Cross-Border Security-Based Swap Activities; Re-Proposal of Regulation SBSR and Certain Rules and Forms Relating to the Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants

SECURITIES AND EXCHANGE
COMMISSION
17 CFR Parts 240, 242, and 249 [Release No. 34–69490; File Nos. S7–02– 13; S7–34–10; S7–40–11] RIN 3235–AL25 Cross-Border Security-Based Swap Activities; Re-Proposal of Regulation SBSR and Certain Rules and Forms Relating to the Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants AGENCY: Securities and Exchange Commission. ACTION: Proposed rules; proposed interpretations. SUMMARY: The Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) is publishing for public comment proposed rules and interpretive guidance to address the application of the provisions of the Securities Exchange Act of 1934, as amended (‘‘Exchange Act’’), that were added by Subtitle B of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (‘‘Dodd-Frank Act’’), to cross-border security-based swap activities. Our proposed rules and interpretive guidance address the application of Subtitle B of Title VII of the Dodd-Frank Act with respect to each of the major registration categories covered by Title VII relating to market intermediaries, participants, and infrastructures for security-based swaps, and certain transaction-related requirements under Title VII in connection with reporting and dissemination, clearing, and trade execution for security-based swaps. In this connection, we are re-proposing Regulation SBSR and certain rules and forms relating to the registration of security-based swap dealers and major security-based swap participants. The proposal also contains a proposed rule providing an exception from the aggregation requirement, in the context of the security-based swap dealer definition, for affiliated groups with a registered security-based swap dealer. Moreover, the proposal addresses the sharing of information and preservation of confidentiality with respect to data collected and maintained by SDRs. In addition, the Commission is proposing rules and interpretive guidance addressing the policy and procedural framework under which the Commission would consider permitting compliance with comparable regulatory requirements in a foreign jurisdiction to substitute for compliance with requirements of the Exchange Act, and the rules and regulations thereunder, relating to security-based swaps (i.e., ‘‘substituted compliance’’). Finally, the Commission is setting forth our view of the scope of our authority, with respect to enforcement proceedings, under
Section 929P of the Dodd-Frank Act.
DATES: Submit comments on or before August 21, 2013. ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments

• Use the Commission’s Internet
  comment form (http://www.sec.gov/ rules/proposed.shtml);
• Send an email to rule￾comments@sec.gov. Please include File
  Number S7–02–13, and File Numbers S7–34–10 (Regulation SBSR) and/or S7– 40–11 (registration of security-based swap dealers and major security-based swap participants), as applicable, on the subject line; or
• Use the Federal eRulemaking Portal
  (http://www.regulations.gov). Follow the instructions for submitting comments. Paper Comments
• Send paper comments in triplicate
  to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number S7–02–13, and File Numbers S7–34–10 (Regulation SBSR) and/or S7– 40–11 (registration of security-based swap dealers and major security-based swap participants), as applicable. 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. The Commission will post all comments on the Commission’s Internet Web site (http://www.sec.gov/rules/ proposed.shtml). Comments also are available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 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:
  Matthew A. Daigler, Senior Special Counsel, at 202–551–5578, Wenchi Hu, Senior Special Counsel, at 202–551– 6268, Richard E. Grant, Special Counsel, at 202–551–5914, or Richard Gabbert, Special Counsel, at 202–551–7814, Office of Derivatives Policy, Division of Trading and Markets, regarding security-based swap dealers and major security-based swap participants; Jeffrey Mooney, Assistant Director, Matthew Landon, Senior Special Counsel, or Stephanie Park, Special Counsel, Office of Clearance and Settlement, Division of Trading and Markets, at 202–551–5710, regarding security-based swap clearing agencies, security-based swap data repositories, and the security-based swap clearing requirement; David Michehl, Senior Counsel, Office of Market Supervision, Division of Trading and Markets, at 202–551–5627, regarding security-based swap reporting; Leah Mesfin, Special Counsel, at 202– 551–5655, or Michael P. Bradley, Special Counsel, at 202–551–5594, Office of Market Supervision, Division of Trading and Markets, regarding the trade execution requirement and swap execution facilities; Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–7010. SUPPLEMENTARY INFORMATION: The Commission is proposing new rules and interpretive guidance under the Exchange Act relating to the application of Subtitle B of Title VII of the Dodd￾Frank Act to cross-border activities and re-proposing Regulation SBSR and certain rules and forms relating to the registration of security-based swap dealers and major security-based swap participants. The Commission is proposing the following rules under the Exchange Act:
  Rule 0–13 (Substituted Compliance Request Procedure); Rule 3a67–10 (Foreign Major Security-Based Swap Participants); Rule 3a71–3 (Cross-Border Security-Based Swap Dealing Activity); Rule 3a71–4 (Exception from Aggregation for Affiliated Groups with Registered Security-Based Swap Dealers); Rule 3a71–5 (Substituted Compliance for Foreign Security-Based Swap Dealers); Rule 3Ca–3 (Application of the Mandatory Clearing Requirement to Cross-Border Security-Based Swap Transactions); Rule 3Ch–1 (Application of the Mandatory Trade Execution Requirement to Cross-Border Security￾Based Swap Transactions); Rule 3Ch–2 (Substituted Compliance for Mandatory Trade Execution); Rule 13n–4(d) (Exemption from the Indemnification Requirement); Rule 13n–12 (Exemption from Requirements Governing Security￾Based Swap Data Repositories for Certain Non-U.S. Persons); Rule 18a– 4(e) (Segregation Requirements for Foreign Security-Based Swap Dealers); and Rule 18a–4(f) (Segregation Requirements for Foreign Major

Security-Based Swap Participants). The Commission also is re-proposing the following rules and forms: 17 CFR 242.900–242.911 (Regulation SBSR) (RIN 3235–AK80) and 17 CFR 249.1600 (Form SBSE), 249.1600a (Form SBSE– A), and 249.1600b (Form SBSE–BD) (RIN 3235–AL05).
Table of Contents
I. Background
A. The Dodd-Frank Wall Street Reform and Consumer Protection Act B. Overview of the Cross-Border Proposal
C. Consultation and Coordination
D. Substituted Compliance E. Conclusion
II. Overview of the Security-Based Swap
Market and the Legal and Policy Principles Guiding the Commission’s Approach to the Application of Title VII to Cross-Border Activities A. Overview of the Security-Based Swap Market

1. Global Nature of the Security-Based
   Swap Market
2. Dealing Structures
   (a) U.S. Bank Dealer
   (b) U.S. Non-Bank Dealer
   (c) Foreign Subsidiary Guaranteed by a U.S. Person (d) Foreign-Based Dealer
   i. Direct Dealing
   ii. Intermediation in the United States
3. Clearing Practices
4. Reporting Practices
5. Trade Execution Practices
6. Broad Economic Considerations of
   Cross-Border Security-Based Swaps (a) Major Economic Considerations (b) Global Nature and Interconnectedness of the Security-Based Swap Market (c) Central Clearing (d) Security-Based Swap Data Reporting B. Scope of Title VII’s Application to Cross-Border Security-Based Swap Activity
7. Commenters’ Views
8. Scope of Application of Title VII in the
   Cross-Border Context
   (a) Overview and General Approach (b) Territorial Approach to Application of Title VII Security-Based Swap Dealer Registration Requirements (c) Application of Other Title VII Requirements to Registered Entities (d) Application of Title VII Regulatory Requirements to Transactions of Foreign Entities Receiving Guarantees From U.S. Persons (e) Regulations Necessary or Appropriate To Prevent Evasion of Title VII
   C. Principles Guiding Proposed Approach
   to Applying Title VII in the Cross-Border Context D. Conclusion
   III. Security-Based Swap Dealers
   A. Introduction
   B. Registration Requirement
9. Introduction
10. Background Discussion Regarding the
    Registration of Foreign Brokers and Dealers
11. Comment Summary
    (a) Market Participants
    (b) Foreign Regulators
12. Application of the De Minimis
    Exception to Cross-Border Security￾Based Swap Dealing Activity (a) Meaning of the Term ‘‘Person’’ in the Security-Based Swap Dealer Definition (b) Proposed Rule
13. Proposed Definition of ‘‘U.S. Person’’
    (a) Introduction
    (b) Discussion
    i. Natural Persons
    ii. Corporations, Organizations, Trusts, and
    Other Legal Persons
    iii. Accounts of U.S. Persons
    iv. International Organizations
    (c) Conclusion
14. Proposed Definition of ‘‘Transaction
    Conducted Within the United States’’
15. Proposed Treatment of Transactions
    With Foreign Branches of U.S. Banks
16. Proposed Rule Regarding Aggregation of
    Affiliate Positions
17. Treatment of Inter-Affiliate and
    Guaranteed Transactions
18. Comparison With Definition of ‘‘U.S.
    Person’’ in Regulation S
    C. Regulation of Security-Based Swap
    Dealers in Title VII
19. Introduction
20. Comment Summary
21. Title VII Requirements Applicable to
    Security-Based Swap Dealers (a) Transaction-Level Requirements
    i. External Business Conduct Standards
    ii. Segregation of Assets
    (b) Entity-Level Requirements
    i. Capital
    ii. Margin
    iii. Risk Management
    iv. Recordkeeping and Reporting
    v. Internal System and Controls
    vi. Diligent Supervision
    vii. Conflicts of Interest
    viii. Chief Compliance Officer
    ix. Inspection and Examination
    x. Licensing Requirements and Statutory
    Disqualification
22. Application of Certain Transaction-Level
    Requirements
    (a) Proposed Rule
    (b) Discussion
    i. External Business Conduct Standards
    a. Foreign Security-Based Swap Dealers b. U.S. Security-Based Swap Dealers
    ii. Segregation Requirements
    a. Foreign Security-Based Swap Dealers b. Non-Cleared Security-Based Swaps
    c. Cleared Security-Based Swaps
    d. Disclosure
23. Application of Entity-Level Rules
    (a) Introduction
    (b) Proposed Approach
    D. Intermediation
24. Introduction
25. Comment Summary
26. Discussion
    E. Registration Application Re-Proposal
27. Introduction
28. Discussion
    IV. Major Security-Based Swap Participants
    A. Introduction
    B. Comment Summary
    C. Proposed Approach
29. In General
30. Guarantees
    (a) Guarantees Provided by U.S. Persons to Non-U.S. Persons (b) Guarantees Provided by Non-U.S. Persons to U.S. Persons and Guarantees Provided by Non-U.S. Persons to Non￾U.S. Persons (c) Limited Circumstances Where Attribution of Guaranteed Security￾Based Swap Positions Does Not Apply (d) Operational Compliance
31. Foreign Public Sector Financial
    Institutions (FPSFIs)
    D. Title VII Requirements Applicable to Major Security-Based Swap Participants
32. Transaction-Level Requirements Related
    to Customer Protection
    (a) Overview
    (b) Proposed Rules
33. Entity-Level Requirements
34. Substituted Compliance
    V. Security-Based Swap Clearing Agencies
    A. Introduction
    B. Proposed Title VII Approach
35. Clearing Agency Registration
    (a) Clearing Agencies Acting as CCPs (b) Proposed Interpretive Guidance
36. Exemption From Registration Under
    Section 17A(k)
37. Application of Alternative Standards to
    Certain Registrants
    VI. Security-Based Swap Data Repositories
    A. Introduction
    B. Application of the SDR Requirements in the Cross-Border Context
38. Introduction
39. Comment Summary
40. Proposed Approach
    (a) U.S. Persons Performing SDR Functions Are Required To Register With the Commission (b) Interpretive Guidance and Exemption for Non-U.S. Persons That Perform the Functions of an SDR Within the United States
    C. Relevant Authorities’ Access to
    Security-Based Swap Information and the Indemnification Requirement
41. Information Sharing Under Sections 21
    and 24 of the Exchange Act
42. Comment Summary
43. Proposed Guidance and Exemptive
    Relief
    (a) Notification Requirement (b) Determination of Appropriate Regulators (c) Option for Exemptive Relief From the Indemnification Requirement
    i. Impact of the Indemnification
    Requirement
    ii. Proposed Rule 13n–4(d):
    Indemnification Exemption
    VII. Security-Based Swap Execution
    Facilities
    A. Introduction
    B. Registration of Foreign Security-Based Swap Markets
    C. Registration Exemption for Foreign
    Security-Based Swap Markets
    VIII. Regulation SBSR—Regulatory Reporting
    and Public Dissemination of Security￾Based Swap Information A. Background B. Modifications to the Definition of ‘‘U.S. Person’’
    C. Additional Modifications to Scope of
    Regulation SBSR
44. Revisions to Proposed Rule 908(a)
45. Revisions to Proposed Rule 908(b)

D. Modifications to ‘‘Reporting Party’’ Rules and Assigning Duty To Report E. Other Technical and Conforming Changes F. Cross-Border Inter-Affiliate Transactions G. Foreign Privacy Laws versus Duty To Report Counterparty ID H. Foreign Public Sector Financial Institutions
I. Summary and Additional Request for
Comment
IX. Mandatory Security-Based Swap Clearing
Requirement
A. Introduction
B. Summary of Comments
C. Application of Title VII Mandatory
Clearing Requirements to Cross-Border Transactions

1. Statutory Framework
2. Proposed Rule
3. Discussion
   (a) Security-Based Swap Transactions Involving U.S. Persons or Non-U.S. Persons Receiving Guarantees From U.S. Persons
   i. Proposed Rule
   ii. Proposed Exception for Certain
   Transactions Involving Foreign Branches of U.S. Banks and Guaranteed Non-U.S. Persons (b) Transactions Conducted Within the United States
   i. Proposed Rule
   ii. Proposed Exception for Transactions
   Conducted Within the United States by Certain Non-U.S. Persons
   X. Mandatory Security-Based Swap Trade
   Execution Requirement
   A. Introduction
   B. Application of the Mandatory Trade Execution Requirement to Cross-Border Transactions
4. Statutory Framework
5. Proposed Rule
6. Discussion
   (a) Security-Based Swap Transactions Involving U.S. Persons or Non-U.S. Persons Receiving Guarantees From U.S. Persons
   i. Proposed Rule
   ii. Proposed Exception for Certain
   Transactions Involving Foreign Branches of U.S. Banks and Guaranteed Non-U.S. Persons (b) Transactions Conducted Within the United States
   i. Proposed Rule
   ii. Proposed Exception for Transactions
   Conducted Within the United States by Certain Non-U.S. Persons
   XI. Substituted Compliance
   A. Introduction
   B. Process for Making Substituted Compliance Requests
   C. Security-Based Swap Dealer
   Requirements
7. Proposed Rule—Commission
   Substituted Compliance Determinations
8. Discussion
   D. Regulatory Reporting and Public Dissemination
9. General
10. Security-Based Swaps Eligible and Not
    Eligible for Substituted Compliance
11. Requests for Substituted Compliance
12. Findings Necessary for Substituted
    Compliance
13. Modification or Withdrawal of
    Substituted Compliance Order
14. Regulatory Reporting and Public
    Dissemination Considered Together in the Commission’s Analysis of Substituted Compliance E. Clearing Requirement F. Trade Execution Requirement
    XII. Antifraud Authority
    XIII. General Request for Comment
    A. General Comments
    B. Consistency With CFTC’s Cross-Border Approach
    XIV. Paperwork Reduction Act
    A. Introduction
    B. Re-Proposal of Form SBSE, Form SBSE– A, and Form SBSE–BD
15. Summary of Collection of Information
16. Proposed Use of Information
17. Respondents
18. Total Initial and Annual Reporting and
    Recordkeeping Burdens
    (a) Paperwork Burden Associated With Filing Application Forms (b) Paperwork Burden Associated With Amending Schedule F (c) Paperwork Burden Associated With Amending Application Forms
19. Request for Comment on Paperwork
    Burden Estimates
    C. Disclosures by Certain Foreign Security￾Based Swap Dealers and Major Security￾Based Swap Participants
20. Summary of Collection of Information
21. Proposed Use of Information
22. Respondents
23. Total Initial and Annual Reporting
    Burdens
24. Request for Comment on Paperwork
    Burden Estimates
    D. Reliance on Counterparty Representations Regarding Activity Within the United States
25. Summary of Collection of Information
26. Proposed Use of Information
27. Respondents
28. Total Initial and Annual Reporting and
    Recordkeeping Burdens
29. Request for Comment on Paperwork
    Burden Estimates
    E. Requests for Cross-Border Substituted Compliance Determinations
30. Summary of Collection of Information
31. Proposed Use of Information
32. Respondents
33. Total Initial and Annual Reporting and
    Recordkeeping Burdens
    (a) Proposed Rule 3a71–5
    (b) Re-Proposed Rule 242.908(c)(2)(ii) of Regulation SBSR (c) Proposed Rule 3Ch–2(c) F. Reporting and Dissemination of Security-Based Swap Information
34. Background on the Re-Proposed Rules
35. Modifications to ‘‘Reporting Party’’
    Rules
    (a) Summary of Collection of Information (b) Proposed Use of Information (c) Respondents (d) Total Initial and Annual Reporting and Recordkeeping Burdens
    i. Baseline Burdens
    ii. Re-Proposed Burdens
    iii. Summary of Re-Proposed Burdens
    iv. Recordkeeping Requirements
    (e) Collection of Information Is Mandatory (f) Confidentiality
36. Rules 902, 905, 906, 907, and 909
    (a) Rule 902
    (b) Rule 905
    (c) Rule 906
    (d) Rule 907
    (e) Rule 909
    i. Impact of Re-Proposed Rules 902, 905,
    906, 907, and 909 on the Commission’s PRA Analysis
37. Rules 900, 903, 908, 910, and 911
    (a) Modification of the Definition of ‘‘U.S. Person’’ (b) Rule 903 (c) Re-Proposed Rules 908(a) and 908(b) (d) Rule 910 (e) Rule 911 G. Request for Comments by the Commission and Director of OMB
    XV. Economic Analysis
    A. Introduction
    B. Economic Baseline
38. Overview
39. Current Security-Based Swap Market
    (a) Security-Based Swap Market Participants (b) Levels of Security-Based Swap Trading Activity (c) Market Participant Domiciles (d) Level of Current Cross-Border Activity in Single-Name CDS (e) Levels of Security-Based Swap Clearing
    C. Analysis of Potential Effects on
    Efficiency, Competition, and Capital Formation
40. Introduction
41. Competition
    (a) Security-Based Swap Dealers (b) Security-Based Swap Market Infrastructure Requirements
    i. Registration of Clearing Agencies, SDRs
    and SB SEFs
    ii. Application of Mandatory Clearing,
    Public Dissemination, Regulatory Reporting, and Trade Execution Requirements in the Cross-Border Context
42. Efficiency
43. Capital Formation
    D. Economic Analysis of Proposed Rules Regarding ‘‘Security-Based Swap Dealers’’ and ‘‘Major Security-Based Swap Participants’’
44. Programmatic Costs and Benefits
    (a) Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants (b) Security-Based Swap Dealers—De Minimis Exception (c) Major Security-Based Swap Participants—‘‘Substantial Position’’ and ‘‘Substantial Counterparty Exposure’’ Thresholds
45. Assessment Costs
    (a) Security-Based Swap Dealers—De Minimis Exception (b) Major Security-Based Swap Participants—‘‘Substantial Position’’ and ‘‘Substantial Counterparty Exposure’’ Thresholds
46. Alternatives Considered
    (a) De Minimis Exception
    i. Alternatives to the Proposed Definition
    of U.S. Person
    ii. Alternatives to the Proposed Rule
    Regarding Application of the De Minimis Exception

1The Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111–203, 124 Stat. 1376 (2010). 2Unless otherwise indicated, references to Title VII of the Dodd-Frank Act in this release are to Subtitle B of Title VII. 3 Generally, in this release, the application of Title VII to ‘‘cross-border activities’’ refers to the application of Title VII to a security-based swap transaction involving (i) A U.S. person and a non￾U.S. person, (ii) two non-U.S. persons where one or both are located within the United States, or (iii) two non-U.S. persons conducting a security-based swap transaction that otherwise occurs in relevant
part within the United States, including by
Continued a. Calculation of U.S. Persons’ Transactions for De Minimis Exception b. Calculation of Non-U.S. Persons’ Transactions for De Minimis Exception (Including Transactions Conducted Within the United States)
iii. Aggregation of Affiliate Dealing
Activity
(b) Major Security-Based Swap Participants E. Economic Analysis of the Proposed Application of the Entity-Level and Transaction-Level Requirements to Security-Based Swap Dealers and Major Security-Based Swap Participants

1. Entity-Level Requirements
2. Transaction-Level Requirements
   (a) Proposed Rule 3a71–3(c)—Application of Customer Protection Requirements
   i. Programmatic Benefits and Costs
   ii. Assessment Costs
   iii. Alternatives
   (b) Proposed Rule 18a–4(e)—Application of Segregation Requirements
   i. Programmatic Benefits and Costs
   a. Pre-Dodd Frank Segregation Practice b. Benefits of the Segregation Requirements
   c. Costs of the Segregation Requirements
   d. Costs and Benefits of Proposed Rules 18a–4(e)(1) and (2) Regarding Application of Segregation Requirements to Foreign Security-Based Swap Dealers e. Costs and Benefits of Proposed Rule 18a–4(e)(3) Regarding Disclosures
   ii. Assessment Costs
   F. Economic Analysis of Application of Rules Governing Security-Based Swap Clearing in Cross-Border Context
3. Programmatic Benefits and Costs
   Associated With the Clearing Agency Registration (a) Proposed Interpretive Guidance Regarding Clearing Agency Registration (b) Proposed Exemption of Foreign Clearing Agency From Registration (c) Programmatic Effects of Alternative Standards
4. Programmatic Benefits and Costs
   Associated With the Mandatory Clearing Requirement of Section 3C(a)(1) of the Exchange Act (a) Programmatic Effects of the Mandatory Clearing Requirement (b) Programmatic Benefits and Costs of the Mandatory Clearing Requirement
5. Programmatic Benefits and Costs of
   Proposed Rule 3Ca–3
   (a) Programmatic Effect of Proposed Rule 3Ca–3 (b) Programmatic Benefits and Costs of Proposed Rule 3Ca–3 (c) Alternatives (d) Assessment Costs G. The Economic Analysis of Application of Rules Governing Security-Based Swap Trading in the Cross-Border Context
6. Programmatic Benefits and Costs of the
   Proposed Application of the Registration Requirements of Section 3D of the Exchange Act to Foreign Security-Based Swap Markets (a) Programmatic Benefits (b) Programmatic Costs (c) Alternatives
7. Programmatic Benefits and Costs of the
   Potential Availability of Exemptive Relief to Foreign Security-Based Swap Markets (a) Programmatic Benefits (b) Programmatic Costs (c) Alternatives (d) Assessment Costs
8. Programmatic Benefits and Costs
   Associated With the Mandatory Trade Execution Requirement of Section 3C(h) of the Exchange Act (a) Programmatic Effect of the Statutory Mandatory Trade Execution Requirement (b) Programmatic Benefits of the Statutory Mandatory Trade Execution Requirement (c) Programmatic Costs of the Statutory Mandatory Trade Execution Requirement
9. Programmatic Benefits and Costs of
   Proposed Rule 3Ch–1 Regarding Application of the Mandatory Trade Execution Requirement in Cross-Border Context (a) Programmatic Effect of Proposed Rule 3Ch–1 (b) Programmatic Benefits and Costs of Proposed Rule 3Ch–1 H. Application of Rules Governing Security-Based Swap Data Repositories in Cross-Border Context
10. Benefits and Costs Associated With
    Application of the SDR Requirements in the Cross-Border Context (a) Benefits of Proposed Approach to SDR Requirements
    i. Programmatic Benefits of Proposed
    Guidance Regarding Registration
    ii. Programmatic Benefits of the SDR
    Exemption
    (b) Costs of Proposed Approach to SDR Requirements
    i. Programmatic Costs of the Commission’s
    Proposed Approach
    ii. Assessment Costs
    (c) Alternative to Proposed Approach
11. Relevant Authorities’ Access to Security￾Based Swap Information and the
    Indemnification Requirement (a) Benefits and Costs of Relevant Authorities’ Access to Security-Based Swap Data Under the Dodd-Frank Act
    i. Benefits of Relevant Authorities’ Access
    to Security-Based Swap Data
    ii. Costs of Relevant Authorities’ Access to
    Security-Based Swap Data
    (b) Benefits and Costs of Proposed Guidance and Exemptive Rule
    i. Notification Requirement
    ii. Determination of Appropriate Regulators
    iii. Exemptive Relief From the
    Indemnification Requirement (c) Alternatives to Proposed Guidance and Exemptive Relief
    i. Notification Requirement
    ii. Determination of Appropriate Regulators
    iii. Exemptive Relief From the
    Indemnification Requirement
12. Economic Analysis of the Re-Proposal of
    Regulation SBSR
    (a) Modifications to ‘‘Reporting Party’’ Rules and Jurisdictional Reach of Regulation SBSR—Re-Proposed Rules 901(a) and 908(a)
    i. Initial Proposal
    a. Programmatic Benefits of Initial Proposal b. Programmatic Costs of Initial Proposal
    ii. Re-Proposal
    a. Programmatic Benefits b. Programmatic Costs (b) Proposed Modification of the Definition of ‘‘U.S. Person’’ (c) Revisions to Proposed Rule 908(b)
    i. Initial Proposal
    ii. Re-Proposal
    a. Programmatic Benefits b. Programmatic Costs (d) Other Technical Revisions in Re￾Proposed Regulation SBSR (e) Aggregate Total Quantifiable Costs
    I. Economic Analysis of Substituted
    Compliance
13. Programmatic Benefits and Costs
14. Alternatives
15. Assessment Costs
    J. General Request for Comments
    XVI. Consideration of Impact on the
    Economy
    XVII. Regulatory Flexibility Act Certification
    Statutory Basis and Text of Proposed Rules
    Appendix A: Application of Subtitle B of
    Title VII in the Cross-Border Context
    Table I—Registered U.S. Security-Based
    Swap Dealers
    Table II—Registered Non-U.S. Security￾Based Swap Dealer with U.S. Guarantee
    Table III—Unregistered Non-U.S. Dealer (or
    Market Participant) With U.S. Guarantee
    Table IV—Registered Non-U.S. Security￾Based Swap Dealer Without U.S.
    Guarantee
    Table V—Unregistered Non-U.S. Dealer (or
    Market Participant) Without U.S.
    Guarantee
    Appendix B: Registration of Security-Based
    Swap Dealers
    Appendix C: Re-Proposal of Registration
    Forms
    Appendix D: List of Commenters
    I. Background
    The global nature of the security￾based swap market highlights the critical importance of addressing the application of the Title VII of the Dodd￾Frank Act 1 (‘‘Title VII’’) to cross-border activities.2 The Commission has received numerous inquiries and comments from market participants, foreign regulators, and other interested parties concerning how Title VII and the Commission’s implementing regulations thereunder will apply to the cross￾border activities of U.S. and non-U.S. market participants. To respond to these inquiries and comments, the Commission is providing our preliminary views on the application of Title VII to cross-border security-based swap activities 3 and non-U.S. persons

negotiating the terms of the security-based swap transaction within the United States or where performance of one or both counterparties under the security-based swap is guaranteed by a U.S. person. 4The Dodd-Frank Act was enacted ‘‘[t]o promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail’, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.’’ Public Law 111– 203, Preamble. 5From their beginnings in the early 1980s, the notional value of these markets grew to approximately $650 trillion globally by the end of
2011. See Bank for International Settlements,
Statistical Release: OTC Derivatives Statistics at End–December 2011 (May 2012) at 1, available at:
http://www.bis.org/publ/otc_hy1205.pdf. 6See Section II.A.6(b), infra. 7See Public Law 111–203 sections 701–774. 8The definition of ‘‘security’’ in both the Exchange Act and the Securities Act of 1933 (‘‘Securities Act’’), 15 U.S.C. 77a et seq., was amended by the Dodd-Frank Act to include security-based swaps. Public Law 111–203, Section 761(a)(2) (inserting ‘‘security-based swap’’ after ‘‘security future’’ in Section 3(a)(10) of the Exchange Act, 15 U.S.C. 78c(a)(10)) and Section 768(a)(1) (inserting ‘‘security-based swap’’ after ‘‘security future’’ in Section 2(a)(1) of the Securities Act, 15 U.S.C. 77b(a)(1)). The revision of the Exchange Act’s definition of ‘‘security’’ raises, among other things, issues related to the definition of ‘‘broker’’ in Section 3(a)(4) of the Exchange Act, 15 U.S.C. 78c(a)(4), the definition of ‘‘dealer’’ in
Section 3(a)(5) of the Exchange Act, 15 U.S.C.
78c(a)(5), the exchange registration requirements in Sections 5 and 6 of the Exchange Act, 15 U.S.C. 78e and 78f, respectively, and the requirement in
Section 12 of the Exchange Act that securities be
registered before a transaction is effected on a national securities exchange. See 15 U.S.C. 78l(a). The Securities Act requires that any offer and sale of a security must either be registered under the Securities Act (see Section 5 of the Securities Act, 15 U.S.C. 77e) or made pursuant to an exemption from registration (see, e.g., Sections 3 and 4 of the Securities Act, 15 U.S.C. 77c and 77d, respectively). In addition, the Securities Act requires that any offer to sell, offer to buy or purchase or sell a security-based swap to any person who is not an eligible contract participant (‘‘ECP’’) must be registered under the Securities Act. See Section 5(e) of the Securities Act, 15 U.S.C. 77e(e). Because of the statutory language of Section 5(e), exemptions from this requirement in Sections 3 and 4 of the Securities Act are not available. This release does not address the requirements under Section 5 of the Securities Act. The Commission adopted interim final rules that provide exemptions from certain provisions of the Securities Act, the Exchange Act, and the Trust Indenture Act of 1939 (‘‘Trust Indenture Act’’), 15 U.S.C. 77aaa et seq., for those security-based swaps that prior to July 16, 2011 were ‘‘security-based swap agreements’’ and are defined as ‘‘securities’’ under the Securities Act and the Exchange Act as of July 16, 2011 due solely to the provisions of Title VII of the Dodd-Frank Act. See Exemptions for Security-Based Swaps, Securities Act Release No. 9231 (July 1, 2011), 76 FR 40605 (July 11, 2011); see also Extension of Exemptions for Security￾Based Swaps, Securities Act Release No. 9383 (Jan. 29, 2013), 78 FR 7654 (Feb. 4, 2013). The Commission also issued temporary exemptions under the Exchange Act regarding certain issues raised by the inclusion of security-based swaps in the definition of ‘‘security.’’ See Order Extending Temporary Exemptions Under the Securities Exchange Act of 1934 in Connection With the Revision of the Definition of ‘‘Security’’ To Encompass Security-Based Swaps, and Request for Comment, Exchange Act Release No. 68864 (Feb. 7, 2013), 78 FR 10218 (Feb. 13, 2013); see also 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, Exchange Act Release No. 64795 (July 1, 2011) 76 FR 39927 (July 7, 2011). 9 In addition, the Dodd-Frank Act adds to the Commodity Exchange Act (‘‘CEA’’) and Exchange Act definitions of the terms ‘‘swap dealer,’’ ‘‘security-based swap dealer,’’ ‘‘major swap participant,’’ and ‘‘major security-based swap participant,’’ and amends the CEA definition of the term ‘‘eligible contract participant.’’ These terms are defined in Sections 721 and 761 of the Dodd-Frank Act and, with respect to the term ‘‘eligible contract participant,’’ in Section 1a(18) of the CEA, 7 U.S.C. 1a(18), as redesignated and amended by Section 721 of the Dodd-Frank Act.
Section 712(d)(1) of the Dodd-Frank Act provides that the CFTC and the Commission, in consultation with the Board of Governors of the Federal Reserve System, shall jointly further define the terms ‘‘swap,’’ ‘‘security￾based swap,’’ ‘‘swap dealer,’’ ‘‘security-based swap dealer,’’ ‘‘major swap participant,’’ ‘‘major security￾based swap participant,’’ ‘‘eligible contract participant,’’ and ‘‘security-based swap agreement.’’ Further, Section 721(c) of the Dodd-Frank Act requires the CFTC to adopt a rule to further define the terms ‘‘swap,’’ ‘‘swap dealer,’’ ‘‘major swap participant,’’ and ‘‘eligible contract participant,’’ and Section 761(b)(3) of the Dodd-Frank Act permits the Commission to adopt a rule to further define the terms ‘‘security-based swap,’’ ‘‘security￾based swap dealer,’’ ‘‘major security-based swap participant,’’ and ‘‘eligible contract participant,’’ with regard to security-based swaps, for the purpose of including transactions and entities that have been structured to evade Title VII or the amendments made by Title VII. The Commission and the CFTC jointly adopted rules and interpretive guidance further defining the terms ‘‘swap,’’ ‘‘security-based swap,’’ and ‘‘security-based swap agreement,’’ and regulations regarding mixed swaps. See Further Definition of ‘‘Swap,’’ ‘‘Security-Based Swap,’’ and ‘‘Security￾Based Swap Agreement’’; Mixed Swaps; Security￾Based Swap Agreement Recordkeeping, Exchange Act Release No. 67453 (July 18, 2012), 77 FR 48208 (Aug. 13, 2012) (‘‘Product Definitions Adopting Release’’). The Commission and the CFTC also jointly adopted rules further defining the terms ‘‘swap dealer,’’ ‘‘security-based swap dealer,’’ ‘‘major swap participant,’’ ‘‘major security-based swap participant,’’ and ‘‘eligible contract participant.’’ See Further Definition of ‘‘Swap Dealer,’’ ‘‘Security-Based Swap Dealer,’’ ‘‘Major Swap Participant,’’ ‘‘Major Security-Based Swap Participant’’ and ‘‘Eligible Contract Participant,’’ Exchange Act Release No. 66868 (Apr. 27, 2012), 77 FR 30596 (May 23, 2012) (‘‘Intermediary Definitions Adopting Release’’). 10The provisions of the Exchange Act relating to security-based swaps that were enacted by Title VII also are referred to herein as ‘‘Title VII requirements’’ or ‘‘requirements in Title VII.’’ 11See Section 764(a) of the Dodd-Frank Act. The Commission, jointly with the CFTC, adopted rules further defining the term ‘‘security-based swap dealer.’’ See Intermediary Definitions Adopting Release, 77 FR 30596. The Commission has proposed rules regarding the registration and substantive requirements for security-based swap dealers and major security￾based swap participants. See Proposed Rules Governing Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants and Capital Requirements for Broker-Dealers, Exchange Act Release No. 68071 (Oct. 18, 2012) 77 FR 70214 (Nov. 23, 2012) (‘‘Capital, Margin, and Segregation Proposing Release’’);
Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants, Exchange Act Release No. 65543 (Oct. 12, 2011) (RIN 3235–AL05), 76 FR 65784 (Oct. 24,
2011) (‘‘Registration Proposing Release’’); Business
Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap Participants, Exchange Act Release No. 64766 (June 29, 2011), 76 FR 42396 (July 18, 2011) (‘‘External Business Conduct Standards Proposing Release’’); and Trade Acknowledgment and Verification of Security￾Based Swap Transactions, Exchange Act Release No. 63727 (Jan. 14, 2011), 76 FR 3859 (Jan. 21,
2011) (‘‘Trade Acknowledgment Proposing
Release’’). The Commission has not yet proposed rules governing the recordkeeping, reporting, and notification requirements for security-based swap that act in capacities regulated under the Dodd-Frank Act in the proposed rules and interpretations discussed below. A. The Dodd-Frank Wall Street Reform and Consumer Protection Act 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.4 The 2008 financial crisis highlighted significant issues in the over-the￾counter (‘‘OTC’’) derivatives markets, which have experienced dramatic growth in recent years 5 and are capable of affecting significant sectors of the U.S. economy.6 Title VII of the Dodd￾Frank Act provides for a comprehensive new regulatory framework for swaps and security-based swaps, including by:
(i) Providing for the registration and comprehensive regulation of swap dealers, security-based swap dealers, major swap participants, and major security-based swap participants; (ii) imposing clearing and trade execution requirements on swaps and security￾based swaps, subject to certain exceptions; (iii) creating recordkeeping and real-time reporting regimes and public dissemination; and (iv) enhancing the rulemaking and enforcement authorities of the Commission and the Commodity Futures Trading Commission (‘‘CFTC’’).7 Specifically, the Dodd-Frank Act provides that the CFTC will regulate ‘‘swaps,’’ the Commission will regulate ‘‘security-based swaps,’’ 8 and both the CFTC and the Commission (together, the ‘‘Commissions’’) will regulate ‘‘mixed swaps.’’ 9 Title VII also amends the Exchange Act to include many specific provisions governing security-based swaps that could apply to cross-border security-based swap transactions and to non-U.S. persons who act in capacities regulated under the Dodd-Frank Act.10 These provisions primarily relate to Commission oversight of security-based swap dealers,11 major security-based

dealers and major security-based swap dealers pursuant to Section 15F(f) of the Exchange Act, 15 U.S.C. 78o–10(f), as added by Section 764(a) of the Dodd-Frank Act. 12See Section 764(a) of the Dodd-Frank Act. The Commission, jointly with the CFTC, adopted rules further defining the term ‘‘major security-based swap participant.’’ See Intermediary Definitions Adopting Release, 77 FR 30596. In a number of releases, the Commission also has proposed rules regarding the registration and substantive requirements for major security-based swap participants. See note 11, supra. 13See Section 763(i) of the Dodd-Frank Act. The Commission has proposed rules regarding the registration and regulation of SDRs. See Security￾Based Swap Data Repository Registration, Duties, and Core Principles, Exchange Act Release No. 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’’). 14See Section 763(b) of the Dodd-Frank Act. The Commission adopted rules regarding the standards for risk management practices and operations of registered clearing agencies, including security￾based swap clearing agencies. See Clearing Agency Standards, Exchange Act Release No. 68080 (Oct. 22, 2012), 77 FR 66220 (Nov. 2, 2012) (‘‘Clearing Agency Standards Adopting Release’’). 15See Section 763(c) of the Dodd-Frank Act. The Commission has proposed rules regarding the registration and regulation of SB SEFs. See Registration and Regulation of Security-Based Swap Execution Facilities, Exchange Act Release No. 63825 (Feb. 2, 2011), 76 FR 10948 (Feb. 29, 2011) (‘‘SB SEF Proposing Release’’). 16See Sections 763 and 766 of the Dodd-Frank Act. The Commission has proposed rules on trade reporting, data elements, and real-time public reporting for security-based swaps. See Regulation SBSR—Reporting and Dissemination of Security￾Based Swap Information, Exchange Act Release No. 63346 (Nov. 19, 2010) (RIN 3235–AK80), 75 FR 75208 (Dec. 2, 2010) (‘‘Regulation SBSR Proposing Release’’). 17See Section 763(b) of the Dodd-Frank Act. The Commission has proposed or adopted rules relating to the end-user clearing exception and the process for submitting for review of security-based swaps for mandatory clearing. See 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, Exchange Act Release No. 67286 (June 28, 2012), 77 FR 41602 (July 13,
2012) (‘‘Clearing Procedures Adopting Release’’);
End-User Exception to Mandatory Clearing of Security-Based Swaps (Corrected), Exchange Act Release No. 63556 (Dec. 15, 2010), 75 FR 79992 (Dec. 21, 2010) (‘‘End-User Exception Proposing Release’’). 18See Section 763(b) of the Dodd-Frank Act. 19The Commission has proposed a rule addressing the application of the security-based swap trade reporting requirement to cross-border transactions and to non-U.S. persons. See Regulation SBSR Proposing Release, 75 FR 75239– 40, as discussed in Section VIII, infra. The Commission also has proposed rules imposing special requirements on ‘‘nonresident security￾based swap dealers,’’ ‘‘nonresident major security￾based swap participants,’’ ‘‘non-resident swap data repositories,’’ and ‘‘non-resident SB SEFs.’’ See Registration Proposing Release, 76 FR 65799–801, as discussed in Section III.E, infra; SDR Proposing Release, 75 FR 77310, as discussed in Section VI, infra; and SB SEF Proposing Release, 76 FR 11000– 3, as discussed in Section VII, infra. 20Tables reflecting the Commission’s proposed approach as it would apply to security-based swap transactions between different types of entities are included in this release as Appendix A. Each table focuses on a specific type of security-based swap dealing entity or market participant and sets out the Title VII requirements that would apply to such person under different transaction scenarios. 21Cf. CFTC Proposed Interpretive Guidance and Policy Statement, Cross-Border Application of Certain Swaps Provisions of the Commodity Exchange Act, 77 FR 41214 (July 12, 2012) (‘‘CFTC Cross-Border Proposal’’); Exemptive Order Regarding Compliance with Certain Swap Regulations, 77 FR 41110 (July 12, 2012) (‘‘CFTC Proposed Cross-Border Exemptive Order’’); Final Exemptive Order Regarding Compliance with Certain Swap Regulations, 78 FR 858 (Jan. 7, 2013) (‘‘Final CFTC Cross-Border Exemptive Order’’); Further Proposed Guidance Regarding Compliance With Certain Swap Regulations, 78 FR 909 (Jan. 7,
2013) (‘‘CFTC Further Proposed Guidance’’). In
Section XIII.B below, we solicit general comment
on the differences between our proposed approach and the CFTC’s proposed approach. 22See Registration Proposing Release, 76 FR 65784, as discussed in Section III.E, infra. 23See Section VI.C, infra. 24 Id. 25See Regulation SBSR Proposing Release, 75 FR 75208, as discussed in Section VIII, infra. 26See Section XI, infra. As discussed in Section XI, in permitting substituted compliance, the Commission might use different procedural approaches depending on the different substantive requirements that are the subject of the substituted compliance determinations. See also note 27, infra. swap participants,12 security-based swap data repositories (‘‘SDRs’’),13 security-based swap clearing agencies,14 security-based swap execution facilities (‘‘SB SEFs’’),15 and mandatory security￾based swap reporting and dissemination,16 clearing,17 and trade execution.18 B. Overview of the Cross-Border Proposal With limited exceptions, the Commission has not proposed specific provisions of rules or forms or provided guidance regarding the application of Title VII to cross-border activities.19 Rather than addressing these issues in a piecemeal fashion through the various substantive rulemaking proposals implementing Title VII, the Commission instead is addressing the application of Title VII to cross-border activities holistically in a single proposing release.20 This approach provides market participants, foreign regulators, and other interested parties with an opportunity to consider, as an integrated whole, the Commission’s proposed approach to the application of Title VII to cross-border security-based swap activities and non-U.S. persons that act in capacities regulated under the Dodd￾Frank Act.21 After providing an overview of the security-based swap market, the Commission’s preliminary views on the scope of application of Title VII to cross￾border security-based swap activity, and the legal and policy principles guiding the Commission’s approach to the application of Title VII to cross-border activities in Section II, we set forth our proposed approach in the subsequent sections of the release. In Sections III and IV, we propose rules and interpretive guidance regarding the registration and regulation of security-based swap dealers and major security-based swap participants, including the treatment of foreign branches of U.S. banks and the provision of guarantees in the cross￾border context. In connection with this, we are re-proposing the following rules and forms: 17 CFR 249.1600 (Form SBSE), 249.1600a (Form SBSE–A), and 249.1600b (Form SBSE–BD).22 In Sections V–VII, we propose rules and interpretive guidance regarding the registration of security-based swap clearing agencies, SDRs, and SB SEFs, as well as discuss generally under what circumstances the Commission would consider granting exemptions from registration for these infrastructures. To facilitate relevant authorities’ access to security-based swap data collected and maintained by Commission-registered
SDRs, the Commission also is proposing interpretive guidance to specify how SDRs may comply with the notification requirement in the Exchange Act and specifying how the Commission proposes to determine whether a relevant authority is appropriate for purposes of receiving security-based swap data from an SDR.23 In addition, the Commission is proposing a tailored exemption from the indemnification requirement in the Exchange Act.24 In Sections VIII–X, we propose rules and interpretive guidance regarding the application of Title VII to cross-border activities with respect to certain transactional requirements in connection with reporting and dissemination, clearing, and trade execution for security-based swaps. As discussed further below, these requirements apply to persons independent of their registration status. In connection with this, we are re￾proposing the following rules: 17 CFR 242.900–242.911 (Regulation SBSR).25 In Section XI, we set forth a proposed policy and procedural framework under which we would consider permitting compliance with comparable regulatory requirements in a foreign jurisdiction to substitute for compliance with certain requirements of the Exchange Act, and the rules and regulations thereunder, relating to security-based swaps (i.e., ‘‘substituted compliance’’).26 Generally speaking, the Commission is proposing a policy and procedural framework that would allow for the possibility of substituted compliance in recognition of

27Separately, in Sections V–VII below, the Commission also discusses generally when we would consider exempting non-resident security￾based swap clearing agencies and SB SEFs that are subject to comparable, comprehensive supervision and regulation in their home countries, and certain SDRs that are non-U.S. persons, from certain obligations under the Exchange Act, including the requirement to register. 28The rules, forms, and interpretive guidance proposed herein and discussed in Sections II–XI below relate solely to the applicability of the registration (and the attendant substantive regulation) and reporting and dissemination, clearing, and trade execution requirements in Title VII, and are not intended to limit or address the cross-border reach or extraterritorial application of the antifraud or other provisions of the federal securities laws. 29The Commission is not addressing in this release issues relating to compliance dates of final rules adopted pursuant to amendments made to the Exchange Act by Title VII. Compliance issues, including compliance dates, will be addressed in connection with the various Title VII final rules. See 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, Exchange Act Release No. 67177 (June 11, 2012), 77 FR 35625 (June 14, 2012) (‘‘Implementation Policy Statement’’). See also Reopening of Comment Periods for Certain Rulemaking Releases and Policy Statement Applicable to Security-Based Swaps Proposed Pursuant to the Securities Exchange Act of 1934 and the Dodd-Frank Wall Street Reform and Consumer Protection Act, Exchange Act Release No. 34–69491 (May 1, 2013). 30The views expressed in comment letters and meetings are collectively referred to as the views of ‘‘commenters.’’ See Appendix D for a list of commenters referred to in this release and the location of their comment letters on the Commission’s (or the CFTC’s) Web site. 31 In addition, the Commission and the CFTC held a joint public roundtable regarding the application of Title VII to cross-border activities. See Joint Public Roundtable on International Issues Relating to the Implementation of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Exchange Act Release No. 64939 (July 21, 2011), 76 FR 44507 (July 26, 2011). 32Section 712(a)(2) of the Dodd-Frank Act states, in part, that ‘‘the Securities and Exchange Commission shall consult and coordinate to the extent possible with the Commodity Futures Trading Commission and the prudential regulators for the purposes of assuring regulatory consistency and comparability, to the extent possible.’’ 33Section 752(a) of the Dodd-Frank Act states, in
part, that ‘‘[i]n order to promote effective and
consistent global regulation of swaps and security￾based swaps, the Commodity Futures Trading Commission, the Securities and Exchange Commission, and the prudential regulators (as that term is defined in Section 1a(39) of the Commodity Exchange Act), as appropriate, shall consult and coordinate with foreign regulatory authorities on the establishment of consistent international standards with respect to the regulation (including fees) of swaps.’’ 34The term ‘‘prudential regulator’’ is defined in
Section 1a(39) of the CEA, 7 U.S.C. 1a(39), and that
definition is incorporated by reference in Section 3(a)(74) of the Exchange Act, 15 U.S.C. 78c(a)(74). Pursuant to the definition, the Board of Governors of the Federal Reserve System (‘‘Federal Reserve Board’’), the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Farm Credit Administration, or the Federal Housing Finance Agency (collectively, the ‘‘prudential regulators’’) is the ‘‘prudential regulator’’ of a security-based swap dealer if the entity is directly supervised by that agency. 35 G20 Meeting, Pittsburgh, United States, September 25, 2009, available at: http:// www.treasury.gov/resource-center/international/g7- g20/Documents/pittsburgh_summit_leaders_ statement_250909.pdf. 36For example, on June 18–19, 2012, the leaders of the G20 convened in Los Cabos, Mexico, and reaffirmed their commitments with respect to the regulation of the OTC derivatives markets. See the G20 Leaders Declaration (June 2012), para. 39, available at: http://www.g20.org/documents/. 37Senior representatives of OTC derivatives market regulators from G20 jurisdictions have met on a number of occasions to discuss international coordination of OTC derivatives regulations. See, e.g., Joint Press Statement of Leaders on Operating Principles and Areas of Exploration in the Regulation of the Cross-Border OTC Derivatives Market (Dec. 4, 2012), available at: http:// www.sec.gov/news/press/2012/2012-251.htm; Joint Statement on Regulation of OTC Derivatives Markets (May 7, 2012), available at: http:// www.sec.gov/news/press/2012/2012-85.htm; and Joint Statement on Regulation of OTC Derivatives Markets (Dec. 9, 2011), available at: http:// www.sec.gov/news/press/2011/2011-260.htm . See also Financial Stability Board (‘‘FSB’’), OTC Derivatives Market Reforms, Fifth Progress Report on Implementation (April 15, 2013) (‘‘FSB Progress Report April 2013’’), at 47, available at: http:// www.financialstabilityboard.org/publications/ r_130415.pdf (noting that SEC staff has regularly consulted its counterparts in other jurisdictions to discuss and compare approaches to the application of Title VII of the Dodd-Frank Act in cross-border contexts); FSB Progress Report April 2013 at 5 and the potential, in a market as global as the security-based swap market, for market participants who engage in cross-border security-based swap activity to be subject to conflicting or duplicative compliance obligations.27 In addition, the Commission is proposing a rule that would set forth procedures for requesting a substituted compliance determination. In Section XII, the Commission sets forth our view of the scope of our authority, with respect to enforcement proceedings, under Section 929P of the Dodd-Frank Act.28 Section XIII sets forth a general request for comment, including request for comment on the consistency of our proposed approach with the CFTC’s proposed approach to applying the provisions of the CEA that were enacted by Title VII in the cross￾border
context. Finally, in Section XIV, the Commission addresses the Paperwork Reduction Act, and Section XV provides an economic analysis of the proposed approach, including a discussion of the associated costs and benefits of the proposals discussed in Sections III–XI, as well as a discussion of issues related to efficiency, competition, and capital formation. Because this release is directly related to security-based swap data reporting and dissemination, clearing, and trade execution, as well as the regulation of various persons required to register as a result of amendments made to the Exchange Act by Title VII, we anticipate that some of the rules, forms, and interpretive guidance proposed herein, and comments received thereon, will be addressed in the adopting releases relating to the impacted substantive rules. In some areas, we may decide to address comments received on the proposals contained in this release by adopting rules in a separate rulemaking.29
C. Consultation and Coordination
As discussed more fully below, a number of market participants, foreign regulators, and other interested parties have already provided their views on the application of Title VII to cross￾border activities through both written comment letters to the Commission and/ or the CFTC and meetings with Commissioners and Commission staff.30 The Commission has taken the commenters’ views expressed thus far into consideration in developing these proposed rules, forms, and interpretive guidance.31 In addition, in developing this proposal, the Commission has, in compliance with Sections 712(a)(2)32 and 752(a)33 of the Dodd-Frank Act, consulted and coordinated with the CFTC, the prudential regulators,34 and foreign regulatory authorities. Efforts to regulate the swaps market are underway not only in the United States but also abroad. In 2009, leaders of the Group of 20 (‘‘G20’’)—whose membership includes the United States, 18 other countries, and the European Union (‘‘EU’’)—called for global improvements in the functioning, transparency, and regulatory oversight of OTC derivatives markets. Specifically, the G20 leaders declared that:
[a]ll standardised OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest. OTC derivative contracts should be reported to trade repositories. Non-centrally cleared contracts should be subject to higher capital requirements. We ask the [Financial Stability Board] and its relevant members to assess regularly implementation and whether it is sufficient to improve transparency in the derivatives markets, mitigate systemic risk and protect against market abuse.35 In subsequent summits, the G20 leaders have reiterated their commitment to OTC derivatives regulatory reform.36 The Commission has participated in numerous bilateral and multilateral discussions with foreign regulatory authorities addressing the regulation of OTC derivatives.37 Through these

45–46 (discussing meetings of the group of market regulators ‘‘to identify and explore ways to address issues and uncertainties in the application of rules in a cross-border context, including options to address identified conflicts, inconsistencies, and duplication.’’). 38The Commission participates in the FSB’s Working Group on OTC Derivatives Regulation (‘‘ODWG’’), both on its own behalf and as the representative of the International Organization of Securities Commissions (‘‘IOSCO’’), which is co￾chair of the ODWG. The Commission also serves as one of the co-chairs of the IOSCO Task Force on OTC Derivatives Regulation. 39See CFTC and SEC, Joint Report on International Swap Regulation (Jan. 31, 2012), available at: http://www.sec.gov/news/studies/ 2012/sec-cftc-intlswapreg.pdf. 40 In addition, Commission and CFTC staff submitted a joint study to Congress on the feasibility of requiring the derivatives industry to adopt standardized computer-readable algorithmic descriptions which may be used to describe complex and standardized financial derivatives. See Joint Study on the Feasibility of Mandating Algorithmic Descriptions for Derivatives: A Study by the Staff of the Securities and Exchange Commission and the Commodity Futures Trading Commission as Required by Section 719(c) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Apr. 7, 2011), available at: http:// www.sec.gov/news/studies/2011/719b-study.pdf. In preparing this report, Commission and CFTC staff coordinated extensively with international financial institutions and foreign regulators. 41 In this release, the term ‘‘foreign’’ is used interchangeably with the term ‘‘non-U.S.’’ See, e.g., note 372, infra (discussing the definition of ‘‘foreign security-based swap dealer’’). 42See Section XI, infra. 43Specifically, the Commission is proposing to make substituted compliance determinations with respect to the following categories of requirements:
(i) Requirements applicable to registered security￾based swap dealers in Section 15F of the Exchange Act and the rules and regulations thereunder; (ii) requirements relating to regulatory reporting and public dissemination of security-based swaps; (iii) requirements relating to clearing for security-based swaps; and (iv) requirements relating to trade execution for security-based swaps. See Section XI, infra. 44See Section II, infra. 45See Section II.C, infra (discussing the principles guiding proposed approach to applying Title VII in the cross-border context). 46All references in this release to an entity that is ‘‘registered’’ indicate an entity that is registered with the Commission, unless otherwise indicated. discussions and our participation in various international task forces and working groups,38 we have gathered information about foreign regulatory reform efforts and have discussed the possibility of conflicts and gaps, as well as inconsistencies and duplications, between U.S. and foreign regulatory regimes. We have taken these discussions into consideration in developing these proposed rules, forms, and interpretations. In addition, the Commission and the CFTC have conducted staff studies to assess developments in OTC derivatives regulation abroad. As directed by Congress in Section 719(c) of the Dodd￾Frank Act, on January 31, 2012, the Commission and the CFTC jointly submitted to Congress a ‘‘Joint Report on International Swap Regulation’’ (‘‘Swap Report’’).39 The Swap Report discussed swap and security-based swap regulation and clearinghouse regulation in the Americas, Asia, and the European Union, and identified similarities and differences in jurisdictions’ approaches to areas of regulation, as well as other areas of regulation that could be harmonized. The Swap Report also identified major clearinghouses, clearing members, and regulators in each geographic area and described the major contracts (including clearing volumes and notional values), methods for clearing swaps, and the systems used for setting margin in each geographic area.40 D. Substituted Compliance As noted above, we recognize the potential, in a market as global as the security-based swap market, that market participants who engage in cross-border security-based swap activity may be subject to conflicting or duplicative compliance obligations. To address this possibility, we are proposing a ‘‘substituted compliance’’ framework under which we would consider permitting compliance with requirements in a foreign41 regulatory system to substitute for compliance with certain requirements of the Exchange Act relating to security-based swaps, provided that the corresponding requirements in the foreign regulatory system are comparable to the relevant provisions of the Exchange Act.42 The availability of substituted compliance should reduce the likelihood that market participants would be subject to potentially conflicting or duplicative sets of rules. As discussed more
fully below, the Commission would perform comparability analysis and make substituted compliance determinations with respect to four separate categories of requirements.43 If, for example, a foreign regulatory system achieves comparable regulatory outcomes in three out of the four categories, then the Commission would permit substituted compliance with respect to those three categories of comparable requirements, but not for the one, non-comparable category for which comparable regulatory outcomes are not achieved. In other words, we are not proposing an ‘‘all-or-nothing’’ approach. In addition, in making comparability determinations within each category of requirements, the Commission is proposing to take a holistic approach; that is, we would ultimately focus on regulatory outcomes rather than a rule-by-rule comparison. Substituted compliance therefore should accept differences between regulatory regimes when those differences nevertheless accomplish comparable regulatory outcomes. E. Conclusion In proposing these rules, forms, and interpretations, the Commission is mindful that the security-based swap market is global in nature and developed prior to the enactment of the Dodd-Frank Act.44 There are challenges involved in imposing a comprehensive regulatory regime on existing markets, particularly ones that have not been subject to the particular regulation that the Dodd-Frank Act provides. Any rules and interpretive guidance we adopt governing the application of Title VII to cross-border activities could significantly affect the global security￾based swap market. As discussed further below, to the extent practicable and consistent with our statutory mandate,45 the Commission has proposed these rules and interpretations with the intent to achieve the regulatory benefits intended by the Dodd-Frank Act and to facilitate a well-functioning global security-based swap market, including by taking into account the impact these proposed rules and interpretations will have on counterparty protection, transparency, systemic risk, liquidity, efficiency, and competition in the market. In addition, the Commission is mindful of the fact that the application of Title VII to cross￾border activities raises issues of potential conflict or overlap with foreign regulatory regimes. Furthermore, the Commission is attentive to the fact that a number of registrants may be registered with both us and the CFTC.46 The rules and interpretations proposed today represent the Commission’s preliminary views regarding the application of Title VII to cross-border security-based swap activities and to non-U.S. persons who act in capacities regulated under the Dodd-Frank Act. We note that these proposed rules and interpretations are tailored to the unique circumstances of the security-based swap market, and as such would not necessarily be appropriate to apply to the Commission’s regulation of traditional securities markets. We also recognize that there are a number of possible
alternative approaches to applying Title VII in the cross-border context. Accordingly, the Commission invites public comment regarding all aspects of

