Rule2023-24587
Security-Based Swap Execution and Registration and Regulation of Security-Based Swap Execution Facilities
Primary source
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Published
December 15, 2023
Effective
February 13, 2024
Issuing agencies
Securities and Exchange Commission
Abstract
The Securities and Exchange Commission ("SEC" or "Commission") is adopting a set of rules 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 adopted implements an element of the Dodd-Frank Act that is intended to mitigate conflicts of interest at SBSEFs and national securities exchanges that trade SBS ("SBS exchanges"). Other rules being adopted 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 amending 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 is also adopting a new rule that, while affirming that an SBSEF would be a broker under the SEA, exempts a registered SBSEF from certain broker requirements. Further, the Commission is adopting 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. Finally, the Commission is delegating new authority to the Director of the Division of Trading and Markets and to the General Counsel to take actions necessary to carry out the rules being adopted.
Full Text
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[Federal Register Volume 88, Number 240 (Friday, December 15, 2023)]
[Rules and Regulations]
[Pages 87156-87328]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-24587]
[[Page 87155]]
Vol. 88
Friday,
No. 240
December 15, 2023
Part III
Securities and Exchange Commission
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17 CFR Parts 200, 201, 232, et al.
Security-Based Swap Execution and Registration and Regulation of
Security-Based Swap Execution Facilities; Final Rule
Federal Register / Vol. 88 , No. 240 / Friday, December 15, 2023 /
Rules and Regulations
[[Page 87156]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 200, 201, 232, 240, 242, and 249
[Release No. 34-98845; File No. S7-14-22]
RIN 3235-AK93
Security-Based Swap Execution and Registration and Regulation of
Security-Based Swap Execution Facilities
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: The Securities and Exchange Commission (``SEC'' or
``Commission'') is adopting a set of rules 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
adopted implements an element of the Dodd-Frank Act that is intended to
mitigate conflicts of interest at SBSEFs and national securities
exchanges that trade SBS (``SBS exchanges''). Other rules being adopted
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 amending 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 is also adopting a new rule that, while
affirming that an SBSEF would be a broker under the SEA, exempts a
registered SBSEF from certain broker requirements. Further, the
Commission is adopting 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. Finally, the Commission is
delegating new authority to the Director of the Division of Trading and
Markets and to the General Counsel to take actions necessary to carry
out the rules being adopted.
DATES:
Effective date: February 13, 2024.
Compliance dates: See section XVI (Compliance Schedule).
FOR FURTHER INFORMATION CONTACT: Michael E. Coe, Assistant Director;
David Liu, Special Counsel; Leah Mesfin, Special Counsel; Michou
Nguyen, Special Counsel; or Geoffrey Pemble, Special Counsel, at (202)
551-5000, Office of Market Supervision, Division of Trading and
Markets, Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549.
SUPPLEMENTARY INFORMATION: The Commission is adopting new 17 CFR
242.800 through 242.835 (``Regulation SE'') to create a regime for the
registration and regulation of SBSEFs and to address other issues
relating to SBS execution generally. Regulation SE consists of 17 CFR
242.800 through 242.835 (Rules 800 through 835). Key rules within
Regulation SE include Rule 803, which establishes a process for SBSEF
registration; Rules 804 to 810, which establish procedures for rule and
product filings by SBSEFs; Rule 815, which establishes permissible
execution methods for SBS that are subject to the SEA's trade execution
requirement; Rule 816, which sets 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 implement the 14 Core
Principles for SBSEFs set forth in section 3D(d) of the SEA; Rules 832
to 833, which address cross-border matters; and Rule 834, which imposes
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
adopting 17 CFR 249.1701 (Form SBSEF), which is the form that an entity
will use to register with the Commission as an SBSEF; 17 CFR 249.1702
(a submission cover sheet), which will be required to accompany filings
with the Commission made by SBSEFs for rule and rule amendments and for
product listings; adopting 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; adopting amendments to 17 CFR 240.3a1-1 (Rule
3a1-1) 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; adopting 17 CFR 240.15a-12 (Rule 15a-12),
which, while affirming that an SBSEF would also be a broker under the
SEA, exempts a registered SBSEF from certain broker requirements;
providing for the sunset of existing temporary exemptions from the
requirement to register as a clearing agency that, among other things,
applies to an entity performing the functions of an SBSEF but that is
not yet registered as such, and from the requirement to register as an
SBSEF or a national securities exchange for entities that meet the
statutory definition of SBSEF; adopting certain new rules and
amendments to 17 CFR part 201 (Rules of Practice) to allow persons who
are aggrieved by certain actions by an SBSEF to apply for review by the
Commission; and adopting amendments to 17 CFR 200.30-3 and 17 CFR
200.30-14 regarding delegations of authority to the Director of the
Division of Trading and Markets and to the General Counsel.
Table of Contents
I. Background
II. Introductory Provisions of Regulation SE
A. Rule 800--Scope
B. Rule 801--Applicable Provisions
C. Rule 802--Definitions
III. Registration of SBSEFs
A. Rule 803--Requirements and Procedures for Registration
B. Form SBSEF
IV. 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
V. Miscellaneous Requirements
A. Rule 811--Information Relating to SBSEF Compliance
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 an SBSEF
E. Rule 815--Methods of Execution for Required and Permitted
Transactions
F. Rule 816--Trade Execution Requirement and Exemptions
Therefrom
G. Rule 817--Trade Execution Compliance Schedule
VI. Implementation of Core Principles
A. Rule 818--Core Principle 1--Compliance With Core Principles
B. Rule 819--Core Principle 2--Compliance With Rules
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
[[Page 87157]]
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
VII. Cross-Border Rules
A. Rule 832--Cross-Border Mandatory Trade Execution
B. Rule 833--Cross-Border Exemptions for Foreign Trading Venues
and Relating to the Trade Execution Requirement
VIII. Rule 834--Implementation of Section 765 of the Dodd-Frank Act
and Governance of SBSEFs and SBS Exchanges
A. Rule 834(a)
B. Rule 834(b)
C. Rule 834(c)
D. Rule 834(d)
E. Rule 834(e)
F. Rule 834(f)
G. Rule 834(g)
H. Rule 834(h)
IX. Rule 835--Notice to Commission by SBSEF of Final Disciplinary
Action, Denial or Conditioning of Membership, or Denial or
Limitation of Access
X. Amendments to Existing Rule 3a1-1 Under the SEA-Exemptions From
the Definition of ``Exchange''
XI. Rule 15a-12--SBSEFs as Registered Brokers; Relief From Certain
Broker Requirements
XII. Termination of Temporary Exemptions
XIII. Electronic Filings Under Regulation SE
A. Use of Electronic Filing Systems and Structured Data
B. Use of Identifiers
XIV. 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
XV. Amendments to Delegations of Authority in Rule 30-3 and Rule 30-
14
A. Delegated Authority Related to SBSEF Registration and Form
SBSEF
B. Delegated Authority Related to New Products Proposed by an
SBSEF
C. Delegated Authority Related to New Rules or Rule Amendments
Proposed by an SBSEF
D. Delegated Authority Related To Request for Joint
Interpretation
E. Delegated Authority Related to SBSEF Submissions Contemplated
by Rule 811
F. Delegated Authority Related to Information Sharing
G. Delegated Authority Related to Commission Review Proceedings
XVI. Compliance Schedule
XVII. Economic Analysis
A. Introduction
B. Economic Baseline
C. Benefits and Costs
D. Effects on Efficiency, Competition, and Capital Formation
E. Reasonable Alternatives
XVIII. Paperwork Reduction Act
A. Summary of Collection of Information
B. Proposed Use of Information
C. Respondents
D. Total Annual Reporting and Recordkeeping Burden
E. Collection of Information is Mandatory
F. Responses To Collection of Information Will Not Be
Confidential
G. Retention Period of Recordkeeping Requirements
XIX. Regulatory Flexibility Certification
A. SBSEFs
B. Persons Requesting an Exemption Order Pursuant to Rule 833
C. SBS Exchanges
D. Certification
XX. Other Matters
I. Background
The Commission is adopting Regulation SE,\1\ which governs the
registration and regulation of SBSEFs, as required by section 3D of the
SEA.\2\ Section 3D was enacted as part of Title VII of the Dodd-Frank
Wall Street Reform and Consumer Protection Act (``Dodd-Frank Act'').\3\
The Dodd-Frank Act was enacted, among other reasons, to promote the
financial stability of the United States by improving accountability
and transparency in the financial system.\4\ The 2008 financial crisis
highlighted significant issues in the over-the-counter (``OTC'')
derivatives markets, which experienced dramatic growth in the years
leading up to the financial crisis and are capable of affecting
significant sectors of the U.S. economy.
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\1\ The Commission proposed Regulation SE on Apr. 6, 2022. See
Rules Relating to Security-Based Swap Execution and Registration and
Regulation of Security-Based Swap Execution Facilities (Proposed
Rule), SEA Release No. 94615 (Apr. 6, 2022), 87 FR 28872 (May 11,
2022) (``Proposing Release'').
\2\ 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'').
\3\ Public Law 111-203, H.R. 4173, sec. 763(c).
\4\ See Public Law 111-203 Preamble.
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Section 3D(a)(1) of the SEA provides that no person may operate a
facility for the trading or processing of SBS unless the facility is
registered as an SBSEF or as a national securities exchange. Section
3D(d) enumerates 14 Core Principles with which SBSEFs must comply.\5\
And section 3D(f) requires the Commission to prescribe rules governing
the regulation of SBSEFs. In addition, 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'').
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\5\ See infra section VI (listing the Core Principles).
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On April 6, 2022, the Commission proposed Regulation SE, relating
to the registration and regulation of SBSEFs and to SBS execution
generally.\6\ As discussed in the Proposing Release, the proposed rules
superseded previous Commission proposals on these subjects.\7\
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\6\ See Proposing Release, supra note 1. In 2011, the Commission
published for comment proposed Regulation SBSEF relating to, among
other things, the registration and regulation of SBSEFs.
Registration and Regulation of Security-Based Swap Execution
Facilities, SEA Release No. 63825 (Feb. 2, 2011), 76 FR 10948 (Feb.
28, 2011) (``2011 SBSEF Proposal''). The Proposing Release, which
contains a more detailed discussion of that and related proposals,
withdrew the 2011 SBSEF Proposal. See Proposing Release, 87 FR at
28874.
\7\ See Proposing Release, supra note 1, 87 FR at 28874.
However, Rule 834 of proposed Regulation SE would implement section
765 only with respect to SBSEFs and SBS exchanges. See infra section
VIII.
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The SBS market is closely related to the swaps market, which is
regulated by the Commodity Futures Trading Commission (``CFTC'').\8\ In
June 2013, the CFTC adopted rules (in 17 CFR chapter I) under Title VII
of the Dodd-Frank Act for swap execution facilities (``SEFs'').\9\ The
swaps market has grown and matured within the framework established by
the CFTC's rules.\10\ As
[[Page 87158]]
discussed in the Proposing Release, the SBS market is a small fraction
of the overall swaps market, and the swaps market provides greater
opportunities for revenue capture from swap execution as compared to
SBS execution.\11\ For example, as of November 25, 2022, the gross
notional amount outstanding in the SBS market was approximately $8.5
trillion across the credit, equity, and interest rate asset
classes,\12\ while the gross notional amount outstanding in the swaps
market was approximately $352 trillion across the interest rate,
credit, and foreign-exchange asset classes.\13\ The Commission was
sensitive in the Proposing Release to the economic impact its proposed
SBSEF rules could have.\14\
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\8\ In adopting Regulation SE, the Commission has consulted and
coordinated with the CFTC and the prudential regulators, in
accordance with the consultation mandate of the Dodd-Frank Act.
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.'' 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).
\9\ 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 Release'').
\10\ In 2018, the CFTC proposed to make fundamental changes to
the SEF regulatory structure. See CFTC, Swap Execution Facilities
and Trade Execution Requirement, 83 FR 61946 (Nov. 30, 2018) (``2018
SEF Proposal''). In 2021, the CFTC ultimately declined to finalize
the 2018 SEF Proposal and elected instead ``to improve the SEF
framework through targeted rulemakings that address distinct
issues.'' Accordingly, the CFTC withdrew the unadopted portions of
its 2018 proposal. See CFTC, Swap Execution Facilities and Trade
Execution Requirement--Proposed rule; partial withdrawal, 86 FR
9304, 9304 (Feb. 12, 2021).
\11\ See Proposing Release, supra note 1, 87 FR at 28874-76.
\12\ See Report on Security-Based Swaps (Mar. 20, 2023),
available at <a href="https://www.sec.gov/files/report-security-based-swaps-032023.pdf">https://www.sec.gov/files/report-security-based-swaps-032023.pdf</a>. See also infra note 815 and accompanying text
(discussing security-based swap transactions data in the credit,
equity, and interest rate derivatives asset classes reported by
registered SBSDRs).
\13\ See CFTC Swaps Report, available at <a href="https://www.cftc.gov/MarketReports/SwapsReports/L3Grossexp.html">https://www.cftc.gov/MarketReports/SwapsReports/L3Grossexp.html</a> (accessed on Sept. 27,
2023).
\14\ See Proposing Release, supra note 1, 87 FR at 28875.
