
[Federal Register Volume 79, Number 131 (Wednesday, July 9, 2014)]
[Rules and Regulations]
[Pages 39067-39162]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-15337]



[[Page 39067]]

Vol. 79

Wednesday,

No. 131

July 9, 2014

Part II





 Securities and Exchange Commission





-----------------------------------------------------------------------





17 CFR Parts 240, 241, and 250





 Application of ``Security-Based Swap Dealer'' and ``Major Security-
Based Swap Participant'' Definitions to Cross-Border Security-Based 
Swap Activities; Final Rule

  Federal Register / Vol. 79 , No. 131 / Wednesday, July 9, 2014 / 
Rules and Regulations  

[[Page 39068]]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240, 241, and 250

[Release No. 34-72472; File No. S7-02-13]
RIN 3235-AL25


Application of ``Security-Based Swap Dealer'' and ``Major 
Security-Based Swap Participant'' Definitions to Cross-Border Security-
Based Swap Activities

AGENCY: Securities and Exchange Commission.

ACTION: Final rules; interpretation.

-----------------------------------------------------------------------

SUMMARY: The Securities and Exchange Commission (``SEC'' or 
``Commission'') is adopting rules and providing guidance to address the 
application of certain provisions of the Securities Exchange Act of 
1934 (``Exchange Act'') that were added by Subtitle B of Title VII of 
the Dodd-Frank Wall Street Reform and Consumer Protection Act (``Dodd-
Frank Act''), to cross-border security-based swap activities. These 
rules and guidance in large part focus on the application of the Title 
VII definitions of ``security-based swap dealer'' and ``major security-
based swap participant'' in the cross-border context. The Commission 
also is adopting a procedural rule related to the submission of 
applications for substituted compliance. In addition, the Commission is 
adopting a rule addressing the scope of our authority, with respect to 
enforcement proceedings, under section 929P of the Dodd-Frank Act.

DATES: Effective September 8, 2014.

FOR FURTHER INFORMATION CONTACT: Richard Gabbert, Senior Special 
Counsel, Joshua Kans, Senior Special Counsel, or Margaret Rubin, 
Special Counsel, Office of Derivatives Policy, at 202-551-5870, 
Division of Trading and Markets, Securities and Exchange Commission, 
100 F Street NE., Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION: The Commission is adopting the following 
rules under the Exchange Act, accompanied by related guidance, 
regarding the application of Subtitle B of Title VII of the Dodd-Frank 
Act to cross-border activities: Rule 0-13 (filing procedures regarding 
substituted compliance requests); Rule 3a67-10 (regarding the cross-
border implementation of the ``major security-based swap participant'' 
definition); Rule 3a71-3 (regarding the cross-border implementation of 
the de minimis exception to the ``security-based swap dealer'' 
definition); Rule 3a71-4 (regarding the cross-border implementation of 
the aggregation provisions of the dealer de minimis exception); and 
Rule 3a71-5 (regarding an exception, from the dealer de minimis 
analysis, for certain cleared anonymous transactions). The Commission 
is not addressing, as part of this release, certain other rules that we 
proposed regarding the application of Subtitle B of Title VII in the 
cross-border context. The Commission also is adopting Rule 250.1 to 
clarify the scope of its antifraud civil law-enforcement authority, 
with respect to enforcement proceedings, in the cross-border context.

Table of Contents

I. Background
    A. Scope of This Rulemaking
    B. The Dodd-Frank Act
    C. The Cross-Border Proposing Release and the CFTC Cross-Border 
Guidance
    D. Comments on the Proposal
II. The Economic, Legal, and Policy Principles Guiding the 
Commission's Approach to the Application of Title VII to Cross-
Border Activities
    A. Economic Considerations in the Cross-Border Regulation of 
Security-Based Swaps
    1. Economic Features of the Security-Based Swap Market
    2. Context for Regulatory Determinations
    B. Scope of Title VII's Application to Cross-Border Security-
Based Swap Activity
    1. Commenters' Views
    2. Scope of Application of Title VII in the Cross-Border Context
    C. Principles Guiding Final Approach To Applying ``Security-
Based Swap Dealer'' and ``Major Security-Based Swap Participant'' 
Definitions in the Cross-Border Context
III. Baseline
    A. Current Security-Based Swap Market
    1. Security-Based Swap Market Participants
    2. Levels of Security-Based Swap Trading Activity
    B. Global Regulatory Efforts
    C. Cross-Market Participation
IV. Cross-Border Application of Dealer De Minimis Exception
    A. Overview
    B. Application of De Minimis Exception To Dealing Activities of 
U.S. Persons
    1. Proposed Approach and Commenters' Views
    2. Final Rule
    C. Definition of ``U.S. Person''
    1. Proposed Approach
    2. Commenters' Views
    3. Final Rule
    4. Representations Regarding U.S.-Person Status
    D. Application of De Minimis Exception To Dealing Activities of 
Conduit Affiliates
    1. Proposed Approach and Commenters' Views
    2. Final Rule
    E. Application of De Minimis Exception To Dealing Activities of 
Other Non-U.S. Persons
    1. Dealing Transactions of Non-U.S. Persons That Are Subject To 
Recourse Guarantees by Their U.S. Affiliates
    2. Dealing Transactions of Non-U.S. Persons Involving U.S. and 
Other Counterparties
    F. Application of the Exception's Aggregation Principles to 
Cross-Border Dealing Activity
    1. Proposed Approach and Commenters' Views
    2. Final Rule
    G. Exception for Cleared Anonymous Transactions
    1. Proposed Approach and Commenters' Views
    2. Final Rule
    H. Additional Issues
    1. Particular Activities and Entities
    2. Foreign Public Sector Financial Institutions and Government-
Related Entities
    I. Economic Analysis of the Final Cross-Border Dealer De Minimis 
Rule
    1. Programmatic Costs and Benefits
    2. Assessment Costs
    3. Alternative Approaches
V. Cross-Border Application of Major Security-Based Swap Participant 
Thresholds
    A. Overview
    B. Application of the Major Security-Based Swap Participant 
Definition to U.S. Persons
    1. Proposed Approach and Commenters' Views
    2. Final Rule
    C. Application of the Major Security-Based Swap Participant 
Definition to Conduit Affiliates
    1. Proposed Approach and Commenters' Views
    2. Final Rule
    D. Application to Other Non-U.S. Persons
    1. Positions With U.S. Persons Other Than Foreign Branches of 
U.S. Banks
    2. Positions With Foreign Branches of U.S. Banks
    3. Positions of Non-U.S. Persons That Are Subject To Recourse 
Guarantees by a U.S. Person
    E. Attribution
    1. Positions Attributed to U.S. Person Guarantors
    2. Positions Attributed to Non-U.S. Person Guarantors
    3. Limited Circumstances Where Attribution of Guaranteed 
Security-Based Swap Positions Does Not Apply
    F. Other Issues Related to the Application of the Major 
Security-Based Swap Participant Definition
    1. Threshold for Registration as a Major Security-Based Swap 
Participant
    2. Entities That Maintain Legacy Portfolios
    G. Foreign Public Sector Financial Institutions and Government-
Related Entities
    H. Economic Analysis of Final Rules Regarding ``Major Security-
Based Swap Participants''
    1. Programmatic Costs and Benefits
    2. Assessment Costs
    3. Alternative Approaches
VI. Substituted Compliance Procedural Rule
    A. Proposed Approach and Commenters' Views

[[Page 39069]]

    B. Final Rule
    C. Economic Analysis
VII. Antifraud Authority
    A. Final Rule
    B. Economic Analysis
VIII. Impacts on Efficiency, Competition, and Capital Formation
    A. Competition
    B. Efficiency
    C. Capital Formation
IX. Paperwork Reduction Act
    A. Introduction
    B. Reliance on Counterparty Representations Regarding 
Transactions Conducted Through a Foreign Branch
    1. Summary of Collection of Information
    2. Proposed Use of Information
    3. Respondents
    4. Total Initial and Annual Reporting and Recordkeeping Burdens
    C. Reliance on Counterparty Representations Regarding Non-U.S. 
Person Status
    1. Summary of Collection of Information
    2. Proposed Use of Information
    3. Respondents
    4. Total Initial and Annual Reporting and Recordkeeping Burdens
X. Regulatory Flexibility Act Certification
XI. Effective Date and Implementation
Statutory Authority and Text of Final Rules

I. Background

A. Scope of This Rulemaking

    The Commission is adopting the first of a series of rules and 
providing guidance regarding the application of Title VII of the Dodd-
Frank Act \1\ (``Title VII'') to cross-border security-based swap 
activities and persons engaged in those activities.\2\ This rulemaking 
primarily focuses on the application of the de minimis exception to the 
definition of ``security-based swap dealer'' in the cross-border 
context, and on the application of thresholds related to the definition 
of ``major security-based swap participant'' in the cross-border 
context. We also are adopting a procedural rule regarding the 
submission of ``substituted compliance'' requests to allow market 
participants to satisfy certain Title VII obligations by complying with 
comparable foreign regulatory requirements.\3\
---------------------------------------------------------------------------

    \1\ Public Law 111-203, 124 Stat. 1376 (2010). Unless otherwise 
indicated, references to Title VII in this release are to Subtitle B 
of Title VII.
    \2\ Consistent with the scope of the final rules as discussed 
below, the references in this release to the application of Title 
VII to ``cross-border activities'' refer to security-based swap 
transactions involving: (i) A U.S. person and a non-U.S. person, or 
(ii) two non-U.S. persons conducting a security-based swap 
transaction that otherwise occurs in relevant part within the United 
States, including where performance of one or both counterparties 
under the security-based swap are guaranteed by a U.S. person. For 
purposes of this release only, ``cross-border activities'' do not 
indicate activities involving a transaction between two non-U.S. 
persons where one or both are conducting dealing activity within the 
United States, because, as discussed below, we anticipate 
considering this issue in a subsequent release.
    \3\ The procedural rule addresses only the process for 
submitting such substituted compliance requests to the Commission. 
It does not address issues regarding whether substituted compliance 
would be available in connection with particular regulatory 
requirements, and, if so, under what conditions. We expect to 
address those matters as part of later rulemakings.
---------------------------------------------------------------------------

    The rules and guidance we are adopting are based on our May 23, 
2013 proposal, which addressed the application of Title VII in the 
cross-border context.\4\ Aside from addressing the definitions and 
procedural rule noted above, the Cross-Border Proposing Release also 
addressed a range of other cross-border issues, including issues 
regarding the requirements applicable to dealers and major 
participants, and requirements relating to mandatory clearing, trade 
execution, regulatory reporting, and public dissemination. The Cross-
Border Proposing Release stated that it was possible that we would 
consider final rules and guidance related to some of those issues in 
the adopting releases related to the relevant substantive rulemakings, 
and that we would address others in a separate rulemaking.\5\
---------------------------------------------------------------------------

    \4\ See Cross-Border Security-Based Swap Activities; Re-Proposal 
of Regulation SBSR and Certain Rules and Forms Relating to the 
Registration of Security-Based Swap Dealers and Major Security-Based 
Swap Participants, Exchange Act Release No. 69490 (May 1, 2013), 78 
FR 30968 (May 23, 2013) (``Cross-Border Proposing Release'').
    \5\ See id. at 30974.
---------------------------------------------------------------------------

    This rulemaking's focus on the cross-border application of the 
dealer and major participant definitions reflects the critical and 
foundational role that those definitions occupy with regard to the 
implementation of Title VII.\6\ We expect to address other matters 
raised by the Cross-Border Proposing Release as part of subsequent 
rulemakings, to allow us to consider the cross-border application of 
the substantive requirements imposed by Title VII--including the 
economic consequences of that cross-border application--in conjunction 
with the final rules that will implement those substantive 
requirements.\7\ Market participants are not required to comply with 
certain of those Title VII requirements pending the publication of 
final rules or other Commission action, and temporarily are exempt from 
having to comply with certain other requirements added by or arising 
from Title VII.\8\
---------------------------------------------------------------------------

    \6\ This rulemaking does not address the requirements under 
section 5 of the Securities Act applicable to security-based swap 
transactions. Security-based swaps, as securities, are subject to 
the provisions of the Securities Act of 1933 (15 U.S.C. 77a et seq.) 
(``Securities Act'') and the rules and regulations thereunder 
applicable to securities. The Securities Act requires that any offer 
and sale of a security must either be registered under the 
Securities Act (see section 5 of the Securities Act, 15 U.S.C. 77e) 
or made pursuant to an exemption from registration (see, e.g., 
sections 3 and 4 of the Securities Act, 15 U.S.C. 77c and 77d, 
respectively). In addition, the Securities Act requires that any 
offer to sell, offer to buy or purchase, or purchase or sale of, a 
security-based swap to any person who is not an eligible contract 
participant must be registered under the Securities Act (see section 
5(e) of the Securities Act, 15 U.S.C. 77e(e)). Because of the 
statutory language of section 5(e) of the Securities Act, exemptions 
from this requirement in sections 3 and 4 of the Securities Act are 
not available.
    \7\ Those subsequent rulemakings may make use of definitions of 
``U.S. person'' and certain other terms that we are adopting today.
    \8\ See Temporary Exemptions and Other Temporary Relief, 
Together With Information on Compliance Dates for New Provisions of 
the Securities Exchange Act of 1934 Applicable to Security-Based 
Swaps, Exchange Act Release No. 64678 (Jun. 15, 2011), 76 FR 36287 
(Jun. 22, 2011) (clarifying the compliance date for certain 
requirements added by Title VII, and in some cases providing 
temporary exemptive relief in connection with those requirements); 
Order Extending Temporary Exemptions under the Securities Exchange 
Act of 1934 in Connection with the Revision of the Definition of 
``Security'' to Encompass Security-Based Swaps, and Request for 
Comment, Exchange Act Release No. 71485 (Feb. 5, 2014), 79 FR 7731 
(Feb. 10, 2014) (extending exemptive relief from certain Exchange 
Act provisions in connection with Title VII's revision of the 
Exchange Act definition of ``security'' to encompass security-based 
swaps).
---------------------------------------------------------------------------

    These final rules and guidance do not address one key issue related 
to the application of the ``security-based swap dealer'' definition in 
the cross-border context. In the Cross-Border Proposing Release, we 
proposed that non-U.S. persons must count, against the relevant 
thresholds of the de minimis exemption, their dealing activity 
involving ``transactions conducted within the United States.'' \9\ 
Commenters raised a number of significant issues related to this 
proposed requirement, including issues regarding the Commission's 
authority to impose this requirement and regarding the costs associated 
with this requirement. While we continue to preliminarily believe that 
the cross-border application of the security-based swap dealer 
definition should account for activities in the United States related 
to dealing--even when neither party to the transaction is a U.S. 
person--we also believe that the final resolution of this issue can 
benefit from further consideration and public comment. Accordingly, we 
anticipate soliciting additional public comment regarding approaches by 
which the cross-border

[[Page 39070]]

application of the dealer definition appropriately can reflect activity 
between two non-U.S. persons where one or both are conducting dealing 
activity within the United States.
---------------------------------------------------------------------------

    \9\ See proposed Exchange Act rule 3a71-3(b). The proposal 
further would have defined a ``transaction conducted within the 
United States'' to encompass transactions that are solicited, 
executed, or booked within the United States by or on behalf of 
either counterparty, regardless of either counterparty's location, 
domicile or residence status, subject to an exception for 
transactions conducted through the foreign branches of U.S. banks. 
See proposed Exchange Act rule 3a71-3(a)(5).
---------------------------------------------------------------------------

B. The Dodd-Frank Act

    As discussed in the Cross-Border Proposing Release, the 2008 
financial crisis highlighted significant issues in the over-the-counter 
(``OTC'') derivatives markets, which had experienced dramatic growth in 
the years leading up to the crisis and are capable of affecting 
significant sectors of the U.S. economy.\10\ 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, including in connection with swaps and security-based 
swaps.\11\
---------------------------------------------------------------------------

    \10\ See generally Cross-Border Proposing Release, 78 FR 30972-
73.
    \11\ See Pub. L. 111-203, Preamble (stating that the Dodd-Frank 
Act was enacted ``[t]o promote the financial stability of the United 
States by improving accountability and transparency in the financial 
system, to end `too big to fail', to protect the American taxpayer 
by ending bailouts, to protect consumers from abusive financial 
services practices, and for other purposes'').
---------------------------------------------------------------------------

    Title VII provides for a comprehensive new regulatory framework for 
swaps and security-based swaps. Under this framework, the Commodity 
Futures Trading Commission (``CFTC'') regulates ``swaps'' while the 
Commission regulates ``security-based swaps,'' and the Commission and 
CFTC jointly regulate ``mixed swaps.'' The new framework encompasses 
the registration and comprehensive regulation of dealers and major 
participants, as well as requirements related to clearing, trade 
execution, regulatory reporting, and public dissemination.\12\ 
Security-based swap transactions are largely cross-border in 
practice,\13\ and the various market participants and infrastructures 
operate in a global market. To ensure that our regulatory framework 
appropriately reflects and addresses the nature and extent of the 
potential impact that the global market can have on U.S. persons and 
the U.S. financial system, it is critically important that we provide 
market participants with clear rules and guidance regarding how the 
regulatory framework mandated by Title VII will apply in the cross-
border context.
---------------------------------------------------------------------------

    \12\ The Commission has proposed a series of rules regarding 
these matters. See Cross-Border Proposing Release, 78 FR 30972 
nn.11-18. Most recently, the Commission proposed rules governing 
recordkeeping, reporting, and notification requirements for dealers 
and major participants. See Exchange Act Release No. 71958 (Apr. 17, 
2014), 79 FR 25194 (May 2, 2014).
    The Dodd-Frank Act further provides that the SEC and CFTC 
jointly should further define certain terms, including ``security-
based swap dealer'' and ``major security-based swap participant.'' 
See Dodd-Frank Act section 712(d). Pursuant to that requirement, the 
SEC and CFTC jointly adopted rules to further define those terms. 
See Further Definition of ``Swap Dealer,'' ``Security-Based Swap 
Dealer,'' ``Major Swap Participant,'' ``Major Security-Based Swap 
Participant'' and ``Eligible Contract Participant,'' Exchange Act 
Release No. 66868 (Apr. 27, 2012), 77 FR 30596 (May 23, 2012) 
(``Intermediary Definitions Adopting Release''); see also Cross-
Border Proposing Release, 78 FR 30972 n.9 (discussing joint 
rulemaking to further define various Title VII terms).
    \13\ See section 0, infra, regarding the preponderance of cross-
border activity in the security-based swap market.
---------------------------------------------------------------------------

    In developing these final rules and guidance, we have consulted and 
coordinated with the CFTC, the prudential regulators,\14\ and foreign 
regulatory authorities in accordance with the consultation provisions 
of the Dodd-Frank Act,\15\ and more generally as part of our domestic 
and international coordination efforts.\16\ Commission staff has 
participated in numerous bilateral and multilateral discussions with 
foreign regulatory authorities addressing the regulation of OTC 
derivatives.\17\ Through these discussions and the Commission staff's 
participation in various international task forces and working 
groups,\18\ we have gathered information about foreign regulatory 
reform efforts and the possibility of conflicts and gaps, as well as 
inconsistencies and overlaps, between U.S. and foreign regulatory 
regimes. We have taken this information into consideration in 
developing the final rules and guidance.
---------------------------------------------------------------------------

    \14\ 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 Exchange Act, 
15 U.S.C. 78c(a)(74). Pursuant to the definition, the Board of 
Governors of the Federal Reserve System (``Federal Reserve Board''), 
the Office of the Comptroller of the Currency, the Federal Deposit 
Insurance Corporation, the Farm Credit Administration, or the 
Federal Housing Finance Agency (collectively, the ``prudential 
regulators'') is the ``prudential regulator'' of a security-based 
swap dealer or major security-based swap participant if the entity 
is directly supervised by that regulator.
    \15\ Section 712(a)(2) of the Dodd-Frank Act provides in 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 
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.''
    \16\ In 2009, leaders of the Group of 20 (``G20'')--whose 
membership includes the United States, 18 other countries, and the 
European Union (``EU'')--called for global improvements in the 
functioning, transparency, and regulatory oversight of OTC 
derivatives markets. See G20 Leaders' Statement, Pittsburgh, United 
States, September 24-25, 2009, available at: http://www.treasury.gov/resource-center/international/g7-g20/Documents/pittsburgh_summit_leaders_statement_250909.pdf. (``G20 Leaders' 
Pittsburgh Statement'').
    In subsequent summits, the G20 leaders have reiterated their 
commitment to OTC derivatives regulatory reform. For example, in 
September 2013, the leaders of the G20 reaffirmed their commitments 
with respect to the regulation of the OTC derivatives markets, 
welcoming Financial Stability Board (``FSB'') members' confirmed 
actions and committed timetables to put the agreed OTC derivatives 
reforms into practice. See the G20 Leaders Declaration (September 
2013), para. 71, available at: https://www.g20.org/sites/default/files/g20_resources/library/Saint_Petersburg_Declaration_ENGpdf 
(``G20 Leaders' St. Petersburg Declaration'').
    \17\ Senior representatives of authorities with responsibility 
for regulation of OTC derivatives have met on a number of occasions 
to discuss international coordination of OTC derivatives 
regulations. See, e.g., Report of the OTC Derivatives Regulators 
Group (``ODRG'') on Cross-Border Implementation Issues March 2014 
(Mar. 31, 2014), available at: http://www.cftc.gov/ucm/groups/public/@internationalaffairs/documents/file/odrgreport033114.pdf.
    \18\ Commission representatives participate in the FSB's Working 
Group on OTC Derivatives Regulation (``ODWG''), both on its own 
behalf and as the representative of the International Organization 
of Securities Commissions (``IOSCO''), which is co-chair of the 
ODWG. A Commission representative also serves as one of the co-
chairs of the IOSCO Task Force on OTC Derivatives Regulation.
---------------------------------------------------------------------------

C. The Cross-Border Proposing Release and the CFTC Cross-Border 
Guidance

    In expressing our preliminary views regarding the application of 
Title VII to security-based swap activity carried out in the cross-
border context (including to persons engaged in such activities), the 
Cross-Border Proposing Release recognized that the security-based swap 
market is global in nature and that it developed prior to the enactment 
of the Dodd-Frank Act.\19\ The proposal further recognized that the 
rules we adopt and guidance we provide regarding the cross-border 
application of Title VII could significantly affect the global 
security-based swap market.\20\
---------------------------------------------------------------------------

    \19\ See Cross-Border Proposing Release, 78 FR 30975-76.
    \20\ See id. at 30975.
---------------------------------------------------------------------------

    Reflecting the range of regulatory requirements that Title VII 
imposes upon the security-based swap market, the Cross-Border Proposing 
Release addressed the cross-border application of: (a) The de minimis 
exception to the ``security-based swap dealer'' definition; (b) the 
entity-level and transaction-level requirements applicable to security-
based swap dealers (e.g., margin, capital, and business conduct 
requirements); (c) the ``substantial

[[Page 39071]]

position'' and ``substantial counterparty exposure'' thresholds for the 
``major security-based swap participant'' definition and the 
requirements applicable to major participants; (d) the registration of 
security-based swap clearing agencies and mandatory clearing 
requirements; (e) the registration of security-based swap execution 
facilities and mandatory trade execution requirements; and (f) the 
registration of security-based swap data repositories and regulatory 
reporting and public dissemination requirements. The proposal also 
addressed the potential for market participants to satisfy certain of 
those Title VII requirements by complying with comparable foreign rules 
as a substitute. This rulemaking establishes a process for submission 
of such requests.
    Following the Commission's proposal, the CFTC issued guidance 
regarding Title VII's application to cross-border swap activity.\21\ 
The CFTC Cross-Border Guidance differed from the Commission's proposed 
rules in certain ways, including, as discussed below, with regard to 
the meaning of ``U.S. person,'' the cross-border application of the de 
minimis exception to the dealer definition, the cross-border 
application of the major participant definition, and the process for 
submitting substituted compliance requests.\22\
---------------------------------------------------------------------------

    \21\ See ``Interpretive Guidance and Policy Statement Regarding 
Compliance With Certain Swap Regulations'' (Jul. 17, 2013), 78 FR 
45292 (Jul. 26, 2013) (``CFTC Cross-Border Guidance'').
    \22\ The CFTC Cross-Border Guidance currently is subject to 
legal challenge. See Complaint, Securities Indus. & Fin. Mkts. 
Ass'n. v. CFTC, No. 1:13-cv-1916 (D.D.C. filed Dec. 4, 2013).
---------------------------------------------------------------------------

    Certain foreign regulators also have addressed or are in the 
process of addressing issues related to the cross-border implementation 
of requirements applicable to OTC derivatives.\23\
---------------------------------------------------------------------------

    \23\ See section 0, infra.
---------------------------------------------------------------------------

D. Comments on the Proposal

    The Commission received 36 comments in connection with the 
proposal.\24\ Several of the commenters addressed differences between 
the SEC's proposed rules and the CFTC Cross-Border Guidance, and urged 
the Commission to harmonize its rules with the approaches taken by the 
CFTC and by foreign regulators.\25\
---------------------------------------------------------------------------

    \24\ The comment letters are located at: http://www.sec.gov/comments/s7-02-13/s70213.shtml. The majority of those commenters 
addressed, at least in part, the definitional issues that are the 
subject of this release. A number of commenters also addressed 
aspects of the proposal that are outside the scope of this release, 
and a few of those commenters only addressed issues that were 
outside the scope of this release (for example, addressing only 
proposed Regulation SBSR). We will consider those comments in 
connection with the relevant rulemakings.
    \25\ See, e.g., Managed Funds Assoc. and Alternative Investment 
Management Assoc. (``MFA/AIMA'') Letter at 3 (``We recognize that 
there are differences between the Commission's proposed approach and 
the CFTC Cross-Border Guidance, and we expect that other 
international regulators will similarly issue proposals related to 
the cross-border application of their regulations. Thus, in light of 
the global nature of the derivatives market, we urge continued 
harmonization with the CFTC and other regulatory authorities with 
respect to the extraterritorial scope of all these regimes. In 
particular, we encourage international coordination of substituted 
compliance regimes to ensure appropriate recognition of comparable 
regulations, create practical and administrable frameworks, and 
alleviate duplicative regulation.'' (footnotes omitted)). See also 
letter from six members of the United States Senate at 2 (stating 
that there should be no gaps or loopholes between the Commission's 
and the CFTC's rules); Futures and Options Association (``FOA'') 
Letter at 8 (urging the Commission and the CFTC ``to coordinate, to 
the extent possible, on their approaches in order to minimise 
distortions or other unintended consequences for market 
participants''); letter from Senator Jeffrey A. Merkley, et al., 
Congress of the United States (Aug. 6, 2013).
     Some commenters generally suggested that we harmonize with 
aspects of the CFTC Cross-Border Guidance, but also expressed 
preferences for particular elements of our proposed approach. See, 
e.g., Institute of International Bankers (``IIB'') Letter at 3-4 
(generally emphasizing the need for consistency with the CFTC and 
European Securities and Markets Authority (``ESMA'') approaches, 
unless the SEC requirement is more flexible than those other 
requirements). One commenter took the view that the Commission's 
rules should be at least as strong as the CFTC Cross-Border 
Guidance, but should go further than the CFTC wherever necessary. 
See Better Markets (``BM'') Letter. See also Chris Barnard Letter at 
2 (recommending that the Commission and the CFTC propose one set of 
rules applicable to cross-border activities to avoid duplicative and 
conflicting rules).
---------------------------------------------------------------------------

    Many of those commenters particularly focused on differences 
between the two regulators' meanings of the term ``U.S. person,'' with 
several suggesting that we change our proposed definition to align with 
the CFTC's approach.\26\ A number of commenters also addressed the 
definition of ``transaction conducted within the United States,'' with 
several opposing any use of the concept as part of the Commission's 
rules.\27\
---------------------------------------------------------------------------

    \26\ See notes 192-224, infra, and accompanying text.
    \27\ As noted above, these final rules and guidance do not 
address the application of the ``transaction conducted within the 
United States'' concept to the dealer definition. We instead 
anticipate soliciting additional public comment regarding the issue.
---------------------------------------------------------------------------

    Commenters further raised a number of more general concerns in 
connection with the proposal, including concerns regarding cost-benefit 
issues,\28\ the clarity of the proposal as a whole,\29\ the link 
between the rules and the location of the associated risk,\30\ and 
perceived concessions to the financial industry.\31\
---------------------------------------------------------------------------

    \28\ For example, a few commenters took the view that cost-
benefit principles weighed in favor of consistency with the CFTC 
Cross-Border Guidance. See Securities Industry and Financial Markets 
Association/Futures Industry Association/Financial Services 
Roundtable (``SIFMA/FIA/FSR'') Letter at 3; PensionsEurope Letter 
(incorporating by reference SIFMA/FIA/FSR Letter; all references to 
SIFMA/FIA/FSR Letter incorporate reference to PensionsEurope 
Letter); IIB Letter at 2, 3. One commenter further took the view 
that cost-benefit principles merited rejection of the use of the 
``transaction conducted within the United States'' concept. See 
SIFMA/FIA/FSR Letter at 3. See also Chris Barnard Letter at 2 
(suggesting that there is insufficient administrative, legal, or 
economic rationale for having ``very different rules'' of cross-
border application between the SEC and the CFTC); Coalition for 
Derivatives End-Users (``CDEU'') Letter at 2 (stating that 
conflicting regulatory regimes will result in increased compliance 
and regulatory costs and an inefficient financial system); 
Association of Financial Guaranty Insurers (``AFGI'') Letter, dated 
August 20, 2013 (``AFGI Letter I'') at 2 (stating that the security-
based swap dealer and major security-based swap participant regime 
would be disruptive and have financial consequences for guaranty 
insurers and their counterparties who have legacy transactions with 
a projected run-off date in the near future); AFGI letter, dated 
July 22, 2013 (``AFGI Letter II'') at 4 (incorporated by reference 
in AFGI Letter I); AFGI letter, dated February 15, 2013 (``AFGI 
Letter III'') at 4 (incorporated by reference in AFGI Letter I).
    One commenter conversely argued that, in lieu of cost-benefit 
principles, the Commission instead should be guided by public 
interest and investor protection principles, as well as the Dodd-
Frank Act's intent to increase financial system soundness and 
prevent another financial crisis. See BM Letter at 4, 37-45 
(stating, inter alia, that ``Congress passed the Dodd-Frank Act 
knowing full well that it would impose significant costs on 
industry, yet it determined those costs were not only justified but 
necessary to stabilize our financial system and avoid another 
financial crisis'').
    One commenter challenged the adequacy--indeed, the existence--of 
the cost-benefit analysis in the proposing release. See CDEU Letter 
at 6 (``To better understand the negative effects of imposing 
conflicting rules on the market, the SEC should conduct a direct 
cost-benefit analysis of the conflicting rule regimes (e.g., with 
the European Market Infrastructure Regulation and the CFTC's cross-
border guidance). Instead, the SEC asks the public to conduct such 
an analysis for the SEC: `what would be the economic impact, 
including the costs and benefits, of these differences on market 
participants . . . ?' '').
    \29\ See BM Letter at 2-3, 7-8; CDEU Letter at 5.
    \30\ See Americans for Financial Reform (``AFR'') Letter, dated 
August 22, 2013 (``AFR Letter I'') at 3-4 (criticizing the proposal 
as having failed to apply the rules based on the geographic location 
of the entity ultimately responsible for the resulting liabilities, 
and stating that the rules should apply to transactions engaged in 
by ``guaranteed foreign subsidiaries of U.S. entities'').
    \31\ See BM Letter at 7-8 (stating that the proposal was the 
result of unwarranted and inappropriate concessions, such as with 
regard to the application of the de minimis threshold to U.S.-
guaranteed entities). See also Karim Shariff letter at 1 (stating 
that the proposal will allow banks to take risks that will lead to 
an economic collapse).
---------------------------------------------------------------------------

    In addition, commenters addressed issues specific to the cross-
border application of the entity-level and transaction-level 
requirements for dealers,\32\ as well as requirements

[[Page 39072]]

specific to clearing, trade execution, regulatory reporting and public 
disclosure.\33\ We expect to address those comments regarding the 
relevant substantive requirements in subsequent rulemakings and 
guidance regarding the relevant substantive requirements.
---------------------------------------------------------------------------

    \32\ See, e.g., BM Letter at 3, 20-21, 28 (stating that 
transactions conducted through foreign branches of U.S. dealers with 
non-U.S. persons should be subject to external business conduct 
requirements, and that margin should be treated as a transaction-
level requirement); SIFMA/FIA/FSR Letter at A-22 to A-26 (addressing 
application of margin, segregation, external business conduct and 
certain other requirements).
    \33\ See, e.g., BM Letter at 3, 21-22 (criticizing exceptions 
from mandatory clearing and trade execution requirements); SIFMA/
FIA/FSR Letter at A-38 to A-52 (in part urging that application of 
regulatory reporting, public dissemination, trade execution and 
clearing requirements should follow the same rules as external 
business conduct requirements).
---------------------------------------------------------------------------

    Commenters also addressed the proposed availability of substituted 
compliance.\34\ Although today we are adopting a procedural rule 
regarding requests for substituted compliance, we generally expect to 
address the potential availability of substituted compliance for 
specific Title VII requirements in connection with subsequent 
rulemakings regarding each substantive requirement.
---------------------------------------------------------------------------

    \34\ See, e.g., AFR Letter I at 8, 12 (opposing rationale for 
substituted compliance, and noting need for the Commission to retain 
discretion to find a lack of comparability based on substantive 
enforcement issues); AFR letter to CFTC, dated August 27, 2012 
(``AFR Letter II'') (stating that CFTC should narrow the scope of 
substituted compliance) (incorporated by reference in AFR Letter I); 
Michael Greenberger letter to CFTC, dated February 6, 2013 at 13 
(``Greenberger Letter I'') (stating that substituted compliance 
should be a last resort and that the CFTC regime be enforced 
vigorously) (incorporated by reference in AFR Letter I); Michael 
Greenberger letter to CFTC, dated August 27, 2012 at 8, 19-23 
(``Greenberger Letter II'') (explaining that international comity 
does not require that the CFTC exempt foreign subsidiaries from 
compliance with U.S. financial regulation) (incorporated by 
reference in AFR Letter I); BM Letter at 3, 26-27 (questioning 
authority for substituted compliance and suggesting potential for 
loopholes; also stating that substituted compliance should not be 
allowed for transactions with U.S. persons or for transactions in 
the United States and urging limited use of exemptive authority; 
further stating that the proposal gave only passing reference to 
foreign supervision and enforcement); SIFMA/FIA/FSR Letter at A-30 
to A-38 (in part supporting the approach to focus on similar 
regulatory objectives rather than requiring foreign rules to be 
identical, stating that foreign branches should be able to make use 
of substituted compliance for certain purposes, stating that 
variations in foreign supervisory practices should not be assumed to 
be defects, and requesting further clarity regarding substituted 
compliance assessment factors); ESMA Letter at 1, 3-4 (suggesting 
particular expansions of the proposed scope of substituted 
compliance); European Commission (``EC'') Letter (supporting 
``holistic'' approach toward substituted compliance based on 
comparison of regulatory outcomes).
---------------------------------------------------------------------------

    We have carefully considered the comments received in adopting the 
final rules and providing guidance. Our final rules and guidance 
further reflect consultation with the CFTC, prudential regulators, and 
foreign regulatory authorities with regard to the development of 
consistent and comparable standards. Accordingly, certain aspects of 
the final rules and guidance--such as, for example, the treatment of 
guaranteed affiliates of U.S. persons for purposes of the dealer de 
minimis exception--have been modified from the proposal.\35\
---------------------------------------------------------------------------

    \35\ In this regard, the final rules in a number of areas take 
approaches that are similar to the approaches taken by the CFTC in 
its own cross-border guidance, although independent considerations 
have driven our approaches. Moreover, throughout the Cross-Border 
Proposing Release we recognized and solicited comment on the 
differences between our proposal and the CFTC's proposed guidance on 
the cross-border application of swap regulation. As noted above, 
many commenters urged harmonization with various aspects of the 
CFTC's guidance. We have taken these comments into account, and in 
developing final rules we have carefully considered the CFTC's 
guidance and the underlying policy rationales. Further, where we 
have determined such policy rationales and approaches are applicable 
in the context of the market for security-based swaps, we have 
adopted similar approaches to the CFTC (see, e.g., application of 
the de minimis exception to non-U.S. persons' dealing transactions 
with foreign branches of U.S. banks).
---------------------------------------------------------------------------

II. The Economic, Legal, and Policy Principles Guiding the Commission's 
Approach to the Application of Title VII to Cross-Border Activities

    In this section, we describe the most significant economic 
considerations regarding the security-based swap market that we have 
taken into account in implementing the cross-border application of the 
security-based swap dealer and major security-based swap participant 
definitions of Title VII. We are sensitive to the economic consequences 
and effects, including costs and benefits, of our rules, including with 
respect to the scope of our application of the security-based swap 
dealer and major security-based swap participant definitions in the 
cross-border context. We have taken into consideration the costs and 
benefits associated with persons being brought within one of these 
definitions through our cross-border application, as well as the costs 
market participants may incur in determining whether they are within 
the scope of these definitions and thus subject to Title VII, while 
recognizing that the ultimate economic impact of these definitions will 
be determined in part by the final rules regarding the substantive 
requirements applicable to security-based swap dealers and major 
security-based swap participants. Some of these economic consequences 
and effects stem from statutory mandates, while others result from the 
discretion we exercise in implementing the mandates.

A. Economic Considerations in the Cross-Border Regulation of Security-
Based Swaps

1. Economic Features of the Security-Based Swap Market
    As noted above, the cross-border implementation of the rules 
defining security-based swap dealer and major security-based swap 
participant is the first in a series of final rules that consider the 
cross-border implications of security-based swaps and Title VII. In 
determining how Title VII security-based swap dealer and major 
security-based swap participant definitions should apply to persons and 
transactions in the cross-border context, the Commission has been 
informed by our analysis of current market activity, including the 
extent of cross-border trading activity in the security-based swap 
market. Several key features of the market inform our analysis.
    First, the security-based swap market is a global market. Security-
based swap business currently takes place across national borders, with 
agreements negotiated and executed between counterparties often in 
different jurisdictions (and at times booked, managed, and hedged in 
still other jurisdictions). The global nature of the security-based 
swap market is evidenced by the data available to the Commission.\36\ 
Based on market data in the Depository Trust and Clearing Corporation's 
Trade Information Warehouse (``DTCC-TIW''),\37\ viewed from the 
perspective of the domiciles of the counterparties booking credit 
default swap (``CDS'') transactions, approximately 48 percent of price 
forming North American corporate single-name CDS transactions \38\ from

[[Page 39073]]

January 2008 to December 2012 were cross-border transactions between a 
U.S.-domiciled \39\ counterparty and a foreign-domiciled counterparty 
\40\ and an additional 39 percent of such CDS transactions were between 
two foreign-domiciled counterparties.\41\ Thus, approximately 13 
percent of the North American corporate single-name CDS transactions in 
2008-2012 were between two U.S.-domiciled counterparties.\42\ These 
statistics indicate that, rather than being an exception, cross-border 
North American corporate single-name CDS transactions are as common as 
intra-jurisdictional transactions in the security-based swap 
market.\43\
---------------------------------------------------------------------------

    \36\ See section 0, infra (discussing in detail the global 
nature of the security-based swap market).
    \37\ The information was made available to the Commission under 
an agreement with the DTCC-TIW and in accordance with guidance 
provided to DTCC-TIW by the OTC Derivatives Regulatory Forum 
(``ODRF'').
    \38\ This figure is based on all price-forming DTCC-TIW North 
American corporate single-name CDS transactions. Price-forming 
transactions include all new transactions, assignments, 
modifications to increase the notional amounts of previously 
executed transactions, and terminations of previously executed 
transactions. Transactions terminated, transactions entered into in 
connection with a compression exercise, and expiration of contracts 
at maturity are not considered price-forming and are therefore 
excluded, as are replacement trades and all bookkeeping-related 
trades.
    ``North American corporate single-name CDS transactions'' are 
classified as such because they use The International Swaps and 
Derivatives Association, Inc. (``ISDA'') North American 
documentation. These may include certain transactions involving non-
U.S. reference entities. We do not have sufficiently reliable data 
on reference entity domicile (as opposed to counterparty domicile, 
which we have sought to identify in the manner described in note 39, 
infra) to limit our analysis to only U.S. single-name CDS. Although 
the inclusion of transactions involving such non-U.S. reference 
entities introduces some noise into the data, we do not believe that 
this noise is sufficiently significant to alter the conclusions we 
draw from the data.
    \39\ The domicile classifications in DTCC-TIW are based on the 
market participants' own reporting and have not been verified by 
Commission staff. Prior to enactment of the Dodd-Frank Act, funds 
and accounts did not formally report their domicile to DTCC-TIW 
because there was no systematic requirement to do so. After 
enactment of the Dodd-Frank Act, the DTCC-TIW has collected the 
registered office location of the account or fund. This information 
is self-reported on a voluntary basis. It is possible that some 
market participants may misclassify their domicile status because 
the databases in DTCC-TIW do not assign a unique legal entity 
identifier to each separate entity. It is also possible that the 
domicile classifications may not correspond precisely to treatment 
as a U.S. person under the rules adopted today. Notwithstanding 
these limitations, we believe that the cross-border and foreign 
activity presented in the analysis by the Commission's Division of 
Economic and Risk Analysis demonstrates the nature of the single-
name CDS market. See section 0, infra.
    \40\ DTCC-TIW classifies a foreign branch or foreign subsidiary 
of a U.S.-domiciled entity as foreign-domiciled. Therefore, CDS 
transactions classified as involving a foreign-domiciled 
counterparty in the DTCC-TIW data may include CDS transactions with 
a foreign branch or foreign subsidiary of a U.S.-domiciled entity as 
counterparty.
    \41\ Put another way, between 2008 and 2012, a vast majority 
(approximately 87 percent) of North American corporate single-name 
CDS transactions directly involved at least one foreign-domiciled 
counterparty. This observation is based on the data compiled by the 
Commission's Division of Economic and Risk Analysis on North 
American corporate single-name CDS transactions from DTCC-TIW 
between January 1, 2008, and December 31, 2012. See section 0, 
infra.
    \42\ See id.
    \43\ We note, however, that, in addition to classifying 
transactions between a U.S. counterparty and a foreign branch of a 
U.S. bank as cross-border transactions, see note 40, supra, these 
statistics characterize as cross-border transactions some 
transactions in which all or substantially all of the activity takes 
place in the United States and all or much of the risk of the 
transactions ultimately is borne by U.S. persons. That is, a 
transaction is classified as cross-border if the legal domicile of 
at least one of the counterparties to the transaction is outside the 
United States, but if the transaction is classified as cross-border 
solely on the basis of legal domicile, the risk associated with 
these transactions may still ultimately be borne by U.S. persons. In 
this sense, our estimates of the cross-border allocation of 
security-based swap activity may not precisely reflect the 
proportion of transactions that are cross-border in nature.
---------------------------------------------------------------------------

    Second, dealers and other market participants are highly 
interconnected within this global market. While most market 
participants have only a few counterparties, dealers can have hundreds 
of counterparties, consisting of both non-dealing market participants 
(e.g., non-dealers, including commercial and financial market 
participants and investment funds) and other dealers.\44\ Furthermore, 
as described in more detail below, the great majority of trades are 
dealer-to-dealer, rather than dealer-to-non-dealer or non-dealer-to-
non-dealer, and a large fraction of single-name CDS volume is between 
counterparties domiciled in different jurisdictions. This 
interconnectedness facilitates the use of security-based swaps as a 
tool for sharing financial and commercial risks. In an environment in 
which market participants can have diverse and offsetting risk 
exposures, security-based swap transactions can allow participants to 
transfer risks so that they are borne by those who can do so 
efficiently. The global scale of the security-based swap market allows 
counterparties to access liquidity across jurisdictional boundaries, 
providing U.S. market participants with opportunities to share these 
risks with counterparties around the world. As discussed further in 
section VIII, a broad set of counterparties across which risks can be 
shared may result in more efficient risk sharing.
---------------------------------------------------------------------------

    \44\ Based on an analysis of 2012 transaction data by staff in 
the Division of Economic and Risk Analysis, accounts associated with 
market participants recognized by ISDA as dealers had on average 403 
counterparties. All other accounts (i.e., those more likely to 
belong to non-dealers) averaged four counterparties.
---------------------------------------------------------------------------

    However, these opportunities for international risk sharing also 
represent channels for risk transmission. In other words, the 
interconnectedness of security-based swap market participants provides 
paths for liquidity and risk to flow throughout the system, so that it 
can be difficult to isolate risks to a particular entity or geographic 
segment. Because dealers facilitate the great majority of security-
based swap transactions, with bilateral relationships that extend to 
potentially hundreds of counterparties, liquidity problems or other 
forms of financial distress that begin in one entity or one corner of 
the globe can potentially spread throughout the network, with dealers 
as a central conduit.
    Third, as highlighted in the Intermediary Definitions Adopting 
Release, dealing activity within the market for security-based swaps is 
highly concentrated.\45\ This concentration in large part appears to 
reflect the fact that larger entities possess competitive advantages in 
engaging in OTC security-based swap dealing activities, particularly 
with regard to having sufficient financial resources to provide 
potential counterparties with adequate assurances of financial 
performance.
---------------------------------------------------------------------------

    \45\ See Intermediary Definitions Adopting Release, 77 FR 30639-
42.
---------------------------------------------------------------------------

    The security-based swap market developed as an OTC market, without 
centralized trading venues or dissemination of pre- or post-trade 
pricing and volume information. In markets without transparent pricing, 
access to information confers a competitive advantage. In the current 
security-based swap market, large dealers and other large market 
participants with a large share of order flow have an informational 
advantage over smaller dealers and non-dealers who, in the absence of 
pre-trade transparency, observe a smaller subset of the market. Greater 
private information about order flow enables better assessment of 
current market values by dealers, permitting them to extract economic 
rents from counterparties who are less informed.\46\ Non-dealers are 
aware of this information asymmetry, and certain non-dealers--
particularly larger entities who transact with many dealers--may be 
able to obtain access to competitive pricing or otherwise demand a 
price discount that reflects the information asymmetry. Typically, 
however, the value of private information (i.e., the economic rent or 
informational premium) will be earned by those who have the most 
information. In the case of security-based swap markets, it is 
predominantly dealers who observe the greatest order flow and benefit 
from market opacity.
---------------------------------------------------------------------------

    \46\ In this situation, economic rents are the profits that 
dealers earn by trading with counterparties who are less informed. 
In a market with competitive access to information, there is no 
informational premium; dealers only earn a liquidity premium. The 
difference between the competitive liquidity premium and the actual 
profits that dealers earn is the economic rent.
---------------------------------------------------------------------------

    Taken together, the need for financial resources and the private 
information conveyed by order flow suggest that new entrants who intend 
to engage in security-based swap dealing activity in fact face high 
barriers to entry. One consequence of the current concentrated market 
structure is the potential for risk

[[Page 39074]]

spillovers and contagion, which can occur when the financial sector as 
a whole (or certain key segments) becomes undercapitalized.\47\ Unlike 
most other securities transactions, a security-based swap gives rise to 
ongoing obligations between transaction counterparties during the life 
of the transaction. This means that each counterparty to the 
transaction undertakes the obligation to perform the security-based 
swap in accordance with its terms and bears counterparty credit risk 
and market risk until the transaction expires or is terminated.\48\ 
Within this interconnected market, participants may have ongoing 
bilateral obligations with multiple counterparties, allowing for 
efficient risk-sharing and access to liquidity throughout the global 
network. However, a primary risk of the integrated market is the 
potential for sequential counterparty failure and contagion when one or 
more large market participants become financially distressed, causing 
the market participant to default on its obligations to its 
counterparties.\49\ A default by one or more security-based swap 
dealers or major security-based swap participants, or even the 
perceived lack of creditworthiness of these large entities, could 
produce contagion, either through direct defaults and risk spillovers, 
reduced willingness to extend credit, reduced liquidity, or reduced 
valuations for financial instruments. As financial distress spreads, 
the aggregate financial system may become undercapitalized, hindering 
its ability to provide financial intermediation services, including 
security-based swap intermediation services.
---------------------------------------------------------------------------

    \47\ See Viral V. Acharya, Lasse H. Pedersen, Thomas Philippon, 
and Matthew Richardson, ``Measuring Systemic Risk'' (May 2010), 
available at: http://vlab.stern.nyu.edu/public/static/SR-v3.pdf. The 
authors use a theoretical model of the banking sector to show that, 
unless the external costs of their trades are considered, financial 
institutions will have an incentive to take risks that are borne by 
the aggregate financial sector. Under this theory, in the context of 
Title VII, the relevant external cost is the potential for risk 
spillovers and sequential counterparty failure, leading to an 
aggregate capital shortfall and breakdown of financial 
intermediation in the financial sector.
    \48\ See Intermediary Definitions Adopting Release, 77 FR 30616-
17 (noting that ``the completion of a purchase or sale transaction'' 
in the secondary equity or debt markets ``can be expected to 
terminate the mutual obligations of the parties,'' unlike security-
based swap transactions, which often give rise to ``an ongoing 
obligation to exchange cash flows over the life of the agreement'').
    \49\ See Brunnermeier, Markus K., Andrew Crockett, Charles A. 
Goodhart, Avinash Persaud, and Hyun Song Shin. ``The Fundamental 
Principles of Financial Regulation.'' (2009) at 15, available at: 
www.princeton.edu/~markus/research/papers/Geneva11.pdf.
---------------------------------------------------------------------------

    In other words, the failure of a single large firm active in the 
security-based swap market can have consequences beyond the firm 
itself. One firm's default may reduce the willingness of dealers to 
trade with, or extend credit to, both non-dealers and other dealers. By 
reducing the availability of sufficient credit to provide 
intermediation services, and by reducing transaction volume that 
reveals information about underlying asset values, the effects of a 
dealer default may, through asset price and liquidity channels, spill 
over into other jurisdictions and even other markets in which security-
based swap dealers participate.
    Given that firms may be expected to consider the implications of 
security-based swap activity only on their own operations, without 
considering aggregate financial sector risk,\50\ the financial system 
may end up bearing more risk than the aggregate capital of the 
intermediaries in the system can support and may cease to function 
normally during times of market distress. For example, during times of 
financial distress a dealer's leverage constraints may begin to bind, 
either because lenders require more collateral or because market 
declines erode a dealer's capital position, forcing the dealer to de-
lever, either by selling assets or raising additional capital. Without 
adequate capital, the dealer may be unable to intermediate trades, 
potentially reducing liquidity in the markets it serves. Security-based 
swap positions replicate leveraged positions in the underlying asset, 
with a small amount of capital supporting large notional exposures.\51\ 
Given the leveraged nature of swap transactions, and the concentrated 
structure of the dealer market, in which a large amount of highly 
leveraged risk exposures may be concentrated in a relatively small 
number of entities that are responsible for the vast majority of global 
dealing activity,\52\ the potential consequences arising from financial 
instability in the security-based swap market may be acute.
---------------------------------------------------------------------------

    \50\ See Daron Acemoglu, Asuman Ozdaglar & Alireza Tahbaz-
Salehi, Systemic Risk and Stability in Financial Networks (NBER 
Working Paper No. 18727, Jan. 2013), available at: http://www.nber.org/papers/w18727.
    \51\ See Giulio Girardi, Craig Lewis, and Mila Getmansky, 
``Interconnectedness in the CDS Market,'' Division of Economic and 
Risk Analysis White Paper, April 2014, available at http://www.sec.gov/servlet/sec/dera/staff-papers/white-papers/credit-defaul-swaps-interconnectivity-04-2014.pdf (describing institutional 
features of credit default swaps).
    \52\ The Commission estimates that, of approximately 1,000 
transacting agents that participated in single-name CDS transactions 
in 2012, nearly 80 percent of transactions, by notional volume, can 
be attributed to the 13 largest entities. See also section 0, infra.
---------------------------------------------------------------------------

    In sum, the security-based swap market is characterized by a high 
level of interconnectedness, facilitating risk sharing by 
counterparties. Further, it is a global market, in which the potential 
for significant inter-jurisdictional activity and access to liquidity 
may enhance risk sharing among counterparties. At the same time, 
channels for risk sharing also represent channels for risk 
transmission. The global nature of this market, combined with the 
interconnectedness of market participants, means that liquidity 
shortfalls or risks that begin pooling in one corner of the market can 
potentially spread beyond that corner to the entire security-based swap 
market, with dealers as a key conduit. Because dealers and major 
participants are a large subset of all participants in the global 
security-based swap market and facilitate the majority of transactions 
(and thus reach many counterparties), concerns surrounding these types 
of spillovers are part of the framework in which we analyze the 
economic effects of our final rules implementing the security-based 
swap dealer and major participant definitions in the cross-border 
context.\53\
---------------------------------------------------------------------------

    \53\ We have previously noted that, depending on the size of the 
security-based swap dealer, default by a security-based swap dealer 
``could have adverse spillover or contagion effects that could 
create instability for the financial markets more generally.'' See 
Capital, Margin, and Segregation Requirements for Security-Based 
Swap Dealers and Major Security-Based Swap Participants and Capital 
Requirements for Broker-Dealers, Exchange Act Release No. 68071 
(Oct. 18, 2012), 77 FR 70214, 70304 (Nov. 23, 2012) (``Capital and 
Margin Proposing Release'').
---------------------------------------------------------------------------

2. Context for Regulatory Determinations
    In determining how Title VII requirements should apply to persons 
and transactions in a market characterized by the types of risks we 
have described, we are aware of the potentially significant tradeoffs 
inherent in our policy decisions. Our primary economic considerations 
for promulgating rules and guidance regarding the application of the 
security-based swap dealer and major participant definitions to cross-
border activities include the effect of our choices on efficiency, 
competition, and capital formation,\54\ the potential risks of 
security-based swaps to U.S. market participants that could affect 
financial

[[Page 39075]]

stability,\55\ the level of transparency and counterparty protection in 
the security-based swap market, and the costs to market 
participants.\56\
---------------------------------------------------------------------------

    \54\ See Exchange Act section 3(f).
    \55\ Title VII imposes financial responsibility and risk 
mitigation requirements on registered security-based swap dealers 
and major security-based swap participants. As we noted in proposing 
rules regarding capital and margin requirements applicable to 
security-based swap dealers, ``the capital and margin requirements 
in particular are broadly intended to work in tandem to strengthen 
the financial system by reducing the potential for default to an 
acceptable level and limiting the amount of leverage that can be 
employed by [security-based swap dealers] and other market 
participants.'' See Capital and Margin Proposing Release, 77 FR 
70304. We also noted that ``[r]equiring particular firms to hold 
more capital or exchange more margin may reduce the risk of default 
by one or more market participants and reduce the amount of leverage 
employed in the system generally, which in turn may have a number of 
important benefits.'' Id.
    \56\ As we noted in the Cross-Border Proposing Release, the 
Commission generally understands the ``U.S. financial system'' to 
include the U.S. banking system and the U.S. financial markets, 
including the U.S. security-based swap market, the traditional 
securities markets (e.g., the debt and equity markets), and the 
markets for other financial activities (e.g., lending). See Cross-
Border Proposing Release, 78 FR 30980 n.97.
---------------------------------------------------------------------------

    As noted above, participants may use security-based swaps to manage 
financial and commercial risks and benefit from a liquid market with 
broad participation that facilitates risk sharing. We also recognize 
the possibility that the same channels that enable risk sharing also 
facilitate the transmission of risks and liquidity problems that begin 
pooling in one geographic segment of the market to the global security-
based swap market. As described more fully in section III.A.1, U.S. 
entities may take on risk exposures in the security-based swap market 
by transacting with non-U.S. counterparties through non-U.S. 
affiliates. This suggests that an approach that applied these Title VII 
definitions to transactions only where all activity occurs inside the 
United States would have little effect in addressing the risks 
associated with security-based swaps, including risks and associated 
economic consequences flowing from contagion that may originate abroad 
and reach U.S. market participants through security-based swap 
activities and the multiple bilateral relationships that may form as a 
result of those activities. The global reach of security-based swap 
dealers, including U.S. dealers, participating in the vast majority of 
trades \57\ and extending to upwards of hundreds of counterparties,\58\ 
provides paths for these risks to flow back into the United States.\59\
---------------------------------------------------------------------------

    \57\ See note 139, infra, and accompanying text.
    \58\ See note 44, supra.
    \59\ As discussed above, the global security-based swaps 
network, characterized by multiple bilateral relationships between 
counterparties, has the potential for risk spillovers and sequential 
counterparty failure. These exposures are not unique to the U.S. 
financial system. Indeed, the global scope of the security-based 
swap market suggests that, given our territorial approach to Title 
VII, there will be the fewest potential gaps in coverage if other 
jurisdictions also adopt similar comprehensive and comparable 
derivative regulations. See Section 0 for a discussion of global 
regulatory efforts in this space.
---------------------------------------------------------------------------

    At the same time, the Commission recognizes that the regulatory 
requirements we adopt for security-based swap dealers and major 
participants under Title VII may not reach all market participants that 
act as dealers or that have positions that pose considerable risk 
concerns in the global security-based swap markets. These limits to the 
application of Title VII raise several issues. First, market 
participants may shift their behavior. Final Title VII requirements may 
impose significant direct costs on participants falling within the 
security-based swap dealer and major security-based swap participant 
definitions that are not borne by other market participants, including 
costs related to capital and margin requirements, regulatory reporting 
requirements, and business conduct requirements. The costs of these 
requirements may provide economic incentive for some market 
participants falling within the dealer and major participant 
definitions to restructure their security-based swap business to seek 
to operate wholly outside of the Title VII regulatory framework by 
exiting the security-based swap market in the United States and not 
transacting with U.S. persons, potentially fragmenting liquidity across 
geographic boundaries.\60\ Conversely, such incentives potentially may 
be mitigated by the fact that capital and margin requirements, 
counterparty protections, and business conduct standards required by 
Title VII \61\ may promote financial stability and lead to non-dealer 
market participants exhibiting a preference for transacting with 
registered dealers and major participants.
---------------------------------------------------------------------------

    \60\ To the extent that registered dealers are ultimately 
subject to more extensive reporting and public dissemination 
requirements than other market participants under Title VII, these 
requirements may also alter the incentives of market participants to 
transact with registered dealers if, for example, public 
dissemination requirements reveal information that participants wish 
to treat as confidential about trading strategies or future hedging 
needs. Incentives for these participants to avoid registered dealers 
could potentially isolate liquidity to less transparent corners of 
the market.
    \61\ See, e.g., Exchange Act sections 15F(e), (f), (h) 
(providing that security-based swap dealers and major security-based 
swap participants be subject to requirements relating to capital and 
margin, reporting and recordkeeping, and business conduct).
---------------------------------------------------------------------------

