Proposed Rule2022-07850
Rules Relating to Security-Based Swap Execution and Registration and Regulation of Security-Based Swap Execution Facilities
Primary source
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Published
May 11, 2022
Issuing agencies
Securities and Exchange Commission
Abstract
The Securities and Exchange Commission ("SEC" or "Commission") is proposing a set of rules ("Regulation SE") and forms under the Securities Exchange Act of 1934 ("SEA") that would create a regime for the registration and regulation of security-based swap execution facilities ("SBSEFs") and address other issues relating to security-based swap ("SBS") execution generally. One of the rules being proposed as part of Regulation SE would implement part of the Dodd-Frank Act, which is intended to mitigate conflicts of interest at SBSEFs and national securities exchanges that trade SBS ("SBS exchanges"). Other rules being proposed as part of Regulation SE would address the cross-border application of the SEA's trading venue registration requirements and the trade execution requirement for SBS. In addition, the Commission is proposing to amend an existing rule to exempt, from the SEA definition of "exchange," certain registered clearing agencies as well as registered SBSEFs that provide a market place only for SBS. The Commission also is proposing a new rule that, while affirming that an SBSEF would be a broker under the SEA, would exempt a registered SBSEF from certain broker requirements. Finally, the Commission is proposing certain new rules and amendments to its Rules of Practice to allow persons who are aggrieved by certain actions by an SBSEF to apply for review by the Commission. The Commission also is withdrawing all previously proposed rules regarding these subjects.
Full Text
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[Federal Register Volume 87, Number 91 (Wednesday, May 11, 2022)]
[Proposed Rules]
[Pages 28872-29016]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-07850]
[[Page 28871]]
Vol. 87
Wednesday,
No. 91
May 11, 2022
Part II
Securities and Exchange Commission
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17 CFR Parts 201, 232, 240, et al.
Rules Relating to Security-Based Swap Execution and Registration and
Regulation of Security-Based Swap Execution Facilities; Proposed Rule
Federal Register / Vol. 87 , No. 91 / Wednesday, May 11, 2022 /
Proposed Rules
[[Page 28872]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 201, 232, 240, 242, and 249
[Release No. 34-94615; File No. S7-14-22]
RIN 3235-AK93
Rules Relating to Security-Based Swap Execution and Registration
and Regulation of Security-Based Swap Execution Facilities
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule; withdrawal of proposed rules.
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SUMMARY: The Securities and Exchange Commission (``SEC'' or
``Commission'') is proposing a set of rules (``Regulation SE'') and
forms under the Securities Exchange Act of 1934 (``SEA'') that would
create a regime for the registration and regulation of security-based
swap execution facilities (``SBSEFs'') and address other issues
relating to security-based swap (``SBS'') execution generally. One of
the rules being proposed as part of Regulation SE would implement part
of the Dodd-Frank Act, which is intended to mitigate conflicts of
interest at SBSEFs and national securities exchanges that trade SBS
(``SBS exchanges''). Other rules being proposed as part of Regulation
SE would address the cross-border application of the SEA's trading
venue registration requirements and the trade execution requirement for
SBS. In addition, the Commission is proposing to amend an existing rule
to exempt, from the SEA definition of ``exchange,'' certain registered
clearing agencies as well as registered SBSEFs that provide a market
place only for SBS. The Commission also is proposing a new rule that,
while affirming that an SBSEF would be a broker under the SEA, would
exempt a registered SBSEF from certain broker requirements. Finally,
the Commission is proposing certain new rules and amendments to its
Rules of Practice to allow persons who are aggrieved by certain actions
by an SBSEF to apply for review by the Commission. The Commission also
is withdrawing all previously proposed rules regarding these subjects.
DATES: Comments should be received on or before June 10, 2022. As of
May 11, 2022, the SEC is withdrawing or partially withdrawing the
following previously proposed rules (see SUPPLEMENTARY INFORMATION for
details): SEA Release No. 63825 (76 FR 10948, published on February 28,
2011); SEA Release No. 63107 (75 FR 65581, published on October 26,
2010); and SEA Release No. 69490 (78 FR 30968, published on May 23,
2013).
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="http://www.sec.gov/rules/submitcomments.htm">http://www.sec.gov/rules/submitcomments.htm</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#6f1d1a030a420c0002020a011b1c2f1c0a0c41080019"><span class="__cf_email__" data-cfemail="9fedeaf3fab2fcf0f2f2faf1ebecdfecfafcb1f8f0e9">[email protected]</span></a>. Please include
File No. S7-14-22 on the subject line.
Paper Comments
<bullet> Send paper comments to Secretary, Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number S7-14-22. This file number
should be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method of submission. The Commission will post all
comments on the Commission's internet website (<a href="http://www.sec.gov/rules/proposed.shtml">http://www.sec.gov/rules/proposed.shtml</a>). Comments are also available for website viewing
and printing in the Commission's Public Reference Room, 100 F Street
NE, Washington, DC 20549, on official business days between the hours
of 10 a.m. and 3 p.m. Operating conditions may limit access to the
Commission's public reference room. All comments received will be
posted without change. Persons submitting comments are cautioned that
the Commission does not redact or edit personal identifying information
from comment submissions. You should submit only information that you
wish to make publicly available.
Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the Commission's website. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at <a href="http://www.sec.gov">www.sec.gov</a> to receive notifications by email.
FOR FURTHER INFORMATION CONTACT: Michael Gaw, Assistant Director, at
(202) 551-5602; David Liu, Special Counsel, at (312) 353-6265; Leah
Mesfin, Special Counsel, at (202) 551-5655; Michou Nguyen, Special
Counsel, at (202) 551-7768; Geoffrey Pemble, Special Counsel, at (202)
551-5628; or Mark Sater, Counsel, at (202) 551-4729; all of whom are in
the Division of Trading and Markets, Securities and Exchange
Commission, 100 F Street, NE, Washington, DC 20549.
SUPPLEMENTARY INFORMATION: The Commission is proposing new 17 CFR
242.800 through 242.835 to create a regime for the registration and
regulation of SBSEFs and address other issues relating to SBS execution
generally. Regulation SE would consist of 17 CFR 242.800 through
242.835 (proposed Rules 800 through 835). Key rules within Regulation
SE would include Rule 803, which would establish a process for SBSEF
registration; Rules 804 to 810, which would establish procedures for
rule and product filings by SBSEFs; Rule 815, which would establish
permissible execution methods for SBS that are subject to the SEA's
trade execution requirement; Rule 816, which would set out a procedure
for SBSEFs to make an SBS available to trade and establish certain
exemptions from the trade execution requirement; Rules 818 to 831,
which would implement the 14 Core Principles for SBSEFs set forth in
section 3D(d) of the SEA; Rules 832 to 833, which would address cross-
border matters; and Rule 834, which would impose requirements
addressing conflicts of interest involving SBSEFs and SBS exchanges, as
required by section 765 of the Dodd-Frank Act.
In addition to the rules described above, the Commission is also
proposing 17 CFR 249.2001 (Form SBSEF), which is the form that an
entity would use to register with the Commission as an SBSEF; 17 CFR
249.2002 (a submission cover sheet), which would be required to
accompany filings with the Commission made by SBSEFs for rule and rule
amendments and for product listings; amendments to 17 CFR 232.405 (Rule
405 of Regulation S-T) to require various SBSEF filings to be provided
in Inline eXtensible Business Reporting Language (``Inline XBRL''), a
structured data language; amendments to 17 CFR 240.3a1-1 (Rule 3a1-1
under the SEA) to exempt from the SEA definition of ``exchange''
certain registered clearing agencies as well as registered SBSEFs that
provide a market place only for SBS; 17 CFR 240.15a-12 (Rule 15a-12
under the SEA) that, while affirming that an SBSEF also would be a
broker under the SEA, would exempt a registered SBSEF from certain
broker requirements; to sunset an existing exemption from the
requirement to register as a clearing agency for an entity performing
the functions of an SBSEF but that is not yet registered as such; and
certain new rules and amendments to 17 CFR part 201
[[Page 28873]]
(the Commission's Rules of Practice) to allow persons who are aggrieved
by certain actions by an SBSEF to apply for review by the Commission.
The Commission also is withdrawing all previously proposed rules,
rule amendments, and interpretations regarding these subjects in view
of the length of time that has passed since they were issued and
significant changes to the swap and SBS markets that have taken place
during that time.
Table of Contents
I. Background
II. Relation to the SEF Market
III. Approach to the Commission's Proposed Requirements Relating to
Security-Based Swap Execution
IV. Introductory Provisions of Regulation SE
A. Rule 800--Scope
B. Rule 801--Applicable Provisions
C. Rule 802--Definitions
V. Registration of SBSEFs
A. Rule 803--Requirements and Procedures for Registration
B. Form SBSEF
C. Abbreviated Registration Procedures for CFTC-Registered SEFs
VI. Rule and Product Filings by SBSEFs
A. Rule 804--Listing Products for Trading by Certification
B. Rule 805--Voluntary Submission of New Products for Commission
Review and Approval
C. Rule 806--Voluntary Submission of Rules for Commission Review
and Approval
D. Rule 807--Self-Certification of Rules
E. Submission Cover Sheet and Instructions
F. Rule 808--Availability of Public Information
G. Rule 809--Staying of Certification and Tolling of Review
Period Pending Jurisdictional Determination
H. Rule 810--Product Filings by SBSEFs That Are Not Yet
Registered and by Dormant SBSEFs
VII. Miscellaneous Requirements
A. Rule 811--Information Relating to SBSEF Compliance
1. Harmonization With Sec. 37.5
2. Harmonization With Sec. 1.60
B. Rule 812--Enforceability
C. Rule 813--Prohibited Use of Data Collected for Regulatory
Purposes
D. Rule 814--Entity Operating Both a National Securities
Exchange and SBSEF
E. Rule 815--Methods of Execution for Required and Permitted
Transactions
F. Rule 816--Trade Execution Requirement and Exemptions
Therefrom
1. Process for an SBSEF To Make an SBS Product Available To
Trade
2. Exemptions From Trade Execution Requirement
G. Rule 817--Trade Execution Compliance Schedule
VIII. Implementation of Core Principles
A. Rule 818--Core Principle 1--Compliance With Core Principles
B. Rule 819--Core Principle 2--Compliance With Rules
1. Rules Modelled on Subpart C of Part 37
2. Provisions of Rule 819 Adapted From Other SEF Requirements
a. Rule 819(h)--Activities of SBSEF's Employees, Governing Board
Members, Committee Members, and Consultants
b. Rule 819(i)--Service on SBSEF Governing Boards or Committees
by Persons With Disciplinary Histories
c. Rule 819(j)--Notification of Final Disciplinary Action
Involving Financial Harm to a Customer
d. Rule 819(k)--Designation of Agent for Non-U.S. Member
C. Rule 820--Core Principle 3--SBS Not Readily Susceptible to
Manipulation
D. Rule 821--Core Principle 4--Monitoring of Trading and Trade
Processing
E. Rule 822--Core Principle 5--Ability To Obtain Information
F. Rule 823--Core Principle 6--Financial Integrity of
Transactions
G. Rule 824--Core Principle 7--Emergency Authority
H. Rule 825--Core Principle 8--Timely Publication of Trading
Information
I. Rule 826--Core Principle 9--Recordkeeping and Reporting
J. Rule 827--Core Principle 10--Antitrust Considerations
K. Rule 828--Core Principle 11--Conflicts of Interest
L. Rule 829--Core Principle 12--Financial Resources
M. Rule 830--Core Principle 13--System Safeguards
N. Rule 831--Core Principle 14--Designation of Chief Compliance
Officer
IX. Cross-Border Rules
A. Rule 832--Cross-Border Mandatory Trade Execution
B. Rule 833--Cross-Border Exemptions
1. Exemptions for Foreign SBS Trading Venues
2. Exemptions Relating to the Trade Execution Requirement
X. Rule 834--Implementation of Section 765 of the Dodd-Frank Act and
Governance of SBSEFs and SBS Exchanges
XI. Rule 835--Notice to Commission by SBSEF of Final Disciplinary
Action, Denial or Conditioning of Membership, or Denial or
Limitation of Access
XII. Amendments to Existing Rule 3a1-1 Under the SEA--Exemptions
From the Definition of ``Exchange''
XIII. Rule 15a-12--SBSEFs as Registered Brokers; Relief From Certain
Broker Requirements
XIV. Proposed Sunsetting of Temporary Exemption From SEA Definition
of ``Clearing Agency'' for Unregistered SBSEFs
XV. Electronic Filings Under Regulation SE
XVI. Amendments to Commission's Rules of Practice for Appeals of
SBSEF Actions
A. Amendment to Rule 101
B. Amendment to Rule 202
C. Amendment to Rule 210
D. Amendment to Rule 401
E. Rule 442--Right to Appeal
F. Rule 443--Sua Sponte Review by Commission
G. Amendment to Rule 450
H. Amendment to Rule 460
I. Request for Comment
XVII. Conclusion
XVIII. Compliance Schedule
XIX. Economic Analysis
A. Introduction
B. Economic Baseline
1. Available Data From the SBS Market
2. SBS Market Activity and Participants
a. SBS Entities
b. Other SBS Market Participants
c. SBS Market Participant Domiciles
3. Distribution of Rransaction Size
4. Other Markets and Regulatory Frameworks
5. Number of Entities That Likely Will Register as SBSEFs
6. SBS Trading on Platforms
7. Global Regulatory Efforts
8. Trading Models
C. Benefits, Costs, and Reasonable Alternatives
1. Overarching Benefits of the Proposal
2. Benefits Associated With Specific Proposed Rules
3. Costs
a. Registration Requirements for SBSEFs and Form SBSEF
b. Ongoing Compliance With Other Requirements That Are Similar
to the Remainder of Part 37
c. Rule and Product Filing Processes for SBSEFs
d. Proposed Rules 809, 811, 819, 826, 833, 834, and 835
e. Assessment Costs
f. Structured Data Costs
4. Reasonable Alternatives
D. Effects on Efficiency, Competition, and Capital Formation
1. Competition
2. Capital Formation
3. Efficiency
E. Request for Comment
XX. Paperwork Reduction Act
A. Summary of Collection of Information
B. Proposed Use of Information
1. Registration Requirements and Form SBSEF
2. Requirements for SBSEFs To Establish Rules
3. Reporting Requirements for SBSEFs
4. Recordkeeping Required Under Regulation SE
5. Timely Publication of Trading Information Requirement for
SBSEFs
6. Rule Filing and Product Filing Processes for SBSEFs
7. Requirements Relating to the CCO
8. Surveillance Systems Requirements for SBSEFs
C. Respondents
D. Total Annual Reporting and Recordkeeping Burden
1. Overview
2. Aggregate Burdens for Rules Modelled After CFTC Part 37 Rules
a. Registration requirements for SBSEFs and Form SBSEF
b. Ongoing Compliance With Other Requirements That Are Similar
to the Remainder of Part 37
3. Aggregate Burdens for Rules Modelled on CFTC Part 40 Rules
a. Rule and Product Filing Processes for SBSEFs
b. Burdens Related to Rules Modelled After Other Part 40 Rules
i. Rule 802
[[Page 28874]]
ii. Rule 809
4. Aggregate Burdens for Rules Modelled After CFTC Rules Other
Than Parts 37 and 40
a. Rule 811(d)
b. Rule 819(h)
c. Rule 819(i)
d. Rule 819(j)
e. Rule 819(k)
f. Rule 826(f)
g. Rule 834
5. Miscellaneous Burdens
a. Rule 833
b. Rule 835
6. Total Paperwork Burden Under Proposed Regulation SE
E. Collection of Information Is Mandatory
F. Responses to Collection of Information Will Not Be
Confidential
G. Retention Period of Recordkeeping Requirements
H. Request for Comment
XXI. Regulatory Flexibility Certification
A. SBSEFs
B. Persons Requesting an Exemption Order Pursuant to Rule 833
C. SBS Exchanges
D. Certification
XXII. Consideration of Impact on Economy
Statutory Authority
I. Background
Section 3D of the SEA,\1\ enacted as part of Title VII of the Dodd-
Frank Wall Street Reform and Consumer Protection Act (``Dodd-Frank
Act''),\2\ provides for the registration and regulation of SBSEFs.
Section 3D(a)(1) provides that no person may operate a facility for the
trading or processing of SBS, unless the facility is registered as an
SBSEF or as a national securities exchange. Section 3D(d) enumerates 14
Core Principles with which SBSEFs must comply.\3\ Section 3D(f)
requires the Commission to prescribe rules governing the regulation of
SBSEFs.
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\1\ 15 U.S.C. 78c-4. In this release, the Commission is defining
the Securities Exchange Act as the ``SEA'' to distinguish it from
the Commodity Exchange Act (``CEA'').
\2\ Public Law 111-203, H.R. 4173, section 763(c).
\3\ See infra section VIII (listing the Core Principles).
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Section 765 of the Dodd-Frank Act directs the Commission to adopt
rules to mitigate conflicts of interest with respect to clearing
agencies that clear SBS (``SBS clearing agencies''), SBSEFs, and
national securities exchanges that post or make available for trading
SBS (``SBS exchanges''). In October 2010, the Commission published for
comment proposed Regulation MC to implement section 765.\4\
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\4\ Ownership Limitations and Governance Requirements for
Security-Based Swap Clearing Agencies, Security-Based Swap Execution
Facilities, and National Securities Exchanges With Respect to
Security-Based Swaps Under Regulation MC, SEA Release No. 63107
(October 14, 2010), 75 FR 65882 (October 26, 2010) (``Regulation MC
Proposal'').
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In February 2011, the Commission published for comment: (1)
Proposed Regulation SBSEF that would govern the registration and
regulation of SBSEFs, including rules to implement the 14 Core
Principles and rules requiring SBSEFs to submit filings with the
Commission to list SBS and to establish or amend rules; (2) proposed
Form SBSEF for an entity to register with the Commission as an SBSEF;
(3) a proposed interpretation of the definition of ``security-based
swap execution facility''; and (4) proposed exemptions for registered
SBSEFs relating to their status also as ``exchanges'' and ``brokers.''
\5\ On May 23, 2013, the Commission issued a proposing release to
address various cross-border aspects of its proposed Title VII rules
\6\--which included a proposed rule on the application of Title VII's
``trade execution requirement'' \7\ to cross-border SBS transactions
and a proposed interpretation of when the SBSEF registration
requirements would apply to a foreign venue that trades SBS (a
``foreign SBS trading venue'') \8\--and reopened the comment period for
various proposed rulemaking releases and policy statements under Title
VII, including the 2011 SBSEF Proposal.\9\
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\5\ Registration and Regulation of Security-Based Swap Execution
Facilities, SEA Release No. 63825 (February 2, 2011), 76 FR 10948
(February 28, 2011) (``2011 SBSEF Proposal'').
\6\ 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, SEA Release No. 69490 (May 1, 2013), 78 FR 30968
(May 23, 2013) (``Cross-Border Proposing Release'').
\7\ The ``trade execution requirement'' as used with respect to
SBS refers to a provision mandated by Title VII and set forth in
section 3C(h) of the SEA that requires a transaction involving an
SBS that is subject to the clearing requirement of section 3C to be
executed on a national securities exchange, a registered SBSEF, or
an SBSEF that is exempt from registration under section 3D(e) of the
SEA. See infra note 106 and accompanying text. A similar provision
regarding swaps is set forth in section 2(h)(8) of the CEA.
\8\ See id., 78 FR at 31053-58 (discussing potential exemptions
for foreign SBS trading venues) and 31081-85 (discussing a proposed
rule to address the application of the trade execution requirement
to cross-border SBS transactions).
\9\ Reopening of Comment Periods for Certain Proposed Rulemaking
Releases and Policy Statements applicable to Security-Based Swaps,
SEA Release No. 69491 (May 1, 2013), 78 FR 30800 (May 23, 2013)
(``Reopening of Comment Periods Release'').
