These proposed requirements currently comply with Form SB SEF, except for Exhibits F, 438 See Securities Exchange Act Release No.
are not included on Form 1. In addition, proposed H and P). 49616 (Apr. 26, 2004), 69 FR 24016 (Apr. 30, 2004)
Rules 801(e) and (f) would require SB SEFs that are 434 See 17 CFR 210.2–01. (outlining the Commission’s calculations regarding
purposes and in order to provide an counsel requirements of Exhibit P of 1 preliminarily believes that SB SEFs
estimate that is not under-inclusive, the hour 442 and $900.443 would prepare these amendments to
Commission preliminarily estimates Therefore, the Commission Form SB SEF internally.
that all respondents applying for preliminarily estimates that the total The Commission preliminarily
registration as a SB SEF pursuant to one-time burden for a SB SEF to prepare believes that two registered SB SEFs
proposed Rule 801, or 20 SB SEFs, may and file the initial Form SB SEF, that are controlled by other persons out
be controlled by other persons and including all exhibits thereto except for of all registered SB SEFs that are
therefore subject to the additional Exhibit P, would be 694 hours 444 and controlled by other persons per year
burden imposed on SB SEF’s controlled $523,000.445 In addition, SB SEFs would be required to file an amendment
by other persons by Exhibit P. Thus, the controlled by other persons and non- to Exhibit P to Form SB SEF pursuant
Commission preliminarily estimates a resident SB SEFs would incur an to proposed Rule 802(c) due to changes
total additional burden for all SB SEFs additional one-time burden of 1 hour in the legal or regulatory framework of
that are controlled by other persons to and $900 to prepare and file Exhibit P any person that controls such SB SEFs.
comply with the opinion of counsel to proposed Form SB SEF. This would The Commission preliminarily believes
requirements of Exhibit P of 20 hours 439 result in a total initial burden for all SB that a SB SEF controlled by another
and $18,000.440 The Commission SEFs of 13,901 hours 446 and person would incur the same burden to
solicits comments as to the accuracy of $10,478,900.447 The Commission prepare an amended Exhibit P as it
these estimates. requests comment on the accuracy of would to prepare the initial Exhibit P.
Pursuant to the requirements of these estimates. Therefore, the Commission
proposed Rule 801(f), Exhibit P to The Commission preliminarily preliminarily estimates that a SB SEF
proposed Form SB SEF would require a estimates that each SB SEF would file controlled by another person would
non-resident SB SEF to provide an four amendments to Form SB SEF incur an average burden of 1 hour and
opinion of counsel that the SB SEF can, pursuant to proposed Rules 802(a) and $900 to prepare an amended Exhibit P
as a matter of law, provide the (b) per year, and that each SB SEF pursuant to proposed Rule 802(c) per
Commission with access to the books would incur an average burden of 25 year,449 and that all SB SEFs controlled
and records of the SB SEF and submit hours to prepare each amendment by other persons would incur an
to onsite inspection and examination by pursuant to proposed Rules 802(a) and aggregate burden of 2 hours 450 and
representatives of the Commission. This (b), for a total annual burden of 100 $1,800 per year 451 to prepare amended
creates an additional burden for non- hours. The Commission bases this Exhibit Ps pursuant to proposed Rule
resident SB SEFs. Based on similar estimate on previous Commission 802(c).
requirements on Form 20–F, the estimates relating to amendments to The Commission preliminarily
Commission preliminarily estimates Form 1 filed by national securities believes that one non-resident SB SEF
that this additional burden would add 1 exchanges pursuant to Rule 6a–2 under would be required to file one
hour and $900 in outside legal costs per the Exchange Act.448 The Commission amendment to Exhibit P to Form SB SEF
respondent.441 For PRA purposes, the pursuant to proposed Rule 802(d) per
Commission preliminarily estimates 442 1 hour = 1 (number of non-resident SB SEF year. The Commission preliminarily
that one out of the 20 estimated persons respondents) × 1 (hourly burden to comply with believes that a non-resident SB SEF
Exhibit P). would incur the same burden to prepare
applying for registration as a SB SEF 443 $900 = 1 (number of non-resident SB SEF
pursuant to proposed Rule 801 may be respondents) × $900 (cost for outside legal services
an amended Exhibit P as it would to
‘‘non-resident’’ SB SEFs and therefore to comply with Exhibit P). prepare the initial Exhibit P. Therefore,
subject to the additional burden 444 694 hours = 100 hours to comply with Form the Commission preliminarily estimates
imposed on non-resident SB SEFs by SB SEF except for Exhibits F, H and P + 500 hours that a non-resident SB SEF would incur
Exhibit P. Thus, the Commission for audited SB SEF financial statements + 40 hours an average burden of 1 hour and $900
for unaudited financial statements of affiliated
preliminarily estimates a total entities + 54 hours for XBRL formatting of
to prepare each amended Exhibit P
additional burden for all non-resident submission. pursuant to proposed Rule 802(d) per
SB SEFs to comply with the opinion of 445 $523,000 = $500,000 for outside accounting year,452 and that this estimate represents
services for auditing SB SEF’s financial statements the aggregate burden for all non-resident
the PRA burdens resulting from having to provide + $23,000 in outside software and other cost for SB SEFs per year.
formatting financial statement submission in XBRL
a legal opinion and additional disclosure required
format.
The Commission believes that each
by Instruction 3 to Item 7.B to Form 20–F). The SB SEF would file one update to Form
446 13,901 = (20 (number of SB SEF respondents)
Commission calculated that such requirements
would result in an additional burden to affected × 694 hours (total initial burden to comply with SB SEF pursuant to proposed Rule
foreign private issuers of 3 hours, of which 25%, Form SB SEF except for Exhibit P)) + (20 (number 802(f) per year, and that it would take
or approximately 1 hour, would be incurred by the of SB SEF respondents controlled by other persons) a SB SEF a longer time to file an annual
foreign private issuers themselves, and 75% would × 1 hour (total initial burden to comply with Exhibit
be incurred by outside firms, including legal P)) + (1 (number of non-resident SB SEF update to Form SB SEF pursuant to
counsel, which would cost approximately $900 respondents) × 1 hour (total initial burden to proposed Rule 802(f) than it would take
($900 = 3 hours (estimated burden to comply with comply with Exhibit P). a SB SEF to file an amendment to Form
proposed Rule 801(f)) × 0.75 (portion of estimated 447 $10,478,900 = (20 (number of SB SEF
SB SEF pursuant to proposed Rules
burden incurred by outside legal counsel × $400 respondents) × $523,000 (total initial cost to comply
(hourly rate for an outside attorney)). The with Form SB SEF except for Exhibit P)) + (20
Commission preliminarily continues to estimate the (number of SB SEF respondents controlled by other is sufficient similarity for PRA purposes that the
hourly rate for an outside attorney at $400 per hour, persons) × $900 (total initial cost to comply with burden would be equivalent.
449 See supra note 438 and accompanying text.
based on industry sources. See Securities Exchange Exhibit P)) + (1 (number of non-resident SB SEF
Act Release No. 62184A (May 27, 2010), 75 FR respondents) × $900 (total initial cost to comply 450 2 = 2 (number of SB SEFs controlled by other
33100 at note 505 (June 10, 2010) (‘‘Municipal with Exhibit P)). persons required to file an amended Exhibit P
Securities Disclosure Release’’). 448 The Commission calculated in 2010 that pursuant to proposed Rule 802(c) per year) × 1 hour
439 20 hours = 20 (number of SB SEF respondents
national securities exchanges file four amendments (total annual burden to file an amended Exhibit P).
controlled by other persons) × 1 (hourly burden to or periodic updates to Form 1 per year, incurring 451 $1,800 = 2 (number of SB SEFs controlled by
comply with Exhibit P). an average burden of 25 hours per amendment to other persons required to file an amended Exhibit
440 $18,000 = 20 (number of SB SEF respondents
comply with Rule 6a–2. See 75 FR 32824, supra P pursuant to proposed Rule 802(c) per year) × $900
controlled by other persons) × $900 (cost for outside note 430. While the requirements of Rule 6a–2 are (total annual cost burden to file an amended Exhibit
legal services to comply with Exhibit P). not identical to the requirements of proposed Rules P).
441 See supra note 438. 802(a) and (b), the Commission believes that there 452 See supra note 441 and accompanying text.
802(a) and (b), but less time than it proposed Rule 803(b), which relates to burden for all respondents pursuant to
would take a SB SEF to prepare an supplemental information being made proposed Rule 804 would be 1 hour.
initial application on Form SB SEF. For available continuously on the SB SEF’s The Commission preliminarily
each annual update to Form SB SEF, the Web site, instead of proposed Rule estimates that the total annual hourly
SB SEF should be able to compile and 803(a), which relates to filing of the burden for all SB SEFs combined to
submit the information more readily actual supplemental information, the comply with the registration
than it would take for the initial Form response required by proposed Rule requirements under Regulation SB SEF
SB SEF submission because the SB SEF 803(b) should take less than one-half would be 3,154 hours 458 and the total
should already have much of the hour as well. The Commission one time hourly burden would be
information required by the annual preliminarily estimates that each SB 13,901 hours.459 The Commission
update in its possession. Therefore, the SEF would make approximately 15 preliminarily estimates that the total
Commission preliminarily estimates filings on an annual basis pursuant to annual cost burden for all SB SEFs to
that each SB SEF would incur an proposed Rules 803(a) and (b) comply with the registration
average burden of 50 hours to prepare combined. The Commission bases these requirements under Regulation SB SEF
each annual update to the Form SB SEF estimates on previous Commission would be $2,700,460 and the total one-
pursuant to proposed Rule 802(f).453 estimates relating to supplemental
The Commission estimates that the time cost burden for all SB SEFs would
material filed by national securities be $10,478,900.461 The Commission
annual burden for all respondents to file exchanges pursuant to Rule 6a–3.456
amendments and periodic updates to requests comment on the accuracy of
Therefore, the Commission estimates these estimates.
the Form SB SEF pursuant to proposed that the total annual reporting burden
Rule 802 would be 3,003 hours 454 and under proposed Rule 803 for all SB 2. Rule-Writing Requirements for SB
$2,700.455 The Commission requests SEFs would be 150 hours.457 The SEFs
comment on the accuracy of its Commission requests comment on the
estimates. accuracy of this estimate. The proposed rules that would
The Commission preliminarily Proposed Rule 804 would require that require a SB SEF to establish rules,
estimates that the preparation and filing a SB SEF provide the Commission policies and procedures to meet the
of supplemental information pursuant notice of withdrawal of registration and requirements of various proposed rules
to proposed Rule 803(a) generally would file an amended Form SB SEF to update in Regulation SB SEF are summarized in
involve photocopying existing any inaccurate information at the time Section XXII.A.2. above. Based on its
documents and therefore should take of such notice of withdrawal. The experience with the rule-writing process
less than one-half hour per response. Commission preliminarily estimates conducted by national securities
The Commission similarly preliminarily that one SB SEF per year would seek to exchanges and applicants to become
estimates that where a SB SEF chooses national securities exchanges, the
withdraw its registration with the
to comply with the requirements of Commission believes that a SB SEF
Commission and therefore be subject to
the collection of information would spend an average of 10 hours to
453 Proposed Rules 811(b)(4) and 811(g)(2) would
requirements in proposed Rule 804. The draft each rule, policy or procedure
require SB SEFs to report information regarding
grants, denials and limitations of access on Form SB Commission preliminarily estimates required to be established under
SEF and to disclose all disciplinary actions taken that a SB SEF would incur an average Regulation SB SEF and that the SB SEF
annually on an amendment to Form SB SEF,
burden of 1 hour to prepare and file would handle this work internally. The
respectively. In addition, proposed Rule 804(a) Commission recognizes that in some
would require that a SB SEF intending to file a with the Commission a notice of
notice of withdrawal from registration as a SB SEF withdrawal of registration. The cases, the SB SEF may take longer than
with the Commission file an amended Form SB SEF Commission preliminarily believes that 10 hours to draft a particular rule,
to update any inaccurate information at the time of
the burden incurred by a SB SEF policy or procedure, but in other cases,
such notice of withdrawal. The Commission the SB SEF may take fewer than 10
preliminarily believes that the burdens associated withdrawing its registration to file an
with these requirements would be included in the amended Form SB SEF pursuant to hours to draft a particular rule, policy or
burden associated with the annual update to Form proposed Rule 804 would be included procedure. Therefore, the Commission
SB SEF required by proposed Rule 802(f). preliminarily believes that the 22
The Commission notes that, pursuant to proposed
in the estimated burden under proposed
Rule 802(f) requiring annual updates to proposed rules, policies and procedures
Rules 823(e)(1) and (2), the CCO of a SB SEF would
be required to prepare annual updates to the Form SB SEF. Therefore, the that a SB SEF would be required to draft
financial reports required by Exhibits F and H. Commission estimates that the annual under proposed Regulation SB SEF
Therefore, the Commission preliminarily believes would carry a one-time paperwork
that any burden resulting from the requirement to burden of 220 hours per respondent, for
456 The Commission calculated in 2010 that Rule
update Exhibits F and H annually pursuant to
proposed Rule 802(f) would be included in the 6a–3 would require national securities exchanges to a maximum total of 4,400 hours.462 The
burden associated with proposed Rule 823(e)(1) and make 25 filings per year at a burden of 0.5 hours estimated 220 hours per respondent also
(2) discussed in the sections of this PRA analysis per filing. 75 FR 32822 (June 9, 2010) (outlining the would include the time expended for
relating to the duties of the SB SEF’s CCO. most recent Commission calculations regarding the
454 3,003 hours = (20 (number of SB SEF PRA burdens for Rule 6a–3). While the
review of the draft rules, policies or
respondents) × 4 (number of filings pursuant to requirements of Rule 6a–3 are not identical to those procedures by the SB SEF’s
proposed Rules 802(a) and (b)) × 25 hours (burden of proposed Rule 803, the Commission believes that management. The Commission requests
per filing)) + (2 (number of respondents) × 1 there is sufficient similarity for PRA purposes that
(number of filings pursuant to proposed Rule the burden would be equivalent. However, Rule 6a– 458 3,154 hours = 3,003 (estimated hourly burden
802(c)) × 1 hour (burden per filing)) + (1 (number 3 contains a requirement for national securities
to comply with proposed Rule 802) + 150

of respondents) × (1 (number of filings pursuant to exchanges to file certain monthly reports, while
(estimated hourly burden to comply with proposed
proposed Rule 802(d)) × 1 hour (burden per filing)) proposed Rule 803 contains no such requirement
+ (20 (number of SB SEF respondents) × (1 (number with respect to SB SEFs. Therefore, the Commission Rule 803) + 1 (estimated hourly burden to comply
of filings pursuant to proposed Rule 802(f)) × 50 preliminarily estimates that a SB SEF would make with proposed Rule 804).
459 See supra note 446.
hours (burden per filing)). 15 filings per year pursuant to proposed Rule 803,
455 $2,700 = (2 (number of respondents) × 1 460 See supra note 455.
rather than 25 filings as estimated in connection
with Rule 6a–3. 461 See supra note 447.
(number of filings pursuant to proposed Rule
802(c)) × $900 (burden per filing)) + (1 (number of 457 150 hours = 20 (number of SB SEF 462 4,400 hours = 20 (number of SB SEF
respondents) × 1 (number of filings pursuant to respondents) × 15 (number of filings per respondents) × 220 hours (one-time burden to draft
proposed Rule 802(d)) × $900 (burden per filing)). respondent) × .5 hours (burden per filing). 22 proposed rules, policies and procedures).
comment on the accuracy of this exchange members for various purposes, to carry out such international
estimate. the Commission estimates that it would information-sharing agreements as the
The Commission preliminarily require an average of 25 hours per Commission may require. If so directed
estimates that once a SB SEF has drafted response for a SB SEF participant to by the Commission, a SB SEF could be
the written rules, policies and compile and transmit documents and required to carry out one or more
procedures that it is required to information requested pursuant to international-information sharing
establish pursuant to Regulation SB proposed Rule 814(a) and that such agreements. It is difficult to estimate
SEF, a SB SEF would spend requests would occur a total of 4 times how many international information-
approximately 10 hours per month to each year per SB SEF participant.467 sharing agreements the Commission
review its written rules, policies and Thus, the Commission estimates that the may direct a SB SEF to carry out or what
procedures to ensure that they are up- annual burden on each SB SEF the reporting requirements under such
to-date and remain in compliance with participant to report documents or agreements may be.
proposed Regulation SB SEF and to information pursuant to proposed Rule
prepare any necessary new or amended 814(a) would be 100 hours.468 The The Commission estimates, for PRA
rules, policies and procedures.463 Commission therefore estimates that the purposes only, that SB SEFs would need
Therefore, the Commission annual aggregate burden on SB SEF to carry out such an agreement, on
preliminarily estimates that the participants for all SB SEFs would be average, once per year. The Commission
provisions of proposed Regulation SB 27,500 hours.469 The Commission further estimates that each such
SEF requiring that a SB SEF establish believes that this work, should it be agreement could require 40 hours per
certain rules, policies and procedures required, would be conducted respondent to prepare, review and
would result in an ongoing annual internally. The Commission seeks finalize. The Commission therefore
burden of 120 hours per respondent,464 comment on these proposed estimates. preliminarily estimates that the
for a total estimated ongoing annual Proposed Rule 814(b)(2) would paperwork burden for SB SEFs
burden of 2,400 hours.465 The require a SB SEF to provide information associated with having the capacity to
Commission requests comment on the or documents to any representative of carry out international information-
accuracy of this estimate. the Commission upon request. For PRA sharing agreements as the Commission
purposes, the Commission estimates may require pursuant to proposed Rule
3. Reporting Requirements for SB SEFs that it would request information or 814(b)(3) would be 800 hours.471 The
Proposed Rule 814: Proposed Rule documents under proposed Rule Commission believes that these
814(a) would require a SB SEF to 814(b)(2) two times per year, per agreements initially would be created or
require its participants to provide respondent. The amount of time that it reviewed internally, but also reviewed
information or documents to the SB SEF would take for a respondent to comply by outside counsel. The Commission
upon request. Proposed Rule 814(a) also with a request would vary depending on estimates that the SB SEF’s outside
would require the SB SEF to require its the nature and extent of the request. counsel would require 10 hours to
participants to provide information or Based on its experience in requesting review these documents for a cost of
documents to any representative of the information from exchanges for a variety $4,000 per respondent, and a total cost
Commission upon request. of purposes, the Commission estimates of $80,000 for all respondents.472 The
As noted above, the Commission that it would require an average of 25 Commission solicits comment as to the
estimates that each SB SEF would have hours per response for a SB SEF to accuracy of these estimates.
275 participants.466 Based on industry compile and transmit documents and
information requested by the In addition, the Commission
sources, the Commission believes it is preliminarily estimates that a SB SEF
likely that each participant would elect Commission, for an annual hourly
burden of 50 hours per respondent. would be required to provide
to be a member of each SB SEF. The information pursuant to an international
Commission therefore estimates that Thus, the Commission preliminarily
estimates the aggregate annual burden information-sharing agreement a total of
each of these estimated 275 participants
on a SB SEF to comply with requests for twice per year and that, similar to
would be a participant of each SB SEF.
documents or information pursuant to complying with a Commission request
The Commission therefore estimates
proposed Rule 814(b)(2) would be 1,000 for information pursuant to other
that there would be a total of 275 SB
hours.470 The Commission believes that provisions of proposed Rule 814, it
SEF participants subject to the
this work, should it be required, would would require 25 hours per response to
collection of information requirements
be conducted internally. The comply with a request for information,
of proposed Rule 814(a). The
Commission solicits comment as to the for a total annual burden of 50 hours per
Commission requests comment on the
accuracy of these estimates. year per SB SEF. The Commission
accuracy of this estimate.
Based on its experience in requesting Proposed Rule 814(b)(3) would believes that this work, should it be
information from exchanges and require a SB SEF to have the capacity required, would be conducted
internally. The Commission therefore
467 The estimate of 4 annual requests assumes that
463 This burden estimate does not include the estimates that aggregate annual
each SB SEF participant would receive, on average,
burden that would be incurred by a SB SEF in one request for information per calendar quarter.
paperwork burden on SB SEFs
connection with submitting rule filings in 468 100 hours = 4 (number of requests annually) associated with reporting under
connection with new rules or rule amendments to × 25 (annual hourly burden for each participant to international information-sharing
the Commission, which burden would be included comply with SB SEF rules imposed pursuant to agreements entered into under proposed
in the burden for proposed Rules 805 and 806 proposed Rule 814(a)).
discussed in the sections of this PRA relating to the 469 27,500 hours = 4 (total number of annual
rule filing processes for SB SEFs. requests made of a SB SEF participant directly or 471 800 hours = 40 (annual hourly burden to enter
464 120 hours = 10 hours (monthly burden) × 12
indirectly) × 25 (hours per respondent) × 275 into an international information-sharing agreement
(months per year). (number of SB SEF participants required to comply pursuant to proposed Rule 814(b)(3) × 20 (number
465 2,400 hours = 20 (number of SB SEF of SB SEF respondents). The Commission believes
with proposed rules imposed by a SB SEF pursuant
respondents) × 120 hours (annual burden to update to proposed Rule 814(a)). there would be no separate initial burden.
rules, policies and procedures required by proposed 470 1,000 hours = 50 (annual hourly burden to 472 These figures are based on an hourly cost of
Regulation SB SEF). comply with proposed Rule 814(b)(2)) × 20 (number outside counsel at $400. See Municipal Securities
466 See supra note 429. of SB SEF respondents). Disclosure Release, supra note 438.
Rule 814(b)(3) would be 1,000 hours.473 Commission solicits comment on these SEFs associated with proposed Rule 818
The Commission solicits comment as to estimates. would be 1,400 hours.480
the accuracy of these estimates. Proposed Rule 818: Proposed Rule Proposed Rule 822: Proposed Rule
The Commission therefore estimates 818(e) would require a SB SEF to report 822(a)(2) would require a SB SEF to
the aggregate annual paperwork burden to the Commission such information as submit to the Commission an annual
associated with proposed Rule 814 to be the Commission may, from time to time, objective review of the capability of SB
27,500 hours for SB SEF participant determine to be necessary to perform SEF systems that support or are
respondents and 2,800 474 hours and the duties of the Commission. For PRA integrally related to the performance of
$80,000 for SB SEF respondents. purposes only, the Commission the SB SEF’s activities. If the objective
Proposed Rule 816: Proposed Rule estimates that the Commission may review is performed by an internal
816 would require a SB SEF to notify request such information from a SB SEF department, an objective, external firm
the Commission of any exercise of its once each year. For PRA purposes only, would be required to assess the internal
emergency authority, and within two the Commission estimates that any department’s objectivity, competency,
weeks following cessation of an request for information would be and work performance. Based on its
emergency, submit to the Commission a information easily accessible to the SB experience with its ARP program, the
report explaining the basis for declaring Commission believes that the annual
SEF, but could require an analysis of
an emergency, how conflicts of interest burden per respondent of conducting an
such information by the SB SEF. Based
were minimized, and the extent to internal audit would be approximately
on the Commission’s experience with
which the SB SEF considered the effect 625 hours.481 Further, the Commission’s
information requested of other
of its emergency action on the markets experience with the ARP program has
registered entities, the Commission
for the SB swap and any security or indicated that an additional 200 hours
preliminarily estimates that each
securities underlying the SB swap. The per respondent per year would be
request pursuant to proposed Rule 818
collection of information associated required on average to oversee and
would require 20 hours to collect,
with proposed Rule 816 would apply establish the independent review of
review, draft any accompanying
only during and following an these audits. 482 Thus, the Commission
analysis or report, and transmit, which
emergency.475 estimates the aggregate annual burden
would result in an annual hourly on SB SEFs to comply with requirement
The Commission notes that burden of 20 hours per SB SEF
emergencies in the securities markets to submit these reports would be 16,500
respondent. Thus, the Commission hours.483 In addition, based on its
are rare, but when they do occur, they estimates that the aggregate annual
require significant time and resources to experience with the ARP program,484
reporting burden on SB SEFs associated the Commission estimates that the
address. For PRA purposes only, the with proposed Rule 818(e) would be 400
Commission estimates that a SB SEF annual cost to hire an objective, external
hours.477 The Commission solicits firm to be approximately $90,000 per
would exercise its emergency authority comment on these estimates.
once per year. Based on its experience respondent annually. For this reason,
with national securities exchanges, the Proposed Rule 818(f) would require a the Commission estimates the total
Commission estimates that the time that SB SEF to provide to any representative annual cost of hiring an objective,
would be necessary for a SB SEF to of the Commission, upon request, copies external firm to review internal audits
prepare and transmit the notice and of documents required to be kept and as $1,800,000 for all respondents.485
report regarding emergency authority preserved pursuant to the recordkeeping The Commission solicits comment as to
pursuant to proposed Rule 816 would requirements of proposed Rule 818. For the accuracy of this information.
be 40 hours per respondent. Thus, the PRA purposes only, the Commission In addition, proposed Rule 822(a)(3)
Commission estimates that the total preliminarily estimates that it would would require a SB SEF to promptly
annual reporting burden associated with request information or documents under notify the Commission in writing of
proposed Rule 816 would be 800 proposed Rule 818(f) twice per year and material systems outages and submit to
hours.476 The Commission believes that would require no more than 25 hours the Commission within five business
this work, should it be required, would per response to compile and transmit, days of when the outage occurred a
be conducted internally. The resulting in an annual hourly burden of written description and analysis of the
50 hours per SB SEF respondent.478 The outage and any remedial measures that
473 1,000 hours = 50 (annual hourly burden to
Commission therefore estimates the have been implemented or are
comply with reporting requirements pursuant to annual aggregate paperwork burden
international information-sharing agreements × 20 associated with proposed Rule 818(f) 480 1,400 hours = 400 (hourly burden to comply
(number of SB SEF respondents). would be 1,000 hours.479 The with proposed Rule 818(e)) + 1,000 (hourly burden
474 2,800 hours = 1,000 (aggregate burden on SB to comply with proposed Rule 818(f)).
Commission solicits comment on these 481 See SDR Release, supra note 6.
SEF respondents to comply with proposed Rule
814(b)(2)) + 1,800 hours (aggregate burden on SB
estimates. 482 Id.
SEF respondent to comply with proposed Rule The Commission therefore estimates 483 16,500 hours = 825 (annual hourly burden to
814(b)(3)). the total annual reporting burden on SB comply proposed Rule 822(a)(2)) × 20 (number of
475 Proposed Rule 816(d)(2) provides that if a SB SB SEF respondents).
SEF implements any rule or rule amendment in the 484 Under the Commission’s ARP inspection
477 400 hours = 20 (annual hourly burden to
exercise of its emergency authority, it must file such program of SROs and certain ATSs, the Commission
rule or rule amendment with the Commission comply with proposed Rule 818(e)) × 20 (number staff conducts on-site inspections and attends
pursuant to proposed Rule 806 prior to the of SB SEF respondents). The Commission believes periodic technology briefings presented by SRO and
implementation of such rule or rule amendment, or, there would be no separate initial burden. ATS staff for the Commission’s ARP staff, which
if not practicable, within 24 hours after 478 Based on its experience in requesting generally covers systems capacity and testing,
implementation of such rule or rule amendment. information from exchanges for a variety of review of system vulnerability, review of planned
The annual hourly burden to comply with proposed purposes, the Commission estimates that it would system development, and business continuity
Rule 816(d)(2) is included in the estimated annual require an average of 25 hours per response for a planning. Under the ARP inspection program, the
hourly burden for a SB SEF to comply with SB SEF to compile and transmit documents and Commission staff also monitors system failures and
proposed Rule 806. information requested by the Commission. planned system changes on a daily basis.
476 800 hours = 40 (annual hourly burden to 479 1,000 hours = 25 (annual hourly burden to 485 $1,800,000 = $90,000 (annual external dollar
comply with proposed Rule 816) × 20 (number of comply with proposed Rule 818(f)) × 20 (number of cost per respondent to comply with proposed Rule
SB SEF respondents). SB SEF respondents). 822(a)(2)) × 20 (number of SB SEF respondents).
contemplated. The Commission SB SEFs combined for reporting would generate, collect, organize and preserve
estimates, based on its experience with be $1,880,000.492 In addition, the all of the documents and other records
the ARP program, that the burden Commission preliminarly estimates that required under proposed Rule 818(a)
imposed by these requirements would the total annual hourly burden on all SB and (b). The Commission requests
be 15.4 hours on average per respondent SEF participants for reporting under comment on the accuracy of this
per year, for a total estimated burden of proposed Regulation SB SEF would be estimate.
308 hours per year for all 28,000 hours. In addition, proposed Rule 818(c)
respondents.486 The Commission would require a SB SEF to keep certain
4. Recordkeeping Required Under
believes that this work would be records with respect to trading activity
Regulation SB SEF
conducted internally. The Commission on and through the SB SEF.
solicits comments as to the accuracy of The annual recordkeeping Specifically, a SB SEF would be
this estimate. requirements that are contained in required to make and keep accurate,
Proposed Rule 822(a)(4) would proposed Rules 818(a) and (b) are time-sequenced records of all trading
require a SB SEF to notify the similar to the requirements that apply to interest and transactions that are
Commission in writing at least thirty SROs pursuant to Rules 17a–1(a) and (b) received by, originated on, or executed
calendar days before implementation of under the Exchange Act.493 The on the SB SEF. This recordkeeping rule
any planned material systems changes. Commission currently estimates that an is similar to the audit trail requirement
The Commission estimates that there SRO, including a national securities that applies to ATSs pursuant to Rule
would be an average of 60 such events exchange, would expend approximately 302 of Regulation ATS under the
per respondent per year.487 Based on the 50 hours per year to comply with the Exchange Act.496 The Commission
Commission’s experience with the ARP collection of information requirement of currently estimates that an ATS would
program, the Commission estimates that Rule 17a–1.494 Based on the expend approximately 130 hours per
each of these notices would require an Commission’s experience with Rule year to comply with the collection of
average of 2 hours for a total burden for 17a–1(a) and (b), the Commission information requirements of Rule 302 of
all respondents of 2,400 hours believes that 50 hours would be an Regulation ATS. Based on the
annually.488 The Commission believes appropriate estimate for the hourly Commission’s experience with Rule 302
that this work would be conducted burden that would apply to SB SEFs to of Regulation ATS, which contains the
internally. The Commission solicits comply with proposed Rule 818(a) and requirement that an ATS make and keep
comments as to the accuracy of this (b). The Commission notes that SB SEFs records necessary to create a meaningful
estimate. generally would be electronic platforms
audit trail, the Commission
The Commission therefore and that the vast preponderance of its
preliminarily estimates that the annual
preliminarily estimates that the total records thus should be retained
hourly paperwork burden for a SB SEF
annual hourly reporting burden electronically in the ordinary course of
to comply with proposed Rule 818(c)
associated with proposed Rule 822 its business. Therefore, the Commission
would be approximately 130 hours,
would be 19,208 hours 489 and preliminarily estimates that it would
which would result in an aggregate
$1,800,000.490 take a SB SEF approximately 50 hours
The Commission preliminarily annual burden of 2,600 hours.497 The
annually to comply with proposed Rule
estimates that the total annual hourly Commission requests comment on the
818(a) and (b) for an aggregate annual
burden for all SB SEFs combined for accuracy of this estimate.
burden of 1,000 hours.495 This
reporting would be 24,208 hours.491 estimated amount includes, but is not The Commission preliminarily
There is no one time initial hourly limited to, the annual hourly burden to believes that the records that a SB SEF
burden associated with the proposed would have to keep and preserve to
reporting requirements. The 492 $1,880,000 = $80,000 (annual cost burden to comply with proposed Rule 818 would
Commission preliminarily estimates comply with proposed Rule 814(b)(3)) + $1,800,000 be the same records that a SB SEF
that the total annual cost burden for all (annual cost burden to comply with proposed Rule would already have to keep and
822(a)(2)). preserve in the ordinary course of its
493 17 CFR 240.17a–1(a) and (b). In addition,
486 308 hours = 15.4 annual hourly burden per
proposed Rule 811(b)(3) would require that a SB
business. A SB SEF would be required
respondent to comply proposed Rule 822(a)(3)) × 20 SEF make and keep records relating to all grants to keep and preserve these records to,
(number of SB SEF respondents). This annual and denials of access to the SB SEF and proposed among other things, pay taxes, defend
hourly burden comports with the Commission’s Rule 811(g) would require a SB SEF to make and against legal actions, resolve conflicts
estimate for similar proposed requirements to be keep records relating to all disciplinary
imposed on SDRs to comply with similar proposed proceedings. The records required by proposed
between participants, and generally to
requirements. See SDR Release, supra note 6. Rules 811(b)(3) and 811(g) would be included in the ensure the smooth functioning of the SB
487 This estimate would account for any weekly
business records required to be kept pursuant to SEF’s business operations. Therefore,
maintenance that would meet the standard of a proposed Rule 818. Therefore, the Commission the Commission preliminarily believes
‘‘material systems change,’’ as well as for any preliminarily believes that the paperwork burden
software upgrades, throughout the year, that would for these rules would be included in the estimated
that, while there would be a collection
meet such standard. burden for proposed Rule 818. See supra note 417 of information required by proposed
488 2,400 hours = 60 (notices per SB SEF) × 2 and accompanying text.
(annual hourly burden per notice) × 20 (number of 494 Rule 17a–1 also states generally that SROs 496 Rule 302 of Regulation ATS under the
SB SEF respondents). See SDR Release, supra note shall, upon the request of any representative of the Exchange Act generally requires an ATS to keep a
6. Commission, promptly furnish copies of documents record of subscribers, daily summaries of trading
489 19,208 hours = 16,500 (annual hourly burden
required to be kept and preserved under the rule. and time sequenced records of order information in
to comply with proposed Rule 822(a)(2)) + 308 See 17 CFR. 240.17a–1. The Commission’s the ATS. See 17 CFR 242.302. The Commission’s
(annual hourly burden to comply with proposed estimated burden of 50 hours per respondent estimated burden of 130 hours per respondent
Rule 822(a)(3)) + 2,400 (annual hourly burden to reflects compliance with all of the recordkeeping reflects compliance with all of the recordkeeping
comply with proposed Rule 822(a)(4)). provisions of this rule. See 2010 Extension of Rule provisions of this rule. See 2010 Extension of Rule
490 See supra note 485. 17a–1 Supporting Statement, Office of Management 302 Supporting Statement, Office of Management
491 24,208 = 2,800 (annual hourly burden to and Budget, available at http://www.reginfo.gov/ and Budget, available at http://www.reginfo.gov/
comply with proposed Rule 814) + 800 (annual public/do/PRAViewDocument?ref_nbr=201007- public/do/PRAViewDocument?ref_nbr=201006-
hourly burden to comply with proposed Rule 816) 3235-003. 3235-008.
+ 1,400 (annual hourly burden to comply with 495 1,000 hours = 20 (number of SB SEF 497 2,600 hours = 20 (number of SB SEF
proposed Rule 818) + 19,208 (annual hourly burden respondents) x 50 hours (annual hourly burden to respondents) x 130 hours (annual hourly burden to
to comply with proposed Rule 822). comply with proposed Rule 818(a) and (b)). comply with proposed Rule 818(c)).
Rule 818 related to recordkeeping, there systems for an aggregate one-time Therefore, the Commission
would not be a paperwork burden for hourly burden of 6,400 hours.504 preliminarily believes that the
PRA purposes associated with the SB Therefore, the Commission paperwork burden for a number of SB
SEF’s complying with proposed Rule preliminarily believes that the total SEF participants is either already
818 aside from establishing or aggregate annual hourly burden for 20 encompassed in the collection of
modifying recordkeeping systems as SB SEFs to comply with proposed Rule information for other recordkeeping
noted below, because these records 818(a) through (c) would be obligations that they must comply with
would be maintained in the ordinary approximately 3,600 hours.505 The total or would not be required to be
course of its business.498 one time hourly burden for 20 SB SEFs calculated for purposes of this PRA
For purposes of the PRA, however, to comply with proposed Rule 818 analysis because such burden relates to
the Commission preliminarily estimates would be approximately 13,300 the maintenance of records that are
that a SB SEF could incur a one-time hours 506 and $36,000. The Commission usually or customarily maintained.509
burden to set up or modify an existing requests comment on the accuracy of
recordkeeping system to comply with However, the Commission believes
this estimate.
the proposed Rule 818. Based on the that proposed Rule 813(c)(1) could
As discussed above, proposed Rule
Commission’s experience with impose a new obligation to maintain
813(c)(1) would require a SB SEF to
recordkeeping costs and consistent with establish rules requiring any participant books and records on those ECPs that
prior burden estimates for similar that enters any trading interest or would become participants of the SB
recordkeeping provisions,499 the executes any transaction on the SB SEF SEF. For PRA purposes the Commission
Commission estimates that setting up or to maintain books and records of any believes that it is appropriate to estimate
modifying a recordkeeping system such trading interest or transaction and that all 210 ECPs would be subject to
would create an initial burden of 345 of any position in any security-based the collection of information
hours 500 and $1,800 in information swap that is the result of any such requirement of proposed Rule
technology costs per respondent to trading interest or transaction. The 813(c)(1).510 Based on the Commission’s
purchase recordkeeping software,501 for Commission preliminarily believes that experience with similar recordkeeping
a total initial burden of 6,900 hours 502 proposed Rule 813(c)(1) could impose a rules,511 the Commission preliminarily
and $36,000.503 The Commission collection of information burden on estimates that it would take each ECP
requests comment on the accuracy of some SB SEF participants.507 However, that is a SB SEF participant
this estimate. the Commission also preliminarily approximately 40 hours on an annual
Additionally, the Commission believes that the records that many SB basis to comply with the collection of
preliminarily estimates that each SB SEF participants would have to information requirement of proposed
SEF may have a one-time burden to maintain pursuant to proposed Rule Rule 813(c)(1) for a total annual burden
upgrade its existing systems to ensure 813(c)(1) would be the same records that for all ECP respondents combined of
that the audit trail component of their these participants would have to 8,400 hours.512 The Commission
systems complies with proposed Rule maintain under other Commission requests comment on the accuracy of
818(c). Based on industry sources, the recordkeeping provisions to the extent this estimate.
Commission preliminarily believes that they are regulated entities or in the For purposes of the PRA, the
this work would be done internally by ordinary course of their business.508 Commission also preliminarily
two programmers over the course of estimates that ECPs that would be SB
approximately four weeks. Therefore, 504 6,400 hours = 320 hours (estimated one-time
SEF participants could incur a one-time
the Commission preliminarily estimates hourly burden for two senior programmers working burden to set up or modify an existing
that it would take a total of 320 hours 40 hours per week for four weeks at each SB SEF
to upgrade systems to comply with proposed Rule recordkeeping system to comply with
for a SB SEF to upgrade its existing 818(c)) × 20 (number of SB SEF respondents). the proposed Rule 813(c)(1). Based on
498 See 5 CFR 1320.3(b)(2). This section generally
505 3,600 hours = 1,000 hours (estimated annual the Commission’s experience with
hourly burden to comply with proposed Rule 818(a) recordkeeping costs and consistent with
provides that the time, effort, and financial and (b)) + 2,600 hours (estimated annual hourly
resources necessary to comply with a collection of burden to comply with proposed Rule 818(c)).
prior burden estimates for similar
information that would be incurred by persons in 506 13,300 hours = 6,900 hours (total estimated recordkeeping provisions,513 the
the normal course of their activities (e.g., in one-time hourly burden for all SB SEF respondents Commission estimates that setting up or
compiling and maintaining business records) are
excluded from the definition of ‘‘burden’’ in the PRA
combined to set-up or modify recordkeeping modifying a recordkeeping system
software to comply with proposed Rule 818) + would create an initial burden of 345
if they are usual and customary. 6,400 hours (total estimated one-time hourly burden
499 See Securities Exchange Act Release No.
for all SB SEF respondents combined to modify hours 514 and $1,800 in information
59342 (February 2, 2009); 74 FR 6456 (February 9, existing systems to comply with audit trail technology costs per ECP to purchase
2009) (Amendments to Rules for Nationally requirements of proposed Rule 818(c)).
Recognized Statistical Rating Organizations) 507 The Commission also notes that proposed
(‘‘NRSRO Adopting Release’’). brokers and dealers) under the Exchange Act, 17
809(c)(2)(i) would require non-registered ECPs to CFR 240.17a–3 and 17 CFR 240.17a–4.
500 See NRSRO Adopting Release, supra note 499,
meet the recordkeeping and reporting requirements 509 See 5 CFR 1320.3(b)(2).
74 FR at 6472, n. 154 (estimated average one-time established by the SB SEF pursuant to proposed 510 See supra note 429 and accompanying text.
hourly burden of 345 hours for each nationally Rule 813. The collection of information associated
recognized statistical ratings organization with 809(c)(2)(i) is encompassed in the burden
511 See, e.g., 17 CFR 240.17a–3 and 17 CFR
(‘‘NRSRO’’) to implement a recordkeeping system to estimates for the collection of information 240.17a–4.
comply with Rule 17g–2 under the Exchange Act, associated with proposed Rule 813. 512 8,400 hours = 210 (estimated number of ECPs
17 CFR 240.17g–2). 508 Section 764 of the Dodd-Frank Act requires that could be subject to the collection of
501 See NRSRO Adopting Release, id., 74 FR at