    Second, to the extent that other jurisdictions may adopt 
requirements with different scopes or on different timelines, the 
requirements we adopt may also result in competitive distortions. That 
is, differences in regulatory requirements across jurisdictions, or the 
ability of certain non-U.S. market participants to avoid security-based 
swap dealer regulation under Title VII, may generate competitive 
burdens and provide incentives for non-U.S. persons to avoid 
transacting with U.S. persons.
    Third, key elements of the rules adopted today--the definition of 
``U.S. person,'' as well as rules covering treatment of guaranteed 
transactions, transactions with foreign branches, transactions 
conducted through conduit affiliates, and cleared anonymous 
transactions, and rules covering aggregation standards--all have 
implications for how U.S. and non-U.S. entities perform their de 
minimis and major participant threshold calculations and may affect the 
number of participants who ultimately register as security-based swap 
dealers or major security-based swap participants. The number of 
persons required to register will affect the costs and benefits of the 
substantive Title VII requirements that will ultimately be adopted; 
depending on the final rules, more or fewer entities, and therefore 
more or fewer security-based swaps, will be subject to Title VII 
requirements applicable to security-based swap dealers and major 
security-based swap participants.\62\ Title VII requires the Commission 
to create a new regulatory regime that includes capital, margin, 
registration and reporting requirements aimed at increasing 
transparency and customer protections as well as mitigating the risk of 
financial contagion. Each of these requirements will impose new costs 
and regulatory burdens on persons that engage in security-based swap 
dealing activity at levels above the de minimis thresholds and on 
persons whose security-based swap positions are large enough to cause 
them to be major security-based swap participants.
---------------------------------------------------------------------------

    \62\ Any forward-looking analysis of the costs and benefits that 
flow from these Title VII requirements necessarily encompasses 
uncertain elements, since the final requirements have not been 
adopted. For example, whether foreign security-based swap dealers 
will be subject to the full range of Title VII requirements in all 
of their transactions will be determined in subsequent rulemaking.
---------------------------------------------------------------------------

    We expect that these requirements' application to security-based 
swap dealers and major security-based swap participants subject to 
Title VII will be

[[Page 39076]]

associated with a number of benefits to the security-based swap market 
and security-based swap market participants, including transparency, 
accountability, and increased counterparty protections.\63\ 
Nevertheless, as we discuss later in this release, the de minimis rules 
for non-U.S. persons could allow certain non-U.S. entities to avoid the 
costs of dealer registration, which could reduce the number of entities 
that register as security-based swap dealers, relative to the 
Commission's estimates in the Intermediary Definitions Adopting 
Release. Although the number of entities that are not required to 
register will depend on the availability of the de minimis exclusions, 
we believe that, to the extent that the final rules change the number 
of eventual registrants, the ultimate programmatic costs and benefits 
expected from Title VII may differ from those that were described in 
the Intermediary Definitions Adopting Release.\64\
---------------------------------------------------------------------------

    \63\ Title VII imposes a number of business conduct requirements 
designed to protect counterparties to security-based swaps, 
including disclosures about material risks and conflicts of 
interest, disclosures concerning the daily mark, or value of the 
position, and segregation of customer assets and collateral from the 
dealer's assets.
    \64\ See section 0 for a discussion of how we expect the cross-
border application of the de minimis exception to alter the number 
of entities required to register with the Commission, and how that 
may affect the programmatic costs and benefits of Title VII.
---------------------------------------------------------------------------

    Finally, the final rules determining how non-U.S. persons must 
perform their de minimis and major participant threshold calculations 
may face limits as to how precisely they address the risk mitigation 
goals of Title VII that are reflected in our rules implementing the de 
minimis exception and the ``major security-based swap participant'' 
definition. On the one hand, the scope of dealer and major participant 
regulation under Title VII may be subject to limitations on the ability 
to control risk because the global nature of counterparty 
interconnections means that it is difficult to prevent risk that pools 
in one geographic segment of the market from flowing throughout the 
entire security-based swap network. On the other hand, there is a 
possibility that the rules defining the scope of dealer and major 
participant regulation, including the territorial application of the 
definitions, may capture certain activity that does not represent risk 
to the U.S. financial system. Because these rules and guidance 
implementing Title VII regulatory definitions will not capture all 
transactions and all entities that engage in security-based swap 
activity, these rules and guidance therefore may create incentives for 
those entities at the boundaries of the definitions to restructure 
their business in a way that allows them to operate outside the scope 
of Title VII. However, as we described in the Intermediary Definitions 
Adopting Release, we have sought to implement the statutory dealer and 
major participant definitions in such a way as to impose the 
substantive rules of Title VII on those entities most likely to 
contribute to those risks that Title VII is intended to address without 
imposing unnecessary burdens on those who do not pose comparable risks 
to the U.S. financial system.\65\
---------------------------------------------------------------------------

    \65\ In adopting the definition of ``security-based swap 
dealer,'' we intended to determine the set of entities in the 
security-based swap market for whom regulation ``is warranted due to 
the nature of their interactions with counterparties, or is 
warranted to promote market stability and transparency.'' See 
Intermediary Definitions Adopting Release, 77 FR 30726. Similarly, 
in adopting rules governing the ``major security-based swap 
participant'' definition, we sought to impose regulations applicable 
to major security-based swap participants in a way that reflects 
``when it would be `prudent' that particular entities be subject to 
monitoring, management and oversight of entities that may be 
systemically important or may significantly impact the U.S. 
financial system.'' See id. at 30666.
     Future rulemakings that depend on these definitions are 
intended to address the transparency, risk, and customer protection 
goals of Title VII. For example, to further risk mitigation in the 
security-based swap market, we explained that ``section 15F(e) of 
the Exchange Act and related rules impose capital and margin 
requirements on dealers and major participants, which will reduce 
the financial risks of these institutions and contribute to the 
stability of the security-based swap market in particular and the 
U.S. financial system more generally.'' See id. at 30723.
---------------------------------------------------------------------------

B. Scope of Title VII's Application to Cross-Border Security-Based Swap 
Activity

    Congress has given the Commission authority in Title VII to 
implement a security-based swap regulatory framework to address the 
potential effects of security-based swap activity on U.S. market 
participants, the financial stability of the United States, on the 
transparency of the U.S. financial system, and on the protection of 
counterparties.\66\ The global nature of the security-based swap market 
and the high proportion of cross-border transactions in that market 
\67\ mean that much of this activity occurs at least in part outside 
the United States and frequently involves persons that are 
incorporated, organized, or established in a location outside the 
United States.\68\ In light of these market realities, we noted in the 
proposal that applying Title VII only to persons incorporated, 
organized, or established within the United States or only to security-
based swap activity occurring entirely within the United States would 
inappropriately exclude from regulation a majority of security-based 
swap activity that involves U.S. persons or otherwise involves conduct 
within the United States, even though such activity raises the types of 
concerns that we believe Congress intended to address through Title 
VII.\69\
---------------------------------------------------------------------------

    \66\ See note 11, supra. See also Pub. L. 111-203 sections 701-
774 (providing for, among other things, a comprehensive new 
regulatory framework for security-based swaps, including by: (i) 
Providing for the registration and comprehensive regulation of 
security-based swap dealers and major security-based swap 
participants; (ii) imposing clearing and trade execution 
requirements on security-based swaps, subject to certain exceptions; 
and (iii) creating real-time reporting and public dissemination 
regimes for security-based swaps).
    \67\ See section 0, supra (noting that cross-border activity 
accounts for the majority of security-based swaps involving U.S. 
firms).
    \68\ For example, a single financial firm engaged in dealing 
activity may utilize two or more entities domiciled in different 
countries to effectuate a single transaction with a counterparty 
that may similarly use multiple entities domiciled in different 
countries.
    \69\ See Cross-Border Proposing Release, 78 FR 30984.
---------------------------------------------------------------------------

    Because some commenters had, prior to the proposal, argued that 
section 30(c) of the Exchange Act limited our ability to reach certain 
types of activity occurring at least in part outside the United 
States,\70\ we discussed in some detail in the proposal our preliminary 
views on the appropriate approach to determining whether certain 
security-based swap activity that involves some conduct outside the 
United States also occurs within the United States for purposes of 
Title VII.\71\ In this subsection, we discuss comments received on this 
question following publication of our proposal and explain our final 
views--which remain largely unchanged from the proposal--on the proper 
approach to determining whether cross-border security-based swap 
activity occurs, in relevant part, within the United States.\72\ We 
then briefly describe how this framework applies to specific types of 
transactions

[[Page 39077]]

relevant to the rules we are adopting here.\73\
---------------------------------------------------------------------------

    \70\ See id. at 30983. Exchange Act section 30(c) was added to 
the Act by Title VII and provides, among other things, that ``[n]o 
provision of [Title VII] . . . shall apply to any person insofar as 
such person transacts a business in security-based swaps without the 
jurisdiction of the United States,'' unless that business is 
transacted in contravention of rules prescribed to prevent evasion 
of Title VII. See section 30(c) of the Exchange Act, 15 U.S.C. 
78dd(c), added by section 772(b) of the Dodd-Frank Act.
    \71\ See Cross-Border Proposing Release, 78 FR 30984-87.
    \72\ We also interpret what it means for a person to ``transact 
a business in security-based swaps without the jurisdiction of the 
United States'' as set forth in Exchange Act section 30(c). 15 
U.S.C. 78dd(c).
    \73\ The following discussion does not reflect a comprehensive 
analysis of the full range of transactions that may fall within our 
territorial approach to application of Title VII or of the full 
range of substantive requirements to which such transactions may be 
subject under Title VII.
    It is important to note that our approach to the application of 
Title VII security-based swap dealer and major security-based swap 
participant registration requirements does not limit, alter, or 
address the cross-border reach or extraterritorial application of 
any other provisions of the federal securities laws, including 
Commission rules, regulations, interpretations, or guidance.
---------------------------------------------------------------------------

1. Commenters' Views
    Prior to our proposal, several commenters raised concerns about the 
application of Title VII to security-based swap activity in the cross-
border context and specifically about the possibility that we would 
impose Title VII requirements on ``extraterritorial'' conduct. We 
received only a few comments on this issue in response to our 
preliminary views set forth in the proposal, and these generally 
focused on the application of section 30(c) of the Exchange Act to 
specific types of activity that we proposed to subject to Title VII 
rather than the proposed territorial framework more broadly.
    One commenter expressed general agreement with our proposed 
guidance.\74\ Three commenters suggested that textual differences 
between section 30(c) of the Exchange Act and section 2(i) of the 
Commodity Exchange Act (``CEA'') do not require the Commission to take 
a different approach to application of Title VII to cross-border 
security-based swap activity from that taken by the CFTC.\75\ Two 
commenters expressed the view that section 30(c) of the Exchange Act, 
considered in light of what they described as the risk-based focus of 
Title VII, prohibited the Commission from imposing Title VII 
requirements on transactions carried out within the United States but 
booked in locations outside the United States.\76\ One commenter stated 
that section 30(c) of the Exchange Act prevents us from imposing Title 
VII requirements on transactions of guaranteed foreign affiliates of 
U.S. persons.\77\ One commenter argued that section 30(c) prevents 
application of Title VII to certain joint ventures.\78\
---------------------------------------------------------------------------

    \74\ See BM Letter at 6.
    \75\ See IIB Letter at 4 (noting, inter alia, that section 712 
of the Dodd-Frank Act requires consultation and coordination between 
the SEC, CFTC, and prudential regulators, and arguing that 
differences between Exchange Act section 30(c) and CEA section 2(i) 
do not require the Commission to take an approach to regulation of 
cross-border security-based swap activity that is ``fundamentally 
different'' from that taken by the CFTC); SIFMA/FIA/FSR Letter at A-
4 to A-5 (stating that Exchange Act section 30(c) must be read to 
harmonize with CFTC approach in light of congressional intent that 
rules be harmonized); FOA Letter at 7 (referring to this element of 
the SIFMA/FIA/FSR Letter). Section 2(i) of the CEA provides, inter 
alia, that Title VII requirements will not apply to activities 
outside the United States unless they ``have a direct and 
significant connection with activities in, or effect on, commerce of 
the United States.'' 7 U.S.C. 2(i). The CFTC Cross-Border Guidance 
was adopted as an interpretation of this provision. See CFTC Cross-
Border Guidance, 78 FR 45295.
    \76\ See SIFMA/FIA/FSR Letter at 4, A-4 to A-6 (acknowledging 
that proposed application of Title VII to transactions conducted 
within the United States between two non-U.S. persons is consistent 
with Commission practice in traditional securities markets but 
arguing that similar language in sections 30(b) and 30(c) of the 
Exchange Act should be read differently, given the different nature 
of security-based swap transactions and focus of Title VII on risk); 
FOA Letter at 7 (referring to this element of the SIFMA/FIA/FSR 
Letter). These commenters argue that we should focus on risks to the 
U.S. financial system and the protection of U.S. counterparties, and 
that neither concern is raised by transactions between two non-U.S. 
persons that happen to occur within the United States. See SIFMA/
FIA/FSR Letter at A-5 to A-6. We continue to believe that this 
argument does not account for the full range of concerns addressed 
by Title VII, but, as discussed further below, we are not addressing 
issues surrounding the proposed ``transaction conducted within the 
United States'' definition in this release.
     Because, as discussed above, we are not adopting ``transaction 
conducted within the United States'' as part of the final rule, we 
anticipate considering these comments in connection with soliciting 
additional public comment.
    \77\ See id. at A-11 (stating that a guarantee may not 
necessarily import risk into the United States and thus creates ``no 
nexus for purposes of [s]ection 30(c) of the Exchange Act'').
    \78\ See Mitsubishi UFJ Financial Group (``MUFJ'') Letter at 4-5 
(urging the Commission not to require both participants in a foreign 
joint venture to aggregate the dealing transactions of the joint 
venture for purposes of the dealer de minimis calculation).
---------------------------------------------------------------------------

2. Scope of Application of Title VII in the Cross-Border Context
    We continue to believe that a territorial approach to the 
application of Title VII is appropriate. This approach, properly 
understood, is grounded in the text of the relevant statutory 
provisions and is designed to help ensure that our application of the 
relevant provisions is consistent with the goals that the statute was 
intended to achieve.
(a) Overview and General Approach
    As in our proposal, our analysis begins with an examination of the 
text of the statutory provision that imposes the relevant requirement. 
The statutory language generally identifies the types of conduct that 
trigger the relevant requirement and, by extension, the focus of the 
statute.\79\ Once we have identified the activity regulated by the 
statutory provision, we can determine whether a person is engaged in 
conduct that the statutory provision regulates and whether this conduct 
occurs within the United States. When the statutory text does not 
describe the relevant activity with specificity or provides for further 
Commission interpretation of statutory terms or requirements, this 
analysis may require us to identify through interpretation of the 
statutory text the specific activity that is relevant under the statute 
or to incorporate prior interpretations of the relevant statutory 
text.\80\
---------------------------------------------------------------------------

    \79\ See Morrison v. National Australia Bank, Ltd., 130 S. Ct. 
2869, 2884 (2010) (identifying focus of statutory language to 
determine what conduct was relevant in determining whether the 
statute was being applied to domestic conduct).
     Section 772(b) of the Dodd-Frank Act amends section 30 of the 
Exchange Act to provide that ``[n]o provision of [Title VII] . . . 
shall apply to any person insofar as such person transacts a 
business in security-based swaps without the jurisdiction of the 
United States,'' unless that business is transacted in contravention 
of rules prescribed to prevent evasion of Title VII. See section 
30(c) of the Exchange Act. As noted above, some commenters suggest 
that statutory language requiring us to coordinate and consult with 
the CFTC also requires us to interpret section 30(c) of the Exchange 
Act in a manner similar to the CFTC's interpretation of CEA section 
2(i). See note 75, supra. However, in light of the differences 
between Exchange Act section 30(c) and CEA section 2(i), we do not 
find this argument persuasive. As noted above, however, in 
developing final rules we have carefully considered the CFTC's 
guidance and the underlying policy rationales, consistent with the 
statutory requirement that we consult and coordinate with the CFTC.
    \80\ The Dodd-Frank Act provides that the CFTC and SEC ``shall 
further define'' several terms, including ``security-based swap 
dealer'' and ``major security-based swap participant.'' Dodd-Frank 
Act section 712(d) (emphasis added). The Commissions fulfilled this 
mandate in the Intermediary Definitions Adopting Release. See 
Intermediary Definitions Adopting Release, 77 FR 30973.
---------------------------------------------------------------------------

    As noted above, the Dodd-Frank Act was enacted, in part, with the 
intent to address the risks to the financial stability of the United 
States posed by entities engaged in security-based swap activity, to 
promote transparency in the U.S. financial system, and to protect 
counterparties to such transactions.\81\ These purposes, considered 
together with the specific statutory requirement, lead us to conclude 
that it is appropriate to impose the statutory requirements, and rules 
or regulations thereunder, on security-based swap activity occurring 
within the United States even if certain conduct in connection with the 
security-based swap also occurs in part outside the United States.
---------------------------------------------------------------------------

    \81\ See e.g., note 11, supra. See also Exchange Act section 
15F(h) (establishing business conduct standards for security-based 
swap dealers and major security-based swap participants).
---------------------------------------------------------------------------

    Contrary to the views expressed by some commenters,\82\ we do not 
agree that the location of risk alone should necessarily determine the 
scope of an appropriate territorial application of every Title VII 
requirement, given that the definition and the relevant regulatory 
regime address not only risk

[[Page 39078]]

but other concerns as well, as just described. For example, neither the 
statutory definition of ``security-based swap dealer,'' our subsequent 
further definition of the term pursuant to section 712(d) of the Dodd-
Frank Act, nor the regulatory requirements applicable to security-based 
swap dealers focus solely on risk to the U.S. financial system.\83\
---------------------------------------------------------------------------

    \82\ See notes 76-77, supra.
    \83\ See note 88, infra, and accompanying text (describing 
elements of statutory definition of ``security-based swap dealer''); 
note 90, infra, and accompanying text (describing elements of the 
further definition of ``security-based swap dealer'' adopted by the 
Commission and the CFTC pursuant to section 712(d) of the Dodd-Frank 
Act); Exchange Act section 15F(h) (establishing business conduct 
standards for security-based swap dealers).
---------------------------------------------------------------------------

    We believe that this approach to territorial application of Title 
VII provides a reasonable means of helping to ensure that our 
regulatory framework focuses on security-based swap activity that is 
most likely to raise the concerns that Congress intended to address in 
Title VII, including the potential effects of security-based swap 
activity on U.S. market participants, on the financial stability of the 
United States, on the transparency of the U.S. financial markets, and 
on the protection of counterparties.\84\ Persons that engage in 
relevant conduct, as identified through this analysis, within the 
United States are not, in our view, ``transact[ing] a business in 
security-based swaps without the jurisdiction of the United States,'' 
\85\ and thus are properly subject to regulation under Title VII.
---------------------------------------------------------------------------

    \84\ See note 11, supra.
    \85\ Exchange Act section 30(c).
---------------------------------------------------------------------------

(b) Territorial Approach to Application of Title VII Security-Based 
Swap Dealer Registration Requirements
    In determining whether specific transactions should be included in 
a person's dealer de minimis calculation, we begin by looking to the 
statutory text to identify the type of dealing activity that the 
statute describes as relevant to a person's status as a security-based 
swap dealer.\86\ Section 3(a)(71) of the Exchange Act \87\ defines 
security-based swap dealer as a person that engages in any of the 
following types of activity:
---------------------------------------------------------------------------

    \86\ See Intermediary Definitions Adopting Release, 77 FR 30616-
30619 (further defining ``security-based swap dealer'' by 
identifying the types of activities that characterize dealing and 
that would therefore lead a transaction to be required to be 
included in a person's de minimis calculation under Exchange Act 
rule 3a71-2).
    \87\ 15 U.S.C. 78c(a)(71).
---------------------------------------------------------------------------

    (i) holding oneself out as a dealer in security-based swaps,
    (ii) making a market in security-based swaps,
    (iii) regularly entering into security-based swaps with 
counterparties as an ordinary course of business for one's own account, 
or
    (iv) engaging in any activity causing oneself to be commonly known 
in the trade as a dealer in security-based swaps.\88\
---------------------------------------------------------------------------

    \88\ Exchange Act section 3(a)(71)(A), 15 U.S.C. 78c(a)(71)(A).
---------------------------------------------------------------------------

    In accordance with the authority provided by section 712(d)(1) of 
the Dodd-Frank Act, which provides that the CFTC and the Commission 
shall by rule further define, among other things, ``security-based swap 
dealer,'' \89\ we further interpreted the statutory definition by 
identifying the types of activities that are relevant in determining 
whether a person is a security-based swap dealer.\90\ Pursuant to this 
further definition, indicia of security-based swap dealing activity 
include any of the following activities:
---------------------------------------------------------------------------

    \89\ See Dodd-Frank Act section 712(d)(1).
    \90\ See Intermediary Definitions Adopting Release, 77 FR 30617-
18.
---------------------------------------------------------------------------

     Providing liquidity to market professionals or other 
persons in connection with security-based swaps;
     seeking to profit by providing liquidity in connection 
with security-based swaps,
     providing advice in connection with security-based swaps 
or structuring security-based swaps;
     having a regular clientele and actively soliciting 
clients;
     using inter-dealer brokers; and
     acting as a market maker on an organized security-based 
swap exchange or trading system.\91\
---------------------------------------------------------------------------

    \91\ Id.
---------------------------------------------------------------------------

    As the foregoing lists illustrate, both the statutory text and our 
interpretation further defining the statutory term include within the 
security-based swap dealer definition a range of activities. In the 
Intermediary Definitions Adopting Release, we stated that transactions 
arising from dealing activity, as identified by the indicia described 
above, would generally be subject to relevant Title VII requirements 
applicable to dealers, including that such transactions be included in 
a person's calculations for purposes of the dealer de minimis 
calculations. Our territorial approach applying Title VII to dealing 
activity similarly looks to whether any of the activities described 
above occur within the United States, and not simply to the location of 
the risk, as some commenters suggested is required under section 30(c) 
of the Exchange Act.\92\ To the extent that such activity does occur 
within the United States, the person engaged in such activity, in our 
view, is transacting a business in security-based swaps within the 
United States,\93\ and therefore applying Title VII to the activity by, 
among other things, requiring the person to include transactions 
arising from such activity in its de minimis calculation is consistent 
with a territorial approach, even if some of this activity (or other 
activity bearing the indicia of dealing activity) relating to the 
transaction also occurs outside the United States.
---------------------------------------------------------------------------

    \92\ See notes 76-77, supra.
    \93\ Cf. Exchange Act section 30(c) (limiting the application 
of, among other provisions, Title VII to ``any person insofar as 
such person transacts a business in security-based swaps without the 
jurisdiction of the United States'').
---------------------------------------------------------------------------

    This approach is consistent with the purposes of the dealer 
definition and the de minimis exception as they relate to dealer 
regulation under Title VII. The de minimis exception excludes from the 
dealer registration requirement those entities that may engage in 
dealing activity but that do so in amounts that may not raise, to a 
degree that warrants application of security-based swap dealer 
requirements, the risk, counterparty protection, or other concerns that 
the dealer registration and regulatory framework were intended to 
address.\94\ On the other hand, dealing activity, as identified by the 
types of activities described above, carried out within the United 
States at levels exceeding the de minimis threshold is likely to raise 
these concerns, which would be addressed by requiring persons engaged 
in that volume of dealing activity to register as security-based swap 
dealers under Title VII and to comply with relevant requirements 
applicable to security-based swap dealers. Accordingly, to the extent 
that a person engages in dealing activity within the United States that 
results in transactions in a notional amount exceeding the applicable 
de minimis threshold, it is appropriate to require the person to 
register as a security-based swap dealer.
---------------------------------------------------------------------------

    \94\ See, e.g., Intermediary Definitions Adopting Release, 77 FR 
30629-30 (noting that the de minimis threshold is intended to 
capture firms that engage in a level of dealing activity that is 
likely to raise the types of concerns that the dealer regulatory 
framework is intended to address).
---------------------------------------------------------------------------

i. Dealing Activity of U.S. Persons
    Under the foregoing analysis and consistent with our proposal, when 
a U.S. person as defined under this final rule \95\ engages in dealing 
activity, it necessarily engages in such activity within the United 
States, even when it enters into such transactions through a foreign 
branch or office. As discussed in further detail below, the definition 
of ``U.S. person'' in the final rule is intended, in part, to identify 
those

[[Page 39079]]

persons for whom it is reasonable to infer that a significant portion 
of their financial and legal relationships are likely to exist within 
the United States and that it is therefore reasonable to conclude that 
risk arising from their security-based swap activities could manifest 
itself within the United States, regardless of the location of their 
counterparties, given the ongoing nature of the obligations that result 
from security-based swap transactions.\96\
---------------------------------------------------------------------------

    \95\ See Exchange Act rule 3a71-3(a)(4).
    \96\ See section 0, infra. In our view, dealing activity 
involving such persons is particularly likely to raise the types of 
concerns Title VII was intended to address, including those related 
to risk to the U.S. financial system, transparency of the U.S. 
financial markets, and customer protection.
---------------------------------------------------------------------------

    Wherever a U.S. person enters into a transaction in a dealing 
capacity, it is the U.S. person as a whole that is holding itself out 
as a dealer in security-based swaps, given that the financial resources 
of the entire person stand behind any dealing activity of the U.S. 
person, both at the time it enters into the transaction and for the 
life of the contract, even when the U.S. person enters into the 
transaction through a foreign branch or office. Moreover, the U.S. 
person as a whole seeks to profit by providing liquidity and engaging 
in market-making in security-based swaps, and the financial resources 
of the entire person enable it to provide liquidity and engage in 
market-making in connection with security-based swaps. Its dealing 
counterparties will look to the entire U.S. person, even when the U.S. 
person enters into the transaction through a foreign branch or office, 
for performance on the transaction. The entire U.S. person assumes, and 
stands behind, the obligations arising from the resulting agreement and 
is directly exposed to liability arising from non-performance of the 
non-U.S. person.\97\
---------------------------------------------------------------------------

    \97\ Cf. SIFMA/FIA/FSR Letter at 4, A-5 (stating that main 
purpose of Title VII is to address risk arising from security-based 
swap activity).
---------------------------------------------------------------------------

    For these reasons, in our view a person does not hold itself out as 
a security-based swap dealer as anything other than a single person 
even when it enters into transactions through its foreign branch or 
office.\98\ Because the foreign branch generally could not operate as a 
dealer absent the financial and other resources of the entire U.S. 
person, its dealing activity with all of its counterparties, including 
dealing activity conducted through its foreign branch or office, is 
best characterized as occurring, at least in part, within the United 
States and should therefore be included in the person's de minimis 
threshold calculation.\99\
---------------------------------------------------------------------------

    \98\ This is consistent with the view expressed in our proposing 
release. See Cross-Border Proposing Release, 78 FR 30985.
    \99\ As discussed in further detail below, this interpretation 
is consistent with the goals of dealer regulation under Title VII. 
Security-based swap activity that results in a transaction involving 
a U.S.-person counterparty creates ongoing obligations that are 
borne by a U.S. person and, as such, is properly viewed as occurring 
within the United States. See note 186, infra.
---------------------------------------------------------------------------

ii. Dealing Transactions of Non-U.S. Persons That are Subject To 
Recourse Guarantees by Their U.S. Affiliates
    In the proposing release, we explained that we preliminarily 
believed that a territorial approach consistent with the text and 
purposes of the Dodd-Frank Act encompasses transactions involving a 
non-U.S. person counterparty whose dealing activity is guaranteed by a 
U.S. person.\100\ However, because we proposed to treat non-U.S. 
persons receiving a guarantee on their security-based swap transactions 
from a U.S. person like any other non-U.S. person for purposes of the 
de minimis exception (i.e., requiring them to include in their 
calculations only dealing activity involving U.S.-person counterparties 
or transactions conducted within the United States), we did not 
elaborate specifically on how the presence of a guarantee related to a 
territorial application of the dealer definition, including the de 
minimis exception. Because our final rule requires transactions of non-
U.S. persons whose obligations under the security-based swap are 
subject to recourse guarantees enforceable against their U.S. 
affiliates to be included in the dealer de minimis calculation of the 
non-U.S. person, we address it here.
---------------------------------------------------------------------------

    \100\ In our proposal, we noted that in a security-based swap 
transaction between two non-U.S. persons where the performance of at 
least one side of the transaction is guaranteed by a U.S. person, 
the guarantee gives the guaranteed person's counterparty recourse to 
the U.S. person for performance of obligations owed by the 
guaranteed person under the security-based swap, and the U.S. 
guarantor exposes itself to the risk of the security-based swap as 
if it were a counterparty to the security-based swap through the 
security-based swap activity engaged in by the guaranteed person. 
See Cross-Border Proposing Release, 78 FR 30986-87. This 
interpretation of guarantee was consistent with our discussion of 
the application of the major participant tests to guaranteed 
positions in the Intermediary Definitions Adopting Release, where 
we, together with the CFTC, noted that a person's security-based 
swap positions are attributed to a parent, other affiliate, or 
guarantor for purposes of the major participant analysis to the 
extent that the counterparties to those positions have recourse to 
that parent, other affiliate, or guarantor in connection with the 
position; as we noted in that release, positions are not attributed 
in the absence of recourse. See Intermediary Definitions Adopting 
Release, 77 FR 30689. In this release, we continue to use the term 
``guarantee'' to refer to an arrangement pursuant to which one party 
to a security-based swap transaction has recourse to its 
counterparty's parent, other affiliate, or guarantor with respect to 
the counterparty's obligations owed under the transaction. See 
section IV.E.1(b), infra.
---------------------------------------------------------------------------

    In our view, a non-U.S. person engaged in dealing activity, to the 
extent that one or more transactions arising from such activity are 
guaranteed by a U.S. person, is engaged in relevant activity for 
purposes of the security-based swap dealer definition within the United 
States, with respect to those transactions. By virtue of the guarantee, 
the non-U.S. person effectively acts together with the U.S. person to 
engage in the dealing activity that results in the transactions, and 
the non-U.S. person's dealing activity with respect to such 
transactions cannot reasonably be isolated from the U.S. person's 
activity in providing the guarantee. The U.S.-person guarantor together 
with the non-U.S. person whose dealing activity it guarantees, and not 
just the non-U.S. person, may seek to profit by providing liquidity and 
engaging in market-making in security-based swaps, and the non-U.S. 
person provides liquidity and engages in market-making in connection 
with security-based swaps by drawing on the U.S. person's financial 
resources.\101\ The non-U.S. person's counterparty, pursuant to the 
recourse guarantee, looks to both the non-U.S. person and its U.S. 
guarantor, which is responsible for performance on the transaction that 
is part of the non-U.S. person's dealing activity. In sum, the non-U.S. 
person is engaged in the United States in relevant dealing activity 
identified in the statutory definition and in our jointly adopted 
further definition of ``security-based swap dealer.''
---------------------------------------------------------------------------

    \101\ Even if the U.S. guarantor generally does not hold itself 
out as a dealer or make a market in security-based swaps, the U.S. 
guarantor enables the non-U.S. person whose dealing activity it 
guarantees to engage in dealing activity by providing financial 
backing. We note that references to ``guarantee,'' ``recourse 
guarantee,'' or ``rights of recourse,'' as those terms are used in 
this release, may describe economic relationships that are different 
from ``guarantee'' under section 2(a)(1) of the Securities Act. We 
note, however, that, depending on the nature of the ``guarantee,'' 
``recourse guarantee,'' or ``rights of recourse'' provided by the 
guarantor, the transaction at issue may involve not only a security-
based swap between two non-U.S. persons but also the offer and sale 
of a security by a U.S. person, given that a ``guarantee'' of a 
security-based swap is itself a separate security issued by the U.S. 
guarantor. See, e.g., Securities Act section 2(a)(1), 15 U.S.C. 
77b(a)(1) (including in the statutory definition of ``security'' a 
guarantee of a security).
---------------------------------------------------------------------------

    Moreover, the economic reality of the non-U.S. person's dealing 
activity, where the resulting transactions are guaranteed by a U.S. 
person, is identical, in relevant respects, to a transaction entered 
into directly by the U.S. guarantor. By virtue of the guarantee, 
transactions arising from the

[[Page 39080]]

non-U.S. person's dealing activity result in risk from the transaction 
being borne by a U.S. person (the guarantor, which is responsible for 
the transactions it guarantees in a manner similar to a direct 
counterparty to the transactions) and potentially the U.S. financial 
system in a manner similar to a dealing transaction entered into 
directly by a U.S. person. As with transactions entered into directly 
by a U.S. person, transactions for which a counterparty has a right of 
recourse against a U.S. person create risk to a U.S. person and 
potentially the U.S. financial system regardless of the location of the 
counterparty.
    Our interpretation of the statutory text of the definition, as well 
as our further definition of the term, as it applies to these entities 
is consistent with the purposes of Title VII, as discussed above. The 
exposure of the U.S. guarantor creates risk to U.S. persons and 
potentially to the U.S. financial system via the guarantor to a 
comparable degree as if the transaction were entered into directly by a 
U.S. person. We understand that in some circumstances a counterparty 
may choose not to enter into a security-based swap transaction (or may 
not do so on the same terms) with a non-U.S. subsidiary of a U.S. 
person when that non-U.S. subsidiary is acting in a dealing capacity to 
the extent that its dealing activity is not subject to a recourse 
guarantee by a U.S. affiliate, absent other circumstances (e.g., 
adequate capitalization of the hitherto-guaranteed affiliate).
    One commenter noted that U.S. guarantors may provide guarantees for 
a variety of reasons, including to satisfy regulatory requirements, to 
``manage capital treatment across an entity,'' and to ``avoid negative 
credit rating consequences,'' and argued that a guarantee may therefore 
not create risk within the United States.\102\ Absent the creation of 
such risk, this commenter further argued that a guarantee creates ``no 
nexus for purposes of section 30(c) of the Exchange Act.'' \103\ 
However, regardless of the motivation for providing the guarantee, the 
non-U.S. person's dealing activity still occurs within the United 
States and creates risk within the United States in the manner 
described above. The commenter provided no evidence that the motivation 
for providing a guarantee affects this analysis: It neither alters the 
risk created within the United States by such a guarantee when it is 
provided by a U.S. person nor affects the economic reality of the 
transaction. Moreover, even if a person provides guarantees not in 
response to counterparty demands but to satisfy regulatory requirements 
or to avoid negative credit rating consequences, the very reasons for 
issuing the guarantee suggest that the non-U.S. person would not be 
able to engage in dealing activity, or to do so on the same terms, 
without the guarantee.\104\
---------------------------------------------------------------------------

    \102\ SIFMA/FIA/FSR Letter at A-11.
    \103\ Id.
    \104\ In addition, this commenter suggested that any risk 
created by guarantees provided to prudentially regulated foreign 
entities is adequately addressed by the foreign prudential 
regulation. See id. Although we recognize that foreign prudential 
regulation may reduce the risk that a guaranteed foreign affiliate's 
counterparties will seek to enforce the terms of the guarantee 
against the U.S. guarantor (depending on the quality of prudential 
regulation in the foreign jurisdiction), it does not eliminate this 
risk, and the counterparty continues to retain a right of recourse 
under the guarantee against the guarantor.
    Given the role of a foreign person whose activity is guaranteed 
in creating risk within the United States through its dealing 
activity, we believe that it is important to ensure that such a 
foreign person be required to register as a security-based swap 
dealer to the extent that its guaranteed dealing transactions 
(together with any dealing transactions with U.S. persons) are 
included in its de minimis threshold calculations. As noted above, 
our proposal set forth a framework under which substituted 
compliance potentially would be available for certain Title VII 
requirements, including for dealer-specific requirements such as 
capital and margin, which should mitigate concerns about overlapping 
regulation of such entities.
---------------------------------------------------------------------------

    In sum, the guarantee provided by a U.S. person poses risk to U.S. 
persons and potentially to the U.S. financial system, and both the non-
U.S. person whose dealing activity is guaranteed and its counterparty 
rely on the creditworthiness of the U.S. guarantor when entering into a 
security-based swap transaction and for the duration of the security-
based swap. The economic reality of this transaction, even though 
entered into by a non-U.S. person, is substantially identical, in 
relevant respects, to a transaction entered into directly by a U.S. 
person. Accordingly, in our view, it is consistent with both the 
statutory text and with the purposes of the statute to identify such 
transactions as occurring within the United States for purposes of 
Title VII.
iii. Dealing Activity of Other Non-U.S. Persons
    In our proposal, we stated that non-U.S. persons engaging in 
dealing activity would be required to count toward their de minimis 
thresholds only transactions arising from their dealing activity with 
U.S. persons or dealing activity otherwise conducted within the United 
States. Under the approach described above, and consistent with our 
proposal, we believe that a non-U.S. person engaged in dealing activity 
with U.S. persons engages in relevant activity for purposes of the 
security-based swap dealer definition within the United States.\105\
---------------------------------------------------------------------------

    \105\ We continue to believe that security-based swap activity 
carried out within the United States may also be relevant activity 
under our territorial approach, even if the resulting transaction 
involves two non-U.S. counterparties. As discussed below, however, 
we anticipate soliciting additional public comment regarding the 
issue.
---------------------------------------------------------------------------

    Dealing activity of non-U.S. persons that involves counterparties 
who are U.S. persons, as that term is defined in the final rule, 
necessarily involves the performance by the non-U.S. person of relevant 
activity under the ``security-based swap dealer'' definition at least 
in part within the United States. For example, in our view, a non-U.S. 
person engaging in dealing activity with a U.S. person is holding 
itself out as a dealer in security-based swaps within the United 
States.\106\ Similarly, by entering into a transaction with a U.S. 
person in a dealing capacity, it is seeking to profit by providing 
liquidity within the United States and possibly engaging in market-
making in security-based swaps within the United States, given that its 
decision to engage in dealing activity with U.S. persons, as defined by 
the rule, affects the liquidity of the security-based swap market 
within the United States. Particularly at volumes in excess of the de 
minimis threshold, entering into security-based swap transactions in a 
dealing capacity with U.S. persons likely is the type of activity that 
would cause a non-U.S. person ``to be commonly known in the trade as a 
dealer in security-based swaps'' \107\ within the United States, that 
constitutes ``regularly entering into security-based swaps with 
counterparties as an ordinary course of business for one's own 
account'' \108\ within the United States, and that permits a reasonable 
inference that it has a regular clientele and actively solicits clients 
within the United States.\109\
---------------------------------------------------------------------------

    \106\ Given the global nature of the security-based swap market, 
U.S. persons seeking to access this market may readily do so through 
both U.S.-person dealers and foreign dealers. That a foreign dealer 
holding itself out as a dealer to U.S. persons is based in, and 
operating out of, a foreign jurisdiction does not alter the economic 
reality of its activity: It is holding itself out as a dealer within 
the United States in a manner largely indistinguishable from a U.S.-
person dealer that ``hangs out its shingle'' in Manhattan.
    \107\ Exchange Act section 3(a)(71)(A)(iv).
    \108\ Exchange Act section 3(a)(71)(A)(iii).
    \109\ See Intermediary Definitions Adopting Release, 77 FR 
30618.
---------------------------------------------------------------------------

    Our application of the statute to non-U.S. persons is consistent 
with the purposes of Title VII, as discussed above. U.S. persons incur 
risks arising from this dealing activity, which in turn

[[Page 39081]]

potentially creates risk to other market participants and the U.S. 
financial system more generally, and transactions with U.S. persons 
raise counterparty protection and market transparency concerns that 
Title VII is intended to address. Accordingly, we believe that the 
dealing activity of a non-U.S. person that involves a U.S.-person 
counterparty is appropriately characterized as occurring, at least in 
part, within the United States.\110\
---------------------------------------------------------------------------

    \110\ Although at least one commenter suggested that we lack the 
authority under section 30(c) of the Exchange Act to require non-
U.S. person joint-ventures to aggregate relevant dealing 
transactions with the relevant dealing transactions of multiple 
investors in the joint-venture, see note 78, supra, we believe that 
our limitation on application of the aggregation requirement only to 
the transactions of such non-U.S. persons that occur within the 
United States (because they involve U.S.-person counterparties or 
are subject to a recourse guarantee against a U.S. person) is 
consistent with our territorial approach.
---------------------------------------------------------------------------

(c) Territorial Approach to Application of Title VII Major Security-
Based Swap Participant Registration Requirements
    As in our territorial approach to the security-based swap dealer 
definition (including the de minimis exception) described above, our 
territorial approach to the application of the major security-based 
swap participant definition looks first to the statutory text to 
identify the types of activity that are relevant for purposes of the 
definition. Section 3(a)(67) of the Exchange Act provides that a major 
security-based swap participant is any person who is not a dealer and 
who satisfies one or more of the following requirements:
    (i) Maintains a substantial position in security-based swaps for 
any of the major security-based swap categories,\111\ excluding certain 
positions;
---------------------------------------------------------------------------

    \111\ The statute further provides the Commission with the 
authority to determine the scope of these categories. See Exchange 
Act section 3(a)(67)(A)(ii)(I).
---------------------------------------------------------------------------

    (ii) has outstanding security-based swaps that create substantial 
counterparty exposure that could have serious adverse effects on the 
financial stability of the U.S. banking system or financial markets; or
    (iii) is a highly leveraged financial entity that maintains 
substantial position in outstanding security-based swaps in any major 
security-based swap category.\112\
---------------------------------------------------------------------------

    \112\ Exchange Act section 3(a)(67)(A).
---------------------------------------------------------------------------

The statute directs us to further define, jointly with the CFTC, 
``major security-based swap participant'' \113\ and separately provides 
us with authority to ``define . . . the term `substantial position' at 
the threshold that the Commission determines to be prudent for the 
effective monitoring, management, and oversight of entities that are 
systemically important or can significantly impact the financial system 
of the United States.'' \114\
---------------------------------------------------------------------------

    \113\ Dodd-Frank Act section 712(d)(1).
    \114\ Exchange Act section 3(a)(67)(B).
---------------------------------------------------------------------------

    Pursuant to these provisions, we further interpreted this 
definition by, among other things, defining what constitutes a 
``substantial position'' and ``substantial counterparty exposure'' for 
purposes of the major security-based swap participant definition.\115\ 
In doing so, we set forth calculation methodologies and thresholds for 
each and adopted rules requiring persons that exceeded these thresholds 
to register as major security-based swap participants.\116\ These 
thresholds were designed to identify persons that were likely to pose 
counterparty credit risks, as such risks are ``more closely linked to 
the statutory criteria that the definition focuses on entities that are 
`systemically important' or can `significantly impact' the U.S. 
financial system.'' \117\ We also noted that our definition of 
``substantial position'' was intended to address the risk that would be 
posed by the default of multiple entities close in time and the 
aggregate risks presented by a person's security-based swap activity, 
as these considerations reflect the market risk concerns expressly 
identified in the statute.\118\
---------------------------------------------------------------------------

    \115\ See Intermediary Definitions Adopting Release, 77 FR 
30663-84.
    \116\ See id.
    \117\ Id. at 30666.
    \118\ See id. We defined ``substantial counterparty exposure'' 
in a similar manner, noting the focus of the statutory test on 
``serious adverse effects on financial stability or financial 
markets.'' Id. at 30683. Cf. Section 3(a)(67)(A)(ii)(II) of the 
Exchange Act (encompassing in major security-based swap participant 
definition persons whose ``outstanding security-based swaps create 
substantial counterparty exposure that could have serious adverse 
effects on the financial stability of the United States banking 
system or financial markets'').
---------------------------------------------------------------------------

    The statutory focus of the major security-based swap participant 
definition differs from that of security-based swap dealer, in that the 
security-based swap dealer definition focuses on activity that may 
raise the concerns that dealer regulation is intended to address, while 
the major security-based swap participant definition focuses on 
positions that may raise systemic risk concerns within the United 
States. Accordingly, a territorial approach to application of the 
definition of major security-based swap participant involves 
identifying security-based swap positions that exist within the United 
States.\119\ In our view, and consistent with the approach taken in our 
proposal, a security-based swap position exists within the United 
States when it is held by or with a U.S. person, or when it is subject 
to a recourse guarantee against a U.S. person,\120\ as the risks 
associated with such positions are borne within the United States, and 
given the involvement of U.S. persons may, at the thresholds 
established for the major security-based swap participant definition, 
give rise to the types of systemic risk within the United States that 
major security-based swap regulation is intended to address. To the 
extent that a position exists within the United States in this sense, 
we believe that it is appropriate under a territorial approach to 
require a market participant, whether a U.S. person or otherwise, that 
is a counterparty or guarantor with respect to that position, to 
include that position in its major security-based swap participant 
threshold calculations, wherever the security-based swap was entered 
into.
---------------------------------------------------------------------------

    \119\ Cf. Morrison, 130 S. Ct. at 2884 (performing a textual 
analysis to identify the focus of the statute).
    \120\ The economic reality of a position subject to such a 
guarantee, even though entered into by a non-U.S. person, is 
substantially identical in relevant respects to a position entered 
into directly by the U.S. guarantor. See section 0, supra.
---------------------------------------------------------------------------

(d) Regulations Necessary or Appropriate To Prevent Evasion of Title 
VII
    Consistent with our proposal, we interpret section 30(c) of the 
Exchange Act as not requiring us to find that actual evasion has 
occurred or is occurring to invoke our authority to reach activity 
``without the jurisdiction of the United States'' or to limit 
application of Title VII to security-based swap activity ``without the 
jurisdiction of the United States'' only to business that is transacted 
in a way that is purposefully intended to evade Title VII. Section 
30(c) of the Exchange Act authorizes the Commission to apply Title VII 
to persons transacting a business ``without the jurisdiction of the 
United States'' if they contravene rules that the Commission has 
prescribed as ``necessary or appropriate to prevent the evasion of any 
provision'' of Title VII. The focus of this provision is not whether 
such rules impose Title VII requirements only on entities engaged in 
evasive activity but whether the rules are generally ``necessary or 
appropriate'' to prevent potential evasion of Title VII. In other 
words, section 30(c) of the Exchange Act permits us to impose 
prophylactic rules intended to prevent possible purposeful evasion, 
even though such rules may affect or prohibit some non-evasive conduct. 
Moreover, exercising the section 30(c) authority does not require us to 
draw a distinction

[[Page 39082]]

between conduct ``without the jurisdiction of the United States'' that 
is purposely evasive as opposed to identical conduct that was motivated 
by some non-evasive purpose. Indeed, to interpret section 30(c) 
authority otherwise could create a bifurcated regulatory regime where 
the same conduct is treated differently based on parties' underlying 
purpose for engaging in it, which could create extraordinary oversight 
challenges involving difficult subjective considerations concerning 
parties' true intentions in entering any given transaction or 
establishing particular business structures, and could create 
significant competitive advantages for incumbent firms.\121\ Thus, we 
read the statute to permit us to prescribe such rules to conduct 
without the jurisdiction of the United States, even if those rules 
would also apply to a market participant that has been transacting 
business through a pre-existing market structure, such as a foreign 
branch or foreign affiliate whose positions are guaranteed by the 
market participant, established for valid business purposes, provided 
the proposed rule or guidance is designed to prevent possibly evasive 
conduct.\122\
---------------------------------------------------------------------------

    \121\ Such an interpretation of our anti-evasion authority, for 
example, could privilege incumbent firms by allowing them to 
leverage existing business models that may not be available to new 
entrants under rules promulgated pursuant to that authority.
    \122\ As a general matter, the final rules adopted in this 
release are not being applied to persons who are ``transacting a 
business in security-based swaps without the jurisdiction of the 
United States'' within the meaning of section 30(c) of the Exchange 
Act. See sections 0-(c), supra. However, as noted below, the 
Commission also believes that these rules are necessary or 
appropriate as a prophylactic measure to help prevent the evasion of 
the provisions of the Exchange Act that were added by the Dodd-Frank 
Act and thus help ensure that the particular purposes of the Dodd-
Frank Act addressed by the rule are not undermined. See, e.g., 
section 0 and note 186, infra.
---------------------------------------------------------------------------

C. Principles Guiding Final Approach To Applying ``Security-Based Swap 
Dealer'' and ``Major Security-Based Swap Participant'' Definitions in 
the Cross-Border Context

    As in our proposal, our final rules and guidance reflect our 
careful consideration of the global nature of the security-based swap 
market and the types of risks created by security-based swap activity 
to the U.S. financial system and market participants and other concerns 
that the dealer and major security-based swap participant definitions 
were intended to address, as well as the needs of a well-functioning 
security-based swap market.\123\ We also have been guided by the 
purpose of Title VII \124\ and the applicable requirements of the 
Exchange Act, including the following:
---------------------------------------------------------------------------

    \123\ See section 0, supra.
    \124\ See note 11, supra.
---------------------------------------------------------------------------

     Economic Impacts--The Exchange Act requires the Commission 
to consider the impact of our rulemakings on efficiency, competition, 
and capital formation.\125\
---------------------------------------------------------------------------

    \125\ Specifically, section 3(f) of the Exchange Act provides: 
``Whenever pursuant to this title the Commission is engaged in 
rulemaking, . . . , and is required to consider or determine whether 
an action is necessary or appropriate in the public interest, the 
Commission shall also consider, in addition to the protection of 
investors, whether the action will promote efficiency, competition, 
and capital formation.'' Section 23(a)(2) of the Exchange Act also 
provides: ``The Commission . . . , in making rules and regulations 
pursuant to any provisions of this title, shall consider among other 
matters the impact any such rule or regulation would have on 
competition. The Commission . . . shall not adopt any such rule or 
regulation which would impose a burden on competition not necessary 
or appropriate in furtherance of the purposes of [the Exchange 
Act].''
---------------------------------------------------------------------------

     Counterparty Protection--The Dodd-Frank Act adds 
provisions to the Exchange Act relating to counterparty protection, 
particularly with respect to ``special entities.'' \126\
---------------------------------------------------------------------------

    \126\ See Exchange Act section 15F(h), as added by section 
764(a) of the Dodd-Frank Act, in particular.
---------------------------------------------------------------------------

     Transparency--The Dodd-Frank Act was intended to promote 
transparency in the U.S. financial system.\127\
---------------------------------------------------------------------------

    \127\ See note 11, supra.
---------------------------------------------------------------------------

     Risk to the U.S. Financial System--The Dodd-Frank Act was 
intended to promote, among other things, the financial stability of the 
United States by limiting/mitigating risks to the financial 
system.\128\
---------------------------------------------------------------------------

    \128\ Id.
---------------------------------------------------------------------------

     Anti-Evasion--The Dodd-Frank Act amends the Exchange Act 
to provide the Commission with authority to prescribe rules and 
regulations as necessary or appropriate to prevent the evasion of any 
provision of the Exchange Act that was added by the Dodd-Frank 
Act.\129\
---------------------------------------------------------------------------

    \129\ See Exchange Act section 30(c), 15 U.S.C. 78dd(c), as 
discussed in section 0, supra.
---------------------------------------------------------------------------

     Consultation and Coordination with Other U.S. Regulators--
In connection with implementation of Title VII, the Dodd Frank Act 
requires the Commission to consult and coordinate with the CFTC and 
prudential regulators for the purpose of ensuring ``regulatory 
consistency and comparability, to the extent possible.'' \130\
---------------------------------------------------------------------------

    \130\ See section 712(a)(2) of the Dodd-Frank Act.
---------------------------------------------------------------------------

     Consistent International Standards--To promote effective 
and consistent global regulation of swaps and security-based swaps, the 
Dodd-Frank Act requires the Commission and the CFTC to consult and 
coordinate with foreign regulatory authorities on the ``establishment 
of consistent international standards'' with respect to the regulation 
of swaps and security-based swaps.\131\ In this regard, the Commission 
recognizes that regulators in other jurisdictions are currently engaged 
in implementing their own regulatory reforms of the OTC derivatives 
markets and that our application of Title VII to cross-border 
activities may affect the policy decisions of these other regulators as 
they seek to address potential conflicts or overlaps in the regulatory 
requirements that apply to market participants under their 
authority.\132\
---------------------------------------------------------------------------

    \131\ See section 752(a) of the Dodd-Frank Act.
    \132\ For example, subjecting non-U.S. persons to Title VII may 
prompt a foreign jurisdiction to respond by subjecting U.S. persons 
to the foreign jurisdiction's regulatory regime.
---------------------------------------------------------------------------

    At times, these principles reinforce one another; at other times, 
they may be in tension. For instance, regulating risk posed to the 
United States may, depending on the final rules, make it more costly 
for U.S.-based firms to conduct security-based swap business, 
particularly in foreign markets, compared to foreign firms; it could 
make foreign firms less willing to deal with U.S. persons; and it could 
discourage foreign firms from carrying out security-based swap dealing 
activity through branches or offices located in the United States. On 
the other hand, providing U.S. persons greater access to foreign 
security-based swap markets may, depending on the final rules, fail to 
appropriately address the risks posed to the United States from 
transactions conducted in part outside the United States or create 
opportunities for market participants to evade the application of Title 
VII, particularly until such time as other jurisdictions adopt similar 
comprehensive and comparable derivative regulations.
    Balancing these sometimes competing principles has been complicated 
by the fact that Title VII imposes a new regulatory regime in a global 
marketplace. Title VII establishes reforms that will have implications 
for entities that compete internationally in the global security-based 
swap market. We have generally sought, in accordance with the statutory 
factors described above, to avoid creating opportunities for market 
participants to evade Title VII requirements, whether by restructuring 
their business or other means, or the potential for overlapping or 
conflicting regulations. We also have considered the needs for a well-
functioning security-based swap market and for avoiding disruption that 
may reduce liquidity, competition, efficiency, transparency, or 
stability in the security-based swap market.

[[Page 39083]]

III. Baseline

    To assess the economic impact of the final rules described in this 
release, we are using as our baseline the security-based swap market as 
it exists at the time of this release, including applicable rules we 
have already adopted but excluding rules that we have proposed but not 
yet finalized.\133\ The analysis includes the statutory and regulatory 
provisions that currently govern the security-based swap market 
pursuant to the Dodd-Frank Act.\134\ We acknowledge limitations in the 
degree to which we can quantitatively characterize the current state of 
the security-based swap market. As we describe in more detail below, 
because the available data on security-based swap transactions do not 
cover the entire market, we have developed an understanding of market 
activity using a sample that includes only certain portions of the 
market.
---------------------------------------------------------------------------

    \133\ We also consider, where appropriate, the impact of rules 
and technical standards promulgated by other regulators, such as the 
CFTC and the European Securities and Markets Authority, on practices 
in the security-based swap market.
    \134\ As noted above, we have not yet adopted other substantive 
requirements of Title VII that may affect how firms structure their 
security-based swap business and market practices more generally.
---------------------------------------------------------------------------

A. Current Security-Based Swap Market

    Our analysis of the state of the current security-based swap market 
is based on data obtained from DTCC-TIW, especially data regarding the 
activity of market participants in the single-name CDS market during 
the period from 2008 to 2012. While other repositories may collect data 
on transactions in total return swaps on equity and debt, we do not 
currently have access to such data for these products (or other 
products that are security-based swaps). We have previously noted that 
the definition of security-based swaps is not limited to single-name 
CDS but we believe that the single-name CDS data are sufficiently 
representative of the market and therefore can directly inform the 
analysis of the state of the current security-based swap market.\135\ 
Additionally, the data for index CDS encompass both broad-based 
security indices and narrow-based security indices, and ``security-
based swap'' in relevant part encompasses swaps based on single 
securities or reference entities or on narrow-based security indices. 
Accordingly, with the exception of the analysis regarding the degree of 
overlap between participation in the single-name CDS market and the 
index CDS market (cross-market activity), our analysis below does not 
include data regarding index CDS.
---------------------------------------------------------------------------

    \135\ According to data published by the Bank for International 
Settlements (``BIS''), the global notional amount outstanding in 
equity forwards and swaps as of June 2013 was $2.32 trillion. The 
notional amount outstanding in single-name CDS was approximately 
$13.14 trillion, in multi-name index CDS was approximately $10.17 
trillion, and in multi-name, non-index CDS was approximately $1.04 
trillion. See Semi-annual OTC derivatives statistics at end-June 
2013 (Nov. 2013), Table 19, available at: http://www.bis.org/statistics/dt1920a.pdf. As we stated in the Cross-Border Proposing 
Release, for the purposes of this analysis, we assume that multi-
name index CDS are not narrow-based index CDS and therefore, do not 
fall within the security-based swap definition. See Cross-Border 
Proposing Release, 78 FR 31120 n.1301; see also Exchange Act section 
3(a)(68)(A); Further Definition of ``Swap,'' ``Security-Based-
Swap,'' and ``Security-Based Swap Agreement''; Mixed Swaps; 
Security-Based Swap Agreement Recordkeeping, Exchange Act Release 
No. 67453 (July 18, 2012), 77 FR 48208 (Aug. 13, 2012) (``Product 
Definitions Adopting Release''), 77 FR 48208. We also assume that 
all instruments reported as equity forwards and swaps are security-
based swaps, potentially resulting in underestimation of the 
proportion of the security-based swap market represented by single-
name CDS. Based on those assumptions, single-name CDS appear to 
constitute roughly 80 percent of the security-based swap market. No 
commenters disputed these assumptions, and we therefore continue to 
believe that, although the BIS data reflect the global OTC 
derivatives market, and not just the U.S. market, these ratios are 
an adequate representation of the U.S. market.
---------------------------------------------------------------------------

    We believe that the data underlying our analysis here provide 
reasonably comprehensive information regarding the single-name CDS 
transactions and composition of the single-name CDS market 
participants. We note that the data available to us from DTCC-TIW do 
not encompass those CDS transactions that both: (i) Do not involve U.S. 
counterparties; \136\ and (ii) are based on non-U.S. reference 
entities. Notwithstanding this limitation, we believe that the DTCC-TIW 
data provide sufficient information to identify the types of market 
participants active in the security-based swap market and the general 
pattern of dealing within that market.\137\
---------------------------------------------------------------------------

    \136\ We note that DTCC-TIW's entity domicile determinations may 
not reflect our definition of ``U.S. person'' in all cases.
    \137\ The challenges we face in estimating measures of current 
market activity stems, in part, from the absence of comprehensive 
reporting requirements for security-based swap market participants. 
The Commission has proposed rules regarding trade reporting, data 
elements, and real-time public reporting for security-based swaps 
that would provide us with appropriate measures of market activity. 
See Regulation SBSR--Reporting and Dissemination of Security-Based 
Swap Information, Exchange Act Release No. 34-63346 (Nov. 19, 2010), 
75 FR 75208 (Dec. 2, 2010).
---------------------------------------------------------------------------

1. Security-Based Swap Market Participants
    A key characteristic of security-based swap activity is that it is 
concentrated among a relatively small number of entities that engage in 
dealing activities. In addition to these entities, thousands of other 
participants appear as counterparties to security-based swap contracts 
in our sample, and include, but are not limited to, investment 
companies, pension funds, private (hedge) funds, sovereign entities, 
and industrial companies. We observe that most non-dealer users of 
security-based swaps do not engage directly in the trading of swaps, 
but use dealers, banks, or investment advisers as intermediaries or 
agents to establish their positions. Based on an analysis of the 
counterparties to trades reported to the DTCC-TIW, there are 1,695 
entities that engaged directly in trading between November 2006 and 
December 2012.
    Table 1, below, highlights that more than three-quarters of these 
entities (DTCC-defined ``firms'' shown in DTCC-TIW, which we refer to 
here as ``transacting agents'') were identified as investment advisers, 
of which approximately 40 percent (about 30 percent of all transacting 
agents) were registered investment advisers under the Investment 
Advisers Act of 1940 (``Investment Advisers Act'').\138\ Although 
investment advisers comprise the vast majority of transacting agents, 
the transactions they executed account for only 10.8 percent of all 
single-name CDS trading activity reported to the DTCC-TIW, measured by 
number of transaction-sides (each transaction has two transaction 
sides, i.e., two transaction counterparties). The vast majority of 
transactions (81.9 percent) measured by number of transaction-sides 
were executed by ISDA-recognized dealers.\139\
---------------------------------------------------------------------------

    \138\ See 15 U.S.C. 80b1-80b21. Transacting agents participate 
directly in the security-based swap market, without relying on an 
intermediary, on behalf of principals. For example, a university 
endowment may hold a position in a security-based swap that is built 
up by an investment adviser that transacts on the endowment's 
behalf. In this case, the university endowment is a principal that 
uses the investment adviser as its transacting agent.
    \139\ The 1,695 entities included all DTCC-defined ``firms'' 
shown in DTCC-TIW as transaction counterparties that report at least 
one transaction to DTCC-TIW as of December 2012. The staff in the 
Division of Economic and Risk Analysis classified these firms, which 
are shown as transaction counterparties, by machine matching names 
to known third-party databases and by manual classification. This is 
consistent with the methodology used in the proposal. See Cross-
Border Proposing Release, 78 FR 31120 n.1304. Manual classification 
was based in part on searches of the EDGAR and Bloomberg databases, 
the SEC's Investment Adviser Public Disclosure database, and a 
firm's public Web site or the public Web site of the account 
represented by a firm. The staff also referred to ISDA protocol 
adherence letters available on the ISDA Web site.

