[Federal Register Volume 77, Number 115 (Thursday, June 14, 2012)]
[Proposed Rules]
[Pages 35625-35643]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-14576]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 77, No. 115 / Thursday, June 14, 2012 /
Proposed Rules
[[Page 35625]]
SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-67177; File No. S7-05-12]
Statement of General Policy on the Sequencing of the Compliance
Dates for Final Rules Applicable to Security-Based Swaps Adopted
Pursuant to the Securities Exchange Act of 1934 and the Dodd-Frank Wall
Street Reform and Consumer Protection Act
AGENCY: Securities and Exchange Commission.
ACTION: Notice of statement of general policy with request for public
comment.
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SUMMARY: We are requesting public comment on a statement of general
policy (``Statement'') on the anticipated sequencing of the compliance
dates of final rules to be adopted by the Securities and Exchange
Commission pursuant to certain provisions of Title VII of the Dodd-
Frank Wall Street Reform and Consumer Protection Act, and the
Securities Exchange Act of 1934, as amended by those provisions
(``Exchange Act''). These provisions establish a framework for the
regulation of security-based swaps and security-based swap market
participants under the Exchange Act. The Statement presents a
sequencing of the compliance dates for these final rules by grouping
the rules into five categories and describes the interconnectedness of
the compliance dates for these rules, both within and among the five
categories. The Statement also describes the timing of the expiration
of the relief previously granted by the Commission that provided
exemptions from certain provisions of the Exchange Act, the Securities
Act of 1933, and the Trust Indenture Act of 1939.
DATES: Comments regarding the Statement should be received on or before
August 13, 2012.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/policy.shtml);
Send an email to rule-comments@sec.gov. Please include
File Number S7-05-12 on the subject line; or
Use the Federal Rulemaking portal (http://www.regulations.gov). Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File No. S7-05-12. This file number
should be included on the subject line if email is used. To help us
process and review your comments more efficiently, please use only one
method. We will post all comments on the Commission's Internet Web site
(http://www.sec.gov). Comments also are available for Web site viewing
and printing at the Commission's Public Reference Room, 100 F Street
NE., Washington, DC 20549, on official business days between the hours
of 10:00 a.m. and 3:00 p.m. All comments received will be posted
without change; we do not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly.
FOR FURTHER INFORMATION CONTACT: Ann Parker McKeehan, Special Counsel,
Office of Derivatives Policy, Division of Trading and Markets, at (202)
551-5797, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549, or, with respect to the Securities Act of 1933,
the Trust Indenture Act of 1939, and Exchange Act section 12, Andrew
Schoeffler, Special Counsel, Office of Capital Markets Trends, Division
of Corporation Finance, at (202) 551-3860, Securities and Exchange
Commission, 100 F Street NE., Washington, DC 20549.
SUPPLEMENTARY INFORMATION:
I. Background and Overview of Statement
A. Background
On July 21, 2010, President Barack Obama signed the Dodd-Frank Wall
Street Reform and Consumer Protection Act (``Dodd-Frank Act'' or
``Act'') into law.\1\ The Dodd-Frank Act was enacted, among other
reasons, to promote the financial stability of the United States by
improving accountability and transparency in the financial system.\2\
Title VII of the Dodd-Frank Act (``Title VII'') establishes a
regulatory regime applicable to the over-the-counter (``OTC'')
derivatives markets by providing the Securities and Exchange Commission
(``Commission'' or ``we'') and the Commodity Futures Trading Commission
(``CFTC'') with authority to oversee these heretofore largely
unregulated markets.\3\ Title VII provides that the CFTC will regulate
``swaps,'' the Commission will regulate ``security-based swaps,'' and
the CFTC and the Commission will jointly regulate ``mixed swaps.'' \4\
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\1\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, 124 Stat. 1376 (2010).
\2\ See, e.g., Public Law 111-203, Preamble.
\3\ Generally, Subtitle A of Title VII creates and relates to
the regulatory regime for swaps, while Subtitle B of Title VII
creates and relates to the regulatory regime for security-based
swaps.
\4\ Section 712(d) of the Dodd-Frank Act provides that the
Commission and the CFTC, in consultation with the Board of Governors
of the Federal Reserve System, shall further define the terms
``swap,'' ``security-based swap,'' ``swap dealer,'' ``security-based
swap dealer,'' ``major swap participant,'' ``major security-based
swap participant,'' ``eligible contract participant,'' and
``security-based swap agreement.'' These terms are defined in
sections 721 and 761 of the Dodd-Frank Act and the Commission and
the CFTC have proposed to further define these terms in joint
rulemakings. See Further Definition of ``Swap Dealer,'' ``Security-
Based Swap Dealer,'' ``Major Swap Participant,'' ``Major Security-
Based Swap Participant'' and ``Eligible Contract Participant'',
Release No. 34-63452 (Dec. 7, 2010), 75 FR 80174 (Dec. 21, 2010)
(``Entity Definitions Proposing Release''); and Further Definition
of ``Swap,'' ``Security-Based Swap,'' and ``Security-Based Swap
Agreement''; Mixed Swaps; Security-Based Swap Agreement
Recordkeeping, Release No. 33-9204 (Apr. 29, 2011), 76 FR 29818 (May
23, 2011), corrected in Release No. 33-9204A (June 1, 2011), 76 FR
32880 (June 7, 2011) (``Product Definitions Proposing Release'').
The rules further defining the terms ``swap dealer,'' ``major swap
participant,'' ``security-based swap dealer,'' ``major security-
based swap participant,'' and ``eligible contract participant'' were
adopted by the Commission on April 27, 2012 and published in the
Federal Register on May 23, 2012. See Further Definition of ``Swap
Dealer,'' ``Security-Based Swap Dealer,'' ``Major Swap
Participant,'' ``Major Security-Based Swap Participant'' and
``Eligible Contract Participant'', Release No. 34-66868 (Apr. 27,
2012), 77 FR 30596 (May 23, 2012) (``Entity Definitions Adopting
Release'').
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Title VII amends the Securities Act of 1933 (``Securities Act'')
\5\ and the
[[Page 35626]]
Exchange Act \6\ to substantially expand the regulation of the
security-based swap (``SB swap'') market by establishing a new
regulatory framework intended to make this market more transparent,
efficient, fair, accessible, and competitive.\7\ The Title VII
amendments to the Exchange Act require, among other things, the
following: (1) Registration and comprehensive oversight of security-
based swap dealers (``SBSDs'') and major security-based swap
participants (``MSBSPs''); \8\ (2) reporting of SB swaps to a
registered security-based swap data repository (``SDR''), or to the
Commission (if the SB swap is uncleared and no SDR will accept the SB
swap), and dissemination of SB swap information to the public; \9\ (3)
clearing of SB swaps at a registered clearing agency (or a clearing
agency that is exempt from registration) if the Commission makes a
determination that such SB swaps are required to be cleared, unless an
exception from the mandatory clearing requirement applies; \10\ and (4)
if an SB swap is subject to the clearing requirement, execution of the
SB swap transaction on an exchange, on a security-based swap execution
facility (``SB SEF'') registered under the Exchange Act,\11\ or on an
SB SEF that has been exempted from registration by the Commission under
the Exchange Act,\12\ unless no SB SEF or exchange makes such SB swap
available for trading.\13\ Title VII also amends the Securities Act and
the Exchange Act to include ``security-based swaps'' in the definition
of ``security'' for the purposes of those statutes.\14\ As a result,
``security-based swaps'' are subject to the provisions of the
Securities Act and the Exchange Act and the rules thereunder applicable
to ``securities.''
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\5\ 15 U.S.C. 77a et seq.
\6\ 15 U.S.C. 78a et seq.
\7\ See generally Subtitle B of Title VII.
\8\ See section 15F of the Exchange Act, 15 U.S.C. 78o-10.
\9\ See section 3(a)(75) of the Exchange Act, 15 U.S.C.
78c(a)(75) (defining the term ``security-based swap data
repository''); section 13(m) of the Exchange Act (regarding public
availability of SB swap data); section 13(n) of the Exchange Act
(regarding requirements related to SDRs); and section 13A of the
Exchange Act (regarding reporting and recordkeeping requirements for
certain SB swaps). See also Security-Based Swap Data Repository
Registration, Duties, and Core Principles, Release No. 34-63347
(Nov. 19, 2010), 75 FR 77306 (Dec. 10, 2010); corrected at 75 FR
79320 (Dec. 20, 2010) and 76 FR 2287 (Jan. 13, 2011) (``SDR
Proposing Release''); and Regulation SBSR--Reporting and
Dissemination of Security-Based Swap Information, Release No. 34-
63346 (Nov. 19, 2010), 75 FR 75208 (Dec. 2, 2010) (``Regulation SBSR
Proposing Release'').
\10\ See section 3C(a)(1) of the Exchange Act, 15 U.S.C. 78c-
3(a)(1). See also Process for Submissions for Review of Security-
Based Swaps for Mandatory Clearing and Notice Filing Requirements
for Clearing Agencies; Technical Amendments to Rule 19b-4 and Form
19b-4 Applicable to All Self-Regulatory Organizations, Release No.
34-63557 (Dec. 15, 2010), 75 FR 82490 (Dec. 30, 2010) (``Clearing
Procedures Proposing Release'').
\11\ 15 U.S.C. 78c-4.
\12\ Id. at 78c-4(e).
\13\ See section 3C(g) of the Exchange Act, 15 U.S.C. 78c-3(g)
and section 3C(h) of the Exchange Act, 15 U.S.C. 78c-3(h). See also
section 3(a)(77) of the Exchange Act, 15 U.S.C. 78c(77) (defining
the term ``security-based swap execution facility''). See also
Registration and Regulation of Security-Based Swap Execution
Facilities, Release No. 34-63825 (Feb. 2, 2011), 76 FR 10948 (Feb.
28, 2011) (``SB SEF Proposing Release'').
\14\ See sections 761(a)(2) and 768(a)(1) of the Dodd-Frank Act
(amending sections 3(a)(10) of the Exchange Act, 15 U.S.C.
78c(a)(10), and 2(a)(1) of the Securities Act, 15 U.S.C. 77b(a)(1),
respectively). The Dodd-Frank Act also amended the Securities Act to
provide that SB swaps could not be used by an issuer, its
affiliates, or underwriters to circumvent the registration
requirement of section 5 of the Securities Act with respect to the
issuer's securities underlying the SB swap. See section 768(a) of
the Dodd-Frank Act (amending section 2(a)(3) of the Securities Act,
15 U.S.C. 77b(a)(3)).
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Since the Dodd-Frank Act was enacted, the Commission has adopted
joint rules with the CFTC further defining the terms ``swap dealer,''
``security-based swap dealer,'' ``major swap participant,'' ``major
security-based swap participant,'' and ``eligible contract
participant'' \15\ and has proposed rules in the following twelve areas
required by Title VII:
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\15\ See Entity Definitions Adopting Release.
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1. Rules prohibiting fraud and manipulation in connection with SB
swaps; \16\
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\16\ See Prohibition Against Fraud, Manipulation, and Deception
in Connection with Security-Based Swaps, Release No. 34-63236 (Nov.
3, 2010), 75 FR 68560 (Nov. 8, 2010) (``SB Swap Antifraud Proposing
Release'').
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2. Rules regarding trade reporting and real-time public
dissemination of trade information for SB swaps that would lay out who
must report SB swaps, what information must be reported, and where and
when such information must be reported; \17\
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\17\ See Regulation SBSR Proposing Release.
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3. Rules regarding the SDR registration process and the obligations
of SDRs, including confidentiality and other requirements with which
they must comply; \18\
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\18\ See SDR Proposing Release.
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4. Rules relating to mandatory clearing of SB swaps that would
specify the process for a registered clearing agency's submission for
review of SB swaps that the clearing agency plans to accept for
clearing and rules to establish a process for a registered clearing
agency to file advance notices with the Commission pursuant to Title
VIII of the Dodd-Frank Act; \19\
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\19\ See Clearing Procedures Proposing Release.
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5. Rules regarding the steps that a party electing to use the end-
user exception to the mandatory clearing requirement must follow to
notify the Commission of how it generally meets its financial
obligations associated with non-cleared SB swap transactions when it is
using SB swaps to hedge or mitigate commercial risk; \20\
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\20\ See End-User Exception of Mandatory Clearing of Security-
Based Swaps, Release No. 34-63556 (Dec. 15, 2010), 75 FR 79992 (Dec.
21, 2010) (``End-User Exception Proposing Release'').
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6. Rules regarding the confirmation of SB swap transactions that
would govern the way in which certain of these transactions are
acknowledged and verified by the parties who enter into them; \21\
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\21\ See Trade Acknowledgment and Verification on Security-Based
Swap Transactions, Release No. 34-63727 (Jan. 14, 2011), 76 FR 3859
(Jan. 21, 2011) (``Trade Documentation Proposing Release'').
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7. Rules defining and regulating SB SEFs, which would specify their
registration requirements, establish the duties, and implement the core
principles for SB SEFs specified in Title VII; \22\
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\22\ See SB SEF Proposing Release.
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8. Rules regarding certain standards that clearing agencies would
be required to maintain with respect to, among other things, their risk
management and operations; \23\
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\23\ See Clearing Agency Standards for Operation and Governance,
Release No. 34-64017 (Mar. 3, 2011), 76 FR 14472 (Mar. 16, 2011)
(``Clearing Agency Standards Proposing Release'').
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9. Joint rules with the CFTC further defining the terms ``swap,''
``security-based swap,'' and ``security-based swap agreement'' and
regarding the regulation of mixed swaps and SB swap agreement
recordkeeping; \24\
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\24\ See Product Definitions Proposing Release.
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10. Rules regarding business conduct that would establish certain
minimum standards of conduct for SBSDs and MSBSPs, including in
connection with their dealings with ``special entities,'' which include
municipalities, pension plans, endowments and similar entities; \25\
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\25\ See Business Conduct Standards for Security-Based Swaps
Dealer and Major Security-Based Swap Participants, Release No. 34-
64766 (June 29, 2011), 76 FR 42396 (July 18, 2011) (``Business
Conduct Standards Proposing Release'').
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11. Rules regarding the registration process for SBSDs and MSBSPs;
\26\ and
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\26\ See Registration of Security-Based Swap Dealers and Major
Security-Based Swap Participants, Release No. 34-65543 (Oct. 12,
2011), 76 FR 65784 (Oct. 24, 2011) (``SB Swap Participant
Registration Proposing Release'').
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12. Rules intended to mitigate conflicts of interest at SB swap
clearing agencies, SB SEFs, and exchanges that trade SB swaps.\27\
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\27\ See Ownership Limitations and Governance Requirements for
Security-Based Swap Clearing Agencies, Security-Based Swap Execution
Facilities, and National Securities Exchanges with Respect to
Security-Based Swaps under Regulation MC, Release No. 34-63107,
(Oct. 14, 2010), 75 FR 65882 (Oct. 26, 2010) (``Proposed Regulation
MC'').
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[[Page 35627]]
In addition, the Commission intends to propose rules establishing
capital, margin, and segregation requirements applicable to SBSDs and
MSBSPs pursuant to Exchange Act sections 3E \28\ and 15F(e) \29\ and
rules regarding the reporting and recordkeeping requirements to which
SBSDs and MSBSPs will be subject pursuant to Exchange Act section
15F(f).\30\ The Commission also intends to address the international
implications of Title VII in a single proposal that would present an
approach to the registration and regulation of foreign entities engaged
in cross-border SB swap transactions, among other areas.\31\
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\28\ 15 U.S.C. 78c-5.
\29\ Id. at 78o-10(e).
\30\ Id. at 78o-10(f).