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In view of the passage of time since these earlier proposals were
issued and the significant market and regulatory developments affecting
swaps and SBS over those years, the Commission is issuing this new
proposal relating to the registration and regulation of SBSEFs and to
SBS execution generally. Accordingly, the Regulation MC Proposal, the
2011 SBSEF Proposal, and the elements of the Cross-Border Proposing
Release relating to the trade execution requirement and the
registration status of foreign SBS trading venues are withdrawn. The
proposed rules discussed below supersede all previous Commission
proposals on these subjects.\10\
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\10\ The Commission notes, however, that Rule 834 of proposed
Regulation SE would implement section 765 only with respect to
SBSEFs and SBS exchanges.
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II. Relation to the SEF Market
The economic baseline for establishing a registration and
regulatory regime for SBSEFs and SBS execution generally has changed
considerably since the Commission issued the 2011 SBSEF Proposal. In
June 2013, the Commodity Futures Trading Commission (``CFTC'') adopted
rules (in 17 CFR chapter I) under Title VII of the Dodd-Frank Act for
swap execution facilities (``SEFs'').\11\ The swap market has grown and
matured within the framework established by the CFTC's rules. In 2018,
the CFTC proposed to make fundamental changes to the SEF regulatory
structure.\12\ However, according to the CFTC, ``[s]everal commenters
expressed concern over the magnitude of changes'' in the proposal.\13\
In 2021, the CFTC ultimately declined to finalize the 2018 SEF Proposal
and elected instead ``to improve the SEF framework through targeted
rulemakings that address distinct issues.''\14\ Accordingly, the CFTC
withdrew the unadopted portions of its 2018 proposal.\15\ Currently,
the CFTC has no proposals outstanding to further amend its SEF rules.
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\11\ See CFTC, Core Principles and Other Requirements for Swap
Execution Facilities, 78 FR 33476 (June 4, 2013) (``2013 CFTC Final
SEF Rules Release''); CFTC, Process for a Designated Contract Market
or Swap Execution Facility To Make a Swap Available to Trade, Swap
Transaction Compliance and Implementation Schedule, and Trade
Execution Requirement Under the Commodity Exchange Act, 78 FR 33606
(June 4, 2013) (``2013 CFTC Final MAT Rules'' and, together with the
2013 CFTC Final SEF Rules Release, the ``2013 CFTC SEF Rules'').
\12\ See CFTC, Swap Execution Facilities and Trade Execution
Requirement, 83 FR 61946 (November 30, 2018) (``2018 SEF
Proposal'').
\13\ CFTC, Swap Execution Facilities and Trade Execution
Requirement--Proposed rule; partial withdrawal, 86 FR 9304, 9304
(February 12, 2021).
\14\ Id.
\15\ See id., 86 FR at 9304-05.
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Because of the close relationship between the swap and SBS markets,
an analysis of swap trading on CFTC-registered SEFs offers insights
into the potential development of SBS trading on SEC-registered
SBSEFs.\16\ Currently,
[[Page 28875]]
there are 20 non-dormant entities registered with the CFTC as SEFs.\17\
In 2021, volume in index credit default swaps (``CDS'') traded on CFTC-
registered SEFs was distributed as follows: One SEF had the largest
share of index CDS volume (in notional amount) at $8 trillion (69%);
one SEF had the second largest share at $2.1 trillion (18%); and the
remaining 13% of volume was shared among five other SEFs.\18\ As
discussed in section XIX below, only a small fraction of SBS trading
occurs on platforms currently. Further, some trading occurs on
platforms that do not include CFTC-registered SEFs.
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\16\ The Commission bases its preliminary analysis on trading of
credit derivatives. Other swap asset classes that trade on SEFs,
such as interest rate swaps (``IRS'') and foreign exchange swaps,
have no analogs in the SBS market. While there are parallels between
the equity swap and equity SBS markets, equity swap trading on SEFs
appears to be minimal.
\17\ See CFTC, Trading Organizations--Swap Execution Facilities
(SEF), <a href="https://sirt.cftc.gov/SIRT/SIRT.aspx?Topic=SwapExecutionFacilities">https://sirt.cftc.gov/SIRT/SIRT.aspx?Topic=SwapExecutionFacilities</a> (accessed on January 25,
2022).
\18\ See infra note 376 and accompanying text.
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Based on research from publicly available sources as well as
discussions with CFTC-registered SEFs, the Commission understands that
the SBS market--both on organized platforms that are potential SBSEF
registrants and on a purely over-the-counter (``OTC'') basis--is a
small fraction of the overall swap market.\19\ Furthermore, the single-
name CDS market, which falls under SEC jurisdiction, is smaller than
the index CDS market, which falls under CFTC jurisdiction.\20\ Because
the swap markets are larger than the SBS markets, the opportunities for
revenue capture from swap execution are much larger than from SBS
execution. In view of the SBS market's size relative to the swap
market, the Commission is sensitive to the economic impact that its
final rules for SBSEFs could have.
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\19\ See infra note 371 and accompanying text.
\20\ See id.
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The entities that are most likely to register with the Commission
as SBSEFs are those already registered with the CFTC as SEFs.\21\ These
entities have made substantial investments in systems, policies, and
procedures to comply with and adapt to the regulatory system developed
by the CFTC. To the extent that the Commission harmonizes its SBSEF
rules with the CFTC's SEF rules, dually registered entities could
utilize their existing systems, policies, and procedures to comply with
the Commission's SBSEF rules, and SEF market participants would face no
or only incremental changes to trade SBS as well as swaps on those
facilities, and to comply with the Commission's rules regarding SBS
trading. To the extent that the Commission establishes different or
additive requirements, dually registered entities and their market
participants might need to incur costs and burdens to modify their
systems, policies, and procedures to comply with the SEC-specific
rules. As indicated below, the Commission seeks comment on such costs
and burdens in light of the CFTC's SEF rules.\22\ Accordingly, as
discussed below, the Commission is proposing to take the general
approach of harmonizing closely with analogous CFTC SEF rules, except
where differences in the SEC's statutory authority relative to the
CFTC's statutory authority or differences in the SBS market relative to
the swap market necessitate differences between the Commission's rules
and the CFTC's, or where the Commission preliminarily believes that the
benefits of deviating from the CFTC's rules would otherwise justify the
burdens and costs associated with imposing different or additional
requirements than the corresponding CFTC rule. Throughout this release,
the Commission will seek comment on the accuracy of these assumptions.
In particular, the Commission seeks comment on the following:
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\21\ See infra section XIX(B)(5).
\22\ Consider the following example: Sec. 37.1306(a) of the
CFTC's rules (17 CFR 37.1306(a)), which is among the rules that
implements CEA Core Principle 13 (Financial resources), requires a
SEF to submit a financial report to the CFTC every quarter (i.e.,
every three months). To implement the corresponding Core Principle
under the SEA, the Commission could require an SBSEF to file only
three financial reports per year, rather than four. All things being
equal, filing three reports per year is less burdensome than filing
four. But all things are not equal, because of the CFTC's rules. In
this case, requiring new ``off cycle'' reporting by a dually
registered SEF/SBSEF would likely be more burdensome than allowing
the dually registered entity to make the same four filings, on the
same cycle, with both the SEC and CFTC. As discussed later in this
release, the Commission is proposing a rule closely modelled on
Sec. 37.1306(a) that would require the same type of financial
report as the CFTC rule, and for that report to be filed quarterly.
See proposed Rule 829(g).
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1. How many CFTC-registered SEFs do you believe will seek to
register with the Commission as SBSEFs? Please explain.
2. Are there any entities that will seek to register with the
Commission as SBSEFs but not register with the CFTC as SEFs? If so,
please explain and estimate how many.
3. For SEFs that will likely seek registration with the Commission
as SBSEFs, please estimate the size of their swaps business versus the
anticipated size of their SBS business, using any metric(s) that you
believe would be illustrative (e.g., number of products listed, trade
count, aggregate notional size traded, number of counterparties trading
swaps versus SBS, etc.).
4. Please provide any information or market data that you believe
would be illustrative regarding current SBS trading activity on
entities that are not likely to register with the Commission as SBSEFs,
and thus would have to cease SBS trading upon the compliance date of
the Commission's SBSEF rules. Do you believe that this activity would
migrate to registered SBSEFs or would it migrate instead to the
bilateral OTC market?
5. What types of products do you anticipate could be listed by
registered SBSEFs (e.g., CDS on individual corporate bonds, CDS on
individual sovereign bonds, CDS on individual securitized bonds, swaps
on securities options, swaps on narrow-based securities indexes, total
return swaps on individual cash equities or crypto/digital asset
securities, etc.)?
In the remainder of this release, the Commission describes its
proposed registration and regulation regime for SBSEFs and SBS
execution generally, and seeks comment on all aspects of its proposal.
You are invited in particular to provide data and analysis regarding
the economic and Paperwork Reduction Act (``PRA'') implications of this
proposal. For example, the Commission seeks comment on the following:
6. If, in a particular area, the Commission were to harmonize
closely with a CFTC rule, to what extent would this reduce, or perhaps
eliminate entirely, any incremental costs or burdens on dually
registered SEF/SBSEFs and their members?
7. Should the Commission impose any different or additive
requirements? For example, are there any statutory or market
differences that would create benefits from different or additive
requirements? If the Commission imposes different or additive
requirements, what would be the impact on dually registered SEF/SBSEFs
and their members?
8. Are there provisions of the CFTC's rules the Commission should
not incorporate, even if the Commission were to opt for harmonization
with the CFTC's rules in other areas? In other words, are there areas
where not harmonizing with a CFTC rule would reduce burdens on SBSEFs
and/or their members? If so, please explain, with particular regard to
the economic impacts and/or PRA burdens.
9. Do you believe that the Commission should adopt different or
additive requirements for SBSEFs, even if there is no analog to such
provisions in the CFTC's SEF rules? If so, please explain, with
particular regards to the economic impacts and/or PRA burdens. For
example, do you believe that the SEC-specific provision would impose
additional costs or burdens on SBSEFs
[[Page 28876]]
and/or their members that are nevertheless appropriate in view of new
and additional benefits? Or do you believe that an SEC-specific
provision would be appropriate because it would relieve costs or
burdens that are imposed on the swap business by a CFTC rule that is
unnecessary or inappropriate in the SBS market?
10. If the Commission ultimately adopts SBSEF rules that are
closely harmonized with the CFTC's SEF rules, do you believe this could
result in ambiguities or potential conflicts between the SEC's SBSEF
rules and the other SEC rules (pertaining, for example, to exchanges or
alternative trading systems)? If so, please indicate where this might
occur and suggest ways that the Commission could reduce these
ambiguities or potential conflicts.
III. Approach to the Commission's Proposed Requirements Relating to
Security-Based Swap Execution
Most of the rules proposed in this release are designed to
implement provisions of section 3D of the SEA,\23\ which is nearly
identical to section 5h of the CEA.\24\ As described in detail
throughout this release, when the Commission is proposing a rule to
implement a provision of section 3D of the SEA, that rule generally
will harmonize as closely as practicable with the analogous CFTC rule,
unless a reason exists to do otherwise.\25\ Indeed, many of the rules
proposed herein are adapted from the CFTC rules, with only minor
changes to reflect differences in the Commission's statutory authority
(e.g., using the term ``security-based swap'' instead of ``swap,''
cross-referencing provisions of the SEA rather than the CEA, etc.). The
Commission seeks to minimize occasions where differences in the wording
between an SEC and a CFTC rule leads affected persons to believe that
there is a difference in policy outcome, where no difference in outcome
is intended.
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\23\ 15 U.S.C 78c-4.
\24\ 7 U.S.C. 7b-3.
\25\ Other rules, however, are designed to address certain
issues relating to SBSEFs that are specific to the SEA. These
include proposed amendments to existing Rule 3a1-1 under the SEA,
proposed new Rule 15a-12, and various proposed amendments to the
Commission's Rules of Practice.
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In cases where the Commission preliminarily believes that a reason
exists for a proposed SEC rule to differ from an analogous CFTC rule,
that reason is described and alternate rule language is proposed and
explained. Here too, the Commission might be in general agreement with
the policy behind the CFTC's rule, but it might not be practicable to
closely track the CFTC rule language, for reasons that are specific to
each instance and which will be discussed herein.
In proposing these rules, the Commission acknowledges that, in the
abstract, there are a variety of ways of implementing a Core Principle
or other policy goal where the benefits could justify the costs.
Indeed, the Commission's 2011 SBSEF Proposal includes many such
alternate ways that differ from the CFTC's current rules. But the
CFTC's rules for SEF--and swap execution more generally--have
significantly reshaped the swap market, and indirectly the SBS market.
The fundamental principles of the CFTC's regulatory regime for SEFs and
swap execution generally have established the existing environment, and
any rules proposed by the SEC to implement the regulatory regime for
SBSEFs and SBS execution more generally must be considered against the
CFTC's regulatory regime. SEFs and swap market participants have
invested significant resources in systems, policies, and procedures to
comply with the CFTC's SEF rules. The Commission believes that the
CFTC's rules are reasonably designed to implement section 5h of the
CEA, which is nearly identical to section 3D of the SEA, and have been
effective in practice in facilitating fair, transparent, and
competitive trading on SEFs. By proposing similar rules for SEC-
registered SBSEFs, the Commission seeks to obtain comparable regulatory
benefits as the CFTC while minimizing costs imposed on SEF/SBSEFs and
their members to the greatest extent practicable.
The Commission recognizes that an entity might elect to register as
an SBSEF with the SEC but not as a SEF with the CFTC. In such case, an
SEC-only registrant would not have any familiarity with the CFTC's
rules and would not have made any investments in systems, policies, and
procedures to comply with them. Nevertheless, because the Commission
preliminarily believes that most if not all entities that will seek
SBSEF registration with the SEC are or will also be registered as SEFs
with the CFTC, such dual registrants would benefit from harmonized
rules. Furthermore, if the Commission adopts these rules substantially
as proposed, it likely would be unnecessary to establish and apply one
set of rules for dual registrants and a different set for SEC-only
SBSEFs.
Proposed Regulation SE follows the basic structure of part 37 of
the CFTC's rules (17 CFR part 37). In the CFTC's rules, subpart A of
part 37 (General Provisions) consists of Sec. Sec. 37.1 to 37.12.
Subparts B to P of part 37 implement the 15 Core Principles for SEFs
set forth in the CEA and consist of Sec. Sec. 37.100 et seq. to
37.1500 et seq. Proposed Rules 800 to 817 of Regulation SE are modelled
on the ``General Provisions'' in subpart A, while proposed Rules 818 to
831 would implement the 14 Core Principles for SBSEFs set forth in the
SEA. Proposed Rules 832 to 833 address cross-border matters that have
no direct counterpart in the CFTC's rules applicable to SEFs. Proposed
Rule 834 is designed to implement section 765 of the Dodd-Frank Act,
which requires the Commission to adopt rules addressing conflicts of
interest involving SBSEFs and SBS exchanges, as well as to harmonize
with certain of the CFTC's governance rules. Proposed Rule 835 is
designed to facilitate reviews of final disciplinary actions, denials
or conditioning of membership, and denials or limitations of access by
SBSEFs. In addition, the Commission is proposing a new subpart V to
part 249 of the Commission's rules,\26\ entitled ``Forms for use by
security-based swap execution facilities,'' that would include proposed
Sec. 249.2001, setting forth Form SBSEF and its instructions, which
would be used to register with the Commission as an SBSEF; and proposed
Sec. 249.2002, setting forth the submission cover sheet (with
instructions) that would be required to accompany filings with the
Commission made by SBSEFs for rule and rule amendments, product
listings, and determinations to make an SBS available to trade.
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\26\ Part 249 is entitled ``Forms, Securities Exchange Act of
1934.''
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Many parts of proposed Rules 800 to 817 are very similar in
substance to Sec. Sec. 37.1 to 37.12. Other parts of proposed Rules
800 to 817 are derived from CFTC rules that are referenced in subpart A
of part 37 but located outside of part 37. For example, Sec. 37.4 is a
short rule entitled ``Procedures for listing products and implementing
rules.'' Section 37.4 does not itself lay out the specific filing
procedures for new products and new rules, but directs a SEF, after it
has registered with the CFTC, to make such filings pursuant to part 40
(Provisions common to registered entities \27\). Key rules in part 40
include Sec. Sec. 40.2 (Listing products for trading by
certification), 40.3 (Voluntary submission of new products for
Commission review and approval), 40.5 (Voluntary submission of rules
for Commission review and
[[Page 28877]]
approval), and 40.6 (Self-certification of rules).
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\27\ ``Registered entity'' is defined under the CEA to include a
SEF. See 7 U.S.C 1a(40).
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To promote oversight of the SBS market and to assess that SBSEFs
continue to operate in a manner consistent with the SEA, the Commission
preliminarily believes that it would be appropriate to establish
procedures whereby SBSEFs would submit filings to the Commission to
list SBS products and to establish new rules, and that it would be
appropriate to harmonize with the procedures that the CFTC applies to
SEFs. These procedures are well articulated and well understood by
SEFs, and appear to provide an effective process for establishing new
rules and listing products. Therefore, the Commission is proposing
Rules 804, 805, 806, and 807 that are closely modelled on relevant
provisions of Sec. Sec. 40.2, 40.3, 40.5, and 40.6, respectively. To
implement such rules for SBSEFs and the SBS market, the Commission
identifies only those parts of the CFTC rules that are most germane to
the SBS market and adapts the wording accordingly.\28\ In the detailed
discussions of each of these proposed rules, the Commission seeks
comment on whether its proposed rule is appropriately tailored for the
SBS market, particularly for dually registered SEF/SBSEFs that would be
complying with substantially similar filing procedures under CFTC
rules, or whether the proposed rule incorporates a part of the CFTC
rule that is not relevant to the SBS market or should have incorporated
additional or different language that is more relevant.
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\28\ Various provisions of part 40 apply to entities other than
SEFs or relate to trading of products other than swaps. See, e.g.,
Sec. 40.4 (Amendments to terms or conditions of enumerated
agricultural products); Sec. 40.11 (Review of event contracts based
upon certain excluded commodities).
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Regulation SE includes proposed rules modelled on CFTC rules found
in Parts 16, 36, 37, 40, 45, and elsewhere. In some cases, these
disparate CFTC rules from outside part 37 that the Commission is
proposing to adapt into Regulation SE use different terms than in part
37 for what appears to be the same concept. To promote uniformity
within Regulation SE, the Commission is proposing certain definitions
for use throughout the regulation--in a dedicated definitions rule,
proposed Rule 802--that will sometimes require the replacement of a
term used in the CFTC version of a rule with a different, newly defined
term in the proposed SEC version.\29\ Any such changes in defined terms
are noted below. Proposed Rule 802 also includes terms derived from the
SEA and certain SEC rules thereunder.
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\29\ For example, certain CFTC rules that the Commission is
proposing to adapt into Regulation SE utilize the term ``board of
directors,'' while other CFTC rules use the term ``governing
board.'' The Commission is proposing to use the term ``governing
board'' throughout Regulation SE and to define that term in proposed
Rule 802 as the board of directors of an SBSEF, or for an SBSEF
whose organizational structure does not include a board of
directors, a body performing a function similar to a board of
directors. This definition is closely modelled on the definition of
``board of directors'' found in Sec. 37.1501(a) of the CFTC's
rules.
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Part 37 of the CFTC's rules includes an appendix B, which sets out
guidance and acceptable practices for demonstrating compliance with
several of the rules that implement the Core Principles for SEFs. These
provisions are, by their terms, non-binding.\30\ The Commission
preliminarily believes that all of the provisions of Regulation SE
should be enforceable. Therefore, the Commission is proposing to adapt
some of the guidance and acceptable practices found in appendix B as
proposed rule text in Regulation SE. As a result, some of the rules
proposed in Regulation SE are a blend of the CFTC rule text with
language adapted from the guidance and/or acceptable practices.
Instances where this occurs in a particular rule will be noted below.
The Commission requests comment on its overall approach to
incorporating relevant portions of the part 37 guidance and acceptable
practices into Regulation SE, as well as comment on how they are
adapted in specific rules.
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\30\ See appendix B to part 37, introductory paragraph (1)
(``The guidance for the core principle is illustrative only of the
types of matters a swap execution facility may address, as
applicable, and is not intended to be used as a mandatory
checklist'').