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In addition, the Commission recognized that the entities that are
most likely to register with the Commission as SBSEFs are existing,
CFTC-registered SEFs, which have already made substantial investments
in systems, policies, and procedures to comply with and adapt to the
regulatory system developed by the CFTC. Harmonization between the
Commission's SBSEF rules and the CFTC's SEF rules could facilitate the
ability of entities to dually register and minimize costs by allowing
incumbent SEFs to use their existing systems, policies, and procedures
to comply with the Commission's SBSEF rules.\15\
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\15\ See Proposing Release, supra note 1, 87 FR at 28875.
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Thus, in proposing Regulation SE, the Commission took 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 swaps market, necessitated differences between the Commission's
rules and the CFTC's, or where 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. And the Commission sought public comment on
this approach.\16\
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\16\ The comment letters are available at <a href="https://www.sec.gov/comments/s7-14-22/s71422.htm">https://www.sec.gov/comments/s7-14-22/s71422.htm</a>. The Commission also received comments
on topics outside the scope of the proposal that are not addressed
in this release. See, e.g., Letter from Anonymous (Apr. 27, 2022)
(discussing CFTC oversight and transparency); Letter from Anonymous
(Apr. 20, 2022) (discussing securities financial transactions).
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One commenter opposes this harmonization approach, and argues that
it does not make sense to harmonize with the ``looser'' rules of SEFs,
which he believes would allow ``more fraud and false narratives to
creep into the market,'' and instead advocates that the Commission
start from scratch with new rules.\17\ Many other commenters, however,
generally support this harmonization approach.\18\ Many of these
commenters echo the Commission's rationale for harmonizing with the
CFTC's SEF rules, and state that such harmonization would minimize the
compliance burden for dually registered entities.\19\ Two of these
commenters also state that the CFTC's regulatory framework has been in
place for almost a decade and has functioned well.\20\ One commenter
also supports the Commission's decision and rationale in withdrawing
proposed Regulation MC \21\ and the Commission's 2011 SBSEF
Proposal.\22\
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\17\ See Letter from Robert McLaughlin (Apr. 7, 2022).
\18\ See, e.g., Letter from Robert Laorno, General Counsel, ICE
Swap Trade, LLC, to Vanessa A. Countryman, Secretary, Commission, at
1-2 (June 20, 2022) (``ICE Letter''); Letter from Stephen W. Hall,
Legal Director and Securities Specialist, and Jason Grimes, Senior
Counsel, Better Markets, Inc., to Vanessa A. Countryman, Secretary,
Commission, at 9-11 (June 10, 2022) (``Better Markets Letter'');
Letter from Derek J. Kleinbauer, Vice-President, Bloomberg SEF LLC,
and Benjamin MacDonald, Global Head Enterprise Products, Bloomberg
L.P., to Vanessa A. Countryman, Secretary, Commission, at 1-2 (June
10, 2022) (``Bloomberg Letter''); Letter from Bella Rosenberg,
Senior Counsel and Head of Legal and Regulatory Practice Group,
International Swaps and Derivatives Association, Inc., and Kyla
Brandon, Managing Director, Head of Derivatives Policy, Securities
Industry and Financial Markets Association, to Vanessa Countryman,
Secretary, Commission, at 1-2 (June 10, 2022) (``ISDA-SIFMA
Letter''); Letter from Sarah A. Bessin Associate General Counsel,
and Nicholas Valderrama, Counsel, Investment Company Institute, at
1-2 (June 10, 2022) (``ICI Letter''); Letter from Elizabeth Kirby,
Head of U.S. Market Structure, Tradeweb Markets Inc., to Vanessa A.
Countryman, Secretary, Commission, at 1-2 (June 10, 2022)
(``Tradeweb Letter''); Letter from Williams Shields, Chairman,
Wholesale Markets Brokers' Association, Americas, to Vanessa A.
Countryman, Secretary, Commission, at 1-2 (June 10, 2022) (``WMBAA
Letter''); Letter from Lindsey Weber Keljo, Head of SIFMA Asset
Management Group, and William Thun, Associate General Counsel, SIFMA
Asset Management Group, to Vanessa A. Countryman, Secretary,
Commission, at 1-2 (June 10, 2022) (``SIFMA AMG Letter''); Letter
from Jennifer W. Han, Chief Counsel & Head of Regulatory Affairs,
Managed Funds Association, at 1-2 (June 10, 2022) (``MFA Letter'');
Letter from Stephen John Berger, Global Head of Government &
Regulatory Policy, Citadel and Citadel Securities (June 10, 2022)
(``Citadel Letter''). While these commenters support the
Commission's general harmonization approach, they also provide
specific recommendations on changes to the Commission's Regulation
SE proposal that they believe would improve the rules, as described
in detail below in the sections discussing these individual rules.
See infra sections II through XVII.
\19\ See, e.g., ICE Letter, supra note 18, at 1-2; ISDA-SIFMA
Letter, supra note 18, at 1-2; ICI Letter, supra note 18, at 1-2;
Tradeweb Letter, supra note 18, at 1-2; WMBAA Letter, supra note 18,
at 1-2; MFA Letter, supra note 18, at 1.
\20\ See, e.g., ISDA-SIFMA Letter, supra note 18, at 1-2; SIFMA
AMG Letter, supra note 18, at 1-2.
\21\ 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
(Oct. 14, 2010), 75 FR 65882 (Oct. 26, 2010) (``Regulation MC
Proposal'').
\22\ See Bloomberg Letter, supra note 18, at 2.
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The Commission disagrees with the comment that harmonizing with the
CFTC approach would allow for more fraud and false narratives in the
SBS markets. Standing up a formal regulatory framework for SBSEFs where
none yet exists will provide greater accountability and oversight for
the SBS market and should, contrary to this commenter's views, serve to
detect and deter abusive and manipulative trading practices by
providing for a set of Commission rules that SBSEFs must adhere to in
operating their platforms and by requiring SBSEFs to make filings with
the Commission regarding the operation of their platforms and to make
their rules publicly available, as described in detail in sections II
through XVII below.
Given the relative size of the SBS market as compared to the swaps
market, the fact that the CFTC's SEF regulation has been in place for
many years now, and the cost efficiencies and reduced burdens that
would result from harmonized rules for dually registered SEFs/SBSEFs,
it is appropriate to generally harmonize the Commission's SBSEF
regulatory framework with the CFTC's SEF regulatory framework. At the
same time, where appropriate, adopted Regulation SE differs in certain
targeted respects from the CFTC's regulatory framework for SEFs. This
includes areas where differences in the Commission's statutory
authority relative to the CFTC's statutory authority or differences in
the SBS market relative to the swaps market necessitate differences
between the
[[Page 87159]]
Commission's rules and the CFTC's, or where 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. The specific approach to harmonization that
the Commission has pursued, along with differences from CFTC's regime
for SEFs, are described in detail in sections II through XVII below.
As discussed below, the Commission is modifying the proposed
provisions of Regulation SE regarding the definition of ``block
trade,'' \23\ the treatment of package transactions,\24\ the treatment
of SBS transactions that are intended to be cleared but are not
accepted for clearing by a registered clearing agency,\25\ permitting
SBSEFs to contract with designated contract markets (``DCMs'') to
provide services to assist in complying with the SEA and Commission
rules thereunder,\26\ the content and timing of the Daily Market Data
Report,\27\ an exception to ownership and voting restrictions for
SBSEFs,\28\ the application of deadlines and standard of review for
Commission review of SBSEF actions,\29\ and the applicability of
electronic filing and structured-data requirements with respect to
specific SBSEF filings.\30\ Otherwise, the rules of Regulation SE are
generally being adopted as proposed, in some instances with minor or
technical modifications, which are described in more detail below.\31\
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\23\ See infra section V.E.1(c).
\24\ See infra section V.E.4.
\25\ See infra section V.E.7.
\26\ See infra section VI.B.5.
\27\ See infra section VI.H.
\28\ See infra section VIII.B.
\29\ See infra section XIV.E.
\30\ See infra section XIII.
\31\ See infra note 32.
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II. Introductory Provisions of Regulation SE
A. Rule 800--Scope
Proposed Rule 800 is based on 17 CFR 37.1, which provides that part
37 of the CFTC's regulations applies to every SEF that is registered or
applying to become registered as a SEF under section 5h of the CEA.
Proposed Rule 800 would provide that the provisions of Regulation SE
apply to every SBSEF that is registered or is applying to become
registered as an SBSEF under section 3D of the SEA.
The Commission received no comments on Proposed Rule 800 and is
adopting Rule 800 as proposed, with minor technical modifications,\32\
for the reasons stated in the Proposing Release.
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\32\ In several instances, here and as noted below, the
Commission has made technical modifications to the proposed
regulatory text to conform cross-references in the regulatory text
to the CFR to the required style, as well as to correct simple
typographical errors. Here, the Commission has modified Rule 800 to
change a reference from ``[t]he provisions of this section'' to
``[t]he provisions of Sec. Sec. 242.800 through 242.835.'' In other
instances, the Commission has added the words ``of this section'' to
a CFR cross-reference to conform to the required form of citation.
Other types of technical modifications, and any substantive
modifications, are described below with respect to specific
instances.
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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 17 CFR 1.60 and part
9, and including any related definitions and cross-referenced sections.
Proposed Rule 801 would require an SBSEF to comply with the
requirements of Regulation SE and all other applicable Commission
rules, including any related definitions and cross-referenced sections.
The Commission did not receive any comments on Proposed Rule 801
and is adopting Rule 801 as proposed, with minor technical
modifications.\33\
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\33\ See id.
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C. Rule 802--Definitions
Proposed Rule 802 would set forth the definitions of terms that are
used in multiple rules in proposed Regulation SE. The majority of these
terms were adapted from the CFTC's swaps rules. Other terms were taken
from section 3 of the SEA \34\ or from a Commission rule under the SEA.
In particular, Proposed Rule 802 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--i.e., a ``forced trading
session''--would be exempt from the definition of ``security-based swap
execution facility.'' \37\
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\34\ 15 U.S.C. 78c.
\35\ 15 U.S.C. 78c(a)(77).
\36\ 15 U.S.C. 78q-1.
\37\ See Proposing Release, supra note 1, 87 FR at 28878. This
provision codifies a series of exemptions granted by the Commission
to SBS clearing agencies that operate ``forced trading'' sessions.
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 (Mar. 6, 2009), 74
FR 10791, 10796 (Mar. 12, 2009) (providing, among other things, 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 (Dec. 14, 2009), 74 FR 67258, 67262 (Dec. 18, 2009)
(providing, among other things, 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'').
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Although the Commission received comments regarding the proper
application of the proposed definitions with respect to registration
requirements, discussed below in section III.A.2, and the proposed
amendments to Rule 3a1-1, discussed below in section X, the Commission
did not receive comments suggesting a modification of the definitions
themselves. The term ``security-based swap execution facility'' is
defined directly in section 3(a)(77) of the SEA 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. . . ,'' \38\ and it is
appropriate to adopt the same definition in Rule 802, with a narrow
exception to address certain activities of registered clearing agencies
in furthering the accuracy of end-of-day valuations.\39\
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\38\ 15 U.S.C. 78c(a)(77).
\39\ Because this exception for certain clearing agencies
specifies ``an entity that is registered with the Commission as a
clearing agency pursuant to section 17A of the [SEA]'' and meets
other specified conditions, the exception would not be available to
any exempt clearing agency.
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Specifically, it is necessary or appropriate in the public
interest, and is consistent with the protection of investors, to exempt
a registered clearing agency that utilizes a forced trading
functionality for SBS from the definition of ``security-based swap
execution facility.'' Such an entity will 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
[[Page 87160]]
those governing the forced trading session--have to be submitted to the
Commission pursuant to section 19 of the SEA. Therefore, codification
of the exemption from the definitions of ``exchange'' and ``security-
based swap execution facility'' preserves the status quo and eliminates
a largely duplicative and unnecessary set of regulatory requirements.
This exemption covers 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.
Proposed Rule 802 would have defined the term ``block trade'' to be
an SBS transaction that, among other requirements, is an SBS based on a
single credit instrument (or issuer of credit instruments) or a narrow-
based index of credit instruments (or issuers of credit instruments)
having a notional size of $5 million or greater.\40\ The Commission
received a number of comments on the proposed definition of ``block
trade.'' These comments are discussed below in section V.E.1(c)
relating to Rule 815(a), which specifies mandatory methods of execution
for a Required Transaction that is not a block trade. As discussed in
detail below in section V.E.1(c), the Commission is not adopting the
proposed definition of ``block trade.\41\
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\40\ See Proposing Release, supra note 1, 87 FR at 28896, 28975.
\41\ Additionally, as discussed below, the Commission is
removing the term ``block trade'' from the text of certain rules
other than Rule 815(a), see infra sections VI.B.1 (Rule 819(a)(3)),
V.B (Rule 812(b)), VI.B.4 (Rule 819(d)(1)), VI.H (Rule 825(c)(1)(i)
and (ii)), and is adding language regarding future definition of
``block trade'' in Rule 825(c)(1)(iii). See infra section VI.H.
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Therefore, the Commission is adopting Rule 802 as proposed, except
for the definition of ``block trade,'' which it is reserving, and minor
technical modifications.\42\
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\42\ See supra note 32. The Commission has also replaced the
term ``SBSEF'' with ``security-based swap execution facility,''
defined ``SBS exchange'' when the term is first used, added the
words ``of this definition of trading facility'' to paragraph
(2)(C)(ii) of the definition of ``trading facility,'' and moved the
definition of ``dormant security-based swap execution facility'' so
that it appears in alphabetical order.