the Commission to adopt rules governing reporting information under proposed Rule 813(c)(1)) × 40
6472 (estimated average cost of $1,800 for each and recordkeeping for SB swap dealers and major hours (estimated annual burden for each ECPs to
NRSRO to purchase recordkeeping software). SB swap participants. See Public Law 111–203, comply with the collection of information under
502 6,900 hours = 345 hours (estimated hourly
§ 764. The Commission is proposing reporting and proposed Rule 813(c)(1)).
burden for each SB SEF to implement a recordkeeping rules for SB swap dealers and major 513 See NRSRO Adopting Release supra note 499.
recordkeeping system) × 20 (number of SB SEF SB swap participants as part of a separate 514 See NRSRO Adopting Release, supra note 499,
respondents). Commission rulemaking. See also, e.g., Rules 74 FR at 6472, n. 154 (estimated average one-time
503 $36,000 = $1,800 (estimated cost to purchase 17a–3 (records to be made by certain exchange hourly burden of 345 hours for each NRSRO to
recordkeeping software) × 20 (number of SB SEF members, brokers and dealers) and 17a–4 (records implement a recordkeeping system to comply with
respondents). to be preserved by certain exchange members, Rule 17g–2 under the Exchange Act).
recordkeeping software,515 for a total believes that for a SB SEF to ensure it requirement. Based on the Commission
initial burden of 72,450 hours 516 and has the capacity to electronically staff’s consultation with CFTC staff,526
$378,000 for all ECPs combined.517 The capture, transmit, and disseminate the Commission estimates that on
Commission requests comment on the information on price, trading volume, average these requirements would
accuracy of this estimate. and other trading data on all SB swaps require 2.5 hours of work per product
executed on or through the SB SEF, as filing, with an estimated average of 34
5. Timely Publication of Trading
required by Section 3D(d)(8) and as responses per year per respondent. The
Information Requirement for SB SEFs
proposed to be incorporated in Commission estimates that this would
Proposed Rule 817(a) would require a proposed Rule 817(a), a SB SEF would result in a total burden of 85 hours per
SB SEF to: (1) have the capacity to need two computer programmers, each respondent 527 and 1,700 hours for all
electronically capture, transmit, and working four weeks. This would result the respondents annually.528 Based on
disseminate information on price, in a one-time hourly burden of 320 the Commission staff’s consultation
trading volume, and other trading data hours 520 per SB SEF respondent, for a with the CFTC staff, the Commission
on all SB swaps executed on or through total annual burden on all SB SEFs of believes that the SB SEF would handle
the SB SEF; and (2) make public timely 6,400 hours.521 The Commission solicits product filings internally. The
information on price, trading volume, comment on the accuracy of these Commission solicits comments
and other trading data on SB swaps to estimates. regarding the accuracy of its estimates.
the extent required by the Commission. The Commission preliminarily
The Commission notes that proposed 6. Rule Filing and Product Filing estimates that the total annual hourly
Rule 817(a)(1) would incorporate Processes for SB SEFs burden for all SB SEFs to prepare and
Section 3D(d)(8) of the Exchange Act Under proposed Rules 805 and 806, a submit rule filings under proposed
but would not otherwise require a SB SB SEF would be required to submit Rules 805 and 806 would be 3,000
SEF to report SB swap transactions to a rule filings for new rules or rule hours. The Commission preliminarily
registered SDR or make public timely amendments, including changes to a estimates that the total annual hourly
information on price, trading volume, product’s terms or conditions. As noted burden for all SB SEFs to prepare and
and other trading data on SB swaps. above, the Commission estimates a total submit product filings under proposed
Rather, the Commission has proposed of 20 SB SEF respondents for this Rules 807 and 808 would be 1,700
that other parties be responsible for requirement. The proposed rules are hours.
reporting of SB swap transactions to a modeled on the rule filing and product
registered SDR and for the public 7. Requirements Relating to the SB
filing processes proposed by the
dissemination of certain SB swap SEF’s CCO
CFTC.522 Based on the Commission
transaction information.518 staff’s consultation with CFTC staff,523 The SB SEF’s CCO would have
However, because proposed Rule several initial and annual paperwork
the Commission estimates that on
817(a) would require a SB SEF to have burdens under proposed Rule 823(b)(6)
average these requirements would
the capacity to electronically capture, and (7) and also under proposed Rule
require 2.5 hours of work per rule filing,
transmit, and disseminate information 823(c) through (e).
with an estimated average of 60
on price, trading volume, and other Under proposed Rule 823(b)(6) and
responses per year per respondent. This
trading data on all SB swaps executed (7), the CCO would be responsible for:
would result in a total estimated burden
on or through the SB SEF so that it (1) Establishing procedures for the
of 150 hours per respondent 524 and
could make such information public if remediation of noncompliance issues
3,000 hours for all the respondents
required, the Commission preliminarily identified by the CCO identified through
annually.525 Based on the Commission
believes that each SB SEF could have a any compliance office review, look-
one-time hourly burden to modify its staff’s consultation with CFTC staff, the
Commission believes that the SB SEF back, internal or external audit finding,
systems so that they have this self-reported error or validated
functionality.519 The Commission would handle the rule filing process
internally. The Commission solicits complaint, and (2) establishing
comments regarding the accuracy of its appropriate procedures for the handling,
515 See NRSRO Adopting Release, supra note 499,
estimates. management response, remediation,
74 FR at 6472 (estimated average cost of $1,800 for
each NRSRO to purchase recordkeeping software). Under proposed Rules 807 and 808, a retesting, and closing of noncompliance
516 72,450 hours = 345 hours (estimated hourly
SB SEF would be required to submit issues. As noted above, the Commission
burden for each SB SEF participant to implement
filings for new products that it makes estimates a total of 20 respondents for
a recordkeeping system) × 210 (estimated number this requirement. Based on the
of ECP SB SEF participants that could seek to set available for trading. As outlined above,
up or modify a recordkeeping system to comply the Commission estimates a total of 20 Commission’s paperwork burden
with proposed Rule 813(c)(1)). SB SEF respondents for this estimates for compliance program rules
517 $378,000 = $1,800 (estimated cost to purchase adopted under the Investment Company
recordkeeping software) × 210 (estimated number of Act of 1940 (‘‘ICA’’) and the Investment
paperwork burden estimate for proposed Rule
ECP SB SEFs that could seek to purchase
recordkeeping software to comply with proposed
817(a). See 5 CFR 1320.3(b)(2). Advisers Act of 1940,529 the
520 320 hours = 2 (number of senior programmers)
Rule 813(c)(1)).
518 See Reporting and Dissemination Release × 40 (hours in a standard full-time work week) × 526 See 75 FR 67282 (November 2, 2010) (CFTC
4 (number of weeks required). proposal to amend 17 CFR 40.2–40.5).
supra note 6. 521 6,400 hours = 320 (estimated one-time hourly
519 The Commission believes that a SB SEF would 527 85 hours = 34 (number of responses per year
burden per SB SEF respondent pursuant to per respondent) × 2.5 hours (burden per response).
seek to ensure that it has the capacity to
proposed Rule 817(a)) × 20 (number of SB SEF 528 1,700 hours = 85 hours (annual burden per
electronically capture, transmit, and disseminate
respondents). respondent pursuant to proposed Rules 807 and
information on price, trading volume, and other 522 See 75 FR 67282 (November 2, 2010) (CFTC
trading data on all SB swaps executed on or through 808) × 20 (number of SB SEF respondents).
its facilities in the ordinary course of its business. proposal to amend 17 CFR 40.2–40.5). 529 Rule 38a–1 under the ICA (17 CFR 270.38a–
523 See id.
Therefore the Commission is not including the one- 1) requires each registered investment company and
524 150 hours = 60 (number of responses per year
time burden of developing and implementing business development company to adopt and
systems having the capacity to electronically per respondent) × 2.5 hours (burden per response). implement policies and procedures reasonably
capture, transmit, and disseminate information on 525 3,000 hours = 150 hours (annual burden per designed to prevent violations of the Federal
price, trading volume, and other trading data on all respondent pursuant to proposed Rules 805 and securities laws. See Investment Company Act
SB swaps executed on or through the SB SEF in its 806) × 20 (number of respondents). Continued
Commission estimates that, on average, a total annual burden of 1,840 hours for purposes of complying with the
the requirements of proposed Rule all respondents.535 Because the report financial statement requirements under
823(b)(6) and (7) would mean that each would be submitted by the CCO, the proposed Rule 823(e)(1) and (2) and
SB SEF would expend 160 hours Commission does not expect that the SB Exhibits F and H to proposed Form SB
initially 530 to create the required two SEF would incur any external costs. The SEF, the Commission estimates a total
policies and procedures, for a total Commission solicits comments on the annual burden of 11,880 hours 537 and
estimated burden for all respondents of accuracy of its estimates. $10,460,000 for respondents.538 The
3,200 hours initially.531 Also, due to the A CCO would be required under Commission solicits comments as to the
novel nature of the CCO requirements in proposed Rule 823(e)(1) and (2) and accuracy of this information.
the SB SEF industry and the new Exhibits F and H to proposed Form SB As a result, the Commission estimates
requirements under the Dodd-Frank SEF to submit an annual financial report that the total burdens for compliance
Act, the Commission estimates that an that would need to satisfy a number of with proposed Rule 823 would be:
initial one-time burden of $40,000 in requirements, including the requirement (1) Initially, for the creation of the
outside legal costs 532 would be incurred that a registered public accounting firm policies and procedures required in
per respondent, for a total outside cost that is qualified and independent in proposed Rule 823(b)(6) and (7), 160
burden for all respondents of accordance with Rule 2–01 of hours and $40,000, per respondent, and
$800,000.533 The Commission solicits Regulation S–X (17 CFR 210.2–01) audit 3,200 hours and $800,000, for all
comments regarding the accuracy of each financial report relating to the SB respondents; and (2) on an annual basis,
these estimates. SEF (unaudited for certain affiliated for the annual compliance report and
A CCO also would be required under entities). Based on conversations with financial reports required under
proposed Rule 823(c) and (d) to prepare operators of current trading platforms proposed Rule 823(c) through (e), 686
and submit an annual compliance report and the Commission’s experience with hours 539 and $523,000, per respondent,
to the Commission and to the SB SEF’s entities of similar size, the Commission and 13,720 540 hours and
Board. Based upon the Commission’s preliminarily estimates that the reports $10,460,000,541 for all respondents.
estimates for similar annual reviews and relating to the SB SEF generally would The Commission preliminarily
reports by CCOs of investment require, on average, 500 hours per estimates that the total annual hourly
companies, the Commission estimates respondent to complete and cost burden for all SB SEFs combined for the
that these reports would require an $500,000 for independent public CCO requirements in proposed Rule 823
average of 92 hours per respondent per accounting services per respondent. The would be 13,720 hours and the total
year.534 Thus, the Commission estimates Commission believes that the unaudited one-time hourly burden would be 3,200.
reports required for certain affiliated The Commission preliminarily
Release No. IC–26299 (December 17, 2003); 68 FR entities and available upon request by estimates that the total annual cost
74714 (December 24, 2003) (adopting release) and the Commission for other affiliated
see 2010 Extension of Rule 38a–1 Supporting burden for all SB SEFs to comply with
Statement, Office of Management and Budget, entities would not be overly time the CCO requirements in proposed Rule
available at: http://www.reginfo.gov/public/do/ consuming to produce because, based 823 would be $10,460,000 and the total
PRAViewDocument?ref_nbr=201002-3235-028 on the Commission’s experience with one-time cost burden would be
(‘‘ICA PRA’’). The ICA PRA estimates a burden of Form 1 filers, a respondent’s accounting
80 hours initially for the creation of such policies $800,000.
and procedures. system should have this information
530 160 hours = 80 hours (burden per policy and available. Furthermore, because the 8. Surveillance Systems Requirements
procedure requirement) × 2 (number of policy and information would not have to be for SB SEFs
procedure requirements). audited, a respondent would only have
531 3,200 hours = 160 hours (initial burden per As discussed above, proposed Rule
respondent) × 20 (number of SB SEF respondents).
to compile the information using a 813(b) requires SB SEFs to have the
532 $40,000 = $400 (estimated hourly cost for computer and commercially available capacity and resources to electronically
outside counsel) × 50 hours (estimated amount of software that it generally would own for monitor trading in SB swaps on its
external legal work require per policy and pre-existing accounting purposes and
procedure requirement) × 2 (number of policy and market by establishing an automated
procedure requirements). The estimate of 50 hours
then submit the information to the surveillance system, including through
of external legal work is from the Commission’s Commission. Based on the number of real-time monitoring of trading and use
estimate for external legal costs for complying with unaudited financial statements that the of automated alerts, to, among other
the requirements of Rule 611 of Regulation NMS for Commission receives from filers of Form
establishing polices and procedures thereunder. See things, detect and deter fraudulent or
Securities Exchange Act Release No. 51808 (June 9, 1 and the substance in these reports, the manipulative acts or practices, detect
2005); 70 FR 37496 (June 29, 2005). See also 2008 Commission estimates that it would take
Extension of Rule 611, Supporting Statement, Office a SB SEF 40 hours to compile, review, 537 11,880 hours = 20 (number of SB SEF
of Management and Budget, available at: http://
www.reginfo.gov/public/do/
and submit these reports. However, all respondents) × 594 hours (500 hours for audited SB
of these reports would need to be SEF financial statements + 40 hours for unaudited
PRAViewICR?ref_nbr=200802-3235-021. The
financial statements of affiliated entities + 54 hours
Commission preliminarily estimates an hourly cost provided in XBRL, as required in Rules for XBRL formatting of submission).s
of outside counsel at $400. See Municipal 405(a)(1), (a)(3), (b), (c), (d) and (e) of 538 $10,460,000 = 20 (number of SB SEF
Securities Disclosure Release, supra note 438.
533 $800,000 = $40,000 (initial burden per
Regulation S–T.536 This would create an respondents) × $523,000 ($500,000 for outside
respondent) × 20 (number of SB SEF respondents). additional burden on respondents. The accounting services for auditing SB SEF’s financial
534 The ICA PRA estimated that CCOs of Commission preliminarily estimates statements + $23,000 in outside software and other
cost for formatting financial statement submission
investment companies would expend 42 hours that, based on its experience with other in XBRL format).
annually to conduct the annual review and prepare data tagging initiatives, these
539 686 hours = 594 hours for financial report +

the annual compliance report under Rule 38a–1
under the ICA. See ICA PRA supra note 529. requirements would add an additional 92 hours for annual compliance report.
Because proposed Rule 823 would require slightly burden of an average of 54 hours and 540 13,720 hours = 686 hours (burden per
more than double the information that is required $23,000 in outside software and other respondent) × 20 (number of SB SEF respondents).
541 $10,460,000 = 20 (number of SB SEF
for CCO annual reports under Rule 38a–1, the costs per respondent per year. Thus, for
Commission preliminarily estimates that the burden respondents) × $523,000 ($500,000 for outside
associated with the CCO’s annual compliance accounting services for auditing SB SEF’s financial
535 1,840 hours = 92 hours (annual burden per
report requirements of proposed Rule 823(c) and (d) statements + $23,000 in outside software and other
would be 220% that of Rule 38a–1, which estimate respondent) × 20 (number of SB SEF respondents). cost for formatting financial statement submission
would be approximately 92 hours. 536 See 17 CFR 232.405. in XBRL format).
and deter market distortions or hours for all respondents.547 In the majority of entities that would seek
disruptions of trading, conduct real-time addition, the Commission estimates that to become SB SEFs would already have
monitoring of trading to provide for these systems may incur an ongoing some risk management systems and
comprehensive and accurate trade information technology cost of and supervisory procedures and controls to
reconstruction, and collect and assess $500,000 per respondent, for a total protect the integrity of their business
data to allow SB SEFs to respond to ongoing annual burden of and to comply with other requirements
market abuses and disruptions.542 $10,000,000548 The Commission solicits already specified, analyzed and
comments on the accuracy of its accounted for herein (e.g., requirements
Based on industry sources, the estimates. relating to surveillance systems,
Commission preliminarily estimates recordkeeping, reporting, and the CCO).
that establishing an automated 9. Access by Non-Registered Eligible
However, some entities that seek to
surveillance system would require one Contract Participants
become SB SEFs could have to change
senior programmer and three additional As discussed above, proposed Rule their systems and procedures and other
programmers working for a year to 809(d)(1) would require a SB SEF that entities that currently do not have such
create and implement such a system. permits non-registered ECPs to be systems and procedures could have to
Assuming a 1,800 hour work year, the participants in the SB SEF to establish, establish new systems and procedures
Commission preliminarily estimates document, and maintain a system of risk to comply with the requirement of
that the average one-time initial burden management controls and supervisory proposed Rule 809(d).
per respondent of establishing an procedures reasonably designed to The Commission preliminarily
automated surveillance system manage the financial, regulatory, and believes that each SB SEF would have
compliant with these requirements, other risks of this business activity.549 a one-time burden to establish or modify
would be 7,200 hours.543 In addition, Proposed Rule 809(d)(2) would require its technology and systems to add the
the Commission believes that a one-time that the risk management controls and controls necessary to comply with the
supervisory procedures for granting requirement of the proposed Rule
capital expenditure of $1,500,000 in
access to certain ECPs as participants of 809(d). The Commission estimates that
information technology costs would be
the SB SEF be reasonably designed to each SB SEF would spend an average of
necessary to establish such a system. ensure compliance with all regulatory
This estimate is based on the 225 hours to develop or modify their
requirements.550 The Commission notes systems to bring them into compliance
Commission’s discussions with market that proposed Rule 809(d) is modeled
participants currently operating with the proposed rule for a total one-
on recently adopted Rule 15c3–5 under time burden for all SB SEFs combined
platforms that trade OTC swaps. Based Exchange Act.551 The PRA analysis
on the estimated number of 20 SB SEF of 4,500 hours.553 Based on industry
prepared in connection with that rule sources, the Commission preliminarily
respondents, the Commission estimates has informed the Commission’s believes that the development or
a total start-up cost of 144,000 hours 544 estimates of the paperwork burdens that modification of the required technology
and $30,000,000 in information would apply to SB SEFS under the and systems would be performed
technology costs.545 Based on proposed Rule 809(d).552 Although the internally.
discussions with operators of current Commission reviewed the burden The Commission also preliminarily
trading platforms, the Commission estimates it prepared in connection with believes that proposed Rules 809(d)(1)
further estimates that to maintain these Rule 15c3–5 to inform its burden and (2) would impose an annual
systems, a SB SEF would have to estimates of the proposed Rule 809(d), paperwork burden on each SB SEF to
employ two programmer/analysts. the Commission recognizes that a maintain its risk management system.
Therefore, assuming a 1,800 hour work number of entities that seek to become The Commission preliminarily
year, the Commission preliminarily SB SEFs may not currently be regulated estimates that the ongoing annual
estimates the average ongoing annual entities. burden for a SB SEF to maintain its risk
costs of these systems to be 3,600 hours The Commission preliminarily management system would be 172.5
per respondent 546 for a total of 72,000 believes that proposed Rule 809(d)(1) hours on average for a total annual
and (2) would impose a one-time burden for all SB SEFs combined of
542 Proposed Rule 811(i) would require a SB SEF
collection of information burden on SB 3,450 hours.554 The Commission
to have the capacity to capture information that SEFs to establish or modify risk believes that the ongoing burden of
may be used in establishing whether rule violations management systems, if they permit complying with the proposed rule’s
have occurred, including through the use of access by non-registered ECPs. The
automated surveillance systems as set forth in collection of information burden would
proposed Rule 813(b). Proposed Rule 813(a)(2)
Commission preliminarily believes that include, among other things, updating
would require a SB SEF to monitor trading in SB systems to address any issues detected,
547 72,000 hours = 3,600 hours (annual burden
swaps to prevent manipulation, price distortion,
and disruptions of the delivery or cash settlement per respondent) × 20 (number of SB SEF updating risk management controls to
practices and procedures, including methods for respondents). reflect changes in the SB SEF’s business
conducting real-time monitoring of trading and 548 $10,000,000 = $500,000 (annual cost burden model, and documenting and preserving
comprehensive and accurate trade reconstructions. per respondent) × 20 (number of SB SEF its written description of risk
The Commission preliminarily believes that the respondents).
information collection burden associated with these 549 See proposed Rule 809(d)(1).
management controls. Based on
requirements would be included in the information 550 See proposed Rule 809(d)(2).
industry sources, the Commission
collection burden for proposed Rule 813(b). 551 See 17 CFR.240.15c3–5. Though the preliminarily believes that the
543 7,200 hours = 1,800 (initial hours burden per

Commission is relying on the PRA estimates it
employee) × 4 (number of employees). prepared in connection with Rule 15c3–5 to inform 553 4,500 hours = 225 (estimated average one-time
544 144,000 hours = 7,200 hours (initial burden
its PRA estimates for this proposed rule, the burden to set up or modify systems to comply with
per respondent) × 20 (number of SB SEF Commission notes that some of the specific collection of information under proposed Rule
respondents). requirements, controls and procedures in Rule 809(d)) × 20 (number of SB SEF respondents).
545 $30,000,000 = $1,500,000 (initial cost burden 15c3–5 are not contained in the proposed Rule 554 3,450 hours = 225 hours (estimated average
per respondent) × 20 (number of SB SEF 809(d) for SB SEFs. annual burden to establish or maintain risk
respondents). 552 See Securities Exchange Act Release No. management systems to comply with collection of
546 3,600 hours = 1,800 (annual hours burden per 63241 (November 3, 2010), 75 FR 69792 (November information under proposed Rule 809(d)) × 20
employee) × 2 (number of employees). 15, 2010). (number of SB SEF respondents).
maintenance of a SB SEF’s risk one-time burden for all SB SEFs to The Commission preliminarily
management systems would performed comply with the collection of believes that this work would be
internally by one or more programmers. information requirements of proposed performed internally by one senior
The Commission preliminarily Rule 809(d) would be 5,550 hours 557 programmer and one programmer. The
believes that proposed Rule 809(d) and the total annual burden to comply Commission preliminarily believes that
would impose a one-time legal and with the proposed Rule would be 4,950 one senior programmer and one
compliance burden on each SB SEF to hours.558 programmer would spend
comply with the requirement to approximately 40 hours each to
establish, document, and maintain risk 10. Composite Indicative Quote and
Executable Bids and Offers establish or update the SB SEF’s
management controls and supervisory
Proposed Rule 811(e) would require a systems to include the composite
procedures. Based on the Commission’s
experience with broker-dealers and SB SEF that operates an RFQ platform indicative quote and executable bids
ATSs, the Commission preliminarily to create and disseminate through the and offers functions. The total one-time
estimates that the average initial one- SB SEF a composite indicative quote, burden, on average, for a SB SEF to
time legal and compliance burden made available to all participants, for SB establish or update its system to include
would be approximately 52.5 hours per swaps traded on or through the SB SEF these functions would be 80 hours for
SB SEF for a total one-time legal and and the Commission’s proposed a total one-time burden for all SB SEFs
compliance burden for all SB SEFs interpretation of SB SEF would require combined of 1,600 hours.559 Further, the
combined of 1,050 hours.555 The each SB SEF, at the minimum, to Commission preliminarily believes that
Commission preliminarily estimates provide any participant with the ability one programmer would spend
that one internal compliance attorney to make and display executable bids or approximately 50 hours annually, on
and one internal compliance manager offers accessible to all participants on average, monitoring and updating the
would spend on average 7.5 hours each the SB SEF, if the participant wishes to system to determine that the composite
to evaluate appropriate access controls do so. The Commission preliminarily indicative quote and the executable bids
and procedures. The Commission also believes that most if not all of the and offers functions would be operating
preliminarily estimates that one internal respondents that operate RFQ platforms appropriately. The total annual burden
compliance attorney and one already have systems that collect and to all SB SEFs combined for monitoring
compliance manager would each require disseminate a composite indicative
and updating these mechanisms would
approximately 15 hours, and the CCO quote for other securities traded on or
be 1,000 hours.560
would require approximately 7.5 hours, through the respondents’ platforms. The
to set up or modify compliance policies Commission also preliminarily believes 11. Total Paperwork Burden Under
and procedures to comply with the that SB SEFs currently have the Regulation SB SEF
proposed rule, which includes capability to offer the executable bids
establishing written policies and and offers function to its participants. Based on the foregoing, the
procedures for reviewing the overall Thus, the Commission preliminarily Commission preliminarily believes that
effectiveness of risk management believes that the composite indicative the total one-time hourly burden for all
controls and supervisory procedures. quote and the executable bids and offers SB SEFs and SB SEF participants
The Commission also preliminarily requirements would result in little or no combined pursuant to the requirements
believes that proposed Rule 809(d) collection of information burden for under Regulation SB SEF is equal to
would impose an annual paperwork such entities. The Commission 264,801 hours 561 and $41,692,900.562
burden on SB SEFs to review and recognizes, however, that some SB SEFs The Commission preliminarily
document their written risk may have a one-time burden to establish
management controls and supervisory believes that annual ongoing burden for
or update their systems to collect and
procedures. Based on the Commission’s all SB SEFs and SB SEF participants
disseminate composite indicative quote
experience with broker-dealers and information and to offer the executable combined pursuant to the requirements
ATSs, the Commission believes that a bids and offers function and an ongoing
SB SEF’s ongoing annual burden would annual burden to determine that such
be approximately 75 hours on average composite indicative quote mechanisms
for a total annual burden for all SB SEFs and executable bids and offers function
combined of 1,500 hours.556 This are operating properly. The Commission 559 1,600 hours = 80 hours (estimated one-time
estimate includes an average of 30 hours does not know how many SB SEFs collection of information burden to establish or
per year for each of an internal update systems to comply with proposed Rule
would have to establish or update their
811(e) and the Commission’s proposed
compliance attorney and compliance systems to collect and disseminate interpretation of the definition of SB SEF as it
manager, and 15 hours per year for the composite indicative quote information relates to executable bids and offers functions) × 20
CCO, to review, document and updated or to provide the executable bids and (estimated number of SB SEF respondents).
these policies and procedures. offer function. Therefore, for PRA 560 1,000 hours = 50 hours (estimated annual
Therefore, the Commission purposes the Commission estimates that collection of information burden to comply with
preliminarily estimates that the total all of the estimated 20 SB SEF proposed Rules 811(e)) × 20 (estimated number of
respondents would incur the paperwork SB SEF respondents).
555 1,050 hours = 52.5 hours (estimated average 561 263,201 hours = 13,901 hours (registration) +
burdens associated with these
one-time burden to establish, document, and 4,400 hours (rule-writing) + 13,300 (SB SEF
requirements.
maintain risk management controls and supervisory recordkeeping) + 72,450 (SB SEF participant
procedures to comply with collection of recordkeeping) + 6,400 (timely publication of
information under proposed Rule 809(d)) × 20 557 See supra notes 553 and 555 and
trading information) + 3,200 (CCO requirements) +
(number of SB SEF respondents). accompanying text for calculations of total one-time
144,000 (surveillance systems) + 5,550 (access by
556 1,500 hours = 75 hours (estimated average burden to comply with collection of information
under proposed Rules 809(d). ECPs) + 1,600 (composite indicative quote).
annual burden to establish, document, and
562 $41,692,900 = $10,478,900 (registration) +
maintain risk management controls and supervisory 558 See supra notes 554 and 556 and
procedures to comply with collection of accompanying text for calculations of total annual $36,000 (SB SEF recordkeeping) + $378,000 (SB
information under proposed Rules 809(d)(1) and burden to comply with collection of information SEF participant recordkeeping) + $800,000 (CCO
(2)) × 20 (estimated number of SB SEF respondents). under proposed Rules 809(d). requirements) + $30,000,000 (surveillance systems).
under Regulation SB SEF are equal to 2. Evaluate the accuracy of the mandate, the Commission is proposing
165,632 hours 563 and $22,342,700.564 agency’s estimate of the burden of the Regulation SB SEF, which would
proposed collection of information; contain several rules setting forth the
E. Collection of Information Is 3. Determine whether there are ways requirements for a platform or system to
Mandatory to enhance the quality, utility, and register with the Commission, and to
The collections of information clarity of the information to be maintain that registration, as a SB SEF,
pursuant to Regulation SB SEF would collected; and and Form SB SEF, which would contain
be mandatory for all registered SB SEFs 4. Minimize the burden of collection the application form and the materials
and SB SEF participants, as applicable. of information on those who are to that an applicant would have to provide
respond, including through the use of as part of the registration process. In
F. Responses to Collection of
automated collection techniques or addition, proposed Regulation SB SEF
Information Will Not Be Confidential
other forms of information technology. would contain a series of rules that are
Other than information for which a Persons wishing to submit comments designed to implement the 14 Core
SB SEF or a SB SEF participant requests on the collection of information Principles with which a SB SEF is
confidential treatment, or as may requirements should direct them to the statutorily required to comply. The
otherwise be kept confidential by the following persons: (1) Desk Officer for proposed registration form and rules
Commission, and which may be the Securities and Exchange contained in Regulation SB SEF are
withheld from the public in accordance Commission, Office of Information and designed to promote the goals of the
with the provisions of the Freedom of Regulatory Affairs, OMB, Room 3208, Dodd-Frank Act of having SB swaps
Information Act (‘‘FOIA’’), 5 U.S.C. 522, New Executive Office Building, trade on a regulated market. In
the collection of information pursuant Washington, DC 20503; and (2) conjunction with other rulemakings
to the proposed rules would not be Secretary, Securities and Exchange proposed by the Commission under the
confidential and would be publicly Commission, Station Place, 100 F Street, Dodd-Frank Act, including rule
available. NE., Washington, DC 20549–1090 with proposals relating to SB swap trade
reference to File No. S7–06–11. OMB is reporting,568 SB swap data
G. Retention Period of Recordkeeping
required to make a decision concerning repositories,569 the mitigation of
Requirements
the collection of information between 30 conflicts of interest relating to SB SEFs,
Although recordkeeping and retention and 60 days after publication, so a SBS exchanges and SB swap clearing
requirements have not yet been comment to OMB is best assured of agencies,570 and SB swap anti-fraud and
established for SB SEFs under the having its full effect if OMB receives it anti-manipulation prohibitions,571 the
Exchange Act provisions added by the within 30 days of publication. The proposed registration form and rules
Dodd-Frank Act, the Commission is Commission has submitted the governing SB SEFs are intended to lead
authorized to adopt such rules under proposed collection of information to to a more robust, transparent, and
proposed Regulation SB SEF as part of OMB for approval. Requests for the competitive environment for the market
this proposed rulemaking.565 Proposed materials submitted to OMB by the for SB swaps.
Rule 818 under Regulation SB SEF Commission with regard to this Currently, SB swaps trade in the OTC
would require a SB SEF to maintain collection of information should be in market, rather than on regulated
records of all documents made or writing, refer to File No. S7–06–11, and markets. The existing market for SB
received by it in the conduct of its be submitted to the Securities and swaps is opaque, with little, if any, pre-
business for a period of not less than Exchange Commission, Office of trade or post-trade transparency. A key
five years, the first two years in an Investor Education and Advocacy, goal of the Dodd-Frank Act is to bring
easily accessible place. Station Place, 100 F Street, NE., more transparency to the OTC
Washington, DC 20549–0213. derivatives markets and to bring the
H. Request for Comment
trading of SB swaps onto regulated
Pursuant to 44 U.S.C. 3505(c)(2)(B), XXVIII. Consideration of Costs and markets.572 The Commission, in drafting
the Commission solicits comment to: Benefits rules to implement the SB SEF
1. Evaluate whether the proposed A. Overview provisions of the Dodd-Frank Act, is
collection of information is necessary proposing to put in place a regulatory
To increase the transparency and
for the performance of the functions of structure that will foster a transparent,
oversight of the OTC derivatives market,
the agency, including whether the fair, and competitive market for the
Title VII of the Dodd-Frank Act requires
information shall have practical utility;
the Commission to undertake a number
Ability to Obtain Information; (6) Financial
563 164,632
of rulemakings to implement the Integrity of Transactions; (7) Emergency Authority;
hours = 3,154 (registration) + 2,400
hours (rule-writing) + 24,208 hours (SB SEF
regulatory framework for SB swaps that (8) Timely Publication of Trading Information; (9)
reporting) + 27,500 hours (SB SEF participant is set forth in the legislation, including Recordkeeping and Reporting; (10) Antitrust
reporting) + 3,600 hours (SB SEF recordkeeping) + the registration and regulation of SB Considerations; (11) Conflicts of Interest; (12)
8,400 hours (SB SEF participant recordkeeping) + Financial Resources; (13) System Safeguards; and
SEFs.566 Pursuant to Section 763(c) of (14) Designation of Chief Compliance Officer.
4,700 hours (rule and product filings) + 13,720
hours (CCO requirements) + 72,000 hours
the Dodd-Frank Act, the Commission is 568 See Reporting and Dissemination Release,
(surveillance systems) + 4,950 (access by ECPs) + required to adopt rules providing for: (1) supra note 6.
1,000 (composite indicative quote). The registration and regulation of SB 569 See SDR Release, supra note 6.
570 See Regulation MC Proposing Release, supra
564 $22,342,700 = $2,700 (registration) +
SEFs; and (2) the compliance by SB
$1,880,000 (SB SEF reporting) + $10,460,000 (CCO note 82.