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In various places in the CFTC's SEF rules, the CFTC has delegated
to its staff authority to perform various functions relating to SEFs on
the CFTC's behalf. The Commission has not adapted any of these
provisions into proposed Regulation SE and is not proposing any
delegation-of-authority rules. The Commission may address delegations
of its authority in the adopting release for Regulation SE.
Finally, in developing this proposal, the Commission has consulted
and coordinated with the CFTC and the prudential regulators,\31\ in
accordance with the consultation mandate of the Dodd-Frank Act.\32\ The
Commission also has consulted and coordinated with foreign regulatory
authorities through Commission staff participation in numerous
bilateral and multilateral discussions with foreign regulatory
authorities addressing the regulation of OTC derivatives markets.\33\
Through these multilateral and bilateral discussions and the Commission
staff's participation in various international task forces and working
groups, the Commission has gathered information about foreign
regulatory reform efforts and their effect on and relationship with the
U.S. regulatory regime. The Commission has taken and will continue to
take these discussions into consideration in developing rules, forms,
and interpretations for implementing Title VII of the Dodd-Frank Act.
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\31\ The 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 SEA, 15 U.S.C.
78c(a)(74).
\32\ Section 712(a)(2) of the Dodd-Frank Act provides in
relevant part that the 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.''
In addition, section 752(a) of the Dodd-Frank Act provides in
relevant 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 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.''
\33\ The Commission participates in a number of international
bodies working on OTC derivatives reforms. For example, the
Commission is a member of the International Organization of
Securities Commissions (``IOSCO'') and the Commission staff
participates on IOSCO's Committee on Derivatives. In addition, the
Commission is a member of the Regulatory Oversight Committee, which
serves as the international standard-setter for data elements and
identifiers used in the reporting of OTC derivatives transactions.
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IV. Introductory Provisions of Regulation SE
A. Rule 800--Scope
Proposed Rule 800 is based on Sec. 37.1 of the CFTC's rules, which
provides that part 37 applies to every SEF that is registered or
applying to become registered as a SEF under section 5h of the CEA.
Section 37.1 further provides that the rule does not affect the
eligibility of SEFs to operate under the provisions of part 38 or 49 of
the CFTC's rules.
Proposed Rule 800 would provide that the provisions of Regulation
SE would apply to every SBSEF that is registered or is applying to
become registered as an SBSEF under section 3D of the SEA.
B. Rule 801--Applicable Provisions
Proposed Rule 801 is based on Sec. 37.2 of the CFTC's rules, which
provides that a SEF shall comply with the requirements of part 37 and
all other applicable CFTC regulations, including Sec. 1.60 and part 9,
and including any related definitions and cross-referenced
[[Page 28878]]
sections. Proposed Rule 801 would require an SBSEF to comply with the
requirements of Regulation SE and all other applicable Commission
rules, including any related definitions and cross-referenced sections.
C. Rule 802--Definitions
Proposed Rule 802 would set forth definitions of terms that are
used in multiple rules in proposed Regulation SE. The majority of such
terms are adapted from a CFTC rule. Other terms are taken from section
3 of the SEA \34\ or from a Commission rule under the SEA. Where
appropriate, the definition is discussed below in the context of the
proposed rule where it is used.
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\34\ 15 U.S.C. 78c.
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In particular, paragraph (w) of proposed Rule 802 which would
define the term ``security-based swap execution facility'' by cross-
referencing the definition of that term provided in section 3(a)(77) of
the SEA,\35\ but with one carve-out. An entity that is registered with
the Commission as a clearing agency pursuant to section 17A of the SEA
\36\ and limits its SBSEF functions to operation of a trading session
that is designed to further the accuracy of end-of-day valuations would
be exempt from the definition of ``security-based swap execution
facility.'' This provision would codify a series of exemptions granted
by the Commission to SBS clearing agencies that operate ``forced
trading'' sessions.\37\ As part of the clearing and risk management
process, an SBS clearing agency must establish an end-of-day valuation
for any SBS in which any of its members has a cleared position and will
calculate margin based on that variation. Certain SBS clearing agencies
utilize a valuation mechanism whereby they require clearing members to
submit indicative quotes for those SBS products, and can require them
to trade as a way to promote accurate quote submissions. The precise
means by which the clearing agency matches quotes from different
clearing members could cause the clearing agency to fall within the SEA
definition of ``exchange.'' The Commission previously has found that it
was necessary or appropriate in the public interest and consistent with
the protection of investors to exempt clearing agencies that engage in
this activity from the definition of ``exchange.'' \38\ The Commission
is now proposing to codify this exemption with respect to the both
exchange and SBSEF registration.
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\35\ 15 U.S.C. 78c(a)(77).
\36\ 15 U.S.C. 78q-1.
\37\ See, e.g., Order Granting Temporary Exemptions Under the
Securities Exchange Act of 1934 in Connection With Request on Behalf
of ICE U.S. Trust LLC Related to Central Clearing of Credit Default
Swaps, and Request for Comments, SEA Release No. 59527 (March 6,
2009), 74 FR 10791, 10796 (March 12, 2009) (providing, inter alia,
an exemption from sections 5 and 6 of the SEA because ``ICE Trust
will periodically require ICE Trust Participants to execute certain
CDS trades at the applicable end-of-day settlement price. Requiring
ICE Trust Participants to trade CDS periodically in this manner is
designed to help ensure that such submitted prices reflect each ICE
Trust Participant's best assessment of the value of each of its open
positions in Cleared CDS on a daily basis, thereby reducing risk by
allowing ICE Trust to impose appropriate margin requirements'');
Order Extending and Modifying Temporary Exemptions Under the
Securities Exchange Act of 1934 in Connection With Request of
Chicago Mercantile Exchange Inc. Related to Central Clearing of
Credit Default Swaps, and Request for Comments, SEA Release No.
61164 (December 14, 2009), 74 FR 67258, 67262 (December 18, 2009)
(providing, inter alia, an exemption from sections 5 and 6 of the
SEA because, ``[a]s part of the CDS clearing process, CME will
periodically require CDS clearing members to trade at prices
generated by their indicative settlement prices where those
indicative settlement prices generate crossed bids and offers,
pursuant to CME's price quality auction methodology'').
\38\ See id.
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The Commission preliminarily believes that it is necessary or
appropriate in the public interest, and is consistent with the
protection of investors, to exempt a registered clearing agency from
the definition of ``security-based swap execution facility'' that
utilizes a forced trading functionality for SBS. Such an entity would
continue to be registered as a clearing agency and subject to the
requirements of section 17A of the SEA. Furthermore, a registered
clearing agency is a self-regulatory organization (``SRO''); therefore,
all of its rules--including those governing the forced trading
session--would have to be submitted to the Commission pursuant to
section 19 of the SEA. The Commission preliminarily believes,
therefore, that codification of the exemption from the definitions of
``exchange'' and ``security-based swap execution facility'' would
preserve the status quo and eliminate a largely duplicative and
unnecessary set of regulatory requirements. This exemption would cover
only the forced-trading functionality of an SBS clearing agency; any
other exchange or SBSEF activity in which a clearing agency might
engage could subject the clearing agency to the SEA provisions and the
Commission's rules thereunder applying to exchanges or SBSEFs.
The Commission seeks comment on the following:
11. Do you believe that any definitions in proposed Rule 802 should
be revised or clarified? If so, please indicate which one(s) and
provide any suggested revisions or clarifications.
12. Are there any terms used in proposed Regulation SE that are not
defined in proposed Rule 802 but which you believe should be defined?
If so, which term(s) and how would you define them?
13. Do you agree with the proposed definition of ``security-based
swap execution facility''? In particular, do you believe that
registered clearing agencies that operate forced trading sessions for
SBS should be exempted from the definition of ``security-based swap
execution facility'' entirely? Or do you believe instead that such
entities should fall within the definition of ``security-based swap
execution facility'' but be exempted from some or all registration and
regulatory requirements that otherwise would apply to SBSEFs? Why?
V. Registration of SBSEFs
Section 3D(a)(1) of the SEA \39\ provides that no person may
operate a facility for the trading or processing of SBS \40\ unless the
facility is registered as an SBSEF or as a national securities
exchange. After issuing the 2011 SBSEF Proposal, the Commission granted
temporary exemptions pursuant to section 36(a)(1) of the SEA \41\ to
entities that meet the definition of ``security-based swap execution
facility'' from having to register with the Commission as an SBSEF or
national securities exchange (``Temporary SBSEF Exemptions'').\42\ The
Temporary SBSEF Exemptions will expire on the
[[Page 28879]]
compliance date for the Commission's final SBSEF rules.\43\
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\39\ 15 U.S.C. 78c-4(a)(1).
\40\ The term ``security-based swap'' is defined in section
3(a)(68) of the SEA, 15 U.S.C. 78c(a)(68), to include, among other
things, a swap that is based on a single security or loan, including
any interest therein or on the value thereof. A single security
could include, for example, a cash equity, a crypto/digital asset
security, or a security option.
\41\ 15 U.S.C. 78mm(a)(1).
\42\ See SEA Release No. 64678 (June 15, 2011), 76 FR 36287
(June 22, 2011) (temporarily exempting entities that meet the
definition of ``security-based swap execution facility'' from the
requirement to register with the Commission as an SBSEF) (``June
2011 Exemptive Order''); SEA Release No. 64795 (July 1, 2011), 76 FR
39927 (July 7, 2011) (temporarily exempting entities that meet the
definition of ``security-based swap execution facility'' from
exchange registration and other requirements of sections 5 and 6 of
the SEA) (``July 2011 Exemptive Order''). An entity that meets the
definition of ``security-based swap execution facility'' is required
to register as an SBSEF under section 3D of the SEA or as an
exchange under sections 5 and 6 of the SEA. But because the
Commission has not yet adopted final rules relating to SBSEFs, such
entities cannot yet register with the Commission as SBSEFs. The
Temporary SBSEF Exemptions allow such entities to continue trading
SBS without needing to register either as SBSEFs or national
securities exchanges before the compliance date of the SBSEF
registration rules.
\43\ See June 2011 Exemptive Order, 76 FR at 36293, 36306; July
2011 Exemptive Order, 76 FR at 39934, 39939. The July 2011 Exemptive
Order also provided an exemption from the broker registration
requirements of section 15(a)(1) of the SEA, 15 U.S.C. 78o(a)(1),
and other requirements of the SEA and the Commission's rules
thereunder that apply to a broker, solely in connection with broker
activities involving SBS (the ``Broker Exemptions''). The Broker
Exemptions generally expired on October 6, 2021; however, because an
entity that meets the definition of ``security-based swap execution
facility'' also would also meet the definition of ``broker'' in
section 3(a)(4) of the SEA, 15 U.S.C. 78c(a)(4), the Commission
extended the Broker Exemptions solely for persons acting as an SBSEF
until the expiration of the Temporary SBSEF Exemptions (i.e., the
compliance date for the Commission's final SBSEF rules). See SEA
Release No. 87005 (September 19, 2019), 84 FR 68550, 68602 (December
16, 2019).
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A. Rule 803--Requirements and Procedures for Registration
Rule 803 of Regulation SE is closely modelled on Sec. 37.3 of the
CFTC's rules and would set forth a process for registration with the
Commission as an SBSEF.
Section 37.3(a)(1) provides that any person operating a facility
that offers a trading system or platform in which more than one market
participant has the ability to execute or trade swaps with more than
one other market participant on the system or platform shall register
the facility as a swap execution facility under this part or as a
designated contract market (``DCM'') under part 38 of this chapter.
Paragraph (a)(1) of proposed Rule 803 would track the language of Sec.
37.3(a)(1) closely, except that a person meeting these criteria would
be directed to register the facility under relevant provisions of the
SEA rather than the CEA (i.e., to register as an SBSEF under proposed
Rule 803 or as a national securities exchange pursuant to section 6 of
the SEA).
A person that registers with the Commission as a national
securities exchange pursuant to section 6 of the SEA does not fall
within the statutory definition of ``security-based swap execution
facility'' \44\ and thus would not need to register as an SBSEF under
proposed Rule 803. Furthermore, as discussed below,\45\ a person that
registers as an SBSEF under proposed Rule 803 and provides a market
place for no securities other than SBS would be exempt from the
definition of ``exchange'' \46\ and would not need to register as such
pursuant to section 6 of the SEA. The SEA definitions of ``exchange''
and ``security-based swap execution facility'' overlap substantially.
The Commission preliminarily believes that it is appropriate to subject
a trading venue for SBS to only one regulatory regime. Thus, under
proposed Regulation SE, if a trading venue for SBS elects to register
as a national securities exchange, it would not fall within the
statutory definition of ``security-based swap execution facility'' and
would not have to register as an SBSEF.\47\ If a trading venue for SBS
elects to register as an SBSEF under proposed Rule 803 and provides a
market place for no securities other than SBS, it would not--pursuant
to a proposed amendment to Rule 3a1-1--fall within the statutory
definition of ``exchange'' and would not have to register as an
exchange.
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\44\ See section 3(a)(77) of the SEA, 15 U.S.C. 78c(a)(77)
(defining ``security-based swap execution facility'' as ``a trading
system or platform in which multiple participants have the ability
to execute or trade security-based swaps by accepting bids and
offers made by multiple participants in the facility or system,
through any means of interstate commerce, including any trading
facility that . . . is not a national securities exchange''
(emphasis added).
\45\ See infra section XII (discussing proposed paragraph (a)(4)
of SEA Rule 3a1-1).
\46\ 15 U.S.C. 78c(a)(1) (defining ``exchange'' as ``any
organization, association, or group of persons, whether incorporated
or unincorporated, which constitutes, maintains, or provides a
market place or facilities for bringing together purchasers and
sellers of securities or for otherwise performing with respect to
securities the functions commonly performed by a stock exchange as
that term is generally understood, and includes the market place and
the market facilities maintained by such exchange'').
\47\ However, a national securities exchange could elect to
operate an SBSEF and separately register that SBSEF with the
Commission. See section 3D(c) of the SEA, 15 U.S.C. 78c-4(c);
proposed Rule 814.
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Section 37.3(a)(2) of the CFTC's rules sets out the minimum trading
functionality that must be offered by a SEF. A SEF must, at a minimum,
offer an ``order book.'' Section 37.3(a)(3) defines ``order book'' to
mean an electronic trading facility, as that term is defined in section
1a(16) of the CEA; a trading facility, as that term is defined in
section 1a(51) of the CEA; or a trading system or platform in which all
market participants in the trading system or platform have the ability
to enter multiple bids and offers, observe or receive bids and offers
entered by other market participants, and transact on such bids and
offers.
Paragraph (a)(2) of proposed Rule 803, like Sec. 37.3(a)(2), would
require an SBSEF, at a minimum, to offer an order book. The Commission
is proposing, like Sec. 37.3(a)(3), to define ``order book'' in Rule
802 to mean an electronic trading facility, a trading facility, or a
trading system or platform in which all market participants in the
trading system or platform have the ability to enter multiple bids and
offers, observe or receive bids and offers entered by other market
participants, and transact on such bids and offers. Section 37.3(a)(3)
defines ``trading facility'' and ``electronic trading facility'' by
cross-referencing definitions of those terms in the CEA. Rather than
cross-referencing the CEA, the Commission is proposing instead to adapt
the CEA definitions of those terms directly into Rule 802.\48\ The
Commission preliminarily believes that it should harmonize as closely
as possible with the CFTC on foundational terms such as ``trading
facility,'' ``electronic trading facility,'' and ``order book'' because
the CFTC's reliance on these terms over several years has created
understanding of what type of functionality a SEF must offer. The
Commission seeks to avoid a scenario where differences with the CFTC
regarding these key definitions results in an entity's functionality
being allowed under one agency's regime but disallowed under the
other's.
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\48\ See proposed Rule 802.
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Under Sec. 37.3(a)(4), a SEF is not required to provide an order
book for certain package transactions, although the SEF must provide an
order book for a Required Transaction \49\ when such Required
Transaction is not executed as part of a package transaction. Paragraph
(a)(3) of proposed Rule 803 is closely modelled on Sec. 37.3(a)(4) and
would provide a narrow exception to allow an SBSEF not to offer an
order book for the SBS component(s) of a package transaction that
contains a mix of products that both are and are not subject to the
trade execution requirement.
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\49\ As discussed below in section VII(E), the Commission is
proposing to incorporate into Regulation SE the concepts of
``Required Transaction'' and ``Permitted Transaction'' in a manner
closely modelled on the CFTC's use of those terms. A Required
Transaction would be a transaction involving an SBS that is subject
to the trade execution requirement.
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Paragraph (b) of proposed Rule 803 is closely modelled on Sec.
37.3(b) and would set out procedures for full registration of an SBSEF.
Paragraph (b)(1), like Sec. 37.3(b)(1), would provide that an
applicant requesting registration must:
(i) File electronically a complete Form SBSEF or any successor
forms, and all information and documentation described in such forms
with the Commission using the EDGAR system as an Interactive Data File
in accordance with Rule 405 of Regulation S-T; and
(ii) Provide to the Commission, upon the Commission's request, any
additional information and documentation necessary to review an
application.
Paragraph (b)(2) of proposed Rule 803, like Sec. 37.3(b)(2), would
provide that an
[[Page 28880]]
applicant requesting registration as an SBSEF must identify with
particularity any information in the application that will be subject
to a request for confidential treatment pursuant to Rule 24b-2 under
the SEA.\50\ Paragraph (b)(2) also would provide that, as set forth in
proposed Rule 808, certain information provided in an application shall
be made publicly available.
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\50\ Section 37.3(b)(2), like many other provisions in the
CFTC's SEF rules, states that a request for confidential treatment
for parts of a required filing shall be made pursuant to Sec. 145.9
of the CFTC's rules, which contains the CFTC's substantive
requirements for requests for confidential treatment. Rather than
adapting Sec. 145.9 into proposed Regulation SE, the Commission
instead is proposing that confidential treatment requests arising
from SBSEF matters would be made and adjudicated pursuant to SEA
Rule 24b-2, 17 CFR 240.24b-2. The Commission preliminarily believes
that it is not necessary or appropriate to establish and utilize one
set of procedures to handle confidential treatment requests made by
SBSEFs while utilizing a different set of procedures for all other
persons who request confidential treatment from the Commission under
the SEA.
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Paragraph (b)(3) of proposed Rule 803 would address amendments to
the SBSEF registration application. Like Sec. 37.3(b)(3), proposed
Rule 803(b)(3) would provide that an applicant amending a pending
application or requesting an amendment to an order of registration
shall file an amended application electronically with the Commission
using the EDGAR system as an Interactive Data File in accordance with
Rule 405 of Regulation S-T. Subsequent to being registered, an SBSEF
would be required to submit rule and product filings under Rule 806 or
807, as well as provide other updates as may be required pursuant to
other rules for SBSEFs.
Paragraph (b)(4) of proposed Rule 803 would address the effect of
an incomplete application. Like Sec. 37.3(b)(4), proposed Rule
803(b)(4) would provide that, if an application is incomplete, the
Commission shall notify the applicant that its application will not be
deemed to have been submitted for purposes of the Commission's review.
Paragraph (b)(5) of proposed Rule 803 would establish the
Commission review period for an application to register as an SBSEF.
Proposed Rule 803(b)(5) is closely modelled on Sec. 37.3(b)(5) and
would require the Commission to approve or deny an application for
registration as an SBSEF within 180 days of the filing of the
application. Proposed Rule 803(b)(5) would further provide that, if the
Commission notifies the person that its application is materially
incomplete and specifies the deficiencies in the application, the
running of the 180-day period would be stayed from the time of such
notification until the application is resubmitted in completed form. In
such case, the Commission would have not less than 60 days to approve
or deny the application from the time the application is resubmitted in
completed form.