\31\ The Commission also adopted an interim final temporary rule
that required counterparties to SB swaps entered into prior to the
date of enactment of the Dodd-Frank Act, the terms of which had not
expired as of that date, to report certain information relating to
such SB swaps to a registered SDR, after such registered SDR is
operational, or to the Commission and to report information relating
to such SB swaps to the Commission upon request. The Commission also
issued an interpretive note to the rule requiring counterparties to
retain information relating to the terms of such SB swaps. See
Reporting of Security-Based Swap Transaction Data, Release No. 34-
63094 (Oct. 13, 2010), 75 FR 64643 (Oct. 20, 2010). This interim
final temporary rule was to remain in effect until the earlier of
the operative date of the permanent recordkeeping and reporting
rules for SB swap transactions to be adopted by the Commission or
January 12, 2012. Commission staff currently is considering what
further action, if any, to recommend the Commission take with regard
to the interim final temporary rule and interpretive note.
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Moreover, while not mandated by Title VII, the Commission has
adopted exemptions under the Securities Act, the Exchange Act, and the
Trust Indenture Act of 1939 (``Trust Indenture Act'') for SB swaps
issued by certain clearing agencies satisfying specified conditions to
facilitate the intent of Title VII with respect to the clearing of SB
swaps.\32\
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\32\ See Exemptions for Security-Based Swaps Issued By Certain
Clearing Agencies, Release No. 33-9308 (Mar. 30, 2012), 77 FR 20536
(Apr. 5, 2012). These exemptions supplant the temporary exemptions
the Commission adopted to facilitate the operation of clearing
agencies as central counterparties for eligible credit default
swaps. See Temporary Exemptions for Eligible Credit Default Swaps to
Facilitate Operation of Central Counterparties to Clear and Settle
Credit Default Swaps, Release No. 33-8999 (Jan. 14, 2009), 74 FR
3967 (Jan. 22, 2009). See also Extension of Temporary Exemptions for
Eligible Credit Default Swaps to Facilitate Operation of Central
Counterparties to Clear and Settle Credit Default Swaps, Release No.
33-9232 (Jul. 1, 2011), 76 FR 40223 (Jul. 8, 2011) (extending the
expiration date of the temporary exemptions until April 16, 2012).
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The provisions of Title VII were generally effective on July 16,
2011 (360 days after the enactment of the Dodd-Frank Act, the
``Effective Date''), unless a provision required a rulemaking, in which
case such provision would go into effect ``not less than'' 60 days
after publication of the related final rules in the Federal Register or
on July 16, 2011, whichever is later.\33\ Because the Commission did
not complete its rulemaking prior to the Effective Date, we took a
number of actions intended to clarify which U.S. securities laws would
apply to security-based swaps as of July 16, 2011 and to provide
exemptions from certain provisions of the Securities Act, the Exchange
Act, and the Trust Indenture Act.
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\33\ See section 774 of the Dodd-Frank Act, 15 U.S.C. 77b note.
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First, the Commission provided guidance as to which of the
requirements of the Exchange Act, as amended by Title VII, would apply
to SB swap transactions as of the Effective Date and granted temporary
relief to market participants from compliance with certain of those
requirements.\34\ As a result, SB swap market participants were not
required to comply with substantially all of Title VII's requirements
applicable to SB swaps under the Exchange Act. The expiration dates of
the temporary exemptions granted pursuant to the Effective Date Order
are triggered by the effective or compliance dates for certain final
rules required to be adopted by the Commission pursuant to Title
VII.\35\
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\34\ Order Pursuant to Sections 15F(b)(6) and 36 of the
Securities Exchange Act of 1934 Granting Temporary Exemptions and
Other Temporary Relief, Together With Information on Compliance
Dates for New Provisions of the Securities Exchange Act of 1934
Applicable to Security-Based Swaps, and Request for Comment, Release
No. 34-64678 (June 15, 2011), 76 FR 36287 (June 22, 2011)
(``Effective Date Order'').
\35\ See Effective Date Order at 36306-7.
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Second, the Commission approved an order granting temporary relief
and providing interpretive guidance to make it clear that a substantial
number of the requirements of the Exchange Act would not apply to SB
swaps when the revised definition of ``security'' went into effect on
July 16, 2011.\36\ Additionally, this order provided temporary relief
from provisions of the Exchange Act that allow the voiding of contracts
made in violation of those laws.\37\ The exemptions granted will expire
upon the compliance dates of certain of the rules required to be
promulgated pursuant to Title VII, including rules further defining the
terms ``security-based swap'' and ``eligible contract participant''
\38\ and the rules regarding the registration of SB SEFs.\39\
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\36\ Order Granting Temporary Exemptions under the Securities
Exchange Act of 1934 in Connection with the Pending Revision of the
Definition of ``Security'' to Encompass Security-Based Swaps, and
Request for Comment, Release No. 34-64795 (July 1, 2011), 76 FR
39927 (July 7, 2011) (``Exchange Act Exemptive Order'').
\37\ Id. at 39930, 39940.
\38\ Id. at 39938.
\39\ Id. at 39939.
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Third, the Commission provided, until the compliance date for the
final rules to be adopted by the Commission further defining the terms
``security-based swap'' and ``eligible contract participant,'' \40\
interim exemptions from all provisions of the Securities Act (other
than the section 17(a) antifraud provisions), the registration
requirements of the Exchange Act relating to classes of securities, and
the indenture provisions of the Trust Indenture Act for those SB swaps
that would have been, prior to the Effective Date, within the
definition of ``security-based swap agreement'' under Securities Act
section 2A \41\ and Exchange Act section 3A \42\ and are entered into
solely between eligible contract participants (as defined prior to the
Effective Date).\43\ As a result, pursuant to the interim exemptions,
the offer and sale of such SB swaps between eligible contract
participants may be made pursuant to exemptions under the Securities
Act without registration of the class under Exchange Act sections 12(a)
and 12(g), and without qualification of an indenture under the Trust
Indenture Act.\44\
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\40\ Further definition of the term ``security-based swap'' was
proposed in the Product Definitions Proposing Release and the term
``eligible contract participant'' was further defined in the Entity
Definitions Adopting Release.
\41\ 15 U.S.C. 77b(b)-1.
\42\ Id. at 78c-1.
\43\ Exemptions for Security-Based Swaps, Release No. 33-9231
(July 1, 2011), 76 FR 40605 (July 11, 2011) (``SB Swaps Interim
Final Rule''). These interim exemptions will expire upon the
compliance date for the final rules further defining the terms
``security-based swap'' and ``eligible contract participant.''
Further, the Division of Corporation Finance issued a no-action
letter that addressed the availability of these interim exemptions
to offers and sales of SB swaps that are based on or reference only
loans or indexes only of loans. See Cleary Gottlieb Steen & Hamilton
LLP (July 15, 2011) (``Clearly Gottlieb Letter''). We understand
that Commission staff intends to withdraw the Cleary Gottlieb Letter
upon the expiration of these interim exemptions.
\44\ SB Swaps Interim Final Rule at 40611-2.
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As previously announced, the Commission has been considering how to
implement the new requirements that will be applicable to SB swaps
pursuant to the rules described above in a practical and efficient
manner that avoids unnecessary disruption to the SB
[[Page 35628]]
swap market.\45\ As noted in the Effective Date Order, the Commission
has the ability to establish effective dates and compliance dates--
which may be later than the effective dates--for provisions of Title
VII that are subject to rulemaking.\46\ Given this ability, the
Commission seeks to sequence the implementation of the final rules to
be adopted pursuant to Title VII of the Dodd-Frank Act in an
appropriate manner.
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\45\ See Financial Regulatory Reform: The International Context:
Hearing Before the H. Comm. on Fin. Serv., 112th Cong. 18 (2011)
(statement of Mary L. Schapiro, Chairman of the Commission).
\46\ See Effective Date Order at 36289.
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To engage the public on these issues, the staffs of the Commission
and the CFTC held a two-day joint public roundtable on May 2-3, 2011,
to discuss the sequencing of the implementation of the final rules to
be adopted under Title VII.\47\ In connection with this roundtable, the
Commission and the CFTC solicited comment on issues pertaining to the
phased implementation of Title VII's final rules.\48\ Additionally, the
Commission and the CFTC have received comment letters in response to
specific rules proposed under and orders issued in connection with
Title VII that address implementation issues pertaining to those rules,
as well as implementation issues more generally.
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\47\ See Joint Public Roundtable on Issues Related to the
Schedule for Implementing Final Rules for Swaps and Security-Based
Swaps Under the Dodd-Frank Wall Street Reform and Consumer
Protection Act, Release No. 34-64314 (Apr. 20, 2011), 76 FR 23221
(Apr. 26, 2011) (Request for Comment; Notice of Roundtable
Discussion).
\48\ See id.
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Many commenters have noted that the Commission and the CFTC have
the flexibility to phase in or sequence the issuance of final rules, as
well as the compliance dates for those rules, in a manner that produces
an orderly implementation plan,\49\ as opposed to a ``big bang''
approach where all of the rules to be adopted under Title VII go into
effect simultaneously.\50\ Commenters have advocated that such an
implementation plan should allow market participants enough time to
come into compliance with rules to be adopted under Title VII \51\ and
be sequenced in some manner to provide for differing compliance dates
depending upon the requirements involved.\52\
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\49\ See, e.g., letter from Alternative Investment Management
Association (June 10, 2011), 75 FR 80174, at 1 (CFTC only letter;
stating that the CFTC ``should phase in the implementation of the
Dodd-Frank Act rules over time''); letter from Edison Electric
Institute (June 3, 2011), 76 FR 25274, at 7 (CFTC only letter);
letter from Morgan Stanley (Nov. 1, 2010), File No. S7-16-10, at 6
(noting that ``Dodd-Frank does not require application of the
various requirements across all over-the-counter products on a
single effective date or a limited range of effective dates. To the
contrary, the statute permits and even contemplates that
implementation of the requirements will be phased in over time, as
appropriate and necessary to the continued operation of the
markets.''); letter from NextEra Energy Resources, LLC (Mar. 11,
2011), 75 FR 80174, at 4 (CFTC only letter; noting that ``[t]he
market place is far better served if the [CFTC] considers all of the
final rules in a comprehensively organized and logical fashion.'').
\50\ See, e.g., letter from Alternative Investment Management
Association (June 10, 2011), 75 FR 80174, at 1 (CFTC only letter;
``we believe that market participants should be given sufficient
time to properly understand and prepare themselves to comply with
the new regulatory requirements.''); letter from Managed Funds
Association, MFA Recommended Timeline for Adoption and
Implementation of Final Rules Pursuant to Title VII of the Dodd-
Frank Act (Mar. 24, 2011), 76 FR 3698, at 1 (CFTC only letter);
letter from Tradeweb Markets LLC (June 3, 2011), 76 FR 25274, at 2
(CFTC only letter; ``[a]t the outset, we encourage the [CFTC] to
implement the regulatory requirements over time rather than all at
once because a `big bang' approach to implementation would be too
disruptive to the marketplace--particularly given the breadth and
complexity of the new rules to be implemented and the varying states
of readiness of market participants.'').
\51\ See, e.g., letter from American Bankers Association, ABA
Securities Association, The Clearing House Association L.L.C.,
Financial Services Forum, Financial Services Roundtable, Futures
Industry Association, Institute of International Bankers,
International Swaps and Derivatives Association, Investment Company
Institute, Managed Funds Association, and Securities Industry and
Financial Markets Association (Dec. 6, 2010) (``December Trade
Association Letter''), Commission ``Other Comments'' file, at 3
(stating that ``[t]o implement a complex new regulatory structure
without adequate time to adapt, prepare, and test systems also could
lead to an ineffective or poorly designed reporting, clearing, and
exchange infrastructure * * *''); letter from Alternative Investment
Management Association (June 10, 2011), 75 FR 80174, at 1 (CFTC only
letter; noting that ``market participants should be given sufficient
time to properly understand and prepare themselves to comply with
the new regulatory requirements.''); letter from Financial Services
Forum, Futures Industry Association, International Swaps and
Derivatives Association, and Securities Industry and Financial
Markets Association (May 4, 2011), File No. S7-27-10, at 4-5; letter
from Investment Company Institute (June 10, 2011), 75 FR 76139, at 6
(``[p]hasing in the rules will provide market participants with
essential time to identify the cumulative impact of the rule
changes, build upon the actions of other market participants, and
manage the cumulative costs of the rule changes.'').
\52\ See, e.g., letter from Financial Services Forum, Futures
Industry Association, International Swaps and Derivatives
Association, and Securities Industry and Financial Markets
Association (May 4, 2011), File No. S7-27-10, at 7-8 (recommending
that Title VII's requirements be phased in by asset class and market
participant type); letter from Investment Company Institute (June
10, 2011), 75 FR 76139, at 11; letter from Swaps & Derivatives
Market Association (June 1, 2011), File No. S7-06-11, at 2, 5
(recommending that at each phase of implementation (namely,
clearing, trading and data reporting), compliance should be further
sequenced by market participant, with ``those with the highest
volume share * * * lead[ing] the implementation, allowing less
frequent users more time to comply.'').
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In September 2011, the CFTC published two notices of proposed
rulemakings \53\ that propose to phase in compliance with the swap
clearing, trading, trade documentation, and margining requirements of
Subtitle A of Title VII of the Dodd-Frank Act \54\ by category of
market participant in the following manner:
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\53\ Swap Transaction Compliance and Implementation Schedule:
Clearing and Trade Execution Requirements Under Section 2(h) of the
CEA (Sept. 8, 2011), 76 FR 58186 (Sept. 20, 2011) (``CFTC Clearing
and Trade Execution Implementation Proposal''); Swap Transaction
Compliance and Implementation Schedule: Trading Documentation and
Margining Requirements Under Section 4s of the CEA (Sept. 8, 2011),
76 FR 58176 (Sept. 20, 2011) (``CFTC Trading Documentation and
Margining Implementation Proposal'').
\54\ The analogues to the CFTC Clearing and Trade Execution
Implementation Proposal and the trade documentation portion of the
CFTC Trading Documentation and Margining Implementation Proposal are
the Commission's rule proposals set forth in the Clearing Procedures
Proposing Release, the SB SEF Proposing Release, and the Trade
Documentation Proposing Release. The analogue to the margining
proposals in the CFTC Trading Documentation and Margining
Implementation Proposal is the Commission's forthcoming proposed
rules on margin requirements for SBSDs and MSBSPs.
---------------------------------------------------------------------------
Category 1 Entities, which would include swap dealers,
SBSDs, major swap participants and MSBSPs that will be required to
register with the CFTC or the Commission and ``active funds'' (defined
as any private fund, as defined in section 202(a) of the Investment
Advisers Act of 1940,\55\ that is not a third-party subaccount and that
executes 20 or more swaps per month based upon a monthly average over
the 12 months preceding the CFTC issuing a mandatory clearing
determination), would be required to comply with the clearing, trading,
trade documentation and margining requirements for swaps entered into
by Category 1 Entities within 90 days (1) after the CFTC issues any
clearing determination or 30 days after a swap is made available to
trade, whichever is later; and (2) after the adoption of the final
trade documentation or margining rule, as relevant.
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\55\ 15 U.S.C. 80b-2(a).
---------------------------------------------------------------------------
Category 2 Entities, which would include commodity pools,
a private fund as defined in section 202(a) of the Investment Advisers
Act of 1940 \56\ other than an active fund, employee benefit plans as
defined under the Employee Retirement Income Security Act
(``ERISA''),\57\ and persons predominantly engaged in activities that
are financial in nature as defined under the Bank Holding Company
Act,\58\ provided that the entity is not a third-party subaccount,
would be required to comply with the clearing, trading, trade
[[Page 35629]]
documentation and margining requirements for swaps entered into by
Category 2 Entities within 180 days (1) after the CFTC issues any
clearing determination or 30 days after a swap is made available to
trade, whichever is later; and (2) after the adoption of the final
trade documentation or margining rule, as relevant.
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\56\ Id.