[[Page 39084]]



 Table 1--The Number of Transacting Agents by Counterparty Type and the Fraction of Total Trading Activity, From
                   November 2006 Through December 2012, Represented by Each Counterparty Type
----------------------------------------------------------------------------------------------------------------
                                                                                                    Transaction
                       Transacting agents                             Number          Percent          share
                                                                                                     (percent)
----------------------------------------------------------------------------------------------------------------
Investment Advisers.............................................           1,261            74.4            10.9
--SEC registered................................................             510            30.1             6.6
Banks...........................................................             256            15.1             5.9
Pension Funds...................................................              27             1.6             0.1
Insurance Companies.............................................              32             1.9             0.3
ISDA-Recognized Dealers \140\...................................              17             1.0            82.1
Other...........................................................             102             6.0             0.8
                                                                 -----------------------------------------------
    Total.......................................................           1,695           100.0           100.0
----------------------------------------------------------------------------------------------------------------

    Principal holders of CDS risk exposure are represented by 
``accounts'' in the DTCC-TIW.\141\ The staff's analysis of these 
accounts in DTCC-TIW shows that the 1,695 transacting agents classified 
in Table 1 represent over 9,238 principal risk holders. Table 2, below, 
classifies these principal risk holders by their counterparty type and 
whether they are represented by a registered or unregistered investment 
adviser.\142\ For instance, 256 banks in Table 1 allocated transactions 
across 364 accounts, of which 25 were represented by investment 
advisers. In the remaining 339 instances, banks traded for their own 
accounts. Meanwhile, 17 ISDA-recognized dealers in Table 1 allocated 
transactions across 65 accounts.
---------------------------------------------------------------------------

    \140\ For the purpose of this analysis, the ISDA-recognized 
dealers are those identified by ISDA as belonging to the G14 or G16 
dealer group during the period: JP Morgan Chase NA (and Bear 
Stearns), Morgan Stanley, Bank of America NA (and Merrill Lynch), 
Goldman Sachs, Deutsche Bank AG, Barclays Capital, Citigroup, UBS, 
Credit Suisse AG, RBS Group, BNP Paribas, HSBC Bank, Lehman 
Brothers, Soci[eacute]t[eacute] G[eacute]n[eacute]rale, Credit 
Agricole, Wells Fargo and Nomura. See, e.g., http://www.isda.org/c_and_a/pdf/ISDA-Operations-Survey-2010.pdf.
    \141\ ``Accounts'' as defined in the DTCC-TIW context are not 
equivalent to ``accounts'' in the definition of ``U.S. person'' 
provided by Exchange Act rule 3a71-3(a)(4)(i)(C). They also do not 
necessarily represent separate legal persons. One entity or legal 
person may have multiple accounts. For example, a bank may have one 
DTCC account for its U.S. headquarters and one DTCC account for one 
of its foreign branches.
    \142\ Unregistered investment advisers include all investment 
advisers not registered under the Investment Advisers Act and may 
include investment advisers registered with a state or a foreign 
authority.
---------------------------------------------------------------------------

    Among the accounts, there are 1,000 Dodd-Frank Act-defined special 
entities and 570 investment companies registered under the Investment 
Company Act of 1940.\143\ Private funds comprise the largest type of 
account holders that we were able to classify, and although not 
verified through a recognized database, most of the funds we were not 
able to classify appear to be private funds.\144\
---------------------------------------------------------------------------

    \143\ See 15 U.S.C. 80a1 through 80a64. There remain over 4,000 
DTCC ``accounts'' unclassified by type. Although unclassified, each 
was manually reviewed to verify that it was not likely to be a 
special entity within the meaning of the Dodd-Frank Act and instead 
was likely to be an entity such as a corporation, an insurance 
company, or a bank.
    \144\ Private funds for this purposes encompasses various 
unregistered pooled investment vehicles, including hedge funds, 
private equity funds, and venture capital funds.

   Table 2--The Number and Percentage of Account Holders--by Type--Who Participate in the Security-Based Swap
Market Through a Registered Investment Adviser, an Unregistered Investment Adviser, or Directly as a Transacting
                                 Agent, From November 2006 Through December 2012
----------------------------------------------------------------------------------------------------------------
                                                            Represented by a   Represented by
                                                               registered      an unregistered   Participant is
         Account holders by type               Number          investment        investment        transacting
                                                                 adviser           adviser         agent \145\
                                                                (percent)         (percent)         (percent)
----------------------------------------------------------------------------------------------------------------
Private Funds...........................             2,696         1,275--47         1,400--52            21--1.
DFA Special Entities....................             1,000           973--97              7--1            20--2.
Registered Investment Companies.........               570           560--98              8--1             2--0.
Banks (non-ISDA-recognized dealers).....               364             21--6              4--1          339--93.
Insurance Companies.....................               205           132--64            20--10           53--26.
ISDA-Recognized Dealers.................                65              0--0              0--0          65--100.
Foreign Sovereigns......................                57            40--70              2--4           15--26.
Non-Financial Corporations..............                55            37--67              3--5           15--27.
Finance Companies.......................                 8             4--50              0--0            4--50.
Other/Unclassified......................             4,218         2,885--68         1,146--27           187--4.
                                         -----------------------------------------------------------------------
    All.................................             9,238         5,927--64         2,590--28           721--8.
----------------------------------------------------------------------------------------------------------------

    (a) Dealing Structures
    Security-based swap dealers use a variety of business models and 
legal structures to engage in dealing business with counterparties in 
jurisdictions all around the world. As we noted in the proposal, both 
U.S.-based and foreign-based entities use certain dealing structures 
for a variety of legal, tax, strategic, and business reasons.\146\ 
Dealers may use a variety of structures in part to reduce risk and 
enhance credit

[[Page 39085]]

protection based on the particular characteristics of each entity's 
business.
---------------------------------------------------------------------------

    \145\ This column reflects the number of participants who are 
also trading for their own accounts.
    \146\ See Cross-Border Proposing Release, 78 FR 30976-78.
---------------------------------------------------------------------------

    Bank and non-bank holding companies may use subsidiaries to deal 
with counterparties. Further, dealers may rely on multiple sales forces 
to originate security-based swap transactions. For example, a U.S. bank 
dealer may use a sales force in its U.S. home office to originate 
security-based swap transactions in the United States and use separate 
sales forces spread across foreign branches to originate security-based 
swap transactions with counterparties in foreign markets.
    In some situations, an entity's performance under security-based 
swaps may be supported by a guarantee provided by an affiliate. More 
generally, guarantees may take the form of a blanket guarantee of an 
affiliate's performance on all security-based swap contracts, or a 
guarantee may apply only to a specified transaction or counterparty. 
Guarantees may give counterparties to the dealer direct recourse to the 
holding company or another affiliate for its dealer-affiliate's 
obligations under security-based swaps for which that dealer-affiliate 
acts as counterparty.
(b) Participant Domiciles
    The security-based swap market is global in scope, with 
counterparties located across multiple jurisdictions. As depicted in 
Figure 1, the domicile of new accounts participating in the market has 
shifted over time.
[GRAPHIC] [TIFF OMITTED] TR09JY14.000

    Over time a greater share of accounts entering the market either 
have a foreign domicile, or have a foreign domicile while being managed 
by a U.S. person. The increase in foreign accounts may reflect an 
increase in participation by foreign accountholders while the increase 
in foreign accounts managed by U.S. persons may reflect the flexibility 
with which market participants can restructure their market 
participation in response to regulatory intervention, competitive 
pressures, and other stimuli. There are, however, alternative 
explanations for the shifts in new account domicile we observe in 
Figure 1. Changes in the domicile of new accounts through time may 
reflect improvements in reporting by market participants to DTCC-
TIW.\148\

[[Page 39086]]

Additionally, because the data only include accounts that are domiciled 
in the United States, transact with U.S.-domiciled counterparties, or 
transact in single-name CDS with U.S. reference entities, changes in 
the domicile of new accounts may reflect increased transaction activity 
between U.S. and non-U.S. counterparties.
---------------------------------------------------------------------------

    \147\ In these instances, the fund or account lists a non-U.S. 
registered office location while the investment adviser, U.S. bank, 
or U.S. parent lists the United States as its settlement country.
    \148\ Consistent with the guidance on CDS data access, see text 
accompanying note 37, supra, DTCC-TIW surveyed market participants, 
asking for the physical address associated with each of their 
accounts (i.e., where the account is incorporated as a legal 
entity). This is designated the registered office location. For 
purposes of this discussion, we have assumed that the registered 
office location reflects the place of domicile for the fund or 
account. When the fund does not report a registered office location, 
we assume that the settlement country reported by the investment 
adviser or parent entity to the fund or account is the place of 
domicile.
---------------------------------------------------------------------------

    A U.S.-based holding company may conduct dealing activity through a 
foreign subsidiary that faces both U.S. and foreign counterparties. 
Similarly, foreign dealers may choose to deal with U.S. and foreign 
counterparties through U.S. subsidiaries. Non-dealer users of security-
based swaps may participate in the market using an agent in their home 
country or abroad. An investment adviser located in one jurisdiction 
may transact in security-based swaps on behalf of beneficial owners 
that reside in another.
    The various layers separating origination from booking by dealers, 
and management from ownership by non-dealer users, highlights the 
potential distinctions between the location where a transaction is 
arranged, negotiated, or executed, the location where economic 
decisions are made by managers on behalf of beneficial owners, and the 
jurisdiction ultimately bearing the financial risks associated with the 
security-based swap transaction that results. As a corollary, a 
participant in the security-based swap market may be exposed to 
counterparty risk from a jurisdiction that is different from the market 
center in which it participates.
(c) Current Estimates of Dealers and Major Participants.
    In the Intermediary Definitions Adopting Release, we estimated, 
based on an analysis of DTCC-TIW data, that out of more than 1,000 
entities engaged in single-name CDS activity worldwide in 2011, 166 
entities engaged in single-name CDS activity at a sufficiently high 
level that they would be expected to incur assessment costs to 
determine whether they meet the ``security-based swap dealer'' 
definition.\149\ Analysis of those data further indicated that 
potentially 50 entities may engage in dealing activity that would 
exceed the de minimis threshold and thus ultimately have to register as 
security-based swap dealers.\150\
---------------------------------------------------------------------------

    \149\ Based on the de minimis threshold of $3 billion for 
single-name CDS, we estimated that there were 123 entities engaged 
in single-name CDS transactions in 2011 that had more than $3 
billion in single-name CDS transactions over the previous 12 months. 
We also estimated that 43 entities with between $2 and $3 billion in 
transactions over the trailing 12 months may opt to engage in the 
dealer analysis out of an abundance of caution or to meet internal 
compliance guidelines, thus leading to the 166 total. See 
Intermediary Definitions Adopting Release, 77 FR 30731-32; see also 
Cross-Border Proposing Release, 78 FR 31139-40. We adopted a phase-
in period during which the de minimis threshold will be $8 billion 
and during which Commission staff will study the security-based swap 
market as it evolves under the new regulatory framework, resulting 
in a report that will consider the operation of the security-based 
swap dealer and major security-based swap participant definitions. 
At the end of the phase-in period, the Commission will take into 
account the report, as well as public comment on the report, in 
determining whether to terminate the phase-in period or propose any 
changes to the rule implementing the de minimis exception, including 
any increases or decreases to the $3 billion threshold. See 
Intermediary Definitions Adopting Release, 77 FR 30640.
    \150\ In particular, we estimated that 28 entities and corporate 
groups had three or more counterparties that are not ISDA dealers 
(which we viewed as a useful proxy for application of the dealer-
trader distinction) and that 25 of those entities had trailing 
notional transactions exceeding $3 billion. See id. at 30725 n.1457; 
SEC Staff Report, ``Information regarding activities and positions 
of participants in the single-name credit default swap market (``CDS 
Data Analysis'') (Mar. 15, 2012), available at: http://www.sec.gov/comments/s7-39-10/s73910-154.pdf at 14. Our additional estimate of 
up to 50 potential dealers reflected our recognition of the 
potential for growth in the security-based swap market, for new 
entrants into the dealing space, and the possibility that some 
corporate groups may register more than one entity. See Intermediary 
Definitions Adopting Release, 77 FR 30725 n.1457.
    In the Cross-Border Proposing Release, we revised those 
estimates to reflect a more granular analysis of the data. Under 
this refined approach--which identified the number of entities 
within a corporate group that may have to register--we estimated 
that 46 individual firms had three or more non-ISDA dealer 
counterparties, and that, of those, 31 firms engaged in at least $3 
billion of security-based swap activity in 2011. We further 
estimated that, under the cross-border provisions of proposed 
Exchange Act rule 3a71-3(b), 27 of those entities engaged in at 
least $3 billion notional activity that they would have to count 
against the de minimis threshold, and that accounting for the 
aggregation requirement may result in an additional two firms being 
required to register, for a total of 29. We also concluded that our 
original estimate of there being up to 50 dealers was still valid, 
noting that the revised estimate included individual entities within 
corporate groups (thus accounting for the possibility that some 
corporate groups may register more than one dealer), and also 
accounted for the likely results of the proposed aggregation 
requirement. See Cross-Border Proposing Release, 78 FR 31137-38 
n.1407.
---------------------------------------------------------------------------

    Analysis of more recent data regarding the single-name CDS market 
using the same methodology suggests comparable results that are 
consistent with the reduction in transaction volume noted below. In 
particular, single-name CDS data from 2012 indicate that out of more 
than 1,000 entities engaged in single-name CDS activity, approximately 
145 engaged in single-name CDS activity at a level high enough such 
that they may be expected to perform the dealer-trader analysis 
prescribed under the security-based swap dealer definition.\151\ These 
data suggest that, consistent with the Intermediary Definitions 
Adopting Release analysis, up to approximately 50 entities would engage 
in dealing activity that would exceed the de minimis threshold.\152\
---------------------------------------------------------------------------

    \151\ Consistent with the earlier analysis, this figure is 
derived from the fact that 110 transacting agents had total single-
name security-based swap activity above the $3 billion de minimis 
threshold, while another 35 transacting agents had activity between 
$2 and $3 billion and hence out of caution may be expected to engage 
in the dealer-trader analysis.
    In calculating this estimate, Commission staff used methods 
identical to those used referenced in the Intermediary Definitions 
Adopting Release, 77 FR 30732 n.1509, aggregating the activity of 
DTCC accounts to the level of transacting agents and estimating the 
number of transacting agents with gross transaction notional amounts 
exceeding $2 billion in 2012. While the analysis contained in the 
Intermediary Definitions Adopting Release used a sample that ended 
in December 2011, the sample has been updated through the end of 
December 2012.
    In connection with the economic analysis of the final cross-
border dealer de minimis rules, we also have estimated the number of 
entities that may perform the dealer-trader analysis using a more 
granular methodology that considers data both at the account level 
and at the transacting agent level. See notes 456 through 458, 
infra, and accompanying text.
    \152\ As discussed below, and consistent with the methodology 
used in the Cross-Border Proposing Release, 78 FR 31137 n.1407, data 
from 2012 indicates that 40 entities engaged in the single-name 
security-based swap market had three or more counterparties that 
were not identified by ISDA as dealers, and that 27 of those 
entities had $3 billion or more in notional single-name CDS activity 
over a 12 month period. Applying the principles reflected in these 
final rules regarding the counting of transactions against the de 
minimis thresholds suggests that 25 of those entities would have $3 
billion or more in notional transactions counted against the 
thresholds, and that applying the aggregation rules increases that 
number to 26 entities. Based on this data, we believe that it is 
reasonable to conclude that up to 50 entities ultimately may 
register as security-based swap dealers, although the number may be 
smaller. See note 444, infra.
    In this regard it is important to note that, due to limitations 
in the availability of the underlying data, this analysis does not 
include information about transactions involving single-name CDS 
with a non-U.S. reference entity when neither party is domiciled in 
the United States or guaranteed by a person domiciled in the United 
States. This is because for single-name CDS with a non-U.S. 
reference entity, the data supplied to the Commission by the DTCC-
TIW encompasses only information regarding transactions involving at 
least one counterparty domiciled in the United States or guaranteed 
by a person domiciled in the United States, based on physical 
addresses reported by market participants. That data exclusion 
introduces the possibility that these numbers may underestimate the 
number of persons that would engage in the dealer-trader analysis 
(and hence incur assessment costs) or that exceed $3 billion in 
dealing transactions on an annual basis (and hence would potentially 
be linked to programmatic costs and benefits).
---------------------------------------------------------------------------

    Additionally, in the Intermediary Definitions Adopting Release, we 
estimated, based on position data from DTCC-TIW for 2011, that as many 
as 12 entities would be likely to perform

[[Page 39087]]

substantial position and substantial counterparty exposure tests, and 
thus incur assessment costs, prescribed under the major security-based 
swap participant definition. Of these 12 firms, we estimated that the 
number of persons with positions sufficiently large to bring them 
within the scope of the definition of major security-based swap 
participant likely would be fewer than five. Although we did not 
specify how the major security-based swap participant definition would 
apply to foreign persons in the Intermediary Definitions Adopting 
Release, our approach in estimating the assessment costs caused by our 
final definition used available single-name CDS data as a proxy for the 
market as a whole, and assumed that all potential major security-based 
swap participants would be required to include in their threshold 
calculations all positions with all counterparties.
    Analysis of more recent data regarding the single-name CDS market 
suggests comparable results. In particular, single-name CDS data from 
2012 indicate that out of over 1,100 DTCC-TIW firms holding positions 
in single-name CDS activity and not expected to register as security-
based swap dealers, nine had worldwide single-name CDS positions at a 
level high enough such that they may be expected to perform the major 
security-based swap participant threshold analysis prescribed under the 
security-based swap dealer definition. Analysis based on these more 
recent data is consistent with the prior conclusion that five or fewer 
entities would be likely to register as major security-based swap 
participants.\153\
---------------------------------------------------------------------------

    \153\ In calculating this estimate, Commission staff used 
methods identical to those used referenced in the Intermediary 
Definitions Adopting Release, 77 FR 30734, note 1529, estimating the 
number of participants with notional positions exceeding $100 
billion in 2012. The analysis contained in the Intermediary Adopting 
Release used a sample that ended in December 2011, aggregated the 
activity of DTCC accounts to the level of transacting agents, and 
did not attribute positions to parent companies. For the purposes of 
analysis of the final rules, the sample has been updated through the 
end of December 2012 and positions falling short of the $100 billion 
threshold have been attributed to parent companies.
---------------------------------------------------------------------------

2. Levels of Security-Based Swap Trading Activity
    Single-name CDS contracts make up the vast majority of security-
based swap products and most are written on corporate issuers, 
corporate securities, sovereign countries, or sovereign debt (reference 
entities and reference securities). Figure 2 below describes the 
percentage of global, notional transaction volume in North American 
corporate single-name CDS reported to the DTCC-TIW between January 2008 
and December 2012, separated by whether transactions are between two 
ISDA-recognized dealers (interdealer transactions) or whether a 
transaction has at least one non-dealer counterparty.
    The level of trading activity with respect to North American 
corporate single-name CDS in terms of notional volume has declined from 
more than $5 trillion in 2008 to approximately $2 trillion in 
2012.\154\ While notional volume has declined over the past five years, 
the share of interdealer transactions has remained fairly constant and 
interdealer transactions continue to represent the bulk of trading 
activity, whether measured in terms of notional value or number of 
transactions (see Figure 2).
---------------------------------------------------------------------------

    \154\ The start of this decline predates the enactment of the 
Dodd-Frank Act and the proposal of rules thereunder, which is 
important to note for the purpose of understanding the economic 
baseline for this rulemaking. The timing of this decline seems to 
indicate that CDS market demand shrank prior to the enactment of the 
Dodd-Frank Act, and therefore the causes of this reduction in 
trading volume may be related to market dynamics and not directly 
related to the enactment of statutes and the development of 
security-based swap market regulation. If the security-based swap 
market experiences further declines in trading activity, it would be 
difficult to identify the effects of the newly developed security-
based swap market regulation apart from changes in trading activity 
that may be due to natural market forces, or the anticipation of (or 
reaction to) proposed (or adopted) Title VII requirements or 
requirements being considered or implemented in other jurisdictions.

---------------------------------------------------------------------------

[[Page 39088]]

[GRAPHIC] [TIFF OMITTED] TR09JY14.001

    Against this backdrop of declining North American corporate single-
name CDS activity, about half of the trading activity in North American 
corporate single-name CDS reflected in the set of data we analyzed was 
between counterparties domiciled in the United States and 
counterparties domiciled abroad. Basing counterparty domicile on the 
self-reported registered office location of the DTCC-TIW accounts, the 
Commission estimates that only 13 percent of the global transaction 
volume by notional volume between 2008 and 2012 was between two U.S.-
domiciled counterparties, compared to 48 percent entered into between 
one U.S.-domiciled counterparty and a foreign-domiciled counterparty 
and 39 percent entered into between two foreign-domiciled 
counterparties (see Figure 3).\155\
---------------------------------------------------------------------------

    \155\ Following publication of the Warehouse Trust Guidance on 
CDS data access, the DTCC-TIW surveyed market participants, asking 
for the physical address associated with each of their accounts 
(i.e., where the account is organized as a legal entity). This is 
designated the registered office location by the DTCC-TIW. When an 
account does not report a registered office location, we assume that 
the settlement country reported by the investment adviser or parent 
entity to the fund or account is the place of domicile. For purposes 
of this discussion, we have assumed that the registered office 
location reflects the place of domicile for the fund or account.
     Changes to these estimates relative to figures presented in the 
proposing release represent additional data regarding new accounts 
in the time series as well as the use of a longer sample period.
---------------------------------------------------------------------------

    When the domicile of DTCC-TIW accounts are instead defined 
according to the domicile of their ultimate parents, headquarters, or 
home offices (e.g., classifying a foreign bank branch or foreign 
subsidiary of a U.S. entity as domiciled in the United States), the 
fraction of transactions entered into between two U.S.-domiciled 
counterparties increases to 29 percent, and to 53 percent for 
transactions entered into between a U.S.-domiciled counterparty and a 
foreign-domiciled counterparty.
    Differences in classifications across different definitions of 
domicile illustrate the effect of participant structures that operate 
across jurisdictions. Notably, the proportion of activity between two 
foreign-domiciled counterparties drops from 39 percent to 18 percent 
when domicile is defined as the ultimate parent's domicile. As noted 
earlier, foreign subsidiaries of U.S. parent companies and foreign 
branches of U.S. banks, and U.S. subsidiaries of foreign parent 
companies and U.S. branches of foreign banks may transact with U.S. and 
foreign counterparties. However, this decrease in share suggests that 
the activity of foreign subsidiaries of U.S. firms and foreign branches 
of U.S. banks is generally higher than the activity of U.S. 
subsidiaries of foreign firms and U.S. branches of foreign banks.
    By either of those definitions of domicile, the data indicate that 
a large fraction of North American corporate single-name CDS 
transaction volume is entered into between counterparties domiciled in 
two different jurisdictions or between counterparties domiciled outside 
the United States. For the purpose of establishing an economic 
baseline, this observation indicates that a large fraction of security-
based swap

[[Page 39089]]

activity would be affected by the scope of any cross-border approach we 
take in applying the Title VII requirements. Further, the large 
fraction of North American corporate single-name CDS transactions 
between U.S.-domiciled and foreign-domiciled counterparties also 
highlights the extent to which security-based swap activity transfers 
risk across geographical boundaries, both facilitating risk sharing 
among market participants and allowing for risk transmission between 
jurisdictions.
[GRAPHIC] [TIFF OMITTED] TR09JY14.002

B. Global Regulatory Efforts

    Efforts to regulate the swaps market are underway not only in the 
United States but also abroad. In 2009, leaders of the G20--whose 
membership includes the United States, 18 other countries, and the EU--
called for global improvements in the functioning, transparency, and 
regulatory oversight of OTC derivatives markets agreeing that ``all 
standardised OTC derivatives contracts should be traded on exchanges or 
electronic trading platforms, where appropriate, and cleared through 
central counterparties (``CCPs'') by end-2012 at the latest. OTC 
derivatives contracts should be reported to trade repositories. Non-
centrally cleared contracts should be subject to higher capital 
requirements.'' \156\ In subsequent summits, the G20 leaders have 
reiterated their commitment to OTC derivatives regulatory reform and 
encouraged international consultation in developing standards for these 
markets.\157\ The FSB monitors implementation of OTC derivatives 
reforms and provides progress reports to the G20.\158\
---------------------------------------------------------------------------

    \156\ See G20 Leaders' Statement cited in note 16, supra.
    \157\ See e.g., G20 Leaders' St. Petersburg Declaration. See 
also G20 Meeting, Los Cabos, Mexico, June 2012, available at: http://www.treasury.gov/resource-center/international/g7-g20/Documents/Los%20Cabos%20Leaders%27%20Declaration.pdf; and G20 Meeting, Cannes, 
France, November 2011, available at: https://www.g20.org/sites/default/files/g20_resources/library/Declaration_eng_Cannes.pdf 
(``G20 Leaders' Cannes Declaration''). In the G20 Leaders' Cannes 
Declaration, the G20 Leaders agreed to develop standards on margin 
for non-centrally cleared OTC derivatives.
    \158\ The FSB has published seven progress reports on OTC 
derivatives markets reform implementation: FSB Progress Report April 
2014 (available at: http://www.financialstabilityboard.org/publications/r_140408.pdf); September 2013 (available at: http://www.financialstabilityboard.org/publications/r_130902b.pdf), April 
2013 (available at: http://www.financialstabilityboard.org/publications/r_130415.pdf), October 2012 (available at: http://www.financialstabilityboard.org/publications/r_121031a.pdf), June 
2012 (available at: http://www.financialstabilityboard.org/publications/r_120615.pdf), October 2011 (available at: http://www.financialstabilityboard.org/publications/r_111011b.pdf) and 
April 2011 (available at: http://www.financialstabilityboard.org/publications/r_110415b.pdf) (collectively, ``FSB Progress 
Reports'') . The ODWG prepares the FSB Progress Reports. The 
Commission participates in the ODWG, both on its own behalf and as 
the representative of IOSCO, which is co-chair of the ODWG.
---------------------------------------------------------------------------

    Pursuant to these commitments, jurisdictions with major OTC 
derivatives markets have taken steps toward substantive regulation of 
these markets, though the pace of regulation varies. This suggests that 
many foreign participants will face substantive regulation of their 
security-based swap activities that is intended to implement the G20 
objectives and that may therefore address concerns similar to those 
addressed by rules the Commission has proposed but not yet adopted.
    Foreign legislative and regulatory efforts have focused on five 
general areas: Requiring post-trade reporting of transactions data for 
regulatory purposes, moving OTC derivatives onto organized trading 
platforms, requiring central clearing of OTC derivatives, establishing 
or enhancing capital requirements, and establishing or enhancing margin 
requirements for OTC derivatives transactions.
    The first two areas of regulation should help improve transparency 
in OTC derivatives markets, both to regulators and market participants. 
Regulatory transaction reporting requirements have entered into force 
in a number of jurisdictions including the EU, Hong Kong SAR, Japan, 
and Singapore, and other jurisdictions are in

[[Page 39090]]

the process of proposing legislation and rules to implement these 
requirements.\159\ The European Parliament has adopted legislation for 
markets in financial instruments that addresses trading OTC derivatives 
on regulated trading platforms.\160\ This legislation also should 
promote post-trade public transparency in OTC derivatives markets by 
requiring the price, volume, and time of OTC derivatives transactions 
conducted on these regulated trading platforms to be made public in as 
close to real time as technically possible.
---------------------------------------------------------------------------

    \159\ Information regarding ongoing regulatory developments 
described in this section was primarily obtained from the FSB 
Progress Reports cited in note 158, supra, which reflect the input 
of relevant jurisdictions.
    \160\ Id.
---------------------------------------------------------------------------

    Regulation of derivatives central clearing, capital requirements, 
and margin requirements aims to improve management of financial risks 
in these markets. Japan has rules in force mandating central clearing 
of certain OTC derivatives transactions. The EU has its legislation in 
place but has not yet made any determinations of specific OTC 
derivatives transactions subject to mandatory central clearing. Most 
other jurisdictions are still in the process of formulating their legal 
frameworks that govern central clearing. While the EU is the only major 
foreign jurisdiction that has initiated the process of drafting rules 
to implement margin requirements for OTC derivatives transactions, we 
understand that several other jurisdictions anticipate taking steps 
towards implementing such requirements.

C. Cross-Market Participation

    Persons registered as security-based swap dealers or major 
security-based swap participants are likely also to engage in swap 
activity, which is subject to regulation by the CFTC. In the release 
proposing registration requirements for security-based swap dealers and 
major security-based swap participants, we estimated, based on our 
experience and understanding of the swap and security-based swap 
markets that of the 55 firms that might register as security-based swap 
dealers or major security-based swap participants, approximately 35 
would also register with the CFTC as swap dealers or major swap 
participants.\161\
---------------------------------------------------------------------------

    \161\ See Registration of Security-Based Swap Dealers and Major 
Security-Based Swap Participants, Exchange Act Release No. 65543 
(Oct. 12, 2011), 76 FR 65784, 65808 (Oct. 24, 2011). Based on its 
analysis of 2012 DTCC-TIW and the list of swap dealers 
provisionally-registered with the CFTC, and applying the methodology 
used in the Intermediary Definitions Adopting Release, the 
Commission estimates that substantially all registered security-
based swap dealers would also register as swap dealers with the 
CFTC. See also CFTC list of provisionally registered swap dealers, 
available at: http://www.cftc.gov/LawRegulation/DoddFrankAct/registerswapdealer.
---------------------------------------------------------------------------

    This overlap reflects the relationship between single-name CDS 
contracts, which are security-based swaps, and index CDS contracts, 
which may be swaps or security-based swaps. A single-name CDS contract 
covers default events for a single reference entity or reference 
security. These entities and securities are often part of broad-based 
indices on which market participants write index CDS contracts. Index 
CDS contracts and related products make payouts that are contingent on 
the default of index components and allow participants in these 
instruments to gain exposure to the credit risk of the basket of 
reference entities that comprise the index, which is a function of the 
credit risk of the index components. As a result of this construction, 
a default event for a reference entity that is an index component will 
result in payoffs on both single-name CDS written on the reference 
entity and index CDS written on indices that contain the reference 
entity. Because of this relationship between the payoffs of single-name 
CDS and index CDS products, prices of these products depend upon one 
another. This dependence is particularly strong between index CDS 
contracts and single-name CDS contracts written on index 
components.\162\
---------------------------------------------------------------------------

    \162\ ``Correlation'' typically refers to linear relationships 
between variables; ``dependence'' captures a broader set of 
relationships that may be more appropriate for certain swaps and 
security-based swaps. See, e.g., Casella, George and Roger L. 
Berger, ``Statistical Inference'' (2002), at 171.
---------------------------------------------------------------------------

    Because payoffs associated with these single-name CDS and index CDS 
are dependent, hedging opportunities exist across these markets. 
Participants who sell protection on reference entities through a series 
of single-name CDS transactions can lay off some of the credit risk of 
their resulting positions by buying protection on an index that 
includes a subset of those reference entities. Participants that are 
active in one market are likely to be active in the other. Commission 
staff analysis of approximately 4,400 DTCC-TIW accounts that 
participated in the market for single-name CDS in 2012 revealed that 
approximately 2,700 of those accounts, or 61 percent, also participated 
in the market for index CDS. Of the accounts that participated in both 
markets, data regarding transactions in 2012 suggest that, conditional 
on an account transacting in notional volume of index CDS in the top 
third of accounts, the probability of the same account landing in the 
top third of accounts in terms of single-name CDS notional volume is 
approximately 62 percent; by contrast, the probability of the same 
account landing in the bottom third of accounts in terms of single-name 
CDS notional volume is only 14 percent.
    In an effort to comply with CFTC rules and applicable statutory 
provisions in the cross-border context, swap market participants, many 
of whom, as discussed above, likely also participate in the security-
based swap market, may have already changed some market practices.\163\ 
Although a commenter suggested that swap market participants have 
already conformed their business practices to the CFTC's approach to 
cross-border regulation, the commenter did not supply particular 
details as to the scope of that operations restructuring.\164\ We 
believe, however, based on these comments, it is likely that all 
participants who preliminarily believe they may be subject to the 
CFTC's registration requirements will have expended resources to build 
systems and infrastructure that will permit them to determine and then 
record the U.S.-person status of their counterparties consistent with 
applicable requirements, as interpreted by the CFTC Cross-Border 
Guidance.
---------------------------------------------------------------------------

    \163\ See, e.g., SIFMA/FIA/FSR Letter at 2-3. We understand that 
new capabilities have been built by swap market participants 
following issuance of the CFTC's guidance. To the extent that such 
capabilities can be transferred to these participants' security-
based swap activities (e.g., to the extent that a market 
participant's assessment practices regarding whether a counterparty 
would generally be considered a U.S. person for purposes of the CFTC 
guidance also can help determine the corresponding assessment for 
purposes of these final rules and guidance), such capabilities may 
tend to mitigate the costs that market participants otherwise would 
incur in connection with the Commission's final cross-border rules.
    \164\ Id. at 2-4. The commenter notes the ``technological, 
operational, legal and compliance systems'' necessary for complying 
with the Commission's proposed rules, and taking account of the CFTC 
Cross-Border Guidance, outlining the general categories of changes 
to practice necessary for compliance. The commenter further 
indicates a potential need to ``build[] separate systems for a small 
percentage of the combined swaps and SBS market instead of using the 
systems already built for compliance with the CFTC's cross-border 
approach,'' suggesting that market participants have already altered 
market practices to follow the CFTC Cross-Border Guidance.
---------------------------------------------------------------------------

    The CFTC's rules and cross-border guidance have likely influenced 
the information that market participants collect and maintain about the 
swap transactions they enter into and the counterparties they face. For 
example, the CFTC's guidance describes a majority-ownership approach 
for collective investment vehicles that are offered to U.S. persons, 
contemplating

[[Page 39091]]

that managers of these vehicles would assess, on an ongoing basis, the 
proportion of ownership by U.S. persons. As another example, the CFTC's 
guidance articulates an approach by which all swap transactions by a 
non-U.S. person that rely on guarantees from U.S. affiliates would 
generally count against that non-U.S. person's dealer de minimis 
exception.\165\
---------------------------------------------------------------------------

    \165\ See section 0, supra, for a discussion of costs to market 
participants that may arise from differences between the CFTC 
approach to guarantees and the Commission's final rules.
---------------------------------------------------------------------------

    Thus, as discussed in more detail in sections IV.I.2 and V.H.2 
below, the adoption of rules that would seek similar information from 
security-based swap market participants as the CFTC seeks from swap 
market participants, may allow such participants to use infrastructure 
already in place as a result of CFTC regulation to comply with 
Commission regulation. Among those entities that participate in both 
markets, entities that are able to apply to security-based swap 
activity new capabilities they have built in order to comply with 
requirements applicable to cross-border swap activity may experience 
lower costs associated with assessing which cross-border security-based 
swap activity counts against the dealer de minimis exception or towards 
the major participant threshold, relative to those that are unable to 
redeploy such capabilities. The Commission remains sensitive to the 
fact that in cases where its final rules differ from the CFTC approach, 
additional outlays related to information collection and storage may be 
required even of market participants that conformed to the CFTC's 
guidance regarding the applicable cross-border requirements.\166\ These 
costs are discussed in sections IV.I.1 and V.H.1(b).
---------------------------------------------------------------------------

    \166\ We recognize that the CFTC Cross-Border Guidance is the 
subject of ongoing litigation. Our economic analysis is not intended 
to draw any conclusions about the ultimate outcome of that 
litigation; rather, the economic analysis relies on the current 
practices and operational abilities of firms that are, we 
understand, either in accordance with the CFTC Cross-Border Guidance 
or are in the process of adapting their systems to account for the 
CFTC's approach to cross-border issues.
---------------------------------------------------------------------------

IV. Cross-Border Application of Dealer De Minimis Exception

A. Overview

    The Exchange Act excepts from designation as ``security-based swap 
dealer'' entities that engage in a ``de minimis'' quantity of security-
based swap dealing activity with or on behalf of customers.\167\ Under 
the final rules adopted in the Intermediary Definitions Adopting 
Release, a person may take advantage of that exception if, in 
connection with CDS that constitute security-based swaps, the person's 
dealing activity over the preceding 12 months does not exceed a gross 
notional amount of $3 billion, subject to a phase-in level of $8 
billion.\168\ The phase-in level will remain in place until--following 
a study regarding the definitions of ``security-based swap dealer'' and 
``major security-based swap participant''--the Commission either 
terminates the phase-in period or establishes an alternative threshold 
following rulemaking.\169\
---------------------------------------------------------------------------

    \167\ See Exchange Act section 3(a)(71)(D).
    \168\ See Exchange Act rule 3a71-2(a).
    \169\ See Intermediary Definitions Adopting Release, 77 FR 
30640-41; see also note 149, supra (addressing process for 
termination of phase-in level). Lower thresholds are set forth in 
connection with dealing activity involving other types of security-
based swaps. See Exchange Act rule 3a71-2(a)(1)(ii).
---------------------------------------------------------------------------

    To apply the exception to cross-border dealing activity, the Cross-
Border Proposing Release would have required that a U.S. person count 
against the de minimis thresholds all of its security-based swap 
dealing activity, including transactions conducted through a foreign 
branch of a U.S. bank.\170\ Non-U.S. persons, in contrast, would have 
included only dealing transactions entered into with U.S. persons other 
than foreign branches of U.S. banks, plus dealing transactions where 
the transaction is ``conducted within the United States.'' \171\ To 
implement, within the cross-border context, the existing rule that 
requires a person to aggregate the dealing activity of its affiliates 
against its own de minimis thresholds,\172\ the proposal would have 
required a person to count: (i) Dealing transactions by its affiliates 
that are U.S. persons; and (ii) dealing transactions by non-U.S. 
affiliates that either are entered into with U.S. persons other than 
foreign branches, or that are conducted within the United States.\173\ 
The proposal further would have permitted a person to exclude, from the 
de minimis analysis, transactions by affiliates that are registered 
security-based swap dealers, provided that the person's dealing 
activity is ``operationally independent'' from the registered dealer's 
dealing activity.\174\ The proposal, moreover, set forth definitions 
relevant to the application of the de minimis exception in the cross-
border context, including proposed definitions of the terms ``U.S. 
person'' and ``transaction conducted within the United States.'' \175\
---------------------------------------------------------------------------

    \170\ See proposed Exchange Act rule 3a71-3(b)(1)(i).
    \171\ See proposed Exchange Act rule 3a71-3(b)(1)(ii).
    \172\ See Exchange Act rule 3a71-2(a)(1) (providing that, for 
purposes of the de minimis exception, a person shall count its own 
dealing activity plus the dealing activity of ``any other entity 
controlling, controlled by, or under common control with the 
person'').
    \173\ See proposed Exchange Act rule 3a71-3(b)(2).
    \174\ See proposed Exchange Act rule 3a71-4.
    \175\ The proposal also set forth definitions of ``foreign 
branch'' and ``transaction conducted through a foreign branch'' in 
connection with the de minimis exception. See proposed Exchange Act 
rule 3a71-3(a). The proposed definitions of ``U.S. person,'' 
``transaction conducted within the United States,'' ``foreign 
branch,'' and ``transaction conducted through a foreign branch'' 
also are relevant to the Commission's proposed rules regarding the 
cross-border application of certain other Title VII requirements. 
See, e.g., proposed Exchange Act regulation SBSR (regarding 
regulatory reporting and public dissemination).
    Proposed Exchange Act rule 3a71-3 also contained a provision and 
associated definitions related to the cross-border application of 
counterparty protection requirements in connection with security-
based swap activities. As discussed above, those matters are not the 
subject of the present rulemaking, and the Commission intends to 
address those matters as part of a subsequent rulemaking.
---------------------------------------------------------------------------

    Commenters raised issues related to various aspects of this 
proposed approach to application of the de minimis exception in the 
cross-border context. As discussed below, these include issues 
regarding: The scope of the ``U.S. person'' definition, the proposal to 
require counting of certain ``transactions conducted within the United 
States'' between two non-U.S. persons, the treatment of the dealing 
activity of non-U.S. persons that is guaranteed by U.S. persons, and 
the application of the exception to non-U.S. persons whose 
counterparties are foreign branches of U.S. banks. Some commenters also 
urged us to more closely harmonize particular aspects of our proposal 
with the CFTC Cross-Border Guidance.
    After considering commenters' views regarding the cross-border 
application of the de minimis exception, we are adopting final rules 
that have been modified from the proposal in certain important 
respects. While these changes are discussed in more detail below, key 
elements include:
     Modifications to the proposed definition of ``U.S. 
person'';
     Provisions to distinguish non-U.S. persons' dealing 
activity involving security-based swaps that are guaranteed by their 
U.S. affiliates from such non-U.S. persons' other dealing activity for 
purposes of the de minimis exception, by requiring a non-U.S. person to 
count against the de minimis thresholds all dealing activity involving 
security-based swaps for which its counterparty has rights of recourse 
against a U.S. guarantor that is affiliated with the non-U.S. person;

[[Page 39092]]

     Provisions to distinguish non-U.S. persons that act as 
conduit affiliates (by entering into certain security-based swap 
transactions on behalf of their U.S. affiliates) from other non-U.S. 
persons for purposes of the de minimis exception, in that conduit 
affiliates are required to count all of their dealing activity against 
the de minimis thresholds regardless of counterparty;
     Modifications to the application of the de minimis 
exception to dealing activity by non-U.S. persons when the counterparty 
is the foreign branch of a U.S. bank.
     The addition of an exclusion related to cleared, anonymous 
transactions; and
     Modifications of the proposed aggregation provisions, in 
part by removing the ``operational independence'' condition to 
excluding dealing positions of affiliates that are registered dealers.
    The final rules we are adopting reflect a territorial approach that 
is generally consistent with the principles that the Commission 
traditionally has followed with respect to the registration of brokers 
and dealers under the Exchange Act. Under this territorial approach, 
registration and other requirements applicable to brokers and dealers 
generally are triggered by a broker or dealer physically operating in 
the United States, even if its activities are directed solely toward 
non-U.S. persons outside the United States. The territorial approach 
further generally requires broker-dealer registration by foreign 
brokers or dealers that, from outside the United States, induce or 
attempt to induce securities transactions by persons within the United 
States--but not when such foreign brokers or dealers conduct their 
activities entirely outside the United States.\176\
---------------------------------------------------------------------------

    \176\ See Cross-Border Proposing Release, 78 FR 30990; see 
generally section 0, supra.
---------------------------------------------------------------------------

    In the cross-border context, moreover, the application of the 
``security-based swap dealer'' definition and its de minimis exception 
remains subject to general principles that we addressed in the 
Intermediary Definitions Adopting Release. Accordingly, the term 
``person'' as used in the ``security-based swap dealer'' definition and 
in the Commission's rules implementing the de minimis exception should 
be interpreted to refer to a particular legal person, meaning that a 
trading desk, department, office, branch or other discrete business 
unit that is not a separately organized legal person will not be viewed 
as a security-based swap dealer. As a result, a legal person with a 
branch, agency, or office that is engaged in dealing activity above the 
de minimis threshold is required to register as a security-based swap 
dealer, even if the legal person's dealing activity is limited to such 
branch, agency, or office.\177\
---------------------------------------------------------------------------

    \177\ See Intermediary Definitions Adopting Release, 77 FR 
30624; see also Cross-Border Proposing Release at 30993.
---------------------------------------------------------------------------

    Cross-border security-based swap transactions also are subject to 
the principle that transactions between majority-owned affiliates need 
not be considered for purposes of determining whether a person is a 
dealer.\178\
---------------------------------------------------------------------------

    \178\ See Exchange Act rule 3a71-1(d).
---------------------------------------------------------------------------

    As discussed below, these final rules and guidance do not address 
the proposed provisions regarding the cross-border application of the 
dealer definition to ``transactions conducted within the United 
States,'' as defined in the Cross-Border Proposing Release. We 
anticipate soliciting additional public comment on potential approaches 
for applying the dealer definition to non-U.S. persons in connection 
with activity between two non-U.S. persons where one or both are 
conducting dealing activity that occurs within the United States.\179\
---------------------------------------------------------------------------

    \179\ See section I.A, supra.
---------------------------------------------------------------------------

B. Application of De Minimis Exception To Dealing Activities of U.S. 
Persons

1. Proposed Approach and Commenters' Views
    Under the proposal, a U.S. person would have counted all of its 
security-based swap dealing activity against the de minimis thresholds, 
including transactions that it conducted through a foreign branch.\180\ 
Although some persons who submitted comments in connection with the 
Intermediary Definitions Adopting Release expressed the view that 
dealing activity by foreign branches should not be counted as part of a 
U.S. person's de minimis calculation,\181\ we did not propose such an 
approach.\182\ Moreover, commenters to the Cross-Border Proposing 
Release did not specifically express opposition to this aspect of the 
proposal, although several commenters addressed related issues 
regarding the proposed scope of the ``U.S. person'' definition.\183\
---------------------------------------------------------------------------

    \180\ See proposed Exchange Act rule 3a71-3(b)(1)(i).
    \181\ See, e.g., ISDA Letter (Feb. 22, 2011) (``Non-U.S. 
entities (including non-U.S. affiliates and branches of U.S. banks) 
should not be required to register as Dealers when they are 
conducting business with non-U.S. counterparties''). This and other 
comments in connection with the Intermediary Definitions Adopting 
Release are located at: http://www.sec.gov/comments/s7-39-10/s73910.shtml.
    \182\ We considered these comments in connection with the Cross-
Border Proposing Release. See Cross-Border Proposing Release, 78 FR 
30990, 30994.
    \183\ We address these comments in the context of our discussion 
of our final definition of ``U.S. person.'' See notes 192-231, 
infra, and accompanying text.
---------------------------------------------------------------------------

2. Final Rule
    Consistent with the proposal, the final rules require U.S. persons 
to apply all of their dealing transactions against the de minimis 
thresholds, including activity they conduct through their foreign 
branches.\184\ Such dealing transactions must be counted regardless of 
where they are arranged, negotiated, or executed.
---------------------------------------------------------------------------

    \184\ See Exchange Act rule 3a71-3(b)(1)(i). Issues regarding 
how the de minimis exception applies to a non-U.S. person whose 
counterparty is a foreign branch are addressed in section 0, infra.
---------------------------------------------------------------------------

    As discussed above, it is our view that any dealing activity 
undertaken by a U.S. person, as defined in this final rule, occurs at 
least in part within the United States and therefore warrants the 
application of Title VII regardless of where particular aspects of 
dealing activity are conducted.\185\ Whenever a U.S. person enters into 
a security-based swap in a dealing capacity, it is the U.S. person as a 
whole--and not merely any applicable foreign branch or office of that 
U.S. person--that holds itself out as a dealer in security-based swaps. 
It is the U.S. person as a whole that seeks to profit by providing 
liquidity and making a market in security-based swaps, and it is the 
financial resources of the U.S. person as a whole that enable it to do 
so. Even if the U.S. person engages in dealing activity through a 
foreign branch or office, its dealing counterparties will look to the 
entire U.S. person--and not merely its foreign branch or office--for 
performance on the transaction, and the U.S. person as a whole assumes 
and stands behind the obligations arising from the security-based swap, 
thereby creating risk to the U.S. person and potentially to the U.S. 
financial system. A dealer that is organized or has its principal place 
of business in the United States thus cannot hold itself out as 
anything other than a single person, and generally cannot operate as a 
dealer absent the financial and other resources of that single person. 
Accordingly, we conclude that U.S. persons that engage in security-
based swap dealing activity through foreign branches or offices should 
be subject to the regulatory framework for dealers even if those U.S. 
persons deal exclusively with non-U.S. persons.\186\
---------------------------------------------------------------------------

    \185\ See Cross-Border Proposing Release, 78 FR 30994.
    \186\ The definition of ``U.S. person'' is addressed below. The 
definitions of ``foreign branch'' and ``transaction conducted 
through a foreign branch'' are addressed in section 0, infra.
    This interpretation, moreover, is consistent with the goals of 
security-based swap dealer regulation under Title VII. Security-
based swap activity that results in a transaction involving a U.S. 
counterparty creates ongoing obligations that are borne by a U.S. 
person, and thus is properly viewed as occurring within the United 
States. The events associated with AIG FP, described in detail in 
our proposal, illustrate how certain transactions of U.S. persons 
can pose risks to the U.S. financial system even when they are 
conducted through foreign operations. See Cross-Border Proposing 
Release, 78 FR 30980-81. Such risks, and their role in the financial 
crisis and in the enactment of Title VII, suggest that the statutory 
framework established by Congress and the objectives of Title VII 
would be undermined by an analysis that excludes from Title VII's 
application certain transactions involving U.S. persons solely 
because they involve conduct carried out through operations outside 
the United States, particularly when those transactions raise 
concerns about risk to the U.S. person and to the U.S. financial 
system that are similar or identical to those raised by such conduct 
when carried out by the U.S. person entirely inside the United 
States.
    For the above reasons, we conclude that our approach does not 
apply to persons who are ``transact[ing] a business in security-
based swaps without the jurisdiction of the United States,'' within 
the meaning of section 30(c) of the Exchange Act. See section 0, 
supra. A contrary interpretation would, in our view, reflect an 
understanding of what it means to conduct a security-based swaps 
business within the jurisdiction of the United States that is 
divorced both from Title VII's statutory objectives and from the 
reality of the role of U.S. persons within the global security-based 
swap market. But in any event we also believe that this final rule 
is necessary or appropriate as a prophylactic measure to help 
prevent the evasion of the provisions of the Exchange Act that were 
added by the Dodd-Frank Act, and thus help ensure that the relevant 
purposes of the Dodd-Frank Act are not undermined. Otherwise, U.S. 
persons could simply conduct dealing activities with non-U.S. 
persons using foreign branches and remain outside of the application 
of the dealer requirements of Title VII, bringing the same risk into 
the United States that would be associated with such dealing 
activity that is conducted out of their U.S. offices.

---------------------------------------------------------------------------

[[Page 39093]]

C. Definition of ``U.S. Person''

1. Proposed Approach
    Consistent with our territorial approach to application of Title 
VII to cross-border security-based swap activity, our Cross-Border 
Proposal defined ``U.S. person'' to mean:
     Any natural person resident in the United States;
     Any partnership, corporation, trust, or other legal person 
organized or incorporated under the laws of the United States \187\ or 
having its principal place of business in the United States; and
---------------------------------------------------------------------------

    \187\ Proposed Exchange Act rule 3a71-3(a)(9) under the Exchange 
Act defined ``United States'' as ``the United States of America, its 
territories and possessions, any States of the United States, and 
the District of Columbia.''
---------------------------------------------------------------------------

     Any account (whether discretionary or non-discretionary) 
of a U.S. person.\188\
---------------------------------------------------------------------------

    \188\ Proposed Exchange Act rule 3a71-3(a)(7)(i) under the 
Exchange Act.