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III. Registration of SBSEFS
Section 3D(a)(1) of the SEA \43\ provides that no person may
operate a facility for the trading or processing of SBS \44\ 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 \45\ 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'').\46\
According to their terms, the Temporary SBSEF Exemptions expire upon
the earliest compliance date for the Commission's final rules regarding
SBSEF registration.\47\
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\43\ 15 U.S.C. 78c-4(a)(1).
\44\ 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.
\45\ 15 U.S.C. 78mm(a)(1).
\46\ 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 the
restrictions and 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 section 6 of the SEA. But because the Commission has not
previously adopted final rules relating to SBSEFs, such entities
have been unable to register with the Commission as SBSEFs. The
Temporary SBSEF Exemptions have allowed 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.
\47\ See June 2011 Exemptive Order, supra note 46, 76 FR at
36293, 36306; July 2011 Exemptive Order, supra note 46, 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
(``Broker Exemptions''). The Broker Exemptions generally expired on
Oct. 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 earliest compliance date set
forth in any of the Commission's final rules regarding registration
of SBSEFs). See SEA Release No. 87005 (Sept. 19, 2019), 84 FR 68550,
68602 (Dec. 16, 2019).
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A. Rule 803--Requirements and Procedures for Registration
1. Summary of Proposed Rule 803
Proposed Rule 803 of Regulation SE is closely modeled on Sec. 37.3
of the CFTC's rules and would set forth a process for registration with
the Commission as an SBSEF.
Paragraph (a)(1) of Proposed Rule 803 would track the language of
Sec. 37.3(a)(1) closely, and would provide 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 security-
based swaps with more than one other market participant on the system
or platform shall register the facility as a security-based swap
execution facility under this section or as a national securities
exchange pursuant to section 6 of the SEA.\48\
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\48\ 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,'' see sec. 3(a)(77) of the SEA, 15 U.S.C. 78c(a)(77), and
thus does not need to register as an SBSEF under Rule 803.
Furthermore, as discussed below, see infra section X (discussing
proposed paragraph (a)(4) of SEA Rule 3a1-1), a person that
registers as an SBSEF under Rule 803 and provides a market place for
no securities other than SBS is exempt from the definition of
``exchange'' and does not need to register as such pursuant to
section 6 of the SEA. 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'').
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Paragraph (a)(2) of Rule 803, like Sec. 37.3(a)(2), would require
an SBSEF, at a minimum, to offer an order book, which would be defined
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.\49\
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\49\ 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 adapted the CEA definitions of those terms directly into
Rule 802. See Proposed Rule 802 (defining ``trading facility'' and
``electronic trading facility'').
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Paragraph (a)(3) of Rule 803 is closely modeled on Sec. 37.3(a)(4)
and would provide a narrow exception to the requirement to provide an
order book for a Required Transaction \50\ 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, with some parts of the
[[Page 87161]]
package being subject to a trade execution requirement and some not.
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\50\ As discussed below in section V.E.1(a), the Commission is
incorporating into Regulation SE the concepts of ``Required
Transaction'' and ``Permitted Transaction'' in a manner closely
modeled 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. Section 37.3 of the CFTC's rules requires an
order book as a minimum trading functionality for all SEFs and is
not limited to provision of an order book only for Required
Transactions.
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Paragraph (b) of Proposed Rule 803 is closely modeled 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 file electronically a complete
Form SBSEF or any successor forms, and all information and
documentation described in such forms with the Commission using the
Electronic Data Gathering, Analysis, and Retrieval (``EDGAR'') system
as an Interactive Data File in accordance with Rule 405 of Regulation
S-T, and must 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 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.\51\ Paragraph (b)(2) would also provide that,
as set forth in Rule 808, certain information provided in an
application shall be made publicly available.
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\51\ See 17 CFR 240.24b-2 (setting forth the procedures for
identifying and redacting the portion of a submission under the SEA
for which confidential treatment is requested). As the Commission
stated in the Proposing Release, 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 other persons who request
confidential treatment from the Commission under the SEA. See
Proposing Release, supra note 1, 87 FR at 28880 n.50.
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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), 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
Rule 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 modeled 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 that
notification until the application is resubmitted in completed form. In
such a 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 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, modeled 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 Rule 803(b)(6)(ii), it would be required to
specify the grounds for the denial.
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 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 definition is modeled 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 modeled 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), modeled 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 that change.
Paragraph (d)(3) of Proposed Rule 803, like Sec. 37.3(e)(3), would
require an SBSEF's request for a transfer of registration to include
the underlying agreement governing the corporate change, a description
of the corporate change, a discussion of the transferee's ability to
comply with the SEA, the governing documents of the transferee, the
transferee's rules marked to show changes from the rules of the SBSEF,
and specified representations by the transferee.\53\
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\53\ See Proposing Release, supra note 1, 87 FR at 28880-81.
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Paragraph (d)(4) of Proposed Rule 803, modeled 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.\54\ 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
[[Page 87162]]
the Commission based upon actions, activities, or events occurring
during the time that the application was pending with the Commission.
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\54\ 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 Regulation SE. See infra section XIII.A.
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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.
2. Comments and Analysis
(a) Registration Requirements, Generally
Two commenters support the proposed SBSEF registration requirements
under Rule 803 being modeled on the CFTC's rules and state that, as
market participants are familiar with CFTC's requirements, they
appreciate the Commission's attempts to minimize registration burdens
and expedite the establishment of the SBSEF regime.\55\
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\55\ See SIFMA AMG Letter, supra note 18, at 5; see also
Bloomberg Letter, supra note 18, at 11.
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One commenter states that the Commission should ensure that all
multilateral trading venues for SBS are required to register as an
SBSEF, regardless of the specific trading protocol used.\56\ Another
commenter argues that section 3D(a)(1) of the SEA requires the
registration of any ``facility for the trading or processing of SBS,''
not just those that meet the statutory definition of SBSEF, which
includes multiple-to-multiple trading.\57\ Accordingly, this commenter
states that single-dealer platforms should be required to register as
SBSEFs and to change their operations to offer multiple-to-multiple
trading, consistent with the definition of SBSEF.\58\
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\56\ See Citadel Letter, supra note 18, at 9 (``[A] security-
based swap transaction executed via a fully electronic multilateral
RFQ protocol should be subject to the same regulations as one
executed by voice with the assistance of a voice broker (who may or
may not be employed by the SBSEF)'').
\57\ As discussed above, see supra note 38 and accompanying
text, the statutory definition of SBSEF provides in relevant part
that an SBSEF is ``a trading system platform in which multiple
participants have the ability to execute or trade security-based
swaps by accepting bids and offers made by multiple participants. .
. .'' SEA section 3(a)(77), 15 U.S.C. 78c(a)(77) (emphasis added).
This is sometimes referred to as ``multiple-to-multiple trading.''
\58\ See Better Markets Letter, supra note 18, at 11-13.
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One commenter asks the Commission to ``make clear that the SBSEF
registration requirement applies only to these types of platforms that
are within the statutory and proposed regulatory definition and does
not include any broader CFTC staff interpretations purporting to expand
the SEF definition.'' \59\ This commenter states that CFTC Staff Letter
21-19 \60\ maintains that platforms can be required to register as SEFs
``(i) even where multiple participants cannot simultaneously request,
make, or accept bids and offers from market participants; or (ii) where
multiple participants can initiate a one-to-many communication.'' \61\
The commenter states that extending the definition of SBSEF to include
``facilities offering one-to-many or bilateral communications if more
than one participant is able to submit an RFQ on the platform'' would
``contradict Congress' express intent'' to limit the scope of SBSEF
registration requirements to multiple-to-multiple platforms; that the
Commission should make clear that the CFTC staff guidance is
inapplicable to SBSEFs; and that the Commission should confirm that it
is not adopting or incorporating, explicitly or implicitly, similar
guidance.\62\
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\59\ See MFA Letter, supra note 18, at 3.
\60\ See CFTC Staff Advisory on Swap Execution Facility
Registration Requirement, Letter No. 21-19 (Sept. 29, 2021),
available at <a href="https://www.cftc.gov/node/238336">https://www.cftc.gov/node/238336</a>.
\61\ See MFA Letter, supra note 18, at 3 (quoting CFTC Staff
Letter No. 21-19, supra note 60 (emphasis in original)).
\62\ MFA Letter, supra note 18, at 3-4 (internal quotations
omitted).
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The Commission agrees with the comment that the definition of SBSEF
applies to multilateral trading facilities regardless of the specific
trading protocol used. As the statutory definition of SBSEF makes
clear, a trading facility would fall under the definition of SBSEF if
it offers ``multiple participants 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. . . .'' \63\ Whether a specific instance or practice of
brokering in fact offers multiple participants the ability to accept
the bids or offers made by multiple participants, though, will depend
on the attendant facts and circumstances of that instance or practice.
The Commission does not, however, agree with the comment that the
language of SEA section 3D(a)(1) means that single-dealer platforms for
trading SBS must register as SBSEFs and, consistent with the statutory
definition of SBSEF, change their operations to provide multiple-to-
multiple trading. SEA section 3D is titled ``Security-based swap
execution facilities,'' and section 3D(a)(1) states, in full, ``No
person may operate a facility for the trading or processing of
security-based swaps, unless the facility is registered as a security-
based swap execution facility or as a national securities exchange
under this section.'' \64\ The Commission is not persuaded that the
phrase ``facility for the trading or processing of security-based
swaps'' in this context can reasonably be read to apply more broadly to
encompass anything other than an SBSEF or an SBS exchange. Since the
definitions of both SBSEF and exchange include the concept of multiple-
to-multiple trading,\65\ single-dealer ``one-to-many'' trading
platforms that do not offer multiple-to-multiple trading are outside
the scope of the provisions of section 3D(a)(1).
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\63\ SEA section 3(a)(77), 15 U.S.C. 78c(a)(77) (emphasis
added).
\64\ SEA section 3D(a)(1), 15 U.S.C. 78c-4(a)(1).
\65\ See SEA section 3(a)(77), 15 U.S.C. 78c(a)(77) (defining
SBSEF in relevant part 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 . . .''); SEA section
3(a)(1), 15 U.S.C. 78c(a)(1) (defining an exchange in relevant part
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'') (emphasis added).
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It is not necessary to incorporate the guidance in CFTC Staff
Letter 21-19 into this release, because the CFTC staff letter in large
part refers to fact-specific circumstances that the Commission has yet
to encounter since Reg SE is not yet effective and the application of
the SBSEF definition depends on the particular facts and circumstances
of a platform's structure and operations. For the same reason, it would
be premature to reject the possibility of taking a position similar to
that of the CFTC guidance with regard to SBSEFs, as one commenter
suggested.\66\ Moreover, because the statutory definition of SBSEF does
not include the word ``simultaneous,'' the Commission declines to issue
its own guidance to reflect a requirement for simultaneity here. Where
operators of SBS trading platforms have questions about the facts and
circumstances particular to their situations, they can discuss their
particular circumstances with Commission staff.
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\66\ See supra notes 59-62 and accompanying text.
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(b) Abbreviated Registration Procedures for CFTC-Registered SEFs
Several commenters state that the Commission should use its
exemptive authority to provide a streamlined registration process for
SBSEFs that are already registered with the CFTC as
[[Page 87163]]
SEFs.\67\ One commenter states that, because many entities will likely
be registering with both the Commission and the CFTC, a streamlined
SBSEF registration process will ease the burden of new requirements
imposed on potential dual-registrants.\68\ This commenter further
states that allowing currently registered CFTC SEFs to become SEC-
registered SBSEFs would be more efficient and would more quickly kick-
start the Commission's SBS regime. This commenter thus supports the use
of exemptive authority for SEFs that are currently registered, provided
that the Commission's approach to exemptive authority does not disrupt
the existing market structure and the relationships between venues and
participants. Another commenter states that a streamlined registration
process for SEFs currently registered and in good standing with the
CFTC would have the potential to lower the costs of registration and
encourage the entry of market participants.\69\
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\67\ See SIFMA AMG Letter, supra note 18, at 5; Bloomberg
Letter, supra note 18, at 11; WMBAA Letter, supra note 18, at 3; ICE
Letter, supra note 18, at 5.
\68\ See SIFMA AMG Letter, supra note 18, at 5.
\69\ See Bloomberg Letter, supra note 18, at 11.
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One commenter that supports a streamlined SBSEF registration
process for SEFs states that a prolonged registration process,
particularly for venues already registered with the CFTC, only further
delays the introduction of regulated price discovery, liquidity
formation, and trade execution for SBS.\70\ This commenter also states
that SBSEF registration also further expedites SBS data reporting to
the extent SBSEFs will report trades to an SBS swap data repository
under the Commission's Regulation SBSR, as this service cannot be
provided until SBSEFs are registered and operational. If the Commission
were not to retain the exemptive authority within Rule 803, this
commenter supports a process that gives deference to existing CFTC SEFs
and provides a more streamlined process for such registrants. The
commenter states that, as the Commission observed in the proposing
release, most of the SBS liquidity will likely be centralized around a
few facilities, with most (if not all) of them already operating CFTC-
regulated SEFs.\71\
---------------------------------------------------------------------------
\70\ See WMBAA Letter, supra note 18, at 3.
\71\ See WMBAA Letter, supra note 18, at 3-4.