\57\ Public Law 93-406, 88 Stat. 829 (1974).
\58\ 12 U.S.C. 1841 et seq.
---------------------------------------------------------------------------
Category 3 Entities, which would include third party sub-
accounts and ``all other swap transactions not excepted from the
mandatory clearing requirement,'' would be required to comply with the
clearing, trading, trade documentation and margining requirements for
swaps entered into by Category 3 Entities within 270 days (1) after the
CFTC issues any clearing determination or 30 days after a swap is made
available to trade, whichever is later; and (2) after the adoption of
the final trade documentation or margining rule, as relevant.
With regard to the trade documentation and margining
requirements, the CFTC Trading Documentation and Margining
Implementation Proposal adds an additional fourth category of
entities--Category 4 Entities--for any persons not included in
Categories 1 through 3. Under this proposal, Category 4 Entities would
be subject to the same compliance date scheduling as Category 3
Entities.
In its Clearing and Trade Execution Implementation Proposal and its
Trading Documentation and Margining Implementation Proposal, the CFTC
did not propose specific adoption or compliance dates for rules, but
did note that certain final rules must be adopted before compliance
with others would be required. For example, the CFTC noted in its
Clearing and Trade Execution Implementation Proposal that before the
mandatory clearing of swaps begins, the final rules establishing the
product and entity definitions, the end-user exception from mandatory
clearing, and pertaining to the segregation of customer collateral must
be adopted and that before swap market participants could be required
to comply with a trade execution requirement, the CFTC must adopt final
rules related to swap execution facilities and designated contract
markets.\59\
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\59\ See CFTC Clearing and Trade Execution Implementation
Proposal at 58188-9.
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B. Overview of Statement
In order to better effectuate the purposes of Title VII and to
address the comments received from market participants, the Commission
has developed, and is seeking public comment on, this Statement, which
discusses issues pertaining to, and presents a general sequence for,
the anticipated compliance dates of final rules to be adopted by the
Commission under Subtitle B of Title VII. The issues discussed in this
Statement are set out in relation to the following five categories of
rules: \60\ (1) The rules further defining the terms ``security-based
swap,'' ``security-based swap agreement,'' ``mixed swap,'' ``security-
based swap dealer,'' ``major security-based swap participant,'' and
``eligible contract participant,'' (the ``Definitional Rules'') and the
rules concerning the treatment of cross-border SB swap transactions and
non-U.S. persons acting in capacities regulated under Subtitle B of
Title VII (the ``Cross-Border Rules''); (2) rules pertaining to the
registration and regulation of SDRs, the reporting of SB swap
transaction data to SDRs, and the public dissemination of SB swap
transaction data; (3) rules pertaining to the mandatory clearing
process of SB swap transactions, clearing agency standards, and the
end-user exception from mandatory clearing; (4) rules pertaining to the
registration and regulation of SBSDs and MSBSPs; and (5) rules
pertaining to the mandatory trading of SB swap transactions, including
the rules pertaining to the registration and regulation of SB SEFs.
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\60\ For the purposes of this Statement, the Commission has
categorized the twelve rule proposals and one adopting release the
Commission has published pursuant to Title VII (other than the SB
Swap Antifraud Proposing Release, compliance with which will be
addressed in the release adopting the final rules contemplated
therein) along with the proposals the Commission has yet to publish,
as described above, into five categories.
---------------------------------------------------------------------------
The first category of rules affects compliance with rules in the
other four categories. As a result, the Commission believes the
Definitional Rules would need to be adopted and effective prior to
requiring compliance with any of the other rules to be adopted under
Title VII of the Dodd-Frank Act. The Definitional Rules would help
inform market participants as to whether they will be subject to the
requirements of Subtitle B of Title VII, section 12 of the Exchange
Act, and the relevant provisions of the Securities Act and the Trust
Indenture Act. Additionally, the Commission generally believes the
Cross-Border Rules should be proposed before final rules with cross-
border implications are adopted. We believe the Commission would
benefit by being able to take into account comments on its proposed
approach to cross-border issues before final rules with cross-border
implications are adopted.\61\
---------------------------------------------------------------------------
\61\ For example, before requiring compliance with the
registration requirements for SBSDs, the Commission believes the
proposed applicability of such registration requirements to non-U.S.
persons should be addressed and subject to public comment.
---------------------------------------------------------------------------
With regard to the rules in the remaining four categories, the
Statement describes the interconnectedness of the compliance dates of
the final rules within one category, and where applicable, the impact
of compliance dates of final rules within one category upon those of
another category. The Statement also discusses the dependencies that
exist between the categories of rules. The Statement does not provide
specific compliance dates for the final rules to be adopted under
Subtitle B of Title VII, nor does it provide a conclusive sequencing of
compliance dates. However, the Statement does explain how such dates
could be sequenced in relative terms and, in this way, seeks to give SB
swap market participants clarity into and an opportunity to comment
upon the general order in which they might expect to consider and
prepare for compliance with these final rules. The Statement also
discusses the relief the Commission has previously granted by providing
exemptions from certain provisions of the Securities Act, the Exchange
Act, and the Trust Indenture Act for certain SB swaps and when these
exemptions will expire.
In general, in formulating the sequencing of compliance dates
described herein, the Commission has taken into consideration four
principles in addition to the primacy of the Definitional Rules and
Cross-Border Rules described above: (1) Compliance with the final rules
establishing the registration process and duties of SDRs and the rules
governing the reporting of SB swap transaction data should be the next
step in the implementation process, following the adoption and
effectiveness of the Definitional Rules and the proposal of the Cross-
Border Rules, so that the Commission would be able to begin utilizing
comprehensive SB swap transaction data reported to registered SDRs in
making certain determinations required by Subtitle B of Title VII; \62\
(2) before SB swaps are
[[Page 35630]]
required to be cleared, the Commission intends to determine whether to
propose amendments to its rules regarding net capital and customer
protection specifically with regard to SB swap clearing activity in a
broker-dealer and whether margin for SB swaps that are required to be
cleared can be calculated on a portfolio margining basis with swaps;
\63\ (3) the Dodd-Frank Act establishes a sequencing of the mandatory
clearing and mandatory trading requirements of Subtitle B of Title VII,
as only SB swaps that the Commission requires to be cleared will be
required to be traded on an exchange or SB SEF, provided that an
exchange or SB SEF makes such SB swaps available to trade, and the
implementation process should take this sequencing into account; \64\
and (4) without unnecessarily delaying the implementation of Title
VII's reforms of the SB swap market, at all stages of the
implementation process, persons regulated pursuant to Subtitle B of
Title VII should be given adequate, but not excessive, time to come
into compliance with the final rules applicable to them, which includes
(a) having an appropriate amount of time to analyze and understand the
final rules to be adopted pursuant to Title VII, (b) having an
appropriate amount of time to develop and test new systems required as
a result of the new regulatory requirements for SB swaps, and (c) being
subject to a phasing in of the requirements arising from the final
rules to be adopted pursuant to Title VII, as appropriate.\65\
---------------------------------------------------------------------------
\62\ See Letter from Managed Funds Association, MFA Recommended
Timeline for Adoption and Implementation of Final Rules Pursuant to
Title VII of the Dodd-Frank Act (Mar. 24, 2011), 76 FR 3698, at 1
(CFTC only letter; noting that certain rules should be delayed ``in
favor of obtaining market data or allowing time for the build out of
necessary systems prior to adoption (e.g., position limits and real-
time reporting).''); but cf., letter from Swaps & Derivatives Market
Association (June 1, 2011), File No. S7-06-11, at 2 (stating that
``[c]entral clearing paves the way for electronic trading, which
facilitates trade reporting and data gathering.'').
\63\ See infra note 138.
\64\ See, e.g., letter from Wholesale Market Brokers'
Association (June 3, 2011), 76 FR 1214, at 5 (noting that ``upon the
plain language of the Dodd-Frank Act, the mandatory trade execution
requirement will become effective at the time that swaps are deemed
`clearable' by the appropriate Commission.'').
\65\ Any potential phasing in of any such requirements could
take a variety of forms, including, for example, the further
sequencing of the compliances dates of a particular final rule by SB
swap asset class, SB swap market participant type, and/or the
specific requirements arising from such rule.
---------------------------------------------------------------------------
The Commission is seeking public comment on all aspects of this
Statement. The Commission appreciates the importance of SB swap market
participants having the opportunity to comment upon the sequencing
discussed herein.\66\ Comments received will be addressed in the
relevant final rulemakings to which they pertain.
---------------------------------------------------------------------------
\66\ See, e.g., letter from Investment Company Institute (June
10, 2011), 75 FR 76139, at 2 (requesting that the Commission and the
CFTC ``publish for comment their proposed timelines to phase in
implementation of the new swaps rules.''); letter from International
Swaps and Derivatives Association, Inc. (June 2, 2011), 76 FR 25274,
at 4 (CFTC only letter; recommending that the CFTC ``propose a step-
by-step implementation schedule upon which the public may comment
that builds on the discussions currently underway between the
financial regulators and the industry.''); letter from BlackRock,
Inc. (June 3, 2011), 76 FR 25274, at 1-2 (CFTC only letter; noting
that ``[a] proper sequencing of the [CFTC's] consideration of final
rules and a phased, publicly-vetted schedule for implementation of
compliance with such final rules will promote a more orderly
transition from the current OTC bilateral market and will allow for
the development of a new market structure for cleared derivatives
where the interdependent and interoperable relationships among the
various entities and market participants (including some new
participants) is well thought through so as to preserve and even
enhance liquidity.''); letter from Bloomberg L.P. (Apr. 4, 2011),
File No. S7-06-11, at 7.
---------------------------------------------------------------------------
II. Statement on the Sequencing of the Compliance Dates for Final Rules
Applicable to Security-Based Swaps Adopted Pursuant to the Securities
Exchange Act of 1934 and the Dodd-Frank Wall Street Reform and Consumer
Protection Act
A. Definitional and Cross-Border Rules
(i) Definitional Rules
The Commission believes the Definitional Rules, the rules further
defining the terms ``security-based swap,'' ``security-based swap
agreement,'' and ``mixed swap'' and the rules further defining
``security-based swap dealer,'' and ``major security-based swap
participant,'' should be the earliest of the final rules of Subtitle B
of Title VII that are adopted and effective. As noted above, the
Commission already has adopted joint rules with the CFTC further
defining the terms ``swap dealer,'' ``security-based swap dealer,''
``major swap participant,'' ``major security-based swap participant,''
and ``eligible contract participant.'' \67\
---------------------------------------------------------------------------
\67\ See Entity Definitions Adopting Release.
---------------------------------------------------------------------------
Many commenters have noted the importance of the early finalization
of the these definitional rules, as they provide the foundation for the
remainder of Title VII's rules by providing further guidance as to what
products constitute SB swaps and which participants constitute SBSDs
and MSBSPs.\68\ Once adopted and effective, the Definitional Rules
should help provide certainty to market participants with regard to
whether the products in which they transact and the activities they
undertake will be subject to the regulatory regime to be established
through Subtitle B of Title VII and the rules to be adopted by the
Commission pursuant to it. Except as otherwise noted below with regard
to section 6(l) of the Exchange Act, upon their effectiveness, the
Definitional Rules will not, on their own, impose upon market
participants engaged in SB swaps any of the new requirements to be
adopted under Subtitle B of Title VII.\69\
---------------------------------------------------------------------------
\68\ See, e.g., December Trade Association letter at 2; letter
from American Gas Association (June 3, 2011), 76 FR 25274, at 2
(CFTC only letter; stating that ``any sequencing of final rules must
begin with the foundational definitions of `swap,' `swap dealer',
and `major swap participant.' '' Industry participants must
understand whether and to what extent their activities will be
regulated before they can assess how those activities should be
regulated.''); letter from Edison Electric Institute (June 3, 2011),
76 FR 25274, at 7 (CFTC only letter; advocating that the
implementation process ``start with basic definitions of `swap,'
`swap dealer,' and `major swap participant' ''); letter from Managed
Funds Association, MFA Recommended Timeline for Adoption and
Implementation of Final Rules Pursuant to Title VII of the Dodd-
Frank Act (Mar. 24, 2011), 76 FR 3698, at 3 (CFTC only letter);
letter from NextEra Energy Resources, LLC (Mar. 11, 2011), 75 FR
80174, at 6 (CFTC only letter); letter from Alternative Investment
Management Association (June 10, 2011), 75 FR 80174, at 3 (CFTC only
letter; ``[i]t is essential that the definitions of products and the
categories of firms to whom final rules will apply are finalised
before implementation of any of the other final rules.''); letter
from CME Group, Inc. (June 3, 2011), 76 FR 25274, at 3 (CFTC only
letter).
\69\ As of the Effective Date of the Dodd-Frank Act, SB swaps,
as securities, were subject to the general antifraud and anti-
manipulation provisions of the federal securities laws and the
regulations thereunder. See, e.g., Exchange Act section 10(b), 15
U.S.C. 78j, and Securities Act section 17(a), 15 U.S.C. 77q(a).
---------------------------------------------------------------------------
Upon the compliance date of the final rules further defining the
term ``security-based swap'' and ``eligible contract participant,'' two
of the temporary exemptions granted by the Commission pursuant to the
Exchange Act Exemptive Order will expire: \70\
---------------------------------------------------------------------------
\70\ The Commission has subsequently received and is considering
a request for certain permanent exemptions upon the expiration of
the temporary exemptions contained in the Exchange Act Exemptive
Order. See SIFMA SBS Exemptive Relief Request (Dec. 5, 2011), http://www.sec.gov/comments/s7-27-11/s72711-10.pdf.
---------------------------------------------------------------------------
The exemption for any person meeting the definition of
``eligible contract participant'' that was in effect prior to the
enactment of the Dodd-Frank Act, other than a registered broker-dealer
or a self-regulatory organization, from the provisions of the Exchange
Act and the rules and regulations thereunder (other than those
provisions expressly excluded pursuant to the Exchange Act Exemptive
Order), in connection with a person's activities involving SB swaps;
\71\ and
---------------------------------------------------------------------------
\71\ Exchange Act Exemptive Order at 39938-40.
---------------------------------------------------------------------------
The exemption for a broker or dealer registered under
section 15(b) of the Exchange Act \72\ from certain provisions of the
Exchange Act and the
[[Page 35631]]
rules and regulations thereunder with respect to SB swaps.\73\
---------------------------------------------------------------------------
\72\ 15 U.S.C. 78o(a).
\73\ Id. at 39939-40.
---------------------------------------------------------------------------
At the same time, the following exemptions granted pursuant to the
SB Swaps Interim Final Rule \74\ will expire, unless the Commission
extends or modifies the exemptions or adopts other exemptions: \75\
---------------------------------------------------------------------------
\74\ See supra note 43.
\75\ The interim exemptions provide that upon their expiration,
the Commission must publish a rule to remove the interim exemptions
from the Code of Federal Regulations. See, e.g., 17 CFR 230.240.
Further, we understand that Commission staff intends to withdraw the
Cleary Gottlieb Letter upon the expiration of these interim
exemptions.
---------------------------------------------------------------------------
The exemption pursuant to Securities Act rule 240 (``Rule
240'') from all provisions of the Securities Act, except the anti-fraud
provisions of section 17(a), subject to certain conditions, of the
offer and sale of those SB swaps that under pre-Dodd-Frank Act law were
``security-based swap agreements'' (which, under that definition, must
be entered into between eligible contract participants and subject to
individual negotiation) and that were defined as ``securities'' under
the Securities Act on the Effective Date solely due to the provisions
of Title VII; \76\
---------------------------------------------------------------------------
\76\ SB Swaps Interim Final Rule at 40611.
---------------------------------------------------------------------------
The exemptions from the provisions of Exchange Act
sections 12(a) \77\ and 12(g) \78\ for any SB swaps offered and sold in
reliance on Rule 240; \79\ and
---------------------------------------------------------------------------
\77\ 15 U.S.C. 78l(a).