47See, e.g., IIB Letter at 1 (noting the ‘‘truly global nature of the OTC derivatives market’’); Cleary Letter IV at 2 (noting that swaps and security-based swaps trade in a ‘‘unique global market’’); Socie´te´ Ge´ne´rale Letter II at 2 (noting the ‘‘global nature of the derivatives business’’); see also Bank of International Settlements (‘‘BIS’’), Committee on the Global Financial System, No. 46, The macro financial implications of alternative configurations for access to central counterparties in OTC derivatives markets (Nov. 2011) at 1, available at:
http://www.bis.org/publ/cgfs46.pdf (referring to the ‘‘globalized nature of the market, in which a significant proportion of OTC derivatives trading is undertaken across borders’’). 48See, e.g., SIFMA Letter I at 2. 49See Section XV.B, infra (discussing in detail the global nature of the security-based swap market). 50The information was made available to the Commission in accordance with the agreement between DTCC–TIW and the OTC Derivatives Regulatory Forum (‘‘ODRF’’). 51The domicile classifications in DTCC–TIW are based on the market participants’ own reporting and may not have been verified. Prior to enactment of the Dodd-Frank Act, funds and accounts did not formally report their domicile to DTCC–TIW because there was no systematic requirement to do so. After enactment of the Dodd-Frank Act, the DTCC–TIW has collected the registered office location of the account or fund. This information is self-reported on a voluntary basis. It is possible that some market participants may misclassify their domicile status because the databases in DTCC– TIW do not assign a unique legal entity identifier to each separate entity. Notwithstanding this limitation, we believe that the cross-border and foreign activity presented in the analysis by the Commission’s Division of Risk, Strategy, and Financial Innovation demonstrates the nature of the CDS market. See Section XV.B.2.c, infra. 52 DTCC–TIW classified a foreign branch or foreign subsidiary of a U.S. domiciled entity as foreign-domiciled. Therefore, CDS transactions with a foreign-domiciled counterparty include CDS transactions with a foreign branch or foreign subsidiary of a U.S.-domiciled entity as counterparty. 53Put another way, in 2011, a vast majority (approximately 93%) of U.S. single-name CDS transactions directly involved at least one foreign￾domiciled counterparty. This observation is based on the data compiled by the Commission’s Division of Risk, Strategy, and Financial Innovation on single-name CDS transactions with U.S. reference entities from the DTCC–TIW between January 1, 2011, and December 31, 2011. See Section XV.B.2.d, infra. 54 Id. 55We note, however, that, in addition to classifying transactions between a U.S. counterparty and a foreign branch of a U.S. bank as a cross￾border transaction (see note 51, supra), these statistics characterize as cross-border transactions those in which all or substantially all of the activity takes place in the United States and all or much of the risk of the transactions ultimately is borne by U.S. persons. 56As used in this release, ‘‘security-based swap dealing,’’ ‘‘security-based swap dealing activity,’’ ‘‘dealing activity,’’ and related concepts have the meaning described in the Intermediary Definitions Adopting Release, 77 FR 30596, unless otherwise indicated in this release. 57See, e.g., Cleary Letter IV at 5; Davis Polk Letter I at 2–3; IIB Letter at 7. 58See, e.g., Cleary Letter at 3. 59See, e.g., SIFMA Letter at 2. 60See Intermediary
Definitions Adopting Release, 77 FR 30617 n.264 (‘‘A sales force, however, is not a prerequisite to a person being a security-based swap dealer. For example, a person that enters into security-based swaps in a dealing capacity can fall within the dealer definition even if it uses an affiliated entity to market and/or negotiate those security-based swaps (e.g., the person is a booking entity).’’). See also Section III.D, infra. 61See Sullivan & Cromwell Letter at 2. the proposed approach, including each proposed rule and interpretation contained herein, and potential alternative approaches. In particular, data and comment from market participants and other interested parties with respect to the likely effect of each proposed rule and interpretation regarding application of a specific Title VII requirement, and the effect of such proposed application in the aggregate, will be particularly useful to the Commission in evaluating possible modifications to the proposal and understanding the consequences of the substantive rules that have not yet been adopted under Title VII.
II. Overview of the Security-Based
Swap Market and the Legal and Policy Principles Guiding the Commission’s Approach to the Application of Title VII to Cross-Border Activities In this section, the Commission provides a general overview of the security-based swap market that informs our proposed implementation of Title VII, including a description of the various dealing structures used by U.S.- based and foreign-based entities to conduct their security-based swap businesses, and existing clearing, reporting, and trade execution practices. We also discuss the Commission’s preliminary views on the scope of application of Title VII and the principles guiding our proposed approach to applying Title VII in the cross-border context. A. Overview of the Security-Based Swap Market

1. Global Nature of the Security-Based
   Swap Market
   The security-based swap market is a global market.47 Security-based swap business currently takes place across national borders, with agreements negotiated and executed between counterparties often in different jurisdictions (and at times booked and risk-managed in still other jurisdictions).48 The global nature of the security￾based swap market is evidenced by the data available to the Commission.49 Based on market data in the Depository Trust and Clearing Corporation’s Trade Information Warehouse (‘‘DTCC– TIW’’),50 viewed from the perspective of the domiciles of the counterparties booking credit default swap (‘‘CDS’’) transactions, approximately 49% of U.S. single-name CDS transactions in 2011 were cross-border transactions between a U.S.-domiciled 51 counterparty and a foreign-domiciled counterparty 52 and an additional 44% of such CDS transactions were between two foreign￾domiciled counterparties.53 Thus, approximately 7% of the U.S. single￾name CDS transactions in 2011 were between two U.S.-domiciled counterparties.54 These statistics indicate that cross-border transactions are the norm, not the exception, in the security-based swap market.55 Accordingly, the question of how the Commission is implementing Title VII with respect to security-based swaps will, to a large extent, be affected by how the Commission applies Title VII to the cross-border transactions that are the majority of security-based swaps.
2. Dealing Structures
   Dealers use a variety of business models and legal structures to conduct security-based swap dealing business 56 with counterparties in jurisdictions all around the world.57 Commenters have indicated that both U.S.-based and foreign-based entities use certain dealing structures for a variety of legal, tax, strategic, and business reasons that often pre-date the enactment of the Dodd-Frank Act.58 Among the reasons cited for the variety of dealing structures is the desire of counterparties to reduce risk and enhance credit protection based on the particular characteristics of each entity’s business.59 In this subsection, we describe certain dealing structures that U.S.-based entities and foreign-based entities in the security-based swap market might use. In each of these dealing structures, because the booking entity is the counterparty to the security-based swap transaction resulting from the dealing activity (i.e., the principal) and bears the ongoing risk of performance on the transaction, we view the booking entity, and not the intermediary that acts as an agent on behalf of the booking entity to originate the transaction, as the dealing entity.60 (a) U.S. Bank Dealer A U.S. bank holding company may use a U.S. subsidiary that is a banking entity to deal directly with U.S. and foreign counterparties. Such U.S. bank dealer may use a sales force in its U.S. home office to originate security-based swap transactions in the United States and use separate sales force in foreign branches to originate security-based swap transactions with counterparties in foreign local markets.61 The resulting security-based swap transactions may be

62See id. at 3–4.
63See Cleary Letter IV at 10 (discussing a U.S. holding company providing a guarantee of performance on the obligations of its foreign swap dealing subsidiary). 64See Intermediary Definitions Adopting Release, 77 FR 30689. See also Product Definitions Adopting Release, 77 FR 48227 (stating that the Commission would consider issues involving cross-border guarantees of security-based swaps in a separate release addressing the application of Title VII in the cross-border context). 65See, e.g., Sullivan & Cromwell Letter, at 3–4 (stating that Bank of America Corporation, Citigroup Inc. and JPMorgan Chase & Co. conduct swap activities overseas through subsidiaries of the bank holding company, Edge Corporation subsidiaries of their U.S. banks and non-U.S. branches of the bank); Cleary Letter IV at 10–11. 66See Cleary Letter IV at 10 (discussing a U.S. holding company providing a guarantee of performance on the obligations of its foreign swap dealing subsidiary). 67See Cleary Letter VI at 3, 13 (discussing direct dealing by a foreign dealer from abroad); IIB Letter at 7. 68See Cleary Letter IV at 4, 21 (discussing the use of U.S. affiliate to intermediate) and IIB Letter at 7. 69See IIB Letter at 8. 70See Cleary Letter IV at 10 (discussing inter￾affiliate transactions). 71See id. (discussing a non-U.S. holding company providing a guarantee on the obligations of its U.S. swap dealing subsidiary). booked in the home office of the U.S. bank or in a foreign branch of the bank.62 (b) U.S. Non-bank Dealer A U.S.-based holding company may use a non-bank subsidiary to conduct security-based swap dealing activity in the U.S. market and foreign local markets. The U.S. non-bank dealer may act as principal to originate and book transactions in the United States and use a sales force in the foreign local markets (e.g., salespersons employed by its foreign affiliate) as agent to originate transactions on its behalf, and then centrally book the resulting transactions in the U.S. non-bank dealer. In some situations, such as where the holding company has rated debt, but the U.S. non-bank dealer does not, the U.S. non￾bank dealer’s performance under security-based swaps may be supported by a parental guarantee provided by the holding company.63 The guarantee would typically give counterparties to the U.S. non-bank dealer direct recourse to the holding company for obligations owed by such non-bank dealer under the security-based swaps as though the guarantor had entered into the transactions directly with the counterparties.64 (c) Foreign Subsidiary Guaranteed by a U.S. Person A U.S.-based holding company also may conduct dealing activity in both U.S. markets and foreign markets out of a foreign subsidiary.65 The foreign subsidiary may use a sales force in the United States (e.g., salespersons employed by its U.S. affiliate) to originate security-based swap transactions with counterparties in the U.S. markets, or may directly solicit, negotiate, and execute security-based
swap transactions with counterparties in the U.S. markets from outside the United States, and centrally book the resulting transactions itself. The foreign subsidiary also may conduct security￾based swap dealing activity in various foreign markets using local salespersons as agent to originate and centrally book the resulting security-based swap transactions itself. In some situations, such as where the U.S.-based holding company has rated debt, but the foreign subsidiary does not, the foreign subsidiary’s performance under security-based swaps may be supported by a parental guarantee provided by the holding company.66 Such guarantee would typically give its counterparty direct recourse to the U.S. parent acting as guarantor for obligations owed by such foreign subsidiary under the security-based swaps. As a result, a guarantee provided by a U.S. person of another person’s obligations owed under a security-based swap transaction poses the same degree of risk to the United States as the risk posed by a transaction entered into directly by such U.S. person. In circumstances where a foreign non￾bank subsidiary of a U.S. holding company has sufficient credit￾worthiness and does not rely on a U.S. parental guarantee to support its creditworthiness, the risk of the security-based swaps entered into by the foreign subsidiary of a U.S.-based holding company resides in the foreign subsidiary outside the United States. (d) Foreign-Based Dealer
i. Direct Dealing
Foreign-based entities also may use a number of business models and legal structures to conduct global security￾based swap dealing activity in both the U.S. and foreign markets. Like U.S. dealers, foreign dealers may deal directly with U.S. counterparties and non-U.S. counterparties without using any agents in the local market to intermediate and book the resulting transactions in the foreign entities themselves.67
ii. Intermediation in the United States
Foreign dealers also may use local personnel with knowledge of and expertise on the local markets to intermediate security-based swap transactions in each local market, for instance, using salespersons in the United States to originate security-based swaps in the U.S. market, and either book the resulting transactions in an entity based in the United States (such as a U.S. affiliate) or centrally book the resulting transactions in a foreign central booking affiliate.68 Intermediation activity within the United States on behalf of foreign entities may occur in two principal legal structures. First, foreign dealers that are banking entities may conduct dealing activity with U.S. counterparties out of their U.S. branches. In this structure, a foreign banking entity may originate and book transactions in its U.S. branch, or the U.S. branch may originate transactions that are booked in the foreign home office.69 Second, both bank and non-bank foreign dealers may conduct dealing activity out of their U.S. subsidiaries. The U.S. subsidiaries may act as principal to originate and book security￾based swaps in the United States and enter into inter-affiliate back-to-back transactions with the foreign central booking entity (usually the foreign parent) for purposes of centralized booking and centralized risk management.70 The U.S. subsidiary also may act as agent to originate security￾based swaps in the United States on behalf of the foreign entity and the resulting transactions would be booked in a centralized foreign booking entity, usually the foreign parent. In some situations, such as where the foreign￾based entity has rated debt, but the U.S. subsidiary does not, the U.S.-based subsidiary’s performance under security-based swaps that it enters into as principal may be supported by a parental guarantee provided by the foreign-based entity.71 The transactions originated by the U.S. branch of a foreign bank or a U.S. subsidiary of a foreign bank or non-bank entity may not be limited to those with U.S. counterparties in the U.S. security￾based swap market. Foreign bank or non-bank entities may utilize their U.S. branches or U.S. subsidiaries to conduct dealing activity with, for instance, non￾U.S. counterparties located in various jurisdictions within the same region or same time zones, such as Canada or Latin America, and centrally book the resulting transactions in the home offices of the foreign entities themselves. For example, a Canadian counterparty might enter into a security￾based swap with a non-U.S.-based dealer that solicits and negotiates the transaction out of a U.S subsidiary

72The President’s Working Group on Financial Markets made the central clearing of OTC derivatives a top policy objective in 2008. See Policy Objectives for the OTC Derivatives Market (Nov. 14, 2008), available at: http:// www.treasury.gov/resource-center/fin-mkts/ Documents/policyobjectives.pdf; see also Policy Statement on Financial Market Developments (Mar. 13, 2008), available at: http://www.law.du.edu/ images/uploads/presidents-working-group.pdf; and Progress Update on March Policy Statement on Financial Market Developments (Oct. 2008), available at: http://www.treasury.gov/resource￾center/fin-mkts/Documents/ q4progress%20update.pdf. 73On November 14, 2008, the Commission executed a Memorandum of Understanding with the Board and the CFTC that established a framework for consultation and information sharing on issues related to central counterparties for the OTC derivatives market. See http://www.sec.gov/ news/press/2008/2008-269.htm. 74The Commission authorized five entities to clear CDS. See CDS clearing by ICE Clear Europe Limited, Exchange Act Release Nos. 60372 (July 23, 2009), 74 FR 37748 (July 29, 2009) and 61973 (Apr. 23, 2010), 75 FR 22656 (Apr. 29, 2010); CDS clearing by Eurex Clearing AG, Exchange Act Release Nos. 60373 (July 23, 2009), 74 FR 37740 (July 29, 2009) and 61975 (Apr. 23, 2010), 75 FR 22641 (Apr. 29, 2010); CDS clearing by Chicago Mercantile Exchange Inc., Exchange Act Release Nos. 59578 (Mar. 13, 2009), 74 FR 11781 (Mar. 19, 2009), 61164 (Dec. 14, 2009), 74 FR 67258 (Dec. 18,
2009) and 61803 (Mar. 30, 2010), 75 FR 17181 (Apr.
5, 2010); CDS clearing by ICE Clear Credit LLC (formerly ICE Trust US LLC), Exchange Act Release Nos. 59527 (Mar. 6, 2009), 74 FR 10791 (Mar. 12, 2009), 61119 (Dec. 4, 2009), 74 FR 65554 (Dec. 10,
2009) and 61662 (Mar. 5, 2010), 75 FR 11589 (Mar.
11, 2010); Temporary CDS clearing by LIFFE A&M and LCH.Clearnet Ltd., Exchange Act Release No. 59164 (Dec. 24, 2008), 74 FR 139 (Jan. 2, 2009) (‘‘CDS Clearing Exemption Orders’’). 75 Voluntary CCP clearing grew out of a series of meetings beginning in September 2005 hosted by the Federal Reserve Bank of New York with major market participants and their domestic and international supervisors for the purpose of discussing problems in the processing of CDS, and related risk management and control issues. See http://www.ny.frb.org/newsevents/news/markets/ 2005/an050915.html. In June 2008 the attendees agreed to an agenda for improvement in the derivatives market infrastructure that included ‘‘developing a central counterparty for credit default swaps that, with a robust risk management regime, can help reduce systemic risk.’’ See http:// www.ny.frb.org/newsevents/news/markets/2008/ ma080609.html; see also https://www.theice.com/ marketdata/reports/ReportCenter.shtml. 76As of April 19, 2012, ICE Clear Credit had cleared approximately $15.6 trillion notional amount of CDS contracts based on indices of securities and approximately $1.5 trillion notional amount of CDS contracts based on individual reference entities or securities. As of April 19, 2012, ICE Clear Europe had cleared approximately Ö7.2 trillion notional amount of CDS contracts based on indices of securities and approximately Ö1.2 trillion notional amount of CDS contracts based on individual reference entities or securities. See Clearing Agency Standards Adopting Release, 77 FR 66236 n.184 (citing https://www.theice.com/ marketdata/reports/ReportCenter.shtml). 77See Section XV.B.2(e), infra. 78See FSB, Implementing OTC Derivatives Market Reforms (Oct. 25, 2010) (‘‘FSB October 2010 Report’’), at 11, available at: http:// www.financialstabilityboard.org/publications/ r_101025.pdf. 79 Government Accountability Office, ‘‘Systemic Risk: Regulatory Oversight and Recent Initiatives to Address Risk Posed by Credit Default Swaps,’’ GAO–09–397T (Mar. 2009), at 2, 5, 27, available at:
http://www.gao.gov/new.items/d09397t.pdf. 80See note 35 and accompanying text, supra. See also SDR Proposing Release, 75 FR 77307 (‘‘Under the Dodd-Frank Act, SDRs are intended to play a key role in enhancing transparency in the [security￾based swap] market by retaining complete records of [security-based swap] transactions, maintaining the integrity of those records, and providing effective access to those records to relevant authorities and the public in line with their respective information needs. The enhanced transparency provided by an SDR is important to help regulators and others monitor the build-up and concentration of risk exposures in the [security￾based swap] market. Without an SDR, data on [security-based swap] transactions is dispersed and not readily available to regulators and others.’’). 81See Committee on Payment and Settlement Systems (‘‘CPSS’’) and Technical Committee of IOSCO, Report on OTC Derivatives Data Reporting and Aggregation Requirements (Jan. 2012), at 5, available at: http://www.iosco.org/library/pubdocs/ pdf/IOSCOPD366.pdf (‘‘CPSS–IOSCO Data Report’’). 82FSB Progress Report April 2013 at 19. 83 Id. at 20–21, 63–65. Ten trade repositories were offering trade reporting on interest rate derivatives transactions; eight were offering trade reporting on commodity derivative transactions; seven were offering trade reporting on equity derivatives transactions; eight were offering trade reporting on foreign exchange derivative transactions; and seven were offering trade reporting on credit derivatives. acting as agent but books the transaction itself outside the United States.
3. Clearing Practices
Prior to the enactment of the Dodd￾Frank Act, there was no provision in the Exchange Act or any other laws in the United States for the mandatory clearing of OTC derivatives. Although initiatives related to central clearing had been considered before 2008, the 2008 financial crisis brought a new focus on CDS as a source of systemic risk and contributed to a more general recognition that central clearing parties (‘‘CCPs’’) could play a role in helping to manage bilateral counterparty credit risk in OTC CDS.72 In November 2008, the Commission, in consultation and coordination with the Federal Reserve Board and the CFTC, took steps to help facilitate the prompt development of CCPs for OTC derivatives.73 Specifically, the Commission authorized the clearing of OTC security-based swaps by permitting certain clearing agencies to clear CDS on a temporary conditional basis.74 As the Commission and other regulatory agencies monitored the activities of those clearing agencies, a significant volume of interdealer OTC CDS transactions and a smaller volume of dealer-to-non-dealer OTC CDS transactions were centrally cleared on a voluntary basis.75 The level of voluntary clearing in swaps and security-based swaps has steadily increased since that time. Although the volume of interdealer CDS cleared to date is quite large,76 many security-based swap transactions are still ineligible for central clearing, and many transactions in security-based swaps eligible for clearing at a CCP continue to settle bilaterally. Voluntary clearing of security-based swaps in the United States is currently limited to CDS products. Central clearing of security-based swaps began in March 2009 for index CDS products, in December 2009 for single-name corporate CDS products, and in November 2011 for single-name sovereign CDS products. At present, there is no central clearing in the United States for security-based swaps that are not CDS products, such as those based on equity securities. The level of clearing activity appears to have steadily increased as more CDS have become eligible to be cleared.77
4. Reporting Practices
The OTC derivatives markets have historically been largely opaque.78 With respect to CDS, for example, the Government Accountability Office found in 2009 that ‘‘comprehensive and consistent data on the overall market have not been readily available,’’ that ‘‘authoritative information about the actual size of the CDS market is generally not available,’’ and that regulators currently are unable ‘‘to monitor activities across the market.’’ 79 The reporting of comprehensive OTC derivative transaction data to trade repositories is intended to address the lack of transparency in this market, and as such it was one of the G20 regulatory reform commitments previously discussed.80 The first trade repositories were established in the mid-2000s.81 The development of trade repositories for different asset classes accelerated following the 2009 G20 commitment in this area, and as legislative and regulatory requirements began to be put in place. As of the end of the first quarter of 2013, fourteen FSB member jurisdictions had legislation in place either requiring reporting of OTC derivatives contracts or authorizing regulators to implement such regulations.82 In addition, as of the date of publication of the FSB Progress Report April 2013, eighteen trade repositories were either registered or in the process of becoming registered and twelve were operational, meaning, typically, that they were at least accepting transaction reports from more than one asset class.83 Prior to the Dodd-Frank Act, global trade repositories had been established for credit, interest rate, and equity

84Pursuant to initiatives led by the OTC Derivatives Supervisors Group (‘‘ODSG’’), in 2009 the largest OTC derivatives dealers at the global level committed to reporting all of their CDS trades to a trade repository. At that time, a trade repository for credit derivatives was already in existence and used by the industry. To promote the development of trade repositories for all interest rate and equity derivatives, in 2008 and 2009 ISDA sought proposals for the creation of central trade repositories for these asset classes. Two entities were selected to provide trade repository functions for these asset classes. See FSB October 2010 Report at 44. The ODSG originated in 2005, when the Federal Reserve Bank of New York (‘‘New York Federal Reserve’’) hosted a meeting with representatives of major OTC derivatives market participants and their domestic and international supervisors, including the Commission, in order to address the emerging risks of inadequate infrastructure for the rapidly growing market in credit derivatives. The ODSG is chaired by the New York Federal Reserve. 85The ODRF, formed in January 2009, brings together representatives from central banks, prudential supervisors, and securities and market regulators to discuss issues of common interest, regarding OTC derivatives central counterparties and trade repositories. The ODRF’s scope and focus include information sharing/needs and oversight co-ordination and co-operation. 86The Warehouse Trust Company LLC (‘‘Warehouse Trust’’) today provides certain post￾trade processing services to DTCC–TIW. DTCC–TIW provides a centralized electronic trade database for OTC credit derivatives contracts. 87See FSB October 2010 Report at 63. Building on this work, CPSS and IOSCO have published a consultation paper setting forth more comprehensive guidance regarding trade repositories more broadly. The paper provides guidance to authorities that supervise trade repositories; regulators, supervisors, resolution authorities, central banks, and other public-sector authorities (collectively, ‘‘authorities’’) that request OTC derivative data from trade repositories; and trade repositories. This guidance concerns the types of data to which authorities will typically require access and possible approaches to addressing potential constraints and concerns that may prevent effective access to such data. See CPSS and IOSCO, Consultative Report on Authorities’ Access to Trade Repository Data (April 2013), available at: http:// iosco.org/library/pubdocs/pdf/ IOSCOPD408.pdf?v=1. 88See CPSS–IOSCO Data Report at 45–46. 89See OTC Derivatives Market Reforms, Fourth Progress Report on Implementation (Oct. 31, 2012) at 5, available at: http:// www.financialstabilityboard.org/publications/ r_121031a.pdf. 90See SB SEF Proposing Release, 76 FR 10951. 91See id. 92See id. at 10951. 93For example, to the extent that a RFQ platform sets limits on the number of dealers to whom a customer may send an RFQ, the customer’s pre￾trade
transparency is restricted to that number of quotes it receives in response to its RFQ. See SB SEF Proposing Release, 76 FR 10952. 94See id. 95See id. derivatives.84 In addition, in June 2010, the OTC Derivatives Regulators’ Forum (‘‘ODRF’’) 85 developed indicative guidance for Warehouse Trust 86 aiming to identify data that authorities would expect to request from Warehouse Trust to carry out their mandates.87 Public availability of trade repository data varies globally and has changed significantly over time. For example, since October 2008, on a weekly basis, DTCC has published aggregated data via its Web site.88 More generally, in a recent FSB survey, all trade repositories that responded stated that they provide or intend to provide, transaction data on OTC derivatives to the public. In some cases and for some products, trading information is provided on a real-time basis. Some trade repositories publicly disclose only aggregated, end-of-day information.89
5. Trade Execution Practices
Unlike the markets for cash equity securities and listed options, the market for security-based swaps currently is characterized generally by bilateral negotiation directly between two counterparties in the OTC market and is largely decentralized; many instruments are individually negotiated and often customized; and many security-based swaps are not centrally cleared.90 The historical one-to-one nature of trade negotiation in security-based swaps has fostered various types of trading venues and execution practices, ranging among the following:
Bilateral Negotiations
‘‘Bilateral negotiation’’ refers to the execution practice whereby one party uses the telephone, email or other means of communication to directly contact a potential counterparty to negotiate and execute a security-based swap. In bilateral negotiation and execution, only the two parties to the transaction are aware of the terms of the negotiation and the final terms of the agreement.91 Single-Dealer RFQ Platforms A single-dealer request for quote (‘‘RFQ’’) platform refers to an electronic trading platform where a dealer may post indicative quotes for security-based swaps in various asset classes that the dealer is willing to trade. Only the dealer’s approved customers have access to the platform. When a customer wishes to transact in a security-based swap, the customer requests an executable quote, the dealer provides one, and if the customer accepts the dealer’s quote, the transaction is executed electronically. This type of platform generally provides indicative quotes on a pricing screen, but only from one dealer to its customers.92 Multi-Dealer RFQ Platforms A multi-dealer RFQ electronic trading platform refers to a multi-dealer RFQ system whereby a requester can send an RFQ to solicit quotes on a certain security-based swap from multiple dealers at the same time. After the RFQ is submitted, the recipients have a prescribed amount of time in which to respond to the RFQ with a quote. Responses to the RFQ are firm. The requestor then has the opportunity to review the responses and accept the best quote. A multi-dealer RFQ platform provides a certain amount of pricing information, depending on its characteristics.93 Central Limit Order Books A central limit order book system or similar system refers to a trading system in which firm bids and offers are posted for all participants to see, with the identity of the parties withheld until a transaction occurs. Bids and offers are then matched based on price-time priority or other established parameters and trades are executed accordingly. The quotes on a limit order book system are firm. In general, a limit order book system provides greater pricing information than the three platforms described above because all participants can view bids and offers before placing their bids and offers.94 Currently, limit order books for the trading of security￾based swaps in the United States are utilized by inter-dealer brokers for dealer-to-dealer transactions. Brokerage Trading ‘‘Brokerage trading’’ refers to an execution practice used by brokers to execute security-based swaps on behalf of customers, often in larger sized transactions. In such a system, a broker receives a request from a customer (which may be a dealer) who seeks to execute a specific type of security-based swap. The broker then interacts with other customers (which may also be dealers) to fill the request and execute the transaction. This model often is used by dealers that seek to transact with other dealers through the use of an
interdealer broker as an intermediary. In this model, participants may or may not be able to see bids and offers of other participants.95 These various trading venues and execution practices provide different degrees of pre-trade pricing information and different levels of access. The Commission currently does not have sufficient information with respect to the volume of security-based swap transactions executed across these different trading venues and execution practices to evaluate the individual impact of such venues and practices on

96See Section XV, infra (providing more detailed commentary on the economic effects of the proposed rules, including supporting citations). 97The Commission generally understands the ‘‘U.S. financial system’’ to include the U.S. banking system and the U.S. financial markets, including the U.S. security-based swap market, the traditional securities markets (e.g., the debt and equity markets), and the markets for other financial activities (e.g., lending). 98See Intermediary Definitions Adopting Release, 77 FR 30616–17 (noting that ‘‘the completion of a purchase or sale transaction’’ in the secondary equity or debt markets ‘‘can be expected to terminate the mutual obligations of the parties,’’ unlike security-based swap transactions, which often give rise to ‘‘an ongoing obligation to exchange cash flows over the life of the agreement’’). 99See Section II.A, supra, and Section XV.B.2, infra. 100For example, review of the DTCC–TIW single￾name CDS transactions executed in 2011 reveals that approximately 49% of the U.S. single-name CDS transactions were between one U.S.-domiciled counterparty and one foreign-domiciled counterparty, and 44% of such transactions were between two foreign-domiciled counterparties. See
Section II.A.1, supra, and Section XV.B.2(d), infra.
101See, e.g., Markus K. Brunnermeier and Lasse Heje Pedersen, ‘‘Market Liquidity and Funding Liquidity,’’ Rev. Financ. Stud. (2009); Denis Gromb and Dimitri Vayanos, ‘‘A Model of Financial Market Liquidity,’’ Journal of the European Economic Association (2010). pricing information available in the security-based swap market.
6. Broad Economic Considerations of
Cross-Border Security-Based Swaps 96 Our primary economic considerations for promulgating rules and interpretations regarding the application of Title VII to cross-border activities include the potential risks of security￾based swaps to the U.S. financial system 97 that could affect financial stability, the level of transparency and counterparty protection in the security￾based swap market, the costs to market participants, and the impact of such rules and interpretations on liquidity, efficiency, and competition in the market. Unlike most other securities transactions, a security-based swap gives rise to ongoing obligations between transaction counterparties during the life of the transaction. This means that each counterparty to the transaction undertakes the obligation to perform the security-based swap in accordance with its terms and bears the counterparty credit risk and market risk until the transaction is terminated.98 The cross-border rules ultimately adopted by the Commission could materially impact the economic effects of the final Title VII regulatory requirements. (a) Major Economic Considerations In determining how Title VII requirements should apply to persons and transactions in the cross-border context, the Commission is aware of the potentially significant trade-offs inherent in our policy decisions. For example, it is possible that counterparties excluded from the Title VII regulatory framework would not, among other things, receive the same level of counterparty protection or impartial access to trading venues and information as those included in the Title VII regulatory framework. However, it is also possible that market participants excluded from the Title VII regulatory framework would face lower regulatory burdens and lower compliance costs associated with their security-based swap activity. Further, it is possible that these trade-offs could alter the incentives for individuals to participate in the security-based swap market, which may impact the overall market, affecting its liquidity, as well as its efficiency and the competitive dynamics among participants. In addition, we also recognize that regulators in other jurisdictions are currently engaged in implementing their own regulatory reforms of the OTC derivatives markets and that our proposed application of Title VII to cross-border activities may affect the policy decisions of these other regulators as they seek to address potential conflicts or duplication in the regulatory requirements that apply to market participants under their authority. In proposing our rules and interpretations in this release, the Commission has considered the benefits of the Title VII regulatory framework, including counterparty protection and access to information, as well as the costs of compliance, taking into account the potential impact of the rules and interpretations on liquidity, efficiency, and competition in the security-based swap market. Moreover, the costs and benefits of
various Title VII substantive requirements may not be the same for each individual market participant, depending on the role it plays, the market function it performs, and the activity it engages in in the security￾based swap market. For example, Title VII requirements for security-based swap dealers and major security-based swap participants may impose significant costs on persons falling within the definitions of security-based swap dealer and major security-based swap participant that are not borne by other market participants. The costs of these requirements may provide economic incentive for some market participants falling within the definitions of security-based swap dealer and major security-based swap participant to restructure their security￾based swap business to operate wholly outside of the Title VII regulatory framework, exiting the security-based swap market in the United States and not transacting with U.S. persons. Conversely, certain Title VII requirements may promote financial stability and increase market participants’ confidence in entering into security-based swap transactions. (b) Global Nature and Interconnectedness of the Security￾Based Swap Market In considering the proposed approach to the application of the Title VII requirements, the Commission has been informed by the analysis of current market activity described in this release,99 including the extent of cross￾border trading activity in the security￾based swap market.100 The security￾based swap transactions between U.S.- and non-U.S. domiciled market participants provide conduits of risk into the U.S. financial system, which could affect the safety and soundness of the U.S. financial system. Similarly, such transactions also provide conduits for liquidity into the U.S. financial system. As a consequence, changes to incentives or costs that result from the application of U.S. regulatory requirements may have effects on the liquidity of the global market, as well as its efficiency and competitive dynamics. With respect to conduits of risk, one area of particular concern in the current security-based swap market is the risks that arise when a large market participant becomes financially distressed, including the potential for sequential counterparty failure. A default by one or more security-based swap dealers or major security-based swap participants could produce spillovers or contagion by reducing the willingness and/or ability of market participants to extend credit to each other, and thus could substantially reduce liquidity and valuations for particular types of financial instruments.101 The experience of American International Group, Inc. (‘‘AIG’’), a Delaware corporation based in New York, and its subsidiary, AIG Financial Products Corp. (‘‘AIG FP’’), a Delaware corporation based in Connecticut, during and after the 2008 financial crisis both illustrates spillovers and contagion arising from security-based swap transactions and demonstrates how cross-border
transactions could contribute to the destabilization of the

102More generally, the Lehman Brothers Holding Inc. bankruptcy offers an example of how risk can spread across affiliated entities of multinational financial institutions. See Lehman Brothers International (Europe) in Administration, Joint Administrators’ Progress Report for the Period 15 September 2008 to 14 March 2009 (Apr. 14, 2009), available at: http://www.pwc.co.uk/assets/pdf/lbie￾progress-report-140409.pdf (‘‘The global nature of the Lehman business with highly integrated, trading and non-trading relationships across the group led to a complex series of inter-company positions being outstanding at the date of Administration. There are over 300 debtor and creditor balances between LBIE and its affiliates representing $10.5B of receivables and $11.0B of payables as at 15 September 2008.’’). 103 In 2007, AIG FP’s CDS portfolio reached a peak of $527 billion. Congressional Oversight Panel, June Oversight Report, ‘‘The AIG Rescue, Its Impact on Markets, and the Government’s Exit Strategy,’’ June 2010, at 23, available at: http://www.gpo.gov/ fdsys/pkg/CPRT-111JPRT56698/pdf/CPRT￾111JPRT56698.pdf (‘‘AIG Report’’). 104See Intermediary Definitions Adopting Release, 77 FR 30689 n.1133 (‘‘AIGFP’s obligations were guaranteed by its highly-rated parent company . . . an arrangement that facilitated easy money via much lower interest rates from the public markets, but ultimately made it difficult to isolate AIGFP from its parent, with disastrous consequences’’) (quoting AIG Report at 20). 105See AIG Report at 18. 106See Office of the Special Inspector General for the Troubled Asset Relief Program, Factors Affecting Efforts to Limit Payments to AIG Counterparties, at 20 (Nov. 17, 2009) (listing AIG FP’s CDS counterparties, including a variety of U.S. and foreign financial institutions), available at:
http://www.sigtarp.gov/Audit%20Reports/Factors_ Affecting_Efforts_to_Limit_Payments_to_AIG_ Counterparties.pdf. 107See AIG Report at 2. 108See Capital, Margin, and Segregation Proposing Release, 77 FR 70218. 109See id. at 70303–06. 110See, e.g., Darrell Duffie and Haoxiang Zhu, ‘‘Does a Central Clearing Counterparty Reduce Counterparty Risk?’’ Stanford University, Working Paper (2010), available at: http://www.stanford.edu/ ∼duffie/DuffieZhu.pdf; Nout Wellink, ‘‘Mitigating systemic risk in OTC derivatives markets,’’ Banque de France, Financial Stability Review, No. 14— Derivatives—Financial innovation and stability (July 2010), available at: http://www.banque￾france.fr/fileadmin/user_upload/banque_de_france/ publications/Revue_de_la_stabilite_financiere/ etude15_rsf_1007.pdf. 111See Christopher Culp, ‘‘OTC-Cleared Derivative: Benefits, Costs, and Implications of the Dodd-Frank Wall Street Reform and Consumer Protection Act,’’ Journal of Applied Finance No. 2 (2010), available at: http://www.rmcsinc.com/ articles/OTCCleared.pdf. 112The Financial Stability Oversight Council (‘‘FSOC’’) can designate a CCP as systemically important under Section 804 of the Dodd-Frank Act. See, e.g., Craig Pirrong, ‘‘Mutualization of Default Risk, Fungibility, and Moral Hazard: The Economics of Default Risk Sharing in Cleared and Bilateral Markets,’’ University of Houston, Working Paper (2010), available at: http://business.nd.edu/ uploadedFiles/Academic_Centers/ Study_of_Financial_Regulation/ pdf_and_documents/clearing_moral_hazard_1.pdf (‘‘[c]learing of OTC derivatives has been touted as an essential component of reforms designed to prevent a repeat of the financial crisis. A back-to￾basics analysis of the economics of clearing suggests Continued U.S. financial system if the security￾based swap market were not adequately regulated.102 AIG FP sold extensive amounts of credit protection in the form of CDS in the years leading up to the crisis,103 largely on the strength of AIG’s AAA rating; AIG FP’s obligations were guaranteed by its parent AIG.104 AIG FP’s CDS business reflected the global nature of the security-based swap market because, although both AIG and AIG FP were headquartered in the United States, much of AIG FP’s CDS business was run out of its London office,105 and AIG FP sold credit protection to counterparties both within the United States and around the world.106 As the subprime mortgage market in the United States collapsed, the ongoing obligations borne by AIG FP and, through its guarantees, its parent AIG, arising from AIG FP’s CDS transactions produced losses that threatened to overwhelm both AIG FP and AIG. The Federal Reserve Bank of New York established a credit facility to prevent AIG from collapsing. These funds were later supplemented by financial support from the U.S. Treasury and the Federal Reserve, resulting in over $180 billion in financial assistance.107 As we discuss in more detail below, security-based swap market regulators need to
take into account the spillover and contagion effect of security-based swap risk to avoid overburdening the financial system. One way to mitigate the spillover effect of a firm failure is to impose capital standards that take into account the security-based swap risk the firm undertakes while allowing flexibility in how it conducts security￾based swap business.108 At the same time, the Commission is mindful that the application of Title VII prudential requirements such as capital and margin impose costs on market participants that could provide economic incentives to restructure or separate their security￾based swap activity according to geographical or jurisdictional regions, or to engage in less security-based swap activity, which may reduce the liquidity or efficiency of the overall market.109 There are circumstances where risk generated by security-based swaps may reside in the United States while conduits of such risk (e.g., security￾based swap transactions or persons engaged in security-based swap transactions) could take place or reside outside the United States or outside the scope of application of the Title VII requirements. In these instances, the Commission has considered the nature of the risk, the magnitude of the risk, and the existence of other financial regulations, such as regulation of systemically important financial institutions in Title I and Title II of the Dodd-Frank Act and banking regulations. The Commission is mindful that the same interconnectedness in the security-based swap market that may provide conduits for risk also may mean that changes to incentives or costs caused by the application of U.S. regulatory requirements may have effects on the liquidity of the global market, as well as its efficiency and competitive dynamics. As described below in Section XV.C, there are a myriad of paths for liquidity as well as risk to move throughout the financial system in this interconnected market. In addition, differences in regulatory requirements between the United States and non-U.S. jurisdictions may also impact markets by changing the competitive dynamics currently at play in the interconnected global market. For example, as articulated in Section XV.C, some potential responses by market participants to the proposed rules and interpretations in this release may result in lessened competition in the security￾based swap market within the United States. Among other considerations, some entities may determine that the compliance costs arising from the requirements of Title VII warrant exiting the security-based swap market in the United States and not transacting with U.S. persons. These exits could result in higher spreads and affect the ability and willingness of end users to engage in security-based swaps. (c) Central Clearing Many of the bilateral counterparty credit risks associated with security￾based swaps can be mitigated by central clearing. Central clearing of security￾based swaps provides a mechanism for market
participants to engage in security-based swap activity without having to assess the creditworthiness of each counterparty. Clearing of security￾based swaps shifts the counterparty risk from individual counterparties to CCPs whose members collectively share the default risk of all members.110 Central clearing also requires consistent application of mark-to-market pricing and margin requirements, which standardizes the settling of payment or collateral delivery resulting from market movements and minimizes the risk of clearing member defaults.111 However, central clearing may also pose risk to financial systems. Because a CCP necessarily concentrates a large number of otherwise bilateral contracts into a single location, a CCP could itself become systemically important.112

that such claims are overstated, and that traditional OTC mechanisms may be more efficient for some instruments and some counterparties.’’). 113See, e.g., Clearing Agency Standards Adopting Release, 77 FR 66220. 114Based on the analysis of the member positions at ICE Clear Credit in the United States by the staff in the Division of Risk, Strategy and Financial Innovation, approximately half of the positions at ICE Clear Credit in the United States are held by foreign-domiciled dealing entities. See Section XV.B.2(e), infra. 115See Section XV.C, infra (discussing the effects of our proposed cross-border approach on competition, efficiency, and capital formation). 116See Section II.A, supra. We preliminarily believe that many of the circumstances of concern also would create the opportunity for evasion of the Dodd-Frank Act’s regulatory regime. See, e.g., note 558, infra. 117 15 U.S.C. 78dd(c). While a loss by any single member in excess of its margin posted with the CCP is likely to be absorbed by the CCP’s risk capital structure, correlated losses among many members, such as those which occurred among many asset classes during the 2008 financial crisis, could diminish the effectiveness of the risk mutualization structure of a CCP. Its failure could create financial instability through its members if the members, as residual obligors to the default related losses are unable to absorb the resulting financial impact. Such an outcome could lead to failure among CCP member counterparties, particularly when obligations are sizable, which may be the case if the members are themselves systemically important. Certain aspects of Title VII are intended to reduce the risk of CCP failure by promoting sound risk management practices among registered clearing agencies, while also providing open access to market participants.113 Sound risk management practices are important among both domestic and foreign CCPs, given the global nature of CCP membership.114 When a CCP in the United States has significant number of foreign members, the CCP and its U.S.- domiciled members would be exposed to the foreign members. Similarly, when U.S.-domiciled entities are members of foreign domiciled CCPs, U.S. exposure to a foreign institution is created that may be systemically important. (d) Security-Based Swap Data Reporting Certain Title VII requirements are designed to increase market transparency for regulators and among security-based swap market participants. Requirements of regulatory reporting are designed to provide regulators with a broad view of the market and help monitor pockets of risk that might not otherwise be observed by market participants with an incomplete view of the market. Separately, requirements of post-trade reporting of prices in real-time are intended to promote price discovery and lower the trading costs by lessening the information advantage afforded certain OTC market participants with the largest order flow. Allowing all market participants
access to more information about transactions’ prices and sizes should create a more level playing field and may promote the efficiency of exchange or SEF trading of security￾based swaps. In particular, as in other security markets, quoted bids and offers should form and adjust according to the reporting of executed trades. At the same time, however, we recognize that increased post-trade transparency also could impact the liquidity of, and competition in, the security-based swap market.115 For example, market participants may be less willing to provide liquidity for large, potentially market-moving trades if the implementation of the Title VII public dissemination requirements reveals private information about future hedging and inventory needs. The increased transparency caused by the Title VII reporting requirements could be diminished if consistent reporting requirements are not applied to transactions across various jurisdictions and information regarding security-based swaps taking place in the global market is not shared among jurisdictions. For instance, the aggregate exposures created by a particular security-based swap or class of security￾based swaps may only be partially observed if security-based swap transactions span multiple jurisdictions. As a result any single regulator may not have a complete view of the security￾based swap risks and may underestimate such risks. Separately, if some regulatory regimes do not require, or provide for less informative, post￾trade reporting rules, then certain transactions may gravitate to these jurisdictions so that market participants can escape reporting their transaction prices. In both instances the increased transparency contemplated by the Title VII reporting requirements may be diluted. B. Scope of Title VII’s Application to Cross-Border Security-Based Swap Activity Congress has given the Commission authority in Title VII to implement a security-based swap regulatory framework. In the statutory definitions and registration requirements for market intermediaries and participants (i.e., security-based swap dealers and major security-based swap participants) and security-based swap infrastructures (i.e., SDRs, security-based swap clearing agencies, and SB SEFs), Congress has identified the types of security-based swap activity that triggers Title VII registration and regulatory requirements relevant to such persons or the application of Title VII transaction-level requirements. We recognize that applying Title VII to persons and transactions that fall within the statutory definitions or requirements may subject some persons based outside the United States, or some transactions arising from activity that occurs in part inside and in part outside the United States, to the various provisions of Title VII. At the same time, however, the global nature of the security-based swap market and the characteristics of the risk associated with security-based swap activity suggest that applying Title VII
only to the conduct of persons located within the United States or to security-based swap activity occurring entirely within the United States would exclude from regulation a significant proportion of security-based swap activity that occurs in part inside and in part outside the United States.116 Our proposed approach is intended to strike a reasonable balance in light of the authority provided by Congress, the structure of the security-based swap market, and the transfer of risk within that market. Accordingly, among other things, our proposed approach does not impose Title VII requirements on persons whose relevant security-based swap activity occurs entirely outside the United States and thus likely does not raise the types of concerns in the U.S. financial system that would warrant application of Title VII. Commenters have raised concerns about the application of Title VII to security-based swap activity in the cross-border context and specifically about the possibility that the Commission may apply our security￾based swap regulations to ‘‘extraterritorial’’ conduct. In this subsection, we discuss commenters’ views regarding the applicability of Title VII to cross-border security-based swap activity, explain our proposed approach to determining whether the relevant security-based swap activity takes place, in whole or in part, within the United States, and interpret what it means for a person to ‘‘transact a business in security-based swaps without the jurisdiction of the United States’’ as set forth in Section 30(c) of the Exchange Act (‘‘Section 30(c)’’).117 In subsequent sections of the release, we discuss in more detail our proposed

118See Cleary Letter IV at 33–36; see also SIFMA Letter I at 5, 22; Sullivan & Cromwell Letter at 6 (suggesting that Section 30(c) permits ‘‘extraterritorial’’ application of Title VII only to prevent ‘‘efforts to evade’’ statutory requirements). 119See, e.g., Sullivan & Cromwell Letter at 11 (stating that the Commission has ‘‘plainly stated that it uses a territorial approach in applying the broker-dealer requirements to international operations’’). 120 130 S.Ct. 2869 (2010). See, e.g., Jones Day Letter at 7–8 (suggesting that the jurisdictional limits of Dodd-Frank Act Sections 722 and 772 be interpreted narrowly in a manner consistent with the Morrison decision); Cleary Letter IV at 33–6 (arguing against an extraterritorial application of Title VII); SIFMA Letter I at 5–6; ISDA Letter I at 11. 121See, e.g., Jones Day Letter at 7–8; Cleary Letter IV at 33–6; Sullivan & Cromwell Letter at 10–11; SIFMA Letter I at 5–6; ISDA Letter I at 11. 122See SIFMA Letter I at 4; see also ISDA Letter I at 11 (recommending that designation as a dealer should not be triggered by transactions entered into with foreign affiliates or branches of a U.S. bank or with foreign entities whose obligations are guaranteed by a U.S. person, or by legacy positions with U.S. counterparties); Davis Polk Letter II at 5– 6 (stating that a foreign entity engaged in swaps exclusively with foreign counterparties is ‘‘‘without the jurisdiction of the United States’’’). Similarly, one commenter recommended that transactions between two foreign entities should be excluded from calculations of substantial position for purposes of the major participant definition. Canadian MAVs Letter at 7–8. 123See, e.g., Sullivan & Cromwell Letter at 7 (stating that a territorial interpretation of Section 30(c) prevented the Commission from imposing Title VII requirements on the U.S. banks’ ‘‘Non-U.S. Operations,’’ defined to include both foreign affiliates or subsidiaries and foreign branches of these banks). 124See, e.g., Cleary Letter IV at 12; see also id. at 26 (arguing that a non-U.S. branch or affiliate of a U.S. entity should not be required to register as a dealer by virtue of its transactions with a non-U.S. person counterparty); ISDA Letter I at 11 (stating that a ‘‘branch, division or office of an entity should be able to be designated as a Dealer without subjecting the whole entity to regulation’’). 125See Cleary Letter IV at 11; see also SIFMA Letter I at 14 (suggesting that Section 30(c) ‘‘provide[s] strong support’’ for not applying Title VII to transactions between a registered foreign swap dealer and non-U.S. persons); ISDA Letter I at 11 (recommending that no Title VII requirements should apply to transactions between a non-U.S. entity registered as a dealer and its non-U.S. person counterparties). 126See Cleary Letter IV at 12. 127See SIFMA Letter I at 5–6; see also ISDA Letter I at 11 (suggesting that dealer-related requirements of Title VII should not apply to business with
non-U.S. person counterparties, including foreign affiliates and branches of U.S. persons). 128See Sullivan & Cromwell Letter at 9. 129See, e.g., id. at 9–10 (suggesting that ‘‘extraterritorial’’ application of Title VII requires an ‘‘intent to evade’’ Title VII). 130See Cleary Letter IV at 7. 131See Section 30(c) of the Exchange Act, 15 U.S.C. 78dd(c), added by Section 772(b) of the Dodd-Frank Act. 132Section 30(b) of the Exchange Act, 15 U.S.C. 78dd(b), provides that the Exchange Act and related rules ‘‘shall not apply to any person insofar as he transacts a business in securities without the jurisdiction of the United States,’’ unless that business is transacted in contravention of rules prescribed as necessary or appropriate to prevent evasion of the Exchange Act. application of Title VII to cross-border security-based swap activity.

1. Commenters’ Views
   Commenters generally expressed the view that Section 30(c) restricts the Commission’s authority to apply Title VII to ‘‘extraterritorial’’ conduct and thus, that the Commission follow a territorial approach in applying Title VII to cross-border security-based swap activity. One commenter interpreted
   Section 30(c) as prescribing a strictly
   territorial approach to the application of Title VII, arguing that this section codifies the territorial approach that we have historically taken in our existing securities regulations.118 Several commenters argued that a narrow interpretation of the ‘‘extraterritorial’’ reach of Title VII was consistent with both Commission precedent119 and the Supreme Court’s decision in Morrison v. National Australia Bank.120 Based on this interpretation of Section 30(c), commenters generally argued that Title VII does not give the Commission authority to regulate entities that transact a business in security-based swaps outside the United States.121 Some commenters suggested that non￾U.S. entities (including affiliates of U.S. persons) that conduct business entirely with counterparties outside the United States should not be required to register as swap or security-based swap dealers or comply with Title VII.122 Some of these commenters also urged the Commission not to subject foreign branches and affiliates of U.S. banks to Title VII registration requirements to the extent that they transact solely with foreign persons.123 Some commenters urged that, even within a single entity, only those branches, departments, or divisions that engage in business within the United States should be required to register.124 Commenters generally took the view that Section 30(c) does not permit the Commission to apply Title VII to transactions occurring outside the United States. Accordingly, commenters suggested that Section 30(c) restricts the Commission’s ability to apply Title VII requirements to the foreign business of entities that are required to register with the Commission.125 For example, one commenter interpreted Section 30(c) to prohibit application of Title VII to any of a person’s ‘‘activity’’ or ‘‘business’’ outside the United States, even if that person otherwise transacts a business in security-based swaps within the jurisdiction of the United States.126 Similarly, some commenters suggested that Section 30(c) prohibits the application of Title VII to transactions involving the foreign affiliates of U.S. persons, on the basis that such transactions occur ‘‘without the jurisdiction of the United States’’ when no U.S. person is a counterparty to the trade.127 One commenter explained that, because such transactions involve parties outside the United States and occur outside the United States, they are ‘‘removed from the stream of U.S. commerce.’’ 128 Commenters also generally recommended a narrower interpretation of the language in Section 30(c) permitting the application of Title VII regulations to persons transacting a business in security-based swaps without the jurisdiction of the United States to the extent that they are doing so in contravention of rules the Commission has prescribed as ‘‘necessary or appropriate to prevent the evasion of any provision of [the Exchange Act that was added by the Dodd-Frank Act].’’ Under this view,
   Section 30(c) permits ‘‘extraterritorial’’
   application of Title VII only to entities that have themselves engaged in willful or intentional evasion.129 These commenters argued that the longstanding use of foreign branches and affiliates by security-based swap market entities demonstrates that these types of business structures are not evasive and, therefore, do not fall within the exception to the limits on the applicability of Title VII as set forth in
   Section 30(c).130
2. Scope of Application of Title VII in
   the Cross-Border Context
   (a) Overview and General Approach
   Section 772(b) of the Dodd-Frank Act
   amends Section 30 of the Exchange Act to provide that ‘‘[n]o provision of [Title VII] . . . shall apply to any person insofar as such person transacts a business in security-based swaps without the jurisdiction of the United States,’’ unless that business is transacted in contravention of rules prescribed to prevent evasion of Title VII.131 In so amending Section 30 of the Exchange Act, Congress directly appropriated nearly identical language defining the scope of the Exchange Act’s application that appears in subsection (b) of Section 30 of the Exchange Act,132 indicating that Congress intended the territorial application of Title VII to entities and transactions in the security￾based swap market to follow similar principles to those applicable to the

133See, e.g., Commodity Futures Trading Comm’n
v. Schor, 478 U.S. 833, 846 (1986) (holding that
‘‘when Congress revisits a statute giving rise to a longstanding administrative interpretation without pertinent change, the ‘congressional failure to revise or repeal the agency’s interpretation is persuasive evidence that the interpretation is the one intended by Congress’’’). 134See, e.g., Cleary Letter IV at 33–37. 135See, e.g., Cleary Letter IV at 35; ISDA Letter I at 11; SIFMA Letter I at 5–6; Sullivan & Cromwell Letter at 11–13. 136See Morrison, 130 S. Ct. at 2884 (looking to the ‘‘focus’’ of the relevant statutory provision in determining whether the statute was being applied to domestic conduct). 137See Section II.A, infra. 138See Morrison, 130 S. Ct. at 2884 (performing a textual analysis of Section 10(b) of the Exchange Act to determine what conduct was relevant in determining whether the statute was being applied to domestic conduct). 139See, e.g., Sullivan & Cromwell Letter at 11. 140See note 135, supra; see also Intermediary Definitions Adopting Release, 77 FR 30616–19. 141See Morrison, 130 S. Ct. at 2884. 142See Sections III–VII, infra (discussing each major registration category), and Sections VIII–IX.A, infra (discussing certain requirements in connection with reporting and dissemination, clearing, and trade execution for security-based swaps). 143 15 U.S.C. 78c(a)(71). securities market under the Exchange Act.133 In light of this similar language, commenters have urged us to follow a territorial approach in applying Title VII to cross-border security-based swap activity.134 We preliminarily agree that a territorial approach, if properly tailored to the characteristics of the security-based swap market, should help ensure that our regulatory framework focuses on security-based swap activity that is most likely to raise the concerns that Congress intended to address in Title VII, including the effects of security-based swap activity on the financial stability of the United States, on the transparency of the U.S. financial system, and on the protection of counterparties. We differ from commenters, however, in our understanding of what a territorial approach means in the context of a global security-based swap market. As noted above, some commenters suggested that the security￾based swap activity of foreign branches and affiliates of U.S. persons with non￾U.S. persons occurs outside the United States and has only an indirect connection with the United States and that, therefore, subjecting transactions resulting from that activity to Title VII would involve extraterritorial application of the statute.135 Although we recognize that some of the security￾based swap activity involving these foreign branches and affiliates occur outside the United States, we believe that a properly tailored territorial approach should look to both the full range of activities described in the statutory text as well as to the concerns that Congress intended Title VII to address in determining whether the relevant activity, considered in its entirety,
occurs at least in part within the United States.136 As noted above, security-based swap transactions differ from most traditional securities transactions in that they give rise to an ongoing obligation between the counterparties to the trade: the counterparties bear the risks that result from those transactions for the duration of the transactions.137 The Dodd-Frank Act was enacted, in part, to address the risks to the financial stability of the United States posed by entities bearing such risks, and a territorial approach to the application of Title VII should be consistent with achieving these statutory purposes. A territorial approach to the application of Title VII that excluded from the application of Title VII any activity conducted by the foreign operations of a U.S. person where they do business only with non￾U.S. counterparties located outside the United States would likely fail to achieve the financial stability goals of Title VII, as such an approach would not account for the security-based swap risks that may be borne by entities located within the United States whose foreign operations solicit, negotiate, or execute transactions outside the United States. In addition, it is not clear that a different territorial approach that focused solely on the location of the entity bearing the risk (and disregarded whether certain relevant activity, including execution of the transaction, occurred within the United States) would adequately address the Dodd￾Frank Act’s concern with promoting transparency in the U.S. financial system and protecting counterparties, concerns that are likely to be raised by the solicitation, negotiation, or execution within the United States, even if the risk arising from those security-based swaps transactions is borne by entities outside the United States. For example, some transactions characterized by commenters as occurring outside the United States, even with non-U.S. persons, are entered into by persons located within the United States and would appear to raise the same types of risk concerns as transactions occurring wholly within the United States. Similarly, the Commission preliminarily believes that a territorial approach should be informed by the text of the statutory provision that imposes the registration or other regulatory requirement.138 Some commenters suggested, for instance, that a territorial approach would necessarily exclude certain foreign operations of U.S. persons from registration as security￾based swap dealers so long as they did not enter into security-based swap transactions with counterparties located within the United States.139 However, in this instance, these commenters did not show how their suggested approach relates to the statutory definition of security-based swap dealer or to the rules and interpretation adopted by the Commission and the CFTC to further define ‘‘security-based swap dealer’’ in the Intermediary Definitions Adopting Release, including our discussion of conduct
that is indicative of dealing activity.140 In our preliminary view, we should identify the activity that the statutory provision regulates before reaching a determination of whether relevant activity is occurring within the United States.141 Only after we identify the activity that the statutory provision regulates would we then be able to determine whether the conduct at issue involves activity that the statutory provision regulates and whether this conduct occurs within the United States. To the extent that conduct involving activity that the statutory provision regulates occurs within the United States, application of Title VII to that conduct would be consistent with a territorial approach. (b) Territorial Approach to Application of Title VII Security-Based Swap Dealer Registration Requirements We discuss our application of this approach with respect to each of the major Title VII registration categories and requirements in connection with reporting, public dissemination, clearing, and trade execution for security-based swaps in further detail in the sections below,142 but for sake of illustration, we provide a brief overview of our territorial approach as it applies to the security-based swap dealer definition.
Section 3(a)(71) of the Exchange
Act 143 defines security-based swap dealer as a person that engages in any of the following types of activity:
(i) Holding oneself out as a dealer in security-based swaps, (ii) making a market in security-based swaps, (iii) regularly entering into security￾based swaps with counterparties as an ordinary course of business for one’s own account, (iv) engaging in any activity causing oneself to be commonly known in the