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Another commenter states that SEFs that are currently registered
and in good standing with the CFTC should be permitted to register with
the Commission utilizing their current documentation filed pursuant to
the requirements of Form SEF.\72\ This commenter states that CFTC
registered SEFs are required to keep their Form SEF and its exhibits
current through post-registration amendments and that, as the
Commission is modeling proposed Form SBSEF on the CFTC's Form SEF,
substituting the forms should not be problematic for the Commission to
review. The commenter states that the Commission should permit
registered SEFs seeking to register as an SBSEF to submit their Form
SEF and exhibits, with an accompanying addendum reflecting only those
changes necessary to fulfill the specific requirements of proposed
Regulation SE, in lieu of filing a new Form SBSEF.
---------------------------------------------------------------------------
\72\ See ICE Letter, supra note 18, at 5.
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One commenter, however, stated that ``relaxing or eliminating any
registration requirements would be highly inappropriate,'' and argued
that the Commission must be ``rigorous in reviewing and approving
SBSEFs applicants while upholding complete impartiality.'' \73\ This
commenter further states that both active SEFs and non-SEFs seeking to
register SBSEFs ``must be held under the same standard to avoid any
conflict of interests.'' \74\ Therefore, this commenter states that the
Commission should not use exemptive authority under SEA section
36(a)(1) to adopt an abbreviated procedure for SEFs seeking to register
as SBSEFs, because doing so would rely on the ``CFTC's biased
judgment'' and would not permit an ``unprejudiced determination'' by
the Commission.\75\
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\73\ Letter from J. T. at 1 (May 26, 2022).
\74\ Id.
\75\ Id.
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In the Proposing Release, the Commission stated that it was
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 \76\ to relax or eliminate
entirely certain of the registration requirements for entities that are
already registered as SEFs with the CFTC.\77\ The Commission recognizes
that 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 has
sought 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 minimizing costs so as to
impose only marginal costs on dually registered SEF/SBSEFs and their
members. As a result of these harmonized regimes, 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.
---------------------------------------------------------------------------
\76\ 15 U.S.C. 78mm(a)(1).
\77\ See Proposing Release, supra note 1, 87 FR at 28882.
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While one commenter states that it would be inappropriate to relax
or eliminate any SBSEF registration requirements for CFTC-registered
SEFs,\78\ an entity's status as a registered SEF in good standing with
the CFTC is relevant when considering its application to register as an
SBSEF and that reducing the registration burden for CFTC-registered
SEFs, where possible, is appropriate. However, granting exemptive
relief under section 36(a)(1), which this commenter opposes, or
providing for a formally abbreviated SBSEF registration regime for
CFTC-registered SEFs is not necessary to accomplish expedited
registration and reduced registration burdens.\79\ Requiring all
applicants to submit Form SBSEF will support consistency in the review
by the Commission and its staff of applications for registration of
SBSEFs, which will include a review of the proposed rules for the
SBSEFs. The Commission expects that prospective SBSEFs will be able to
use the information in their SEF applications to complete their SBSEF
applications, as discussed below.
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\78\ See supra note 75 and accompanying text.
\79\ In the Proposing Release, the Commission stated that it was
``preliminarily considering'' that it would exercise exemptive
authority under section 36(a)(1) of the Act, 15 U.S.C. 78mm(a)(1),
``to relax or eliminate entirely certain of the registration
requirements for entities that are already registered as SEFs with
the CFTC.'' Proposing Release, supra note 1, 87 FR at 28882.
---------------------------------------------------------------------------
For the reasons discussed above, the Commission is adopting Rule
803 as proposed, with minor technical modifications.\80\
---------------------------------------------------------------------------
\80\ See supra note 32. The Commission is also deleting the
header text ``Minimum trading functionality'' from paragraph (a)(3),
and is adding the header text ``Request to register'' to paragraph
(b)(1), in order to maintain consistency of style in the regulatory
text. Additionally, the Commission is removing the requirement to
use an Interactive Data File for filing requests to withdraw or
vacate an application for registration pursuant to Rules 803(e) and
803(f). See infra section XIII.A.
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B. Form SBSEF
The Commission proposed new Sec. 249.2001 to require that entities
use Form SBSEF to register with the Commission as an SBSEF. Form SBSEF
would also be used for submitting any
[[Page 87164]]
updates, corrections, or supplemental information to a pending
application for registration. Form SBSEF is closely modeled on the
CFTC's Form SEF for entities that seek to register with the CFTC as
SEFs, with only minor changes to remove from the form the concept of
post-registration amendments, as the proposed rule would not require
any amendments to Form SBSEF post-registration. The exhibits that were
proposed along with Form SBSEF are very similar to the exhibits in Form
SEF. As 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, 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 Rule 803(b)(1), an applicant for SBSEF registration would be
required to complete Form SBSEF and provide, upon the Commission's
request, any additional necessary information and documentation in
order review the application. The determination as to when an
application submission is complete would be at the sole discretion of
the Commission. The Commission would review Form SBSEF and, at the
conclusion of its review, by order either: (i) grant registration; (ii)
deny the application for registration; or (iii) grant registration
subject to certain conditions. After an applicant is granted
registration, any updates or amendments to the information contained in
its Form SBSEF by an active SBSEF would be required to be submitted as
rules or rule amendments under Rule 806 or Rule 807 or as may be
required by other rules in Regulation SE.
One commenter states that the Commission should closely harmonize
the rules for SBSEF registration with the CFTC's rules, with the
exception of Exhibits D and H of Form SBSEF, which require: (a) a list
of all affiliates and a description of any material pending legal
proceedings of such affiliates, and (b) the financial statements of the
affiliates. This commenter states that the information required by
these exhibits is ``burdensome and not fit for purpose'' and should not
be required unless the affiliate provides support services to the SBSEF
or the legal proceedings are expected to have a material effect on the
applicant or the operation of its proposed SBSEF.\81\ As discussed
above, several commenters expressed support for the Commission
providing an expedited process for CFTC-registered SEFs that wish to
register as SBSEFs.
---------------------------------------------------------------------------
\81\ See Bloomberg Letter, supra note 18, at 11.
---------------------------------------------------------------------------
The CFTC adopted rules for the registration and regulation of SEFs
in 2013,\82\ and the CFTC's process for registering SEFs appears to be
well understood by the industry and well designed for being adapted to
the SBS market. Therefore, the Commission has used the CFTC's process
as a basis for its own process for registering SBSEFs, and information
about SBSEF affiliates is relevant to the Commission's oversight of
SBSEFs and, in particular, oversight of SBSEF compliance with Rule 828
(conflicts of interest).\83\ In addition, we assume that most if not
all SBSEFs will be dually registered as SEFs.
---------------------------------------------------------------------------
\82\ See 2013 CFTC Final SEF Rules Release, supra note 9.
\83\ See infra section VI.K.
---------------------------------------------------------------------------
However, while the content and exhibits of Form SBSEF closely match
the form and content of Form SEF, exhibits to Form SEF are provided to
the CFTC as unstructured documents, whereas most exhibits to Form SBSEF
will be provided to the Commission as structured, machine-readable
documents. Permitting SBSEFs to provide copies of Form SEF exhibits in
lieu of Form SBSEF exhibits, while likely resulting in an expedited
registration process for most SBSEFs, would also potentially result in
a much higher volume of unstructured data, making the Form SBSEF
disclosures more difficult for market participants and the Commission
to analyze in an efficient manner. Thus, notwithstanding some
commenters' support for an expedited registration process, the final
rules do not permit SBSEFs to provide copies of Form SEF exhibits in
lieu of Form SBSEF exhibits. The Commission is therefore adopting 17
CFR 249.2001 as proposed, but is renumbering it as 17 CFR 249.1701
under new subpart R (``Forms for Registration of, and Filings by,
Security-Based Swap Execution Facilities'') and is making a minor
technical correction.\84\
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\84\ The Commission is correcting the text in Instruction 20 to
Form SBSEF to read ``a list with the name(s) of the clearing
agency(ies)'' instead of ``a list of the name of the clearing
organization(s).''
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IV. Rule and Product Filings by SBSEFs
Unlike section 19(b) of the SEA,\85\ 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 \86\ does not set out an equivalent
process for SBSEFs, which are not SROs. 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 to make its market more attractive to participants,
and adopting rules for filings related to these changes will promote
public transparency regarding the changes, as well as consistent
handling of those filings by the Commission.
---------------------------------------------------------------------------
\85\ 15 U.S.C. 78s(b).
\86\ 15 U.S.C. 78c-4.
---------------------------------------------------------------------------
An appropriate review process is necessary to assess whether
changes to an SBSEF's rules and product offerings are consistent with
section 3D of the SEA and the Commission's rules thereunder, and the
CFTC's filing procedures are an appropriate model on which to base the
Commission's own filing procedures. Furthermore, because of the
likelihood that most if not all SBSEFs will be dually registered with
the CFTC as SEFs, and that many rule changes for a dual registrant will
affect both its SBS and swap trading businesses, close harmonization
with the CFTC's filing procedures would allow a dual registrant to make
a similar filing to each agency, allowing each agency to carry out its
oversight functions while minimizing the burdens on dual registrants.
Parts 37 and 40 of the CFTC's rules set out processes whereby SEFs
may establish or amend rules and list products. 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,\87\ the Commission
proposed to
[[Page 87165]]
establish similar filing processes for registered SBSEFs in Rules 804
to 810 of Regulation SE.\88\
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\87\ See 15 U.S.C. 78c-4(d)(1)(A)(ii) (requiring an SBSEF, in
order 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).
\88\ The CFTC has proposed to amend the rules that govern how
CFTC-registered entities submit self-certifications and requests for
approval of their rules, rule amendments, and new products for
trading and clearing, as well as the CFTC's review and processing of
such submissions. See CFTC, Provisions Common to Registered Entities
(Notice of Proposed Rulemaking), 88 FR 61432 (Sept. 9, 2023). The
CFTC's proposing release states that the proposed amendments ``are
intended to clarify, simplify and enhance the utility of those
regulations for market participants and the [CFTC].'' Id. at 61432.
The CFTC has not yet taken action on this proposal.
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A. Rule 804--Listing Products for Trading by Certification
1. Summary of the Proposed Rule
Proposed Rule 804 is modeled on 17 CFR 40.2 of the CFTC's rules and
would set forth procedures by which an SBSEF may list a product via
certification. 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 10 business days preceding the product's
listing.\89\
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\89\ 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. 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).
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Paragraph (a)(3) of Proposed Rule 804 would require a self-
certification to include a copy of the submission cover sheet; \90\ a
copy of the product's rules, including all rules related to its terms
and conditions; the intended listing date; a certification by the SBSEF
that the product to be listed complies with the SEA and the
Commission's rules thereunder; a concise 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; 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; \91\ and a request for confidential treatment, if
appropriate, as permitted pursuant to SEA Rule 24b-2.\92\
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\90\ The Commission proposed, in new Sec. 249.2002, a
submission cover sheet (with instructions) that is closely modeled
on the CFTC's submission cover sheet.
\91\ Under Rule 804(a)(3)(vi), information that the SBSEF seeks
to keep confidential can 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.
\92\ 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 17 CFR 145.9. The Commission proposed
instead to direct filers to make any request for confidential
treatment pursuant to existing SEA Rule 24b-2. See supra note 51.
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Paragraph (b) of Proposed Rule 804, modeled 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.
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.\93\ Under paragraph (c)(1), the
Commission would have an additional 90 days from the date of the
notification to conduct the review.
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\93\ Rule 807(c) is based on Sec. 40.2(c), which 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 proposed, in Rule 804(c), a
provision that would allow the Commission to stay the certification
of a new product in the same manner that Rule 807(c) would allow the
Commission to stay the self-certification of a new rule or rule
amendment.
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Paragraph (c)(2) would require the Commission to provide a 30-day
comment period during that 90-day period, 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.
2. Comments and Analysis
One commenter states that, while the proposed self-certification
process does include improvements to the CFTC's self-certification
process, including extending the initial review period from one
business day to 10 business days and expanding the scope of reasons for
staying the self-certification, it is still fundamentally flawed. This
commenter states that the CFTC's self-certification process is mandated
by statute and that, in the absence of any statutory mandate analogous
to that applicable to the CFTC, the Commission must, at the very least,
provide a coherent policy justification for its proposed self-
certification process.\94\
---------------------------------------------------------------------------
\94\ See Better Markets Letter, supra note 18, at 13.
---------------------------------------------------------------------------
This commenter states that it is not clear why it is necessary or
desirable for SBSEFs to be able to bring new products to the market
``speedily'' and that self-certification turns the regulatory process
on its head, creating in effect a presumption of regulatory compliance
and putting the onus on the agency, under a predetermined timeline, to
fully evaluate a proposed product that may threaten significant harm to
investors and market stability.\95\ This is especially the case, the
commenter states, considering the context in which the SEC was given
comprehensive authority to regulate and oversee the SBS market, i.e., a
financial crisis caused in large part by SBS and other novel financial
products whose risks regulators and market participants thought were
well understood, but in fact were not. Given this context, the
commenter states, it ``makes little policy sense to establish a regime
whereby an SBSEF could introduce a new potentially dangerous product to
the financial system without an affirmative, independent SEC
[[Page 87166]]
determination that such product not only complies with the SBSEF Core
Principles and other requirements, but also that it does not pose an
unwarranted danger to investors, the financial system, and the broader
economy.'' \96\
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\95\ See Better Markets Letter, supra note 18, at 13-14; see
also Letter from Bryce Keeney (Apr. 27, 2022) (``Keeney Letter'')
(stating that ``[d]erivatives are not the purpose of the market''
and that the Commission should ``align rules to focus on the primary
purpose, not to support tertiary aspects that result in systemic
risk and systemic abuse''); Letter from Kevin (Apr. 20, 2023)
(``Kevin Letter'') (stating that the proposed rules do not protect
retail investors and that ``[c]reating a self governing regime,
allowing easier swaps trading across borders, exemption exchanges
and registered brokers . . . sound like a terrible recipe for
disaster in a multi-trillion marketplace'').