\78\ 15 U.S.C. 78l(g).
\79\ Id. at 40612.
---------------------------------------------------------------------------
The exemption from the provisions of the Trust Indenture
Act for any SB swaps offered and sold in reliance on Rule 240.\80\
---------------------------------------------------------------------------
\80\ Id.
---------------------------------------------------------------------------
In light of the fact that these exemptions expire upon the
compliance date of the final rules further defining the term
``security-based swap'' and ``eligible contract participant,'' the
Commission is considering what the appropriate compliance date for the
rules further defining the term ``security-based swap'' should be.
Additionally, upon the effective date of the final rules further
defining the term ``eligible contract participant,'' the limited
exemption granted pursuant to the Effective Date Order permitting
compliance with section 6(l) using the definition of ``eligible
contract participant'' as set forth in section 1a(12) of the Commodity
Exchange Act (as in effect on July 20, 2010),\81\ as opposed to the
definition of ``eligible contract participant'' as amended by the Dodd-
Frank Act, will expire.\82\ Section 6(l) of the Exchange Act makes it
unlawful for any person to effect a transaction in an SB swap with or
for a person that is not an ``eligible contract participant,'' unless
such transaction is effected on a national securities exchange
registered pursuant to section 6(b) of the Exchange Act.\83\ Upon the
effective date of the final rules further defining the term ``eligible
contract participant,'' which will be 60 days after the rule's
publication in the Federal Register, or July 23, 2012,\84\ section 6(l)
of the Exchange Act will apply to persons in connection with SB swap
transactions with counterparties that do not meet the ``eligible
contract participant'' definition, as amended by the Dodd-Frank Act and
as further defined by such rules.
---------------------------------------------------------------------------
\81\ 7 U.S.C. 1a(12).
\82\ Effective Date Order at 36307.
\83\ 15 U.S.C. 78f(l).
\84\ See supra note 4.
---------------------------------------------------------------------------
(ii) Cross-Border Rules
The Commission expects to propose the Cross-Border Rules as a
single release addressing the application of the requirements of
Subtitle B of Title VII to cross-border SB swap transactions and non-
U.S. persons acting in capacities regulated under Subtitle B of Title
VII. The Cross-Border Rules, which the Commission expects to propose
prior to adopting any rules other than the Definitional Rules (except
as otherwise noted in sections II.C.(i) and (ii) below), generally
would not propose to impose additional requirements or obligations upon
SB swap market participants, but rather would propose to address the
extent to which non-U.S. SB swap market participants would be subject
to the requirements arising from Subtitle B of Title VII by defining
the scope of Title VII as it applies to these market participants and
their SB swap transactions involving the U.S. market. Because the
Cross-Border Rules are expected to be directly related to, among other
things, SB swap data reporting, clearing and trading, as well as
various registration categories under Title VII, the Commission
anticipates that certain rulemakings that are affected by the Cross-
Border Rules would address comments received on the relevant proposals
in the Cross-Border Rules. In other substantive areas, the Commission
could address comments received by adopting final rules addressing
cross-border issues in a complementary separate rulemaking. In either
case, the Commission does not expect to require compliance by
participants in the U.S. SB swap market with the final rules arising
under the Exchange Act before addressing the cross-border aspects of
such rules.\85\
---------------------------------------------------------------------------
\85\ For example and as noted above, before requiring compliance
with the registration requirements for SBSDs, the Commission
believes the applicability of such registration requirements to non-
U.S. persons should be addressed.
---------------------------------------------------------------------------
(iii) Request for Comment
In addition to the Definitional Rules and the Cross-Border
Rules, are there any other rules arising under Title VII that should be
proposed or adopted before all other Title VII rules? If so, which
ones, and why?
Are there any sets of rules included in this first
category that should not be? If so, which ones, and why?
B. SDR Registration and SB Swap Transaction Reporting
Following the adoption and effectiveness of the Definitional Rules
and the proposal of the Cross-Border Rules, the Commission believes the
next step in the implementation process should be requiring SDRs to
register with the Commission and comply with applicable duties and core
principles. Compliance earlier in the implementation process should
facilitate the development and utilization of SDRs in a regulated
manner and facilitate the reporting of SB swap transaction data by SB
swap market participants to registered SDRs, as well as the public
dissemination of SB swap data by registered SDRs. Because the
Regulation SBSR Proposing Release links the timeframes for reporting
and publicly disseminating SB swap transaction data to the registration
of SDRs,\86\ the Commission anticipates that the sooner SDRs are
required to register with the Commission and comply with applicable
duties and core principles, the sooner SB swap transaction data on all
SB swaps can be promptly reported to such SDRs and disseminated to the
public. The Commission also believes it should require the reporting of
SB swap transactions to registered SDRs earlier in the implementation
process, as has been suggested by commenters, to enable the Commission
to utilize the data reported to registered SDRs to inform other aspects
of the Commission's efforts with respect to Title VII.\87\
---------------------------------------------------------------------------
\86\ Regulation SBSR Proposing Release at 75187-8.
\87\ See, e.g., letter from MarkitSERV (June 10, 2011), 75 FR
63113, at 2-3 (CFTC only letter; noting that ``[d]ata reporting to
the Commission will provide the Commission with the significant
amount of market data needed before it can determine which swaps
should be subject to the clearing mandate, which ones are `available
to trade', and what are the appropriate thresholds for block trade
sizes.''); letter from Financial Services Forum, Futures Industry
Association, International Swaps and Derivatives Association, and
Securities Industry and Financial Markets Association (May 4, 2011),
File No. S7-27-10, at 2, 5-6 (noting that ``the Commissions will be
in a better position to adopt rules that achieve Dodd-Frank's goals
while maintaining active and viable [SB swap] markets'' if SDRs are
required to register and data reporting is enabled).
---------------------------------------------------------------------------
[[Page 35632]]
The Commission further believes compliance with final rules
resulting from the SDR Proposing Release should be required as soon as
practicable after the effectiveness of the Definitional Rules and
proposal of the Cross-Border Rules, taking into account the necessity
of SB swap market participants having an appropriate amount of time to
analyze and understand the final rules and develop and test new
policies and systems required as a result of them, to facilitate the
establishment and utilization of registered SDRs. Furthermore, the
Commission believes compliance with final rules resulting from the
Regulation SBSR Proposing Release should be required at approximately
the same time as compliance with final rules resulting from the SDR
Proposing Release, also taking into account the necessity of SB swap
market participants having an appropriate amount of time to analyze and
understand the final rules and develop and test new policies and
systems required as a result of them. As a result, the requirement to
report SB swap transactions to registered SDRs would facilitate the
comprehensiveness of SB swap data contained in SDRs. Accordingly,
except as otherwise noted in sections II.C.(i) and (ii) below, the
final rules resulting from the SDR Proposing Release and the Regulation
SBSR Proposing Release would be the first sets of rules with which
compliance would be required by the Commission, following the
effectiveness of the Definitional Rules and the proposal of the Cross-
Border Rules.
The following subsections discuss certain additional issues
concerning the compliance dates for final rules resulting from (i) the
SDR Proposing Release and (ii) the Regulation SBSR Proposing Release.
(i) SDR Proposing Release
In accordance with section 763(i) of Title VII, the Commission
issued the SDR Proposing Release, which proposed new rules under the
Exchange Act governing the SDR registration process, duties, and core
principles. This subsection discusses issues surrounding the timing of
the SDR registration process and compliance with the duties, core
principles, and other requirements resulting from these proposed rules,
as well as the relationship of certain of the proposed rules in the
Regulation SBSR Proposing Release to those in the SDR Proposing
Release.
a. Registration and Compliance With Regulatory Requirements
The Regulation SBSR Proposing Release would require that an entity
registered with the Commission as an SDR also register with the
Commission as a securities information processor (``SIP'') on existing
Form SIP.\88\ The Commission anticipates that the timeframe within
which persons seeking to operate as SDRs will be required to register
with the Commission would be established in the release adopting final
rules resulting from the SDR Proposing Release. As noted above, the
Commission believes compliance with final rules resulting from the SDR
Proposing Release should be required as soon as practicable after the
effectiveness of the Definitional Rules and the proposal of the Cross-
Border Rules, taking into account the necessity of SB swap market
participants having an appropriate amount of time to analyze and
understand the final rules and develop and test new policies and
systems required as a result of them. Accordingly, the Commission
anticipates that the final rules governing the SDR registration process
and applicable duties, core principles, and other requirements, as
explained immediately below, would be one component of the two sets of
rules with which compliance would be required first.
---------------------------------------------------------------------------
\88\ Regulation SBSR Proposing Release at 75211.
---------------------------------------------------------------------------
Proposed rules 13n-4 through 13n-11 are intended to implement the
duties and core principles established by section 763(i) of the Dodd-
Frank Act, which amended the Exchange Act to add Exchange Act section
13(n).\89\ An SDR would be required to comply with the final rules
establishing the duties and core principles resulting from proposed
rules 13n-4 through 13n-11 as soon as the Commission approves the SDR's
application for registration.\90\
---------------------------------------------------------------------------
\89\ SDR Proposing Release at 77367-9.
\90\ 15 U.S.C. 78m(n). Proposed rule 13n-1(c) provides that the
Commission shall grant the registration of an SDR if the Commission
finds that such SDR is so organized, and has the capacity, to be
able to assure the prompt, accurate, and reliable performance of its
functions as an SDR, comply with any applicable provision of the
federal securities laws and the rules and regulations thereunder,
and carry out its functions in a manner consistent with the purposes
of Exchange Act section 13(n) and the rules and regulations
thereunder. See SDR Proposing Release at 77313.
---------------------------------------------------------------------------
b. Expiration of Exemptions Granted Pursuant to the Effective Date
Order
The Effective Date Order granted temporary exemptions from
compliance with a number of provisions of section 13(n) of the Exchange
Act that apply to SDRs generally, as they do not require a rulemaking
or other Commission action or do not apply only to registered SDRs.
Specifically, the Effective Date Order provided temporary exemptions
from compliance with the following sections:
Section 13(n)(5)(D)(i) of the Exchange Act,\91\ which
would require an SDR to provide direct electronic access to the
Commission or any designee of the Commission;
---------------------------------------------------------------------------
\91\ 15 U.S.C. 78m(n)(5)(D)(i).
---------------------------------------------------------------------------
Section 13(n)(5)(F) of the Exchange Act,\92\ which would
require an SDR to maintain the privacy of any and all SB swap
transaction information that the SDR receives from an SBSD,
counterparty, or other registered entity;
---------------------------------------------------------------------------
\92\ Id. at 78m(n)(5)(F).
---------------------------------------------------------------------------
Section 13(n)(5)(G) of the Exchange Act,\93\ which would
require an SDR, on a confidential basis and after notifying the
Commission of the request, to make available all data obtained by the
SDR, including individual counterparty trade and position data, to
certain enumerated entities;
---------------------------------------------------------------------------
\93\ Id. at 78m(n)(5)(G).
---------------------------------------------------------------------------
Section 13(n)(5)(H) of the Exchange Act,\94\ which would
require an SDR, before sharing information with certain enumerated
entities, to (1) receive a written agreement from each such entity that
the entity will abide by certain confidentiality provisions relating to
the information on SB swap transactions that is provided and (2) have
each such entity agree to indemnify the SDR and the Commission for any
expenses arising from litigation relating to the information provided;
---------------------------------------------------------------------------
\94\ Id. at 78m(n)(5)(H).
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Section 13(n)(7)(A) of the Exchange Act,\95\ which would
prohibit an SDR from adopting any rule or taking any action that
results in any unreasonable restraint of trade or impose any material
anticompetitive burden on the trading, clearing, or reporting of
transactions;
---------------------------------------------------------------------------
\95\ Id. at 78m(n)(7)(A).
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Section 13(n)(7)(B) of the Exchange Act,\96\ which would
require an SDR to establish transparent governance arrangements for
certain enumerated reasons; and
---------------------------------------------------------------------------
\96\ Id. at 78m(n)(7)(B).
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Section 13(n)(7)(C),\97\ which would require an SDR to
establish rules to minimize conflicts of interest and
[[Page 35633]]
establish a process for resolving conflicts of interest.
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\97\ Id. at 78m(n)(7)(C).
These temporary exemptions will expire upon the earlier of: (1) The
date the Commission grants registration to the SDR; and (2) the
earliest compliance date set forth in any of the final rules regarding
the registration of SDRs. In setting the compliance dates of final
rules resulting from the SDR Proposing Release, the Commission intends
to consider whether it is necessary or appropriate in the public
interest, and consistent with the protection of investors, to take
further action with regard to any of the above-described exemptions.
(ii) Regulation SBSR Proposing Release
In accordance with sections 763 and 766 of the Dodd-Frank Act, the
Commission issued the Regulation SBSR Proposing Release, which, among
other things, proposed timeframes for the reporting of SB swap
information to registered SDRs or to the Commission and for the public
dissemination of SB swap transaction, volume, and pricing
information.\98\ As noted in the Regulation SBSR Proposing Release, the
Commission understands that market participants would need a reasonable
period of time in which to acquire or configure the necessary systems,
engage and train the necessary staff, and develop and implement the
necessary policies and procedures that would be required by the final
rules regarding SB swap transaction reporting.\99\ Accordingly, through
proposed rule 910, as set forth in the Regulation SBSR Proposing
Release, the Commission aimed to provide clarity as to SB swap
reporting and public dissemination timelines by establishing a phased-
in compliance schedule for those requirements.\100\ The following
section discusses certain issues concerning the timing-related aspects
of the Regulation SBSR Proposing Release.
---------------------------------------------------------------------------
\98\ See Regulation SBSR Proposing Release at 75287-8.
\99\ Id. at 75242.
\100\ Id. at 75242-4.
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A. Reporting Requirements for Pre-Enactment SB Swaps
Proposed rule 910(a) would have required reporting parties to
report any pre-enactment SB swaps required to be reported pursuant to
proposed rule 901(i) to a registered SDR no later than January 12, 2012
(180 days after the effective date of the Dodd-Frank Act), pursuant to
the requirement of section 3C(e)(1) of the Exchange Act.\101\ However,
as acknowledged by the Commission in the Effective Date Order, ``even
after an SDR is registered, market participants will need additional
time to establish connectivity and develop appropriate policies and
procedures to be able to deliver information to the registered SDR.''
\102\ Accordingly, pursuant to the Effective Date Order, the Commission
granted temporary exemptive relief such that no person would be
required to report pre-enactment SB swaps pursuant to section 3C(e)(1)
of the Exchange Act to a registered SDR until six months after the SDR
that is capable of accepting the asset class of the pre-enactment SB
swap is registered by the Commission.\103\ The Regulation SBSR
Proposing Release proposed to define pre-enactment SB swaps as those
entered into before July 21, 2010 the terms of which had not expired as
of that date.\104\
---------------------------------------------------------------------------
\101\ Id. at 75243. Section 3C(e)(1) of the Exchange Act
requires SB swaps entered into before the date of enactment of
section 3C to be reported to a registered SDR or the Commission no
later than 180 days after the effective date of section 3C (i.e., no
later than January 12, 2012). 15 U.S.C. 78c-3(e)(1).
\102\ Effective Date Order at 36291.
\103\ Id. at 36291.
\104\ Regulation SBSR Proposing Release at 75209, 75223-4.