Paragraph (b)(6)(i) of proposed Rule 803, like Sec. 37.3(b)(6)(i),
would provide that the Commission shall issue an order granting
registration upon a Commission determination, in its own discretion,
that the applicant has demonstrated compliance with the SEA and the
Commission's rules applicable to SBSEFs. Paragraph (b)(6)(i) would
allow the Commission to issue an order granting registration, subject
to conditions. Paragraph (b)(6)(ii) of proposed Rule 803, modelled on
Sec. 37.3(b)(6)(ii), would provide that the Commission may issue an
order denying registration upon a Commission determination, in its own
discretion, that the applicant has not demonstrated compliance with the
SEA and the Commission's rules applicable to SBSEFs. If the Commission
denies an application under proposed Rule 803(b)(6)(ii), it would be
required to specify the grounds for the denial.
Paragraph (c) of Sec. 37.3, which allows the CFTC to grant SEFs
temporary registration under certain conditions, was adopted with a
sunset provision that generally terminated the applicability of the
paragraph two years after it became effective in August 2013.\51\
Because this provision is now obsolete, the Commission is not proposing
an equivalent provision in Regulation SE.
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\51\ See Sec. 37.3(c)(5). Notwithstanding the general sunset
provision, SEFs that applied for temporary registration before the
termination date were permitted to continue operating if they had
not yet been either granted or denied full registration by that
date. See id.
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Paragraph (c) of proposed Rule 803, like Sec. 37.3(d), would
address reinstatement of a dormant registration. Proposed Rule 803(c)
would provide that a dormant SBSEF \52\ may reinstate its registration
under the procedures of proposed Rule 803(b). Proposed Rule 803(c)
would further provide that the applicant may rely upon previously
submitted materials if such materials accurately describe the dormant
SBSEF's conditions at the time that it applies for reinstatement of its
registration.
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\52\ See proposed Rule 802 (defining ``dormant security-based
swap execution facility'' to mean ``a security-based swap execution
facility on which no trading has occurred for the previous 12
consecutive calendar months; provided, however, that no security-
based swap execution facility shall be considered to be a dormant
security-based swap execution facility if its initial and original
Commission order of registration was issued within the preceding 36
consecutive calendar months''). This proposed definition is modelled
on the definition of ``dormant swap execution facility'' found in
Sec. 40.1(f).
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Paragraph (d) of proposed Rule 803, like Sec. 37.3(e), would set
out procedures for an SBSEF to request a transfer of registration.
Paragraph (d)(1), which is closely modelled on Sec. 37.3(e)(1), would
provide that an SBSEF seeking to transfer its registration from its
current legal entity to a new legal entity as a result of a corporate
change shall file a request for approval to transfer such registration
with the Commission in the form and manner specified by the Commission.
Paragraph (d)(2), modelled on Sec. 37.3(e)(2), would provide that a
request for transfer of registration shall be filed no later than three
months prior to the anticipated corporate change; or in the event that
the SBSEF could not have known of the anticipated change three months
prior to the anticipated change, as soon as it knows of such change.
Paragraph (d)(3) of proposed Rule 803, like Sec. 37.3(e)(3), would
require an SBSEF's request for transfer of registration to include the
following:
<bullet> The underlying agreement that governs the corporate
change;
<bullet> A description of the corporate change, including the
reason for the change and its impact on the SBSEF, including its
governance and operations, and its impact on the rights and obligations
of members; \53\
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\53\ Here, and at several other places in Sec. 37.3(e)(3), the
CFTC uses the term ``market participants'' rather than ``members.''
However, there are other places in the CFTC's rules that are being
adapted by the Commission into proposed Regulation SE that use the
term ``member'' synonymously with ``market participant.'' When the
context suggests that a rule is addressing participants of a
particular SBSEF market, rather than market participants in the
abstract, the Commission is proposing to use the term ``member''
throughout Regulation SE.
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<bullet> A discussion of the transferee's ability to comply with
the SEA, including the core principles applicable to SBSEFs and the
Commission's rules thereunder;
<bullet> The governing documents of the transferee, including, but
not limited to, articles of incorporation and bylaws;
<bullet> The transferee's rules marked to show changes from the
current rules of the SBSEF;
<bullet> A representation by the transferee that it:
[cir] Will be the surviving entity and successor-in-interest to the
transferor SBSEF and will retain and assume, without limitation, all of
the assets and liabilities of the transferor;
[cir] Will assume responsibility for complying with all applicable
[[Page 28881]]
provisions of the SEA and the Commission's rules thereunder;
[cir] Will assume, maintain, and enforce all rules implementing and
complying with the core principles applicable to SBSEFs, including the
adoption of the transferor's rulebook, as amended in the request, and
that any such amendments will be submitted to the Commission pursuant
to proposed Rules 806 or 807;
[cir] Will comply with all regulatory responsibilities \54\ except
if otherwise indicated in the request, and will maintain and enforce
all regulatory programs; and
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\54\ The equivalent provision in Sec. 37.3(e)(3)(vi)(D)
requires a representation from the transferee that it ``[w]ill
comply with all self-regulatory responsibilities except if otherwise
indicated in the request, and will maintain and enforce all self-
regulatory programs'' (emphasis added). SBSEFs are not SROs under
the SEA and therefore do not have self-regulatory responsibilities
or self-regulatory programs.
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[cir] Will notify members of all changes to the transferor's
rulebook prior to the transfer and will further notify members of the
concurrent transfer of the registration to the transferee upon
Commission approval and issuance of an order permitting this transfer.
<bullet> A representation by the transferee that upon the transfer:
[cir] It will assume responsibility for and maintain compliance
with core principles for all SBS previously made available for trading
through the transferor, whether by certification or approval; and
[cir] None of the proposed rule changes will affect the rights and
obligations of any member.
Paragraph (d)(4) of proposed Rule 803, modelled on Sec.
37.3(e)(4), would provide that, upon review of a request for transfer
of registration, the Commission, as soon as practicable, shall issue an
order either approving or denying the request.
Paragraph (e) of proposed Rule 803, like Sec. 37.3(f), would
provide that an applicant for registration as an SBSEF may withdraw its
application by filing a withdrawal request electronically with the
Commission using the EDGAR system as an Interactive Data File in
accordance with Rule 405 of Regulation S-T.\55\ Proposed Rule 803(e)
would further provide that withdrawal of an application for
registration shall not affect any action taken or to be taken by the
Commission based upon actions, activities, or events occurring during
the time that the application was pending with the Commission.
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\55\ 17 CFR 232.405. The proposed electronic filing requirement
discussed above does not appear in the CFTC version of this
provision. The Commission is adding this specification to implement
the Inline XBRL and EDGAR electronic filing requirements for certain
documents required by proposed Regulation SE. See infra section XV.
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Paragraph (f) of proposed Rule 803, like Sec. 37.3(g), would
provide that an SBSEF may request that its registration be vacated by
filing a vacation request electronically with the Commission using the
EDGAR system and must be provided as an Interactive Data File in
accordance with Rule 405 of Regulation S-T at least 90 days prior to
the date that the vacation is requested to take effect. Section 37.3(g)
provides that a registration may be vacated under section 7 of the CEA.
Since the Commission does not operate under the CEA, the Commission is
proposing to adapt relevant language from section 7 of the CEA directly
into proposed Rule 803(f). Thus, proposed Rule 803(f) would continue as
follows, with language taken from section 7 italicized and language
taken from Sec. 37.3(g) in regular text: ``Upon receipt of such
request, the Commission shall promptly order the vacation to be
effective upon the date named in the request and send a copy of the
request and its order to all other security-based swap execution
facilities, SBS exchanges, and registered clearing agencies that clear
security-based swaps. Vacation of registration shall not affect any
action taken or to be taken by the Commission based upon actions,
activities, or events occurring during the time that the security-based
swap execution facility was registered by the Commission. From and
after the date upon which the vacation became effective the said
security-based swap execution facility can thereafter be registered
again by applying to the Commission in the manner provided in paragraph
(b) of this section for an original application.''
The Commission seeks comment on the following:
14. Do you believe in general that the Commission should closely
harmonize the rules for SBSEF registration with the CFTC's rules for
SEF registration? Why or why not?
15. In particular, do you agree with the language that the
Commission is proposing to adapt from Sec. 37.3 (Requirements and
procedures for registration) into Rule 803? If not, what language would
you delete or revise, and why?
16. Do you believe that the Commission should harmonize the
application procedures and timeframes in proposed Rule 803 with Sec.
37.3 of the CFTC's rules? Why or why not? Are there aspects of Sec.
37.3 that you believe are not necessary or appropriate to incorporate
into Rule 803? If so, please describe. Are there different or
additional requirements that the Commission should include in Rule 803
that are not included in Sec. 37.3? If so, please describe.
17. Do you believe that any provisions of Sec. 37.3(c) relating to
temporary registration are still relevant and should be adapted into
Rule 803? If so, which provisions and why?
18. Do you believe in general that proposed Rule 803 should include
provisions relating to vacation of an SBSEF registration? If so, do you
agree with the specific language adapted by the Commission from section
7 of the CEA and Sec. 37.3(g) into proposed Rule 803(f)? If not, how
would you revise that language?
B. Form SBSEF
As new Sec. 249.2001, the Commission is proposing Form SBSEF, the
application form for an entity to register with the Commission as an
SBSEF. The proposed form would also be used for submitting any updates,
corrections, or supplemental information to a pending application for
registration. Proposed Form SBSEF is closely modelled on the CFTC's
Form SEF for entities that seek to register with the CFTC as SEFs, with
only minor changes to remove the concept of post-registration
amendments, as the proposed rule would not require any amendments to
Form SBSEF post-registration. The exhibits being proposed along with
Form SBSEF are very similar to the exhibits in Form SEF. Like with Form
SEF, each applicant submitting a Form SBSEF would be required to
provide the Commission with documents and descriptions pertaining to
its business organization, financial resources, and compliance program,
including various documents describing the applicant's legal and
financial status. An applicant would be required to disclose any
affiliates and provide a brief description of the nature of the
affiliation, and submit copies of any agreements between the SBSEF and
third parties that would assist the applicant in complying with its
duties under the SEA. In addition, an applicant would be required to
demonstrate operational capability through documentation, including
technical manuals and third-party service provider agreements.
Under proposed Rule 803(b)(1), an applicant for SBSEF registration
would be required to complete Form SBSEF and provide, upon the
Commission's request, any additional necessary information and
documentation in order review the application. The determination as to
when an application submission is complete would be at the sole
discretion of the Commission. The Commission would review Form SBSEF
[[Page 28882]]
and, at the conclusion of its review, by order either: (i) Grant
registration; (ii) deny the application for registration; or (iii)
grant registration subject to certain conditions. After an applicant is
granted registration, any updates or amendments to the information
contained in its Form SBSEF by an active SBSEF would be required to be
submitted as rules or rule amendments under proposed Rule 806 or 807 or
as may be required by other rules in Regulation SE.
The CFTC's process for registering SEFs appears well understood by
the industry and well designed for being adapted to the SBS market.
Therefore, the Commission is using the CFTC's process as a basis for
its own process for registering SBSEFs. Assuming that most if not all
SBSEFs will be dually registered as SEFs, the Commission preliminarily
believes that it is not necessary to require the same registrant to
provide relevant information in one manner to the Commission if the
CFTC requires it in a different manner.
The Commission seeks comment on the following:
19. Are there parts of Form SEF that you believe are not necessary
or appropriate to incorporate into Form SBSEF? If so, please describe.
20. Are there different or additional requirements that the
Commission should include in Form SBSEF that are not included in Form
SEF? If so, please describe. What would be the benefits and costs of
requiring that information in Form SBSEF that is not required by the
CFTC in Form SEF?
C. Abbreviated Registration Procedures for CFTC-Registered SEFs
Many of the entities that will seek registration with the
Commission as SBSEFs are already registered with the CFTC as SEFs.
Entities that seek dual registration presumably see efficiencies in
utilizing the same systems, policies, and procedures to trade both
swaps and SBS. As noted throughout this release, the Commission seeks
to harmonize the SBSEF regulatory regime as closely as practicable with
the CFTC's SEF regulatory regime, achieving similar regulatory benefits
as the CFTC regime while imposing only marginal costs on dually-
registered SEF/SBSEFs and their members. If the Commission ultimately
adopts SBSEF rules that are closely harmonized with those of the CFTC,
SEFs that seek dual registration with the SEC would likely need to make
only minor adjustments to their rules and trading procedures to support
trading of SBS in addition to the trading of swaps. The Commission
preliminarily believes that whether an entity is registered as a SEF
and in good standing with the CFTC is relevant when considering its
application to register as an SBSEF, and that an abbreviated
registration for CFTC-registered SEFs is appropriate. Furthermore, the
Commission is preliminarily considering that, after adopting final
rules establishing a registration process for SBSEFs, it could exercise
its exemptive authority under section 36(a)(1) of the SEA \56\ to relax
or eliminate entirely certain of the registration requirements for
entities that are already registered as SEFs with the CFTC.
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\56\ 15 U.S.C. 78mm(a)(1).
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The Commission seeks comment on the following:
21. Do you believe in general that the Commission should utilize
its authority under section 36(a)(1) of the SEA to establish an
abbreviated procedure for entities wishing to register as SBSEFs that
are already registered with the CFTC as SEFs? Why or why not?
22. If so, what registration requirements should the Commission
relax or eliminate entirely for entities seeking dual registration?
VI. Rule and Product Filings by SBSEFs
Unlike section 19(b) of the SEA,\57\ which sets out a process
whereby national securities exchanges and other SROs submit filings to
the Commission to add, delete, or amend rules (including rules to list
products), section 3D of the SEA \58\ does not set out an equivalent
process for SBSEFs. It can be expected, however, that an SBSEF will
seek to change its rules over time in order, for example, to implement
new trading methodologies and to expand its product offerings, with the
intent to make its market more attractive to participants. The
Commission preliminarily believes, therefore, that some review process
is necessary to assess whether such changes to an SBSEF's rules and
product offerings are consistent with section 3D of the SEA and the
Commission's rules thereunder. The Commission preliminarily believes
that the CFTC's filing procedures are an appropriate model on which to
base its own filing procedures. Furthermore, because of the likelihood
that most if not all SBSEFs will be dually registered with the CFTC as
SEFs and that many rule changes for a dual registrant will affect both
its SBS and swap trading businesses, close harmonization with the
CFTC's filing procedures would allow a dual registrant to make a
similar filing to each agency, allowing each agency to carry out its
oversight functions while minimizing the burdens on dual registrants.
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\57\ 15 U.S.C. 78s(b).
\58\ 15 U.S.C. 78c-4.
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Parts 37 and 40 of the CFTC's rules set out processes whereby SEFs
may establish or amend rules and list products. In short, these
processes allow a SEF to voluntarily submit a rule, rule amendment, or
new product for CFTC review and approval, or to ``self-certify'' that a
rule, rule amendment, or new product meets applicable standards under
the CEA and the CFTC's rules thereunder without obtaining CFTC
approval, although the CFTC retains the ability, in certain
circumstances, to stay the self-certification for further review before
it may become effective. Using its general authority to impose any
requirement on SBSEFs and to prescribe rules governing the regulation
of SBSEFs,\59\ the Commission is proposing to establish similar filing
processes for registered SBSEFs in proposed Rules 804 to 810 of
Regulation SE.
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\59\ See 15 U.S.C. 78c-4(d)(1)(A)(ii) (requiring an SBSEF, to be
registered and to maintain registration, to comply with any
requirement that the Commission may impose by rule or regulation);
15 U.S.C. 78c-4(f) (directing the Commission to prescribe rules
governing the regulation of SBSEFs).
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A. Rule 804--Listing Products for Trading by Certification
Proposed Rule 804 is modelled on Sec. 40.2 of the CFTC's rules and
would set forth procedures by which an SBSEF may list a product via
certification.
Sec. 40.2(a) specifies the filing requirements for DCMs and SEFs
to certify a product for listing. Paragraph (a) of proposed Rule 804
would adapt these requirements for SBSEFs, with one exception, as
explained in the next paragraph. Paragraph (a)(1) of proposed Rule 804
would require an SBSEF to file its submission electronically with the
Commission using the EDGAR system as an Interactive Data File in
accordance with Rule 405 of Regulation S-T.
Paragraph (a)(2) of proposed Rule 804 would provide that the
Commission must receive the submission by the open of business on the
business day that is ten business days preceding the product's listing.
By contrast, the parallel provision in Sec. 40.2(a) provides that a
DCM or SEF must file the self-certification only one business day
before listing the product.\60\ The Commission preliminarily believes
that a ten-business-day review period for self-certified SBS products
before they can be listed strikes a reasonable balance between allowing
SBSEFs to bring new products to market quickly while affording the
Commission staff a
[[Page 28883]]
reasonable period in which to assess them prior to listing. The
Commission is concerned that one business day would not provide the SEC
staff sufficient time to review a new product, especially a novel or
complex product that might be difficult to analyze. As discussed below,
the Commission is proposing that it could stay a product for reasons
similar to those in the CFTC's stay provision. If a product does
warrant a stay, the Commission also would need sufficient time to go
through the administrative steps of formally issuing the stay. The
proposed ten-business-day review period for self-certified products
accords with the CFTC's ten-business-day review period for self-
certified rules,\61\ which the Commission is proposing to replicate in
Rule 807(a)(3).\62\
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\60\ See Sec. 40.2(a)(2) (one of the conditions for a valid
self-certification of a product is that the CFTC has received the
submission by the open of business on the business day preceding the
product's listing).
\61\ See Sec. 40.6(a)(3) (one of the conditions for a valid
self-certification of a rule or rule amendment is that the CFTC has
received the submission not later than the open of business on the
business day that is ten business days prior to the registered
entity's implementation of the rule or rule amendment).
\62\ See infra section VI(D).
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Paragraph (a)(3) of proposed Rule 804 would require a self-
certification to include:
(1) A copy of the submission cover sheet; \63\
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\63\ The Commission is proposing, in new Sec. 249.2002, a
submission cover sheet (with instructions) that is closely modelled
on the CFTC's submission cover sheet.
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(2) A copy of the product's rules, including all rules related to
its terms and conditions;
(3) The intended listing date;
(4) A certification by the SBSEF that the product to be listed
complies with the SEA and the Commission's rules thereunder;
(5) A concise explanation and analysis of the product and its
compliance with applicable provisions of the SEA, including core
principles, and the Commission's rules thereunder. This explanation and
analysis shall either be accompanied by the documentation relied upon
to establish the basis for compliance with applicable law, or
incorporate information contained in such documentation, with
appropriate citations to data sources;
(6) A certification that the SBSEF posted a notice of pending
product certification with the Commission and a copy of the submission,
concurrent with the filing of a submission with the Commission, on the
SBSEF's website; \64\ and
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\64\ Under proposed Rule 804(a)(3)(vi), information that the
SBSEF seeks to keep confidential could be redacted from the
documents published on the SBSEF's website but would have to be
republished consistent with any determination made by the Commission
pursuant to SEA Rule 24b-2.
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(7) A request for confidential treatment, if appropriate, as
permitted pursuant to SEA Rule 24b-2.\65\
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\65\ Section 40.2(a)(3) instructs filers to make any request for
confidential treatment pursuant to Sec. 40.8 of the CFTC's rules,
which in turn cross-references Sec. 145.9. The Commission is
proposing instead to direct filers to make any request for
confidential treatment pursuant to existing SEA Rule 24b-2. See
supra note 50.
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Paragraph (b) of proposed Rule 804, modelled on Sec. 40.2(b),
would provide that, if requested by Commission staff, an SBSEF shall
provide any additional evidence, information, or data that demonstrates
that the SBS meets, initially or on a continuing basis, the
requirements of the SEA or the Commission's rules or policies
thereunder.