SEFs with the Core Principles set forth
requirements) + $10,000,000 (surveillance systems). 571 See Prohibition Against Fraud, Manipulation,
565 As discussed above, new Section 3D of the thereunder.567 To satisfy this statutory and Deception in Connection with Security-Based
Exchange Act sets forth 14 Core Principles that a Swaps, Exchange Act Rel. No. 63236, proposed on
566 SeePublic Law 111–203 Preamble. Nov. 3, 2010.
SB SEF would need to satisfy, including one
relating to recordkeeping and reporting, and 567 TheCore Principles applicable to SB SEFs are 572 See Public Law 111–203 Preamble. See also
provides the Commission with rulemaking captioned: (1) Compliance with Core Principles; (2) Section 3C(h) of the Exchange Act, Public Law 111–
authority with respect to implementation of these Compliance with Rules; (3) Security-Based Swaps 203, requiring that, subject to certain exceptions,
Core Principles. See Public Law 111–203, § 763(c) Not Readily Susceptible to Manipulation; (4) any SB swap subject to mandatory clearing must be
(adding Section 3D of the Exchange Act). Monitoring of Trading and Trade Processing; (5) traded on a SB SEF or an exchange.
trading of SB swaps. Considering the effective date of the Dodd-Frank Act and competition among market
early stage of regulatory development implementation of the Commission’s participants.574 The Commission
and the existing structure of the SB rules promulgated thereunder, the preliminarily believes that the proposed
swaps market, however, the impact of—and the costs and benefits requirements with respect to pre-trade
Commission is mindful that the that may result from—proposed price transparency should lead to more
proposed rules could have unforeseen Regulation SB SEF may change over efficient pricing in the SB swaps
consequences, either beneficial or time. As commenters review proposed market,575 but is mindful that, under
undesirable, with respect to the shape Regulation SB SEF, they are urged to certain circumstances, pre-trade price
that this market will take. In the consider generally the role that transparency could also discourage the
Commission’s view, it is important that regulation may play in fostering or provision of liquidity by some market
the regulatory structure provides limiting the development of the market participants.576
incentives for the trading of SB swaps for SB swaps. The Commission preliminarily
on regulated markets that are designed believes that proposed Rule 811(e),
B. Benefits which would require a SB SEF that
to foster greater transparency and
competition and are subject to SB SEFs are expected to play a critical operates an RFQ platform to create and
Commission oversight, while at the role in enhancing the pre-trade disseminate through the SB SEF a
same time allowing for the continued transparency and oversight of the composite indicative quote, made
efficient innovation and evolution of the market for SB swaps. SB SEFs should available to all participants, for SB
SB swaps market. In this regard, rather help further the statutory objective of swaps traded on or through the SB SEF,
than proposing a rule that establishes a financial stability and greater would provide a certain level of pre-
prescribed format for the system or transparency for SB swaps 573 by trade transparency for an RFQ platform.
platform that constitutes a SB SEF, the providing a venue for counterparties to Displaying the composite indicative
Commission is proposing to provide execute trades in SB swaps and also by quote would include displaying both
baseline principles, consistent with the serving as a conduit for information composite indicative bids and
requirements of the Exchange Act, that regarding trading interest in SB swaps. composite indicative offers for SB swaps
any potential SB SEF would need to In addition, because the proposed rules traded on or through the SB SEF. As a
meet as a condition to registration as a would impose certain regulatory result of this proposal, an average
SB SEF. Such an approach would allow responsibilities on SB SEFs, such as indicative pricing interest would be
flexibility to those trading venues that monitoring trading, assuring the ability available to all of the SB SEF’s
plan to register as SB SEFs and would to obtain information, and establishing participants. The Commission also
permit the continued development of and enforcing rules and procedures to believes that including RFQ responses
organized markets for the trading of SB ensure the financial integrity of SB in the composite indicative quote would
swaps. This more flexible approach also swaps entered on or though the SB SEF, be an appropriate method to inform SB
would allow the Commission to monitor SB SEFs would be charged with an SEF participants of changes in the
the market for SB swaps and propose important role in helping to oversee average level of pricing interest due to
adjustments, as necessary, as this trading in the market for SB swaps on responses.577 At the same time, the
market evolves. an ongoing basis and allowing dissemination of a composite indicative
The Commission believes that the regulators to quickly assess information quote would provide a greater level of
proposed registration form and rules regarding the potential for systemic risk anonymity for the execution of trades on
under Regulation SB SEF would create across trading venues. an RFQ platform compared with the
a comprehensive structure for the Broadly, the Commission anticipates dissemination of an individual
registration and regulation of SB SEFs, that Regulation SB SEF may bring participant’s indications of interest or
but would also impose costs on market several overarching benefits to the SB responses to an RFQ.
participants. The Commission is swap market. These include the In addition, the Commission
sensitive to the costs and benefits that following: preliminary believes that proposed Rule
would result from proposed Regulation Improved Transparency. The 817(c), which prohibits a SB SEF from
SB SEF and has identified certain costs proposed rules on the registration and making any information regarding a SB
and benefits of these proposals, as regulation of SB SEFs could have swap transaction publicly available
described more fully below. The significant benefits to the market for SB prior to the time that a SDR would be
Commission requests comment on the swaps. The trading of SB swaps on permitted to disseminate the trade
costs and benefits associated with the regulated markets, i.e., SB SEFs, should information, could positively impact the
proposed registration form and rules bring more transparency to the currently market for block trades. Under proposed
contained in proposed Regulation SB opaque market for SB swaps. In Rule 817(c), a SB SEF could not
SEF, and its cost-benefit analysis addition, the Commission’s proposed
thereof, including identification and interpretation of the definition of a SB 574 See, e.g., Ananth Madhavan, Market
assessments of any costs and benefits SEF, combined with the proposed rules Microstructure: A Practitioner’s Guide, Fin.
Analysts J., Vol. 58, at 38 (2002) (nondisclosure of
not discussed in this analysis. The relating to pre-trade transparency, pre-trade price information benefits dealers by
Commission also seeks comment on the should increase overall transparency in reducing price competition).
accuracy of any of the benefits and costs the market for SB swaps. Increased pre- 575 See, e.g., Ekkehart Boehmer, et al., Lifting the
it has identified below and also trade price transparency should help Veil: An Analysis of Pre-trade Transparency at the
welcomes comments on the accuracy of alleviate informational asymmetries that NYSE, J. of Fin., Vol. LX (2005) (greater pre-trade
price transparency leads to more efficient pricing).

any of its cost estimates. Finally, the may exist today in the SB swaps 576 See, e.g., Ananth Madhavan, et al., Should
Commission encourages commenters to markets and allow an increased number Securities Markets Be Transparent? J. of Fin.
identify, discuss, analyze, and supply of market participants to be able to see Markets, Vol. 8 (2005) (finding that an increase in
relevant data, information, or statistics the trading interest of other market pre-trade price transparency leads to lower liquidity
and higher execution costs, because limit-order
regarding any such costs or benefits. participants prior to trading, which traders are reluctant to submit orders given that
Because the structure of the SB swaps should lead to increased price their orders essentially represent free options to
market and the behavior of its market other traders).
participants is likely to change after the 573 See Public Law 111–203 Preamble. 577 See supra Section VIII.C.1.
publicly disseminate complete the extent that market participants the Commission preliminarily believes
transaction reports for block trades (i.e., utilize SB swaps to better manage their that a SB SEF is best positioned to
including the transaction ID and the full risk with respect to a position in implement the proposed controls and
notional size) prior to the time SDRs underlying securities or assets, the procedures.
would be permitted to do so. The extent they are willing to participate in Proposed Rule 811(b)(1) would
Commission believes that proposed the SB swaps market may impact their require every SB SEF to establish fair,
Rule 817(c) would provide parties to willingness to participate in the objective and not unreasonably
block trades some flexibility in timing underlying asset’s market. Thus, the discriminatory standards for granting
their transactions. Based on discussions Commission preliminarily believes that impartial access to trading on the SB
with market participants, the the proposal could benefit the securities SEF. In addition, proposed Rule
Commission believes that parties to markets overall by encouraging a more 811(b)(3)–(4) would require every SB
block trades favor a consistent approach efficient, and potentially higher, level of SEF to make and keep records of all
to the timing of the public reporting of capital investment. denials, or limitations, of access to the
such trades. Therefore, the Commission Improved Access and Competition. SB SEF, and to report such information
preliminary believes that parties to Currently, the market for SB swaps is to the Commission. These proposed
block trades, especially dealers, would dominated by a small group of requirements would further the
be able to have more flexibility in dealers.579 The Dodd-Frank Act’s requirement in the Exchange Act that
effecting a block trade and any mandate to bring SB swaps that are SB SEFs provide market participants
associated hedging transactions, because subject to the mandatory clearing with impartial access.582 Taken
trade information about the block could requirement onto regulated markets, together, these proposed rules should
not be made publicly available by the unless the SB swap is not made foster greater direct access to SB SEFs
SB SEF prior to the time that it is available to trade,580 and proposed by dealers, major SB swap participants,
permitted to be disseminated by a Regulation SB SEF, which is intended to brokers and ECPs. This impartial access
SDR.578 Furthermore, if the market help implement the statutory directive, should, in turn, promote greater
participants choose to utilize this should help foster greater competition participation by liquidity providers and
functionality, the display of executable in the trading of SB swaps by increasing competition on each SB SEF. Increased
bids or offers should also improve pre- access to SB swap trading venues. The participation could lead to reduced
trade price transparency. proposed rules would provide a information asymmetries among market
Improved Oversight. The proposed framework to allow a number of trading participants, while increased
rules would require SB SEFs to platforms or systems to register as SB competition could lead to more efficient
maintain an audit trail and surveillance SEFs and thus more effectively compete and better pricing in the SB swaps
systems to monitor trading. Regulation for business in SB swaps. Proposed Rule market. Further, a more competitive
SB SEF also would require 809(b) would require a SB SEF’s rules environment should lead to lower
comprehensive reporting and to permit all eligible persons that meet trading costs, which may lead to
recordkeeping by SB SEFs. These the requirements for becoming a increased participation in the SB swaps
requirements would put in place a participant as set forth in the SB SEF’s
market. Impartial access requirements
structure that would provide the SB SEF rules to become participants in the SB
also would help guard against situations
with information to better enable it to SEF.581 Proposed Rule 809(b) would
where certain participants in a SB SEF
oversee trading on its market by its also give a SB SEF the option to not
(who also might be owners of the SB
participants, including detecting and permit any non-registered ECP to
SEF) might seek to limit the number of
deterring fraudulent and manipulative become participants in the SB SEF. As
other participants in the SB SEF in
acts. Regulation SB SEF would also such, proposed Rule 809(b) provides SB
order to limit competition and increase
provide the Commission with greater SEFs with flexibility in choosing
their own profits. Thus, the impartial
access to information on the trading of whether or not to provide access to non-
access should, in turn, promote greater
SB swaps to support its responsibilities registered ECPs. Proposed Rule 809(d)
would require that, if a SB SEF chooses participation by liquidity providers and
to oversee the SB swaps market. competition on each SB SEF.
Further, Regulation SB SEF would to permit non-registered ECPs to become
participants, it would be responsible for As proposed, SB SEFs would remain
enable the Commission to share that free to establish standards for impartial
establishing risk management controls
information with other Federal financial access consistent with the requirement
and supervisory procedures reasonably
regulators in instances of broad market that they be fair and objective and do
designed to manage financial,
turmoil. not unfairly discriminate, and that they
This framework could in turn lead to regulatory, and other risks associated
with the non-registered ECP’s access. do not apply the standards in an unfair
increased confidence in a well-regulated or unreasonably discriminatory manner.
market among SB swaps market These proposed requirements should
reduce risks associated with access to Therefore, SB SEFs could choose the
participants. To the extent market most cost-effective methods to ensure
SB SEFs by non-registered ECPs (e.g., if
participants consider a well-regulated that all their participants and would-be
they enter into trades that exceed
market as significant to their investment participants are evaluated on a fair and
appropriate credit or capital limits or
decisions, trust, which is a component impartial basis.
submit erroneous orders). In addition,
of investor confidence, is improved and To address the problem of restricting
market participants may be more willing 579 See supra note 81. the scope of SB swaps that trade on SB
to participate in the SB swaps market. 580 See Section 3C(h) of the Exchange Act. SEFs, the Commission is proposing to
An increase in participation in the SB 581 Proposed Rule 809(a) would require SB SEFs
require that each SB SEF have a swap
swaps market can potentially benefit the to only permit a person to become a participant in
review committee that would determine
SB swaps market as a whole. Further, to the security-based swap execution facility if such
person is registered with the Commission as a which SB swaps would trade on the SB
security-based swap dealer, major security-based SEF, as well as the SB swaps that
578 See Reporting and Dissemination Release,
swap participant, or broker (as defined in section should no longer trade on the SB
supra note 6, and proposed Rule 904(d) of 3(a)(4) of the Act, 15 U.S.C. 78c(a)(4)), or if such
Regulation SBSR. See also proposed Rule 817(c) of person is an eligible contract participant (as defined
Regulation SB SEF. in section 3(a)(65) of the Act, 15 U.S.C. 78c(a)(65)). 582 See Section 3D(d)(2)(B)(i) of the Exchange Act.
SEF.583 Proposed Rule 811(c)(2) would oversight over the currently unregulated semi-annual and annual public reports
require that the composition of the swap OTC derivative markets.584 Proposed of SB swap data required by Section 763
review committee must provide for the Regulation SB SEF would provide the of the Dodd-Frank Act, because the
fair representation of participants of the means for the Commission to gain better Commission would be able to obtain
SB SEF as well as other market insight into and oversight of the market information about the SB swap market
participants such that each class of for SB swaps. The proposed rules would through its oversight of SB SEFs.585
participant and other market provide the Commission the ability to, Improved Automation. In order to
participants would be given the right to among other things, review the rules of comply with the requirements of
participate in such swap review SB SEFs, obtain data and records from proposed Regulation SB SEF relating to
committee and that no single class of SB SEFs, and inspect and examine SB recordkeeping and surveillance, SB
participant or category of market SEFs, all of which would support the
SEFs would need to invest in and
participant would predominate. Having Commission’s oversight function over
develop automated technology systems
a swap review committee that provides the SB swaps market, as directed by
to store, monitor and communicate a
for the fair representation of participants Congress in the Dodd-Frank Act.
Specifically, proposed Rule 818(a) variety of trading data, including orders,
and other market participants should
would require each SB SEF to keep and requests for quotations, responses and
help assure that the process of
preserve all documents, including all quotations, among others. The
determining those SB swaps that should
correspondence, memoranda, papers, Commission preliminary believes that
trade on the SB SEF would be fair and
books, notices, accounts, and other such the proposed rules should bring about
that various classes of participants in
records that would be made or received increased automation in the SB swaps
the SB SEF, as well as other market
by it in the conduct of its business. In markets. This increased automation
participants, would have a voice in
addition, proposed Rule 818(c) would could help market participants more
those decisions.
require SB SEFs to keep audit trail efficiently track their trading and risk
Consequently, the Commission
records relating to all orders, requests exposures in SB swaps. In addition, the
believes that the proposed rules
for quotations, responses, quotations, automation and systems development
requiring impartial access to trading on
other trading interest, and transactions associated with the regulation of SB
the SB SEF and providing for fair
that are received by, originated on, or SEFs, as required by proposed
representation on the swap review
executed on, the SB SEF. The records Regulation SB SEF, could provide SB
committee to determine which SB
required to be kept, preserved and swaps market participants with new
swaps should be traded on SB SEFs
maintained by a SB SEF under proposed platforms and tools to execute and
should help mitigate the inappropriate
Rule 818 would help the Commission to process transactions in SB swaps at a
exercise of market power by any given
determine whether an SB SEF is lower expense per transaction. Such
market participant or group of market
operating in compliance with the increased efficiency would enable
participants. In addition, the
Exchange Act and the rules and participants of the SB SEF to handle
Commission believes that, in a
regulations thereunder. The audit trail increased volumes of SB swaps with
competitive market, new SB SEFs could
information required to be maintained greater efficiency.
be created to attract market participants
that are unable to meet the objective under proposed Rule 818(c) would In addition to the broad benefits that
requirements of more exclusive SB SEFs facilitate the ability of the SB SEF and the Commission anticipates that
or to trade the SB swaps other SB SEFs the Commission to carry out their Regulation SB SEF may bring to the SB
decide not to trade. respective obligations under the swaps market, the Commission
The Commission also believes that its Exchange Act, by providing a record of preliminarily believes that its individual
proposed interpretation of which the complete history of all trading proposed rules may bring particular
facilities fall within the term SB SEF, interest entered and transactions benefits to the SB swap market. These
providing, at the minimum, any executed on the SB SEF. This audit trail include the following:
participant with the ability to make and could be used to help detect abusive or
Interpretation of SB SEF Definition.
display executable bids or offers manipulative trading activity, prepare
The Commission believes that its
accessible to all participants on the SB reconstructions of activity on the SB
proposed interpretation of the scope of
SEF, if the market participant wishes to SEF or in the SB swaps market, and
the definition of SB SEF 586 should
do so, would also improve access to the generally to understand the causes of
unusual market activity. provide sufficient flexibility for market
SB SEF by participants because it participants in creating and operating a
provides participants an additional Furthermore, proposed Rule 811(h)
would require the SB SEF to make and variety of SB SEFs to trade SB swaps.
method with which to execute The Commission preliminary believes
transactions on the SB SEF. keep records specifically of all
disciplinary proceedings and appeals, that a system or a platform which allows
Improved Commission and SB SEF a participant the ability to send an RFQ
Oversight. The Commission believes which would allow the Commission to
review the disciplinary process at a SB to all participants, as well as the choice
that one of the goals of the Dodd-Frank to send an RFQ to fewer than all
Act is to increase the regulatory SEF, providing the Commission an
additional tool to carry out its oversight participants, would provide flexibility
583 See proposed Rule 811(c). See also Core responsibilities. The proposed to the market, because participants
Principle 3 and proposed Rule 812, which permit registration requirements and related would be able to trade SB swaps by
a SB SEF to trade only SB swaps that are not readily proposed Form SB SEF, and the CCO’s accepting bids and offers from multiple
susceptible to manipulation. Prior to trading any SB annual compliance report, which are participants, while still preserving the
swap, proposed Rule 812 would require the swap ability of each participant to decide how
review committee to determine whether, after further discussed below, should also aid
taking into account all of the terms and conditions the Commission in its oversight
585 See Section 763(i) of the Dodd-Frank Act
of the SB swap and the markets for the SB swap responsibilities. As a whole, proposed
and any underlying security or securities, that such requiring the Commission to provide SB swap data
Regulation SB SEF should facilitate the to the public.
SB swap is not readily susceptible to manipulation.
Proposed Rule 812 also would require the swap Commission’s work in preparing the 586 See supra Section III.B for a detailed
review committee to periodically review that discussion of the proposed interpretation of the
determination. 584 See Public Law 111–203 Preamble. definition of SB SEF.
broadly or narrowly to disseminate his benefit to the SB swaps market by imposed on registered SB SEFs, and to
or her RFQ. reducing the costs of complying with ensure that a registered SB SEF
The Commission believes that this unnecessary rules or regulations. continues to comply with the
proposed interpretation would likely Registration. The registration of SB requirements imposed on registered SB
encourage a greater number of SB swaps SEFs is a requirement under the Dodd- SEFs under the Exchange Act. In
to trade on SB SEFs because, as Frank Act.588 Proposed Rule 810(a) addition, proposed Rule 805(a)(4),
mentioned above, it would give incorporates the requirement under the which would require a SB SEF to
requestors the flexibility to determine Dodd-Frank Act that a SB SEF, in order explain the anticipated benefits and
how best to broadcast their interests. to be registered and maintain potential anticompetitive effects on
The Commission believes that, rather registration, comply with the Core market participants of a proposed new
than proposing a rule that establishes a Principles in Section 3D(d) of the rule or rule amendment should help
prescribed format for a system or Exchange Act and any requirement that foster a competitive SB swaps market
platform that constitutes a SB SEF, the the Commission may impose by rule or because it would require SB SEFs to
better approach is to provide baseline regulation. The proposed registration disclose the positive as well as negative
principles, as outlined in the proposed process is intended to implement this aspects of the SB SEF’s proposed rules.
interpretation consistent with the requirement and assist the Commission The information to be provided by the
requirements of the Exchange Act, that in overseeing and regulating the SB SB SEF under proposed Rules 807 and
any potential SB SEF would need to swaps market. The information to be 808 would further the ability of the
meet as a condition to registration as a provided on proposed Form SB SEF is Commission to obtain information
SB SEF. Such an approach should designed to enable the Commission to regarding SB swaps that a SB SEF
provide flexibility to those trading assess whether an applicant has the intends to trade on its market. In
venues that plan to register as SB SEFs capacity and the means to perform the addition, because these processes are
and would permit the continued duties of a SB SEF and to comply with comparable to the parallel processes of
development of organized markets for the Core Principles and other the CFTC, they would promote
the trading of SB swaps. requirements imposed on registered SB efficiency for SB SEFs that are also
Exemptions from Definition of SEFs. registered as SEFs.
Exchange and Certain Regulatory In addition, the amendments,
Requirements Applicable to a Broker. Chief Compliance Officer. The
supplemental information and notices submission of the CCO’s annual
The proposed rules would include that the Commission proposes to require
exemptions for SB SEFs from the compliance report and the annual
registered SB SEFs to file pursuant to financial report to the Commission as
definition of ‘‘exchange’’ and from most proposed Rules 802, 803 and 804 are
regulations governing brokers. Using its would be required by proposed Rule
designed to further the ability of the 823 would help the Commission
exemptive authority under Section 36 of Commission to efficiently monitor SB
the Exchange Act, the Commission is monitor the compliance activities and
SEFs’ compliance with the provisions of financial state of SB SEFs. These reports
proposing: (1) To amend Rule 3a1–1 the Exchange Act and to oversee the
under the Exchange Act to exempt any would also assist the Commission in
marketplace for SB swaps and, carrying out its oversight of the SB SEFs
SB SEF from the definition of specifically, the trading of SB swaps on
‘‘exchange,’’ if such SB SEF provides a and the SB swaps market by providing
SB SEFs. the Commission the information
marketplace solely for the trading of Rule and Product Filings. Proposed
security-based swaps (and no other necessary to review instances, for
Rules 805 and 806 set forth two
security) and complies with the example, of non-compliance and denials
alternative filing processes for a new
provisions of proposed Regulation SB of access.
rule or rule amendment of a registered
SEF; 587 and (2) new Rule 15a–12 to SB SEF, and proposed Rules 807 and Conflicts of Interest. Proposed Rule
allow a person that meets the definition 808 set forth two alternative filing 820 sets forth certain governance
of a SB SEF and broker, to satisfy the processes for SB SEFs to submit filings arrangements that would be required of
broker registration requirements by for new products that it trades. The SB SEFs. Proposed Rule 820(a) would
registering as a SB SEF. The proposed rules are intended to assist the require the rules of a SB SEF to assure
Commission believes that Congress Commission in overseeing and a fair representation of its participants
specifically provided a comprehensive regulating the trading of SB swaps and in the selection of its directors and
regulatory framework for SB SEFs in the to help ensure that SB SEFs operate in administration of its affairs. No less than
Dodd-Frank Act and, therefore, SB SEFs compliance with the Exchange Act. The 20% of the total number of directors of
should not also be required to be self-certification processes of Rules 806 the SB SEF would be required to be
regulated as national securities and 807 require SB SEFs to include a selected by the SB SEF participants.
exchanges or as brokers. Without these certification that the proposed new rule Further, the Commission proposes that
proposed exemptions, SB SEFs would or rule amendment or SB swap, as the SB SEF participant owners be restricted
be required to register with the case may be, complies with the in their ability to participate in the ‘‘fair
Commission not only as SB SEFs, but Exchange Act and Commission rules representation’’ process. In addition,
also as exchanges and brokers. Given and regulations thereunder.589 proposed Rule 820(b) would require that
the regulatory framework for SB SEFs The information to be provided by the at least one director on the Board be
required by the Exchange Act and SB SEF under proposed Rules 805 and representative of investors (‘‘investor
proposed Regulation SB SEF, the 806 would further the ability of the director’’) who are (1) not SB swap
Commission preliminarily believes that Commission to assess whether a SB SEF dealers or major SB swap participants
requiring a SB SEF to register in such has the capacity to perform the duties of and (2) not associated with a
multiple capacities would not be a SB SEF and to comply with the duties, participant. Finally, proposed Rule
efficient. The Commission believes that Core Principles, and other requirements 820(c) would require the rules of a SB
reducing or eliminating such SEF to establish a fair process for SB
inefficiency will confer an overall 588 See Section 3D(a)(1) of the Exchange Act. SEF participants to nominate an
589 See proposed Rules 806(a)(5)(iii) and alternative candidate or candidates to
587 See proposed Rule 3a1–1(a)(4). 807(a)(4)(iii). the Board by petition.
The requirements of proposed Rule swaps market. Further, if the rules informational asymmetries, increasing
820 are important to help ensure that SB proposed by the Commission are, or are price competition and supplying better
SEF participants and investors have a perceived to be, too costly for trading executions beyond the changes in
voice in the administration and venues to comply with, fewer entities response to the other requirements of
governance of the SB SEF, without than expected may seek to register as SB Dodd-Frank. However, the Commission
jeopardizing the overall independence SEFs, thus impacting competition. In believes that this concern depends on
of the Board.590 The proposed addition, if the proposed rules for the degree of pre-trade transparency
governance requirements should also trading on a SB SEF are perceived as too required and the characteristics of the
help to mitigate any conflicts of interest burdensome by market participants, trading market. The proposed rules are
that may arise between SB SEF some trading of SB swaps may move to intended to provide for greater pre-trade
participants who also could be owners foreign markets whose regulations are transparency than currently exists
of the SB SEF, by reducing the perceived to be less restrictive, thus without requiring pre-trade
possibility that a small group of market frustrating the goals of the Dodd-Frank transparency in a manner that would
participants would have the ability to Act. At the same time, if the proposed cause participants to avoid providing
unfairly disadvantage other market rules relating to SB SEFs are too lenient, liquidity on SB SEFs.
participants through the SB SEF they may have little or no impact on the The requirements of the proposed
governance process. In order to further market structure and surveillance of the rules would impose the same minimum
mitigate conflicts of interest and achieve SB swaps markets, which could result level of pre-trade transparency and
fairness in the governance process of a in the loss of many of the benefits order interaction on block trades as on
SB SEF, the proposal would also discussed above and fail to achieve the non-block trades. This can potentially
provide for the ability of SB SEF goals of the Dodd-Frank Act of greater have an impact on the liquidity
participants to have alternative transparency. In addition, because the available on those types of platforms
candidates by requiring the SB SEF to trading mechanisms in the OTC market that would provide for block trading.
establish a fair process for SB SEFs to will continue to be largely unregulated, Today, many block trades are transacted
nominate an alternative candidate or OTC-traded SB swaps may be perceived through voice brokerage, without pre-
candidates by petition. Finally, the by some market participants to be less trade transparency and order
Commission believes that requiring expensive to trade than SB SEF-traded interaction. Block trading enables,
representation on the SB SEF Board by swaps, i.e., in the sense that they are among other things, entities with large
investors who are not SB swap dealers subject to less regulation. exposures to certain business risks to
or major SB swap participants, or In addition, SB swaps traded on SB hedge those risks. For example,
associated with SB SEF participants, SEFs may be perceived to be subject to investors considering making
would provide an important perspective increased costs, monetary and investments in, or lenders considering
to the governance and administration of otherwise. For example, some industry making loans to, certain corporate
a SB SEF. Investor directors could participants have expressed their belief borrowers may seek to purchase credit
provide unique and different that any proposed requirement of pre- default swap (‘‘CDS’’) protection to
perspectives from dealers and other trade transparency would force market hedge some portion of the credit risk the
participants of the SB SEF, which participants to reveal valuable economic investor does not want to retain. The
should enhance the ability of the Board information regarding their trading availability of such credit risk
to address issues in an impartial fashion interest more broadly than they may protection in large block transaction size
believe would be economically prudent may therefore influence investment or
and consequently support the integrity
and could discourage participation in lending decisions which in turn may
of a SB SEF’s governance.
the SB swaps market. An additional influence the cost of borrowing for
C. Costs impact of pre-trade transparency are corporations whose investors rely on
Although the Commission believes perceived costs associated with front block size CDS.
running, if customers or dealers are Generally, economic studies have
that proposed Regulation SB SEF would
required to show their trading interest shown that block trades benefit from
result in significant benefits to the
before a trade is executed. These different market structures than non-
market for SB swaps, the Commission
potential costs of pre-trade transparency block trades.592 These studies suggest
recognizes that the proposed registration
may change market participants’ trading that pre-trade transparency can be
form and rules would also entail
strategies, which could result in them particularly costly for block trades as
significant costs. Some costs are
working more orders or finding ways to prices are likely to move adversely if the
difficult to precisely quantify and are
attempt to hide their interest.591 If existence of a large unexecuted order
discussed below. becomes known. Other traders may
The Commission is mindful that any market participants view the
Commission’s proposal as too front run the block trade order or simply
rules it may adopt with respect to SB infer information about future price
SEFs under the Dodd-Frank Act may burdensome with respect to pre-trade
transparency, dealers may be less movements from its presence, thus
impact the incentives of market potentially making it more costly for the
participants with respect to where and willing to supply liquidity for SB swaps
that trade on SB SEFs or exchanges, block-initiating participant to find a
how they trade SB swaps. The counterparty willing to trade at an
Commission is cognizant that its thus impacting liquidity and
competition. On the other hand, if the acceptable price. In addition, if a block
proposed interpretation of the definition trade interacts with other trading
of SB SEF, coupled with the level of requirement with respect to pre-trade