\96\ Better Markets Letter, supra note 18, at 13-14.
---------------------------------------------------------------------------
For several reasons the Commission does not agree with the
objections raised by this commenter. First, the Commission does not
agree that the self-certification process of Rule 804 either ``turns
the regulatory process on its head'' or would deny the Commission the
opportunity to ``fully evaluate a proposed product that may threaten
significant harm to investors and market stability.'' \97\ The ability
of the Commission to stay the effectiveness of any product self-
certification, to seek public comment on that self-certification, and
to object to (i.e., effectively disapprove) the proposed certification
on the grounds that the product is inconsistent with the SEA or the
Commission's rules will provide the Commission with sufficient
opportunity (including the opportunity to seek public comment) to
consider the self-certified rules and take steps to protect investors
and maintain fair, orderly, and efficient markets. Further, the self-
certification process does not create a ``presumption of compliance,''
because: (a) Rule 804(b) requires an SBSEF to provide, at Commission
request, 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''; (b) Rule 804(c)(1) permits the Commission to suspend a
new product certification because ``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'' (emphasis added); and (c)
Rule 804(c)(3) does not create a presumption of compliance but instead
provides the Commission a mechanism by which to object to a proposed
certification ``on the grounds that the proposed product is
inconsistent with the SEA or the Commission's rules.'' \98\
---------------------------------------------------------------------------
\97\ See supra note 96 and accompanying text.
\98\ Section IV.D, infra, discusses the process for self-
certification of rule changes, including the Commission's ability to
stay the effectiveness of such a filing, which would lead to a
public comment period and the opportunity for the Commission to
object to the certification.
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Second, given the relationship between the swaps market and the SBS
market, as well as the likelihood that most or all entities seeking to
register as SBSEFs will be CFTC-registered SEFs, harmonization with the
CFTC filing procedures for new products should facilitate the ability
of entities to dually register and minimize costs by allowing incumbent
SEFs to use their existing systems, policies, and procedures to comply
with the Commission's SBSEF rules. The aim of the rule is, however, not
merely to allow SBSEFs to bring products to market ``speedily,'' or at
minimal cost, and, as discussed below in this section, it is
appropriate for its rules to provide for a longer review period than
the CFTC's rules.
And third, the Commission disagrees with this commenter's view that
the self-certification process ``would pose an unwarranted danger to
investors, the financial system, and the broader economy.'' The new-
product provisions of Regulation SE must be read in the context of the
other relevant provisions of Title VII of the Dodd-Frank Act and the
Commission's rules thereunder, which include, among other things, rules
governing the registration and regulation of Security-Based Swap
Dealers (``SBSDs'') and Major Security-Based Swap Participants
(``MSBSPs''); \99\ capital, margin, and segregation requirements for
SBSDs and MSBSPs; \100\ business conduct standards and chief compliance
officer requirements for SBSDs and MSBSPs; \101\ and post-trade
reporting and public dissemination of SBS transactions.\102\ Because of
the significant role these other rules play in addressing potential
risks posed by SBS, the Commission's ability to require SBSEFs to
provide any evidence, information, or data demonstrating that the SBS
meets, initially or on a continuing basis, the requirements of the SEA
or the Commission's rules or policies thereunder, and the Commission's
ability to suspend and ultimately object to SBSEF self-certifications,
are appropriate to protect investors, the financial system, and the
broader economy with respect to new SBSEF products and rules.\103\
Thus, the self-certification process in this context is appropriate for
the underlying aims of the Dodd-Frank Act.
---------------------------------------------------------------------------
\99\ See Registration Process for Security-Based Swap Dealers
and Major Security-Based Swap Participants, SEA Release No. 75611
(Aug. 5, 2015), 80 FR 48963 (Aug. 14, 2015) (``SBSD and MSBSP
Registration Release'').
\100\ See Capital, Margin, and Segregation Requirements for
Security-Based Swap Dealers and Major Security-Based Swap
Participants and Capital and Segregation Requirements for Broker-
Dealers, SEA Release No. 86175 (June 21, 2019), 84 FR 43872 (Aug.
22, 2019) (``Capital, Margin, and Segregation Release'').
\101\ See Business Conduct Standards for Security-Based Swap
Dealers and Major Security-Based Swap Participants, SEA Release No.
77617 (Apr. 14, 2016), 81 FR 29959 (May 13, 2016) (``Business
Conduct Standards Release'').
\102\ See Regulation SBSR--Reporting and Dissemination of
Security-Based Swap Information, SEA Release No, 78321 (July 14,
2016), 81 FR 53546 (Aug. 12, 2016) (``Regulation SBSR Release'').
\103\ The Commission's rules for SBSEFs do not directly affect
retail investors. Only eligible contract participants (``ECPs'') are
eligible to trade on an SBSEF, see section 6(l) of the SEA, 15
U.S.C. 78f(l), and retail investors would have access to an SBS only
after an SBS exchange has filed a proposed rule change with the
Commission under Rule 19b-4, 17 CFR 240.19b-4, to amend its rules to
permit the listing of a registered SBS, with that proposed rule
change being published for public comment.
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Two commenters state that the relatively low volume of SBS products
expected to be self-certified supports a shorter review period than the
proposed ten-business-day Commission review period.\104\ Both
commenters recommend a shorter review period of one day to harmonize
with the CFTC's approach.\105\ Alternatively, one of the commenters
suggests a two-day review period.\106\ This commenter suggests that a
shorter review period would be beneficial to allow market operators to
meet participants' demands to transact on regulated platforms in a
reasonable period of time.\107\ The commenter also states that a
shorter review period would accommodate participants' needs to hedge
risk in a timely manner.\108\ The other commenter states that a longer
review period would reduce the competitive benefit to SBSEFs that
develop new products because a 10-day review period would enable
competitors to list similar products.\109\ This commenter also suggests
varying from the one-day review period in certain limited
circumstances, such as when an SBSEF submits an SBS for a made-
available-to-trade determination.\110\
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\104\ See WMBAA Letter, supra note 18, at 4; ICE Letter, supra
note 18, at 2.
\105\ See WMBAA Letter, supra note 18, at 4; ICE Letter, supra
note 18, at 2.
\106\ See WMBAA Letter, supra note 18, at 4.
\107\ See id.
\108\ See id.
\109\ See ICE Letter, supra note 18, at 3.
\110\ See id.
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While a ten-day review period differs from the CFTC's one-day
review period, one business day would not provide the SEC staff
sufficient time to review a new product filing for error or
incompleteness, let alone review a new product for compliance with the
SEA or Regulation SE. Further, if a product does warrant a stay, the
Commission would also need sufficient time to go through the
administrative steps of formally issuing the stay.\111\ The
[[Page 87167]]
proposed ten-business-day review period for self-certified products
also accords with the CFTC's ten-business-day review period for self-
certified rules,\112\ which the Commission is replicating in Rule
807(a)(3).\113\
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\111\ See infra sections XV.D and XV.E (delegating authority to
the Director of the Division of Trading and Markets to stay the
effectiveness of a self-certification and to extend the period for
consideration of a new product).
\112\ 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 10 business days prior to the registered
entity's implementation of the rule or rule amendment).
\113\ See infra section IV.D.
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Further, while a shorter review period may allow SBS to trade on an
SBSEF more quickly, failing to provide the Commission with a meaningful
period for review of a new product would hamper the Commission's
ability to protect market participants and maintain fair, orderly, and
efficient SBS markets. A ten-day review period would still permit
market participants to trade SBS on regulated platforms within a
``reasonable period'' and would provide the Commission the time it
needs to review submissions. The Commission also disagrees with the
comment that a shorter review period is necessary to accommodate market
participants' need to hedge risk in a timely manner. During the
relatively brief and time-limited period for Commission review of an
SBSEF new-product filings, market participants would remain able to
hedge that risk in other ways, such as in the OTC SBS market or other
related securities markets, depending on the risk to be managed.
Finally, while the 10-day review period might reduce the first-to-
market competitive advantage of an SBSEF that first lists a given
SBS,\114\ the extent of such an advantage may vary considerably based
on other factors in the SBSEF market, and that, in any event, the need
for the Commission to have sufficient time to review a new product
before it is listed justifies the potential competitive effect.
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\114\ Cf. ICI Letter, supra note 18, at 9 n.29 (discussing
``first mover'' advantage in the context of an SBSEF that has made
an SBS available to trade).
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Thus, a ten-business-day review period strikes an appropriate
balance between allowing SBSEFs to list new products quickly and
affording Commission staff a sufficient time period in which to assess
those products prior to listing.
One commenter asks the Commission to confirm that it does not
expect SBSEFs to self-certify for every security for which there may
exist a related SBS.\115\ This commenter states that, for example,
while an SBSEF may publish ``terms and conditions'' relevant for an
instrument (like a single-name total return SBS) under Rule 804, the
Commission might receive thousands of underlying national market system
equity stocks from each SBSEF, exponentially increasing the number of
products the Commission would need to review. The commenter also states
that, given the potential 10-day review period (compared to the CFTC's
shorter timeframe), SBSEFs will be forced to proactively self-certify
every potential SBS in an attempt to meet all potential participant
demand without a two-week delay, only increasing the volume of self-
certifications the Commission may receive. This commenter states that
listing the instrument, and not each equity that may be linked to the
instrument, is an appropriate approach to balance the SBSEFs and the
Commission's resources with respect to product self-certification.
---------------------------------------------------------------------------
\115\ See WMBAA Letter, supra note 18, at 4.
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The Commission is conscious of the large number of individual SBS
that may constitute a ``class'' of SBS, such as single-name, total
return SBS given as an example by the commenter. While an SBSEF should
not necessarily be required to make an individual filing for each of
the securities underlying a single such class of SBS, a filing for a
simple class certification that merely described the parameters of the
SBS covered by the certification would not necessarily provide
sufficient information for the Commission to determine whether all the
potential products covered by the class are consistent with the SEA and
the rules thereunder, including Regulation SE. Therefore, while the
Commission is not providing for ``class certifications'' of SBS, the
Commission will not necessarily require separate submissions for each
underlying security.\116\ The Commission will consider submissions for
an SBS that might overlie one or more of a list of securities, provided
that those potential underlying securities are specifically identified
and that the submission addresses, as part of the requirement in Rule
804 to submit ``a concise explanation and analysis of the product and
its compliance with applicable provisions of the Act, including core
principles, and the Commission's rules thereunder,'' \117\ why all
included underlying securities meet the applicable provisions of the
SEA and the Commission's rules thereunder.\118\
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\116\ By contrast, paragraph (d) of Sec. 40.2 provides that a
DCM or SEF may submit a class certification of swaps based on an
``excluded commodity,'' subject to certain conditions. See section
1a(19) of the CEA, 7 U.S.C. 1a(19) (defining ``excluded
commodity'').
\117\ Rule 804(a)(3)(v).
\118\ For example, a submission might cover a single-name total
return SBS on any of the components of a given index, provided that
the submission explains why the minimum criteria for inclusion in
that index are sufficient to ensure that the proposed SBS are
consistent with the requirements of the SEA and the rules
thereunder, including Regulation SE.
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Accordingly, for the reasons discussed above, the Commission is
adopting Rule 804 as proposed, with the exception of the proposed
Inline XBRL and EDGAR filing requirements, and with minor technical
modifications.\119\
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\119\ See supra note 32. As described in further detail in the
discussion of electronic filing systems and structured data, the
Commission will require all rule and product filings required by
Rules 804 through 807 and 816 to be filed in unstructured format
through EFFS, rather than in Inline XBRL through EDGAR. See infra
section XIII.A.
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B. Rule 805--Voluntary Submission of New Products for Commission Review
and Approval
Proposed Rule 805 is closely modeled 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.
Paragraph (a) of Proposed Rule 805 would adapt these requirements
for SBSEFs.\120\ 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 would also 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.\121\ The
submission would also have to describe any agreements or contracts
entered into
[[Page 87168]]
with other parties that enable the SBSEF to carry out its
responsibilities.
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\120\ Paragraph (a) of Rule 805 omits two provisions in Sec.
40.3(a). First, Sec. 40.3(a)(6) requires the submitting entity to
include the certifications required in 17 CFR 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 did not propose to adapt 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.
\121\ 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, modeled 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.\122\ 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.\123\
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\122\ 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 51.
\123\ 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 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, modeled 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 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)
would also 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, modeled 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) would also
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 may, at any time during its review, notify the SBSEF that it
will not, or is unable to, approve the product. This notification would
have to briefly specify the nature of the issues raised and the
specific provision of the SEA or the Commission's rules thereunder,
including the form or content requirements of 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 a 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, the notification would be
presumptive evidence that the entity may not truthfully certify under
Rule 804 that the same, or substantially the same, product does not
violate the SEA or the Commission's rules thereunder.
The Commission did not receive any comments on this proposed rule.