Section 40.2(c) provides that the CFTC may stay the listing of a
contract pursuant to paragraph (a) of this section during the pendency
of CFTC proceedings for filing a false certification or during the
pendency of a petition to alter or amend the contract terms and
conditions pursuant to section 8a(7) of the CEA. The SEA does not
include the CEA's provisions regarding altering or amending the terms
and conditions of an SBS listed by an SBSEF like the authority granted
to the CFTC with respect to products listed by SEFs, such that the
Commission would be able to stay the listing of an SBS that it believes
may be inconsistent with the SEA, pending proceedings to exercise that
authority. Nor are proceedings for false certification of an SBS
contemplated by the SEA. For this reason, in lieu of harmonizing with
Sec. 40.2(c), the Commission is proposing, in Rule 804(c), a provision
that would allow the Commission to stay the certification of a new
product in the same manner that proposed Rule 807(c)--which, as
described below, is itself based on Sec. 40.6(c) of the CFTC rules--
would allow the Commission to stay the self-certifications of a new
rule or rule amendment.\66\
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\66\ The Commission also is not proposing to adapt--either in
Rule 807 or here in Rule 804--Sec. 40.6(c)(4), which relates to
rules already implemented and permits the CFTC to stay the
effectiveness of such rules during the pendency of proceedings for
filing a false certification or of a petition to alter or amend the
rule pursuant to section 8a(7) of the CEA.
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Thus, paragraph (c)(1) of proposed Rule 804 would provide that the
Commission may stay the certification of a new product by issuing a
notification informing the SBSEF that the Commission is staying the
certification on the grounds that the product presents novel or complex
issues that require additional time to analyze, is accompanied by an
inadequate explanation, or is potentially inconsistent with the SEA or
the Commission's rules thereunder. Under paragraph (c)(1), the
Commission would have an additional 90 days from the date of the
notification to conduct the review. Paragraph (c)(2) would require the
Commission to provide a 30-day comment period during that 90 days, and
to publish a notice of the 30-day comment period on the Commission's
website. Comments from the public could be submitted as specified in
that notice. Paragraph (c)(3) would provide that the product that had
been stayed would become effective, pursuant to the certification, at
the expiration of the 90-day review period, unless the Commission
withdraws the stay prior to that time, or the Commission notifies the
SBSEF during the 90-day time period that it objects to the proposed
certification on the grounds that the proposed product is inconsistent
with the SEA or the Commission's rules.
Paragraph (d) of Sec. 40.2 provides that a DCM or SEF may submit a
class certification of swaps based on an ``excluded commodity,'' \67\
subject to certain conditions. The proposed rules do not provide for
class certification of any SBS although, as noted below, the Commission
seeks commenters' views on whether the concept of class certification
would be appropriate for SBSEFs.
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\67\ See section 1a(19) of the CEA, 7 U.S.C. 1a(19) (defining
``excluded commodity'').
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The Commission preliminarily believes that proposed Regulation SE
should allow SBSEFs to introduce new SBS products to their market
places as speedily as practicable while affording the Commission an
effective mechanism to assess their consistency with section 3D of the
SEA. The Commission preliminarily believes that the CFTC's self-
certification procedures are well articulated and well understood by
SEFs, and that harmonizing with these procedures for new product
filings by SBSEF would yield comparable regulatory benefits while
minimizing burdens on SBSEFs. At the same time, the Commission
preliminarily believes that, for the reasons noted above, a ten-
business-day pre-listing review period is more appropriate than a one-
business-day review period for self-certified SBS products.
The Commission seeks comment on the following:
23. Do you believe in general that Regulation SE should include a
rule that allows SBSEFs to list products for trading by certification?
Why or why not?
[[Page 28884]]
24. In particular, should the Commission establish a procedure for
listing SBS products for trading by certification by harmonizing
closely with Sec. 40.2 of the CFTC's rules? Why or why not?
25. Do you agree with the ten-business-day pre-listing review
period for self-certified products in proposed Rule 804(a)(2) instead
of the CFTC's one-business-day review period? Why or why not? What
economic harm might an SBSEF and/or its members suffer if the
Commission ultimately adopted a review period other than one business
day? If you believe that the Commission should adopt a review period of
greater than one day (but other than ten), please explain.
26. Do you believe that the Commission should adapt the concept of
class certification from Sec. 40.2(d) into proposed Rule 804? Why or
why not? If so, how do you believe a ``class'' should be defined for
purposes of listing SBS products on an SBSEF? Should there be any
conditions for class certification? If so, what conditions and why?
27. Are there any provisions of proposed Rule 804 that the
Commission has adapted from Sec. 40.2 that you believe would be
inappropriate, or would not create any benefit, in a Commission rule to
establish procedures for SBSEFs to list SBS products for trading by
certification? If so, please identify any such provision, explain why
it would be inappropriate or unnecessary for SBSEFs, and what economic
benefit that you believe would result from omitting it from the
Commission's final rule.
28. Do you believe that proposed Rule 804(c), relating to stays of
product certifications, mirroring the Commission's proposed provisions
relating to stays of self-certifications of new rules, is appropriate
and workable? Why or why not? If not, what alternatives, if any, should
be considered to enable the Commission to stay product certifications
that it believes pose issues with respect to consistency with the SEA?
B. Rule 805--Voluntary Submission of New Products for Commission Review
and Approval
Proposed Rule 805 is closely modelled on Sec. 40.3 of the CFTC's
rules and would set forth procedures by which an SBSEF may voluntarily
submit new SBS products for Commission review and approval.
Section 40.3(a) provides that a SEF or DCM may request the CFTC to
approve a new or dormant product prior to listing it for trading, and
sets out the filing requirements. Paragraph (a) of proposed Rule 805
would adapt these requirements for SBSEFs. First, an SBSEF would be
required to file its submission electronically with the Commission
using the EDGAR system as an Interactive Data File in accordance with
Rule 405 of Regulation S-T. The filing also would have to include a
copy of the submission cover sheet, a copy of the rules that set forth
the terms and conditions of the SBS to be listed, and an explanation
and analysis of the product and its compliance with applicable
provisions of the SEA, including the Core Principles and the
Commission's rules thereunder.\68\ The submission also would have to
describe any agreements or contracts entered into with other parties
that enable the SBSEF to carry out its responsibilities.
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\68\ This explanation and analysis would have to either be
accompanied by the documentation relied upon to establish the basis
for compliance with the applicable law, or incorporate information
contained in such documentation, with appropriate citations to data
sources.
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Furthermore, paragraph (a) of proposed Rule 805, modelled on Sec.
40.3(a), would require the SBSEF to include, if requested by Commission
staff, additional evidence, information, or data demonstrating that the
SBS meets, initially or on a continuing basis, the requirements of the
SEA, or other requirement for registration under the SEA, or the
Commission's rules or policies thereunder. The SBSEF would be required
to submit the requested information by the open of business on the date
that is two business days from the date of request by Commission staff,
or at the conclusion of such extended period agreed to by Commission
staff after timely receipt of a written request from the SBSEF.
Paragraph (a) of proposed Rule 805, like Sec. 40.3(a), would permit
the submitting SBSEF to include a request for confidential treatment
regarding portions of its application.\69\ Finally, paragraph (a) of
proposed Rule 805, like Sec. 40.3(a), would require the SBSEF to
certify that it posted a notice of its request for Commission approval
of the new product and a copy of the submission, concurrent with the
filing of a submission with the Commission, on the SBSEF's website.\70\
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\69\ Section 40.3(a), like Sec. 40.2(a)(3), instructs filers to
make any request for confidential treatment pursuant to Sec. 40.8
of the CFTC's rules, which in turn cross-references Sec. 145.9. As
noted previously, the Commission proposes instead to direct filers
to make any request for confidential treatment pursuant to SEA Rule
24b-2. See supra note 50.
\70\ Information that the SBSEF seeks to keep confidential could
be redacted from the documents published on the SBSEF's website but
would have to be republished consistent with any determination made
by the Commission pursuant to SEA Rule 24b-2.
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Paragraph (a) of proposed Rule 805 would omit two provisions in
Sec. 40.3(a). First, Sec. 40.3(a)(6) requires the submitting entity
to include the certifications required in Sec. 41.22 for product
approval of a commodity that is a security future or a security futures
product, as defined in sections 1a(44) or 1a(45) of the CEA,
respectively. The Commission is not adapting this provision into
proposed Regulation SE because it pertains to security futures and
security futures products, not to swaps or SBS. Second, Sec.
40.3(a)(8) requires the submitting entity to include a filing fee. The
Commission is not proposing to charge SBSEFs filing fees for submitting
new product proposals.
Paragraph (b) of proposed Rule 805, like Sec. 40.3(b), would
provide that the Commission shall approve a new product unless the
terms and conditions of the product violate the SEA or the Commission's
rules thereunder.
Paragraph (c) of proposed Rule 805, modelled on Sec. 40.3(c),
would provide that a product submitted for Commission approval under
Rule 805 shall be deemed approved by the Commission 45 days after
receipt by the Commission, or at the conclusion of an extended period
as provided under proposed Rule 805(d), unless notified otherwise
within the applicable period, if the submission complies with the
requirements of Rule 805(a) and the SBSEF does not amend the terms or
conditions of the product or supplement the request for approval,
except as requested by the Commission or for correction of
typographical errors, renumbering, or other non-substantive revisions,
during that period. Paragraph (c) also would provide that any
voluntary, substantive amendment by the SBSEF would be treated as a new
submission under Rule 805.
Paragraph (d) of proposed Rule 805, modelled on Sec. 40.3(d),
would provide that the Commission may extend the 45-day review period
in paragraph (c) for an additional 45 days, if the product raises novel
or complex issues that require additional time to analyze, in which
case the Commission shall notify the SBSEF within the initial 45-day
review period and briefly describe the nature of the specific issue(s)
for which additional time for review is required. Paragraph (d) also
would provide that the Commission may extend the 45-day review period
for any length of time to which the SBSEF agrees in writing.
Paragraph (e) of proposed Rule 805 would provide that the
Commission, at any time during its review, may notify the SBSEF that it
will not, or is unable to, approve the product. This notification would
have to briefly specify the nature of the issues raised and the
specific provision of the SEA or
[[Page 28885]]
the Commission's rules thereunder, including the form or content
requirements of proposed Rule 805(a), that the product violates,
appears to violate, or potentially violates but which cannot be
ascertained from the submission. Paragraph (f) of proposed Rule 805,
like Sec. 40.3(f), would provide that such notification of the
Commission's determination not to approve a product does not prejudice
the SBSEF from subsequently submitting a revised version of the product
for Commission approval, or from submitting the product as initially
proposed pursuant to a supplemented submission. Furthermore, such
notification would be presumptive evidence that the entity may not
truthfully certify under proposed Rule 804 that the same, or
substantially the same, product does not violate the SEA or the
Commission's rules thereunder.
The Commission preliminarily believes that it is reasonable and
appropriate to supplement the product certification procedures in
proposed Rule 804 by also including in Regulation SE, as proposed Rule
805, procedures for voluntary submission of new products for Commission
review and approval. The Commission preliminarily believes that
providing this approval process, as the CFTC does, can be valuable to
an SBSEF seeking the Commission's concurrence that a new product is in
compliance with the SEA prior to listing it. The Commission
preliminarily believes that the CFTC's procedures in this regard are
well articulated and well understood by SEFs, and that closely
harmonizing with these procedures would yield comparable regulatory
benefits while minimizing burdens on SBSEFs.\71\
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\71\ The Commission does not discount the possibility that an
entity might elect to register as an SBSEF with the SEC but not as a
SEF with the CFTC. In such case, the SEC-only registrant would not
have any familiarity with the CFTC's rules and filing procedures.
Nevertheless, because the Commission preliminarily believes that
most if not all entities that will seek SBSEF registration with the
SEC are or will also be registered as SEFs with the CFTC, such dual
registrants would benefit from harmonized procedures. Furthermore,
if the Commission ultimately adopts these procedures substantially
as proposed, it likely would be unnecessary to establish and apply
one set of procedures for dual registrants and a different set for
SEC-only SBSEFs.
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The Commission requests comment on the following:
29. Do you believe in general that Regulation SE should include a
rule setting forth procedures for an SBSEF to voluntarily submit new
SBS products for Commission review and approval? Why or why not?
30. In particular, should the Commission adopt procedures for
voluntary submission of new SBS products for Commission review and
approval by harmonizing closely with Sec. 40.3 of the CFTC's rules?
Why or why not?
31. Are there any provisions of Sec. 40.3 that are adapted into
proposed Rule 805 that you believe would be inappropriate, or would not
create any benefit, in a Commission rule applying to SBSEFs? If so,
please identify any such provision, explain why it would be
inappropriate or unnecessary for SBSEFs, and what economic benefit that
you believe would result from omitting it from the Commission's final
rule.
C. Rule 806--Voluntary Submission of Rules for Commission Review and
Approval
Proposed Rule 806 is closely modelled on Sec. 40.5 of the CFTC's
rules and would set forth procedures by which an SBSEF may voluntarily
submit rules, rule amendments, or dormant rules for Commission review
and approval.
Section 40.5(a) provides that a registered entity, including a SEF,
may request that the CFTC approve a new rule, rule amendment, or
dormant rule and sets out the filing requirements. Paragraph (a) of
proposed Rule 805 would adapt these requirements for SBSEFs. First, an
SBSEF would be required to file its submission electronically with the
Commission using the EDGAR system as an Interactive Data File in
accordance with Rule 405 of Regulation S-T. The filing also would have
to include a copy of the submission cover sheet and set forth the text
of the rule or rule amendment (in the case of a rule amendment,
deletions and additions must be indicated). Further, the SBSEF would be
required to describe the proposed effective date of the rule or rule
amendment and any action taken or anticipated to be taken to adopt the
proposed rule by the SBSEF or by its governing board or by any
committee thereof, and cite the rules of the SBSEF that authorize the
adoption of the proposed rule. The SBSEF also would be required to
provide an explanation and analysis of the operation, purpose, and
effect of the proposed rule or rule amendment and its compliance with
applicable provisions of the SEA, including the core principles
relating to SBSEFs and the Commission's rules thereunder, and, as
applicable, a description of the anticipated benefits to market
participants or others, any potential anticompetitive effects on market
participants or others, and how the rule fits into the SBSEF's
framework of regulation.
Moreover, the SBSEF would be required to provide additional
information which may be beneficial to the Commission in analyzing the
new rule or rule amendment. If a proposed rule affects, directly or
indirectly, the application of any other rule of the SBSEF, the
pertinent text of any such rule would have to be set forth and the
anticipated effect described. The SBSEF also would be required to
provide a brief explanation of any substantive opposing views expressed
to the SBSEF by governing board or committee members, members of the
SBSEF, or market participants that were not incorporated into the rule,
or a statement that no such opposing views were expressed.
The SBSEF could request confidential treatment for portions of its
submission, as permitted by SEA Rule 24b-2. Finally, the SBSEF would
have to certify that it posted a notice of the pending rule with the
Commission and a copy of the submission, concurrent with the filing of
a submission with the Commission, on the SBSEF's website.\72\
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\72\ Information that the SBSEF seeks to keep confidential could
be redacted from the documents published on the SBSEF's website, but
would have to be republished consistent with any determination made
pursuant to SEA Rule 24b-2.
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Paragraph (b) of proposed Rule 806, modelled on Sec. 40.5(b),
would provide that the Commission shall approve a new rule or rule
amendment unless the rule or rule amendment is inconsistent with the
SEA or the Commission's rules thereunder. Paragraph (c) of proposed
Rule 806, like Sec. 40.5(c), would provide that a rule or rule
amendment submitted for Commission approval under Rule 806 shall be
deemed approved by the Commission 45 days after receipt by the
Commission, or at the conclusion of such extended period as provided
under paragraph (d) of this section, unless the SBSEF is notified
otherwise within the applicable period, if the submission complies with
the requirements of proposed Rule 806(a) and the SBSEF does not amend
the proposed rule or supplemented the submission, except as requested
by the Commission, during the pendency of the review period, other than
for correction of typographical errors, renumbering, or other non-
substantive revisions. Paragraph (c) also would provide that any
amendment or supplementation not requested by the Commission would be
treated as the submission of a new filing under Rule 806.
Paragraph (d) of proposed Rule 806, modelled on Sec. 40.5(d),
would provide that the Commission may further extend the review period
in paragraph (c) for an additional 45 days, if the proposed rule
[[Page 28886]]
or rule amendment raises novel or complex issues that require
additional time for review or is of major economic significance, the
submission is incomplete, or the requestor does not respond completely
to Commission questions in a timely manner, in which case the
Commission shall notify the submitting SBSEF within the initial 45-day
review period and shall briefly describe the nature of the specific
issues for which additional time for review shall be required.
Paragraph (d) also would allow an extension to which the SBSEF agrees
in writing.
Paragraph (e) of proposed Rule 806, like Sec. 40.5(e), would
provide that, at any time during its review, the Commission may notify
the SBSEF that it will not, or is unable to, approve the new rule or
rule amendment. This notification would have to briefly specify the
nature of the issues raised and the specific provision of the SEA or
the Commission's rules thereunder, including the form or content
requirements of proposed Rule 806, with which the new rule or rule
amendment is inconsistent or appears to be inconsistent with the SEA or
the Commission's rules thereunder. Paragraph (f) of proposed Rule 806,
like Sec. 40.5(f), would provide that such notification to an SBSEF
would not prevent the SBSEF from subsequently submitting a revised
version of the proposed rule or rule amendment for Commission review
and approval or from submitting the new rule or rule amendment as
initially proposed in a supplemented submission. Paragraph (f) would
further provide that the revised submission would be reviewed without
prejudice. Finally, paragraph (f) would provide that such notification
to an SBSEF of the Commission's determination not to approve a proposed
rule or rule amendment shall be presumptive evidence that the SBSEF may
not truthfully certify the same, or substantially the same, proposed
rule or rule amendment under proposed Rule 807(a).
Paragraph (g) of proposed Rule 806, like Sec. 40.5(g), would
provide that, notwithstanding Rule 806(c), changes to a proposed rule
or a rule amendment, including changes to terms and conditions of a
product that are consistent with the SEA and the Commission's rules
thereunder, may be approved by the Commission at such time and under
such conditions as the Commission shall specify in the written
notification; provided, however, that the Commission may, at any time,
alter or revoke the applicability of such a notice to any particular
product or rule amendment.
The Commission preliminarily believes that Regulation SE should
afford the Commission a means for assessing whether SBSEF rules and
rule amendments are consistent with section 3D of the SEA, and that it
is appropriate to achieve this aim by aligning closely with the CFTC's
process for voluntary rule-approval submission in Sec. 40.5. The
CFTC's procedures are well articulated and well understood by SEFs, and
closely harmonizing with these procedures should yield comparable
regulatory benefits while minimizing burdens on SBSEFs. As with the
process for seeking Commission approval of new products, the Commission
preliminarily believes that providing a process for voluntarily seeking
Commission approval of rules, rule amendments, and dormant rules--as
the CFTC does--can be valuable to an SBSEF seeking the Commission's
concurrence that the rule change is consistent with the SEA prior to
implementing it. Moreover, for dually registered SEF/SBSEFs, it is
likely that certain rules will apply to member behavior generally--and
not to one product market (e.g., swaps or SBS) exclusively--and so will
have to be filed with both the SEC and CFTC. Closely harmonizing the
SEC's filing procedures with Sec. 40.5 would allow dually registered
entities to submit the same (or substantially the same) filing to both
agencies for review and approval. The Commission preliminarily believes
that it is not necessary to require SBSEFs to make a substantially
different type of filing to the SEC than to the CFTC for the same
underlying rule.
The Commission seeks comment on the following:
32. Do you believe in general that Regulation SE should include a
rule establishing procedures for an SBSEF to voluntarily submit rules
and rule amendments for Commission review and approval? Why or why not?
33. In particular, should the Commission adopt procedures for
voluntary submission of rules and rule amendments for Commission review
and approval by harmonizing closely with Sec. 40.5 of the CFTC's
rules? Why or why not?
34. Are there any provisions of Sec. 40.5 that are adapted into
proposed Rule 806 that you believe would be inappropriate, or would not
create any benefit, in a Commission rule applying to SBSEFs? If so,
please identify any such provision, explain why it would be
inappropriate or unnecessary for SBSEFs, and what economic benefit that
you believe would result from omitting it from the Commission's final
rule.