transparency is too loose, the result interest on a SB SEF, there might not be
pre-trade transparency that would be enough liquidity on the SB SEF to
required for trading on a SB SEF, will could be that there would be no
substantive change from the status quo, execute the entire block trade, leaving a
impact the development of the SB portion of the block trade unexecuted,
including no benefits of alleviating
590 Proposed Rule 702(d) under Regulation MC
or requiring the block to be broken into
would require the Board of a SB SEF to have at least 591 See, e.g., Ananth Madhavan, Market smaller order sizes, which also could
a majority of independent directors. See Regulation Microstructure: A Survey, J. of Fin. Markets, Vol. 3
MC Proposing Release, supra note 82. (2000). 592 See, e.g., Bessembinder Paper, supra note 159.
lead to increased transaction costs and for the trading of OTC derivatives, the We detail below cost estimates for
a decreased willingness of market cost of forming a SB SEF would be more specifics parts of the proposed rules.
participants to participate in block incremental, given that these entities Many of these costs estimates are based
trades. already have viable technology that on the PRA estimates of costs and
The Commission recognizes these could be modified to comply with the burdens from Section XXVII, as well as
potential costs and believes that the requirements that the Commission may other costs associated with the proposed
proposal mitigates these costs, because impose for SB SEFs. According to rules.
it would allow SB SEFs flexibility in industry sources, the incremental costs Registration. The Commission
setting their market structure and of enhancing a trading platform to be preliminary estimates that the aggregate
trading rules concerning block trades. compatible with any SB SEF initial costs to all potential SB SEF
This should allow SB SEFs to create requirements established by the registrants to file Form SB SEF,
certain trading structures, e.g., multi- Commission would range from as low as including all exhibits thereto, would be
dealer RFQ platforms, that cater to block $50,000 to as much as $3 million per SB approximately $13,505,940,596 or
trades and others that cater to non- SEF, depending on the enhancements approximately $675,297 597 per SB SEF.
blocks. Moreover, under the proposed needed to establish a platform The Commission estimates the initial
interpretation of the definition of SB compatible with any Commission rules costs (aside from the costs associated
SEF, for a transaction on an RFQ governing SB SEFs. The annual ongoing with Exhibits F, H and P, which are
platform, the person exercising cost of maintaining the technology and separately discussed below) associated
investment discretion for the any improvements is estimated to be in with proposed Form SB SEF would be
transaction, whether it is the participant the range of $2 million to $4 million.595 $32,000 per SB SEF, or $640,000 for all
itself or the participant’s customer, In addition, the regulatory potential SB SEFs.598 This would
could choose to send the RFQ to less requirement of complying with the include the time required to compile the
than all participants. Under this statutory Core Principles would increase information required by proposed Form
proposed interpretation, market the regulatory obligations of registered SB SEF, prepare the proposed Form SB
participants would have the choice to SB SEFs with respect to operating as a SEF itself, and file it with the
determine how broad or how narrow to SB SEF and with respect to overseeing Commission. In addition, Exhibits F and
disseminate their intent to trade blocks. the participants that trade on their H to proposed Form SB SEF would
The Commission further notes that, if facilities. Industry sources estimate that require an applicant to submit financial
overall trading costs decline, then the the cost to an SB SEF of complying with reports that would need to satisfy a
costs of breaking up a block into smaller the rules relating to surveillance and number of requirements, including the
parcels and spreading out those parcels oversight they expected the Commission requirement that a certified public
by market participants seeking to to propose would be in the range of $1 account audit each financial report
execute a block transaction may not million to $3 million annually, with relating to the SB SEF and a
actually increase.593 initial costs likely to be at the higher requirement that unaudited financial
According to industry sources end of such range, since a SB SEF information be provided for certain
consulted by Commission staff,594 the would need to create the technology affiliated entities of the SB SEF.599 The
monetary cost of forming a SB SEF is necessary to monitor and surveil its Commission preliminarily believes that
estimated to range from approximately market participants, as well as to create it is unlikely that during the initial
$15 million to $20 million per SB SEF a rule book in compliance with the Core implementation period a potential
for the first year of operation, if an Principles and related rules. The
registrant would have audited financial
entity were to establish a SB SEF ongoing annual compliance costs are
statements for the SB SEF in the
without the benefit of modifying an estimated by industry sources to be
ordinary course of business prior to
already existing trading system. The approximately $1 million, which would
applying for registration on Form SB
industry sources consulted by include the salary of a CCO and at least
SEF. Therefore, in order to register as a
Commission staff estimate that, for the two junior compliance personnel,
SB SEF with the Commission on Form
first year of operation, the cost of expected to be attorneys.
The Commission requests comments SB SEF and comply with Exhibits F and
software and product development H thereto, potential registrants would
would range from approximately $6.5 on the accuracy of these estimates.
Specifically, the Commission requests incur an initial cost to generate such
million to $10.5 million per SB SEF. financial statements. Based on
The technological costs would be comment on how the Commission can
most accurately estimate the cost and conversations with operators of current
expected to decline considerably during
the second and subsequent years of benefits of the proposed rules and 596 See infra note 597.
operation, and are estimated to be in the interpretations. Are there any important 597 $13,505,940/20 potential SB SEF registrants =
range of $3 million to $4 million per benefits and costs not currently $675,297.
year per SB SEF. For entities that discussed? How would the costs and 598 The Commission preliminarily estimates, for
currently own and/or operate platforms benefits differ between operators of purposes of its PRA, that the average initial burden
current platforms or systems trading SB imposed by proposed Form SB SEF (other than
Exhibits F, H and P of Form SB SEF) for SB SEF
593 See, e.g., Amber Anand, et al., Market Crashes swaps? What are the potential costs and registration would be 100 hours per SB SEF. See
and Institutional Trading, Working Paper, Social benefits of the pre-trade transparency supra Section XXVII. Assuming an hourly cost of
Science Research Network (2010). requirement, block trade requirement, $320 for a compliance attorney to meet these
594 In discussing estimated costs with
order interaction requirement and other requirements, the one-time estimated dollar cost to
Commission staff, these industry sources were register as a SB SEF would be $32,000 (100 hours
market structure requirements included × $320), or $640,000 ($32,000 × 20 SB SEFs) in the
generally familiar with the requirements of the
Dodd-Frank Act and the Core Principles and related in the proposal? aggregate. The hourly rate for the compliance
requirements specified therein, but were not aware attorney is from SIFMA’s Management &
of the specifics of the rules being proposed. Thus, 595 Although there currently are trading systems Professional Earnings in the Securities Industry
they were able to provide the broad general that trade SB swaps on an OTC basis, the 2010, modified by the Commission’s staff to
estimates of projected costs, which are described Commission preliminarily believes that no such account for an 1800-hour work-year and multiplied
here. More specific estimates as to the costs systems are currently in operation that would by 5.35 to account for bonuses, firm size, employee
associated with specific rules are detailed further comply, without modifications, with the benefits and overhead.
below. requirements of proposed Regulation SB SEF. 599 See supra Section XXVII.D.1.
trading platforms and the Commission’s software and other costs per respondent, Therefore, the Commission
experience with entities of similar size, or $241,920 607 and $460,000 608 in the preliminarily estimates that the total
the Commission preliminarily estimates aggregate, respectively. Thus, for one-time aggregate cost for all
that each potential SB SEF registrant complying with the financial statement respondents to file the initial Form SB
would incur, on average, a cost of requirements under Exhibits F and H to SEF, including all exhibits thereto,
$99,000 to complete the financial proposed Form SB SEF, the Commission would be approximately $13,505,940.613
statements,600 and a cost of $500,000 for estimates a total initial cost of After the initial year in which a SB
independent public accounting services. approximately $642,016 per SEF would be registered, the
In the aggregate, these costs are respondent 609 and $12,840,320 in the Commission estimates that each
estimated to be $1,980,000 601 and aggregate for all respondents.610 registered SB SEF would submit 4
$10,000,000,602 respectively.603 Exhibit P to proposed Form SB SEF amendments to Form SB SEF on average
The Commission also estimates that it would require SB SEFs controlled by and one annual update, at an annual
would cost approximately $7,920 per other persons and non-resident SB SEFs cost of $48,000 per SB SEF, or $960,000
respondent to compile, review, and to provide opinions of counsel as in the aggregate.614 In addition, the
submit the financial reports for certain required by Rules 801(e) and (f), Commission estimates that two SB SEFs
affiliated entities as required pursuant respectively. Therefore, in order to controlled by another person would
to Exhibit H to proposed Form SB SEF, register as a SB SEF with the each submit one amendment to Exhibit
or $158,400 in the aggregate.604 All of Commission on Form SB SEF, potential P to Form SB SEF per year, at an annual
the financial statements required by registrants that are controlled by other aggregate cost of $2,440.615 The
Exhibits F and H to proposed Form SB persons or that are non-resident persons Commission also estimates that one
SEF would need to be provided in would incur an initial cost to generate non-resident SB SEF would submit one
XBRL, as required in Rules 405(a)(1), such opinions of counsel. As discussed amendment to Exhibit P to Form SB SEF
(a)(3), (b), (c), (d) and (e) of Regulation above, the Commission preliminarily per year, at an annual cost of $1,220.616
S–T.605 This would create an additional estimates that the average initial
cost for potential SB SEF respondents. paperwork cost for each SB SEF Commission has estimated that only one non-
The Commission preliminarily resident person would seek to register as a SB SEF.
controlled by another person and each The hourly rate for the compliance attorney is from
estimates, based on its experience with non-resident SB SEF to provide the SIFMA’s Management & Professional Earnings in
other data tagging initiatives, that these opinion of counsel required by Exhibit the Securities Industry 2010, modified by the
requirements would add an additional P would be one hour and $900 per SB Commission’s staff to account for an 1800-hour
cost on average of approximately work-year and multiplied by 5.35 to account for
SEF. As discussed above, the bonuses, firm size, employee benefits and overhead.
$12,096 606 and $23,000 in outside Commission preliminarily estimates 613 $13,505,940 = $640,000 (costs other than
that all 20 estimated applicants seeking Exhibits F, H and P to Form SB SEF) + $12,840,320
600 The Commission preliminarily estimates, for
to register as SB SEFs would be (costs relating to Exhibits F and H to Form SB SEF)
purposes of its PRA, that the average initial burden + $24,400 (costs relating to Exhibit P to Form SB
would be 500 hours per SB SEF. See supra Section controlled by other persons and that one SEF for SB SEFs controlled by other persons) +
XXVII. Assuming an hourly cost of $198 for a senior applicant seeking to register as a SB SEF $1,220 (costs relating to Exhibit P to Form SB SEF
accountant to meet these requirements, the one- will be a non-resident person. for all non-resident SB SEFs).
time estimated dollar cost to register as a SB SEF
would be $99,000 (500 hours × $198), or $1,980,000
Therefore, in the aggregate, the costs to 614 The Commission preliminarily estimates, for
comply with Exhibit P are estimated to purposes of its PRA, that the average annual burden
($99,000 × 20 SB SEFs) in the aggregate. The hourly to prepare and file rule amendments and the annual
rate for the senior accountant is from SIFMA’s be $24,400 for all SB SEFs controlled by update to Form SB SEF would be 150 hours per SB
Management & Professional Earnings in the other persons 611 and $1,220 for all non- SEF. See supra Section XXVII. Assuming an hourly
Securities Industry 2010, modified by the
Commission’s staff to account for an 1800-hour
resident SB SEFs.612 cost of $320 for a compliance attorney to meet these
requirements, the annual estimated dollar cost
work-year and multiplied by 5.35 to account for would be $48,000 (150 hours × $320), or $960,000
bonuses, firm size, employee benefits and overhead. account for an 1800-hour work-year and multiplied
($48,000 × 20 SB SEFs) in the aggregate. The hourly
601 $1,980,000 = $99,000 × 20 SB SEFs. by 5.35 to account for bonuses, firm size, employee
rate for the compliance attorney is from SIFMA’s
602 $10,000,000 = $500,000 × 20 SB SEFs. benefits and overhead.
607 $241,920 = $12,096 × 20 SB SEFs.
Management & Professional Earnings in the
603 See also Section XXVII.D.1.
Securities Industry 2010, modified by the
608 $460,000 = $23,000 × 20 SB SEFs.
604 The Commission preliminarily estimates, for Commission’s staff to account for an 1800-hour
609 $99,000 + $500,000 + $7,920 + $12,096 +
purposes of its PRA, that the average initial burden work-year and multiplied by 5.35 to account for
to comply with the financial statement $23,000 = $642,016. bonuses, firm size, employee benefits and overhead.
requirements of Exhibit H to proposed Form SB SEF 610 $12,840,320 = $642,016 × 20 SB SEFs. 615 The Commission estimates that a SB SEF that
would be 40 hours per SB SEF. See supra Section 611 The Commission estimates that a SB SEF that is controlled by another person will assign these
XXVII. Assuming an hourly cost of $198 for a senior is controlled by another person will assign these responsibilities to a compliance attorney. Assuming
accountant to meet these requirements, the one- responsibilities to a compliance attorney. Assuming an hourly cost of $320 for a compliance attorney to
time estimated dollar cost per SB SEF would be an hourly cost of $320 for a compliance attorney to meet these requirements, the annual estimated
$7,920 (40 hours × $198), or $158,400 ($7,920 × 20 meet these requirements, the one-time estimated dollar cost for a SB SEF controlled by another
SB SEFs) in the aggregate. The hourly rate for the dollar cost for a SB SEF controlled by another person to amend Exhibit P would be $1,220 ((1 hour
senior accountant is from SIFMA’s Management & person to comply with Exhibit P would be $1,220 × $320) + $900), or $2,440 in the aggregate ($1,220
Professional Earnings in the Securities Industry ((1 hour × $320) + $900), or $24,400 ($1,220 × 20 × 2 (estimated number of SB SEFs controlled by
2010, modified by the Commission’s staff to SB SEFs controlled by other persons) in the other persons required to amend Exhibit P per year)
account for an 1800-hour work-year and multiplied aggregate. The hourly rate for the compliance × 1 amendment). The hourly rate for the compliance
by 5.35 to account for bonuses, firm size, employee attorney is from SIFMA’s Management & attorney is from SIFMA’s Management &
benefits and overhead. Professional Earnings in the Securities Industry Professional Earnings in the Securities Industry
605 See 17 CFR 232.405. 2010, modified by the Commission’s staff to 2010, modified by the Commission’s staff to
606 The Commission preliminarily estimates, for account for an 1800-hour work-year and multiplied account for an 1800-hour work-year and multiplied
purposes of its PRA, that the average initial burden by 5.35 to account for bonuses, firm size, employee by 5.35 to account for bonuses, firm size, employee
would be 54 hours per SB SEF. See supra Section benefits and overhead. benefits and overhead.
XXVII. Assuming an hourly cost of $224 for a 612 The Commission estimates that a non-resident 616 The Commission estimates that a non-resident
programmer analyst to meet these requirements, the SB SEF will assign these responsibilities to a SB SEF will assign these responsibilities to a
initial estimated dollar cost would be $12,096 (54 compliance attorney. Assuming an hourly cost of compliance attorney. Assuming an hourly cost of
hours × $224), or $241,920 ($12,096 × 20 SB SEFs) $320 for a compliance attorney to meet these $320 for a compliance attorney to meet these
in the aggregate. The hourly rate for the programmer requirements, the one-time estimated dollar cost for requirements, the annual estimated dollar cost for
analyst is from SIFMA’s Management & a non-resident SB SEF to comply with Exhibit P a non-resident SB SEF to amend Exhibit P would
Professional Earnings in the Securities Industry would be $1,220 ((1 hour × $320) + $900). This be $1,220 ((1 hour × $320) + $900). This would also
2010, modified by the Commission’s staff to would also be the aggregate initial cost as the be the aggregate annual cost as the Commission has
In addition, proposed Rule 804 would Please describe and, to the extent for all SB SEFs of approximately
impose costs on SB SEFs seeking to practicable, quantify the costs $768,000.621
withdraw registration. The Commission associated with any comments that are The Commission requests comment
estimates that one SB SEF would seek submitted. In addition, the Commission on the costs and benefits of the
to withdraw its registration per year. requests comment on the following: proposed rule writing requirements
Therefore, the Commission estimates • How can the Commission most discussed above, as well as any costs
that the aggregate annual estimated accurately estimate the costs and and benefits not already described that
dollar cost for SB SEFs seeking to benefits arising from proposed could result. The Commission also
withdraw registration would be $320.617 Regulation SB SEF’s registration requests data to quantify any potential
Finally, proposed Rule 803 would requirements? costs or benefits. The Commission
impose costs on SB SEFs to prepare and • What are the costs currently borne requests comment on the costs and
file supplemental information with the by entities covered by the proposed benefits of the proposed registration
Commission. The Commission estimates registration requirements that may have requirements discussed above, as well
that the average annual cost for a SB as any costs and benefits not already
been included in the Commission’s
SEF to prepare and file such described that could result. The
analysis?
supplemental information would be Commission also requests data to
$2,400 for each SB SEF, or $48,000 in • Are there additional costs involved
quantify any potential costs or benefits.
the aggregate.618 in complying with the registration
In addition, the Commission requests
Thus, the Commission estimates that requirements that have not been
comment on the following:
the total annual aggregate cost of making identified? If so, what are the types, and • How can the Commission most
all required filings related to Form SB amounts, of such costs? accurately estimate the costs and
SEF would be approximately • Can commenters assess the benefits benefits arising from the proposed rule
$1,011,980.619 of having comprehensive and accurate writing requirements of Regulation SB
The Commission solicits comments registration of SB SEFs, which would SEF?
on the costs associated with the provide access to such information to • What are the costs currently borne
registration related rules and new Form the Commission and other regulators? by entities that may have been included
SB SEF and exhibits. The Commission • Would there be additional benefits in the Commission’s analysis of the
specifically requests comment on initial from the proposed registration costs of the proposed rule writing
costs associated with completing the requirements that have not been requirements?
registration form and ongoing annual identified? • Are there additional costs involved
costs of completing the required Rules Generally. The Commission in complying with the rule writing
periodic and annual amendments. estimates that the initial cost for SB requirements that have not been
SEFs to comply with the rule writing identified? If so, what are the types, and
estimated that only one non-resident person would requirements of Regulation SB SEF, amounts, of such costs?
seek to register as a SB SEF, and that such non-
including to establish and submit the • Can commenters assess the benefits
resident SB SEF will only file one amendment to
Exhibit P per year. The hourly rate for the rules to the Commission, would be of having a comprehensive and accurate
compliance attorney is from SIFMA’s Management $73,600 for each SB SEF, for an rule writing requirement for SB SEFs,
& Professional Earnings in the Securities Industry aggregate initial cost of $1,472,000.620 which would provide access to such
2010, modified by the Commission’s staff to information to the Commission and
account for an 1800-hour work-year and multiplied The estimated cost would include the
by 5.35 to account for bonuses, firm size, employee time expended for drafting the rules, other regulators?
benefits and overhead. and for review of the draft rules, • Would there be additional benefits
policies or procedures by the SB SEF’s from the proposed rule writing
purposes of its PRA, that the average burden for a
senior management. requirements that have not been
SB SEF to withdraw its registration would be 1 identified?
hour. See supra Section XXVII. Assuming an hourly The Commission notes that a SB SEF
Reporting. The Commission estimates
cost of $320 for a compliance attorney to meet these may choose to refine the rules, policies
requirements, the estimated dollar cost to withdraw that the annual cost for SB SEFs to
or procedures that it would establish in
the registration of a SB SEF would be $320 (1 hour comply with the reporting requirements
× $320). This would also be the aggregate annual connection with the requirements of
of Regulation SB SEF would be
cost as the Commission has estimated that only one Regulation SB SEF. Once a SB SEF has
$387,200 per SB SEF, for an aggregate
SB SEF would seek to withdraw its registration as drafted the written rules, policies and
a SB SEF per year. The hourly rate for the annual cost of $7,744,000.622 Further,
procedures it is required to establish
compliance attorney is from SIFMA’s Management
& Professional Earnings in the Securities Industry pursuant to Regulation SB SEF, the 621 The Commission preliminarily estimates, for
2010, modified by the Commission’s staff to Commission estimates that it would cost purposes of its PRA, that the average annual burden
account for an 1800-hour work-year and multiplied a SB SEF approximately $38,400 to comply with the rule-writing requirements of
by 5.35 to account for bonuses, firm size, employee annually to update its rules, for an Regulation SB SEF would be 120 hours per SB SEF.
benefits and overhead. See supra Section XXVII. Assuming an hourly cost
618 The Commission preliminarily estimates, for aggregate estimated ongoing annual cost of $320 for a compliance attorney to meet these
purposes of its PRA, that the average annual burden requirements, the annual estimated dollar cost
to prepare and file supplemental information would 620 The Commission preliminarily estimates, for would be $38,400 (120 hours × $320), or $768,000
be 7.5 hours per SB SEF. See supra Section XXVII. purposes of its PRA, that the average initial burden ($38,400 × 20 SB SEFs) in the aggregate. The hourly
Assuming an hourly cost of $320 for a compliance to comply with the rule-writing requirements of rate for the compliance attorney is from SIFMA’s
attorney to meet these requirements, the estimated Regulation SB SEF would be 230 hours per SB SEF. Management & Professional Earnings in the
annual dollar cost would be $2,400 (7.5 hours × See supra Section XXVII. Assuming an hourly cost Securities Industry 2010, modified by the
$320), or $48,000 ($2,400 × 20 SB SEFs) in the of $320 for a compliance attorney to meet these Commission’s staff to account for an 1800-hour
aggregate. The hourly rate for the compliance requirements, the initial estimated dollar cost work-year and multiplied by 5.35 to account for
attorney is from SIFMA’s Management & would be $73,600 (230 hours × $320), or $1,472,000 bonuses, firm size, employee benefits and overhead.
Professional Earnings in the Securities Industry ($73,600 × 20 SB SEFs) in the aggregate. The hourly 622 The Commission preliminarily estimates, for
2010, modified by the Commission’s staff to rate for the compliance attorney is from SIFMA’s purposes of its PRA, that the average annual costs
account for an 1800-hour work-year and multiplied Management & Professional Earnings in the comply with the reporting requirements of
by 5.35 to account for bonuses, firm size, employee Securities Industry 2010, modified by the Regulation SB SEF would be 1,210 hours per SB
benefits and overhead. Commission’s staff to account for an 1800-hour SEF. See supra Section XXVII. Assuming an hourly
619 $1,011,980 = $960,000 + $2,440 + $1,220 + work-year and multiplied by 5.35 to account for cost of $320 for a compliance attorney to meet these
$320 + $48,000. bonuses, firm size, employee benefits and overhead. Continued
the Commission estimates the total cost • Are there additional costs involved The Commission preliminarily
of hiring outside legal counsel to review in complying with the reporting estimates that a SB SEF could incur a
an international information sharing requirements that have not been one-time cost to set up or modify an
agreement to be $4,000 per SB SEF, for identified? If so, what are the types, and existing recordkeeping system to
an aggregate cost of approximately amounts, of such costs? comply with proposed Rule 818. Based
$80,000 623 for all SB SEFs. In addition, • Can commenters assess the benefits on the Commission’s experience with
the Commission estimates the total of having comprehensive and accurate recordkeeping costs, and consistent
annual cost of hiring an objective, reporting requirements for SB SEFs, with prior cost estimates for similar
external firm to review internal audits to which would provide access to such recordkeeping provisions,629 the
be $90,000 per SB SEF, for an aggregate information to the Commission and Commission estimates that setting up or
cost of approximately $1,800,000 624 for other regulators? modifying a recordkeeping system
all SB SEFs. Thus, the estimated • Would there be additional benefits would cost $106,680 per SB SEF, for an
aggregate total annual costs associated from the proposed reporting aggregate total of $2,133,600.630
with reporting requirements for all SB requirements that have not been Additionally, the Commission
SEFs would be approximately identified? preliminarily estimates that each SB
$9,624,000.625 Recordkeeping. The Commission SEF may have a one-time burden to
The Commission estimates that the estimates that the annual cost for SB upgrade its existing systems to ensure
annual cost for SB SEF participants to SEFs to comply with the recordkeeping that the audit trail component of its
comply with the reporting requirements requirements of proposed Rule 818(a)– systems complies with proposed Rule
of Regulation SB SEF would be $32,000 (b) would be similar to the annual cost 818(c). Based on industry sources, the
per SB SEF participant, for an aggregate for national securities exchanges to Commission preliminarily believes that
annual cost of $8,800,000.626 comply with comparable rules. The this work would be done internally by
The Commission requests comment Commission estimates that the annual two programmers over the course of
on the costs and benefits of the cost would be $16,000 per SB SEF, for approximately four weeks. The
an aggregate annual cost of $320,000.627
proposed reporting requirements Commission preliminarily estimates
This figure includes, but is not limited
discussed above, as well as any costs that it would cost a total of $97,280 per
to, the annual hourly burden to
and benefits not already described that SB SEF, or $1,945,600 in the aggregate
generate, collect, organize and preserve
could result. The Commission also for all SB SEFs.631
all of the documents and other records
requests data to quantify any potential As discussed above, proposed Rule
required under proposed Rule 818(a)
costs or benefits. In addition, the 809(d) would require a SB SEF that
and (b).
Commission requests comment on the In addition, proposed Rule 818(c) permits non-registered ECPs to be
following: would require a SB SEF to keep certain participants in the SB SEF to establish,
• How can the Commission most records with respect to trading activity document, and maintain a system of risk
accurately estimate the costs and on and through the SB SEF. management controls and supervisory
benefits arising from proposed reporting Specifically, a SB SEF must make and procedures reasonably designed to
requirements? keep accurate, time-sequenced records manage the financial, regulatory, and
• What are the costs currently borne of all inquiries, responses, orders, other risks of this business activity.
by entities that may have been included quotations, other trading interest and Based on conversations with industry
in the Commission’s analysis of the transactions that are received by,
costs of the proposed reporting originated on, or executed on the SB
Commission’s staff to account for an 1800-hour
requirements? work-year and multiplied by 5.35 to account for
SEF. The Commission estimates that the bonuses, firm size, employee benefits and overhead.
annual cost to comply with this 629 See Securities Exchange Act Release No.
requirements, the annual estimated dollar cost 59342 (February 2, 2009); 74 FR 6456 (February 9,
would be $387,200 (1,210 hours × $320), or
requirement would be $41,600 per SB
2009) (Amendments to Rules for Nationally
$7,744,000 ($387,200 × 20 SB SEFs) in the SEF, for an aggregate annual cost of Recognized Statistical Rating Organizations)
aggregate. The hourly rate for the compliance $832,000.628 (‘‘NRSRO Adopting Release’’).
attorney is from SIFMA’s Management & 630 The Commission estimates it would take 345
Professional Earnings in the Securities Industry 627 The Commission preliminarily estimates, for hours for a senior programmer to set up or modify
2010, modified by the Commission’s staff to purposes of its PRA, that the average annual burden a recordkeeping system for a cost of $104,880 per
account for an 1800-hour work-year and multiplied to comply with the recordkeeping requirements of SB SEF (345 hours × $304), or $2,097,600 ($104,880
by 5.35 to account for bonuses, firm size, employee proposed Rule 818(a)–(b) would be 50 hours per SB × 20 SB SEFs). In addition, the Commission
benefits and overhead. SEF. See supra Section XXVII. Assuming an hourly estimates a cost of $1,800 per SB SEF in
623 $80,000 = $4,000 × 20 SB SEFs.
cost of $320 for a compliance attorney to meet these information technology expenses to purchase
624 $1,800,000 = $90,000 × 20 SB SEFs.
requirements, the annual estimated dollar cost recordkeeping software for a total initial cost of
625 $9,624,000 = $7,744,000 + $80,000 + would be $16,000 (50 hours × $320), or $320,000 $36,000 for all SB SEFs. The total costs would be
$1,800,000. ($16,000 × 20 SB SEFs) in the aggregate. The hourly $106,680 ($104,880 + $1,800) per SB SEF or a total
626 The Commission preliminarily estimates, for rate for the compliance attorney is from SIFMA’s of $2,133,600 ($106,680 × 20 SB SEFs) for all SB
purposes of its PRA, that the average annual costs Management & Professional Earnings in the SEFs. The hourly rate for the senior programmer is
to comply with the reporting requirements of Securities Industry 2010, modified by the from SIFMA’s Management & Professional Earnings
Regulation SB SEF would be 100 hours per SB SEF Commission’s staff to account for an 1800-hour in the Securities Industry 2010, modified by the
participant, with an estimated 275 SB SEF work-year and multiplied by 5.35 to account for Commission’s staff to account for an 1800-hour
participants in total for a total of 27,500 hours. See bonuses, firm size, employee benefits and overhead. work-year and multiplied by 5.35 to account for
supra Section XXVII. Assuming an hourly cost of 628 The Commission preliminarily estimates, for bonuses, firm size, employee benefits and overhead.
$320 for a compliance attorney to meet these purposes of its PRA, that the average annual burden 631 The Commission estimates that it would take
requirements, the annual estimated dollar cost to comply with the recordkeeping requirements of 160 hours for two senior programmers to set up or
would be $32,000 (100 hours × $320), or $8,800,000 proposed Rule 818(c) would be 130 hours per SB modify a recordkeeping system for a cost of $97,280
($32,000 × 275 SB SEF participants) in the SEF. See supra Section XXVII. Assuming an hourly per SB SEF (160 hours × 2 programmers × $304),
aggregate. The hourly rate for the compliance cost of $320 for a compliance attorney to meet these or $1,945,600 ($97,280 × 20 SB SEFs) for all SB
attorney is from SIFMA’s Management & requirements, the annual estimated dollar cost SEFs. The hourly rate for the senior programmer is
Professional Earnings in the Securities Industry would be $41,600 (130 hours × $320), or $832,000 from SIFMA’s Management & Professional Earnings
2010, modified by the Commission’s staff to ($41,600 × 20 SB SEFs) in the aggregate. The hourly in the Securities Industry 2010, modified by the
account for an 1800-hour work-year and multiplied rate for the compliance attorney is from SIFMA’s Commission’s staff to account for an 1800-hour
by 5.35 to account for bonuses, firm size, employee Management & Professional Earnings in the work-year and multiplied by 5.35 to account for
benefits and overhead. Securities Industry 2010, modified by the bonuses, firm size, employee benefits and overhead.
sources, the Commission preliminarily $482,700 on all SB SEFs to review their SEFs, which would provide access to
believes that the majority of entities that written compliance policies and such information to the Commission
would seek to become SB SEFs already supervisory procedures.635 and other regulators?
would have risk management systems Therefore, the Commission • Are the Commission’s estimates
and supervisory procedures and preliminarily estimates that the total concerning what it would cost to
controls to protect the integrity of their one-time burden for all SB SEFs to implement and maintain technology
business and to comply with other comply with the collection of systems to comply with the
requirements already specified and information requirements of proposed recordkeeping requirements accurate? If
accounted for herein. The Commission Rule 809(d) would be $1,698,300,636 not, what would the costs, in both time
also believes that only a small number and the total annual burden for all SB and dollar figures, be? Please provide
of entities would have to establish SEFs to comply with the proposed Rule data.
completely new systems and procedures would be $1,531,500.637 • Would there be additional benefits
to comply with the requirement of The Commission requests comment from the proposed recordkeeping
proposed Rule 809(d). on the costs and benefits of the requirements that have not been
The Commission estimates that each proposed recordkeeping requirements identified?
SB SEF would spend an average of discussed above, as well as any costs Publication of Trading Information.
$68,400 to modify its risk management and benefits not already described that For the requirement in proposed Rule
systems to bring them into compliance could result. The Commission also 817(a) that a SB SEF have the capacity
with the proposed Rule for a total one- requests data to quantify any potential to electronically capture, transmit, and
time cost of $1,368,000 for all SB SEFs costs or benefits. In addition, the disseminate information on price,
combined,632 and a total annual ongoing Commission requests comment on the trading volume, and other trading data
burden of $1,048,800 on all SB SEFs to following: on all SB swaps executed on or through
maintain their systems.633 The • How can the Commission most the SB SEF, the Commission
Commission preliminarily believes that accurately estimate the costs and preliminarily estimates that a SB SEF
proposed Rule 809(d) also would benefits arising from the proposed would incur a one-time cost of $92,416
impose a one-time legal and compliance recordkeeping requirements? per SB SEF, or $1,848,320 in the
cost of $330,300 on all SB SEFs to • What are the costs currently borne aggregate.638
comply with the requirement to by entities that may have been included The Commission requests comment
in the Commission’s analysis of the on the costs and benefits of the
establish, document, and maintain
costs of the proposed recordkeeping requirements discussed above, as well
compliance policies and supervisory
requirements? as any costs and benefits not already
procedures,634 and an annual cost of
• Are there additional costs involved described that could result. The
632 The Commission preliminarily estimates, for in complying with the recordkeeping Commission also requests data to
purposes of its PRA, that the average one-time cost requirements that have not been quantify any potential costs or benefits.
to comply with proposed Rule 809(d) would require
identified? If so, what are the types, and In addition, the Commission requests
one senior programmer working 225 hours. See comment on the following:
amounts, of such costs?
supra Section XXVII. Assuming an hourly cost of • How can the Commission most
$304 for a senior programmer the one-time cost • Can commenters assess the benefits
would be $68,400 (225 hours × $304), or $1,368,000 accurately estimate the costs and
of having comprehensive and accurate
($68,400 × 20) in the aggregate. The hourly rate for benefits arising from the proposed
recordkeeping requirements for SB
the senior programmer is from SIFMA’s publication of trading information
Management & Professional Earnings in the requirements?
Securities Industry 2010, modified by the × $273), for a total of $330,300 for all SB SEFs
Commission’s staff to account for an 1800-hour ($16,515 × 20). The hourly rate for the compliance • What are the costs currently borne
work-year and multiplied by 5.35 to account for attorney, compliance manager and CCO are from by entities that may have been included
bonuses, firm size, employee benefits and overhead. SIFMA’s Management & Professional Earnings in in the Commission’s analysis of the
633 The Commission preliminarily estimates, for the Securities Industry 2010, modified by the costs of the proposed publication of
purposes of its PRA, that the ongoing cost to Commission’s staff to account for an 1800-hour
work-year and multiplied by 5.35 to account for trading information requirements?
comply with proposed Rule 809(d) would require
one senior programmer working 172.5 hours bonuses, firm size, employee benefits and overhead. • Are there additional costs involved
annually. See supra Section XXVII. Assuming an 635 The Commission preliminarily estimates, for in complying with the publication of
hourly cost of $304 for a senior programmer, the purposes of its PRA, that the ongoing cost to trading information requirements that
cost would be $52,440 (172.5 hours × $304), or comply with proposed Rule 809(d) would require have not been identified? If so, what are
$1,048,800 ($52,440 × 20 SB SEFs) in the aggregate. an average of 30 hours per year for each of an
The hourly rate for the senior programmer is from compliance attorney and compliance manager, and the types, and amounts, of such costs?
SIFMA’s Management & Professional Earnings in 15 hours per year for the CCO, to review and • Can commenters assess the benefits
the Securities Industry 2010, modified by the document their written compliance policies and of having these requirements for SB
Commission’s staff to account for an 1800-hour supervisory procedures. Assuming an hourly cost of SEFs, which would provide access to
work-year and multiplied by 5.35 to account for $320 for a compliance attorney, $423 for the CCO,
bonuses, firm size, employee benefits and overhead. and $273 for a compliance manager, the cost for such information to the Commission
634 The Commission preliminarily estimates, for each SB SEF would be 24,135 = $9,600 (30 hours and other regulators?
purposes of its PRA, that the average one-time cost × $320) + $6,345 (15 hours × $423) + $8,190 (30
to comply with proposed Rule 809(d) would require hours × $273), for a total of $482,700 for all SB SEFs 638 The Commission preliminarily estimates, for
one compliance attorney and one compliance ($24,135 × 20 SB SEFs). The hourly rate for the purposes of its PRA, that the average one-time cost
manager to spend 7.5 hours each to evaluate compliance attorney, compliance manager and CCO to comply with proposed Rule 817(a) would require
appropriate access thresholds. The Commission are from SIFMA’s Management & Professional two senior programmers working 160 hours, for a
also preliminarily estimates that one compliance Earnings in the Securities Industry 2010, modified total of 320 hours. See supra Section XXVII.
attorney and one compliance manager would each by the Commission’s staff to account for an 1800- Assuming an hourly cost of $304 for a senior
require approximately 15 hours, and the CCO hour work-year and multiplied by 5.35 to account programmer, the one-time cost would be $92,416
would require approximately 7.5 hours, to set up for bonuses, firm size, employee benefits and (320 hours × $304), or $1,848,320 ($92,416 × 20 SB
or modify compliance policies and procedures to overhead. SEFs) in the aggregate. The hourly rate for the
636 $1,698,300 = $1,368,000 + $330,300. See supra
comply with the proposed rule. See supra Section senior programmer and programmer analyst are
XXVII. Assuming an hourly cost of $320 for a notes 632 and 634 (discussing the average one-time from SIFMA’s Management & Professional Earnings
compliance attorney, $423 for the CCO, and $273 costs to comply with Rule 809(d)). in the Securities Industry 2010, modified by the
for a compliance manager the cost for each SB SEF 637 $1,531,500 = $1,048,800 + $482,700. See supra Commission’s staff to account for an 1800-hour
would be $16,515 = 7,200 (22.5 hours × $320) + notes 633 and 635 (discussing the ongoing costs to work-year and multiplied by 5.35 to account for
$3,172.5 (7.5 hours × $423) + $6,142.5 (22.5 hours comply with Rule 809(d)). bonuses, firm size, employee benefits and overhead.
• Would there be additional benefits In addition, the Commission requests • How can the Commission most
from the proposed publication of comment on the following: accurately estimate the costs and
trading information requirements that • How can the Commission most benefits arising from the proposed rule
have not been identified? accurately estimate the costs and and product filing requirements?
Composite Indicative Quote and benefits arising from the proposed • What are the costs currently borne
Executable Bids and Offers. For the two requirements to collect and disseminate by entities that may have been included
requirements: (1) The requirement in a composite indicative quote and in the Commission’s analysis of the
proposed Rule 811(e) that a SB SEF executable bids and offers? costs of the proposed rule and product
operating a RFQ platform create and • What are the costs currently borne filing requirements?
disseminate through the SB SEF a by entities that may have been included • Are there additional costs involved
composite indicative quote, made in the Commission’s analysis of the in complying with the rule and product
available to all participants, for SB costs of the proposed dissemination of filing requirements that have not been
swaps traded on or through the SB SEF; a composite indicative quote? identified? If so, what are the types, and
and (2) the requirement imposed by the • Are there additional costs involved amounts, of such costs?
Commission’s proposed interpretation in complying with the requirements to • Can commenters assess the benefits
of the definition of SB SEF that each SB collect and disseminate a composite of having comprehensive and accurate
SEF, at a minimum, provide any indicative quote and providing the rules and product filing requirements
participant with the ability to make and ability for participants to disseminate for SB SEFs, which would provide
display executable bids or offers executable bids and offer that have not access to such information to the
accessible to all participants on the SB been identified? What are the types, and Commission and other regulators?
SEF, if the participant wishes to do so, amounts, of the costs? • Would there be additional benefits
the Commission preliminarily estimates • Can commenters assess the benefits from the proposed rule and product
that a SB SEF would incur a one-time of collecting and disseminating a filing requirements that have not been
cost of $21,120 per SB SEF, or $422,400 composite indicative quote for SB SEFs identified?
in the aggregate.639 Further, the and of SB SEFs providing participants Chief Compliance Officer. The
Commission preliminarily estimates the ability to disseminate executable Commission estimates that the initial
that each SB SEF would incur a bids and offers? cost for SB SEFs to comply with the
recurring annual cost of $11,200 to Rule and Product Filings. The CCO requirements of proposed Rule
monitor and update its systems to Commission estimates that the annual 823(b)(6) and (7), which relate to the
determine if its composite indicative cost for SB SEFs to comply with the handling of noncompliance issues,
quote and executable bid and offer proposed rule and product filing would be $91,200 per SB SEF, for an
functionalities operate appropriately.640 requirements of proposed Rules 805 aggregate annual cost of $1,824,000.642
The Commission requests comment through 808 would be $75,200 per SB A CCO also would be required under
on the costs and benefits of collecting SEF, for an aggregate annual cost of proposed Rule 823(c) and (d) to prepare
and disseminating a composite $1,504,000.641 These estimated costs and submit an annual compliance report
indicative quote and of allowing entail preparing, reviewing and to the Commission and to the SB SEF’s
participants to disseminate executable submitting the filings to the Board. The Commission estimates that
bids and offers discussed above, as well Commission. Based on the Commission the annual cost for SB SEFs to comply
as any costs and benefits not already staff’s consultation with CFTC staff, the with this requirement is $29,440 per SB
described that could result. The Commission believes that SB SEFs SEF, for an aggregate annual cost of
Commission also requests data to would handle the rule and product $588,800.643 Proposed Rule 823(e)(1)
quantify any potential costs or benefits. filing processes internally. 642 The Commission preliminarily estimates, for
639 The
The Commission requests comment purposes of its PRA, that the average initial burden
Commission preliminarily estimates, for
purposes of its PRA, that the average one-time cost on the costs and benefits of the to comply with the CCO requirements of proposed
to comply with the above requirements would proposed rule and product filing Rule 823(b)(6) and (7) would be 160 hours. Also,
require one senior programmer and one requirements discussed above, as well due to the novel nature of the CCO requirements
programmer analyst working 40 hours each. See in the SB SEF industry and the new requirements
as any costs and benefits not already under the Dodd-Frank Act, the Commission
supra Section XXVII. Assuming an hourly cost of
$304 for a senior programmer and $224 for a described that could result. The estimates that there would be an initial one-time
programmer analyst, the one-time cost would be Commission also requests data to burden of $40,000 per SB SEF in outside legal costs.
$21,120 ((40 hours × $304) + (40 hours × $224)), or quantify any potential costs or benefits. See supra Section XXVII. Assuming an hourly cost
$422,400 ($21,120 × 20 SB SEFs) in the aggregate. In addition, the Commission requests of $320 for a compliance attorney to meet these
The hourly rate for the senior programmer and requirements, the annual estimated dollar cost
programmer analyst are from SIFMA’s Management comment on the following: would be $51,200 (160 hours × $320) plus $40,000,
& Professional Earnings in the Securities Industry for a total of $91,200, or $1,824,000 ($91,200 × 20
2010, modified by the Commission’s staff to 641 Based on the Commission staff’s consultation SB SEFs) in the aggregate. The hourly rate for the
account for an 1800-hour work-year and multiplied with CFTC staff, the Commission preliminarily compliance attorney is from SIFMA’s Management
by 5.35 to account for bonuses, firm size, employee estimates for purposes of its PRA that the average & Professional Earnings in the Securities Industry
benefits and overhead. annual burden to comply with the rule filing 2010, modified by the Commission’s staff to
640 The Commission preliminarily estimates, for requirements of Rules 805 and 806 would be 150 account for an 1800-hour work-year and multiplied
purposes of its PRA, that the average annual cost hours, and the average annual burden to comply by 5.35 to account for bonuses, firm size, employee
to comply with the above requirements would with the product filing requirements of Rules 807 benefits and overhead.
require one programmer analyst working 50 hours. and 808 would be 85 hours per SB SEF. See supra 643 The Commission preliminarily estimates, for
See supra Section XXVII. Assuming an hourly cost Section XXVII. Assuming an hourly cost of $320 for purposes of its PRA, that the average initial burden
of $224 for a programmer analyst the one-time cost a compliance attorney to meet these requirements, to comply with the CCO requirements of proposed
would be $11,200 (50 hours × $224), or $224,000 the annual estimated dollar cost would be $75,200 Rule 823(c) and (d) would be 92 hours. See supra
($11,200 × 20 SB SEFs) in the aggregate. The hourly (235 hours × $320), or $1,504,000 ($75,200 × 20 SB Section XXVII. Assuming an hourly cost of $320 for
rate for the senior programmer and programmer SEFs) in the aggregate. The hourly rate for the a compliance attorney to meet these requirements,
analyst are from SIFMA’s Management & compliance attorney is from SIFMA’s Management the annual estimated dollar cost would be $29,440
Professional Earnings in the Securities Industry & Professional Earnings in the Securities Industry (92 hours × $320) or $588,800 ($29,440 × 20 SB
2010, modified by the Commission’s staff to 2010, modified by the Commission’s staff to SEFs) in the aggregate. The hourly rate for the
account for an 1800-hour work-year and multiplied account for an 1800-hour work-year and multiplied compliance attorney is from SIFMA’s Management
by 5.35 to account for bonuses, firm size, employee by 5.35 to account for bonuses, firm size, employee & Professional Earnings in the Securities Industry
benefits and overhead. benefits and overhead. 2010, modified by the Commission’s staff to
and (2) and Exhibits F and H to software and other costs per respondent, beneficially owns an interest in the SB
proposed Form SB SEF also require the or $241,920 and $460,000 in the SEF from dominating or exercising
CCO to submit an annual financial aggregate, respectively. Thus, the disproportionate influence in the
report. Based on conversations with Commission estimates a total initial cost selection of participant directors, if such
operators of current trading platforms of approximately $762,656 per participant could thereby dominate or
and the Commission’s experience with respondent 649 and $15,253,120 in the exercise disproportionate influence in
entities of similar size, the Commission aggregate for all respondents.650 the selection or appointment of the
preliminarily estimates that each SB The Commission requests comment entire Board. The Commission estimates
SEF would incur, on average, a cost of on the costs and benefits of the a cost per SB SEF of $4,800, or $96,000
$99,500 to complete the reports,644 and proposed CCO requirements discussed in the aggregate for all SB SEFs to revise
a cost of $500,000 for independent above, as well as any costs and benefits the relevant governing documents.651
public accounting services. In the not already described that could result. A SB SEF may also need to revise the
aggregate, these costs are estimated to be The Commission also requests data to composition of its Board to include at
$1,980,000 and $10,000,000, quantify any potential costs or benefits. least one director that is representative
respectively.645 The Commission also In addition, the Commission requests of investors who are not SB swap
estimates that it would cost comment on the following: dealers or major SB swap participants,
approximately $7,920 per respondent to • How can the Commission most and are not associated with a
compile, review, and submit the accurately estimate the costs and participant. In this regard, SB SEFs
financial reports for certain affiliated benefits arising from the proposed CCO could face difficulties in locating
entities or $158,400 in the aggregate.646 requirements? qualified individuals to serve as
However, all of these reports would • What are the costs currently borne investor directors, particularly because
need to be provided in XBRL, as by entities that may have been included SB swaps trading is complex and some
required by Rules 405(a)(1), (a)(3), (b), in the Commission’s analysis of the cost potential candidates may decline to
(c), (d) and (e) of Regulation S–T.647 of the proposed CCO requirements? serve as a director if they believe that
This would create an additional cost for • Are there additional costs involved they lack sufficient expertise. There
SB SEFs. The Commission preliminarily in complying with the CCO could also be costs in educating investor
estimates, based on its experience with requirements that have not been directors to become familiar with the
other data tagging initiatives, that these identified? If so, what are the types, and manner in which SB swaps are traded
requirements would add an additional amounts, of such costs? and the overall market for SB swaps, as
cost on average of approximately • Can commenters assess the benefits well as the new regulatory structure that
$12,096 648 and $23,000 in outside of having comprehensive and accurate would govern them, which could slow
CCO requirements for SB SEFs, which Board or committee processes at least
account for an 1800-hour work-year and multiplied would provide access to such initially.
by 5.35 to account for bonuses, firm size, employee information to the Commission and The Commission preliminarily
benefits and overhead. other regulators? believes that the cost of securing an
• Would there be additional benefits investor director to serve on the Board
purposes of its PRA, that the average initial burden from the proposed CCO requirements
would be 500 hours per SB SEF. See supra Section of the SB SEF could range from a
XXVII. Assuming an hourly cost of $198 for a senior that have not been identified? relatively low cost for those entities that
accountant to meet these requirements, the one- Conflicts of Interest. As described
have the contacts and resources to be
time estimated dollar cost to register a SB SEF above, proposed Rule 820 sets forth
would be $99,000 (500 hours × $198), or $1,980,000 able to search for one or more investor
certain governance arrangements that
($99,000 × 20 SB SEFs) in the aggregate. The hourly directors on their own; to a moderate
rate for the senior accountant is from SIFMA’s would be required of SB SEFs. A SB
cost for those entities that can undertake
Management & Professional Earnings in the SEF may need to revise the composition
the search on their own but would incur
Securities Industry 2010, modified by the of its Board, if the Board currently is not
Commission’s staff to account for an 1800-hour some expenditures, such as placing
composed of at least 20% SB SEF
work-year and multiplied by 5.35 to account for advertisements in national media; to a
bonuses, firm size, employee benefits and overhead. participants. A SB SEF could comply
higher cost for those entities that must
645 Id. See also Section XXVII.D.1. with the 20% participant director
secure the services of a recruitment firm
646 The Commission preliminarily estimates, for requirement by decreasing the size of its
that specializes in the placement of
purposes of its PRA, that the average initial burden Board and allowing some non-
would be 40 hours per SB SEF. See supra Section outside directors. The Commission
participant directors to resign,
XXVII. Assuming an hourly cost of $198 for a senior preliminarily estimates that those SB
accountant to meet these requirements, the one- maintaining the current size of its Board
SEFs that must rely on a recruitment
time estimated dollar cost per SB SEF would be and replacing some non-participant
$7,920 (40 hours × $198), or $158,400 ($7,920 × 20
specialist could incur a cost of
directors with participant directors, or
SB SEFs) in the aggregate. The hourly rate for the approximately $68,000 per director,652
by increasing the size of its Board and
senior accountant is from SIFMA’s Management &
Professional Earnings in the Securities Industry electing additional participant directors. 651 The Commission preliminarily estimates, for
2010, modified by the Commission’s staff to In any event, unless a SB SEF currently purposes of its PRA, that it would take a
account for an 1800-hour work-year and multiplied complies with proposed Rule 820, it compliance attorney approximately 15 hours to
by 5.35 to account for bonuses, firm size, employee would incur the cost of adding new revise the relevant governing documents. Assuming
benefits and overhead. an hourly cost of $320 for a compliance attorney to
647 See 17 CFR 232.405.
directors or replacing existing directors. meet these requirements, the one-time estimated
648 The Commission preliminarily estimates, for A SB SEF may also need to design or dollar cost would be $4,800 (15 hours × $320) or
purposes of its PRA, that the average initial burden modify its governance processes to $96,000 ($4,800 × 20 SB SEFs) in the aggregate. The
would be 54 hours per SB SEF. See supra Section preclude any participant, either alone or hourly rate for the senior programmer and
XXVII. Assuming an hourly cost of $224 for a programmer analyst are from SIFMA’s Management
together with its related persons, that & Professional Earnings in the Securities Industry
programmer analyst to meet these requirements, the
initial estimated dollar cost would be $12,096 (54 2010, modified by the Commission’s staff to
hours × $224), or $241,920 ($12,096 × 20 SB SEFs) by 5.35 to account for bonuses, firm size, employee account for an 1800-hour work-year and multiplied
in the aggregate. The hourly rate for the programmer benefits and overhead. by 5.35 to account for bonuses, firm size, employee
649 $762,656 = $91,200 + $29,440 + $99,000 + benefits and overhead.
analyst is from SIFMA’s Management &
Professional Earnings in the Securities Industry $500,000 + $7,920 + $12,096 + $23,000. 652 The Commission is basing this estimate on a
2010, modified by the Commission’s staff to 650 $15,253,120 = 20 (number of SB SEFs) × recent study noting that the retainer fee for outside
account for an 1800-hour work-year and multiplied $762,656. Continued
or $1,360,000 in the aggregate, if all SB per SB SEF of $1.5 million in D. General Request for Comments on
SEFs utilized a recruitment firm.653 information technology costs that would Regulation SB SEF
The Commission requests comment be necessary to establish such a system. • The Commission requests comment
on the costs and benefits of the This capital expenditure estimate is on any other aspect of the costs and
proposed conflicts requirements based on the Commission’s discussions benefits associated with Regulation SB
discussed above, as well as any costs with market participants currently SEF.
and benefits not already described that operating platforms that trade OTC • Would the obligations imposed on
could result. The Commission also swaps. reporting parties by proposed
requests data to quantify any potential The Commission preliminarily Regulation SB SEF be a significant
costs or benefits. In addition, the estimates that the ongoing annual costs enough barrier to entry to cause some
Commission requests comment on the associated with the automated firms not to enter the SB swaps market?
following: surveillance system required by If so, how many firms might decline to
• How can the Commission most proposed Rules 811 and 813 would be enter the market? How can the cost of
accurately estimate the costs and $1,306,400 per SB SEF, or $26,128,000 their not entering the market be
benefits arising from the proposed in the aggregate. The annual cost per SB tabulated? How should the Commission
conflicts requirements? SEF includes $806,400 in annual weigh such costs, if any, against the
• What are the costs currently borne programming costs per SB SEF 655 as anticipated benefits from increased
by entities that may have been included well as an ongoing annual information transparency to the SB swaps market
in the Commission’s analysis of the technology cost of $500,000 per SB SEF. from the proposal, as discussed above?
costs of the proposed conflicts The Commission requests comment • How many entities would be
requirements? on the costs and benefits of the affected by proposed Regulation SB
• Are there additional costs involved proposed surveillance system SEF?
in complying with the governance requirements discussed above, as well
requirements that have not been as any costs and benefits not already XXIX. Consideration of Burden on
identified? If so, what are the types, and described that could result. The Competition, and Promotion of
amounts, of such costs? Commission also requests data to Efficiency, Competition and Capital
• Can commenters assess the benefits quantify any potential costs or benefits. Formation
of having governance requirements for In addition, the Commission requests Section 3(f) of the Exchange Act 656
SB SEFs? comment on the following: requires the Commission, whenever it
• Would there be additional benefits • How can the Commission most engages in rulemaking and is required to
from the proposed conflicts accurately estimate the costs and consider or determine whether an action
requirements that have not been benefits arising from the proposed is necessary or appropriate in the public
identified? surveillance system requirements? interest, to consider, in addition to the
Surveillance. The Commission • What are the costs currently borne protection of investors, whether the
preliminarily estimates that establishing by entities that may have been included action would promote efficiency,
an automated surveillance system in in the Commission’s analysis of the competition, and capital formation. In
compliance with proposed Rules 811 costs of the proposed surveillance addition, Section 23(a)(2) of the
and 813 would require an initial cost of system requirements? Exchange Act 657 requires the
$3,256,800 per SB SEF, or $65,136,000 • Are there additional costs involved Commission, when adopting rules
in the aggregate. The initial cost per SB in complying with the surveillance under the Exchange Act, to consider the
SEF includes $1,756,800 in initial system requirements that have not been impact of any such rules on
programming costs per SB SEF 654 as identified? If so, what are the types, and competition. Section 23(a)(2) of the
well as a one-time capital expenditure amounts, of such costs? Exchange Act also prohibits the
• Can commenters assess the benefits Commission from adopting any rule that
directors is on average $67,624 (rounded to
$68,000). See http://www.hewittassociates.com/ of having comprehensive and accurate would impose a burden on competition
_MetaBasicCMAssetCache_/Assets/Articles/2010/ surveillance system requirements for SB not necessary or appropriate in
2010_Outside_Director_Compensation.pdf. The SEFs, which would provide access to furtherance of the purposes of the
Commission believes that this amount could serve such information to the Commission Exchange Act.658
as a proxy for the amount of any fee to be charged
by a recruitment firm that would conduct a national and other regulators? The Commission preliminarily
search for a director that meets the requirements of • Would there be additional benefits believes that the regulation of SB SEFs,
proposed Rule 820(c)(2). from the proposed surveillance system as required by the Dodd-Frank Act and
653 $1,360,000 = 20 (number of SB SEFs) ×
requirements that have not been proposed to be implemented under
$68,000.
identified? Regulation SB SEF, would promote
purposes of its PRA, that establishing an automated efficiency, competition, and capital
surveillance system would require one senior 655 The Commission preliminarily estimates, for formation.
programmer and three additional programmers purposes of its PRA, that the average annual burden Promotion of Efficiency. The
working for 1,800 hours each to create and to comply with the automated surveillance system Commission preliminarily believes that
implement such a system. See supra Section XXVII. requirements of proposed Rules 811 and 813 would
Assuming an hourly cost of $304 for a senior require two programmer analysts working for 1,800 the regulation of SB SEFs, as required
programmer and $224 for a programmer analyst to hours per SB SEF. See supra Section XXVII. by the Dodd-Frank Act and proposed to
meet these requirements, the initial estimated dollar Assuming an hourly cost of $224 for a programmer be implemented under Regulation SB
cost would be $1,756,800 = (1,800 hours × $304) + analyst to meet these requirements, the initial SEF, would promote efficiency by
((1,800 hours × $224) × 3), or $35,136,000 estimated dollar cost would be $806,400 (1,800
($1,756,800 × 20 SB SEFs) in the aggregate. The hours × $224 × 2), or $16,128,000 ($806,400 × 20 encouraging innovation, automation,
hourly rate for the senior programmer and SB SEFs) in the aggregate. The hourly rate for the and reduction of informational
programmer analyst are from SIFMA’s Management programmer analyst is from SIFMA’s Management asymmetries.
& Professional Earnings in the Securities Industry & Professional Earnings in the Securities Industry
2010, modified by the Commission’s staff to 2010, modified by the Commission’s staff to
656 15 U.S.C. 78c(f).
account for an 1800-hour work-year and multiplied account for an 1800-hour work-year and multiplied
657 15 U.S.C. 78w(a)(2).
by 5.35 to account for bonuses, firm size, employee by 5.35 to account for bonuses, firm size, employee
benefits and overhead. benefits and overhead. 658 Id.
The proposed rules are designed to be costs and thus could lead to more entry, because entry into the SB swap
flexible and to foster innovation in the efficient trading of SB swaps. market would not be delayed by
SB swaps market, particularly with The Commission also believes that the procedural matters, such as the timing
respect to the trading of SB swaps by a proposed exemptions for SB SEFs from of Commission review of the applicant’s
diverse group of market participants. regulation as national securities full registration submission. In addition,
The Commission formulated the exchanges or as brokers would eliminate the Commission would have the
proposed rules, along with the proposed what would be largely an additive opportunity to observe the SB SEF in
interpretation of the definition of SB oversight of SB SEFs and therefore operation before it grants permanent
SEF in a manner that would allow would promote efficiency, because SB registration to the SB SEF, thereby
entities that seek to become SB SEFs to SEFs would not have to expend helping to ensure that the SB SEF
structure diverse platforms for the resources to comply with these promotes desirable competition.
trading of SB swaps, subject to certain regulatory obligations from which they Promotion of Capital Formation. The
baseline requirements. These proposed would be exempt. Commission preliminary believes that
baseline requirements are meant to Promotion of Competition. The the regulation of SB SEFs, as required
permit access by a wide group of market Commission preliminary believes that by the Dodd-Frank Act and as proposed
participants to a range of SB swaps in the regulation of SB SEFs, as required to be implemented under Regulation SB
keeping with the mandate of the Dodd- by the Dodd-Frank Act and proposed to SEF, would promote capital formation
Frank Act. Thus, the Commission be implemented under Regulation SB because the proposed interpretation of
believes that the trading of SB swaps SEF, could promote competition. The the definition of SB SEF, along with the
could evolve to its most efficient proposed rules that would require SB elements of proposed Rule 811 that
structure while also meeting the SEFs to establish fair, objective and not relate to pre-trade price transparency,
statutory and regulatory requirements unreasonably discriminatory standards are intended to provide a flexible
relating to such activity. for granting impartial access to trading approach as to the parameters of what
The Commission preliminarily on the SB SEF would foster greater can be traded on a SB SEF. As a result,
access to SB SEFs by SB swap dealers, entities that currently provide a
believes that the proposed requirements
major SB swap participants, brokers, platform or system for OTC derivatives
with respect to pre-trade price
and ECPs. The resulting increase in the trading should be able to leverage off of
transparency could lead to more
number of participants who could their current trading platforms when
efficient pricing in the SB swaps market.
access venues for the trading of SB developing a SB SEF-compatible trading
The proposed rules are designed to
swaps would allow a range of market platform. These entities would have
result in an increase in pre-trade price
participants to compete for business on various options available to them when
transparency for SB swaps, which
the SB SEF through price competition or developing their systems or platforms to
should aid market participants in
other dimensions of service. The comply with the Commission’s
evaluating current market prices for SB
proposed pre-trade transparency proposed rulemaking. This flexible
swaps, thereby furthering more efficient requirements, including the proposed feature of the proposals should help
price discovery. Price transparency, requirement to create and disseminate a promote capital formation because
coupled with the potential increase in composite indicative quote, could resources would be invested in a more
the number of market participants with further promote price competition by efficient manner to improve upon or
access to trading in SB swaps, could making available information about expand the features of those that plan to
further decrease the spread in quoted trading interest before execution of the register as a SB SEF.
prices, and thus could lead to higher trade, thereby allowing participants to In addition, proposed Regulation SB
efficiency in the trading of these improve upon current quotes. SEF would provide the Commission
securities. The Dodd-Frank Act’s mandate to with information relating to trading,
Some industry participants, however, bring SB swaps that are subject to the recordkeeping, and surveillance of SB
have expressed concerns to the mandatory clearing requirement and SEFs, as well as access to the books and
Commission that pre-trade price that are made available to trade onto records of SB SEFs. A well-regulated SB
transparency could force market regulated markets as well as the swap market, where the Commission
participants to reveal more information proposed interpretation of the definition has access to information about SB swap
about trading interest than they believe of SB SEF, and proposed Regulation SB transactions, would increase the
would be economically desirable. To the SEF that are intended to further Commission’s ability to assess risks in
extent that market participants consider implement the statutory directive, the SB swap market. In addition, the
that pre-trade price transparency should help foster greater competition proposals would provide for various
requirements are too burdensome and in the trading of SB swaps. The trading safeguards to help promote market
choose not to participate in the market, of SB swaps on regulated markets, and integrity, including proposed Rule 809
thereby foregoing any potential the Commission’s proposals to institute relating to access to the SB SEF and
economic benefits that may have rules for such trading, should allow proposed Rule 822 relating to systems
resulted from purchasing a particular SB diverse trading platforms or systems to safeguards. Proposed Regulation SB SEF
swap, market efficiency could be register as SB SEFs and to compete for also is intended to support the
harmed for less liquid instruments and business in the SB swap market. statutorily-mandated regulatory
for large blocks of SB swaps. The Commission proposes to initially obligations of SB SEFs through
The Commission preliminarily permit temporary registration of SB proposed Rule 823 relating to the duties
believes that automation and systems SEFs while it considers each applicant’s of the CCO, among other proposed rules.
development that would be associated full registration application, as long as Any resulting increase in market
with the regulation of SB SEFs, as the applicant meets certain integrity would likely increase market
required by proposed Regulation SB requirements for temporary registration. participants’ confidence in the
SEF, would provide market participants This proposed temporary registration soundness and fairness of the SB swap
with new platforms and tools to execute should help alleviate burdens associated market. Such increased confidence
and process transactions in SB swaps, with starting up a SB SEF and promote likely would stimulate financial
which could result in lower trading competition by reducing barriers to investment in SB swaps by corporate
entities and others that may find that a ‘‘major’’ rule. Under SBREFA, a rule is registration of these new entities. Based
more transparent venues for the trading considered ‘‘major’’ where, if adopted, it on its understanding of the market and
of SB swaps would allow them to results or is likely to result in: (1) An conversations with industry sources, the
purchase SB swaps to offset business annual effect on the economy of $100 Commission preliminarily believes that
risks and to meet hedging objectives. million or more (either in the form of an approximately 20 SB SEFs could be
Further, to the extent that market increase or a decrease); (2) a major subject to the requirements of proposed
participants utilize SB swaps to better increase in costs or prices for consumers Regulation SB SEF.
manage portfolio risks with respect to or individual industries; or (3) a
positions in underlying securities, the significant adverse effect on For purposes of Commission
extent that they are willing to competition, investment or innovation. rulemaking in connection with the RFA,
participate in the SB swap market may If a rule is ‘‘major,’’ its effectiveness will a small entity includes: (1i) When used
impact their willingness to participate generally be delayed for 60 days with reference to an ‘‘issuer’’ or a
in the underlying asset’s market. pending Congressional review. ‘‘person,’’ other than an investment
Therefore, the Commission The Commission requests comment company, an ‘‘issuer’’ or ‘‘person’’ that,
preliminarily believes that the proposed on the potential impact of proposed on the last day of its most recent fiscal
rules would help encourage capital Regulation SB SEF on the economy on year, had total assets of $5 million or
formation. an annual basis, on the costs or prices less,664 or (2) a broker-dealer with total
Burden on Competition. Based on for consumers or individual industries, capital (net worth plus subordinated
discussions with industry participants, and any potential effect on competition, liabilities) of less than $500,000 on the
the Commission preliminarily believes investment, or innovation. Commenters date in the prior fiscal year as of which
that the start-up costs to become a SB are requested to provide empirical data its audited financial statements were
SEF for those entities that currently own and other factual support for their views prepared pursuant to Rule 17a–5(d)
and/or operate a platform for the trading to the extent possible. under the Exchange Act,665 or, if not
of OTC swaps would be moderate. required to file such statements, a
According to these industry XXXI. Regulatory Flexibility Act
Certification broker-dealer with total capital (net
participants, any needed modifications worth plus subordinated liabilities) of
to their systems or operations as a result The Regulatory Flexibility Act less than $500,000 on the last day of the
of the Commission’s proposals generally (‘‘RFA’’) 659 requires Federal agencies, in
preceding fiscal year (or in the time that
would entail the expenditure of promulgating rules, to consider the
it has been in business, if shorter); and
resources chiefly on regulatory and impact of those rules on small entities.
is not affiliated with any person (other
compliance matters and on enhancing Section 603(a) 660 of the Administrative
electronic systems to support both the than a natural person) that is not a small
Procedure Act,661 as amended by the
operational and regulatory aspects of a RFA, generally requires the Commission business or small organization.666 Under
SB SEF. A trading platform that to undertake a regulatory flexibility the standards adopted by the Small
currently trades OTC swaps would need analysis of all proposed rules, or Business Administration (‘‘SBA’’),
to make some adjustments to its systems proposed rule amendments, to entities in financial investments and
and structure to trade SB swaps in determine the impact of such related activities 667 are considered
compliance with proposed Regulation rulemaking on ‘‘small entities.’’ 662 small entities if they have $7 million or
SB SEF. The Commission preliminarily Section 605(b) of the RFA states that less in annual receipts.
believes that the development and this requirement shall not apply to any Based on the Commission’s existing
registration of, and introduction of proposed rule or proposed rule information about the SB swap market
trading in SB swaps by, a SB SEF would amendment, which if adopted, would and the entities likely to register as SB
result in some barriers to entry that not have a significant economic impact SEFs, the Commission preliminarily
otherwise would not exist. This is on a substantial number of small believes that the entities likely to
particularly the case because, prior to entities.663 register as SB SEFs would not be
the enactment of the Dodd-Frank Act, considered small entities. The
there were no statutory provisions A. Security-Based Swap Execution
Facilities Commission preliminarily believes that
mandating the trading of certain SB
most, if not all, of the SB SEFs would
swaps on regulated markets. The proposed rules and form under
The Commission requests comment be large business entities or subsidiaries
Regulation SB SEF would apply to all
on all aspects of this analysis and, in entities that seek to register with the of large business entities, and that all SB
particular, on whether proposed Commission as a SB SEF and thus to SEFs would have assets in excess of
Regulation SB SEF and the proposed operate as a SB SEF in compliance with $5 million and annual receipts in excess
interpretation of the definition of SB Regulation SB SEF. In the Dodd-Frank of $7,000,000. Therefore, the
SEF would place a burden on Act, Congress defined for the first time Commission preliminarily believes that
competition, as well as the effect of the the scope of a SB SEF and mandated the none of the potential SB SEFs would be
proposals on efficiency, competition, considered small entities.
and capital formation. Commenters are 659 5 U.S.C. 601 et seq.
requested to provide empirical data and 660 5 U.S.C. 603(a). 664 See 17 CFR 240.0–10(a).
661 5 U.S.C. 551 et seq. 665 See 17 CFR 240.17a–5(d).
other factual support for their views, if
662 Although Section 601(b) of the RFA defines 666 See 17 CFR 240.0–10(c).
possible.
the term ‘‘small entity,’’ the statute permits agencies 667 These entities would include firms involved
XXX. Consideration of Impact on the to formulate their own definitions. The Commission in investment banking and securities dealing,
has adopted definitions for the term ‘‘small entity’’ securities brokerage, commodity contracts dealing,
Economy for the purposes of Commission rulemaking in commodity contracts brokerage, securities and
For purposes of the Small Business accordance with the RFA. Those definitions, as commodity exchanges, miscellaneous
Regulatory Enforcement Fairness Act of relevant to this proposed rulemaking, are set forth intermediation, portfolio management, providing
in Rule 0–10, 17 CFR 240.0–10. See Securities investment advice, trust, fiduciary and custody
1996, or ‘‘SBREFA,’’ the Commission Exchange Act Release No. 18451 (January 28, 1982), activities, and miscellaneous financial investment
must advise the OMB as to whether 47 FR 5215 (February 4, 1982) (File No. AS–305). activities. See SBA’s Table of Small Business Size
proposed Regulation SB SEF constitutes 663 See 5 U.S.C. 605(b). Standards, Subsector 523.
B. SB SEF Participants less in annual receipts; (3) for entities in 78w(a), 78dd(b), 78dd(c) and 78mm),
The proposed rules under Regulation financial investments and related thereof, and Section 763 of the Dodd-
SB SEF also would impose requirements activities,674 entities with $7 million or Frank Act (15 U.S.C. 78c–4), the
on participants of SB SEFs, i.e., SB swap less in annual receipts; (4) for insurance Commission is proposing to adopt
dealers, major SB swap participants, carriers and entities in related § 240.15a–12, Regulation SB SEF and
brokers and non-registered ECPs. activities,675 entities with $7 million or Form SB SEF under the Exchange Act
Among other requirements relating to less in annual receipts; and (5) for and to amend § 240.3a1–1 under the
participants, SB SEFs would be required funds, trusts, and other financial Exchange Act.
to establish and enforce rules that vehicles,676 entities with $7 million or
less in annual receipts. List of Subjects in 17 CFR Parts 240,
require its participants to maintain 242 and 249
books and records of any trading Based on feedback from industry
interest, transaction, or position in any participants about the SB swap market, Securities, brokers, reporting and
SB swap pertinent to their activity on the Commission preliminarily believes recordkeeping requirements.
the SB SEF and to provide prompt that the entities that will be participants For the reasons stated in the
access to those books and records to the of SB SEFs, whether SB swap dealers, preamble, the Commission is proposing
SB SEF and to the Commission. Based major SB swap participants, registered to amend Title 17, Chapter II of the
on conversations with industry sources, brokers or non-registered ECPs, would Code of the Federal Regulations as
the Commission preliminarily believes exceed the thresholds defining ‘‘small follows:
that there could be a total of 275 persons entities’’ set out above. Thus, the
that could become SB SEF participants Commission believes it is unlikely that PART 240—GENERAL RULES AND
and thus would thus be subject to the proposed Regulation SB SEF, as it REGULATIONS, SECURITIES
requirements of the proposed rules.668 would affect SB SEF participants, would EXCHANGE ACT OF 1934
For purposes of Commission have a significant economic impact on
rulemaking in connection with the RFA, any small entity. 1. The general authority citation for
a small entity includes: (1) When used Part 240 is revised and the following
C. Certification
with reference to an ‘‘issuer’’ or a citation is added in numerical order to
For the foregoing reasons, the read as follows:
‘‘person,’’ other than an investment
Commission certifies that the proposed
company, an ‘‘issuer’’ or ‘‘person’’ that, Authority: 15 U.S.C. 77c, 77d, 77g, 77j,
rules and form under Regulation SB SEF 77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn,
on the last day of its most recent fiscal
would not have a significant economic 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 78j,
year, had total assets of $5 million or
impact on a substantial number of small 78j–1, 78k, 78k–1, 78l, 78m, 78n, 78n–1, 78o,
less,669 or (2) a broker-dealer with total
entities for purposes of the RFA. The 78o–4, 78p, 78q, 78s, 78u–5, 78w, 78x, 78ll,
capital (net worth plus subordinated
Commission requests comments 78mm, 80a–20, 80a–23, 80a–29, 80a–37, 80b–
liabilities) of less than $500,000 on the 3, 80b–4, 80b–11, and 7201 et seq; 18 U.S.C.
regarding this certification. The
date in the prior fiscal year as of which 1350 and 12 U.S.C. 5221(e)(3), unless
Commission requests that commenters
its audited financial statements were otherwise noted.
describe the nature of any impact on
prepared pursuant to Rule 17a–5(d) * * * * *
small entities and provide empirical
under the Exchange Act,670 or, if not
data to illustrate the extent of the
required to file such statements, a § 240.15a–12 also issued under 15 U.S.C.
impact.
broker-dealer with total capital (net 78c–4.
worth plus subordinated liabilities) of XXXII. Statutory Authority and Text of * * * * *
less than $500,000 on the last day of the Proposed Amendments 2. Section 240.3a1–1 is amended by
preceding fiscal year (or in the time that Pursuant to the Exchange Act, 15 adding paragraph (a)(4) and revising
it has been in business, if shorter); and U.S.C. 78a et seq., and particularly, paragraph (b) introductory text to read
is not affiliated with any person (other Sections 3, 6, 15, 19, 23(a), 30(b), 30(c) as follows:
than a natural person) that is not a small and 36 (15 U.S.C. 78c, 78f, 78o, 78s,
business or small organization.671 Under § 240.3a1–1 Exemption from the definition
the standards adopted by the SBA, small of ‘‘Exchange’’ under Section 3(a)(1) of the
related to credit intermediation. See SBA’s Table of
entities in the finance and insurance Small Business Size Standards, Subsector 522.
Act.
industry include the following: (1) For 674 This includes firms involved in investment (a) * * *
entities in credit intermediation and banking and securities dealing, securities brokerage, (4) Is a security-based swap execution
commodity contracts dealing, commodity contracts
related activities,672 entities with $175 brokerage, securities and commodity exchanges,
facility, as that term is defined in
million or less in assets or, (2) for non- miscellaneous intermediation, portfolio section 3(a)(77) of the Act (15 U.S.C.
depository credit intermediation and management, providing investment advice, trust, 78c(a)(77)), that:
certain other activities,673 $7 million or fiduciary and custody activities, and miscellaneous (i) Is in compliance with Regulation
financial investment activities. See SBA’s Table of
Small Business Size Standards, Subsector 523. SB SEF (17 CFR 242.800 through
668 See supra Section XXVII.C. 675 This includes direct life insurance carriers, 242.823); and
669 See 17 CFR 240.0–10(a).
670 See 17 CFR 240.17a–5(d).
direct health and medical insurance carriers, direct (ii) Does not serve as a marketplace
property and casualty insurance carriers, direct title for transactions in securities other than
671 See 17 CFR 240.0–10(c).
insurance carriers, other direct insurance (except
672 This includes commercial banks, savings life, health and medical) carriers, reinsurance
security-based swaps.
institutions, credit unions, firms involved in other carriers, insurance agencies and brokerages, claims (b) Notwithstanding paragraph (a)(1),
depository credit intermediation, credit card adjusting, third party administration of insurance (a)(2), or (a)(3) of this section, an
issuing, sales financing, consumer lending, real and pension funds, and all other insurance related organization, association, or group of
estate credit, and international trade financing. See activities. See SBA’s Table of Small Business Size
SBA’s Table of Small Business Size Standards, Standards, Subsector 524. persons shall not be exempt under this
Subsector 522. 676 This includes pension funds, health and section from the definition of
673 This includes firms involved in secondary welfare funds, other insurance funds, open-end ‘‘exchange,’’ if:
market financing, all other non-depository credit investment funds, trusts, estates, and agency
intermediation, mortgage and nonmortgage loan accounts, real estate investment trusts and other
* * * * *
brokers, financial transactions processing, reserve, financial vehicles. See SBA’s Table of Small 3. Add § 240.15a–12 to read as
and clearing house activities, and other activities Business Size Standards, Subsector 525. follows:
§ 240.15a–12 Conditional exemption from Sections 242.800 through 242.823 are also the Act (15 U.S.C. 78l); provided that to
the regulation of brokers registered as issued under sec. 943, Pub. L. 111–203, the extent any person is a member of a
security-based swap execution facilities. Section 763. group within the meaning of section
(a) A security-based swap execution 5. The heading for part 242 is revised 13(d)(3) under the Act (15 U.S.C.
facility (as that term is defined in to read as set forth above. 78m(d)(3)) and § 240.13d–5(b) of this
section 3(a)(77) of the Act (15 U.S.C. 6. Add §§ 242.800 through 242.823 to chapter, such person shall not be
78c(a)(77))) may register as a broker read as follows: deemed to beneficially own such
under section 15(a)(1) and (b) of the Act * * * * * security or other ownership interest for
(15 U.S.C. 78o(a)(1) and (b)) by purposes of this section, unless such
registering as a security-based swap Sec.
242.800 Definitions. person has the power to direct the vote
execution facility, if such security-based 242.801 Application for registration as a of such security or other ownership
swap execution facility does not engage security-based swap execution facility. interest.
in any activity other than facilitating the 242.802 Amendments to application. The term block trade has the same
trading of security-based swaps on or 242.803 Supplemental material to be filed meaning as § 242.900, provided
through the security-based swap by security-based swap execution however that until the Commission sets
execution facility in a manner facilities. the criteria and formula for determining
consistent with Regulation SB SEF (17 242.804 Withdrawal from or revocation of what constitutes a block trade under
CFR 242.800 through 242.823). registration for security-based swap
execution facilities.
§ 242.907(b), a security-based swap
(b) Except for the provisions of the execution facility may set its own
Act specified in paragraph (c) of this 242.805 Voluntary submission of rules for
Commission review and approval. criteria and formula for determining
section, a broker registered under what constitutes a block trade as long as
242.806 Self-certification of rules.
paragraph (a) of this section that does 242.807 Trading security-based swaps such criteria and formula comply with
not engage in any activity other than pursuant to certification. the Core Principles relating to security-
facilitating the trading of security-based 242.808 Trading security-based swaps based swap execution facilities in
swaps on or through the security-based pursuant to Commission review and section 3D of the Act (15 U.S.C. 78c–4)
swap execution facility in a manner approval. and the rules and regulations
consistent with the Regulation SB SEF 242.809 Access to security-based swap
thereunder.
(17 CFR 242.800 through 242.823) shall execution facilities.
242.810 Compliance with core principles.
The term Board means the Board of
be exempt from the requirements of the Directors or Board of Governors of the
Act and the rules and regulations 242.811 Compliance with rules.
242.812 Security-based swaps not readily security-based swap execution facility
thereunder that, by their terms, require, susceptible to manipulation. or any equivalent body.
prohibit, restrict, limit, condition, or 242.813 Monitoring of trading and trade The term competent, objective
affect activities of a broker unless those processing. personnel means a recognized
requirements of the Act or any rule, 242.814 Ability to obtain information. information technology firm or a
regulation, or order thereunder specifies 242.815 Financial integrity of transactions. qualified internal department
that it applies to a security-based swap 242.816 Emergency authority. knowledgeable of information
execution facility. 242.817 Timely publication of trading
technology systems.
(c) The following provisions of the information.
The term control, controlled by, or
Act shall apply to a broker that is a 242.818 Recordkeeping and reporting.
242.819 Antitrust considerations. any derivative thereof, for purposes of
security-based swap execution facility: §§ 242.800 through 823, means the
242.820 Conflicts of interest.
(1) Section 15(b)(4) of the Act (15 possession, direct or indirect, of the
242.821 Financial resources.
U.S.C. 78o(b)(4)); 242.822 System safeguards. power to direct or cause the direction of
(2) Section 15(b)(6) of the Act (15 242.823 Designation of Chief Compliance the management and policies of a
U.S.C. 78o(b)(6)); and Officer of security-based swap execution person, whether through the ownership
(3) Section 17(b) of the Act (15 U.S.C. facility. of voting securities, by contract, or
78q(b)).
* * * * * otherwise. For purposes of §§ 242.800
(d) A broker registered under
paragraph (a) of this section that does through 823, a person is presumed to
§ 242.800 Definitions.
not engage in any activity other than control another person if the person:
Terms used in this Regulation SB SEF (1) Is a director, general partner, or
facilitating the trading of security-based (17 CFR 242.800 through 242.823) that officer exercising executive
swaps on or through the security-based appear in section 3 of the Act (15 U.S.C. responsibility (or having similar status
swap execution facility in a manner 78c) have the same meaning as in or functions);
consistent with Regulation SB SEF (17 section 3 of the Act (15 U.S.C. 78c) and (2) Directly or indirectly has the right
CFR 242.800 through 242.823) shall be the rules or regulations thereunder. In to vote 25 percent or more of a class of
exempt from the Securities Investor addition, the following definitions shall voting securities or has the power to sell
Protection Act. apply: or direct the sale of 25 percent or more
The term affiliate means any person of a class of voting securities; or
PART 242—REGULATIONS M, SHO, that, directly or indirectly, controls, is
ATS, AC, NMS, AND SB SEF AND (3) In the case of a partnership, has
controlled by, or is under common the right to receive, upon dissolution, or
CUSTOMER MARGIN REQUIREMENTS control with, the person.
FOR SECURITY FUTURES has contributed, 25 percent or more of
The terms beneficial ownership, the capital.
4. The authority citation for part 242 beneficially owns, or any derivative The term director means any member
is amended by adding the following thereof have the same meaning, with of the Board.
citation to read as follows: respect to any security or other The term EDGAR Filer Manual has the
ownership interest, as set forth in same meaning as set forth in § 232.11 of
Authority: 15 U.S.C. 77g, 77q(a), 77s(a),
78b, 78c, 78g(c)(2), 78i(a), 78j, 78k–1(c), 78l, § 240.13d–3 of this chapter, as if (and this chapter.
78m, 78n, 78o(b), 78o(c), 78o(g), 78q(a), whether or not) such security or other The term emergency has the same
78q(b), 78q(h), 78w(a), 78dd–1, 78mm, 80a– ownership interest were a voting equity meaning as set forth in section 12(k)(7)
23, 80a–29, and 80a–37. security registered under section 12 of of the Act (15 U.S.C. 78l(k)(7)).
The term immediate family member (A) Payments arising solely from (1) Significantly affects existing
means a person’s spouse, parents, investments in the securities of the capacity or security;
children and siblings, whether by blood, security-based swap execution facility (2) In itself, raises significant capacity
marriage or adoption, or anyone or any affiliate thereof; or or security issues, even if it does not
residing in such person’s home. (B) Payments under non-discretionary affect other existing systems;
The term independent director means: charitable contribution matching (3) Relies upon substantially new or
(1) A director who has no material programs; different technology;
relationship with: (v) The director, or an immediate (4) Is designed to provide a new
(i) The security-based swap execution family member, is, or within the past service or function; or
facility or any affiliate of the security- three years was, employed as an (5) Otherwise significantly affects the
based swap execution facility; or executive officer of another entity where operations of the security-based swap
(ii) A participant or any affiliate of a any executive officers of the security- execution facility.
participant. based swap execution facility serve on The term material systems outage
(2) A director is not an independent that entity’s compensation committee; means an unauthorized intrusion into
director if any of the following (vi) The director, or an immediate any system or an event at a security-
circumstances exists: family member, is a current partner of based swap execution facility that
(i) The director, or an immediate the outside auditor of the security-based causes a problem in systems or
family member, is employed by or swap execution facility or any affiliate procedures that results in:
otherwise has a material relationship thereof, or was a partner or employee of (1) A failure to maintain accurate,
with the security-based swap execution the outside auditor of the security-based time-sequenced records of all orders,
facility or any affiliate thereof, or within swap execution facility or any affiliate quotations, and transactions that are
the past three years, was employed by thereof who worked on the audit of the received by, or originated on, the
or otherwise had a material relationship security-based swap execution facility security-based swap execution facility;
with the security-based swap execution or any affiliate thereof, at any time (2) A disruption of normal operations,
facility or any affiliate thereof; within the past three years; or including switchover to back-up
(vii) In the case of a director that is equipment with no possibility of near-
(ii) (A) The director is a participant or,
a member of the audit committee of the term recovery of primary hardware;
within the past three years, was
security-based swap execution facility, (3) A loss of use of any system;
employed by or affiliated with a
such director (other than in his or her (4) A loss of transactions;
participant or any affiliate thereof; or (5) Excessive back-ups or delays in
capacity as a member of the audit
(B) The director has an immediate executing trades;
committee, the Board, or any other
family member that is, or within the (6) A loss of ability to disseminate
Board committee), accepts, directly or
past three years was, an executive vital information;
indirectly, any consulting, advisory, or
officer of a participant or any affiliate (7) A communication of an outage
other compensatory fee from the
thereof; situation to other external entities;
security-based swap execution facility
(iii) The director, or an immediate (8) A report or referral of an event to
or any affiliate thereof or a participant
family member, has received during any the Board or senior management of the
or any affiliate thereof, other than fixed
twelve month period, within the past security-based swap execution facility;
amounts of pension and other forms of
three years, payments that reasonably (9) A serious threat to systems
deferred compensation for prior service,
could affect the independent judgment operations even though systems
provided such compensation is not
or decision-making of the director from operations were not disrupted;
contingent in any way on continued
the security-based swap execution (10) A queuing of data between
service.
facility or any affiliate thereof or from a The term material change means a system components or queuing of
participant or any affiliate thereof, other change that a Chief Compliance Officer messages to or from participants of such
than the following: would reasonably need to know in order duration that a participant’s normal
(A) Compensation for Board or Board to oversee compliance of the security- activity with the security-based swap
committee services; based swap execution facility. execution facility is affected; or
(B) Compensation to an immediate The term material compliance matter (11) A failure to maintain the integrity
family member who is not an executive means any compliance matter that the of systems that results in the entry of
officer of the security-based swap Board would reasonably need to know erroneous or inaccurate inquiries,
execution facility or any affiliate thereof to oversee the compliance of the responses, orders, quotations, other
or of a participant or any affiliate security-based swap execution facility trading interest, transactions, or other
thereof; or and includes, without limitation: information in the security-based swap
(C) Pension and other forms of (1) A violation of the Federal execution facility or the securities
deferred compensation for prior securities laws by the security-based markets as a whole.
services, not contingent on continued swap execution facility, its officers, The term non-resident person means:
service; directors, employees, or agents; (1) In the case of an individual, one
(iv) The director, or an immediate (2) A violation of the policies and who resides in or has his principal place
family member, is a partner in, or procedures of the security-based swap of business in any place not in the
controlling shareholder or executive execution facility by the security-based United States;
officer of, any organization to or from swap execution facility, its officers, (2) In the case of a corporation, one
which the security-based swap directors, employees, or agents; or incorporated in or having its principal
execution facility or any affiliate thereof (3) A weakness in the design or place of business in any place not in the
made or received payments for property implementation of the security-based United States; and
or services in the current or any of the swap execution facility’s policies and (3) In the case of a partnership or
past three full fiscal years that exceed procedures. other unincorporated organization or
two percent of the recipient’s The term material systems change association, one having its principal
consolidated gross revenues for that means a change to automated systems place of business in any place not in the
year, other than the following: that: United States.
The term objective review means an thereunder. Form SB SEF consists of such proceedings, the Commission, by
internal or external review, performed instructions, an Execution Page, and a order, shall grant or deny such
by competent, objective personnel list of Exhibits that the Commission registration. The Commission may
following established audit procedures requires in order to be able to determine extend the time for conclusion of such
and standards, and containing a risk whether an applicant is able to comply proceedings for up to 90 days, if it finds
assessment conducted pursuant to a with the Act and rules and regulations good cause for such extension and
review schedule. thereunder. An application on Form SB publishes its reasons for so finding, or
The term participant when used with SEF will not be considered to be for such longer period as to which the
respect to a security-based swap complete unless the applicant has applicant consents.
execution facility means a person that is submitted, at a minimum, the Execution (3) The Commission shall grant the
permitted to directly effect transactions Page and Exhibits as required in Form registration of a security-based swap
on the security-based swap execution SB SEF, and any other material that the execution facility if the Commission
facility. Commission may require, upon request, finds that the requirements of the Act
The term person associated with a in order to be able to determine whether and the rules and regulations
participant means any partner, officer, an applicant is able to comply with the thereunder with respect to the applicant
director, or branch manager of such Act and rules and regulations are satisfied. The Commission shall
participant (or any person occupying a thereunder. If the application is not deny the registration of a security-based
similar status or performing similar complete, the Commission shall notify swap execution facility if it does not
functions), any person directly or the applicant that the application will make such finding.
indirectly controlling, controlled by, or not be deemed to have been submitted (c) For any application for registration
under common control with such for purposes of the Commission’s as a security-based swap execution
participant, or any employee of such review. facility filed pursuant to paragraph (a) of
participant. (b)(1) In connection with an this section on Form SB SEF (referenced
The term related person when used application for registration furnished to in § 249.1700 of this chapter) on or
with respect to a participant means: the Commission under paragraph (a) of before July 31, 2014, for which the
(1) Any affiliate of a participant; this section on or before July 31, 2014, applicant indicates that it would like to
(2) Any person associated with a within 360 days of the date of the filing be considered for temporary registration
participant; of such application (or within such pursuant to this paragraph (c), the
(3) Any immediate family member of longer period as to which the applicant Commission may grant temporary
a participant, or any immediate family consents), the Commission shall: registration of the security-based swap
member of the spouse of such (i) By order grant registration; or
(ii) Institute proceedings to determine execution facility that shall expire on
participant, who, in each case, has the the earlier of:
same home as the person or who is a whether registration should be denied.
Such proceedings shall include notice (1) The date that the Commission
director or officer of the security-based grants or denies registration of the
swap execution facility or any of its of the grounds for denial under
consideration and opportunity for security-based swap execution facility;
parents or subsidiaries; or or
(4) Any immediate family member of hearing and shall be concluded within
450 days after the date on which the (2) The date that the Commission
a person associated with a participant,
application for registration is furnished rescinds the temporary registration of
or any immediate family member of the
to the Commission under paragraph (a) the security-based swap execution
spouse of such person, who, in each
of this section. At the conclusion of facility.
case, has the same home as the person
such proceedings, the Commission, by (d) A security-based swap execution
associated with the participant or who
order, shall grant or deny such facility shall designate and authorize on
is a director or officer of the security-
registration. The Commission may Form SB SEF (referenced in § 249.1700
based swap execution facility or any of
extend the time for conclusion of such of this chapter) an agent in the United
its parents or subsidiaries.
proceedings for up to 90 days, if it finds States, other than a Commission
The term review schedule means a
good cause for such extension and member, official, or employee, who
schedule in which each element
publishes its reasons for so finding, or shall accept any notice or service of
contained in § 242.822(a)(1) would be
for such longer period as to which the process, pleadings, or other documents
assessed at specific, regular intervals.
The term tagged means having an applicant consents. in any suit, action or proceedings
identifier that highlights specific (2) In connection with an application brought against the security-based swap
information submitted to the for registration furnished to the execution facility to enforce the Federal
Commission that is in the format Commission under paragraph (a) of this securities laws or the rules or
required by the EDGAR Filer Manual, as section after July 31, 2014, within 180 regulations thereunder.
described in Section 301 of Regulation days of the date of the filing of such (e) Any person applying for
S–T (17 CFR 232.301). application (or within such longer registration pursuant to paragraph (a) of
period as to which the applicant this section that is controlled by any
§ 242.801 Application for registration as a consents), the Commission shall: other person shall certify on its Form SB
security-based swap execution facility. (i) By order grant registration; or SEF (referenced in § 249.1700 of this
(a) An application for registration as (ii) Institute proceedings to determine chapter) and provide an opinion of
a security-based swap execution facility whether registration should be denied. counsel that any such person that
shall be filed electronically in a tagged Such proceedings shall include notice controls such security-based swap
data format with the Commission on of the grounds for denial under execution facility will consent to and
Form SB SEF (referenced in § 249.1700 consideration and opportunity for can, as a matter of law:
of this chapter), in accordance with the hearing and shall be concluded within (1) Provide the Commission with
instructions contained therein. The 270 days after the date on which the prompt access to its books and records,
application must include information application for registration is furnished to the extent such books and records are
sufficient to demonstrate compliance to the Commission under paragraph (a) related to the activities of the security-
with the Act and rules and regulations of this section. At the conclusion of based swap execution facility; and
(2) Submit to onsite inspection and § 249.1700 of this chapter) on Form SB statement together with all exhibits
examination by representatives of the SEF, within 5 business days after any which are prescribed to be filed in
Commission with respect to the changes in the legal or regulatory connection with Form SB SEF
activities of the security-based swap framework of any person that controls (referenced in § 249.1700 of this
execution facility. the security-based swap execution chapter).
(f) Any non-resident person applying facility that would impact the ability of (f) Within 60 days of the end of its
for registration pursuant to paragraph (a) or the manner in which any such person fiscal year, a security-based swap
of this section shall certify on its Form consents to or provides the Commission execution facility shall file an
SB SEF (referenced in § 249.1700 of this prompt access to its books and records, amendment to its Form SB SEF
chapter) and provide an opinion of to the extent such books and records are (referenced in § 249.1700 of this
counsel that the security-based swap related to the activities of the security- chapter), which shall update the Form
execution facility can, as a matter of based swap execution facility, or SB SEF in its entirety. Each exhibit to
law: impacts the Commission’s ability to the amended Form SB SEF shall be up
(1) Provide the Commission with inspect and examine any such person to date as of the end of the latest fiscal
prompt access to the books and records with respect to the activities of the year of the security-based swap
of such security-based swap execution security-based swap execution facility. execution facility.
facility; and The amendment shall include a revised
§ 242.803 Supplemental material to be filed
(2) Submit to onsite inspection and opinion of counsel pursuant to Exhibit by security-based swap execution facilities.
examination by representatives of the P describing how, as a matter of law,
Commission. any person that controls the security- (a) A registered security-based swap
(g) An application for registration or based swap execution facility will execution facility, or a security-based
any amendment thereto that is filed continue to meet its obligations to swap execution facility exempted from
pursuant to Regulation SB SEF consent to and provide the Commission such registration pursuant to section
(referenced in § 249.1700 of this with prompt access to its books and 3D(e) of the Act (15 U.S.C. 78c–4(e)),
chapter) shall be considered a ‘‘report’’ records, to the extent such books and shall file electronically with the
filed with the Commission for purposes records are related to the activities of Commission any material relating to the
the security-based swap execution trading of security-based swaps
of sections 18(a) and 32(a) of the Act (15
facility, and to consent to and be subject (including notices, circulars, bulletins,
U.S.C. 78r(a) and 78ff(a)) and the rules
to onsite inspection and examination by lists, and periodicals) issued or made
and regulations thereunder.
representatives of the Commission with generally available to participants. Such
§ 242.802 Amendments to application. respect to the activities of the security- material shall be filed with the
(a) After the discovery that any based swap execution facility under Commission upon issuing or making
information filed on Form SB SEF such new legal or regulatory framework. such material available to the
(referenced in § 249.1700 of this (d) A non-resident security-based participants.
chapter), any statement therein, or any swap execution facility shall file (b) If the information required to be
Exhibit or amendment thereto, was electronically with the Commission an filed under paragraph (a) of this section
inaccurate when filed, the security- amendment to Exhibit P to Form SB is available continuously on an Internet
based swap execution facility shall file SEF, on Form SB SEF (referenced in Web site controlled by a security-based
with the Commission an amendment § 249.1700 of this chapter), within 5 swap execution facility, in lieu of filing
correcting such inaccuracy promptly, business days after any changes in legal such information with the Commission,
but in no event later than 5 business or regulatory framework that would such security-based swap execution
days after such discovery. impact the security-based swap facility may:
(b)(1) The security-based swap (1) Indicate the location of the
execution facility’s ability to or the
execution facility shall file Internet Web site where such
manner in which it provides the
information may be found; and
electronically with the Commission an Commission prompt access to its books (2) Certify that the information
amendment to Form SB SEF (referenced and records or impacts the available at such location is accurate as
in § 249.1700 of this chapter), on Form Commission’s ability to inspect and of its date.
SB SEF, within 5 business days after examine the security-based swap
any action is taken that renders execution facility. The amendment shall § 242.804 Withdrawal from or revocation of
inaccurate, or that causes to be include a revised opinion of counsel registration for security-based swap
incomplete, any of the following: pursuant to Exhibit P describing how, as execution facilities.
(i) Information filed on the Execution a matter of law, the entity will continue (a) A registered security-based swap
Page of Form SB SEF (referenced in to meet its obligations to provide the execution facility may withdraw from
§ 249.1700 of this chapter), or Commission with prompt access to its registration by filing a written notice of
amendment thereto; or books and records and to be subject to withdrawal with the Commission. The
(ii) Information filed as part of onsite inspection and examination by security-based swap execution facility
Exhibits C, E, G or N, or any representatives of the Commission shall designate on its notice of
amendments thereto. under such new legal or regulatory withdrawal a person associated with the
(2) An amendment required under framework. security-based swap execution facility
this paragraph (b) shall set forth the (e) Whenever the number of changes to serve as the custodian of the security-
nature and effective date of the action to be reported in an amendment, or the based swap execution facility’s books
taken and shall provide any new number of amendments filed, are so and records. Prior to filing a notice of
information and correct any information great that the purpose of clarity will be withdrawal, a security-based swap
rendered inaccurate. promoted by the filing of a complete execution facility shall file an amended
(c) Any security-based swap new statement and exhibits, a security- Form SB SEF (referenced in § 249.1700
execution facility that is controlled by based swap execution facility may, at its of this chapter) to update any inaccurate
any other person shall file electronically election, or shall, upon request of any information.
with the Commission an amendment to representative of the Commission, file as (b) A notice of withdrawal from
Exhibit P to Form SB SEF (referenced in an amendment a complete new registration filed by a security-based
swap execution facility shall become amendment, deletions and additions the proposed amendment or
effective for all matters (except as must be indicated); interpretation;
provided in this paragraph (b)) on the (3) Describe the proposed effective (10) In the case of proposed
60th day after the filing thereof with the date of the new rule or rule amendment amendments to the terms and
Commission, within such longer period and any action taken or anticipated to conditions of a security-based swap,
of time as to which such security-based be taken to adopt the proposed rule by include a written statement verifying
swap execution facility consents or the the registered security-based swap that the registered security-based swap
Commission, by order, may determine execution facility or by its Board, or by execution facility has undertaken a due
as necessary or appropriate in the public any committee thereof, and cite the diligence review of the legal conditions,
interest or for the protection of rules of the registered security-based including conditions relating to
investors, or within such shorter period swap execution facility that authorize contractual and intellectual property
of time as the Commission may the adoption of the proposed rule rights, that may materially affect the
determine. change; trading of the security-based swap; and
(c) A notice of withdrawal that is filed (4) Explain the operation, purpose, (11) A request for confidential
pursuant to this rule shall be considered and effect of the new rule or rule treatment, if appropriate, as permitted
a ‘‘report’’ filed with the Commission for amendment, including, as applicable, a pursuant to the applicable provisions of
purposes of sections 18(a) and 32(a) of description of the anticipated benefits to the Freedom of Information Act, 5
the Act (15 U.S.C. 78r(a) and 78ff(a)), market participants or others, any U.S.C. 552, and Commission rules and
and the rules and regulations potential anticompetitive effects on regulations thereunder, 17 CFR 200.83.
thereunder. market participants or others, and how (b) Standard for review and approval.
(d) If the Commission finds, on the the rule fits into the registered security- The Commission shall approve a new
record after notice and opportunity for based swap execution facility’s rule or rule amendment unless the new
hearing, that any registered security- framework of regulation; rule or rule amendment is inconsistent
based swap execution facility has (5) Certify that the registered security- with the Act or Commission rules or
obtained its registration by making any based swap execution facility has regulations.
false or misleading statements with published on its Web site a notice of (c) Forty-five day review. (1) All rules
respect to any material fact or has pending new rule or rule amendment submitted for Commission approval
violated or failed to comply with any with the Commission and a copy of the under paragraph (a) of this section shall
provision of the Federal securities laws submission, concurrent with the filing be deemed approved by the Commission
and the rules and regulations of the submission with the Commission; 45 days after receipt by the Commission,
thereunder, the Commission, by order, (6) Include the documentation relied or at the conclusion of such extended
may revoke the registration. Pending on to establish the basis for compliance period as provided under paragraph (d)
final determination of whether any with the applicable provisions of the of this section, unless the registered
registration shall be revoked, the Act and Commission rules and security-based swap execution facility is
Commission, by order, may suspend regulations thereunder, including notified otherwise within the applicable
such registration, if such suspension section 3D(d) of the Act (15 U.S.C. 78c– period, if:
appears to the Commission, after notice 4(d)) and the rules and regulations (i) The submission complies with the
and opportunity for hearing, to be thereunder; requirements of paragraph (a) of this
necessary or appropriate in the public (7) Provide additional information section; and
interest or for the protection of that may be beneficial to the (ii) The registered security-based
investors. Commission in analyzing the new rule swap execution facility does not amend
(e) If the Commission finds that a or rule amendment. If a proposed rule the new rule or rule amendment or
registered security-based swap affects, directly or indirectly, the supplement the submission, except as
execution facility is no longer in application of any other rule of the requested by the Commission, during
existence or has ceased to do business registered security-based swap the pendency of the review period. Any
in the capacity specified in its execution facility, the pertinent text of amendment or supplementation not
application for registration, the any such rule must be set forth and the requested by the Commission will be
Commission, by order, may cancel the anticipated effect described; treated as the submission of a new filing
registration. (8) Describe briefly any substantive under this section.
opposing views expressed to the (d) Extension of time for review. The
§ 242.805 Voluntary submission of rules registered security-based swap Commission may further extend the
for Commission review and approval.
execution facility by the Board or review period in paragraph (c) of this
(a) Request for approval of rules. A committee members, participants, or section for any approval request for:
registered security-based swap market participants with respect to the (1) An additional 45 days, if the new
execution facility may request that the new rule or rule amendment that were rule or rule amendment raises novel or
Commission approve a new rule or rule not incorporated into the new rule or complex issues that require additional
amendment prior to implementation of rule amendment; time for review, is of major economic
the new rule or rule amendment or, if (9) Identify any Commission rule or significance, the submission is
the request was initially submitted regulation that the Commission may incomplete, or the requestor does not
under § 242.806 or 242.807, subsequent need to amend, or sections of the Act or respond completely to the
to implementation of the new rule or the rules or regulations thereunder that Commission’s questions in a timely
rule amendment. A request for approval the Commission may need to interpret, manner, in which case, the Commission
shall: in order to approve the new rule or rule shall notify the submitting registered
(1) Be filed electronically with the amendment. To the extent that such an security-based swap execution facility
Commission in a format specified by the amendment or interpretation is within the initial 45-day review period
Commission; necessary to accommodate a new rule or and shall briefly describe the nature of
(2) Set forth the text of the new rule rule amendment, the submission should the specific issues for which additional
or rule amendment (in the case of a rule include a reasoned analysis supporting time for review shall be required; or
(2) Any period, beyond the additional § 242.806 Self-certification of rules. (v) A brief explanation of any
45 days provided in paragraph (d)(1) of (a) Required certification. A registered substantive opposing views expressed to
this section, to which the registered security-based swap execution facility the registered security-based swap
security-based swap execution facility shall comply with the following execution facility by the Board or
agrees in writing. conditions prior to implementing any committee members, participants, or
rule that has not obtained Commission market participants that were not
(e) Notice of non-approval. Any time
approval under § 242.805: incorporated into the rule, or a
during its review under this section, the
(1) The registered security-based swap statement that no such opposing views
Commission may notify the registered execution facility has filed its were expressed;
security-based swap execution facility submission electronically in a format (vi) A request for confidential
that it will not, or is unable to, approve specified by the Commission. treatment, if appropriate, as permitted
the new rule or rule amendment. This (2) The registered security-based swap pursuant to the applicable provisions of
notification will briefly specify the execution facility has provided to the the Freedom of Information Act, 5
nature of the issues raised and the Commission a certification that it U.S.C. 552, and Commission rules and
specific provision of the Act or published on its Web site a notice of regulations thereunder, 17 CFR 200.83;
Commission rules or regulations, pending certification with the and
including the form or content Commission and a copy of the (vii) For amendments to the terms and
requirements of this section, with which submission, concurrent with the filing conditions of a security-based swap, a
the new rule or rule amendment is of a submission with the Commission. written statement verifying that the
inconsistent or appears to be Information that the registered security- registered security-based swap
inconsistent with the Commission rules based swap execution facility seeks to execution facility has undertaken a due
or regulations. keep confidential may be redacted from diligence review of the legal conditions,
(f) Effect of non-approval. (1) the documents published on its Web including conditions relating to
Notification to a registered security- site but must be republished consistent contractual and intellectual property
based swap execution facility under with any determination made pursuant rights, that may materially affect the
to the applicable provisions of the trading of the product.
paragraph (e) of this section shall not (6) The registered security-based swap
prevent the registered security-based Freedom of Information Act, 5 U.S.C.
552, and Commission rules and execution facility has provided, upon
swap execution facility from request of any representative of the
subsequently submitting a revised regulations thereunder, 17 CFR 200.83.
(3) The Commission has received the Commission, additional evidence,
version of the new rule or rule information, or data that may be
submission not later than the opening of
amendment for the Commission’s beneficial to the Commission in
business on the business day that is 10
review and approval or from submitting conducting a due diligence assessment
business days prior to the registered
the new rule or rule amendment as of the filing and the registered security-
security-based swap execution facility’s
initially proposed in a supplemented proposed implementation of the rule or based swap execution facility’s
submission. The revised submission rule amendment; provided, however, compliance with any of the
will be reviewed without prejudice. that if a security-based swap execution requirements of the Act or Commission
(2) Notification to a registered facility implements any rule or rule rules or regulations thereunder.
security-based swap execution facility amendment in the exercise of its (b) Review by the Commission. The
under paragraph (e) of this section of the emergency authority pursuant to Commission shall have 10 business days
Commission’s determination not to § 242.816, it shall file such rule or rule to review the new rule or rule
approve the new rule or rule amendment with the Commission amendment before the new rule or rule
amendment of the registered security- pursuant to this paragraph (a) prior to amendment is deemed certified and can
based swap execution facility shall be the implementation of such rule or rule be made effective, unless the
presumptive evidence that the amendment, or, if not practicable, Commission notifies the registered
registered security-based swap within 24 hours after implementation of security-based swap execution facility
execution facility may not truthfully such emergency rule or rule during the 10-business day review
certify the same, or substantially the amendment. period that it intends to issue a stay of
same, proposed rule or rule amendment (4) The Commission has not stayed the certification under paragraph (c) of
under § 242.806. the submission pursuant to paragraph this section.
(c) of this section. (c) Stay. (1) Stay of certification of
(g) Expedited approval. new rule or rule amendment. The
(5) The rule submission includes:
Notwithstanding the provisions of (i) The text of the rule (in the case of Commission may stay the certification
paragraph (c) of this section, a new rule a rule amendment, deletions, and of a new rule or rule amendment
or rule amendment, including proposed additions must be indicated); submitted pursuant to paragraph (a) of
changes to the terms and conditions of (ii) The date of intended this section by issuing a notification
a security-based swap, that is consistent implementation; informing the registered security-based
with the Act and Commission rules and (iii) A certification by the registered swap execution facility that the
regulations and with standards security-based swap execution facility Commission is staying the certification
approved or established by the that the rule complies with the Act and of the new rule or rule amendment on
Commission may be approved by the Commission rules and regulations the grounds that the new rule or rule
Commission at such time and under thereunder; amendment presents novel or complex
such conditions as the Commission (iv) The documentation relied on to issues that require additional time to
shall specify in the written notification; establish the basis for compliance with analyze, the new rule or rule
provided, however, that the the applicable provisions of the Act and amendment is accompanied by an
Commission may, at any time, alter or Commission rules and regulations inadequate explanation, or the new rule
revoke the applicability of such a notice thereunder, including section 3D(d) of or rule amendment is potentially
to any particular product or rule the Act (15 U.S.C. 78c–4(d)) and the inconsistent with the Act or
amendment. rules and regulations thereunder; Commission rules or regulations
thereunder. The Commission will have (i) Administrative procedures. The diligence review of the legal conditions,
90 days from the date of the notification organization and administrative including legal conditions that relate to
to conduct a review. procedures of a security-based swap contractual and intellectual property
(2) Public comment. The Commission execution facility’s governing bodies, rights, that may materially affect the
shall provide a 30-day comment period such as the Board, officers, and trading of the security-based swap;
within the 90-day review period while committees, but not any of the (vi) A certification that the registered
the stay is in effect as described in following: Voting requirements, Board security-based swap execution facility
paragraph (c)(1) of this section. The or committee composition requirements published on its Web site a notice of
Commission shall publish a notice of or procedures, decision making pending certification with the
the 30-day comment period on the procedures, use or disclosure of material Commission and a copy of the
Commission’s Web site. Comments from non-public information gained through submission, concurrent with the filing
the public shall be submitted as the performance of official duties, or of the submission with the Commission.
specified in that notice. requirements relating to conflicts of Information that the registered security-
(3) Expiration of a stay of certification interest; or based swap execution facility seeks to
of new rule or rule amendment. A new (ii) Administration. The routine, daily keep confidential may be redacted from
rule or rule amendment subject to a stay administration, direction and control of the documents published on its Web
pursuant to paragraph (c) of this section employees, requirements relating to site, but must be republished consistent
shall become effective, pursuant to the gratuity and similar funds, but not any with any determination made pursuant
certification, at the expiration of the 90- of the following: Guaranty, reserves, or to the applicable provisions of the
day review period described in similar funds; declaration of holidays; Freedom of Information Act, 5 U.S.C.
paragraph (c)(1) of this section unless and changes to facilities housing the 552, and Commission rules and
the Commission withdraws the stay market; and regulations thereunder, 17 CFR 200.83;
prior to that time or the Commission (2) The registered security-based swap and
notifies the registered security-based execution facility maintains (vii) A request for confidential
swap execution facility during the 90- documentation regarding all changes to treatment, if appropriate, as permitted
day review period that it objects to the rules and posts all such rule changes on pursuant to the applicable provisions of
certification on the grounds that the its Web site. the Freedom of Information Act, 5
new rule or rule amendment is § 242.807 Trading security-based swaps
U.S.C. 552, and Commission rules and
inconsistent with the Act or pursuant to certification. regulations thereunder, 17 CFR 200.83.
Commission rules or regulations (b) A registered security-based swap
(a) A registered security-based swap
thereunder. execution facility, upon request of any
execution facility shall comply with the
(d) Notwithstanding paragraph (a) of representative of the Commission, shall
submission requirements of this section
this section, a registered security-based provide any additional evidence,
prior to trading a security-based swap
swap execution facility may place the information, or data that demonstrates
that has not been approved under
following new rules or rule amendments that the security-based swap meets,
§ 242.808. A submission shall comply
into effect on the following business day initially or on a continuing basis, all of
with the following conditions:
without certification to the Commission (1) The registered security-based swap the requirements of the Act and
if the following conditions are met: execution facility has filed its Commission rules and regulations
(1) The rule is limited to corrections submission electronically in a format thereunder.
of typographical errors, renumbering, specified by the Commission; (c) Stay. (1) The Commission may stay
periodic routine updates to identifying (2) The Commission has received the the certification of a security-based
information about approved entities, submission by the opening of business swap pursuant to paragraph (a) of this
and other such non-substantive on the business day preceding the day section by issuing a notification
revisions of the terms and conditions of on which the security-based swap informing the registered security-based
a security-based swap that have no would begin trading; swap execution facility that the
effect on the economic characteristics of (3) The Commission has not stayed Commission is staying the certification
the security-based swap; and the submission pursuant to paragraph on the grounds that the security-based
(2) The registered security-based swap (c) of this section; and swap proposed to begin trading presents
execution facility provides to the (4) The submission includes: novel or complex issues that require
Commission at least weekly a summary (i) A copy of the terms and conditions additional time to analyze, the
notice of all rule amendments made of the security-based swap; certification is accompanied by an
effective pursuant to this paragraph (ii) The intended date on which the inadequate explanation or the proposed
during the preceding week. Such notice security-based swap may begin trading; security-based swap is potentially
must be labeled ‘‘Weekly Notification of (iii) A certification by the registered inconsistent with the Act or
Rule Amendments’’ and need not be security-based swap execution facility Commission rules or regulations
filed for weeks during which no such that the security-based swap to be thereunder. The Commission will have
actions have been taken. One copy of traded complies with the Act and 90 days from the date of the notification
each such submission shall be furnished Commission rules and regulations to conduct the review.
electronically in a format specified by thereunder; (2) Public comment. The Commission
the Commission. (iv) The documentation relied on to shall provide a 30-day comment period,
(e) Notwithstanding paragraph (a) of establish the basis for compliance with within the 90-day review period while
this section, a registered security-based the Act and the rules and regulations the stay is in effect as described in
swap execution facility may place the thereunder, including section 3D(d) of paragraph (c)(1) of this section. The
following new rules or rule amendments the Act (15 U.S.C. 78c–4(d)) and the Commission shall publish a notice of
into effect without certification or notice rules and regulations thereunder; the 30-day comment period on the
to the Commission if the following (v) A written statement verifying that Commission’s Web site. Comments from
conditions are met: the registered security-based swap the public shall be submitted as
(1) The rule governs: execution facility has undertaken a due specified in that notice.
(3) Expiration of a stay. A proposed 552, and Commission rules or review under this section may notify the
security-based swap subject to a stay regulations thereunder, 17 CFR 200.83; registered security-based swap
pursuant to paragraph (c) of this section and execution facility that it will not, or is
shall become effective, pursuant to the (b) A registered security-based swap unable to, approve the security-based
certification, at the expiration of the 90- execution facility, upon request of any swap. This notification will briefly
day review period described in representative of the Commission, shall specify the nature of the issues raised
paragraph (c)(1) of this section unless provide additional evidence, and the specific provision of the Act or
the Commission withdraws the stay information, or data that demonstrates Commission rules or regulations
prior to that time or the Commission that the security-based swap meets, thereunder, including the form or
notifies the registered security-based initially or on a continuing basis, all of content requirements of paragraph (a) of
swap execution facility during the 90- the requirements of the Act and this section, with which the security-
day review period that it objects to the Commission rules or regulations based swap is inconsistent, appears to
proposed certification on the grounds thereunder. be inconsistent, or is potentially
that it is inconsistent with the Act or (c) Standard for review and approval. inconsistent.
Commission rules or regulations The Commission shall approve a (g) Effect of non-approval. (1)
thereunder. security-based swap unless the terms Notification to a registered security-
and conditions of such security-based based swap execution facility under
§ 242.808 Trading security-based swaps swap are inconsistent with the Act or paragraph (f) of this section of the
pursuant to Commission review and Commission rules or regulations Commission’s determination not to
approval. thereunder. approve a security-based swap shall not
(a) A registered security-based swap (d) Forty-five day review. All security- prejudice the registered security-based
execution facility may request that the based swaps submitted for Commission swap execution facility from
Commission approve a security-based approval under this section shall be subsequently submitting a revised
swap prior to trading such security- deemed approved by the Commission version of the security-based swap for
based swap or, if a security-based swap 45 days after receipt by the Commission Commission approval or from
was initially submitted under § 242.807, or at the conclusion of an extended submitting the security-based swap as
subsequent to the commencement of period as provided under paragraph (e) initially proposed pursuant to a
trading such security-based swap. A of this section, unless the registered supplemented submission.
submission requesting approval shall be security-based swap execution facility is (2) Notification to a registered
filed electronically with the notified otherwise within the applicable security-based swap execution facility
Commission in a format specified by the period, if: under paragraph (f) of this section of the
Commission and include: (1) The submission complies with the Commission’s inability to approve the
(1) A copy of the terms and conditions requirements of paragraph (a) of this security-based swap shall be
of the security-based swap; section; and presumptive evidence that the
(2) The documentation relied on to (2) The registered security-based swap registered security-based swap
establish the basis for compliance with execution facility making the execution facility may not truthfully
the Act and rules and regulations submission does not amend the terms certify under § 242.807 that the same, or
thereunder, including section 3D(d) of and conditions of the security-based substantially the same, security-based
the Act (15 U.S.C. 78c–4(d)) and the swap or supplement its request for swap complies with the Act or
rules and regulations thereunder; approval during that period, except as Commission rules and regulations
(3) A written statement verifying that requested by the Commission to correct thereunder.
the registered security-based swap typographical errors, renumber, or make
execution facility has undertaken a due other non-substantive revisions, during § 242.809 Access to security-based swap
diligence review of the legal conditions, that period. Any voluntary, substantive execution facilities.
including legal conditions that relate to amendment by the registered security- (a) A security-based swap execution
contractual and intellectual property based swap execution facility shall be facility shall permit a person to become
rights, that may materially affect the treated as a new submission under this a participant in the security-based swap
trading of the security-based swap; section. execution facility only if such person is
(4) A request for confidential (e) Extension of time. The registered with the Commission as a
treatment, if appropriate, as permitted Commission may extend the 45-day security-based swap dealer, major
pursuant to the applicable provisions of review period in paragraph (d) of this security-based swap participant, or
the Freedom of Information Act, 5 section for: broker (as defined in section 3(a)(4) of
U.S.C. 552, and Commission rules and (1) An additional 45 days, if the the Act, 15 U.S.C. 78c(a)(4)), or if such
regulations thereunder, 17 CFR 200.83; proposed security-based swap raises person is an eligible contract participant
(5) A certification that the registered novel or complex issues that require (as defined in section 3(a)(65) of the Act,
security-based swap execution facility additional time for review, in which 15 U.S.C. 78c(a)(65)).
has published on its Web site a notice case the Commission shall notify the (b) A security-based swap execution
of pending request for approval with the registered security-based swap facility shall permit all eligible persons
Commission and a copy of the execution facility within the initial 45- that meet the requirements for becoming
submission, concurrent with the filing day review period and shall briefly a participant in the security-based swap
of a submission with the Commission. describe the nature of the specific issues execution facility under paragraph (a) of
Information that the registered security- for which additional time for review is this section and the security-based swap
based swap execution facility seeks to required; or execution facility’s rules to become
keep confidential may be redacted from (2) Any extended review period to participants of the security-based swap
the documents published on its Web which the registered security-based execution facility, consistent with the
site, but must be republished consistent swap execution facility agrees in requirements for providing impartial
with any determination made pursuant writing. access in section 3D(d)(6) of the Act (15
to the applicable provisions of the (f) Notice of non-approval. The U.S.C. 78c–4(d)(6)) and § 242.811(b);
Freedom of Information Act, 5 U.S.C. Commission at any time during its provided, however, that a security-based
swap execution facility may choose to that are not registered as a security- (3) Establish rules governing the
not permit any eligible contract based swap dealer, major security-based operation of the security-based swap
participants that are not registered with swap participant, or broker as execution facility, including rules
the Commission as a security-based participants of the security-based swap specifying trading procedures to be used
swap dealer, major security-based swap execution facility shall be reasonably in entering and executing orders traded
participant, or broker (as defined in designed to ensure compliance with all or posted on the security-based swap
section 3(a)(4) of the Act, 15 U.S.C. regulatory requirements. execution facility, including block
78c(a)(4)) to become participants in the trades.
security-based swap execution facility. § 242.810 Compliance with core principles. (b) A security-based swap execution
(c) A security-based swap execution (a) To be registered, and maintain facility shall:
facility shall establish rules setting forth registration, as a security-based swap (1) Establish fair, objective, and not
requirements for an eligible person to execution facility, a security-based swap unreasonably discriminatory standards
become a participant in the security- execution facility shall comply with: for granting impartial access to trading
based swap execution facility consistent (1) The Core Principles described in on the security-based swap execution
with the security-based swap execution section 3D of the Act (15 U.S.C. 78c–4) facility, which standards shall include a
facility’s obligations under the Act and and the rules and regulations requirement that each participant of the
the rules and regulations thereunder. thereunder; and security-based swap execution facility
Such rules must require a participant, at (2) The requirements of this rule and submit to the oversight (including the
a minimum, to: any other requirement that the disciplinary procedures of paragraph (g)
(1) Be a member of, or have an Commission may impose by rule or of this section) of the security-based
arrangement with a member of, a regulation. swap execution facility, with respect to
registered clearing agency to clear trades (b) A security-based swap execution the participant’s trading on the facility,
in the security-based swaps that are facility shall establish: as a condition of becoming a participant
subject to mandatory clearing pursuant (1) Rules that provide for the in such security-based swap execution
to section 3C(a)(1) of the Act (15 U.S.C. equitable allocation of reasonable dues, facility;
78c–3(a)(1)) and entered into by the fees, and other charges among its (2) Not unreasonably prohibit or limit
participant on the security-based swap participants and any other users of its any person in respect to access to the
execution facility; system; services offered by such security-based
(2)(i) Meet the minimum financial (2) Rules and systems that are not swap execution facility by applying the
responsibility and recordkeeping and designed to permit unfair standards established under paragraph
reporting requirements imposed by the discrimination among its participants (b)(1) of this section in an unfair or
Commission by virtue of its registration and any other persons using its system; unreasonably discriminatory manner;
as a security-based swap dealer, major (3) Rules that promote just and (3) Make and keep records of:
security-based swap participant, or equitable principles of trade; and (i) All grants of access, including, for
broker; or (4) Rules to provide, in general, a fair all participants, the basis for granting
(ii) In the case of an eligible contract procedure for disciplining participants such access; and
participant that is not registered with for violations of the rules of the (ii) All denials or limitations of access
the Commission as a security-based security-based swap execution facility. for each applicant or participant (as
swap dealer, major security-based swap (c) A security-based swap execution applicable), and the reasons for denying
participant, or broker, meet the facility shall not use for non-regulatory or limiting access;
recordkeeping and reporting purposes any confidential information it (4) Report the information required
requirements that the security-based collects or receives, from or on behalf of regarding grants, denials, and
swap execution facility shall establish any person, in connection with the limitations of access on Form SB SEF
pursuant to § 242.813; security-based swap execution facility’s (referenced in § 249.1700 of this
(3) Agree to comply with the rules, regulatory obligations. chapter) and in the annual compliance
policies, and procedures of the security- report of the Chief Compliance Officer
based swap execution facility; and § 242.811 Compliance with rules.
pursuant to § 242.823(c); and
(4) Consent to the disciplinary (a) A security-based swap execution (5) Establish a fair process for the
procedures of the security-based facility shall: review of any prohibition or limitation
execution facility for violations of the (1) Establish and enforce compliance on access with respect to a participant
security-based swap execution facility’s with any rule established by such or any refusal to grant access with
rules. security-based swap execution facility, respect to an applicant.
(d)(1) A security-based swap including: (c) A security-based swap execution
execution facility that permits an (i) The terms and conditions of the facility shall establish and enforce
eligible contract participant that is not security-based swaps traded or compliance with rules concerning the
registered as a security-based swap processed on or through the security- terms and conditions of the security-
dealer, major security-based swap based swap execution facility; and based swaps traded on the security-
participant or broker to become a (ii) Any limitation on access to the based swap execution facility.
participant in the security-based swap security-based swap execution facility; (1) A security-based swap execution
execution facility pursuant to this (2) Establish and enforce trading, facility shall establish a swap review
section shall establish, document, and trade processing, and participation rules committee to determine:
maintain a system of risk management that will deter abuses and have the (i) The security-based swaps that shall
controls and supervisory procedures capacity to detect, investigate, and trade on the security-based swap
reasonably designed to manage the enforce those rules, including means: execution facility; and
financial, regulatory, and other risks of (i) To provide market participants (ii) The security-based swaps that
this business activity. with impartial access to the market; and shall no longer trade on the security-
(2) The risk management controls and (ii) To capture information that may based swap execution facility.
supervisory procedures for granting be used in establishing whether rule (2) The composition of the swap
access to eligible contract participants violations have occurred; and review committee shall provide for the
fair representation of participants of the execution facility. The rules of a (g) A security-based swap execution
security-based swap execution facility security-based swap execution facility facility shall establish rules and
and other market participants, such that shall provide for fair treatment of all procedures concerning the disciplining
each class of participant and other trading interest; of participants, including, but not
market participants shall be given the (4) The manner in which price limited to, rules:
right to participate in such swap review transparency for participants entering (1) Authorizing its staff to recommend
committee and that no single class of orders, requests for quotations, and take disciplinary action for
participant or category of market responses, quotations, or other trading violations of the rules of the security-
participant shall predominate. The rules interest into the system will be based swap execution facility;
of the security-based swap execution promoted; (2) Specifying the sanctions that may
facility shall stipulate the method by (5) The manner in which trading be imposed upon participants for
which such representation shall be interest, including orders, requests for violations of the rules of the security-
chosen by the Board. quotations, responses, quotations, and based swap execution facility such that
(3) The security-based swap execution transaction data will be disseminated, each sanction is commensurate with the
facility shall establish criteria that the whether to participants of the security- corresponding violation; and
swap review committee shall consider based swap execution facility or (3) Establishing fair and non-arbitrary
in determining which security-based otherwise, and whether for a fee or procedures for any disciplinary process
swaps shall trade on the security-based otherwise; and appeal thereof.
swap execution facility. (6) Prohibited trading practices; (h) A security-based swap execution
(4) The swap review committee shall (7) The prevention of the entry of facility shall:
periodically review, on at least a orders, requests for quotations, (1) Make and keep records of all
quarterly basis, each security-based responses, quotations, or other trading disciplinary proceedings, sanctions
swap trading on the security-based swap interest that may result in a trade that imposed, and appeals thereof; and
execution facility to determine whether is clearly erroneous with respect to the (2) Disclose all disciplinary actions
the trading characteristics of each terms of the trade; the fair and non- taken annually on an amendment to
security-based swap justify a change to discriminatory manner of handling any Form SB SEF and in the security-based
trade that is clearly erroneous; and the swap execution facility’s annual
the trading platform for each such
resolution of any disputes concerning a compliance report of the Chief
security-based swap. In addition to the
clearly erroneous trade; Compliance Officer required pursuant to
factors set forth in paragraph (c)(3) of
(8) Trading halts in any security-based § 242.823(c). Such report shall include
this section in making such a
swap, which rules shall include information summarizing any
determination, the swap review
procedures for halting trading in a disciplinary action taken and the
committee shall consider whether:
(i) The liquidity in each security- security-based swap when trading has reasons for such action.
been halted or suspended in the (i) A security-based swap execution
based swap is at an appropriate level for
facility shall establish rules and
the security-based swap’s trading underlying security or securities
procedures to assure that information to
platform on which it trades; and pursuant to the rules or an order of a
be used to determine whether rule
(ii) Such security-based swap would regulatory authority with authority over
violations have occurred is captured
be more suited for trading on a different the underlying security or securities;
(9) The manner in which block trades and retained in a timely manner.
type of platform, including a platform (j) A security-based swap execution
that provides for increased price will be handled, if different from the
facility shall:
transparency for participants entering handling of non-block trades; and (1) Have the capacity to capture
orders, requests for quotations, (10) Any other rules concerning
information that may be used in
responses, quotations, or other trading trading on the security-based swap
establishing whether rule violations
interest. The first review shall not be execution facility. have occurred, including through the
earlier than 120 days after the initiation (e) A security-based swap execution
use of automated surveillance systems
of trading for a given security-based facility that operates a request-for-quote
as set forth in § 242.813(b);
swap. platform shall create and disseminate (2) Maintain appropriate resources to
(5) The swap review committee shall through the security-based swap fulfill its obligations under this section;
report decisions on each security-based execution facility a composite indicative and
swap promptly to the Chief Compliance quote for security-based swaps traded (3) Investigate possible rule
Officer and annually to the regulatory on or through such system, which shall violations.
oversight committee. be made available to all participants.
(d) A security-based swap execution The composite indicative quote shall § 242.812 Security-based swaps not
facility shall establish and enforce rules include both composite indicative bids readily susceptible to manipulation.
governing the procedures for trading on and composite indicative offers. (a) A security-based swap execution
the security-based swap execution (f) A security-based swap execution facility shall permit trading only in
facility, including, but not limited to, facility shall establish and enforce rules security-based swaps that are not
rules concerning: concerning: readily susceptible to manipulation.
(1) Doing business on the security- (1) The reporting of trades executed (b) Prior to permitting the trading of
based swap execution facility; on the security-based swap execution any security-based swap, a security-
(2) The types of orders, requests for facility to a clearing agency, if the based swap execution facility’s swap
quotations, responses, quotations, or transaction is subject to clearing; and review committee shall have
other trading interest that will be (2) The procedures for the processing determined, after taking into account all
available on the security-based swap of transactions in security-based swaps of the terms and conditions of the
execution facility; that occur on or though the security- security-based swap and the markets for
(3) The manner in which trading based swap execution facility, the security-based swap and any
interest, including orders, requests for including, but not limited to, underlying security or securities, that
quotations, responses, or quotations will procedures to resolve any disputes such security-based swap is not readily
be handled on the security-based swap concerning the execution of a trade. susceptible to manipulation.
(c) Periodic Review. The rules of a facility to respond promptly to market at such reasonable times as any
security-based swap execution facility abuses or disruptions. representative of the Commission may
shall require that, after commencement (c) A security-based swap execution request, to examine the books and
of trading of a security-based swap, the facility shall establish and enforce rules records of the participant or to obtain or
swap review committee shall that require any participant that enters verify other information related to
periodically review the trading in the any order, request for quotation, orders, requests for quotation,
security-based swap. If the swap review response, quotation, or other trading responses, quotations, or other trading
committee cannot determine, after interest, or executes any transaction on interest entered and transactions
taking into account all of the terms and the security-based swap execution executed on or through its facilities.
conditions of the security-based swap, facility, to: (b) A security-based swap execution
the markets for the security-based swap (1) Maintain books and records of any facility shall:
and any underlying security or such order, request for quotation, (1) Cooperate with any representative
securities, and the trading in the response, quotation or other trading of the Commission and allow access by
security-based swap, that such security- interest, or transaction, and of any any representative of the Commission,
based swap is not readily susceptible to position in any security-based swap that at such reasonable times as any
manipulation, the security-based swap is the result of any such order, request representative of the Commission may
execution facility shall no longer permit for quotation, response, quotation, other request, to:
the trading of such security-based swap. trading interest, or transaction; and (i) Examine the books and records
(2) Provide prompt access to such required to be kept by the security-based
§ 242.813 Monitoring of trading and trade books and records to the security-based swap execution facility pursuant to
processing. swap execution facility and to the § 242.818; and
(a) A security-based swap execution Commission. (ii) Obtain or verify other information
facility shall: (d) A security-based swap execution related to orders, requests for
(1) Establish and enforce rules, terms facility shall establish and maintain quotations, responses, quotations, or
and conditions defining, or procedures to investigate possible rule other trading interest entered and
specifications detailing: violations, to prepare reports concerning transactions executed on or through its
(i) Trading procedures to be used in the findings and recommendations of facilities;
entering and executing orders traded on any such investigations, and to take (2) Upon request of any representative
or through the facilities of the security- corrective action, as necessary. of the Commission, promptly furnish to
based swap execution facility; and the possession of such representative
(ii) Procedures for trade processing of § 242.814 Ability to obtain information.
copies of any documents, in such form
security-based swaps on or through the (a) A security-based swap execution and manner acceptable to such
facilities of the security-based swap facility shall establish and enforce rules representative, that the security-based
execution facility; and requiring its participants to: swap execution facility possesses or has
(2) Monitor trading in security-based (1) Furnish to the security-based swap access to pursuant to paragraph (a) of
swaps to prevent manipulation, price execution facility, upon request, and in this section;
distortion, and disruptions of the the form and manner prescribed by the (3) Have the capacity to carry out such
delivery or cash settlement practices security-based swap execution facility, international information-sharing
and procedures, including methods for any information necessary to permit the agreements as the Commission may
conducting real-time monitoring of security-based swap execution facility require; and
trading and comprehensive and accurate to perform its responsibilities under this (4) Certify at the time of registration
trade reconstructions. section, including, without limitation, on Form SB SEF, and annually
(b) A security-based swap execution surveillance, investigations, thereafter as part of the annual
facility shall have the capacity and examinations and discipline of compliance report described in
appropriate resources to electronically participants; such information may § 242.823, that the security-based swap
monitor trading in security-based swaps include, without limitation, financial execution facility has the capacity to
on its market by establishing an information, books, accounts, records, fulfill its obligations under any
automated surveillance system, files, memoranda, correspondence, and international information-sharing
including through real-time monitoring any other information pertaining to agreements to which it is a party as of
of trading and use of automated alerts, orders, requests for quotations, the date of such certification.
that is designed to: responses, quotations, or other trading
(1) Detect and deter any fraudulent or interest entered and transactions § 242.815 Financial integrity of
manipulative acts or practices, executed on or through the security- transactions.
including insider trading or other based swap execution facility; (a) A security-based swap execution
unlawful conduct or any violation of the (2) Cooperate with the security-based facility shall establish and enforce rules
rules of the security-based swap swap execution facility and allow access and procedures for ensuring the
execution facility that has occurred or is by the security-based swap execution financial integrity of security-based
occurring; facility, at such reasonable times as the swaps entered on or through the
(2) Detect and deter market distortions security-based swap execution facility facilities of such security-based swap
or disruptions of trading that may may request, to examine the books and execution facility, including the
impact the entry and execution of records of the participant or to obtain or clearance and settlement of security-
trading interests or the processing of verify information related to orders, based swaps pursuant to section
trading interests on or through the requests for quotation, responses, 3C(a)(1) of the Act (15 U.S.C. 78c–
security-based swap execution facility; quotations, or other trading interest 3(a)(1)).
(3) Conduct real-time monitoring of entered and transactions executed on or (b) Notwithstanding the requirements
trading to provide for comprehensive through its facilities; and of § 242.810(b)(2), the rules of a
and accurate trade reconstruction; and (3) Cooperate with any representative security-based swap execution facility
(4) Collect and assess data to allow of the Commission and allow access by relating to the trading on the security-
the security-based swap execution any representative of the Commission, based swap execution facility, of
security-based swaps that will not be declaring an emergency, how conflicts required pursuant to the provisions of
cleared at a registered clearing agency of interest were minimized, and the paragraph (c) of this section) as shall be
may permit a participant to take into extent to which the security-based swap made or received by it in the conduct
account counterparty credit risk. execution facility considered the effect of its business.
of its emergency action on the markets (b) A security-based swap execution
§ 242.816 Emergency authority. for the security-based swap and any facility shall keep and preserve all such
(a) A security-based swap execution security or securities underlying the documents and other records for a
facility shall establish rules and security-based swap; period of not less than five years, the
procedures to provide for the exercise of (2) If a security-based swap execution first two years in an easily accessible
emergency authority, in consultation or facility implements any rule or rule place.
cooperation with the Commission, as amendment in the exercise of its (c) A security-based swap execution
necessary or appropriate, which rules emergency authority, it shall file such facility shall establish and maintain
and procedures shall include the items rule or rule amendment with the accurate, time-sequenced records of all
set forth in paragraphs (b) and (c) of this Commission pursuant to § 242.806 prior orders, requests for quotations,
section. to the implementation of such rule or responses, quotations, other trading
(b) A security-based swap execution rule amendment or, if not practicable, interest, and transactions that are
facility shall establish rules and within 24 hours after implementation of received by, originated on, or executed
procedures that specify: such rule or rule amendment. on the security-based swap execution
(1) The person or persons authorized facility. These records shall include the
by the security-based swap execution § 242.817 Timely publication of trading
information. key terms of each order, request for
facility to declare an emergency; quotation, response, quotation, other
(2) How the security-based swap (a) A security-based swap execution
trading interest, or transaction and shall
execution facility will notify the facility shall:
document the complete life of each
Commission of its decision to exercise (1) Have the capacity to electronically
order, request for quotation, response,
its emergency authority; capture, transmit, and disseminate
quotation, other trading interest, or
(3) How the security-based swap information on price, trading volume,
transaction on the security-based swap
execution facility will notify the public and other trading data on all security-
execution facility, including any
of its decision to exercise its emergency based swaps executed on or through the
modification, cancellation, execution, or
authority; security-based swap execution facility;
(4) The processes for decision-making any other action taken with respect to
and
by the security-based swap execution (2) Make public timely information on such order, request for quotation,
facility personnel with respect to the price, trading volume, and other trading response, quotation, other trading
exercise of emergency authority, data on security-based swaps to the interest, or transaction.
including alternate lines of extent and in the manner prescribed by (d) A security-based swap execution
communication and guidelines to avoid the Commission. facility shall establish, maintain, and
conflicts of interest in the exercise of (b) If any security-based swap enforce written policies and procedures
such authority; and execution facility makes available to verify the accuracy of the transaction
(5) The processes for determining that information regarding a security-based data that it collects and reports.
an emergency no longer exists and swap transaction to any party other than (e) A security-based swap execution
notifying the Commission and the a counterparty to the transaction, then facility shall report to the Commission,
public of such decision. the security-based swap execution in a form and manner acceptable to the
(c) A security-based swap execution facility must make that information Commission, such information as the
facility shall have rules permitting the available to all participants on terms Commission may, from time to time,
security-based swap execution facility and conditions that are fair and determine to be necessary to perform
to immediately take any or all of the reasonable and not unfairly the duties of the Commission under the
following actions during an emergency: discriminatory; provided however, that Act.
(1) Impose or modify trading limits, nothing in this paragraph shall prohibit (f) A security-based swap execution
price limits, position limits, or other a security-based swap execution facility facility shall, upon request of any
market restrictions, including from acting as the agent of a reporting representative of the Commission,
suspending or curtailing trading on its party, as defined in § 242.900 ( ), for promptly furnish to the possession of
market in any security-based swap or purposes of reporting required such representative copies of any
class of security-based swaps; information directly to a registered documents, in such form and manner
(2) Extend or shorten trading hours; security-based swap data repository. acceptable to such representative,
(3) Coordinate trading halts with (c) A security-based swap execution required to be kept and preserved by it
markets trading a security or securities facility shall not make any information pursuant to paragraphs (a) and (b) of
underlying any security-based swap; regarding a security-based swap this section.
(4) Coordinate with a registered transaction publicly available prior to § 242.819 Antitrust considerations.
clearing agency to liquidate or transfer the time a security-based swap data
positions in any open security-based repository is permitted to publicly Unless necessary or appropriate to
swap of one of its participants; and disseminate such information under achieve compliance with the Act and
(5) Any action, if so directed by the § 242.902. the rules and regulations thereunder, a
Commission. security-based swap execution facility