144Section 3(a)(71)(A) of the Exchange Act, 15 U.S.C. 78c(a)(71)(A). 145See Intermediary Definitions Adopting Release, 77 FR 30617–18. 146 Id. 147Under our proposed approach to the application of the de minimis threshold in the cross-border context, non-U.S. persons that engage in dealing activity with U.S. persons or otherwise within the United States at levels below the de minimis threshold generally would also not be required to register as security-based swap dealers. Such entities are engaged in dealing activity within the United States, and their dealing activity within the United States may raise certain concerns addressed by Title VII. However, we preliminarily believe that, to the extent that this dealing activity remains at levels below the de minimis threshold, they should be treated similarly to a U.S. person that engages in dealing activity at levels below the de minimis threshold. See Section III.B.4, infra. Like U.S. entities engaged in dealing activity, they may be required to register under the aggregation requirements the Commission and the CFTC adopted in the Intermediary Definitions Adopting Release. See Intermediary Definitions Adopting Release, 77 FR 30631; 17 CFR 240.3a71–2(a)(1). Under the aggregation requirements we propose below, even entities with security-based swap dealing activity at levels below the de minimis threshold may be required to register if the total security-based swap dealing activity of affiliates under common control (excluding the activity of any registered affiliates that have independent operations) exceeds the de minimis threshold. See
Section III.B.8, infra.
148See Section III.B.4, infra.
149As we discuss below, such activity would include providing guarantees for a foreign entity’s security-based swap transactions. See Section II.B.2(d), infra. trade as a dealer in security-based swaps.144 We have further interpreted this definition by jointly adopting interpretive guidance with the CFTC that identifies the types of activity that is relevant in determining whether a person is a security-based swap dealer.145 In this interpretive guidance, we have identified indicia of security￾based swap dealing activity to include the following activities:

• Providing liquidity to market
  professionals or other persons in connection with security-based swaps,
• seeking to profit by providing
  liquidity in connection with security￾based swaps,
• providing advice in connection
  with security-based swaps or structuring security-based swaps,
• having a regular clientele and
  actively soliciting clients,
• using inter-dealer brokers, and
• acting as a market maker on an
  organized security-based swap exchange or trading system.146 As the foregoing list of relevant activities illustrates, both the statutory text and our interpretation of that text include within the security-based swap dealer definition a range of activities. The broad scope of activities listed above identifies various characteristics of dealing activity. Given the risks associated with dealing activity that the dealer definition and associated regulatory framework in Title VII are intended to address, we preliminarily believe that a territorial approach consistent with these statutory purposes should consider whether the entity performs any of these indicia of dealing activity within the United States (even if some of these indicia also arise in activity conducted outside the United States). This type of analysis appears to us more consistent with the statutory text and with the Supreme Court’s approach to statutory analysis in its decision in Morrison than an approach that excludes from jurisdiction certain foreign operations of U.S. persons transacting with foreign counterparties. We also believe that our proposed approach would better help ensure that our regulatory framework achieves the various purposes of security-based swap dealer regulation under Title VII, while avoiding application of security-based swap dealer registration to persons whose dealing activity is unlikely to raise the types of dealer-specific risks that Title VII dealer registration was intended to address because it occurs entirely outside the United States.147 Under our proposed territorial approach to the security-based swap dealer definition, as explained further below, we would require persons resident or organized in the United States, or with their principal place of business in the United States, to count all of their dealing transactions toward their de minimis threshold, including transactions that arise from dealing activity that occurs in part outside the United States (for example, because it is negotiated and executed through that person’s foreign branch or office).148 An interpretation of Section 30(c) that advances the view that security-based swap activity conducted by a U.S. person through a foreign branch constitutes activity ‘‘without the jurisdiction of the United States’’ or that a transaction arising from such activity constitutes ‘‘transacting a business in security-based swaps without the jurisdiction of the United States’’ for purposes of Section 30(c) may not fully account for the statutory definition of ‘‘security-based swap dealer,’’ the purposes of Title VII, or the global nature of the security-based swap market. It does not account for the entire range of activities performed by entities active in the security-based swap market, including security-based swap dealers, and the relevance of such activities to the statutory definitions and requirements, given the purposes of Title VII, and it would leave unaddressed significant levels of
  activity that poses precisely the sorts of risks that Title VII was intended to address. In our preliminary view, to the extent that a U.S. person engages in dealing activity through a foreign operation that is part of the U.S. legal person (such as a foreign branch or office), relevant activity for purposes of the security￾based swap dealer definition occurs, at least in part, within the United States because we believe it is the U.S. entity as a whole, and not just the foreign branch or office, that is holding itself out as a dealer and making a market in security-based swaps. Moreover, it is necessarily the U.S. person as a whole that is seeking to profit by providing liquidity and engaging in market￾making in security-based swaps, and it is the financial resources of the entire entity that enable it to provide liquidity and engage in market-making in connection with security-based swaps. Its dealing counterparties will look to the entire U.S. person, and not just the foreign branch or office, for performance on the transaction. The entire U.S. person assumes, and stands behind, the obligations arising from the resulting agreement. For these reasons, to the extent that a dealer resides or is organized, or has its principal place of business, within the United States, we believe that it cannot hold itself out as a security-based swap dealer, even through a foreign branch, as anything other than a single person, given that it generally could not operate as a dealer absent the financial and other resources of the entire U.S. person. Its dealing activity with all of its counterparties, including dealing activity conducted through its foreign branch or office, is best characterized as occurring, at least in part, within the United States and should therefore be counted toward the entity’s de minimis threshold. More generally, we preliminarily believe that transactions that create ongoing obligations that are borne by a U.S. person are properly described as directly occurring within the United States, particularly given Title VII’s focus on, among other things, addressing risks to the financial stability of the United States.149 Indeed, the history of AIG FP confirms that such transactions of U.S. persons can pose risks to the U.S. financial system even if they are conducted through foreign operations. The nature of such risks, and their role in the financial crisis and in the enactment of Title VII, suggest that the statutory framework established

150However, for reasons explained below, the Commission is not proposing to subject the foreign operations of U.S. persons to certain of the requirements in Title VII. See, e.g., Sections III.B.7, III.B.9, VIII.C, IX.C.3(a), and X.B.3(a), infra. 151However, for reasons explained below, the Commission is not proposing to require non-U.S. persons to include transactions with the foreign branches of U.S. banks in their de minimis calculations. See Section III.B.7, infra. 152See Intermediary Definitions Adopting Release, 77 FR 30617–18. 153Proposed Rule 3a71–3(b) under the Exchange Act, as discussed in Section III.B.4, infra. Of course, the transactions of an entity engaged in security￾based swap dealing activity within the United States at levels below the de minimis threshold or in security-based swap activity within the United States that is not dealing activity may be subject to other Title VII requirements, as discussed below, or other provisions of the federal securities laws. 154This proposed approach to the application of Title VII security-based swap dealer registration requirements is not intended to limit or address the cross-border reach or extraterritorial application of the antifraud or other provisions of the federal securities laws. 155See Section 15F of the Exchange Act, 15 U.S.C. 78o–10. 156See, e.g., Sections III.C.3 and 4, infra (discussing requirements applicable to security￾based swap dealers). 157Section 30(c) prohibits the application of the Exchange Act only with respect to those persons that ‘‘transact[] a business in security-based swaps without the jurisdiction of the United States.’’ Because only security-based swap entities that transact a business in security-based swaps within the United States would be required to register under the approach proposed in this release, registered entities are not persons that ‘‘transact[] a business in security-based swaps without the jurisdiction of the United States.’’ 158See Registration Requirements for Foreign Broker-Dealers, Exchange Act Release No. 27017 (July 11, 1989), 54 FR 30013, 30016–17 (July 18,
1989) (‘‘Rule 15a–6 Adopting Release’’) (noting that
a foreign registrant is subject to the regulatory system applicable to such entities); Revision of Form BD, Exchange Act Release No. 25285 (Jan. 22,
1988) (‘‘It is the Commission’s view that a broker￾dealer submits to the Commission’s jurisdiction
when it registers with the Commission.’’); In re International Paper and Power Co., 4 SEC 873, 876 (1939) (registration with the Commission makes registrant ‘‘subject to the complete jurisdiction of the Commission’’). See also Exemption of Certain Foreign Brokers or Dealers, Exchange Act Release No. 58047 (June 27, 2008), 73 FR 39182 (July 8,
2008) (‘‘Proposed Amendments to Rule 15a–6’’), at
39182 (describing registration requirements as applying to the entire foreign entity); In re Ira William Scott, 53 SEC 862, 866 (1998) (holding that investment adviser that registers with the Commission has ‘‘submitted himself to [the Commission’s] jurisdiction pursuant to the Advisers Act’’). Cf. In re United Corp., 232 F.2d 601, 606 (1956) (stating that, upon registration as a holding company, an entity comes within ‘‘the jurisdiction of the Commission and [is] subject to all requirements applicable to a registered holding company’’). 159See Sections VIII–XI, infra. 160 In discussing the application of the major participant tests to guaranteed positions in the Intermediary Definitions Adopting Release, the Commission and the CFTC noted that an entity’s security-based swap positions are attributed to a parent, other affiliate, or guarantor for purposes of the major participant analysis to the extent that the counterparties to those positions have recourse to that parent, other affiliate, or guarantor in connection with the position. Positions are not attributed in the absence of recourse. See Intermediary Definitions Adopting Release, 77 FR
30689. As a result, the term ‘‘guarantee’’ as used in
this release refers to a contractual agreement pursuant to which one party to a security-based swap transaction has recourse to its counterparty’s parent, other affiliate, or guarantor with respect to the counterparty’s obligations owed under the transaction. by Congress and the objectives of Title VII may require a broader analysis than excluding transactions involving U.S. persons from the application of Title VII solely because they are conducted through operations outside the United States, while others by the same U.S. persons occur within the United States.150 However, we preliminarily believe that non-U.S. persons engaged in dealing activity would be required to count toward their de minimis thresholds only transactions arising from their dealing activity with U.S. persons 151 or dealing activity otherwise conducted within the United States. In addition, to the extent that a non-U.S. person engages in security-based swap dealing activity within the United States, we preliminarily believe that such dealing activity should be counted toward the non-U.S. person’s de minimis threshold regardless of whether its counterparties are U.S. persons.152 This view is consistent with the fact that such security-based swap activity raises the types of concerns that the Dodd￾Frank Act was intended to address. We preliminarily believe that a non￾U.S. person not engaged in any security￾based swap activity within the United States (or engaged only at levels below the de minimis threshold) is unlikely to pose the types of concerns within the U.S. financial system that Title VII dealer regulation was intended to address.153 Thus, under our proposed approach, a non-U.S. person that engages in dealing activity entirely outside the United States (i.e., does not enter into transactions with a U.S. person or otherwise conduct any part of its dealing activity within the United States) would not be required to register as a security-based swap dealer.154 (c) Application of Other Title VII Requirements to Registered Entities We are proposing to apply the Title VII requirements associated with registration (including, among others, capital and margin requirements and external business conduct requirements 155) to the activities of registered entities to the extent we have determined that doing so advances the purposes of Title VII.156 Although some commenters suggested that a territorial approach would prohibit the Commission from applying Title VII to the foreign security-based swap activities of even registered entities, such an interpretation of the application of Title VII to registered entities is difficult to reconcile with the statutory language describing the requirements applicable to registered security-based swap dealers, with the text of Section 30(c),157 or with the purposes of Title VII and the nature of risks in the security-based swap market as described above. We have long taken the view that an entity that has registered with the Commission subjects
itself to the entire regulatory system governing such registered entities.158 (d) Application of Title VII Regulatory Requirements to Transactions of Foreign Entities Receiving Guarantees From U.S. Persons We also are proposing to apply certain Title VII transaction-level requirements (e.g., mandatory clearing, reporting and dissemination, and mandatory trade execution of security-based swaps) to certain transactions involving one or more non-U.S. persons whose performance under the security-based swaps is guaranteed by a U.S. person. We discuss the statutory basis for applying specific Title VII requirements to such transactions in the relevant substantive discussions below.159 In this subsection, we briefly explain why we believe that a territorial approach that is consistent with the purposes and text of the Dodd-Frank Act supports the application of Title VII to such transactions. In a security-based swap transaction between two non-U.S. persons where the performance of at least one side of the transaction is guaranteed by a U.S. person, the guarantee gives the guaranteed entity’s counterparty direct recourse to the U.S. person for performance of obligations owed by the guaranteed entity under the security￾based swap,160 and the U.S. guarantor exposes itself to the security-based swap risk as if it were a direct counterparty to the security-based swap through the security-based swap activity engaged in by the guaranteed entity. As a result, the guarantee creates risk to the U.S. financial system and counterparties (including U.S. guarantors) to the same degree as if the transaction were entered into directly by a U.S. person. In addition, in many cases, the counterparty would not enter into the transaction (or would not do so on the same terms) with the guaranteed entity, and the guaranteed entity would not be able to engage in any security-based swaps, absent the presence of the guarantee. Given that the guarantee is

161See, e.g., Cleary Letter IV at 5–6, 7, 18; Sullivan & Cromwell Letter at 6–7. 162We preliminarily believe that the proposed rules or interpretations set forth in this release are not being applied to persons who are ‘‘transact[ing] a business in security-based swaps without the jurisdiction of the United States,’’ within the meaning of Section 30(c). See Section II.B.2(a), supra. However, as noted below, the Commission also preliminarily believes that the proposed rules or interpretations are necessary or appropriate to help prevent the evasion of the provisions of the Exchange Act that were added by the Dodd-Frank Act and prophylactically will help ensure that the particular purposes of the Dodd-Frank Act addressed by the rule or interpretation are not undermined. See, e.g., note 558, infra. 163See Sections II.A.1–II.A.3, supra. 164See note 4, supra. 165See id. 166See id. 167See Section 15F(h) of the Exchange Act, as added by Section 764(a) of the Dodd-Frank Act, in particular. 168Specifically, Section 3(f) of the Exchange Act provides: ‘‘Whenever pursuant to this title the Commission is engaged in rulemaking, . . .; required to consider or determine whether an action is necessary or appropriate in the public interest, the Commission shall also consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation.’’ Section 23(a)(2) of the Exchange Act also provides: ‘‘The Commission . . ., in making rules and regulations pursuant to any provisions of this title, shall consider among other matters the impact any such rule or regulation would have on competition. The Commission . . . shall not adopt any such rule or regulation which would impose a burden on competition not necessary or appropriate in furtherance of the purposes of [the Exchange Act].’’ 169See Section 712(a)(2) of the Dodd-Frank Act. 170See Section 752(a) of the Dodd-Frank Act. In this regard, some commenters have encouraged the Commission to consider international comity when applying Title VII in the cross-border context. See note 225, infra. provided by a U.S. person and poses risks to the U.S. financial system, and considering the reliance by both the guaranteed entity and its counterparty on the creditworthiness of the guarantor in the course of engaging in security￾based swap transactions and for the duration of the security-based swap, we preliminarily believe that a transaction entered into by a non-U.S. person whose performance under the security-based swap is guaranteed by a U.S. person is within the United States by virtue of the involvement of the U.S. guarantor in the security-based swap. Therefore, we preliminarily believe that subjecting such transactions to Title VII is consistent with our territorial approach. (e) Regulations Necessary or Appropriate to Prevent Evasion of Title VII As noted above, several commenters expressed the view that Section 30(c) of the Exchange Act restricts the Commission’s
authority to apply amendments made to the Exchange Act by Title VII to ‘‘extraterritorial’’ conduct. Section 30(c) provides the Commission with the express authority to prescribe rules and regulations for persons that transact a business in security-based swaps without the jurisdiction of the United States to the extent the Commission determines that doing so is necessary or appropriate to prevent evasion. Some commenters have expressed the view that this authority extends to ‘‘extraterritorial’’ activity only when such activity is intended to evade Title VII or to conceal a domestic violation of Title VII, suggesting that Section 30(c) prohibits application of Title VII to transactions by foreign affiliates or operations established for a legitimate business purpose, as the existence of such a purpose is evidence that the conduct is not intended to be evasive.161 While recognizing the concerns expressed by commenters, the Commission preliminarily believes that
Section 30(c) does not require the
Commission to find actual evasion in order to invoke our authority to reach activity ‘‘without the jurisdiction of the United States.’’ Section 30(c) also does not require that every particular application of Title VII to security-based swap activity ‘‘without the jurisdiction of the United States’’ address only business that is transacted in a way that evades Title VII. Section 30(c) authorizes the Commission to apply Title VII to persons transacting a business ‘‘without the jurisdiction of the United States’’ if they violate rules that the Commission has prescribed as ‘‘necessary or appropriate to prevent the evasion of any provision’’ of Title VII. The focus of this provision is not whether such rules impose Title VII requirements only on entities engaged in evasive activity but whether the rules are generally ‘‘necessary or appropriate’’ to prevent evasion of Title VII. In other words, Section 30(c) permits the Commission to impose prophylactic rules intended to prevent possible evasion, even if they affect both evasive and non-evasive conduct. Thus, under our preliminary proposed interpretation of Section 30(c), the statute permits us to prescribe such rules to conduct without the jurisdiction of the United States, even if those rules would also apply to a market participant that has been transacting business through a pre￾existing market structure such as a foreign branch or guaranteed foreign affiliate established for valid business purposes, provided the proposed rule or interpretation is designed to prevent possible evasive conduct.162
C. Principles Guiding Proposed
Approach to Applying Title VII in the Cross-Border Context In considering how to apply Title VII in the cross-border context, the Commission has been mindful of the global nature of the security-based swap market and the types of risks created by security-based swap activity to the U.S. financial system and market participants, as well as the needs of a well-functioning security-based swap market.163 We also have been guided by the purpose of the Dodd-Frank Act 164 and the applicable requirements of the Exchange Act, including the following:

• Risk to the U.S. Financial System—
  The Dodd-Frank Act was intended to promote, among other things, the financial stability of the United States by limiting/mitigating risks to the financial system.165
• Transparency—The Dodd-Frank
  Act was intended to promote transparency in the U.S. financial system.166
• Counterparty Protection—The
  Dodd-Frank Act adds provisions to the Exchange Act relating to counterparty protection, particularly with respect to ‘‘special entities.’’ 167
• Economic Impacts—The Exchange
  Act requires the Commission to consider the impact of our rulemakings on efficiency, competition, and capital formation.168
• Harmonization with Other U.S.
  Regulators—In connection with implementation of Title VII, the Dodd Frank Act requires the Commission to consult and coordinate with the CFTC and prudential regulators to ensure ‘‘regulatory consistency and comparability, to the extent possible.’’ 169
• Consistent International
  Standards—To promote effective and consistent global regulation of swaps and security-based swaps, the Dodd￾Frank Act requires the Commission and the CFTC to consult and coordinate with foreign regulatory authorities on the ‘‘establishment of consistent international standards’’ with respect to the regulation of swaps and security￾based swaps.170 In this regard, the Commission recognizes that regulators in other jurisdictions are currently engaged in implementing their own regulatory reforms of the OTC derivatives markets and that our proposed application of Title VII to cross-border activities may affect the policy decisions of these other regulators as they seek to address potential conflicts or duplication in the regulatory requirements that apply to

171For example, subjecting non-U.S. persons to Title VII may prompt a foreign jurisdiction to respond by subjecting U.S. persons to the foreign jurisdiction’s regulatory regime. However, substituted compliance of the type proposed in this release or other mechanisms may address potential conflicts or duplication arising from overlapping regulatory requirements. 172See Section 30(c) of the Exchange Act, 15 U.S.C. 78dd(c), as discussed in Section II.B, supra. 173See Section 764(a) of the Dodd-Frank Act, codified as Section 15F of the Exchange Act, 15 U.S.C. 78o–10. See also Section IV, infra (discussing major security-based swap participants). 174See Section 3(a)(71) of the Exchange Act, 15 U.S.C. 78c(a)(71), as added by Section 761(a) of the Dodd-Frank Act; see also Section II.B.2(b), supra. 175See Intermediary Definitions Adopting Release, 77 FR 30596; 17 CFR 240.3a71–1. 176Section 3(a)(71)(D) of the Exchange Act, 15 U.S.C. 78c(a)(71)(D), provides that ‘‘[t]he Commission shall exempt from designation as a security-based swap dealer an entity that engages in a de minimis quantity of security-based swap dealing in connection with transactions with or on behalf of its customers. The Commission shall promulgate regulations to establish factors with respect to the making of this determination to exempt.’’ This provision is implemented in Rule 3a71–2 under the Exchange Act (17 CFR 240.3a71– 2), as discussed in the Intermediary Definitions Adopting Release, 77 FR 30626–43. 177 Intermediary Definitions Adopting Release, 77 FR 30617. 178See Intermediary Definitions Adopting Release, 77 FR 30608; see also Section III.C.1, infra (discussing substantive requirements applicable to security-based swap dealers). 179 15 U.S.C. 78c(a)(71). 180See Section 3(a)(71) of the Exchange Act, 15 U.S.C. 78c(a)(71); 17 CFR 240.3a71–1. market participants under their authority.171

• Anti-Evasion—The Dodd-Frank Act
  amends the Exchange Act to provide the Commission with authority to prescribe rules and regulations as necessary or appropriate to prevent the evasion of any provision of the Exchange Act that was added by the Dodd-Frank Act.172 At times these principles reinforce one another; at other times they compete with each other. For instance, attempts to regulate risk posed to the United States may, depending on what is proposed, make it more costly for U.S.-based firms to conduct security￾based swap business, particularly in foreign markets, compared to foreign firms, or could make foreign firms less willing to deal with U.S. persons. On the other hand, attempts to provide U.S. persons greater access to foreign security-based swap markets may, depending on what is proposed, fail to appropriately address the risk posed to the United States from transactions conducted outside the United States or create opportunities for market participants to evade the application of Title VII, particularly until such time as global initiatives to regulate the derivatives markets are fully enacted and implemented. Balancing these sometimes competing principles is complicated by the fact that Title VII imposes a new regulatory regime on a marketplace that already exists as a functioning, global market. Title VII establishes reforms that will have implications for entities that compete internationally in the global security-based swap market. As we have formulated our proposal, we have generally sought, in accordance with the statutory factors described above, to avoid creating opportunities for regulatory arbitrage or evasion or the potential for duplicative or conflicting regulations. We also have considered the needs for a well-functioning security-based swap market and for avoiding disruption that may reduce liquidity, competition, efficiency, transparency, or stability in the security￾based swap market. D. Conclusion Consistent with the principles and requirements outlined above, we are proposing to structure our implementation of Title VII around an approach that focuses on identifying market participants whose presence or activity within the United States or activity involving market participants within the United States may give rise to the types of risk to the U.S. financial system and counterparties that Title VII seeks to address, as described more fully below in the subsequent sections of the release. Request for Comment The Commission requests comment on all aspects of the discussion and analysis above, including the following:
• Is our understanding of the global
  nature of the security-based swap market accurate? If not, why not? Please elaborate.
• Is our understanding of the dealing
  structures used by U.S. and non-U.S. persons accurate? If not, why not? Are there other dealing structures used by market participants? If so, please elaborate.
• Is our understanding of clearing,
  reporting, and trade execution practices accurate? If not, why not? Please elaborate.
• As discussed above in Section
  II.B.1, some commenters recommend a narrower approach to the cross-border application of Title VII than this proposal sets forth. We request further comment on these and any other potential alternative approaches to determining the extent to which Title VII should be applied to cross-border transactions, non-U.S. persons, and registered entities.
  III. Security-Based Swap Dealers
  A. Introduction
  Among the market participants subject to regulation under Title VII as a result of their security-based swap activities are security-based swap dealers.173 As discussed above, a ‘‘security-based swap dealer’’ generally is defined as any person that (i) Holds itself out as a dealer in security-based swaps; (ii) makes a market in security￾based swaps; (iii) regularly enters into security-based swaps with counterparties as an ordinary course of business for its own account; or (iv) engages in any activity causing the person to be commonly known in the trade as a dealer or market maker in security-based swaps.174 The Commission, jointly with the CFTC, issued final rules and interpretive guidance to further define the term security-based swap dealer,175 including rules implementing the de minimis exception.176 As part of these final rules and interpretive guidance, the Commission stated that the relevant statutory provisions suggest that, rather than focusing solely on the risk these entities pose to the financial markets, we should interpret the ‘‘security-based swap dealer definition in a way that identifies those persons for which regulation is warranted either: (i) [D]ue to the nature of their interactions with counterparties; or (ii) to promote market stability and transparency, in light of the role those persons occupy within the security-based swap markets.’’ 177 Security-based swap dealers are subject to a comprehensive regulatory regime under Title VII. The statutory provisions added to the Exchange Act by Title VII are intended to provide for financial responsibility associated with security￾based swap dealers’ activities (e.g., the ability to satisfy obligations and the protection of counterparties’ funds and assets), and other counterparty protections, as well as market stability and transparency.178 By its terms, application of the security-based swap dealer definition set forth in Section 3(a)(71) of the Exchange Act 179 does not depend on whether a security-based swap dealer or its counterparty is a U.S. person.180 Rather, the security-based swap dealer definition encompasses persons engaged in security-based swap dealing activities without regard to the geographic location or legal residence of either the dealing person or such person’s counterparties. The Commission did not provide guidance on the application of the security-based swap dealer definition to non-U.S. persons or to U.S. persons that conduct dealing activities

181See Intermediary Definitions Adopting Release, 77 FR 30596; Further Definition of ‘‘Swap Dealer,’’ ‘‘Security-Based Swap Dealer,’’ ‘‘Major Swap Participant,’’ ‘‘Major Security-Based Swap Participant’’ and ‘‘Eligible Contract Participant,’’ Exchange Act Release No. 63452 (Dec. 7, 2010), 75 FR 80174 (Dec. 21, 2010) (‘‘Intermediary Definitions Proposing Release’’). 182See Section II.B, supra. 183See Section III.B.3, infra. 184See Section II.C, supra. 185See Section II.A, supra. 186See Section II.A.2, supra. 187See Section III.B.2, infra. 188See Intermediary Definitions Adopting Release, 77 FR 30626–43. The de minimis threshold was adopted by the Commission in the Intermediary Definitions Adopting Release to implement a statutory exclusion from the security￾based swap dealer definition found in Section 3(a)(71)(D) of the Exchange Act. See note 176, supra. The de minimis threshold is defined in terms of a notional amount of security-based swap positions connected with dealing activity in which a person engages over the course of the immediately preceding 12 months. An entity engaged in security-based swap dealing activity in connection with security-based swap transactions with or on behalf of its customers below the de minimis threshold amount is exempt from designation as a security-based swap dealer. See Intermediary Definitions Adopting Release, 77 FR 30626. 189 15 U.S.C. 78c(3)(a)(71). 190 17 CFR 240.3a71–1 and 240.3a71–2. 191Section 15F(a)(1) of the Exchange Act provides that ‘‘[i]t shall be unlawful for any person to act as a security-based swap dealer unless the person is registered as a security-based swap dealer with the Commission.’’ 15 U.S.C. 78o–10(a)(1). A person that engages in security-based swap dealing activity in connection with transactions with or on behalf of customers in excess of the de minimis threshold falls within the security-based swap dealer definition, and such person must register as a security-based swap dealer pursuant to Section 15F(a)(1). By contrast, persons that fall within the statutory definitions of a broker and dealer in Sections 3(a)(4) and (5) of the Exchange Act, 15 U.S.C. 78c(a)(4) and (a)(5), are required to register with the Commission only if they make use of the ‘‘mails or any means or instrumentality of interstate commerce to effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security. . . . ’’ Section 15(a)(1) of the Exchange Act, 15 U.S.C. 78o(a)(1). 192See Intermediary Definitions Adopting Release, 77 FR 30628 n.407 (indicating that the Commission and the CFTC intended to address the application of the Title VII dealer regime to non￾U.S. persons in separate releases). 193See Section III.B.2, infra. 194Proposed Rule 3a71–3(a)(7) under the Exchange Act (defining ‘‘U.S. person’’), as discussed in Section III.B.5, infra. 195 15 U.S.C. 78o–10(a)(1). 196See note 188, supra. 197Proposed Rule 3a71–3(a)(1) under the Exchange Act (defining ‘‘foreign branch’’), as
discussed in Section III.B.7, infra. 198Proposed Rule 3a71–3(a)(5) under the Exchange Act (defining ‘‘transaction conducted within the United States’’), as discussed in Section III.B.6, infra. This provision would capture dealing activity undertaken by non-U.S. persons that are physically located within the United States, such as through a U.S. branch of a foreign bank, or through an agent, such as non-U.S. person’s U.S. subsidiary or an unaffiliated third party acting on the non-U.S. person’s behalf. As discussed elsewhere in the release, foreign security-based swap dealers utilize these organizational models as part of their global security-based swap dealing businesses. See Section II.A.2, supra (discussing dealing structures), and
Section III.D, infra (discussing intermediation).
199Proposed Rule 3a71–3(b)(1)(ii) under the Exchange Act. 200But see Section III.B.9, infra (discussing the aggregation of affiliate positions). in the cross-border context in either our proposed or final rules.181 As discussed above 182 and as further discussed below, market participants, foreign regulators, and other interested parties have raised concerns regarding, among other things, the application of Title VII to non-U.S. persons that engage in security-based swap dealing activity and U.S. persons who conduct dealing activities ‘‘outside the United States.’’ 183 The rules and interpretations described below represent the Commission’s proposed approach to applying the security-based swap dealer definition to non-U.S. persons and to U.S. persons who conduct dealing activities in the cross-border context in light of the principles discussed above.184 Our proposal reflects a particular balancing of these principles, informed by, among other things, the particular nature of the security-based swap market,185 the structure of security-based swap dealing activity,186 and our experience in applying the federal securities laws in the cross￾border context in the past.187 We recognize that other approaches are possible to achieve the goals of the Dodd-Frank Act, in whole or in part. Accordingly, we invite comment regarding all aspects of the proposal described below, and each proposed rule and interpretation contained therein, including potential alternative approaches. Data and comment from market participants and other interested parties regarding the likely effect of each proposed rule and interpretation and potential alternative approaches will be particularly useful to the Commission in evaluating possible modifications to the proposal. B. Registration Requirement

1. Introduction
   In the Intermediary Definitions Adopting Release, which was adopted jointly with the CFTC, the Commission set forth a de minimis threshold of security-based swap dealing that takes into account the notional amount of security-based swap positions connected with a person’s security￾based swap dealing activity over the prior 12 months.188 When a person engages in security-based swap dealing in connection with transactions above that threshold, such person meets the definition of a security-based swap dealer under Section 3(a)(71) of the Exchange Act,189 and the rules and regulations thereunder,190 and is required to register as a security-based swap dealer with the Commission pursuant to Section 15F(a)(1) of the Exchange Act.191 The de minimis exception in Section 3(a)(71) of the Exchange Act is silent on its application to the cross-border security-based swap dealing activity of U.S. persons and non-U.S. persons, and the Commission did not address this issue in the Intermediary Definitions Adopting Release.192 Without additional Commission guidance, it would be unclear how persons would be required to calculate the notional amount of their security-based swaps for purposes of the de minimis exception based on their global book of security-based swap dealing activity. In addition, as discussed below, commenters have raised questions regarding how the de minimis threshold should be applied in the cross-border context, expressing concern that, among other things, if a non-U.S. person were required to register as a security-based swap dealer with the Commission because its security-based swap dealing activity exceeded the de minimis threshold, it might be subject to duplicative and potentially conflicting requirements by the Commission and a foreign jurisdiction.193 Under the Commission’s proposal, as described more fully in the following subsections of this release, a non-U.S. person 194 would be required to register as a security-based swap dealer with the Commission pursuant to Section 15F(a)(1) of the Exchange Act 195 if the notional amount of security-based swap positions connected with its security￾based swap dealing activity 196 with U.S. persons (other than with foreign branches of U.S. banks) 197 or otherwise conducted within the United States 198 exceeds the de minimis threshold in the security-based swap dealer definition.199 Thus, a non-U.S. person with a global security-based swap dealing business, but whose positions connected with its security-based swap dealing activity with U.S persons (other than with foreign branches of U.S. banks) or otherwise conducted within the United States fall below the de minimis threshold, would not be required to register with the Commission as a security-based swap dealer.200 A U.S. person, by contrast, would be required to count all of its security-based swap transactions (including transactions conducted

201Proposed Rule 3a71–3(a)(4) under the Exchange Act (defining ‘‘transaction conducted through a foreign branch’’), as discussed in Section III.C.4, infra. 202Proposed Rule 3a71–3(b)(1)(i) under the Exchange Act. 203See Section III.B.8, infra. However, such U.S. guarantor may become a major security-based swap participant by virtue of the guarantee it extends on the performance of the obligations under the transaction. See Section IV.C.2, infra. In addition, a security-based swap entered into by a non-U.S. person whose performance under such security￾based swap is guaranteed by a U.S. person would be required to be reported and, in certain cases, publicly disseminated, under re-proposed Regulation SBSR. See Section VIII.C, infra. Such security-based swap also may be subject to the clearing and trade execution requirements in Title
VII. See Sections IX and X, infra. 204See Intermediary Definitions Adopting
Release, 77 FR 30624–25. 205See Section III.B.8, infra. 206Proposed Rule 3a71–3(b) under the Exchange Act, as discussed in Section III.B.4, infra. 207Proposed Rule 3a71–3(a)(7) under the Exchange Act, as discussed in Section III.B.5, infra. The proposed definition of U.S. person is used not only in the proposed rule regarding the application of the de minimis threshold in the cross-border context, but also in proposed rules discussed in subsequent sections of the release. 208Proposed Rule 3a71–3(a)(5) under the Exchange Act, as discussed in Section III.B.6, infra. Like the proposed definition of U.S. person, the definition of ‘‘transaction conducted within the United States’’ is used not only in the proposed rule regarding the application of the de minimis threshold in the cross-border context, but also in proposed rules discussed in subsequent sections of the release. In general, under the Commission’s proposal, transactions conducted within the United States, as defined in the proposed rule, would trigger certain transaction-level requirements in Title VII. See Sections VIII–X, infra. 209Proposed Rule 3a71–3(b)(1)(ii) under the Exchange Act; see also proposed Rule 3a71–3(a)(1) under the Exchange Act (defining ‘‘foreign branch’’), as discussed in Section III.B.7, infra. 210Proposed Rule 3a71–4 under the Exchange Act, as discussed in Section III.B.8, infra. 211See Section III.B.8, infra. 212See Rule 15a–6 Adopting Release, 54 FR 30016–17 (‘‘As a policy matter, the Commission now uses a territorial approach in applying the broker-dealer registration requirements to the international operations of broker-dealers. Under this approach, all broker-dealers physically operating within the United States that effect, induce, or attempt to induce any securities transactions would be required to register as broker￾dealers with the Commission, even if these activities were directed only to foreign investors outside the United States.’’); see also Proposed Amendments to Rule 15a–6, 73 FR 39182 (‘‘Under this [territorial] approach, broker-dealers located outside the United States that induce or attempt to induce securities transactions with persons in the United States are required to register with the Commission, unless an exemption applies’’). 213See Rule 15a–6 Adopting Release, 54 FR 30016 (‘‘[E]ven if section 30(b) [of the Exchange Act] were read to incorporate a territorial approach, the Commission does not believe that section 30(b) would exempt from broker-dealer registration the activities suggested by the commenters. In particular, directed selling efforts to U.S. investors in the United States hardly could be considered activities not traversing the U.S. territorial limits. A broker-dealer operating outside the physical boundaries of the United States, but using the U.S. mails, wires, or telephone lines to trade securities with U.S. persons located in this country, would not be, in the words of section 30(b), ‘transact[ing] a business in securities
without the jurisdiction of the United States.’ ’’). 214See Rule 15a–6 Adopting Release, 54 FR 30016 (citing Exchange Act Release No. 25801, 53 FR 23646 n.9, and accompanying text). 215See Rule 15a–6 Adopting Release, 54 FR 30017 (‘‘Also, the Commission uses an entity approach with respect to registered broker￾dealers’’); see also Proposed Amendments to Rule 15a–6, 73 FR 39182 (‘‘Because this territorial approach applies on an entity level, not a branch level, if a foreign broker-dealer establishes a branch in the United States, broker-dealer registration requirements would extend to the entire foreign broker-dealer entity.’’). 216As noted above, this is consistent with the approach we have taken in other contexts under the federal securities laws. See note 158, supra. 217See Rule 15a–6 Adopting Release, 54 FR 30017. through a foreign branch),201 conducted in a dealing capacity, toward the de minimis threshold to determine whether it would be required to register as a security-based swap dealer with the Commission pursuant to Section 15F(a)(1) of the Exchange Act.202 As further discussed below, however, we are not proposing to require a non￾U.S. person engaged in security-based swap dealing activity to count a transaction with a non-U.S. person conducted outside the United States toward its de minimis threshold, even if its performance (or the performance of its counterparty) on the security-based swap is guaranteed by a U.S. person.203 In addition, in conformity with the position that the Commissions took in the Intermediary Definitions Adopting Release,204 we are not proposing to require cross-border security-based swap transactions between majority￾owned affiliates to be considered when determining whether a person is a security-based swap dealer.205 In the following subsections, we first briefly discuss the Commission’s approach to the registration of foreign brokers and dealers, as background, and the views of commenters on the application of Title VII to cross-border activities, particularly as such views relate to security-based swap dealing activity. Then we propose a rule regarding the application of the de minimis exception to cross-border security-based swap dealing activity.206 In order to give further definition to this proposed rule, we are proposing rules defining a number of relevant terms, including ‘‘U.S. person’’ 207 and ‘‘transaction conducted within the United States.’’208 We also are proposing a rule excluding from a non￾U.S. person’s de minimis calculation security-based swap transactions entered into, in a dealing capacity, with a foreign branch of a U.S. bank.209 In addition, we are proposing a rule providing an exception from the aggregation requirement, in the context of the security-based swap dealer definition, for affiliated groups with a registered security-based swap dealer.210 Finally, we are proposing interpretive guidance regarding and requesting comment on the treatment of inter-affiliate and guaranteed
transactions in the cross-border context for purposes of the de minimis threshold.211
2. Background Discussion Regarding the
Registration of Foreign Brokers and Dealers Under the Commission’s traditional approach to the registration of brokers and dealers under the Exchange Act, registration and other requirements generally are triggered by a broker or dealer physically operating in the United States, even if such activities are directed only to non-U.S. persons outside the United States.212 The Commission’s territorial approach also generally requires broker-dealer registration by foreign brokers or dealers that, from outside the United States, induce or attempt to induce securities transactions by persons within the United States.213 By contrast, the Commission has not required foreign entities to register as broker-dealers if they conduct their ‘‘sales activities’’ entirely outside the United States.214 In addition to our territorial approach to registration of broker-dealers under the Exchange Act, the Commission traditionally has taken an ‘‘entity’’ approach to the application of regulation to registered broker￾dealers.215 Pursuant to this approach, we have not limited the application of the Exchange Act, and rules and regulations thereunder, solely to the transactions of such entities that result in the registration requirement. Instead, we have taken the position that a registered broker-dealer is generally subject to registration and consequent substantive requirements with respect to all of its securities activity, including the activity of its branches and offices, regardless of whether the activity occurs in the United States or with U.S. persons.216 For instance, under this approach, if a foreign broker-dealer is required to register with the Commission as a result of conducting securities activity through a branch in the United States, the registration requirements and the regulatory system governing U.S. broker-dealers, including capital, margin, and recordkeeping requirements, would apply to the entire foreign broker-dealer entity, including its head office, not just the U.S. branch.217 By contrast, the Commission

218See id. (‘‘If the foreign broker-dealer establishes an affiliate in the United States, however, only the affiliate must be registered as a broker-dealer; the foreign broker-dealer parent would not be required to register.’’); see also Proposed Amendments to Rule 15a–6, 73 FR 39182. As discussed in Section III.B.89, infra, this is consistent with the approach that the Commission is proposing to take in the context of security-based swap dealer registration. 219See Rule 15a–6 Adopting Release, 54 FR 30017. 220 17 CFR 240.15a–6. 221See Rule 15a–6 Adopting Release, 54 FR
30013. As discussed below, some commenters have
suggested that the Commission use an approach that would be modeled after the approach the Commission has applied to foreign broker-dealers in Rule 15a–6 to address issues related to cross￾border security-based swap transactions and foreign security-based swap dealers. 222See e.g., ACP/AMF Letter, BaFin Letter, Cleary Letter IV, Davis Polk Letter I, Davis Polk Letter II, IIB Letter, ISDA Letter I, Japanese Banks Letter, JFSA Letter I, Newedge Letter, Rabobank Letter, Socie´te´ Ge´ne´rale Letter I, SIFMA Letter, Socie´te´ Ge´ne´rale Letter II, Sullivan & Cromwell Letter, and TCX Letter. 223See Section II.B, supra. 224See Section II.B, supra; see also ISDA Letter I at 17 (urging that the new regulations be implemented so as to not distort the current global derivatives market that functions ‘‘within a relatively level international playing field,’’ and noting that to address concerns related to competition and conflicts between various regulators and regulations ‘‘[i]t is imperative that U.S. and non-U.S. regulators must coordinate requirements to avoid unintended impediments to, and fragmentation of, the derivatives markets’’). 225See, e.g., Davis Polk Letter II at 12 (recommending that in implementing Title VII regulations, ‘‘the Commissions and the Federal Reserve should also give effect to the general jurisdictional limits specified in Sections 722 and 772 of the Dodd-Frank Act in a manner that is consistent with the principle of international comity evident in the statute and general legal principles governing statutory construction pertaining to extraterritorial and international matters’’); Socie´te´ Ge´ne´rale Letter I at 8, 11 (recommending U.S. and foreign counterparts to work toward a memorandum of understanding on the jurisdictional reach of U.S. and EU derivatives rules and warning that without cooperation between the U.S. and foreign regulators the result could be ‘‘regulatory retaliation’’ whereby ‘‘the [s]waps market could devolve into regulatory chaos, thereby increasing systemic risk’’); Newedge Letter at 10–12 (expressing concern that requiring foreign firms to register as swaps dealers or major swap participants in the U.S. ‘‘could result in foreign regulators taking retaliatory action against U.S. firms engaging in swap activities with non-U.S. persons domiciled within their physical borders’’ and that any regulation of foreign firms not physically present in the United States that are already subject to foreign regulations is unnecessary and would violate principles of international comity). 226See, e.g., Sullivan & Cromwell Letter at 11 (‘‘The SEC has, in the past, plainly stated that it uses a territorial approach in applying broker-dealer registration requirements to international operations. Only those broker-dealers who induce, or attempt to induce, securities transactions with persons in the United States would be required to register.’’); MFA Letter II at 15–16 (commenting that the proposed security-based swap dealer
and major security-based swap participant rules do not appear to encompass trading outside of the U.S. between non-U.S. entities or non-U.S. affiliates of U.S. entities, and adding that the rules also should not capture the non-U.S. affiliates of U.S. investment managers that advise offshore funds, or non-U.S.- domiciled funds that have U.S. investment managers but trade in swaps referencing non-U.S. securities or on a non-U.S. market, considering that foreign regulators will have jurisdiction over the non-U.S. activities of U.S. entities); IIB Letter at 9 (urging the Commission to adopt an interpretation that a ‘‘reference to a U.S. underlier or reference entity in a swap conducted outside the U.S. [is not] a sufficient connection to the U.S. to subject either counterparty to U.S. Swap Dealer registration requirements’’); Newedge Letter at 2 (suggesting that foreign entities engaging in swaps transactions ‘‘with US persons should not be required to register as swaps dealers or major swaps participants in the US to the extent they are not physically located in the US and are subject to a comparable regulatory regime’’). 227See, e.g., Sullivan & Cromwell Letter at 2, 8 (acknowledging that a foreign entity’s swaps transactions with U.S. persons in excess of the de minimis amount, ‘‘if otherwise covered by the definitions, [should] be required to register’’ as a swaps entity, but suggesting that swaps activities with U.S. persons within ‘‘any de minimis amount authorized by the final rules and in transactions with their U.S. affiliates for purposes of risk management’’ should not trigger swaps entity registration); TCX Letter at 6 (‘‘We are concerned that, should TCX become subject to swap dealer registration notwithstanding the arguments presented above, the de minimis exception as proposed in the [Intermediary Definitions Proposing Release] has been drafted too narrowly to be of any practical use to TCXIM or to any other similarly-situated offshore entity with limited US swaps business. In particular, we urge the Commission to clarify that an offshore entity’s swaps with US counterparties, excluding non-US subsidiaries of US entities, must be counted when determining if the de minimis exemption is available.’’). 228See, e.g., IIB Letter at 7 (suggesting that the ‘‘Commissions should establish a framework for cross-border swap activities that preserves and leverages the strengths of existing market practices and home country supervision and regulation’’ and ‘‘avoid a framework that is duplicative, inefficient (for supervisors and market participants) and would result in unrealistic extraterritorial supervisory responsibilities for the Commissions and potential fragmentation of the derivatives markets’’). traditionally has not extended our regulatory oversight of broker-dealers to the activities of their corporate parents, subsidiaries, or other affiliates.218 The Commission’s approach to registration and regulation of foreign broker-dealers thus
extends Commission oversight to the global activities of non￾U.S.-based securities market intermediaries that are registered broker-dealers because of their securities activities with U.S. persons or that physically operate within the United States.219 In recognition of the internationalization of securities markets, however, the Commission has used available exemptive authority to tailor rules and regulations to the specific circumstances of foreign markets and market participants. For example, we used our exemptive authority under Section 15(a)(2) of the Exchange Act to adopt Rule 15a–6 under the Exchange Act (‘‘Rule 15a– 6’’),220 which provides limited exemptions from registration to foreign brokers or dealers engaging in securities transactions, or offering to engage in securities transactions, within the United States or with U.S. persons, subject to certain conditions.221
3. Comment Summary
(a) Market Participants
As noted above, various commenters expressed concerns about the ‘‘extraterritorial’’ application of Title VII, and many of these commenters expressed particular concerns about the possible extraterritorial application of security-based swap dealer regulation and registration requirements.222 In addition to concerns described above regarding the application of Title VII to cross-border security-based swap activity,223 commenters noted that the derivatives industry functions in a global market and that new regulations pose the potential to disrupt this market if they do not take into account the nature of the industry and the appropriate extraterritorial reach of the regulations.224 A consistent theme in many of these comment letters was the importance of taking into account the principles of international comity in limiting the extraterritorial reach of the proposed rules, including entering into coordination agreements with our foreign regulatory counterparts on the jurisdictional reach of U.S. and foreign derivatives rules.225 For example, a number of commenters recommended that the Commission take a territorial approach in determining when a person engaging in security￾based swap dealing activity would be required to register with the Commission as a security-based swap dealer, generally recommending registration of an entity for its security￾based swaps dealing activity from within the United States or with regard to its dealings with U.S. counterparties.226 Several commenters further suggested that a non-U.S. person’s de minimis amount of swap activities with U.S. persons should not trigger security-based swap dealer registration.227 Some commenters expressed the view that the Commission’s cross-border framework should seek to avoid imposing duplicative regulation and unnecessary cost on entities that are already regulated in a foreign jurisdiction.228 Some commenters have suggested that the Commission use an approach that would be modeled after the approach the Commission has applied to foreign broker-dealers in Rule 15a–6 to address

229See, e.g., Davis Polk Letter I at 11 n.17 (‘‘This model is similar to the mode of operation permitted by Rule 15a–6 under the Securities Exchange Act of 1934, pursuant to which foreign broker-dealers interface with U.S. customers under arrangements with affiliated or non-affiliated broker-dealers without themselves registering as broker-dealers in the U.S.’’); Cleary Letter IV at 22 (‘‘Accordingly, as one alternative, we suggest that the Commissions adopt an approach that is modeled on the Commissions’ existing regimes, permitting non-U.S. swap dealers to transact with U.S. persons without registering in the U.S. if those transactions are intermediated by a U.S.-registered swap dealer. This would be consistent with the approach adopted by the SEC under Rule 15a–6 and prior interpretative precedents with respect to non-U.S. securities dealers.’’). 230See 17 CFR 230.901(k). See, e.g., Cleary Letter IV at 2, 6–9; Davis Polk Letter I at note 6. 231See, e.g., Cleary Letter IV at 7 (stating that ‘‘Regulation S does not include as a ‘U.S. person’ the non-U.S. branch or affiliate of a U.S. or non-U.S. person; only affiliates or branches located in the U.S. are covered’’); SIFMA Letter at 5 (stating that (‘‘It is noteworthy that the Regulation S definition of U.S. person does not include non-U.S. affiliates of U.S. persons or non-U.S. branches of a U.S. bank. . . .’’). 232See, e.g., Sullivan & Cromwell Letter at 2–3, 6–9 (arguing against the extraterritorial application to foreign affiliates of a U.S. person, stating that when a foreign entity’s ‘‘counterparty to a transaction is a non-U.S. affiliate of a U.S. person,’’ the transactions are ‘‘removed from the U.S. stream of commerce. As a result, there is no ‘direct’ effect on U.S. commerce and it is highly unlikely that the transactions would have any significant effect on U.S. commerce’’); ISDA Letter I at 11 (stating that ‘‘Non-U.S. entities (including non-U.S. affiliates and branches of U.S. banks) should not be required to register as Dealers where they are conducting business with non-U.S. counterparties.’’). 233See Cleary Letter IV at 7 (‘‘The non-U.S. affiliate of a U.S. person is, in its own insolvency or that of its parent, typically subject to separate resolution from its parent and other affiliates’’). 234See, e.g., Cleary Letter IV at 7 (arguing that ‘‘[a]lthough bank branches are not usually separately capitalized,’’ they should not be considered U.S. persons because their operations are subject to separate local licensing, examination, and books and records requirements); SIFMA Letter I at 15 n.37 (‘‘We acknowledge that Title VII capital requirements cannot be applied at the branch-level and, therefore, must be applied at the bank level.’’); Sullivan & Cromwell Letter at 16 (remarking that ‘‘foreign branches have long been allowed to engage in a wider range of activities than are their U.S. head offices and have benefitted from the presumption against applying U.S. law
extraterritorially’’ despite the fact that ‘‘foreign branches of U.S. banks are not corporate entities separate and apart from their bank parents’’). 235See, e.g., IIB Letter at 10 (suggesting that a U.S.-based person who acts as an agent for a non￾U.S. person in soliciting or negotiating security￾based swap transactions with counterparties located outside of the U.S. should register as a broker￾dealer); Rabobank Letter at 3 (recommending that U.S. affiliates who help to arrange swaps transactions with U.S. persons should ‘‘register as futures commissions merchants or introducing brokers, broker-dealers, or swap dealers depending upon their respective roles in soliciting transactions, receiving customer margin, performing delegated compliance functions, effecting transactions as an agent on exchanges and swap execution facilities and in OTC markets, or clearing customer transactions’’); cf. Newedge Letter at 1–2 (asserting that broker-dealers and foreign entities subject to comparable regulations who ‘‘engage principally in customer [security-based] swap facilitation activities’’ should not be subject to security-based swap dealer and major security￾based swaps participant registration requirements because they already are ‘‘subject to stringent rules relating to capital, risk, margin and other requirements by virtue of their registration status’’; and alternatively, suggesting that registrants who ‘‘execute swaps solely in response to customer orders and that hedge each such transactions individually . . . should be exempt since, among other things, their trading poses little or no risk to themselves, their customers or the markets generally.’’). 236See, e.g., Sullivan & Cromwell Letter at 10 (‘‘We understand the concerns that the Commission may have that persons would seek to book transactions through non-U.S. branches or subsidiaries in order to evade the requirements of the CEA or Exchange Act.’’). 237See, e.g., Sullivan & Cromwell Letter at 9–10 (expressing understanding for the Commissions’ evasion concerns, but noting that U.S. companies have legitimate business reasons for establishing their non-U.S. operations, including requirements in some foreign jurisdictions that only local banks and local branches of foreign banks may engage in swap activities); Cleary Letter IV at 5–7 (noting legitimate business reasons for establishing non￾U.S. operations abroad, and stating that the Commissions ‘‘should not adopt an extraterritorial regulatory framework premised on the assumption that activities conducted outside the U.S. will be undertaken for the purpose of evasion’’). 238See, e.g., BaFIN Letter at 1–2 (‘‘Close cooperation of our respective authorities, accompanied by a Memorandum of Understanding, might help to establish an adequate regulatory environment for the swap activities of US and German entities and to provide the confidence that the respective national legislation is adequately recognized and complied with.’’). 239See, e.g., JFSA
Letter I at 1–2 (requesting that Japanese financial institutions be exempted from ‘‘Swap Dealer’’ and ‘‘Major Swap Participant’’ registration under the Dodd-Frank Act); BaFIN Letter at 1 (‘‘The obligations for foreign banks should be proportionate and take into account equivalent requirements in their home jurisdiction.’’). See also ECB Letter at 2 (expressing concern about the ‘‘possible inconsistency between US and EU legislation with respect to differing rules on exempting public international institutions . . . from the clearing and reporting obligation.’’). based swap transactions and foreign security-based swap dealers.229 For purposes of analyzing the appropriate definition of U.S. person in the security-based swap dealer context, several commenters suggested that the Commission look to rules adopted under the Securities Act and adopt a definition of U.S. person based on Regulation S under the Securities Act (‘‘Regulation S’’).230 Some commenters stated the view that under Regulation S, only affiliates or branches located within the United States would be considered U.S. persons.231 Some commenters argued that a foreign affiliate of a U.S. person and non-U.S. branches of a U.S. bank should be treated as non-U.S. persons and, depending on their dealing activity, not be required to register as security-based swap dealers because such entities may not have direct and significant connection with, or effect on, U.S. commerce.232 One commenter further argued that a non-U.S. affiliate of a U.S. person, in its insolvency, is subject to separate resolution from its parent, and thus should be treated as a non-U.S. entity.233 Several commenters stated that a foreign branch or office of a U.S. person also should be treated as a non-U.S. person, despite the fact that, as a few commenters acknowledged, foreign branches of U.S. banks are not separate legal entities from their U.S. head office and typically are not separately capitalized, although in some cases they may be subject to certain local capital or reserve maintenance requirements.234 Several commenters suggested that broker-dealer registration, not security￾based swap dealer registration, may be more appropriate for a U.S. branch, agency, or affiliate that acts as an agent of a non-U.S. person for security-based swaps transactions.235 Several commenters acknowledged concerns that persons may seek to book transactions through non-U.S. branches or subsidiaries in an effort to evade the requirements of Title VII.236 These commenters, however, urged that the Commissions not seek to address the potential for evasion through an overbroad definition of a security-based swap dealer, noting that there are legitimate business reasons for conducting security-based swap transactions with non-U.S. persons through non-U.S. operations.237 (b) Foreign Regulators Foreign regulators have reached out to the Commission through correspondence and bilateral and multilateral discussions to better understand the
approach being considered by the Commission, to express concern about the potential impact of potential approaches on their markets, and to seek regulatory coordination.238 One of the principal concerns of foreign regulators is that the Commission would require foreign entities to register with the Commission and subject them to regulatory requirements that are duplicative of, or potentially conflict with, the requirements imposed by their home country or host country.239 In their view, the Commission’s application of Title VII requirements to foreign entities in jurisdictions that commit to developing or have developed similar OTC derivatives regulations would fail to acknowledge, under general principles of international comity, the effectiveness, suitability, and scope of foreign regulatory regimes and place undue regulatory burdens on foreign

240See Asian-Pacific Regulators Letter at 4. 241See, e.g., JFSA Letter I at 1 (‘‘If these institutions were also to be regulated under US DFA framework, this will create an undesirable and redundant effect on these Japanese institutions.’’). 242See, e.g., ACP/AMF Letter at 1–32 (‘‘[W]e strongly support . . . a mutual recognition regime built around an adequate and balanced symmetrical system taking into account the home and the host country regulatory regimes. Thus . . . we expect that [the registration of non-resident entities] will be limited to activities in relation with US counterparties and/or clients and will not involve similar obligations to the financial organizations as a whole. The obligations for non-resident entities should indeed be proportionate and take into [account] equivalent requirements in their home jurisdiction.’’). 243See, e.g., BaFIN Letter at 1 (‘‘Without questioning the registration of foreign banks, I suppose that such registration will be limited to activities in relation with US counterparties and/or clients and will not involve similar obligations to foreign banks as a whole’’). 244 15 U.S.C. 78o–10(a)(1). 245Proposed Rule 3a71–3(a)(7) under the Exchange Act (defining ‘‘U.S. person’’), as discussed in Section III.B.5, infra; proposed Rule 3a71–3(a)(1) under the Exchange Act (defining ‘‘foreign branch’’), as discussed in Section III.B.7, infra. 246Proposed Rule 3a71–3(a)(5) under the Exchange Act (defining ‘‘transaction conducted within the United States’’), as discussed in Section III.B.6, infra. 247Proposed Rule 3a71–3(b) under the Exchange Act; see also 17 CFR 240.3a71–2. 248See id. 249See Intermediary Definitions Adopting Release, 77 FR 30624. Section 3(a)(9) of the Exchange Act defines ‘‘person’’ as ‘‘a natural person, company, government, or political subdivision, agency, or instrumentality of a government.’’ 15 U.S.C. 78c(a)(9); see also proposed Rule 3a71–3(a)(7) under the Exchange Act (defining ‘‘U.S. person’’), as discussed in Section III.B.5, infra. 250This approach is consistent with the Commission’s discussion in the Intermediary Definitions Adopting Release regarding the entity￾level designation of security-based swap dealers. 77 FR 30624. It also generally is consistent with the Commission’s traditional entity approach to the registration of broker-dealers, as discussed in
Section III.B.2, supra.
251See 17 CFR 240.3a71–2; proposed Rule 3a71– 3(b) under the Exchange Act. 252Within an affiliated group of companies, only those legal persons that engage in dealing activities will be designated as dealers; that designation will not be imputed to other non-dealer affiliates or to the group as a whole. A single affiliate group may have multiple swap or security-based swap dealers. See Intermediary Definitions Adopting Release, 77 FR 30624–25. But see Section III.B.8, infra (discussing aggregation). 253The definition of security-based swap dealer provides that a person may be designated as a security-based swap dealer for a single type or class or category of security-based swaps or activity, and not others. See Section 3(a)(71)(B) of the Exchange Act, 15 U.S.C. 78c(71)(B); 17 CFR 240.3a71–1(c) (‘‘A person that is a security-based swap dealer in general shall be deemed to be a security-based swap dealer with respect to each security-based swap it enters into, regardless of the type, class, or category of the security-based swap or the person’s activities in connection with the security-based swap, unless the Commission limits the person’s designation as a security-based swap dealer to specified types, classes, or categories of security-based swaps or specified activities of the person in connection with security-based swaps.’’). See note 588, infra. Although the Commission is not proposing to designate non-U.S. persons as security-based swap dealers in a limited capacity, the Commission’s proposed approach would limit the application of certain transaction-level requirements to the ‘‘U.S. Business’’ of foreign security-based swap dealers. See Section III.C.4, infra. 254See Section III.B.8, infra (discussing inter￾affiliate transactions), and Section III.B.8, infra (discussing aggregation). entities that conduct security-based swap business with U.S. persons.240 Such concerns from foreign regulators include comments that U.S. regulators should not ask financial institutions domiciled in their jurisdictions to register as security-based swap dealers because this would create undesirable redundancies for those financial institutions that are already regulated in the foreign jurisdiction.241 Certain foreign regulators also argued that the Commission should not regulate foreign subsidiaries of U.S. security-based swap dealers because these entities would already be regulated by a foreign regulator.242 Some foreign regulators expressed the expectation that the Commission would limit the registration of foreign banks as security-based swap dealers to operations conducting activities with U.S. counterparties or clients and would not apply the registration and regulation requirements to foreign banks as a whole.243
4. Application of the De Minimis
Exception to Cross-Border Security￾Based Swap Dealing Activity The Commission recognizes the concerns raised by commenters regarding the potential for imposing inconsistent or conflicting requirements on security-based swap dealers with global operations, as well as their desire that the Commission take into account the principles of international comity when applying Title VII to cross-border dealing activity. After considering the goals of the Dodd-Frank Act and the scope of the provisions of Title VII covering security-based swap dealers, in light of the global nature of the security￾based swap market, the various structures of dealing operations, and the views of commenters, the Commission is proposing an approach to the application of the Title VII registration requirement to cross-border security￾based swap dealing activity that focuses on whether dealing conduct occurs with U.S. persons or otherwise occurs within the United States. Specifically, as explained below, the Commission is proposing to require a non-U.S. person engaged in security￾based swap dealing activity to register with the Commission as a security￾based swap dealer pursuant to Section 15F(a)(1) of the Exchange Act 244 if the notional amount of security-based swap transactions connected with its dealing activity with U.S. persons (other than with foreign branches of U.S. banks) 245 or otherwise conducted within the United States 246 exceeds the de minimis threshold in the security-based swap dealer definition.247 A U.S. person engaged in security-based swap dealing activity would be required to count all security-based swap transactions connected with its dealing activity toward the de minimis threshold, including transactions conducted through a foreign branch.248 (a) Meaning of the Term ‘‘Person’’ in the Security-Based Swap Dealer Definition As a preliminary matter, we note that, as the Commission discussed in the Intermediary Definitions Adopting Release, the term ‘‘person’’ as used in the security-based swap dealer definition should be interpreted to refer to a particular legal person.249 Accordingly, a trading desk, department, office, branch, or other discrete business unit that is not a separately organized legal person would not be viewed as a security-based swap dealer (regardless of where located); rather, the legal person of which it is a
part would be the security-based swap
dealer.250 Similarly, the term ‘‘person’’ in the Commission’s rules implementing the de minimis exception should be interpreted to refer to a particular legal person.251 Thus, the security-based swap dealer definition would apply to the particular legal person performing the dealing activity, even if that person’s dealing activity is limited to a trading desk or discrete business unit.252 The presumption is that a person who falls within the security-based swap dealer definition is a dealer with regard to all of its security-based swap activities.253 As a result, a legal person with a branch, agency, or office that is engaged in dealing activity in connection with transactions above the de minimis threshold would be required to register as a security-based swap dealer, even if the legal person’s dealing activity were limited to such branch, agency, or office. By contrast, each affiliate of a security-based swap dealer would need to separately consider whether it falls within the de minimis exception if that affiliate engages in security-based swap dealing activity.254 (b) Proposed Rule We are proposing a rule identifying the types of security-based swap transactions that should be included in