The Commission also proposed that the term ``U.S. person'' would 
exclude the following international organizations: The International 
Monetary Fund (``IMF''), the International Bank for Reconstruction and 
Development, the Inter-American Development Bank, the Asian Development 
Bank, the African Development Bank, the United Nations, and their 
agencies and pension plans, and any other similar international 
organizations, their agencies and pension plans.\189\
---------------------------------------------------------------------------

    \189\ See proposed Exchange Act rule 3a71-3(a)(7)(ii).
---------------------------------------------------------------------------

    This proposed definition of ``U.S. person'' generally followed an 
approach to defining U.S. person that is similar to that used by the 
Commission in other contexts,\190\ though it was tailored to the 
specific goals of Title VII. As we noted in the proposal, we sought 
with the proposed definition to identify those types of individuals or 
entities whose security-based swap activity is likely to impact the 
U.S. market even if they transact with security-based swap dealers that 
are not U.S. persons and to identify those types of individuals or 
entities that are part of the U.S. security-based swap market and 
should receive the protections of Title VII.\191\
---------------------------------------------------------------------------

    \190\ See, e.g., Securities Act Release No. 6863 (``Regulation S 
Adopting Release'') (April 24, 1990), 55 FR 18306, 18308 (May 2, 
1990), 55 FR 18308 (adopting regulation ``based on a territorial 
approach to [s]ection 5 of the Securities Act''). Although the 
proposed rule followed the approach to defining ``U.S. person'' in 
Regulation S in certain respects, we stated that we preliminarily 
believed that it was necessary to depart from Regulation S in 
defining ``U.S. person'' in the context of the cross-border 
application of Title VII. See Cross-Border Proposing Release, 78 FR 
31007-08 (comparing the proposed definition of ``U.S. person'' with 
the definition of ``U.S. person'' in Regulation S). For example, 
Regulation S expressly excludes foreign branches of U.S. banks from 
the definition of ``U.S. person,'' whereas our proposed definition 
provided that U.S.-person status would be determined at the entity 
level, meaning that a foreign branch of a U.S. person would, as part 
of that U.S. person, share in that U.S.-person status of the entity 
as a whole. See section 0, supra. Thus, under our proposed approach, 
the term ``U.S. person'' would have been interpreted to include any 
foreign trading desk, office, or branch of an entity that is 
organized under U.S. law or that has its principal place of business 
in the United States. See Cross-Border Proposing Release, 78 FR 
30996.
    The proposed definition of ``U.S. person'' was similar in many 
respects to the definition provided by CFTC staff in its October 12, 
2012 no-action letter. See Time-Limited No-Action Relief: Swaps Only 
With Certain Persons to be Included in Calculation of Aggregate 
Gross Notional Amount for Purposes of Swap Dealer De Minimis 
Exception and Calculation of Whether a Person is a Major Swap 
Participant (Oct. 12, 2012), available at: http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/12-22.pdf; see also 
Final CFTC Cross-Border Exemptive Order, 78 FR 862 (indicating that 
for purposes of its temporary conditional relief the CFTC is taking 
a similar approach to the ``U.S. person'' definition as that set 
forth in the October 12, 2012 no-action letter). In July 2013, the 
CFTC issued its cross-border guidance, which modified its 
interpretation of U.S. person in certain respects, discussed in 
greater detail below.
    \191\ See Cross-Border Proposing Release, 78 FR 30996.
---------------------------------------------------------------------------

2. Commenters' Views
    We received extensive comments on our proposed definition of ``U.S. 
person.'' In these comments, many commenters also expressed their views 
on the interpretation of ``U.S. person'' in the CFTC Cross-Border 
Guidance. As explained in more detail below, several commenters 
emphasized that we should minimize divergence from the CFTC's approach, 
including by adding certain elements to our definition of ``U.S. 
person'' that we had not proposed. Many commenters also identified 
specific elements of the CFTC interpretation that we should not adopt 
in our final rule.
(a) Definition of ``U.S. Person'' Generally
    Several commenters expressed the view that our proposed definition 
of ``U.S. person'' was clear, objective, and territorial in scope.\192\ 
At the same time, many commenters, including some who expressed 
agreement with our proposed approach, urged us to adopt, in whole or in 
part, a definition of ``U.S. person'' that is consistent with the 
interpretation of ``U.S. person'' in the CFTC Cross-Border 
Guidance.\193\ In contrast, two

[[Page 39094]]

commenters disagreed with our approach as being underinclusive and 
urged us to define U.S. person more broadly than the CFTC had 
interpreted it.\194\ Two commenters addressed whether our ``U.S. 
person'' definition should follow the U.S. person analysis in 
Regulation S.\195\
---------------------------------------------------------------------------

    \192\ See, e.g., SIFMA/FIA/FSR Letter at A-6 (stating that the 
Commission's proposed ``U.S. person'' definition was ``clear, 
objective and ascertainable''); American Bar Association (``ABA'') 
Letter at 1-2, 4 (commending the Commission for a ``clear and 
objective'' approach to the ``U.S. person'' definition that is 
consistent with its statutory authority and respects principles of 
comity); IIB Letter at 5 (stating that the Commission's proposed 
``U.S. person'' definition is sensible in its jurisdictional scope 
and is consistent with territorial principles). But see EC Letter at 
2 (generally supporting the territorial scope of the ``U.S. person'' 
definition, with the exception of the ``principal place of 
business'' requirement, arguing that it is inconsistent with the 
territorial approach); ESMA Letter at 2 (supporting a definition of 
``U.S. person'' that covers only persons located or incorporated in 
the United States).
    \193\ See, e.g., SIFMA/FIA/FSR Letter at 2-3, A-7 (suggesting 
that the Commission coordinate with the CFTC in order to provide a 
``consistent set of standards for determining an entity's principal 
place of business''); IIB Letter at 2 (noting that its 
recommendations are generally intended to emphasize consistency 
across regimes). See also Chris Barnard Letter at 2 (stating belief 
that the ``U.S. person'' definition should be aligned with the 
CFTC's definition, specifically with respect to commodity pools, 
pension plans, estates, and trusts); Japan Financial Markets Council 
(``JFMC'') Letter at 4 (noting that, even though JFMC does not 
support all aspects of the CFTC's definition, it believes the 
Commission should adopt the same definition as the CFTC); Japan 
Securities Dealers Association (``JSDA'') Letter at 3 (expressing 
hope that the Commission and the CFTC do not adopt different 
definitions of U.S. person); Investment Adviser Association 
(``IAA'') Letter at 3 (noting that, given the finalization of the 
CFTC Cross-Border Guidance, the Commission should modify its 
proposal in several respects to be more consistent with the CFTC's 
definition of ``U.S. person'').
    \194\ See AFR Letter I at 3, 5 (stating that the proposed 
definition of ``U.S. person'' is overly narrow because it does not 
include foreign subsidiaries of the seven largest U.S. bank holding 
companies); BM Letter at 5, 9, 14-15 (stating that the proposed 
definition of ``U.S. person'' is too narrow because it excludes 
guaranteed affiliates and other affiliates in a control relationship 
with a U.S. person; further suggesting that, should such guaranteed 
entities, whether they are implicitly or explicitly guaranteed, not 
be considered U.S. persons, they be separately ``ring-fenced'' from 
their U.S. affiliate in order to ensure that the U.S. affiliate does 
not cover any of the guaranteed affiliates obligations; further 
stating that such entities are within the scope of the Commission's 
broad authority under Exchange Act section 30(c) to regulate cross-
border activity).
    \195\ See Citadel Letter at 3 (supporting our proposal to not 
rely on Regulation S as it would not capture certain foreign funds 
that the commenter believed should be considered U.S. persons); ICI 
Letter at 6 (recommending that our analysis be consistent with 
Regulation S because fund managers are accustomed to that 
definition). Cf. note 190, supra (describing elements of ``U.S. 
person'' definition contained in Regulation S).
---------------------------------------------------------------------------

(b) Treatment of Investment Vehicles
    In response to our questions about whether our proposed definition 
of ``U.S. person'' provided sufficient guidance to investment vehicles 
and similar legal persons, commenters generally requested guidance but 
expressed a range of views as to what guidance we should provide. One 
commenter requested that we ensure that foreign investment vehicles 
with a ``U.S. nexus'' be considered U.S. persons.\196\ This commenter 
expressed support for what it described as our ``complementary'' 
proposed approach that would have required legal persons, including 
investment vehicles, to perform a principal place of business 
assessment to determine whether they are U.S. persons, and would have 
subjected all transactions conducted within the United States to Title 
VII requirements.\197\ One commenter conversely argued that a 
``principal place of business'' test for investment vehicles would be 
inappropriate.\198\
---------------------------------------------------------------------------

    \196\ See Citadel Letter at 2-3 (noting further that such an 
approach will ensure that these entities will be subject to 
clearing, reporting, and other transaction-level requirements).
    \197\ See id.
    \198\ See ICI Letter at 4-5 (arguing that a ``principal place of 
business'' test is inappropriate for investment vehicles because 
they generally have no employees or offices of their own).
---------------------------------------------------------------------------

    Several commenters requested that we provide additional guidance 
regarding the application of the ``principal place of business'' test 
to investment vehicles. Some commenters specifically requested that we 
avoid diverging from the CFTC's interpretation of ``U.S. person'' in 
our own final definition.\199\ One commenter urged us to help ensure 
that market participants are able to make rational and consistent 
determinations regarding the U.S.-person status of investment vehicles, 
and suggested that an appropriate test would look to the location of 
the person responsible for the fund's operational management, which the 
commenter identified as the person that establishes the investment 
vehicle and selects persons to carry out functions on behalf of the 
vehicle, as opposed to the person responsible for the fund's investment 
management activities.\200\ Another commenter requested guidance 
regarding the application of the ``principal place of business'' test, 
while expressing support for using an approach similar to the CFTC 
Cross-Border Guidance.\201\ One commenter requested that the location 
of an asset manager retained by a person not be the sole factor used to 
determine the person's principal place of business or U.S.-person 
status.\202\
---------------------------------------------------------------------------

    \199\ See IAA Letter at 3 (urging the Commission to coordinate 
with the CFTC to develop a consistent definition of principal place 
of business); SIFMA/FIA/FSR Letter at A-8 (urging harmonization with 
the CFTC).
    \200\ See IIB Letter at 6. But see ICI Letter at 5 n.13 
(requesting that the U.S.-person status of an investment vehicle not 
turn on the location of the vehicle's activities, employees, or the 
offices of its sponsor or adviser because such considerations are 
not relevant to whether risk is transferred to the United States).
    \201\ See Citadel Letter at 2. This commenter suggested looking 
to those senior personnel responsible for implementing the 
investment vehicle's investment and trading strategy as well as 
those responsible for ``investment selections, risk management 
decisions, portfolio management, or trade execution.'' See id.
    \202\ See IAA Letter at 4 (suggesting that the Commission follow 
the CFTC Cross-Border Guidance by specifically providing that non-
U.S. persons are not U.S. persons simply by virtue of using a U.S.-
person asset manager); SIFMA/FIA/FSA at A-8 (same).
---------------------------------------------------------------------------

    A few commenters responded to our question whether the proposed 
definition should encompass funds that are majority-owned by U.S. 
persons, as the CFTC's interpretation does, with two commenters 
advocating against and three advocating in favor of such an 
approach.\203\ One of the commenters that opposed such a test urged, 
however, that if we were to adopt such a test, the test be identical to 
the approach taken by the CFTC.\204\
---------------------------------------------------------------------------

    \203\ Compare ICI Letter at 7 (arguing that a majority-ownership 
test is not workable for non-U.S. regulated funds that are offered 
publicly abroad because it may be impossible or inconsistent with 
local law to identify or reveal investor information) and IAA Letter 
at 4 (explaining that a majority-ownership test would capture non-
U.S. funds with minimal nexus to the United States and present 
implementation challenges) with AFR Letter I at 8 (recommending that 
the U.S.-person status of investment vehicles be based on majority 
ownership and/or actual locations of the person, regardless of the 
location of incorporation), and Greenberger Letter I at 6-7 (making 
a similar argument with respect to CFTC's interpretation of U.S. 
person), and BM Letter at 10 (recommending that the ``U.S. person'' 
definition include collective investment vehicles that are majority-
owned by U.S. persons).
    \204\ See IAA Letter at 5.
---------------------------------------------------------------------------

    One commenter suggested that we adopt the CFTC's approach by which 
collective investment vehicles that are offered publicly only to non-
U.S. persons, and not offered to U.S. persons, would not generally be 
considered ``U.S. persons.'' \205\ Another commenter urged that the 
definition exclude ``non-U.S. regulated funds'' that are offered 
publicly only to non-U.S. persons but are offered privately to U.S. 
persons in certain specific circumstances.\206\
---------------------------------------------------------------------------

    \205\ See id. at 3, 5 (noting that the CFTC Cross-Border 
Guidance has been finalized and urging the Commission to adopt the 
CFTC approach to permit market participants to operate ``under the 
certainty and clarity'' of consistent definitions of U.S. persons).
    \206\ See ICI Letter at 5-6 (noting that such investment 
vehicles have only minimal nexus to the United States and stating 
that institutional investors that invest in such funds would not 
expect U.S. law to apply to the vehicles' transactions).
---------------------------------------------------------------------------

(c) Treatment of Legal Persons More Generally
    Two commenters urged us to include in the definition of ``U.S. 
person'' guaranteed subsidiaries and affiliates of U.S. persons.\207\ 
Alternatively, these

[[Page 39095]]

commenters suggested that we should require dealing transactions with 
such persons to be included in the dealing counterparty's security-
based swap dealer de minimis calculation.\208\ However, another 
commenter supported our proposed approach not to look to whether a 
person's transactions are guaranteed by a U.S. person for purposes of 
determining that person's U.S.-person status, stating that our proposal 
to address such risk through major security-based swap participant 
registration was sufficient.\209\
---------------------------------------------------------------------------

    \207\ See AFR Letter I at 3, 5-7 (stating that proposed 
definition is too narrow and would allow U.S. entities to avoid 
regulation and engage in regulatory arbitrage); BM Letter at 9, 11-
15 (requesting that the ``U.S. person'' definition be broadened to 
include any person that is ``indistinguishable'' from a U.S. person, 
such as by implicit or explicit guarantees from a U.S. person, 
including any affiliate controlling, controlled by, or under common 
control with a person that is headquartered, incorporated, or 
otherwise residing in the United States). These commenters further 
argued that the acknowledgement in the Cross-Border Proposing 
Release that guarantees of foreign entities by a U.S. person may 
subject the U.S. financial system to risk is inconsistent with a 
definition that does not include such entities in the ``U.S. 
person'' definition. See id. at 5-6; BM letter at 8, 12. Cf. AFR 
Letter II at 2 (urging CFTC to include guaranteed affiliates in of 
U.S. persons in the interpretation of U.S. person); Greenberger 
Letter II at 3, 16 (requesting that the CFTC classify foreign 
subsidiaries of U.S. financial institutions as U.S. persons); AFR 
letter to CFTC, dated August 13, 2012 (``AFR Letter III'') (stating 
that the CFTC's Final Exemptive Order Regarding Compliance with 
Certain Swap Regulation, 78 FR 858, will pose a risk to U.S. 
taxpayers due to the delay in applying requirements to foreign 
affiliates of U.S. banks) (incorporated by reference in AFR Letter 
I); Michael Greenberger letter to CFTC, dated August 13, 2012 
(``Greenberger Letter III'') (incorporated by reference in AFR 
Letter I).
    \208\ See AFR Letter I at 7; BM Letter at 17 (stating that the 
exclusion from the de minimis calculation for guaranteed 
transactions is ``indefensible'' and ``must be eliminated''). See 
also Chris Barnard Letter at 2 (stating that Title VII should apply 
to transactions involving a guarantee by a U.S. person).
    \209\ See SIFMA/FIA/FSR Letter at A-11 to A-12 (stating that to 
treat the existence of a U.S. parent as relevant to determining 
whether a person is a U.S. person would disregard the legal 
independence of affiliates and imply that persons within the same 
corporate group necessarily coordinate their security-based swap 
activities).
---------------------------------------------------------------------------

    One commenter suggested that the Commission follow the CFTC in 
including in its final ``U.S. person'' definition legal persons that 
are directly or indirectly majority-owned by one or more U.S. persons 
who bear unlimited responsibility for the obligations of that legal 
person, stating that such a provision is necessary to prevent evasion 
of Title VII.\210\
---------------------------------------------------------------------------

    \210\ See BM Letter at 10. Cf. CFTC Cross-Border Guidance, 78 FR 
45312.
---------------------------------------------------------------------------

    One commenter expressed support for a principal place of business 
component to the ``U.S. person'' definition as set forth in our 
proposal.\211\ Several commenters requested that the Commission provide 
additional guidance regarding relevant factors in identifying a legal 
person's principal place of business.\212\ One commenter suggested that 
the location of a company's headquarters should be determinative and 
that a particular legal person should have only one principal place of 
business.\213\
---------------------------------------------------------------------------

    \211\ See Citadel Letter at 2 (stating that Commission was 
correct to incorporate a principal place of business determination 
into the ``U.S. person'' definition).
    \212\ See IIB Letter at 5 (noting the difficulty of implementing 
the ``principal place of business'' test without further guidance 
and requesting the Commission to provide workable criteria); ABA 
Letter at 2-3 (requesting clarification of ``principal place of 
business'' test and recommending that the Commission confirm that an 
entity may rely on its counterparty's written representations 
regarding the counterparty's principal place of business).
    \213\ See IIB Letter at 5-6. Another commenter suggested that 
the location of the personnel directing the security-based swap 
activity of the legal person be determinative. See Citadel Letter at 
2.
---------------------------------------------------------------------------

    Several commenters suggested that the Commission harmonize its 
approach to determining a person's principal place of business to the 
approach in the CFTC Cross-Border Guidance,\214\ while at least one 
commenter suggested that the Commission work with the CFTC to develop a 
new, common definition.\215\ At least two commenters, on the other 
hand, objected to the use of a ``principal place of business'' 
test.\216\ One commenter suggested an alternative approach that would 
establish criteria for this determination, such as quantitative 
thresholds, and would also consider not requiring a principal place of 
business analysis if the jurisdiction of incorporation has an 
acceptable regulatory framework.\217\ Another commenter stated that a 
U.S. branch of a person established in another jurisdiction should not 
be considered to have its principal place of business in the United 
States.\218\ Another suggested that requiring a principal place of 
business analysis represented a departure from the Commission's stated 
territorial approach to U.S. person.\219\
---------------------------------------------------------------------------

    \214\ See JFMC Letter at 4 (notwithstanding burdensome aspects 
of the CFTC's interpretation, and the difficulties of the 
``principal place of business'' test in particular, urging the 
Commission to adopt the same definition as the CFTC); SIFMA/FIA/FSR 
Letter at A-8 (explaining the difficulty in having to determine a 
counterparty's principal place of business under two different 
standards); Citadel Letter at 2 (requesting that the Commission 
provide further guidance ``to parallel the CFTC's guidance'' on 
principal place of business).
    \215\ See IAA Letter at 3 (urging that, if the Commission adopts 
a ``principal place of business'' test, it coordinate with the CFTC 
to develop a consistent and harmonized definition).
    \216\ See ESMA Letter at 2 (arguing that the ``U.S. person'' 
definition should be limited to entities that are established within 
the United States and should not in any case extend to an entity, 
such as a U.S. branch of a foreign bank, whose presence in the 
United States is ``complementary'' to its principal activity outside 
the United States and which is already regulated by a non-U.S. 
jurisdiction); JSDA Letter at 3 (recommending that the Commission 
and the CFTC eliminate the principal place of business concept from 
their respective criteria for identifying U.S. persons). See also EC 
Letter at 2 (supporting the territorial approach of the ``U.S. 
person'' definition, but suggesting that the ``principal place of 
business'' test is not territorial and suffers from ambiguity);
    \217\ See EC Letter at 2. See also ESMA Letter at 2 (requesting 
that the Commission provide clarity with respect to its proposed 
``U.S. person'' definition, particularly the ``principal place of 
business'' test).
    \218\ See ESMA Letter at 2 (noting that to include such persons 
would place potentially duplicative and conflicting requirements on 
the person in the case of European persons that would also be 
subject to the European Market Infrastructure Regulation).
    \219\ See EC Letter at 2.
---------------------------------------------------------------------------

    Several commenters recommended that, if the Commission were to 
adopt a ``principal place'' of business test in its ``U.S. person'' 
definition, market participants be allowed to rely on a counterparty's 
representations as to the counterparty's principal place of 
business.\220\ Another suggested that the test look to information 
found in the public filings of a public company or, with respect to a 
private company, the location of its business.\221\
---------------------------------------------------------------------------

    \220\ See ABA Letter at 2-3 (stating that entities should be 
able to rely on their counterparty's written representations 
``absent evidence to the contrary,'' regarding their principal place 
of business); JSDA Letter at 3 (recommending that, if the 
Commissions determine to keep a ``principal place of business'' 
test, they permit entities to rely on counterparty representations); 
IIB Letter at 5 n.9 (recommending that a counterparty representation 
as to U.S.-person status be sufficient to fulfill a person's 
diligence requirements). One of these commenters specifically 
requested that the reasonable reliance standard be limited to 
representations regarding principal place of business. See ABA 
letter at 3 n.2.
    \221\ See IIB Letter at 6.
---------------------------------------------------------------------------

(d) Accounts
    One commenter supported the Commission's proposal for determining 
the U.S.-person status of an account, which would look to whether the 
owner of the account itself is a U.S. person,\222\ but suggested that 
the Commission provide bright-line thresholds to clarify that de 
minimis ownership by U.S. persons would not cause the account to be 
considered a U.S. person.\223\ The commenter further requested that the 
Commission clarify that the ``account'' prong of the ``U.S. person'' 
definition would not apply to collective investment vehicles but was 
intended to capture persons that should be considered U.S. persons even 
though they are conducting trades, as the direct counterparty, through 
an account.\224\
---------------------------------------------------------------------------

    \222\ See SIFMA/FIA/FSR Letter at A-8.
    \223\ See id. at A-9. See also IAA Letter at 4-5 (requesting 
that, should the Commission adopt an ownership test, it adopt a test 
consistent with and no more restrictive than the CFTC test for 
collective investment vehicles).
    \224\ See SIFMA/FIA/FSR Letter at A-8 to A-9. Another commenter 
expressed disagreement with the Commission's proposed treatment of 
accounts in the ``U.S. person'' definition, expressing concern that 
inclusion of accounts in the definition may affect the U.S.-person 
status of funds. See IAA Letter at 4 (explaining that an ownership 
test applying to accounts would potentially capture non-U.S. funds 
that may have U.S. investors but whose ``purposeful activities'' 
such as ``marketing or offering'' are not aimed at U.S. persons, 
meaning the fund would have ``little nexus to the U.S.'').
---------------------------------------------------------------------------

(e) International Organizations
    A number of commenters expressed support for the Commission's 
proposal to exclude certain international organizations (e.g., 
multilateral development banks, or ``MDBs'') from the ``U.S. person'' 
definition.\225\ Three

[[Page 39096]]

commenters specifically requested that the Commission list all such 
institutions that would be excluded from the ``U.S. person'' 
definition, similar to the approach the CFTC took in its guidance,\226\ 
rather than refer to ``other similar international organizations.'' 
\227\ These commenters also argued that certain organizations have 
absolute immunity under federal law and should be excluded from 
regulation under Title VII entirely.\228\ Three commenters requested 
that affiliates of MDBs and similar organizations also be excluded from 
the definition of ``U.S. person.'' \229\
---------------------------------------------------------------------------

    \225\ See SIFMA/FIA/FSR Letter at A-10 (supporting an exclusion 
for all Foreign Public Sector Financial Institutions (including 
MDBs) (``FPSFIs'') and their affiliates from the ``U.S. person'' 
definition); JFMC Letter at 4 (supporting an exclusion from ``U.S. 
person'' definition for FPSFIs and their affiliates); JSDA letter at 
3 (supporting the Commission's proposed exclusion from the ``U.S. 
person'' definition for certain ``international organizations'' and 
expressing support for an exclusion for FPSFIs); International Bank 
for Reconstruction and Development, International Finance 
Corporation et al. Letter (``WB/IFC Letter'') at 1, 6 (supporting an 
exclusion for multilateral development institutions and their 
affiliates from the ``U.S. person'' definition, and noting that such 
affiliates are excluded under Regulation S as well); IDB Letter at 1 
(requesting that MDBs and their affiliates not be considered U.S. 
persons).
    \226\ See Sullivan and Cromwell (``SC'') Letter at 18 and n.20; 
WB/IFC Letter at 4-5 (suggesting that to avoid confusion, the 
Commission expressly include other MDBs that maintain headquarters 
in Washington, DC and identify those organizations which include 
IFC, the International Development Association, the Multilateral 
Investment Guarantee Agency, and the Inter-American Investment 
Corporation); IIB Letter at 5 (supporting an exclusion from U.S.-
person status for ``international organizations'' similar to those 
already enumerated in the Cross-Border Proposing Release, and 
stating that such an exclusion would be consistent with the CFTC 
Cross-Border Guidance and ``well-established'' principles of 
international law); Inter-American Development Bank (``IDB'') Letter 
at 2 (stating that it shares the position of the International 
Finance Corporation and the International Bank for Reconstruction 
and Development that the Commission's approach to MDB's should be 
consistent with the CFTC). See also Intermediary Definitions 
Adopting Release, 77 FR 30692 n.1180 (listing international 
financial institutions for purposes of CFTC requirements); CFTC 
Cross-Border Guidance, 78 FR 45353 n.531 (incorporating list 
provided in Intermediary Definitions Adopting Release by reference).
    \227\ Proposed Exchange Act rule 3a71-3(a)(7)(ii).
    \228\ See SC Letter at 3-4, 7-9, 12-14; WB/IFC letter at 2. See 
also IDB Letter at 1 (requesting confirmation that MDBs will not be 
subject to Commission's requirements with respect to security-based 
swaps and indicating that such an approach would respect its 
privileges and immunities).
    \229\ See SC Letter at 19-22 (requesting that, in response to 
footnote 301 of the Cross-Border Proposing Release, ``controlled 
affiliates'' of MDBs not be treated as U.S. persons); IDB Letter at 
1 (requesting that affiliates of international organizations not be 
treated as U.S. persons); WB/IFC Letter at 1, 6 (supporting an 
exclusion for multilateral development institutions and their 
affiliates from the ``U.S. person'' definition, and noting that such 
affiliates are excluded under Regulation S as well). One commenter 
suggested that this exclusion be made available for a ``controlled 
affiliate,'' defined as follows: (1) An entity subject to the MDB's 
governance structure; (2) all of whose activities must be consistent 
with and in furtherance of the MDB's purpose and mission; (3) whose 
governing instruments restrict it to engaging in activities in which 
the MDB could itself engage and provide that it is not authorized to 
engage in any other activities; and (4) which is under the 
``control'' of the MDB as that term is used in securities laws 
(Securities Act Rule 405). See also note 225, supra.
---------------------------------------------------------------------------

(f) Status Representations
    Some commenters requested that a potential dealer expressly be 
permitted to rely on a counterparty representation to fulfill its 
diligence requirements in determining whether its counterparty is a 
U.S. person under the final rule.\230\ Several commenters, as discussed 
above, specifically requested that we permit reliance on 
representations as to a person's principal place of business.\231\ Two 
commenters requested that market participants be permitted to rely on 
the representations prepared by counterparties under the CFTC Cross-
Border Guidance.\232\
---------------------------------------------------------------------------

    \230\ See IIB Letter at 5 n.9. This commenter suggested that we 
should permit reliance on a representation ``absent knowledge of 
facts that would cause a reasonable person to question the accuracy 
of the representation.'' See also JSDA Letter at 3.
    \231\ See note 220, supra.
    \232\ See SIFMA/FIA/FSR Letter at A-8 (noting that performing a 
separate analysis would be burdensome); IIB Letter at 5, note 9 
(noting that the CFTC's interpretation of ``U.S. person'' is broader 
than, and encompasses the three elements of, the Commission's 
proposed ``U.S. person'' definition).
---------------------------------------------------------------------------

3. Final Rule
    Consistent with the proposal, we are adopting a final definition of 
``U.S. person'' that continues to reflect a territorial approach to the 
application of Title VII and is in most respects unchanged from the 
proposal.\233\ In response to comments, the final definition reflects 
certain changes intended to clarify the scope of the definition. Also 
in response to comments, we are adopting a general definition of 
``principal place of business'' and a specific application of the term 
to externally managed investment vehicles. We are also adding a prong 
relating specifically to the U.S.-person status of estates.
---------------------------------------------------------------------------

    \233\ Cf. note 192, supra (citing comment letters expressing 
general agreement with our territorial approach to defining U.S. 
person).
---------------------------------------------------------------------------

    The final rule defines ``U.S. person'' to mean:
     Any natural person resident in the United States;
     Any partnership, corporation, trust, investment vehicle, 
or other legal person organized, incorporated, or established under the 
laws of the United States or having its principal place of business in 
the United States;
     Any account (whether discretionary or non-discretionary) 
of a U.S. person; or
     Any estate of a decedent who was a resident of the United 
States at the time of death. \234\
---------------------------------------------------------------------------

    \234\ Exchange Act rule 3a71-3(a)(4)(i). The second prong has 
been modified from the proposal to include an express reference to 
``investment vehicle'' and to clarify that any legal person 
``established'' under United States law is a U.S. person, as 
discussed further below. See Exchange Act rule 3a71-3(a)(4)(i)(B). 
The fourth prong has been added to include an express reference to 
``estate.'' See Exchange Act rule 3a71-3(a)(4)(i)(D). In the text of 
the final rule we have made a technical change to the proposal to 
clarify that the ``U.S. person'' definition is met if any one of the 
applicable prongs is satisfied (in part by replacing ``and'' with 
``or'' in connection with the enumeration of the prongs). See 
Exchange Act rule 3a71-3(a)(4)(i).
     Consistent with the proposal, ``special entities,'' as defined 
in section 15F(h)(2)(C) of the Exchange Act, are U.S. persons 
because they are legal persons organized under the laws of the 
United States. Section 15F(h)(2)(C) of the Exchange Act defines the 
term ``special entity'' as: A Federal agency; a State, State agency, 
city, county, municipality, or other political subdivision of a 
State; any employee benefit plan, as defined in section 3 of the 
Employee Retirement Income Security Act of 1974, 29 U.S.C. 1002; any 
governmental plan, as defined in section 3 of the Employee 
Retirement Income Security Act of 1974, 29 U.S.C. 1002; or any 
endowment, including an endowment that is an organization described 
in section 501(c)(3) of the Internal Revenue Code of 1986. 15 U.S.C. 
78o-10(h)(2)(C).
---------------------------------------------------------------------------

    The final rule defines ``principal place of business'' to mean 
``the location from which the officers, partners, or managers of the 
legal person primarily direct, control, and coordinate the activities 
of the legal person.'' \235\ It also provides that, with respect to an 
externally managed investment vehicle, this location ``is the office 
from which the manager of the vehicle primarily directs, controls, and 
coordinates the investment activities of the vehicle.'' \236\
---------------------------------------------------------------------------

    \235\ Exchange Act rule 3a71-3(a)(4)(ii).
    \236\ Id.
---------------------------------------------------------------------------

    Also consistent with the proposal, the final definition excludes 
the following international organizations from the definition of ``U.S. 
person'': The IMF, the International Bank for Reconstruction and 
Development, the Inter-American Development Bank, the Asian Development 
Bank, the African Development Bank, the United Nations, and their 
agencies and pension plans, and any other similar international 
organizations, their agencies and pension plans.\237\
---------------------------------------------------------------------------

    \237\ Exchange Act rule 3a71-3(a)(4)(iii).
---------------------------------------------------------------------------

    To address commenters' requests,\238\ the final rule also has been 
revised from the proposal to provide that a person may rely on a 
counterparty's representation regarding its status as a U.S. person, 
unless such person knows, or has reason to know, that the 
representation is inaccurate.\239\
---------------------------------------------------------------------------

    \238\ See notes 220, 230, supra.
    \239\ Exchange Act rule 3a71-3(a)(4)(iv).

---------------------------------------------------------------------------

[[Page 39097]]

    Although one commenter requested that we use a definition of ``U.S. 
person'' that is consistent with Regulation S, we are declining to do 
so for the reasons described in our Cross-Border Proposing 
Release.\240\ We acknowledge that many market participants are 
accustomed to Regulation S and may find such a definition relatively 
easy to implement. As we discussed in our proposal, however, Regulation 
S addresses different concerns from those addressed by Title VII.\241\ 
In light of these differences, the Commission believes that adopting 
the definition of ``U.S. person'' in Regulation S would not achieve the 
goals of Title VII and that a definition of U.S. person specifically 
tailored to the regulatory objectives it is meant to serve, as we are 
adopting here, is appropriate.
---------------------------------------------------------------------------

    \240\ See note 195, supra.
    \241\ See 17 CFR 230.901(k); Regulation S Adopting Release, 55 
FR 18306. See also Cross-Border Proposing Release, 78 FR 31007 
(describing differences between policy concerns underlying 
Regulation S and Title VII). For example, with its exclusions for 
certain foreign branches and agencies of U.S. persons from the 
definition of ``U.S. person,'' Regulation S would not address the 
entity-wide nature of the risks that Title VII seeks to address. See 
id.
---------------------------------------------------------------------------

(a) Natural Persons
    As in our proposed definition, the final definition of ``U.S. 
person'' provides that any natural person resident in the United States 
\242\ is a U.S. person. This definition encompasses persons resident 
within the United States regardless of the individual's citizenship 
status,\243\ but it does not encompass individuals who are resident 
abroad, even if they possess U.S. citizenship.\244\
---------------------------------------------------------------------------

    \242\ Exchange Act rule 3a71-3(a)(5) defines ``United States'' 
to mean ``the United States of America, its territories and 
possessions, any State of the United States, and the District of 
Columbia.''
    \243\ Exchange Act rule 3a71-3(a)(4)(i)(A).
    \244\ This approach to treating natural persons as U.S. persons 
solely based on residence, rather than citizenship, differs from the 
approach to legal persons, such as partnerships and corporations, 
discussed below.
     Notwithstanding slight differences between the language of our 
final rule and the CFTC Cross-Border Guidance, we expect that a 
natural person's U.S.-person status under our final definition would 
be the same as under the CFTC Cross-Border Guidance. Cf. note 193, 
supra (citing commenters urging the Commission to harmonize its 
definition of ``U.S. person'' with the interpretation set forth by 
the CFTC).
---------------------------------------------------------------------------

    As we noted in the proposal, it is consistent with the approach we 
have taken in prior rulemakings relating to the cross-border 
application of certain similar regulatory requirements to subject 
natural persons residing within the United States to our regulatory 
framework.\245\ Moreover, we believe that natural persons residing 
within the United States who engage in security-based swap transactions 
are likely to raise the types of concerns intended to be addressed by 
Title VII, including those related to risk, transparency, and 
counterparty protection.\246\ We believe that it is reasonable to infer 
that a significant portion of such persons' financial and legal 
relationships are likely to exist within the United States and that it 
is therefore reasonable to conclude that risks arising from the 
security-based swap activities of such persons could manifest 
themselves within the United States, regardless of the location of 
their counterparties.
---------------------------------------------------------------------------

    \245\ See Rule 15a-6 Adopting Release, 54 FR 30017 (providing 
that foreign broker-dealers soliciting U.S. investors abroad 
generally would not be subject to registration requirements with the 
Commission).
    \246\ See Cross-Border Proposing Release, 78 FR 30996.
---------------------------------------------------------------------------

(b) Corporations, Organizations, Trusts, Investment Vehicles, and Other 
Legal Persons
    The final definition of ``U.S. person'' as applied to legal persons 
has been modified to clarify certain aspects of the rule. Also, in 
response to comments, we are adopting a definition of ``principal place 
of business.'' In general, the scope of the definition as applied to 
legal persons does not differ materially from the scope of our 
proposal.\247\
---------------------------------------------------------------------------

    \247\ Moreover, we expect that a legal person's U.S.-person 
status under the Commission's final definition of ``U.S. person'' 
and under the definition ``principal place of business'' would as a 
general matter be the same as under similar prongs on the CFTC 
Cross-Border Guidance.
---------------------------------------------------------------------------

i. Entities Incorporated, Organized, or Established Under U.S. Law
    As with the proposed rule, the final definition provides that any 
partnership, corporation, trust, or other legal person organized or 
incorporated under the laws of the United States or having its 
principal place of business in the United States would be a U.S. 
person.\248\ The final definition also includes two changes that are 
intended to make explicit certain concepts that were implicit in the 
proposed definition. First, the final rule provides that a legal person 
``established'' under the laws of the United States is a U.S. person, 
just as if it had been ``organized'' or ``incorporated'' under the laws 
of the United States. This change is intended to clarify the 
Commission's intention that any person formed in any manner under the 
laws of the United States will be a U.S. person for purposes of Title 
VII.
---------------------------------------------------------------------------

    \248\ See Exchange Act rule 3a71-3(a)(4)(i)(B).
---------------------------------------------------------------------------

    Second, the final rule adds an express reference to ``investment 
vehicle'' in the non-exclusive list of legal persons to clarify that 
any such person, however formed, will be treated as a U.S. person for 
purposes of Title VII if it is organized, incorporated, or established 
under the laws of the United States or has its principal place of 
business in the United States.\249\ Investment vehicles are commonly 
established as partnerships, trusts, or limited liability entities and, 
therefore, fall within the scope of the rule as proposed. However, 
given the significant role that such vehicles have played and likely 
will continue to play in the security-based swap market, we believe 
that the final rule should incorporate an express reference to such 
vehicles to avoid any ambiguity regarding whether the definition of 
``U.S. person,'' including the principal place of business component of 
that definition, applies to them.
---------------------------------------------------------------------------

    \249\ Cf. Cross-Border Proposing Release, 78 FR 30997 n.296 
(using funds and special-purpose investment vehicles as examples of 
other legal persons that may be U.S. persons).
---------------------------------------------------------------------------

    As noted in our proposal, we have previously looked to where a 
legal person is organized, incorporated, or established to determine 
whether it is a U.S. person.\250\ We continue to believe that place of 
organization, incorporation, or establishment is relevant in the 
context of Title VII. In our view, the decision of a corporation, 
trustee, or other person to organize under the laws of the United 
States indicates a degree of involvement in the U.S. economy or legal 
system that warrants subjecting it to security-based swap dealer or 
major security-based swap participant registration requirements under 
Title VII if its security-based swap dealing activity or its security-
based swap positions exceed the relevant thresholds.\251\ We believe 
that it is reasonable to infer that an entity incorporated, organized, 
or established under the laws of the United States is likely to have a 
significant portion of its financial and legal relationships in the 
United States and that it is therefore reasonable to conclude that the 
risks arising from its security-based swap activities are likely to 
manifest themselves in the United States, regardless of the location of 
its counterparties. Accordingly, the final rule retains this element of 
the definition.
---------------------------------------------------------------------------

    \250\ See Regulation S Adopting Release, 55 FR 18316.
    \251\ Cf. EC Letter at 2 (expressing support for this approach); 
ESMA letter at 1 (same).
---------------------------------------------------------------------------

    As under the proposal, the final definition determines a legal 
person's

[[Page 39098]]

status at the entity level and thus applies to the entire legal person, 
including any foreign operations that are part of the U.S. legal 
person. Consistent with this approach, a foreign branch, agency, or 
office of a U.S. person is treated as part of a U.S. person, as it 
lacks the legal independence to be considered a non-U.S. person for 
purposes of Title VII even if its head office is physically located 
within the United States. We continue to believe that there is no basis 
to treat security-based swap transactions or positions of a foreign 
branch, agency, or office of a U.S. person differently from similar 
transactions or positions of the home office for purposes of the dealer 
de minimis or major security-based swap participant threshold 
calculations, given that the legal obligations and economic risks 
associated with such transactions or positions directly affect the 
entire U.S. person.
    Under the final definition, the status of a legal person as a U.S. 
person has no bearing on whether separately incorporated or organized 
legal persons in its affiliated corporate group are U.S. persons. 
Accordingly, a foreign subsidiary of a U.S. person is not a U.S. person 
merely by virtue of its relationship with its U.S. parent. Similarly, a 
foreign person with a U.S. subsidiary is not a U.S. person simply by 
virtue of its relationship with its U.S. subsidiary. Although two 
commenters urged that most foreign affiliates of U.S. persons be 
treated as U.S. persons themselves,\252\ we continue to believe that it 
is appropriate for each affiliate to determine its U.S.-person status 
independently, given the distinct legal status of each of the 
affiliates, and that such status should turn on each affiliate's place 
of incorporation, organization, or establishment, or on its principal 
place of business.\253\ We recognize that certain foreign persons, 
including foreign persons whose security-based swap activity is subject 
to a recourse guarantee against a U.S. person, may create risk to 
persons within the United States such as counterparties or 
guarantors.\254\ We continue to believe, however, that, to the extent 
that such persons are established under the laws of a foreign 
jurisdiction and have their principal place of business abroad, they 
should not be included in the definition of ``U.S. person.'' \255\ As 
discussed in further detail below, we believe that our final rules 
regarding application of the dealer de minimis exception and the major 
security-based swap participant thresholds adequately address concerns 
about the treatment of these persons under the dealer and major 
participant definitions without categorizing them as U.S. persons.\256\
---------------------------------------------------------------------------

    \252\ See note 194, supra (citing AFR and BM Letters). One of 
these commenters argued that the final definition of ``U.S. person'' 
should include guaranteed foreign affiliates of U.S. persons, 
whether the guarantee is explicit or implicit, and that affiliates 
should be presumed to be receiving guarantees. See AFR Letter I at 
3, 5-7. The other urged that the final definition of ``U.S. person'' 
include guaranteed foreign affiliates and ``de facto guaranteed'' 
affiliates of U.S. persons that may not be explicitly guaranteed. 
See BM Letter at 9, 11-15.
    \253\ But see section 0, infra (discussing the aggregation of 
affiliate positions for purposes of the de minimis calculation).
    \254\ See note 207 (citing AFR and BM Letters).
    \255\ As we noted above, our ``U.S. person'' definition is 
intended to identify those persons whose financial and legal 
relationships are likely to be located in significant part within 
the United States. The mere fact of an affiliate relationship with, 
or a guarantee from, a U.S. person does not appear to us to indicate 
that such person has such relationships within the United States. 
Similarly, the mere fact that a person's security-based swap 
activity poses some degree of risk to the United States does not 
necessarily indicate that the person has the types of financial and 
legal relationships within the United States that warrant treating 
it as a U.S. person. However, we recognize that non-U.S. persons may 
in fact pose risk to the United States, particularly when their 
security-based swap transactions are subject to a recourse guarantee 
against a U.S.-person affiliate, and, even though we do not include 
them in our ``U.S. person'' definition, we do address such risk 
through our final rules applying the security-based swap dealer de 
minimis exception and the major security-based swap participant 
thresholds.
    One commenter also urged us to follow the CFTC in including 
within the final definition any legal person that is directly or 
indirectly majority-owned by one or more U.S. persons that bear 
unlimited responsibility for the obligations and liabilities of such 
legal person. See note 210, supra (citing BM Letter). Cf. CFTC 
Cross-Border Guidance, 78 FR 45312, 45317. Although we recognize 
that such persons give rise to risk to the U.S. financial system, as 
with non-U.S. persons whose security-based swap transactions are 
subject to explicit financial support arrangements from U.S. 
persons, we do not believe that it is appropriate in the context of 
security-based swap markets to treat such persons as U.S. persons 
given that they are incorporated under foreign law, unless their 
principal place of business is in the United States. See Exchange 
Act rule 3a71-3(a)(4)(i)(B). Moreover, to the extent that a non-U.S. 
person's counterparty has recourse to a U.S. person for the 
performance of the non-U.S. person's obligations under a security-
based swap by virtue of the U.S. person's unlimited responsibility 
for the non-U.S. person, the non-U.S. person would be required to 
include the security-based swap in its own dealer de minimis 
calculations (if the transaction arises out of the non-U.S. person's 
dealing activity) and its major participant threshold calculations. 
See sections 0 and 0, infra. For example, if a counterparty to a 
transaction is a general partnership that is not a U.S. person but 
has a U.S.-person general partner that has unlimited responsibility 
for the general partnership's liabilities, including for its 
obligations to security-based swap counterparties, we would view the 
general partner's obligations with respect to the security-based 
swaps of the partnership as recourse guarantees for purposes of this 
final rule, absent countervailing factors.
    \256\ See section 0 (describing application of de minimis 
exception to transactions of non-U.S. persons that are subject to a 
recourse guarantee against a U.S. person) and section 0 (describing 
application of major security-based swap participant threshold 
calculations to positions of non-U.S. persons that are subject to a 
recourse guarantee against a U.S. person), infra. As discussed 
above, we will address the application of other Title VII 
requirements to these persons in subsequent releases.
---------------------------------------------------------------------------

ii. Entities Having Their Principal Place of Business in the United 
States
a. In General
    Consistent with our proposal, we are defining ``U.S. person'' to 
include persons that are organized, incorporated, or established 
abroad, but have their principal place of business in the United 
States. For purposes of this final rule, and in response to commenters' 
request for further guidance,\257\ we are defining ``principal place of 
business'' generally to mean ``the location from which the officers, 
partners, or managers of the legal person primarily direct, control, 
and coordinate the activities of the legal person.'' \258\ As with the 
``U.S. person'' definition more generally, our definition of 
``principal place of business'' is intended to

[[Page 39099]]

identify the location where a significant portion of the person's 
financial and legal relationships would be likely to exist, and we 
think it is reasonable to assume, for purposes of this final rule, that 
this location also generally corresponds to the location from which the 
activities of the person are primarily directed, controlled, and 
coordinated. In our view, to the extent that this location is within 
the United States, it is reasonable to conclude that the risks arising 
from that entity's security-based swap activity could manifest 
themselves within the United States, regardless of location of its 
counterparties.
---------------------------------------------------------------------------

    \257\ In the proposing release, we did not provide guidance 
regarding the meaning of ``principal place of business,'' but we 
requested comment whether such guidance was desirable, including 
whether it would be appropriate to adopt a definition similar to 
that adopted in rules under the Investment Advisers Act. See Cross-
Border Proposing Release, 78 FR 30999 n.306 (noting that the focus 
of one possible definition would be similar to that of the 
definition used in rules promulgated under the Investment Advisers 
Act, which define principal place of business as ``the executive 
office of the investment adviser from which the officers, partners, 
or managers of the investment adviser direct, control, and 
coordinate the activities of the investment adviser'') (citing 17 
CFR 275.222-1(b)). As noted above, several commenters requested that 
we provide guidance regarding the concept, and some provided 
suggested interpretations of the phrase with respect to operating 
companies and investment vehicles. See, e.g., note 213, supra 
(citing IIB Letter). See also SIFMA/FIA/FSR letter at A-8; Citadel 
Letter at 2. Several of these commenters urged us to minimize 
divergence from the approach taken subsequent to our proposal by the 
CFTC in its July 2013 guidance (or from likely outcomes under that 
approach). See note 214, supra (citing letters from JFMC, SIFMA/FIA/
FSR, Citadel, and IAA). Another commenter urged us to work closely 
with the CFTC in developing guidance regarding the meaning of 
principal place of business. See note 215, supra (citing IAA 
Letter).
    \258\ Exchange Act rule 3a71-3(a)(4)(ii). Cf. 17 CFR 275.222-
1(b) (defining principal place of business for investment advisers 
under the Investment Advisers Act to mean ``the executive office of 
the investment adviser from which the officers, partners, or 
managers of the investment adviser direct, control, and coordinate 
the activities of the investment adviser'').
    Because the definition of ``principal place of business'' in 
this final rule is tailored to the unique characteristics of the 
security-based swap market, it does not limit, alter, or address any 
guidance regarding the meaning of the phrase ``principal place of 
business'' that may appear in other provisions of the federal 
securities laws, including the Investment Advisers Act, Commission 
rules, regulations, interpretations, or guidance.
---------------------------------------------------------------------------

    This definition is intended to help market participants make 
rational and consistent determinations regarding whether their (or 
their counterparty's) principal place of business is in the United 
States.\259\ Under the final rule, the principal place of business is 
in the United States if the location from which the overall business 
activities of the entity are primarily directed, controlled, and 
coordinated is within the United States. With the exception of 
externally managed entities, as discussed further below, we expect that 
for most entities the location of these officers, partners, or managers 
generally would correspond to the location of the person's headquarters 
or main office.\260\
---------------------------------------------------------------------------

    \259\ Cf. IIB Letter at 6 (urging an approach that ``enable[s] 
market participants to reach rational, consistent U.S. person 
determinations for funds''). We also believe that our definition of 
``principal place of business'' should reduce the potential that a 
particular entity would have a different U.S.-person status by 
virtue of the ``principal place of business'' prong under our 
definition and under the CFTC Cross-Border Guidance.
     As discussed in further detail below, we also are including in 
our definition of ``U.S. person'' a provision permitting persons to 
rely on representations from a counterparty regarding whether the 
counterparty's principal place of business is in the United States, 
unless these persons know or have reason to know that the 
representation is false. See section 0, infra. Cf. note 220, supra 
(citing letters requesting that the Commission's final rule permit 
reliance on representations regarding principal place of business). 
This provision should further facilitate consistent application of 
the ``U.S. person'' to specific entities across market participants. 
We are not, however, specifically providing that entities may rely 
solely on representations prepared by counterparties under the CFTC 
Cross-Border Guidance, see note 232, supra, given that the CFTC has 
articulated a facts-and-circumstances approach to the principal 
place of business determination that is susceptible to significant 
further development and interpretation. However, depending on how 
market participants have applied the CFTC's facts-and-circumstances 
analysis, they may be able to rely on such representations. Because 
we are permitting persons to rely on counterparty representations, 
we do not think it necessary to provide guidance regarding specific 
factors a person may consider in determining its counterparty's 
principal place of business, as some commenters requested. Cf. note 
221, supra (citing IIB Letter).
    \260\ Cf. note 213, supra (citing IIB letter suggesting that an 
entity's principal place of business should be the location of its 
headquarters). Our definition of ``principal place of business'' is 
in this respect similar to the guidance issued by the CFTC regarding 
the application of ``principal place of business'' to operating 
companies. See CFTC Cross-Border Guidance, 78 FR 45309. We expect 
that outcomes of our final definition of ``principal place of 
business'' for such entities would generally be similar to those 
produced under the CFTC Cross-Border Guidance.
---------------------------------------------------------------------------

    Although we recognize that several commenters objected to including 
a ``principal place of business'' test in our definition of ``U.S. 
person,'' \261\ we believe that a definition that focused solely on 
whether a legal person is organized, incorporated, or established in 
the United States could encourage some entities to move their place of 
incorporation to a non-U.S. jurisdiction to avoid complying with Title 
VII, while maintaining their principal place of business--and thus, 
reasonably likely, risks arising from their security-based swap 
transactions--in the United States.\262\ Moreover, we believe that a 
definition of ``U.S. person'' that did not incorporate a ``principal 
place of business'' element potentially would result in certain 
entities falling outside the Title VII regulatory framework, even 
though the nature of their legal and financial relationships in the 
United States is, as a general matter, indistinguishable from that of 
entities incorporated, organized, or established in the United 
States.\263\ Given that such entities raise the types of concerns that 
Title VII was intended to address, we believe it is both appropriate 
under our territorial approach and consistent with the purposes of 
Title VII to treat such entities as U.S. persons for purposes of the 
final rule.
---------------------------------------------------------------------------

    \261\ See note 216, supra.
    \262\ For this reason, although we believe that the definition 
of ``principal place of business'' set forth in the final rule is 
consistent with our territorial approach to application of Title 
VII, we also believe that it is necessary or appropriate to prevent 
the evasion of Title VII. See Exchange Act section 30(c). The final 
definition of ``principal place of business'' will help ensure that 
entities do not restructure their business by incorporating under 
foreign law while continuing to direct, control, and coordinate the 
operations of the entity from within the United States, which would 
enable them to maintain a significant portion of their financial and 
legal relationships within the United States while avoiding 
application of Title VII requirements to such transactions.
    \263\ In addition, some foreign regulators expressed concerns 
about our proposed inclusion of a ``principal place of business'' 
element in the ``U.S. person'' definition, see notes 216-217, supra, 
and one foreign regulator encouraged us to focus our final ``U.S. 
person'' definition on where a legal person is established. See note 
216, supra. We note that under the European Market Infrastructure 
Regulation, a foreign fund is treated identically to a European 
financial counterparty if it is managed by a European investment 
manager. See Regulation (EU) No 648/2012 of the European Parliament 
and of the Council on OTC derivatives, CCPs, and trade repositories, 
Article 2(8) (defining ``financial counterparty'' to include ``an 
alternative investment fund managed by [alternative investment fund 
managers] authorised or registered in accordance with Directive 
2011/61/EU''). This appears to reflect a recognition that where 
legal person is established should not be treated as the sole 
relevant factor in determining whether legal person should be 
subject to such jurisdiction's rules.
     We also note that limiting our definition of ``U.S. person'' to 
entities incorporated, established, or organized in the United 
States as some commenters requested would not eliminate the 
potential that entities would be simultaneously classified as U.S. 
persons and as local persons under foreign law. Even under such a 
definition, some persons could be classified both as U.S. persons 
for purposes of Title VII and as persons established in foreign 
jurisdictions under a foreign regulatory regime. Cf. EC Letter. 
Although we are adopting a definition of ``U.S. person'' that should 
mitigate this likelihood, we recognize that such entities may be 
subject to overlapping regulation, and we intend to address the 
availability of substituted compliance with respect to specific 
substantive requirements in subsequent releases, which should 
mitigate the concerns expressed by these commenters. Cf. note 218, 
supra (citing ESMA Letter noting possibility of duplicative and 
conflicting regulation of certain persons as a result of the 
Commission's inclusion of a principal place of business element in 
the ``U.S. person'' definition).
---------------------------------------------------------------------------

    We also have considered the suggestion by one commenter that 
``principal place of business'' be defined to incorporate certain 
quantitative thresholds and an exception for firms whose jurisdiction 
of incorporation has an acceptable regulatory framework in place.\264\ 
However, we do not believe such thresholds are necessary. Because the 
analysis is applied on an entity-wide basis, consistent with our 
entity-based approach generally, the ``principal place of business'' 
analysis generally will not encompass companies incorporated, 
organized, or established outside the United States merely because they 
have an office or branch within the United States. Similarly, we do not 
believe that the determination whether a legal person's jurisdiction of 
incorporation, organization, or establishment has an acceptable 
regulatory framework is relevant to the question whether a specific 
person has its principal place of business in the United States any 
more than it would be relevant for a person incorporated within the 
United States but subject to regulation abroad. The question whether 
such a company should be permitted to fulfill relevant Title VII 
requirements by complying with the law of the jurisdiction in which it 
is incorporated, organized, or established is a separate issue that may

[[Page 39100]]

be addressed in a separate substituted compliance determination.\265\
---------------------------------------------------------------------------

    \264\ See note 217, supra (citing EC Letter); note 216, supra 
(citing ESMA Letter urging the Commission not to include U.S. 
branches of foreign banks in its ``U.S. person'' definition under a 
``principal place of business'' test).
    \265\ Cf. Cross-Border Proposing Release, 78 FR 31085-102 
(setting forth proposed substituted compliance framework).
---------------------------------------------------------------------------

    Finally, we recognize that one commenter suggested that a 
``principal place of business'' test should look to the location of 
personnel directing the security-based swap activity of the 
entity,\266\ but we are not convinced that the location of such 
personnel, without more, would necessarily correspond to the location 
of a significant portion of the entity's financial and legal 
relationships, which is the focus of our ``U.S. person'' definition. We 
also note that a focus on the location of personnel directing the 
entity's security-based swap activity would provide an incentive for 
market participants to move such personnel outside the United States 
while maintaining their executive offices, and the bulk of their 
operations, within the United States. Such restructuring would allow an 
entity to avoid application of Title VII to its security-based swap 
activities while continuing to maintain a significant portion of its 
financial and legal relationships within the United States, leaving 
unchanged the likelihood that risks arising from its security-based 
swap activity could manifest themselves within the United States while 
avoiding application of Title VII to such activities.\267\
---------------------------------------------------------------------------

    \266\ See note 206, supra (citing Citadel Letter).
    \267\ As noted above, we believe that the definition of 
``principal place of business'' set forth in the final rule is 
consistent with our territorial approach to application of Title 
VII. We also note, however, that for the reasons just discussed the 
final definition's focus on activity of the person as a whole, as 
opposed to a focus on the security-based swap activity of the 
person, is in our view necessary or appropriate to prevent the 
evasion of Title VII. See Exchange Act section 30(c).
---------------------------------------------------------------------------

b. Externally Managed Investment Vehicles
    Application of the ``principal place of business'' test to 
externally managed investment vehicles presents certain challenges not 
present when determining the principal place of business of an 
operating company or other internally managed legal person. For 
example, an operating company generally will carry out key functions 
(including directing, controlling, and coordinating its business 
activities) on its own behalf and generally will have offices through 
which these functions are performed. Responsibility for key functions 
of an externally managed investment vehicle, on the other hand, 
generally will be allocated to one or more separate persons (such as 
external managers, or other agents), with few or no functions carried 
out through an office of the vehicle itself.\268\ Further complicating 
the application of this definition is the organizational and 
operational diversity of such vehicles.
---------------------------------------------------------------------------

    \268\ Such functions may not even be carried out in the 
jurisdiction in which the externally managed vehicle is 
incorporated, organized, or established. Indeed, many private 
investment funds are incorporated, organized, or established under 
the laws of a jurisdiction with which they have only a nominal 
connection.
---------------------------------------------------------------------------

    Notwithstanding these challenges, we also recognize that externally 
managed investment vehicle are active participants in the security-
based swap market \269\ and, in our view, should be treated as U.S. 
persons if their operations are primarily directed, controlled, and 
coordinated from a location within the United States. For example, we 
understand that a significant portion of the investment vehicles that 
participate in the security-based swap market are private funds such as 
hedge funds. We have observed that such private funds commonly may be 
organized under non-U.S. law--frequently in the Cayman Islands--but are 
managed by investment advisers headquartered in the United States.\270\ 
We also understand that those advisers commonly manage or direct the 
investment activities of these vehicles, including the arrangement of 
security-based swaps, through locations within the United States. We 
further understand that a significant portion of the financial and 
legal relationships of such vehicles, as a general matter, are in the 
United States, including some combination of equity ownership by 
managers (or their affiliates) and outside investors, credit 
relationships with prime brokers and other lenders, and relationships 
with other market participants and service providers. These vehicles, 
therefore, raise concerns that are similar to those raised by the 
security-based swap activities of market participants that are 
incorporated, established, or organized in the United States. Over the 
past two decades, failures of investment vehicles of various types 
organized under foreign law, but directed, controlled, or coordinated 
from within the United States have had significant negative impact on 
U.S. financial institutions, potentially threatening the stability of 
the U.S. financial system more generally.\271\ We believe that it is 
reasonable to expect that the security-based swap activities of such 
vehicles may pose similar risks.\272\
---------------------------------------------------------------------------

    \269\ See Tables 1 and 2, supra (noting involvement of 
investment advisers and private funds in the security-based swap 
market).
    \270\ This observation is consistent with data reported to us by 
private fund managers. See Staff of the Division of Investment 
Management, U.S. Securities and Exchange Commission, Annual Staff 
Report Relating to the Use of Data Collected from Private Fund 
Systemic Risk Reports (July 25, 2013) at Appendix A (providing 
aggregated, non-proprietary data on percentages of reporting private 
funds organized under non-U.S. law and on locations of advisers to 
such funds).
    \271\ For example, Long Term Capital Management (``LTCM''), a 
Delaware partnership with its principal place of business in 
Connecticut, established a master fund, Long-Term Capital Portfolio, 
L.P. (``LTCP''), in the Cayman Islands. Mine Aysen Doyran, Financial 
Crisis Management and the Pursuit of Power: American Pre-Eminience 
and the Credit Crunch 83-84 (Ashgate 2011). LTCP attracted 
investments from both U.S. and foreign investors. Id. When it failed 
in 1998, fourteen domestic and foreign banks and securities firms 
(``the Consortium'') that were major creditors or counterparties of 
the fund agreed to recapitalize it. GAO, Responses to Questions 
Concerning Long-Term Capital Management and Related Events 1 n.2, 
(identifying these fourteen firms); id. at 8-9 (stating that 
``[t]hese firms contributed about $3.6 billion into [LTCP]'') 
(available at: http://www.gao.gov/archive/2000/gg00067r.pdf). The 
Federal Reserve Board of New York played a key role in initiating 
discussion among the banks that ultimately formed the Consortium. 
Id. at 10.
    Other, more recent, examples of risks of such entities 
established under foreign law manifesting themselves within the 
United States include the failure of two Bear Stearns hedge funds, 
which had significant repercussions within the United States, and 
the bailouts of bank-sponsored structured investment vehicles. See, 
e.g., FCIC Report at 241, 289-90; Henry Tabe, The Unravelling of 
Structured Investment Vehicles: How Liquidity Leaked Through SIVs 
(2010), at 192-94.
    \272\ For these reasons, we are declining to follow the 
suggestion of one commenter that we not include a principal place of 
business element of the ``U.S. person'' definition for investment 
vehicles. See note 198, supra.
---------------------------------------------------------------------------

    To address the unique characteristics of externally managed 
investment vehicles, we are including in our definition of ``principal 
place of business'' language specifying that an externally managed 
investment vehicle's principal place of business is ``the office from 
which the manager \273\ of the vehicle primarily directs, controls, and 
coordinates the investment activities of the vehicle.'' This definition 
directs market participants to consider where the activities of an 
externally managed investment vehicle generally are directed, 
controlled, and coordinated, even if this conduct is performed by one 
or more legally separate persons.\274\ For

[[Page 39101]]

an investment vehicle, for example, the primary manager is responsible 
for directing, controlling, and coordinating the overall activity of 
the vehicle, such that the business of the vehicle, such as its 
investment and financing activity, is principally carried out at the 
location of the primary manager. Such an investment vehicle's principal 
place of business under the final rule would be the location from which 
the manager carries out those responsibilities.\275\
---------------------------------------------------------------------------

    \273\ Identifying the manager for purposes of this definition 
will depend on the structure and organizing documents of the 
investment vehicle under consideration.
    \274\ Exchange Act rule 3a71-3(a)(4)(ii). At least one commenter 
also recognized that differences between categories of legal persons 
may require different tests for determining whether a person has its 
principal place of business in the United States. See IIB Letter at 
5-6 (suggesting separate ``principal place of business'' tests for 
operating companies and investment vehicles). The CFTC Cross-Border 
Guidance, which provides separate guidance for operating companies, 
trusts, and investment vehicles, tailored to the characteristics of 
each, appears to reflect this distinction. See CFTC Cross-Border 
Guidance, 78 FR 45309-311.
    \275\ As noted above, one commenter suggested that we adopt a 
definition of ``principal place of business'' that looked to where 
the operational management activities of the fund are carried out. 
Cf. note 200, supra. We are not convinced, however, that the 
location of such activities (which the commenter identified as 
including ``establishing the fund and selecting its investment 
manager, broker, and underwriter/placement agent''), absent an 
ongoing role by the person performing those activities in directing, 
controlling, and coordinating the investment activities of the fund, 
generally will be as indicative of activities, financial and legal 
relationships, and risks within the United States of the type that 
Title VII as the location of a fund manager.
---------------------------------------------------------------------------