(d)(1) A security-based swap § 242.818 Recordkeeping and reporting. shall not:
execution facility shall promptly notify (a) A security-based swap execution (a) Adopt any rule or take any action
the Commission of the exercise of its facility shall keep and preserve at least that results in any unreasonable
emergency authority, followed by one copy of all documents, including all restraint of trade; or
submission of written documentation correspondence, memoranda, papers, (b) Impose any material
within two weeks following cessation of books, notices, accounts, and other such anticompetitive burden on trading or
the emergency explaining the basis for records (including the audit trail records clearing.
§ 242.820 Conflicts of interest. execution facility to cover its operating execution facility’s primary site and any
For additional rules relating to the costs for a one-year period, as calculated back-up sites.
mitigation of conflicts of interest of on a rolling basis. (2) On an annual basis, submit an
security-based swap execution facilities, objective review to the Commission
see § 242.702. § 242.822 System safeguards. within 30 calendar days of completion.
(a) The rules of a security-based swap (a) Requirements for security-based Where the objective review is performed
execution facility shall assure a fair swap execution facilities. A security- by an internal department, an objective,
representation of its participants in the based swap execution facility, with external firm shall assess the internal
selection of its directors and respect to those systems that support or department’s objectivity, competency,
administration of its affairs, but no less are integrally related to the performance and work performance with respect to
than 20 percent of the total number of of its activities, shall: the review performed by the internal
directors of the security-based swap (1) Establish, maintain, and enforce department. The external firm must
execution facility must be selected by written policies and procedures issue a report of the objective review,
the participants; provided, however, reasonably designed to ensure that its which the security-based swap
that the security-based swap execution systems provide adequate levels of execution facility must submit to the
facility shall preclude any participant, capacity, resiliency, and security. These Commission on an annual basis, within
or any group or class of participants, policies and procedures shall, at a 30 calendar days of completion of the
either alone or together with its related minimum, require the security-based review;
persons, that beneficially owns, directly swap execution facility to: (3) Promptly notify the Commission
or indirectly, an interest in the security- (i) Establish reasonable current and in writing of material systems outages
based swap execution facility from future capacity estimates, including and any remedial measures that have
dominating or exercising quantifying in appropriate units of been implemented or are contemplated.
disproportionate influence in the measure the limits of the security-based Prompt notification includes the
selection of such directors if the swap execution facility’s capacity to following:
participant may thereby dominate or receive (or collect), process, store, or (i) Immediately notify the
exercise disproportionate influence in display (or disseminate for display or Commission when a material systems
the selection or appointment of the other use) the data elements included outage is detected;
entire Board. within each function, and identifying (ii) Immediately notify the
(b) At least one director on the Board the factors (mechanical, electronic, or Commission when remedial measures
shall be representative of investors who other) that account for the current are selected to address the material
are not security-based swap dealers or limitations; systems outage;
major security-based swap participants, (iii) Immediately notify the
(ii) Conduct periodic, capacity stress
and such director must not be a person Commission when the material systems
tests of critical systems to determine
associated with a participant. outage is addressed; and
such systems’ ability to process (iv) Submit to the Commission within
(c) The rules of a security-based swap transactions in an accurate, timely, and
execution facility must establish a fair five business days of when the material
efficient manner; systems outage occurred a more detailed
process for participants to nominate an (iii) Develop and implement
alternative candidate or candidates to written description and analysis of the
reasonable procedures to review and outage and any remedial measures that
the Board by petition and shall specify keep current its system development
the percentage of the participants that is have been implemented or are
and testing methodology; contemplated.
necessary to put forth such alternative (iv) Review the vulnerability of its
candidate or candidates, which (4) Notify the Commission in writing
systems and data center computer at least 30 calendar days before
percentage shall not be unreasonable. operations to internal and external implementation of any planned material
§ 242.821 Financial resources. threats, physical hazards, and natural systems changes.
(a) A security-based swap execution disasters; (b) Electronic filing. A security-based
facility shall have adequate financial, (v) Establish adequate contingency swap execution facility shall submit a
operational, and managerial resources to and disaster recovery plans that shall notification, review, or description and
discharge each responsibility of the include plans to resume trading of analysis that is required to be submitted
security-based swap execution facility, security-based swaps by the security- to the Commission pursuant to this
as determined by the Commission. based swap execution facility no later section in an appropriate electronic
(b) The financial resources of a than the next business day following a format. Any such notification, review,
security-based swap execution facility wide-scale disruption. In developing or description and analysis shall be
shall be considered to be adequate if, such plans, the security-based swap submitted to the Division of Trading
when using reasonable estimates and execution facility shall take into and Markets, Office of Market
assumptions and not overestimating account: Operations, at the principal office of the
resources or underestimating expenses, (A) The extent of alternative trading Commission in Washington, DC. Any
liabilities, and financial exposure, the venues for the security-based swaps such notification, review, or description
value of the financial resources: traded by the security-based swap and analysis shall be considered
(1) Enables the security-based swap execution facility, including the number submitted when an electronic version is
execution facility to meet its financial of security-based swaps traded on the received at the Division of Trading and
obligations to participants, security-based swap execution facility, Markets at the principal office of the
notwithstanding a default by the the market share of the security-based Commission in Washington, DC.
participant creating the largest financial swap execution facility, and the number (c) Confidential treatment. A person
exposure for the security-based swap of participants on the security-based who submits a notification, review, or
execution facility in extreme but swap execution facility; and description and analysis pursuant to
plausible market conditions; and (B) The necessity of geographic this section for which such person seeks
(2) Exceeds the total amount that diversity and diversity of infrastructure confidential treatment shall clearly
would enable the security-based swap between the security-based swap mark each page or segregable portion of
each page with the words ‘‘Confidential execution facility with respect to the (e) Financial report. With each annual
Treatment Requested.’’ A notification, Act and the rules and regulations compliance report, the Chief
review, or description and analysis thereunder and each policy and Compliance Officer shall also prepare
submitted pursuant to this section will procedure of the security-based swap and submit to the Commission a
be accorded confidential treatment to execution facility (including the code of financial report of the security-based
the extent permitted by law. ethics and conflicts of interest policies swap execution facility. Each financial
of the security-based swap execution report filed with a compliance report
§ 242.823 Designation of Chief Compliance facility). Each compliance report shall shall:
Officer of security-based swap execution (1) For the financial statements
facility.
also contain, at a minimum, a
description of: relating to the security-based swap
(a) In general. Each security-based (i) The security-based swap execution execution facility:
swap execution facility shall identify on facility’s enforcement of its policies and (i) Be a complete set of financial
Form SB SEF (referenced in § 249.1700 procedures; statements of the security-based swap
of this chapter) a person who has been (ii) Information on all investigations, execution facility that are prepared in
designated by the Board to serve as a inspections, examinations, and accordance with U.S. generally accepted
Chief Compliance Officer of the disciplinary cases opened, closed, and accounting principles for the two most
security-based swap execution facility. pending during the reporting period; recent fiscal years of the security-based
The compensation and removal of the (iii) All grants of access (including, for swap execution facility;
Chief Compliance Officer shall require all participants, the reasons for granting (ii) Be audited in accordance with
the approval of a majority of the Board. such access) and all denials or standards of the Public Company
(b) Duties. Each Chief Compliance limitations of access (including, for each Accounting Oversight Board by a
Officer designated by a registered applicant, the reasons for denying or registered public accounting firm that is
security-based swap execution facility limiting access), consistent with qualified and independent in
shall: § 242.811(b)(3); accordance with § 210.2–01 of this
(1) Report directly to the Board or the (iv) Any material changes to the chapter;
senior officer of the security-based swap policies and procedures since the date (iii) Include a report of the registered
execution facility; of the preceding compliance report; public accounting firm that complies
(2) Review the compliance of the (v) Any recommendation for material with paragraphs (a) through (d) of
security-based swap execution facility changes to the policies and procedures § 210.2–02 of this chapter;
with the Core Principles described in as a result of the annual review, the (iv) Include the accounting policies
section 3D of the Act (15 U.S.C. 78c–4) rationale for such recommendation, and and practices of the security-based swap
and the rules and regulations whether such policies and procedures execution facility; and
thereunder; were or will be modified by the (v) If the security-based swap
(3) In consultation with the Board or security-based swap execution facility execution facility’s financial statements
the senior officer of the security-based to incorporate such recommendation; contain consolidated information of the
swap execution facility, resolve any (vi) The results of the security-based security-based swap execution facility’s
conflicts of interest that may arise; swap execution facility’s surveillance subsidiaries, then the security-based
(4) Be responsible for establishing and program, including information on the swap execution facility’s financial
administering each policy and number of reports and alerts generated, statement must provide condensed
procedure that is required to be and the reports and alerts that were financial information, in a financial
established pursuant to section 3D of referred for further investigation or for statement footnote, as to the financial
the Act (15 U.S.C. 78c–4) and the rules an enforcement proceeding; position, changes in financial position,
and regulations thereunder; (vii) Any complaints received and results of operations of the security-
(5) Monitor compliance with the Act regarding the security-based swap based swap execution facility, as of the
and the rules and regulations execution facility’s surveillance same dates and for the same periods for
thereunder relating to its business as a program; and which audited consolidated financial
security-based swap execution facility, (viii) Any material compliance statements are required. Such financial
including each rule prescribed by the matters identified since the date of the information need not be presented in
Commission under section 3D of the Act preceding compliance report. greater detail than is required for
(15 U.S.C. 78c–4); (2) Requirements. A financial report condensed statements by § 210.10–
(6) Establish procedures for the of the security-based swap execution 01(a)(2), (3), and (4) of this chapter.
remediation of noncompliance issues facility shall be filed with the Detailed footnote disclosure that would
identified by the Chief Compliance Commission as described in paragraph normally be included with complete
Officer through any: (e) of this section and shall accompany financial statements may be omitted
(i) Compliance office review; a compliance report as described in with the exception of disclosures
(ii) Look-back; paragraph (c)(1) of this section. The regarding material contingencies, long-
(iii) Internal or external audit finding; compliance report shall include a term obligations, and guarantees.
(iv) Self-reported error; or certification that, under penalty of law, Descriptions of significant provisions of
(v) Validated complaint; and the compliance report is accurate and the security-based swap execution
(7) Establish and follow appropriate complete. The compliance report shall facility’s long-term obligations,
procedures for the handling, also be filed in a tagged data format in mandatory dividend or redemption
management response, remediation, accordance with the instructions requirements of redeemable stocks, and
retesting, and closing of noncompliance contained in the EDGAR Filer Manual, guarantees of the security-based swap
issues. as described in § 232.301 of this chapter. execution facility shall be provided
(c) Annual Reports. (1) In general. The (d) The Chief Compliance Officer along with a five-year schedule of
Chief Compliance Officer shall annually shall submit the annual compliance maturities of debt. If the material
prepare and sign a report that contains report to the Board for its review prior contingencies, long-term obligations,
a description of the compliance of the to the submission of the report to the redeemable stock requirements, and
registered security-based swap Commission. guarantees of the security-based swap
execution facility have been separately Subpart R—Forms for Security-Based ‘‘Commission’’) electronically,
disclosed in the consolidated Swap Execution Facilities unless the Commission requests
statements, then they need not be that the materials be filed in paper.
§ 249.1700 Form SB SEF, form for 8. WHERE TO FILE AND NUMBER OF
repeated in this schedule.
application for registration as a security- COPIES—Submit one original and
(2) For the financial statements of a based swap execution facility and for two copies of this Form SB SEF to:
security-based swap execution facility’s amendments to the registration form of a
SEC, Division of Trading and
affiliated entities (any subsidiary in registered security-based swap execution
facility. Markets, Office of Market
which the applicant has, directly or Supervision, 100 F Street, N.E.,
indirectly, a 25% interest and for any Note: Form SB SEF does not appear in the Washington, DC 20549–7010.
entity that has, directly or indirectly, a Code of Federal Regulations. 9. PAPERWORK REDUCTION ACT
25% interest in the applicant): DISCLOSURE
(i) Be a complete set of FORM SB SEF • This Form SB SEF requires an
unconsolidated financial statements (in APPLICATION FOR, AND applicant seeking to register as a SB
English) for the latest two fiscal years; AMENDMENTS TO APPLICATION SEF to provide the Commission
FOR, REGISTRATION AS A SECURITY- with certain information regarding
and
BASED SWAP EXECUTION FACILITY the operation of the SB SEF.
(ii) Include such footnotes and other • §§ 242.802 and 242.804 also require
disclosures as are necessary to avoid FORM SB SEF INSTRUCTIONS registered SB SEFs to update certain
rendering the financial statements A. GENERAL INSTRUCTIONS information on this Form SB SEF
misleading. on a periodic basis and the entire
1. Form SB SEF (referenced in 17 CFR Form SB SEF annually.
(3) All financial statements must be 249.1700) is the form for the • An agency may not conduct or
provided in eXtensible Business application for, and amendment to sponsor, and a person is not
Reporting Language consistent with application for, registration as a required to respond to, a collection
§ 232.405 (a)(1), (a)(3), (b), (c), (d), and security-based swap execution of information unless it displays a
(e) of this chapter; and facility (‘‘SB SEF’’) pursuant to currently valid control number.
(4) If the financial report required by Section 3D of the Securities Sections 3(a)(77), 3C(h), 3D(a),
§ 242.823(e) is submitted to the Exchange Act of 1934 (15 U.S.C. 3D(d), 3D(e), 3D(f) and 23(a) of the
Commission on Form SB SEF 78c–4) (‘‘Exchange Act’’) and the Exchange Act authorize the
(referenced in § 249.1700 of this rules of Regulation SB SEF Commission to collect information
chapter) pursuant to § 242.802(f) at the thereunder. on this Form SB SEF from SB SEFs.
same time that the Chief Compliance 2. UPDATING—An applicant or See 15 U.S.C. §§ 78c(a)(77), 78e,
Officer submits the annual compliance registered SB SEF must file 78c–4(h), 78c–4(a), 78c–4(d), 78c–
report required by § 242.823(c) and the amendments to its Form SB SEF in 4(e), 78c–4(f) and 78w(a).
Chief Compliance Officer represents in accordance with 17 CFR 242.802 • Any member of the public may
the annual compliance report that the and 804, as applicable. direct to the Commission any
3. CONTACT EMPLOYEE—The comments concerning the accuracy
financial report has been submitted on
individual listed on the Execution of the burden estimate on the facing
Form SB SEF pursuant to § 242.802(f),
Page (Page 1) of this Form SB SEF page of this Form SB SEF and any
the Chief Compliance Officer need not as the contact employee must be suggestions for reducing this
also submit the financial report as part authorized to receive all contact burden.
of the annual compliance report. information, communications, and • This Form SB SEF is designed to
(f) Reports filed pursuant to mailings, and is responsible for enable the Commission to
paragraphs (c) and (e) of this section disseminating such information determine whether a SB SEF
shall be filed within 60 days after the within the applicant’s organization. applying for registration is in
end of the fiscal year covered by such 4. FORMAT compliance with the provisions of
reports. • Attach an Execution Page (Page 1) Section 3D of the Exchange Act (15
with original manual signatures. U.S.C. 78c–4) and the rules under
PART 249—FORMS, SECURITIES • Please type all information. Regulation SB SEF thereunder.
EXCHANGE ACT OF 1934 • Use only the current version of this • It is estimated that a SB SEF will
Form SB SEF or a reproduction. spend approximately 694 hours and
7. The general authority citation for 5. If the information called for by any $523,000 completing the initial
Part 249 continues to read in part as Exhibit is available in printed form, application on Form SB SEF
follows: the printed material may be filed, pursuant to 17 CFR 242.801. It is
provided it does not exceed 81⁄2 x estimated that each SB SEF
Authority: 15 U.S.C. 78a et seq. and 7201
11 inches in size. controlled by another person and
et seq.; and 18 U.S.C. 1350 unless otherwise
6. If any Exhibit required is each non-resident SB SEF will
noted.
inapplicable, a statement to that spend approximately an additional
Subpart O—[Removed and reserved] effect shall be furnished in lieu of 1 hour and $900 to complete
such Exhibit. Exhibit P to the initial application
8. Remove and reserve Subpart O to 7. A SB SEF that is filing this Form SB on this Form SB SEF. It is also
Part 249. SEF as an application may not estimated that each SB SEF will
satisfy the requirements to provide spend approximately 25 hours to
9. Add Subpart R (consisting of certain information by means of an prepare each periodic amendment
§ 249.1700) to Part 249 to read as Internet web page. However, all to its Form SB SEF pursuant to 17
follows: materials must be filed with the CFR 242.802(a) and (b) and
Securities and Exchange approximately 50 hours to prepare
Commission (‘‘SEC’’ or each annual update to its Form SB
SEF pursuant to 17 CFR 242.802(f). section 3(a)(68) of the Exchange Act lllllllllllllllllll
It is estimated that each SB SEF (15 U.S.C. 78c(a)(68)) or any rules or (Number and Street)
controlled by another person and regulations thereunder. lllllllllllllllllll
each non-resident SB SEF will SECURITY-BASED SWAP DEALER— (City) (State) (Zip Code)
spend approximately 1 hour and Shall have the same meaning as set 3. Provide the applicant’s mailing
$900 to prepare each amendment to forth in section 3(a)(71) of the address (if different):
its Form SB SEF pursuant to 17 CFR Exchange Act (15 U.S.C. 78c(a)(71)) or lllllllllllllllllll
242.802(c) and (d), respectively. any rules or regulations thereunder. (Number and Street)
• It is mandatory that an applicant SECURITY-BASED SWAP EXECUTION lllllllllllllllllll
seeking to register as a SB SEF file FACILITY—Shall have the same (City) (State) (Zip Code)
this Form SB SEF with the meaning as set forth in section 4. Provide the applicant’s business
Commission. It is also mandatory 3(a)(77) of the Exchange Act (15 telephone and facsimile number:
that registered SB SEFs file U.S.C. 78c(a)(77)) or any rules or lllllllllllllllllll
amendments to this Form SB SEF regulations thereunder. (Telephone) (Facsimile)
under 17 CFR 242.802 and 804. REGISTERED SECURITY-BASED 5. Provide the name, title, and telephone
• No assurance of confidentiality is SWAP EXECUTION FACILITY— number of a contact employee:
given by the Commission with Shall mean any security-based swap lllllllllllllllllll
respect to the responses made in execution facility registered pursuant
(Name) (Title) (Telephone)
this Form SB SEF. The public has to Section 3D(a) of the Exchange Act
6. Provide the name and address of
access to the information contained (15 U.S.C. 78c–4(a)) and the rules of
counsel for the applicant:
in this Form SB SEF. Regulation SB SEF thereunder.
lllllllllllllllllll
• This collection of information has FORM SB SEF (Name)
been reviewed by the Office of lllllllllllllllllll
Management and Budget (‘‘OMB’’) Execution Page
(Number and Street)
in accordance with the clearance UNITED STATES SECURITIES AND lllllllllllllllllll
requirements of 44 U.S.C. § 3507. EXCHANGE COMMISSION (City) (State) (Zip Code)
The applicable Privacy Act system WASHINGTON, DC 20549 7. Provide the date applicant’s fiscal
of records is SEC–2 and the routine year ends:
uses of the records are set forth at APPLICATION FOR, AND
AMENDMENTS TO APPLICATION lllllllllllllllllll
40 FR 39255 (August 27, 1975) and 8. Indicate legal status of applicant:
41 FR 5318 (February 5, 1976). FOR, REGISTRATION AS A
SECURITY–BASED SWAP EXECUTION l Corporation l Sole Proprietor-
FORM SB SEF INSTRUCTIONS FACILITY ship l Partnership l Limited
Liability Company l Other
B. EXPLANATION OF TERMS WARNING: Failure to keep this form
(specify):
APPLICANT—The entity or current and to file accurate
If other than a sole proprietor,
organization filing an application for supplementary information on a
indicate the date and place where the
registration as a security-based swap timely basis, or the failure to keep
applicant obtained its legal status (e.g.
execution facility, or amending any accurate books and records or
state where incorporated, place where
such application, on this Form SB otherwise to comply with the
partnership agreement was filed or
SEF. provisions of law applying to the
where the applicant entity was formed),
AFFILIATE—Shall have the same conduct of the applicant, would
and the statute under which the
meaning as set forth in 17 CFR violate the federal securities laws and
applicant was organized:
242.800. may result in disciplinary,
lllllllllllllllllll
BOARD—Shall have the same meaning administrative, or criminal action.
(Date) (MM/DD/YYYY)
as set forth in 17 CFR 242.800. INTENTIONAL MISSTATEMENTS OR lllllllllllllllllll
CONTROL—Shall have the same OMISSIONS OF FACTS MAY State/Country of formation:
meaning as set forth in 17 CFR CONSTITUTE CRIMINAL VIOLATIONS lllllllllllllllllll
242.800. (Statute under which the applicant was
EXCHANGE ACT—The Securities lAPPLICATION FOR REGISTRATION
organized)
Exchange Act of 1934 (15 U.S.C. 78a l AMENDMENT 9. Applicant understands and consents
et seq.).
NON-RESIDENT PERSON—Shall have If this is an APPLICATION, indicate if that any notice or service of
the same meaning as set forth in 17 the applicant requests consideration process, pleadings, or other
CFR 242.800. for temporary registration pursuant to documents in connection with any
PARTICIPANT—Shall have the same Rule 801(c) of Regulation SB SEF action or proceeding against the
meaning as set forth in 17 CFR under the Exchange Act: applicant may be effectuated by
242.800. llYES certified mail to the officer
PERSON—Shall have the same meaning llNO specified or person named below at
as set forth in section 3(a)(9) of the If this is an AMENDMENT to an the U.S. address given. Such officer
Exchange Act (15 U.S.C. 78c(a)(9)). application, or to an effective or person cannot be a Commission
PERSON ASSOCIATED WITH A registration (including an annual member, official or employee.
PARTICIPANT—Shall have the same amendment), list all items that are lllllllllllllllllll
meaning as set forth in 17 CFR amended: (Name of Person or, if the Applicant is
242.800. lllllllllllllllllll a Corporation, Title of Officer)
RELATED PERSON—Shall have the lllllllllllllllllll lllllllllllllllllll
same meaning as set forth in 17 CFR 1. State the name of the applicant: ll (Name of the Applicant or Applicable
242.800. lllllllllllllllllll Entity)
SECURITY-BASED SWAP—Shall have 2. Provide the applicant’s primary street lllllllllllllllllll
the same meaning as set forth in address (Do not use a P.O. Box): (Number and Street)
lllllllllllllllllll By: Exhibit B A copy of all written rulings,