255Proposed Rule 3a71–3(b) under the Exchange Act. Appendix B to this release contains a table that identifies whether a potential security-based swap dealer would be required to count a transaction with a specific type of counterparty toward its de minimis threshold. The table in Appendix B is only a summary of the rules and interpretations proposed in this release that is provided for ease of reference; it does not supersede, and should be read in conjunction with, the proposed rules and interpretations. 256Proposed Rule 3a71–3(b)(1)(i) under the Exchange Act. As noted above, as used in this release, ‘‘security-based swap dealing,’’ ‘‘security￾based swap dealing activity,’’ ‘‘dealing activity,’’ and related concepts have the meanings described in the Intermediary Definitions Adopting Release, 77 FR 30596, unless otherwise indicated in this release. Such dealing activity is normally carried out through interactions with counterparties or potential counterparties, which includes solicitation, negotiation, or execution of a security￾based swap. 257See, e.g., Sullivan and Cromwell Letter, at 9– 11. 258See notes 231 and 234, supra. As noted in
Section II.A.3 above, the security-based swap
transactions of U.S. persons, wherever entered into, give rise to ongoing obligations that may affect the financial stability of the United States and thus present the type of risk that Title VII was intended to address. 259These risk concerns may be greater for uncleared security-based swap than for cleared security-based swaps where the U.S. person would not retain the credit risk of its counterparty; however, cleared security-based swaps still represent an importation of risk into the U.S. financial system when entered into by U.S. persons because in the context of cleared security-based swaps, the U.S. persons would be exposed to the credit, financial, and operational risks of the clearing agency. 260Proposed Rule 3a71–3(a)(7) under the Exchange Act (defining ‘‘U.S. person’’), as discussed in Section III.B.5; proposed Rule 3a71– 3(a)(1) under the Exchange Act (defining ‘‘foreign branch’’), as discussed in Section III.B.7, infra. 261Proposed Rule 3a71–3(a)(5) under the Exchange Act (defining ‘‘transaction conducted within the United States’’), as discussed in Section III.B.6, infra. Proposed Rule 3a71–3(a)(9) under the Exchange Act defines ‘‘United States’’ as ‘‘the United States of America, its territories and possessions, any States of the United States, and the District of Columbia.’’ The proposed definition of ‘‘United States’’ is consistent with the definition of that term in other contexts in the federal securities laws. See, e.g., 17 CFR 230.902(l); 17 CFR 240.15a– 6(b)(6). 262Proposed Rule 3a71–3(b)(1)(ii) under the Exchange Act. 263See Section III.B.7, infra (discussing the exception from the de minimis threshold for transactions by foreign dealers with foreign branches of U.S. banks). 264Proposed Rule 3a71–3(b)(1)(ii) under the Exchange Act. For purposes of the de minimis threshold, the U.S. person-status of a non-U.S. person’s counterparty would be relevant only at the time of a transaction that arises out of the non-U.S. person’s dealing activity. Any change in a counterparty’s U.S. person status after the transaction is executed would not affect that transaction’s treatment for purposes of the de minimis exception, though it would affect the treatment of any subsequent dealing transactions with that counterparty. See also Product Definitions Adopting Release, 77 FR 48286 (‘‘If the material terms of a Title VII instrument are amended or modified during its life based on an exercise of discretion and not through predetermined criteria or a predetermined self-executing formula, the Commissions view the amended or modified Title VII instrument as a new Title VII instrument’’). 265See 17 CFR 240.3a71–2(a). The Commission notes that, to the extent that a non-U.S. person does not conduct dealing activity within the United States or with U.S. persons (or to the extent that the volume of positions connected with such dealing activity does not exceed the de minimis threshold discussed below), it would not be required to register with the
Commission as a security-based swap dealer under Section 15F(a)(1) of the Exchange Act regardless of the volume of non￾dealing security-based swap transactions it has within the United States or with U.S. persons. See Intermediary Definitions Adopting Release, 77 FR
30631. Such an entity still would be subject to the
major security-based swap participant thresholds with respect to its non-dealing security-based swap transactions. However, once a non-U.S. person’s transactions with U.S. persons (other than foreign branches of U.S. banks) or otherwise conducted within the United States involve dealing activity that exceeds the de minimis threshold, that person would be required to register as a security-based swap dealer and would be subject to the statutory requirements applicable to security-based swap dealers for all of its security-based swap transactions. See Intermediary Definitions Adopting Release, 77 FR 30645. 266The Commission understands that entities such as foreign central banks, international financial institutions, multilateral development banks, and sovereign wealth funds (‘‘SWFs’’) (together, ‘‘foreign public sector financial institutions’’ or ‘‘FPSFIs’’) rarely enter into security￾based swap transactions in a dealing capacity. As such, we believe that the proposed approach outlined in this release would sufficiently address the dealer registration concerns of these entities. a person’s calculation of the notional amount of security-based swap transactions connected with dealing activity for purposes of determining whether the de minimis exception excludes that dealer from the security￾based swap dealer definition.255 The proposed rule confirms that all of a U.S. person’s security-based swap transactions conducted in a dealing capacity would count toward its de minimis threshold, wherever those transactions are solicited, negotiated, executed, or booked.256 Although we recognize that some commenters have suggested that the Commission should not require U.S. persons to include positions connected with dealing activity conducted through foreign branches in calculating the amount of their dealing activity,257 we are not proposing to adopt this approach. The security-based swap dealing activity of a foreign branch is activity of the U.S. legal person regardless of the role played by the foreign branch or the location of the security-based swap dealing activity. We believe that any dealing activity undertaken by a U.S. person occurs at least in part within the United States and therefore warrants application of Title VII, regardless of where particular dealing activity in connection with the transactions is conducted.258 The security-based swap dealing activity of a U.S. person creates risk to the U.S. person and to the U.S. financial system, because the risk of such transactions ultimately is borne by the U.S. person, even if the transactions in connection with that dealing activity are conducted in part outside the United States, and because the U.S. person is
part of the U.S. financial system.259 To
achieve the purposes of Title VII, including the reduction of systemic risk, we preliminarily believe that U.S. persons that engage in security-based swap dealing activity through foreign branches should be subject to the regulatory framework for dealers established by Congress in Title VII, even if they deal exclusively with non￾U.S. persons. By contrast, a non-U.S. person would be required to consider only the security-based swap transactions connected with its dealing activity with U.S. persons (other than foreign branches of U.S. banks) 260 or otherwise conducted within the United States 261 for purposes of the de minimis exception.262 Under this proposed approach, a non-U.S. person would be required to calculate its security-based swap position for purposes of the de minimis threshold by adding together the notional amount of transactions connected with dealing activity with U.S. persons (other than foreign branches of U.S. banks) 263 or otherwise conducted within the United States.264 As a result, a foreign entity with a global security-based swap dealing business, but whose transactions connected with its dealing activity with U.S. persons (other than foreign branches of U.S. banks) or otherwise conducted within the United States fall under the de minimis threshold, would not fall within the security-based swap dealer definition and, therefore, would not be required to register as a security-based swap dealer.265 This approach to the de minimis exception for non-U.S. persons engaged in cross-border dealing activity preliminarily appears to us to focus appropriately on a non-U.S. person’s security-based swap dealing activity in the United States. In addition, this proposed approach, when combined with our broader approach to the registration and regulation of foreign security-based swap dealers, appears to us to appropriately focus our oversight on those non-U.S. persons engaged in security-based swap dealing activities that most directly impact the U.S. security-based swap market and U.S. financial system and that, therefore, warrant the application of the provisions of Title VII covering security￾based swap dealers.266

The Commission is soliciting comment on whether our proposal sufficiently addresses the concerns of FPSFIs and whether our understanding of the security-based swap activity of such entities is accurate. See also Section III.B.5(b)iv, infra (discussing international organizations). 267See note 229, supra. 268See Section II.A.3, supra. 269The Commission also is not proposing a dealer-to-dealer exception modeled on Rule 15a– 6(a)(4)(i) (providing that a foreign broker or dealer shall be exempt from the registration requirements of Section 15(a)(l) or 15B(a)(l) of the Exchange Act to the extent that the foreign broker or dealer effects transactions in securities with or for, or induces or attempts to induce the purchase or sale of any security by ‘‘[a] registered broker or dealer, whether the registered broker or dealer is acting as principal for its own account or as agent for others, or a bank acting in a broker or dealer capacity as permitted by U.S. law’’). 270See CFTC Cross-Border Proposal, 77 FR 41221. The Commission is not proposing, as some commenters have suggested, an approach modeled on Rule 15a–6(a)(3), which would permit non-U.S. persons to conduct security-based swap dealing activity with U.S. persons without registering with the Commission if such dealing activity were intermediated by a registered security-based swap dealer.267 The Commission preliminarily believes that such an approach would not address the risk to the U.S. financial system by dealing activity of non-U.S. persons within the United States or with U.S. persons. As a dealer, the non-U.S. person would be the party to the security-based swap transaction and, therefore, the party that bears the financial risk of such transaction and whose financial integrity is of primary concern to the Commission. This concern is heightened by the fact, noted above, that, unlike most other securities transactions, security-based swap transactions give rise to ongoing obligations between the transaction counterparties.268 Under the alternative suggested, the important financial responsibility requirements that Title VII imposes on security-based swap dealers would not apply to the non-U.S. person with respect to that transaction. Instead, the intermediating registered security-based swap dealer would be subject to the financial responsibility rules with respect to the transaction, but since it would not be a party to, and would not bear the financial risk of, the security-based swap transaction, it would not bear the ongoing financial risk of such transaction. As a result, the financial responsibility requirements imposed on the intermediating dealer would not address the dealing risk posed by the non-U.S. person in this context.269 Request for Comment The Commission requests comment on all aspects of the proposed rule regarding the application of the de minimis exception to U.S. persons and non-U.S. persons, including the following:

• Should the proposed rule limit the
  de minimis test to the notional amount of a U.S. person’s positions connected with its dealing activity involving transactions with other U.S. persons or otherwise conducted within the United States? For example, should the proposed rule be altered to provide that U.S. banks would not include the notional amount of transactions connected with the dealing activity of their foreign branches in the de minimis calculation, rather than counting these transactions against the de minimis threshold as required under the proposed approach? Why or why not?
• Should the proposed rule require
  non-U.S. persons to count transactions with the foreign branches of U.S. banks towards their de minimis calculations? Why or why not?
• Should the proposed rule follow an
  approach modeled on Rule 15a–6(a)(3), which would permit non-U.S. persons to conduct security-based swap dealing activity within the United States without registering with the Commission if those transactions were intermediated by a registered U.S. security-based swap dealer? If so, what compliance obligations, if any, should the unregistered non-U.S. person be subject to? What obligations should the U.S. security-based swap dealer be subject to with respect to such intermediated transactions, particularly with respect to capital, margin, and segregation requirements? How would this approach deal with risk concerns, especially with any security-based swaps not subject to clearing?
• Should the proposed rule follow an
  approach modeled on Rule 15a– 6(a)(4)(i), which would permit non-U.S. persons to conduct security-based swap dealing activity within the United States without registering with the Commission if those transactions were with a registered U.S. security-based swap dealer? If so, what conditions, if any, should the Commission impose on such an exception?
• Should non-U.S. persons acting in a
  dealing capacity be required to count transactions entered into with registered security-based swap dealers toward their de minimis threshold? Why or why not? If non-U.S. persons are not required to count security-based swap transactions, conducted in a dealing capacity, with registered security-based swap dealers, should U.S. persons be required to count security-based swap transactions, conducted in a dealing capacity, with registered security-based swap dealers? If not, why not? If so, why?
• The CFTC has proposed an
  interpretation that would require a non￾U.S. person to consider the aggregate notional value of its swap dealing transactions (or any swap dealing transactions of its affiliates under common control) where the non-U.S. person’s obligations are guaranteed by a U.S. person.270 Should the proposed rule require a non-U.S. person whose security-based swap transactions are guaranteed by a U.S. person to count all of its security-based swap dealing transactions that are guaranteed by a U.S. person toward the de minimis threshold, even if they are not entered into with U.S. persons or otherwise conducted within the United States?
• Should the proposed rule require
  counting against the de minimis threshold the notional amount of a non￾U.S. person’s transactions entered into in its dealing capacity within the United States or with a U.S. person? Should a non-U.S. person be required instead to aggregate the total worldwide notional amount of its security-based swap transactions entered into in a dealing capacity, regardless of the geographic location of the dealing activity or the counterparty’s status as a U.S. person if it engages in any dealing transactions with U.S. persons? Why or why not?
• What circumstances, if any, would
  justify requiring a non-U.S. person to register with the Commission if its dealing activity arising from its transactions with non-U.S. persons outside the United States would exceed the de minimis threshold if it had been conducted within the United States or with U.S. persons but the non-U.S. person enters into transactions within the United States or with U.S. persons solely in a non-dealing capacity?
• What circumstances would justify
  following a different territorial approach that would treat transactions connected with the dealing activity conducted by a U.S. person through its foreign locations with non-U.S. persons as outside the United States and not required to be counted against such U.S. person’s de minimis threshold?
• Does the Commission’s proposed
  approach adequately address the concerns of FPSFIs? Is our understanding of the security-based swap activity of FPSFIs accurate? If not, please explain.
• What would be the market impact
  of the proposed approach to apply the de minimis exception in the cross￾border context? How would the proposed application of the de minimis

271Proposed Rule 3a71–3(a)(7) under the Exchange Act. The definition of ‘‘U.S. person’’ also is used in other proposed rules and interpretive guidance discussed below. See Sections IV–XI, infra. 272See, e.g., Regulation S Adopting Release, 55 FR 18308 (‘‘The Regulation adopted today is based on a territorial approach to Section 5 of the Securities Act.’’). Although the proposed rule generally follows the same approach as Regulation S, the Commission preliminarily believes that it is necessary to depart from Regulation S in certain respects. See Section III.B.10, infra (comparing the proposed definition of ‘‘U.S.’’ person with the definition of ‘‘U.S. person’’ in Regulation S). Notably, neither the Exchange Act nor Rule 15a–6 contains a definition of U.S. person. The proposed definition of U.S. person is similar to the definition of U.S. person that the CFTC staff provided its October 12, 2012 no-action letter. See Time-Limited No-Action Relief: Swaps Only With Certain Persons to be Included in Calculation of Aggregate Gross Notional Amount for Purposes of Swap Dealer De Minimis Exception and Calculation of Whether a Person is a Major Swap Participant (Oct. 12, 2012), available at: http://www.cftc.gov/ ucm/groups/public/@lrlettergeneral/documents/ letter/12-22.pdf; see also Final CFTC Cross-Border Exemptive Order, 78 FR 862 (indicating that for purposes of its temporary conditional relief the CFTC is taking a similar approach to the U.S. person definition as that set forth in the October 12, 2012 no-action letter). 273Proposed Rule 3a71–3(a)(9) under the Exchange Act defines ‘‘United States’’ as ‘‘the United States of America, its territories and possessions, any States of the United States, and the District of Columbia.’’ 274Proposed Rule 3a71–3(a)(7)(i) under the Exchange Act. 275Proposed Rule 3a71–3(a)(7)(ii) under the Exchange Act. 276As noted in Section II.A.3 above, the security￾based swap transactions of U.S. persons give rise to ongoing liability that is borne by a person located within the United States and thus are likely to pose the types of financial stability risks to U.S. financial system that Title VII was intended to address. The security-based swap activity of U.S. persons occurs, at least in part, within the United States. 277See Section III.B.4(a), supra. 278 Id. 279Proposed Rule 3a71–3(a)(7)(i)(A) under the Exchange Act. 280This proposed approach to treating natural persons as U.S. persons based on residency, rather than citizenship, differs from the proposed approach to legal entities, such as partnerships and corporations, discussed below. 281See note 4, supra. 282See Rule 15a–6 Adopting Release, 54 FR 30017 (providing that foreign broker-dealers soliciting U.S. investors abroad generally would not be subject to registration requirements with the Commission). 283Proposed Rule 3a71–3(a)(9) under the Exchange Act (defining ‘‘United States’’). 284Proposed Rule 3a71–3(a)(7)(i)(B) under the Exchange Act. exception to U.S. persons
and non-U.S. persons affect the competitiveness of U.S. entities in the global marketplace (both in the United States as well as in foreign jurisdictions)? Would the proposed approach place any market participants at a competitive disadvantage or advantage? If so, please explain. Would the proposed approach be a more general burden on competition? If so, please explain. What other measures should the Commission consider to implement the de minimis exception? What would be the market impacts and competitiveness effects of alternatives to the proposed approach discussed in this release?
5. Proposed Definition of ‘‘U.S. Person’’
Introduction
The proposed rule defining ‘‘U.S. person’’ would identify a person’s status as a U.S. person for purposes of applying the calculation for the de minimis exception in the cross-border context.271 The proposed definition of U.S. person generally follows an approach to defining U.S. person similar to that used by the Commission in other contexts.272 Specifically, the proposed rule would define U.S. person to mean any of the following:

• Any natural person resident in the
  United States;
• Any partnership, corporation, trust,
  or other legal person organized or incorporated under the laws of the United States 273 or having its principal place of business in the United States; or
• Any account (whether discretionary
  or non-discretionary) of a U.S. person.274 The proposed rule also would provide that the term ‘‘U.S. person’’ would not include the following international organizations: The International Monetary Fund (‘‘IMF’’), the International Bank for Reconstruction and Development, the Inter-American Development Bank, the Asian Development Bank, the African Development Bank, the United Nations, and their agencies and pension plans, and any other similar international organizations, their agencies and pension plans.275 We preliminarily believe that the proposed definition of U.S. person would achieve three objectives necessary to effective application of Title VII in the cross-border context. First, it would identify those types of individuals or entities that, by virtue of their location within the United States or their legal or other relationship with the United States, are likely to impact the U.S. market even if they transact with security-based swap dealers that are not U.S. persons.276 Second, it would identify those types of individuals or entities that, by virtue of their location within the United States or their legal or other relationship with the United States, are part of the U.S. security-based swap market and should receive the protections of Title VII. Third, it would permit us to identify dealing entities that most likely would be active in the U.S. security-based swap market and whose dealing activity most likely would pose a risk to the U.S. financial system by virtue of their counterparties’ resident or domicile status. Because of the nature of the risks posed by security-based swaps, which are borne by the entire corporate entity even if the transaction is entered into by a specific trading desk, office, or branch of such entity, consistent with the Commission’s approach to the meaning of ‘‘person’’ in the security-based swap dealer definition, as discussed above, we are proposing to define the term ‘‘U.S. person’’ to include the entire entity, including its branches and offices that may be located in a foreign jurisdiction.277 Thus, under this approach, the term ‘‘U.S. person’’ would be interpreted to include any foreign trading desk, office, or branch of an entity that is organized under U.S. law or whose principal place of business is located in the United States.278 (b) Discussion
  i. Natural Persons
  Under the proposed rule, any natural person resident in the United States would be a U.S. person, regardless of that individual’s citizenship status.279 Individuals resident abroad, on the other hand, would not be treated as U.S. persons, even if they possess U.S. citizenship.280 We preliminarily believe that natural persons residing within the United States who engage in security￾based swap transactions may raise the types of concerns intended to be addressed by Title VII, including those related to transparency and customer protection.281 We also note that this approach is generally consistent with the approach we have taken in prior rulemakings relating to the cross-border application of certain similar regulatory requirements.282 Moreover, any risk to such person arising from its security￾based swap activity may manifest itself most directly within the United States, where a significant portion of its commercial and legal relationships exist because that is where its residency is (unlike a U.S. citizen resident abroad).
  ii. Corporations, Organizations, Trusts,
  and Other Legal Persons
  Under the proposed rule, any partnership, corporation, trust, or other legal person organized or incorporated under the laws of the United States 283 or having as its principal place of business in the United States would be a U.S. person.284 We have previously looked to an entity’s place of

285See Regulation S Adopting Release, 55 FR 18316. 286Under this prong of the proposed rule, ‘‘special entities,’’ as defined in Section 15F(h)(2)(C) of the Exchange Act, would be U.S. persons because they are legal persons organized under the laws of the United States. Section 15F(h)(2)(C) of the Exchange Act defines the term ‘‘special entity’’ as ‘‘(i) a Federal agency; (ii) a State, State agency, city, county, municipality, or other political subdivision of a State; (iii) any employee benefit plan, as defined in Section 3 of the Employee Retirement Income Security Act of 1974, 29 U.S.C. 1002; (iv) any governmental plan, as defined in Section 3 of the Employee Retirement Income Security Act of 1974, 29 U.S.C. 1002; or (v) any endowment, including an endowment that is an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986.’’ 15 U.S.C. 78o– 10(h)(2)(C). 287For example, a business may be incorporated under the laws of a foreign jurisdiction but nonetheless have its business operations, including its home office, in the United States. 288As discussed in Section III.B.6 below, the Commission also is proposing to require non-U.S. persons that conduct security-based swap transactions within the United States, in a dealing capacity, to count such transactions toward their de minimis threshold. In addition, the Commission is proposing to subject security-based swap transactions that are conducted within the United States to certain transaction-level requirements in Title VII in connection with reporting and dissemination, clearing, and trade execution. See Sections VIII–X, infra. 289 In principle, Regulation S looks to the location of the branch rather than the jurisdiction in which the entity is organized or incorporated in determining whether the branch is a U.S. person. See 17 CFR 230.902(k)(1)(v) and (2)(v). Thus, under Regulation S, the foreign branch of a U.S. bank is not treated as a U.S. person while the U.S. branch of a foreign bank is treated as a U.S. person. Under subsection (a)(7)(ii) of proposed Rule 3a71–3 under the Exchange Act, the foreign branch of a U.S. bank would be treated as part of a U.S. person. See
Section III.B.10, infra (discussing the proposed
definition of ‘‘U.S. person’’ with the definition of ‘‘U.S. person’’ in Regulation S). 290Proposed Rule 3a71–3(a)(7) under the Exchange Act. 291See Regulation SBSR Proposing Release, 75 FR 75240 (‘‘The Commission intends for this proposed definition [of U.S. person] to include branches and offices of U.S. persons’’). The Commission is re￾proposing Regulation SBSR in this release, including its definition of U.S. person. See Section VIII, infra. 292See Section III.B.8, infra. 293But see Section III.B.8, infra (discussing the aggregation of affiliate positions for purposes of the de minimis calculation). 294Proposed Rule 3a71–3(a)(7)(i)(C) under the Exchange Act. 295An account of a non-U.S. person and, therefore, not a ‘‘U.S. person’’ under proposed Rule 3a71–3(a)(7) under the Exchange Act, may nevertheless engage in ‘‘transactions conducted within the United States,’’ as defined in proposed Rule 3a71–3(a)(5) under the Exchange Act. For example, if a non-U.S. person executes a security￾based swap from an office located in the United States that security-based swap would be a ‘‘transaction conducted within the United States’’ even though neither party would be a ‘‘U.S. person.’’ Similarly, if a non-U.S. person solicits a counterparty within the United States to enter into a security-based swap transaction, that transaction would be a ‘‘transaction conducted within the United States,’’ regardless of whether both counterparties were non-U.S. persons. See Section III.B.6, infra. 296The same approach would apply to an account of a partnership, corporation, trust, or other legal person (e.g., a fund or a special-purpose investment vehicle) to enter into a security-based swap. If the partnership, corporation, trust, or other legal person were a U.S. person, the account would be a U.S. person. 297For purposes of this definition, the term ‘‘account’’ includes both discretionary accounts and non-discretionary accounts. See proposed Rule 3a71–3(a)(7)(i)(C) under the Exchange Act. organization or incorporation to determine whether it is a U.S. person in adopting rules under the federal securities laws,285 and we preliminarily believe that it is also appropriate to do so in the context of Title VII. We preliminarily believe that the decision of a corporation, trustee, or other entity to organize under the laws of the United States indicates a degree of involvement in the U.S. economy or legal system that warrants ensuring that its security-based swap activity is subject to the requirements of Title VII.286 Similarly, we believe that the proposed definition should ensure that Title VII applies to entities that are organized or incorporated in a jurisdiction outside the United States if they have their principal place of business in the United States.287 Any risk to such entities arising from their security-based swap activity is likely to manifest itself most directly within the United States, where a significant portion of their commercial and legal
relationships would be likely to exist. Moreover, focusing exclusively on whether an entity is organized or incorporated in the United States could encourage some entities that are currently organized or incorporated in the United States to incorporate in a non-U.S. jurisdiction to avoid the costs of complying with Title VII while maintaining their principal place of business—and thus in all likelihood, the risks arising from their security-based swap transactions—within the United States. To prevent this possibility, we are proposing to define ‘‘U.S. person’’ to include entities that are organized or incorporated abroad but have their principal place of business within the United States.288 An entity’s status as a U.S. person under the proposed rule would be determined at the legal entity-level and thus apply to the entire legal entity, including any foreign operations that are part of the U.S. legal entity.289 Consistent with this entity-level approach, a foreign branch, agency, or office of a U.S. person would be treated as a U.S. person under the proposed definition.290 As the Commission noted in proposing Regulation SBSR, ‘‘[b]ecause a branch or office has no separate legal existence under corporate law, the branch or office would be an integral part of the U.S. person itself.’’ 291 In other words, because a branch or office is merely an extension of the head office, not a separately incorporated or organized legal entity, we preliminarily believe that it lacks the legal independence to be considered a non-U.S. person for purposes of Title VII if its head office is a U.S. person. We preliminarily believe a wholesale exclusion from the requirements of Title VII for a foreign branch, agency, or office of a U.S. person is not warranted with respect to its security-based swap transactions because the legal obligations and economic risks associated with the transactions directly affect a U.S. person, of which the branch, agency, or office is merely a
part.
Under the proposed definition, the status of an entity as a U.S. person would have no bearing on whether separately incorporated or organized legal entities in its affiliated corporate group are U.S. persons. Accordingly, a foreign subsidiary of a U.S. person would not be a U.S. person by virtue of its relationship with its U.S. parent. Similarly, a foreign entity with a U.S. subsidiary would not be a U.S. person simply by virtue of its relationship with its U.S. subsidiary.292 The Commission preliminarily believes that it is appropriate to treat each affiliate separately because of the distinct legal status of each of the affiliates.293
iii. Accounts of U.S. Persons
Consistent with the proposed definition’s focus on the location of the person bearing the actual risk arising from the security-based swap transaction, the proposed definition of U.S. person would include any accounts (whether discretionary or not) of U.S. persons.294 Such accounts would be U.S. persons regardless of whether the entity at which the account is held or maintained is a U.S. person. Conversely, accounts of non-U.S. persons would not be U.S. persons solely because they are held by a U.S. financial institution or other entity that is itself a U.S. person.295 In our view, the purposes of Title VII require that its provisions apply to the person that actually bears the risks arising from the security-based swap transaction.296 For this reason, we preliminarily believe that the status of accounts, wherever located, should turn on whether any owner of the account is itself a U.S. person,297 and not on the status of the fiduciary or other person managing the account, the discretionary or non-discretionary nature of the

298This proposed approach is consistent with the treatment of managed accounts in the context of the major security-based swap participant definition, whereby the swap or security-based swap positions in client accounts managed by asset managers or investment advisers are not attributed to such entities for purposes of the major participant definitions, but rather are attributed to the beneficial owners of such positions based on where the risk associated with those positions ultimately lies. See Intermediary Definitions Adopting Release, 77 FR 30690. 299Proposed Rule 3a71–3(a)(7)(ii) under the Exchange Act. 300 Id. 301Regulation S also specifies that these international organizations are not considered U.S. persons, but Regulation S also considers affiliates of such organizations to be non-U.S. persons. See 17 CFR 230.902(k)(2)(vi). The Commission is soliciting comment on whether affiliates of such organizations should be treated as non-U.S. persons under proposed Rule 3a71–3(a)(7) under the Exchange Act. Currently, under the proposed rule, an affiliate of one of these international organizations would have to separately consider its U.S. person-status. 302As discussed below, the proposed definition is used in other proposed rules and interpretive guidance in the release. See Sections IV–XI, infra. account, or the status of the entity at which the account is held or maintained.298 Thus any account of a U.S. person would be a U.S. person for purposes of Title VII.
iv. International Organizations
In addition to identifying the persons that fall within the U.S. person definition, the proposed rule also provides a list of specific international organizations that do not fall within such definition.299 This list includes ‘‘the International Monetary Fund, the International Bank for Reconstruction and Development, the Inter-American Development Bank, the Asian Development Bank, the African Development Bank, the United Nations, and their agencies and pension plans, and any other similar international organizations, their agencies and pension plans.’’ 300 Although these organizations may have headquarters in the United States, the Commission preliminarily believes that most of their membership and financial activity are outside the United States. Thus, based on the nature of these entities as international organizations the Commission is proposing not to treat them as U.S. persons for purposes of Title VII.301 (c) Conclusion In short, by following a territorial approach, the Commission preliminarily believes that the proposed definition of U.S. person describes the types of individuals and entities residing, organized, or conducting business within the United States, and the types of accounts that should be designated as U.S. persons for purposes of the proposed rule regarding application of the de minimis exception to security￾based swap dealers.302 Request for Comment The Commission requests comment on all aspects of the proposed definition of ‘‘U.S. person,’’ including the following:

• Does the proposed definition of
  ‘‘U.S. person’’ appropriately address the concerns of security-based swap dealer regulation under Title VII?
• Does the proposed definition
  appropriately identify all individuals or entities that should be designated as U.S. persons? Is the proposed definition too narrow or too broad? Why? Do the proposed criteria for determining whether an entity is a U.S. person effectively describe the types of counterparties that are relevant to identifying the transactions a security￾based swap dealer must count when calculating its de minimis threshold for purposes of determining whether it is required to register as a security-based swap dealer and comply with the requirements of Title VII? Does the proposed definition appropriately identify the types of entities that should be entitled to the protections afforded to counterparties of security-based swap dealers under Title VII?
• Does the proposed definition
  appropriately treat natural persons residing in the United States as U.S. persons? Should certain categories of persons residing in the United States be excluded from the definition of U.S. person? Should certain categories of persons (such as U.S. citizens or permanent residents) residing abroad be included in the definition of U.S. person? Please explain why excluding or including particular categories of natural persons would be consistent with and further the objectives of dealer regulation under Title VII.
• Is the proposed approach to the
  U.S. person status of natural persons based on residency, rather than citizenship, appropriate? In particular, is the proposed approach to natural persons, which differs from the proposed approach to legal entities, such as partnerships and corporations, appropriate in light of the fact that, as the Commission understands, natural persons rarely enter into security-based swaps?
• Does incorporation or organization
  under the laws of the United States appropriately define the types of entities (both for-profit and non-profit) that should be treated as U.S. persons under Title VII? Is it appropriate to define an entity as a U.S. person if it has its principal place of business in the United States, even if it is incorporated or organized under the laws of a foreign jurisdiction? Why or why not?
• Does the proposed rule adequately
  address the risk of evasion or avoidance of Title VII requirements? Are there entities incorporated or organized under foreign law that should be defined as a U.S. person under the proposed rule that are not currently so defined? For example, should an entity incorporated or organized under foreign law but whose security-based swap transactions are guaranteed by a U.S. person be defined as a U.S. person? Why or why not? Should a foreign entity that conducts security-based swap dealing activity predominantly with U.S. persons or within the United States be defined as a U.S. person? If so, why?
• Is it appropriate to determine the
  U.S. person status of a corporation or organization on an entity-wide basis? Why or why not? Should foreign branches, offices, or agencies of U.S. persons be U.S. persons? Why or why not? What distinguishes transactions mediated or entered into by a foreign branch of a U.S. bank from transactions entered into by the head office of such U.S. bank for purposes of Title VII regulation?
• What, if any, competitive concerns
  would be raised by defining foreign branches, offices, or agencies of U.S. persons as non-U.S. persons? Please explain the mechanism of any competitive effects. For example, would particular business structures become unworkable under this approach and what would be the relevant impact? If so, please explain possible alternatives and their relative competitiveness.
• Should the proposed rule include
  within the definition of U.S. person foreign affiliates of U.S. persons? Should other factors be taken into account in determining the status of such affiliated entities, such as, for example, whether performance on the security-based swap obligations of the foreign entity is guaranteed by a U.S. affiliate? Should a foreign entity with performance on its security-based swap obligations guaranteed by a U.S. affiliate, where such foreign entity’s security-based swap dealing activity is conducted predominantly or exclusively with non-U.S. persons, be included within the definition of U.S. person? Why or why not?
• Should a foreign branch of a U.S.
  parent, including a foreign branch of a U.S. bank, be included in the definition of ‘‘U.S. person’’ for all purposes under Title VII? Why or why not?

303See CFTC Further Proposed Guidance, 78 FR
912. 304See CFTC Cross-Border Proposal, 77 FR 41218.
305See Section III.B.10, infra (discussing the definition of ‘‘U.S. person’’ in Regulation S). 306This focus would be generally consistent with the focus of the definition of ‘‘principal office and place of business’’ in the Investment Advisers Act, where it is defined as ‘‘the executive office of the investment adviser from which the officers, partners, or managers of the investment adviser direct, control, and coordinate the activities of the investment adviser.’’ 17 CFR 275.222–1(b). 307Proposed Rule 3a71–3(a)(5) under the Exchange Act. The proposed definition of ‘‘transaction conducted within the United States’’ also is used in other places in the release in the context of our proposed application of Title VII requirements in the cross-border context. See Sections VIII–X, infra. The proposed definition of ‘‘transaction conducted within the United States,’’ and related discussion in this release, is not intended to apply outside of the scope of the proposals set forth in this release, unless otherwise indicated. Accordingly, it thus does not affect other rights or obligations of parties under the Exchange Act or the federal securities laws generally.

• Should a majority-owned
  subsidiary of a U.S. parent, regardless of whether the subsidiary has financial guarantees from the U.S. parent, be included in the definition of ‘‘U.S. person’’ for purposes of Title VII? Why or why not?
• Should an account of one U.S.
  person and one or more non-U.S. persons be treated as a U.S. person? Should the Commission instead establish a de minimis threshold amount or otherwise allows some U.S. person ownership without triggering U.S. person status for the account? If so, how?
• The CFTC has proposed a definition
  of U.S. person that would include a legal entity that is directly or indirectly majority-owned by one or more U.S. persons and in which such person(s) bears unlimited responsibility for the obligations and liabilities of the legal entity (other than a limited liability company or limited liability partnership where partners have limited liability).303 Should the Commission adopt a similar approach? If so, why? How should majority ownership be determined? Is majority ownership the appropriate test? If not, should some other percentage test be used (e.g., 25% or some other measure of control)? Are there operational or other difficulties in implementing such an approach?
• Should entities, whatever their
  place of domicile, that guarantee the performance of U.S. person counterparties to security-based swaps themselves be deemed U.S. persons? Why or why not? How would treating such indirect counterparties to security￾based swaps as U.S. persons affect the application of Title VII rules?
• Is the proposed definition’s focus
  on the status of the person bearing the actual risk in the transaction (e.g., looking at the status of the account owner rather than the person with authority to direct the investment decisions) appropriate in determining whether the person is a U.S. person?
• The CFTC has proposed a definition
  of U.S. person that would include any pension plan for the employees, officers or principals of a legal entity with its principal place of business inside the United States. Should the Commission adopt a similar approach? If so, what categories of entities would or would not be U.S. persons when compared to the Commission’s proposed approach? How is including or excluding such entities, as applicable, from the definition of U.S. person consistent with and in furtherance of the objectives of Title VII?
• Does the proposed rule
  appropriately address the treatment of certain international organizations with respect to the definition of U.S. person? Should any or all of the organizations specifically identified in the proposed rule be treated as U.S. persons? If so, why? Are there other similarly situated international organizations that should also be explicitly excluded from the U.S. person definition? Should the affiliates of international organizations be treated as non-U.S. persons, even if organized under U.S. law? If so, why? If not, why not?
• Should the proposed definition
  expressly exclude from the definition of U.S. person any other entity or category of entities? If so, which ones and why?
• The CFTC has proposed a definition
  of U.S. person that would include any commodity pool, pooled account, or collective investment vehicle (whether or not it is organized or incorporated in the United States) of which a majority ownership is held, directly or indirectly, by a U.S. person. Should the Commission adopt a similar definition that includes any investment fund, commodity pool, pooled account, or collective investment vehicle of which a majority ownership is held by one or more U.S. persons, even if such entity is not incorporated or organized under the laws of the United States, or does not have its principal place of business in the United States? If so, why and how should majority ownership be determined? Is majority ownership the appropriate test? If not, should some other percentage test be used (e.g., 25% or some other measure of control)? Are there operational or other difficulties in implementing such an approach?
• The CFTC has proposed a definition
  of U.S. person that would include any commodity pool, pooled account, or collective investment vehicle the operator of which would be required to register as a commodity pool operator under the CEA.304 Should the Commission adopt a similar definition that includes any investment fund, commodity pool, pooled account, or collective investment vehicle the operator of which would be required to register as a commodity pool operator under the CEA or an investment adviser under the Investment Advisers Act of 1940 (‘‘Investment Advisers Act’’)? If so, why?
• Should the definition of U.S. person
  specifically address the status of estates, which is specifically addressed in Regulation S? 305 If so, please explain the types of security-based swap transaction such entities typically engage in and describe any problems created by the proposed definition of U.S. person relative to the goals of Title VII.
• The CFTC has proposed a definition
  of U.S. person that would include any estate or trust, the income of which is subject to U.S. income tax regardless of source. Should the Commission adopt a similar approach? If so, why?
• Should the Commission define the
  term ‘‘principal place of business’’ for purposes of the proposed definition of ‘‘U.S. person’’? If so, should the Commission define ‘‘principal place of business’’ as the location of the personnel who direct, control, or coordinate the security-based swap activities of the entity? 306 If no, how should the Commission define it?

6. Proposed Definition of ‘‘Transaction
   Conducted Within the United States’’ We are proposing a definition of ‘‘transaction conducted within the United States’’ to identify security-based swap transactions that involve activities in the United States that the Commission preliminarily believes would warrant requiring a non-U.S. person to count such transactions toward its de minimis threshold in the security-based swap dealer definition.307 Under the proposed rule, ‘‘transaction conducted within the United States’’ would be defined to mean any ‘‘security-based swap transaction that is solicited, negotiated, executed, or booked within the United States, by or on behalf of either counterparty to the transaction, regardless of the location, domicile, or residence status of either counterparty

308Proposed Rule 3a71–3(a)(5)(i) under the Exchange Act. The use of the term ‘‘counterparty’’ in the proposed rule is intended to refer to the direct counterparty to the security-based swap transaction, not a party that provides a guarantee on the performance of the direct counterparty to the transaction. See Section VIII.A, infra (distinguishing between direct and indirect counterparties). 309Proposed Rule 3a71–3(a)(4)(ii) under the Exchange Act. See proposed Rule 3a71–3(a)(4) under the Exchange Act (defining ‘‘transaction conducted through a foreign branch’’), as discussed in Section III.B.7, infra. 310See Section II.B.2(b), supra. More generally, solicitation, negotiation, execution, and booking are activities that represent key stages in a potential or completed security-based swap transaction. As discussed below, transactions conducted within the United States, regardless of whether in a dealing or non-dealing capacity, would generally be subject to requirements relating to reporting and dissemination, clearing, and trade execution. See Sections VIII–X, infra. 311See 17 CFR 240.3a71–2(a)(1). 312See proposed Rule 3a71–3(b) under the Exchange Act. 313The de minimis exception threshold is computed based on the notional amount of an entity’s security-based swap positions, connected with its dealing activity, not transactions that are merely solicited. See Intermediary Definitions Adopting Release, 77 FR 30630. 314See Section 3(a)(70) of the Exchange Act, 15 U.S.C. 78c(a)(70) (defining ‘‘person associated with a security-based swap dealer or major security￾based swap participant’’); see also note 472, infra. 315See Proposed Rule 3a71–3(b)(1)(ii) under the Exchange Act. 316See id. 317 Depending on the nature of the activity and the person located in the United States engaging in the activity, such person may need to register with the Commission as a broker-dealer under Section 15(a)(1) of the Exchange Act, 15 U.S.C. 78o(a)(1). 318The Commission is not distinguishing, for purposes of the proposed rule, whether a potential dealer or its counterparty is operating out of a branch, an office, an affiliate, or utilizes a third￾party agent to act on its behalf. We are, however, soliciting comment on whether there is a basis for drawing distinctions in this area and look forward to receiving commenters’ views. 319See note 97, supra. 320See Section II.B.2(b), supra. to the transaction.’’ 308 It would not, however, include a transaction conducted through a foreign branch of a U.S. bank, for reasons discussed below.309 As noted above, dealing activity is normally carried out through interactions with counterparties or potential counterparties that include solicitation, negotiation, execution, or booking of a security-based swap.310 Engaging in any of these activities within the United States, as part of dealing activity, would involve a level of involvement in a security-based swap transaction that the Commission believes should require such transaction to
count toward a potential security￾based swap dealer’s de minimis threshold. The proposed rule, therefore, is designed to identify for market participants the key aspects of a security-based swap transaction that the Commission believes should trigger security-based swap dealer registration requirements. By contrast, we are not proposing to include either submitting a transaction for clearing in the United States or reporting a transaction to an SDR in the United States as activity that would cause a transaction to be conducted within the United States under the proposed rule, nor are we proposing to treat activities related to collateral management (e.g., exchange of margin payments) that may occur in the United States or involve U.S. banks or custodians as activity conducted within the United States for these purposes. We recognize that submission of a transaction for clearing to a CCP located in the United States poses risk to the U.S. financial system, and collateral management plays a vital role in an entity’s financial responsibility program and risk management. However, we preliminarily believe that none of these activities, by themselves, involves activities conducted between a potential dealer and its counterparty that may be characterized as dealing activity, although clearing and collateral management services may be offered in conjunction with dealing activity. Under the rule adopted by the Commission, jointly with the CFTC, a potential security-based swap dealer is required to consider the security-based swap positions ‘‘connected with’’ the dealing activity in which the potential dealer—or any other entity controlling, controlled by or under common control with the potential dealer—engages over the course of the immediately preceding 12 months (or following the effective date of final rules implementing Section 3(a)(68) of the Exchange Act, 15 U.S.C. 78c(a)(68), if that period is less than 12 months).311 By incorporating the definition of a ‘‘transaction conducted within the United States’’ into the proposed rule applying the de minimis exception in the cross-border context,312 the Commission is proposing that non￾U.S. persons engaged in cross-border dealing activity include in their de minimis calculations any security-based swap transaction that is connected with 313 an entity’s dealing activity with another non-U.S. person if a U.S. branch or office of either counterparty, or an associated person 314 of either counterparty—including any affiliate and any associated person of any affiliate, or a third party agent, located within the United States—is directly involved in the transaction. Thus, a non-U.S. person engaged in security￾based swap dealing activity would be required to count toward its de minimis threshold any dealing transaction entered into with another non-U.S. person that was conducted in the United States, whether the transaction falls within the ‘‘conducted within the United States’’ definition through such non-U.S.
person’s own activity (or that of an agent within the United States), or that of its non-U.S. person counterparty (or such counterparty’s agent).315 Similarly, if any transaction connected with a non-U.S. person’s dealing activity is executed within the United States, the non-U.S. person would be required to count that transaction toward its de minimis threshold.316 We recognize that many of a non-U.S. person’s transactions conducted within the United States that arise out of its dealing activity may also be transactions with U.S. persons, and thus would already be counted for purposes of the de minimis threshold. However, requiring non-U.S. persons to include in their de minimis calculations only transactions with U.S. person counterparties would enable such persons to engage in significant amounts of security-based swap dealing activity within the United States without Commission oversight as a security￾based swap dealer, so long as the dealing activity were limited to non￾U.S. persons.317 This would be the case if the potential dealer operated out of a branch, office, or affiliate, or utilized a third-party agent acting on its behalf within the United States, or merely directed its dealing activity to non-U.S. persons that themselves operate out of the United States, either through branches, office, or affiliates, or by utilizing third party agents.318 The Commission preliminarily does not believe that this would be consistent with the purposes of the Dodd-Frank Act, which is intended, in part, to promote accountability and transparency in the U.S. security-based swap market.319 First, we preliminarily believe that when a non-U.S. person engages in dealing activity with another non-U.S. person from within the United States either through an agent, branch, or office, or otherwise engages in security￾based swap dealing activity within the United States (such as by soliciting persons within the United States from outside the United States), the solicitation, negotiation, or execution activity that occurs within the United States constitutes dealing activity that is described by the security-based swap dealer definition.320 This is the case even where such transaction is

321The Commission previously has noted the role that the location of the dealer plays in setting expectations regarding the legal protections available in transactions with that dealer. See Rule 15a–6 Adopting Release, 54 FR 30017 (noting that a U.S. citizen residing abroad who seeks out transactions with foreign broker-dealers would not generally expect U.S. securities laws to apply to the transaction); Regulation S Adopting Release, 55 FR 18310 (noting the expectation that a buyer outside the United States who purchases securities offered outside the United States is aware that ‘‘the transaction is not subject to registration under the Securities Act’’). See also Cleary Letter IV at 17 (‘‘As both Commissions have consistently recognized in the past, the non-U.S. counterparty in . . . transactions [with a non-U.S. branch or affiliate of a U.S. person] conducted abroad have no expectation of protection under U.S. law’’); Davis Polk Letter II at 20 (‘‘Finally, the non-U.S. counterparty would not reasonably expect the swap [with a foreign bank swap dealer] to be subject to Title VII’s requirements’’). 322See Rui Albequerque and Neng Wang, ‘‘Agency Conflicts, Investment and Asset Pricing,’’ Journal of Finance, Vol. 63, No. 1 (2008) (discussing the effect of customer protection on prices) and Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert Vishny, ‘‘Investor Protection and Corporate Valuation,’’ Journal of Finance, Vol. 57, No. 3 (2002) (discussing the effect of customer protection on prices). 323Proposed Rule 3a71–3(a)(5)(iii) under the Exchange Act. 324 Id. Cf. Exemptions for Advisers to Venture Capital Funds, Private Fund Advisers With Less Than $150 Million in Assets Under Management, and Foreign Private Advisers, Advisers Act Release No. 3222 (June 22, 2011), 76 FR 39646, 39676 (July 6, 2011) (‘‘if an adviser reasonably believes that an investor is not ‘in the United States,’ the adviser may treat the investor as not being ‘in the United States’’’). We are proposing to use a knowledge standard rather than a reasonable belief standard with respect to transactions conducted within the United States between non-U.S. person counterparties due to the fact that this definition applies to both counterparties to a transaction, thus each counterparty has an incentive to ensure the accuracy of its representation. In addition, the proposed ‘‘actual knowledge’’ standard and related discussion in this release are not intended to apply outside the scope of the proposals set forth in this release. Accordingly, it does not affect the standard for reliance on representations with respect to other rights or obligations of persons under the Exchange Act or the federal securities law generally. ultimately booked by the two non-U.S. entities outside the United States. Second, most market participants, including non-U.S. persons, entering into a security-based swap transaction with a security-based swap dealer, particularly through personnel
located in the United States, could reasonably expect to be entitled to the customer protections of Title VII because of Title VII’s role in setting the standards for the U.S. security-based swap market and the market participant’s decision to engage in a transaction within that market.321 Given the Commission’s responsibility in Title VII to regulate the U.S. security￾based swap market, as well as reasonable market expectations and the risk of creating confusion among market participants,322 we preliminarily do not believe that it is appropriate to diverge from our traditional approach to the regulation of broker-dealers by establishing a regulatory regime for the security-based swap market that would allow non-U.S. persons to engage in unregulated dealing activity within the United States, either when it acts through U.S. branches, office, or agents or it solicits, negotiates, or executes transactions with non-U.S. persons that themselves are operating out of the United States. Moreover, suppose non-U.S. persons were not required to register when engaging in security-based swap dealing activity within the United States with other non-U.S. persons. Non-U.S. persons seeking to negotiate security￾based swap transactions using personnel in the United States may choose to enter into security-based swap transactions with such unregistered non-U.S. persons rather than with a U.S. person to avoid the application of Title
VII. In this way, customers may choose
to forego the protections of Title VII in order to achieve potential cost savings. This could limit the access of U.S. persons engaged in dealing activity within the United States to non-U.S. persons, as well as more generally limiting the ability of U.S. persons to access liquidity in the security-based swap market. Accordingly, the Commission is proposing that a non￾U.S. person would be required to count its security-based swap transactions conducted within the United States (as well as its transactions with U.S. persons) that arise out of its dealing activity to determine whether the notional amount of its dealing transactions exceeds the de minimis threshold. This would have the effect of subjecting both non-U.S. persons engaged in dealing activity within the United States and U.S. persons engaged in dealing activity within the United States to the same set of rules, thus providing their counterparties the same set of protections. Finally, although the proposed rule reflects the importance of ensuring that neither non-U.S. person counterparty is engaged in the relevant activities within the United States for purposes of this definition, we also recognize the operational difficulties that could arise in investigating the activities of a counterparty to ensure compliance with the rule. As a result, we are preliminarily proposing to allow parties to rely on a representation received from a counterparty indicating that a given transaction ‘‘is not solicited, negotiated, executed, or booked within the United States by or on behalf of such counterparty.’’ 323 A party may rely on such a representation by its counterparty unless the party knows that the representation is not accurate.324 The Commission preliminarily believes that this would address whatever operational difficulties parties may have in determining whether or not their counterparty is conducting a transaction within the United States. Request for Comment The Commission requests comment on all aspects of the proposed rule regarding registration by non-U.S persons who engage in dealing activity within the United States, including the following:

• Should non-U.S. persons be
  required to register by virtue of engaging in security-based swap dealing activity within the United States, even if none of this dealing activity is directed to, or otherwise involves, U.S. persons? Why or why not?
• Does the proposed approach
  appropriately impose the dealer registration requirement on non-U.S. persons based on their dealing activities conducted within the United States? Should a non-U.S. person be required to register as a security-based swap dealer if it enters into, or offers to enter into, security-based swap transactions that are transactions conducted within the United States if such non-U.S. person’s dealing activity is limited to its foreign business? What about if the non-U.S. person engages in non-U.S. dealing activity, but also enters into transactions with U.S. persons in a non-dealing capacity?
• What, if any, market-transparency
  or counterparty-protection issues would be likely to arise if non-U.S. persons were not required to register if they engaged in dealing activity solely with non-U.S. persons from within the United States?
• What, if any, competition issues
  would be likely to arise if non-U.S. persons were not required to register if they engaged in dealing activity solely with non-U.S. persons from within the United States?
• Is the proposed approach toward
  determining whether dealing activity is conducted within the United States appropriate? Does the proposed rule identify appropriate factors in determining whether a transaction has been conducted within the United States? If not, what factors should be modified, removed, or added?
• Is the proposed identification of
  activities appropriate in the context of determining whether a security-based swap is a transaction conducted within

325See CFTC Cross-Border Proposal, 77 FR 41219–20. 326Proposed Rule 3a71–3(b)(1)(ii) under the Exchange Act. Section 716 of the Dodd-Frank Act (commonly known as the ‘‘Push-Out Rule’’) prohibits the provision of certain types of ‘‘Federal assistance’’ to certain swap and security-based swap dealers and major swap and security-based swap participants referred to as ‘‘swaps entities,’’ subject to certain exceptions. In addition, Section 619 of the Dodd-Frank Act (commonly referred to as the ‘‘Volcker Rule’’) adds a new Section 13 to the Bank Holding Company Act of 1956 (‘‘BHC Act’’) (to be codified at 12 U.S.C. 1851) that generally prohibits any banking entity from engaging in proprietary trading or from acquiring or retaining an ownership interest in, sponsoring, or having certain relationships with a hedge fund or private equity fund (‘‘covered fund’’), subject to certain exemptions. See Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds, Exchange Act Release No. 66057 (Oct. 12, 2011), 76 FR 68846 (Nov. 7, 2011). Both the Push-Out Rule and the Volcker Rule will potentially limit the ability of U.S. banks to conduct security-based swap activity. 327Proposed Rule 3a–71–3(a)(1) under the Exchange Act. We are not proposing to include ‘‘agencies’’ within the definition of ‘‘foreign branch’’ as such term is used in connection with our treatment of transactions with foreign branches of U.S. banks. We recognize that Regulation S groups agencies and branches together in defining the term U.S. person. See 17 CFR 230.902(k)(1)(v), (2)(v). However, as discussed in Section III.B.10 below, although certain aspects of Regulation S may be useful in the context of security-based swaps, Title VII and Regulation S are tailored to serve different objectives. In particular, the common treatment of agencies and branches under Regulation S does not compel us to similarly group agencies and branches for purposes of our treatment of transactions with foreign branches of U.S. banks given the fact that the term ‘‘agency’’ does not have any operative meaning with respect to the foreign operations of U.S. banks. 328Proposed Rules 3a71–3(b)(1)(ii) and (2)(ii) under the Exchange Act. 329Proposed Rule 3a71–3(a)(4)(i)(A) under the Exchange Act. 330Proposed Rule 3a71–3(a)(4)(i)(B) under the Exchange Act. the United States? If not, which activities should the Commission consider as key evidence of a transaction that is conducted within the United States?

• Is direct participation by a branch,
  agency, office, or associated person, including any affiliate and any associated person of any affiliate, within the United States an appropriate element for identifying whether a security-based swap transaction is a transaction conducted within the United States? Are there functions routinely performed by these entities that should not trigger a registration requirement, even if performed within the United States?
• Is the direct participation of a third￾party agent an appropriate element for
  identifying whether a security-based swap transaction is a transaction conducted within the United States? If not, why not?
• From an operational perspective,
  what, if any, changes to policies and procedures would be required to identify transactions conducted within the United States under the proposed approach? What changes would be required, for example, to monitor circumstances that would prevent a party from relying on representations?
• Does the proposed rule
  appropriately identify the range of security-based swap activities (i.e., solicitation, negotiation, execution, and booking) that should be considered in determining whether dealing activity is conducted within the United States? If not, what activities should be excluded or included? Why?
• Should a transaction entered into
  by a non-U.S. person in its capacity as a dealer be treated as dealing activity conducted within the United States if it is executed on an SB SEF, submitted to an SDR, or cleared by a security-based swap clearing agency physically located within the United States, even if no other activity related to the transaction were conducted within the United States?
• Should the Commission allow
  parties to rely on representations from their counterparties regarding compliance with the definition of ‘‘transaction conducted within the United States’’? Are there alternatives to relying on representations to ensure compliance? Should parties be required to exercise reasonable standards of care and due diligence?
• Is the standard used for the
  proposed ability to rely on a representation appropriate? Should another standard of knowledge be used? If so, what standard would be more appropriate for this purpose?
• The CFTC has proposed an
  interpretation that does not consider whether swap dealing activity is conducted inside or outside the United States when determining whether the de minimis threshold is met.325 Should the Commission adopt this approach? If yes, please address the effect of both approaches on customer protection, market transparency, competition, and capital formation in the U.S. security￾based swap market.
• What would be the market impact
  of the proposed approach to determining whether dealing activity occurred within the United States? How would the proposed approach affect the competitiveness of U.S. entities in the global marketplace (both in the United States as well as in foreign jurisdictions)? Would the proposed approach place any market participants at a competitive disadvantage or advantage? If so, please explain. Would the proposed approach be a more general burden on competition? If so, please explain. What other measures should the Commission consider to implement the proposed approach? What would be the market impacts and competitiveness effects of alternatives to the proposed approach discussed in this release?