    As noted above, at least one commenter suggested that a ``principal 
place of business'' test should look to the location of personnel 
directing the security-based swap activity of the vehicle.\276\ 
Although we believe that the manager responsible for directing, 
controlling, and coordinating the activities of the externally managed 
investment vehicle also would generally be responsible for directing, 
controlling, and coordinating the security-based swap activity of such 
vehicle, we do not believe that an externally managed vehicle should be 
excluded from the U.S. person definition merely because the manager 
that otherwise directs, controls, and coordinates its activity has 
effectively shifted responsibility for the security-based swap activity 
of the externally managed vehicle to a non-U.S. person. As noted above, 
such an approach would provide an incentive to move responsibility for 
the security-based swap activity of externally managed vehicles outside 
the United States while retaining control of all other activities 
relating to management of such vehicles within the United States. As 
with the ``principal place of business'' definition more generally, and 
for similar reasons, we believe that the definition of ``principal 
place of business'' set forth in the final rule with respect to 
externally managed vehicles is consistent with our territorial approach 
to application of Title VII. We also note, however, that for the 
reasons just discussed the final definition's focus on where the 
activity of the vehicle as a whole is primarily directed, controlled, 
and coordinated, as opposed to a focus on its security-based swap 
activity, is in our view necessary or appropriate to prevent the 
evasion of Title VII.\277\
---------------------------------------------------------------------------

    \276\ See note 213, supra (citing Citadel Letter).
    \277\ See Exchange Act section 30(c).
---------------------------------------------------------------------------

    In our proposal, we stated that we did not think that the U.S.-
person status of a commodity pool operator (``CPO'') or fund adviser 
(as opposed to the fund actually entering into the transaction) was in 
itself relevant in determining the U.S.-person status of an investment 
vehicle.\278\ Although the definition of ``principal place of 
business'' we are adopting in this final rule may lead to similar 
classifications of investment vehicles for purposes of the ``U.S. 
person'' definition as a test that looked to the U.S.-person status of 
a CPO or fund adviser, we believe that the definition we are adopting 
is more appropriately designed to capture externally managed investment 
vehicles that raise the kinds of concerns that Title VII was intended 
to address. Moreover, we note that mere retention of an asset manager 
that is a U.S. person, without more, would not necessarily bring an 
offshore investment vehicle or other person within the scope of the 
``U.S. person'' definition.\279\ However, where an asset manager, 
whether or not a U.S. person, is primarily responsible for directing, 
controlling, and coordinating the activities of an externally managed 
vehicle and carries out this responsibility within the United States, 
we believe that it is reasonable to include the externally managed 
vehicle in the definition of ``U.S. person'' \280\ and to require 
foreign dealers to include dealing activity with such vehicles in their 
de minimis threshold calculations.
---------------------------------------------------------------------------

    \278\ See Cross-Border Proposing Release, 78 FR 31144 n.1454.
    \279\ Cf. note 195, supra (citing IAA letter urging the 
Commission to follow the CFTC in clarifying that retention of an 
asset manager that is a U.S. person alone would not bring a person 
within the scope of the ``U.S. person'' definition).
    \280\ We also noted in our proposal that a transaction by an 
adviser on behalf of a fund could be a ``transaction conducted 
within the United States'' as defined in the proposal and thus fall 
within the scope of Title VII. See Cross-Border Proposing Release, 
78 FR 31144 n.1454. As noted above, we are not addressing the 
``transaction conducted within the United States'' element of our 
proposal in the final rule and instead intend to address this 
element of the proposed dealer de minimis threshold calculations in 
a subsequent reproposal.
---------------------------------------------------------------------------

iii. Fund Ownership
    Some commenters urged us to include in the definition investment 
vehicles that are majority-owned by U.S. persons.\281\ One of these 
commenters noted that the CFTC had reasoned that ``passive investment 
vehicles'' designed to ``achieve the investment objectives of their 
beneficial owner'' were distinguishable from majority-owned entities 
that are ``separate, active operating businesses.'' \282\ We are not 
persuaded, however, that this distinction between investment vehicles 
and operating companies warrants treating ownership interests in these 
two types of entities differently for purposes of the ``U.S. person'' 
definition, particularly given that the exposure of investors in a 
collective investment vehicle engaging in security-based swap 
transactions typically is capped at the amount of their investment and 
such investors generally are unlikely to seek to make the investment 
vehicle's counterparties whole for reputational or other reasons in the 
event of a default.\283\ We do not believe risks created through 
ownership interests in collective investment vehicles are the types of 
risks that Title VII is intended to address with respect to security-
based swaps.\284\
---------------------------------------------------------------------------

    \281\ See note 203, supra (citing BM Letter and AFR Letter). The 
CFTC also incorporated a majority-ownership inquiry in its 
interpretation of ``U.S. person'' as it applies to funds. See CFTC 
Cross-Border Guidance, 78 FR 45313.
    \282\ BM Letter at 10 (quoting CFTC Cross-Border Guidance, 78 FR 
45314).
    \283\ See Cross-Border Proposal, 78 FR 31144 (noting that losses 
arising from investments in investment vehicles ``are generally 
limited to their investments in the form of equity or debt 
securities'' and that these risks are ``addressed by other 
provisions of U.S. securities law pertaining to issuances and 
offerings of equity or debt securities'').
    \284\ Several commenters also argued that a majority-ownership 
test, including any look-through requirements, may be difficult to 
implement in this context. See note 203, supra (citing ICI Letter 
and IAA Letter). We believe that our definition of ``principal place 
of business'' with respect to externally managed entities should 
help to ensure that the ``U.S. person'' definition encompasses 
investment vehicles that may generally have a significant portion of 
their financial and legal relationships within the United States and 
that may therefore raise the types of risk concerns within the 
United States that Title VII was intended to address.
     We note that, because we are not following a majority-ownership 
approach for collective investment vehicles as part of the ``U.S. 
person'' definition, the U.S.-person status of accounts investing in 
such investment vehicles will not affect the U.S.-person status of 
such vehicles. Cf. IAA Letter at 4 (explaining that a majority-
ownership test would capture non-U.S. funds with minimal nexus to 
the United States and present implementation challenges).
---------------------------------------------------------------------------

    Because we are not adopting an ownership test for funds, we are 
also not following the suggestion of some commenters that we exclude 
from the ``U.S. person'' definition investment vehicles that are 
offered publicly only to non-U.S. persons and are not offered to

[[Page 39102]]

U.S. persons.\285\ Although we recognize that the CFTC reasoned that 
such investment vehicles would generally not be within its 
interpretation of ``U.S. person,'' \286\ we do not believe that it 
would be relevant under our final definition, which does not focus on 
an investment vehicle's ownership by U.S. persons.\287\
---------------------------------------------------------------------------

    \285\ See note 205, supra (citing IAA Letter). Cf. CFTC Cross-
Border Guidance, 78 FR 45314, 45317. One commenter suggested that 
the exclusion apply to funds offered publicly only to non-U.S. 
persons and are regulated in a foreign jurisdiction. See note 205, 
supra (citing ICI Letter, which suggested that funds regulated under 
foreign law be excluded from the ``U.S. person'' definition if they 
are (1) offered publicly only to non-U.S. persons; (2) offered 
publicly only to non-U.S. persons but offered privately to U.S. 
persons; or (3) authorized to offer publicly within the United 
States. but elect to offer only privately to non-U.S. institutional 
investors).
    \286\ See CFTC Cross-Border Guidance, 78 FR 45314.
    \287\ We also note that our guidance regarding the meaning of 
``principal place of business'' is designed to identify, among other 
entities, investment vehicles that may pose risks to the United 
States, regardless of where they may be offered.
---------------------------------------------------------------------------

(c) Accounts
    The final definition of ``U.S. person'' continues to mean ``any 
account (whether discretionary or not) of a U.S. person,'' irrespective 
of whether the person at which the account is held or maintained is a 
U.S. person.\288\ As a general matter, we expect that market 
participants will determine their U.S.-person status under the prongs 
of that definition relating to natural persons or to legal 
persons.\289\ This ``account'' prong of the definition is intended to 
clarify that a person's status for purposes of this rule generally does 
not differ depending on whether the person enters into security-based 
swap transactions through an account, or depending on whether the 
account is held or maintained at a U.S. person or a non-U.S. person 
intermediary or financial institution.\290\
---------------------------------------------------------------------------

    \288\ Exchange Act rule 3a71-3(a)(4)(i)(C). Thus, if a 
partnership, corporation, trust, investment vehicle, or other legal 
person is a U.S. person, any account of that person is a U.S. 
person.
    \289\ See Exchange Act rule 3a71-3(a)(4)(i)(A) and (B).
    \290\ As we noted in the Cross-Border Proposing Release, this 
approach is consistent with the treatment of managed accounts in the 
context of the major security-based swap participant definition, 
whereby the swap or security-based swap positions in client accounts 
managed by asset managers or investment advisers are not attributed 
to such entities for purposes of the major participant definitions, 
but rather are attributed to the beneficial owners of such positions 
based on where the risk associated with those positions ultimately 
lies. See Intermediary Definitions Adopting Release, 77 FR 30690.
---------------------------------------------------------------------------

    Consistent with the overall approach to the definition of ``U.S. 
person,'' our focus under the ``account'' prong of this definition is 
on the party that actually bears the risk arising from the security-
based swap transactions.\291\ Accordingly, an account owned solely by 
one or more U.S. persons is a U.S. person, even if it is held or 
maintained at a foreign financial institution or other person that is 
itself not a U.S. person; an account owned solely by one or more non-
U.S. persons is not a U.S. person, even if it is held or maintained at 
a U.S. financial institution or other person that is itself a U.S. 
person. For purposes of this ``account'' prong of the ``U.S. person'' 
definition, account ownership is evaluated only with respect to direct 
beneficial owners of the account. Because the status of an account 
turns on the status of the account's beneficial owners, the status of 
any nominees of an account is irrelevant in determining whether the 
account is a U.S. person under the final rule.
---------------------------------------------------------------------------

    \291\ In other words, the U.S.-person status of an account is 
relevant under our final rule to the extent that the security-based 
swap activity is carried out by or through the account. Because our 
final definition of ``U.S. person'' does not include investment 
vehicles that are majority-owned by U.S. persons, the underlying 
ownership of an investment vehicle that engages in security-based 
swap activity through an account is not relevant in determining the 
U.S.-person status of an account. Cf. note 224, supra (citing IAA 
Letter expressing concern about the relationship between the 
definition of accounts and treatment of funds).
---------------------------------------------------------------------------

    Where an account is owned by both U.S. persons and non-U.S. 
persons, the U.S.-person status of the account, as a general matter, 
should turn on whether any U.S.-person owner of the account incurs 
obligations under the security-based swap.\292\ Consistent with the 
approach to U.S.-person and non-U.S.-person accounts described above, 
neither the status of the fiduciary or other person managing the 
account, nor the discretionary or non-discretionary nature of the 
account, nor the status of the person at which the account is held or 
maintained are relevant in determining the account's U.S.-person 
status.
---------------------------------------------------------------------------

    \292\ Two commenters urged us to exclude from the definition of 
``U.S. person'' any account with a de minimis level of ownership by 
a U.S. person. See note 223, supra (citing letters from IAA and 
SIFMA/FIA/FSR). We, however, do not believe it would be appropriate 
to incorporate this concept wholesale into the definition of ``U.S. 
person,'' as a de minimis level of ownership by a U.S. person in the 
account does not necessarily indicate that such a U.S. person incurs 
only a de minimis level of risk or obligations under the security-
based swap transactions entered into through the account. For 
example, the U.S. person may be jointly and severally liable with 
all of the other account owners for obligations incurred under a 
security-based swap. We recognize that account ownership may take 
different forms and that security-based swap transactions may impose 
risks and obligations on account holders in different ways. The 
approach we are taking here is intended to take into account the 
concerns expressed by commenters regarding de minimis U.S.-person 
interests in such accounts, while also recognizing that security-
based swap transactions carried out through such accounts may pose 
risks to U.S. persons and to the U.S. financial system.
---------------------------------------------------------------------------

(d) Estates
    The final rule incorporates a new prong that expressly includes 
certain estates within the definition of ``U.S. person.'' Under the 
final rule any estate of a natural person who was a resident of the 
United States at the time of death is itself a U.S. person.\293\ Our 
proposed rule did not expressly address estates because we did not 
believe that they typically engage in security-based swap activity and, 
to the extent that they do, their U.S.-person status would have been 
determined under the standard applicable to any legal person under our 
proposed rule. We received no comments in response to our questions 
regarding whether we should adopt a final rule that expressly addresses 
estates or that reflects the CFTC's proposed approach.\294\
---------------------------------------------------------------------------

    \293\ See Exchange Act rule 3a71-3(a)(4)(i)(D).
    \294\ The CFTC subsequently issued an interpretation of ``U.S. 
person'' that expressly incorporates estates. See CFTC Cross-Border 
Guidance, 78 FR 45314.
---------------------------------------------------------------------------

    We continue to believe that estates are not likely to be 
significant participants in the security-based swap market, but we also 
believe that, given the unique characteristics of estates, it is 
appropriate to include in the ``U.S. person'' definition an express 
reference to estates of decedents who were residents of the United 
States at the time of death. This element of our final definition 
reflects similar considerations to those that informed our inclusion of 
natural persons who are residents of the United States within the scope 
of that definition. We noted above that the security-based swap 
activity of a natural person who is a resident of the United States 
raises the types of risks that Title VII is intended to address, given 
that person's residence status and likely financial and legal 
relationships, and we expect that the estate of a natural person who 
was a resident of the United States at the time of his or her death is 
likely to operate within the same relationships that warranted 
subjecting such transactions to Title VII during the life of the 
decedent.
(e) Certain International Organizations
    As under the proposal, the final rule expressly excludes certain 
international organizations from the definition of U.S. person.\295\ 
This list includes ``the [IMF], the International Bank for 
Reconstruction and Development, the Inter-American Development Bank, 
the

[[Page 39103]]

Asian Development Bank, the African Development Bank, the United 
Nations, and their agencies and pension plans, and any other similar 
international organizations, their agencies and pension plans.'' \296\ 
Although these organizations may have headquarters in the United 
States, the Commission continues to believe that their status as 
international organizations warrants excluding them from the definition 
of ``U.S. person.'' \297\
---------------------------------------------------------------------------

    \295\ Exchange Act rule 3a71-3(a)(4)(iii).
    \296\ Id. Although three commenters requested that we list all 
such organizations that are excluded from U.S. persons, see note 
226, supra, we do not believe it appropriate to attempt to enumerate 
an exclusive list of entities that may be eligible for such 
exclusion.
    \297\ Although three commenters requested that the final rule 
also exclude ``controlled affiliates'' of these international 
organizations from the definition of ``U.S. person,'' see note 229, 
supra (citing SC Letter, WB/IFC Letter, and IDB Letter), our final 
rule does not incorporate such an exclusion, as commenters did not 
provide us with information that leads us to change our view that we 
should not treat such affiliates' security-based swap or other 
activities differently from other persons that are incorporated, 
organized, or established in the United States or have their 
principal place of business here.
---------------------------------------------------------------------------

4. Representations Regarding U.S.-Person Status
    Our proposed definition of ``U.S. person'' did not expressly 
provide that parties could rely on representations from their 
counterparties as to their counterparties' U.S.-person status, although 
we did anticipate that parties likely would request such 
representations.\298\ On further consideration, we believe that market 
participants would benefit from an express provision permitting 
reliance on such representations.\299\ Accordingly, under the final 
rule, a person need not consider its counterparty to be a U.S. person 
for purposes of Title VII if that person receives a representation from 
the counterparty that the counterparty does not satisfy the criteria 
set forth in Exchange Act rule 3a71-3(a)(4)(i), unless such person 
knows or has reason to know that the representation is not accurate. 
For purposes of the final rule a person would have reason to know the 
representation is not accurate if a reasonable person should know, 
under all of the facts of which the person is aware, that it is not 
accurate.\300\
---------------------------------------------------------------------------

    \298\ See Cross-Border Proposing Release, 78 FR 31140.
    \299\ Cf. note 230, supra (citing IIB Letter requesting the 
Commission to confirm that, as a general matter, a representation is 
sufficient to fulfill diligence requirements under these rules).
    \300\ See Exchange Act rule 3a71-3(a)(4)(iii). This provision 
applies to each prong of the ``U.S. person'' definition, including 
the principal place of business prong. Cf. note 220, supra. As noted 
above, we are not providing that persons may rely solely on 
representations from counterparties that have been developed for 
purposes of the CFTC's interpretation of U.S. person. However, 
depending on how market participants have applied the CFTC's general 
facts-and-circumstances inquiry, they may be able to rely on such 
representations.
     As we noted in the proposal, for purposes of the de minimis 
threshold, the U.S.-person status of a non-U.S. person's 
counterparty would be relevant only at the time of a transaction 
that arises out of the non-U.S. person's dealing activity. See 
Cross-Border Proposing Release, 78 FR 30994 n.264. Any change in a 
counterparty's U.S.-person status after the transaction is executed 
would not affect the original transaction's treatment for purposes 
of the de minimis exception, though it would affect the treatment of 
any subsequent dealing transactions with that counterparty. See also 
Product Definitions Adopting Release, 77 FR 48286 (``If the material 
terms of a Title VII instrument are amended or modified during its 
life based on an exercise of discretion and not through 
predetermined criteria or a predetermined self-executing formula, 
the Commissions view the amended or modified Title VII instrument as 
a new Title VII instrument'').
---------------------------------------------------------------------------

    Expressly permitting market participants to rely on such 
representations in the ``U.S. person'' definition should help mitigate 
challenges that could arise in determining a counterparty's U.S.-person 
status under the final rule. It permits the party best positioned to 
make this determination to perform an analysis of its own U.S.-person 
status and convey, in the form of a representation, the results of that 
analysis to its counterparty. In addition, such representations should 
help reduce the potential for inconsistent classification and treatment 
of a person by its counterparties and promote uniform application of 
Title VII.\301\
---------------------------------------------------------------------------

    \301\ The final rule permitting reliance on representations with 
respect to a counterparty's U.S.-person status applies only to the 
definition of ``U.S. person'' as used in this final rule and does 
not apply to any determinations of a person's U.S.-person status 
under any other provision of the federal securities laws, including 
Commission rules, regulations, interpretations, or guidance.
---------------------------------------------------------------------------

    The final rule reflects a constructive knowledge standard for 
reliance. Under this standard, a counterparty is permitted to rely on a 
representation, unless the person knows or has reason to know that the 
representation is inaccurate. A person would have reason to know the 
representation is not accurate for purposes of the final rule if a 
reasonable person should know, under all of the facts of which the 
person is aware, that it is not accurate.\302\ We believe that this 
``know or have reason to know'' standard should help ensure that 
potential security-based swap dealers and major security-based swap 
participants do not disregard facts that call into question the 
validity of the representation.
---------------------------------------------------------------------------

    \302\ Cf. IIB Letter at 5 n.9 (urging the Commission to permit 
reliance on counterparty representations, ``absent knowledge of 
facts that would cause a reasonable person to question the accuracy 
of the representation''). To the extent that a person has knowledge 
of facts that would lead a reasonable person to believe that a 
counterparty may be a U.S. person under the final definitions it may 
need to conduct additional diligence before relying on the 
representation.
     We recognize that one commenter urged us to limit a reasonable 
reliance standard for such representations to representations 
concerning whether a person had its principal place of business in 
the United States. Cf. note 220, supra (citing ABA Letter). However, 
we believe that applying a single standard of reliance to all 
representations regarding a person's U.S.-person status will reduce 
the potential complexity of establishing policies and procedures 
associated with identifying the U.S.-person status of 
counterparties.
---------------------------------------------------------------------------

D. Application of De Minimis Exception To Dealing Activities of Conduit 
Affiliates

1. Proposed Approach and Commenters' Views
    The Cross-Border Proposing Release did not include requirements 
specific to ``conduit affiliates'' or other non-U.S. persons that enter 
into security-based swap transactions on behalf of their U.S. 
affiliates. Instead, the proposal would have treated those entities 
like other non-U.S. persons, and required them to count, against the de 
minimis thresholds, only their dealing transactions with U.S. persons 
other than foreign branches, and their dealing transactions conducted 
in the United States.\303\ The proposal also noted that the general 
rule implementing the de minimis exception excludes transactions 
between majority-owned affiliates from the analysis.\304\
---------------------------------------------------------------------------

    \303\ See proposed Exchange Act rule 3a71-3(b)(1)(ii).
    \304\ See Cross-Border Proposing Release at 31006 (citing 
Exchange Act rule 3a71-1(d)).
---------------------------------------------------------------------------

    The proposal acknowledged the difference between its approach and 
the CFTC's approach in its proposed cross-border guidance, which 
encompassed special provisions for foreign affiliates that act as 
conduits for U.S. persons.\305\ We thus cited the CFTC's proposed 
approach toward conduit affiliates in requesting comment regarding 
whether the Commission should follow a similar approach.\306\ We also 
requested comment as to whether the Commission should, consistent with 
the CFTC's proposed approach, require a person that operates a 
``central booking system''--whereby security-based swaps are booked to 
a single legal person--be subject to applicable dealer registration 
requirements as if the person had entered into the security-based swaps 
directly.\307\ More generally, we requested comment as to whether 
foreign affiliates of U.S. persons, such as majority-owned subsidiaries 
of U.S.

[[Page 39104]]

parents, should be considered to be U.S. persons.\308\
---------------------------------------------------------------------------

    \305\ See id. at 31006 n.356.
    \306\ See id. at 31024.
    \307\ See id. at 31007.
    \308\ See id. at 30998-99.
---------------------------------------------------------------------------

    One commenter took the view that the Commission's rules should not 
make use of the conduit affiliate concept notwithstanding its use in 
the CFTC Cross-Border Guidance, stating that the concept lacks any 
statutory or regulatory authority, would not advance efforts to reduce 
systemic risk, and, if applied to end-users, would interfere with 
internal risk allocations within a corporate group.\309\ In contrast, 
one commenter depicted conduit affiliates as being a type of person 
that is subject to a de facto guarantee by a U.S. affiliate and that 
should thus be treated as a U.S. person, and also argued that the 
dealer registration requirement should apply to other types of entities 
subject to a de facto guarantee.\310\
---------------------------------------------------------------------------

    \309\ See CDEU Letter at 3-5 (adding that if the conduit concept 
is not rejected, at a minimum it should exclude non-dealers and 
should not be applied to security-based swaps in which neither party 
is a dealer or a major participant).
    \310\ See BM Letter at 3, 14-15.
---------------------------------------------------------------------------

    One commenter further opposed the adoption of an approach that 
would require a ``central booking system'' or any other affiliate to 
register as a security-based swap dealer based solely on its inter-
affiliate security-based swap transactions, arguing that such an 
approach would tie registration requirements to firms' internal risk 
management practices, and would hamper the ability to manage risk 
across a multinational enterprise.\311\
---------------------------------------------------------------------------

    \311\ See SIFMA/FIA/FSR Letter at A-16 to A-17 (also stating 
that the final CFTC cross-border guidance does not include the 
central booking system concept). See also CDEU Letter at 3-5 
(raising concerns that the regulation of conduit affiliates may have 
the potential to interfere with the use of centralized treasury 
units that corporate groups may use as a market-facing entity for a 
non-dealer's corporate group).
---------------------------------------------------------------------------

2. Final Rule
    The final rule distinguishes ``conduit affiliates'' from other non-
U.S. persons by requiring such entities to count all of their dealing 
transactions against the de minimis thresholds, regardless of the 
counterparty.\312\ As discussed below, for these purposes a ``conduit 
affiliate'' is a non-U.S. affiliate of a U.S. person that enters into 
security-based swaps with non-U.S. persons, or with certain foreign 
branches of U.S. banks, on behalf of one or more of its U.S. affiliates 
(other than U.S. affiliates that are registered as security-based swap 
dealers or major security-based swap participants), and enters into 
offsetting transactions with its U.S. affiliates to transfer the risks 
and benefits of those security-based swaps.
---------------------------------------------------------------------------

    \312\ See Exchange Act rule 3a71-3(b)(1)(ii).
---------------------------------------------------------------------------

    After careful consideration, we believe that requiring such conduit 
affiliates to count their dealing transactions against the de minimis 
thresholds is appropriate to help ensure that non-U.S. persons do not 
facilitate the evasion of registration requirements under Dodd-Frank by 
participating in arrangements whereby a non-U.S. person engages in 
security-based swap activity outside the United States on behalf of a 
U.S. affiliate that is not a registered security-based swap dealer or 
major security-based swap participant,\313\ and the U.S. affiliate 
assumes economic risks and benefits of those positions by entering into 
offsetting transactions with the non-U.S. affiliate. Absent such a 
requirement that conduit affiliates count their dealing transactions 
for purposes of the de minimis exception, a U.S. person may be able to 
effectively engage in unregistered dealing activity involving non-U.S. 
persons by having a non-U.S. affiliate enter into dealing transactions 
with other non-U.S. persons (which would not be counted against the de 
minimis thresholds because both counterparties are non-U.S. persons) or 
with foreign branches of U.S. banks that are registered as security-
based swap dealers (which would not be counted against the de minimis 
thresholds because of an exclusion for dealing transactions with 
foreign branches of U.S. banks that are registered as security-based 
swap dealers). The U.S. person could enter into offsetting transactions 
with those non-U.S. affiliates, and those offsetting transactions would 
not be counted against the de minimis thresholds due to the inter-
affiliate exception to the dealer analysis.\314\
---------------------------------------------------------------------------

    \313\ As discussed below, the ``conduit affiliate'' definition 
does not encompass persons that engage in such offsetting 
transactions solely with U.S. persons that are registered with the 
Commission as security-based swap dealers or major security-based 
swap participants because we do not believe that such transactions 
raise the types of evasion concerns that the conduit affiliate 
concept is designed to address.
    \314\ The rule requires that a conduit affiliate count all of 
its dealing activity, and is not limited to the conduit affiliate's 
dealing transactions that specifically are linked to offsetting 
transactions with a U.S. affiliate. This is because there may not be 
a one-to-one correspondence between dealing transactions and their 
offsets for reasons such as netting.
---------------------------------------------------------------------------

    Accordingly, in our view, requiring conduit affiliates to count 
their dealing transactions against the thresholds is necessary or 
appropriate to prevent the evasion of any provision of the amendments 
made to the Exchange Act by Title VII for the reasons given above.\315\ 
We believe that this requirement is appropriately tailored to prevent 
the evasion of the dealer requirements,\316\ while preserving 
participants' flexibility in managing risk exposures through inter-
affiliate transactions.\317\
---------------------------------------------------------------------------

    \315\ See Exchange Act section 30(c); section 0, supra. In 
noting that this requirement is consistent with our anti-evasion 
authority under Exchange Act section 30(c), we are not taking a 
position as to whether such activity by a conduit affiliate 
otherwise constitutes a ``business in security-based swaps without 
the jurisdiction of the United States.''
    \316\ We recognize that not all dealing structures involving 
conduit affiliates may be evasive in purpose. We believe, however, 
that the anti-evasion authority of section 30(c) permits us to 
prescribe prophylactic rules to conduct without the jurisdiction of 
the United States, even if those rules would also apply to a market 
participant that has been transacting business through a pre-
existing market structure established for valid business purposes, 
so long as the rule is designed to prevent possible evasive conduct. 
See Cross-Border Proposing Release, 78 FR 30987; see also section 0, 
supra (discussion of anti-evasion authority); Abramski v. United 
States, No. 12-1493, slip op. at 14 (S. Ct. June 16, 2014) (noting 
``courts' standard practice, evident in many legal spheres and 
presumably known to Congress, of ignoring artifice when identifying 
the parties to a transaction'').
     We also note that while this requirement appears consistent 
with the views of a commenter that supported the use of the conduit 
affiliate concept, we take no position on that commenter's view that 
conduit affiliates represent a type of entity that is subject to a 
de facto guarantee by a U.S. person. See note 310, supra. Indeed, in 
our view the conduit affiliate concept will serve as a useful anti-
evasion tool even in the situation where the conduit affiliate's 
counterparty does not consider the U.S. person's creditworthiness in 
determining whether to enter into a security-based swap with the 
conduit affiliate.
    \317\ For example, one potential alternative anti-evasion 
safeguard could be to narrow the inter-affiliate exception to 
counting dealing transactions against the de minimis thresholds, 
such as by making the exception unavailable in the context of 
transactions between non-U.S. persons and their U.S. affiliates. We 
believe, however, that such an approach would be less well-targeted 
than the use of the conduit affiliate concept, as that alternative 
could impact a corporate group's ability to use specific market-
facing entities to facilitate the group's security-based swap 
activities (given that the market-facing entities would arguably be 
acting as a dealer on behalf of its affiliates).
---------------------------------------------------------------------------

    In light of the anti-evasion rationale for this use of the conduit 
affiliate concept, which is consistent with our statutory anti-evasion 
authority, we are not persuaded by a commenter's view that the use of 
the concept is outside of our authority.\318\ We also are not persuaded 
by that commenter's suggestion that the use of the conduit affiliate 
concept would not advance risk-mitigation goals, given that the concept 
can be expected to help ensure that the provisions of Title VII 
applicable to dealers (including risk

[[Page 39105]]

mitigation provisions such as margin and capital requirements) are 
implemented, which can be expected to produce risk mitigation benefits.
---------------------------------------------------------------------------

    \318\ See CDEU Letter at 3 (``The concept of a conduit affiliate 
is not based on statutory or regulatory authority, and does not 
decrease the potential for systemic risk.''). See also note 309, 
supra.
---------------------------------------------------------------------------

    At the same time, we recognize the significance of commenter 
concerns that the use of the ``conduit affiliate'' concept or the use 
of a ``central booking system'' approach to registration could impede 
efficient risk management practices.\319\ The conduit affiliate concept 
serves as a prophylactic anti-evasion measure, and we do not believe 
that any entities currently act as conduit affiliates in the security-
based swap market, particularly given that a framework for the 
comprehensive regulation of security-based swaps did not exist prior to 
the enactment of Title VII, suggesting that market participants would 
have had no incentives to use such arrangements for evasive purposes.
---------------------------------------------------------------------------

    \319\ See note 311, supra (citing CDEU Letter).
---------------------------------------------------------------------------

    Moreover, in light of this anti-evasion purpose, the definition of 
``conduit affiliate'' does not include entities that may otherwise 
engage in relevant activity on behalf of affiliated U.S. persons that 
are registered with the Commission as security-based swap dealers or 
major security-based swap participants, as we do not believe that 
transactions involving these types of registered entities and their 
foreign affiliates raise the types of evasion concerns that the conduit 
affiliate concept is designed to address.\320\
---------------------------------------------------------------------------

    \320\ As discussed below, we also are applying the conduit 
affiliate concept to the major participant analysis to help guard 
against evasive practices. See section 0, infra.
---------------------------------------------------------------------------

    In addition, in the context of the dealer de minimis exception, the 
relevant rules would require the conduit affiliate to count only its 
dealing transactions. The rules accordingly distinguish dealing 
activity by a conduit affiliate from a corporate group's use of 
affiliates for non-dealing purposes, such as a corporate group's use of 
a single affiliated person to enter into transactions with the market 
for risk management not involving dealing activity (accompanied by 
offsetting inter-affiliate transactions that place the economic 
substance of the instrument into another person within the group). The 
requirement we are adopting here--under which a conduit affiliate will 
count only its dealing transactions against the de minimis thresholds--
is not expected to impact persons that enter into security-based swaps 
with affiliates for non-dealing purposes.\321\
---------------------------------------------------------------------------

    \321\ One commenter particularly suggested that the conduit 
affiliate concept, if implemented, should exclude non-dealers. See 
CDEU Letter. As the requirement related to counting by conduit 
affiliates for purposes of the de minimis dealer exception is 
relevant only to the extent that a conduit affiliate engages in 
dealing activity, however, we do not believe that it is necessary to 
otherwise tailor the requirement to address the possibility that a 
conduit affiliate is acting on behalf of an affiliated U.S. non-
dealer for risk management or other non-dealing purposes.
     Moreover, as discussed above, over a recent six-year period, 
entities that are recognized as dealers are responsible for almost 
85 percent of transactions involving single-name CDS. See Table 1, 
section 0, supra.
---------------------------------------------------------------------------

    Consistent with these goals, the final rule defines ``conduit 
affiliate'' in part as a non-U.S. person that directly or indirectly is 
majority-owned by one or more U.S. persons.\322\ To be a conduit 
affiliate, moreover, such a person must in the regular course of 
business enter into in security-based swaps with one or more other non-
U.S. persons or with foreign branches of U.S. banks that are registered 
as security-based swap dealers,\323\ for the purposes of hedging or 
mitigating risks faced by, or otherwise taking positions on behalf of, 
one or more U.S. persons \324\ (other than U.S. persons that are 
registered as security-based swap dealers or major security-based swap 
participants) that control, are controlled by, or are under common 
control with the potential conduit affiliate, and enter into offsetting 
security-based swaps or other arrangements with such affiliated U.S. 
persons to transfer risks and benefits of those security-based 
swaps.\325\
---------------------------------------------------------------------------

    \322\ See Exchange Act rule 3a71-3(a)(1)(i)(A).
    For purposes of the definition, the majority-ownership standard 
is met if one or more U.S. persons directly or indirectly own a 
majority interest in the non-U.S. person, where ``majority 
interest'' is the right to vote or direct the vote of a majority of 
a class of voting securities of an entity, the power to sell or 
direct the sale of a majority of a class of voting securities of an 
entity, or the right to receive upon dissolution, or the 
contribution of, a majority of the capital of a partnership. See 
Exchange Act rule 3a71-3(a)(1)(ii). This parallels the majority-
ownership standard in the inter-affiliate exclusion from the dealer 
analysis. See Exchange Act rule 3a71-1(d).
    \323\ The definition does not require a conduit affiliate to 
exclusively transact with such non-U.S. persons and foreign 
branches. Accordingly, transactions with other types of U.S. persons 
would not cause a person to fall outside the ``conduit affiliate'' 
definition.
    \324\ For these purposes, it would not be necessary that the 
non-U.S. person transfer the risks and benefits of all of its 
security-based swaps. It also would not be necessary that the non-
U.S. person transfer all of the risks and benefits of any particular 
security-based swap; for example, the non-U.S. person may retain the 
credit risk associated with a security-based swap with a non-U.S. 
counterparty, but transfer to its U.S. affiliate the market risk 
associated with the instrument.
    \325\ See Exchange Act rule 3a71-3(a)(1)(i)(B).
    The reference to ``other arrangements'' to transfer the risks 
and benefits of security-based swaps, as an alternative to entering 
into offsetting security-based swaps, may encompass, for example, 
the use of swaps to transfer risks and benefits of the security-
based swaps (for example, two CDS based on slightly different 
indices of securities could be used to approximately replicate a 
security-based swap such as a CDS based on a single reference 
entity).
    We note that while the CFTC Cross-Border Guidance also states 
the view that as a general matter conduit affiliates should count 
their dealing activity against the de minimis thresholds (see 78 FR 
45318-19), the CFTC's interpretation of what constitutes a ``conduit 
affiliate'' differs in certain ways from our final rule. For 
example, the CFTC's approach takes into account whether the conduit 
affiliate's financial results are consolidated in the U.S. person's 
financial statements, and the CFTC states that it did not ``intend 
that the term `conduit affiliate' would include affiliates of swap 
dealers.'' See CFTC Cross-Border Guidance, 78 FR 45359; see also id. 
at 45318-19 n.258.
    In our view, the final rule's definition--including its 
prerequisite that the conduit affiliate be majority-owned by non-
natural U.S. persons appropriately focuses the meaning of the term 
``conduit affiliate'' on persons who may engage in security-based 
swap activity on behalf of U.S. affiliates in connection with 
dealing activity (and, as discussed below, see section 0, infra, in 
connection with other security-based swap activity in the context of 
the major participant definition).
---------------------------------------------------------------------------

E. Application of De Minimis Exception To Dealing Activities of Other 
Non-U.S. Persons

    As noted above, the proposal would have required non-U.S. persons 
to count, against the de minimis thresholds, only their dealing 
transactions involving U.S. persons other than foreign branches, and 
their dealing transactions conducted within the United States.\326\
---------------------------------------------------------------------------

    \326\ See proposed Exchange Act rule 3a71-3(b)(1)(ii).
---------------------------------------------------------------------------

    Aside from issues related to conduit affiliates, addressed above, 
commenters discussed other issues regarding the application of the de 
minimis exception to the dealing activities of non-U.S. persons, 
particularly relating to: (i) Dealing transactions of non-U.S. persons 
that are guaranteed by their U.S. affiliates; (ii) activities within 
the United States; and (iii) dealing activities of other non-U.S. 
persons whose counterparties are U.S. persons (including foreign 
branches of U.S. banks) or non-U.S. persons guaranteed by U.S. persons. 
We are addressing those groups of issues separately, given the distinct 
issues relevant to each.\327\ As discussed below, the final rule 
requires non-U.S. persons (apart from the conduit affiliates addressed 
above) to count all of their dealing transactions where: (1) The 
transaction is subject to a recourse guarantee against a U.S. affiliate 
of the non-U.S. person; or (2) the counterparty to the transaction is a 
U.S. person, other than the foreign branch of a registered security-
based swap dealer.
---------------------------------------------------------------------------

    \327\ In addition, some commenters requested an exclusion for 
transactions that are executed anonymously and cleared. Those 
comments--and our incorporation of an exception for certain cleared 
anonymous transactions--are addressed below. See section 0, infra.

---------------------------------------------------------------------------

[[Page 39106]]

1. Dealing Transactions of Non-U.S. Persons That Are Subject To 
Recourse Guarantees by Their U.S. Affiliates
(a) Proposed Approach and Commenters' Views
    Under the proposal, a non-U.S. person's transactions involving 
security-based swaps guaranteed by its U.S. affiliate would have been 
treated the same as other transactions of non-U.S. persons for purposes 
of the de minimis exception. In other words, the non-U.S. guaranteed 
affiliate would have counted, against the de minimis thresholds, only 
its dealing transactions involving U.S. persons other than foreign 
branches, and its dealing transactions otherwise conducted within the 
United States.\328\
---------------------------------------------------------------------------

    \328\ See proposed Exchange Act rule 3a71-3(b)(1)(ii).
---------------------------------------------------------------------------

    In the Cross-Border Proposing Release, we solicited comment 
regarding whether the ``U.S. person'' definition should incorporate 
foreign entities that are guaranteed by their U.S. affiliates.\329\ We 
also expressed the preliminary view that the primary risk related to 
such guaranteed transactions of non-U.S. persons was the risk posed to 
the United States via the guarantee from a U.S. person, rather than the 
dealing activity occurring between two non-U.S. persons outside the 
United States, and sought to address this risk via the proposed 
attribution principles in the ``major security-based swap participant'' 
definition, and we also expressed the view that the use of the major 
participant definition effectively would address those regulatory 
concerns.\330\
---------------------------------------------------------------------------

    \329\ See Cross-Border Proposing Release, 78 FR 30998.
    \330\ See id. at 31006. As part of the proposal, we also 
expressed the preliminary view that dealer regulation of such 
persons would not materially increase the programmatic benefits of 
the dealer registration requirement, and that such an approach would 
impose programmatic costs without a corresponding increase in 
programmatic benefits to the U.S. security-based swap market. See 
id. at 31146-47. For the reasons discussed below, however, we have 
concluded that it is appropriate to require non-U.S. guaranteed 
affiliates of U.S. persons to count, against the de minimis 
thresholds, their dealing transactions that are subject to a right 
of recourse against a U.S. person. See 0 (discussing the final 
rule's changes to the preliminary view).
---------------------------------------------------------------------------

    Two commenters supported an alternative approach to require such 
guaranteed non-U.S. persons to count all of their dealing transactions 
against the thresholds. One commenter stated that non-U.S. persons that 
receive guarantees from U.S. persons should count all of their dealing 
transactions toward the de minimis thresholds, arguing that the failure 
to do so would be inconsistent with the resulting flow of risk to the 
United States and that major participant regulation was not the 
appropriate means of addressing those risks.\331\ Another commenter 
took the position that the proposed approach would provide a loophole 
whereby U.S. entities trading in security-based swaps could avoid 
regulation under the Dodd-Frank Act.\332\ Both commenters further 
suggested that affiliates of U.S. persons be presumed to be 
beneficiaries of guarantees,\333\ with the presumption potentially 
subject to rebuttal if there is notice that no guarantee would be 
provided.\334\
---------------------------------------------------------------------------

    \331\ See BM Letter at 17-18.
    \332\ See AFR Letter I at 7-8, 14.
    \333\ See id. at 14 (``In cases where a guarantee is implicit, 
the use of a rebuttable presumption of a guarantee will put the 
burden on the foreign affiliate in question to demonstrate to 
regulators that it is not guaranteed.''); BM Letter at 14 
(suggesting in part that support should be presumed if a foreign 
affiliate incorporates a ``de facto guarantor's name in its own'').
    \334\ See AFR Letter I at 7 (``This presumption could be 
rebutted by showing clear evidence that counterparties were informed 
of the absence of a guarantee.''); BM Letter at 14-15 (suggesting 
that presumptions of support might be rebutted by explicit 
statements within trade documentation accompanied by explicit 
counterparty waivers, and discussing the potential additional use of 
associated public filing requirements and of possible ``ring-fence'' 
systems for determining which affiliates should be considered U.S 
persons).
---------------------------------------------------------------------------

    One comment letter did not explicitly address this issue, but did 
support the Commission's proposed approach not to require non-U.S. 
persons to aggregate the dealing transactions of their U.S.-guaranteed 
affiliates against the de minimis thresholds, stating that this would 
pose too tenuous a nexus with the U.S. to justify registration.\335\
---------------------------------------------------------------------------

    \335\ See SIFMA/FIA/FSR Letter at A-17.
---------------------------------------------------------------------------

(b) Final Rule
    Under the final rule, a non-U.S. person (other than a conduit 
affiliate, as discussed above) must count, against the de minimis 
thresholds, any security-based swap transaction connected with its 
dealing activity for which, in connection with that particular 
security-based swap, the counterparty to the security-based swap has 
rights of recourse against a U.S. person that is controlling, 
controlled by, or under common control with the non-U.S. person.\336\ 
For these purposes, the counterparty would be deemed to have a right of 
recourse against a U.S. affiliate of the non-U.S. person if the 
counterparty has a conditional or unconditional legally enforceable 
right, in whole or in part, to receive payments from, or otherwise 
collect from, the U.S. affiliate in connection with the non-U.S. 
person's obligations under the security-based swap.
---------------------------------------------------------------------------

    \336\ See Exchange Act rule 3a71-3(b)(1)(iii)(B). Consistent 
with the rule generally requiring a person to consider its 
affiliates' dealing activities for purposes of the de minimis 
exception (Exchange Act rule 3a71-2(a)(1)), the Commission 
interprets control to mean the possession, direct or indirect, of 
the power to direct or cause the direction of the management and 
policies of a person, whether through the ownership of voting 
securities, by contract or otherwise. See Intermediary Definitions 
Adopting Release, 77 FR 30631 n.437.
---------------------------------------------------------------------------

    We understand that such rights may arise in a variety of contexts. 
For example, a counterparty would have such a right of recourse against 
the U.S. person if the applicable arrangement provides the counterparty 
the legally enforceable right to demand payment from the U.S. person in 
connection with the security-based swap, without conditioning that 
right upon the non-U.S. person's non-performance or requiring that the 
counterparty first make a demand on the non-U.S. person. A counterparty 
also would have such a right of recourse if the counterparty itself 
could exercise legally enforceable rights of collection against the 
U.S. person in connection with the security-based swap, even when such 
rights are conditioned upon the non-U.S. person's insolvency or failure 
to meet its obligations under the security-based swap, and/or are 
conditioned upon the counterparty first being required to take legal 
action against the non-U.S. person to enforce its rights of collection.
    The terms of the guarantee need not necessarily be included within 
the security-based swap documentation or even otherwise reduced to 
writing (so long as legally enforceable rights are created under the 
laws of the relevant jurisdiction); for instance, such rights of 
recourse would arise when the counterparty, as a matter of law in the 
relevant jurisdiction, would have rights to payment and/or collection 
that may arise in connection with the non-U.S. person's obligations 
under the security-based swap that are enforceable.\337\ We would view 
the transactions of a non-U.S. person as subject to a recourse 
guarantee if at least one U.S. person (either individually or jointly 
and severally with others) bears unlimited responsibility for the non-
U.S. person's obligations, including the non-U.S. person's obligations 
to security-based

[[Page 39107]]

swap counterparties. Such arrangements may include those associated 
with foreign unlimited companies or unlimited liability companies with 
at least one U.S.-person member or shareholder, general partnerships 
with at least one U.S.-person general partner, or entities formed under 
similar arrangements such that at least one U.S. persons bears 
unlimited responsibility for the non-U.S. person's liabilities. In our 
view, the nature of the legal arrangement between the U.S. person and 
the non-U.S. person--which makes the U.S. person responsible for the 
obligations of the non-U.S. person--is appropriately characterized as a 
recourse guarantee, absent countervailing factors. More generally, a 
recourse guarantee is present if, in connection with the security-based 
swap, the counterparty itself has a legally enforceable right to 
payment or collection from the U.S. person, regardless of the form of 
the arrangement that provides such a legally enforceable right to 
payment or collection.
---------------------------------------------------------------------------

    \337\ For purposes of the dealer de minimis exception, rights of 
recourse would not be present if legally enforceable rights were to 
arise by operation of law following the transaction, such as due to 
later actions that evidence the disregard of corporate form by a 
party to the transaction and its affiliate. Rights of recourse, in 
contrast, would encompass rights existing at the time of the 
transaction but conditioned upon the non-U.S. person's insolvency or 
failure to meet its obligations under the security-based swap or 
conditioned upon the counterparty first being required to take legal 
action against the non-U.S. person to enforce its right of 
collection.
---------------------------------------------------------------------------

    Accordingly, the final rule clarifies that for these purposes a 
counterparty would have rights of recourse against the U.S. person ``if 
the counterparty has a conditional or unconditional legally enforceable 
right, in whole or in part, to receive payments from, or otherwise 
collect from, the U.S. person in connection with the security-based 
swap.'' \338\
---------------------------------------------------------------------------

    \338\ See Exchange Act rule 3a71-3(b)(1)(B). This approach of 
looking to the presence of rights of recourse to identify guarantees 
is consistent with our prior views in connection with Title VII 
implementation. See generally Intermediary Definitions Adopting 
Release, 77 FR 30689 (stating that in connection with the 
application of the major participant definition, ``positions in 
general would be attributed to a parent, other affiliate or 
guarantor for purposes of the major participant analysis to the 
extent that the counterparties to those positions would have 
recourse to that other entity in connection with the position''); 
Cross-Border Proposing Release, 78 FR 30977 (noting that a guarantee 
would typically give the counterparties to a U.S. non-bank dealer 
direct recourse to a holding company, as though the guarantor had 
entered into the transactions directly).
---------------------------------------------------------------------------

    In revising the proposal, we have been influenced by commenter 
concerns that the proposed approach could allow non-U.S. persons to 
conduct a dealing business involving security-based swaps that are 
guaranteed by a U.S. affiliate without being regulated as a dealer, 
even though the guarantee exposes the U.S. person guarantor to risk in 
connection with the dealing activity.\339\
---------------------------------------------------------------------------

    \339\ See BM Letter at 12, 17-18 (stating that the ``proposed 
exemption has the potential to create a large loophole for foreign 
market participants, while leaving the risk with the American 
taxpayer,'' also stating that ``de facto guaranteed affiliates'' 
should be classified as U.S. persons ``under the SEC's territorial 
or anti-evasion authority''); AFR Letter I at 5 (suggesting that the 
proposed treatment of U.S.-guaranteed affiliates, as well as certain 
other aspects of the proposal, could result in regulatory 
arbitrage).
---------------------------------------------------------------------------

    This final rule also reflects our conclusion that a non-U.S. 
person--to the extent it engages in dealing activity involving 
security-based swaps subject to a recourse guarantee by its U.S. 
affiliate--engages in dealing activity that occurs, at least in part, 
within the United States. As discussed above, the economic reality is 
that by virtue of the guarantee the non-U.S. person effectively acts 
together with its U.S. affiliate to engage in the dealing activity that 
results in the transactions, and the non-U.S. person's dealing activity 
cannot reasonably be isolated from the U.S. person's activity in 
providing the guarantee. The U.S. person guarantor together with the 
non-U.S. person whose dealing activity it guarantees jointly may seek 
to profit by providing liquidity and otherwise engaging in dealing 
activity in security-based swaps, and it is the U.S. guarantor's 
financial resources that enable the guarantor to help its affiliate 
provide liquidity and otherwise engage in dealing activity. It is 
reasonable to assume that the counterparties of the non-U.S. person 
whose dealing activity is guaranteed look to both the non-U.S. person 
and the U.S. guarantor for performance on the security-based swap. 
Moreover, the U.S. guarantor bears risks arising from any security-
based swap between the non-U.S. person whose dealing activity it 
guarantees and that affiliate's counterparties, wherever located.
    This approach is consistent with the purposes of Title VII. The 
exposure of the U.S. guarantor creates risk to U.S. persons and 
potentially to the U.S. financial system via the guarantor to a 
comparable degree as if that U.S. person had directly entered into the 
transactions that constituted dealing activity by the affiliate. In 
many cases the counterparty to the non-U.S. person whose dealing 
activity is guaranteed may not enter into the transaction with that 
non-U.S. person, or may not do so on the same terms, absent the 
guarantee. The U.S. guarantor usually undertakes obligations with 
respect to the security-based swap regardless of whether that non-U.S. 
person ultimately defaults in connection with the security-based 
swap.\340\
---------------------------------------------------------------------------

    \340\ We understand that, in practice, a guarantor's obligation 
to a derivatives counterparty of a person whose security-based swap 
activity is guaranteed may be based on the same terms as that of the 
guaranteed person, and that the guarantor's obligation to make 
payments under the contract may not be contingent upon the 
guaranteed person's default. Moreover, we understand that margin 
payments under a contract at times may be made directly by a U.S. 
guarantor to the counterparty of the guaranteed person, particularly 
when the corporate group uses a consolidated back office located 
within a parent guarantor, or when the derivative is denominated in 
U.S. dollars. We further understand that a counterparty may, for 
risk management purposes, use a single credit limit for all 
transactions guaranteed by a parent, regardless of which particular 
affiliate may be used for booking the transaction with that 
counterparty.
---------------------------------------------------------------------------

    In requiring non-U.S. persons whose dealing involves security-based 
swaps that are guaranteed by a U.S. person to apply those dealing 
transactions against the de minimis thresholds, the final rule further 
reflects the fact that the economic reality of an offshore dealing 
business using such non-U.S. persons may be similar or identical to an 
offshore dealing business carried out through a foreign branch. In both 
cases the risk of the dealing activity has directly been placed into 
the United States, and non-U.S. counterparties generally may be 
expected to look to a U.S. person's creditworthiness in deciding 
whether to enter into the transaction with the guarantor's non-U.S. 
affiliate or the foreign branch (and on what terms). The final rule 
thus should help apply dealer regulation in similar ways to differing 
organizational structures that serve similar economic purposes, and 
help avoid disparities in applying dealer regulation to differing 
arrangements that pose similar risks to the United States.\341\
---------------------------------------------------------------------------

    \341\ For the above reasons, we conclude that this final rule is 
not being applied to persons who are ``transact[ing] a business in 
security-based swaps without the jurisdiction of the United 
States,'' within the meaning of Exchange Act section 30(c). See 
section 0, supra.
---------------------------------------------------------------------------

    We believe, moreover, that this final rule is necessary or 
appropriate as a prophylactic measure to help prevent the evasion of 
the provisions of the Exchange Act that were added by the Dodd-Frank 
Act, and thus help ensure that the relevant purposes of the Dodd-Frank 
Act are not undermined. Without this rule, U.S. persons may have a 
strong incentive to evade dealer regulation under Title VII simply by 
conducting their dealing activity via a guaranteed affiliate, while the 
economic reality of transactions arising from that activity--including 
the risks these transactions introduce to the U.S. market--would be no 
different in most respects than transactions directly entered into by 
U.S. persons. In other words, for example, if a U.S. entity engaged in 
security-based swap dealing wanted to either avoid registration or 
otherwise have its security-based swap transactions with foreign 
counterparties be outside the various Title VII requirements with 
respect to those transactions, it could establish an overseas affiliate 
and simply extend a

[[Page 39108]]

payment guarantee. The purpose for doing so would be to evade the 
requirements of Title VII and the incentives to do so could be high, 
making it necessary and appropriate to invoke our Title VII authority, 
because the economic reality of these transactions would be no 
different in most respects, including the risks these transactions 
could introduce to the U.S. market. Arrangements between a U.S. person 
and a non-U.S. person that, as a matter of law in the relevant 
jurisdiction, make the U.S. person responsible for the non-U.S. 
person's liabilities may create similarly strong incentives to 
restructure business operations to avoid the application of Title VII 
by providing the economic equivalent of an express guarantee through an 
arrangement that under relevant law provides the non-U.S. person 
counterparty with direct recourse against the U.S. person. For these 
reasons, we believe that it is necessary and appropriate to adopt this 
rule pursuant to our anti-evasion authority under Exchange Act section 
30(c).\342\
---------------------------------------------------------------------------

    \342\ Exchange Act section 30(c) particularly provides that 
``[n]o provision of [Title VII] . . . shall apply to any person 
insofar as such person transacts a business in security-based swaps 
without the jurisdiction of the United States,'' unless that 
business is transacted in contravention of rules prescribed to 
prevent evasion of Title VII.
---------------------------------------------------------------------------

    Compared to the proposal, this approach also more fully accounts 
for differences between the regulatory regimes applicable to security-
based swap dealers and major security-based swap participants. The 
definition of ``major security-based swap participant'' focuses on 
systemic risk issues, in that it particularly targets persons that 
maintain ``substantial positions'' that are ``systemically important,'' 
or that pose ``substantial counterparty exposure that could have 
serious adverse effects on the financial stability of the United States 
banking system or financial markets.'' \343\ The thresholds associated 
with the major participant definition reflect that systemic risk 
focus.\344\ The dealer definition, in contrast, is activity-focused, 
addresses the significance of a person's dealing activity only via the 
de minimis exception, and addresses regulatory interests apart from 
risk.\345\ Accordingly, upon further consideration, we believe that 
availability of major participant regulation does not mitigate the 
above considerations regarding risk and regulatory treatment of similar 
business models, and those considerations are better addressed by 
counting dealing activities guaranteed by U.S. affiliates against the 
de minimis thresholds of the non-U.S. persons whose transactions are 
subject to the guarantees.\346\
---------------------------------------------------------------------------

    \343\ See Exchange Act section 3(a)(67).
    \344\ For example, for cleared security-based CDS, a person 
would have to write $200 billion notional of CDS protection to meet 
the relevant $2 billion ``potential future exposure'' threshold that 
is used as part of the major participant analysis. See Intermediary 
Definitions Adopting Release, 77 FR 30671 n.914.
    \345\ See id. at 30629 (``The statutory requirements that apply 
to swap dealers and security-based swap dealers include requirements 
aimed at the protection of customers and counterparties, . . . as 
well as requirements aimed at helping to promote effective 
operations and transparency of the swap and security-based swap 
markets.''; footnotes omitted).
    \346\ This is consistent with the view of one commenter that 
highlighted the differences in purpose between dealer and major 
participant regulation. See BM Letter.
---------------------------------------------------------------------------

    In adopting these provisions, we acknowledge that the final rule 
does not go as far as some commenters have requested, in that it does 
not require a non-U.S. person to count its dealing transactions 
involving security-based swaps that do not grant its counterparty a 
recourse guarantee against the U.S. affiliate of that non-U.S. person, 
even if the U.S. affiliate is subject to a recourse guarantee with 
respect to other security-based swaps of the same non-U.S. person. The 
final rule also does not incorporate the suggestion from certain 
commenters that we should treat U.S. entities and their affiliates as 
equivalent for purposes of the cross-border implementation of Title 
VII.\347\ The final rule further does not incorporate the suggestion 
that affiliates of a U.S. person should be presumed to be recipients of 
de facto guarantees, which could be rebutted via disclosure.\348\
---------------------------------------------------------------------------

    \347\ See id. at 14, 17-18 (``Thus, regardless of whether an 
affiliate is `guaranteed' by a U.S. person, that affiliate may be 
effectively guaranteed, having the same connection with and posing 
the same risks to the United States.''). See also AFR Letter I at 7-
8.
    \348\ See notes 333 and 334, supra and accompanying text. We 
note that any U.S. person that is subject to the reporting 
requirements of section 13(a) or section 15(d) of the Exchange Act, 
15 U.S.C. 78m(a) or 15 U.S.C. 78o(d) respectively, regardless of 
whether that person provides a recourse guarantee relating to its 
non-U.S. affiliates' obligations, must consider whether there are 
disclosures that must be made in its periodic reports regarding any 
of its obligations. These disclosures would include any known 
trends, events, demands, commitments and uncertainties that are 
reasonably likely to have a material effect on the financial 
condition or operating performance of the U.S. person that would be 
required to be disclosed pursuant to Item 303 of Regulation S-K. As 
required by Item 303 of Regulation S-K, the disclosures are 
presented with regard to the registrant (the U.S. person) and its 
subsidiaries on a consolidated basis. See Item 303 of Regulation S-
K, 17 CFR 229.303, and Commission's Guidance Regarding Management's 
Discussion and Analysis of Financial Condition and Results of 
Operations, Securities Act Release No. 8350 (Dec. 19, 2003), 68 FR 
75056 (Dec. 29, 2003). See also Item 305 of Regulation S-K, 17 CFR 
229.305.
---------------------------------------------------------------------------

    Those commenters raise important concerns regarding the possibility 
that, even absent explicit financial support arrangements, U.S. 
entities that are affiliated with non-U.S. persons for reputational 
reasons may determine that they must support their non-U.S. affiliates 
at times of crisis. In those commenters' view, such considerations 
impose risks upon U.S. markets even absent explicit legal obligations. 
As a result, the commenters suggest that foreign affiliates of U.S. 
entities should have to count all their dealing transactions against 
the de minimis thresholds, or that such foreign affiliates should be 
deemed to be ``U.S. persons'' for purposes of Title VII.\349\
---------------------------------------------------------------------------