(City) (State) (Zip Code) (Signature) settled practices having the effect of
lllllllllllllllllll lllllllllllllllllll rules, stated policies, and
(Telephone) (Printed Name and Title) interpretations of the Board or other
EXECUTION: The undersigned, being Subscribed and sworn before me this committee of the applicant in
first duly sworn, deposes and says lllllllllllllllllll respect of any provisions of the
that he/she has executed this form on day of governing documents, rules, or
behalf of, and with the authority of, llllllllllllllllll, trading practices of the applicant
said applicant. The undersigned and (Month) which are not included in Exhibit
applicant represent that the lllllllllllllllllll A.
(Year) Exhibit C A list of the officers and
information and statements contained
herein, including exhibits, schedules, by directors, or persons performing
or other documents attached hereto, lllllllllllllllllll similar functions who presently
and other information filed herewith, (Notary Public) hold or have held their offices or
positions during the previous year,
all of which are made a part hereof, My Commission expires lllllll
are current, true, and complete. It is County of lllllllllllll and a list of all standing committees
understood that all required items and State of llllllllllllll and their members (including the
exhibits are considered integral parts lllllllllllllllllll nominating committee, regulatory
of this form and that the submission oversight committee, and all
This page must always be completed committees that have the authority
of any amendment represents that all in full with original, manual
unamended items and Exhibits to act on behalf of the Board or the
signature and notarization. Affix nominating committee), indicating
remain true, current, and complete as notary stamp or seal where
previously filed. The applicant and the following for each:
applicable. 1. Name;
the undersigned certify that the
FORM SB SEF 2. Title;
applicant is currently in compliance 3. Dates of commencement and
with, and is currently operating its UNITED STATES SECURITIES AND termination of term of office or
business in a manner consistent with, EXCHANGE COMMISSION position;
the Exchange Act and all rules and WASHINGTON, DC 20549 4. Type of business in which each is
regulations thereunder. The applicant primarily engaged (e.g., security-
and the undersigned certify that the APPLICATION FOR, AND
based swap dealer, major security-
applicant is so organized, and has the AMENDMENTS TO APPLICATION based swap participant, inter-dealer
capacity, to assure the prompt, FOR, REGISTRATION AS A
SECURITY–BASED SWAP EXECUTION broker, end-user, etc.);
accurate, and reliable performance of 5. If a director, whether such person
its functions as a security-based swap FACILITY PURSUANT TO SECTION qualifies as an ‘‘independent
execution facility. The applicant and 3D OF THE EXCHANGE ACT
director’’ pursuant to Rule 800 of
the undersigned certify that the DO NOT WRITE BELOW THIS LINE— Regulation SB SEF; and
applicant has the capacity to fulfill its FOR OFFICIAL USE ONLY 6. If a director, whether such person
obligations under all international is a member of any standing
information-sharing agreements to EXHIBITS
committees, committees that have
which it is a party. If the applicant is File all Exhibits with an application for the authority to act on behalf of the
controlled by another person, the registration as a security-based swap Board, or the nominating
applicant and the undersigned certify execution facility pursuant to Section committee.
that any person that controls the 3D of the Exchange Act and Rule 801 Exhibit D A chart or charts illustrating
applicant has consented to and can, as of Regulation SB SEF thereunder, or fully the internal organizational
a matter of law, (i) provide the with amendments to such structure of the applicant. The chart
Commission with prompt access to its applications pursuant to Rule 802 and or charts should indicate the
books and records, to the extent such 804 of Regulation SB SEF. For each internal divisions or departments;
books and records are related to the exhibit, include the name of the the responsibilities of each such
activities of the security-based swap applicant, the date upon which the division or department; and the
execution facility; and (ii) submit to exhibit was filed, and the date as of reporting structure of each division
onsite inspection and examination by which the information is accurate (if or department, including its
representatives of the Commission different from the date of the filing). oversight by committees (or their
with respect to the activities of the If any Exhibit required is equivalent).
security-based swap execution inapplicable, a statement to that effect Exhibit E A list of all persons that have
facility. If the applicant is a non- shall be furnished in lieu of such either, direct or indirect, ownership
resident person, the applicant and the Exhibit. or voting interest in the security
undersigned further represent that the Exhibit A A copy of the governing based swap execution facility that
applicant can, as a matter of law, (i) documents of the applicant, equals or exceeds 5% and a list of
provide the Commission with prompt including but not limited to, a all related persons of such persons;
access to the applicant’s books and corporate charter, articles of provided that a related person
records and (ii) submit to an onsite incorporation or association, (1) has ownership or voting interest
inspection and examination by limited liability company in the security-based swap
representatives of the Commission. agreement, or partnership execution facility; or (2) is a
Date: agreement, with all subsequent participant. For each of the persons
lllllllllllllllllll amendments, and by-laws or and related persons listed in this
(MM/DD/YY) corresponding rules or instruments, Exhibit E, please provide the
lllllllllllllllllll whatever the name, of the following:
(Name of applicant) applicant. 1. Full legal name;
2. Title or legal status; dividend or redemption regarding such definition, including