7. Proposed Treatment of Transactions
   With Foreign Branches of U.S. Banks As noted above, under the proposed rule, a non-U.S. person would not be required to count toward the de minimis threshold in the security-based swap dealer definition its transactions with the foreign branch of a U.S. bank.326 For purposes of this proposed approach, and as described more fully below, ‘‘foreign branch’’ would be defined as any branch of a U.S. bank if:

• The branch is located outside the
  United States;
• The branch operates for valid
  business reasons; and
• The branch is engaged in the
  business of banking and is subject to substantive banking regulation in the jurisdiction where located.327 We preliminarily believe that these factors are appropriate for determining which entities fall within the definition of a foreign branch for purposes of this proposed approach due to their focus on the physical location of the branch and the nature of the branch’s business and regulation in a foreign jurisdiction. Requiring the branch to be located outside the United States is consistent with the goal of the proposed rule, which is to identify security-based swap activity that is not conducted within the United States. Requiring the branch to be operated for valid business purposes and to be engaged in the business of banking and subject to substantive banking regulation in a foreign jurisdiction is intended to help ensure that U.S. banks are not able to take advantage of the proposed rule by setting up offshore operations to evade the application of Title VII. In order for a transaction to be a ‘‘transaction conducted through a foreign branch,’’ and therefore excluded from a non-U.S. person’s de minimis threshold calculation,328 the foreign branch must be the named counterparty to the transaction 329 and the transaction must not be solicited, negotiated, or executed by a person within the United States on behalf of the foreign branch or its counterparty.330 To the extent that the transaction is conducted within the

331See Section III.B.6, supra.
332See Section III.B.5, supra.
333See, e.g., Sullivan and Cromwell Letter at 14 (‘‘The jurisdictional scope of the swaps entity definitions is critical to the ability of U.S. banking organizations to maintain their competitive position in foreign marketplaces. Imposing the regulatory regime of Title VII on their Non-U.S. Operations would place them at a disadvantage to their foreign bank competitors because the Non-U.S. Operations would be subject to an additional regulatory regime which their foreign competitors would not.’’); Cleary IV at 7 (‘‘Subjecting such non-U.S. branches and affiliates to U.S. requirements could effectively preclude them from, or significantly increase the cost of, managing their risk in the local financial markets, since local financial institutions may be required to comply with Dodd-Frank to provide those services’’). 334See Section III.C, infra. Provided the transaction is not a transaction conducted within the United States under proposed Rule 3a71–3(a)(5) under the Exchange Act, the Commission also is not proposing to require non-U.S. persons to count transactions with a non-U.S. person toward their de minimis threshold even if the non-U.S. person’s performance on the security-based swap is guaranteed by a U.S. person. See Section III.B.9, infra. 335Proposed Rule 3a71–3(a)(4)(ii) under the Exchange Act; see also Section III.B.6, supra. United States, as described in the immediately preceding section (whether on behalf of the U.S. bank to which the branch belongs or of the foreign counterparty), the non-U.S. person would be required to count such transaction arising out of its dealing activity toward its de minimis threshold for purposes of determining whether it is required to register as a security-based swap dealer.331 We believe that counting transactions with a foreign branch toward the de minimis threshold would be consistent with the view that a foreign branch of a U.S. bank is part of a U.S. person within the proposed definition.332 We also recognize that such transactions pose risk to the U.S. financial system. At the same time, however, we believe that imposing registration requirements on non-U.S. persons solely by virtue of their transactions with foreign branches of U.S. banks could limit the access of U.S. banks to non-U.S. counterparties when they conduct their foreign security-based swap dealing activity through foreign branches because non￾U.S. persons may not be willing to enter into transactions with them in order to avoid being required to register as a security-based swap dealer.333 We have preliminary concluded that not requiring such transactions to be counted toward the foreign counterparty’s de minimis threshold for purposes of the security-based swap dealer registration requirement would minimize this disparate treatment while ensuring that transactions involving foreign branches of U.S. banks remain subject to certain Title VII requirements (as described below).334 Finally, although the proposed rule reflects the
importance of ensuring that neither counterparty is operating from within the United States for purposes of conducting a transaction through a foreign branch, we also recognize the operational difficulties that could arise in investigating the activities of a counterparty to ensure compliance with the rule. As a result, we are proposing to allow parties to rely on a representation received from a counterparty indicating that ‘‘no person within the United States is directly involved in soliciting, negotiating, executing, or booking’’ a given transaction on behalf of the counterparty.335 A party may rely on such a representation by its counterparty unless the party knows that the representation is not accurate. The Commission preliminarily believes that this would address whatever operational difficulties parties may have in determining whether or not their counterparty is conducting a transaction conducted through a foreign branch. Request for Comment The Commission requests comment on all aspects of the proposed treatment of transactions with foreign branches of U.S. persons for purposes of the de minimis exception, including the following:

• Would the proposed approach
  reduce the effectiveness of customer protections or any other provisions of Title VII? If so, how should these concerns be balanced against the competitiveness concerns identified as
  part of the rationale behind the
  proposed approach?
• Does the proposed approach
  appropriately address the potential for disparate competitive impacts related to the application of the de minimis exception to dealers operating out of foreign branches? If not, how might the Commission more effectively address these concerns?
• Does the proposed approach
  provide an advantage to U.S. banks engaging in security-based swap dealing activity through foreign branches? Are there competitiveness concerns raised by this approach for entities (either banks or nonbanks) that do not utilize the branch model? Are there competitiveness concerns for non-U.S. persons, including non-U.S. persons whose performance under security￾based swaps is guaranteed by a U.S. person? If so, what are they?
• Should the Commission allow
  parties to rely on representations from their counterparties regarding compliance with the definition of ‘‘transaction conducted through a foreign branch’’? Should the Commission separately allow parties to rely on representations from their counterparties regarding status under the ‘‘foreign branch’’ definition?
• Is the standard used for the
  proposed ability to rely on a representation appropriate? Should another standard of knowledge be used? If so, what standard would be more appropriate for this purpose?
• Should the definition of a ‘‘foreign
  branch’’ be broadened to include ‘‘agencies’’ of U.S. banks in addition to branches? If so, what rationale justifies the inclusion of agencies? In particular, what are the similarities (or differences) in the legal status and regulatory treatment of the foreign branches and foreign agencies of U.S. banks that would warrant similar treatment? How do foreign agencies of U.S. banks differ from foreign offices of U.S. persons that are not banks?
• How might the proposed approach
  to the foreign branches of U.S. banks be impacted by the Volcker Rule and the Push-Out Rule? How might security￾based swap dealers alter their business practices in response to the Volcker Rule and the Push-Out Rule? Should the proposed approach to the foreign branches of U.S. banks be altered to account for these changes to business practice?
• What would be the market impact
  of the proposed treatment of transactions with foreign branches of U.S. banks? How would the proposed approach affect the competitiveness of U.S. entities in the global marketplace (both in the United States as well as in foreign jurisdictions)? Would the proposed approach place any market participants at a competitive disadvantage or advantage? If so, please explain. Would the proposed approach be a more general burden on competition? If so, please explain. What other measures should the Commission consider to implement the proposed approach? What would be the market impacts and competitiveness effects of alternatives to the proposed approach discussed in this release?

8. Proposed Rule Regarding Aggregation
   of Affiliate Positions
   One key issue related to our proposed approach to the de minimis exception, both in the cross-border context and domestically, is the aggregation of transactions connected with the dealing activity of an affiliate. In the Intermediary Definitions Adopting Release, the Commission and the CFTC

336See Intermediary Definitions Adopting Release, 77 FR 30631; 17 CFR 240.3a71–2(a)(1). 337See Intermediary Definitions Adopting Release, 77 FR 30631 n.437. 338See Intermediary Definitions Adopting Release, 77 FR 30631. 339Proposed Rule 3a71–4 under the Exchange Act. 340See Intermediary Definitions Adopting Release, 77 FR 30631 n.438 (explaining that the Commission intended to address the application of the aggregation principle to non-U.S. persons in a separate release); 17 CFR 240.3a71–2(a)(1). 341Proposed Rule 3a71–3(b)(2)(i) under the Exchange Act. The proposed rule also clarifies that only a person directly engaged in dealing activity that is required to be counted toward such person’s de minimis threshold would be required to aggregate the dealing activity of its affiliates. 342Proposed Rule 3a71–4 under the Exchange Act. 343See Section III.B.4(b), supra; see also proposed Rule 3a71–3(b)(2)(ii) under the Exchange Act. 344See Section III.B.4(b), supra. A U.S. person affiliate would be required to calculate all of its security-based swap transactions connected with its dealing activity and a non-U.S.-person affiliate would be required to calculate its security-based swap transactions connected with its dealing activity with U.S. persons (other than foreign branches of U.S. banks) or otherwise conducted within the United States. 345Proposed Rules 3a71–3(b)(2)(i) and (ii) and proposed Rule 3a71–4 under the Exchange Act. 346 Id. 347See Subtitle B of Title VII of the Dodd-Frank Act. 348See note 4, supra. 349See Intermediary Definitions Adopting Release, 77 FR 30631. jointly stated that the notional thresholds in the de minimis exception encompass swap and security-based swap dealing positions entered into by an affiliate controlling, controlled by, or under common control with the person at issue.336 The Commission and the CFTC further noted that for these purposes, control would be interpreted to mean the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract or otherwise.337 This aggregation of affiliate positions was deemed necessary to prevent persons from avoiding dealer regulation by dividing up dealing activity in excess of the notional thresholds among multiple affiliates.338 The Commission is proposing a rule that would describe how this aggregation requirement would apply to U.S. persons and non-U.S. persons engaged in cross-border security-based swap dealing activity, as well as to U.S. persons engaged in purely domestic transactions.339 As set forth in the Intermediary Definitions Adopting Release, the affiliate aggregation principle requires that a person aggregate the entire security-based swap dealing activity of any of its affiliates, without distinguishing whether the dealing positions are entered into by U.S. person affiliates or non-U.S. person affiliates, and without distinguishing whether the
dealing positions are entered into with U.S. persons or non￾U.S. persons.340 The proposed rule takes an approach that generally is consistent with the affiliate aggregation interpretive guidance jointly adopted by the Commission and the CFTC to require a person to aggregate all of the security-based swap dealing positions entered into by its U.S. person affiliates,341 except that it excludes from such aggregation the positions of an affiliate that is a registered security￾based swap dealer, under certain conditions.342 The proposed rule also provides that such aggregation must include any security-based swap transactions of such person’s non-U.S. person affiliates that would be required to be counted by such affiliates toward their respective de minimis thresholds in accordance with the proposed approach described above (i.e., a non￾U.S. person affiliate would be required to calculate its security-based swap transactions connected with dealing activity conducted with U.S. persons (other than foreign branches of U.S. banks) or otherwise conducted within the United States).343 The proposed rule similarly provides that the affiliate aggregation principle also would apply to non-U.S. persons that engage in transactions in a dealing capacity with U.S. persons (other than foreign branches of U.S. banks) or otherwise within the United States. In determining whether its dealing activity exceeds the de minimis threshold, a non-U.S. person must aggregate the amount of its own transactions connected with its dealing activity with U.S. persons (other than foreign branches) or otherwise conducted within the United States with the amount of any security-based swap transactions connected with the dealing activity conducted by its affiliates, whether U.S. persons or non-U.S. persons, that such affiliates would be required to count toward their respective de minimis thresholds in accordance with the proposed approach described above 344 (other than the transactions of affiliates that are registered security-based swap dealers).345 Transactions of affiliates that are themselves non-U.S. persons with other non-U.S. persons (or foreign branches of U.S. banks) outside the United States would not need to be aggregated for purposes of the de minimis exception.346 Thus, the Commission’s proposal would require aggregation of the amount of dealing transactions of all affiliates, both U.S. persons and non-U.S. persons, other than registered security-based swap dealers. We believe that the Commission’s proposed approach implements the de minimis exception in a manner that is consistent with the Dodd-Frank Act’s focus on the U.S. security-based swap market.347 The proposed approach reflects the fact that all of a U.S. affiliate’s security-based swap dealing transactions impact the U.S. financial system, regardless of whether such entity’s counterparties are located in the United States or abroad. The same is not true of non-U.S. affiliates, however, because the
security￾based swap transactions entered into by a non-U.S. affiliate with other non-U.S. persons outside the United States would not impact the U.S. financial system to the same extent as transactions with U.S. persons. Thus, because the statutory focus is on the U.S. security￾based swap market, we preliminarily believe it is appropriate to distinguish between U.S. and non-U.S. affiliates based on the disparate impact of their security-based swap dealing transactions on the U.S. financial system when determining which dealing transactions should be aggregated for purposes of the de minimis threshold. This further suggests that we should aggregate the dealing positions of both U.S. and non-U.S. person affiliates that are not already registered security-based swap dealers, in accordance with the rule and guidance described in the following paragraph regarding aggregation of the positions of registered dealers, with the goal of capturing all dealing transactions that warrant imposing dealer registration and regulation348 and minimizing the opportunity for a person to evasively engage in large amounts of dealing activity.349 As a result, where the aggregate security-based swap dealing activity of an affiliated group, calculated as described above, exceeds the de minimis threshold, then each affiliate within such group that engages in the security-based swap dealing activity included in such aggregation calculation would be required to register with the Commission as a security￾based swap dealer, subject to the exception described below. The Commission also is proposing a rule to address the affiliate aggregation of dealing positions for purposes of the de minimis threshold where one or more affiliates within a corporate group are registered with the Commission as

350Proposed Rule 3a71–4 under the Exchange Act. 351 Id. 352See Intermediary Definitions Adopting Release, 77 FR 30631. 353See Final CFTC Cross-Border Exemptive Order, 78 FR 868. 354See CFTC Cross-Border Proposal, 77 FR 41219–20; see also Final CFTC Cross-Border Exemptive Order, 78 FR 867–68 (providing temporary conditional relief from the CFTC’s de minimis aggregation requirements). security-based swap dealers.350 Under the proposed approach, a person calculating the amount of its security￾based swap positions for purposes of the de minimis threshold would not need to include in such calculation the security￾based swap transactions of an affiliate controlling, controlled by, or under common control with the person if such affiliate is registered with the Commission as a security-based swap dealer.351 The application of this proposed rule would be limited to circumstances where a person’s security-based swap activities are operationally independent from those of its registered security-based swap dealer affiliate. For purposes of this proposed rule, the security-based swap activities of two affiliates would be considered operationally independent if the two affiliated persons maintained separate sales and trading functions, operations (including separate back offices), and risk management with respect to any security-based swap dealing activity conducted by either affiliate that is required to be counted against their respective de minimis thresholds. If any of these functions were jointly administered by the two affiliates, or were managed at a central location within the affiliates’ corporate group (e.g., at the entity serving as the central booking entity) with respect to any security-based swap dealing activity conducted by either affiliate that is required to be counted against their respective de minimis thresholds, then an unregistered person would not be able to exclude the security-based swap dealing activities of its registered security-based swap dealer affiliate under the proposed rule. Absent the proposed exclusion of the dealing positions of a registered security-based swap dealer affiliate in the proposed rule, any affiliate of a registered security-based swap dealer that engaged in security-based swap dealing activity with U.S. persons or within the United States would be required to aggregate the dealing positions of the registered security￾based swap dealer with its own dealing positions for purposes of the de minimis threshold. Given that a registered security-based swap dealer would presumably conduct relevant security￾based swap dealing positions in excess of the de minimis threshold over the course of the immediately preceding 12 months, all persons affiliated with a registered security-based swap dealer that engaged in any level of security￾based swap dealing activity that is required to be counted against the de minimis threshold would necessarily be required to register with the Commission as security-based swap dealers
because of the affiliate aggregation principle. We preliminarily do not believe that this outcome would be consistent with the statutory purpose of the de minimis exception, because it would prevent all affiliates of a registered dealer from taking advantage of the exception, even those engaged in a minimal amount of dealing activity relevant to Title VII dealer registration and regulation. We also do not believe that this scenario raises the concerns about evasion that underlie the de minimis affiliate aggregation rule jointly adopted by the Commission and the CFTC in the Intermediary Definitions Adopting Release, given that this proposed rule would apply only where a corporate group already included a registered dealer subject to Commission oversight, and the dealing positions of all commonly controlled unregistered affiliates in the corporate group would still be aggregated for purposes of the de minimis threshold.352 For these reasons, we believe that it is appropriate not to include the security-based swap dealing positions of registered security-based swap dealers in the de minimis calculations of their commonly controlled affiliates provided that their security-based swap dealing activities that are relevant to the de minimis calculation are operationally independent of the registered security￾based swap dealer affiliates. Request for Comment The Commission requests comment on all aspects of the proposed rule regarding the aggregation of affiliate positions, including the following:

• Should the Commission permit
  affiliated persons to exclude the security-based swap dealing positions of affiliated registered security-based swap dealers from their de minimis calculations, as proposed? Why or why not?
• Would permitting affiliated entities
  to exclude the security-based swap dealing positions of registered security￾based swap dealers from their de minimis calculations undermine any of the Title VII protections associated with security-based swap dealer registration and regulation? If so, please explain. Should the Commission further explain what ‘‘operationally independent’’ means? If so, what should the Commission consider?
• Should the Commission permit
  affiliated entities to exclude the security-based swap dealing positions of operationally independent affiliates from their de minimis calculations, even if such affiliates are not registered security-based swap dealers?
• The CFTC has adopted temporary
  conditional relief that would permit a non-U.S. person to exclude from its de minimis calculation the security-based swap dealing positions of an affiliated non-U.S. person that is registered as a swap dealer and not guaranteed by a U.S. person with respect to its swap obligations.353 Should the Commission adopt a similar interpretation to permit a non-U.S. person (but not a U.S. person) to exclude the dealing positions of its affiliated registered non-U.S. security-based swap dealer (but not the dealing positions of its affiliated registered U.S. security-based swap dealer)? Should the Commission condition such exclusion on the affiliated registered security-based swap dealer not being guaranteed by a U.S. person? If so, please describe the likely economic effects of providing different exclusions from the affiliate aggregation principle for U.S. and non-U.S. security￾based swap dealers and how the Commission should best address them.
• The CFTC has also proposed an
  interpretation that would permit non￾U.S. persons engaged in dealing activity with U.S. persons to aggregate the notional amounts of security-based swap dealing transactions by their non￾U.S. affiliates separately from any dealing activity performed by their U.S. affiliates.354 Should the Commission adopt a similar approach? If so, please explain how this approach is consistent with the de minimis threshold and the rationale provided for the affiliate aggregation principle in the Intermediaries Definitions Adopting Release. In addition, please describe the likely economic effects of providing an effectively higher de minimis threshold for corporate groups that engage in dealing activity with U.S. persons or within the United States through affiliates located in the United States and in foreign jurisdictions.
• What would be the market impact
  of the proposed approach to aggregation of affiliate positions? How would the proposed approach affect the competitiveness of U.S. entities in the global marketplace (both in the United

355See 17 CFR 240.3a71–1(d), as discussed in the Intermediary Definitions Adopting Release, 77 FR 30624–25. For the purposes of this rule, which was adopted in the Intermediary Definitions Adopting Release, counterparties are considered majority￾owned affiliates if one party directly or indirectly owns a majority interest in the other, or if a third party directly or indirectly owns a majority interest in both, based on the right to vote or direct the vote of a majority of a class of voting securities of an entity, the power to sell or direct the sale of a majority of a class of voting securities of an entity, or the right to receive upon dissolution or the contribution of a majority of the capital of a partnership. See 17 CFR 240.3a71–1(d)(2). 356This approach differs from the treatment of conduit entities in the CFTC Cross-Border Proposal. Under the CFTC Cross-Border Proposal, a U.S. entity may be required to register as a swap dealer as a result of its inter-affiliate swap transactions with an affiliated foreign dealer if the foreign dealer is acting as a conduit by transferring swaps to the U.S. entity through back-to-back transactions. See CFTC Cross-Border Proposal, 77 FR 41222. 357Proposed Rule 3a71–4 under the Exchange Act. 358This approach differs from the treatment of guaranteed entities in the CFTC Cross-Border Proposal. Under the CFTC Cross-Border Proposal, a non-U.S. person that receives a guarantee from a U.S. person would be required to count all of its swap dealing transactions against the de minimis threshold. See CFTC Cross-Border Proposal, 77 FR
41221. 359See Intermediary Definitions Adopting
Release, 77 FR 30688–89; Section V.C.2(a), infra. 360See, e.g., Section IV, infra; see also Bank Holding Company Act of 1956 (12 U.S.C. 1841, et seq.); Title I of the Dodd-Frank Act (concerning regulation of certain nonbank financial companies and bank holding companies that pose a threat to the financial stability of the United States). 361See Section VIII, infra. Under proposed Regulation SBSR, inter-affiliate transactions would be subject to reporting and dissemination requirements. See id. States as well as in foreign jurisdictions)? Would the proposed approach place any market participants at a competitive disadvantage or advantage? If so, please explain. Would the proposed approach be a more general burden on competition? If so, please explain. What other measures should the Commission consider to implement the proposed approach? What would be the market impacts and competitiveness effects of alternatives to the proposed approach discussed in this release?
9. Treatment of Inter-Affiliate and
Guaranteed Transactions
Consistent with the approach taken in the Intermediary Definitions Adopting Release, the Commission is proposing that cross-border security-based swap transactions between majority-owned affiliates would not need to be considered when determining whether a person is a security-based swap dealer.355 Thus, a non-U.S. person engaged in dealing activity outside the United States would not be required to register as a security-based swap dealer simply by virtue of entering into security-based swap transactions with its majority-owned U.S. affiliate, even if such inter-affiliate security-based swaps were back-to-back transactions (i.e., the foreign subsidiary was acting as a ‘‘conduit’’ for the U.S. person). Similarly, a U.S. person would not be required to register as a security-based swap dealer as a result of back-to-back transactions with a non-U.S. person subsidiary that acts as a conduit for such U.S. person.356 Instead, as proposed, there must be an independent basis for requiring a person to register as a security-based swap dealer that is unrelated to its inter-affiliate transactions.357 Furthermore, the Commission is proposing not to require a non-U.S. person that receives a guarantee from a U.S. person of its performance on security-based swaps with non-U.S. persons outside the United States to count its dealing transactions with those non-U.S. persons toward the de minimis threshold as a U.S. person would be required to do.358 We believe that the primary risk related to these transactions is the risk posed to the United States via the guarantee from a U.S. person, not the dealing activity occurring between two non-U.S. persons outside the United States. As a result, we do not believe that the risk posed by the existence of the U.S. guarantee would be better addressed through requiring non-U.S. persons receiving such guarantees to register with the Commission as security-based swap dealers. One way that the accumulation of risk resulting from security-based swap positions is addressed in Title VII is through the major security-based swap participant registration category. We preliminarily believe that the risk associated with guarantees by U.S. persons of the performance on security￾based swap obligations of non-U.S. persons may be best addressed through the application of principles of attribution in the major security-based swap participant definition described in the Intermediary Definitions Adopting Release.359 We preliminarily believe that use of the major security-based swap participant definition to address the risks posed to the United States as a result of guarantees by U.S. persons effectively deals with the specific regulatory concerns posed by the risks these guarantees present to the U.S. financial system and is consistent with the regulatory framework set forth in the Dodd-Frank Act.360 The Commission also is proposing not to require a foreign dealer to count security-based swap transactions with non-U.S. persons that receive
guarantees from U.S. persons toward the de minimis threshold. The Commission notes that, in many respects, the risk created for U.S. persons and the U.S. financial system in these transactions is the same as the risk posed if the U.S. person who provides the guarantee had entered into transactions directly with non-U.S. persons. The U.S. guarantor would be held responsible to settle those obligations, thus maintaining similar liability as though the U.S. person had entered into security-based swap transactions directly with a non￾U.S person. The Commission preliminarily believes that the risk posed to the U.S. markets by non-U.S. persons engaged in dealing activity with non-U.S. persons outside the United States whose performance under security-based swaps is guaranteed by a U.S. person can be best addressed through the major security-based swap participant definition and requirements applicable to major security-based swap participants, as the risks to the United States appear to arise only from the resulting positions and not the dealing activity as such. Finally, as discussed below, the Commission is proposing to subject a security-based swap transaction between two non-U.S. persons where at least one of the persons receives a guarantee on the performance of its obligations from a U.S. person to the regulatory reporting requirement (but not, in some cases, to real-time public reporting).361 If the proposed approach is adopted, the Commission would gain an understanding of market developments in this area as a result of the proposed de minimis exception. Request for Comment The Commission requests comment on all aspects of the proposed treatment of inter-affiliate and guaranteed transactions, including the following:

• Should the Commission revise our
  proposed approach to inter-affiliate transactions to require those transactions to be considered when determining whether a person is a security-based swap dealer? If so, why?
• If the Commission determines not
  to exclude inter-affiliate transactions from security-based swap dealing activity in the cross-border context, how could such a decision be reconciled with the exclusion for inter-affiliate transactions provided in the Intermediary Definitions Adopting Release? Should the Commission and the CFTC jointly reconsider the approach to inter-affiliate transactions provided in the Intermediary Definitions Adopting Release?

362See CFTC Cross-Border Proposal, 77 FR 41221–22. 363See, e.g., Cleary Letter IV at 2 (‘‘The Agencies should adopt a consistent definition of ‘U.S. person’ based on SEC Regulation S for purposes of analyzing whether a transaction involving one or more such persons may be subject to the provisions of Dodd-Frank.’’); Davis Polk I at 6 n.6 (‘‘We propose that the term ‘U.S. counterparty’ be defined in the same way as the term ‘U.S. person’ in Rule 902(k) of the SEC’s Regulation S under the Securities Act, 17 CFR 230.902(k). This established definition is familiar to countless financial market professionals. Following the ‘U.S. person’ definition in Regulation S, rather than creating an entirely new definition, would avoid confusion and also provide consistency of application and legal certainty for a financial institution that offers a security and a swap to the same customer, which is common.’’); SIFMA Letter I at 5 (‘‘To determine whether a party to a swap is a ‘U.S. person,’ the Commissions should rely on the existing definition of that term contained in Rule 902(k) of the SEC’s Regulation S. This established, workable definition is familiar to regulators and market participants alike, and would provide legal certainty. It is noteworthy that the Regulation S definition of U.S. person does not include non-U.S. affiliates of U.S. persons or non-U.S. branches of a U.S. bank and generally excludes collective investment vehicles established outside the United States with U.S. investors.’’) (footnotes omitted); see also Section III.B.5(c), supra. 364See 17 CFR 230.901(k); see also Regulation S Adopting Release, 55 FR 18306. 365Regulation S Adopting Release, 55 FR 18307. 366See proposed Rule 3a71–3(a)(7)(i)(B) under the Exchange Act; Section III.B.5(b)ii, supra. 367See proposed Rule 3a71–3(a)(7)(i)(C) under the Exchange Act; Section III.B.5(b)iii, supra. 368See Section III.B.5(a), supra. 369Under Regulation S, the foreign branch of a U.S. bank is not treated as a U.S. person while the U.S. branch of a foreign bank is treated as a U.S. person. By contrast, under proposed Rule 3a71– 3(a)(7)(i)(B) under the Exchange Act, the foreign branch of a U.S. bank would be treated as part of a U.S. person while the U.S. branch of a foreign bank would be treated as a non-U.S. person.

• Should the Commission require the
  registration of non-U.S. dealers that receive guarantees on the performance of their security-based swap obligations from U.S. persons based on their transactions with non-U.S. persons as well as U.S. persons? Why or why not? Should the U.S. guarantor be viewed as engaging indirectly in dealing activity through its affiliate and, therefore, required to register as a security-based swap dealer if the security-based swap transactions in connection with its dealing activity exceed the de minimis threshold? Should there be a concern that the U.S. guarantor is using the non￾US affiliate to evade the requirements of Title VII?
• Does the proposed approach to
  guarantees effectively address concerns related to the risk posed to the U.S. financial system resulting from guarantees by U.S. persons of security￾based swap dealing activity by non-U.S. persons?
• Are there competitiveness concerns
  related to the proposed approach to guarantees with regard to U.S. entities that engage in non-U.S. security-based swap dealing activity through business models that do not rely on guarantees of non-U.S. persons, such as those that operate through foreign branches?
• The CFTC has proposed an
  interpretation that would subject an entity that operates a ‘‘central booking system’’ where swaps are booked into a single legal entity, to any applicable swap dealer registration requirement as if it had entered into such swaps directly, irrespective of whether such entity is a U.S. person or whether the booking entity is a counterparty to the swap or enters into the swap indirectly through a back-to-back swap or other arrangement with its affiliate or subsidiary.362 Should the Commission adopt a similar approach? If so, please describe how such a decision could be reconciled with the exclusion for inter￾affiliate transactions provided in the Intermediary Definitions Adopting Release.
• What would be the market impact
  of the proposed approach to inter￾affiliate and guaranteed transactions? How would the application of the proposed approach affect the competitiveness of U.S. entities in the global marketplace (both in the United States as well as in foreign jurisdictions)? Would the proposed approach place any market participants at a competitive disadvantage or advantage? If so, please explain. Would the proposed approach be a more general burden on competition? If so, please explain. What other measures should the Commission consider to implement the proposed approach? What would be the market impacts and competitiveness effects of alternatives to the proposed approach discussed in this release?

10. Comparison With Definition of ‘‘U.S.
    Person’’ in Regulation S
    In proposing an entity-based approach to the definition of a U.S. person, we have declined to follow the suggestions by some commenters that we adopt the definition of ‘‘U.S. person’’ used in Regulation S, which among other things expressly excludes from the definition of ‘‘U.S. person’’ agencies or branches of U.S. persons located outside the United States.363 Although we recognize that the Regulation S definition of U.S. person has the advantage of familiarity for many market participants, Regulation S addresses specific policy concerns that are different from those addressed by Title VII.364 Specifically, the definition of U.S. person in Regulation S was adopted in the context of providing an ‘‘issuer safe harbor’’ from the registration requirements of
    Section 5 of the Securities Act, which
    was intended ‘‘to ensure that the [unregistered] securities offered [abroad] come to rest offshore.’’ 365 In that context, providing a safe harbor based in
    part on the location of the person,
    branch, or office making the investment decision is consistent with the goals of that regulatory framework, which include protecting the integrity of the registration requirements applicable to securities publicly offered in the United States under the Securities Act. The Regulation S definition of ‘‘U.S. person’’ reflects this policy judgment. We preliminarily believe that the definition of U.S. person in Title VII should encompass, for example, not only a person that has its place of residence or legal organization within the United States, but also its principal place of business within the United States, as the security-based swap activities of such entities are likely to manifest themselves most directly within the United States, where the majority of their commercial, legal, and financial relationships would be likely to exist because that is where their business principally occurs.366 Similarly, we preliminarily believe that the definition of U.S. person in Title VII should include accounts of a U.S. person, regardless of whether the account is a discretionary account or is held by a dealer or other person that is not resident in the United States, because the U.S. person bears the direct risk of transactions in the account, regardless of where the investment decision is made.367 Moreover, we are proposing that an entity’s U.S.-person status would apply to the entity as a whole, since the risks related to the concerns of Title VII are borne by the entire entity and not just by the specific business unit (or branch or office) engaged in security-based swap activity.368 With its exclusions for certain foreign branches and agencies of U.S. persons from the definition of ‘‘U.S. person,’’ Regulation S would not address the entity-wide nature of the risks that Title VII seeks to address.369 The Commission preliminarily believes that adopting the definition of ‘‘U.S. person’’ in Regulation S without significant modifications would not achieve the goals of Title VII. As discussed above, we are instead proposing a definition of U.S. person that focuses primarily on the location of the person bearing the direct risk of the transaction. Regulation S, with its focus on the person making the investment decision (rather than the person actually

370Rather than creating a U.S. person definition specifically tailored to Title VII, the Commission could have proposed a modified version of Regulation S. However, significantly modifying the definition of ‘‘U.S. person’’ in Regulation S to accommodate the objectives of Title VII would largely eliminate the benefits associated with adopting a consistent and well-established regulatory standard. 371See Section III.B.3(b)(4), infra. The Commission notes that it took a different approach to the definition of U.S. person and activity in the United States in connection with the Commission’s exemption from registration for foreign private advisers. See Exemptions for Advisers to Venture Capital Funds, Private Fund Advisers With Less Than $150 Million in Assets Under Management, and Foreign Private Advisers, Advisers Act Release No 3222, 76 FR 39646 (July 6, 2011) (the ‘‘Foreign Private Adviser Exemption’’). The Foreign Private Adviser Exemption defines certain terms in the statutory definition of ‘‘foreign private adviser’’ (added by Section 402 of the Dodd-Frank Act and codified at section 202(a)(30) of the Investment Advisers Act) by incorporating the definition of a ‘‘U.S. person’’ and ‘‘United States’’ under Regulation S. As discussed in this subsection, the Commission preliminarily believes that it would be inappropriate to follow the approach in Regulation S in its entirety with respect to the cross-border regulation of security-based swaps, although it may be appropriate in the context of the Foreign Private Adviser Exemption given the similar policy objectives with Regulation S. 372Proposed Rule 3a71–3(a)(8) under the Exchange Act defines ‘‘U.S. security-based swap dealer’’ as a security-based swap dealer, as defined in Section 3(a)(71) of the Exchange Act, 15 U.S.C. 78c(a)(71), and the rules and regulations thereunder, that is a U.S. person, as defined in proposed Rule 3a71–3(a)(7) under the Exchange Act. Proposed Rule 3a71–3(a)(3) under the Exchange Act defines ‘‘foreign security-based swap dealer’’ as a security-based swap dealer, as defined in Section 3(a)(71) of the Exchange Act, and the rules and regulations thereunder, that is not a U.S. security-based swap dealer. 373See note 372, supra. 374As discussed below, proposed Rule 3a71– 3(a)(2) under the Exchange Act defines ‘‘Foreign Business’’ as meaning the security-based swap transactions of foreign security-based swap dealers and U.S. security-based swap dealers ‘‘other than the U.S. Business of such entities.’’ ‘‘U.S. Business’’ is defined in proposed Rule 3a71–3(a)(6) under the Exchange Act, with respect to a foreign security￾based swap dealer, as (i) any transaction entered into, or offered to be entered into, by or on behalf of such foreign security-based swap dealer, with a U.S. person (other than with a foreign branch); or (ii) any transaction conducted within the United States; and, with respect to a U.S. security-based swap dealer, as any transaction by or on behalf of such U.S.
security-based swap dealer, wherever entered into or offered to be entered into, other than a transaction conducted through a foreign branch, as defined in proposed Rule 3a71–3(a)(4), with a non-U.S. person or another foreign branch. See
Section III.C.4, infra.
375Proposed Rule 3a71–3(b) under the Exchange Act. 376Proposed Rule 3a71–5 under the Exchange Act, as discussed in Section XI, infra. 377See, e.g., Socie´te´ Ge´ne´rale Letter I at 3 (‘‘Overall, the advantages of carrying out Swap transactions in and with a foreign bank with a consolidated booking structure help control risk significantly . . . . We believe it would be sensible for the Commissions to craft regulations that do not discourage foreign banks such as SG from registering as Swap Dealers.’’); Davis Polk Letter I at 2, 5 (‘‘We believe operating and managing a global swaps business out of a single booking entity presents many advantages from the perspective of foreign banks, customers and supervisors.’’). 378See ISDA Letter I at 10 (warning that ‘‘U.S. counterparties will . . . face increased costs and decreased liquidity if U.S. regulation forces non￾U.S. SDs to create fragmented booking structures to avoid duplicative and conflicting regulatory regimes’’). bearing the risk), would not necessarily capture the entity that actually bears the risks arising from security-based swap transactions that Title VII seeks to address.370 In light of the specific objectives of Title VII, the Commission preliminarily believes that a definition of U.S. person specifically tailored to the regulatory objectives it is meant to serve, as described above, is appropriate.371 Request for Comment The Commission requests comment on all aspects of the proposed definition of U.S. person, including the following:

• Should the Commission adopt the
  definition of U.S. person in Regulation S? If so, how should the Commission reconcile the objectives of Title VII with the objectives that Regulation S is meant to serve?
• Should the Commission include all
  U.S. citizens in the definition of U.S. person, regardless of a person’s residence or domicile?
• Should the Commission include
  within the definition of U.S. person entities and accounts where the discretion to enter into security-based swaps resides with a U.S. person? To what extent would this approach produce a result that differs from the current approach reflected in the proposed rule and the definitions of ‘‘security-based swap dealer’’ and ‘‘major security-based swap participant’’?
  C. Regulation of Security-Based Swap
  Dealers in Title VII
  I. Introduction
  To help address the potential effects of registration, and attendant regulatory requirements, on foreign security-based swap dealers 372 with global security￾based swap businesses and U.S. security-based swap dealers 373 that engage in security-based swap dealing activity through foreign branches that also may be subject to registration or regulation in foreign jurisdictions, the Commission is proposing not to apply the external business conduct standards and segregation requirements in Title VII to the Foreign Business 374 of such registered foreign security-based swap dealers and registered U.S. security￾based swap dealers that engage in dealing activity through foreign branches with non-U.S. persons and foreign branches of U.S. banks.375 In addition, while we are not proposing a rule to limit the application of entity￾level requirements in Title VII to foreign security-based swap dealers, we are proposing to establish a policy and procedural framework under which the Commission would permit substituted compliance in some circumstances by registered foreign security-based swap dealers with certain Title VII requirements specifically applicable to security-based swap dealers.376 In the following sections, we discuss the views of commenters, describe the transaction-level and entity-level requirements specifically applicable to security-based swap dealers in Title VII, and discuss the proposed application of transaction-level and entity-level requirements to registered security￾based swap dealers in the cross-border context.

2. Comment Summary
   Various foreign dealers expressed their views about the application of the Dodd-Frank Act requirements to their derivatives businesses. A number of them expressed concern that if the Commission applies security-based swap dealer regulations, not only to entities conducting business from within the United States, but also to foreign-domiciled entities, it could effectively prevent foreign dealers from, among other things, managing their global security-based swap business out of a centralized booking entity (i.e., the entity that acts as principal—the named counterparty—to a security-based swap transaction), which they maintain has many advantages for foreign dealers and their clients, including more efficient counterparty netting, greater transparency, greater financial counterparty financial strength, and operational efficiencies.377 One commenter cautioned that if the regulations lead foreign dealers to create ‘‘fragmented booking structures’’ to avoid duplicative and conflicting regulatory regimes, it could harm U.S. consumers through increased transaction costs with foreign dealers.378 Many commenters suggested that to preserve a registration framework that would allow foreign dealers to continue to book their global security-based swap business out of a central non-U.S. entity, the Commission should use our limited designation authority under the Dodd￾Frank Act’s swap dealer definition to designate and regulate only specific activities and particular branches or agencies of foreign banks that transact

379See, e.g., IIB Letter at 11 (pointing out that
Section 3(a)(71) of the Exchange Act, as amended
by the Dodd-Frank Act, provides for limited designation as a security-based swap dealer ‘‘for a single type or single class . . . of activities, and not for other types, classes, of . . . activities,’’ and recommending that the Commissions designate as a Swap Dealer only the particular U.S. or non-U.S. branch or agency of the foreign bank involved in the execution of swaps with U.S. customers’’); Rabobank Letter at 2 (recommending that to preserve ‘‘the benefits of the centralized booking model, a non-U.S. branch of a foreign bank should register as a swap dealer solely with respect to its swap dealing activities with U.S. persons. Under this scenario, Title VII’s transaction-level rules would apply only to the non-U.S. branch’s swap dealing activities with U.S. persons and would not apply to its other activities or to the swap activities of other parts of the foreign bank’’). 380See, e.g., Davis Polk Letter II at 4–20 (recommending reliance on comprehensive home country requirements such as capital, margin, conflicts of interest, risk management, and limited recordkeeping requirements for entity-level regulations if certain standards are met, and recommending the application of Title VII transaction-level rules to a swap dealer’s swap dealing activities with U.S. persons). 381See, e.g., Sullivan & Cromwell Letter at 14–15 (asserting that subjecting foreign entities to transaction-level requirements on foreign transactions would likely lead to a competitive disadvantage, because other foreign ‘‘banking organizations that are not so burdened by such dual and potentially conflicting requirements would be able to provide a wider range of services . . ., which may cause customers to migrate away from’’ those foreign operations, which would limit their ability to manage, transfer, and reduce systemic risk). 382See, e.g., SIFMA Letter I at 11 (remarking that ‘‘U.S. swap dealers also may be at a competitive disadvantage relative to non-U.S. entities if U.S. swap dealers must comply with U.S. rules when dealing with a non-U.S. counterparty in a jurisdiction that does not have similar rules, for example, if the foreign rules do not mandate margin requirements for non-cleared swaps’’). 383See, e.g., Financial Services Roundtable Letter at 25 (suggesting that the Commissions should defer to foreign prudential regulators with regard to entity-level requirements such as capital and margin, when they are deemed consistent with U.S. standards); Davis Polk Letter I at 3–4 (emphasizing the importance of relying on home country regulation for entity-level rules such as capital, margin, conflicts of interest, risk management, and limited recordkeeping requirements). 384See Davis Polk Letter II at 13–15 (recommending a comparability standard that ‘‘focuses on the similarities in regulatory objectives as opposed to identity of technical rules,’’ whereby the Federal Reserve, as the prudential regulator, could determine comparability even when a home country regulator
does not require margin for non￾cleared swaps, if ‘‘the capital regime in such home country is determined to take account appropriately of unmargined or undermargined swaps by imposing additional capital charges’’). 385See, e.g., Davis Polk Letter I at 9 (stating that ‘‘[w]here information is required from the foreign bank swap dealer, U.S. regulators should seek to rely upon regulatory examinations by home country regulators, and information sharing arrangements’’). 386See, e.g., Socie´te´ Ge´ne´rale Letter I at 12 (recommending that a foreign dealer based outside the U.S. with no U.S. nexus ‘‘should be ‘ring￾fenced’ and outside the scope of the Commissions’ examination and regulatory authority,’’ but allowing for a limited examination of a foreign bank’s U.S. facing business concerning its clearing, trade execution, and capital rules, through its U.S. domiciled agent who ‘‘would facilitate this examination by making all necessary information available directly to the Commissions’’). 387See, e.g., Section 15F(h)(3)(A) of the Exchange Act, 15 U.S.C. 78o–10(h)(3)(A). See generally
Section 15F(h) (discussing external business
conduct standards). However, requirements under
Section 15F(h)(1), which address fraud, supervision
and adherence to position limits, apply at the entity level. 388See Section 3E of the Exchange Act, 15 U.S.C. 78c–5. 389See Section 15F(e) of the Exchange Act, 15 U.S.C. 78o–10(e). 390See Section 15F(j)(2) of the Exchange Act, 15 U.S.C. 78o–10(j)(2). 391See Section 15F(k) of the Exchange Act, 15 U.S.C. 78o–10(k). 392See Section 15F(h)(1)(B) of the Exchange Act, 15 U.S.C. 78o–10(h)(1)(B). 393See Section 15F(k) of the Exchange Act, 15 U.S.C. 78o–10(k). with U.S. customers, without subjecting the whole entity or its other branches to regulation.379 In addition, various commenters suggested a variety of operational models through which foreign dealers could operate in the U.S. security-based swap market, generally premising the proposed registration and regulatory regime on the notion that home country supervision should apply to entity-level regulations (e.g., capital, risk management, and conflicts of interest), while Title VII transaction-level regulations should apply only to security-based swaps involving a U.S. counterparty.380 A number of commenters emphasized that transaction-level requirements should not apply to security-based swaps entered into between foreign counterparties.381 Other commenters remarked that if the Commission regulates both the U.S.-facing business (i.e., transactions with U.S. persons) and the foreign-facing business (i.e., transactions with non-U.S. persons) of U.S. security-based swap dealers, but only the U.S.-facing business of foreign security-based swap dealers, then U.S. firms would be at a competitive disadvantage vis-a`-vis their foreign counterparts with respect to transactions with foreign counterparties.382 Several commenters further expressed concern that a requirement for foreign persons to register with the Commission as security-based swap dealers could be particularly problematic in the case of capital requirements, where foreign security-based swap dealers already would be subject to their home country’s prudential requirements. These commenters favored deferring to foreign regulators the regulation and supervision of entity-level requirements when a foreign security-based swap dealer is subject to comprehensive and comparable home country regulation.383 One commenter recommended a comparability standard whereby the Federal Reserve and the Commission determine comparability even when a home country regulator does not require margin for non-cleared security-based swaps, if the home country’s capital regime takes into account functionally equivalent capital charges.384 Several commenters recommended that, for monitoring purposes, U.S. regulators could rely on information-sharing arrangements with home regulators regarding foreign swap transactions and activities.385 A few commenters argued that U.S. regulators should not have examination authority over foreign swap transactions and activities located outside the United States, and suggested that the Commissions obtain any necessary information about U.S.
swap transactions and activities from U.S. affiliates of the foreign security-based swap dealer.386
3. Title VII Requirements Applicable to
Security-Based Swap Dealers Certain Title VII requirements specifically applicable to security-based swap dealers apply at a transaction level, that is, to security-based swap transactions with specific counterparties. Examples of transaction￾level requirements in Title VII principally include requirements relating to external business conduct standards such as the requirement that a security-based swap dealer or major security-based swap participant verify that any counterparty meets the eligibility standards for an eligible contract participant 387 and requirements relating to segregation of assets held as collateral in security￾based swap transactions.388 Other requirements apply to security-based swap dealers at an entity level, that is, to the dealing entity as a whole. Examples of entity-level requirements include, among others, requirements relating to capital,389 risk management procedures,390 recordkeeping and reporting,391 supervision,392 and designation of a chief compliance officer.393 Some requirements can be considered both entity-level and transaction-level requirements. For instance, the margin requirement in
Section 15F(e) of the Exchange Act can
be considered both an entity-level requirement because margin affects the financial soundness of an entity and a transaction-level requirement because margin calculation is based on particular transactions (i.e., an entity

394See Section 15F(e) of the Exchange Act, 15 U.S.C. 78o–10(e). To take another example, the requirement that security-based swap dealers implement conflict-of-interest systems and procedures relating to security-based swaps in
Section 15F(j)(5) of the Exchange Act, 15 U.S.C.
78o–10(j)(5), is transactional in the sense that potential conflicts of interest relate to particular security-based swap transactions. At the same time, however, it also is an entity-level requirement because implementing such systems and procedures would require, among other things, a security-based swap dealer to establish structural and institutional safeguards to wall off the activities of persons within the firm relating to research or analysis of the price or market for any security￾based swap. See External Business Conduct Standards Proposing Release, 76 FR 42420. 395For purposes of this discussion, we are addressing only requirements applicable to security-based swap dealers in Sections 3E and 15F of the Exchange Act, 15 U.S.C. 78c–5 and 78o–10, and the rules and regulations thereunder. Title VII requirements relating to regulatory reporting and public dissemination, clearing, and trade execution are discussed in Sections VIII–X below. 396Section 15F(h)(6) of the Exchange Act, 15 U.S.C. 78o–10(h)(6), directs the Commission to prescribe rules governing external business conduct standards for security-based swap dealers. Section 15F(h) of the Exchange Act, 15 U.S.C. 78o–10(h), also generally authorizes and requires the Commission to adopt rules for major security-based swap participants. See Section IV, infra. 397Section 15F(h)(2)(C) of the Exchange Act, 15 U.S.C. 78o–10(h)(2)(C). See note 286, supra. 398See Section 15F(h)(3)(D) of the Exchange Act, 15 U.S.C. 78o–10(h)(3)(D) (‘‘[b]usiness conduct requirements adopted by the Commission shall establish such other standards and requirements as the Commission may determine are appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of this Act’’). See also Section 15F(h)(1)(D) of the Exchange Act (requiring that security-based swap dealers to comply as well with ‘‘such business conduct standards . . . as may be prescribed by the Commission by rule or regulation that relate to . . . such other matters as the Commission determines to be appropriate’’). 399See External Business Conduct Standards Proposing Release, 76 FR 42423–25. 400See External Business Conduct Standards Proposing Release, 76 FR 42396. 401See External Business Conduct Standards Proposing Release, 76 FR 42399–400; proposed Rules 15Fh–3(e) (‘‘know your counterparty’’), 15Fh–3(f) (‘‘suitability’’), and 15Fh–6 (‘‘pay to play’’) under the Exchange Act. 402Proposed Rule 18a–4 under the Exchange Act, as discussed in Section II.C. of the Capital, Margin, and Segregation Proposing Release, 77 FR 70274. 403See Section 3E of the Exchange Act, 15 U.S.C. 78c–5. 404See Section 3E(c)(2) of the Exchange Act, 15 U.S.C. 78c–5(c)(2). calculates margin based on the market value of specific transactions or on a portfolio basis).394 Below, we describe in more detail various transaction-level and entity￾level requirements in Title VII applicable to security-based swap dealers.395 (a)
Transaction-Level Requirements In general, transaction-level requirements primarily focus on protecting counterparties by requiring security-based swap dealers to, among other things, provide certain disclosures to counterparties, adhere to certain standards of business conduct, and segregate customer funds, securities, and other assets. The following briefly describes the most significant transaction-level requirements applicable to security-based swap dealers in Title VII.
i. External Business Conduct Standards
Section 15F(h) of the Exchange Act
requires the Commission to adopt rules specifying external business conduct standards for security-based swap dealers in their dealings with counterparties,396 including counterparties that are ‘‘special entities.’’ 397 Congress granted the Commission broad authority to promulgate business conduct requirements, as the Commission determines to be appropriate in the public interest, for the protection of investors or otherwise in furtherance of the purposes of the Exchange Act.398 These standards, as described in
Section 15F(h)(3) of the Exchange Act,
must require security-based swap dealers to: (i) Verify that a counterparty meets the eligibility standards for an ECP; (ii) disclose to the counterparty material information about the security￾based swap, including material risks and characteristics of the security-based swap, and material incentives and conflicts of interest of the security-based swap dealer in connection with the security-based swap; and (iii) provide the counterparty with information concerning the daily mark for the security-based swap. Section 15F(h)(3) also directs the Commission to establish a duty for security-based swap dealers to communicate information in a fair and balanced manner based on principles of fair dealing and good faith. In addition, Section 15F(h)(4) of the Exchange Act requires that a security￾based swap dealer that ‘‘acts as an advisor to a special entity’’ must act in the ‘‘best interests’’ of the special entity and undertake ‘‘reasonable efforts to obtain such information as is necessary to make a reasonable determination’’ that a recommended security-based swap is in the best interests of the special entity.399 Section 15F(h)(5) requires that security-based swap dealers that enter into, or offer to enter into, security-based swaps with a special entity comply with any duty established by the Commission that requires a security-based swap dealer to have a ‘‘reasonable basis’’ for believing that a special entity has an ‘‘independent representative’’ that meets certain criteria and undertakes a duty to act in the ‘‘best interests’’ of the special entity. The Commission has proposed Rules 15Fh–1 through 15Fh–6 under the Exchange Act to implement the business conduct requirements described above.400 In addition to external business conduct standards expressly addressed by Title VII, the Commission has proposed certain other business conduct requirements for security-based swap dealers that the Commission preliminarily believed would further the principles that underlie the Dodd-Frank Act. These rules would, among other things, impose certain ‘‘know your counterparty’’ and suitability obligations on security-based swap dealers, as well as restrict security-based swap dealers from engaging in certain ‘‘pay to play’’ activities.401
ii. Segregation of Assets
Segregation requirements are designed to identify and protect customer property held by a security￾based swap dealer as collateral in order to facilitate the prompt return of the property to customers or counterparties in a liquidation proceeding of such security-based swap dealer.402 Segregation not only protects counterparties who are customers of a security-based swap dealer but also facilitates orderly liquidation of a security-based swap dealer and minimizes the disruption to and impact on the U.S. security-based swap market and the U.S. financial system overall caused by insolvency and liquidation of a security-based swap dealer.
Section 3E of the Exchange Act
provides the Commission with rulemaking authority to prescribe segregation requirements for securities￾based swap dealers that receive assets from, for, or on behalf of a counterparty to margin, guarantee, or secure a security-based swap transaction.403
Section 3E(c) provides the Commission
with rulemaking authority to prescribe how any margin received by a security￾based swap dealer with respect to cleared security-based swap transactions may be maintained, accounted for, treated and dealt with by the security-based swap dealer.404 In addition, Section 3E(g) extended the customer protections of the U.S. Bankruptcy Code to counterparties of a security-based swap dealer with respect to cleared security-based swaps, and with respect to non-cleared security￾based swaps, if there is a customer protection requirement under Section 15(c)(3) or a segregation requirement

405See Section 3E(g) of the Exchange Act, 15 U.S.C. 78c–5(g); Capital, Margin, and Segregation Proposing Release, 77 FR 70275. 406Proposed Rule 18a–4 under the Exchange Act, as discussed in the Capital, Margin, and Segregation Proposing Release, 77 FR 70274–88. 407 17 CFR 240.15c3–3. See Capital, Margin, and Segregation Proposing Release, 77 FR 70276. 408For example, Section 15F(e)(3) of the Exchange Act provides that the requirements relating to capital and margin imposed by the Commission pursuant to Section 15F(e)(2) shall help ensure the safety and soundness of the security-based swap dealer and be appropriate for the risk associated with the non-cleared security￾based swaps held as a security-based swap dealer in order ‘‘[t]o offset the greater risk to the security￾based swap dealer . . . and the financial system arising from the use of security-based swaps that are not cleared.’’ 409See Section 15F(e)(1)(B) of the Exchange Act, 15 U.S.C. 78o–10(e)(1)(B); note 34, supra (discussing the term ‘‘prudential regulator’’). 410See Section 15F(e)(1)(A) of the Exchange Act, 15 U.S.C. 78o–10(e)(1)(A); see also Prudential Regulators Proposed Rule, Margin and Capital Requirements for Covered Swap Entities, 76 FR 27564 (May 11, 2011) (‘‘Prudential Regulator Margin and Capital Proposal’’). 411See Section 4s(e)(1)(B) of the CEA, 7 U.S.C. 6s(e)(1)(B), as added by Section 731 of the Dodd￾Frank Act; see also CFTC Proposed Rule, Capital Requirements of Swap Dealers and Major Swap Participants, 76 FR 27802 (May 12, 2011) (‘‘CFTC Capital Proposal’’). 412See Section 4s(e)(1)(A) of the CEA, 7 U.S.C. 6s(e)(1)(A); see also Prudential Regulator Margin and Capital Proposal, 76 FR 27564. 413See Capital, Margin, and Segregation Proposing Release, 77 FR 70218 (‘‘[T]he capital and other financial responsibility requirements for broker-dealers generally provide a reasonable template for crafting the corresponding requirements for nonbank [security-based swap dealers]. For example, among other considerations, the objectives of capital standards for both types of entities are similar.’’). 414See, e.g., Basel Committee on Banking Supervision (‘‘BCBS’’), Basel III: International framework for liquidity risk measurement, standards and monitoring for banks (Dec. 2010) (‘‘Basel III’’), available at: http://www.bis.org/publ/ bcbs188.pdf. 415See Capital, Margin, and Segregation Proposing Release, 77 FR 70218. In this release, the Commission discussed the operational, policy, and legal differences between banks and nonbank entities for distinguishing the Commission’s capital rules from those applicable to bank security-based swap dealers. 416 Depository institutions that maintain transaction accounts or non-personal time deposits subject to reserve requirements are eligible to borrow funds from the Federal Reserve’s discount window, such as commercial banks, thrift institutions, and U.S. branches and agencies of foreign banks. See Regulation D, 12 CFR part 204. 417Under the
segregation requirements in Rule 15c3–3 under the Exchange Act and proposed Rule 18a–4 under the Exchange Act, broker-dealers and security-based swap dealers are not permitted to rehypothecate customer assets to finance their business activity. Thus, they cannot use customer assets as a source of funding, whereas banks are in the business of investing customer deposits (subject to banking regulations). 418 Id. 419See, e.g., Section 15F(e)(3)(A)(i) of the Exchange Act, 15 U.S.C. 78o–10(e)(3)(A)(i) (stating that Title VII’s capital and margin requirements are intended to ‘‘help ensure the safety and soundness of the security-based swap dealer or major security￾based swap participant’’). In setting capital and margin requirements for security-based swap dealers and major security-based swap participants, the Commission’s goal is to help ensure the safety and soundness of these entities because of their connection to the U.S. financial system. prescribed by the Commission.405 The Commission has proposed Rule 18a–4 under the Exchange Act to establish segregation requirements for security￾based swap dealers with respect to both cleared and non-cleared security-based swap transactions.406 The provisions of proposed Rule 18a–4 were modeled on the broker-dealer customer protection rule and take into account the characteristics of security-based swaps.407 (b) Entity-Level Requirements Entity-level requirements in Title VII primarily address concerns relating to the security-based swap dealer as a whole, with a particular focus on safety and soundness of the entity to reduce systemic risk in the U.S. financial system.408 The most significant entity￾level requirements, as discussed below, are capital and margin requirements. Certain other entity-level requirements relate to the capital and margin requirements because, at their core, they relate to how the firm identifies and manages its risk exposure arising from its activities (e.g., risk management requirements). Given their functions, these entity-level requirements would be applied under our proposal on a firm-wide basis to address risks to the security-based swap dealer as a whole.
i. Capital
The Commission is required to establish minimum requirements relating to capital for security-based swap dealers for which there is not a prudential regulator (‘‘nonbank security￾based swap dealers’’).409 The prudential regulators are required to establish requirements relating to capital for bank security-based swap dealers.410 Some security-based swap dealers may also be registered as swap dealers with the CFTC. The CFTC is required to establish capital requirements for nonbank swap dealers.411 The prudential regulators are required to establish capital requirements for bank swap dealers.412 The objective of the Commission’s proposed capital rule for security-based swap dealers is the same as the Commission’s capital rule for broker￾dealers; specifically, to ensure that the entity maintains at all times sufficient liquid assets to (i) promptly satisfy its liabilities—the claims of customers, creditors, and other security-based swap dealers, and (ii) provide a cushion of liquid assets in excess of liabilities to cover potential market, credit, and other risks.413 As noted above, the Commission’s proposed capital rules focus on the liquid assets of a nonbank security￾based swap dealer available to satisfy its liabilities or cover its risks in a liquidation scenario. This focus on liquid assets would distinguish the Commission’s capital rules applicable to security-based swap dealers from those applicable to banks, which generally include a more permissive list of assets that may be taken into account for purposes of capital calculations.414 The difference in approach between the capital rules applicable to nonbank dealers and bank dealers is supported by certain operational, policy, and legal differences between nonbank security￾based swap dealers and bank security￾based swap dealers.415 Notably, existing capital standards for banks and broker￾dealers reflect, in part, differences in their funding models and access to certain types of financial support, and we expect that those same differences also will exist between bank security￾based swap dealers and nonbank security-based swap dealers. For example, banks obtain funding through customer deposits and can generally obtain liquidity through the Federal Reserve’s discount window to meet their obligations,416 whereas broker￾dealers and nonbank security-based swap dealers cannot.417 Thus all of a nonbank entity’s counterparty obligations must be met through the nonbank entity’s own liquid assets. For these reasons, the Commission’s proposed capital standard for nonbank security-based swap dealers is a net liquid assets test modeled on the broker￾dealer capital standard in Rule 15c3–1 under the Exchange Act.418
ii. Margin
Margin may be viewed as an entity￾level requirement given its effect on the financial soundness of an entity, as well as a transaction-level requirement due to the fact that margin is calculated based on particular transactions and positions. Although margin is calculated based on individual transactions, the cumulative effect of collecting margin from counterparties is to protect an entity from the default of its counterparties. Given the emphasis placed on the financial soundness of security-based swap dealers in Title VII,419 we believe that margin should be treated as an entity-level requirement for purposes of implementing Title VII in the cross-border context. We recognize that this approach differs from the approach to margin