    \349\ See AFR Letter I at 7 (stating that ``[b]oth explicit and 
implicit guarantees of support from the parent institution should be 
counted,'' with a rebuttable presumption that a subsidiary of a U.S. 
entity is guaranteed, and that ``[s]hould the SEC not include 
guaranteed affiliates and subsidiaries in the definition of `U.S. 
person', at the very least SBS with such entities should count 
toward entities de minimis calculation''); BM Letter at 12, 17 
(stating that guaranteed affiliate should be defined ``to include 
those affiliates that are de factor guaranteed, even though not 
explicitly subject to a guarantee agreement,'' and that transactions 
with non-U.S. persons that receive guarantees from U.S. persons 
should be included in the de minimis calculation).
---------------------------------------------------------------------------

    Our modification requiring these non-U.S. persons to count certain 
of their dealing transactions with non-U.S. persons against the de 
minimis thresholds partially addresses those commenter concerns.\350\ 
We also recognize that there may be circumstances in which a U.S. 
person provides its foreign affiliate with non-recourse support that is 
not specifically linked to particular instruments or to derivatives 
activities generally. Our final rule, however, targets recourse-based 
arrangements whereby the counterparties to the non-U.S. affiliate would 
be particularly likely to look to the U.S. person for satisfaction of 
some or all of the obligations arising under the security-based swap. 
On balance, we believe that an approach that focuses on the presence of 
recourse arrangements appropriately addresses dealing activities that 
have a particularly direct effect on the U.S. market, as well as the 
ability of a U.S. person to use such guarantees to conduct a security-
based

[[Page 39109]]

swap dealing business as an alternative to using a foreign branch.
---------------------------------------------------------------------------

    \350\ This final rule regarding the de minimis exception does 
not encompass non-U.S. persons who receive a guarantee from an 
unaffiliated U.S. person. We do not expect that U.S. persons would 
use guarantees of unaffiliated persons as a substitute for dealing 
activity via a foreign branch, and we do not believe such 
arrangements comprise a significant part of dealing activity in the 
market. Our final rules do, however, generally require such non-
affiliate arrangements to be included in the major security-based 
swap participant threshold calculations. See section 0, infra.
---------------------------------------------------------------------------

    This is not to say that more general financial support arrangements 
do not also pose risks to U.S. persons and potentially to the U.S. 
financial system, including risks posed by the activity of non-U.S. 
persons to their U.S. parents or affiliates. However, we believe that 
this focus on recourse guarantees appropriately addresses the most 
direct risks posed by such guarantee arrangements to U.S. persons and 
potentially to the U.S. financial system. We also note that Congress 
has provided additional regulatory tools apart from Title VII to 
address such risks. Indeed, in enacting the Dodd-Frank Act, Congress 
provided general tools--not merely tools focusing on derivatives 
activities--to address the risks associated with U.S.-based financial 
groups as a whole, including the risks posed by such groups' non-
guaranteed foreign affiliates engaged in financial services business. 
This holistic approach to risks that could flow back to the United 
States may reflect the fact that financial services activities apart 
from security-based swaps constitute the great majority of such groups' 
overall financial activities outside the United States that can produce 
such risks. The regulatory tools substantially enhanced by the Dodd-
Frank Act to better address these cross-border risks posed by financial 
services activities other than security-based swaps and such tools 
include globally consolidated capital requirements (including enhanced 
capital and leverage standards, group-wide single-counterparty credit 
limits, and capital surcharges for firms with particularly high levels 
of risk), and globally consolidated liquidity and risk management 
standards (including stress testing, debt-to-equity limitations, living 
will requirement, and timely remediation measures). By accounting for 
risks at the consolidated level, these tools address risks posed by 
guaranteed and non-guaranteed subsidiaries within U.S.-based financial 
groups, regardless of whether the subsidiaries are based in the United 
States or outside the United States.\351\ Our focus on recourse 
guarantees appropriately targets the concerns raised by security-based 
swap activity that Title VII was intended to address, recognizing that 
Congress has established other regulatory tools that are specifically 
intended, and better suited, to address risks to bank holding companies 
and financial holding companies, arising from the financial services 
activities of a foreign affiliate of those holding companies where the 
foreign affiliate does not engage in security-based swap activity in 
the United States.
---------------------------------------------------------------------------

    \351\ See, e.g., Public Law 111-203, sections 165-166 of the 
Dodd Frank Act, 124 Stat. 1376, 1423-32 (2010). In the Cross-Border 
Proposing Release, in connection with our preliminary view that the 
risks posed by guarantees could be adequately addressed via the 
regulation of major security-based swap participants, we referenced 
the Bank Holding Company Act of 1956, and the provisions of Title I 
of the Dodd-Frank Act regarding the regulation of certain nonbank 
financial companies and bank holding companies that pose a threat to 
the financial stability of the United States. See Cross-Border 
Proposing Release, 78 FR 31006 n.360.
    For the reasons discussed above, however, we have concluded that 
the presence of those particular regulatory safeguards do not 
warrant the conclusion that non-U.S. guaranteed affiliates of U.S. 
persons should not have to count, against the de minimis thresholds, 
their dealing activity involving other non-U.S. persons when the 
transaction is subject to a right of recourse against the U.S. 
affiliate. Although those provisions encompass regulatory safeguards 
that can be expected to address the risks associated with U.S.-based 
financial groups, upon further consideration we conclude that it is 
appropriate for the application of the de minimis test to directly 
account for those specific security-based swap transactions that are 
subject to recourse guarantees, as opposed to more generalized risks 
arising from the range of activities conducted by non-guaranteed 
foreign affiliates, given the U.S. person's participation in the 
security-based swap transaction through the guarantee.
---------------------------------------------------------------------------

    Conversely, one commenter implicitly appeared to oppose any 
requirement that non-U.S. persons count their guaranteed transactions 
carried out in a dealing capacity with non-U.S. person counterparties 
against their de minimis thresholds.\352\ For the reasons discussed 
above, however, we believe that the targeted counting required by the 
final rule is appropriate to reflect activity involving security-based 
swaps that occurs in the United States and presents risks to U.S. 
persons and potentially to the U.S. financial system.
---------------------------------------------------------------------------

    \352\ See note 335, supra, and accompanying text.
---------------------------------------------------------------------------

    Finally, in adopting these provisions we recognize that the CFTC 
Cross-Border Guidance appears to broadly opine that non-U.S. persons 
who receive any express guarantee from a U.S. affiliate should, as a 
general matter, count all of their dealing activity against the de 
minimis thresholds, regardless of whether a counterparty has recourse 
against the U.S. person in connection with the swap.\353\ Our final 
rule is more targeted than the CFTC approach, in that our final rule 
requires a non-U.S. guaranteed affiliate to count only those dealing 
transactions for which the counterparty to the security-based swap has 
recourse against a U.S. person that is affiliated with the non-U.S. 
person. This reflects our decision to focus the application of the de 
minimis exception on recourse arrangements involving security-based 
swaps, while recognizing that some non-recourse arrangements could 
influence a U.S. person to provide financial support to non-U.S. 
persons and thereby present risk to the U.S. person and potential risk 
to the U.S. financial system.
---------------------------------------------------------------------------

    \353\ See CFTC Cross-Border Guidance, 78 FR 45319. For those 
purposes, the CFTC Cross-Border Guidance interprets guarantees 
generally to include ``not only traditional guarantees of payment or 
performance of the related swaps, but also other formal arrangements 
that, in view of all the facts and circumstances, support the non-
U.S. person's ability to pay or perform its swap obligations with 
respect to its swaps,'' and also refers to ``keepwells and liquidity 
puts, certain types of indemnity agreements, master trust 
agreements, liability or loss transfer or sharing agreements, and 
any other explicit financial support arrangements'' as being types 
of guarantees notwithstanding that that they ``may provide for 
different third-party rights and/or address different risks than 
traditional guarantees.'' See id. at 45319-20.
---------------------------------------------------------------------------

2. Dealing Transactions of Non-U.S. Persons Involving U.S. and Other 
Counterparties
(a) Proposed Approach and Commenters' Views
    Under the proposal, non-U.S. persons also would be required to 
count their dealing transactions entered into with a U.S. person, other 
than a foreign branch.\354\ As discussed below, this proposed exclusion 
for transactions in which the counterparty is a foreign branch 
reflected concerns regarding U.S. banks being limited in their access 
to foreign counterparties when conducting dealing activity through 
their foreign branches.
---------------------------------------------------------------------------

    \354\ See proposed Exchange Act rule 3a71-3(b)(1)(ii). For those 
purposes, ``foreign branch'' was defined to mean any branch of a 
U.S. bank if: The branch is located outside the United States; the 
branch operates for valid business reasons; And the branch is 
engaged in the business of banking and is subject to substantive 
banking regulation in the jurisdiction where it is located. See 
proposed Exchange Act rule 3a71-3(a)(1). The proposal also included 
a definition of ``transaction conducted through a foreign branch'' 
that encompassed transactions solicited, negotiated, or executed 
through a foreign branch where the foreign branch is the 
counterparty to the transaction, and the transaction was not 
solicited, negotiated, or executed by a person within the United 
States. See proposed Exchange Act rule 3a71-3(a)(4).
    Under the CFTC's cross-border guidance, as a general matter non-
U.S. persons may exclude their dealing activities involving foreign 
branches of U.S. persons only if the U.S. person is registered with 
the CFTC as a swap dealer. See CFTC Cross-Border Guidance, 78 FR 
45319.
---------------------------------------------------------------------------

    The proposal solicited comment regarding whether non-U.S. persons 
should be required to count, towards their de minimis thresholds, 
transactions with U.S. persons or with foreign branches of U.S. banks. 
It also solicited comment regarding whether non-U.S. persons should be 
required to count the dealing transactions they enter into with 
registered security-based

[[Page 39110]]

swap dealers, and regarding whether non-U.S. persons should be able to 
conduct dealing transactions within the United States without 
registering if their transactions are with a registered security-based 
swap dealer.\355\
---------------------------------------------------------------------------

    \355\ See Cross-Border Proposing Release, 78 FR 30995.
---------------------------------------------------------------------------

    Two commenters took the position that non-U.S. persons should have 
to count their transactions with foreign branches of U.S. banks against 
the de minimis thresholds, noting that those foreign branches 
themselves fall within the ``U.S. person'' definition,\356\ and stating 
that excluding those transactions would serve as a loophole from 
regulation.\357\ In contrast, one commenter stated that such 
transactions should be excluded from the de minimis analysis even if 
U.S. personnel are involved in soliciting, negotiating, executing or 
booking the transaction.\358\
---------------------------------------------------------------------------

    \356\ See AFR Letter I at 6 (supporting the premise that offices 
and branches of U.S. persons are ``an integral part of the U.S. 
person'' but arguing that it is inconsistent to treat such foreign 
branches different from their U.S. parent institutions); BM Letter 
at 18 (noting that the foreign branch of a U.S. person should be 
treated no differently than the U.S. person).
    \357\ See AFR Letter I at 6-7 (``With these incentives [related 
to transactions with foreign branches, offices and guaranteed 
subsidiaries and affiliates of U.S. persons], it is unlikely that 
any foreign entities will choose to trade within the United States 
directly, and quite likely that U.S. financial institutions will 
simply advise their clients to trade with their foreign branches if 
they want to avoid Dodd-Frank''); BM Letter at 3, 18-19 (``This 
exception is no more than a loophole based upon a scare tactic, 
which will cause U.S. firms to operate their SBS business through 
offshore branches.'').
    \358\ See SIFMA/FIA/FSR Letter at A-15 to A-16 (supporting the 
proposed approach and urging the Commission to extend the exclusion 
to transactions between non-U.S. persons and foreign branches even 
if they are conducted within the United States).
---------------------------------------------------------------------------

    Commenters also addressed the application of the exception to non-
U.S. persons' dealing activities involving counterparties that are 
guaranteed affiliates of non-U.S. persons. The proposal did not require 
such transactions to be counted. One commenter expressed support for 
the fact that our proposal, unlike the CFTC's guidance, did not require 
non-U.S. persons to count certain transactions with non-U.S. 
counterparties that are guaranteed by U.S. persons.\359\ On the other 
hand, one commenter stated that non-U.S. persons should count against 
the thresholds security-based swaps entered into with guaranteed 
affiliates and subsidiaries of U.S. persons if those affiliates and 
subsidiaries are not included within the ``U.S. person'' 
definition.\360\ Also, as noted above, that commenter and one other 
commenter generally suggested that the presence of explicit or implicit 
guarantees of foreign affiliates should trigger application of the 
Exchange Act.\361\
---------------------------------------------------------------------------

    \359\ See SIFMA/FIA/FSR Letter at A-17. Under the CFTC's 
guidance, non-U.S. persons would generally count certain dealing 
transactions involving counterparties that are guaranteed affiliates 
of U.S. persons, subject to exceptions. See CFTC Cross-Border 
Guidance, 78 FR 45319.
    \360\ See AFR Letter I at 7-8 and note 28 (stating that the 
proposal ``incentivizes U.S. institutions to execute SBS indirectly 
by using foreign affiliates, subsidiaries, branches and offices,'' 
and thus lead U.S. institutions to incur risks ``by trading with 
foreign entities without the full regulatory protections of Dodd-
Frank''; also acknowledging that U.S. guarantors would count those 
trades for determining whether the guarantor is a major participant, 
but adding that major participants are subject to fewer requirements 
than dealers ``so this is not a satisfactory method for addressing 
the risks presented by U.S. parent institutions guaranteeing the 
swaps of foreign subsidiaries and affiliates'').
    \361\ See note 333, supra.
---------------------------------------------------------------------------

(b) Final Rule
    The final rule has been modified from the proposal to require non-
U.S. persons (other than conduit affiliates \362\) to count, against 
the de minimis thresholds, their dealing transactions with U.S. persons 
other than certain transactions with the foreign branches of registered 
security-based swap dealers.\363\ The proposal would have excluded all 
of the non-U.S. person's transactions with a foreign branch (other than 
``transactions conducted within the United States'') regardless of the 
branch's registration status.
---------------------------------------------------------------------------

    \362\ The separate counting requirements applicable to conduit 
affiliates are addressed above. See section 0, supra.
    \363\ See Exchange Act rule 3a71-3(b)(1)(iii)(A). ``Foreign 
branch'' is defined in Exchange Act rule 3a71-3(a)(2).
---------------------------------------------------------------------------

    The requirement that such non-U.S. persons must count their dealing 
transactions with U.S. persons against the de minimis thresholds 
reflects the fact that dealing activity involving counterparties who 
are U.S. persons necessarily involves the performance, at least in 
part, of dealing activity within the United States. As discussed above, 
a non-U.S. person engaged in dealing activity with U.S. persons in an 
amount sufficient to implicate the de minimis thresholds reasonably can 
be concluded to constitute dealing activity within the United States by 
virtue of indicating that the non-U.S. person is commonly known in the 
trade as a security-based swap dealer within the United States, and 
that the non-U.S. person is regularly entering into security-based 
swaps as an ordinary course of business within the United States.\364\ 
Similarly, that non-U.S. person seeks to profit by, among other things, 
providing liquidity within the United States and engaging in market 
making in security-based swaps within the United States, and its 
decision to engage in dealing activity with U.S. persons affects the 
liquidity of the security-based swap market within the United States. 
U.S. persons incur risks arising from this dealing activity, which in 
turn potentially creates risk to the U.S. financial system more 
generally. Transactions with U.S. persons further raise market 
transparency and counterparty protection concerns that Title VII is 
intended to address. Accordingly, the dealing activity of such a non-
U.S. person is best characterized as occurring, at least in part, 
within the United States to the extent that the dealing activity 
involves a U.S. person.\365\ No commenters to the Cross-

[[Page 39111]]

Border Proposing Release expressed opposition to generally requiring 
non-U.S. persons to count their dealing transactions with U.S. persons 
(other than comments regarding transactions with foreign branches, as 
discussed below).
---------------------------------------------------------------------------

    \364\ See section 0, supra. We also note that the Commission's 
traditional approach toward the registration of securities brokers 
and dealers under the Exchange Act generally requires registration 
of foreign brokers or dealers that, from outside the United States, 
induce or attempt to induce securities transactions by persons 
within the United States. See Cross-Border Proposing Release, 78 FR 
30990 n.213 and accompanying text.
    In this regard we recognize that Exchange Act rule 15a-6, which 
provides an exemption for the activities of certain foreign broker-
dealers, includes an exemption for transactions in securities with 
or for persons ``that have not been solicited by the foreign broker 
or dealer.'' Exchange Act rule 15a-6(a)(1). In adopting this 
provision, the Commission stated that it ``does not believe, as a 
policy matter, that registration is necessary if U.S. investors have 
sought out foreign broker-dealers outside the United States and 
initiated transactions in foreign securities markets entirely of 
their own accord.'' See 54 FR 30013, 30017 (Jul. 18, 1989). The 
Commission further stated that a narrow construction of 
``solicitation'' would be inconsistent with the Exchange Act. See 
id. at 30018. We do not believe that a similar unsolicited 
exception--which reflects a policy decision rather than a matter of 
statutory scope--would be appropriate in this context, particularly 
given that situations in which non-U.S. persons engage in dealing 
activity with U.S. persons in an amount that is significant enough 
to implicate the de minimis thresholds would not appear consistent 
with a policy allowing non-U.S. persons to accommodate transactions 
which U.S. persons initiate ``entirely of their own accord.'' 
Moreover, we note that the definition of ``security-based swap 
dealer'' includes persons that hold themselves out as security-based 
swap dealers or that are commonly known in the trade as security-
based swap dealers. See Exchange Act section 3(a)(71)(A). Such 
persons may not actively solicit transactions from particular 
customers, and nothing in the statutory definition suggests that 
active solicitation on the part of such persons is required for them 
to fall within the definition of ``security-based swap dealer.''
    \365\ For the above reasons, we conclude that this final rule is 
not being applied to persons who are ``transact[ing] a business in 
security-based swaps without the jurisdiction of the United 
States,'' within the meaning of Exchange Act section 30(c). See 
section 0, supra. We also believe, moreover, that this final rule is 
necessary or appropriate as a prophylactic measure to help prevent 
the evasion of the provisions of the Exchange Act that were added by 
the Dodd-Frank Act, and thus help ensure that the relevant purposes 
of the Dodd-Frank Act are not undermined. Without this rule, market 
participants could engage in dealing activity with persons within 
the U.S. market, causing the U.S. person counterparties to incur 
associated risks simply by using non-U.S. persons to engage in those 
transactions with U.S. counterparties.
---------------------------------------------------------------------------

    The final rule permits such non-U.S. persons not to count certain 
dealing transactions conducted through a foreign branch of a 
counterparty that is a U.S. bank as part of the de minimis analysis. 
For this exclusion to be effective, persons located within the United 
States cannot be involved in arranging, negotiating, or executing the 
transaction. Moreover--and in contrast to the proposal--the 
counterparty bank must be registered as a security-based swap 
dealer,\366\ unless the transaction occurs prior to 60 days following 
the effective date of final rules providing for the registration of 
security-based swap dealers.\367\ Registration of the counterparty U.S. 
bank would not be required for the exclusion to be effective before 
then, given that the non-U.S. person would not be able to know with 
certainty whether the U.S. bank in the future would register with the 
Commission as a security-based swap dealer.\368\
---------------------------------------------------------------------------

    \366\ See Exchange Act rule 3a71-3(b)(1)(iii)(A)(1).
    As addressed in the Cross-Border Proposing Release, the ability 
of U.S. banks to conduct security-based swap activity potentially 
will be limited by section 716 of the Dodd-Frank Act, which in part 
prohibits certain federal assistance to security-based swap dealers, 
and by section 619 of the Dodd-Frank Act, which in part prohibits 
banking entities from engaging in proprietary trading. See Cross-
Border Proposing Release, 78 FR 31002 n.326. The prohibitions of 
section 619 do not extend to certain market making activities. See 
Dodd-Frank Act section 619(d)(1)(B). In December of 2013, the 
Commission, together with the Office of the Comptroller of Currency, 
the Federal Reserve Board, the Federal Deposit Insurance 
Corporation, and the CFTC, issued final rules implementing section 
619 of the Dodd-Frank Act. See 79 FR 5536 (Jan. 31, 2014). In 
addition, based on our understanding of changes in the way major 
U.S. dealers engage with non-U.S. counterparties in the single-name 
CDS market following the issuance of the CFTC Cross-Border Guidance, 
we believe that few, if any, U.S. persons currently may participate 
in the single-name CDS market through their foreign branches.
    \367\ See Exchange Act rule 3a71-3(b)(1)(iii)(A)(2).
    \368\ In other words, this provision will help to avoid 
requiring non-U.S. persons to speculate whether their counterparties 
would register, and to face the consequences of their speculation 
being wrong.
---------------------------------------------------------------------------

    As we noted in the proposal, although a foreign branch is part of a 
``U.S. person,'' and dealing transactions with foreign branches pose 
risk to the U.S. financial system, requiring non-U.S. persons to count 
transactions with foreign branches ``could limit access of U.S. banks 
to non-U.S. counterparties when they conduct their foreign security-
based swap dealing activity through foreign branches because non-U.S. 
persons may not be willing to enter into transactions with them in 
order to avoid being required to register as a security-based swap 
dealer.'' \369\ We continue to believe that generally permitting a non-
U.S. person not to count those types of transactions that do not 
involve U.S. personnel against the thresholds thus should help avoid 
the disparate treatment of foreign branches that engage in security-
based swap dealing activity and that seek to access offshore dealing 
services, compared to other persons that engage in security-based swap 
dealing activities outside the U.S.
---------------------------------------------------------------------------

    \369\ Cross-Border Proposing Release, 78 FR 31003.
---------------------------------------------------------------------------

    The final rule differs from the proposal in that the final rule 
permits a non-U.S. person not to count its transactions with a foreign 
branch of a U.S. person against the de minimis thresholds only when the 
foreign branch is part of a registered security-based swap dealer (or 
for a temporary period of time prior to 60 days prior to the 
effectiveness of the dealer registration requirements), rather than 
transactions with any foreign branch. This tailoring of the proposal 
seeks to balance the above concerns that the proposed approach would 
result in disparate treatment of foreign branches and U.S. persons 
having inadequate access to liquidity located outside the United 
States, against the purposes of dealer regulation under Title VII. This 
consideration of competing interests results in an approach that will 
help to focus the application of the de minimis exception in such a way 
as to ensure that a registered security-based swap dealer is involved 
in the transaction, and thus that relevant Title VII provisions 
applicable to dealers (such as margin requirements) will apply to the 
transaction.\370\ This manner of focusing the exclusion also is 
consistent with the approach taken by the CFTC in its cross-border 
guidance.\371\
---------------------------------------------------------------------------

    \370\ We note that the mere involvement of a registered dealer 
in a transaction by itself would not implicate the above concerns 
regarding disparate treatment and liquidity that balance against the 
purposes of dealer regulation when it is not acting through a 
foreign branch, and thus by itself would not be sufficient to 
justify a more general exception to these counting principles (e.g., 
an exception for a non-U.S. person's dealing transactions involving 
any U.S. person that is registered as a security-based swap dealer).
    \371\ See CFTC Cross-Border Guidance, 78 FR 45319.
---------------------------------------------------------------------------

    In adopting an exclusion for certain transactions with foreign 
branches, we recognize that some commenters opposed having any such 
exclusion for a non-U.S. person's transactions with a foreign branch, 
stating that the breadth of the proposed exclusion would facilitate the 
avoidance of the Dodd-Frank Act even while U.S. entities incur the 
risks of transactions with foreign entities, and that the exclusion 
would be based on a ``scare tactic.'' \372\ We nonetheless believe that 
this approach is justified by concerns about disparate treatment, along 
with associated liquidity concerns.\373\ We also note that the 
modification of the proposal--such that transactions with foreign 
branches are excluded only if the foreign branch is part of a 
registered dealer--should help address concerns that the exclusion 
would promote evasion of the dealer requirements.\374\ Also, as 
discussed below, a transaction would not constitute a ``transaction 
conducted through a foreign branch'' if personnel located in the United 
States were responsible for arranging, negotiating or executing the 
transaction.
---------------------------------------------------------------------------

    \372\ See note 357, supra.
    \373\ In this regard we recognize that dealing activity 
involving foreign branches of U.S. banks does pose risks to the U.S. 
bank of which the foreign branch is a part and potentially to the 
U.S. financial system. Such risks are mitigated in part, however, in 
that foreign branches of banks that are registered security-based 
swap dealers will be subject to a number of Title VII regulatory 
requirements, including capital and margin requirements, that are 
designed to protect the system against those risks. Furthermore, 
this limitation is designed to help preserve liquidity throughout 
the system, given that absent the exclusion non-U.S. dealers may 
have reasons to favor non-U.S. counterparties to avoid the 
regulatory requirements of Title VII, which could threaten to 
fragment liquidity across geographical or jurisdictional lines.
    \374\ This modification--in conjunction with the fact that 
dealing transactions conducted through the foreign branch of a U.S. 
bank will have to be counted against the bank's de minimis 
thresholds regardless of counterparty (as was proposed)--will limit 
the possibility that U.S. banks could engage in a significant amount 
of security-based swap business through their foreign branches 
without either the banks or their non-U.S. counterparties being 
subject to dealer regulation.
---------------------------------------------------------------------------

    We also recognize that commenters took the view that such an 
exclusion is inconsistent with the fact that foreign branches fall 
within the ``U.S. person'' definition.\375\ In our view, the exclusion 
does not disregard the U.S.-person status of foreign branches. Instead, 
as discussed above, we believe that this exclusion is appropriate to 
address market concerns regarding disparate treatment of the dealing 
activity of foreign branches, notwithstanding that U.S.-person status.
---------------------------------------------------------------------------

    \375\ See note 356, supra.
---------------------------------------------------------------------------

    We also have considered the view of one commenter that all of a 
non-U.S. person's transactions with foreign branches should be excluded 
from the

[[Page 39112]]

analysis, even if U.S. personnel are involved in soliciting, 
negotiating, executing or booking the transaction.\376\ As discussed 
elsewhere, we conclude that a non-U.S. person's dealing transactions 
within the United States should be counted against the thresholds.\377\ 
More generally, for the reasons addressed above we conclude that the 
proposed exclusion related to a non-U.S. person's transactions with a 
foreign branch should be narrowed--not widened.
---------------------------------------------------------------------------

    \376\ See note 358, supra.
    \377\ See section 0, supra.
---------------------------------------------------------------------------

    The final rule retains the proposed definition of ``foreign 
branch,'' which encompasses any branch of a U.S. bank that is located 
outside the United States, operates for valid business reasons, and is 
engaged in the business of banking and is subject to substantive 
banking regulation in the jurisdiction where it is located.\378\ As 
discussed in the Cross-Border Proposing Release, we believe these 
factors appropriately focus on the location of the branch, the nature 
of its business and its regulation in a foreign jurisdiction.\379\
---------------------------------------------------------------------------

    \378\ See Exchange Act rule 3a71-3(a)(2).
    \379\ See Cross-Border Proposing Release, 78 FR 31002. No 
commenters specifically addressed the proposed definition of 
``foreign branch.''
    We are adopting this definition as proposed while recognizing 
that it differs from the CFTC's interpretation of ``foreign branch'' 
in its cross-border guidance. See CFTC Cross-Border Guidance, 78 FR 
45329 (interpreting ``foreign branch'' in part by reference to 
designation by banking regulators, and by reference to the 
accounting of profits and losses). However, we believe that any 
foreign branch of a U.S. bank that would generally be considered a 
foreign branch under the CFTC Cross-Border Guidance also likely 
would be a foreign branch under our final rule.
---------------------------------------------------------------------------

    The final rule modifies the proposed definition of ``transaction 
conducted through a foreign branch'' to provide that the definition 
addresses transactions that are arranged, negotiated, and executed by a 
U.S. person through a foreign branch if both: (a) The foreign branch is 
the counterparty to the transaction; and (b) the security-based swap 
transaction is arranged, negotiated, and executed on behalf of the 
foreign branch solely by persons located outside the United 
States.\380\ We believe that this definition identifies the functions 
associated with foreign branch activity in a manner that appropriately 
focuses the exclusion for non-U.S. person's transactions toward 
situations in which the branch performs the core dealing functions 
outside the United States.\381\
---------------------------------------------------------------------------

    \380\ See Exchange Act rule 3a71-3(a)(3)(i). No commenters 
specifically addressed the proposed definition.
    \381\ The proposed definition would have addressed transactions 
that are ``solicited, negotiated, or executed'' by persons outside 
the United States. The final rule refers to ``arranged'' in lieu of 
``solicited'' to reflect the fact that a person may engage in 
dealing activity not only through transactions that the person 
actively solicits, but also through transactions that result from 
counterparties reaching out to the person. See generally Exchange 
Act section 3(a)(71)(A)(i) (defining ``security-based swap dealer'' 
in part to encompass any person who ``holds themselves out as a 
dealer in security-based swaps'').
    Under the proposed rule, ``transaction conducted through a 
foreign branch'' was defined, in part, to exclude any transaction 
solicited, negotiated, or executed by a person within the United 
States on behalf of the foreign branch. See proposed Exchange Act 
rule 3a71-3(a)(4)(i)(B). Under the final rule, this element of the 
definition is set forth in the affirmative and provides that the 
transaction must be arranged, negotiated, and executed on behalf of 
the foreign branch solely by persons located outside the United 
States. See Exchange Act Rule 3a71-3(a)(3)(i)(B). Consistent with 
the proposed rule, the final definition requires all relevant 
activity to be performed outside the United States for a transaction 
to fall within the definition of ``transaction conducted through a 
foreign branch.''
---------------------------------------------------------------------------

    Similar to the proposal, the final definition of ``transaction 
conducted through a foreign branch'' also states that a person need not 
consider its counterparty's activities in connection with the 
transaction--i.e., where its counterparty's personnel arranged, 
negotiated and executed the transaction--if the person received a 
representation from the counterparty that the transaction is arranged, 
negotiated, and executed on behalf of the branch solely by persons 
located outside the United States, unless the person knows or has 
reason to know that the representation is not accurate. For these 
purposes a person would have reason to know the representation is not 
accurate if a reasonable person should know, under all of the facts of 
which the person is aware, that it is not accurate.\382\ This is 
intended to help address operational difficulties that a non-U.S. 
person otherwise could face in investigating the activities of its 
counterparty to ensure compliance with the rule.
---------------------------------------------------------------------------

    \382\ See Exchange Act rule 3a71-3(a)(3)(ii). This 
representation provision within the final definition also contains 
certain clarifying changes from the proposal, in part to reflect the 
reference to ``arranged'' in lieu of ``solicited.'' See note 364, 
supra. The final rule has been modified from the proposal to reflect 
the change in the definition of ``transaction conducted through a 
foreign branch'' described above. See note 382, supra. Also, 
consistent with the analogous representation provisions of the 
``U.S. person'' definition, the final rule also changes the proposal 
to reflect that the non-U.S. person may not rely on the 
representation if it knows that the representation is not accurate, 
or has reason to know that the representation is not accurate; for 
these purposes a person would have reason to know the representation 
is not accurate if a reasonable person should know, under all of the 
facts of which the person is aware, that it is not accurate. This 
``know or have reason to know'' standard should help ensure that 
potential security-based swap dealers and major security-based swap 
participants do not disregard facts that may call into question the 
validity of the representation. See note 302, supra, and 
accompanying text. In addition, applying a single standard of 
reliance to all representations regarding the status of a person or 
transaction for purposes of the final rule will reduce the potential 
complexity of establishing policies and procedures associated with 
reliance on such representations. See section 0, supra.
---------------------------------------------------------------------------

    Separately, the final rule, consistent with the proposal, does not 
require such non-U.S. persons to count, against the de minimis 
thresholds, their dealing transactions with non-U.S. persons whose 
security-based swap transactions are guaranteed by a U.S. person. We 
recognize the significance of commenter concerns regarding the risk 
posed to the United States by such security-based swaps, and regarding 
the potential use of such guaranteed affiliates to evade the Dodd-Frank 
Act.\383\ We nonetheless believe that such concerns are adequately 
addressed by the requirement that guaranteed affiliates count their own 
dealing activity against the de minimis thresholds when the 
counterparty has recourse to a U.S. person. Although there can remain 
residual risk to U.S. markets associated with the security-based swaps 
involving such non-U.S. guaranteed affiliates, we do not believe that 
such risk is significant enough to warrant a requirement that non-U.S. 
persons count all of their dealing activity involving such non-U.S. 
guaranteed affiliates against their own de minimis thresholds. In this 
regard we note that such a requirement would necessitate certain non-
U.S. persons to incur compliance costs associated with assessing 
whether their counterparties are guaranteed affiliates.\384\ For 
similar reasons, the final rule does not require such non-U.S. persons 
to count, against the thresholds, their dealing transactions involving 
non-U.S. persons that are conduit affiliates.
---------------------------------------------------------------------------

    \383\ See note 360, supra.
    \384\ In taking this position we also recognize that the CFTC 
takes a different approach in its cross-border guidance, which 
generally considers it appropriate for such non-U.S. persons to 
count their dealing transactions with guaranteed affiliate 
counterparties, subject to certain exceptions. See CFTC Cross-Border 
Guidance, 78 FR 45319, 45324 (stating there generally is no need for 
non-U.S. persons to count such dealing transactions with a 
counterparty that is a registered dealer, an affiliate of a 
registered dealer whose own dealing activities are below the 
relevant de minimis thresholds, or is guaranteed by a U.S. person 
that is not a financial entity).
---------------------------------------------------------------------------

F. Application of the Exception's Aggregation Principles to Cross-
Border Dealing Activity

1. Proposed Approach and Commenters' Views
    The Cross-Border Proposing Release also addressed the cross-border

[[Page 39113]]

implementation of a previously adopted rule requiring a person to count 
dealing transactions by its affiliates against its own de minimis 
thresholds.\385\ Under the proposal, a person engaged in dealing 
activity would have had to count: (i) Dealing transactions by its U.S. 
affiliates, including transactions conducted through a foreign branch; 
and (ii) all dealing transactions of its non-U.S. affiliates where the 
counterparty is a U.S. person other than a foreign branch, or where the 
transaction is conducted within the United States.\386\
---------------------------------------------------------------------------

    \385\ See Exchange Act rule 3a71-2 (requiring that a person 
count against the thresholds its dealing activity plus that of ``any 
other entity controlling, controlled by, or under common control 
with the person'').
    \386\ See proposed Exchange Act rule 3a71-3(b)(2).
---------------------------------------------------------------------------

    In the Cross-Border Proposing Release we took the view that the 
approach would be consistent with the Dodd-Frank Act's statutory focus 
on the U.S. security-based swap market, in that the dealing of a 
person's U.S. affiliates would impact the U.S. financial system 
regardless of the location of the affiliate's counterparty, but that 
the dealing of a person's non-U.S. affiliates with other non-U.S. 
persons outside the United States would not impact the U.S. financial 
system to the same extent. We also took the view that the aggregation 
approach would minimize the opportunity for a person to evasively 
engage in large amounts of dealing activity, and that the approach 
would be in accordance with other aspects of the proposal governing 
which transactions would be applied against the thresholds.\387\
---------------------------------------------------------------------------

    \387\ See Cross-Border Proposing Release, 78 FR 31004.
---------------------------------------------------------------------------

    The proposal separately would have permitted a person not to 
include, as part of the de minimis analysis, transactions by an 
affiliate that is registered as a security-based swap dealer, so long 
as the person's dealing activity is ``operationally independent'' of 
the dealer's activity.\388\ For these purposes, the person and its 
registered dealer affiliate would be considered to be ``operationally 
independent'' if the two entities maintained separate sales and trading 
functions, operations (including separate back offices) and risk 
management.\389\
---------------------------------------------------------------------------

    \388\ See proposed Exchange Act rule 3a71-4.
    \389\ See Cross-Border Proposing Release, 78 FR 31005.
---------------------------------------------------------------------------

    This aspect of the proposal recognized that any person affiliated 
with a registered dealer otherwise would have to count the registered 
affiliate's dealing activity against the person's own de minimis 
thresholds, which likely would require the person to register as a 
dealer if it engages in any dealing activity. We stated in the Cross-
Border Proposing Release that, in our preliminary view, this outcome of 
preventing all affiliates of a dealer from taking advantage of the de 
minimis exception would not be consistent with the statutory purpose of 
the exception. We noted, moreover, that this scenario would not appear 
to raise the anti-evasion concerns at the core of the aggregation 
provisions, given that it would apply only where a corporate group 
already included a registered dealer subject to Commission 
oversight.\390\
---------------------------------------------------------------------------

    \390\ See id.
---------------------------------------------------------------------------

    A number of commenters opposed the operational independence 
condition to the proposed exclusion, arguing that it would hinder 
operational efficiency--including the use of group-wide risk 
management--without any countervailing benefit,\391\ and that the 
requirement was vague and would impede the growth of different business 
models.\392\ Commenters also pointed out that, in the parallel 
discussion in the CFTC's cross-border guidance, the CFTC did not 
interpret its cross-border statute as requiring operational 
independence.\393\ One of these commenters further opposed the use of 
any aggregation requirement in connection with the de minimis 
exception.\394\ One commenter expressed particular concerns regarding 
the application of aggregation principles in connection with joint 
venture arrangements involving dealer shareholders.\395\ One commenter 
supported the proposed approach as an anti-evasion safeguard.\396\ One 
commenter suggested we eliminate the ``operationally independent'' 
requirement but, to prevent evasion of the dealer requirements, 
prohibit a registered dealer from using an unregistered affiliate as a 
booking vehicle.\397\
---------------------------------------------------------------------------

    \391\ See SIFMA/FIA/FSR Letter at A-13 to A-15 (stating that the 
operational independence condition is overbroad and unnecessary to 
achieve the statutory goals in that it ``would have the effect of 
tying registration requirements to firms' internal risk management 
strategies or limited efficient leverage of back office functions'' 
without any regulatory benefit and noting that the requirement would 
be burdensome for smaller market participants who would need to 
register solely due to their affiliation with larger entities); IIB 
Letter at 14-15 (stating that preventing the sharing of group-wide 
risk management and other resources would have the effect of 
nullifying the exclusion from the aggregation requirement for 
affiliates that are registered security-based swap dealers); JSDA 
Letter at 4-5 (stating that the ``operationally independent'' 
condition would discourage efficient global management of 
transactions).
    \392\ See JFMC Letter at 6-7.
    \393\ See SIFMA/FIA/FSR Letter at A-15; JFMC Letter at 6-7; IIB 
Letter at 14.
    \394\ See SIFMA/FIA/FSR Letter at A-12 to A-13 (stating that the 
aggregation requirement ``effectively disregards the legal 
independence of entities'' and that the Commission's existing anti-
evasion capabilities are sufficient to guard against abuses; also 
stating that had the aggregation requirement been proposed as part 
of the underlying definitional rules SIFMA would have objected to 
the requirement).
    \395\ See JSDA Letter at 5 (requesting that aggregation not be 
required of the minority shareholder of a joint venture); see also 
MUFJ Letter at 2-8 (generally opposing aggregation for such joint 
venture arrangements).
    \396\ See BM Letter at 17 (stating that the condition is a 
safeguard that addresses evasion concerns while promoting the 
purpose of the de minimis exception).
    \397\ IIB Letter at 14-15.
---------------------------------------------------------------------------

2. Final Rule
    The final rule governing aggregation, like the proposal, generally 
applies the principles that govern the counting of a person's own 
dealing activity to also determine how the person must count its 
affiliates' dealing activities for purposes of the de minimis 
exception. Accordingly, the rule has been modified from the proposal to 
be consistent with changes to the proposed provisions regarding the 
counting of a person's dealing activity.
    Moreover, the final rule modifies the exclusion from having to 
aggregate the dealing transactions of a person's registered dealer 
affiliate from the proposal, both to remove the operational 
independence condition and to address situations in which a person's 
affiliate has exceeded the de minimis thresholds but is in the process 
of registering as a dealer.
(a) General Provisions Regarding Aggregation of Cross-Border 
Transactions
    The final rule, like the proposal, provides in part that if a 
person engages in dealing transactions counted against the de minimis 
thresholds, the person also must count all dealing transactions in 
which any U.S. person controlling, controlled by, or under common 
control with the person engages, including transactions conducted 
through a foreign branch.\398\ The final rule has been revised from the 
proposal to further provide that the person should

[[Page 39114]]

count all dealing transactions of its conduit affiliates.\399\ Finally, 
the final rule has been modified from the proposal to provide that the 
person must count all dealing transactions of non-U.S. person 
affiliates that: (a) Are entered into with U.S. persons other than the 
foreign branches of registered dealers; or (b) constitute dealing 
activity subject to a guarantee giving the non-U.S. person's 
counterparty rights of recourse against a U.S. person affiliated with 
the non-U.S. person.\400\
---------------------------------------------------------------------------

    \398\ See Exchange Act rule 3a71-3(b)(2)(i). Consistent with our 
position in the Intermediary Definitions Adopting Release (see 77 FR 
30631 n.437) and in the Cross-Border Proposing Release (see 78 FR 
31004), and with our position regarding the de minimis exception 
when there is a right of recourse against a U.S. person (see note 
336, supra) for purposes of determining whether a person is 
controlling, controlled by, or under common control with another 
person (i.e., an affiliate), we interpret control to mean the direct 
or indirect power to direct or cause the direction of the management 
and policies of a person, whether through the ownership of voting 
securities, by contract or otherwise.
    \399\ See Exchange Act rule 3a71-3(b)(2)(ii).
    \400\ See Exchange Act rule 3a71-3(b)(2)(iii) (cross-referencing 
the direct counting provisions of paragraph (b)(1)(iii), applicable 
to non-U.S. persons other than conduit affiliates); see also 
Sections 0, supra (addressing counting by non-U.S. persons engaged 
in dealing activity whose counterparties are U.S. persons); and 0 
(addressing counting by non-U.S. persons engaged in dealing activity 
when their counterparties have recourse against a U.S. person).
---------------------------------------------------------------------------

    These modifications from the proposal are consistent with similar 
modifications made to the rules regarding the counting of a person's 
own transactions for purposes of the de minimis exception, and reflect 
the risk concerns and interests discussed above. The aggregation 
requirement serves to prevent evasion of the dealer registration 
requirements by persons that otherwise may seek to avoid dealer 
registration by simply dividing up dealing activity in excess of the de 
minimis thresholds among multiple affiliates.\401\ In keeping with that 
purpose, in the cross-border context it is appropriate to require a 
person's affiliates to count the same dealing transactions that the 
person itself would be required to count for purposes of the de minimis 
exception--unless, as discussed below, the person is registered as a 
dealer.\402\ Because this approach incorporates the direct counting 
standards discussed above, we believe that the approach implements the 
de minimis exception in a manner that is consistent with the Dodd-Frank 
Act's focus on the U.S. security-based swap market.\403\
---------------------------------------------------------------------------

    \401\ See Intermediary Definitions Adopting Release, 77 FR 
30631.
    \402\ As noted above, one commenter questioned whether any 
aggregation principles should be applied in the de minimis context, 
arguing that the requirement disregards the legal independence of 
entities and disregards the possibility that two entities under 
common control may operate independently of each other. The comment 
further stated that the Commission's existing anti-evasion 
capacities are sufficient to guard against abuse without requiring 
aggregation. See note 391, supra. In our view, however, the 
aggregation provision is tailored appropriately to prevent evasion 
of the limits of the de minimis exception. See Intermediary 
Definitions Adopting Release, 77 FR 30631 (discussing the use of the 
aggregation principles in light of the ``increased notional 
thresholds of the final [definitional] rules, and the resulting 
opportunity for a person to evasively engage in large amounts of 
dealing activity if it can multiply those thresholds''; and 
addressing the use of the common control standard ``as a means 
reasonably designed to prevent evasion of the limitations of that 
exception''). We further believe that this aggregation approach 
would be more effective at implementing the de minimis exception 
than a case-by-case approach, because the aggregation provision 
would provide upfront objective standards regarding which affiliate 
transactions must be counted against the thresholds, and thus help 
avoid uncertainty. Moreover, as discussed below, we are revising the 
aggregation provisions to allow the exclusion of the positions of 
affiliates that are registered as dealers (or that are in the 
process of registering), in response to comments.
    \403\ In short, we believe that this final rule is necessary or 
appropriate as a prophylactic measure to help prevent the evasion of 
the provisions of the Exchange Act that were added by the Dodd-Frank 
Act, and thus help ensure that the relevant purposes of the Dodd-
Frank Act are not undermined. Without this rule, corporate groups 
may engage in dealing activity above the de minimis thresholds 
within the United States while avoiding dealer regulation under 
Title VII by dividing up the dealing activity among multiple 
affiliated entities, none of which individually engages in dealing 
activity above the thresholds.
---------------------------------------------------------------------------

(b) Application To Dealing Activities of Registered Affiliates
    In addition, we are adopting an exception which provides that a 
person need not count against the de minimis thresholds the security-
based swap transactions of an affiliate that either is: (1) Registered 
with the Commission as a dealer; or (2) deemed not to be a dealer 
pursuant to the provisions of Exchange Act rule 3a71-2(b), which 
addresses persons who have exceeded the de minimis thresholds but are 
in the process of registering.\404\
---------------------------------------------------------------------------

    \404\ See Exchange Act rule 3a71-4. This exception, when 
available, applies to all of the dealing of a person's registered 
dealing affiliate (or affiliate deemed not to be a dealer pursuant 
to the provisions of Exchange Act rule 3a71-2(b)), regardless of the 
counterparty or the location of the transaction, and regardless of 
whether the dealing transaction otherwise implicates cross-border 
issues.
---------------------------------------------------------------------------

    In part, this final rule has been modified from the proposal by 
removing the proposed operational independence condition. After 
considering the views of several commenters that the proposed 
operational independence condition would tend to inhibit operational 
efficiencies,\405\ we are persuaded that excluding the condition from 
the final rule would help facilitate efficiency and avoid deterring 
beneficial group-wide risk management practices. In this regard we also 
note that even with the removal of the proposed operational 
independence condition, the aggregation provisions would prevent a 
corporate group from cumulatively engaging in aggregate relevant 
dealing activity--outside of its registered dealers--in excess of the 
de minimis thresholds.\406\
---------------------------------------------------------------------------

    \405\ See notes 391 and 392, supra.
    \406\ We recognize that one commenter supported the proposed 
operational independence condition, stating that the condition would 
address evasion concerns while promoting the statutory purpose of 
the de minimis exception. See note 396, supra. After further 
consideration, however, we believe that the fact that the 
aggregation provision will still limit cumulative group-wide dealing 
activity by unregistered entities to no more than the de minimis 
thresholds should suffice as a safeguard against evasive activity. 
This is particularly true given that those thresholds are 
significantly below the amounts of dealing typically engaged in by 
persons above the thresholds. See Intermediary Definitions Adopting 
Release, 77 FR 30636 (noting that, out of 28 potential dealers that 
had three or more counterparties that themselves were not recognized 
as dealers by ISDA, 15 of those exceeded a notional transaction 
threshold of $100 billion and accounted for over 98 percent of the 
total activity of all 28 entities).
    We also note that certain commenters raised concerns about the 
application of the aggregation provisions generally in the context 
of joint ventures, particularly in the context of minority 
shareholders. See note 395, supra. Those issues regarding the scope 
of the aggregation provisions that the Commission previously adopted 
are not unique to the cross-border context, and in our view are 
outside the scope of this release. We note generally, however, that 
in the Intermediary Definitions Adopting Release we concluded that a 
common control standard is more appropriate than a majority-
ownership standard in the context of the anti-evasive purposes of 
the aggregation requirement. See Intermediary Definitions Adopting 
Release, 77 FR 30631 n.437.
---------------------------------------------------------------------------

    The final rule also has been modified from the proposal to permit a 
person to rely on this provision if its affiliate is in the process of 
registering as a dealer. The de minimis rule generally provides that a 
person that is not registered as a dealer but that no longer falls 
below the applicable de minimis thresholds nonetheless will be deemed 
not to be a dealer until the earlier of the date in which it submits a 
complete application for registration as a dealer, or two months after 
the end of the month that it becomes no longer able to take advantage 
of the exception.\407\ That provision was intended to avoid market 
disruption in conjunction with the registration process.\408\ Upon 
further consideration, we similarly believe that the provision at issue 
here should allow a person not to count the transactions of its 
affiliates that are in the process of registering as dealers, to avoid 
market disruption that may otherwise result due to the prospect of a 
person intermittently exceeding the de minimis thresholds when its 
affiliates are in the process of registering. Such situations, 
moreover, would not appear to provide practical opportunities for 
corporate groups to evade dealer registration by

[[Page 39115]]

dividing dealing activities among multiple affiliates.
---------------------------------------------------------------------------

    \407\ See Exchange Act rule 3a71-2(b).
    \408\ See Intermediary Definitions Adopting Release, 77 FR 
30643.
---------------------------------------------------------------------------

G. Exception for Cleared Anonymous Transactions

1. Proposed Approach and Commenters' Views
    Three commenters expressed the view \409\ that the Commission's 
final rules should include a provision similar to an aspect of the CFTC 
Cross-Border Guidance, which stated the CFTC's view that certain 
dealing transactions that are executed anonymously and cleared 
generally would not be counted against the de minimis thresholds.\410\ 
One commenter particularly emphasized that market participants would 
not have information available regarding a counterparty's identity in 
an anonymous transaction, and suggested that the prospect of becoming 
subject to dealer registration could deter non-U.S. liquidity providers 
from participating on security-based swap markets that provide access 
to U.S. persons.\411\
---------------------------------------------------------------------------

    \409\ See IIB Letter at 13-14; JSDA Letter at 4; JFMC Letter at 
5.
    \410\ See CFTC Cross-Border Guidance, 78 FR 45325 (stating that 
when a non-U.S. person that is not a guaranteed or conduit affiliate 
enters in to swaps anonymously on CFTC-registered platforms, and the 
swaps are cleared, the non-U.S. person would generally not have to 
count those swaps against the applicable thresholds, noting that, in 
such circumstances, the non-U.S. person would not have any prior 
information regarding its counterparty; also interpreting the CFTC's 
cross-border jurisdiction such that, with respect to such cleared 
and anonymously executed swaps, the non-U.S. person would generally 
satisfy certain transaction-level requirements).
    The Cross-Border Proposing Release generally requested comment 
as to whether the proposed de minimis approach would place market 
participants at a competitive advantage or disadvantage, and as to 
whether there are other measures the Commission should consider to 
implement the de minimis exception. See Cross-Border Proposing 
Release, 78 FR 30996. More generally, the Commission also requested 
comment regarding the proposals as whole, and regarding consistency 
with the CFTC's cross-border approach, including comments regarding 
the impact of differences between the two approaches, and comments 
regarding whether the Commission's proposed approach should be 
modified to conform with that taken by the CFTC. See id. at 31102.
    \411\ See IIB Letter at 13-14.
---------------------------------------------------------------------------

2. Final Rule
    After considering commenter views we have concluded that this type 
of exception is appropriate, particularly given that the final de 
minimis rules turn in part on the domicile of the counterparty to the 
non-U.S. person, and this information would be unavailable to the non-
U.S. person that is a counterparty to a cleared anonymous transaction. 
Absent such an exception, it is possible that execution facilities 
would exclude U.S. market participants to prevent their non-U.S. 
members from having to face the prospect of dealer regulation, which 
could impair market liquidity and increase costs and risks.\412\
---------------------------------------------------------------------------

    \412\ The exclusion for cleared anonymous transactions is 
intended to avoid placing market participants in a position where 
counterparty-related information needed for compliance would be 
unavailable, which may in turn lead execution facilities to exclude 
U.S. persons. We also note that the exclusion would strengthen 
incentives for shifting activity to transparent trading venues, 
which is a key goal of Title VII. While these transactions may pose 
risks to U.S. persons and to the U.S. financial system as a whole, 
those risks may be offset by the liquidity and transparency benefits 
that occur due to trading on transparent venues. Furthermore, the 
characteristics expected to be associated with central clearing 
(e.g., the daily exchange of mark-to-market margin) have parallels 
to the capital and margin requirements for registered dealers in 
terms of helping to protect the financial system against the risks 
introduced by particular transactions. On the other hand, such risk 
mitigation may be absent to the extent that the relevant clearing 
agency--which under the exception is not required to be registered 
with the Commission--does not follow standards consistent with the 
Title VII requirements applicable to registered clearing agencies.
---------------------------------------------------------------------------

    For those reasons, the final rule has been revised from the 
proposal to except, from having to be counted against the de minimis 
thresholds, certain security-based swap transactions that a non-U.S. 
person enters into anonymously on an execution facility or national 
securities exchange and that are cleared through a clearing 
agency.\413\
---------------------------------------------------------------------------

    \413\ See Exchange Act rule 3a71-5. This exception solely 
addresses the issue of whether a particular transaction needs to be 
counted against the de minimis thresholds. It does not address the 
issue of when a particular execution facility or clearing agency 
needs to register with the Commission. The Cross-Border Proposing 
Release separately addressed cross-border issues regarding when an 
execution facility or clearing agency would have to register with 
the Commission. See Cross-Border Proposing Release, 78 FR 31054-58 
(regarding security-based swap execution facility registration), 78 
FR 31038-40 (regarding clearing agency registration); see also 
Registration and Regulation of Security-Based Swap Execution 
Facilities, Exchange Act Release No. 63825 (Feb. 2, 2011), 76 FR 
10948 (Feb. 28, 2011) (proposed rules regarding registration and 
other requirements applicable to security-based swap execution 
facilities).
    This exception also does not address the application of section 
5 of the Securities Act to such transactions. Rule 239 under the 
Securities Act (17 CFR 230.239) provides an exemption under the 
Securities Act for certain security-based swap transactions 
involving an eligible clearing agency. This exemption does not apply 
to security-based swap transactions not involving an eligible 
clearing agency, such as the anonymous transactions entered into on 
the execution facility or national securities exchange, regardless 
of whether the security-based swaps subsequently are cleared by an 
eligible clearing agency. See Exemptions for Security-Based Swaps 
Issued By Certain Clearing Agencies, Securities Act Release No. 9308 
(Mar. 30, 2012), 77 FR 20536 (Apr. 5, 2012).
---------------------------------------------------------------------------

    In particular, the final rule in part provides that a non-U.S. 
person need not count such cleared anonymous transactions against the 
threshold, unless the non-U.S. person is a conduit affiliate.\414\ In 
addition, the final rule permits an affiliate (that itself may be a 
U.S. or non-U.S. person) of such a non-U.S. person not to count such 
transactions of the non-U.S. person against the affiliate's own 
thresholds for purposes of the aggregation provisions, unless the non-
U.S. person is a conduit affiliate.\415\
---------------------------------------------------------------------------

    \414\ See Exchange Act rule 3a71-5(a). This exception applies 
regardless of whether the execution facility on which the 
transaction is entered into, or the clearing agency through which it 
is cleared, needs to be registered with the Commission. This is 
because the exclusion of U.S. market participants from an overseas 
execution or clearing facility--a result this exception is intended 
to guard against--could impair the markets regardless of whether the 
facility from which U.S. persons are excluded in fact are 
registered, and thus lead to increased costs and risks.
    \415\ See Exchange Act rule 3a71-5(a)(2), (b).
---------------------------------------------------------------------------

    The exception is not available when the non-U.S. person is a 
conduit affiliate because conduit affiliates are required to count all 
of their dealing transaction against the thresholds regardless of 
whether their counterparty is a U.S. or a non-U.S. person. As a result, 
the anonymous nature of the transaction would not cause implementation 
issues for conduit affiliates.
    For purposes of the exception, a transaction would be ``anonymous'' 
only if the counterparty to the transaction in fact is unknown to the 
non-U.S. person prior to the transaction. The transaction would not be 
``anonymous'' if, for example, a person submitted the transaction to an 
execution facility after accepting a request for quotation from a known 
counterparty or a known group of potential counterparties, even if the 
process of submitting the transaction itself did not involve a named 
counterparty.