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B. Compliance With Other Reporting Requirements
As discussed in section B.(i) above, the Commission believes SDRs
should be required to register with the Commission and comply with the
duties, core principles and other requirements applicable to SDRs, as
soon as practicable after the effectiveness of the Definitional Rules
and the proposal of the Cross-Border Rules, taking into account the
necessity of SB swap market participants having an appropriate amount
of time to analyze and understand the final rules and develop and test
new policies and systems required as a result of them. The Commission
also believes compliance with final rules resulting from the Regulation
SBSR Proposing Release should be required as soon as practicable after
the effectiveness of the Definitional Rules and the proposal of the
Cross-Border Rules. Accordingly, the reporting of SB swap transaction
information to registered SDRs and the dissemination of SB swap
transaction information to the public pursuant to the implementation
timeframes that would be set forth by the Commission final rules
resulting from the Regulation SBSR Proposing Release would begin as
soon as practicable after the registration of SDRs, also taking into
account the necessity of SB swap market participants having an
appropriate amount of time to analyze and understand the final rules
and develop and test new policies and systems required as a result of
them, which would be the triggering event for the reporting obligations
contemplated by the Regulation SBSR Proposing Release.\105\
---------------------------------------------------------------------------
\105\ Id. at 75243 n.156.
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C. Establishment of Block Trade Thresholds
With respect to defining block trade thresholds for SB swaps, the
Commission stated in the Regulation SBSR Proposing Release that ``it
would be appropriate to seek additional comment from the public, as
well as to collect and analyze additional data on the [SB swap] market,
in the coming months'' before proposing specific block trade
thresholds.\106\ The Commission further noted its intent to propose
specific block trade thresholds simultaneously with the adoption of
final rules resulting from the Regulation SBSR Proposing Release.\107\
---------------------------------------------------------------------------
\106\ Id. at 75228.
\107\ Id.
---------------------------------------------------------------------------
The Commission recognizes that current data on the nature and size
of SB swap transactions reflects a market that is not yet subject to
any of the requirements to be adopted under Title VII, including the
requirement that such SB swap transaction data be disseminated to the
public. Data collected after these requirements are implemented may
provide additional insight into the SB swap market, including whether
these requirements are associated with a change in the nature and size
of SB swap transactions. The Commission therefore is considering
various means of how to approach establishing block trade thresholds,
including, for example, establishing an initial period during which
information regarding SB swaps would be reported (and subsequently
disseminated publicly) on a delayed basis, while giving reporting
parties the option of reporting their trades on a shorter timeframe.
The Commission continues to analyze the comments it received
relating to block trade issues, and to consider how to implement the
reporting and dissemination requirements of sections 763 and 766 of the
Dodd-Frank Act in an appropriate manner. The Commission notes that it
already has proposed a staged implementation schedule for the final
rules resulting from the Regulation SBSR Proposing Release via proposed
rule 910.\108\ The
[[Page 35634]]
Commission also is considering whether and how it might revise that
schedule in light of comments received, and whether certain issues
relating to block trades--such as the required time delays--should be
reopened for comment in connection with the future Commission proposal
regarding how to define block thresholds.
---------------------------------------------------------------------------
\108\ See id. at 75243-4.
---------------------------------------------------------------------------
(iii) Request for Comment
Should the Commission adopt a phase-in of the SDR duties,
core principles and other requirements resulting from the SDR Proposing
Release that includes sequenced effective and compliance dates aimed at
providing time for SDRs to complete their analysis of the final rules,
develop and test systems, submit a completed Form SDR, and be in a
position to demonstrate compliance with the federal securities laws and
the rules and regulations thereunder? How would such a phase-in period
affect the goals of Title VII's reforms of the SB swap market? Would
there be potential advantages or disadvantages of such a phase-in
period? If so, what would they be? If there are potential
disadvantages, what steps could be taken to mitigate them?
Should the Commission offer SDRs an avenue to secure a
grace period to defer compliance with some or all requirements of
section 13(n) of the Exchange Act and the SDR duties, core principles
and other requirements resulting from the SDR Proposing Release, in
order for SDRs to obtain additional time to demonstrate compliance with
the SDR duties, core principles and other requirements and to obtain
registration with the Commission? If so, for which requirements should
a grace period be made available and how long should such a grace
period be? Should such a grace period be conditioned on any steps taken
by the SDR, such as submission of a complete Form SDR within a certain
time-frame? Would there be potential advantages or disadvantages of
such a grace period? If so, what would they be? If there are potential
disadvantages, what steps could be taken to mitigate them?
Should SDRs be in compliance with all duties, core
principles and other requirements resulting from the SDR Proposing
Release at the time they seek to register with the Commission? Why or
why not? Should compliance with some of these requirements be delayed
until a later point in time? If so, for which requirements, until what
point, and why should compliance be delayed? How would such delayed
compliance affect the goals of Title VII's reforms of the SB swap
market? Would there be potential advantages and disadvantages of such
delayed compliance? If so, what would they be? If there are potential
disadvantages, what steps could be taken to mitigate them?
Is it appropriate for the final rules pertaining to the
registration and regulation of SDRs resulting from the SDR Proposing
Release and the final rules pertaining to the reporting and
dissemination of SB swap transaction data resulting from the Regulation
SBSR Proposing Release to be the first rules (except as otherwise noted
in sections II.C.(i) and (ii) below) after the effectiveness of the
Definitional Rules and the proposal of the Cross-Border Rules with
which compliance is required? Why or why not?
In determining when SDRs should be required to register
with the Commission, should the Commission take into account other
authorities', including the CFTC's, timing for a parallel or similar
requirement? Why or why not? If so, what is the most appropriate manner
of sequencing in relation to those potentially differing timelines?
What would the potential advantages and disadvantages of doing so be?
If there are potential disadvantages, what steps could be taken to
mitigate them?
In determining when SB swap transaction data should be
reported to registered SDRs, should the Commission take into account
other authorities', including the CFTC's, timing for a parallel or
similar requirement? Why or why not? If so, what is the most
appropriate manner of sequencing in relation to those potentially
differing timelines? What would the potential advantages and
disadvantages of doing so be? If there are potential disadvantages,
what steps could be taken to mitigate them?
Should the Commission defer its proposed rulemaking
regarding block thresholds until after SDRs register with the
Commission and the Commission begins to receive and analyze data
required to be reported under final rules resulting from the Regulation
SBSR Proposing Release? Why or why not? If yes, how many months of data
would be sufficient? How would such a deferral affect the goals of
Title VII's reforms of the SB swap market? Would there be potential
advantages and disadvantages of such a deferral? If so, what would they
be? If there are potential disadvantages, what steps could be taken to
mitigate them?
Should the Commission defer its proposed rulemaking
regarding block thresholds until after SB swap transaction information
begins to be publicly disseminated? Why or why not? If yes, how many
months of public dissemination would be sufficient? How would such a
deferral affect the goals of Title VII's reforms of the SB swap market?
Would there be potential disadvantages of such a deferral? If so, what
would they be and what steps could be taken to mitigate them?
In the absence of the definition of any block trade
thresholds by the Commission, what form could SB swap transaction data
dissemination take? For example, should all trades be disseminated with
a delay? If so, how long should that delay be? Furthermore, could the
public dissemination of SB swap transaction data be phased such that
initially, public dissemination is limited only to certain SB swap
instruments? If so, which instruments? If not, why not? Alternatively,
should the Commission set initial block thresholds based upon data
currently available about the SB swap market and undertake a study to
determine whether the thresholds should be modified as a result of how
the market develops? How would each of these approaches affect the
goals of Title VII's reforms of the SB swap market? What are the
potential advantages and disadvantages of each of these approaches? If
there are potential disadvantages, what steps could be taken to
mitigate them?
Can the impact of post-trade transparency on market
behavior be inferred from data collected before post-trade transparency
is required? Why or why not?
In determining when SB swap transaction data should be
disseminated to the public, should the Commission take into account
other authorities', including the CFTC's, timing for a parallel or
similar requirement? Why or why not? If so, what is the most
appropriate manner of sequencing in relation to those potentially
differing timelines? What would the potential advantages and
disadvantages of doing so be? If there are potential disadvantages,
what steps could be taken to mitigate them?
C. Mandatory Clearing
The following discussion explains the sequencing of compliance
dates of the final rules regarding mandatory clearing of SB swaps
pursuant to section 3C of the Exchange Act.\109\ These rules include
the process for submitting SB swaps for mandatory clearing
determinations, the standards with which clearing agencies must comply,
and the end-user exception to
[[Page 35635]]
mandatory clearing. As explained below, the Commission believes it may
be appropriate for the procedural rules related to mandatory clearing
determinations to be adopted before the rules further defining the
terms ``swap,'' ``security-based swap,'' ``security-based swap
agreement,'' and ``mixed swap'' are adopted and/or effective or before
the Cross-Border Rules are proposed. However, given the dependency of
the SB swap mandatory clearing regime upon other Title VII final rules
yet to be adopted, the Commission believes SB swaps should not be
required to be cleared until after the later of: (1) The compliance
date of certain of the final rules resulting from the Clearing Agency
Standards Proposing Release; (2) the compliance date of final rules
resulting from the End-User Clearing Exception Proposing Release; and
(3) the Commission determining whether to propose amendments to the
existing net capital and customer protection requirements applicable to
broker-dealers with regard to SB swap clearing through such broker-
dealers and whether to address portfolio margining with swaps.
---------------------------------------------------------------------------
\109\ 15 U.S.C. 78c-3.
---------------------------------------------------------------------------
(i) Clearing Procedures Proposing Release
The Commission believes it may be appropriate for final rules
resulting from the Clearing Procedures Proposing Release to be adopted
before the rules further defining the terms ``swap,'' ``security-based
swap,'' ``security-based swap agreement,'' and ``mixed swap'' are
adopted and/or effective or before the Cross-Border Rules are proposed.
The Commission, in the Clearing Procedures Proposing Release, also
proposed rule and form amendments to implement the requirement that any
financial market utility (``FMU''), which may include registered
clearing agencies, that is designated as systemically important by the
Financial Stability Oversight Council (``FSOC'') pursuant to Title VIII
of the Dodd-Frank Act provide 60 days advance notice to the Commission
of changes to its rules, procedures, or operations that could
materially affect the nature or level of risks presented by the
FMU.\110\ These final rule and form amendments would need to be
effective for registered clearing agencies designated by the FSOC as
systemically important because such clearing agencies would be required
to begin complying with the advance notice requirement as soon as they
are designated as systemically important.\111\ To fully capture the
efficiencies contemplated by this effort to produce a single package of
clearing procedural rules, it therefore might be appropriate to adopt
the mandatory clearing submission process rules earlier in the
implementation process.
---------------------------------------------------------------------------
\110\ See Clearing Procedures Proposing Release at 82501-3.
\111\ The Commission understands that the FSOC currently is in
the process of considering which FMUs to designate as systemically
important in accordance with Title VIII of the Dodd-Frank Act and
the rules of the FSOC adopted in July 2011. See Authority to
Designate Financial Market Utilities as Systemically Important, 76
FR 44763 (July 27, 2011).
---------------------------------------------------------------------------
However, given the number of final rules the Commission
contemplates would need to be in place before the first SB swap
mandatory clearing determination can be made, the Commission is
considering bifurcating the effectiveness of final rules resulting from
the Clearing Procedures Proposing Release for the purposes of Titles
VII and VIII of the Dodd-Frank Act such that the mandatory clearing
process for the purposes of Title VII would be effective upon a date
later than the rules relating to advance notice under Title VIII. Under
such an approach, the Commission would not begin reviewing SB swaps to
determine whether such SB swaps are required to be cleared until such
later date.
(ii) Clearing Agency Standards
The Commission appreciates the views of commenters who have
suggested that market participants that perform central clearing
services, like clearing agencies, be required to be in compliance with
the rules resulting from the Clearing Agency Standards Proposing
Release pertaining to their governance and operation before compliance
is required with mandatory clearing requirements.\112\ As discussed in
the Clearing Agency Standards Proposing Release, the rules proposed in
that release are aimed at reducing risk within the financial system by
facilitating prompt and accurate clearance and settlement of all
securities transactions and the safety and soundness of clearing
agencies.\113\ Given that, the Commission believes clearing agencies
should be required to be in compliance with certain key requirements
resulting from the Clearing Agency Standards Proposing Release before
counterparties are required to clear any SB swaps.
---------------------------------------------------------------------------
\112\ See, e.g., letter from Committee on Capital Markets
Regulation (June 24, 2011), 76 FR 25274, at 2 (CFTC only letter;
recommending that before requiring ``mandatory central clearing, the
CFTC first needs to finalize the rules for clearinghouses, including
margin, governance, financial resources, and conflicts of interest.
This will enable clearinghouses to be in compliance before mandatory
clearing begins.'').
\113\ Clearing Agency Standards Proposing Release at 14474.
---------------------------------------------------------------------------
To facilitate this ordering, the Commission believes the compliance
dates of final rules resulting from the Clearing Agency Standards
Proposing Release should be tranched and broadly sequenced by rule
type. Taking into consideration comments received to date by the
Commission, we believe the first subset of final rules with which
compliance should be required are those resulting from proposed rule
17Ad-22 of the Clearing Agency Standards Proposing Release because this
rule would address issues central to clearing agency governance,
operation, participation standards, and risk management practices.\114\
The Commission anticipates that compliance with this subset of final
rules would be necessary before any SB swaps are required to be
cleared.
---------------------------------------------------------------------------
\114\ Proposed rule 17Ad-22 would augment the existing statutory
requirements for clearing agencies under the Exchange Act by
establishing minimum requirements regarding how clearing agencies
must maintain effective risk management procedures and controls as
well as meet the statutory requirements under the Exchange Act on an
ongoing basis. See Clearing Agency Standards Proposing Release at
14476-14492, 14537-14539.
---------------------------------------------------------------------------
Additionally, the Commission understands that the final rules
resulting from proposed rule 17Ad-22 should be effective at the time,
or soon after, registered clearing agencies are designated by the FSOC
as systemically important.\115\ Under such an approach, these rules,
together with the final rules resulting from the Clearing Procedures
Proposing Release that relate to the advance notice requirement of
Title VIII of the Dodd-Frank Act, might need to be adopted before the
rules further defining the terms ``swap,'' ``security-based swap,''
``security-based swap agreement,'' and ``mixed swap'' are adopted and/
or effective or before the Cross-Border Rules are proposed.
---------------------------------------------------------------------------
\115\ See Dodd-Frank Act section 805, 12 U.S.C. 5464.
---------------------------------------------------------------------------
We believe compliance with a second subset of rules for clearing
agencies--those focusing more specifically on matters of governance and
mitigation of conflicts of interest--should be complied with
subsequently, followed by compliance with a third subset composed of
the requirements that address more specific components of a clearing
agency's internal operations and administrative practices and other
rules concerning clearance and settlement services. The Commission
preliminarily believes the clearing of SB swaps could commence before
compliance is required with these two subsets of rules.
[[Page 35636]]
The Commission understands the views of those commenters that
indicate that clearing agencies will need sufficient time to adjust
their current practices and establish new policies, procedures, and
processes necessary to comply with final rules resulting from the
Clearing Agency Standards Proposing Release.\116\ Accordingly, the
Commission anticipates that the compliance dates set forth in such
final rules would reflect these considerations by providing clearing
agencies with an appropriate amount of time to comply with these final
rules.
---------------------------------------------------------------------------
\116\ See, e.g., letter from The Options Clearing Corporation
(Apr. 29, 2011), 76 FR 14472, at 17 (noting that Subtitle B of Title
VII of the Dodd-Frank Act will require clearing agencies, at a
minimum, to ``develop[] extensive new policies and procedures,
draft[], propos[e] and obtain[] approval of necessary rules and
rules changes, execut[e] plans to raise additional financial
resources, conduct[] extensive internal training, hir[e] additional
compliance personnel, and many other tasks.'').