420See CFTC Cross-Border Proposal, 77 FR 41226. 421See Capital, Margin, and Segregation Proposing Release, 77 FR 70303 and 70259. 422See id. at 70304. 423See id. at 70245–46. 424See Sections 15F(e)(1)(B) and (2)(B) of the Exchange Act, 15 U.S.C. 78o–10(e)(1)(B) and (2)(B). 425See Section 15F(e)(1)(A) of the Exchange Act, 15 U.S.C. 78o–10(e)(1)(A); see also Prudential Regulator Margin and Capital Proposal, 76 FR
27564. 426See Section 4s(e)(1)(B) of the CEA, 7 U.S.C.
6s(e)(1)(B), as added by Section 731 of the Dodd￾Frank Act; see also CFTC Proposed Rule, Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 76 FR 23732 (Apr. 28, 2011) (‘‘CFTC Margin Proposal’’). The CFTC also has adopted segregation requirements for cleared swaps and proposed segregation requirements for non-cleared swaps. See Protection of Cleared Swaps Customer Contracts and Collateral; Conforming Amendments to the Commodity Broker Bankruptcy Provisions, 77 FR 6336 (Feb. 7, 2012) (‘‘CFTC Segregation for Cleared Swaps Final Release’’); Protection of Collateral of Counterparties to Uncleared Swaps; Treatment of Securities in a Portfolio Margining Account in a Commodity Broker Bankruptcy, 75 FR 75432 (Dec. 3, 2010) (‘‘CFTC Segregation for Uncleared Swaps Proposing Release’’). 427See Section 15F(e)(3)(A) of the Exchange Act, 15 U.S.C. 78o–10(e)(3)(A). 428See Capital, Margin, and Segregation Proposing Release, 77 FR 70259. 429See Sections 15F(e)(3)(A)(i) and (ii) of the Exchange Act, 15 U.S.C. 78o–10(e)(3)(A)(i) and (ii). 430See Capital, Margin, and Segregation Proposing Release, 77 FR 70257–74. 431See id. at 70259. Broker-dealers are subject to margin requirements in Regulation T promulgated by the Federal Reserve (12 CFR 220.1–220.132), in rules promulgated by the self-regulatory organizations (‘‘SROs’’) (see, e.g., Rules 4210–4240 of the Financial Industry Regulatory Authority (‘‘FINRA’’)), and with respect to security futures, in rules jointly promulgated by the Commission and the CFTC (17 CFR 242.400–242.406). 432See Capital, Margin, and Segregation Proposing Release, 77 FR 70259. 433 Id. 434See proposed Rule 3a71–3(a)(2) under the Exchange Act (defining ‘‘Foreign Business’’). 435Although we do not believe that it is appropriate to distinguish between the geographic locations of counterparties when applying the margin requirement, we recognize that it may be appropriate, in certain circumstances, to distinguish between types of counterparties in applying margin based on such factors as the risk they pose to dealers and the policy goal of promoting liquidity in dealers. See Capital, Margin, and Segregation Proposing Release, 77 FR 70265–68 (proposing to exclude both transactions with commercial end users and those with other dealers from certain margin requirements applicable to security-based swap dealers). proposed by the CFTC in its cross￾border guidance, which focused on the transaction-by-transaction nature of margin and thus treated it as a transaction-level requirement.420 However, we preliminarily believe that treating margin as an entity-level requirement is consistent with the role margin plays as part of an integrated program of financial responsibility requirements, along with the capital standards and segregation requirements, that are intended to enhance the financial integrity of security-based swap dealers.421 The margin requirements proposed by the Commission are intended to work in tandem
with the capital requirements to strengthen the financial system by reducing the potential for default to an acceptable level and limiting the amount of leverage that can be employed by security-based swap dealers and other market participants.422 For example, the capital requirements proposed by the Commission take into account whether a security-based swap is cleared or non￾cleared, the amount of margin collateral imposed by registered clearing agencies with respect to cleared security-based swaps, and the circumstances where non-cleared security-based swaps are excepted from the margin collection requirements imposed by the Commission, and would impose a capital charge in certain cases for uncollateralized or insufficiently collateralized exposures arising from cleared or non-cleared security-based swaps in order to account for the counterparty default risk that is not adequately addressed by margin collateral.423 We preliminarily do not believe that margin would effectively fulfill its purpose as part of a comprehensive financial responsibility program for non-bank security-based swap dealers if the Commission were to treat margin solely as a transaction-level requirement. The division of regulatory responsibilities related to margin requirements in Title VII mirrors that of the capital requirements discussed above. As with capital, the Commission is required to establish minimum requirements relating to initial and variation margin on all security-based swaps that are not cleared by a registered clearing agency for nonbank security-based swap dealers.424 The prudential regulators are required to establish requirements relating to margin for bank security-based swap dealers.425 Security-based swap dealers that are also registered as swap dealers with the CFTC also would be subject to CFTC requirements for nonbank swap dealers with respect to initial and variation margin requirements on all swaps that are not cleared by a registered derivatives clearing organization.426 The objective of the margin requirements for security-based swap dealers is to offset the greater risk to the security-based swap dealer and the financial system arising from the use of security-based swaps that are not cleared.427 Margin serves as a buffer in the event a counterparty fails to meet an obligation to the security-based swap dealer and the security-based swap dealer must liquidate the assets posted by the counterparty to satisfy the obligation.428 More generally, under Title VII, the Commission is specifically required to set both capital and margin requirements for nonbank security￾based swap dealers that (i) help ensure the safety and soundness of the nonbank security-based swap dealer and (ii) are appropriate for the risk associated with the non-cleared swaps held as a security-based swap dealer.429 Pursuant to Section 15F(e) of the Exchange Act, the Commission has proposed Rule 18a–3 to establish margin requirements for nonbank security￾based swap dealers with
respect to non￾cleared security-based swaps.430 Proposed Rule 18a–3 is based on the margin rules applicable to broker￾dealers.431 The goal of modeling proposed Rule 18a–3 on the broker￾dealer margin rules is to promote consistency with existing rules and to facilitate the portfolio margining of security-based swaps with other types of securities.432 Proposed Rule 18a–3 is intended to form part of an integrated program of financial responsibility requirements, along with the proposed capital and segregation standards.433 The Commission preliminarily believes that it is necessary to treat margin as an entity-level requirement applicable to all of a dealer’s security￾based swap transactions in order to effectively address the Dodd-Frank Act requirements for setting margin. We preliminarily believe that treating margin solely as a transaction-level requirement, and applying margin requirements differently to a security￾based swap dealer’s U.S. Business and Foreign Business,434 would not adequately further the goals of using margin to ensure the safety and soundness of security-based swap dealers because it could result in security-based swap dealers with global businesses collecting significantly less collateral than would otherwise be required to the extent that they are not required by local law to collect margin from their counterparties. Further, separately applying margin in this way would force those counterparties entering into transactions that constitute the U.S. Business of a dealer to bear a greater burden in ensuring the safety and soundness of such dealer than counterparties that are part of the dealer’s Foreign Business.435 We thus preliminarily believe that it is

436See Section 15F(j)(2) of the Exchange Act, 15 U.S.C. 78o–10(j)(2). 437See proposed new paragraph (a)(10)(ii) of Rule 15c3–1 under the Exchange Act (17 CFR 240.15c3– 1); paragraph (g) of proposed new Rule 18a–1 under the Exchange Act. See also 17 CFR 240.15c3–4; Capital, Margin, and Segregation Proposing Release, 77 FR 70250–51. The Commission has not proposed rules relating to risk management for bank security￾based swap dealers. 438See OTC Derivatives Dealers, Exchange Act Release No. 40594 (Oct. 23, 1998), 63 FR 59362 (Nov. 3, 1998). 439See 17 CFR 240.15c3–4(c), as discussed in the Capital, Margin, and Segregation Proposing Release, 77 FR 70250. 440See Section 15F(i) of the Exchange Act, 15 U.S.C. 78o–10(i). 441See Trade Acknowledgement Proposing Release, 76 FR 3859. 442See Sections 15F(f)(1)(B)(i) and (ii) of the Exchange Act, 15 U.S.C. 78o–10(f)(1)(B)(i) and (ii). 443See Section 15F(f)(1)(A) of the Exchange Act, 15 U.S.C. 78o–10(f)(1)(A). 444See Section 15F(g) of the Exchange Act, 15 U.S.C. 78o–10(g). 445See Section 15F(j)(3) of the Exchange Act, 15 U.S.C. 78o–10(j)(3). 446 15 U.S.C. 78o–10(j). These functions include monitoring of applicable position limits under
Section 15F(j)(1) of the Exchange Act, 15 U.S.C.
78o–10(j)(1); establishment of risk management procedures under Section 15F(j)(2) of the Exchange Act, 15 U.S.C. 78o–10(j)(2); disclosure of general information to the Commission and prudential regulators under Section 15F(j)(3) of the Exchange Act, 15 U.S.C. 78o–10(j)(3); establishment of policies and procedures to avoid conflicts of interest under Section 15F(j)(5) of the Exchange Act, 15 U.S.C. 78o–10(j)(5); and avoidance of any actions that result in an unreasonable restraint of trade or place any material anticompetitive burden on trading or clearing under Section 15F(j)(6) of the Exchange Act, 15 U.S.C. 78o–10(j)(6). 447See Section 15F(j)(4) of the Exchange Act, 15 U.S.C. 78o–10(j)(4). 448See proposed Rule 15Fh–3(h)(2)(iv) under the Exchange Act, as discussed in the External Business Conduct Standards Proposing Release, 76 FR 42420. appropriate to treat margin as an entity￾level requirement applicable to the security-based swap transactions of registered security-based swap dealers regardless of the location of their counterparties. As noted below, the Commission is soliciting comment on this approach.
iii. Risk Management
Registered security-based swap dealers are required to establish robust and professional risk management systems adequate for managing their day-to-day business.436 The Commission has proposed that nonbank security-based swap dealers would be required to comply with existing Rule 15c3–4 under the Exchange Act.437 This rule, originally adopted for OTC derivative dealers, requires firms subject to its provisions to establish, document, and maintain a comprehensive system of internal risk management controls to assist in managing the risks associated with its business activities, including market, credit, leverage, liquidity, legal, and operational risks.438 These various risks arise from both the U.S. Business and Foreign Business of a global security-based swap dealer. A risk management system limited in scope to cover only one type of business, or limited to certain security-based swap transactions, would not effectively control the risks undertaken by a security-based swap dealer because the risks stemming from business outside the scope of such risk management system could still negatively impact the dealer. As a result, we preliminarily believe that it is necessary to treat risk management requirements as entity￾level requirements in order to place risk controls over the entire security-based swap business, thus effectively addressing the Dodd-Frank Act requirements for managing risk within security-based swap dealers. Rule 15c3–4 identifies a number of qualitative factors that would need to be a part of the risk management controls of a nonbank security-based swap dealer. For example, a nonbank security-based swap dealer would need to have a risk control unit that reports directly to senior management and is independent from business trading units, and it would be required to separate duties between personnel responsible for entering into a transaction and those responsible for recording the transaction in the books and records of the firm.439 In addition, the Commission is authorized to adopt rules governing documentation standards of security-based swap dealers for timely and accurate confirmation, processing, netting, documentation, and valuation of security-based swaps.440 Pursuant to this authority, the Commission has proposed rules regarding trade acknowledgement and verification related to security-based swap transactions.441
iv. Recordkeeping and Reporting
Registered nonbank security-based swap dealers are required to keep books and records in such form and manner and for such period as may be prescribed by the Commission by rule or regulation; registered bank security￾based swap dealers are required to keep books and records of all activities related to their ‘‘business as a security￾based swap dealer’’ in such form and manner and for such period as may be prescribed by the Commission.442 Registered security-based swap dealers also are required to make such reports as are required by the Commission regarding the transactions and positions, and financial condition of the registrant.443 In addition, security-based swap dealers are required to maintain daily trading records of the security-based swaps they enter into.444 Security-based swap dealers also are required to disclose to the Commission and the prudential regulators information concerning: (i) Terms and conditions of their security-based swaps; (ii) security￾based swap trading operations, mechanisms, and practices; (iii) financial integrity protections relating to security-based swaps; and (iv) other information relevant to their trading in security-based swaps.445 Each of these types of records is an important part of the Commission’s oversight of our registrants because it provides the Commission with vital information regarding such entities. If the Commission’s information were limited in scope to cover only one type of business, or limited to only certain security-based swap activities, the Commission would not be able to effectively regulate our registered security-based swap dealers because it would not have a full picture of the business of such registrants. As a result, we preliminarily believe that it is necessary to treat recordkeeping and reporting as entity-level requirements in order to provide the Commission with the information necessary to regulate registered security-based swap dealers and thus effectively address the Dodd￾Frank Act requirements for maintaining books and records. The Commission has not yet proposed rules regarding the recordkeeping and reporting requirements under Section 15F of the Exchange Act and solicits comment regarding the application of recordkeeping and reporting requirements in the cross-border context.
v. Internal System and Controls
Security-based swap dealers are required to establish and enforce systems and procedures to obtain any information that is necessary to perform any of the functions that are required under Section 15F(j) of the Exchange Act 446 and to provide this information to the Commission, or the responsible prudential regulator, upon request.447 The Commission has proposed a rule that would require a registered security￾based swap dealer to establish policies and procedures that are reasonably designed to comply with its responsibilities under Section 15F(j) of the Exchange Act.448 Many of the functions required under
Section 15F(j) of the Exchange Act are

449See Section III.C.3(b)iii, supra.
450See Section III.C.3(b)vii, infra.
451See Section 15F(h)(1)(B) of the Exchange Act, 15 U.S.C. 78o–10(h)(1)(B). 452Proposed Rule 15Fh–3(h) under the Exchange Act, as discussed in the External Business Conduct Standards Proposing Release, 76 FR 42419–21. 453Proposed Rule 15Fh–3(h)(1) under the Exchange Act, as discussed in the External Business Conduct Standards Proposing Release, 76 FR 42419–21. 454Proposed Rule 15Fh–3(h)(2) under the Exchange Act, as discussed in the External Business Conduct Standards Proposing Release, 76 FR 42419–21. 455See Section 15F(j)(5) of the Exchange Act, 15 U.S.C. 78o–10(j)(5), as discussed in the External Business Conduct Standards Proposing Release, 76 FR 42420. 456Proposed Rule 15Fh–3(h)(2)(iv) under the Exchange Act, as discussed in the External Business Conduct Standards Proposing Release, 76 FR 42420. 457See Section 15F(k) of the Exchange Act, 15 U.S.C. 78o–10(k). 458See Section 15F(k)(2) of the Exchange Act, 15 U.S.C. 78o–10(k)(2). 459See Section 15F(k)(3) of the Exchange Act, 15 U.S.C. 78o–10(k)(3). 460Proposed Rule 15Fk–1 under the Exchange Act, as discussed in the External Business Conduct Standards Proposing Release, 76 FR 42435–38. 461See Proposed Rule 15Fk–1(b)(2) under the Exchange Act, as discussed in the External Business Conduct Standards Proposing Release, 76 FR 42435–36. entity-level in nature (e.g., risk management procedures 449 and conflicts of interest 450). As a result, we preliminarily believe that the requirement to establish and enforce systems and procedures to obtain any information that is necessary to perform these functions cannot be effectively implemented unless it also is treated as an entity-level requirement, or else it would not cover the full scope of the requirements under Section 15F(j) of the Exchange Act to which it applies.
vi. Diligent Supervision
The Commission is authorized under the Dodd-Frank Act to adopt rules requiring diligent supervision of the business of security-based swap dealers.451 The Commission has proposed a rule that would establish supervisory obligations and that would incorporate principles from Section 15(b) of the Exchange Act and existing SRO rules.452 Among other things, under proposed Rule 15Fh–3(h), a security-based swap dealer would be required to establish, maintain, and enforce a system to supervise, and would be required to supervise diligently, its business and its associated persons, with a view to preventing violations of applicable federal securities laws, and the rules and regulations thereunder, relating to its business as a security-based swap dealer.453 The rule proposed by the Commission also would establish certain minimum requirements relating to the supervisory systems that are prescriptive in nature, that is, they would impose specific obligations on security-based swap dealers.454 As previously noted, the purpose of diligent supervision requirements is to prevent violations of applicable federal securities laws, and the rules and regulations thereunder, relating to an entity’s business as a security-based swap dealer. An entity’s business as a security-based swap dealer is not limited to either its Foreign Business or its U.S. Business, but rather is comprised of its entire global security￾based swap dealing activity. As a result, we preliminarily believe that it is necessary to treat diligent supervision as an entity-level requirement applicable to all of a dealer’s security-based swap transactions in order to effectively address the Dodd-Frank Act requirements for diligent supervision. We believe that treating diligent supervision solely as a transaction-level requirement, and applying supervisory requirements differently to a security￾based swap dealer’s U.S. Business and Foreign Business, would not further the Dodd-Frank Act goal of establishing effective supervisory systems for security-based swap dealers.
vii. Conflicts of Interest
Section 15F(j)(5) of the Exchange Act
requires security-based swap dealers to implement conflict-of-interest systems and procedures. Such policies and procedures must establish structural and institutional safeguards to ensure that the activities of any person within the firm relating to research or analysis of the price or market for any security￾based swap, or acting in the role of providing clearing activities, or making determinations as to accepting clearing customers are separated by appropriate informational partitions within the firm from the review, pressure, or oversight of persons whose involvement in pricing, trading, or clearing activities might potentially bias their judgment or supervision, and contravene the core principles of open access and the business conduct standards addressed in Title VII.455 The Commission has proposed a rule that would require a security-based swap dealer to establish policies and procedures that are reasonably designed to comply with its responsibilities under Section 15F(j)(5).456 The Commission preliminarily believes that it is necessary to treat conflicts of interest as an entity-level requirement applicable to all of a dealer’s security-based swap transactions in order to effectively address the Dodd-Frank Act requirements for setting systems and procedures to prevent conflicts of interest from biasing the judgment or supervision of security-based swap dealers. We believe that treating conflicts of interest solely as a transaction-level requirement, and applying the required structural and institutional safeguards differently to a security-based swap dealer’s U.S. Business and Foreign Business, would not further the goals of preventing conflicts of interest from influencing the security-based swap dealing activities of registered security-based swap dealers because such safeguards would only be in place for a portion of a security-based swap dealer’s activities.
viii. Chief Compliance Officer
Registered security-based swap dealers are required to designate a chief compliance officer who reports directly to the board of directors or to the senior officer of the security-based swap dealer.457 The chief compliance officer’s responsibilities include reviewing and ensuring compliance of the security￾based swap dealer with applicable requirements in the Exchange Act and the rules and regulations thereunder, resolution of conflicts of interest, administration of business conduct policies and procedures, and establishment of procedures for the remediation of noncompliance issues.458 The chief compliance officer also is required to prepare and sign a report that contains a description of the security-based swap dealer’s compliance with applicable requirements in the Exchange Act, and the rules and regulations thereunder, and each of the security-based swap dealer’s policies and procedures.459 The Commission has proposed a rule to implement these statutory requirements relating to the designation and functions of a chief compliance officer.460 As noted above, part of the chief compliance officer’s responsibilities, under the proposed rule, include establishing, maintaining, and reviewing policies and procedures reasonably designed to ensure compliance with applicable requirements in the Exchange Act and the rules and regulations thereunder.461 Many of Title VII requirements, such as those applicable to security-based swap dealers that are described in this
section, apply at the entity level. As a
result, we preliminarily believe that it is necessary to treat the chief compliance officer as an entity-level requirement

462See Section 15F(f)(1)(C) of the Exchange Act, 15 U.S.C. 78o–10(f)(1)(C). Registered bank security￾based swap dealers are only required to keep the books and records associated with the activities related to their security-based swap dealing business, as prescribed by the Commission, and to make these books and records available for inspection by any representative of the Commission. See id. 463Proposed Rule 15Fb2–4 under the Exchange Act, as discussed in the Registration Proposing Release, 76 FR 65799. For a description of the term ‘‘nonresident security-based swap dealer’’ as defined in proposed Rule 15Fb2–4(a) under the Exchange Act, including how that definition differs from the definition of the term ‘‘foreign security￾based swap dealer’’ as proposed in this release, see note 579 above. 464Proposed Rule 15Fb2–4 under the Exchange Act, as discussed in the Registration Proposing Release, 76 FR 65800. 465Proposed Rule 15Fb2–4 under the Exchange Act, as discussed in the Registration Proposing Release, 76 FR 65799–801. 466See Registration Proposing Release, 76 FR 65800. 467 Id. 468 Id. 469 15 U.S.C. 78c(a)(39). See proposed Rule 15Fb6–1 under the Exchange Act, as discussed in the Registration Proposing Release, 76 FR 65795. 470 15 U.S.C. 78o–10(b)(6). 471Section 3(a)(70) of the Exchange Act, 15 U.S.C. 78c(a)(70), generally defines the term ‘‘person associated with’’ a security-based swap dealer or major security-based swap participant (‘‘SBS Entity’’) to include: (i) any partner, officer, director, or branch manager of an SBS Entity (or any person occupying a similar status or performing similar functions); (ii) any person directly or indirectly controlling, controlled by, or under common control with an SBS Entity; or (iii) any employee of an SBS Entity. However, it generally excludes persons whose functions are solely clerical or ministerial. 472As stated in the Registration Proposing Release, ‘‘[t]he Commission believes that associated persons ‘involved in effecting’ security-based swaps would include, but not be limited to, persons involved in drafting and negotiating master agreements and confirmations, persons recommending security-based swap transactions to counterparties, persons on a trading desk actively involved in effecting security-based swap transactions, persons pricing security-based swap positions and managing collateral for the [security￾based swap dealer or major security-based swap participant], and persons assuring that the [security￾based swap dealer’s or major security-based swap participant’s] security-based swap business operates in compliance with applicable regulations. In short, the term would encompass persons engaged in functions necessary to facilitate the [security-based swap dealer’s or major security-based swap participant’s] security-based swap business.’’ Registration Proposing Release, 76 FR 65795 n. 56. based swap business in order to effectively address the Dodd-Frank Act requirements for the chief
compliance officer. We believe that treating the chief compliance officer solely as a transaction-level requirement, and applying the chief compliance officer requirements differently to a security￾based swap dealer’s U.S. Business and Foreign Business, would be unworkable given the chief compliance officer’s oversight responsibilities over entity￾level requirements and thus would not further the goals of establishing the chief compliance officer role for security-based swap dealers.
ix. Inspection and Examination
Registered bank and nonbank security-based swap dealers are obligated to keep their books and records required pursuant to Commission rules and regulations open to inspection and examination by any representative of the Commission.462 The Commission has proposed a rule that would require, among other things, ‘‘nonresident security-based swap dealers’’ that are required to register with the Commission to appoint and identify to the Commission an agent in the United States (other than the Commission or a Commission member, official, or employee) for service of process.463 In addition, the proposed rule would require that a nonresident security-based swap dealer certify that the firm can, as a matter of law, provide the Commission with prompt access to its books and records and can, as a matter of law, submit to onsite inspection and examination by the Commission.464 The proposed rule also would require that the nonresident security-based swap dealer provide the Commission with an opinion of counsel concurring that the firm can, as a matter of law, provide the Commission with prompt access to its books and records and can, as a matter of law, submit to onsite inspection and examination by the Commission.465 In proposing this rule, the Commission stated that it preliminarily believed that the nonresident security￾based swap certification and supporting opinion of counsel were important to confirm that each registered nonresident security-based swap dealer has taken the necessary steps to be in the position to provide the Commission with prompt access to its books and records and to be subject to inspection and examination by the Commission.466 To effectively fulfill our regulatory oversight responsibilities with respect to nonresident security-based swap dealers registered with it, the Commission stated that it must have access to those entities’ records and the ability to examine them. The Commission recognized, however, that certain foreign jurisdictions may have laws that complicate the ability of financial institutions, such as nonresident security-based swap dealers located in their jurisdictions, to share and/or transfer certain information including personal financial data of individuals that the financial institutions come to possess from third persons (e.g., personal data relating to the identity of market participants or their customers).467 The Commission further stated that the required certification and opinion of counsel regarding the nonresident security-based swap dealer’s ability to provide prompt access to books and records and to be subject to inspection and examination would allow the Commission to better evaluate a nonresident security-based swap dealer’s ability to meet the requirements of registration and ongoing supervision.468 The Commission’s inspection and examination authority is vital to our oversight of registered security-based swap dealers. If the Commission’s inspection and examination were limited in scope to cover
only one type of business, or limited to only certain security-based swap activities, the Commission would not be able to effectively regulate our registered security-based swap dealers because it would not have a full picture of the business of such registrants. As a result, we preliminarily believe that it is necessary to treat inspection and examination requirements as entity￾level in order to provide the Commission with the information and access necessary to regulate registered security-based swap dealers.
x. Licensing Requirements and Statutory
Disqualification
The Commission has not proposed any licensing requirements for associated persons of registered security-based swap dealers, that are specifically related to their security￾based swap dealing activities. However, the Commission has proposed a rule that would require security-based swap dealers (and major security-based swap participants) to certify that no person associated with such entities who effects or is involved in effecting security-based swaps on their behalf is subject to statutory disqualification, as defined in Section 3(a)(39) of the Exchange Act.469 This proposed rule relates to paragraph (b)(6) of Section 15F of the Exchange Act,470 which generally prohibits security-based swap dealers (and major security-based swap participants) from permitting any of their associated persons 471 who are subject to a ‘‘statutory disqualification’’ to effect or be involved in effecting 472 security-based swaps on behalf of such entities if the security-based swap dealer (or major security-based swap participant) knew, or in the exercise of

473See Registration Proposing Release, 76 FR 65795. 474For purposes of this discussion, we are addressing only requirements applicable to security-based swap dealers in Sections 3E and 15F of the Exchange Act, 15 U.S.C. 78c–5 and 78o–10, and the rules and regulations thereunder. Title VII requirements relating to reporting and dissemination, clearing, and trade execution are discussed in Sections VIII–X, infra. 475 15 U.S.C. 78o–10(h). 476Proposed Rule 3a71–3(c) under the Exchange Act. The approach under the proposed rule does not affect applicability of the general antifraud provisions of the federal securities laws to the activity of a foreign security-based swap dealer. See
Section XII, infra.
477Proposed Rule 3a71–3(a)(2) under the Exchange Act. 478Proposed Rule 3a71–3(a)(6) under the Exchange Act. A person that meets the security￾based swap dealer definition is a dealer with regard to all of its security-based swap activities, not just its dealing activities. See Intermediary Definitions Adopting Release, 77 FR 30645. Accordingly, a foreign security-based swap dealer’s U.S. Business would not be limited only to transactions arising from its dealing activity, but rather would include all types of security-based swap activity. 479Proposed Rule 3a71–3(a)(6) under the Exchange Act. 480See Section III.B.6, supra (discussing the proposed definition of ‘‘transaction conducted within the United States’’). 481Proposed Rule 3a71–3(a)(4) under the Exchange Act. See also proposed Rule 3a71– 3(a)(5)(ii) under the Exchange Act (providing that the definition of ‘‘transaction conducted within the United States’’ shall not include a transaction conducted through a foreign branch). 482See Section III.B.7, supra. 483Proposed Rule 3a71–3(a)(1) under the Exchange Act. 484See Section XI.C, infra. 485Proposed Rule 18a–4(e) under the Exchange Act. 486Proposed Rule 18a–4(e)(1) under the Exchange Act. reasonable care should have known, of the statutory disqualification.473 The Commission preliminarily believes that it is necessary to treat requirements related to licensing and statutory disqualification as entity-level requirements applicable to all of a dealer’s security-based swap business in order to effectively address the Exchange Act’s statutory disqualification provision. We believe that treating licensing requirements and statutory disqualification solely as transaction-level requirements, and applying the statutory disqualification differently to a security-based swap dealer’s U.S. Business and Foreign Business, would not further the goals of preventing statutorily disqualified persons from effecting security-based swaps on behalf of registered security￾based swap dealers because such disqualifications would only be in place for a portion of a security-based swap dealer’s activities.
4. Application of Certain Transaction￾Level Requirements 474
(a) Proposed Rule
The Commission is proposing a rule that would provide that a registered foreign security-based swap dealer and a foreign branch of a registered U.S. security-based swap dealer, with respect to their Foreign Business, shall not be subject to the requirements relating to external business conduct standards described in Section 15F(h) of the Exchange Act,475 and the rules and regulations thereunder, other than the rules and regulations prescribed by the Commission pursuant to Section 15F(h)(1)(B).476 The proposed rule would define ‘‘Foreign Business’’ as security-based swap transactions entered into, or offered to be entered into, by or on behalf of a foreign security-based swap dealer or a U.S. security-based swap dealer that do not include its U.S. Business.477 The proposed rule would define ‘‘U.S. Business’’ as:

• With respect to a foreign security￾based swap dealer, (i) any transaction
  entered into, or offered to be entered into, by or on behalf of such foreign security-based swap dealer, with a U.S. person (other than with a foreign branch), or (ii) any transaction conducted within the United States; 478 and
• With respect to a U.S. security￾based swap dealer, any transaction by or
  on behalf of such U.S. security-based swap dealer, wherever entered into or offered to be entered into, other than a transaction conducted through a foreign branch with a non-U.S. person or another foreign branch.479 Whether the activity occurred within the United States or with a U.S. person for purposes of identifying whether security-based swap transactions are
  part of a U.S. Business or Foreign
  Business would turn on the same factors used to determine whether a foreign security-based swap dealer is engaging in dealing activity within the United States or with U.S. persons, as discussed above.480 The proposed rule provides that a U.S. security-based swap dealer would be considered to have conducted a security-based swap transaction through a foreign branch if:
• The foreign branch is the
  counterparty to such security-based swap transaction; and
• No person within the United States
  is directly involved in soliciting, negotiating, or executing the security￾based swap transaction on behalf of the foreign branch or its counterparty.481 As discussed above,482 the proposed rule would define ‘‘foreign branch’’ as any branch of a U.S. bank if:
• The branch is located outside the
  United States;
• The branch operates for valid
  business reasons; and
• The branch is engaged in the
  business of banking and is subject to substantive banking regulation in the jurisdiction where located.483 All other requirements in Section 15F of the Exchange Act, and the rules and regulations thereunder, would apply to both U.S. and foreign security-based swap dealers registered with the Commission, although the Commission is proposing to establish a policy and procedural framework under which it would consider permitting substituted compliance for foreign security-based swap dealers (but not for U.S. security￾based swap dealers that conduct dealing activity through foreign branches) under certain circumstances, as discussed below.484 The Commission also is proposing a rule that would provide that a foreign security-based swap dealer would not be required to comply with the segregation requirements set forth in
  Section 3E of the Exchange Act, and the
  rules and regulations thereunder, with respect to security-based transactions with non-U.S. person counterparties in certain circumstances.485 Specifically, the Commission is proposing a rule that would provide the following:
• With respect to non-cleared
  security-based swap transactions:
  Æ A registered foreign security-based swap dealer that is a registered broker￾dealer would be subject to the requirements relating to segregation of assets held as collateral set forth in
  Section 3E of the Exchange Act, and
  rules and regulations thereunder, with respect to assets collected from, for, or on behalf of any counterparty to margin a non-cleared security-based swap transaction. Æ a registered foreign security-based swap dealer that is not a registered broker-dealer would be subject to the requirements relating to segregation of assets held as collateral set forth in
  Section 3E of the Exchange Act, and
  Rules 18a–4(a)–(d), solely with respect to assets collected from, for, or on behalf of a counterparty that is a U.S. person to margin a non-cleared security-based swap transaction. The special account maintained by a registered foreign security-based swap dealer that is not a registered broker-dealer in accordance with proposed Rule 18a–4(c) would be required to be designated for the exclusive benefit of U.S. person security-based swap customers.486
• With respect to cleared security￾based swap transactions:

487Proposed Rule 18a–4(e)(2)(ii) under the Exchange Act. 488See Capital, Margin, and Segregation Proposing Release, 77 FR 70274–88 (proposing Rules 18a–4(a)–(d) under the Exchange Act). 489Proposed Rule 18a–4(e)(2)(i) under the Exchange Act. 490Proposed Rule 18a–4(e)(3) under the Exchange Act. 491Proposed Rule 3a71–3(c) under the Exchange Act. 492See note 4, supra. 493See note 321, supra. 494Proposed Rule 3a71–3(c) under the Exchange Act. 495 15 U.S.C. 78o–10(h)(1)(B). See Section III.C.3(b)vi, supra (discussing the diligent supervision requirements). 496See Section XI.C, infra. 497See id. Æ A registered foreign security-based swap dealer that is not a foreign bank with a branch or agency in the United States and is a registered broker-dealer shall be subject to the requirements relating to segregation of assets held as collateral set forth in Section 3E of the Exchange Act, and rules and regulations thereunder, with respect to assets collected from, for, or on behalf of any counterparty to margin a cleared security-based swap transaction. Æ a registered foreign security-based swap dealer that is not a foreign bank with a branch or agency in the United States and that is not a registered broker-dealer shall be subject to the requirements relating to segregation of assets held as collateral set forth in
Section 3E of the Exchange Act, and
Rules 18a–4(a)–(d), only if such registered foreign security-based swap dealer accepts any assets from, for, or on behalf of a counterparty that is a U.S. person to margin, guarantee, or secure a cleared security-based swap transaction.487 Æ a registered foreign security-based swap dealer that is a foreign bank with a branch or agency in the United States would be subject to the requirements relating to segregation of assets held as collateral set forth in Section 3E of the Exchange Act, and Rules 18a–4(a)– (d),488 solely with respect to assets collected from a counterparty that is a U.S. person to margin a cleared security￾based swap transaction. The special account maintained by a registered foreign security-based swap dealer that is a foreign bank with a branch or agency in the United States in accordance with proposed Rule 18a–4(c) would be required to be designated for the exclusive benefit of U.S. person security-based swap customers.489 In addition, a registered foreign security-based swap dealer would be required to disclose to its counterparty the potential treatment of the assets segregated by such registered foreign security-based swap dealer pursuant to
Section 3E of the Exchange Act, and
rules and regulations thereunder, in insolvency proceedings under the U.S. bankruptcy law and applicable foreign insolvency laws.490 (b) Discussion
i. External Business Conduct Standards
a. Foreign Security-Based Swap Dealers The Commission preliminarily believes it is appropriate not to impose on foreign security-based swap dealers the external business conduct standards in Section 15F(h) (other than rules and requirements prescribed by the Commission pursuant to Section 15F(h)(1)(B)) of the Exchange Act, and the rules and regulations thereunder, described in the proposed rule,491 with respect to their Foreign Business, because these requirements relate primarily to customer protection. The Dodd-Frank Act’s counterparty protection mandate focuses on the United States and the U.S. markets.492 In addition, we preliminarily believe that foreign counterparties typically would not expect to receive the customer protections of Title VII when dealing with a foreign security-based swap dealer outside the United States. At the same time, our proposed approach would preserve customer protections for U.S. counterparties that would expect to benefit from the protection afforded to them by Title VII of the Dodd-Frank Act. Therefore, the Commission preliminarily believes that requiring foreign security-based swap dealers to comply with the external business conduct standards requirement with respect to their security-based swap transactions conducted outside the United States with non-U.S. persons (or with foreign branches of U.S. banks) would not advance this statutory purpose. Although this approach represents a departure from the entity approach the Commission has traditionally taken in the regulation of foreign broker-dealers, as discussed above, whereby the Commission applies our regulations to the entire global business of a registered broker-dealer, we preliminarily believe this departure is appropriate in the context of a global security-based swap market in order to create a regulatory framework that provides effective protections for counterparties that are U.S. persons while recognizing the role of foreign regulators in non-U.S. markets. The Commission also preliminarily believes that this approach addresses many of the concerns raised by commenters, including foreign regulators, concerning the potential application of Title VII to transactions between registered foreign security￾based swap dealers and non-U.S. counterparties. In addition, this approach is consistent with the reasonable expectations of U.S. person counterparties, who would expect to receive the protection of external business conduct standards and conflicts of interest requirements when dealing with a foreign security-based swap dealer within the United States.493 The Commission’s proposed approach to external business conduct standards would not except foreign security-based swap dealers from the rules and requirements prescribed by the Commission pursuant to Section 15F(h)(1)(B) of the Exchange Act with respect to their Foreign Business.494
Section 15F(h)(1)(B) requires security￾based swap dealers to conform with
such business conduct standards relating to diligent supervision as the Commission shall prescribe.495 The Commission preliminarily believes that it is not appropriate to except foreign security-based swap dealers from compliance with such requirements. Because registered foreign security￾based swap dealers would be subject to a number of obligations under the federal securities laws with respect to their security-based swap business, the Commission preliminarily believes that having systems in place reasonably designed to ensure diligent supervision would be an important aspect of their compliance with the federal securities laws. However, as discussed below, the Commission is proposing to permit substituted compliance with the diligent supervision requirement in Section 15F(h)(1)(B), and the rules and regulations thereunder, by foreign security-based swap dealers.496 The Commission preliminarily believes that foreign security-based swap dealers subject to regulation in a foreign jurisdiction are very likely to be subject to diligent supervision requirements and to the extent that such requirements are comparable to Commission requirements, we would consider permitting substituted compliance, as discussed below.497 The Commission is proposing to except foreign security-based swap dealers from complying with the rules and regulations that the Commission may prescribe pursuant to Section 15F(h)(1)(A) or (C) of the Exchange

498 15 U.S.C. 78o–10(h)(1)(A) and (C). 499Although the Commission has not proposed rules under Section 15F(h)(1)(A) of the Exchange Act, the Commission has proposed new Rule 9j–1 under the Exchange Act, which is intended to prevent fraud, manipulation, and deception in connection with the offer, purchase, or sale of any security-based swap, the exercise of any right or performance of any obligation under a security￾based swap, or the avoidance of such exercise or performance. See Prohibition Against Fraud, Manipulation, and Deception in Connection with Security-Based Swaps, Exchange Act Release No. 63236 (Nov. 3, 2010), 75 FR 68560 (Nov. 8, 2010). The Commission’s view of its antifraud enforcement authority in the cross-border context is described in further detail in Section XI below. 500See note 4, supra. 501See note 321, supra. The proposed definition of foreign branch is the same as discussed above. See proposed Rule 3a71–3(a)(1) under the Exchange Act, as discussed in Section III.B.7, supra. 502Proposed Rule 3a71–3(a)(4) under the Exchange Act. 503Proposed Rule 3a71–3(a)(4)(i) under the Exchange Act. 504See Capital, Margin, and Segregation Proposing Release, 77 FR 70274–78 (discussing the customer protection treatment provided by proposed Rules 18a–4(a)–(d) in the stockbroker liquidation provisions in the U.S. Bankruptcy Code). 505See 11 U.S.C. 741–53. 506See 11 U.S.C. 752. 507See Public Law 111–203 section 763(d), adding Section 3E(g) to the Exchange Act, 15 U.S.C. 78c–5(g). 508See 15 U.S.C. 78c–5(g). 509See 11 U.S.C. 101(53A)(B). Section 101(53A) of the U.S. Bankruptcy Code defines a ‘‘stockbroker’’ to mean a person—(A) with respect to which there is a customer, as defined in section 741, subchapter III of chapter 7, title 11, United States Code (the definition section of the stockbroker liquidation provisions); and (B) that is engaged in the business of effecting transactions in securities—(i) for the account of others; or (ii) with members of the general public, from or for such person’s own account. See 11 U.S.C. 101(53A). 510See 15 U.S.C. 78c–5(g) and 11 U.S.C. 741. There is not a definition of ‘‘securities account’’ in 11 U.S.C. 741. The term ‘‘securities account’’ is used in 11 U.S.C. 741(2) and (4) in defining the terms ‘‘customer’’ and ‘‘customer property.’’ Act.498 Section 15F(h)(1)(A) requires security-based swap dealers to conform with such business conduct standards relating to fraud, manipulation, and other abusive practices involving security-based swaps (including security-based swaps that are offered but not entered into) as prescribed by the Commission. Section 15F(h)(1)(C) requires security-based swap dealers to adhere to rules and regulations prescribed by the Commission with respect to applicable position limits. The Commission has not engaged in rulemaking pursuant to these provisions.499 If the Commission does propose rules pursuant to these provisions in the future, the Commission would consider, at that time,
whether it would be appropriate to subject foreign security-based swap dealers to such requirements with respect to their Foreign Business. b. U.S. Security-Based Swap Dealers The Commission preliminarily believes it is appropriate not to subject U.S. security-based swap dealers to the external business conduct standards in
Section 15F(h) (other than Section
15F(h)(1)(B)) of the Exchange Act, and the rules and regulations thereunder, as specified in the proposed rule, with respect to security-based swap transactions conducted through their foreign branches outside the United States with non-U.S. counterparties, because such requirements relate primarily to customer protection requirements. The Dodd-Frank Act generally is concerned with the protection of U.S. markets and participants in those markets.500 Therefore, we preliminarily believe that subjecting U.S. security-based swap dealers to the Title VII customer protection requirements with respect to their security-based swap transactions conducted through their foreign branches outside the United States (even though the transactions may pose risk to the U.S. financial system) with non-U.S. persons would produce little or no benefit to U.S. market participants. Although this approach would represent a departure from the entity approach the Commission has traditionally taken in the regulation of broker-dealers, whereby the Commission applies our regulations to the entire global business of a registered broker-dealer, we preliminarily believe it is appropriate in the context of a global security-based swap market in order to develop a national regulatory framework that provides effective protections for counterparties who are U.S. persons while recognizing the role of foreign regulators in non-U.S. markets. The Commission also preliminarily believes that this approach would help address the potential application of duplicative and conflicting regulatory requirements to security-based swap transactions between the foreign branches of registered U.S. bank security-based swap dealers and non￾U.S. counterparties. In addition, the Commission preliminarily believes this approach is consistent with the reasonable expectations of foreign counterparties, who would not necessarily expect to receive the protections of Title VII when dealing with a foreign branch of a U.S. bank outside the United States, even if it is registered as a security-based swap dealer with the Commission.501 The purpose of the proposed provision defining when a security￾based swap transaction would be considered to have been conducted through a foreign branch is intended to prevent U.S. security-based swap dealers from using the proposed rule to evade the application of Title VII.502 Requiring that the foreign branch be the named counterparty to the security￾based swap transaction and that no person within the United States be directly involved in soliciting, negotiating, or executing the security￾based swap transaction on behalf of the foreign branch or its counterparty is intended to help ensure that the security-based swap transaction occurs outside the United States, even though the Commission recognizes that the risk of the transaction would ultimately be borne by the U.S. security-based swap dealer, of which the foreign branch is merely a part.503 The U.S. security￾based swap
dealer would still be subject to the entity-level requirements described above intended to address the risk the transactions pose to the U.S. financial system.
ii. Segregation Requirements
The segregation requirements set forth in Section 3E of the Exchange Act, and rules and regulations thereunder, are closely tied to U.S. bankruptcy laws.504 Subchapter III of Chapter 7, Title 11 of the United States Code (the ‘‘stockbroker liquidation provisions’’) 505 provides special protections for ‘‘customers’’ of stockbrokers. Among other protections, ‘‘customers’’ share ratably with other customers ahead of virtually all other creditors in the ‘‘customer property’’ held by the failed stockbroker.506 The Dodd-Frank Act contains provisions designed to ensure that cash and securities held by a security-based swap dealer relating to security-based swaps will be deemed customer property under the stockbroker liquidation provisions.507 In particular, Section 3E(g) of the Exchange Act 508 provides, among other things, that a security￾based swap shall be considered to be a ‘‘security’’ as such term is used in
section 101(53A)(B) 509 and the
stockbroker liquidation provisions.
Section 3E(g) also provides that an
account that holds a security-based swap shall be considered to be a ‘‘securities account’’ as that term is defined in the stockbroker liquidation provisions.510 In addition, Section 3E(g) provides that the terms ‘‘purchase’’ and ‘‘sale’’ as defined in Sections 3(a)(13) and (14) of the Exchange Act, respectively, shall be applied to the terms ‘‘purchase’’ and ‘‘sale’’ as used in the stockbroker liquidation

511See also 15 U.S.C. 78c–5(g) and 11 U.S.C. 741–
753. Section 3(a)(13) of the Exchange Act, as
amended by Section 761(a) of the Dodd-Frank Act, defines the term ‘‘purchase’’ to mean, in the case of security-based swaps, the execution, termination (prior to its scheduled maturity date), assignment, exchange, or similar transfer or conveyance of, or extinguishing of rights or obligations under, a security-based swap, as the context may require. See 15 U.S.C. 3(a)(13). Section 3(a)(14) of the Exchange Act, as amended by Section 761(a) of the Dodd-Frank Act, defines the term ‘‘sale’’ to mean, in the case of security-based swaps, the execution, termination (prior to its scheduled maturity date), assignment, exchange, or similar transfer or conveyance of, or extinguishing of rights or obligations under, a security-based swap, as the context may require. See 15 U.S.C. 3(a)(14). 512See 15 U.S.C. 78c–5(g) and 11 U.S.C. 741(2). 513See 15 U.S.C. 78c–5(g) and 11 U.S.C. 741–53. 514 15 U.S.C. 78o(c)(3). 515See proposed Rules 18a–4(a)–(d) under the Exchange Act and Section 3E of the Exchange Act, 15 U.S.C. 78c–5. See also the Capital, Margin, and Segregation Proposing Release, 77 FR 70278–88, for detailed descriptions and discussions of the proposed segregation requirements for security￾based swaps in proposed Rules 18a–4(a), (b), and (c) under the Exchange Act and special provisions for non-cleared security-based swaps in proposed Rule 18a–4(d) under the Exchange Act. 516See proposed Rule 18a–4(c) and the related discussion in the Capital, Margin, and Segregation Proposing Release, 77 FR 70277. 517See the stockbroker liquidation provisions in the U.S. Bankruptcy Code, 11 U.S.C. 741–53. 518 15 U.S.C. 78c–5(f)(1)(A). 519See proposed Rules 18a–4(d)(1) and (d)(2)(i) and (ii) under the Exchange Act, as discussed in the Capital, Margin, and Segregation Proposing Release, 77 FR 70287–88. If a non-cleared security-based swap counterparty elects to segregate funds or other property with a third-party custodian, the subordination agreement would be conditioned on the counterparty’s funds and other property segregated at a third-party custodian not being included in the bankruptcy estate of the security￾based swap dealer. If the election is not effective in keeping the counterparty’s assets bankruptcy remote, then the counterparty should be treated as a security-based swap customer with a pro rata priority claim to customer property. See proposed Rule 18a–4(d)(2)(i) under the Exchange Act. If a non-cleared security-based swap counterparty elects not to segregate any assets at all, the security￾based swap dealer would need to obtain an unconditional subordination agreement from the counterparty that waives segregation altogether. See proposed Rule 18a–4(d)(2)(ii) under the Exchange Act. 520See note 4, supra. 521See proposed Rules 18a–4(a)–(d) under the Exchange Act and Section 3E of the Exchange Act, 15 U.S.C. 78c–5. See also the Capital, Margin, and Segregation Proposing Release, 77 FR 70278–88. 522See Section 109(b) of the U.S. Bankruptcy Code, 11 U.S.C. 109(b)
(providing that a person may be a debtor under chapter 7 of the U.S. Bankruptcy Code only if such person is not, among other things, a bank or similar institution which is an insured bank as defined in Section 3(h) of the Federal Deposit Insurance Act, or a foreign bank that has a branch or agency (as defined in Section 1(b) of the International Banking Act of 1978) in the United States). 523See 12 U.S.C. 1821–25. Whereas insured deposit institutions would be resolved under the Federal Deposit Insurance Act, uninsured U.S. branches of foreign banks would be resolved under either relevant state statutes, in the case of uninsured state branches, or the International Continued provisions.511 Finally, Section 3E(g) provides that the term ‘‘customer’’ as defined in the stockbroker liquidation provisions excludes any person to the extent the person has a claim based on a non-cleared security-based swap transaction except to the extent of any margin delivered to or by the customer with respect to which there is a customer protection requirement under
Section 15(c)(3) of the Exchange Act or
a segregation requirement.512 The provisions of Section 3E(g) of the Exchange Act apply the customer protection elements of the stockbroker liquidation provisions to cleared security-based swaps, including related collateral, and, if subject to customer protection requirements under Section 15(c)(3) of the Exchange Act or a segregation requirement prescribed by the Commission, to collateral delivered as margin for non-cleared security-based swaps.513 The Commission has proposed Rule 18a–4(a)–(d) to establish segregation requirements for security￾based swap dealers with respect to cleared and non-cleared security-based swaps pursuant to Section 3E of the Exchange Act and pursuant to Section 15(c)(3) of the Exchange Act 514 with respect to security-based swap dealers that are broker-dealers.515 Specifically, proposed Rule 18a–4(b) requires a security-based swap dealer to promptly obtain and thereafter maintain physical possession or control of all excess securities collateral carried for the accounts of security-based swap customers. Such possession or control requirement is designed to ensure the securities held for the accounts of security-based swap customers are under the control of the security-based swap dealer and, therefore, readily available to be returned to security￾based swap customers. Proposed Rule 18a–4(c) requires a security-based swap dealer to maintain a special account for the exclusive benefit of security-based swap customers and have on deposit in that account at all times an amount of cash or qualified securities determined by computing the net amount of credits owed to customers.516 The objective of the possession or control and special account requirements in proposed Rule 18a–4 is to facilitate the prompt return of ‘‘customer property’’ to security￾based swap customers either before or during a liquidation proceeding if the firm fails. In the event of a failure of the security-based swap dealer, customers would share the ‘‘customer property’’ ratably with other customers and ahead of virtually all other creditors.517 In addition, with respect to non-cleared security-based swaps, proposed Rule 18a–4(d) requires a security-based swap dealer to provide the notice required under Section 3E(f)(1)(A) of the Exchange Act 518 to a counterparty in writing prior to the execution of the first non-cleared security-based swap transaction with such counterparty. If a counterparty to a non-cleared security￾based swap elects to segregate funds or other property with a third-party custodian pursuant to Section 3E(f) of the Exchange Act or elects not to require the omnibus segregation of funds or other property pursuant to proposed Rule 18a–4(c), the security-based swap dealer must obtain an agreement from such counterparty to subordinate all claims against the security-based swap dealer to the claims of security-based swap customers of such security-based swap dealer.519 As proposed in the Capital, Margin and Segregation Proposing Release,
the segregation requirements in proposed Rule 18a–4(a)–(d) do not distinguish between U.S. security-based swap dealers and foreign security-based swap dealers or between U.S. person and non￾U.S. person security-based swap counterparties, and do not address application of the segregation requirements in the cross-border context. The Commission preliminarily believes that the Dodd-Frank Act’s mandate to promote financial stability, improve accountability, and protect counterparties focuses territorially on the United States and the U.S. security￾based swap market 520 and, therefore, is not proposing any changes with respect to U.S. security-based swap dealers to the segregation requirements already proposed.521 The Commission’s proposed approach to application of segregation requirements to foreign security-based swap dealers intends to protect U.S. person counterparties and minimize the impact of a failed security￾based swap dealer on the U.S. financial system generally and the U.S. security￾based swap market in particular. a. Foreign Security-Based Swap Dealers As stated above, Section 3E(g) extends the customer protection provided by the stockbroker liquidation provisions of the U.S. Bankruptcy Code to cleared security-based swaps and non-cleared security-based swaps in different ways. In addition, a foreign security-based swap dealer may not be subject to the stockbroker liquidation provisions if it is a foreign bank with a branch or agency in the United States.522 Such foreign security-based swap dealer’s insolvency and liquidation would be subject to banking regulations.523 On the

Banking Act, in the case of uninsured federal branches. 524See note 522, supra. 525We recognize that a very limited number of registered foreign broker-dealers who do not conduct securities business in the United States and do not hold U.S. person customers’ funds are not members of SIPC. 526 15 U.S.C. 78o(c)(3). 527See Rule 15c3–3 under the Exchange Act, 17 CFR 240.15c3–3. 528See 15 U.S.C. 78aaa et seq. 529We preliminarily believe that the proposed approach with respect to the segregation requirements set forth in Section 3E of the Exchange Act, and rules and regulations thereunder, is not being applied to persons who are ‘‘transact[ing] a business in security-based swaps without the jurisdiction of the United States,’’ within the meaning of Section 30(c). See Section II.B.2(a), supra. However, the Commission also preliminary believes that the proposed approach with respect to the segregation requirements is necessary or appropriate to help prevent the evasion of the particular provisions of the Exchange Act that were added by the Dodd-Frank Act that are being implemented by the proposed approach and prophylactically will help ensure that the purposes of those provisions of the Dodd-Frank Act are not undermined. See Section II.B.2(e), supra; see also
Section II.B.2(c), supra.
For example, if the segregation requirements do not apply to the entire business of a registered foreign security-based swap dealer that is a registered broker-dealer, or do not apply to assets received from non-U.S. person customers to secure cleared security-based swaps by a registered foreign security-based swap dealer that is not a registered broker-dealer (and is not a foreign bank with a branch or agency in the United States) if such foreign security-based swap dealer also receives assets from a U.S. person customer to secure clear security-based swaps, then U.S. security-based swap dealers would have an incentive to evade the full application of the segregation requirements by moving their operations outside the United States. In this event, these security-based swap dealers could use the assets collected from the non-U.S. person counterparties for their own business purposes, and the assets segregated (i.e., assets posted by U.S. person customers) could be insufficient to satisfy the combined priority claims of both U.S. person and non-U.S. person customers, potentially resulting in losses to U.S. person customers in contravention of the purposes of the customer protection framework established by the Dodd-Frank Act. See discussions of application of the segregation requirements to a foreign security￾based swap dealer that is a registered broker-dealer with respect to non-cleared security-based swaps in
Section III.C.4(b)ii.b.i, application of the segregation
requirements to a foreign security-based swap dealer that is a registered broker-dealer with respect to cleared security-based swaps in Section III.C.4(b)ii.c.i, and application of the segregation requirements to a foreign security-based swap dealer that is not a registered broker-dealer and is not a foreign bank with a branch or agency in the United States in Section III.C.4(b)ii.c.ii above. 530See proposed Rule 18a–4(e)(1)(i) under the Exchange Act. 531 15 U.S.C. 78o(c)(3). 532See Capital, Margin, and Segregation Proposing Release, 77 FR 70276–77 (discussing the broker-dealer segregation rule—Rule 15c3–3 under the Exchange Act, 17 CFR 240.15c3–3). 533See Rule 15c3–3(a)(1) under the Exchange Act, 17 CFR 240.15c3–3(a)(1). 534See Section 3E(g) of the Exchange Act, 15 U.S.C. 78c–5(g) (‘‘The term ‘customer’, as defined in section 741 of title 11, United States Code, excludes any person, to the extent that such person has a claim based on any . . . non-cleared security￾based swap except to the extent of any margin delivered to or by the customer with respect to which there is a customer protection requirement under section 15(c)(3) or a segregation requirement.’’). 535A non-cleared security-based swap counterparty may waive its pro rata priority claim on customer property with other customers by executing a conditional subordination agreement pursuant to proposed Rule 18a–4(d)(i) under the Exchange Act to affirmatively elect individual segregation, or by executing an unconditional subordination agreement pursuant to proposed Rule 18a–4(d)(ii) under the Exchange Act to affirmatively waive segregation altogether. other hand, if a foreign security-based swap dealer is not a foreign bank with a branch or agency in the United States, it may be subject to the stockbroker liquidation provisions 524 in a stockbroker liquidation proceeding in a U.S. bankruptcy court. Moreover, if a foreign security-based swap dealer is a registered broker-dealer, it is a member of the Securities Investor Protection Corporation (‘‘SIPC’’) 525 and is subject to segregation requirements under
Section 15(c)(3) of the Exchange Act,526
and rules and regulations thereunder.527 Such a foreign security-based swap dealer would be subject to the liquidation proceeding under the Securities Investor Protection Act of 1970 (the ‘‘SIPA’’).528 Therefore, we propose an approach that would apply the segregation requirements to a foreign security-based swap dealer depending on whether it holds assets to secure cleared security-based swap transactions or non-cleared security￾based swap transactions and whether such foreign security-based swap dealer is a registered broker-dealer, a foreign bank with a branch or agency in the United States, or neither of the above.529 We recognize that a foreign security￾based swap dealer may not be subject to the stockbroker liquidation provisions and its insolvency or liquidation proceeding in the United States may be administered under SIPA or banking regulations concurrently with other potential insolvency proceedings outside the United States under applicable foreign insolvency laws. Therefore, the effectiveness of the segregation requirements with respect to a foreign security-based swap dealer in practice may depend on many factors, including the type and objectives of the insolvency or liquidation proceeding and how the U.S. Bankruptcy Code, SIPA, banking regulations and applicable foreign insolvency laws are interpreted by the U.S. bankruptcy court, SIPC, Federal Deposit Insurance Corporation and relevant foreign authorities. b. Non-Cleared Security-Based Swaps
i. Foreign Security-Based Swap Dealer
That Is a Registered Broker-Dealer With respect to non-cleared security￾based swaps, the Commission proposes to apply segregation requirements differently to foreign security-based swap dealers depending on whether they also are registered broker-dealers. Specifically, the Commission proposes to require a foreign security-based swap dealer that is a registered broker-dealer to segregate margin received from all counterparties to secure non-cleared security-based swap transactions, in accordance with Section 3E of the Exchange Act, and rules and regulations thereunder.530 If a foreign security-based swap dealer is a registered broker-dealer, it already would: (i) be subject to the customer protection requirements under Section 15(c)(3) of the Exchange Act,531 and rules and regulations thereunder, including Rule 15c3–3 if it carries customer securities and cash; (ii) be required to maintain possession or control of customer securities and maintain cash or qualified securities in a special reserve account if it carries customer securities and cash; and (iii) if it is a member of SIPC, be liquidated in a formal proceeding under the SIPA.532 Rule 15c3–3 under Section 15(c)(3) of the Exchange Act provides customer protection and defines ‘‘customer’’ broadly to include any person from whom or on whose behalf a broker or dealer has received or acquired or holds funds or securities for the account of that person.533 Therefore, if a foreign security-based swap dealer that is a registered broker-dealer receives collateral from a non-cleared security￾based swap counterparty, such counterparty would be a ‘‘customer’’ and is afforded customer protection with respect to such collateral under Rule 15c3–3. As stated above, Section 3E(g) extends ‘‘customer’’ status to non￾cleared security-based swap counterparties to the extent of any margin delivered to or by the counterparties with respect to which there is a customer protection requirement under Section 15(c)(3).534 Therefore, non-cleared security-based swap counterparties of a foreign security-based swap dealer that is a registered broker-dealer are ‘‘customers’’ within the meaning of the stockbroker liquidation provisions.535 As such, if the Commission does not require a foreign security-based swap dealer that is a registered broker-dealer to segregate all counterparties’ assets posted to secure non-cleared security￾based swaps, in a SIPA liquidation