D. Rule 807--Self-Certification of Rules
Proposed Rule 807 is closely modelled on Sec. 40.6 of the CFTC's
rules and would set forth procedures by which an SBSEF may self-certify
changes to its rules. Paragraph (a) of proposed Rule 807, modelled on
Sec. 40.6(a), would set forth the conditions that an SBSEF must comply
with before implementing a rule or rule amendment via self-
certification. Like Sec. 40.6(a), proposed Rule 807(a) would permit an
SBSEF to implement a rule or rule amendment without obtaining the
Commission's prior approval under Rule 806, but only if it ``self-
certifies'' the rule or rule amendment in compliance with the
conditions set forth in Rule 807. Rule 807(a) also would permit an
SBSEF to self-certify a rule or rule amendment that the Commission had
previously approved under Rule 806, or that the SBSEF had previously
self-certified under this Rule 807, but that in the interim had become
a dormant rule (i.e., unimplemented for 12 consecutive calendar
months).\73\
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\73\ Also like Sec. 40.6(a), proposed Rule 807(a) would include
an exception that would allow an SBSEF to implement a certain kind
of rule without having to comply with the full set of conditions set
forth in paragraphs (a)(1) through (8) of proposed Rule 807, the
details of which are discussed below. Specifically, the exception
would provide that, when submitting a rule delisting or withdrawing
the certification of a product with no open interest, an SBSEF would
be required only to meet the conditions of paragraphs (a)(1),
(a)(2), and (a)(6) of proposed Rule 807. The introductory language
being proposed by the Commission in paragraph (a) of proposed Rule
807 generally tracks the language of Sec. 40.6(a), with slight
changes for clarity. However, proposed Rule 807(a) would not include
an equivalent of the reference in Sec. 40.6(a) to submissions under
Sec. 40.10, which concerns only systemically important derivatives
clearing organizations and thus are not relevant to SBSEFs.
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Paragraph (a)(1) of proposed Rule 807 would require the SBSEF to
file its submission electronically with the Commission using the EDGAR
system as an Interactive Data File in accordance with Rule 405 of
Regulation S-T. Paragraph (a)(2) would require the SBSEF to provide a
certification that the SBSEF posted a notice of the self-certification
with the Commission and a copy of the submission, concurrent with the
filing of a submission with the Commission, on the SBSEF's website.\74\
Paragraph (a)(3) would provide that the Commission must have received
the submission not later than the open of business on the business day
that is ten business days before the SBSEF's implementation of the rule
or rule amendment. Paragraph (a)(4) would
[[Page 28887]]
provide that the SBSEF may not implement the rule or rule amendment if
the Commission has stayed it pursuant to proposed Rule 807(c),
discussed below.
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\74\ Information that the SBSEF seeks to keep confidential could
be redacted from the documents published on the SBSEF's website but
must be republished consistent with any determination made pursuant
to SEA Rule 24b-2.
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Section 40.6(a)(5) sets forth an additional condition that the rule
or rule amendment is not a rule or rule amendment of a DCM that
materially changes a term or condition of a contract for future
delivery of an agricultural commodity enumerated in section 1a(4) of
the CEA or an option on such a contract or commodity in a delivery
month having open interest. Because this provision applies to DCMs that
trade contracts for future delivery of agricultural commodities, it is
not germane to the SBS markets; therefore, the Commission is not
adapting this condition into proposed Rule 807.
Section 40.6(a)(6) sets out procedures for emergency rule
certifications, which the Commission is proposing to adapt into
paragraph (a)(5) of Rule 807. Paragraph (a)(5)(i) would require a new
rule or rule amendment that establishes standards for responding to an
emergency \75\ to be submitted pursuant to Rule 807(a). Paragraph
(a)(5)(ii) would provide that a rule or rule amendment implemented
under procedures of the governing board to respond to an emergency
shall, if practicable, be filed with the Commission prior to
implementation or, if not practicable, be filed with the Commission at
the earliest possible time after implementation, but in no event more
than 24 hours after implementation. In addition, paragraph (a)(5)(ii)
would provide that any such submission be subject to the certification
and stay provisions of proposed Rules 807(b) and (c), described below.
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\75\ See Sec. 40.1(h) (defining ``emergency'' as ``any
occurrence or circumstance that, in the opinion of the governing
board of a registered entity, or a person or persons duly authorized
to issue such an opinion on behalf of the governing board of a
registered entity under circumstances and pursuant to procedures
that are specified by rule, requires immediate action and threatens
or may threaten such things as the fair and orderly trading in, or
the liquidation of or delivery pursuant to, any agreements,
contracts, swaps or transactions or the timely collection and
payment of funds in connection with clearing and settlement by a
derivatives clearing organization''). The definition goes on to list
a series of circumstances that are deemed emergencies under the
definition. The Commission is proposing a definition of
``emergency'' in proposed Rule 802 that is adapted from Sec.
40.1(h).
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Paragraph (a)(6) of proposed Rule 807, modelled on Sec.
40.6(a)(7), would set out the required elements for a rule submission
under Rule 807. These requirements would include a copy of the
submission cover sheet (in the case of a rule or rule amendment that
responds to an emergency, ``Emergency Rule Certification'' should be
noted in the description section of the submission cover sheet); the
text of the rule (in the case of a rule amendment, deletions and
additions must be indicated); the date of intended implementation; a
certification by the SBSEF that the rule complies with the SEA and the
Commission's rules thereunder; a concise explanation and analysis of
the operation, purpose, and effect of the proposed rule or rule
amendment and its compliance with applicable provisions of the SEA,
including Core Principles relating to SBSEFs and the Commission's rules
thereunder; and a brief explanation of any substantive opposing views
expressed to the SBSEF by governing board or committee members, members
of the SBSEF, or market participants, that were not incorporated into
the rule, or a statement that no such opposing views were expressed.
Paragraph (a)(6)(vii) also would permit the SBSEF to request
confidential treatment for portions of its submission.\76\
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\76\ Section 40.6(a)(7)(vii) directs the submitting entity to
follow the procedures in Sec. 40.8 when making a request for
confidential treatment, which in turn cross-references Sec. 145.9.
As noted previously, the Commission proposes instead to direct
filers to make any request for confidential treatment pursuant to
SEA Rule 24b-2. See supra note 50.
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Paragraph (a)(7) of proposed Rule 807, like Sec. 40.6(a)(8), would
require an SBSEF to provide, if requested by Commission staff,
additional evidence, information, or data that may be beneficial to the
Commission in conducting a due diligence assessment of the filing and
the SBSEF's compliance with any of the requirements of the SEA or the
Commission's rules or policies thereunder.
Paragraph (b) of proposed Rule 807, modelled on Sec. 40.6(b),
would give the Commission ten business days to review the new rule or
rule amendment before it is deemed certified and can be made effective,
unless the Commission notifies the SBSEF during that ten-business-day
review period that it intends to issue a stay of the certification
under proposed Rule 807(c).
Paragraph (c)(1) of proposed Rule 807, modelled on Sec.
40.6(c)(1), would provide that the Commission may stay the
certification of a new rule or rule amendment by issuing a notification
informing the SBSEF that the Commission is staying the certification on
the grounds that it presents novel or complex issues that require
additional time to analyze, is accompanied by an inadequate
explanation, or is potentially inconsistent with the SEA or the
Commission's rules thereunder. In addition, paragraph (c)(1) would
afford the Commission an additional 90 days from the date of the
notification to conduct the review.
Paragraph (c)(2) of proposed Rule 807, modelled on Sec.
40.6(c)(2), would require the Commission to provide a 30-day comment
period within the 90-day period in which the stay is in effect. The
Commission would be required to publish a notice of the 30-day comment
period on the Commission's internet website, and comments from the
public could be submitted as specified in that notice.
Paragraph (c)(3) of proposed Rule 807, modelled on Sec.
40.6(c)(3), would provide that the new rule or rule amendment subject
to the stay shall become effective, pursuant to the certification, at
the expiration of the 90-day review period, unless the Commission
withdraws the stay prior to that time, or the Commission notifies the
SBSEF during the 90-day period that it objects to the proposed
certification on the grounds that the proposed rule or rule amendment
is inconsistent with the SEA or the Commission's rules thereunder.
Section 40.6(c)(4), relating to rules or rule amendments already
implemented by a SEF (as opposed to rules or rule amendments that are
the subject of a new submission) provides: ``The Commission may stay
the effectiveness of an implemented rule during the pendency of
Commission proceedings for filing a false certification or during the
pendency of a petition to alter or amend the rule pursuant to section
8a(7) of the Act. The decision to stay the effectiveness of a rule in
such circumstances shall not be delegable to any employee of the
Commission.'' As previously noted,\77\ the SEA does not provide the
Commission explicit authority to alter or amend the terms and
conditions of an SBS like the authority granted to the CFTC with
respect to swaps, and does not contemplate proceedings for a false
certification. Hence the Commission is not proposing a provision
corresponding to Sec. 40.6(c)(4).\78\
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\77\ See supra note 66 and accompanying text.
\78\ See id.
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Section 40.6(d) of the CFTC's rules allows a registered entity to
place certain rules or rule amendments into effect even without a self-
certification, if certain enumerated conditions are met. Certain types
of these rules or rule amendments must be disclosed on a
[[Page 28888]]
``Weekly Notification of Rule Amendments,'' pursuant to Sec.
40.6(d)(1) and (2), while others can be put into effect without any
notification to the CFTC at all, pursuant to Sec. 40.6(d)(3).
Paragraph (d) of proposed Rule 807, modelled on Sec. 40.6(d), would
provide that certain kinds of rules or rule amendments may be put into
effect by an SBSEF without certification to the Commission if similar
enumerated conditions are met. Some would be subject to a Weekly
Notification of Rule Amendments, which is closely modelled on the CFTC
notification; others would not be subject to any notification
requirement.
Under paragraph (d)(2) of proposed Rule 807, the following types of
rules could be put into effect by an SBSEF without self-certification,
so long as they are disclosed on the Weekly Notice of Rule Amendments:
<bullet> Non-substantive revisions. Corrections of typographical
errors, renumbering, periodic routine updates to identifying
information about the SBSEF, and other such non-substantive revisions
of a product's terms and conditions that have no effect on the economic
characteristics of the product;
<bullet> Fees. Fees or fee changes, other than fees or fee changes
associated with market making or trading incentive programs, that total
$1.00 or more per contract, and are established by an independent third
party or are unrelated to delivery, trading, clearing, or dispute
resolution.
<bullet> Survey lists. Changes to lists of banks, brokers, dealers,
or other entities that provide price or cash market information to an
independent third party and that are incorporated by reference as
product terms;
<bullet> Approved brands. Changes in lists of approved brands or
markings pursuant to previously certified or Commission approved
standards or criteria;
<bullet> Trading months. The initial listing of trading months,
which may qualify for implementation without notice, within the
currently established cycle of trading months; or
<bullet> Minimum tick. Reductions in the minimum price fluctuation
(or `tick').
Under paragraph (d)(3)(ii) of proposed Rule 807, the following
types of rules could be put into effect by an SBSEF without self-
certification and without having to be disclosed on the Weekly Notice
of Rule Amendments:
<bullet> Transfer of membership or ownership. Procedures and forms
for the purchase, sale, or transfer of membership or ownership, but not
including qualifications for membership or ownership, any right or
obligation of membership or ownership, or dues or assessments;
<bullet> Administrative procedures. The organization and
administrative procedures of governing bodies such as a governing
board, officers, and committees, but not voting requirements, governing
board, or committee composition requirements or procedures, decision-
making procedures, use or disclosure of material non-public information
gained through the performance of official duties, or requirements
relating to conflicts of interest;
<bullet> Administration. The routine daily administration,
direction, and control of employees, requirements relating to gratuity
and similar funds, but not guaranty, reserves, or similar funds;
declaration of holidays; and changes to facilities housing the market,
trading floor, or trading area;
<bullet> Standards of decorum. Standards of decorum or attire or
similar provisions relating to admission to the floor, badges, or
visitors, but not the establishment of penalties for violations of such
rules;
<bullet> Fees. Fees or fee changes, other than fees or fee changes
associated with market making or trading incentive programs that are
less than $1.00 or relate to matters such as dues, badges,
telecommunication services, booth space, real-time quotations,
historical information, publications, software licenses, or other
matters that are administrative in nature.
<bullet> Trading months. The initial listing of trading months
which are within the currently established cycle of trading months.
Paragraphs (d)(2) and (3) of proposed Rule 807, which enumerate the
types of rule and rule amendments that an SBSEF could put into effect
without a self-certification, are adapted from the types of rules
enumerated in Sec. 40.6(d)(2) and (3). However, the Commission is not
adapting into proposed Rules 807(d)(2) and (d)(3) the other types of
rules enumerated in Sec. 40.6(d)(2) and (3).\79\
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\79\ These rules pertain to products that are only distantly
related, if at all, to the types of products that are likely to
trade on SBSEFs. See Sec. 40.6(d)(2)(ii) (delivery standards set by
third parties); Sec. 40.6(d)(2)(iii) (index products); Sec.
40.6(d)(2)(iv) (option contract terms); Sec. 40.6(d)(2)(viii)
(delivery facilities and delivery service providers); Sec.
40.6(d)(3)(ii)(F) (securities indexes); Sec. 40.6(d)(3)(ii)(G)
(option contract term).
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The Commission preliminarily believes that Regulation SE should
afford the Commission a mechanism to assess new SBSEF rules and rule
amendments for consistency with section 3D of the SEA, and to permit
SBSEFs to submit new rules and rule amendments using a self-
certification process closely aligned with the Sec. 40.6. The CFTC's
procedures are well articulated and well understood by SEFs, and
closely harmonizing with these procedures should yield comparable
regulatory benefits while minimizing burdens on SBSEFs. It is likely
that certain rules of dually registered SEF/SBSEFs will apply to member
behavior generally--and not to one product market (e.g., swaps or SBS)
exclusively--and so will have to be filed with both the SEC and CFTC.
Closely harmonizing the SEC's filing procedures with the CFTC's would
allow dually registered entities to submit the same (or substantially
the same) filing to both agencies for review. The Commission
preliminarily believes that it is not necessary to require SBSEFs to
make a substantially different type of filing to the SEC than to the
CFTC for the same underlying rule.
The Commission requests comment on the following:
35. Do you believe in general that Regulation SE should include a
rule establishing procedures for an SBSEF to establish rules via self-
certification? Why or why not?
36. In particular, should the Commission adopt procedures for self-
certification of rules by harmonizing closely with Sec. 40.6 of the
CFTC's rules? Why or why not?
37. Are there any provisions of Sec. 40.6 that are adapted into
proposed Rule 807 that you believe would be inappropriate, or would not
create any benefit, in a Commission rule applying to SBSEFs? If so,
please identify any such provision, explain why it would be
inappropriate or unnecessary for SBSEFs, and what economic benefit that
you believe would result from omitting it from the Commission's final
rule.
38. Do you disagree with the specific language that the Commission
is proposing? If so, what revisions to the language would you suggest?
39. Do you agree with the proposed list of the types of rules and
rule amendments that the Commission would allow an SBSEF to make
effective without a self-certification? Are there any types that you
believe should be added to that list? If so, which types and why? Are
there any types that you believe should be removed from that list? If
so, which types and why?
E. Submission Cover Sheet and Instructions
As new Sec. 249.2002, the Commission is proposing a submission
cover sheet and instructions that an SBSEF would be required to use in
conjunction with
[[Page 28889]]
filings submitted pursuant to proposed Rules 804 through 807, 809, and
816. These are modelled on the cover sheet and instructions used by
SEFs in conjunction with their analogous filings with the CFTC.\80\
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\80\ The CFTC cover sheet and instructions, found in appendix D
to part 40 of the CFTC's rules, are designed for rule and product
filings from a wider range of registered entities than just SEFs,
and thus include entries that are omitted from the Commission's
proposed adaptation.
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The same cover sheet and instructions would be used for a new rule,
rule amendment, or new product filing, with the SBSEF checking the
appropriate box to indicate which of these types the filing represents.
The SBSEF also would be required to check boxes to indicate whether the
submission was seeking approval by the Commission or whether it was
being filed as a certification by the SBSEF; and to identify the
specific provision in the Commission's rules pursuant to which the
filing was being submitted. The submission cover sheet also would
include a box that the SBSEF would check if it intends to submit a
request for a joint interpretation from the Commission and the CFTC
regarding whether the product is a swap, an SBS, or mixed swap pursuant
to SEA Rule 3a68-2.\81\ Finally, the cover sheet would include a check
box by which an SBSEF could indicate that it was requesting
confidential treatment of materials in the submission.
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\81\ Proposed Rule 809 would provide that a product filing will
be stayed or tolled, as applicable, if such a request for a joint
interpretation is made by the SBSEF, the SEC, or the CFTC. See infra
section VI(G).
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The cover sheet would divide the rules and rule amendment filings
into two categories: One for general rules of the SBSEF and the other
for rules relating to the terms and conditions of a product. Additional
boxes would need to be checked if a filing under the terms-and-
conditions category concerned specifically a determination by the SBSEF
that a particular SBS was now to be considered MAT (``made-available-
to-trade''); \82\ or if the filing concerned the delisting of an SBS
with no open interest.\83\ The cover sheet would need to be used in
conjunction with the weekly notifications that SBSEFs would be required
to file pursuant to Rule 807(d) for certain changes that do not need to
be approved or certified, as discussed above.
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\82\ See infra section VII(F).
\83\ See supra note 73.
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Paragraph (a) of the submission cover sheet instructions would
provide that a properly completed submission cover sheet must accompany
all rule and product submissions submitted electronically to the
Commission by an SBSEF, using the EDGAR system and must be provided as
an Interactive Data File in accordance with Rule 405 of Regulation S-T.
Per paragraph (a), a properly completed submission cover sheet would
include all of the following:
1. The name and platform ID of the SBSEF.\84\
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\84\ ``Platform ID'' is a term utilized in Regulation SBSR, 17
CFR 242.900 et seq., and means the unique identification code
(``UIC'') assigned to a platform on which an SBS is executed. See 17
CFR 242.900(w). The term ``platform'' includes an SBSEF. See Rule
900(v), 17 CFR 242.900(v). A registered SBSEF is required by Rule
903(a) of Regulation SBSR, 17 CFR 242.903(a), to use as its platform
ID an identifier issued by an internationally recognized standards-
setting system (``IRSS'') if the IRSS meets enumerated criteria and
has therefore been recognized by the Commission pursuant to Rule
903(a). This identification requirement stems from a registered
SBSEF's status as a ``participant'' of a registered SDR under Rule
900(u), 17 CFR 242.900(u), because the term ``participant'' includes
a ``platform,'' as defined in Rule 900(v), 17 CFR 242.900(v), that
incurs reporting duties under Rule 901(a), 17 CFR 242.901(a).
Currently, the Global Legal Entity Identifier System (``GLEIS'') is
the only IRSS that has been recognized by the Commission under Rule
903(a). See Regulation SBSR--Reporting and Dissemination of
Security-Based Swap Information, SEA Release No. 74244 (February 11,
2015), 80 FR 14564, 14631-32 (March 19, 2015) (``Regulation SBSR
Adopting Release I''). Therefore, LEIs issued through the GLEIS are
currently the only allowable platform IDs that may be used by
registered SBSEFs.
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2. The date of the filing.
3. An indication as to whether the filing is a new rule, rule
amendment, or new product.
4. For rule filings, the rule number(s) being adopted or, in the
case of rule amendments, the number of the rule(s) being modified.
5. For rule or rule amendment filings, a description of the new
rule or rule amendment, including a discussion of its expected impact
on the SBSEF, its members, and the overall market. The instructions
will state that the narrative should describe the substance of the
submission with enough specificity to characterize all material aspects
of the filing.
Paragraph (b) of the proposed submission cover sheet instructions
would state that a submission must comply with all applicable filing
requirements for proposed rules, rule amendments, or products, and that
the filing of the submission cover sheet would not obviate the SBSEF's
responsibility to comply with applicable filing requirements.
Paragraph (c) of the proposed submission cover sheet would state
that checking the box marked ``confidential treatment requested'' would
not obviate the submitter's responsibility to comply with all
applicable requirements for requesting confidential treatment under SEA
Rule 24b-2 and would not substitute for notice or full compliance with
such requirements.