---------------------------------------------------------------------------
(iii) End-User Exception From Mandatory Clearing
Before SB swaps are required to be cleared, the Commission believes
compliance with final rules resulting from the End-User Clearing
Exception Proposing Release should be required.\117\ Section
3C(g)(1)(C) requires that a counterparty electing the end-user
exception notify the Commission as to how it generally meets its
financial obligations associated with non-cleared SB swaps.\118\ The
End-User Exception Proposing Release proposed that a counterparty that
invokes the clearing exception under section 3C(g)(1) of the Exchange
Act would satisfy the notice requirement of section 3C(g)(1)(C) by
delivering or causing such notice to be delivered to a registered SDR
(or to the Commission if no SDR is available) in the form and manner
required by final rules resulting from the Regulation SBSR Proposing
Release \119\ together with additional information that is intended to
affirm compliance with particular requirements of the Exchange Act and
to aid the Commission in its efforts to prevent abuse of the end-user
exception.\120\
---------------------------------------------------------------------------
\117\ Section 3C(g)(1) of the Exchange Act, 15 U.S.C. 78c-
3(g)(1).
\118\ 15 U.S.C. 78c-3(g)(1)(C).
\119\ See End-User Exception Proposing Release at 80011.
\120\ See id. at 79995.
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As described in section B above, the Commission anticipates that
final rules establishing the SDR registration and regulation regime
resulting from the SDR Proposing Release and final rules resulting from
the Regulation SBSR Proposing Release would be the first sets of final
rules under Title VII with which compliance would be required,
following the effectiveness of the Definitional Rules and the proposal
of the Cross-Border Rules. Given this, compliance with final rules
resulting from the Regulation SBSR Proposing Release likely would be
required before SB swaps are required to be cleared and before the
compliance date of final rules resulting from the End-User Clearing
Exception Proposing Release. The Commission believes an appropriate
amount of time should be provided between the compliance dates of final
rules resulting from the Regulation SBSR Proposing Release and the
compliance date of final rules resulting from the End-User Clearing
Exception Proposing Release so that SB swap counterparties that seek to
avail themselves of the end-user clearing exception would already be
submitting SB swap transaction information to registered SDRs.
(iv) Mandatory Clearing Determinations
As described above, upon the compliance date of the mandatory
clearing submission process rules for SB swap submissions under Title
VII of the Dodd-Frank Act, the Commission would begin reviewing SB
swaps submitted by clearing agencies to determine whether such SB swaps
would be required to be cleared. Pursuant to section 3C(b)(3) of the
Exchange Act,\121\ the Commission is required to make such
determinations not later than 90 days after the submission has been
made, or has been considered to have been made,\122\ unless the
submitting clearing agency agrees to an extension.
---------------------------------------------------------------------------
\121\ 15 U.S.C. 78c-3(b)(3).
\122\ Section 3C(b)(2)(B) of the Exchange Act provides that any
security-based swap or group, category, type, or class of security-
based swaps listed for clearing by a clearing agency as of the
enactment of section 3C(b)(2)(B) shall be considered submitted to
the Commission. 15 U.S.C. 78c3(b)(2)(B).
---------------------------------------------------------------------------
Section 3C(b)(2) of the Exchange Act requires that a clearing
agency submit to the Commission the SB swaps it plans to accept for
clearing in order for the Commission to determine whether the SB swaps
described in the submission are required to be cleared.\123\
Additionally, pursuant to section 3C(b)(1) of the Exchange Act, on an
ongoing basis, the Commission shall review SB swaps to make a
determination of whether such SB swaps should be required to be
cleared.\124\
---------------------------------------------------------------------------
\123\ Id. at 78c-3(b)(2). As provided in Exchange Act section
3C(b)(2), such submissions and determinations can be made on an
individual basis or by group, category, type, or class of SB swaps.
Id.
\124\ Id. at 78c-3(b)(1). As provided in Exchange Act section
3C(b)(1), such determinations can be made on an individual basis or
by group, category, type, or class of SB swaps. Id.
---------------------------------------------------------------------------
The Commission recognizes the importance of communicating clearly
and in a timely fashion to SB swap market participants which SB swaps
will be required to be cleared.\125\ One way in which the Commission
could help facilitate such communication is to require the mandatory
clearing of SB swaps only some specified amount of time after
publishing its determination that such SB swaps are required to be
cleared so that SB swap market participants are given appropriate
notice of the Commission's SB swap clearing determinations. This
approach would afford the clearing agency and its members time to
prepare to accommodate the SB swaps that will be required to be
cleared. Doing so also would allow SB swap market participants time to
establish appropriate clearing arrangements with the clearing agency or
indirect clearing arrangements with members of the clearing
agency.\126\ Furthermore, the Commission believes early designation of
the SB swaps that will be required to be cleared would facilitate the
voluntary clearing of such products prior to the compliance date of the
clearing requirement.
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\125\ See, e.g., letter from the International Swaps and
Derivatives Association, Inc. (Feb. 14, 2011), File No. S7-44-10, at
10-11 (recommending that the Commission consider an extended period
between a determination being made that a SB swap is required to be
cleared and clearing becoming mandatory on that product, as ``[t]his
period would provide market participants the opportunity to make
themselves appropriately ready to clear mandated transactions
without risking either (i) disruption to their use of derivatives
for hedging or (ii) noncompliance with the law.'').
\126\ See, e.g., letter from Financial Services Forum, Futures
Industry Association, International Swaps and Derivatives
Association, and Securities Industry and Financial Markets
Association (May 4, 2011), File No. S7-27-10, at 5; letter from The
Financial Services Roundtable (May 12, 2011), File No. 4-625, at 8-
10.
---------------------------------------------------------------------------
(v) Expiration of Exemptions Granted Pursuant to the Effective Date
Order
The Effective Date Order granted a temporary exemption from
compliance with Exchange Act section 3C(g)(5)(B), which would permit a
counterparty to an SB swap that is not subject to the mandatory
clearing requirement to elect to require the clearing of such SB swap
in certain circumstances.\127\ In granting this exemption, the
Commission noted the exemption was needed because there currently are
no central counterparties offering customer
[[Page 35637]]
clearing of SB swaps and because additional action by the Commission
would be necessary to address segregation and other customer protection
issues.\128\ The exemption from compliance with the requirements of
section 3C(g)(5)(B) will expire upon the earliest compliance date set
forth in any of the final rules regarding section 3C(b) of the Exchange
Act,\129\ which pertains to the mandatory clearing submission
process.\130\ In setting the compliance date for the final rules
pertaining to the mandatory clearing submission process, the Commission
intends to consider whether it is necessary or appropriate in the
public interest, and consistent with the protection of investors, to
take further action with regard to this temporary exemption.
---------------------------------------------------------------------------
\127\ Effective Date Order at 36291.
\128\ Id.
\129\ Id.
\130\ 15 U.S.C. 78c-3(b).
---------------------------------------------------------------------------
The Effective Date Order also granted a temporary exemption from
compliance by registered clearing agencies with Exchange Act section
3C(j) until the earliest compliance date set forth in any of the final
rules regarding section 3C(j)(2) of the Exchange Act.\131\ Exchange Act
section 3C(j) requires registered clearing agencies to designate a
chief compliance officer and establishes the duties of the chief
compliance officer.\132\ The Clearing Agency Standards Proposing
Release contained proposed rules regarding section 3C(j)(2) of the
Exchange Act.\133\ In setting the compliance date for the final rules
regarding section 3C(j)(2), the Commission intends to consider whether
it is necessary or appropriate in the public interest, and consistent
with the protection of investors, to take further action with regard to
this temporary exemption.
---------------------------------------------------------------------------
\131\ Effective Date Order at 36291-2.
\132\ 15 U.S.C. 78c-3(j).
\133\ Clearing Agency Standards Proposing Release at 14499-
14500.
---------------------------------------------------------------------------
(vi) Request for Comment
Are there other final rules or sets of final rules beyond
those resulting from the SDR Proposing Release and the Regulation SBSR
Proposing Release with which compliance should be required before
compliance is required with final rules resulting from the End-User
Clearing Exception Proposing Release? If so, which ones, and why?
Alternatively, should compliance with final rules resulting from the
End-User Clearing Exception Proposing Release be accelerated to allow
for the use of the exception to be established by those rules before
compliance with final rules resulting from the SDR Proposing Release
and the Regulation SBSR Proposing Release is required? For example,
should the Commission consider temporarily de-linking the notice
requirement of the end-user clearing exception from certain of the
final rules resulting from the SDR Proposing Release and the Regulation
SBSR Proposing Release, such that it could be utilized earlier in the
implementation process? Why or why not? What would the potential
advantages and disadvantages of doing so be? If there are potential
disadvantages, what steps could be taken to mitigate them?
Would there be positive or negative consequences of the
Commission determining what SB swaps will be subject to mandatory
clearing and allowing a period of time prior to requiring the clearing
of such SB swaps? If so, what are the consequences, why would they
occur, and if there are negative consequences, what steps could be
taken to mitigate them? How would the allowance of such a period of
time affect the goals of Title VII's reforms of the SB swap market?
Has the Commission appropriately identified in the
discussion above those rules with which compliance should be required
before SB swaps are required to be cleared? Why or why not?
Are there other rules or sets of rules with which
compliance should be required before SB swaps are required to be
cleared? If so, which ones, and why?
Should the Commission require the mandatory clearing of SB
swaps for a subset of SB swap market participants, such as SBSDs and
their affiliates, before all of the final rules regarding the SBSD
registration and regulation regime are in place? If so, which subset of
SB swap market participants and why? Would doing so affect the goals of
the Title VII reforms of the SB swap market?
Should the Commission consider further phasing in such
submissions and determinations by type of SB swap? If so, what further
phasing in should occur? For example, should the Commission implement
the mandatory clearing submission process for credit-related SB swaps,
then for other SB swaps? \134\ Would such phasing in affect the goals
of the Title VII reforms of the SB swap market? Would there be
potential advantages and disadvantages of such phasing in? If so, what
would they be? If there are potential disadvantages, what steps could
be taken to mitigate them?
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\134\ ``Credit-related SB swaps'' means any SB swap that is
based, in whole or in part, on one or more instruments of
indebtedness (including loans), or on a credit event relating to one
or more issuers or securities, including but not limited to any SB
swap that is a credit default swap, total return swap on one or more
debt instruments, debt swaps, debt index swaps, or credit spread.
``Other SB swaps'' means any SB swap not described in the preceding
sentence.
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Should the Commission phase in mandatory clearing by type
of market participant? For example, should the Commission phase these
requirements in the manner proposed by the CFTC in its Clearing and
Trade Execution Implementation Proposal? \135\ What would the potential
advantages and disadvantages of doing so be? If there are potential
disadvantages, what steps could be taken to mitigate them?
---------------------------------------------------------------------------
\135\ See supra note 53 and the accompanying text for a
discussion of the CFTC Clearing and Trade Execution Implementation
Proposal.
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In determining when SB swaps would be required to be
cleared, should the Commission take into account the mandatory clearing
timelines of other authorities? Why or why not? If so, what is the most
appropriate manner of sequencing in relation to those potentially
differing timelines? What would the potential advantages and
disadvantages of doing so be? If there are potential disadvantages,
what steps could be taken to mitigate them?
D. SBSD and MSBSP Registration and Regulation
Pursuant to sections 3E \136\ and 15F \137\ of the Exchange Act,
the Commission must adopt rules pertaining to the regulation of SBSDs
and MSBSPs in the following areas:
---------------------------------------------------------------------------
\136\ 15 U.S.C. 78c-5.
\137\ 15 U.S.C. 78o-10.
---------------------------------------------------------------------------
Registration of SBSDs and MSBSPs;
Business conduct standards for SBSDs and MSBSPs;
Trade acknowledgment and verification of SB swap
transactions by SBSDs and MSBSPs;
Capital, margin and segregation requirements applicable to
SBSDs and MSBSPs; \138\ and
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\138\ In addition, the Commission intends to determine whether
to propose amendments to its rules regarding net capital and
customer protection requirements, Exchange Act Rule 15c3-1 and Rule
15c3-3, respectively, specifically with regard to SB swap activity
in a broker-dealer. The Commission understands that many members of
clearing agencies are dually-registered broker-dealers and futures
commission merchants and that much of the clearing of SB swaps may
occur through such dually-registered entities. See, e.g., letter to
the Commission from ICE Clear Credit LLC, dated November 7, 2011
(``ICE Clear Credit Letter''), available at: http://www.sec.gov/rules/petitions/2011/petn4-641.pdf (requesting exemptive relief from
the application of section 15(c)(3) of the Exchange Act and Rule
15c3-3 thereunder to allow ICE Clear Credit, and its members that
are dually-registered broker-dealers and futures commission
merchants, to, among other things: (1) Hold customer assets used to
margin, secure, or guarantee customer positions consisting of
cleared credit default swaps that include swaps and SB swaps in a
commingled customer omnibus account subject to section 4d(f) of the
Commodity Exchange Act; and (2) calculate margin for this commingled
customer account on a portfolio margin basis); see also Commodity
Exchange Act section 4d(F)(1) (making it unlawful for any person to,
among other things, accept money and securities from a swaps
customer for a cleared swap unless such person has registered with
the CFTC as a futures commission merchant). In light of the role
broker-dealers perform in clearing SB swaps, the Commission
recognizes the importance of considering net capital and customer
protection requirements with regard to SB swap clearing through a
broker-dealer prior to requiring that SB swaps be cleared.
The Commission also recognizes the importance of determining
whether margin for SB swaps that are required to be cleared can be
calculated on a portfolio margining basis, as there might be
customer capital-related efficiencies that result from holding SB
swap and swap positions in a single account as opposed to multiple
accounts. See ICE Clear Credit Letter at 6, 13-14. Commission staff
currently is evaluating the separate statutory and bankruptcy
regimes that apply to SB swaps and swap, and is working with the
CFTC staff to develop recommendations on any next steps.
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[[Page 35638]]
Reporting and recordkeeping requirements applicable to
SBSDs and MSBSPs.
The Commission understands that SBSDs and MSBSPs would need an
appropriate amount of time to determine whether they are required to
register with the Commission and if so, to put into place the necessary
infrastructure and documentation to comply with requirements ultimately
applicable to such entities.\139\ The following section discusses the
timing of the implementation of these requirements, the proposed
registration process set forth in the SB Swap Participant Registration
Proposing Release, and other related issues.
---------------------------------------------------------------------------
\139\ See, e.g., letter from Financial Services Roundtable (May
12, 2011), File No. 4-625, at 7-8, 11; letter from Financial
Services Forum, Future Industry Association, International Swaps and
Derivatives Association, and Securities Industry and Financial
Markets Association (May 4, 2011), File No. S7-27-10, at 9; letter
from International Swaps and Derivatives Association, Inc. (Jan. 24,
2011), 75 FR 71379, at 2 (CFTC only letter).
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(i) SBSD and MSBSP Registration and Regulatory Requirements
In the SB Swap Participant Registration Proposing Release, the
Commission proposed that SBSDs and MSBSPs conditionally register with
the Commission, and then convert such conditional registration to
``ongoing registration'' by filing a certification on or before the
``last compliance date.'' \140\ The SB Swap Participant Registration
Proposing Release also requested comment as to whether the Commission
should delay requiring registration until after the last compliance
date, rather than adopting a conditional registration process.\141\
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\140\ The term ``last compliance date'' is defined, in proposed
rule 15Fb2-1(e), to mean the latest date, designated by the
Commission, by which SBSDs and MSBSPs must comply with any of the
initial rules promulgated under section 15F of the Securities
Exchange Act of 1934, 15 U.S.C. 78o-10.
\141\ See SB Swap Participant Registration Release at 65788,
question 4.