536 In very limited circumstances where a foreign security-based swap dealer that is a registered broker-dealer is not a SIPC member, it would potentially be liquidated pursuant to the stockbroker liquidation provisions in a U.S. bankruptcy court. 537See Section 3E(g) of the Exchange Act, 15 U.S.C. 78c–5(g). 538See proposed Rule 18a–4(e)(1)(ii) under the Exchange Act. 539See Sections 1(b)(1), (3), and (7) of the International Banking Act of 1978, 12 U.S.C. 3101(b)(1), (3) and (7), for definitions of ‘‘agency,’’ ‘‘branch,’’ and ‘‘foreign bank.’’ 540See Section 109(b)(3)(B) of the U.S. Bankruptcy Code, 11 U.S.C. 109(b)(3)(B). 541See 12 U.S.C. 1821–25. Whereas insured deposit institutions would be resolved under the Federal Deposit Insurance Act, uninsured U.S. branches of foreign banks would be resolved under either relevant state statutes, in the case of uninsured state branches, or the International Banking Act, in the case of uninsured federal branches. 542Proposed Rule 18a–4(e)(2)(i) under the Exchange Act. 543See Section III.C.4(b)ii.b, supra. 544A non-cleared security-based swap counterparty would be a customer of a foreign security-based swap dealer that is a registered broker-dealer and have a pro rata priority claim to customer property under the stockbroker liquidation provisions unless it affirmatively waives segregation altogether by executing an unconditional subordination agreement pursuant to proposed Rule 18a–4(d)(ii) under the Exchange Act, or elects individual segregation pursuant to Section 3E(f) of the Exchange Act by executing a conditional subordination agreement pursuant to proposed Rule 18a–4(d)(i) under the Exchange Act. proceeding of such foreign security￾based swap dealer and broker-dealer,536 the pool of assets segregated pursuant to Rule 15c3–3 and proposed Rule 18a–4 may be insufficient to satisfy the combined claims of all customers, resulting in losses to all customers. Therefore, the Commission proposes to subject a foreign security-based swap dealer that is a registered broker-dealer to the segregation requirements set forth in Section 3E of the Exchange Act, and rules and regulations thereunder, relating to assets received from all counterparties held as collateral to secure non-cleared security-based swap transactions.
ii. Non-Cleared Security-Based Swaps—
Foreign Security-Based Swap Dealer That is Not a Registered Broker-Dealer If a foreign security-based swap dealer is not a registered broker-dealer, its non￾cleared security-based swap counterparties would be ‘‘customers’’ under the stockbroker liquidation provisions only to the extent that there is a segregation requirement prescribed by the Commission.537 The Commission proposes to subject such foreign security-based swap dealer to the segregation requirements set forth in
Section 3E of the Exchange Act, and
rules and regulations thereunder, solely with respect to non-cleared security￾based swaps with U.S. person counterparties.538 This approach would provide U.S. person counterparties ‘‘customer’’ status under the stockbroker liquidation provisions and their assets would be segregated for their exclusive benefit. Non-U.S. person counterparties would not be ‘‘customers’’ and would not have ‘‘customer’’ status with respect to the segregated assets. As stated above, the Commission preliminarily believes that the objective of the Dodd-Frank Act is to protect U.S. counterparties and to minimize disruption to the U.S. financial system caused by a security￾based swap dealer’s failure. Therefore, the Commission preliminarily believes that the proposed approach would achieve the benefit intended by the segregation requirements set forth in
Section 3E of the Exchange Act, and
rules and regulations thereunder.
The Commission recognizes that a foreign security-based swap dealer that is not a broker-dealer but is a foreign bank with a branch or agency (as defined in Section 1(b) of the International Banking Act of 1978) 539 in the United States may not be eligible to be liquidated pursuant to the stockbroker liquidation provisions.540 Such foreign security-based swap dealer’s insolvency proceeding in the United States would be administered under banking regulations.541 Nevertheless, the Commission preliminarily believes that imposing segregation requirements on such foreign security-based swap dealer when it receives collateral from U.S. person counterparties would reduce the likelihood of U.S. person counterparties incurring losses by helping identify U.S. customers’ assets in an insolvency proceeding of such foreign security￾based swap dealer in the United States and would potentially minimize disruption to the U.S. security-based swap market, thereby producing potential benefits to the U.S. financial system and U.S. counterparties that are consistent with the objectives of the Dodd-Frank Act.
c. Cleared Security-Based Swaps
In applying the segregation requirements to a foreign security-based swap dealer with respect to cleared security-based swap transactions, the Commission also proposes to distinguish among: (1) a foreign security-based swap dealer that is a registered broker-dealer; (2) a foreign security-based swap dealer that is not a registered broker-dealer and is not a foreign bank with a branch or agency in the United States; and (3) a foreign security-based swap dealer that is a foreign bank with a branch or agency in the United States. In the following paragraphs, we will discuss how we propose to apply the segregation requirements to foreign security-based swap dealers in each of these categories with respect to assets held by them as collateral to secure cleared security￾based swaps.
i. Foreign Security-Based Swap Dealer
That Is a Registered Broker-Dealer The proposed rule would apply segregation requirements to a foreign security-based swap dealer that is a registered broker-dealer with respect to assets received from all counterparties to secure cleared security-based swaps.542 As stated above, Section 3E(g) of the Exchange Act extends customer protection under the stockbroker liquidation provisions to all cleared security-based swap counterparties and to all non-cleared security-based swap counterparties, with respect to which there is a customer protection requirement under Section 15(c)(3) of the Exchange Act.543 Therefore, all security-based swap counterparties of a foreign security-based swap dealer that is a registered broker-dealer are customers under the stockbroker liquidation provisions.544 In the absence of a Commission requirement that a foreign security-based swap dealer that is a registered broker-dealer segregate all cleared security-based swap counterparties’ collateral, if such an entity were liquidated pursuant to SIPA, the amount of assets segregated could be less than the combined priority claims of all security-based swap customers, potentially resulting in losses to customers. Therefore, the Commission proposes to subject a foreign security￾based swap dealer who is a registered broker-dealer to segregation requirements set forth in Section 3E of the Exchange Act, and rules and regulations thereunder, with respect to assets received from all counterparties to secure cleared security-based swaps.
ii. Foreign Security-Based Swap Dealer
That Is Not a Registered Broker-Dealer and Is Not a Foreign Bank With Branch or Agency in the United States If a foreign security-based swap dealer is not a registered broker-dealer and is not a foreign bank that has a branch or agency (as defined in Section 1(b) of the International Banking Act of 1978) in the United States, such foreign security￾based swap dealer may be eligible to be

545See Section 109(b) of the U.S. Bankruptcy Code, 11 U.S.C. 109(b). 546See 15 U.S.C. 78c–5(g) and 11 U.S.C. 741(2). 547Proposed Rule 18a–4(e)(2)(ii) under the Exchange Act. 548See Section 109(b) of the U.S. Bankruptcy Code, 11 U.S.C. 109(b). 549See 12 U.S.C. 1821–25. Whereas insured deposit institutions would be resolved under the Federal Deposit Insurance Act, uninsured U.S. branches of foreign banks would be resolved under either relevant state statutes, in the case of uninsured state branches, or the International Banking Act, in the case of uninsured federal branches. 550Proposed Rule 18a–4(e)(2)(iii) under the Exchange Act. 551Proposed Rule 18a–4(e)(3) under the Exchange Act. 552Proposed Rule 18a–4(e)(3) under the Exchange Act. a debtor under Chapter 7 of the U.S. Bankruptcy Code and may therefore be subject to the stockbroker liquidation provisions in the U.S. Bankruptcy Code.545 As stated above, Section 3E(g) of the Exchange Act provides ‘‘customer’’ status to all counterparties to cleared security-based swaps, making no distinction between U.S. customers or counterparties and non-U.S. person customers or counterparties.546 Therefore, in the case where such foreign security-based swap dealer receives any assets from, for, or on behalf of a U.S. person customer to margin, guarantee, or secure security￾based swaps, if the Commission were to apply the segregation requirements only to assets posted by U.S. person customers but not to assets posted by non-U.S. person customers, in a stockbroker liquidation proceeding of such foreign security-based swap dealer, the assets segregated (i.e., assets posted by U.S. person customers) could be insufficient to satisfy the combined priority claims of both U.S person and non-U.S. person customers, potentially resulting in losses to U.S. person customers. As stated above, the Commission preliminarily believes that
Section 3E intends to provide customer
protection to U.S. person counterparties and apply segregation requirements in a way that would protect the U.S. financial system and counterparties in the United States. Therefore, the Commission proposes to apply segregation requirements described in
Section 3E of the Exchange Act, and the
rules and regulations thereunder, to a foreign security-based swap dealer that is not a registered broker-dealer and is not a foreign bank with a branch or agency in the United States with respect to assets received from both U.S. person counterparties and non-U.S. person counterparties if such foreign security￾based swap dealer receives collateral from U.S. person counterparties to secure security-based swaps.547
iii. Foreign Security-Based Swap Dealer
That is Not a Registered Broker-Dealer and is a Foreign Bank With Branch or Agency in the United States Finally, if a foreign security-based swap dealer is not a registered broker￾dealer and is a foreign bank that has a branch or agency in the United States, it is not eligible to be a debtor under
Chapter 7 and will therefore not be
subject to the stockbroker liquidation provisions of the U.S. Bankruptcy Code 548 and its insolvency proceeding in the United States would be administered under banking regulations.549 Consistent with the objective of protecting U.S. person counterparties, the Commission is proposing that such foreign security￾based swap dealer shall be subject to the segregation requirements set forth in
Section 3E of the Exchange Act, and the
rules and regulations thereunder, with respect to any assets received from, for or on behalf of a counterparty who is a U.S. person to margin, guarantee, or secure a cleared security-based swap, but shall not be required to segregate assets received from, for or on behalf of all other counterparties to margin, guarantee, or secure a cleared security￾based swap.550 The special account maintained by the foreign security￾based swap dealer shall be designated for the exclusive benefit of U.S. person security-based swap customers. The Commission preliminarily believes that imposing segregation requirements on such foreign security-based swap dealer when it receives collateral from U.S. person counterparties would reduce the likelihood of U.S. person counterparties incurring losses by helping identify U.S. customers’ assets in an insolvency proceeding of such foreign security￾based swap dealer in the United States and would potentially minimize disruption to the U.S. security-based swap market, thereby producing potential benefits to the U.S. financial system and U.S. counterparties that are consistent with the objectives of the Dodd-Frank Act. For the same reason, the Commission preliminarily does not believe that extending segregation requirements and customer protection to such foreign security-based swap dealer’s transactions with non-U.S. persons would advance the purposes of the Dodd-Frank Act. d. Disclosure In addition to the proposed rules described above relating to application of the segregation requirements to foreign security-based swap dealers, the Commission also is proposing to require foreign security-based swap dealers to make certain disclosures.551 Since the treatment of the special account under Sections 3E(b) and (g) or individually segregated assets pursuant to Section 3E(f) of the Exchange Act in insolvency proceedings of a foreign security-based swap dealer may vary depending on the status of the foreign security-based swap dealer and the insolvency proceedings such foreign security-based swap dealer is subject to, the Commission proposes to require a foreign security-based swap dealer to disclose to each counterparty that is a U.S. person, prior to accepting any assets from, for, or on behalf of such counterparty to margin, guarantee, or secure a security-based swap, the potential treatment of the assets segregated by such foreign security￾based swap dealer pursuant to Section 3E of the Exchange Act, and the rules and regulations thereunder, in insolvency proceedings relating to such foreign security-based swap dealer under U.S. bankruptcy law and applicable foreign insolvency laws. Pursuant to this proposed rule, the Commission intends to require that a foreign security-based swap dealer disclose whether it is subject to the segregation requirement set forth in
Section 3E of the Exchange Act, and the
rules and regulations thereunder, with respect to the assets collected from the U.S. person counterparty who will receive the disclosure, whether the foreign security-based swap dealer could be subject to the stockbroker liquidation provisions in the U.S. Bankruptcy Code, whether the segregated assets could be afforded customer property treatment under the U.S. bankruptcy law, and any other relevant considerations that may affect the treatment of the assets segregated under Section 3E of the Exchange Act in insolvency proceedings of a foreign security-based swap dealer.552 Since the proposed rule regarding application of the segregation requirements in the cross-border context is designed to advance the goals of protecting U.S. person counterparties, the Commission believes that such disclosure would enhance U.S. person counterparty protection and the objectives that segregation requirements intend to achieve in the context of cross-border security-based swap dealing. Request for Comment The Commission requests comment on all aspects of the proposed rule

553See CFTC Cross-Border Proposal, 77 FR 41228–29. level requirements relating to customer protection and segregation, including the following:

• What, if any, are the likely
  competitive effects, within the U.S. security-based swap market and among U.S. security-based swap dealers, of the proposed approach for foreign security￾based swap dealers? Please describe the specific nature of any such effects.
• Should a foreign security-based
  swap dealer automatically be eligible for the proposed approach by virtue of being a nonresident entity? Alternatively, should the Commission consider other factors, such as the share of the foreign security-based swap dealer’s business that constitutes U.S. Business, in determining how to apply transaction-level requirements?
• From an operational perspective,
  what types of internal controls would be necessary to identify Foreign Business and U.S. Business and ensure that the foreign security-based swap dealer complies with the external business conduct standards with respect to its U.S. Business? Should U.S. Business be generally defined with reference to the type of activity that, if performed in a dealing capacity, triggers the registration requirement?
• Does the proposed approach
  appropriately classify entity-level and transaction-level requirements? Does it appropriately identify those transaction￾level requirements that relate to the operation of the security-based swap dealer on an entity level? If not, please identify those requirements that should be classified differently and how doing so is consistent with the goals of Title VII.
• To what extent would foreign
  security-based swap dealers in various jurisdictions be prohibited from complying, under local law, with the Commission’s requirements to provide the Commission with prompt access to their books and records and to submit to onsite inspection and examination by the Commission? If there are limitations, what are they, and under what circumstances would they arise? Are there other entity-level requirements that foreign security-based swap dealers would not be permitted to comply with under local law? If so, what are they?
• Should the external business
  conduct rules apply in transactions between a registered non-U.S. security￾based swap dealer and foreign branches of a U.S. bank?
• Should the external business
  conduct rules apply in transactions between a registered non-U.S. security￾based swap dealer and non-U.S. persons with U.S. guarantees in transactions outside the United States?
• Does the proposed application of
  the business conduct standards in the cross-border context appropriately implement the business conduct standards as described in Section 15F(h) of the Exchange Act?
• As described above, the
  Commission does not, at this time, propose to apply the business conduct standards in Section 15F(h) of the Exchange Act, and the rules and regulations thereunder (other than the rules and regulations relating to diligent supervision prescribed by the Commission pursuant to Section 15F(h)(1)(B)), to the Foreign Business of registered security-based swap dealers. Should such standards apply to the Foreign Business of registered security￾based swap dealers? Would such application of business conduct standards further the goals of Title VII of the Dodd-Frank Act?
• Should the Commission apply rules
  and regulations pursuant to Section 15F(h)(1)(A) of the Exchange Act relating to fraud, manipulation, and other abusive practices involving security-based swaps (including security-based swaps that are offered but not entered into) to the Foreign Business of registered foreign security￾based swap dealers?
• Should the Commission apply rules
  and regulations pursuant to Section 15F(h)(1)(C) of the Exchange Act relating to position limits to the Foreign Business of foreign security-based swap dealers?
• Should the proposed rule relating to
  conflicts of interest set forth in Section 15F(j)(5) of the Exchange Act apply to both the U.S. Business and Foreign Business of security-based swap dealers?
• Does the proposed approach
  appropriately treat the rules and regulations prescribed by the Commission relating to diligent supervision pursuant to Section 15F(h)(1)(B) as entity-level requirements applicable to both the U.S. Business and the Foreign Business of foreign security￾based swap dealers? Why or why not?
• Is it appropriate that the proposed
  rule does not apply future rules and regulations that the Commission may prescribe pursuant to Section 15F(h)(1)(A) of the Exchange Act relating to fraud, manipulation, and other abusive practices involving security-based swaps (including security-based swaps that are offered but not entered into) to the Foreign Business of foreign security-based swap dealers? Why or why not?
• Is it appropriate that the proposed
  rule does not apply future rules and regulations that the Commission may prescribe pursuant to Section 15F(h)(1)(C) of the Exchange Act relating to position limits to the Foreign Business of foreign security-based swap dealers? Why or why not?
• Does the proposed approach
  appropriately treat the requirements relating to conflicts of interest set forth in Section 15F(j)(5) of the Exchange Act as entity-level requirements applicable to both the U.S. Business and Foreign Business of foreign security-based swap dealers? If not, please identify any requirements that should not be applied to a foreign security-based swap dealer and explain how such an approach would be consistent with the goals of Title VII. Please identify what the costs or operational challenges would be, if any, for a registered security-based swap dealer to establish conflict-of-interest systems and procedures that would apply to its U.S. Business but not its Foreign Business.
• Does the proposed approach
  appropriately implement the requirements relating to segregation of assets held as collateral in Section 3E of the Exchange Act, and rules and regulations thereunder, in light of various statuses of foreign security￾based swap dealers?
• Should the Commission apply
  segregation requirements to a foreign security-based swap dealer that is not subject to the stockbroker liquidation provisions in the U.S. Bankruptcy Code? If not, what are the reasons for not applying segregation requirements? If the segregation requirements do not apply, how would the objective of customer protection be achieved?
• Should the Commission adopt the
  disclosure requirement with respect to foreign security-based swap dealers? Why or why not? Is the proposed disclosure requirement feasible? What would the difficulties be in complying with the proposed disclosure requirement?
• The CFTC has proposed an
  interpretation that would effectively treat a non-U.S. person whose obligations are guaranteed by a U.S. person as a U.S. person for purposes of determining whether a swap between it and a non-U.S. swap dealer or major swap participant would be subject to transaction-level requirements as interpreted by the CFTC to include, without limitation, margin and segregation requirements, reporting, clearing, and trade execution.553 Should the Commission adopt a similar approach? What would be the effects on efficiency, competition and capital

554See id. at 41229.
555See id. at 41230–31.
556See Section XI, infra.
557See note 419, supra.
558We preliminarily believe that the proposed approach with respect to entity-level requirements is not being applied to persons who are ‘‘transact[ing] a business in security-based swaps without the jurisdiction of the United States,’’ within the meaning of Section 30(c) of the Exchange Act. See Section II.B.2(a), supra. However, the Commission also preliminarily believes that the proposed approach with respect to entity-level requirements is necessary or appropriate to help prevent the evasion of the particular provisions of the Exchange Act that were added by the Dodd￾Frank Act that are being implemented by the proposed approach and prophylactically will help ensure that the purposes of those provisions of the Dodd-Frank Act are not undermined. See Section II.B.2(e), supra; see also Section II.B.2(c), supra. For example, if entity-level requirements do not apply to the entire business of a registered foreign security-based swap dealer, then U.S. security￾based swap dealers would have an incentive to evade the full application of the entity-level requirements by moving their operations outside the United States. In this event, assuming the scope of the security-based swap dealers dealing activity remained unchanged, the risk presented by the entity to its U.S. counterparties and the U.S. financial system would remain unchanged. If, for instance, Title VII margin requirements did not apply to the entire entity, these entities could accumulate risk through their non-U.S. dealing activity and transmit that risk to U.S. counterparties in contravention of the purposes of the financial responsibility framework established by the Dodd￾Frank Act. See Section III.C.3(b)ii, supra. 559See Section III.C.3(b)i, supra. 560See, e.g., Davis Polk Letter II at 4–20; Sullivan & Cromwell Letter at 14–15. formation in the event that there are overlapping or duplicative requirements across multiple jurisdictions?

• In addition, the CFTC has proposed
  an interpretation that includes a description of a ‘‘conduit affiliate’’ that includes: (1) a non-U.S. person that is majority-owned, directly or indirectly, by a U.S. person where (2) the non-U.S. person regularly enters into swaps with one or more U.S. affiliates or subsidiaries of the U.S. person, and (3) the financial statements of the non-U.S. person are included in the consolidated financial statements of the U.S. person.554 Conduit affiliates would be subject to transaction-level requirements as if they were U.S. persons. Should the Commission consider a similar approach?
• The CFTC’s proposed interpretation
  would subject foreign branches of U.S.- based bank swap dealers and major swap participants to the CFTC’s entity￾level requirements and transaction-level requirements (other than external business conduct standards for swaps with non-U.S. persons), provided that foreign branches would be eligible for a limited exception in emerging markets where foreign regulations are not comparable.555 Should the Commission consider a similar approach? If so, please explain how such an approach would be consistent with the goals of Title VII.
• What would be the market impact
  of the proposed approach to application of the transaction-level requirements relating to customer protection and segregation? How would the proposed application of transaction-level requirements affect the competitiveness of U.S. entities in the global marketplace (both in the United States as well as in foreign jurisdictions)? Would the proposed approach place any market participants at a competitive disadvantage or advantage? If so, please explain. Would the proposed approach be a more general burden on competition? If so, please explain. What other measures should the Commission consider to implement the transaction￾level requirements? What would be the market impacts and competitiveness effects of alternatives to the proposed approach discussed in this release?

5. Application of Entity-Level Rules
   (a) Introduction
   As noted above, by their very nature, entity-level requirements apply to the operation of a security-based swap dealer as a whole. The Commission recognizes that the capital, margin, and other entity-level requirements that it adopts could have a substantial impact on international commerce and the relative competitive position of intermediaries operating in various, or multiple, jurisdictions. In particular, if these requirements are substantially more or less stringent than corresponding requirements, if any, that apply to intermediaries operating in security-based swap markets outside the United States, depending on how the rules are written, these differences could impact the ability of firms based in the United States to participate in non-U.S. markets, access to U.S. markets by foreign-based firms, and how and whether international firms make use of global ‘‘booking entities’’ to centralize risks related to security-based swaps, among other possible impacts. These issues have been the focus of numerous comments to the Commission and other regulators, as discussed above, as well as Congressional inquiries and other public dialogue. (b) Proposed Approach The Commission is not proposing to provide specific relief for foreign security-based swap dealers from Title VII entity-level requirements, although, as discussed in Section XI below, under a Commission substituted compliance determination, a foreign security-based swap dealer would be able to satisfy relevant Title VII entity-level requirements by substituting compliance with corresponding requirements under a foreign regulatory system.556 The Commission preliminarily believes that entity-level requirements are core requirements of the Commission’s responsibility to ensure the safety and soundness of registered security-based swap dealers.557 The Commission preliminarily believes that it would not be consistent with this mandate to provide a blanket exclusion to foreign security-based swap dealers from entity￾level requirements applicable to such entities.558 For example, capital requirements play an essential role in ensuring the safety and soundness of security-based swap dealers. As discussed above, the Commission’s proposed capital rules for nonbank security-based swap dealers are modeled on the net liquid assets test found in the capital requirements applicable to broker-dealers.559 We believe that this capital standard is necessary to ensure the safety and soundness of nonbank security-based swap dealers, and thus we are not proposing to exclude foreign nonbank security-based swap dealers from our capital rules. In addition, we believe that the capital, margin, and other entity-level requirements proposed and adopted by the Commission work together to provide a comprehensive regulatory scheme that is vital for ensuring the safety and soundness of registered security-based swap dealers, and that the benefits of Title VII’s entity￾level requirements are equally important to both foreign
   and U.S. dealers registered with the Commission. As a result, we are not proposing to provide specific relief from individual entity-level requirements for foreign dealers. We do, however, recognize the concerns raised by commenters regarding the application of entity-level requirements to foreign security-based swap dealers.560 We preliminarily believe that these concerns are largely addressed through the Commission’s overall proposed approach to substituted compliance in the context of Title VII, which is discussed in detail in
   Section XI below. In general, the
   Commission is proposing a framework under which it may permit a registered foreign security-based swap dealer (or class thereof) to satisfy the capital, margin, and other requirements in
   Section 15F of the Exchange Act, and
   the rules and regulations thereunder, by

561Section 3(a)(52) of the Exchange Act, 15 U.S.C. 78c(a)(52), defines ‘‘foreign financial regulatory authority’’ as ‘‘any (A) foreign securities authority, (B) other governmental body or foreign equivalent of a self-regulatory organization empowered by a foreign government to administer or enforce its laws relating to the regulation of fiduciaries, trusts, commercial lending, insurance, trading in contracts of sale of a commodity for future delivery, or other instruments traded on or subject to the rules of a contract market, board of trade, or foreign equivalent, or other financial activities, or (C) membership organization a function of which is to regulate participation of its members in activities listed above.’’ The term ‘‘foreign securities authority’’ is defined in Section 3(a)(50) of the Exchange Act as ‘‘any foreign government, or any governmental body or regulatory organization empowered by a foreign government to administer or enforce its laws as they relate to securities matters.’’ 562Proposed Rule 3a71–5 under the Exchange Act. As discussed in Section II.C.3(b) above, the Commission has authority to establish capital and margin requirements only for registered nonbank security-based swap dealers. For treatment of the capital and margin requirements for foreign bank security-based swap dealers, see Prudential Regulator Margin and Capital Proposal, 76 FR 27564. 563See CFTC Cross-Border Proposal, 77 FR 41223–27. 564See, e.g., IIB Letter at 15 (‘‘Perhaps more commonly, a foreign bank may transact in swaps as a dealer with U.S. customers through a separate U.S. branch, agency, or affiliate that intermediates the transactions as agent for the foreign bank. This is often because, to facilitate strong relationships with U.S. customers, the personnel who solicit and negotiate with U.S. customers and commit a foreign bank to swaps are located in the U.S.’’). 565See, e.g., IIB Letter at 6 (‘‘Globally, there are a number of paradigms under which swap activity is conducted. To achieve the benefits of reduced risk and increased liquidity and efficiency associated with netting and margining on a portfolio basis, foreign banks (like their U.S. domestic counterparts) typically seek to transact with swap counterparties globally, to the extent feasible, through a single, highly creditworthy entity. In many cases, however, the personnel who have relationships with U.S. customers or who manage the market risk of the foreign bank’s swap portfolio are located regionally, outside the jurisdiction in which the foreign bank is domiciled. In some cases, entities other than the foreign bank (such as a U.S. branch, agency, or affiliate) transact with local customers in order to satisfy unique customer documentation, insolvency, tax, regulatory, or other considerations.); Davis Polk Letter I at 2–3 (suggesting that ‘‘operating and managing a global swaps business out of a single Continued complying with the corresponding requirements established by its foreign
financial regulatory authority,561 subject to certain conditions.562 We preliminarily believe that providing foreign security-based swap dealers with the possibility of substituted compliance in this way will help address concerns related to competitiveness and overlapping regulations related to entity-level requirements, while still ensuring that registered foreign security-based swap dealers are subject to appropriate regulatory oversight. Request for Comment The Commission requests comment on all aspects of the proposed interpretive guidance regarding the proposed provision of substituted compliance for certain requirements in
Section 15F of the Exchange Act for
foreign security-based swap dealers, including the following:

• What types of conflicts might a
  foreign security-based swap dealer face if subjected to capital requirements in more than one jurisdiction? In what situations would compliance with more than one capital requirement be difficult or impossible?
• Should the Commission provide
  specific relief to foreign security-based swap dealers with respect to entity-level requirements? If so, please indicate the specific relief that should be provided and the rationale for providing such relief.
• Would the provision of relief from
  entity-level requirements undermine the Commission’s efforts to set capital requirements to ensure the safety and soundness of security-based swap dealers, as required by Section 15F(e)(2)(C) of the Exchange Act? Why or why not?
• Should the Commission treat
  margin as an entity-level requirement or a transaction-level requirement? If only a transaction-level requirement, why?
• Should the Commission consider
  providing relief for foreign security￾based swap dealers from the statutory disqualification requirement in Section 15F(b)(6) of the Exchange Act with respect to their transactions with non￾U.S. persons? For example, should the Commission permit associated persons of a foreign security-based swap dealer that are subject to a statutory disqualification to conduct security￾based swap activity with non-U.S. persons outside the United States? If so, why?
• The CFTC has proposed an
  interpretation that categorizes certain entity-level requirements and transaction-level requirements differently when compared to the Commission’s proposed approach.563 For example, the CFTC has proposed classifying margin requirements applicable to uncleared swaps as a transaction-level requirement, where the Commission has proposed categorizing margin as an entity-level requirement. Should the Commission adopt portions of the CFTC’s approach to categorization? If so, which requirements should be re-categorized and why?
• What would be the market impact
  of the proposed approach to applying entity-level requirements to registered foreign security-based swap dealers? How would the proposed application of the entity-level requirements affect the competitiveness of U.S. entities in the global marketplace (both in the United States as well as in foreign jurisdictions)? Would the proposed approach place any market participants at a competitive disadvantage or advantage? If so, please explain. Would the proposed approach be a more general burden on competition? If so, please explain. What other measures should the Commission consider to implement the entity-level requirements? What would be the market impacts and competitiveness effects of alternatives to the proposed approach discussed in this release? D. Intermediation

1. Introduction
   Security-based swap dealers currently use a variety of business models and legal structures to do business with customers in jurisdictions around the world. For instance, many security￾based swap dealers with global businesses use local personnel to provide security-based swap services to customers in a particular jurisdiction while booking transactions originated from multiple jurisdictions in a single entity (i.e., a centralized booking model). Some security-based swap dealers also use unique organizational structures to provide local customers with access to market or product specialists in other jurisdictions. As discussed below, commenters have indicated that, in the U.S. market, these scenarios are particularly prevalent in the case of foreign security-based swap dealers seeking access to U.S. customers or providing non-U.S. customers with expertise from employees located in the United States.564 In the following discussion, we briefly describe comments received regarding various intermediation models. Throughout this release we use the term ‘‘intermediation’’ generally to refer to origination activity (e.g., solicitation and negotiation of transactions) in connection with a security-based swap transaction.
2. Comment Summary
   Commenters stated that foreign security-based swap dealers use different types of business models to service U.S. customers and provide their global customer base with specialized information, while at the same time reducing both customer costs and entity risks through centralized netting and risk management of their global security-based swap businesses.565 In

booking entity presents many advantages from the perspective of foreign banks, customers and supervisors,’’ including reduction in system risk, maximization of benefits of counterparty netting for customers, and consolidated supervision); Cleary IV at 3–4 (stating that the represented firms ‘‘conduct their swap dealing businesses through a variety of structures, based on multiple and in many cases interdependent legal, strategic and business considerations that pre-date Dodd-Frank,’’ and urging the Commissions to address a number of ‘‘common cross-border transaction structures’’). 566See, e.g., IIB Letter at 6–7 (‘‘[T]he Commissions should establish a framework for cross-border swap activities that preserves and leverages the strengths of existing market practices and home country supervision and regulation.’’); Cleary IV at 3–4 (urging the Commissions to give consideration to a number of common cross-border transaction structures in deciding how to implement Title VII). 567See, e.g., Financial Services Roundtable Letter at 25 (suggesting that ‘‘entities that would meet the definition of ‘swap dealer’ based on their non-U.S. activity, but that act in the U.S. only on an intermediated basis through a regulated U.S. swap dealer, should not be subject to U.S. regulation’’); Davis Polk Letter II at 4, 7 (discussing reasons to exclude dealing activities with U.S.-registered swap dealers, including because ‘‘a swap between a foreign dealer and a U.S. registered swap dealer would be already subject to Title VII by the virtue of the latter’s involvement’’). 568See Cleary Letter IV at 3–4 (recommending that the Commission either adopt an approach similar to the broker-dealer registration regime, ‘‘under which a non-U.S. swap dealer transacting with U.S. persons . . . intermediated by an affiliated U.S.-registered swap dealer’’ would not have to register as a swap dealer or a major swap participant, or adopt a limited registration approach whereby ‘‘the non-U.S. swap dealer would be subject to U.S. swap dealer registration and regulation solely with respect to the capital and related prudential requirements relevant to its status as a swap counterparty, which requirements could be satisfied through compliance with comparable home country requirements’’). 569See, e.g., Socie´te´ Ge´ne´rale Letter I at 4–6 (suggesting a bifurcated registration model allowing foreign banks to centrally book their U.S. swap and security-based swap business with a registered ‘‘Foreign Swap Dealer’’ who is responsible for obligations associated with a booking entity (e.g., complying with capital requirements), while complying with most of Title VII’s regulations through a U.S. domiciled, registered ‘‘Non-Booking Swap Dealer’’); and Davis Polk Letter II at 4–22 (proposing two registration scenarios, including one that would require a foreign bank to register with the Commission solely as a booking center for security-based swap transactions, while a U.S. affiliate of a foreign
bank would also register with the Commission, and the foreign bank’s obligations under Title VII would be divided between the two registered entities). 570See, e.g., Cleary Letter IV at 12 (recommending a limited designation registration whereby ‘‘the branch, department or division of a registrant involved in the regulated swap activity should be responsible for compliance with Dodd-Frank’s requirements,’’ but allowing for the outsourcing of ‘‘performance (but not responsibility for due performance) of those requirements to a U.S. affiliate that is registered as an introducing broker, futures commission merchant (‘‘FCM’’) and/or securities broker-dealer’’); Rabobank Letter at 3 (suggesting that ‘‘the non-U.S. branch registrant would use one or more U.S. affiliates as agents in arranging swaps with U.S. persons and would be permitted to delegate certain compliance functions to its U.S. affiliates, although such delegation would not relieve the non-U.S. branch registrant of its ultimate compliance responsibilities’’). 571The Commission previously proposed new Rule 15Fh–2(d), which would provide that the term ‘‘security-based swap dealer’’ would include, where relevant, an ‘‘associated person’’ of the security￾based swap dealer. See External Business Conduct Standards Proposing Release, 76 FR 42402. Section 3(a)(70) of the Exchange Act, as added by Section 761(a)(6), defines the term ‘‘person associated with a security-based swap dealer or major security￾based swap participant’’ as ‘‘(i) any partner, officer, director, or branch manager of such security-based swap dealer or major security-based swap participant (or any person occupying a similar status or performing similar functions); (ii) any person directly or indirectly controlling, controlled by, or under common control with such security￾based swap dealer or major security-based swap participant; or (iii) any employee of such security￾based swap dealer or major security-based swap participant.’’ The term does not include, however, any person associated with a security-based swap dealer or major security-based swap participant ‘‘whose functions are solely clerical or ministerial.’’ See id. As the Commission noted, to the extent that a security-based swap dealer acts through, or by means of, an associated person of that security￾based swap dealer, the associated person must comply as well with the applicable business conduct standards. See External Business Conduct Standards Proposing Release, 76 FR 42402–3. In support of this position, the Commission cited
Section 20(b) of the Exchange Act, which provides
that ‘‘[i]t shall be unlawful for any person, directly or indirectly, to do any act or thing which it would be unlawful for such person to do under the provisions of this title or any rule or regulation thereunder through or by means of any other person.’’ 572See Section III.C.4, supra. 573See Section III.C.5, supra, and Section XI, infra. support of these perceived benefits, commenters have urged the Commission not to apply Title VII to cross-border transactions in a way that would either prohibit or disincentivize the existing security-based swap dealing business models of foreign security-based swap dealers.566 A number of commenters recommended that a foreign dealer that engages in security-based swap transactions with U.S. counterparties, but only through U.S. registered swap or security-based swap dealers, should not be subject to security-based swap dealer registration.567 One commenter stated that in such situations, the Commission should either not require security-based swap dealer registration of the non-U.S. security-based swap dealer at all, or require a limited registration, whereby the non-U.S. security-based swap dealer would be subject to only capital and related prudential requirements and be permitted to rely on comparable home country regulation.568 In situations where a foreign security-based swap dealer uses a U.S. domiciled subsidiary or affiliate as its agent to solicit and negotiate the terms of security-based swap transactions, several commenters suggested that the Commission allow for a bifurcated registration and regulation framework allowing the foreign security-based swap dealer to comply with Title VII’s requirements by registering both the foreign dealer and its agent in limited capacities and allocating the compliance responsibilities between the two entities.569 Other commenters remarked that the foreign security-based swap dealer should remain ultimately responsible for ensuring compliance with all the applicable Title VII requirements whether or not the regulated activities were carried out by the foreign security-based swap dealer or its agent.570
3. Discussion
The Commission is not at this time proposing any specific rules regarding security-based swap dealing activities undertaken through intermediation. At the same time, we recognize the importance of intermediation, particularly with respect to foreign security-based swap dealers accessing U.S. customers or product specialists located in the United States. Based on the Commission’s experience in the securities markets, we expect that many foreign security-based swap dealers will operate within the U.S. market by utilizing their U.S. affiliates or other U.S. entities as agents 571 in the United States, while booking transactions facilitated by such U.S. personnel in a central booking entity located abroad. We preliminarily believe that the approach proposed in this release for the cross-border regulation of security￾based swap dealing activity will not impede the use of these types of intermediation business models by foreign security-based swap dealers. More specifically, we believe that the Commission’s proposed approach to the application of transaction-level requirements related to Foreign Business 572 and proposed framework for substituted compliance on entity￾level requirements 573 should help to address commenter concerns that a foreign security-based swap dealer engaging in Foreign Business would be subject to potentially duplicative and conflicting transaction-level requirements in a foreign jurisdiction with respect to its Foreign Business. While the foreign security-based swap dealer would remain responsible for ensuring that all relevant Title VII requirements applicable to a given security-based swap transaction are fulfilled, the dealer and its agent(s) may choose to allocate the specific responsibilities such as taking responsibility that all U.S. external

574The agent, in these circumstances, would need to consider whether it separately would need to register as a security-based swap dealer (if, for example, the agent acted as principal in a security￾based swap with the counterparty, and then entered into a back-to-back transaction with the booking entity), a broker (e.g., by soliciting or negotiating the terms of security-based swap transactions), or other regulated entity. Further, the allocation of functions between a foreign security-based swap dealer and a U.S. agent would not affect the aggregation calculation for determining whether the foreign security-based swap dealer exceeded the de minimis threshold. See Section III.B.3(c), supra. 575See note 574, supra. 576Proposed Rule 3a71–3(c) under the Exchange Act. 577See Section III.C.5, supra. 578The Commission is proposing to establish a separate process whereby foreign security-based swap dealers may request that the Commission make a substituted compliance determination with respect to a particular foreign jurisdiction. See
Section XI, infra.
579The Commission’s Registration Proposing Release does not use the term ‘‘foreign security￾based swap dealer,’’ but rather references a ‘‘nonresident security-based swap dealer.’’ Proposed Rule 15Fb2–4(a) under the Exchange Act defines the term ‘‘nonresident security-based swap dealer’’ as a security-based swap dealer that is incorporated or organized any place that is not in the United States or that has its principal place of business in any place not in the United States. See Registration Proposing Release, 76 FR 65799–801. The definition of ‘‘nonresident security-based swap dealer’’ in proposed Rule 15Fb2–4(a) is similar to, but potentially broader than, the definition of ‘‘foreign security-based swap dealer’’ in proposed Rule 3a71–3(a)(3) under the Exchange Act because it uses ‘‘or’’ instead of ‘‘and’’ in the definition. As a result, proposed Rule 15Fb2–4(a) would treat a U.S. corporation as a nonresident person if its principal place of business were outside the United States, whereas proposed Rule 3a71–3(a)(3) would not treat such an entity as a U.S. security-based swap dealer and, therefore, it would not be able to avail itself of substituted compliance determinations applicable to foreign security-based swap dealers. The Commission preliminarily believes that defining the term ‘‘foreign security-based swap dealer’’ more narrowly for purposes of the proposals in this release is appropriate because proposed Rule 15Fb2–4(a) uses the term ‘‘nonresident security-based swap dealer’’ only for determining whether a nonresident security-based dealer would be required to appoint an agent for service of process in the United States and provide assurance that the Commission would have prompt access to books and records in the foreign jurisdiction. In proposed Rule 3a71–3(a)(3), by contrast, the definition of ‘‘foreign security-based swap dealer’’ would be used to determine who would be eligible to take advantage of the proposed substituted compliance framework, as well as how customer protection and segregation requirements would be applied. The Commission does not believe that it is appropriate to treat an entity as a foreign security-based swap dealer for these purposes if its principal place of business were outside the United States but it were incorporated in the United States, because of its connection to the U.S. security-based swap market. Nonetheless, the Commission would still want the assurances required of a ‘‘nonresident security-based swap dealer’’ described above, even if the dealer is incorporated in the United States but has a principal place of business outside the United States. 580See Registration Proposing Release, 76 FR 65822. 581See id. at 65784. business conduct requirements are complied with, margin is collected and segregated, and required trading records are maintained and available, to be undertaken by each entity depending on the intermediation model it adopts.574 Further, although a foreign security￾based swap dealer
could use an entity that is not a security-based swap dealer to act as its agent, the foreign security￾based swap dealer would nonetheless be responsible for ensuring compliance with all the requirements applicable to security-based swap dealers under Title VII (and the federal securities laws) whether or not the regulated activities were carried out by the foreign security￾based swap dealer or its non-security￾based swap dealer agent.575 Request for Comment The Commission requests comment on all aspects of the proposed approach to intermediation. In addition, the Commission requests comment in response to the following questions:

• Should the Commission revise our
  proposed approach to address directly the concerns of entities using the intermediation model to access the U.S. market? If so, what type of approach should the Commission use to address these concerns consistent with the protection of counterparties’ interests and the purposes of Title VII?
• Should the Commission adopt a
  model on intermediation similar to the approach laid out in Rule 15a–6(a)(3) (17 CFR 240.15a–6(a)(3)) governing foreign broker-dealers, which would permit non-U.S. persons to conduct security-based swap dealing activity within the United States without registering with the Commission if those transactions were intermediated by a registered U.S. security-based swap dealer? If so, how would it work in the security-based swap context, and how would it address Title VII policy concerns?
• What would be the market impact
  of the proposed approach to intermediation? How would the application of the proposed approach to intermediation affect the competitiveness of U.S. entities in the global marketplace (both in the United States as well as in foreign jurisdictions)? Would the proposed approach place any market participants at a competitive disadvantage or advantage? If so, please explain. Would the proposed approach be a more general burden on competition? If so, please explain. What other measures should the Commission consider to implement the proposed approach to intermediation? What would be the market impacts and competitiveness effects of alternatives to the proposed approach discussed in this release? E. Registration Application Re-Proposal

1. Introduction
   As discussed in Section XI.C below, the Commission is proposing a rule that would create a framework under which the Commission would consider permitting a foreign security-based swap dealer, where appropriate, to rely on a substituted compliance determination by the Commission with respect to certain of the requirements in Section 15F of the Exchange Act and the rules and regulations thereunder.576 In discussing the application of this proposed framework below, the Commission indicated that certain entity-level requirements under Section 15F of the Exchange Act may be candidates for substituted compliance determinations.577 The Commission preliminarily believes that the most appropriate time for a foreign security-based swap dealer to notify the Commission of its intention to avail itself of an existing substituted compliance determination 578 would be at the time the foreign security-based swap dealer files an application to register with the Commission as a security-based swap dealer.579 As part of its application, the foreign security￾based swap dealer would already be providing the Commission with detailed information in support of its application. The intent of a foreign security-based swap dealer to avail itself of a previously granted substituted compliance determination would be relevant to the Commission’s review of such application because it would impact how the Commission will conduct oversight of the security-based swap dealer. In addition, if a security￾based swap dealer determines, after it registered with the Commission, that it intends to rely on a substituted compliance determination, proposed Rule 15Fb2–3 would require that it promptly update its application.580 Accordingly, the Commission preliminarily believes it is appropriate to require foreign security-based swap dealers to provide additional information in their applications for registration as security-based swap dealers, as described below. The Commission previously proposed Form SBSE, Form SBSE–A, and Form SBSE–BD for the purpose of registering security-based swap dealers and major security-based swap participants.581 All of these forms are generally based on Form BD, which is the consolidated form used by broker-dealers to register

582See id. at 65802.
583See id. at 65804–5.
584See id. at 65802.
585See SIFMA Letter II. SIFMA indicated that it appreciated ‘‘the Commission’s attempts to minimize registration burdens by aligning its proposed registration requirements for SBSDs and MSBSPs with those the CFTC is proposing for swap dealers and major swap participants as well as by creating a streamlined registration process for entities already registered with the Commission or the CFTC,’’ and was ‘‘generally pleased that the Commission elected to make its existing broker￾dealer registration forms the basis for its proposed registration requirements for SBSDs and MSBSPs’’ because ‘‘[m]arket participants are familiar with these requirements and may, in some cases, be registering broker-dealers as SBSDs.’’ However, SIFMA did object to ‘‘several of the required disclosures on proposed Form SBSE,’’ which are substantially similar to disclosures required on Form BD, which it claimed would ‘‘impose significant burdens on registrants.’’ 586See Instruction B.1.b. on Forms SBSE, SBSE– A, and SBSE–BD. 587The Commission is not proposing to add these questions to the Form SBSE–BD, because that form is only applicable to entities that are already registered as broker-dealers. These firms would not be eligible to rely on a substituted compliance determination because the substituted compliance determination only is with respect to the requirements in Section 15F of the Exchange Act, not the requirements in the Exchange Act to which registered broker-dealers are subject. with the Commission, states, and SROs.582 Forms SBSE–A and SBSE–BD are shorter forms that have been modified to provide a more streamlined application process for entities that are registered or registering with the CFTC or registered or registering with the Commission as a broker-dealer.583 Each of these forms is designed to be used to gather information concerning a registrant’s business operations to facilitate the Commission’s initial registration decisions, as well as ongoing examination and monitoring of registration.’’ 584 While the Commission received four comments on the Registration Proposing Release, only one specifically expressed views on the Forms SBSE, SBSE–A, and SBSE–BD.585
2. Discussion
To address the Commission’s proposed rule regarding substituted compliance, the Commission is re￾proposing Forms SBSE, SBSE–A, and SBSE–BD to add two questions to Form SBSE and Form SBSE–A, add one question to all three Forms, and to modify Schedule F to all the Forms. In addition, we are proposing one new instruction to the Forms, which is unrelated to substituted compliance, to clarify that if an application is not filed properly or completely, it may be delayed or rejected.586 Key differences from the originally proposed forms are discussed more fully below. The Commission is not proposing to modify or eliminate any of the other Forms, or any of the rules, proposed in the Registration Proposing Release. Re-proposed Forms SBSE and SBSE– A would include two new questions, question 3 (which has three parts) and question 6.587 The new question 3.A. would ask whether an applicant is a foreign security-based swap dealer that intends to work with the Commission and its primary regulator to have the Commission determine whether the requirements of its primary regulator’s regulatory system are comparable to the Commission’s, or avail itself of a substituted compliance determination previously granted by the Commission with respect to the requirements of
Section 15F of the Exchange Act and the
rules and regulations thereunder. If the applicant responds in the affirmative to either part of the question, new question 3.B. would require that the applicant identify the foreign financial regulatory authority that serves as the applicant’s primary regulator and for which the Commission has made, or may make, a substituted compliance determination. If the applicant indicates that it is relying on a previously granted substituted compliance determination, new question 3.C. would require the applicant to describe how it satisfies any conditions the Commission may have placed on the use of such substituted compliance determination. New question 3 would elicit basic information from an applicant to inform the Commission with respect to its intent to rely upon a substituted compliance determination. New question 6 would ask whether the applicant is a U.S. branch of a non￾resident entity. If the applicant responds in the affirmative, the applicant would need to identify the non-resident entity and its location. This question would provide the Commission with information regarding whether the firm would be subject to the rules of the foreign regulator or the rules of one of the U.S. banking regulators, which would, in turn, elicit which rules may be applicable to the entity’s U.S. security-based swap business. Re-proposed Forms SBSE and SBSE– A would also include new question 17, which would be identified as new question 15 in re-proposed Form SBSE– BD. This new question would ask if the applicant is registered with or subject to the jurisdiction of a foreign financial regulatory authority. If the applicant answered this question in the affirmative, it would be directed to provide additional information on
Schedule F as discussed below. This
question would apply to all applicants, not just foreign security-based swap applicants, and would provide the Commission with information regarding other regulatory schemes that may be applicable to an applicant. The proposed revisions to Schedule F would divide Schedule F into two sections. Section I would include the full text of the originally proposed
Schedule F. Section II would elicit
additional information regarding foreign regulators with which the applicant may be registered or that otherwise have jurisdiction over the applicant. The Commission preliminarily believes that modifying Forms SBSE, SBSE–A, and SBSE–BD (including the changes to Schedule F), as described above, would be appropriate because it would provide foreign security-based swap dealers with a convenient and cost-effective way of informing the Commission of their intention to rely on or seek a substituted compliance determination, as discussed above. In addition, we believe these modifications to our original proposal would provide the Commission with additional information necessary to make a determination as to whether it is appropriate to grant or institute proceedings to deny registration to a person applying to become a non￾resident security-based swap dealer. Request for Comment The Commission requests comment on all aspects of the proposed modifications and additions to proposed Forms SBSE, SBSE–A and SBSE–BD (including the proposed changes to
Schedule F). The Commission also
specifically requests comment on the following:

• Please explain whether Form SBSE
  and Form SBSE–A are the appropriate places to identify whether an entity is intending to rely on a substituted compliance determination. If not, please explain why and what other method of notifying the Commission might be appropriate as well as when such notification to the Commission should be required to be made.
• Please explain whether Forms
  SBSE, SBSE–A, and SBSE–BD (and
  Schedule F) are the appropriate places
  to identify whether an entity is subject to oversight by a foreign regulator, and if so, which regulators. If so, why? If not, why not?
• Should any additional questions be
  added to Form SBSE to elicit information related to a registrant’s reliance on a substituted compliance determination?
• Should any additional questions be
  added to Form SBSE–A to elicit information related to a registrant’s

588As we noted in the Intermediary Definitions Adopting Release, 77 FR 30643–46 and 30696–97, the Commission will consider limited designation applications on an individual basis through analysis of the unique circumstances of each applicant, given that the types of entities that engage in security-based swap transactions are diverse and their organization and activities are varied. Any particular limited designation application will be analyzed in light of the unique circumstances presented by the applicant, and must demonstrate full compliance with the requirements that apply to the type, class, or category of security￾based swap, or the activities involving security￾based swaps, that fall within the security-based swap dealer or major security-based swap participant designation. A key challenge that any applicant for a limited purpose designation will face is the need to demonstrate that the applicant can comply with the statutory and regulatory requirements applicable to security-based swap dealers or major security-based swap participants while subject to a limited designation. Regardless of the type of limited designation being requested, the Commission will not designate a person as a security-based swap dealer or major security-based swap participant in a limited capacity unless it can demonstrate that it can fully comply with the applicable requirements. 589See Registration Proposing Release, 76 FR
65795. The Commission received one comment on
this topic, from SIFMA (see note 585, supra). SIFMA indicated that it ‘‘SIFMA strongly believes that the Commission should allow for limited SBSD or MSBSP registration along a number of dimensions.’’ For instance, SIFMA suggested that the Commission allow entities to separately register individual trading desks, allow an entity to register as an SBSD in one class or type of security-based swap but not another (e.g., ‘‘an entity that acts as a dealer in single-name credit default swaps but not total return swaps on single securities should be able to register as an SBSD in the former but not the latter’’), and ‘‘allow entities to register as an SBSD or MSBSP for their activities with U.S. persons, keeping activities with non-U.S. persons outside the scope of registration and related regulation.’’ 590See, e.g., the Product Definitions Adopting Release, 77 FR 48208, and the Capital, Margin, and Segregation Proposing Release, 77 FR 70214. 591See Section 3(a)(67) of Exchange Act, 15 U.S.C. 78c(a)(67), as added by Section 761(a) of the Dodd-Frank Act. 592As discussed in the Intermediary Definitions Adopting Release, the tests of the major security￾based swap participant definition use terms— particularly ‘‘systemically important,’’ ‘‘significantly impact the financial system’’ or ‘‘create substantial counterparty exposure’’—that denote a focus on entities that pose a high degree of risk through their security-based swap activities. See Intermediary Definitions Adopting Release, 77 FR 30661 n.761. In addition, the link between the major participant definitions and risk was highlighted during the congressional debate on the statute. See 156 Cong. Rec. S5907 (daily ed. July 15, 2010). 593See Intermediary Definitions Adopting Release, 77 FR 30661. Under Rule 3a67–1 under the Exchange Act, 17 CFR 240.3a67–1, a major security￾based swap participant is any entity that maintains security-based swap positions exceeding one of the following three thresholds: (1) $1 billion current uncollateralized exposure or $2 billion combined current uncollateralized exposure and potential future exposure in a major category of security￾based swaps (excluding certain hedging positions); (2) $2 billion current uncollateralized exposure or $4 billion combined current uncollateralized exposure and potential future exposure in all security-based swaps; or (3) highly leveraged financial entities with $1 billion current uncollateralized exposure or $2 billion combined current uncollateralized exposure and potential future exposure in a major category of security￾based swaps. See Intermediary Definitions Adopting Release, 77 FR 30751–54. 594See Intermediary Definitions Adopting Release, 77 FR 30661. 595The Commission indicated that the cross￾border application of the major security-based swap participant definition would be addressed in a separate release. See Intermediary Definitions Adopting Release, 77 FR 30692 n.1181. 596See, e.g., Financial Services Roundtable Letter at 25
(stating that ‘‘non-US entities should not be subject to regulation as major participants unless their activities in US markets exceed the relevant thresholds, even if their aggregate global activity would exceed those thresholds’’ and warning that ‘‘the regulatory burden is sufficiently high that such entities may choose to exit the US markets, or deny US market participants access to non-US markets, rather than submit to regulation’’); APG Asset Management Letter at 4 (recommending that the thresholds be amended to exclude from the computations the outward credit exposures of the computing party to non-U.S. persons, and supporting the CFTC’s statement in its proposed registration release that the major participant analysis should be focused on an entity’s activities with U.S. counterparties or using U.S. mails or instrumentalities); and AIMA Letter at 4–5 (suggesting that in the case of managed funds, only U.S. funds or funds otherwise regulated in the U.S. should be subject to potential major participant designation). 597See, e.g., Jones Day Letter at 7–8 (recommending that ‘‘[f]oreign swap transactions not involving a U.S. counterparty, i.e., between two foreign counterparties[,] are more appropriately the province of the supervisory authorities in the relevant non-U.S. jurisdiction and should, therefore, be excluded from calculations of substantial swap positions’’); Milbank Tweed Letter at 3 (‘‘Clearly, the thresholds should not be applied to a non-U.S. participant’s transactions with all of its counterparties. Equally, all transactions with U.S. counterparties can reasonably be included. To take account of transactions with non-U.S. counterparties that might meet the ‘direct and Continued reliance on a substituted compliance determination?

• Should Form SBSE–BD also be
  modified to include any of the additional questions the Commission is proposing to include in re-proposed Form SBSE or Form SBSE–A? If so, which questions and why?
• The Commission previously
  indicated in the Intermediary Definitions Adopting Release that it would consider applications for limited purpose designations from the major security-based swap participant and security-based swap dealer definitions under Rules 3a67–1(b) and 3a71–1(c) under the Exchange Act, respectively,588 and requested comment on this topic in the Registration Proposing Release.589 Since that time, we have adopted and proposed, both jointly with the CFTC and individually, various rules that further clarify the regulations that will be applicable to security-based swap dealers,590 and today we propose a substituted compliance framework to potentially address the concerns of foreign security-based swap dealers. Given these developments, are there any situations addressed by previous comments where limited registration designation would no longer be appropriate? Are there any situations, addressed by previous comments or otherwise, where a limited registration designation may be appropriate for security-based swap dealers? If so, in what situations would a limited registration designation be warranted, and how should the registration forms be amended to facilitate such limited registration? If not, why not?
  IV. Major Security-Based Swap
  Participants
  A. Introduction
  Title VII defines a new type of entity regulated by the Commission, the ‘‘major security-based swap participant.’’ 591 The statutory definition of major security-based swap participant encompasses persons whose security￾based swap activities do not cause them to be dealers, but nonetheless could pose a high degree of risk to the U.S. financial system generally.592 This term was further defined in the Intermediary Definitions Adopting Release, focusing on the potential market impact and risks associated with a person’s security￾based swap positions.593 In this respect, the major security-based swap participant definition differs from the security-based swap dealer definition, which generally focuses on a person’s activities and how it holds itself out to the market. The amount or significance of those activities is relevant only in the context of the de minimis exception.594 As a result, we believe that the cross￾border issues that are raised by the definition of major security-based swap participant differ from those raised by the definition of security-based swap dealer. The application of the major security-based swap participant definition to cross-border activities was not addressed in the Intermediary Definitions Adopting Release.595 B. Comment Summary A variety of commenters provided their views on the application of the major security-based swap participant definition and its related thresholds in the cross-border context, generally suggesting that the major participant tests focus on the systemic risk that an entity’s swap transactions poses to the U.S. market.596 Commenters further suggested that major security-based swap participant threshold calculations should exclude security-based swap transactions that do not involve a U.S. counterparty.597 Several FPSFIs further

significant connection’ standard, we suggest the Commissions consider including only those transactions by a potential non-U.S. major swap participant that are with non-U.S. registered swap dealers or non-U.S. registered major swap participants.’’). 598For this purpose, we consider the Bank for International Settlements, in which the Federal Reserve and foreign central banks are members, to be a foreign central bank. See http://www.bis.org/ about/orggov.htm. 599See, e.g., Norges Bank Letter at 4–5 (recommending exemptions for foreign governments and their agencies); KfW letter at 8 (FPSFIs); World Bank Group Letter II at 1–2 (multilateral development institutions); China Investment Letter at 2 (SWFs); and GIC Letter at 2, 5–6 (SWFs). 600See China Investment Letter at 2–4 (further explaining that exempting SWFs from the definition of MSBSP would not result in reduced transparency, given that the SWF would still have to comply with a number of other Dodd-Frank Act requirements) and GIC Letter at 2, 5–6. 601See China Investment Letter at 3–4 and GIC Letter at 3. 602See KfW Letter at 8. 603See Section II.C, supra. 604Proposed Rule 3a67–10(a)(2) under the Exchange Act (defining the term ‘‘U.S. person’’ by cross-reference to the definition of U.S. person in proposed Rule 3a71–3(a)(7) under the Exchange Act, as discussed in Section III.B.5, supra). 605Proposed Rule 3a67–10(c) under the Exchange Act. 606See Rule 3a67–1 under the Exchange Act, 17 CFR 240.3a67–1; see also note 593, supra. 607Proposed Rule 3a67–10(a)(2) under the Exchange Act; see also proposed Rule 3a71–3(a)(7) under the Exchange Act, as discussed in Section III.B.5, supra. 608See Section III.B.5, supra, (discussing the definition of ‘‘U.S. person’’). 609 Id. 610See Section 3(a)(67) of Exchange Act, 15 U.S.C. 78c(a)(67). In particular, one of the thresholds of the statutory definition of major security-based swap participant focuses on the serious adverse effects on the financial stability of the U.S. banking system or financial markets as a result of substantial counterparty exposure created by a person’s security-based swap positions. See
Section 3(a)(67)(A)(ii)(II) of the Exchange Act, 15
U.S.C. 78c(a)(67)(A)(ii)(II). In addition, Section 3(a)(67)(B) of the Exchange Act requires the Commission to define the term ‘‘substantial position’’ in Sections 3(a)(67)(A)(ii)(I) and (III) of the Exchange Act at the threshold that the Commission determines to be prudent for the effective monitoring, management, and oversight of entities that are systemically important or can significantly impact the financial system of the United States. See Section 3(a)(67)(B) of the Exchange Act, 15 U.S.C. 78c(a)(67)(B). 611See Intermediary Definitions Adopting Release, 77 FR 30666–71; Rules 3a67–3(b) and (c) under the Exchange Act, 17 CFR 240.3a67–3(b) and (c). 612The determination of whether a security-based swap transaction must be included in a non-U.S. person’s major security-based swap participant calculation is based on the U.S. person status of the non-U.S. person’s counterparty to such transaction, regardless of whether the counterparty is a security￾based swap dealer, end user, CCP, or other market participant. For example, where a non-U.S. person enters into a security-based swap transaction with a security-based swap dealer, and that transaction is submitted for clearing and novated from the dealer to a CCP, the non-U.S. person would look to the U.S. person status of the CCP that became its counterparty as a result of such novation when determining whether the transaction must be included in such non-U.S. person’s major security￾based swap participant calculation. requested specific exclusions from the major security-based swap participant definition, suggesting that as a matter of comity, swap transactions involving foreign central banks as a counterparty,598 international financial institutions, and/or foreign SWFs should be excluded from the major participant definitions.599 Certain entities managed or controlled by foreign governments also have asked for exemptions or exclusions from Commission registration or the Dodd￾Frank Act’s substantive requirements. For example, SWFs commented that they believe SWFs should be excluded from the definition of major security￾based swap participant and thus the related regulatory obligations.600 These entities argued that the Commission should not subject SWFs to registration requirements based on principles of international comity and cooperation and noted that SWFs are typically subject to comparable home country supervision that would render SEC regulation largely duplicative. They also argued that excluding SWFs from the major security-based swap participant definition would not increase systemic risks given that SWFs make long-term investments across diverse asset classes, use swaps or security-based swaps to hedge portfolio risks rather than generate returns, and are more likely to ensure that risk management measures are in place because of SWFs’ heightened concerns regarding reputational risk.601 Another entity, which operates with an explicit government guarantee of its swap and security-based
swap obligations, argued that it should be excluded from the major participant definition due to its lack of risk to the market resulting from this government support.602
C. Proposed Approach
In light of the comments received on the application of the major security￾based swap participant definition in the cross-border context and the principles discussed above,603 the Commission is proposing a rule and interpretive guidance regarding the application of the major security-based swap participant definition to cross-border activities.