It is reasonable and appropriate to supplement the product
certification procedures in Rule 804 by also including in Regulation
SE, as Rule 805, procedures for voluntary submission of new products
for Commission review and approval. Providing this approval process, as
the CFTC does, can be valuable to an SBSEF seeking the Commission's
concurrence that a new product does not violate the SEA or the
Commission's rules thereunder prior to listing it. 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.\124\
Therefore, the Commission is adopting Rule 805 as proposed, with the
exception of the proposed Inline XBRL and EDGAR filing requirements,
and with minor technical modifications.\125\
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\124\ As stated in the Proposing Release, 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 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,
because the Commission is adopting these procedures substantially as
proposed, is unnecessary to establish and apply one set of
procedures for dual registrants and a different set for SEC-only
SBSEFs. See Proposing Release, supra note 1, 87 FR at 28956 (stating
that if the Commission ``establishe[d] 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''). See also Bloomberg Letter, supra note 18, at 10 (``[A]
harmonized framework has the potential to lower compliance costs by
allowing SBSEFs and market participants to integrate with existing
operational and compliance frameworks. Any potential differences
would require SBSEF registrants to devote resources toward assessing
the potential gaps and consequences of regulatory divergence.'').
\125\ See supra note 32. As described in further detail in the
discussion of electronic filing systems and structured data, the
Commission will require all rule and product filings required by
Rules 804 through 807 and 816 to be filed in unstructured format
through EFFS, rather than in Inline XBRL through EDGAR. See infra
section XIII.A.
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C. Rule 806--Voluntary Submission of Rules for Commission Review and
Approval
Proposed Rule 806 is closely modeled 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.
Paragraph (a) of Proposed Rule 806 would provide that an SBSEF may
request that the Commission approve a new rule, rule amendment, or
dormant rule prior to implementation of the rule. First, an SBSEF must
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 would be required to include a copy of the
submission cover sheet and to 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
[[Page 87169]]
thereof, and to cite the rules of the SBSEF that authorize the adoption
of the proposed rule. The SBSEF 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.
Additionally, 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 be required to be set forth and the anticipated
effect described. The SBSEF would also 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, as appropriate, include a request for confidential
treatment as permitted under SEA Rule 24b-2. Finally, the SBSEF would
be required 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.\126\
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\126\ 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, modeled 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
Rule 806(a) and the SBSEF does not amend the proposed rule or
supplement 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) would also 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, modeled 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 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) would also 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 a 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 a 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 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 received no comments on Proposed Rule 806 and the
Commission is adopting Rule 806 as proposed, with the exception of the
proposed Inline XBRL and EDGAR filing requirements, and with minor
technical modifications, for the reasons stated in the Proposing
Release.\127\
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\127\ See supra note 32. As described in further detail in the
discussion of electronic filing systems and structured data, the
Commission will require all rule and product filings required by
Rules 804 through 807 and 816 to be filed in unstructured format
through EFFS, rather than in Inline XBRL through EDGAR. See infra
section XIII.A.
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D. Rule 807--Self-Certification of Rules
Proposed Rule 807 is closely modeled 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, modeled 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. Proposed Rule 807(a) would also
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 Rule 807, but that in the interim
had become a dormant rule (i.e., unimplemented for 12 consecutive
calendar months).\128\
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\128\ 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 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 only be required to meet the conditions of paragraphs
(a)(1), (a)(2), and (a)(6) of Rule 807. The introductory language in
paragraph (a) of Proposed Rule 807 would generally track 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 is not relevant to SBSEFs.
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[[Page 87170]]
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.\129\ 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 10 business days before the SBSEF's implementation
of the rule or rule amendment. Paragraph (a)(4) would provide that the
SBSEF may not implement the rule or rule amendment if the Commission
has stayed it pursuant to Rule 807(c).
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\129\ 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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Paragraph (a)(5) of Proposed Rule 807 would set out procedures for
emergency rule certifications. Paragraph (a)(5)(i) would require a new
rule or rule amendment that establishes standards for responding to an
emergency \130\ 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 Rules 807(b) and (c), described below.
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\130\ 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 adopting a definition of ``emergency''
in Rule 802 that is adapted from Sec. 40.1(h).
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Paragraph (a)(6) of Proposed Rule 807, modeled 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 the 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) would also permit the SBSEF to include, as
appropriate, a request for confidential treatment pursuant to the
procedures provided in Rule 240.24b-2.\131\
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\131\ 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 51.
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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, modeled on Sec. 40.6(b), would
provide the Commission 10 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 Rule 807(c).
Paragraph (c)(1) of Proposed Rule 807, modeled 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) affords the Commission an additional 90 days
from the date of the notification to conduct the review.
Paragraph (c)(2) of Proposed Rule 807, modeled 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, modeled 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.
Paragraph (d) of Proposed Rule 807, modeled 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 modeled 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 Notification 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;
[[Page 87171]]
<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 Rule 807, the following types of
rules can be put into effect by an SBSEF without self-certification and
without having to be disclosed on the Weekly Notification 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.
One commenter states that the CFTC's self-certification process has
been relied upon by CFTC registrants for most submissions, leaving
little that is reviewed or capable of challenge by market participants
or the CFTC unless it is inconsistent with the statute or CFTC
regulation.\132\ This commenter states that rulebook or contractual
changes can alter protections within Commission-regulated markets and
that the Commission should be able to object to any such change it
deems inconsistent with Commission policy, including considerations of
compliance costs and the impact on consumer protections, all of which
would be best informed by a requirement for public comment prior to
certification. Under the CFTC regime, the commenter states, there is no
formal process to allow market participants to object to a submission
for changes that are submitted for certification. Decisions to adopt or
modify rules by self-certification are typically made by the
registrant's board of directors or a board committee, this commenter
states, with market participants only learning of the rule after the
registrant has self-certified the rule or amendment. This commenter
supports an alternative approach in which the Commission can review all
material rule and contractual changes by SBSEFs, clearing agencies, SBS
data depositories, and exchanges. This commenter also recommends that
the Commission adopt a requirement for public comment for such changes.
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\132\ See SIFMA AMG Letter, supra note 18, at 5-6. Another
commenter raised questions specifically about self-certification in
the context of a determination by an SBSEF that an SBS has been
``made available to trade.'' See MFA Letter, supra note 18, at 6.
This comment is discussed below in the context of made-available-to-
trade determinations under Rule 816(a). See infra section V.F.2.
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Regulation SE will afford the Commission a sufficient mechanism to
assess new SBSEF rules and rule amendments for consistency with section
3D of the SEA, while also permitting SBSEFs to submit new rules and
rule amendments using a self-certification process closely aligned with
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 that these rules will thus have
to be filed with both the SEC and CFTC. Adding a default comment period
or otherwise altering the standard so that the Commission reviews all
material rule or contractual changes by SBSEFs, as requested by one
commenter,\133\ would significantly alter the timing of self-certified
SBSEF rules compared to their SEF equivalents. By contrast, closely
harmonizing the SEC's filing procedures and standards of review with
the CFTC's would allow dually registered entities to submit the same
(or substantially the same) filing to both agencies for review.
Moreover, if the Commission exercises its authority to stay the
effectiveness of a self-certified rule and seek public comment--i.e.,
with respect to a rule that is novel, complex, inadequately explained,
or potentially inconsistent with the SEA or the regulations thereunder,
including Regulation SE--market participants would be able to convey
their concerns regarding that rule to the Commission.
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\133\ See SIFMA AMG Letter, supra note 18, at 5-6.
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The specified types of SBSEF rules or rule amendments that may be
put into effect under Rule 807(d) without certification to the
Commission are appropriate because they are limited to the types of
rule changes described earlier in this section (e.g., administration),
which do not implicate significant protections to market participants,
including compliance costs and customer protection. Therefore, the
Commission has harmonized Rule 807(d) with Sec. 40.6(d) to allow such
filings to be made without self-certification or Commission review.
Thus, 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. For the reasons discussed above, the Commission is
adopting Rule 807 as proposed, with the exception of the proposed
Inline XBRL and EDGAR filing requirements, and with minor technical
modifications.\134\
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\134\ See supra note 32. The Commission has also moved the word
``and'' from the end of paragraph (d)(3)(D) to the end of paragraph
(d)(3)(E)(2). As described in further detail in the discussion of
electronic filing systems and structured data, the Commission will
require all rule and product filings required by Rules 804 through
807 and 816 to be filed in unstructured format through EFFS, rather
than in Inline XBRL through EDGAR. See infra section XIII.A.
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[[Page 87172]]
E. Submission Cover Sheet and Instructions
In proposed new Sec. 249.2002, the Commission proposed to require
that an SBSEF use a submission cover sheet in conjunction with filings
submitted pursuant to Rules 804 through 807, 809, and 816. The cover
sheet and the instructions therein are modeled on the cover sheet and
instructions used by SEFs in conjunction with their analogous filings
with the CFTC.\135\
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\135\ 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 would also 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 includes 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.\136\ Finally, the cover sheet includes a check box by which an SBSEF
can indicate that it is requesting confidential treatment of materials
in the submission.
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\136\ Rule 809 provides 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 IV.G.
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The cover sheet divides the rule 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 ``made available to
trade'' (or ``MAT''); \137\ or if the filing concerned the delisting of
an SBS with no open interest.\138\ 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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\137\ Rule 809 provides 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 IV.G.
\138\ See supra note 128.
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Paragraph (a) of the submission cover sheet instructions provides
that a properly completed submission cover sheet must accompany all
rule and product submissions filed electronically with the Commission
by an SBSEF using the Electronic Form Filing System (EFFS).\139\ Per
paragraph (a), a properly completed submission cover sheet would
include: (1) the name and platform ID of the SBSEF; \140\ (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; and (4) 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 state that the narrative should
describe the substance of the submission with enough specificity to
characterize all material aspects of the filing.
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\139\ The Electronic Form Filing System (EFFS) is a secure, web-
based system used for filing Forms 19b-4, 19b-7, and SCI. The system
also supports pre-filings of certain types of Form 19b-4 filings.
EFFS is used for form filing by SROs, including national securities
exchanges, national securities associations, clearing agencies, and
Systems Compliance Integrity (SCI) entities, including SCI SROs, SCI
alternative trading systems, plan processors, and exempt clearing
agencies subject to Automation Review Policy. See <a href="https://www.sec.gov/tm/electronic-form-filing-system-resources">https://www.sec.gov/tm/electronic-form-filing-system-resources</a>.
\140\ ``Platform ID'' is a term utilized in Regulation SBSR, 17
CFR 242.900 et seq., and means the unique identification code
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 SBSDR 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 (Feb. 11,
2015), 80 FR 14563, 14631-32 (Mar. 19, 2015) (``Regulation SBSR
Adopting Release I''). Therefore, Legal Entity Identifiers
(``LEIs'') issued through the GLEIS are currently the only allowable
platform IDs that may be used by registered SBSEFs.
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Paragraph (b) of the submission cover sheet instructions states
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 does not obviate the SBSEF's
responsibility to comply with applicable filing requirements.
Paragraph (c) of the submission cover sheet states that checking
the box marked ``confidential treatment requested'' does not obviate
the submitter's responsibility to comply with all applicable
requirements for requesting confidential treatment under SEA Rule 24b-2
and does not substitute for notice or full compliance with such
requirements.
One commenter states that the submission cover sheet and
instructions for SBSEF filings should harmonize with those of the
CFTC.\141\ This commenter states that entities currently registered
with the CFTC as SEFs will be able to seamlessly enact the necessary
steps for required SEC filings because of their familiarity with the
CFTC's filing process. This commenter also states that any identifiers
regarded as necessary should be included on the cover sheet.
---------------------------------------------------------------------------
\141\ See Letter from J.T. (May 26, 2022). In section XIII.B,
infra, the Commission discusses the use of identifiers, such as the
LEI.
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The Commission agrees that the use of a submission cover sheet that
is harmonized with that required for CFTC filings by SEFs is likely to
facilitate the filing process for SBSEFs that are also registered as
SEFs. For this reason, the proposed submission coversheet is harmonized
with the CFTC's, with differences only in the details specific to the
rules and processes of the SEC. The Commission contemplates providing
for electronic completion (as well as submission) of the cover sheet
and attachment of the submissions required by Rules 804, 805, 806, 807,
and 809, and intends to advise affected persons regarding its use by
public announcement in advance of the effective date of these
rules.\142\
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\142\ Below in section XIII.A, the Commission addresses the
requirements to use the EDGAR system and Inline XBRL for
submissions.
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For the reasons discussed above, the Commission is adopting 17 CFR
249.2002 as proposed, but is renumbering it as 17 CFR 249.1702 under
new subpart R (``Forms for Registration of, and Filings by, Security-
Based Swap Execution Facilities''), and is also adopting the submission
cover sheet and instructions as proposed with the exception of the
proposed Inline
[[Page 87173]]
XBRL and EDGAR filing requirements.\143\
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\143\ See id.
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F. Rule 808--Availability of Public Information
Proposed Rule 808 is closely modeled on Sec. 40.8 of the CFTC's
rules.\144\ Proposed Rule 808(a) would provide that certain parts of an
application to register as an SBSEF would be made publicly available on
the Commission's website, unless confidential treatment is obtained
pursuant to SEA Rule 24b-2. Specifically, Proposed Rule 808(a) would
make the following parts of a Form SBSEF publicly available: the (i)
transmittal letter and first part of the application cover sheet; (ii)
Exhibit C; (iii) Exhibit G; (iv) Exhibit L; and (v) Exhibit M.\145\
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\144\ Section 40.8 of the CFTC's rules is entitled
``Availability of public information.''