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A number of sequencing issues arise in relation to compliance with
the requirements applicable to SBSDs and MSBSPs pursuant to sections 3E
and 15F of the Exchange Act that are relevant to both conditional and
non-conditional registration processes. Specifically, the Commission
understands that some of the requirements that would be applicable to
SBSDs and MSBSPs could be complied with by SBSDs and MSBSPs in a
relatively shorter amount of time, while others would require more
time. This, in turn, counsels against imposing all of the compliance
dates for these requirements at once and instead suggests phasing in
compliance by considering the amount of time estimated to be required
for compliance with the relevant provisions. For example, the
Commission understands from commenters that SBSDs and MSBSPs might need
a shorter amount of time to come into compliance with certain
recordkeeping rules applicable to such persons, as these rules likely
may not necessitate extensive modifications to SBSDs' and MSBSPs'
business practices.\142\
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\142\ See, e.g., letter from The Financial Services Roundtable
(May 12, 2011), File No. 4-625, at 5 (stating that ``recordkeeping
may rely on internal resources, and therefore may be able to be
implemented more quickly * * *.'').
---------------------------------------------------------------------------
Some commenters have indicated that SBSDs and MSBSPs might need
more time to come into compliance with final rules resulting from the
Business Conduct Standards Proposing Release, as adherence to these
standards and duties could involve changes to the practices, policies,
and procedures of SBSDs and MSBSPs.\143\ Among other things, these
proposed rules would require SBSDs and MSBSPs to communicate with their
SB swap counterparties in a fair and balanced manner \144\ and to make
certain disclosures to such counterparties,\145\ and would impose
additional requirements for dealings with ``special entities.'' \146\
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\143\ See, e.g., letter from the Futures Industry Association,
the International Swaps and Derivatives Association, and the
Securities Industry and Financial Markets Association (Aug. 26,
2011), 76 FR 42396; letter from Managed Funds Association (Aug. 29,
2011), 76 FR 42396, at 6-7 (noting that the requirements proposed in
the Business Conduct Standards Proposing Release would require
MSBSPs to implement new processes and procedures, which could result
in ``substantial costs'' and expenditure of ``substantial
resources'').
\144\ See proposed rule 15Fh-3(g), Business Conduct Standards
Proposing Release at 42418-19, 42455 (proposing to require SBSDs and
MSBSPs to communicate with counterparties in a fair and balanced
manner based on principles of fair dealing and good faith).
\145\ See, e.g., proposed rule 15Fh-3(b), id. at 42405-10, 42454
(proposing rules that would require disclosures by SBSDs and MSBSPs
to counterparties of information related to material risks and
characteristics the SB swap and material incentives or conflicts of
interest that an SBSD or MSBSP may have in connection with the SB
swap).
\146\ See, e.g., proposed rule 15Fh-5(a), id. at 42425-26, 42457
(proposing to require any SBSD or MSBSP that offers to enter into or
enters into an SB swap with a special entity to have a reasonable
basis to believe that the special entity has an ``independent
representative'' that meets certain specified requirements).
---------------------------------------------------------------------------
In addition, the Commission understands from commenters that
compliance with documentation standards resulting from the Trade
Documentation Proposing Release, which include standards relating to
confirmation, processing, netting, documentation, and valuation of all
SB swap transactions,\147\ may require more time for full
implementation. Documentation would need to be developed and processes
would need to be established to enable SBSDs and MSBSPs to document,
implement, and monitor these new requirements as applied to all SB swap
transactions.\148\ However, the Commission believes that some of these
documentation standards may require less time for compliance than
others.\149\
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\147\ See supra note 21.
\148\ See, e.g., letter from the International Swaps and
Derivatives Association (Feb. 22, 2011), 76 FR 3859 (noting, for
example, the ``heavy documentation burden'' that would be placed
upon the inception of transactions by the proposed rules); letter
from MarkitSERV (Feb. 22, 2011), 76 FR 3859, at 11 (noting that
``the proposed requirements regarding the confirmation process and
time periods for such confirmations would be demanding in many
cases.'').
\149\ As one commenter has noted, there are aspects of SB swap
transaction documentation that are easier to implement, and thus
could be implemented earlier, and others that may require a longer
implementation window, as ``aspects of the trade documentation rules
* * * would represent a significant shift from current industry best
practices.'' Letter from The Financial Services Roundtable (May 12,
2011), File No. 4-625, at 4.
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The Commission also understands that capital, margin, and
segregation requirements could have a significant impact upon the
business structure of SBSDs and MSBSPs and this impact could influence
the decision of whether a person registers with the Commission as such
or whether it restructures its SB swap business such that registration
is not required. Commenters have noted that the capital and margin
requirements required to be adopted by Title VII may result in
significant changes to the financial arrangements of the impacted
persons and, as a result, should be sequenced in a manner that
[[Page 35639]]
allows impacted persons enough time to plan to accommodate such
changes.\150\ Commenters also have noted that ample time would be
needed to adhere to the segregation requirements applicable to customer
collateral collected for cleared and uncleared SB swaps because these
requirements would necessitate the establishment of policies and
procedures related to the collection and maintenance of
collateral.\151\ Accordingly, the Commission preliminarily believes the
compliance date of these rules should reflect the amount of time that
SBSDs and MSBSPs might need to come into compliance with these new
requirements and plans to address this issue in the relevant final
rules.
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\150\ See, e.g., id. at 11 (noting that ``capital and margin
changes may lead to significant changes in available cash resources
that will have broader financial repercussions for affected
organizations, including end-users'' and recommending that the
Commission ``recognize the significance of these issues and allow
market participants sufficient time to revise their financial
planning to accommodate them.'').
\151\ See, e.g., letter from the Financial Services Forum,
Futures Industry Association, International Swaps and Derivatives
Association, and Securities Industry and Financial Markets
Association (May 4, 2011), File No. S7-27-10, at 5 (noting that
``[l]egal documentation, treatment of collateral, margin
requirements, account setup, and fee negotiations * * * between Swap
clearing houses and their clearing members will take significant
time.'').
---------------------------------------------------------------------------
Moreover, in the Cross-Border Rules, the Commission intends to
address the extent to which non-U.S. SB swap market participants would
be subject to the SBSD and MSBSP registration and regulatory
requirements. Such market participants would need time to consider the
extent to which these requirements apply to their SB swap business.
(ii) Other Timing Issues and Expiration of the Exemption Granted
Pursuant to the Effective Date Order
There are additional timing issues that are relevant regardless of
whether a conditional registration process is employed. Upon
registration, SBSDs and MSBSPs would be required to adhere to certain
self-operating provisions of section 15F of the Exchange Act,\152\
specifically, the requirement to designate a chief compliance officer
pursuant to section 15F(k)(1) of the Exchange Act \153\ and the
obligation of the chief compliance officer to adhere to the duties set
forth in section 15F(k)(2) of the Exchange Act.\154\ However, the chief
compliance officer may not be required to prepare and submit annual
reports to the Commission pursuant to section 15F(k)(3) of the Exchange
Act, as the process for doing so is subject to rulemaking by the
Commission \155\ and such rules may not have been adopted by the
Commission and/or require compliance at that time.\156\
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\152\ SB Swap Participant Registration Proposing Release at
65787.
\153\ 15 U.S.C. 78o-10(k)(1).
\154\ Id. at 78o-10(k)(2).
\155\ See id. at 78o-10(k)(3)(A).
\156\ These rules have been proposed as part of the Business
Conduct Standards Proposing Release. See proposed rule 15Fk-1(c),
Business Conduct Standards Proposing Release at 42459.
---------------------------------------------------------------------------
The Effective Date Order granted a temporary exemption from
compliance with section 3E(f) of the Exchange Act, which requires SBSDs
and MSBSPs to segregate initial margin amounts delivered by their
counterparties in uncleared SB swaps if requested to do so by such
counterparties.\157\ This temporary exemption will expire on the date
upon which the rules adopted by the Commission to register SBSDs and
MSBSPs become effective.\158\
---------------------------------------------------------------------------
\157\ 15 U.S.C. 78c-5(f).
\158\ Effective Date Order at 36294.
---------------------------------------------------------------------------
If the Commission adopts a conditional SBSD and MSBSP registration
process and this temporary exemption expires, SBSDs and MSBSPs would be
required to segregate initial margin amounts delivered by their
counterparties in uncleared SB swaps before the capital, margin, and
segregation rules are adopted or before compliance with such rules is
required. However, the Commission believes it would not be appropriate
to require SBSDs and MSBSPs to comply with Exchange Act section 3E(f)
before the Commission adopts and requires compliance with the rules
pertaining to the segregation of margin pursuant to section 3E of the
Exchange Act.\159\ Given this, if the Commission determines to adopt a
conditional registration regime, the Commission will consider whether
it is necessary or appropriate in the public interest, and consistent
with the protection of investors, to extend the exemption from
compliance with section 3E(f) of the Exchange Act until the later of:
(1) The date upon which SBSDs and MSBSPs are required to register with
the Commission; and (2) the last compliance date of any of the final
rules to be adopted under sections 3E and 15F of the Exchange Act.
---------------------------------------------------------------------------
\159\ 15 U.S.C. 78c-5.
---------------------------------------------------------------------------
(iii) Request for Comment
Should the registration of SBSDs and MSBSPs be required
before compliance with some, but not all, of the rules to be adopted
under sections 3E and 15F of the Exchange Act is required? Why or why
not? If yes, what would the impact of doing so be upon the goals of
Title VII's reforms of the SB swap market?
What would be the advantages and disadvantages of
requiring SBSDs and MSBSPs to register with the Commission prior to the
compliance date of the capital, margin, and segregation requirements?
If there are potential disadvantages, what steps could be taken to
mitigate them? Would SBSDs and MSBSPs be subject to additional costs or
other burdens if the Commission were to require such persons to
register with the Commission prior to the compliance date for the
capital, margin, and segregation requirements? Why or why not? What
would the impact of doing so be upon the goals of Title VII's reforms
of the SB swap market?
In determining when SBSDs and MSBPs should be required to
register with the Commission, should the Commission take into account
the CFTC's timing for its parallel requirement and/or the timing of
other jurisdictions? Why or why not? If so, what is the most
appropriate manner of sequencing in relation to those potentially
differing timelines? What would the potential advantages and
disadvantages of doing so be? If there are potential disadvantages,
what steps could be taken to mitigate them?
What would be the advantages and disadvantages of
requiring SBSDs and MSBSPs to comply with final rules resulting from
the Business Conduct Standards Proposing Release prior to the
compliance date of the capital, margin, and segregation requirements
and vice versa? If there are potential disadvantages, what steps could
be taken to mitigate them? Would SBSDs and MSBSPs be subject to
additional costs or other burdens if the Commission were to require
compliance with final rules resulting from the Business Conduct
Standards Proposing Release prior to the compliance date of the
capital, margin, and segregation requirements? Why or why not? What
would the impact of doing so be upon the goals of Title VII's reforms
of the SB swap market?
Would SBSDs and MSBSPs be subject to additional costs or
other burdens if the Commission were to require compliance with the
capital, margin, and segregation requirements prior to the compliance
date of the business conduct standards? Why or why not? What would the
impact of doing so be upon the goals of Title VII's reforms of the SB
swap market?
Should compliance with the final rules to be adopted under
sections 3E and 15F of the Exchange Act be further sequenced in some
manner beyond the
[[Page 35640]]
estimated amount of time needed for compliance, such as by SB swap
market participant type (i.e., SBSD or MSBSP)? If so, how? Are there
other factors that should be considered in establishing the compliance
dates for these rules?
In determining when SBSDs and MSBPs should be subject to
the final rules to be adopted under sections 3E and 15F of the Exchange
Act, should the Commission take into account the CFTC's timing for its
parallel requirements and/or the timing of other jurisdictions? Why or
why not? If so, what is the most appropriate manner of sequencing in
relation to those potentially differing timelines? What would the
potential advantages and disadvantages of doing so be? If there are
potential disadvantages, what steps could be taken to mitigate them?
Should the Commission phase the introduction of the SB
swap trade documentation and margining requirements by type of SB swap
market participant? For example, should the Commission phase these
requirements in the manner proposed by the CFTC in its Trading
Documentation and Margining Implementation Proposal? \160\ What would
the potential advantages and disadvantages of doing so be? If there are
potential disadvantages, what steps could be taken to mitigate them?
---------------------------------------------------------------------------
\160\ See supra note 53 and the accompanying text for a
discussion of the CFTC Clearing and Trade Execution Implementation
Proposal.
---------------------------------------------------------------------------
E. SB SEF Registration and Regulation and the Mandatory Trade Execution
Requirement
The following section discusses timing issues pertaining to the
implementation of the registration requirements and core principles
applicable to SB SEFs as set forth in section 3D of the Exchange Act
\161\ and the mandatory trade execution requirement as set forth in
section 3C(h) of the Exchange Act.\162\ This section also discusses the
timing of the compliance dates of final rules resulting from Proposed
Regulation MC that would be applicable to SB SEFs and the sequencing of
the mandatory trade execution requirement as it relates to both the
mandatory clearing requirement and the exception from the mandatory
trade execution requirement for any SB swap that is not made available
to trade by an exchange or SB SEF. Finally, this section discusses the
timing of the expiration of the temporary exemptions granted in the
Effective Date Order \163\ and the Exchange Act Exemptive Order \164\
that permit certain persons that engage in SB swap activities to
continue to do so until the earliest compliance date set forth in any
final rules regarding the registration of SB SEFs.
---------------------------------------------------------------------------
\161\ 15 U.S.C. 78c-4.
\162\ Id. at 78c-3(h). See section II.E.(iii) infra for a
discussion of the mandatory trade execution requirement set forth in
section 3C(h) of the Exchange Act.
\163\ See supra note 34.
\164\ See supra note 36.
---------------------------------------------------------------------------
(i) SB SEF Registration and Core Principles
The Dodd-Frank Act amended the Exchange Act to add new section
3D.\165\ Section 3D(a)(1) provides that no person may operate a
facility for the trading or processing of SB swaps, unless the facility
is registered as an SB SEF or as a national securities exchange.\166\
Section 3(a)(77) of the Exchange Act defines ``security-based swap
execution facility'' as a trading system or platform in which multiple
participants have the ability to execute or trade SB swaps by accepting
bids and offers made by multiple participants in the facility or
system, through any means of interstate commerce, including any trading
facility that (A) facilitates the execution of SB swaps between
persons; and (B) is not a national securities exchange. Thus, the
Commission has proposed to interpret these two provisions, taken
together, to require registration as a SB SEF or a national securities
exchange for any entity that meets the definition of SB SEF in section
3(a)(77) of the Exchange Act.\167\
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\165\ See Public Law 111-203, section 763(c) (adding section 3D
of the Exchange Act).
\166\ Id.
\167\ See SB SEF Proposing Release at 10959 n.62.
---------------------------------------------------------------------------
To facilitate the start of organized trading of SB swaps, the
Commission proposed rule 801(c) of proposed Regulation SB SEF, which
would provide a method for the Commission to grant temporary
registration to an applicant to become a registered SB SEF.\168\ For
any application for registration as a SB SEF filed with the Commission
on or before July 31, 2014, for which the applicant indicates that it
would like to be considered for temporary registration, the Commission
proposed to grant such temporary registration as long as certain
requirements were met. The Commission believes a temporary (or similar)
registration process for prospective SB SEFs would serve as a useful
tool during the initial implementation period to allow an applicant to
operate as a SB SEF for a period of time while the Commission reviews
its SB SEF registration application.
---------------------------------------------------------------------------
\168\ See proposed rule 801(c) of proposed Regulation SB SEF, SB
SEF Proposing Release at 11054.
---------------------------------------------------------------------------
In the SB SEF Proposing Release, the Commission stated that when
considering whether to grant a request for temporary registration, the
Commission would review the information provided by the applicant that
the Commission believes to be relevant, including, but not limited to:
whether the applicant's trading system satisfies the definition of a
``security-based swap execution facility'' in section 3(a)(77) of the
Exchange Act and any Commission rules, interpretations or guidelines
regarding such definition; any access requirements or limitations
imposed by the SB SEF; the ownership and voting structure of the
applicant; and any certifications made by the applicant, including with
respect to its capacity to function as a SB SEF and its compliance with
the Exchange Act and the rules and regulations thereunder.\169\
Temporary registration would expire on the earlier of: (1) The date
that the Commission grants or denies the applicant's registration as a
SB SEF; or (2) the date that the Commission rescinds the applicant's
temporary registration.