The Commission contemplates establishing a system for electronic
completion of the cover sheet and attachment of the submissions
required by proposed Rules 804, 805, 806, 807, and 809, and will advise
affected persons regarding its use by public announcement in advance of
the effective date of these rules.
The Commission seeks comment on the following:
40. Do you agree in general that the submission cover sheet and
instructions for SBSEF filings should be harmonized with the CFTC's?
Why or why not?
41. Do you agree with the specific language proposed in the cover
sheet and instructions? If not, how should the language be revised? Is
there any information not included in the proposed cover sheet and
instructions that you believe should be included?
42. Do you agree with the requirement for an SBSEF to report its
platform ID on the cover sheet? Should the disclosure of standard
identifiers such as the LEI, the Financial Instrument Global Identifier
(``FIGI''), and the Unique Product Identifier (``UPI'') be included in
an SBSEF's other reporting obligations under the proposed rules?
43. Are any of the instructions in the submission cover sheet
unclear? If so, what matters do you believe require clarification?
F. Rule 808--Availability of Public Information
Section 40.8 of the CFTC's rules is entitled ``Availability of
public information.'' Sec. 40.8(a) provides that any part of an
application to register as a SEF (among other CFTC-registered entities)
that is not covered by a request for confidential treatment will be
made publicly available. Section 40.8(a) also sets out the sections of
an application to register as a SEF that shall be made publicly
available. Section 40.8(c) \85\ provides that rule and new product
filings by a SEF, whether made under the self-certification procedures
or pursuant to CFTC review and approval, will be treated as public
information unless accompanied by a request for confidential treatment.
Section 40.8(c) includes procedures for such requests for confidential
treatment. Section 40.8(d) provides that CFTC staff will not consider
confidential treatment requests for information that is required to be
made public under the CEA, and that the terms and conditions of a
product
[[Page 28890]]
submitted to the CFTC shall be made publicly available at the time of
submission.
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\85\ Section 40.8(b) has no text and is marked ``reserved.''
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Proposed Rule 808 is closely modelled on Sec. 40.8. Section
40.8(a) does not provide a list of the exhibits required to be made
public, but rather refers to a general description of items required to
be made public. For purposes of clarity and ease of reference, however,
the Commission is proposing to list the specific corresponding exhibits
in proposed Rule 808 that would be made publicly available. Therefore,
paragraph (a) of proposed Rule 808 would provide that the Commission
shall make publicly available on its website the following parts of an
application to register as an SBSEF, unless confidential treatment is
obtained pursuant to SEA Rule 24b-2: the transmittal letter and first
page of the application cover sheet; Exhibit C; Exhibit G; Exhibit L;
and Exhibit M.
Paragraph (b) of proposed Rule 808, adapted from Sec. 40.8(c),
would provide that the Commission shall make publicly available on its
website, unless confidential treatment is obtained pursuant to SEA Rule
24b-2,\86\ an SBSEF's filing of new products pursuant to the self-
certification procedures of proposed Rule 804, new products for
Commission review and approval pursuant to proposed Rule 805, new rules
and rule amendments for Commission review and approval pursuant to
proposed Rule 806, and new rules and rule amendments pursuant to the
self-certification procedures of proposed Rule 807. Paragraph (c),
adapted from Sec. 40.8(d), would provide that the terms and conditions
of a product submitted to the Commission pursuant to any of proposed
Rules 804 through 807 shall be made publicly available at the time of
submission unless confidential treatment is obtained pursuant to SEA
Rule 24b-2.
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\86\ An application for confidential treatment shall contain,
among other things, a statement of the grounds of objection
referring to, and containing an analysis of, the applicable
exemption(s) from disclosure under the Freedom of Information Act,
and a justification of the period of time for which confidential
treatment is sought. See 17 CFR 240.24b-2(b)(2)(ii).
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The Commission preliminarily believes that it would be appropriate
to include in proposed Regulation SE a rule similar to Sec. 40.8 that
would clarify how SBSEFs may request confidential treatment for their
filings, and what information contained in those filings would be
publicly available by the Commission. The Commission preliminarily
believes that the items enumerated in proposed Rule 808 are not of the
type that typically would constitute confidential information.
The Commission requests comment on the following:
44. Do you believe in general that Regulation SE should include a
rule modelled on Sec. 40.8? Why or why not?
45. In particular, do you agree with the specific language proposed
by the Commission to adapt Sec. 40.8 into proposed Rule 808? If not,
how would you revise that language?
46. Are there any provisions of Sec. 40.8 that are adapted into
proposed Rule 808 that you believe would be inappropriate, or would not
create any benefit, in a Commission rule applying to SBSEFs? If so,
please identify any such provision, explain why it would be
inappropriate or unnecessary for SBSEFs, and what economic benefit that
you believe would result from omitting it from the Commission's final
rule.
47. Do you prefer the Commission's proposed approach of listing
specific exhibits or the CFTC's approach of providing in the rule only
a general description of items required to be made public? If the
former, are there any additional exhibits that you believe should be
enumerated in Rule 808 that should be made publicly available? If so,
which exhibits and why?
G. Rule 809--Staying of Certification and Tolling of Review Period
Pending Jurisdictional Determination
Section 40.12 of the CFTC's rules is entitled ``Staying of
certification and tolling of review period pending jurisdictional
determination'' and reflects the process described in section 718 of
the Dodd-Frank Act, which is entitled ``Determining Status of Novel
Derivative Products.'' Section 718 of the Dodd-Frank Act sets forth a
mechanism for addressing a situation where a person wishes to list or
trade a novel derivative product that may have elements of both
securities and contracts of sale of a commodity for future delivery (or
options on such contracts or options on commodities)--i.e., it is
unclear whether the product is a security under the jurisdiction of the
SEC or a future under the jurisdiction of the CFTC. Section 718(a)
provides that the SEC or the CFTC may request that the other agency
issue a determination as to the classification of that product, and
section 718(b) provides that the CFTC and SEC may petition for the
judicial review of any such determination. Section 40.12 provides that
if a SEF (among other registered entities) certifies, submits for
approval, or otherwise files a proposal to list or trade such a novel
derivative product, the product certification shall be stayed or the
approval review period shall be tolled until a final determination
order is issued under section 718.
Proposed Rule 809 is loosely modelled on Sec. 40.12, but modified
to focus on the products and jurisdictional problems that are more
likely to be relevant to SBSEFs. An SBSEF might seek to list a product
where it is unclear whether the product is a swap or an SBS. While
section 718 of the Dodd-Frank Act addresses situations where it is
unclear if a product is a security or a future, the SEC and the CFTC
have adopted separate rules--SEA Rule 3a68-2 and Sec. 1.8,
respectively--governing requests for interpretation regarding a product
that might be an SBS, a swap, or a mixed swap. Accordingly, the
Commission believes that it would be appropriate for proposed Rule 809
to reflect the process set forth in SEA Rule 3a68-2. Nonetheless, the
objective of proposed Rule 809 would be consistent with the objective
of Sec. 40.12--to provide for a stay or tolling of a product filing
where it is unclear whether the product is under the jurisdiction of
the SEC or the CFTC.
Paragraph (a) of proposed Rule 809, modelled on Sec. 40.12(b),
would provide that a product certification made by an SBSEF pursuant to
proposed Rule 804 shall be stayed, or the review period for a product
that has been submitted for Commission approval by an SBSEF pursuant to
proposed Rule 805 shall be tolled, upon request for a joint
interpretation of whether the product is a swap, SBS, or mixed swap
made pursuant to Rule 3a68-2 under the SEA \87\ by the SBSEF, the SEC,
or the CFTC. Paragraph (b) is modelled on Sec. 40.12(b)(1) and would
require the SEC to provide the SBSEF with a written notice of the stay
or tolling pending issuance of a joint interpretation by the SEC and
CFTC. Paragraph (c) is modelled on Sec. 40.12(b)(2) and would provide
that the stay shall be withdrawn, or the approval review period shall
resume, if a joint interpretation finding that the SEC has jurisdiction
over the product is issued.
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\87\ 17 CFR 240.3a68-2.
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The Commission preliminarily believes that it is appropriate for
Regulation SE to include a mechanism for the staying or tolling of a
filing by an SBSEF where it is unclear whether the product is a swap or
an SBS--should an SBSEF ever seek to list such a product. Although
proposed Rule 809 would deviate from Sec. 40.12 in that it would apply
where it is unclear whether a product is swap or an SBS, rather than
where it is unclear whether
[[Page 28891]]
the product is a security or a future, the Commission preliminarily
believes that modifying the scope of proposed Rule 809, in relation to
Sec. 40.12, would appropriately address the jurisdictional questions
that are more likely to arise from a product listed by an SBSEF.
The Commission seeks comment on the following:
48. Do you believe in general that Regulation SE should include a
rule setting out a procedure for staying a product certification or
tolling a product review period if a request for a joint interpretation
regarding the classification of the product is made pursuant to SEA
Rule 3a68-2? Why or why not?
49. In particular, do you agree with the specific language proposed
by the Commission to adapt Sec. 40.12 into proposed Rule 809? If not,
how would you revise that language?
50. Do you agree that Rule 809 should apply to a product that might
be an SBS or a swap, rather than to a product that might be a security
or a future? Why or why not?
51. Are there any provisions of Sec. 40.12 that are adapted into
proposed Rule 809 that you believe would be inappropriate, or would not
create any benefit, in a Commission rule applying to SBSEFs? If so,
please identify any such provision, explain why it would be
inappropriate or unnecessary for SBSEFs, and what economic benefit that
you believe would result from omitting it from the Commission's final
rule.
H. Rule 810--Product Filings by SBSEFs That Are Not Yet Registered and
by Dormant SBSEFs
Part 37 directs SEFs to submit product filings via self-
certification or for CFTC review and approval, using Sec. 40.2 or
Sec. 40.3, respectively. However, these sections cannot be utilized by
an entity that has submitted an application for SEF registration but
has not yet been registered, or by a dormant SEF that has submitted an
application to reinstate its registration. Under Sec. 37.4, either
entity may submit a swap's terms and conditions before being registered
or having its registration reinstated, and the CFTC will consider the
swap listing request as part of the application for registration or
reinstatement, respectively.
Proposed Rule 810 is closely modelled on Sec. 37.4. Paragraph (a)
of proposed Rule 810 is closely modelled on Sec. 37.4(a) and would
provide that an applicant for registration as an SBSEF may submit an
SBS's terms and conditions prior to listing the product as part of its
application for registration. Paragraph (b) is closely modelled on
Sec. 37.4(b) and would provide that any SBS terms and conditions or
rules submitted as part of an application for registration shall be
considered for approval by the Commission at the time the Commission
issues the SBSEF's order of registration. Paragraph (c) is closely
modelled on Sec. 37.4(c) and would provide that, after the Commission
issues the order of registration, the SBSEF shall submit an SBS's terms
and conditions, including amendments to such terms and conditions, new
rules, or rule amendments pursuant to the procedures in proposed Rules
804 to 807. Paragraph (d) is closely modelled on Sec. 37.4(d), would
provide that any SBS terms and conditions or rules submitted as part of
an application to reinstate the registration of a dormant SBSEF shall
be considered for approval by the Commission at the time the Commission
approves the reinstatement of registration of the dormant SBSEF.
The Commission preliminarily believes that it is appropriate for
Regulation SE to include provisions that address new products submitted
as part of an SBSEF registration by an entity that has not yet been
registered, or by a dormant SBSEF seeking reinstatement of its
registration, and that these provisions should align with the CFTC's
provisions as closely as possible.
The Commission seeks comment on the following:
52. Do you believe in general that Regulation SE should include a
rule setting out how dormant SBSEFs and applicants for SBSEF
registration can submit new products? Why or why not?
53. In particular, do you agree with the specific language proposed
by the Commission to adapt Sec. 37.4 into proposed Rule 810? If not,
how would you revise that language?
54. Are there any provisions of Sec. 37.4 that are adapted into
proposed Rule 810 that you believe would be inappropriate, or would not
create any benefit, in a Commission rule applying to SBSEFs? If so,
please identify any such provision, explain why it would be
inappropriate or unnecessary for SBSEFs, and what economic benefit that
you believe would result from omitting it from the Commission's final
rule.
VII. Miscellaneous Requirements
Sections 37.5 to 37.12 of the CFTC's rules impose miscellaneous
requirements on SEFs. The Commission seeks to impose similar
requirements on SBSEFs in proposed Rules 811 to 817 of Regulation SE.
A. Rule 811--Information Relating to SBSEF Compliance
1. Harmonization With Sec. 37.5
Paragraphs (a) to (c) of proposed Rule 811 are modelled on Sec.
37.5, which is entitled ``Information regarding swap execution facility
compliance.'' Section 37.5 provides that the CFTC may request various
types of information from a SEF, and that the SEF must supply the
information to the CFTC in a form and manner specified by the CFTC.
Paragraph (a) of Sec. 37.5 requires a SEF, at the CFTC's request, to
provide information related to its business as a SEF. Paragraph (b)
states that a SEF may be required to provide a written demonstration,
containing supporting data, information, and documents that it is in
compliance with one or more core principles or with its other
obligations under the CEA. Paragraph (c) sets out procedures for a SEF
to notify the CFTC of any transfer of 50% or more of the equity
interest in the SEF.
Proposed Rules 811(a) to (c) are closely modelled on Sec. 37.5.
Paragraph (a) of proposed Rule 811 is closely modelled on Sec. 37.5(a)
and would provide that, upon the Commission's request, an SBSEF shall
file with the Commission information related to its business as an
SBSEF in the form and manner, and within the timeframe, specified by
the Commission. Paragraph (b) is closely modelled on Sec. 37.5(b) and
would provide that, upon the Commission's request, an SBSEF shall file
with the Commission a written demonstration, containing supporting
data, information, and documents, that it is in compliance with one or
more Core Principles or with its other obligations under the SEA or the
Commission's rules thereunder, as the Commission specifies in its
request. Also, under proposed Rule 811(b), the SBSEF would be required
to file such written demonstration in the form and manner, and within
the timeframe, specified by the Commission.
Paragraph (c)(1) of proposed Rule 811 is closely modelled on Sec.
37.5(c)(1) and would provide that an SBSEF shall file with the
Commission a notification of any transaction involving the direct or
indirect transfer of 50% or more of the equity interest in the SBSEF.
Also, under proposed Rule 811(c)(1), the Commission could, upon
receiving such notification, request supporting documentation of the
transaction. Paragraph (c)(2) is closely modelled on Sec. 37.5(c)(2)
and would provide that the equity interest transfer notice shall be
filed with the Commission in a form and manner specified by the
Commission at the earliest possible time, but in no
[[Page 28892]]
event later than the open of business ten business days following the
date upon which the SBSEF enters into a firm obligation to transfer the
equity interest. Paragraph (c)(3) is closely modelled on Sec.
37.5(c)(3), would provide that, notwithstanding the foregoing, if any
aspect of an equity interest transfer requires an SBSEF to file a rule,
the SBSEF shall comply with the applicable rule filing requirements of
proposed Rule 806 or 807.
Paragraph (c)(4) of proposed Rule 811 is closely modelled on Sec.
37.5(c)(4) and would provide that, upon a transfer of an equity
interest of 50% or more in an SBSEF, the SBSEF shall file with the
Commission, in a form and manner specified by the Commission, a
certification that the SBSEF meets all of the requirements of section
3D of the SEA and the Commission rules thereunder, no later than two
business days following the date on which the equity interest of 50% or
more was acquired.
The Commission preliminarily believes that it is appropriate for
Regulation SE to include provisions requiring an SBSEF to provide the
Commission with the information described above. Information about its
business as an SBSEF and transfers of 50% of its equity would promote
understanding of its operations and ownership, which should facilitate
oversight of the SBSEF; therefore, the Commission preliminarily
believes that it should, similar to the CFTC, clarify that it may
request such information from an SBSEF. In addition, should questions
about compliance arise, the Commission should be able to obtain from an
SBSEF supporting data, information, and documents that the SBSEF is in
compliance with relevant obligations under the SEA. By modelling its
proposed requirements on existing CFTC rules, the Commission seeks to
obtain comparable regulatory benefits while imposing only marginal
additional burdens on dually registered entities that are already
subject to similar obligations.
The Commission requests comment on the following:
55. Do you believe in general that Regulation SE should include a
rule that would require an SBSEF to provide the Commission with
information about its business or its compliance with the SEA, as well
as information regarding transfers of 50% or more of its equity
interest? Why or why not?
56. In particular, do you agree with the specific language proposed
by the Commission to adapt Sec. 37.5 into proposed Rule 811? If not,
how would you revise that language?
57. Are there any provisions of Sec. 37.5 that are adapted into
proposed Rule 811 that you believe would be inappropriate, or would not
create any benefit, in a Commission rule applying to SBSEFs? If so,
please identify any such provision, explain why it would be
inappropriate or unnecessary for SBSEFs, and what economic benefit that
you believe would result from omitting it from the Commission's final
rule.
2. Harmonization With Sec. 1.60
Paragraph (d) of proposed Rule 811 is not modelled on Sec. 37.5
but rather on Sec. 1.60 of the CFTC's rules, which is entitled
``Pending legal proceedings.'' Because it is conceptually similar to
Sec. 37.5 in that it requires another type of information relevant to
the regulatory oversight of a SEF, the Commission is proposing to adapt
this provision into Rule 811.
Section 1.60 requires a SEF (among other entities) to provide the
CFTC with copies of any legal proceeding to which it is a party, or to
which its property or assets is subject. Paragraph (d) of proposed Rule
811 would adapt paragraphs (a), (c), and (e) of Sec. 1.60 to apply to
SBSEFs.\88\
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\88\ Paragraphs (b) and (d) of Sec. 1.60 apply to futures
commission merchants and do not appear germane to SEFs or SBSEFs.
Therefore, the Commission is not adapting these paragraphs into
proposed Rule 811(d).
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Paragraph (d)(1) of proposed Rule 811 is closely modelled on Sec.
1.60(a) and would provide that an SBSEF shall submit to the Commission
a copy of the complaint, any dispositive or partially dispositive
decision, any notice of appeal filed concerning such decision, and such
further documents as the Commission may thereafter request filed in any
material legal proceeding to which the SBSEF is a party or its property
or assets is subject. Paragraph (d)(2) is closely modelled on Sec.
1.60(c) and would provide that an SBSEF shall submit to the Commission
a copy of the complaint, any dispositive or partially dispositive
decision, any notice of appeal filed concerning such decision, and such
further documents as the Commission may thereafter request filed in any
material legal proceeding instituted against any officer, director, or
other official of the SBSEF from conduct in such person's capacity as
an official of the SBSEF and alleging violations of the SEA or any
rule, regulation, or order thereunder; the constitution, bylaws, or
rules of the SBSEF; or the applicable provisions of State law relating
to the duties of officers, directors, or other officials of business
organizations.
Paragraph (d)(3) of proposed Rule 811 is loosely modelled on Sec.
1.60(e) and would provide that documents required by Rule 811(d) to be
submitted to the Commission shall be submitted electronically in a form
and manner specified by the Commission within ten days after the
initiation of the legal proceedings to which they relate, after the
date of issuance, or after receipt by the SBSEF of the notice of
appeal, as the case may be.\89\
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\89\ Section 1.60(e) requires relevant documents to be ``mailed
via first-class or submitted by other more expeditious means.''
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Paragraph (d)(4) of proposed Rule 811 is closely modelled on the
final two sentences of Sec. 1.60(e) and would provide that, for
purposes of Rule 811(d), a ``material legal proceeding'' includes but
is not limited to actions involving alleged violations of the SEA or
the Commission rules thereunder, and that a legal proceeding is not
``material'' for the purposes of Rule 811 if the proceeding is not in a
Federal or State court or if the Commission is a party.
The Commission preliminarily believes that, to properly oversee an
SBSEF, the Commission needs to be aware of any pending legal
proceedings involving the SBSEF or any officer, director, or other
official of the SBSEF from conduct in such person's capacity as an
official of the SBSEF. The Commission preliminarily believes,
furthermore, that Sec. 1.60 provides an established and well
understood mechanism for obtaining this information, and therefore is
using Sec. 1.60 as the model for proposed Rule 811(d).