3. Whether such person or related requirements of redeemable stocks, a description of how the System
person is a participant; and guarantees of the applicant displays all orders, quotes, requests
4. Date that title, legal status, or shall be provided along with a five- for quote, responses, and trades in
participation in a security-based year schedule of maturities of debt. an electronic or other form, and the
swap execution facility was If the material contingencies, long- timelines in which the System does
acquired or commenced; term obligations, redeemable stock so; how orders interact on the
5. Percentage of ownership interest requirements, and guarantees of the System, the ability of market
held; applicant have been separately participants to see and transact with
6. Type of ownership interest held, disclosed in the consolidated orders, quotes, requests for quotes,
including whether the ownership statements, then they need not be and responses; and an explanation
interest is ‘‘beneficial ownership’’ as repeated in this schedule; and (5) be of the trade-matching algorithm if it
defined in Rule 800 of Regulation provided in eXtensible Business is based on order priority factors
SB SEF or is entitled to vote; Reporting Language consistent with other than price and time;
7. Percentage of voting interest held; Rules 405 (a)(1), (a)(3), (b), (c), (d), 2. The means of access to the System,
and and (e) of Regulation S–T (17 CFR including any limitations on access;
8. Type of voting interest held. 232.11). 3. Procedures governing entry and
Exhibit F For the latest two fiscal years Exhibit G An executed or executable display of quotations and orders in
of the applicant, financial copy of any agreements or contracts
statements that shall: (1) Be a the System;
entered into or to be entered into by 4. Procedures governing the
complete set of financial statements the applicant, or a subsidiary or an execution, reporting, clearance and
of the applicant that are prepared in affiliate of the applicant, including settlement of transactions in
accordance with U.S. generally partnership or limited liability connection with the System;
accepted accounting principles for company, third-party regulatory 5. Proposed fees;
the most recent fiscal year of the service, or other agreements relating 6. Procedures for ensuring compliance
applicant; (2) be audited in to the operation of an electronic with System usage guidelines and
accordance with standards of the trading system to be used to effect rules;
Public Company Accounting transactions on the security-based 7. The hours of operation of the
Oversight Board by a registered swap execution facility (‘‘System’’), System and the date on which the
public accounting firm that is that enable or empower the applicant intends to commence
qualified and independent in applicant to comply with Section operation of the System;
accordance with Rule 2–01 of 3D of the Exchange Act (15 U.S.C. 8. A copy of the users’ manual or
Regulation S–X (17 CFR 210.2–01); 78c–4). equivalent document;
(3) include a report of the registered Exhibit H For each of the applicant’s 9. If the applicant proposes to hold
public accounting firm that affiliated entities (every subsidiary funds or securities on a regular
complies with paragraphs (a) in which the applicant has, directly basis, describe the controls that will
through (d) of Rule 2–02 of or indirectly, a 25% interest and for be implemented to ensure safety of
Regulation S–X (17 CFR 210.2–02); every entity that has, directly or those funds or securities; and
(4) include the accounting policies indirectly, a 25% interest in the 10. The name of any entity, other than
and practices of the applicant; (4) if applicant) provide a complete set of the security-based swap execution
the applicant’s financial statements unconsolidated financial statements facility, that will be involved in
contain consolidated information of (in English) for the latest two fiscal operation of the System, including
a subsidiary of the applicant, then years and include such footnotes the execution, trading, clearing and
the applicant’s financial statement and other disclosures as are settling of transactions on behalf of
must provide condensed financial necessary to avoid rendering the the security-based swap execution
information, in a financial financial statements misleading. facility, and a description of the
statement footnote, as to the The financial statements shall be role and responsibilities of each
financial position, changes in provided in eXtensible Business entity.
financial position, and results of Reporting Language consistent with Exhibit J A complete set of all forms
operations of the applicant, as of Rules 405 (a)(1), (a)(3), (b), (c), (d), pertaining to:
the same dates and for the same and (e) of Regulation S–T (17 CFR 1. Application for participation or use
periods for which audited 232.11). In addition to the of the security-based swap
consolidated financial statements foregoing, for all other affiliates of execution facility.
are required. Such financial the applicant not listed in the 2. Application for approval as a
information need not be presented paragraph above, the information person associated with a participant
in greater detail than is required for required by the paragraph above or other user of the security-based
condensed statements by Rules 10– shall be made available upon swap execution facility.
01(a)(2), (3), and (4) of Regulation request. 3. Any other similar materials.
S–X (17 CFR 210.10–01). Detailed Exhibit I Describe the manner of Provide a table of contents listing the
footnote disclosure that would operation of the System. This forms included in this Exhibit J.
normally be included with description should include the Exhibit K A complete set of all forms of
complete financial statements may following: financial statements, reports, or