H. Additional Issues

1. Particular Activities and Entities
    Commenters to the Cross-Border Proposing Release raised issues 
regarding the application of the dealer registration requirement to 
limited security-based swap activities by certain ``run-off'' 
entities,\416\ and in the context of portfolio compression.\417\ Those

[[Page 39116]]

issues are not unique to the cross-border context, and are outside of 
the scope of this release. We generally note, moreover, that in the 
Intermediary Definitions Adopting Release we considered and rejected 
certain requests for categorical exclusions from dealer definition. 
With regard to issues regarding the relevance of those or other 
activities to the de minimis analysis, we generally note that the 
dealer registration requirement necessarily distinguishes between a 
person's dealing and non-dealing activities.\418\
---------------------------------------------------------------------------

    \416\ See SIFMA/FIA/FSR Letter at A-18 (addressing entities that 
are consolidating U.S.-facing dealing activities worldwide into one 
or a few registered dealers, but that may not be able to transfer or 
terminate their legacy security-based swap portfolios and thus may 
need to enter into new transactions in connection with those legacy 
portfolios); JSDA Letter at 4 (suggesting that including contract 
cancellations, alternations and transfers within the de minimis 
calculation ``might invite a rush of cancellation before the 
enforcement of the proposed rules and make it difficult to cancel or 
transfer contracts for reducing risks'').
    \417\ See TriOptima Letter at 3-4 (explaining that portfolio 
compression services do not involve any of the enumerated factors 
that the Commission has identified as indicators of dealing 
activity).
    \418\ See generally Intermediary Definitions Adopting Release, 
77 FR 30616-20 (discussing application of the dealer-trader 
distinction to security-based swap transactions).
---------------------------------------------------------------------------

2. Foreign Public Sector Financial Institutions and Government-Related 
Entities
    As discussed above, the final rule defining ``U.S. person'' (like 
the proposed definition of that term) specifically excludes several 
foreign public sector financial institutions and their agencies and 
pension plans, and more generally excludes any other similar 
international organization and its agencies and pension plans.\419\ 
Certain commenters requested that we take further action to address the 
application of the dealer definition and its de minimis exception to 
security-based swap activities involving such foreign public sector 
financial institutions. Those commenters in part stated that such 
organizations should not be required to register as security-based swap 
dealers, and that those organizations' affiliates should be considered 
immune from domestic regulation to the same extent as the organizations 
themselves.\420\ In our view, however, such issues are outside the 
scope of this release, given that the source of any such privileges and 
immunities is found outside of the Dodd-Frank Act and the federal 
securities laws.
---------------------------------------------------------------------------

    \419\ See section 0, supra.
    \420\ See, e.g., WB/IFC Letter at 2-4, 6-7 (also stating that 
such organizations should not be required to register as major 
participants or to clear security-based swaps, and that affiliates 
of such organizations should be excluded from the ``U.S. person'' 
definition); SC Letter at 16-24 (contending that the privileges and 
immunities afforded such organizations would be violated by their 
direct regulation as dealers or major participants, or by direct 
regulation equivalents, and that affiliates of such organizations 
also are immune from regulation); IDB Letter at 5. See also notes 
225 and 229, supra.
---------------------------------------------------------------------------

    Separately, commenters stated that non-U.S. persons should not have 
to count their dealing transactions involving those organizations 
against the non-U.S. persons' dealer de minimis thresholds, on the 
grounds that counting such transactions would constitute the 
impermissible regulation of such organizations even if those were 
``transactions conducted within the United States.'' \421\ As noted 
below, we have determined not to include the ``transaction conducted 
within the United States'' provisions in this final rule. With that 
said, we do not concur with the suggestion that counting a person's 
dealing transactions with such organizations against the de minimis 
thresholds--when otherwise provided for by the rules--involves the 
regulation of such organizations. Requiring a person to count, against 
the de minimis thresholds, the person's dealing transactions involving 
such an international organization as counterparty simply reflects the 
application of the federal securities laws to that person and its 
dealing activities, and does not constitute the regulation of the 
international organization. A person's security-based swap dealing 
transaction with such an international organization accordingly are 
considered the same, for purposes of applying the de minimis thresholds 
and other Title VII requirements, as a dealing transaction with some 
other non-U.S. person counterparty.
---------------------------------------------------------------------------

    \421\ See SC Letter at 18-19 (stating that the inclusion of such 
transactions against a counterparty's de minimis thresholds would be 
``tantamount to regulation of the operations of the World Bank and 
the IFC, in violation of their privileges and immunities''); WB/IFC 
Letter (incorporating SC Letter). These comments did not object to 
the inclusion of transactions between a U.S. person and an FPSFI, 
because the Commission would have jurisdiction to regulate that 
``U.S. person'' for other reasons and it would not be regulated 
simply because it does business with the FPSFI. See SC Letter at 
note 21.
---------------------------------------------------------------------------

    Finally, two commenters stated that they should not be subject to 
the possibility of dealer regulation for comity reasons, on the grounds 
that they are arms of a foreign government.\422\ We believe that such 
issues best are addressed on a case-by-case basis, but we generally 
note that the prospect of dealer regulation is relevant only to the 
extent that a person engages in dealing activity.
---------------------------------------------------------------------------

    \422\ See KfW Letter; FMS-WM Letter.
---------------------------------------------------------------------------

I. Economic Analysis of the Final Cross-Border Dealer De Minimis Rule

    These final rules and guidance regarding the cross-border 
implementation of the de minimis exception to the ``security-based swap 
dealer'' definition will affect the costs and benefits of dealer 
regulation by determining which dealing transactions will be counted 
against the exception's thresholds.\423\ The cross-border rules have 
the potential to be important in determining the extent to which the 
risk mitigation and other benefits of Title VII (such as market 
transparency and customer protection) are achieved, given the core role 
that dealers play within the security-based swap market and the 
market's cross-border nature.\424\
---------------------------------------------------------------------------

    \423\ As we noted in the Intermediary Definitions Adopting 
Release, because the de minimis exception will determine which 
entities engaged in security-based swap dealing activity ultimately 
will be regulated as dealers under Title VII, the exception will 
have an effect on the burdens and benefits associated with dealer 
regulation. See Intermediary Definitions Adopting Release, 77 FR 
30628-30. The thresholds used in the de minimis exception 
accordingly were set at a level that sought to meet the goals of 
Title VII while appropriately minimizing the costs to market 
participants by providing for the regulation, as dealers, ``of 
persons responsible for the vast majority of dealing activity within 
the market.'' See id. at 30638-40.
    \424\ See section 0, supra.
---------------------------------------------------------------------------

    Commenters addressed the associated cost-benefit issues from a 
variety of perspectives. Some directly addressed the link between the 
cross-border scope of the dealer definition and the associated costs 
and benefits, by arguing that cost-benefit principles warranted greater 
harmonization with approaches taken by the CFTC or foreign 
regulators.\425\ Commenters also

[[Page 39117]]

addressed the need for cost-benefit analysis,\426\ or questioned the 
adequacy of the Cross-Border Proposal's cost-benefit assessment.\427\ 
Other comments that addressed the dealer definition implicate the 
tradeoff between the costs and benefits associated with the 
definition's scope, even when the commenters did not directly address 
the economic analysis in the Cross-Border Proposing Release or 
otherwise explicitly raise cost-benefit considerations.\428\
---------------------------------------------------------------------------

    \425\ See, e.g., IIB Letter (stating that cost-benefit 
considerations warrant harmonization to the CFTC and foreign 
regulatory authorities with regard to cross-border rules, and that 
divergence generally would be warranted only if the Commission's 
rules are more flexible, and thence would not preclude the voluntary 
adoption of consistent practices).
    Although we have considered those comments that expressed 
complete or partial support in favor of consistency with the CFTC 
guidance, these final rules nonetheless follow approaches that 
differ from those taken by the CFTC in certain regards, generally by 
taking approaches that are narrower in scope than those adopted by 
the CFTC. See supra note 255 (Commission's definition of ``U.S. 
person'' differs from the CFTC approach in part by not including 
investment companies that beneficially are majority-owned by U.S. 
persons); note 353 and accompanying text (Commission's rules 
regarding the treatment of guaranteed affiliates of U.S. persons 
focuses on the presence of recourse against a U.S. guarantor, in 
contrast to the CFTC approach that more generally accounts for 
financial support commitments regardless of recourse rights), note 
325(Commission's definition of ``conduit affiliate'' differs from 
the CFTC's approach in part by not considering financial statement 
treatment); note 379 (discussing expectation that any foreign branch 
of a U.S. bank that generally would be considered a foreign branch 
under the CFTC Cross-Border Guidance also likely would be a foreign 
branch under our final rule).
    We also have considered initiatives by foreign regulators 
related to the regulation of OTC derivatives. In that regard, we 
note that the regulatory regimes in certain other jurisdictions do 
not provide for the registration of persons who function as dealers, 
in contrast to the approach Congress took in Title VII. Also, we 
expect to take into account the regulatory frameworks followed in 
other jurisdictions as we assess requests for substituted compliance 
in connection with the substantive requirements applicable to 
security-based swap dealers and other market participants. Those 
substituted compliance assessments are geared to promote Title VII 
in a way that fairly accounts for other regimes by assessing the 
requirements of those regimes on a function-by-function basis.
    \426\ See BM Letter, note 28, supra. As stated above, the 
Commission in fact is sensitive to the economic consequences of its 
rules, and has taken the costs and benefits into account in adopting 
these rules.
    \427\ See CDEU Letter, note 28, supra. This commenter 
particularly expressed the view that the Commission's proposal had 
failed to engage in an adequate consideration of cost-benefit 
principles, and instead stated that the Commission should ``conduct 
a direct cost-benefit analysis of the conflicting rule regimes 
(e.g., with the European Market Infrastructure Regulation and the 
CFTC's cross-border guidance).'' That commenter further expressed 
the view that, in requesting comment on the proposal's cost-benefit 
analysis, the Commission actually ``asks the public to conduct such 
an analysis for the SEC'' in lieu of the Commission having conducted 
its own analysis. See id.
    In actuality, our request for comment simply gave the public the 
opportunity to address our economic analysis. The economic 
assessment in this release specifically addresses those economic 
impacts in a context where many entities may have taken steps to 
follow the CFTC's cross-border guidance, and also recognizes that 
market participants may seek to structure their activities to avoid 
Title VII given differences between Title VII regulation and the 
regulation present in foreign regimes.
    \428\ For example, one comment in opposition to the proposed 
``operational independence'' condition to the exception to the 
aggregation requirement for positions of affiliates that are 
registered as security-based swap dealers in part addressed the 
extra costs that would be associated with such a provision. See 
SIFMA/FIA/FSR Letter, note 391, supra. As discussed above, that 
proposed condition has been removed. See section IV.F, supra.
---------------------------------------------------------------------------

    We have taken economic effects into account in adopting these final 
cross-border rules and providing guidance. In doing so, we believe that 
a narrow application of dealer regulation under Title VII--such as one 
that is limited to dealing activity that might be viewed as occurring 
solely within the United States--would not be sufficient to achieve the 
purposes of Title VII in light of the attributes of the security-based 
swap market, including the market's global nature, the concentration of 
dealing activity, the key role played by dealers and the risks posed by 
dealers via their legal and financial relationships. At the same time, 
we recognize that the cross-border application of Title VII has the 
potential to reduce liquidity within the U.S. market to the extent it 
increases the costs of entering into security-based swaps or provides 
incentives for particular market participants to avoid the U.S. market 
by operating wholly outside the Title VII framework.
    The cross-border rules applying the ``security-based swap dealer'' 
definition to cross-border dealing activity implicate two categories of 
costs and benefits. First, certain current and future participants in 
the security-based swap market will incur assessment costs in 
connection with determining whether they fall within the ``security-
based swap dealer'' definition and thus would have to register with the 
Commission.
    Second, the registration and regulation of some entities as 
security-based swap dealers will lead to programmatic costs and 
benefits arising as a consequence of the Title VII requirements that 
apply to registered security-based swap dealers, such as the capital, 
margin, and business conduct requirements.\429\ These requirements may 
be expected to impose certain costs on participants acting as dealers, 
but also to produce benefits to the market and its participants, 
including counterparty protections and risk-mitigation benefits.
---------------------------------------------------------------------------

    \429\ See Cross-Border Proposing Release, 78 FR 31135.
---------------------------------------------------------------------------

    We discuss the programmatic and assessment costs and benefits 
associated with the final rules more fully below. We also discuss the 
economic impact of certain potential alternatives to the approach taken 
by the final rules.
1. Programmatic Costs and Benefits
(a) Cost-Benefit Considerations of the Final Rules
    Exchange Act rules 3a71-3, 3a71-4, and 3a71-5 will permit market 
participants to exclude certain dealing transactions from their de 
minimis calculations, and thus may cause particular entities that 
engage in certain dealing activities not to be regulated as security-
based swap dealers. The rules accordingly may be expected to affect the 
programmatic costs and benefits associated with the regulation of 
security-based swap dealers under Title VII, given that those costs and 
benefits are determined in part by which persons will be regulated as 
security-based swap dealers.\430\
---------------------------------------------------------------------------

    \430\ See Intermediary Definitions Adopting Release, 77 FR 
30724.
---------------------------------------------------------------------------

    This does not mean that there is a one-to-one relationship between 
a person not being a ``security-based swap dealer'' as a result of 
these cross-border rules, and the resulting change to programmatic 
benefits and costs. Indeed, although these rules may determine which 
particular entities will be regulated as dealers, it does not follow 
that total programmatic costs and benefits will vary by an amount 
proportional to the volume of those entities' dealing activity. As the 
Commission explained in the Intermediary Definitions Adopting Release, 
some of the costs and benefits of regulating dealers may be fixed, 
while others may be variable depending on a particular person's 
security-based swap dealing activity.\431\ In practice, the 
programmatic benefits associated with the regulation of persons engaged 
in security-based swap dealing activity--in other words, the expected 
transparency, customer protection and market efficiency objectives 
associated with dealer regulation--likely will vary depending on the 
type and nature of those persons' dealing activity, including the 
degree to which those persons engage in security-based swap dealing 
activity within the United States or in a manner likely to give rise to 
Title VII concerns within the United States.
---------------------------------------------------------------------------

    \431\ See id. (``Some of the costs of regulating a particular 
person as a dealer or major participants, such as costs of 
registration, may largely be fixed. At the same time, other costs 
associated with regulating that person as a dealer or major 
participant (e.g., costs associated with margin and capital 
requirements) may be variable, reflecting the level of the person's 
security-based swap activity. Similarly, the regulatory benefits 
that would arise from deeming that person to be a dealer or major 
participant (e.g., benefits associated with increased transparency 
and efficiency, and reduced risks faced by customers and 
counterparties), although not quantifiable, may be expected to be 
variable in a way that reflects the person's security-based swap 
activity.'').
---------------------------------------------------------------------------

    We believe that the cross-border rules we are adopting today will 
focus the regulation of security-based swap dealers under Title VII 
upon those entities that engage in security-based swap transactions 
that occur in the United States, or on the prevention of evasion. Our 
definition of ``security-based swap dealer'' seeks to capture those 
entities for which regulation of security-based swap activity is 
warranted due to the nature of their activities with other market 
participants.\432\ Specifically, we have focused the rules on those 
market participants that are likely to have financial and legal 
relationships within the United States. This set of entities includes 
those that currently provide liquidity to U.S. persons as market makers 
in the OTC security-based swap market and those that trade with U.S. 
persons as market makers for security-based swaps on organized trading 
venues. Regulation of these entities will

[[Page 39118]]

mitigate risk and promote stability for U.S. persons and potentially 
the U.S. financial markets by increasing the likelihood that they are 
able to meet their obligations under security-based swap contracts 
against counterparties with ties to the U.S. financial system once they 
are subject to the final adopted rules regarding the requirements 
applicable to dealers (rules establishing capital and margin 
requirements for registered security-based swap dealers). Furthermore, 
regulation of these entities as dealers may enable them to continue to 
provide liquidity to their counterparties, particularly in times when 
the markets are under financial stress and their counterparties may 
struggle to meet their financial obligations. We also believe that 
regulation of these entities will further other goals of Title VII, 
particularly as we consider future substantive regulation of the 
security-based swap market. In other words, these requirements will 
direct the application of the de minimis thresholds--which themselves 
are the product of cost-benefit considerations--toward those dealing 
activities in U.S. financial markets that most directly implicate the 
purposes of Title VII. As such, these rules reflect our assessment and 
evaluation of those programmatic costs and benefits:
---------------------------------------------------------------------------

    \432\ See id. at 30617.
---------------------------------------------------------------------------

     Dealing by U.S. persons--The ``U.S. person'' definition 
captures entities whose security-based swap activities pose risks to 
the United States that may raise the concerns intended to be addressed 
by Title VII, regardless of the status of their counterparty.\433\ The 
requirement that U.S. persons, including foreign branches, count all of 
their dealing transactions against the de minimis thresholds reflects 
the domestic nature of their dealing activity, particularly given that 
it is the financial resources of the entire person that enable it to 
engage in dealing activity.\434\
---------------------------------------------------------------------------

    \433\ See section 0, supra.
    \434\ See section 0, supra.
---------------------------------------------------------------------------

     Dealing by guaranteed affiliates of U.S. persons--The 
requirement that non-U.S. persons count all their dealing transactions 
that are subject to a recourse guarantee by a U.S. affiliate, even when 
the counterparty is another non-U.S. person, reflects the domestic 
nature of that activity and the risks that those recourse guarantees 
pose to U.S. persons and potentially to the U.S. financial system via 
the U.S. person guarantor.\435\
---------------------------------------------------------------------------

    \435\ See section 0, supra. In the Cross-Border Proposing 
Release we preliminarily concluded that the risks associated with 
such guarantees could be adequately addressed through major 
participant regulation. We have reconsidered that view for the 
reasons discussed above.
---------------------------------------------------------------------------

     Dealing by other non-U.S. persons with U.S.-person 
counterparties--The general requirement that non-U.S. persons count 
their dealing transactions with counterparties that are U.S. persons 
reflects the domestic nature of that activity and the concerns raised 
by the performance of dealing activity within the United States, 
impacts on U.S. market liquidity, risks that this dealing activity 
poses to U.S. persons and potentially toward the U.S. financial system 
as a whole, and counterparty and market transparency concerns.\436\ 
This general requirement is limited, however, as it does not extend to 
transactions with foreign branches of U.S. banks that are registered as 
dealers, or to certain cleared anonymous transactions. While those 
excluded transactions also involve the performance, at least in part, 
of relevant dealing activity within the United States, implicate Title 
VII concerns, and import risk into the United States--and their 
counting against the thresholds thus would be consistent with achieving 
the programmatic benefits of dealer regulation--their exclusion is 
nevertheless warranted by considerations regarding market access by 
U.S. persons (in the case of transactions with certain foreign branches 
of U.S. banks) \437\ and by considerations regarding information 
availability and market liquidity (in the case of the exclusion for 
cleared anonymous transactions).\438\
---------------------------------------------------------------------------

    \436\ See section 0, supra.
    \437\ See section 0, supra. Although dealing activity involving 
foreign branches of U.S. banks does pose risks to the U.S. bank of 
which the foreign branch is a part and potentially to the U.S. 
financial system, foreign branches of registered security-based swap 
dealers will be subject to a number of Title VII regulatory 
requirements, including capital and margin requirements, that are 
designed to protect the system against those risks. Furthermore, 
this limitation is guided in part by the desire to preserve 
liquidity throughout the system, given that absent the exclusion 
non-U.S. dealers may have reasons to favor non-U.S. counterparties 
to avoid the regulatory requirements of Title VII, which could 
threaten to fragment liquidity across geographical or jurisdictional 
lines.
    \438\ See section 0, supra. As noted above, see note 412, supra, 
the exclusion for cleared anonymous transactions is driven by 
concerns about counterparty-related information needed for 
compliance being unavailable, which in turn may lead U.S. persons to 
be excluded from certain execution facilities. The exclusion for 
such transactions also would be expected to have the effect of 
strengthening incentives for shifting activity to transparent 
trading venues, a key goal of Title VII. While these transactions of 
non-U.S. persons may pose risks to the U.S. bank of which the 
foreign branch is a part and potentially to the U.S. financial 
system as a whole, those risks may be offset by the liquidity and 
transparency benefits that occur due to trading on transparent 
venues. Furthermore, certain of the characteristics we expect to be 
associated with central clearing (e.g., the daily exchange of mark-
to-market margin) serve similar functions as the capital and margin 
requirements for registered dealers in terms of helping to protect 
the financial system against the risks introduced by particular 
transactions. Of course, such risk mitigation may be absent to the 
extent that the relevant clearing agency--which under the exception 
is not required to be registered with the Commission--does not 
follow standards consistent with the Title VII requirements 
applicable to registered clearing agencies. As noted above, 
moreover, see note 413, supra, we are not addressing the 
registration requirements for such clearing agencies in this 
release.
---------------------------------------------------------------------------

     Anti-evasion provisions--The requirement that conduit 
affiliates count all of their dealing activities against the 
thresholds, and the cross-border application of the aggregation 
requirements related to the de minimis exception, both reflect targeted 
efforts to prevent evasion of the security-based swap dealer 
requirements of Title VII.\439\ We are adopting a definition of 
``conduit affiliate'' that excludes affiliates of registered security-
based swap dealers and major security-based swap participants to avoid 
imposing costs on registered persons in situations where the types of 
evasion concerns that the conduit affiliate definition is intended to 
address are minimal.
---------------------------------------------------------------------------

    \439\ See sections 0 and 0, supra.
---------------------------------------------------------------------------

    In short, these final rules apply the de minimis thresholds--which 
themselves reflect cost-benefit considerations \440\--to cross-border 
security-based swap activity in a way that directs the focus of dealer 
regulation toward those entities whose security-based swap dealing 
activities most fully implicate the purposes of Title VII, or that is 
reasonably designed to prevent evasion of dealer regulation under Title 
VII.
---------------------------------------------------------------------------

    \440\ Based on an analysis of dealing activity within the 
security-based swap market, we concluded that a de minimis threshold 
of $3 billion for dealing activity involving security-based swaps 
would capture over 99 percent of dealing activity within the single-
name CDS market under the ambit of dealer regulation. See 
Intermediary Definitions Adopting Release, 77 FR 30639. We also 
concluded that this amount constituted a reasonable threshold, 
though not the only such threshold, for addressing the relevant 
competing factors--including the fact that the economic benefits 
provided by dealer requirements in large part will depend on the 
proportion of security-based swaps that are transacted subject to 
those requirements, while certain of the costs associated with 
dealer regulation would include costs that are independent of the 
amount of a person's dealing activity. See Intermediary Definitions 
Adopting Release, 77 FR 30629, 30639.
     As noted above, in application the general de minimis threshold 
currently is subject to an $8 billion phase-in level, and that 
phase-in level will remain in place until the Commission, following 
a study, either determines to terminate the phase-in level or adopts 
a different threshold. See part IV.A, supra.
---------------------------------------------------------------------------

    In the Cross-Border Proposing Release, we concluded that ``[t]o the 
extent that an entity engaged in dealing activity wholly outside the 
United

[[Page 39119]]

States poses risks to the U.S. financial system, we preliminarily 
believe that subjecting it to dealer registration and the related 
requirements would not generate the types of programmatic benefits that 
Title VII dealer regulation is intended to produce, as the dealing 
activity of such entity poses risks to counterparties outside the 
United States.'' \441\ These final rules and guidance regarding which 
transactions are to be counted against the de minimis thresholds are 
consistent with that principle, although in part they reflect a further 
assessment of the programmatic benefits resulting from the application 
of dealer regulation to non-U.S. persons when there is a recourse 
guarantee against a U.S. affiliate, including the benefits resulting 
from the application of financial responsibility requirements imposed 
upon registered security-based swap dealers. In this regard, the final 
rules and guidance reflect a reconsideration of our earlier conclusion 
that the risks to U.S. persons arising from such guarantees could 
adequately be addressed by the regulation of major security-based swap 
participants. In addition, these final rules and guidance more fully 
account for anti-evasion concerns associated with the potential for a 
U.S. person to engage in dealing activity using a guaranteed non-U.S. 
affiliate that is economically equivalent to the U.S. person itself 
entering into those dealing transactions.
---------------------------------------------------------------------------

    \441\ See Cross-Border Proposing Release, 77 FR 31137.
---------------------------------------------------------------------------

(b) Evaluation of Programmatic Impacts
    In setting the de minimis thresholds as part of the Intermediary 
Definitions Adopting Release, we attempted to identify a level of 
dealing activity that would identify and capture the entities for which 
the Title VII dealer requirements are most appropriate, without 
imposing the costs of Title VII on those entities for which regulation 
currently may not be justified in light of the purposes of the 
statute.\442\ We particularly took into account data regarding the 
activities of participants in the security-based swap market, including 
data regarding activity suggestive of dealing. Based on this analysis, 
we estimated that up to 50 entities in the security-based swap market 
might register as security-based swap dealers.\443\ Those estimates--
made outside of the context the cross-border application of the dealer 
definition--provide a baseline against which the Commission can analyze 
the programmatic costs and benefits and assessment costs of the final 
rules applying the de minimis exception to cross-border activities.
---------------------------------------------------------------------------

    \442\ See Intermediary Definitions Adopting Release, 77 FR 
30724-25.
    \443\ See section 0, supra; see also Intermediary Definitions 
Adopting Release, 77 FR 30635.
    We stated that this was a ``conservative'' estimate. See 
Intermediary Definitions Adopting Release, 77 FR 30725 and n.1457. 
In establishing the de minimis threshold, we analyzed the percentage 
of the market activity that would likely be attributable to 
registered security-based swap dealers under various thresholds and 
various screens designed to identify entities that are engaged in 
dealing activity. See id. at 30636. Our analysis placed particular 
weight on the screen that identified entities that engaged in 
security-based swap transactions with three or more counterparties 
that themselves were not identified as dealers by ISDA. See id. at 
30636. Of the 28 firms and corporate groups that satisfied this 
criterion, 25 also engaged in activity over the $3 billion 
threshold. See id. Based on this analysis, together with our 
expectation that some of the included corporate groups would 
register more than a single security-based swap dealer and that new 
entrants may be likely to enter the market, we estimated that as 
many as 50 entities would ultimately be required to register as a 
security-based swap dealer. See id. at 30725 n.1457.
---------------------------------------------------------------------------

    We believe the methodology used in the Intermediary Definitions 
Adopting Release also is appropriate for considering the potential 
programmatic costs and benefits associated with the final cross-border 
rules. This methodology particularly can help provide context as to how 
rules regarding the cross-border application of the de minimis 
exception may change the number of entities that must register as 
security-based swap dealers, and thus help provide perspective 
regarding the corresponding impact on the programmatic costs and 
benefits of Title VII. Applying that methodology to 2012 data regarding 
the single-name CDS market suggests that under these final rules 
approximately 50 entities may have to register as dealers--a number 
that is consistent with our estimates as part of the Intermediary 
Definitions Adopting Release.\444\
---------------------------------------------------------------------------

    \444\ While these revised figures are based on methodology 
similar to what Commission staff employed in the Intermediary 
Definitions Adopting Release, they make use of newer data and also 
account for the final rules' approach to counting dealing 
transactions against the de minimis thresholds.
     Consistent with that methodology regarding the use of market 
data to identify entities that may be engaged in dealing activity 
pursuant to the dealer-trader distinction (see id. 30636 n.478), the 
data indicated that in 2012, 40 entities engaged in the single-name 
security-based swap market had three or more counterparties that 
were not identified by ISDA as dealers. Of those 40 entities, 27 had 
$3 billion or more in notional single-name CDS activity over a 12 
month period. Applying the principles reflected in these final rules 
regarding the counting of transactions against the de minimis 
thresholds suggests that 25 of those entities would have $3 billion 
or more in notional transactions counted against the thresholds. 
Applying the aggregation rules (by aggregating the transactions, 
that are subject to counting, of other affiliates within a corporate 
group that individually do not have $3 billion in transactions 
subject to counting) increases that number to 26 entities. Based on 
this data, we believe that it is reasonable to conclude that up to 
50 entities ultimately may register as security-based swap dealers, 
although fewer dealers also is possible.
     To apply the counting tests of these final rules to the data, 
Commission staff identified DTCC-TIW accounts associated with 
foreign branches and foreign subsidiaries of U.S. entities and 
counted all transaction activity in these accounts against the 
firm's de minimis threshold. Commission staff further counted non-
U.S. persons' activity against U.S. persons and foreign branches and 
subsidiaries of U.S. persons against the de minimis thresholds.
---------------------------------------------------------------------------

    We recognize that there are limitations to using this methodology 
to consider the potential programmatic impact of the cross-border 
rules. These include limitations associated with the fact that the 
available data does not extend to all types of security-based 
swaps,\445\ and challenges in extrapolating transaction data into 
inferences of dealing activity.\446\ Also, the available single-name 
CDS data in certain regards potentially may lead the impact of these 
rules to be underestimated or overestimated:
---------------------------------------------------------------------------

    \445\ In these assessments, we have taken into account data 
obtained from DTCC-TIW regarding the activity of participants in the 
single-name CDS market. See Intermediary Definitions Adopting 
Release, 77 FR 30635. The present assessments use data from 2012, 
rather than the 2011 period used in connection with the Intermediary 
Definitions Adopting Release.
    As part of the Intermediary Definitions Adopting Release we also 
considered more limited publicly available data regarding equity 
swaps. See id. at 30636 n.476, and 30637 n.485. The lack of market 
data is significant in the context of total return swaps on equity 
and debt, in that we do not have the same amount of information 
regarding those products as we have in connection with the present 
market for single name CDS. See id. at 30724 n.1456. Although the 
definition of security-based swaps is not limited to single-name 
CDS, we believe that the single-name CDS data are sufficiently 
representative of the market to help inform the analysis. See id. at 
30636.
    \446\ As we noted in the Intermediary Definitions Adopting 
Release, the data incorporates transactions reflecting both dealing 
activity and non-dealing activity, including transactions by persons 
who may engage in no dealing activity whatsoever. See id. at 30635-
36. For these purposes we have identified potential dealers based on 
whether an entity engaged in the single-name security-based swap 
market had three or more counterparties that were not identified by 
ISDA as dealers. We recognize that this may be imperfect as a tool 
for identifying dealing activity, given that the presence or absence 
of dealing activity ultimately turns upon the relevant facts and 
circumstances of an entity's security-based swap transactions, as 
informed by the dealer-trader distinction.
---------------------------------------------------------------------------

     The Commission's access to data on CDS that are written on 
non-U.S. reference entities does not extend to data regarding 
transactions between two counterparties that are not domiciled in the 
United States, or guaranteed by a person domiciled in the United 
States.\447\ More generally, the

[[Page 39120]]

Commission's access to data also does not extend to transactions among 
affiliated entities. The available data thus does not extend to the 
activities of non-U.S. conduit affiliates, to the extent that they 
engage in transactions with non-U.S. persons (that themselves are not 
the subject of a guarantee), and potentially makes the assessment 
underinclusive to the extent that conduit affiliates engaged in dealing 
activity during the relevant period.
---------------------------------------------------------------------------

    \447\ The Commission has more complete access to data regarding 
transactions involving single-name CDS on U.S. reference entities.
---------------------------------------------------------------------------

     The available data also does not specifically distinguish 
those transactions of non-U.S. persons that are subject to a guarantee 
by a U.S. person, and other (non-guaranteed) transactions by such non-
U.S. persons. As a result, we have assumed that all foreign 
subsidiaries of U.S. persons rely on guarantees for all transactions, 
which potentially overestimates the level of transaction activity that 
would count toward de minimis thresholds for U.S. persons with foreign 
subsidiaries.
    Separately, the programmatic costs and benefits associated with the 
implementation of these rules cannot be quantified with any degree of 
precision because the full range of the de minimis exception's effects 
on the programmatic costs and benefits also will reflect final rules--
which have yet to be finalized--implementing the Title VII entity-level 
and transaction-level requirements applicable to security-based swap 
dealers.
    In addition, the programmatic benefits and costs associated with 
the cross-border application of the de minimis exception may change as 
market participants modify their business structure or practices in 
response to these rules. To avoid the prospect of being regulated as a 
security-based swap dealer, some market participants may restructure 
their businesses or take other steps (such as avoiding engaging in 
security-based swap activities involving U.S. persons) to avoid having 
their dealing transactions counted against the de minimis thresholds. 
Other market participants may take similar steps in response to 
counterparty demands. We understand that some market participants 
already have taken these types of steps to restructure their 
derivatives operations in response to the implementation of Title VII 
requirements related to swaps. More fundamentally, there are inherent 
challenges associated with attempting to quantify the risk-mitigation 
and other benefits of financial regulation.\448\ The programmatic 
impact of these rules may further reflect the fact that certain 
entities that are deemed to be security-based swap dealers, and hence 
are subject to the applicable Title VII dealer requirements, separately 
may be subject to other regulatory requirements that are analogous to 
the security-based swap dealer requirements. For example, we recognize 
that certain entities that are deemed to be security-based swap dealers 
pursuant to these rules also may be registered as swap dealers with the 
CFTC, pursuant to the CEA. Those entities' compliance with CFTC 
requirements applicable to swap dealers potentially may mitigate the 
programmatic effect of these rules--in terms of both costs and 
benefits--to the extent that those CFTC requirements are comparable 
with the SEC's yet-to-be-finalized substantive rules applicable to 
security-based swap dealers. The potential availability of substituted 
compliance, whereby a market participant may comply with a Title VII 
security-based swap dealer requirement by complying with a comparable 
requirement of a foreign financial regulator, also may affect the final 
programmatic impact of these rules.
---------------------------------------------------------------------------

    \448\ In the Intermediary Definitions Adopting Release, we and 
the CFTC noted that we are ``not of the general view that the costs 
of extending regulation to any particular entity must be outweighed 
by the quantifiable or other benefits to be achieved with respect to 
that particular entity.'' See Intermediary Definitions Adopting 
Release, 77 FR 30630. We also noted that ``it does not appear 
possible to demonstrate empirically--let alone quantify--the 
increase or decrease in the possibility that a financial crisis 
would occur at a particular future time and with a particular 
intensity in the absence of financial regulation or as a result of 
varying levels or types of financial regulation.'' See id. at 30630 
n.421 (also noting the difficulty of demonstrating empirically 
``that the customer protections associated with dealer regulation 
would increase or decrease the likelihood that any particular market 
participant would suffer injury (or the degree to which the 
participant would suffer injury) associated with entering into an 
inappropriate swap or security-based swap'').
---------------------------------------------------------------------------

    In general, however, and consistent with our territorial approach, 
we believe that these rules are targeted appropriately, and do not 
apply dealer regulation to those entities that have a more limited 
involvement in the U.S. financial system and hence whose regulation as 
a security-based swap dealer under Title VII would be less linked to 
programmatic benefits (i.e., non-U.S. persons that engage in security-
based swap dealing activity entirely, or almost entirely, outside the 
United States with non-U.S. persons or with certain foreign branches), 
while applying dealer regulation to those entities whose dealing 
activity would be more likely to produce programmatic benefits under 
Title VII. The nexus between specific aspects of these requirements and 
the programmatic costs and benefits also is addressed below in 
connection with our consideration of various alternatives to the 
approach taken in the final rules.
    Finally, we recognize that the U.S. market participants and 
transactions regulated under Title VII are a subset of the overall 
global security-based swap market and that shocks to risk or liquidity 
arising from a foreign entity's dealing activity outside the United 
States may spill into the United States. Such spillover risks 
associated with dealing activity that falls outside the scope of Title 
VII have the potential to affect U.S. persons and the U.S. financial 
system either through a foreign entity's transactions with foreign 
entities, which, in turn, transact with U.S. persons (and may, as a 
result, be registered security-based swap dealers or major security-
based swap participants), or through membership in a clearing agency 
that may provide CCP services in the United States or have a U.S. 
person as a clearing member. We also have considered these spillovers 
in connection with our analysis of the effects of these final cross-
border rules on efficiency, competition and capital formation.\449\
---------------------------------------------------------------------------

    \449\ See section 0, supra.
---------------------------------------------------------------------------

2. Assessment Costs
    The analysis of how these cross-border rules will affect the 
assessment costs associated with the ``security-based swap dealer'' 
definition and its de minimis exception is related to the assessment 
cost analysis described in the Intermediary Definitions Adopting 
Release,\450\ but must also account for certain issues specific to 
these cross-border rules. While in certain regards those assessment 
costs can more readily be estimated than the programmatic effects 
discussed above, the assessment costs associated with the cross-border 
application of the Title VII dealer requirements will be considerably 
smaller in significance than those programmatic effects.
---------------------------------------------------------------------------

    \450\ See Intermediary Definitions Adopting Release, 77 FR 
30731-32.
---------------------------------------------------------------------------

    The Intermediary Definitions Adopting Release addressed how certain 
market participants whose security-based swap activities exceed or are 
not materially below the de minimis threshold may be expected to incur 
assessment costs in connection with the dealer analysis.\451\ In that 
release we estimated that 166 entities--out of over one thousand U.S. 
and non-U.S. entities

[[Page 39121]]

that engaged in single-name CDS transactions in 2011--had more than $2 
billion in single-name CDS transactions over the previous 12 months, 
and as a result would engage in the dealer analysis.\452\ Based on 
those numbers, and assuming that that all of those entities retain 
outside counsel to analyze their status under the security-based swap 
dealer definition, including the de minimis exception, we estimated 
that the legal costs associated with assessing market participants' 
potential status as security-based swap dealers may approach $4.2 
million.\453\
---------------------------------------------------------------------------

    \451\ See id. at 30731. These assessment costs include costs 
associated with analyzing a person's security-based swap activities 
to determine whether those activities constitute dealing activity 
and the costs of monitoring the volume of dealing activity against 
the de minimis threshold.
    \452\ Id. at 30731-32. As discussed below, a comparable 
assessment using 2012 data indicates that there were approximately 
210 entities in the single-name CDS market with more than $2 billion 
in transactions over 12 months. That analysis accounts for the 
aggregation of affiliate activity for purposes of the de minimis 
analysis, by first counting individual accounts with more than $2 
billion in activity, and then aggregating any remaining accounts to 
the level of the ultimate parent and counting those also.
    \453\ See id. We estimated that the per-entity cost of the 
dealer analysis would be approximately $25,000. Our estimate of 
aggregate industry-wide costs of $4.2 million reflected the costs 
that may be incurred by all 166 entities. See id.
---------------------------------------------------------------------------

    Application of these cross-border rules to the de minimis exception 
can be expected to affect the assessment costs that market participants 
will incur. In part, certain non-U.S. persons may be expected to incur 
personnel costs and legal costs--beyond the legal costs addressed as 
part of the Intermediary Definitions Adopting Release--associated with 
analyzing these cross-border rules and developing systems and 
procedures to assess which transactions would have to be counted 
against the de minimis thresholds (or with the purpose of avoiding 
activities within the United States that would be sufficient to meet 
the applicable thresholds). On the other hand, while certain market 
participants also would incur additional legal costs associated with 
the dealer determination (i.e., the assessment of whether particular 
activities constitute dealing activity for purposes of the analysis) 
addressed in the Intermediary Definitions Adopting Release, the 
application of the cross-border rules may reduce the number of entities 
that incur such legal costs.
    In adopting these rules we estimate the assessment costs that 
market participants may incur as a result. As discussed below, however, 
these costs in practice may be mitigated in large part by steps that 
market participants already have taken in response to other regulatory 
initiatives, including the CFTC Cross-Border Guidance.
(a) Legal Costs
    The implementation of these cross-border rules in some 
circumstances has the potential to change the legal costs identified in 
the Intermediary Definitions Adopting Release, including by adding new 
categories of legal costs that non-U.S. persons may incur in connection 
with applying the de minimis exception in the cross-border context.
    Legal costs related to application of the dealer-trader 
distinction--As discussed in the Intermediary Definitions Adopting 
Release, certain market participants will incur assessment costs 
relating to performing the analysis as to whether their security-based 
swap activities constitute dealing. For purposes of that release we 
assumed that only entities with more than $2 billion in security-based 
swap transactions over the previous 12 months would be likely to engage 
in the full dealer analysis, and, based on analysis of single-name CDS 
data, we concluded that there were 166 market participants that would 
meet those criteria.\454\
---------------------------------------------------------------------------

    \454\ See id. at 30731-32. Using an estimate of $25,000 in legal 
costs per firm, this led to a total estimate of $4.2 million. See 
id. at 30732.
---------------------------------------------------------------------------

    In the cross-border context, we believe that some non-U.S. persons 
that have more than $2 billion in total security-based swap 
transactions over the previous 12 months nonetheless may be expected to 
forgo the costs of performing the dealing activity analysis, if only a 
comparatively low volume of their security-based swap activity involves 
U.S. counterparties or otherwise potentially needs to be counted 
against the de minimis thresholds. In particular, we believe that it is 
unlikely that non-U.S. persons would engage in the dealer analysis (and 
hence would not be likely to incur such legal costs described in the 
Intermediary Definitions Adopting Release) if over the previous 12 
months they have less than $2 billion in security-based swap 
transactions that potentially would have to be counted against the 
thresholds.\455\
---------------------------------------------------------------------------

    \455\ See Cross-Border Proposing Release, 78 FR 31141.
---------------------------------------------------------------------------

    Available data from 2012 indicates that 218 entities worldwide (147 
of which are domiciled in the United States and 71 domiciled elsewhere) 
had security-based swap activity, with all counterparties, of $2 
billion or more. Of those 218 entities 202 had total activity of $2 
billion or more that--to the extent it constituted dealing activity--
would appear to have to be counted against the de minimis thresholds. 
Those 202 entities consisted of 147 entities domiciled in the United 
States (which would have to count all of their dealing transactions), 
and 55 entities domiciled elsewhere that have $2 billion in 
transactions with U.S. counterparties or that otherwise may have to be 
counted for purposes of the de minimis analysis.\456\ To the extent 
that all 202 of those entities engage in the legal analysis related to 
which of their security-based swap activities constitutes dealing under 
the dealer-trader distinction (while recognizing that some such 
entities may conclude that, based on the nature of their business, they 
engage in dealing activities and that no such additional analysis is 
necessary), and assuming that such analyses amount to $30,000 per 
entity,\457\ those 202 entities would incur a total of approximately 
$6.1 million in such legal costs.\458\
---------------------------------------------------------------------------

    \456\ A total of 16 of those 71 entities that are not domiciled 
in the United States appear to have less than $2 billion in activity 
that involve U.S. counterparties or that otherwise would appear to 
potentially have to be counted against the de minimis thresholds.
    \457\ In the Intermediary Definitions Adopting Release, we 
estimated that such costs may range from $20,000 to $30,000. See 
Intermediary Definitions Adopting Release, 77 FR 30732. For purposes 
of this analysis, we conservatively are using the upper end of that 
range.
    \458\ This analysis of data related to potential assessment 
costs reflects both the activities of individual DTCC-TIW accounts 
as well as the activities of transacting agents. The analysis in 
particular first considers the number of accounts that have $2 
billion or more in annual security-based swap activity, and then, 
after removing those particular accounts, considers activity 
aggregated at the level of individual transacting agents. This 
analysis is comparable to the analysis we use to estimate the 
potential number of dealers under the final rules. See note 444, 
supra. This analysis is distinct from the analogous analysis we used 
in the Intermediary Definitions Adopting Release to estimate the 
number of entities that may be expected to perform the dealer-trader 
analysis (see notes 149 through 151 and accompanying text, supra), 
which focuses on activity at the transacting agent level, because 
further experience with the associated data permits us to conduct a 
more granular analysis of that data. See generally Cross-Border 
Proposing Release, 78 FR 31137 n.1407.
     These estimates do not reflect a new category of costs arising 
from the cross-border rules. They instead are a revision of a 
category of previously identified costs that market participants may 
incur in engaging in the dealer-trader analysis, using newer data 
and reflecting only trades that are counted under the final cross-
border rules.
---------------------------------------------------------------------------

    Legal costs related to systems and analysis--As noted above, out of 
the 218 entities that had total security-based swap activity of $2 
billion or more in 2012, 71 are domiciled outside of the United States. 
Upon further consideration (and in addition to the estimates in the 
Cross-Border Proposing Release), we also believe that it is reasonable 
to conclude that those 71 entities may have to incur one-time

[[Page 39122]]

legal expenses related to the development of systems and analysis 
expenses--discussed below--to identify which of their total security-
based swap transactions potentially must be counted for purposes of the 
de minimis analysis consistent with these cross-border rules. This 
additional cost estimate reflects the fact that the development of such 
systems and procedures must address cross-border rules that require 
accounting for factors such as whether an entity's security-based swaps 
are subject to guarantees from affiliated U.S. persons, and whether its 
counterparties are U.S. persons.\459\ We estimate that such legal costs 
would amount to approximately $30,400 per entity, and that those 60 
entities would incur total costs of approximately $2.2 million.\460\
---------------------------------------------------------------------------

    \459\ We would not expect U.S. persons with more than $2 billion 
in activities to incur such costs, given that U.S. persons would 
need to count all of their dealing activities against the de minimis 
thresholds.
    \460\ This estimate of $30,400 reflects an assumption that such 
efforts would require 80 hours of in-house legal or compliance 
staff's time. Based upon data from SIFMA's Management & Professional 
Earnings in the Securities Industry 2012 (modified by the Commission 
staff to account for an 1800-hour-work-year and multiplied by 5.35 
to account for bonuses, firm size, employee benefits, and overhead), 
the staff estimates that the average national hourly rate for an in-
house attorney is $380.
---------------------------------------------------------------------------

(b) Costs Related to Systems, Analysis, and Representations
    Transaction-monitoring systems--The elements introduced by the 
final cross-border rules may cause certain non-U.S. persons to 
implement systems to identify whether their dealing transactions exceed 
the de minimis thresholds.\461\ Such systems may reflect the need for 
non-U.S. persons to: (i) Identify whether their dealing counterparties 
are ``U.S. persons''; (ii) determine whether their dealing transactions 
with a U.S. person constitutes ``transactions conducted through a 
foreign branch'' (which itself requires consideration of whether their 
counterparty is a ``foreign branch'') and--of those--determine which 
transactions involve a foreign branch of a U.S. bank that itself is 
registered as a security-based swap dealer; (iii) determine whether 
particular transactions are subject to a recourse guarantee against a 
U.S. affiliate; (iv) evaluate the applicability of the aggregation 
principles; and (v) evaluate the availability of the exception for 
cleared anonymous transactions.\462\
---------------------------------------------------------------------------

    \461\ It is possible that a subset of non-U.S. dealers may 
reasonably conclude they are above the de minimis thresholds and 
should register with the Commission as security-based swap dealers, 
without establishing systems to analyze their status under the 
exception, in light of the nature of their operations and their 
activity within the United States.
    Moreover, in considering the assessment costs associated with 
the final rules, we continue to hold the expectation, noted in the 
Intermediary Definitions Adopting Release, that market participants 
generally would be aware of the notional amount of their activity 
involving security-based swaps as a matter of good business 
practice. See Intermediary Definitions Adopting Release, 77 FR 
30732. These systems cost estimates for non-U.S. persons are 
provided in recognition of the fact that non-U.S. persons will 
likely need to distinguish those transactions that must be counted 
against their de minimis thresholds and those that do not need to be 
included.
    \462\ In considering the assessment costs associated with the 
final rules, we believe that a potential dealer assessment of 
whether it is a ``conduit affiliate'' would not require the use of 
any systems. A conduit affiliate must count all of its dealing 
transactions, making transaction-specific tracking unnecessary. 
Moreover, the question of whether a person acts as a conduit 
affiliate would turn upon whether it engages in certain security-
based transactions on behalf of a U.S. affiliate, accompanied by 
back-to-back transactions with that affiliate. That analysis 
fundamentally is different from the transaction-specific assessments 
that are more likely to require the development of new systems for 
monitoring the attributes of particular transactions.
---------------------------------------------------------------------------

    In general, we believe that the costs of such systems should be 
similar to the costs estimated in the Intermediary Definitions Adopting 
Release for a system to monitor positions for purposes of the major 
security-based swap participant thresholds. In both cases--the 
assessment of dealer status in the cross-border context and the 
assessment of major participant status--such systems would have to flag 
a person's security-based swaps against the specific criteria embedded 
in the final rules, and then compare the cumulative amount of security-
based swaps that meet those criteria against regulatory 
thresholds.\463\ Based on the methodology set forth in the Intermediary 
Definitions Adopting Release related to systems associated with the 
major participant analysis, we estimate that such systems would be 
associated with one-time programming costs of $14,904 and ongoing 
annual systems costs of $16,612 per entity.\464\
---------------------------------------------------------------------------

    \463\ As discussed in the Cross-Border Proposing Release, we 
would expect that market participants would be aware of the notional 
amount of their security-based swap activity as a matter of good 
business practice. See Cross-Border Proposing Release, 78 FR 31140.
    \464\ In the Intermediary Definitions Adopting Release, we 
estimated that the one-time programming costs of $13,692 per entity 
and annual ongoing assessment costs of $15,268. See Intermediary 
Definitions Adopting Release, 77 FR 30734-35 and accompanying text 
(providing an explanation of the methodology used to estimate these 
costs). The hourly cost figures in the Intermediary Definitions 
Adopting Release for the positions of Compliance Attorney, 
Compliance Manager, Programmer Analyst, and Senior Internal Auditor 
were based on data from SIFMA's Management & Professional Earnings 
in the Securities Industry 2010.
    For purposes of the cost estimates in this release, we have 
updated these figures with more recent data as follows: The figure 
for a Compliance Attorney is $334/hour, the figure for a Compliance 
Manager is $283/hour, the figure for a Programmer Analyst is $220/
hour, and the figure for a Senior Internal Auditor is $209/hour, 
each from SIFMA's Management & Professional Earnings in the 
Securities Industry 2013, modified by SEC staff to account for an 
1800-hour work-year and multiplied by 5.35 to account for bonuses, 
firm size, employee benefits, and overhead. We also have updated the 
Intermediary Definitions Adopting Release's $464/hour figure for a 
Chief Financial Officer, which was based on 2011 data, with a 
revised figure of $500/hour, for a Chief Financial Officer with five 
years of experience in New York, that is from http://www.payscale.com, modified by Commission staff to account for an 
1800-hour work-year and multiplied by 5.35 to account for bonuses, 
firm size, employee benefits, and overhead. See http://www.payscale.com (last visited Apr. 16, 2014). Incorporating these 
new cost figures, the updated one-time programming costs based upon 
our assumptions regarding the number of hours required in the 
Intermediary Definitions Adopting Release would be $15,287 per 
entity, i.e., (Compliance Attorney at $334 per hour for 2 hours) + 
(Compliance Manager at $283 per hour for 8 hours) + (Programmer 
Analyst at $220 per hour for 40 hours) + (Senior Internal Auditor at 
$209 per hour for 8 hours) + (Chief Financial Officer at $500 per 
hour for 3 hours) = $14,904, and the annual ongoing costs would be 
$16,612 per entity, i.e., ((Senior Internal Auditor at $209 per hour 
for 16 hours) + Compliance Attorney at $334 per hour for 4 hours) + 
(Compliance Manager at $283 per hour for 4 hours) + (Chief Financial 
Officer at $500 per hour for 4 hours) + (Programmer Analyst at $220 
per hour for 40 hours) = $16,612).
---------------------------------------------------------------------------

    Analysis of counterparty status, including representations--Non-
U.S. market participants also would be likely to incur costs arising 
from the need to assess the potential U.S.-person status of their 
counterparties, and in some cases to obtain and maintain records 
related to representations regarding their counterparties' U.S.-person 
status.\465\ We anticipate that non-U.S. persons are likely to review 
existing information (e.g., information already available in connection 
with account opening materials and ``know your customer'' practices) to 
assess whether their

[[Page 39123]]

counterparties are U.S. persons. Non-U.S. persons at times may also 
request and maintain representations from their counterparties to help 
determine or confirm their counterparties' status. Accordingly, in our 
view, such assessment costs primarily would encompass one-time costs to 
review and assess existing information regarding counterparty domicile, 
principal place of business, and other factors relevant to potential 
U.S.-person status, as well as one-time costs associated with 
requesting and collecting representations from counterparties.\466\ The 
Commission believes that such one-time costs would be approximately 
$732 thousand per firm.\467\
---------------------------------------------------------------------------

    \465\ Non-U.S. market participants potentially may also assess 
and seek representations related to whether their security-based 
swap activity with a particular counterparty constitutes 
transactions conducted through a foreign branch of a U.S. bank 
(including representations regarding the non-involvement of U.S. 
personnel) that is registered as a security-based swap dealer. Based 
on our understanding of changes in the way major U.S. dealers engage 
with non-U.S. counterparties in the single-name CDS market following 
the issuance of the CFTC Cross-Border Guidance, we believe that few, 
if any, U.S. persons currently may participate in this market 
through their foreign branches. Also, as noted above, other 
regulatory provisions may limit the ability of U.S. banks to conduct 
security-based swap activity. See note 366, supra. Accordingly, we 
do not believe that it is likely that non-U.S. market participants 
will independently assess, and seek representations related to, the 
foreign branch status of their counterparties. Instead, we believe 
that it is likely that such non-U.S. persons will focus on assessing 
the U.S.-person status of the bank for which the foreign branch is a 
part.
    \466\ We expect that an assessment of whether a particular 
counterparty is a U.S. person--once properly made--generally will 
not vary over time, given that the components of the ``U.S. person'' 
definition generally would not be expected to vary for a particular 
counterparty absent changes such as a corporate reorganization, 
restructuring or merger. With that said, we believe market 
participants will likely monitor for the presence of information 
that may indicate that the representations they have received in 
connection with a person's U.S.-person status are outdated or 
otherwise are no longer accurate (e.g., information regarding a 
counterparty's reorganization, restructuring, or merger).
    We also believe that such non-U.S. persons will likely obtain 
the relevant information regarding the U.S.-person status of their 
new accounts as part of the account opening process, as a result of 
these and other regulatory requirements.
    \467\ In part, this estimate is based on each firm incurring an 
estimated one-half hour compliance staff time and one-half hour of 
legal staff time--per counterparty of the firm--to review and assess 
information regarding the counterparty, and potentially to request 
and obtain representations regarding the U.S.-person status of their 
counterparties. These are in addition to the assessment cost 
estimates we made in the Cross-Border Proposing Release, and reflect 
further consideration of the issue in light of industry experience 
in connection with the CFTC Cross-Border Guidance. For these 
purposes, we conservatively assume that each of those non U.S. firms 
will have 2400 single-name CDS counterparties (based on data 
indicating that the 60 non-U.S. persons with total single-name CDS 
transactions in 2012 of $2 billion or less all had fewer than 2400 
counterparties in connection with single-name CDS), which produces 
an estimate of 1200 hours of compliance staff time and 1200 hours of 
legal staff time per firm. Based upon data from SIFMA's Management & 
Professional Earnings in the Securities Industry 2013 (modified by 
the Commission staff to account for an 1800-hour-work-year and 
multiplied by 5.35 to account for bonuses, firm size, employee 
benefits, and overhead), the staff estimates that the average 
national hourly rate for a senior compliance examiner is $217 and 
that the average national hourly rate for an in-house attorney is 
$380; this leads to a cumulative estimate of approximately $716 
thousand per firm for such costs.
    Consistent with the Cross-Border Proposing Release, moreover, 
this estimate is further based on estimated 40 hours of in-house 
legal or compliance staff's time (based on the above rate of $380 
per hour for an in-house attorney) to establish a procedure of 
requesting and collecting representations from trading 
counterparties, taking into account that such representation may be 
incorporated into standardized trading documentation used by market 
participants. This leads to an estimate of $15,200 per firm for such 
costs.
---------------------------------------------------------------------------

    Monitoring of counterparty status--In addition, market participants 
may be expected to adapt the systems described above to monitor the 
status of their counterparties for purposes of their future security-
based swap activities. Such refinements would permit these systems to 
maintain records of counterparty status for purposes of conducting the 
de minimis assessments (e.g., representations regarding a 
counterparty's U.S.-person status, or whether a counterparty's 
transaction through a foreign branch involve U.S. personnel), such as 
by monitoring for the presence of existing representations, to obviate 
the need to request representations on a transaction-by-transaction 
basis.\468\ Market participants also may need to monitor for the 
presence of information that may indicate that the representation they 
have received are outdated or otherwise are not valid.\469\ We estimate 
that this would require one-time costs of approximately $12,436 per 
firm.\470\
---------------------------------------------------------------------------

    \468\ The exclusion for a non-U.S. person's dealing transactions 
conducted through the foreign branch of a counterparty that is a 
registered security-based swap dealer is predicated on U.S.-based 
personnel of the counterparty not being involved in arranging, 
negotiating or executing the transaction at issue. Notwithstanding 
the potentially transaction-specific nature of that assessment, we 
believe that parties may structure their relationships in such a way 
that the non-U.S. person may rely on general representations by its 
counterparty, without the need for a separate representation in 
conjunction with each individual transaction.
    \469\ It is possible that the need to monitor for information 
inconsistent with existing representations would be more significant 
in the context of representations regarding whether a transaction 
has been conducted through a foreign branch of a U.S. bank, than 
they would be in the context of representations regarding the U.S.-
person status of a counterparty. This is because a counterparty's 
potential status as a U.S. person would not be expected to vary on a 
transaction-by-transaction basis. At the same time, we believe that 
few, if any, U.S. persons currently may participate in this market 
through their foreign branches. See note 465, supra.
    \470\ In part, this is based on an estimate of the time required 
for a programmer analyst to modify the software to track whether the 
counterparty is a U.S. person (including whether it is a foreign 
branch of a U.S. bank that is not registered as a security-based 
swap dealer), and to record and classify whether a transaction 
constitutes dealing activity conducted through a foreign branch of a 
registered dealer This includes time associated with consultation 
with internal personnel, and an estimate of the time such personnel 
would require to ensure that these modifications conformed to those 
aspects of the final rule. Using the estimated hourly costs 
described above, we estimate the costs as follows: (Compliance 
Attorney at $334 per hour for 2 hours) + (Compliance Manager at $283 
per hour for 4 hours) + (Programmer Analyst at $220 per hour for 40 
hours) + (Senior Internal Auditor at $209 per hour for 4 hours) + 
(Chief Financial Officer at $500 per hour for 2 hours) = $12,436. 
See note 464, supra (for source of the estimated per-hour costs).
     As noted above, we generally would not expect a counterparty's 
U.S.-person status to vary over time absent changes such as 
reorganization, restructuring or merger. See note 466, supra.
---------------------------------------------------------------------------

    Summary of system, analysis and representation costs--In sum, we 
estimate that the costs that certain non-U.S. market participants would 
incur in connection with systems, analysis of counterparty status and 
representations in connection with these cross-border rules would be 
approximately $759 thousand in one-time costs,\471\ and their estimated 
annual ongoing costs would be $16,612. The available data provided by 
the DTCC-TIW, subject to the limitations associated with the use of 
data analysis discussed above, suggests that such costs may be incurred 
by 71 non-U.S. domiciled entities with total annual activity of at 
least $2 billion. Assuming that each of these 71 entities concludes it 
has a need to monitor the above categories of information in connection 
with its security-based swap activities, we estimate that the total 
one-time industry-wide costs associated with establishing such systems 
would amount to approximately $54 million, and total annual ongoing 
costs would amount to approximately $1.2 million.
---------------------------------------------------------------------------

    \471\ Consistent with the above discussion, the estimated one-
time costs of $759 thousand represent: The costs to establish a 
system to assess the status of their dealing activities under the 
definitions and other provisions specific to these cross-border 
rules ($14,904); the costs related to the assessment of counterparty 
status, including costs of assessing existing information and of 
requesting and obtaining representations, as well as costs of 
related procedures ($732 thousand), and the costs for monitoring the 
status of their counterparties for purposes of their future 
security-based swap activities ($12,436).
---------------------------------------------------------------------------

(c) Overall Considerations Related to Assessment Costs
    In sum, we believe that the effect of these final cross-border 
rules would be an increase over the amounts that otherwise would be 
incurred by certain non-U.S. market participants, both in terms of 
additional categories of legal costs and in terms of the need to 
develop certain systems and procedures.
    Requiring certain non-U.S. persons to incur such assessment costs 
is an unavoidable adjunct to the implementation of a set of rules that 
are appropriately tailored to apply the ``security-based swap dealer'' 
definition under Title VII to a global security-based swap market in a 
way that yields the important transparency, accountability, and 
counterparty protection benefits associated with dealer regulation 
under Title VII. The alternative--avoiding application of the Title VII 
dealer requirements to non-U.S. persons--would be inappropriate 
because, in our view, the dealing

[[Page 39124]]

activity of non-U.S. persons required to count their dealing activity 
under these final rules constitutes part of the U.S. financial system. 
The benefits that arise from Title VII regulatory requirements, 
including risk management and transparency benefits associated with 
dealer regulation accordingly could be undermined if a significant 
portion of U.S. dealing activity by non-U.S. persons were excluded from 
the Title VII framework. In certain respects, however, decisions 
embedded in these final rules are designed to avoid imposing assessment 
costs upon market participants.\472\
---------------------------------------------------------------------------