---------------------------------------------------------------------------
\169\ SB SEF Proposing Release at 10999.
---------------------------------------------------------------------------
As discussed further below, the Commission has exempted entities
that meet the definition of ``security-based swap execution facility''
from having to comply with the registration requirements set forth in
section 3D(a)(1) of the Exchange Act until the compliance date set
forth in the final rules pertaining to the registration of SB SEFs. The
Commission expects to set forth in any future release adopting final SB
SEF rules the timing for compliance with the registration requirements
(including any temporary registration requirements), the core
principles and the rules thereunder.
(ii) Proposed Regulation MC
Proposed Regulation MC would apply governance requirements and
ownership and voting limitations to SB SEFs as a means to mitigate
conflicts of interest for SB SEFs.\170\ The Commission may, taking into
account comments received, consider taking final action on the
conflicts of interest proposals relating to SB SEFs that are set forth
in proposed Regulation MC as part of any final rules the Commission may
adopt that relate to the regulation and registration of SB SEFs. The
Commission preliminarily believes the
[[Page 35641]]
proposed rules for SB SEFs contained in Proposed Regulation MC \171\
align in scope with proposed Rule 820 implementing Core Principle 11,
as set forth in proposed Regulation SB SEF,\172\ because both proposals
include rules that are designed to minimize and resolve conflicts of
interest with respect to SB SEFs.
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\170\ See Proposed Regulation MC, supra note 27. Proposed
Regulation MC also would apply governance requirements and ownership
and voting limitations on national securities exchanges that post or
make available for trading SB swaps.
\171\ Proposed Regulation MC at 65890-12, 65931-2.
\172\ SB SEF Proposing Release at 11064.
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(iii) Statutory Sequencing of the SB Swap Mandatory Trade Execution
Requirement
Section 3C(h) of the Exchange Act requires that transactions in SB
swaps that are subject to the clearing requirement of section 3C(a)(1)
of the Exchange Act must be executed on an exchange or on a SB SEF
registered with the Commission (or a SB SEF exempt from registration),
unless no exchange or SB SEF makes the SB swap available to trade
(referred to as the ``mandatory trade execution requirement'') or the
SB swap transaction is subject to the clearing exception in section
3C(g) of the Exchange Act.\173\ The Commission believes this section
provides a certain sequencing of the SB swap mandatory trade execution
requirement, as it states that only a SB swap that has been determined
by the Commission to be required to be cleared, and that has been made
available to trade on an exchange or registered SB SEF, must be
executed on an exchange or registered SB SEF.\174\
---------------------------------------------------------------------------
\173\ 15 U.S.C. 78c-3(h).
\174\ See id.
---------------------------------------------------------------------------
As discussed in section II.C above, the Commission anticipates that
SB swap transactions that the Commission determines are subject to
mandatory clearing would not be required to be cleared until the later
of: (1) The compliance date of certain of the final rules to be adopted
pursuant to the Clearing Agency Standards Proposing Release; (2) the
compliance date of the final rules adopted pursuant to the End-User
Exception Proposing Release; and (3) the Commission determining whether
to propose amendments to the existing net capital and customer
protection requirements applicable to broker-dealers with regard to SB
swap clearing through such broker-dealers and whether to address
portfolio margining with swaps. The Commission expects there would be
no mandatory exchange or SB SEF trading of SB swap transactions (thus
allowing such SB swap transactions to continue to trade OTC) before
compliance is required with any final rules adopted pursuant to the
Clearing Agency Standards Proposing Release and the End-User Exception
Proposing Release and before the Commission considers appropriate steps
to address potential issues relating to the existing broker-dealer net
capital and customer protection requirements and portfolio margining
with swaps, as SB swaps would not be required to be cleared until the
Commission has determined that SB swaps are required to be cleared and
the clearing requirement has become operative.
The Dodd-Frank Act additionally provides that SB swaps that are
subject to mandatory clearing but that have not been made available to
trade by an exchange or SB SEF would not be subject to the mandatory
trade execution requirement.\175\ In the SB SEF Proposing Release, the
Commission proposed to interpret the phrase ``made available to trade''
to mean something more than the decision to simply trade an SB swap on
a SB SEF or an exchange, and that SB swaps subject to mandatory
clearing would not be subject to mandatory exchange or SB SEF trading
simply because they are listed on a SB SEF or exchange.\176\ The
Commission further proposed that the determination as to when a SB swap
would be considered to be ``made available to trade'' on an exchange or
a SB SEF be made pursuant to objective measures established by the
Commission, rather than by one or a group of SB SEFs.\177\ The
Commission further noted that it did not, at that time, have sufficient
data to propose standards pursuant to which a determination of whether
an SB swap is ``made available to trade'' should be made, and requested
that commenters provide suggestions as to those objective standards
that would be appropriate.\178\ The Commission is reviewing comments
received on its proposal relating to the determination of when a SB
swap should be ``made available to trade''. If the Commission adopts
its interpretation of ``made available to trade'' as proposed, the
Commission anticipates that it would ultimately adopt standards for
determining when a SB swap has been ``made available to trade.'' Thus,
if the Commission adopts the proposed interpretation, the Commission
expects that there would be no mandatory exchange or SB SEF trading of
SB swaps (and thus such SB swaps may continue to trade OTC) before: (1)
Any such standards have been finalized; (2) a SB swap has been
determined to be ``made available to trade'' pursuant to such
standards; and (3) such ``made available to trade'' determination has
become effective.
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\175\ Exchange Act section 3C(h)(2), 15 U.S.C. 78c-3(h)(2).
\176\ SB SEF Proposing Release at 10969.
\177\ Id.
\178\ Id.
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As discussed above, the specific compliance dates for the core
principles applicable to SB SEFs as set forth in the Exchange Act, and
any final rules relating to SB SEFs that are adopted by the Commission,
including registration rules, will be addressed in any release adopting
such final rules. The Commission understands that some entities that
intend to seek to register with the Commission as an SB SEF or to be
exempt from such registration would do so as soon as possible, which
likely would be, as discussed above, before the mandatory trade
execution requirement becomes operational.\179\
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\179\ See, e.g., letter from Tradeweb Markets LLC (Apr. 4,
2011), File No. S7-06-11, at 1; letter from MarketAxess Corporation
(Apr. 4, 2011), File No. S7-06-11, at 1.
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Based upon Commission staff conversations with industry
participants, the Commission believes that some entities that meet the
definition of an SB SEF may seek to register with the Commission (or be
exempt from such registration) before the mandatory trade execution
requirement becomes operational.
(iv) Expiration of Exemptions and Exceptions Granted Pursuant to the
Effective Date Order and the Exchange Act Exemptive Order
The compliance dates of certain of the rules pertaining to SB SEFs
will result in the expiration of certain of the temporary exemptions
and exceptions granted pursuant to the Effective Date Order and the
Exchange Act Exemptive Order. Specifically, the following temporary
exemptions granted pursuant to the Effective Date Order will expire
upon the earliest compliance date set forth in any of the final rules
pertaining to the registration of SB SEFs:
The exemption from compliance with section 3D(a)(1) of the
Exchange Act's prohibition against any person operating a facility for
the trading or processing of SB swaps unless the facility is registered
as a SB SEF or as a national securities exchange; \180\ and
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\180\ Effective Date Order at 36306.
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The exemption from compliance with section 3D(c) of the
Exchange Act's requirement that a national securities exchange (to the
extent that it also operates a SB SEF and uses the same electronic
trade execution system for listing and executing trades of SB swaps on
or through the exchange and the facility) identify whether electronic
trading of SB swaps is taking place on
[[Page 35642]]
or through the national securities exchange or the SB SEF.\181\
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\181\ Id. at 36306.
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Also upon the earliest compliance date set forth in the any of the
final rules pertaining to the registration of SB SEFs, the temporary
exceptions from the following Exchange Act requirements will expire:
The temporary exemption from Exchange Act sections 5 and
6; \182\
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\182\ Exchange Act Exemptive Order at 39939.
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The exemption applicable to any person other than a
clearing agency acting as a central counterparty in SB swaps from the
requirements to register as a national securities exchange under
sections 5 and 6 of the Exchange Act and the rules and regulations
thereunder solely in connection with the person's activities involving
SB swaps; \183\
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\183\ Id.
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The exemption applicable to broker-dealers from section 5
of the Exchange Act solely in connection with the broker's or dealer's
activities involving SB swaps that it effects or reports on an exchange
that is exempted from registration pursuant to the Exchange Act
Exemptive Order's temporary exemption from Exchange Act sections 5 and
6; \184\
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\184\ Id.
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The exemption applicable to credit default swap central
counterparties from the requirements of sections 5 and 6 of the
Exchange Act and the rules and regulations thereunder solely in
connection with their calculation of mark-to-market prices for opened
positions in cleared credit default swaps; \185\
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\185\ Id. at 39939-40.
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The exemption applicable to any member of a credit default
swap central counterparty from the requirements of section 5 of the
Exchange Act solely to the extent such member uses any transactions in
cleared credit default swaps to effect any transaction in cleared
credit default swaps, or to report any such transaction, in connection
with the credit default swap central counterparty's clearance and risk
management process for cleared credit default swaps.\186\
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\186\ Id. at 39940.
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The Commission granted the foregoing exemptions in the Exchange Act
Exemptive Order because certain persons, particularly those that would
meet the statutory definition of ``security-based swap execution
facility,'' may be engaging in activities that would subject them to
the restrictions and requirements of Sections 5 and 6 of the Exchange
Act as of the Effective Date. In setting the compliance dates for the
final rules pertaining to the registration and regulation of SB SEFs,
the Commission intends to consider whether it is necessary or
appropriate in the public interest, and consistent with the protection
of investors, to take further action with regard to any of the above-
described temporary exemptions.
(v) Request for Comment
Pursuant to the sequencing described herein, rules
implementing the regulation and registration of SB SEFs would be
sequenced later in the process than other rules implementing SB swap
provisions of the Dodd-Frank Act. Do commenters believe this sequencing
is appropriate or should any final rules governing SB SEFs be
considered at an earlier point in time? Why or why not? How would this
sequencing affect the goals of Title VII's reforms of the SB swap
market?
Should an SB SEF be required to comply with all duties,
core principles and other requirements upon receiving approval of its
registration with the Commission or should compliance with some of
these requirements be delayed until a later point in time? Why or why
not? If so, for which requirements and until what point in time should
compliance be delayed? What factors, if any, should be considered in
establishing the compliance dates for any SB SEF requirements that
should be subject to delayed or phased-in compliance, and why should
such factors be considered? How would such a delay or phasing in affect
the goals of Title VII's reforms of the SB swap market? Would there be
potential advantages and disadvantages of such a delay or phasing in?
If so, what would they be? If there are potential disadvantages, what
steps could be taken to mitigate them?
In the SB SEF Proposing Release, the Commission proposed a
rule that would permit applicants to apply for temporary registration
as a SB SEF.\187\ The Commission believes temporary registration for SB
SEFs could serve as a useful tool during the initial implementation
period and should provide the Commission sufficient time to review an
application more thoroughly when considering an application for
registration that is not limited in duration.\188\ Should the
Commission consider granting an exemption from section 3D of the
Exchange Act or extending the current exemption from section 3D in the
Effective Date Order for any entity that submits an application for
temporary SB SEF registration to permit it to operate as a SB SEF
pending submission of an application for permanent SB SEF registration,
or pending Commission approval or disapproval of its permanent
application? If so, should the Commission condition such extension or
granting of an exemption on the prospective SB SEF complying with
certain conditions such as, for example, meeting the Commission's
interpretation of the definition of SB SEF, satisfying any requirements
relating to fair access, and providing the Commission with access to
its books and records? Why or why not? If so, which conditions should
the Commission impose on the SB SEF's operations prior to the
Commission taking action on its application for registration, and why?
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\187\ See SB SEF Proposing Release at 10999-11000; see also
section II.E.(i) supra.
\188\ See SB SEF Proposing Release at 11000.
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If the Commission were to permit entities to submit
applications for temporary SB SEF registration prior to their permanent
SB SEF applications, how soon after an entity submitted its application
for temporary SB SEF registration should it be required to submit its
application for permanent SB SEF registration? For example, would 360
days be sufficient? Should a shorter or longer time period be applied?
If so, what is an appropriate time period and why?
In the SB SEF Proposing Release, the Commission proposed
an initial implementation phase for the registration of SB SEFs, which
phase would begin on the date of Regulation SB SEF's effectiveness and
end on July 31, 2014.\189\ Based upon the sequencing of the compliance
dates of the final rules described herein that would result in the
regulation and registration of SB SEFs later in the implementation
process, is this time period initially proposed to implement the
registration of SB SEFs appropriate? Why or why not? If not, what would
be a more appropriate time period?
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\189\ See id. at 10998.
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In determining when to require SB SEFs to register with
the Commission, should the Commission take into account the CFTC's
timing for its parallel requirement and/or the timing of other
jurisdictions? Why or why not? If so, what is the most appropriate
manner of sequencing in relation to those potentially differing
timelines? What would the advantages and disadvantages of doing so be?
If there are potential disadvantages, what steps could be taken to
mitigate them?
[[Page 35643]]
Should the Commission consider a delayed implementation
schedule for any conflicts of interest rules that it may adopt for SB
SEFs? Why or why not? How would such a delayed implementation schedule
affect the goals of Title VII's reforms of the SB swap market? Would
there be potential advantages and disadvantages of doing so? If so,
what would they be? If there are potential disadvantages, what steps
could be taken to mitigate them?
Are there other rules or sets of rules with which
compliance should be required, or which must be effective, before SB
swaps subject to the mandatory trade execution requirement are required
to be traded? If so, which ones, and why?
Should the Commission phase in compliance with the
mandatory trade execution requirement by type of market participant?
For example, should the Commission phase in this requirement by market
participant type in the manner proposed by the CFTC in its Clearing and
Trade Execution Implementation Proposal? \190\ Why or why not? What
would the advantages and disadvantages of doing so be? If there are
potential disadvantages, what steps could be taken to mitigate them?
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\190\ See supra note 53 and accompanying text for a discussion
of the CFTC's proposals to phase in compliance with the swap
clearing, trading, trade documentation, and margining requirements
arising under Subtitle A of Title VII of the Dodd-Frank Act by
category of market participant. See also supra note 59 and
accompanying text noting that, in the CFTC Clearing and Trade
Execution Implementation Proposal, the CFTC stated that before the
mandatory clearing of swaps begins, the product and entity
definitions, the end-user exception from mandatory clearing, and the
rules pertaining to the segregation of customer collateral must be
adopted and that before swap market participants could be required
to comply with a trade execution requirement, the CFTC must adopt
final rules related to swap execution facilities and designated
contract markets.
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In determining when to require compliance with the
mandatory trade execution requirement, should the Commission take into
account the CFTC's timing for its parallel requirement and/or the
timing of other jurisdictions? Why or why not? If so, what is the most
appropriate manner of sequencing in relation to those potentially
differing timelines? What would the advantages and disadvantages of
doing so be? If there are potential disadvantages, what steps could be
taken to mitigate them?
III. Solicitation of Comments
The Commission intends to monitor closely the imposition of the new
regulatory regime upon SB swaps and SB swap market participants to
determine to what extent, if any, additional regulatory action may be
necessary. The Commission is soliciting comment on all aspects of this
Statement and the guidance it provides regarding compliance dates for
the rules to be adopted under Subtitle B of Title VII. Comments
received will be addressed in the relevant final rulemakings to which
they pertain.
By the Commission.
Dated: June 11, 2012.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-14576 Filed 6-13-12; 8:45 am]
BILLING CODE 8011-01-P