The Commission seeks comment on the following:
58. Do you believe in general that Regulation SE should include a
rule that would require an SBSEF to provide the Commission with
information about its pending legal proceedings? Why or why not?
59. In particular, do you agree with the specific language proposed
by the Commission to adapt Sec. 1.60 into proposed Rule 811? If not,
how would you revise that language?
60. Are there any provisions of Sec. 1.60 that are adapted into
proposed Rule 811 that you believe would be inappropriate, or would not
create any benefit, in a Commission rule applying to SBSEFs? If so,
please identify any such provision, explain why it would be
inappropriate or unnecessary for SBSEFs, and what economic benefit that
you believe would result from omitting it from the Commission's final
rule.
[[Page 28893]]
B. Rule 812--Enforceability
Section 37.6(a) of the CFTC's rules provides that a transaction
entered into on or pursuant to the rules of a SEF shall not be void,
voidable, subject to rescission, otherwise invalidated, or rendered
unenforceable as a result of a violation by the SEF of the Core
Principles or the part 37 rules thereunder. Section 37.6(a) also
provides generally that such a transaction would not be void or
voidable as a result of a CFTC or other proceeding to alter or
supplement a rule, term, or trading rule or procedure. Section 37.6(b)
requires a SEF to provide each counterparty to a transaction that is
entered into on or pursuant to the rules of the SEF with a written
record of all of the terms of the transaction which shall legally
supersede any previous agreement and serve as a confirmation of the
transaction. Furthermore, under Sec. 37.6(b), the confirmation of all
terms of the transaction must take place at the same time as execution,
provided that specific customer identifiers for accounts included in
bunched orders need not be included in confirmations if certain
conditions are met.
Proposed Rule 812 generally is modelled on Sec. 37.6, but omits
certain of its detailed provisions. Paragraph (a) of proposed Rule 812,
which is based on Sec. 37.6(a)(1), would provide that a transaction on
or pursuant to the rules of an SBSEF cannot be invalidated as a result
of a violation by the SBSEF of section 3D of the SEA or the
Commission's rules thereunder.\90\ An SBS executed on an SBSEF should
not be invalidated by the SBSEF's violation of any of the securities
laws, given that swaps executed on SEFs are afforded the same legal
certainty under Sec. 37.6(a).
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\90\ The Commission is not adapting into proposed Rule 812
paragraphs (a)(2) and (a)(3) of Sec. 37.6, which provide that a
transaction on a SEF may not be invalidated by CFTC proceedings that
alter or supplement SEF rules, terms, and conditions, because the
Commission has no authority in the SEA analogous to the CFTC's
authority under section 8a(7) of the CEA to conduct such
proceedings. See supra note 66 and accompanying text.
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Paragraph (b) of proposed Rule 812 is modelled on the first
sentence of Sec. 37.6(b) and would provide that an SBSEF shall, as
soon as technologically practicable after the time of execution of a
transaction entered into on or pursuant to the rules of the facility,
provide a written record to each counterparty of all of the terms of
the transaction that were agreed to on the facility, which shall
legally supersede any previous agreement regarding such terms. The
Commission preliminarily believes that it would be appropriate to
require an SBSEF to inform counterparties as soon as technologically
practicable after they have effected a trade on or pursuant the rules
of the SBSEF, and to provide them with a written record of the terms to
which they have agreed. The Commission also preliminarily believes that
it would be appropriate to require that this written record legally
supersede any previous agreement regarding the terms that were agreed
to on the SBSEF. The Commission recognizes, however, that there may be
other terms of an uncleared SBS transaction that are specified in one
or more agreements previously negotiated between the counterparty pair
(relating, e.g., to credit support). Because agreements between
counterparty pairs likely are not known or easily obtained by an SBSEF,
the Commission is not including a requirement that the SBSEF provide a
written record of any such terms.\91\
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\91\ Section 37.6(b) requires a SEF to provide a written record
of ``all of the terms of the transaction which shall legally
supersede any previous agreement and serve as a confirmation of the
transaction.'' In the adopting release for the final part 37 rules,
the CFTC explained that, with respect to uncleared swaps, a SEF
could satisfy this requirement by incorporating by reference terms
set forth in agreements previously negotiated by the counterparties,
provided that such agreements had been submitted to the SEF ahead of
execution. See 2013 CFTC Final SEF Rules Release, 78 FR at 33491, n.
195. The CFTC staff has provided no-action relief with respect to
the confirmation requirements for uncleared swaps in response to
assertions by industry participants that it is impracticable for a
SEF to satisfy the written confirmation requirements by
incorporating by reference terms from previously negotiated
agreements between the counterparties if the SEF must receive copies
of such agreements prior to execution. See CFTC No Action Letter 17-
17 (March 24, 2017) (issued by the CFTC's Division of Market
Oversight). In so doing, the CFTC staff indicated that it was
continuing to assess confirmation requirements, including
establishing a permanent solution to the issues raised. Given these
circumstances, the Commission preliminarily believes that it is
appropriate to require an SBSEF to provide counterparties with a
written record of only those terms that are agreed to on the SBSEF.
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The Commission seeks comment on the following:
61. Do you believe in general that Regulation SE should include a
rule regarding enforceability of contracts entered into on an SBSEF
that is modelled on Sec. 37.6? Why or why not?
62. In particular, do you agree with the specific language proposed
by the Commission to adapt Sec. 37.6 into proposed Rule 812? If not,
how would you revise that language?
63. Are there any provisions of Sec. 37.6 that the Commission is
proposing to adapt into Rule 812 that you believe would be
inappropriate, or fail to create any benefit, in a Commission rule
applicable to SBSEFs? If so, please identify any such provision,
explain why it would be inappropriate or unnecessary for SBSEFs, and
what economic benefit that you believe would result from omitting it
from the Commission's final rule.
64. Do you believe that any of the provisions of Sec. 37.6 for
which the Commission has not proposed an analog warrant inclusion? If
so, which one(s) and why?
65. Rule 15Fi-2(f)(1) under the SEA \92\ provides SBS dealers and
major SBS participants with an exception from the trade acknowledgment
and verification requirements for SBS transactions ``executed on [an
SBSEF] or national securities exchange, provided that the rules,
procedures or processes of the [SBSEF] or national securities exchange
provide for the acknowledgment and verification of all terms of the
security-based swap transaction no later than the time required by
[Rule 15Fi-2(b) and (d)(2)]'' (emphasis added). Proposed Rule 812(b)
would require an SBSEF to provide a written record only of the terms of
the transaction that are agreed to on the SBSEF. As a result, if the
Commission were to adopt Rule 812(b) substantially as proposed, the
exception in Rule 15Fi-2(f)(1) would not be available where the
counterparty pair has agreed to other terms of the SBS transaction away
from the SBSEF. Do you agree with this result? If not, how would an
SBSEF be able to provide a record of all terms of an SBS transaction
effected on or pursuant to the rules of the SBSEF when there are one or
more pre-existing agreements between the counterparty pair where the
counterparties agree to additional terms?
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\92\ 17 CFR 240.15Fi-2(f)(1).
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C. Rule 813--Prohibited Use of Data Collected for Regulatory Purposes
Section 37.7 of the CFTC's rules provides that a SEF shall not use
for business or marketing purposes any proprietary data or personal
information that it collects or receives from or on behalf of any
person for the purpose of fulfilling its regulatory obligations. The
SEF may use data or information for business or marketing purposes if
the person consents, but the SEF may not condition access to the SEF on
the person's providing such consent. Finally, Sec. 37.7 provides that
a SEF, where necessary for regulatory purposes, may share such data or
information with another SEF or a DCM.
Proposed Rule 813 is modelled on Sec. 37.7. Persons who trade on
an SBSEF may have to provide proprietary data or
[[Page 28894]]
personal information to the SBSEF from time to time to allow the SBSEF
to carry out its regulatory obligations. The Commission preliminarily
believes, in general, that an SBSEF using that information for business
or marketing purposes would be a misappropriation, because the SBSEF's
powers to compel production of that information by its members is for
regulatory purposes, not for the benefit of the SBSEF's business
interests. While a member of the SBSEF could consent to the SBSEF using
this information for business or marketing purposes, the Commission
preliminarily believes that access to the SBSEF should not be
conditioned on such consent being given. The Commission preliminarily
believes that Sec. 37.7 is well understood by market participants and
well designed for adaptation to the SBS market to deter such
misappropriation. Therefore, the Commission preliminarily believes that
close harmonization with Sec. 37.7 is appropriate.
The Commission seeks comment on the following:
66. Do you believe in general that Regulation SE should include a
rule that prohibits an SBSEF from using for business or marketing
purposes any proprietary data or personal information that it collects
or receives from or on behalf of any person for the purpose of
fulfilling its regulatory obligations? Why or why not?
67. In particular, do you agree with the specific language proposed
by the Commission to adapt Sec. 37.7 into proposed Rule 813? If not,
how would you revise that language?
68. Are there any provisions of Sec. 37.7 that are adapted into
proposed Rule 813 that you believe would be inappropriate, or would not
create any benefit, in a Commission rule applying to SBSEFs? If so,
please identify any such provision, explain why it would be
inappropriate or unnecessary for SBSEFs, and what economic benefit that
you believe would result from omitting it from the Commission's final
rule.
D. Rule 814--Entity Operating Both a National Securities Exchange and
SBSEF
Section 37.8 of the CFTC's rules applies to a board of trade that
operates both a DCM and a SEF. Paragraph (a) of Sec. 37.8 requires the
board of trade to separately register the DCM and the SEF with the CFTC
under the respective rules for each type of market. Paragraph (b)
requires a board of trade that operates both types of market and that
uses the same electronic trade execution system for executing and
trading swaps on both markets to clearly identify to market
participants whether an execution of a swap took place on the DCM or on
the SEF.
Proposed Rule 814 is modelled on Sec. 37.8. Paragraph (a) of
proposed Rule 814 would provide that an entity intending to operate
both a national securities exchange and an SBSEF shall separately
register the two facilities pursuant to section 6 of the SEA and Rule
803 thereunder. Paragraph (b), although adapted generally from Sec.
37.8(b), draws its specific language from section 3D(c) of the SEA.\93\
Section 3D(c) contemplates that a single entity may operate both a
national securities exchange and an SBSEF, and would provide that a
national securities exchange shall, to the extent that the exchange
also operates an SBSEF and uses the same electronic trade execution
system for listing and executing trades of SBS on or through the
exchange and the facility, identify whether electronic trading of SBS
is taking place on or through the national securities exchange or the
SBSEF. Proposed Rule 814(b) copies section 3D(c) of the SEA verbatim.
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\93\ 15 U.S.C. 78c-4(c).
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The Commission preliminarily believes that it is appropriate for
proposed Regulation SE to include a rule that clarifies the
registration status of an entity that operates both an exchange and an
SBSEF, and that broadly parallels Sec. 37.8.
The Commission seeks comment on the following:
69. Do you believe in general that Regulation SE should include a
rule that clarifies the registration status of an entity that operates
both an exchange and an SBSEF? Why or why not?
70. In particular, do you agree with the specific language proposed
by the Commission in Rule 814? If not, how would you revise that
language?
71. Do you believe that more detailed rules are necessary to
address the extent to which an entity should keep separate its exchange
and its SBSEF or, conversely, areas where overlapping functionality or
personnel should expressly be allowed? If so, please discuss.
E. Rule 815--Methods of Execution for Required and Permitted
Transactions
A key goal of the Dodd-Frank Act is to bring trading of swaps and
SBS onto regulated markets, as reflected in the statutory requirements
for mandatory clearing and mandatory trade execution of certain swap
and SBS products.\94\ If the relevant agency makes a mandatory clearing
determination regarding a product, the product becomes subject to
mandatory trade execution if at least one DCM/exchange or SEF/SBSEF
makes the product ``available to trade.'' The legislative history of
the Dodd-Frank Act indicates that exchange trading is a mechanism to
``provide pre- and post-trade transparency for end users, market
participants, and regulators.'' \95\ Exchange trading also enhances
market efficiency by allowing multiple market participants the
opportunity to compete for individual transactions on price, in
contrast to the bilateral, dealer-driven market that prevailed before
the Dodd-Frank Act.\96\ The Dodd-Frank Act does not require, however,
that all products be subject to mandatory clearing and/or mandatory
trade execution, and does not impose any execution requirements for
transactions in such products. Section 37.9 of the CFTC's rules
addresses these issues using the concepts of ``Required Transaction''
and ``Permitted Transaction.'' The Commission is proposing Rule 815 of
Regulation SE to adapt Sec. 37.9 for SBSEFs.
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\94\ See 7 U.S.C. 2(h)(1)(A) (mandatory clearing for swaps) and
2(h)(8) (mandatory trade execution for swaps); 15 U.S.C. 78c-3(a)(1)
(mandatory clearing for SBS) and 78c-3(h) (mandatory trade execution
for SBS). The heads of the Group of Twenty countries (``G20'') have
also emphasized the importance of exchange-trading of OTC
derivatives, noting in 2009 that ``[a]ll standardized 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.'' See G20, Leaders'
Statement: The Pittsburgh Summit (September 24-25, 2009) at p. 9.
\95\ S. Rep. No. 111-176, at 34 (2010). See also Mark Jickling &
Kathleen Ann Ruane, ``The Dodd-Frank Wall Street Reform and Consumer
Protection Act: Title VII, Derivatives,'' Cong. Research Serv.,
R41398, at 7 (August 30, 2010) (explaining that the goal of the
trade execution requirement is to promote pre-trade price
transparency).
\96\ See id. at 34 (quoting Stanford University Professor Darrel
Duffie: ``The relative opaqueness of the OTC market implies that
bid/ask spreads are in many cases not being set as competitively as
they would be on exchanges. This entails a loss in market
efficiency''). See also id. (quoting International Risk Analytics
co-founder Christopher Whalen: ``The absence of an exchange trading
mandate provides `supra normal returns paid to the dealers in the
closed OTC derivatives market [and] are effectively a tax on other
market participants, especially investors who trade on open, public
exchanges'').
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Section 37.9(a) defines a ``Required Transaction'' as any
transaction involving a swap that is subject to the trade execution
requirement in section 2(h)(8) of the CEA, subject to certain
exceptions. Section 37.9(c) defines a ``Permitted Transaction'' as the
obverse of a Required Transaction: Any transaction involving a swap
that is not subject to the CEA's trade execution requirement. Section
37.9(c) provides that a SEF may offer any method of execution for a
Permitted Transaction.
[[Page 28895]]
In addition, Sec. 37.9(a) provides that a Required Transaction that is
not a block trade must generally be executed by a SEF using an order
book \97\ or a request-for-quote (``RFQ'') system.\98\
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\97\ Section 37.9(a)(2)(i)(A) defines ``order book'' by cross-
referencing to Sec. 37.3(a)(3) for a definition of ``order book,''
which in turn relies on cross-references to other provisions of the
CEA for the embedded terms ``trading facility'' and ``electronic
trading facility.''
\98\ Section 37.9(a)(3) defines ``request for quote system'' as
a trading system or platform in which a market participant transmits
a request for a quote to buy or sell a specific instrument to no
less than three market participants in the trading system or
platform, to which all such market participants may respond. Sec.
37.9(a)(3) further provides that, to meet the definition, the three
market participants shall not be affiliates or controlled by the
requester, and shall not be affiliates of or controlled by each
other.
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Under Sec. 37.9(a)(3), a SEF that offers an RFQ system in
connection with a Required Transaction must, at the same time that the
requester receives the first responsive bid or offer, communicate to
the requester any firm bid or offer pertaining to the same instrument
resting on any of the SEF's order books. In addition, the SEF must
provide the requester with the ability to execute against such firm
resting bids or offers along with any responsive orders. Finally, the
SEF must ensure that its trading protocols provide each of its market
participants with equal priority in receiving requests for quotes and
in transmitting and displaying for execution responsive orders.
Section 37.9(b) establishes a time-delay requirement for a Required
Transaction on an order book. Under the rule, a SEF must require that a
broker or dealer who seeks to either execute against its customer's
order or to execute two of its customers' orders against each other
through the SEF's order book (following some form of pre-arrangement or
pre-negotiation of such orders) be subject to at least a 15-second time
delay between the entry of those two orders into the order book, such
that one side of the potential transaction is disclosed and made
available to other market participants before the second side of the
potential transaction, whether for the broker's or dealer's own account
or for the second customer, is submitted for execution.\99\
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\99\ Section 37.9(b) permits a SEF to adjust the time-delay
requirement to something other than 15 seconds, based on a swap's
liquidity or other product-specific considerations. However, any
such adjustment must still be for a sufficient length so that an
order is exposed to the market and other market participants have a
meaningful opportunity to execute against it.
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Paragraphs (a) through (c) of proposed Rule 815 are modelled on
paragraphs (a) through (c) of Sec. 37.9. Proposed Rule 815(a)(1),
based on Sec. 37.9(a)(1), would define ``Required Transaction'' as
``any transaction involving a security-based swap that is subject to
the trade execution requirement in section 3C(h) of the Act.'' Proposed
Rule 815(a)(2), based on Sec. 37.9(a)(2), would specify execution
methods for Required Transactions. Proposed Rule 815(a)(3), based on
Sec. 37.9(a)(3), would define an RFQ system as ``a trading system or
platform in which a market participant transmits a request for a quote
to buy or sell a specific instrument to no less than three market
participants in the trading system or platform, to which all such
market participants may respond'' and specify other requirements for an
RFQ system to be recognized as such under the rule. The three market
participants could not be affiliates of or controlled by the requester
and shall not be affiliates of or controlled by each other. Also, an
SBSEF that offers an RFQ system in connection with a Required
Transaction would be required, at the same time that the requester
receives the first responsive bid or offer, to communicate to the
requester any firm bid or offer pertaining to the same SBS resting on
any of the SBSEF's order books. In addition, the SBSEF would be
required to provide the requester with the ability to execute against
such firm resting bids or offers along with any responsive orders.
Finally, the SBSEF would be required to ensure that its trading
protocols provide each of its members with equal priority in receiving
requests for quotes and in transmitting and displaying for execution
responsive orders.
Paragraph (b) of proposed Rule 815 is modelled on Sec. 37.9(b) and
would provide for a time delay requirement for Required Transactions on
an order book. Section 37.9(b) recognizes that there are situations
where a broker or dealer might seek to trade against a customer order
(a ``facilitation cross'') or cross two customer orders (a ``customer
cross'') where the product being traded is subject to mandatory trade
execution. Under Sec. 37.9(b), the broker or dealer must expose
customer orders on the SEF order book for a required minimum period so
that other market participants have the opportunity to offer a better
price than the broker or dealer had intended for the cross. Proposed
Rule 815(b) closely follows the order-handling requirements of Sec.
37.9(b) for facilitation and customer crosses that are Required
Transactions.
The Commission preliminarily believes that the CFTC's rules
relating to Required Transactions are reasonably designed to promote
price competition in products that are subject to the trade execution
requirement. The Commission recognizes that, when considering rules for
SBS that are subject to mandatory clearing and mandatory trade
execution, additional or different criteria could plausibly achieve the
goal of promoting price competition. It is debatable, for example,
whether slightly different standards--such as RFQ-to-4 or RFQ-to-2 in
lieu of RFQ-to-3, or a 30-second book-exposure requirement instead of
15 seconds--might promote these ends more effectively. However, the
Commission's determination to propose rules that are closely modelled
on those in Sec. 37.9 reflects the baseline established by the CFTC
rules. Most if not all SBSEFs will be dually registered with the CFTC
as SEFs, and most if not all market participants in the SBS market will
likely be participants in the swap market. The Commission appreciates
that different or additive requirements--particularly for the key
concept of a ``Required Transaction''--could introduce complexity and
confusion if one set of trading protocols applied to Required
Transactions for SBS but different protocols--ones that have been
understood a
[…truncated; see source link]Indexed from Federal Register on May 11, 2022.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.