\145\ 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 proposed to
list the specific corresponding exhibits in Rule 808 that would be
made publicly available. Exhibit C would require a narrative that
sets forth the fitness standards for the governing board and its
composition; Exhibit G would require a copy of the corporate
governance documents for the applicant; Exhibit L would require a
narrative and any other form of documentation that describes the
manner in which the applicant is able to comply with each core
principle; and Exhibit M would require a copy of the applicant's
proposed rules and any technical manuals, guides, or other
instructions for members.
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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,\146\ an SBSEF's filing of new products pursuant to the self-
certification procedures of Rule 804, new products for Commission
review and approval pursuant to Rule 805, new rules and rule amendments
for Commission review and approval pursuant to Rule 806, and new rules
and rule amendments pursuant to the self-certification procedures of
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 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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\146\ 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 received one comment on Proposed Rule 808. This
commenter states that the Commission should not allow requests for
confidential treatment and that these requests are currently abused and
result in little information being made available to the public.\147\ A
blanket prohibition on requesting confidential treatment would not be
appropriate, however, because each request for confidential treatment
should be addressed on its particular facts and circumstances.
Moreover, as the Commission stated in the Proposing Release, ``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 other persons who
request confidential treatment from the Commission under the SEA.''
\148\ The Commission anticipates that while SBSEFs may request
confidential treatment for their filings pursuant to existing SEA Rule
24-2, the items enumerated in Rule 808 are not of the type that
typically would constitute confidential information. Finally, it is
appropriate to adopt a rule that is adapted from Sec. 40.8, because
Rule 808 will apply to submissions made under Rules 804-807, which are,
as discussed above, also based on provisions of the CFTC's rules for
SEFs. Therefore, the Commission is adopting Rule 808 as proposed.
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\147\ See Keeney Letter, supra note 95.
\148\ Proposing Release, supra note 1, 87 FR at 28880 n.50.
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G. Rule 809--Staying of Certification and Tolling of Review Period
Pending Jurisdictional Determination
Section 718 of the Dodd-Frank Act, entitled ``Determining Status of
Novel Derivative Products,'' sets forth a mechanism for addressing a
situation in which 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., a situation in which it is unclear
whether the product in question 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 judicial
review of any such determination.\149\
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\149\ 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. 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.
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As described in the Proposing Release, Proposed Rule 809 is loosely
modeled on Sec. 40.12, but modified to focus on the products and
jurisdictional issues that are more likely to be relevant to
SBSEFs.\150\ Paragraph (a) of Proposed Rule 809, modeled on Sec.
40.12(b), would provide that a product certification made by an SBSEF
pursuant to Rule 804 shall be stayed, or the review period for a
product that has been submitted for Commission approval by an SBSEF
pursuant to 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 \151\ by the SBSEF, the SEC,
or the CFTC. Paragraph (b) is modeled 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 modeled 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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\150\ As noted in the Proposing Release, an SBSEF might seek to
list a product where it is unclear whether the product is a swap or
an SBS. See Proposing Release, supra note 1, 87 FR at 28890.
\151\ 17 CFR 240.3a68-2.
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The Commission did not receive any comments on Proposed Rule 809.
While section 718 of the Dodd-Frank Act addresses situations where it
is unclear whether a product is a security or a future, the SEC and the
CFTC have adopted separate rules--SEA Rule 3a68-2 and 17 CFR 1.8,
respectively--governing requests for interpretation regarding a product
that might be an SBS, a swap, or a mixed swap. It is appropriate for
Regulation SE to include a mechanism for the staying or tolling of a
filing by an SBSEF when it is unclear whether the product is a swap or
an SBS, and it would be appropriate for Rule 809 to reflect the process
set forth in SEA Rule 3a68-2. Tailoring, as proposed, the scope of Rule
809, in relation to Sec. 40.12, appropriately addresses the
jurisdictional questions that are likely to arise from a product listed
by an SBSEF.\152\ Therefore, the Commission is adopting Rule 809 as
proposed.
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\152\ The objective of Rule 809 is 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.
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[[Page 87174]]
H. Rule 810--Product Filings by SBSEFs That Are Not Yet Registered and
by Dormant SBSEFs
Proposed Rule 810 is closely modeled on Sec. 37.4 of the CFTC's
rules and would provide a process whereby a not-yet-registered SBSEF or
a dormant SBSEF could submit product filings. Specifically, Proposed
Rule 810 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 and that any such terms and
conditions or rules submitted as part of an SBSEF's application for
registration shall be considered for approval by the Commission at the
time the Commission issues the SBSEF's order of registration.
Similarly, any SBS terms and conditions or rules submitted as part of
an application to reinstate the registration of a dormant SBSEF would
be considered for approval by the Commission at the time the Commission
approves the reinstatement of registration of the dormant SBSEF.
The Commission did not receive any comments on Proposed Rule 810
and is adopting Rule 810 as proposed, for the reasons stated in the
Proposing Release.
V. Miscellaneous Requirements
Sections 37.5 to 37.12 of the CFTC's rules impose miscellaneous
requirements on SEFs, and the Commission proposed to impose similar
requirements on SBSEFs in 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 modeled on Sec.
37.5, which is entitled ``Information regarding swap execution facility
compliance.'' Paragraph (a) of Proposed Rule 811 is closely modeled 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 modeled 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 modeled 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 a notification, request supporting documentation of the
transaction. Paragraph (c)(2) is closely modeled 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 event later than
the open of business 10 business days following the date upon which the
SBSEF enters into a firm obligation to transfer the equity Interest.
Paragraph (c)(3) is closely modeled on Sec. 37.5(c)(3) and 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 Rule 806 or Rule
807.
Paragraph (c)(4) of Proposed Rule 811 is closely modeled 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 did not receive any comments on Rule 811(a) to (c).
It is appropriate for Regulation SE to include provisions requiring an
SBSEF to provide the Commission with the information described above.
Information about an SBSEF's business as an SBSEF and transfers of 50%
or more of its equity would promote understanding of its operations and
ownership, which should facilitate oversight of the SBSEF. Therefore,
the Commission is clarifying, as proposed, that, similar to the CFTC,
it may request such information from an SBSEF. In addition, as
anticipated in the Proposing Release, 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, and the rule provides for this. By
modeling 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 is changing the phrase ``a transfer of an equity
interest of 50 percent or more in a security-based swap execution
facility'' in paragraph (c)(4) to ``an equity transfer described in
paragraph (c)(1) of this section'' because the text of paragraph (c)(4)
should be modified to parallel the text of paragraphs (c)(2) and
(c)(3). For these reasons, the Commission is adopting Rule 811(a) to
(c) as proposed, with the change described to paragraph (c)(4).
2. Harmonization With Sec. 1.60
Paragraph (d) of Proposed Rule 811 is not modeled 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 would require another type of information
relevant to the regulatory oversight of a SEF, the Commission proposed
to adapt this provision into Rule 811.\153\
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\153\ 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 Rule 811 would adapt paragraphs (a), (c), and (e) of Sec.
1.60 to apply to SBSEFs. 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 Rule 811(d).
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Paragraph (d)(1) of Proposed Rule 811 is closely modeled 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 to which its
property or assets are subject. Paragraph (d)(2) is closely modeled 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
[[Page 87175]]
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 modeled 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 10 days after the
initiation of the legal proceedings to which they relate, after the
date of issuance, or after receipt by the SBSEF of the notice of
appeal, as the case may be.
Paragraph (d)(4) of Proposed Rule 811 is closely modeled 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 did not receive any comments on Proposed Rule 811(d)
and is adopting Rule 811(d) as proposed, for the reasons stated in the
Proposing Release.
B. Rule 812--Enforceability
Proposed Rule 812 generally is modeled on Sec. 37.6. Paragraph (a)
of Rule 812, which is based on Sec. 37.6(a)(1), and 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.\154\ 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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\154\ The Commission is not adapting into 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
93 and accompanying text. See also Proposing Release, supra note 1,
87 FR at 28893 n.90.
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Paragraph (b) of Proposed Rule 812 is modeled on the first sentence
of Sec. 37.6(b), which 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.\155\ Proposed Rule
812(b) differs, however, in that it 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.
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\155\ 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.
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One commenter agrees that Rule 812 should be modeled on Sec. 37.6
and states that, like Sec. 37.6, Rule 812 should require the SBSEF to
confirm ``all the terms of the transaction,'' rather than being
limited, as proposed, to ``all of the terms that were agreed to on the
facility.'' \156\ This commenter states that Rule 812 as proposed may
cause issues with clearing SBS because SBS clearing agencies will
likely require SBSEFs to represent that any transaction executed on the
SBSEF is final and irrevocable (as CFTC-registered clearing agencies
require for SEFs). Since Rule 812 only requires an SBSEF confirmation
to be limited in scope to ``all of the terms that were agreed to on the
facility,'' this commenter states the SBSEF would not necessarily know
any terms agreed upon by counterparties outside the SBSEF, and
therefore could not represent to the clearing agency that the
transaction is ``final and irrevocable,'' which would be a roadblock
for straight-through processing and full adoption of clearing for
SBS.\157\ This commenter states that, to address this issue, SBSEFs
should have the ability to prohibit trading relationship documentation
or enablements for cleared SBS transactions executed on an SBSEF, which
are prohibited for CFTC-registered SEFs in accordance with the CFTC's
2013 Staff Impartial Access Guidance,\158\ and that Rule 812 should
require that the SBSEF confirm ``all of the terms of the transaction.''
\159\
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\156\ See Bloomberg Letter, supra note 18, at 4, 12-13.
\157\ See infra section VI.F (discussing, among other things,
straight-through processing).
\158\ See CFTC Division of Clearing and Risk, Division of Market
Oversight, and Division of Swap Dealer and Intermediary Oversight,
Guidance on Application of Certain Commission Regulations to Swap
Execution Facilities (Nov. 14, 2013), available at <a href="https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/dmostaffguidance111413.pdf">https://www.cftc.gov/sites/default/files/idc/groups/public/@newsroom/documents/file/dmostaffguidance111413.pdf</a>.
\159\ See Bloomberg Letter, supra note 18, at 4, 12-13.
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Another commenter, however, states that it is not practical or cost
effective for an SBSEF to collect, review, and store each free-standing
agreement underlying an SBS transaction entered into between numerous
counterparties.\160\ This commenter states that the CFTC has not
required SEFs to comply with the requirements of 37.6(b) since 2014,
when staff no-action relief was issued due to the impracticability of
compliance.\161\ Thus, this commenter supports the proposal in Rule 812
to require an SBSEF to provide a written record of all the terms of the
transaction that were agreed to on an SBSEF, which shall legally
supersede any previous agreement regarding such terms.
---------------------------------------------------------------------------
\160\ See ICE Letter, supra note 18, at 5.
\161\ See id. (citing CFTC Division of Market Oversight, Staff
No-Action Position Regarding SEF Confirmations and Recordkeeping
Requirements under Certain Provisions Included in Regulations
37.6(b) and 45.2, Letter No. 14-108 (Aug. 18, 2014), available at
<a href="https://www.cftc.gov/csl/14-108/download">https://www.cftc.gov/csl/14-108/download</a>).
---------------------------------------------------------------------------
It is appropriate to require an SBSEF to inform counterparties as
soon as technologically practicable after they have effected a trade on
or pursuant to the rules of the SBSEF, and to provide them with a
written record of the terms to which they have agreed to on the SBSEF.
With respect to uncleared SBS, it would be impractical for an SBSEF to
be aware of, or responsible for, confirming terms of an SBS that were
agreed to off the SBSEF's trading platform, such as terms contained in
a credit support agreement between the two counterparties to an
uncleared SBS. Thus, the Commission is not including in Rule 812 a
requirement that the SBSEF provide a written record of any such
terms.\162\
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\162\ 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, supra note 9, 78
FR at 33491 n.195. The CFTC staff has taken a no-action position
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 (Mar. 24, 2017) (issued by the CFTC's Division
of Market Oversight). In the no-action letter, the CFTC staff stated
that it was continuing to assess confirmation requirements,
including establishing a permanent solution to the issues raised.
Given these circumstances, 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. Additionally, the CFTC recently
issued a notice of proposed rulemaking to adopt a rule codifying the
no-action position, which would enable SEFs to incorporate such
terms by reference in an uncleared swap confirmation without being
required to obtain the underlying, previously negotiated agreements.
See CFTC, Swap Confirmation Requirements for Swap Execution
Facilities (Notice of Proposed Rulemaking), 88 FR 58145, 58147 (Aug.
25, 2023). The CFTC has not yet taken action on this proposal.
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[[Page 87176]]
In response to the comment that Proposed Rule 812 may cause issues
with clearing because the rule requires SBSEFs to confirm only the
terms of an SBS transaction ``that were agreed to on the facility,''
additional terms in trading relationship documents or enablements are
unlikely to hinder the acceptance by a clearing agency of SBS that are
intended to be cleared or might inhibit impartial access to trading of
cleared SBS on an SBSEF. First, a cleared SBS would be a standardized
product, the complete terms of which would be known to the SBSEF,
agreed to by the counterparties trading that SBS on the SBSEF, and
capable of being confirmed to the parties in writing by the SBSEF, as
well as represented to the clearing agency by the SBSEF as ``final and
irrevocable.'' Thus, all the terms of the cleared transaction are
confirmed when executed on the SBSEF. And second, Proposed Rule 819(c)
would require that an SBSEF provide impartial access to its market and
market services,\163\ and it would not be consistent with an SBSEF's
impartial access obligations to permit members to incorporate
additional terms for a cleared SBS in trading relationship
documentation, enablement documentation, or elsewhere, or to otherwise
permit improper discrimination with respect to trading in cleared SBS
against SBSEF members who have a direct or indirect clearing
relationship with the clearing agency for a given SBS.