1. In General
   The Commission is proposing a rule under which a U.S. person would consider all security-based swap transactions entered into by it, while a non-U.S. person would consider only transactions entered into with U.S. persons,604 when determining whether the person falls within the major security-based swap participant definition.605 Under this proposed approach, a non-U.S. person would calculate its security-based swap positions under the three prongs of the major security-based swap participant definition 606 based solely on its transactions with U.S. persons (including foreign branches of U.S. banks). All security-based swap transactions by a non-U.S. person with other non-U.S. person counterparties, regardless of whether they are conducted within the United States or whether the non-U.S. person counterparties are guaranteed by a U.S. person, would be excluded from the major security-based swap participant analysis. The proposed rule would use the same definition of ‘‘U.S. person’’ as proposed in the context of foreign security-based swap dealer registration.607 As previously discussed, this definition generally follows a territorial approach to defining U.S. person.608 The proposed approach to the U.S. person definition is intended to identify individuals or legal persons that, by virtue of their location within the United States or their legal or other relationship with the United States, are likely to impact the U.S. financial market and the U.S. financial system.609 Therefore, we preliminarily believe that requiring a non-U.S. person to take into account its security-based swap positions with U.S. persons, as proposed to be defined, for purposes of the major security-based swap participant definition would provide an appropriate indication of the degree of default risk posed by such non-U.S. person’s security-based swap positions to the U.S. financial system, which we view as the focus of the major security￾based swap participant definition.610 Consistent with the rules further defining the definition of major security-based swap participant adopted in the Intermediary Definitions Adopting Release, such risk to the U.S. financial system would be measured by calculating such non-U.S. person’s aggregate outward exposures 611 to U.S. persons (that is, what such non-U.S. person owes, or potentially could owe, on its security-based swaps with U.S. persons).612 If such non-U.S. person’s aggregate outward exposures to U.S. persons exceed one of the thresholds set forth in the rules further defining ‘‘major security-based swap

613See Rule 3a67–3 and Rule 3a67–5 under the Exchange Act, 17 CFR 240.3a67–3 and 17 CFR 240.3a67–5 (defining ‘‘substantial position’’ and ‘‘substantial counterparty exposure’’). 614See note 610, supra. 615See Section III.B.6, supra. 616See note 610, supra. 617See note 177 and accompanying text, supra. 618See Section III.B.5, supra. 619See, e.g., Citigroup Letter at 3. 620See Section III.B.5, supra. 621See note 610, supra. 622This is the case even if the non-U.S. person counterparties’ obligations under the security-based swaps with the potential non-U.S. person major security-based swap participant are guaranteed by a U.S. person. As discussed in more detail below, the Commission proposes to address the risk posed by a non-U.S. person’s security-based swap positions guaranteed by a U.S. person to the U.S. financial system through its treatment of guarantees for purposes of the major security-based swap participant definition. See Section IV.C.2(a), infra. 623The Commission preliminarily believes that such risk is more appropriately addressed under Titles I and II of the Dodd-Frank Act. participant,’’ 613 the non-U.S. person would be required to register as a major security-based swap participant. Given the focus of the major security￾based swap participant definition on the degree of risk to the U.S. financial system,614 the Commission preliminarily believes that the location in which security-based swap transactions are conducted is not relevant to the calculation of a person’s security-based swap positions for purposes of determining such person’s status as a major security-based swap participant. Such an approach would differ from the approach we are proposing with respect to the security￾based swap dealer definition, where we would count transactions connected with security-based swap dealing activity conducted within the United States toward a potential security-based swap dealer’s de minimis threshold even if the transactions were with non￾U.S. persons.615 This difference in approach is driven by the different focuses of the statutory definitions of the terms security-based swap dealer and major security-based swap participant. While the statutory major security-based swap participant definition is focused specifically on risk,616 the statutory security-based swap dealer definition is focused on, in addition to risk, the nature of the activities undertaken by an entity, its interactions with counterparties, and its role within the security-based swap market.617 These different statutory emphases lead us to treat major security-based swap participants differently from security-based swap dealers with respect to whether activities conducted within the United States should be counted toward their respective thresholds. In addition, as stated above, the U.S. person definition applies to the entire entity, including its branches and offices that may be located in a foreign jurisdiction.618 Therefore, under the proposed approach, a non-U.S.
person would need to include its security-based swap transactions with foreign branches of U.S. banks when calculating its security-based swap positions for purposes of the major security-based swap participant definition. Some commenters on the CFTC Cross￾Border Proposal have suggested that a non-U.S. person should be allowed to exclude swap transactions with foreign branches of U.S. banks for purposes of determining whether it is a major swap participant because otherwise non-U.S. persons would have a strong incentive to limit or even stop trading with U.S. banks that operate outside the United States via foreign branches.619 We are mindful of these concerns. However, because foreign branches are not separate legal persons,620 the Commission believes that the potential losses that a U.S. bank would suffer due to a non-U.S. person counterparty’s default, and the potential impact on the U.S. banking system and the U.S. financial system generally, would not differ depending on whether the non￾U.S. person counterparty entered into the security-based swap with the home office of the U.S. bank or with a foreign branch of the U.S. bank. Therefore, the Commission preliminarily believes that it is appropriate to require a non-U.S. person to include its security-based swap transactions with foreign branches of U.S. banks for purposes of determining its major security-based swap participant status. By contrast, the Commission preliminarily believes that a non-U.S. person (the ‘‘potential non-U.S. person major security-based swap participant’’) does not need to include its security￾based swap transactions with non-U.S. person counterparties in determining whether it is a major security-based swap participant. As stated above, the focus of the major security-based swap participant definition is on the degree of risk posed by a person’s security-based swap positions to the U.S. financial system.621 In the case of transactions with non-U.S. person counterparties, the risk that a potential non-U.S. person major security-based swap participant will not pay what it owes (or potentially could owe) under its security-based swaps to its non-U.S. counterparties is not transmitted directly and fully to the U.S. financial system in the way that such risk would be transmitted if the potential non-U.S. person major security-based swap participant engaged in security-based swap transactions with U.S. person counterparties. Instead, the non-U.S. person counterparties bear the direct and full risk of loss.622 We recognize that there may be indirect spillover effects related to the security-based swap positions arising from the activity conducted by a potential non-U.S. person major security-based swap participant and a non-U.S. person counterparty (e.g., a U.S. person that has an ownership interest in such a non-U.S. person counterparty would potentially face losses on the value of its investment in such a non-U.S. person counterparty due to failure of the potential
non-U.S. person major security-based swap participant), but the Commission preliminarily believes that the major security-based swap participant tests do not need to address the potential indirect spillover risk to the U.S. financial system from foreign investments by U.S. persons in non-U.S. persons, or other non-security-based swap activities by U.S. persons with non-U.S. persons.623 The Commission recognizes that this proposed approach results in different treatment of U.S. and non-U.S. persons under the major security-based swap participant definition (i.e., a non-U.S. person would consider its security￾based swap transactions with only U.S. persons, while a U.S. person would consider all of its security-based swap transactions). However, the Commission preliminarily believes that this approach is appropriate in light of the focus in the major security-based swap participant definition on the U.S. financial system. More specifically, the need for separate analysis of U.S. and non-U.S. entities results from the fact that all of a U.S. person’s security-based swap transactions are part of and create risk to the U.S. financial system, regardless of whether such entity’s counterparties are U.S. persons or non￾U.S. persons. The same is not true of non-U.S. persons, however, because the security-based swap transactions entered into by a non-U.S. person with other non-U.S. persons are not fundamentally part of the U.S. financial system, while such non-U.S. person’s security-based swap transactions with U.S. persons would directly impact the U.S. financial system. Thus, we preliminarily believe that the statutory major security-based swap participant definition’s focus on the U.S. financial system, justifies treating U.S. and non￾U.S. persons differently for purposes of the major participant analysis based on

624 In the Intermediary Definitions Adopting Release, the Commissions stated they intended to address guarantees provided to non-U.S. entities, and guarantees by non-U.S. holding companies, in separate releases. See Intermediary Definitions Adopting Release, 77 FR 30689 n.1134. In this release, we are not altering the interpretive approach with respect to the attribution of guarantees that was adopted by the Commissions in the Intermediary Definitions Adopting Release, but rather we are proposing an interpretive approach that would apply the principles adopted in the Intermediary Definitions Adopting Release in the cross-border context. 625See Intermediary Definitions Adopting Release, 77 FR 30689, and the accompanying note 1132 on that page. 626See id. As indicated in note 160 above, the term ‘‘guarantee’’ as used in this release refers to a contractual agreement pursuant to which one party to a security-based swap transaction has recourse to its counterparty’s parent, other affiliate, or guarantor with respect to the counterparty’s obligations owed under the transaction. 627See id. 628See Section IV.C.2(c), infra (discussing the limited circumstances where attribution of guaranteed security-based swap positions to the guarantor would not apply). 629 In all circumstances where a U.S. person guarantor is required to attribute to itself all security-based swap transactions entered into by the guaranteed non-U.S. person, the guaranteed non-U.S. person would still be required to consider those security-based swap transactions that it enters into with U.S. person counterparties for purposes of determining whether it is a major security-based swap participant pursuant to the proposed Rule 3a67–10(c)(2) under the Exchange Act. See Section IV.C.1, supra (discussing proposed Rule 3a67–10(c) under the Exchange Act). Once the guaranteed non￾U.S. person becomes a major security-based swap participant and registers with the Commission, the U.S. guarantor would no longer be required to attribute to itself the security-based swap positions entered into by the guaranteed non-U.S. person. See Intermediary Definitions Adopting Release, 77 FR
30689. This same result would also occur where a
guaranteed non-U.S. person becomes subject to capital regulation by the Commission or the CFTC (e.g., a registered major swap participant, swap dealer, security-based swap dealer, futures commission merchant, or broker-dealer). See id. 630See note 610, supra. 631See Intermediary Definitions Adopting Release, 77 FR 30730 (discussing the limited circumstances where attribution of guaranteed security-based swap positions of a U.S. person to the guarantor would not apply). the disparate impacts of their security￾based swap transactions on the U.S. financial system. We recognize that a non-U.S. person’s transactions with other non-U.S. person counterparties could still have an impact on the U.S. financial system, including where those transactions threatened the financial integrity of a non-U.S. person counterparty and such person had significant security-based swap positions with U.S. persons. However, the amount of risk the non￾U.S. person poses to the U.S. financial system would most directly stem from the size of its direct positions with U.S. persons. As a result, the Commission preliminarily believes it is appropriate to limit the international application of the major security-based swap participant definition to a non-U.S. person’s security-based swaps entered into with U.S. persons.
2. Guarantees
The application of the major security￾based swap participant definition to security-based swap positions guaranteed by a parent, other affiliate, or guarantor raises unique issues in the cross-border context. These issues were not addressed in the Intermediary Definitions Adopting Release.624 As a general principle, the Commission and the CFTC did note in the Intermediary Definitions Adopting Release that an entity’s security-based swap positions are attributed to a parent, other affiliate, or guarantor for purposes of the major participant analysis to the extent that the counterparties to those positions have recourse to that parent, other affiliate, or guarantor in connection with the position.625 Positions are not attributed in the absence of recourse.626 The Commission and the CFTC further stated that attribution of these positions for purposes of the major participant definitions is intended to reflect the risk focus of the major participant definitions by providing that entities will be regulated as major participants when they pose a high level of risk in connection with the swap and security￾based swap positions they guarantee. The application of these general principles in the cross-border context is discussed below, including the attribution of guaranteed security-based swap positions to U.S. persons and non￾U.S. persons, respectively, when they provide guarantees on performance of the security-based swap obligations of other persons, the limited circumstances where attribution of guaranteed security-based swap positions is not required, and operational compliance. (a) Guarantees Provided by U.S. Persons to Non-U.S. Persons One cross-border issue that arises from the general approach to guarantees set forth in the Intermediary Definitions Adopting Release is how the attribution of guarantees for purposes of the major security-based swap participant definition would apply to a guarantee provided by a U.S. person for performance on the obligations of a non￾U.S. person, such as a U.S. holding company providing a guarantee on the obligations of a foreign subsidiary. As noted in the Intermediary Definitions Adopting Release, the attribution of guaranteed positions for purposes of the major participant definitions is intended to reflect the risk that a guarantor might pose to, and the systemic impact of such risk may impose on, the U.S. financial system as a result of the guarantees that it provides.627 The Commission preliminarily believes that these risk concerns are the same when U.S. persons act as guarantors for foreign persons regardless of whether the underlying security-based swap transactions that they guarantee are entered into with U.S. persons or non￾U.S. persons, given that the risk borne by the U.S. person guarantor would not be impacted by the status of the guaranteed non-U.S. person’s counterparty as either a U.S. person or non-U.S. person. As a result, the Commission is proposing that, other than in the limited circumstances
described below,628 all security-based swaps entered into by a non-U.S. person and guaranteed by a U.S. person be attributed to such U.S. person guarantor for purposes of determining such U.S. person guarantor’s major security-based swap participant status, regardless of whether the underlying transaction was entered into with a U.S. person counterparty or non-U.S. person counterparty.629 (b) Guarantees Provided by Non-U.S. Persons to U.S. Persons and Guarantees Provided by Non-U.S. Persons to Non￾U.S. Persons Another cross-border issue related to the Commission’s approach to the attribution of guarantees is how guarantees provided by non-U.S. persons are treated for purposes of the major security-based swap participant definition. As previously noted, the statutory major security-based swap participant definition’s focus on the accumulation of security-based swap risk by non-U.S. persons is primarily centered on the impact such risk could have on the U.S. financial system.630 Where a non-U.S. person provides a guarantee on performance of the security-based swap obligations of a U.S. person (e.g., a non-U.S. holding company providing a guarantee on performance of the obligations owed by its U.S. subsidiary under security-based swaps entered into by the U.S. subsidiary), the counterparties of such U.S. person would be taking the credit risk of the non-U.S. person guarantor as well as the U.S. person. If the non-U.S. person guarantor defaults, the full amount of risk accumulated under the guaranteed U.S. person’s security-based swap positions would impact the U.S. financial system. As a result, subject to the limited circumstances described in the Intermediary Definitions Adopting Release,631 a non-U.S. person providing

632See note 629, supra.
633See Section IV.C.2(c), infra (discussing the limited circumstances where attribution of guaranteed security-based swap positions of a non￾U.S. person to the guarantor would not apply). 634Where a non-U.S. person guarantor is required to attribute to itself the security-based swap positions entered into by a non-U.S. person that are guaranteed by the first non-U.S. person, the guaranteed non-U.S. person also would be required to consider all security-based swap transactions entered into by itself with U.S. person counterparties for purposes of determining its major security-based swap participant status in accordance with proposed Rule 3a67–10(c)(2) under the Exchange Act. See Section IV.C.1, supra (discussing proposed Rule 3a67–10(c) under the Exchange Act). Once the guaranteed non-U.S. person becomes a major security-based swap participant and registers with the Commission, the non-U.S. guarantor would no longer be required to attribute to itself the security-based swap positions entered into by the guaranteed non-U.S. person. See Intermediary Definitions Adopting Release, 77 FR 30689. 635See Intermediary Definitions Adopting Release, 77 FR 30689. 636 Id. This interpretive guidance applies to both U.S. persons and non-U.S. persons that are subject to registration and regulation in the enumerated categories. 637See Intermediary Definitions Adopting Release, 77 FR 30689. 638This is consistent with the capital standards of the prudential regulators with respect to foreign banks that are bank holding companies subject to the Federal Reserve Board of Governors’ supervision. See § 225.2(r)(3) of the Regulation Y (‘‘For purposes of determining whether a foreign banking organization qualifies under paragraph (r)(1) of this section: (A) A foreign banking organization whose home country supervisor . . . has adopted capital standards consistent in all respects with the Capital Accord of the Basle Committee on Banking Supervision (Basle Accord) may calculate its capital ratios under the home country standard . . .’’), 12 CFR 225.2(r)(3). 639See Prudential Regulator Margin and Capital Proposal, 76 FR 27582 (‘‘The proposed rule generally requires a covered swap entity to comply with regulatory capital rules already made applicable to that covered swap entity as part of its prudential regulatory regime. . . . In the case of a foreign bank or the U.S. branch or agency of a foreign bank, the capital rules that are made applicable to such covered entity pursuant to § 225.2(r)(3) of the Board’s Regulation Y, 12 CFR 225.2(r)(3) . . .’’). a guarantee on performance of the security-based swap obligations of a U.S. person would attribute to itself all of the U.S. person’s security-based swap positions that are guaranteed by the non-U.S. person guarantor for purposes of determining the non-U.S. person guarantor’s major security-based swap participant status.632 By contrast, where a non-U.S. person provides a guarantee on performance of the security-based swap
obligations of another non-U.S. person (e.g., a non￾U.S. holding company providing a guarantee on performance of the obligations owed by its non-U.S. subsidiary under security-based swaps entered into by the non-U.S. subsidiary), the ultimate counterparty credit risk associated with the transaction would generally reside outside of the United States with the non-U.S. guarantor. In this scenario, the potential impact on the U.S. financial system would be limited to transactions entered into by the guaranteed non-U.S. person with U.S. person counterparties. Therefore, the Commission preliminarily believes that, other than in the limited circumstances described below,633 where a non-U.S. person guarantees performance on the security-based swap transactions of another non-U.S. person, the non-U.S. guarantor need only attribute to itself such guaranteed security-based swap transactions entered into with U.S. person counterparties for purposes of determining its major security-based swap participant status.634 (c) Limited Circumstances Where Attribution of Guaranteed Security￾Based Swap Positions Does Not Apply In addition to setting forth general principles regarding the attribution of guaranteed swap or security-based swap positions to the guarantor for the major participant definitions, the Intermediary Definitions Adopting Release also provided interpretive guidance related to the limited circumstances under which attribution of guaranteed swap or security-based swap positions is not required.635 Specifically, it stated that even in the presence of a guarantee, it is not necessary to attribute a person’s swap or security-based swap positions to a parent or other guarantor if the person already is subject to capital regulation by the Commission or the CFTC (i.e., swap dealers, security-based swap dealers, major swap participants, major security-based swap participants, FCMs, and broker-dealers) or if the person is a U.S. entity regulated as a bank in the United States.636 In providing this interpretive guidance, the Commission and the CFTC explained that the positions of those regulated entities already will be subject to capital and other requirements, making it unnecessary to separately address, via major participant regulations, the risks associated with guarantees of those positions of a regulated entity.637 The Intermediary Definitions Adopting Release did not address the application of the interpretive guidance regarding attribution of guaranteed positions where a guarantee is provided to support a non-U.S. person’s performance on the obligations under security-based swaps in the cross-border context. The Commission preliminarily believes that the interpretation jointly adopted by the Commission and the CFTC in the Intermediary Definitions Adopting Release regarding security￾based swap positions of a person subject to capital regulation by the CFTC or the Commission should equally apply to a non-U.S. person whose security-based swap positions
are guaranteed by another person. Therefore, the Commission is proposing to interpret that it is not necessary to attribute a non-U.S. person’s security-based swap positions to a parent or other guarantor if such non-U.S. person already is subject to capital regulation by the Commission or the CFTC (i.e., swap dealers, security-based swap dealers, major swap participants, major security￾based swap participants, FCMs and broker-dealers). In addition, in the cross-border context and with respect to a non-U.S. person, if such non-U.S. person is not subject to capital regulation by the Commission or the CFTC, consistent with the rationale for the approach to attribution of security-based swap positions of a person that is a U.S. entity regulated as a bank in the United States, it would not be necessary to attribute such non-U.S. person’s security-based swap positions to its guarantor if such non-U.S. person is subject to capital standards that are consistent with the capital standards such non-U.S. person would have been subject to if such non￾U.S. person were a bank subject to the prudential regulators’ capital regulation. Therefore, the Commission preliminarily believes that it is not necessary to attribute such non-U.S. person’s security-based swap positions to its guarantor for purposes of determining the guarantor’s major security-based swap participant status, if such non-U.S. person is subject to capital standards adopted by its home country supervisor that are consistent in all respects with the Capital Accord of the Basel Committee on Banking Supervision (the ‘‘Basel Accord’’).638 This proposed approach also is consistent with the capital standards proposed by the prudential regulators for a foreign bank that is a swap dealer, major swap participant, security-based swap dealer or major security-based swap participant, which require such foreign bank to comply with regulatory capital rules already made applicable to such foreign bank as part of the existing prudential regulatory regime.639 The Commission preliminarily believes that security-based swap positions of a non￾U.S. person subject to foreign regulatory capital requirements consistent with the Basel Accord would be subject to risk￾based capital requirements that take into account the unique risks (including the

640 Intermediary Definitions Adopting Release, 77 FR 30689. 641 Id. 642See note 599, supra. 643See China Investment Letter at 3–4. Cf. World Bank Letter II states that ‘‘not all multilateral development banks use derivatives in their development operations, or do so only on a limited basis.’’ See World Bank Letter II at 1 n.1. 644See BIS Letter II at 3 and World Bank Letter I at 7. 645See GIC Letter at 3–4 and KfW Letter at 3 and 8. 646See China Investment Letter at 3–4. 647See KfW Letter at 8. 648See World Bank Letter II at 2–3. credit risk, market risk, and other risks) arising from security-based swap transactions, in such a way as to make it unnecessary to separately address, via major security-based swap participant regulation, the risks associated with guarantees of those security-based swap positions. (d) Operational Compliance Finally, the Commission believes that it is necessary to provide interpretive guidance regarding operational compliance and the special issues that may result from the attribution of security-based swap positions to a parent or guarantor. As the Commission and the CFTC noted in the Intermediary Definitions Adopting Release, these include issues regarding the application of the transaction-focused requirements applicable to registered major participants (e.g., certain requirements related to trading records and transaction confirmations), given that the entity that is the direct counterparty to the swap or security-based swap may be better positioned to comply with those requirements.640 In the Intermediary Definitions Adopting Release, the Commission and the CFTC stated that ‘‘an entity that becomes a major participant by virtue of swaps or security-based swaps directly entered into by others must be responsible for compliance with all applicable major participant requirements with respect to those swaps or security-based swaps (and must be liable for failures to comply), but may delegate operational compliance with transaction-focused requirements to entities that directly are party to the transactions. The entity that is the major participant, however, cannot delegate compliance duties with the entity-level requirements applicable to major participants (e.g., requirements related to registration and capital).’’ 641 The Commission preliminarily believes that the same approach should apply in the cross-border context when the guarantor and the guaranteed person are located in different jurisdictions (e.g., U.S. holding companies that act as guarantors of the security-based swap obligations of their non-U.S. dealing subsidiaries). In each case, the major security-based swap participant may delegate compliance duties for transaction-focused requirements to the entities that are counterparties to the transactions, but the major security￾based swap participant would remain responsible for ensuring that the Title VII requirements applicable to such transactions are fulfilled. However, major security-based swap
participants must comply with all relevant entity￾level requirements themselves that are not transaction-focused, such as registration and capital. Entity-level requirements that have a transaction focus, such as margin, may be delegated to the guaranteed entities that directly are party to the transactions. However, the major security-based swap participants would remain responsible for ensuring compliance with these requirements.
3. Foreign Public Sector Financial
Institutions (FPSFIs)
The proposed approach to the cross￾border application of the major security￾based swap participant definition described above provides a general framework for applying the definition to non-U.S. persons. That framework does not separately address questions raised by commenters regarding how the major security-based swap participant definition applies to FPSFIs. Specifically, some commenters requested explicit exclusions from the major security-based swap participant definition for these types of entities.642 We note that FPSFIs encompass a wide range of institutions and organizations, ranging from divisions of foreign central banks, to international financial institutions established under treaties, to multilateral development banks formed, owned, and controlled by sovereign members, to sovereign wealth funds and other investment corporations owned by foreign governments. Some FPSFIs’ obligations are guaranteed or backed by foreign governments; others may not be. The purposes and activities of these institutions and organizations vary. For example, some FPSFIs (such as the Bank for International Settlements) provide banking services to foreign central banks who are their members. Some FPSFIs provide credits and grants to promote economic development in developing countries (e.g., multilateral development banks) or distribute funds of regional recovery programs to promote regional economies (e.g., KfW for the European Recovery Program). Other FPSFIs conduct investment activities around the world and their exclusive customers are the foreign governments to which they are linked. Depending on their purposes and activities, FPSFIs may engage in different types of swaps or security-based swaps to various degrees, although the Commission is not aware of data reflecting the nature and amount of such transactions across the FPSFI population. One commenter stated that it enters into swaps to manage interest rates and foreign exchange risks but does not use swaps to generate returns.643 Several commenters requested that FPSFIs be excluded from the major security-based swap participant definition. They provided various reasons and basis to support their requests. Some FPSFIs commented that they are subject to exceptionally high risk controls and have extremely strong capital bases and therefore pose no risk to systemic stability.644 Others argued that they already are subject to comparable or comprehensive substantive regulation of their respective governments in their home countries and therefore, subjecting them to the major security-based swap participant regulation would create regulatory duplication or conflicts.645 One FPSFI argued that it only conducts swap activities with dealers, which would be regulated under Title VII, and therefore it is not necessary to subject it to duplicative regulation and supervision.646 Another FPSFI, which operates with an explicit government guarantee of its swap and security-based swap obligations, argued that it
should be excluded from the major participant definition due to its lack of risk to the market resulting from this government support.647 Intergovernmental organizations, such as multilateral development banks, argued that multilateral development institutions are never subject to national regulations and their privileges and immunities should be fully respected.648 After considering the concerns of these commenters, we recognize that FPSFIs raise unique and complex issues because of the diversity of the special purposes they are serving, their differing governance structures and sources of financial strength, and their supranational, intergovernmental, or sovereign nature. The Commission also recognizes that we have received relatively little information from commenters regarding the types, levels, and natures of security-based swap activity that FPSFIs regularly engage in (although some information has been

649See note 4, supra.
650Proposed Rule 3a67–10(b) and proposed Rule 18a–4(f) under the Exchange Act. 651 15 U.S.C. 78o–10(h)(1)(B). 652See Section III.C.3(a)(i), supra. As discussed previously, Section 15F(h)(1)(B) requires security￾based swap dealers to conform with such business conduct standards relating to diligent supervision as the Commission shall prescribe. 653See proposed Rule 18a–4(f) under the Exchange Act. 654See generally Section III.C.4(b), supra. In addition, all ‘‘nonresident major security-based swap participants,’’ as defined in proposed Rule 15Fb2–4(a) under the Exchange Act, would be required: (1) To appoint and identify to the Commission an agent in the United States (other than the Commission or a Commission member, official or employee) for service of process; (2) to certify that the firm can, as a matter of law, provide the Commission with prompt access to its books and records and can, as a matter of law, submit to onsite inspection and examination by the Commission; and (3) to provide the Commission with an opinion of counsel concurring that the firm can, as a matter of law, provide the Commission with prompt access to its books and records and can, as a matter of law, submit to onsite inspection and examination by the Commission. See proposed Rule 15Fb2–4(b) under the Exchange Act, as discussed in the Registration Proposing Release, 76 FR 65799–801. 655See Section III.C.3(b), supra. received regarding their swap transactions) and that, consequently, the Commission has comparatively little basis on which to understand their roles in the security-based swap markets and, as appropriate, exclude them from the major security-based swap participant definition. Therefore, we are not proposing to specifically address the treatment of FPSFIs at this time. Instead, we are soliciting comment to help determine the basis on which it may be appropriate to exclude FPSFIs from the proposed rule regarding application of the major security-based swap participant definition to non-U.S. persons. In particular, we invite public comment regarding the types, levels, and nature of the security-based swap activity that various types of FPSFIs may engage in on a regular basis, the roles of FPSFIs in the security-based swap market, the mitigating factors and reasons that FPSFIs may not pose systemic risk as a result of their security-based swap activity, and whether it would be more appropriate for the Commission to address FPSFI concerns on an individual basis. We also request considerations, information, and data regarding potential definitions of a FPSFI for purposes of the major security-based swap definition. Responses that are supported by empirical data and analysis are encouraged in assisting the Commission in considering whether excluding FPSFIs from the definition of the major security-based swap participant is warranted. D. Title VII Requirements Applicable to Major Security-Based Swap Participants

1. Transaction-Level Requirements
   Related to Customer Protection (a) Overview As previously noted, the Dodd-Frank Act is generally concerned with the protection of the U.S. financial system and counterparties in the U.S. security￾based swap market.649 This general principle is particularly relevant to the customer protection, including segregation, requirements in Title VII, which are focused on the protection of the counterparties or customers of security-based swap dealers. As a result, the Commission preliminarily believes that it is not necessary to the objective of Title VII to subject foreign major security-based swap participants to certain of the customer protection requirements in Title VII with respect to their transactions with non-U.S. persons. Accordingly, the Commission is proposing rules that would identify specific transaction-level requirements that would not apply to foreign major security-based swap participants with respect to their transactions with non￾U.S. persons. (b) Proposed Rules The proposed rules would provide that foreign major security-based swap participants would not be subject, solely with respect to their transactions with non-U.S. persons, to certain of the transaction-level requirements that apply to major security-based swap participants.650 Specifically, under the proposed rules registered foreign major security-based swap participants would not have to comply with business conduct standards as described in
   Section 15F(h) of the Exchange Act, and
   the rules and regulations thereunder, other than the rules and regulations prescribed by the Commission relating to diligent supervision pursuant to
   Section 15F(h)(1)(B) 651 and the rules
   and regulations thereunder, with respect to their transactions with non-U.S. persons.652 In addition, under the proposed rules, registered foreign major security-based swap participants that are not registered broker-dealers would not have to comply with requirements related to the segregation of assets held as collateral in Section 3E of the Exchange Act and the rules and regulations thereunder with respect to their transactions with non-U.S. persons.653 Our rationale for this proposed approach to the application of transaction-level requirements for foreign major security-based swap participants is substantially the same as that discussed previously in the context of foreign security-based swap dealers.654 This rationale includes our belief that applying these customer protections and segregation requirements to security-based swap transactions with non-U.S. persons outside the United States would not advance the objectives of Title VII to protect the U.S. financial system or U.S. counterparties. At the same time, this approach would preserve customer protections for U.S. person counterparties who would expect to benefit from the protections afforded by Title VII. (2) Entity-Level Requirements Entity-level requirements in Title VII primarily address concerns relating to the major security-based swap participant as a whole, with a particular focus on safety and soundness of the entity to reduce systemic risk in the U.S. financial system. The most significant entity-level requirements are capital and margin requirements. Because these requirements address the financial, operational, and business integrity of the entity engaged in security-based swap activity, the Commission preliminarily believes that a registered foreign major security-based swap participant should be required to adhere to these standards. As noted above, other requirements that the Commission believes should apply at the entity, rather than the transactional, level include, but are not limited to, risk management procedures, books and records requirements, conflicts of interest systems and procedures, and designation of a chief compliance officer.655 These entity-level requirements ensure the safety and soundness of the entire registrant and are thus distinguishable from the transaction-level requirements discussed above, which apply to transactions with individual counterparties and thus may be applied differently based on the U.S. person status of a counterparty.
2. Substituted Compliance
   The Commission is not proposing, at this time, to establish a policy and procedural framework under which we would consider permitting compliance by a foreign major security-based swap participant with comparable regulatory requirements in a foreign jurisdiction to substitute for compliance with requirements of the Exchange Act, and the rules and regulations thereunder, applicable to major security-based swap

656See Section XI.C, infra.
657See Capital, Margin, and Segregation Proposing Release, 77 FR 70315. participants, as it is proposing to do for foreign security-based swap dealers.656 Unlike foreign security-based swap dealers whose primary businesses are in securities, security-based swaps, swaps, banking and other financial and investment banking activities, the non￾U.S. persons that may need to register as nonbank major security-based swap participants may engage in a diverse range of business activities different from, and broader than, the activities conducted by broker-dealers or security￾based swap dealers (otherwise they may be required to register as a security￾based swap dealer and/or broker-dealer) or the activities conducted by banks. For example, as stated in the Capital, Margin and Segregation Proposing Release, persons that may need to register as nonbank major security-based swap participants may engage in commercial activities that require them to have substantial fixed assets to support manufacturing and/or result in them having significant assets comprised of unsecured receivables.657 Therefore, it is not clear what types of entity-level regulatory oversight, if any, especially with respect to capital and margin, a foreign major security-based swap participant would be subject to in the foreign regulatory system. Accordingly, in light of the limited information currently available to us regarding what types of foreign entities may become major security-base swap participants, if any, and the foreign regulation of such entities, we are not, at this time, proposing to extend the proposed policy and procedural framework for substituted compliance to foreign major-security-based swap participants. Nevertheless, we will continue to consider the appropriateness of permitting substituted compliance for major security-based swap participants in light of comments received on this proposal and market developments more generally and will consider what further steps to take, if any, at adoption. In this regard, we request considerations, information, and data regarding potential foreign major security-based swap participants. Responses that are supported by empirical data and analysis are encouraged in assisting the Commission in considering whether permitting substituted compliance by foreign major security-based swap participants would be warranted. Request for Comment The proposed rules and interpretations regarding the application of the major security-based swap participant definition and transaction￾level and entity-level requirements to registered major security-based swap participants discussed above represent the Commission’s preliminary views. The Commission seeks comment on the proposed rules and interpretations in all aspects. Interested persons are encouraged to provide supporting data and analysis and, when appropriate, suggest modifications to proposed rule text and interpretations. Responses that are supported by data and analysis provide great
assistance to the Commission in considering the practicality and effectiveness of the proposed application as well as considering the benefits and costs of proposed requirements. In addition, the Commission seeks comment on the following specific questions:

• Should the major security-based
  swap participant definition focus only on a non-U.S. person’s security-based swap transactions entered into with U.S. persons, or should the major security￾based swap participant definition incorporate some or all of a non-U.S. person’s other security-based swap transactions? Which transactions? For example, should a non-U.S. person include security-based swap transactions with non-U.S. person counterparties guaranteed by U.S. persons in such non-U.S. person’s major security-based swap participant calculation? Why or why not?
• Should the proposed approach
  toward determining whether a non-U.S. person should count its security-based swap transactions that are cleared through CCPs be adopted? Why or why not? Should the Commission adopt a different approach to the treatment of security-based swap transactions cleared through CCPs for purposes of the cross-border application of the major security-based swap participant test? If so, how should cleared transactions be treated for purposes of the cross-border application of the major security-based swap participant test?
• Should a non-U.S. person be
  permitted to exclude its security-based swap transactions entered into with foreign branches of U.S. banks from the calculation for purposes of determining whether it is a major security-based swap participant? Why? If a non-U.S. person’s security-based swaps with foreign branches of U.S. banks are not required to be considered in determining such non-U.S. person’s major security-based swap participant status, how should the risk (in terms of outward exposures) that such non-U.S. person poses to U.S. banks be addressed?
• Should the Commission permit a
  non-U.S. person to exclude from its major security-based swap participant calculations its security-based swap positions arising from transactions with the foreign branches of U.S. banks if such non-U.S. person is subject to capital standards adopted by its home country supervisor that are consistent in all respect with the Basel Accord? Are there other conditions or standards the Commission should consider that a non￾U.S. person may satisfy or comply with that should allow a non-U.S. person to exclude its security-based swap positions arising from transactions with foreign branches of U.S. banks from its major security-based swap participant calculation?
• Are there competitiveness concerns
  related to the proposed different treatment of U.S. persons and non-U.S. persons for purposes of calculating their status under the major security-based swap participant definition? If so, what are these concerns, and how should they be addressed?
• Should the proposed approach
  towards the attribution of security-based swap positions guaranteed by U.S. persons and non-U.S. persons be altered? What justifications would support an alternate approach?
• Should the Commission adopt the
  proposed approach to the attribution of guaranteed security-based swap positions whereby the positions of guaranteed entities subject to capital standards adopted by its home country supervisor that are consistent in all respects with the Basel Accord would not need to be attributed? Is Basel Accord capital standard an appropriate standard for determining whether it is not necessary to attribute guaranteed security-based swap positions to a guarantor, or should another standard be used? Is this proposed standard clear, or is additional guidance necessary? In addition to the proposed capital standard, should the Commission’s approach to the attribution of guaranteed security-based swap positions also include a requirement that the guaranteed entities be subject to effective capital oversight by its home country supervisor as determined by the Commission in order not to attribute the guaranteed security-based swap positions to the guarantor?
• Are there FPSFIs that would fall
  within the definition of major security￾based swap participant based on the proposed rules and interpretive guidance? If so, should the Commission

658See Section 763(b) of the Dodd-Frank Act. 659See 15 U.S.C 78q–1 and 17 CFR 240.17Ab2– 1. 660 15 U.S.C. 78q–1(g). Note that Section 929W of the Dodd-Frank Act added another subsection (g) to
Section 17A of the Exchange Act. The subsection
(g) added by Section 763(b) of the Dodd-Frank Act is the focus of the discussion in this section. 661 15 U.S.C. 78q–1(k). The exemptive authority contained in Section 17A(k) of the Exchange Act only pertains to clearing agencies that would be required to register under Section 17A of the Exchange Act for the clearing of security-based swaps. It does not alter the Commission’s existing exemptive authority found in Section 17A(b)(1) and
Section 36 of the Exchange Act.
662Section 17A(h) of the Exchange Act, as added by Section 763(b) of the Dodd-Frank Act, permits a person, in certain cases, to voluntarily register as a clearing agency with the Commission. 15 U.S.C. 78q–1(h). Section 17A(i) of the Exchange Act, as added by Section 763(b) of the Dodd-Frank Act, requires security-based swap clearing agencies to comply with standards established by the Commission. 15 U.S.C. 78q–1(i). 663 15 U.S.C. 78q–1(j). 664 In using the terms ‘‘foreign’’ and ‘‘non￾resident’’ in connection with a security-based swap clearing agency, the Commission means a security￾based swap clearing agency that is not a U.S. person, as that term is defined in proposed Rule 3a71–3(a)(7) under the Exchange Act, as discussed in Section III.B.5, supra. In this regard, the Commission notes that legal persons that have their principal place of business in the United States would be considered ‘‘U.S. persons’’ under the proposed definition regardless of their place of incorporation or organization. See proposed Rule 3a71–3(a)(7)(i)(B) under the Exchange Act. 665As discussed more fully below, generally speaking, a CCP is an entity that interposes itself between the counterparties to a securities transaction. See 17 CFR 240.17Ad–22(a)(1). 666 In this section, the Commission is proposing interpretive guidance only regarding the registration requirement in Section 17A(g) of the Exchange Act as it applies to clearing agencies that provide CCP services. The Commission is not addressing the registration requirement in Section 17A(b) of the Exchange Act, which was unchanged by the Dodd￾Frank Act. The Commission also is not addressing the registration of clearing agencies that provide other types of services for security-based swaps and other securities. Elsewhere, the Commission has provided a temporary exemption from the clearing agency registration requirements to clearing agencies that provide non-CCP types of clearance and settlement services for security-based swaps. See Order Pursuant to Section 36 of the Securities Exchange Act of 1934 Granting Temporary Exemptions from Clearing Agency Registration Requirements under Section 17A(b) of the Exchange Act for Entities Providing Certain Clearing Services for Security-Based Swaps, Exchange Act Release No. 64796 (July 1, 2011). Accordingly, the Commission expects to address clearing agencies that provide non-CCP services in a future release. 667The Commission also has adopted final rules to exempt transactions by CCPs in security-based swaps from all provisions of the Securities Act, other than the anti-fraud provisions in Section 17(a), as well as from Exchange Act registration requirements and provisions of the Trust Indenture Act. See Exemptions for Security-Based Swaps issued by Certain Clearing Agencies, Securities Act Release No. 9308 (Mar. 30, 2012), 77 FR 20536 (Apr. 5, 2012). The exemption is conditioned on the CCP being registered or exempt from registration with the Commission, on the
determination that the security-based swap is required to be cleared or that the CCP is permitted to clear it pursuant to its rules, that the security-based swap is sold only to an ECP, and that certain information be made available to a counterparty or to the public. 668See Section II.C, supra. In addition, as noted above, to promote effective and consistent global regulation of swaps and security-based swaps, the Dodd-Frank Act requires the Commission and the CFTC to consult and coordinate with foreign regulatory authorities on the ‘‘establishment of Continued provide relief to such FPSFIs? If so, what type of relief, what types of entities should be eligible for such relief, and what factors would justify such relief? Would it be more appropriate for the Commission to address these concerns on an individual basis?

• Should the Commission adopt the
  proposed approach to the application of certain customer protection requirements and segregation requirements to foreign major security￾based swap participants with respect to their transactions with non-U.S. persons? If so, are there other transaction-level requirements that should be included within this proposed approach?
• Should substituted compliance be
  provided to foreign major security-based swap participants with respect to entity￾level requirements? Transaction-level requirements? If so, how should the Commission make such a determination? In particular, what standard should be used for determining whether existing regulation merits a substituted compliance determination?
• What would be the market impact
  of the proposed approach to major security-based swap participants? How would the application of the proposed approach affect the competitiveness of U.S. entities in the global marketplace (both in the United States as well as in foreign jurisdictions)? Would the proposed approach place any market participants at a competitive disadvantage or advantage? If so, please explain. Would the proposed approach be a more general burden on competition? If so, please explain. What other measures should the Commission consider to implement the proposed approach to major security-based swap participants? What would be the market impacts and competitiveness effects of alternatives to the proposed approach discussed in this release?
  V. Security-Based Swap Clearing
  Agencies
  A. Introduction
  Title VII of the Dodd-Frank Act adds a number of provisions to the Exchange Act relating to the registration and regulation of clearing agencies that provide clearance and settlement services for security-based swaps.658 Such provisions augment the Commission’s existing authority to register and regulate clearing agencies in
  Section 17A of the Exchange Act.659 In
  particular, Section 17A(g) of the Exchange Act, as added by Section 763(b) of the Dodd-Frank Act, requires clearing agencies that use interstate commerce to perform the functions of a clearing agency with respect to security￾based swaps to register with the Commission.660 Section 17A(k) of the Exchange Act, as added by Section 763(b) of the Dodd-Frank Act, provides the Commission with authority to exempt a security-based swap clearing agency from registration if the Commission determines that the clearing agency is subject to comparable, comprehensive supervision and regulation by the CFTC or the appropriate government authorities in the home country of the clearing agency.661 The Dodd-Frank Act also added provisions to Section 17A of the Exchange Act relating to voluntary clearing agency registration and the establishment of clearing agency standards.662 Finally, Section 17A(j) requires the Commission to adopt rules governing persons that are registered as clearing agencies for security-based swaps.663 Because of the global nature of the security-based swap market, the Commission recognizes that there may be some uncertainty regarding when a foreign security-based swap clearing agency 664 that provides central counterparty (‘‘CCP’’) services 665 for security-based swaps would be required to register with the Commission as a clearing agency. Accordingly, we are proposing interpretive guidance regarding the application of the registration requirement in Section 17A(g) of the Exchange Act for security￾based swap clearing agencies that act as CCPs.666 We also address our exemptive authority under Section 17A(k) to exempt a foreign security-based swap clearing agency from the registration requirement in Section 17A(g).667 In addition, we discuss the potential application of alternative standards to certain foreign clearing agency registrants. The proposed interpretation discussed below represents the Commission’s preliminary views regarding the application of the registration requirement in Section 17A(g) for security-based swap clearing agencies acting as CCPs in the cross￾border context. Our proposal reflects a balancing of the principles described above, including, in particular, the goal of the Dodd-Frank Act to address the risk to the U.S. financial system.668 We

consistent international standards’’ with respect to the regulation of swaps and security-based swaps. Public Law 111–203 section 752(a). 669 15 U.S.C. 78q–1(g). 670See Section II.B, supra. 671Section 3(a)(23)(A) of the Exchange defines the term ‘‘clearing agency’’ to mean any person who: (i) acts as an intermediary in making payments or deliveries or both in connection with transactions in securities; (ii) provides facilities for comparison of data respecting the terms of settlement of securities transactions, to reduce the number of settlements of securities transactions, or for the allocation of securities settlement responsibilities; (iii) acts as a custodian of securities in connection with a system for the central handling of securities whereby all securities of a particular class or series of any issuer deposited within the system are treated as fungible and may be transferred, loaned, or pledged by bookkeeping entry, without physical delivery of securities certificates (such as a securities depository); or (iv) otherwise permits or facilitates the settlement of securities transactions or the hypothecation or lending of securities without physical delivery of securities certificates (such as a securities depository). 15 U.S.C. 78c(a)(23)(A). 672See Clearing Agency Standards Adopting Release, 77 FR 66221 n.17 (‘‘[a]n entity that acts as a CCP for securities transactions is a clearing agency as defined in the Exchange Act and is required to register with the Commission’’). 673See id. 674The Commission does not believe that the opening and maintenance of bank accounts or investment accounts in the United States by a CCP that are not directly accessible by members of a security-based swap clearing agency constitutes the performance of functions of a CCP for these purposes. See, e.g., Exchange Act Release No. 39643 (Feb. 11, 1998), 63 FR 8232, 8234 (Feb. 18, 1998) (discussing a foreign unregistered clearing agency’s use of a U.S. depository, which did not in and of itself trigger the registration requirement). In addition, the Commission does not believe that the use of U.S.-based persons to perform services on behalf of a CCP in the ordinary course of business that do not involve clearing agency functions (e.g., financial guaranties, banking services, or payroll operations) constitutes the performance of functions of a clearing agency. 675See, e.g., CDS Clearing Exemption Orders, note 74, supra. 676See Report of the Senate Committee on Banking, Housing, and Urban Affairs regarding The Restoring American Financial Stability Act of 2010, S. Rep. No. 111–176 at 31 (stating that by ‘‘mandating the use of central clearinghouses, institutions would become much less interconnected, mitigating risk and increasing transparency.’’). At the same time, concentrating risk from several counterparties into a CCP could actually introduce risks through the prospect of moral hazard, such as if the costs of imprudent decisions by one clearing member were shifted
to other clearing members or to the general public through bail-out of a CCP. See, e.g., Craig Pirrong, ‘‘Mutualization of Default Risk, Fungibility, and Moral Hazard: The Economics of Default Risk Sharing in Cleared and Bilateral Markets,’’ University of Houston, Working Paper (2010), available at: http://business.nd.edu/uploadedFiles/ Academic_Centers/Study_of_Financial_Regulation/ pdf_and_documents/clearing_moral_hazard_1.pdf. Such cost-shifting mechanisms might induce members to take on more risk than they otherwise would in a bilateral setting. 677See, e.g., 15 U.S.C. 78q–1(b)(4); see also 17 CFR 240.17Ad–22(d)(2) (requiring registered clearing agencies to establish, implement, maintain, and enforce written policies and procedures reasonably designed to require participants to meet certain operational capacity standards). recognize, however, that the proposed interpretation represents one of a number of possible alternative approaches in applying Title VII in the cross-border context. Accordingly, the Commission invites comment regarding all aspects of the proposal discussed below, including potential alternative approaches. Responses that are supported by data and analysis provide great assistance to the Commission in considering the practicality and effectiveness of the proposed application as well as considering the benefits and costs of proposed requirements. B. Proposed Title VII Approach

1. Clearing Agency Registration
   Section 17A(g) of the Exchange Act,
   entitled ‘‘Registration Requirement,’’ provides that ‘‘[i]t shall be unlawful for a clearing agency, unless registered with the Commission, directly or indirectly to make use of the mails or any means or instrumentality of interstate commerce to perform the functions of a clearing agency with respect to a security-based swap.’’ 669 The Commission preliminarily believes that Title VII was intended to apply to clearing agencies that perform clearing agency functions within the United States, regardless of their principal place of business or their place of incorporation or organization.670 For reasons discussed below, the proposed interpretive guidance would provide that a security-based swap clearing agency performs the functions of a CCP within the United States if it has a U.S. person as a member. (a) Clearing Agencies Acting as CCPs Clearing agencies are broadly defined under the Exchange Act and undertake a variety of functions.671 One such function is to act as a CCP,672 which is an entity that interposes itself between the counterparties to a securities transaction. For example, when a security-based swap contract between two counterparties that are members of a CCP is executed and submitted for clearing, it is typically replaced by two new contracts—separate contracts between the CCP and each of the two original counterparties. At that point, the original counterparties are no longer counterparties to each other. Instead, each acquires the CCP as its counterparty, and the CCP assumes the counterparty credit risk of each of the original counterparties that are members of the CCP. Structured and operated appropriately, CCPs may improve the management of counterparty risk and may provide additional benefits such as multilateral netting of trades.673 Although technology and risk management practices frequently change and vary from CCP to CCP, the following are some of the functions performed by the subset of clearing agencies that are CCPs: 674

• The extinguishing of a security￾based swap contract between two
  counterparties and the associated novation of it with two new contracts between the CCP and each of the two original counterparties;
• The assumption of counterparty
  credit risk of members of the CCP through the novated security-based swap contracts;
• The calculation and collection of
  initial and variation margin during the life of the security-based swap contract;
• The determination of settlement
  obligations under a security-based swap contract;
• The determination of a default
  under a security-based swap contract;
• The collection of funds from
  members for contributions to a clearing fund;
• The implementation of a loss￾sharing arrangement among members to
  respond to a member insolvency or default; and
• The multilateral netting of
  trades.675
  In performing these functions, CCPs help facilitate over-the-counter trading, and trading on exchanges and other platforms, through the assumption of counterparty risk by the CCP from the original counterparties. During times of market stress, a CCP would mitigate the potential for a market participant’s failure to be transmitted to other market participants, and would increase transparency of the risks borne by its members, as well as confidence of the market participants in the performance of their transactions.676 Furthermore, the agreements among members and between members and a CCP play a key role in the CCP’s performance of the functions of a clearing agency. The Exchange Act permits clearing agencies to deny membership if a person does not meet a clearing agency’s financial responsibility, operational capacity, experience and competence standards.677 In a scenario where risk is mutualized under loss-sharing arrangements, the strength of the CCP hinges upon the strength of its members. The legal arrangements between a CCP and its members are of significant importance to the operational resilience of the CCP itself.

678 15 U.S.C. 78q–1.
679See note 4, supra.
680See, e.g., Clearing Agency Standards Adopting Release, 77 FR 66267 (stating that ‘‘[a]ll clearing agencies that act as CCPs in the United States collect contributions from their members to guaranty funds or clearing funds for the mutualization of losses under extreme but plausible market scenarios’’). 681See note 676, supra. 682Traditionally, the Commission has required registration (or an exemption from registration) as a clearing agency if a foreign clearing agency provides services for U.S. securities directly to U.S. persons. The Commission has not viewed intermediated access by U.S. persons to a foreign clearing agency’s services (for example, through a foreign broker) as sufficiently direct to trigger registration requirements. See Proposed Amendments to Rule 15a–6, 73 FR 39198 (summarizing the Commission’s position taken in past exemptive orders). 683As noted above, the interpretation proposed here applies solely to the registration requirement in Section 17A(g) of the Exchange Act with respect to clearing agencies that provide CCP services for security-based swaps; it does not change the Commission’s interpretation of Section 17A(b) of the Exchange Act. See note 666, supra. 684 15 U.S.C. 78q–1(k). 685 Id. 686Specifically, Section 17A(i) of the Exchange Act, entitled ‘‘Standards for Clearing Agencies Clearing Security-Based Swap Transactions’’: (i) Requires registered clearing agencies that clear security-based swaps to comply with such standards that the Commission may establish by rule; (ii) contemplates that the Commission may conform such standards or its oversight practices to reflect evolving United States and international standards; and (iii) except where the Commission determines otherwise by rule or regulation, confirms that a clearing agency shall have reasonable discretion in establishing the manner in which it complies with any such standards. 15 U.S.C. 78q–1(i). (b) Proposed Interpretive Guidance The Commission is proposing interpretive guidance that a security￾based swap clearing agency performing the functions of a CCP within the United States would be required to register pursuant to Section 17A(g) of the Exchange Act.678 In our preliminary view, a foreign security-based swap clearing agency that provides CCP services, as described above, to a member that is a U.S. person for security-based swaps would be performing the functions of a CCP within the United States and, therefore, would be required to register pursuant to Section 17A(g) of the Exchange Act. The Commission preliminarily believes that such an approach is consistent with the Dodd-Frank Act’s goal of reducing systemic risk in the U.S. financial system.679 Foreign security-based swap clearing agencies that provide CCP services to U.S. members could pose a risk to the United States due to the risk mutualization among members of these clearing agencies.680 Further, the more complete information about relationships between security-based swap market participants
that registration would provide to regulators and the marketplace may help reduce the risk of crises.681 Accordingly, to address the risk to the U.S. financial system posed by foreign security-based swap clearing agencies with U.S. members, the Commission preliminarily is proposing to require foreign security￾based swap clearing agencies that provide CCP services to U.S. members to register pursuant to Section 17A(g) of the Exchange Act. The Commission anticipates, however, that some U.S. persons may choose to clear transactions at a foreign security-based swap clearing agency on an indirect basis through a correspondent clearing arrangement with a non-U.S. member of the clearing agency.682 We preliminarily do not believe that such a correspondent clearing arrangement of a U.S. person with a non-U.S. person member alone would cause the foreign security-based swap clearing agency to be required to register with the Commission because the clearing agency’s business is conducted directly with its member firms, which in this example would be located outside of the United States. Correspondent clearing arrangements do not pose the same type of direct risk to the U.S. financial system that foreign security-based swap clearing agencies with U.S. members pose because customers, unlike clearing agency members, do not take mutual responsibility for the obligations of the clearing agency.683
2. Exemption from Registration under
Section 17A(k)
Section 17A(k) of the Exchange Act,
as added by Section 763(b) of the Dodd￾Frank Act, provides that the Commission may grant a conditional or unconditional exemption from clearing agency registration for the clearing of security-based swaps if the Commission determines that the clearing agency is subject to comparable, comprehensive supervision and regulation by the CFTC or the appropriate government authorities in the home country of the clearing agency.684 The Commission preliminarily believes that it may be appropriate to consider an exemption as an alternative to registration in circumstances where the clearing agency is subject to comparable, comprehensive supervision and regulation by appropriate government authorities in the home country of the clearing agency, and the nature of the clearing agency’s activities and performance of functions within the United States suggest that registration is not necessary to achieve the Commission’s regulatory objectives. Exemptions that are carefully targeted could help to improve clearing agency supervision overall by allowing the Commission to devote resources most efficiently where U.S. interests are more directly implicated, while reducing duplication of efforts in areas where its interests are aligned with those of other regulators. Section 17A(k) further provides that any such exemption may be subject to appropriate conditions that may include, but are not limited to, requiring the clearing agency to be available for inspection by the Commission and to make available all information requested by the Commission.685 The Commission is not at this point specifying how such determinations might be made. The Commission notes that market structure and clearing agency supervision and regulation vary in other jurisdictions, and these variances in combination would affect the Commission’s ability to make a determination under Section 17A(k) of the Exchange Act in a particular case, as well as the conditions that would be applied to any exemption. In addition to these factors, differences among individual clearing agencies on matters such as organizational governance, rules for members, and risk management procedures would inform individual exemption determinations.
3. Application of Alternative Standards
to Certain Registrants
In addition, the Commission may consider, as an alternative to an exemption from registration, proposing rules that are specific to foreign-based CCPs that are registered with the Commission under Section 17A(g). We believe that this approach is contemplated by Section 17A(i) of the Exchange Act, which permits the Commission to adopt rules for registered CCPs that clear security-based swaps and conform our regulatory standards and supervisory practices to reflect evolving United States and international standards.686 This approach may be particularly appropriate where the Commission determines not to grant a general exemption from registration under Section 17A(k) of the Exchange Act, based on consideration of the factors described above, but where consistency with some regulatory standards suggests that a targeted regulatory approach may be warranted.