be omitted with the exception of 1. A detailed description of the questionnaires required of
disclosures regarding material manner in which the System participants or any other users of
contingencies, long-term satisfies the definition of ‘‘security- the security-based swap execution
obligations, and guarantees. based swap execution facility’’ in facility relating to financial
Descriptions of significant Section 3(a)(77) of the Exchange Act responsibility or minimum capital
provisions of the applicant’s long- and any Commission rules, requirements for such participants
term obligations, mandatory interpretations, or guidelines or any other users. Provide a table
of contents listing the forms individual, the name of the entity on the security-based swap
included in this Exhibit K. with which such individual is execution facility, including for
Exhibit L Describe the applicant’s associated and the relationship of each a description of the security-
criteria for participation in or use of such individual to the entity (e.g., based swap.
the security-based swap execution partner, officer, director, employee, Exhibit P (1) If the applicant is
facility. Provide a list of all grants etc.); controlled by another person,
of access (including, for all 5. Describe the type of activities provide an opinion of counsel that
participants, the reasons for primarily engaged in by the any person that controls the
granting such access) and all participant or other user (e.g., applicant has consented to and can,
denials or limitations of access security-based swap dealer, major as a matter of law, (i) provide the
(including, for each applicant or security-based swap participant, Commission with prompt access to
participant, the reasons for denying inter-dealer broker, other market its books and records, to the extent
or limiting access). Describe maker, non-broker dealer, non- such books and records are related
conditions under which security-based swap dealer, to the activities of the security-
participants or persons associated commercial end-user, inactive or based swap execution facility; and
with participants may be subject to other functions). A person shall be (ii) submit to onsite inspection and
suspension or termination with ‘‘primarily engaged’’ in an activity examination by representatives of
regard to access to the security- or function for purposes of this item the Commission with respect to the
based swap execution facility. when that activity or function is the activities of the security-based swap
Describe any procedures that will one in which that person is engaged execution facility.
be involved in the suspension or for the majority of their time. When (2) If the applicant is a non-resident
termination of a participant or more than one type of person at an person, provide an opinion of
person associated with a entity engages in any of the types of counsel that the applicant can, as a
participant. Provide a list of all activities or functions enumerated matter of law, (i) provide the
disciplinary actions taken. in this item, identify each and state Commission with prompt access to
Exhibit M Provide an alphabetical list of the number of participants, or other the books and records of such
all participants or other users of the users in each; and applicant and (ii) submit to onsite
security-based swap execution 6. The class of participation or other inspection and examination by
facility, including the following access. representatives of the Commission.
information: Exhibit N Provide a brief description of
By the Commission.
1. Name; the criteria used to determine what
2. Date of acceptance as a participant Dated: February 2, 2011.
securities may be traded on the
or other user; security-based swap execution Elizabeth M. Murphy,
3. Principal business address and facility. Secretary.
telephone number; Exhibit O Provide a schedule of the [FR Doc. 2011–2696 Filed 2–25–11; 8:45 am]
4. If participant or other user is an security-based swaps to be traded BILLING CODE 8011–01–P

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Securities and Exchange Commission: Vol. 76 Monday, No. 39 February 28, 2011

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Vol.

Securities and Exchange Commission

17 CFR Parts 240, 242, and 249

SECURITIES AND EXCHANGE • Use the Federal eRulemaking Portal I. Introduction

Section 3C(a)(1) of the Exchange Act).

means a trading platform where a customer who

commerce, including any trading rules promulgated by the Commission, including

system or platform and their trading transparency and competition, as well

If so, how so? If not, why not?

the combination of the proposed

56 See Public Law 111–203, § 763(a) (adding

Commission broad authority to exempt any person,

94 17 CFR 242.300 et seq. See Securities Exchange

101 The Commission’s regulatory and oversight

whether proposed Rule 809 incorporates for competition across SB SEFs?

designed to promote just and equitable principles

131 See, e.g., Sections 6(b) and 19(g) of Exchange

their reasoning. Should the Commission filled at a disadvantageous price as a

trades to a clearing agency and may be informed by the rules on disciplinary

conducting real-time monitoring of

183 ISG was established in the early 1980s and is

swaps and the requirements relating to clearing

such participant (or any person occupying a similar

244 Proposed Rule 822 is being promulgated under

the business continuity-disaster

to the independent directors without the presence

286 See 17 CFR 210.9–06.

application registration process for SB amendments to Form SB SEF required in proposed

impose by rule or regulation.297 299 15 U.S.C. 78f.

provide a mechanism for an applicant to Frank Act, in a timely manner. In

conduct a thorough review of the SB exercising executive responsibility (or having

information included in the enumerated

supra Section XX.C for a discussion of the financial

347 A person would be ‘‘primarily engaged’’ in an

CFTC Release, supra note 17.

governing bodies such as a Board, been certified or objected to provided

50486 (October 4, 2004), 69 FR 60287 (October 8,

811(f), 811(g), 811(i), 813(a), 813(c), respect to a participant or any refusal to

electronic submission of such filings to the

associated with the audit trail provisions of

to comply with proposed Rule 802) + 150

501 See NRSRO Adopting Release, id., 74 FR at

539 686 hours = 594 hours for financial report +

543 7,200 hours = 1,800 (initial hours burden per

$1,880,000 (SB SEF reporting) + $10,460,000 (CCO note 82.

price transparency leads to more efficient pricing).

of SB SEF, coupled with the level of requirement with respect to pre-trade

Commission. security-based swap execution facility

lllllllllllllllllll By: Exhibit B A copy of all written rulings,

2. Title or legal status; dividend or redemption regarding such definition, including

complete financial statements may following: financial statements, reports, or

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