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\163\ See infra section VI.B.3 (discussing the impartial access
requirements of Rule 819(c)).
---------------------------------------------------------------------------
Therefore, for the foregoing reasons, the Commission is adopting
Rule 812 as proposed.
C. Rule 813--Prohibited Use of Data Collected for Regulatory Purposes
Proposed Rule 813 is modeled on Sec. 37.7, and would provide that
an SBSEF 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. An SBSEF would be able to use such data or
information for business or marketing purposes if the person consents,
but the SBSEF would not be able to condition access to the SBSEF on the
person's providing such consent. Finally, Proposed Rule 813 would
provide that an SBSEF, where necessary for regulatory purposes, may
share such data or information with another SBSEF or a national
securities exchange.
The Commission did not receive any comments on Proposed Rule 813
and is adopting Rule 813 as proposed, for the reasons stated in the
Proposing Release.
D. Rule 814--Entity Operating Both a National Securities Exchange and
an SBSEF
Proposed Rule 814 is modeled 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 under the SEA. Paragraph (b), although consistent with Sec.
37.8(b), draws its specific language from section 3D(c) of the
SEA,\164\ which contemplates that a single entity may operate both a
national securities exchange and an SBSEF. Paragraph (b) of Proposed
Rule 814 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.
---------------------------------------------------------------------------
\164\ 15 U.S.C. 78c-4(c).
---------------------------------------------------------------------------
Two commenters state that the key requirements applicable to SBSEFs
should also apply to SBS exchanges to create a level regulatory
environment and avoid encouraging regulatory arbitrage.\165\ One of the
commenters specifically identifies trading protocols, impartial access,
limits on pre-execution communication, and straight-through processing
as important aspects of SBSEF regulation that should also apply to SBS
exchanges.\166\ Another commenter states that more detailed rules are
needed to address the separation of SBSEFs from SBS exchanges in order
to avoid the aggregation of power in the financial markets and to
clearly separate the roles of an entity operating both an SBSEF and an
SBS exchange.\167\
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\165\ See Citadel Letter, supra note 18, at 17; MFA Letter,
supra note 18, at 14.
\166\ See Citadel Letter, supra note 18, at 17.
\167\ See Keeney Letter, supra note 95.
---------------------------------------------------------------------------
The comment suggesting that requirements for SBSEFs should be
applied to SBS exchanges is outside the scope of this rulemaking, which
is designed to set forth requirements for SBSEFs, not exchanges.
Additionally, more detailed rules are not necessary to separate the
roles of an entity operating both an SBSEF and an SBS exchange. Each
entity would be required to make rule or new product submissions to the
Commission under a separate set of rules--Rules 804 to 807 for SBSEFs,
and Rule 19b-4 for national securities exchanges--making it clear which
rules will apply on which platform. Also, Rule 814(b)--which requires
that a national securities exchange that also operates an SBSEF
identify the platform on which an SBS transaction occurs--will provide
further clarity to the market about the roles of an entity operating
both an SBSEF and an SBS exchange. Further, the ability of an entity to
operate both an SBSEF and an SBS exchange is unlikely to lead to the
aggregation of power in the financial markets, because allowing for a
variety of SBS trading platforms and ownership models should promote
competition in the market for SBS trading.
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.
Therefore, for the reasons discussed above, the Commission is adopting
Rule 814 as proposed.
E. Rule 815--Methods of Execution for Required and Permitted
Transactions
1. Rule 815(a)
(a) Background
The Dodd-Frank Act provides that if the Commission makes a
mandatory clearing determination regarding an SBS, such SBS becomes
subject to mandatory trade execution if at least one exchange or SBSEF
makes the product ``available to trade.'' \168\ The Dodd-Frank Act does
not require, however, that all SBS be subject to mandatory clearing or
mandatory trade execution, and it does not impose any execution
requirements for transactions in an SBS unless the SBS is subject to
mandatory clearing and it has been made available to trade. Section
37.9 of the CFTC's rules addresses these issues for SEFs using the
concepts of ``Required Transactions'' and ``Permitted Transactions,''
and the Commission proposed Rule 815 of Regulation SE to adapt Sec.
37.9 for
[[Page 87177]]
SBSEFs. Rule 815(a)(1) defines ``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.''
---------------------------------------------------------------------------
\168\ See 15 U.S.C. 78c-3(a)(1) (mandatory clearing for SBS) and
78c-3(h) (trade execution for SBS). See also infra section V.F.3
(discussing the six factors that an SBSEF shall consider, as
appropriate, before making an SBS ``available to trade'').
---------------------------------------------------------------------------
(b) Methods of Execution for Required Transactions
(i) Background
Proposed Rule 815(a)(2) would require that, except for block trades
or the exceptions described in paragraph (d) or (e) of the rule and
discussed below,\169\ the mandatory execution methods for a Required
Transaction would be either: (a) an order book or (b) an RFQ system in
conjunction with an order book, and the rule permits the SBSEF to use
any means of interstate commerce for providing these execution
methods.\170\
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\169\ See infra section V.E.3.
\170\ Proposed Rule 815(a)(2)(ii) would provide that any means
of interstate commerce includes, but is not limited to, the mail,
internet, email, and telephone, provided that the chosen execution
method satisfies the requirements for order books in 17 CFR
242.800(x) or in paragraph (a)(3) of Rule 815.
---------------------------------------------------------------------------
Proposed Rule 815(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 would specify other
requirements for an RFQ system to be recognized as such under the rule.
The three market participants to which the RFQ is addressed could not
be affiliates of or controlled by the requester and cannot be
affiliates of or controlled by each other. The proposed rule would also
provide that an SBSEF that offers an RFQ system in connection with a
Required Transaction must have the following functionalities: (i) at
the same time that the requester receives the first responsive bid or
offer, the SBSEF must communicate to the requester any firm bid or
offer pertaining to the same SBS resting on any of the SBSEF's order
books; (ii) the SBSEF must provide the requester with the ability to
execute against those firm resting bids or offers along with any
responsive orders; and (iii) the SBSEF must 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. The requirements of Proposed Rule 815(a)(3) are
referred to as the ``RFQ-to-3 requirement.''
(ii) Comments on the RFQ-to-3 Requirement
The Commission received comments on the proposed RFQ-to-3
requirement in Proposed Rule 815(a)(3).\171\ One commenter suggests
that the Commission expand the permitted modes of SBS execution for
swaps mandated for trading on SBSEFs in order to provide for a less
prescriptive, more principles-based approach that balances
transparency, competition, and liquidity through a flexible set of
rules and states that any means of execution that provides sufficient
pre-trade price transparency and preserves competition should be
available.\172\ This commenter, while supporting general harmonization
between the Commission's and the CFTC's rules on trading protocols and
methods of execution, argues that the Commission's rule also needs to
balance harmonization with the need to reflect the unique and sensitive
liquidity conditions that exist in SBS markets.
---------------------------------------------------------------------------
\171\ See ISDA-SIFMA Letter, supra note 18, at 5-6; SIFMA AMG
Letter, supra note 18, at 8-9.
\172\ See SIFMA AMG Letter, supra note 18, at 8.
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Stating that an RFQ-to-3 requirement for Required Transactions that
are SBSs means something completely different than for swaps, this
commenter urges the Commission to consider a lower RFQ threshold given
the nature of the SBS market. This commenter states that, in some
cases, for an asset manager to seek three quotes would effectively
require the asset manager to contact many of the primary price makers
in the SBS market, as there simply are not the same number of liquidity
providers, particularly for less liquid, more thinly traded SBSs, as
the number of participants, the trading volume, and the depth of market
liquidity are very different in the SBS market. The commenter suggests
that requesting quotes from two participants, for example, would allow
the asset manager to retain some control over the information
disseminated about its interest to the market while preserving the
statute's ``multiple to multiple'' definition requirement.\173\
---------------------------------------------------------------------------
\173\ See id. at 9.
---------------------------------------------------------------------------
Another commenter also urges the Commission to consider an
alternative approach to the proposed RFQ-to-3 requirement, and to
provide a ``phased-in compliance'' with the required methods of
execution, whereby a MAT SBS product may be executed on an SBSEF via
any method of execution until such time as it is determined through
notice and comment that an appropriate level of liquidity exists to
enable an order book or RFQ-to-3 system.\174\ This commenter states
that, considering the lack of liquidity in SBS products, pre-trade
transparency via the proposed RFQ-to-3 requirement could negatively
impact liquidity provision for end-users. The commenter states that, if
clients are required to ``show their hand to three liquidity
providers,'' it may lead to information leakage and an inability to
hedge the clients' risks through the SBS markets.\175\ The commenter
asserts that this is particularly so given that there are a relatively
small number of active dealers for many SBS products, stating that,
based on DTCC \176\ data on credit SBS for the top 700 issuers, there
are on average 2.7 dealers, and 400 of the top 700 issuers have fewer
than three active dealers per month.\177\
---------------------------------------------------------------------------
\174\ See ISDA-SIFMA Letter, supra note 18, at 5-6.
\175\ Id. at 6.
\176\ ``DTCC'' refers to the Depository Trust and Clearing
Corporation.
\177\ See ISDA-SIFMA Letter, supra note 18, at 6.
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This commenter further argues that an RFQ-to-3 requirement would be
problematic for SBS equities, where the current execution processes are
very different from their swaps counterpart. The commenter states that
clients in SBSs typically ask their preferred dealer to execute shares
in SBS at market price (or some other pricing structure), the dealer
then purchases the shares directly for hedging purposes, and the dealer
then executes the swap at the end of the day with the client at an
average market price.\178\ The commenter states that, in this case, the
dealer's interaction is more akin to a broker than a dealer
counterparty, and that these trading practices would not be possible on
an RFQ-to-3 or order book system. In addition, the commenter states
that it has ``compared the credit swaps activity that occurred on-venue
back in 2012 before the CFTC trade execution requirement kicked in,
with the credit SBS activity that occurs on-venue today'' and asserts
that the results suggest ``that the swaps market was much more ready
for the implementation of the trade execution requirement than the SBS
market is today.'' \179\ This commenter states that, ``[a]bsent a
phased-in implementation approach, the SBS market could suffer from
significant disruptions.'' \180\
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\178\ The commenter also stipulates that at the onset of the
relationship, clients will negotiate a grid with dealers where
certain short/long benchmarks and spreads are agreed for equity
issuers on a jurisdictional or other basis. See ISDA-SIFMA Letter,
supra note 18, at 6.
\179\ Id.
\180\ Id.
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While the Commission acknowledges that there are differences
between the liquidity in the SBS market and the
[[Page 87178]]
swaps market, the process required before the execution requirement
would apply to an SBS will reduce the risk of ``substantial
disruptions.'' The required methods of execution would be applied to an
SBS only to the extent that it is subject to the clearing mandate and
has been ``made available to trade.'' Before making an SBS subject to
the clearing mandate, the Commission would be able to take into account
a number of factors, including the existence of significant outstanding
notional exposures, trading liquidity, and the adequacy of pricing
data.\181\
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\181\ See SEA section 3C(b)(4)(i), 15 U.S.C. 78c-3(b)(4)(i). See
also SEA section 3C(b)(4)(ii) through (v), 15 U.S.C. 78c-3(b)(4)(ii)
through (v) (discussing other factors that the Commission would be
required to take into account when making a mandatory clearing
determination).
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Further, to make an SBS ``available to trade,'' an SBSEF would,
under Proposed Rule 816(a)(1),\182\ have to make a filing with the
Commission under Rule 806 or Rule 807--both of which would allow the
Commission to find that a filing was not consistent with the
requirements of the SEA or Regulation SE.\183\ Moreover, the SBSEF's
filing would, under Proposed Rule 816(b), have to address, as
appropriate, a number of relevant factors, including whether there are
ready and willing buyers and sellers; the frequency or size of
transactions; the trading volume; the number and types of market
participants; the bid/ask spread; and the usual number of resting firm
or indicative bids and offers. Similarly, a national securities
exchange that wished to make an SBS ``available to trade'' would have
to file a rule change under Rule 19b-4,\184\ and that proposed rule
change would be subject to Commission review for compliance with the
requirements of the SEA, which requires that the rules of a national
securities exchange, among other things, promote just and equitable
principles of trade, remove impediments to and perfect the mechanism of
a free and open market and a national market system, protect investors
and the public interest, and not impose a burden on competition not
necessary or appropriate in furtherance of the purposes of the
SEA.\185\ Thus, before an SBS becomes subject to the trade execution
requirement, the Commission would have had multiple opportunities to
consider the trading characteristics of that SBS.
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\182\ See infra section V.F.2.
\183\ See supra sections IV.A and B.
\184\ 17 CFR 240.19b-4.
\185\ See Section 6(b)(5) and (8) of the SEA, 15 U.S.C.
78f(b)(5) and (8).
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Additionally, most, if not all, SBSEFs are likely to be dually
registered
[…truncated; see source link]Indexed from Federal Register on December 15, 2023.
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.