    \472\ For example, the final rules incorporate an express 
representation provision in the ``U.S. person'' definition, to help 
the parties best positioned to make the U.S.-person determination 
and convey the results of that analysis to its counterparty. See 
section IV.C.4, supra.
---------------------------------------------------------------------------

    It is important to recognize that our estimates of the assessment 
costs associated with these rules in practice may tend to overestimate 
that costs that market participants actually will incur as a result of 
these rules. This is because in practice, the assessment costs 
associated with the cross-border scope of the dealer definition (like 
the potential programmatic effects of that cross-border scope) may be 
tempered to the extent that the assessments that market participants 
conduct in connection with their security-based swap activities 
correspond to the assessments they otherwise would follow due to other 
regulatory requirements or business practices. Significantly, we 
understand that a substantial number of market participants already 
have engaged in assessment activities--including activities to 
determine whether their counterparties are U.S. persons--conforming to 
the requirements applicable to swaps. Given our expectation that 
persons that are not ``U.S. persons'' under the CFTC's policy (as set 
forth in its cross-border guidance) generally also would not be ``U.S. 
persons'' under our rules, certain market participants may reasonably 
determine that as part of the implementation of the rules we are 
adopting today they need not duplicate work already done in connection 
with implementing the CFTC's swaps regulations. In this regard we 
recognize the significance of commenter views emphasizing the 
importance of harmonization with the CFTC to control the costs 
associated with assessments under Title VII.\473\ We acknowledge that, 
to the extent our final rules differ from the CFTC's approach--
especially if they were to require counting of transactions that would 
not be captured by the requirements applicable to swaps in the cross-
border context, or were to require the collection and/or consideration 
of information that is materially different from that collected under 
the CFTC's approach--market participants may face higher costs than if 
regulations were identical.\474\ As discussed in connection with the 
specific aspects of these rules, however, we believe that such 
differences are justified, as are any associated assessment (or 
programmatic) costs.
---------------------------------------------------------------------------

    \473\ For example, one commenter urged the Commission to exempt 
from the definition of U.S. person collective investment vehicles 
that are publicly offered only to non-U.S. persons, consistent with 
the CFTC's interpretation, on account of the costs that would be 
required for collective investment vehicles that transact in both 
swaps and security-based swaps to develop separate compliance 
systems and operations for swaps and security-based swaps.
    \474\ In this regard we also note that in certain areas the 
Commission has taken an approach that is narrower than the CFTC 
analogue.
---------------------------------------------------------------------------

    Finally, we also anticipate that certain market participants that 
wish to limit the possibility of being regulated as a dealer under 
Title VII, including the programmatic and assessment costs associated 
with the dealer definition, may choose to structure their business to 
avoid engaging in dealing transactions with U.S. persons (other than 
foreign branches of banks registered with the Commission as dealers).
3. Alternative Approaches
    As discussed above, the final rules incorporate a number of 
provisions designed to focus Title VII dealer regulation upon those 
persons that engage in the performance of security-based swap dealing 
activity within the United States in excess of the de minimis 
thresholds, taking into account the mitigation of risks to U.S. persons 
and potentially to the U.S. financial markets, as well as other 
purposes of Title VII.
    In adopting these final rules we have considered alternative 
approaches suggested by commenters, including the economic effects of 
following such alternative approaches. In considering the economic 
impact of potential alternatives, we have sought to isolate the 
individual alternatives to the extent practicable, while recognizing 
that many of those alternatives are not mutually exclusive.
    We further have considered such potential alternatives in light of 
the methodologies discussed above, by assessing the extent to which 
following particular alternatives would be expected to increase or 
decrease the number of entities that ultimately would be expected to be 
regulated as dealers under the final rules, as well as the 
corresponding economic impact. As discussed below, however, analysis of 
the available data standing alone would tend to suggest that various 
alternative approaches suggested by commenters would not produce large 
changes in the numbers of market participants that may have to be 
regulated as security-based swap dealers. These results are subject to 
the above limitations, however, including limitations regarding the 
ability to quantitatively assess how market participants may adjust 
their future activities in response to the rules we adopt or for 
independent reasons. Accordingly, while such analyses provide some 
context regarding alternatives, their use as tools for illustrating the 
economic effects of such alternatives is limited.
(a) Dealing Activity by Foreign Branches of U.S. Banks
    The final rules require U.S. banks to count all dealing 
transactions of their foreign branches against the de minimis 
thresholds, even when the counterparty is a non-U.S. person or another 
foreign branch of a U.S. person. Certain commenters to the rules 
addressed in the Intermediary Definitions Adopting Release had 
expressed the view that such transactions by foreign branches should 
not have to count their dealing transactions involving non-U.S. 
persons.\475\ For the reasons discussed above, we believe that it is 
appropriate for the analysis to include dealing transactions conducted 
through foreign branches to the same extent as other dealing 
transactions by U.S. persons.\476\
---------------------------------------------------------------------------

    \475\ See note 181, supra, and accompanying text. This issue--
regarding whether a foreign branch of a U.S. bank should count all 
of its dealing activity against the de minimis thresholds--is 
distinct from the issue regarding the extent to which a non-U.S. 
person should count its dealing activity involving a foreign branch 
of a U.S. bank as a counterparty. That latter issue is addressed 
below. See section IV.I.3(d), supra.
    \476\ See section 0, supra.
---------------------------------------------------------------------------

    Adopting such an alternative approach potentially could provide 
market participants that are U.S. persons with incentives to execute 
higher volumes through their foreign branches. Such an outcome may be 
expected in part to reduce the programmatic and assessment costs 
associated with dealer regulation under Title VII. Such an outcome also 
would be expected to reduce the programmatic benefits associated with 
dealer regulation, given that those U.S. banks (and potentially the 
U.S. financial system) would incur risks via their foreign branches 
equivalent to the risk that might arise from transactions of

[[Page 39125]]

U.S. banks that are not conducted through foreign branches, but without 
the additional oversight (including risk mitigation requirements such 
as capital and margin requirements) that comes from regulation as a 
dealer.
    Using the 2012 data to assess the impact associated with this 
alternative does not indicate a change to our conservative estimate 
that up to 50 entities potentially would register as security-based 
swap dealers.\477\ This assessment, as well as the other assessments of 
alternatives discussed below, is subject to the limitations discussed 
above, including limitations regarding the ability to assess how market 
participants would change their activities in response to the final 
rules.
---------------------------------------------------------------------------

    \477\ The DTCC-TIW data permits us to separately consider 
dealing activity involving accounts of foreign branches of U.S. 
banks from other accounts of U.S.-domiciled persons. As a result, it 
is possible to consider the potential impact of a requirement under 
which--in contrast to the final rules--dealing activity conducted 
through a foreign branch only needs to be counted against the 
thresholds when the counterparty is a U.S.-domiciled person. Under 
such an alternative approach, the U.S. person would not have to 
count dealing transactions in which the counterparty is a non-U.S. 
person or another foreign branch of a U.S. bank.
    As discussed above, current data indicates that there are 27 
market participants that have three or more counterparties that are 
not recognized as dealers by ISDA, and that have $3 billion or more 
in notional single-name CDS transactions over a 12 month period. 
Screening those entities against a cross-border test that is 
identical to the one we are adopting, except that it does not count 
foreign branches of U.S. banks as U.S. persons, leads to an estimate 
of 25 market entities that have $3 billion or more in activity that 
must be counted against the thresholds (rather than the 26 estimated 
in connection with the test we are adopting). That difference does 
not appear to warrant a change in the conservative estimate that up 
to 50 entities may register as security-based swap dealers.
---------------------------------------------------------------------------

(b) Dealing Activity by Guaranteed Affiliates of U.S. Persons
    The final rules require a non-U.S. person to count, against the de 
minimis thresholds, dealing transactions for which the non-U.S. 
person's performance in connection with the transaction is subject to a 
recourse guarantee against a U.S. affiliate of the non-U.S. person. 
Although the proposal instead would have treated such guaranteed 
affiliates like any other non-U.S. persons, we believe that this 
provision is appropriate for the reasons discussed above, including 
that such recourse guarantees pose risks to U.S. persons and 
potentially to the U.S. financial system via the U.S. guarantor.
    This aspect of the final rules reflects a middle ground between 
commenter views, given that some commenters opposed any consideration 
of guarantees as part of the dealer analysis, while others expressed 
the view that all affiliates of a U.S. person should be assumed to be 
the beneficiary of a de facto guarantee from the U.S. person and, 
absent a showing otherwise, should have to count all of their dealing 
activity against the thresholds.\478\ This diversity of commenter views 
suggests a range of potential alternatives to the final rules--
including one alternative in which the final rules do not address 
guarantees at all, as well as alternatives in which (based on the 
concept of a de facto guarantee) all affiliates of a U.S. person, or at 
least all affiliates within a U.S.-based holding company structure, 
should have to count their dealing activity against the thresholds 
(with a potential exception if they demonstrate to the market that 
there will be no guarantee). For the reasons discussed above, we 
believe that the approach taken by the final rules is appropriate.\479\
---------------------------------------------------------------------------

    \478\ See note 310, supra.
    \479\ See section 0, supra.
---------------------------------------------------------------------------

    Following such alternative approaches could be expected to lead to 
disparate economic effects depending on which approach is followed. On 
the one hand, an approach that does not require counting against the 
thresholds of a non-U.S. person's transactions with non-U.S. 
counterparties that are guaranteed by their U.S. affiliates would help 
provide incentives for greater use of guarantees by U.S. persons, with 
an increase of the associated risk flowing to the United States.\480\ 
On the other hand, an approach that requires the conditional or 
unconditional counting of transactions by all affiliates of U.S. 
persons could provide incentives for certain non-U.S. holding companies 
to limit or eliminate relationships with U.S.-based affiliates, even if 
these affiliates perform functions unrelated to security-based swap 
activity. Additionally, a more limited approach that requires counting 
by non-U.S. subsidiaries of U.S. holding companies could reduce 
liquidity in the security-based swap market even if such a subsidiary's 
participation does not depend on the financial position or backing of 
its parent.
---------------------------------------------------------------------------

    \480\ In the Cross-Border Proposing Release, we expressed the 
preliminary view that dealer regulation of such persons would not 
materially increase the programmatic benefits of the dealer 
registration requirement, and that such an approach would impose 
programmatic costs without a corresponding increase in programmatic 
benefits to the U.S. security-based swap market. See Cross-Border 
Proposing Release, 78 FR 31146-47. For the reasons discussed above, 
we have reached a different conclusion in conjunction with these 
final rules. See section IV.E.1(b), supra.
---------------------------------------------------------------------------

    Data assessment of the first alternative does not indicate a change 
to our estimate that up to 50 entities may be expected to register with 
the Commission as security-based swap dealers.\481\ The available data 
does not permit us to assess the other approaches, whereby all 
affiliates within a U.S.-based holding company, or all affiliates of 
any U.S. person generally, should have to count their dealing activity 
against the thresholds.\482\
---------------------------------------------------------------------------

    \481\ Although the data available to the Commission includes 
data regarding transactions of non-U.S. persons that are guaranteed 
by their U.S. affiliates, the data does not allow us to identify 
which individual transactions of those non-U.S. persons are subject 
to guarantees by their U.S. affiliates, or to distinguish the 
guaranteed and non-guaranteed transactions of such non-U.S. persons. 
As a result, the assessment of the final rule presumed that all 
transactions of foreign subsidiaries of U.S. persons for which we 
have data available constitute guaranteed transactions.
    Screening the 27 market participants that have three or more 
counterparties that are not recognized as dealers by ISDA, and that 
have $3 billion or more in notional single-name CDS transactions 
over a 12 month period, with a revised de minimis test that does not 
include any transactions with non-U.S. person counterparties entered 
into by a foreign subsidiary of a U.S. person produces 26 entities 
that would have more than $3 billion in notional transactions over 
12 months counted against the threshold--a number that is identical 
to the number associated with the test we are adopting.
    \482\ The available data does not include information about the 
single-name security-based swap transactions of non-U.S. domiciled 
persons (including non-U.S. affiliates of U.S.-domiciled persons) 
for single-name CDS involving a non-U.S. reference entity.
---------------------------------------------------------------------------

(c) Dealing by Conduit Affiliates
    The final rules require that conduit affiliates of U.S. persons 
count all of their dealing transactions against the de minimis 
thresholds. The available data does not permit us to identify which 
market participants currently engage in security-based swap dealing 
activity on behalf of U.S. affiliates, and hence would be deemed to be 
conduit affiliates. Accordingly, we are limited in our ability to 
quantify the economic impact of this anti-evasion provision.
    The economic effects of not including these provisions--and instead 
treating conduit affiliates the same as other non-U.S. persons--has the 
potential to be significant, as it would remove a tool that should help 
to deter market participants from seeking to evade dealer regulation 
through arrangements whereby U.S. persons effectively engage in dealing 
activity with non-U.S. persons via back-to-back transactions involving 
non-U.S. affiliates.\483\ Following that alternative thus may partially 
impair the effective functioning of the Title VII dealer requirements, 
and lead risk and liquidity to concentrate outside of the U.S. market.
---------------------------------------------------------------------------

    \483\ See note 314, supra, and accompanying text.

---------------------------------------------------------------------------

[[Page 39126]]

    Another potential alternative approach to addressing such evasive 
activity could be to narrow the inter-affiliate exception to having to 
count dealing transactions against the de minimis thresholds, such as 
by making the exception unavailable when non-U.S. persons transact with 
their U.S. affiliates. Such an alternative approach may be expected to 
reduce the ability of corporate groups to use central market-facing 
entities to facilitate the group's security-based swap activities, and 
as such may increase the costs faced by such entities (e.g., by 
requiring additional entities to directly face the market and hence 
negotiate master agreements with dealers and other counterparties). We 
believe that the more targeted approach of incorporating the conduit 
affiliate concept would achieve comparable anti-evasion purposes with 
less cost and disruption.
(d) Dealing Activity by Non-U.S. Counterparties With Foreign Branches 
of U.S. Banks and Certain Other Counterparties
    The final rules require non-U.S. persons to count, against the 
thresholds, their dealing transactions involving counterparties that 
are foreign branches of U.S. banks unless the U.S. bank is registered 
as a security-based swap dealer and unless no U.S.-based personnel of 
the counterparty are involved in arranging, negotiating and executing 
the transaction. This reflects a change from the proposal, which would 
have excluded all such transactions with a foreign branch regardless of 
whether the U.S. bank was registered as a dealer. The change 
appropriately takes into consideration the benefits of having relevant 
Title VII provisions applicable to dealers apply to the transaction 
against the liquidity and disparate treatment rationales underlying the 
exclusion.\484\
---------------------------------------------------------------------------

    \484\ See note 370, supra, and accompanying text.
---------------------------------------------------------------------------

    This aspect of the final rules reflects a middle ground between 
commenter views regarding transactions with foreign branches, given 
that some commenters expressed the view that all transactions with 
foreign branches should be counted against a non-U.S. person's de 
minimis threshold, while another commenter took the view that no such 
transaction should be counted.\485\ This suggests at least two possible 
alternatives to the final rule--one in which all transactions with 
foreign branches are excluded from being counted against the 
thresholds, and one in which all transactions with foreign branches are 
counted against the thresholds (just like other transactions with U.S. 
person counterparties).
---------------------------------------------------------------------------

    \485\ See notes 359 through 361, supra, and accompanying text.
---------------------------------------------------------------------------

    The effect of adopting the first alternative--whereby all 
transactions with foreign branches are excluded from being counted--
could provide U.S. market participants that are not registered as 
dealers with incentives to execute higher volumes of security-based 
swaps through their foreign branches, resulting in higher amounts of 
risk being transmitted to the United States without the risk-mitigating 
attributes of having a registered dealer involved in the 
transaction.\486\ Adopting the second alternative--whereby all of a 
non-U.S. person's transactions with foreign branches are counted 
regardless of the registration status of the U.S. counterparty--would 
raise the potential for disparate impacts upon U.S. persons trading 
with foreign branches, along with associated concerns about liquidity 
impacts.
---------------------------------------------------------------------------

    \486\ In practice, based on our understanding of changes in the 
way major U.S. dealers engage with non-U.S. counterparties in the 
single-name CDS market following the issuance of the CFTC Cross-
Border Guidance, we believe that few, if any, U.S. persons currently 
may participate in the single-name CDS market through their foreign 
branches. Also, as noted above, we recognize that other regulatory 
provisions may limit the ability of U.S. banks to conduct security-
based swap activities. See note 366, supra.
---------------------------------------------------------------------------

    The available data allows for estimates related to both potential 
alternatives subject to the limitations discussed above, and neither 
alternative would be expected to indicate a change to our assessment 
that up to 50 entities may be expected to register with the Commission 
as security-based swap dealers.\487\
---------------------------------------------------------------------------

    \487\ Screening the 27 market participants that have three or 
more counterparties that are not recognized as dealers by ISDA, and 
that have $3 billion or more in notional single-name CDS 
transactions over a 12 month period, with the two revised de minimis 
tests addressed above produces 26 entities that would have more than 
$3 billion in notional transactions over 12 months counted against 
the threshold--a number identical to the number associated with the 
test we are adopting.
---------------------------------------------------------------------------

    The final rules also incorporate definitions of ``foreign branch'' 
and ``transaction conducted through a foreign branch'' that potentially 
could be modified to reflect alternative approaches. While we do not 
believe that the economic impact of following such alternatives is 
readily quantifiable given the available data, we generally believe 
that any such effects would be limited, particularly in light of our 
understanding that few, if any, U.S. persons currently may participate 
in the single-name CDS market through their foreign branches.
    Separately, the final rules do not require non-U.S. persons to 
count their dealing transactions with non-U.S. counterparties. 
Potential alternatives to that approach could be to require non-U.S. 
persons to count their dealing transactions with counterparties that 
are guaranteed affiliates of U.S. persons (at least with regard to 
transactions subject to the guarantees), or their dealing transactions 
with counterparties that are conduit affiliates.\488\ The alternative 
approach of requiring non-U.S. persons to count dealing transactions 
with either or both of those types of non-U.S. counterparties 
potentially would increase the programmatic benefits associated with 
Title VII dealer regulation, by applying the risk mitigating aspects of 
dealer regulation (such as capital and margin requirements) to the 
dealer counterparties of persons whose security-based swap activities 
directly affect the United States, while recognizing that such risk 
mitigating benefits would be more attenuated than those that are 
associated with the final rules' approach of directly counting dealing 
transactions of such guaranteed and conduit affiliates. On the other 
hand, requiring non-U.S. persons to count such transactions would be 
expected to increase assessment costs by requiring such persons to 
evaluate and track whether their non-U.S. counterparties are guaranteed 
or conduit affiliates. Also, to the extent such an alternative approach 
causes non-U.S. dealers to avoid entering into transactions with 
affiliates of U.S. persons to avoid the need to conduct such 
assessments, the approach could reduce the liquidity available to 
corporate groups with U.S. affiliates, and further could provide an 
incentive for such corporate groups to move their security-based swap 
activity entirely outside the United States (which could impair the 
transparency goals of Title VII).
---------------------------------------------------------------------------

    \488\ For the reasons discussed above, we do not believe that it 
is necessary to require non-U.S. persons to count their dealing 
transactions with such non-U.S. counterparties. See section 0, 
supra.
    Also, as discussed above, we anticipate soliciting additional 
public comment regarding counting of dealing transactions between 
two non-U.S. persons towards the de minimis exception when 
activities related to the transaction occur in the United States. 
See section 0, supra.
---------------------------------------------------------------------------

    As we discussed in the Cross-Border Proposing Release, another 
potential approach related to the treatment of non-U.S. persons' 
dealing activities would be to not require the registration of non-U.S. 
persons that engage in dealing activity with U.S. person counterparties 
through an affiliated U.S. person intermediary.\489\ In our view,

[[Page 39127]]

such an approach would reduce the programmatic benefits associated with 
dealer regulation under Title VII, and would raise particular concerns 
related to financial responsibility and counterparty risk, as well as 
create risk to U.S. persons and potentially to the U.S. financial 
system.
---------------------------------------------------------------------------

    \489\ See Cross-Border Proposing Release, 78 FR 31146.
---------------------------------------------------------------------------

(e) ``U.S. Person'' Definition
    The ``U.S. person'' definition used by the final rules seeks to 
identify those persons for whom it is reasonable to infer that a 
significant portion of their financial and legal relationships are 
likely to exist within the United States and for whom it is therefore 
reasonable to conclude that risks arising from their security-based 
swap activities could manifest themselves within the United States, 
regardless of location of their counterparties. Because the definition 
incorporates decisions regarding a range of issues, the definition 
potentially is associated with a number of alternative approaches that 
could influence the final rules' economic impact.\490\
---------------------------------------------------------------------------

    \490\ The issues regarding the treatment of foreign branches of 
U.S. banks--as potential dealers or as counterparties to non-U.S. 
persons that engage in dealing activity--that are addressed above 
also implicate the status of those foreign branches as ``U.S. 
persons.''
---------------------------------------------------------------------------

    A particularly significant element of this definition addresses the 
treatment of investment vehicles. Under the final rule, a fund is a 
``U.S. person'' if the vehicle is organized, incorporated or 
established within the United States, or if its principal place of 
business is in the United States, which we are interpreting to mean 
that the primary locus of the investment vehicle's day-to-day 
operations is within the United States. One potential alternative 
approach to this element would be to make use of a narrower definition 
that does not use a principal place of business test for investment 
vehicles, and hence does not encompass vehicles that are not 
established, incorporated, or organized within the United States, even 
if the primary locus of their day-to-day operations is located here. 
Another potential approach would be to focus the meaning of ``principal 
place of business'' on the location where the operational management 
activities of the fund are carried out, without regard to the location 
of the fund's managers.
    Similarly, another potential alternative approach to the ``U.S. 
person'' definition would be for the definition not to incorporate a 
principal place of business test for operating companies. Under such an 
alternative approach, an operating company would not fall within the 
``U.S. person'' definition if it is not organized, incorporated or 
established within the United States, even if the officers or directors 
who direct, control and coordinate the operating company's overall 
business activities are located in the United States.
    Following an alternative approach whereby the ``U.S. person'' 
definition did not encompass a ``principal place of business'' test, or 
whereby the definition followed a narrower such test with regard to 
particular types of market participants, may be expected to reduce the 
programmatic costs and benefits associated with dealer regulation, in 
that it may lead certain non-U.S. persons not to have to register as 
dealers notwithstanding dealing activities with such counterparties 
above the de minimis thresholds. Such an alternative approach also may 
promote market participants' use of such counterparties that are 
closely linked to the United States but that are not organized, 
incorporated or established within the United States, or that do not 
have operational management activities within the United States, in 
lieu of entering into security-based swaps with U.S. persons. While 
such an approach may be expected to reduce programmatic costs, it also 
would reduce the programmatic risk mitigation and other benefits of 
dealer regulation under Title VII given that the ``principal place of 
business'' test helps to identify persons for which the risks 
associated with their security-based swap activities can manifest 
themselves within the United States.\491\ Such an alternative approach 
may also be expected to reduce assessment costs incurred by non-U.S. 
persons, although such assessment costs in any event would be reduced 
by the ability of non-U.S. persons to rely on a counterparty's 
representation that the counterparty is not a U.S. person.
---------------------------------------------------------------------------

    \491\ See section IV.C.3(b)(ii), supra.
---------------------------------------------------------------------------

    Aside from those issues related to the use of a ``principal place 
of business'' test, other aspects of the ``U.S. person'' definition 
also may affect the programmatic costs and benefits and assessment 
costs associated with dealer regulation. For example, the final rules 
do not encompass funds that are majority-owned by U.S. persons, 
although two commenters supported such an approach.\492\ Also, the 
final ``U.S. person'' definition does not exclude investment vehicles 
that are offered publicly only to non-U.S. persons and are not offered 
to U.S. persons, although some commenters also supported this type of 
exclusion.\493\
---------------------------------------------------------------------------

    \492\ See section IV.C.3(b)(iii), supra. The CFTC Cross-Border 
Guidance follows such an approach.
    \493\ See note 285 through 287, supra, and accompanying text. 
Here too, the CFTC Cross-Border Guidance follows such an approach.
---------------------------------------------------------------------------

    For the reasons detailed above, we believe that including majority-
owned funds within the definition of ``U.S. person'' would be likely to 
increase programmatic costs (by causing more investment funds to be 
subject to Title VII requirements) as well as assessment costs, while 
not significantly increasing programmatic benefits given our view that 
the composition of a fund's beneficial owners is not likely to have 
significant bearing on the degree of risk that the fund's security-
based swap activity poses to the U.S. financial system. Moreover, for 
the reasons discussed above, we also believe that an exclusion for 
publicly offered funds that are offered only to non-U.S. persons and 
not offered to U.S. persons, while likely to reduce programmatic costs, 
would also reduce programmatic benefits, by excluding certain funds 
from the definition of U.S. person based on factors that we do not 
believe are directly relevant to the degree of risk a fund's security-
based swap activities are likely to pose to U.S. persons and 
potentially to the U.S. financial system.
    Apart from those potential alternatives regarding the treatment of 
majority-owned funds and of investment vehicles offered only to non-
U.S. persons, an additional alternative approach would be for the 
Commission simply to adopt the CFTC's interpretation of ``U.S. 
person.'' We do not believe that following that alternative approach 
would be expected to have a significant effect on programmatic costs 
and benefits, given the substantive similarities between the CFTC's 
interpretation and our final rule. Adopting such an alternative 
approach, however, could have an impact on assessment costs. We 
particularly are mindful that some commenters requested that we adopt a 
consistent definition notwithstanding their views regarding specific 
features of the definition, in part because they believed that 
differences between our definition of ``U.S. person'' and the CFTC's 
interpretation of that term would significantly increase costs 
associated with determining whether they or their counterparties are 
U.S. persons for purposes of Title VII. We recognize that differences 
between the two definitions could lead certain market participants to 
incur additional costs that they would not incur in the presence of 
identical definitions. At the same time, we are adopting definitions of 
``U.S. person''

[[Page 39128]]

and ``principal place of business'' that should be relatively simple 
and straightforward to implement, which should mitigate commenters' 
concerns about the costs associated with different approaches to these 
terms. More generally, for the reasons discussed above we believe that 
the definitions we are adopting are the appropriate definitions for the 
cross-border implementation of Title VII in the security-based swap 
context.\494\
---------------------------------------------------------------------------

    \494\ See section 0, supra.
---------------------------------------------------------------------------

    In addition, as discussed above, the final ``U.S. person'' 
definition does not follow an approach similar to the one used in 
Regulation S.\495\ Because such an alternative approach would treat 
certain foreign branches of U.S. persons as non-U.S. persons, 
notwithstanding the entity-wide nature of the associated risks, 
following such an approach would be expected to reduce programmatic 
benefits by causing Title VII dealer regulation not to apply to certain 
dealing activities that occur in the United States and pose direct 
risks to U.S. persons. Although such an alternative approach 
potentially could impact assessment costs, given that certain market 
participants may already be familiar with the parameters of such a 
Regulation S approach, in our view the ``U.S. person'' definition we 
are adopting is more appropriate and simpler than an approach based on 
Regulation S.
---------------------------------------------------------------------------

    \495\ See section 0, supra.
---------------------------------------------------------------------------

    Another potential alternative approach for addressing the ``U.S. 
person'' definition would be for the definition not to include the 
exclusion we are adopting with regard to specified international 
organizations. The alternative approach of not explicitly excluding 
such organizations from the definition could be expected to increase 
assessment costs--as counterparties to such organizations would have to 
consider those organizations' potential status as U.S. persons, which 
would implicate analysis of the privileges and immunities granted such 
persons under U.S. law--without likely countervailing programmatic 
benefits.\496\
---------------------------------------------------------------------------

    \496\ Separately, as discussed above, we do not concur with the 
view of some commenters that a person's dealing activities involving 
such international organizations as counterparty should be excluded 
from having to be counted under the final rules. See section 
IV.3(e), supra. An alternative approach that followed those views 
would reduce the programmatic benefits of dealer regulation under 
Title VII, such as by permitting dealers that are U.S. persons to 
escape dealer regulation, notwithstanding the risk such U.S. dealers 
pose to the U.S. market, simply by focusing their dealing activities 
toward transactions with such international organizations.
---------------------------------------------------------------------------

    The available data suggests that an alternative in which offshore 
funds managed by U.S. persons are excluded from de minimis calculations 
by non-U.S. persons would not be expected to indicate a change to our 
assessment that up to 50 entities may be expected to register with the 
Commission as security-based swap dealers.\497\ We do not believe that 
other alternative approaches to the ``U.S. person'' definition are 
readily susceptible to quantitative analysis that would illustrate 
their potential programmatic and assessment effects.\498\
---------------------------------------------------------------------------

    \497\ Screening the 27 market participants that have three or 
more counterparties that are not recognized as dealers by ISDA, and 
that have $3 billion or more in notional single-name CDS 
transactions over a 12 month period, with a revised de minimis test 
that does not count non-U.S. persons' dealing transactions involving 
offshore funds managed by U.S. persons produces 26 entities that 
would have more than $3 billion in notional transactions over 12 
months counted against the threshold--a number identical to the 
number associated with the test we are adopting.
    \498\ We note generally, however, that similarities between the 
definition of ``U.S. person'' in the final rules and the CFTC's 
interpretation of that term would help mitigate the assessment costs 
associated with the ``U.S. person'' determination. We do not believe 
that there are any significant differences, whereby a person that is 
a ``U.S. person'' for purposes of our final rules would generally 
not be a ``U.S. person'' for purposes of the CFTC Cross-Border 
Guidance, that may tend to increase assessment costs.
---------------------------------------------------------------------------

(f) Aggregation Requirement
    The final rules apply the de minimis exception's aggregation 
requirement to cross-border activities in a way that reflects the same 
principles that govern when non-U.S. persons must directly count their 
dealing activity against the thresholds. The final rules thus have been 
revised from the proposal to incorporate other aspects of the way that 
the final rules require counting of particular transactions against the 
thresholds. The final rules further have been modified from the 
proposal to remove the proposed ``operational independence'' condition 
to the exclusion that permits a person not to count transactions of its 
affiliates that are registered as security-based swap dealers.\499\ 
These rules--like the incorporation of the aggregation requirement as 
part of the Intermediary Definitions Adopting Release--are intended to 
avoid evasion of the Title VII dealer requirements.
---------------------------------------------------------------------------

    \499\ By removing the proposed ``operational independence'' 
condition, the final rule provides that a person need not count the 
transactions of its registered dealer affiliate regardless of 
whether the person and the registered dealer affiliate are 
operationally independent.
    The final rule also has been revised from the proposal to make 
the exclusion for registered dealer affiliates also available when 
an affiliate is in the process of registering as a dealer.
---------------------------------------------------------------------------

    The final rules regarding the aggregation provision represent a 
middle ground between commenter views. One commenter specifically 
supported the proposal's ``operational independence'' condition that 
would limit when a person could exclude the dealing transactions of 
affiliates that are registered as dealers.\500\ On the other hand, 
other commenters opposed any application of the aggregation provisions 
in the cross-border context (as well as more generally).\501\ This 
suggests at least two alternatives--one in which the ``operational 
independence'' condition is retained, and one in which the aggregation 
requirement is further limited to only require U.S. persons to count 
dealing activities of affiliated U.S. persons.
---------------------------------------------------------------------------

    \500\ See note 396, supra.
    \501\ See note 391 through 395, supra.
---------------------------------------------------------------------------

    The economic impact of retaining the proposed operational 
independence condition potentially would reduce efficiencies and deter 
beneficial group-wide risk management practices. Conversely, the impact 
of the alternative approach of further limiting the aggregation 
requirement, such that it addresses only affiliated U.S. persons, would 
facilitate market participants' evasion of the dealer regulation 
requirement by dividing their dealing activity among multiple non-U.S. 
entities.
    The economic impact of the alternative approach of retaining the 
``operational independence'' condition is not readily susceptible to 
quantification, given the lack of data regarding the extent to which 
affiliates that engage in security-based swap activities jointly make 
use of back office, risk management, sales or trades, or other 
functions. Analysis of data related to the alternate approach under 
which the requirement would be further limited to aggregating 
transactions of affiliated U.S. persons would not be expected to 
indicate a change to our assessment that up to 50 entities may be 
expected to register with the Commission as security-based swap 
dealers, subject to the limitations discussed above.\502\
---------------------------------------------------------------------------

    \502\ Screening the 27 market participants that have three or 
more counterparties that are not recognized as dealers by ISDA, and 
that have $3 billion or more in notional single-name CDS 
transactions over a 12 month period, with a revised de minimis test 
that limits aggregation to U.S. affiliates within a corporate group 
produces 26 entities that would have more than $3 billion in 
notional transactions over 12 months counted against the threshold--
a number identical to the number associated with the test we are 
adopting.
---------------------------------------------------------------------------

(g) Exception for Cleared Anonymous Transactions
    The final rules include an exception whereby non-U.S. persons need 
not

[[Page 39129]]

count, against the thresholds, transactions that are entered into 
anonymously and are cleared. This exception reflects limits on the 
potential availability of relevant information to non-U.S. persons, as 
well as potential impacts on liquidity that may result absent such an 
exception.
    The likely impact of the alternative approach of not including such 
an exception could be to deter the development of anonymous trading 
platforms, or to reduce U.S. persons' ability to participate in such 
platforms. In this regard the alternative can be expected to help 
reduce the programmatic benefits of Title VII. The impact of the 
alternative approach of not including this type of exception is not 
readily susceptible to quantification.\503\
---------------------------------------------------------------------------

    \503\ Based on our understanding of the market, transactions in 
security-based swaps in general currently would not be eligible for 
the exception because transactions currently are not anonymous.
---------------------------------------------------------------------------

V. Cross-Border Application of Major Security-Based Swap Participant 
Thresholds

A. Overview

    The statutory definition of ``major security-based swap 
participant'' encompasses persons that are not dealers but that 
nonetheless could pose a high degree of risk to the U.S. financial 
system.\504\ The statutory focus of the ``major security-based swap 
participant'' definition differs from that of the ``security-based swap 
dealer'' definition, in that the latter focuses on activity that may 
raise the concerns that dealer regulation is intended to address, while 
the former focuses on positions that may raise systemic risk concerns 
within the United States.\505\ The definition focuses on systemic risk 
issues by targeting persons that maintain ``substantial positions'' 
that are ``systemically important,'' or whose positions create 
``substantial counterparty exposure that could have serious adverse 
effects on the financial stability of the United States banking system 
or financial markets.'' \506\ The statute further directed us to define 
the term ``substantial position'' at the ``threshold that the 
Commission determines to be prudent for the effective monitoring, 
management, and oversight of entities that are systemically important 
or can significantly impact the financial system of the United 
States.'' \507\
---------------------------------------------------------------------------

    \504\ As discussed in the Intermediary Definitions Adopting 
Release, the major security-based swap participant definition 
employs tests incorporating terms--particularly ``systemically 
important,'' ``significantly impact the financial system'' or 
``create substantial counterparty exposure''--that denote a focus on 
entities that pose a high degree of risk through their security-
based swap activities. See Intermediary Definitions Adopting 
Release, 77 FR 30661 n.761. That discussion also noted that the link 
between the major participant definitions and risk was highlighted 
during the congressional debate on the statute. See id. (citing 156 
Cong. Rec. S5907 (daily ed. July 15, 2010) (citing colloquy between 
Senators Hagen and Lincoln, discussing how the goal of the major 
participant definitions was to ``focus on risk factors that 
contributed to the recent financial crisis, such as excessive 
leverage, under-collateralization of swap positions, and a lack of 
information about the aggregate size of positions.'')).
    \505\ See section 0, supra.
    \506\ See section 3(a)(67) of the Exchange Act. The statute 
defines a ``major security-based swap participant'' as a person that 
satisfies any one of three alternative statutory tests: A person 
that maintains a ``substantial position'' in swaps or security-based 
swaps for any of the major swap categories as determined by the 
Commission; a person whose outstanding security-based swaps create 
substantial counterparty exposure that could have serious adverse 
effects on the financial stability of the U.S. banking system or 
financial markets; or a person that is a ``financial entity'' that 
is ``highly leveraged'' relative to the amount of capital it holds 
(and that is not subject to capital requirements established by an 
appropriate Federal banking agency) and maintains a ``substantial 
position'' in outstanding security-based swaps in any major category 
as determined by the Commission.
    \507\ See Exchange Act section 3(a)(67)(B).
---------------------------------------------------------------------------

    In the Intermediary Definitions Adopting Release, we, together with 
the CFTC, adopted rules defining what constitutes a ``substantial 
position'' and ``substantial counterparty exposure.'' \508\ In doing 
so, we concentrated on identifying persons whose large security-based 
swap positions pose market risks that are significant enough that it is 
prudent to regulate and monitor those persons.\509\ The definition 
incorporates a current exposure test and a potential future exposure 
test designed to identify such persons.\510\
---------------------------------------------------------------------------

    \508\ See Intermediary Definitions Adopting Release, 77 FR 
30663-84.
    \509\ See id. at 30661, 30666.
    \510\ See id. at 30666 (noting the use of such tests in context 
of ``substantial position'' definition); id. at 30682 (noting use of 
such tests in context of ``substantial counterparty exposure'' 
definition). We also noted that our definition of ``substantial 
position'' was intended to address default-related credit risks, the 
risk that would be posed by the default of multiple entities close 
in time, and the aggregate risks presented by a person's security-
based swap activity, as these considerations reflect the market risk 
concerns expressly identified in the statute. We interpreted 
``substantial counterparty exposure'' in a similar manner, noting 
the focus of the statutory test on ``serious adverse effects on 
financial stability or financial markets.'' Id. at 30683. Cf. 
section 3(a)(67)(A)(ii)(II) of the Exchange Act (encompassing as 
major security-based swap participants persons ``whose outstanding 
security-based swaps create substantial counterparty exposure that 
could have serious adverse effects on the financial stability of the 
United States banking system or financial markets'').
---------------------------------------------------------------------------

    We addressed the application of the major participant definition to 
cross-border security-based swaps in the Cross-Border Proposing 
Release, proposing that a U.S. person consider all security-based swap 
positions entered into by it, and also proposing that a non-U.S. person 
consider only its positions with U.S. persons but not its positions 
with other non-U.S. counterparties, even if the positions are entered 
into within the United States or the non-U.S. counterparties are 
guaranteed by a U.S. person.\511\
---------------------------------------------------------------------------

    \511\ See proposed Exchange Act rule 3a67-10(c); Cross-Border 
Proposing Release, 78 FR 31030.
---------------------------------------------------------------------------

    In the proposal, we also explained our preliminary view on the 
application in the cross-border context of the general principles 
regarding attribution, which were set forth in guidance in the 
Intermediary Definitions Adopting Release. Specifically, we stated that 
a person's security-based swap positions must be attributed to a 
parent, affiliate, or guarantor for purposes of the major security-
based swap participant analysis to the extent that the counterparties 
to those positions have recourse to that parent, affiliate, or 
guarantor in connection with the position.\512\ This treatment was 
intended to reflect the risk focus of the major security-based swap 
participant definition by providing that entities will be regulated as 
major security-based swap participants when the guarantees they provide 
pose a sufficiently high level of risk to the U.S. financial 
system.\513\
---------------------------------------------------------------------------

    \512\ See Cross-Border Proposing Release, 78 FR 31031 and n.625. 
Cf. Intermediary Definitions Adopting Release, 77 FR 30689 
(describing same attribution treatment in context of domestic 
security-based swap activities).
    \513\ See Cross-Border Proposing Release, 78 FR 31032.
---------------------------------------------------------------------------

    Commenters raised several issues related to the proposed approach 
for applying the major security-based swap participant definition to 
cross-border security-based swaps. As discussed below, these include 
issues regarding: The treatment of a non-U.S. person's positions with 
foreign branches of U.S. banks, the treatment of guarantees, and the 
treatment of entities with legacy positions. Commenters also requested 
that the Commission generally harmonize its rules and guidance with the 
CFTC's Cross-Border Guidance.
    After considering commenters' views, we are adopting final rules 
that have been modified from the proposal in certain important 
respects. As addressed in further detail below, key changes to the 
proposal include:
     A requirement that a conduit affiliate, as defined above, 
must include in its major security-based swap participant threshold 
calculations all of its security-based swap positions;
     A requirement that a non-U.S. person other than a conduit 
affiliate

[[Page 39130]]

must include in its major security-based swap participant threshold 
calculations all of its security-based swap positions for which its 
counterparty has rights of recourse against a U.S. person; and
     A modification to the proposed requirement that a non-U.S. 
person must include in its major security-based swap participant 
threshold calculations security-based swap positions with foreign 
branches of U.S. banks.\514\
---------------------------------------------------------------------------

    \514\ In addition to the changes listed above, the final rules 
do not include certain provisions that were included in proposed 
Exchange Act rule 3a67-10 because those provisions, which defined 
``foreign major security-based swap participant,'' and addressed the 
application of business conduct requirements to registered foreign 
major security-based swap participants, were relevant to proposed 
rules regarding substantive requirements that were included in the 
Cross-Border Proposing Release. As this release only addresses 
various definitional rules and not those substantive requirements 
that were proposed, those provisions are not relevant to this 
release and are not addressed. Those provisions may, however, be 
relevant to matters addressed in subsequent rulemakings.
    The final rules applying the major security-based swap 
participant definition also incorporate a conforming change by 
referring to such person's ``positions'' rather than 
``transactions.'' This is consistent with the use of the term 
``positions'' in the statutory definition of major security-based 
swap participant and the rules further defining that term.
---------------------------------------------------------------------------

    Our approach to the application of the major security-based swap 
participant definition in the cross-border context incorporates certain 
principles that also apply in the context of the dealer definition and 
that are set forth in the Intermediary Definitions Adopting 
Release.\515\ First, as in the Intermediary Definitions Adopting 
Release, we interpret the term ``person'' to refer to a particular 
legal person, meaning that we view a trading desk, department, office, 
branch, or other discrete business unit that is not a separately 
organized legal person as a part of the legal person that enters into 
security-based swap positions.\516\ Thus, a legal person with a branch, 
agency, or office that exceeds the major security-based swap 
participant thresholds is required to register as a major security-
based swap participant as a legal person, even if the legal person's 
positions are limited to such branch, agency, or office.\517\ In 
addition, consistent with rules adopted in the Intermediary Definitions 
Adopting Release, cross-border security-based swap positions between 
majority-owned affiliates will not be considered for purposes of 
determining whether the person as a whole is a major security-based 
swap participant.\518\
---------------------------------------------------------------------------

    \515\ See Intermediary Definitions Adopting Release, 77 FR 30624 
(discussing our guidance regarding the meaning of the term 
``person'' as used in security-based swap dealer definition). Cf. 
section 0, supra.
    \516\ See section 0. Cf. Intermediary Definitions Adopting 
Release, 77 FR 30624.
    \517\ Cf. Intermediary Definitions Adopting Release, 77 FR 
30624; see also Cross-Border Proposing Release, 78 FR 30993.
    \518\ See Exchange Act rule 3a67-3(e); Intermediary Definitions 
Adopting Release, 77 FR 30687.
---------------------------------------------------------------------------

B. Application of the Major Security-Based Swap Participant Definition 
to U.S. Persons

1. Proposed Approach and Commenters' Views
    Under the proposal, a U.S. person would have considered all of its 
security-based swap positions for purposes of the major participant 
analysis.\519\ Commenters did not comment on this aspect of the 
proposed approach, although, as discussed above, several commenters 
addressed the proposed scope of the ``U.S. person'' definition.\520\
---------------------------------------------------------------------------

    \519\ See proposed Exchange Act rule 3a-67-10(c)(1).
    \520\ See section 0 and notes 192-194 (citing comment letters 
regarding ``U.S. person'' definition generally), supra.
---------------------------------------------------------------------------

2. Final Rule
    Consistent with the proposal, the final rules require a U.S. person 
to consider all of its security-based swap positions in its major 
security-based swap participant threshold calculations.\521\ The final 
rule incorporates the definition of ``U.S. person'' used in the context 
of a security-based swap dealer's de minimis calculation.\522\
---------------------------------------------------------------------------

    \521\ See Exchange Act rule 3a67-10(b)(1).
    \522\ See Exchange Act rule 3a67-10(a)(4) (defining ``U.S. 
person'' by referring to rule 3a71-3(a)(4)).
---------------------------------------------------------------------------

    As discussed above, in our view, the security-based swap positions 
of a U.S. person exist in the United States and raise, at the 
thresholds set forth in our further definition of major security-based 
swap participant, risks to the stability of the U.S. financial system 
or of U.S. entities, including those that may be systemically 
important.\523\ As noted above, it is the U.S. person as a whole and 
not merely a foreign branch or office that bears the risk of the 
security-based swap. Accordingly, it is consistent with our territorial 
approach to require a U.S. person to include all of its security-based 
swap positions in its major security-based swap participant threshold 
calculations.
---------------------------------------------------------------------------

    \523\ See section 0; Cf. Exchange Act section 3(a)(67)(B).
---------------------------------------------------------------------------

C. Application of the Major Security-Based Swap Participant Definition 
to Conduit Affiliates

1. Proposed Approach and Commenters' Views
    The proposal would have treated non-U.S. persons acting as 
``conduits'' for their U.S. affiliates the same as any other non-U.S. 
person for purposes of the major participant analysis, and, as such 
would have required those persons to include in their major participant 
threshold calculations only positions with U.S. persons.\524\
---------------------------------------------------------------------------

    \524\ Cross-Border Proposing Release, 78 FR 31006. See id. at 
31006 n.356 (acknowledging that such treatment differed from the 
CFTC's proposal and citing CFTC's proposed cross-border guidance).
---------------------------------------------------------------------------

    The proposal solicited comment regarding whether a non-U.S. 
person's major participant analysis should incorporate security-based 
swaps other than those entered into with U.S. persons.\525\ Also, as 
discussed above, the proposal requested comment on the use of the 
conduit affiliate concept and the treatment of entities that operate a 
``central booking system.'' \526\
---------------------------------------------------------------------------

    \525\ Id. at 31036.
    \526\ See section 0, supra.
---------------------------------------------------------------------------

    As discussed above, two commenters opposed applying the ``conduit 
affiliate'' definition to entities that serve as ``central booking 
systems'' for a corporate group, noting that the ``central booking 
systems'' are used to manage internal risk.\527\ The commenters argued 
that applying the conduit affiliate definition in this manner would tie 
regulatory requirements to firms' internal risk management practices, 
and would hamper the firms' ability to manage risk across a 
multinational enterprise.\528\ Another commenter suggested that conduit 
affiliates are the recipients of a de facto guarantee from their U.S. 
affiliates and thus should be treated as U.S. persons.\529\
---------------------------------------------------------------------------

    \527\ See id.
    \528\ See section 0, supra, notes 309 and 311 (citing SIFMA/FIA/
FSR Letter and CDEU Letter).
    \529\ See section 0, note 310, supra (citing BM Letter).
---------------------------------------------------------------------------

2. Final Rule
    The final rule modifies the proposal to require conduit affiliates 
to include all of their security-based swap positions in their major 
participant threshold calculations.\530\ Consistent with the dealer de 
minimis rules, a ``conduit affiliate'' is a non-U.S. affiliate of a 
U.S. person that enters into security-based swaps with non-U.S. 
persons, or with foreign branches of U.S. banks that are registered 
security-based swap dealers, on behalf of one or more of its U.S. 
affiliates (other than U.S. affiliates that are registered as security-
based swap dealers or major security-based swap participants),\531\

[[Page 39131]]

and enters into offsetting transactions with its U.S. affiliates to 
transfer risks and benefits of those security-based swaps.\532\
---------------------------------------------------------------------------

    \530\ Exchange Act rule 3a67-10(b)(2).
    \531\ As noted in the discussion of conduit affiliate in the 
context of the application of dealer de minimis exception, the 
``conduit affiliate'' definition does not encompass persons that 
engage in such offsetting transactions solely with U.S. persons that 
are registered with the Commission as security-based swap dealers or 
major security-based swap participants because we believe the 
registered status of the U.S. person mitigates evasion concerns. See 
note 313, supra.
    \532\ See section 0, supra; Exchange Act section 3a67-10(a)(1) 
(incorporating the ``conduit affiliate'' definition used in the 
dealer de minimis rule).
---------------------------------------------------------------------------

    After careful consideration and as discussed in the context of the 
dealer de minimis exception, we believe that requiring such conduit 
affiliates to include their positions in their major participant 
threshold calculations is consistent with our statutory anti-evasion 
authority and necessary or appropriate to help ensure that non-U.S. 
persons do not facilitate the evasion of major participant regulation 
under the Dodd-Frank Act. Absent a requirement that conduit affiliates 
include their positions in the threshold calculations, a U.S. person 
may be able to evade registration requirements under the Dodd-Frank Act 
by participating in arrangements whereby a non-U.S. person engages in 
security-based swap activity outside the United States on behalf of a 
U.S. affiliate that is not a registered security-based swap dealer or 
major security-based swap participant. The U.S. person could enter into 
offsetting transactions with the non-U.S. affiliate, thereby assuming 
the risks and benefits of those positions.\533\ Requiring conduit 
affiliates to include their positions in their major participant 
threshold calculations will help guard against evasion of major 
participant regulation and the risk that such entities could pose to 
the U.S. financial system.\534\
---------------------------------------------------------------------------

    \533\ See Exchange Act section 30(c); section 0, supra. In 
noting that this requirement is consistent with our anti-evasion 
authority under section 30(c), we are not taking a position as to 
whether such activity by a conduit affiliate otherwise constitutes a 
``business in security-based swaps without the jurisdiction of the 
United States.'' See note 315, supra.
     We recognize that not all structures involving conduit 
affiliates may be evasive in purpose. We believe, however, that the 
anti-evasion authority of Exchange Act section 30(c) permits us to 
prescribe prophylactic rules to conduct without the jurisdiction of 
the United States, even if those rules would also apply to a market 
participant that has been transacting business through a pre-
existing market structure established for valid business purposes, 
so long as the rule is designed to prevent possible evasive conduct. 
See Cross-Border Proposing Release, 78 FR 30987; see also section 0 
and note 316, supra (discussion of anti-evasion authority).
    \534\ Consistent with the approach we are taking in the dealer 
context, the rule under the major participant analysis requires a 
conduit affiliate to count all of its positions. See section 0 and 
note 312, supra. It is not limited to the conduit affiliate's 
positions that are specifically linked to offsetting positions with 
its U.S. affiliate because the correspondence between positions and 
their offsets may not be one-to-one, such as due to netting.
---------------------------------------------------------------------------

    In this context, as in the dealer context, we recognize the 
significance of commenters' concerns that the ``conduit affiliate'' 
concept may impede efficient risk management procedures, such as the 
use of central booking entities.\535\ As in the context of the de 
minimis exception to the dealer analysis, the ``conduit affiliate'' 
definition serves as a prophylactic anti-evasion measure, and we do not 
believe that any entities currently act as conduit affiliates in the 
security-based swap market, particularly given that a framework for the 
comprehensive regulation of security-based swaps did not exist prior to 
the enactment of Title VII, suggesting that market participants would 
have had no incentives to use such arrangements for evasive purposes.
---------------------------------------------------------------------------

    \535\ See note 311, supra (citing SIFMA/FIA/FSR Letter and CDEU 
Letter).
---------------------------------------------------------------------------

    Moreover, we believe that commenter concerns may be mitigated by 
certain features of the major participant analysis and that, to the 
extent risk mitigation procedures such as ``central booking systems'' 
are impacted by the final rules on conduit affiliates, such anticipated 
impact is appropriate given the purpose of the major participant 
definition to identify entities that may pose significant risk to the 
market. As discussed in the Intermediary Definitions Adopting Release, 
we believe the major participant thresholds are high enough that they 
will not affect entities, including centralized hedging facilities, of 
any but the largest security-based swap users.\536\ We would not expect 
that centralized hedging facilities would generally hold positions at 
the level of the major participant thresholds.\537\ Further, the first 
test in the major security-based swap participant definition, which 
calculates whether a person maintains a ``substantial position,'' 
excludes positions held for hedging or mitigating commercial risk.\538\ 
In the Intermediary Definitions Adopting Release, we explained that the 
exclusion includes hedging on behalf of a majority-owned affiliate, 
such as a centralized hedging facility.\539\ We believe this exclusion 
in the first test of the major participant definition is likely to 
lessen the impact that the conduit affiliate rules will have on 
centralized hedging facilities.\540\
---------------------------------------------------------------------------

    \536\ See Intermediary Definitions Adopting Release, 77 FR 
30671-72 and n.914 (explaining that, for cleared security-based CDS, 
a person would have to write $200 billion notional of CDS protection 
to meet the relevant $2 billion threshold for potential future 
exposure).
    \537\ We note that of the five non-U.S. domiciled entities that 
we expect to perceive the need to engage in the major security-based 
swap participant calculation threshold analysis (see section 0, 
infra), none appear to have any U.S.-based affiliates.
    \538\ See Exchange Act rule 3a67-1(a)(2)(i).
    \539\ See Intermediary Definitions Adopting Release, 77 FR 
30675-76.
    \540\ We also note that the third test of the major participant 
definition, rule 3a67-1(a)(2)(iii), which only applies to ``highly 
leveraged financial entities,'' excludes centralized hedging 
facilities acting on behalf of a non-financial entity from the 
definition of financial entity. To the extent commenters expressed 
concern that the conduit affiliate rules would affect financial 
entities and their risk mitigation procedures, this exclusion for 
centralized hedging facilities is designed to limit that impact. 
However, to the extent that an entity is not able to use the 
exclusion and falls within the definition of a highly leveraged 
financial entity, we believe that requiring such positions to be 
included is consistent with the focus of the major participant 
definition. Cf. CDEU Letter at 1 (stating that financial and non-
financial end-users should be subject to the same cross-border 
requirements); IIB Letter at 22 (noting that many financial 
institutions that do not enter into CDS for dealing purposes still 
enter into them for hedging purposes).
---------------------------------------------------------------------------

    In addition to these features of the major security-based swap 
participant definition that we anticipate will mitigate the impact of 
the conduit affiliate rules on risk mitigation practices, we believe 
the focus of the major participant definition on the degree of risk to 
the U.S. financial system justifies regulation of certain entities that 
perform this function if they maintain positions at a level that may 
pose sufficient risk to trigger the major participant definition, 
regardless of the nature of their security-based swap activity.
    For the foregoing reasons, we believe that the final rules 
regarding conduit affiliates are necessary or appropriate to prevent 
the evasion of any provision of the amendments made to the Exchange Act 
by Title VII and appropriately target potentially evasive scenarios 
that present the level of risk that the major security-based swap 
participant definition is intended to address.\541\
---------------------------------------------------------------------------

    \541\ See section 0, supra.
---------------------------------------------------------------------------

D. Application to Other Non-U.S. Persons

    The proposed rules would have required a non-U.S. person to include 
in its major security-based swap participant analysis all positions 
with U.S. persons, including foreign branches of U.S. banks.\542\ A 
non-U.S. person would not have had to include its security-based swap 
positions with non-U.S. person counterparties, even if such positions 
were guaranteed by another

[[Page 39132]]

person.\543\ A few commenters criticized the proposed requirement that 
a non-U.S. person include its positions with foreign branches of U.S. 
banks in its calculation thresholds.\544\ Regarding the treatment of a 
non-U.S. person whose positions with non-U.S. persons are guaranteed by 
a U.S. person, one commenter supported our proposed approach not to 
require the person whose position is guaranteed to include such 
guaranteed positions in its calculation,\545\ while other commenters 
requested that such entities be treated as U.S. persons.\546\ The final 
rules applying the major participant definition to non-U.S. persons are 
tailored to address the market impact and risk that we believe a 
person's security-based swap positions would pose to the U.S. financial 
system.
---------------------------------------------------------------------------

    \542\ See Cross-Border Proposing Release, 78 FR 31031 
(explaining that the ``U.S. person'' definition applies to the 
entire person, including its branches and offices that may be 
located in a foreign jurisdiction and, as such, the potential impact 
in the United States due to a non-U.S. counterparty's default would 
not differ depending on whether the non-U.S. counterparty entered 
into the security-based swap transaction with the home office of a 
U.S. bank or with a foreign branch of a U.S. bank).
    \543\ See proposed Exchange Act rule 3a67-10(c)(2).
    \544\ See SIFMA/FIA/FSR Letter at A-19 to A-20 (noting that the 
requirement may provide an incentive for non-U.S. persons to limit 
trading with foreign branches of U.S. persons and differs from the 
CFTC guidance); IIB Letter at 12 (noting that the requirement that 
non-U.S. person include its positions with foreign branches of U.S. 
persons in its major participant calculation is inconsistent with 
the proposed requirement in the de minimis context and the CFTC 
guidance).
    \545\ See SIFMA/FIA/FSR Letter at A-10 to A-11 (stating that a 
guaranteed non-U.S. person does not have the necessary ``requisite 
jurisdictional nexus'' to be classified as a U.S. person, and 
thereby supporting the Commission's proposal to address the risk of 
such guarantees through the attribution process in the major 
security-based swap participant requirements); note 209, supra.
    \546\ See note 207 (citing AFR Letter I and BM Letter).
---------------------------------------------------------------------------

1. Positions With U.S. Persons Other Than Foreign Branches of U.S. 
Banks
(a) Proposed Approach and Commenters' Views
    As noted above, the proposed rules would have required a non-U.S. 
person to include in its major security-based swap participant 
threshold calculations all positions with U.S. persons, including 
foreign branches of U.S. banks.\547\ The proposal stated that requiring 
non-U.S. persons to include their positions with U.S. persons, as 
defined in the proposal, would ``provide an appropriate indication of 
the degree of default risk proposed by such non-U.S. person's security-
based swap positions to the U.S. financial system,'' by accounting for 
such non-U.S. person's outward exposures to U.S. persons.\548\ One 
commenter objected to the proposal's approach to look to the U.S.-
person status of a clearing agency when a non-U.S. person enters into a 
security-based swap that is cleared and novated through a clearing 
agency.\549\ In the proposal, we explained that we would consider the 
clearing agency as the non-U.S. person's counterparty and because the 
clearing agency is a U.S. person we would require such novated 
security-based swap to be included in the non-U.S. person's major 
security-based swap participant calculation threshold 
calculations.\550\ The commenter objected, arguing that the location of 
clearing should be irrelevant for purposes of determining major 
security-based swap participant status.\551\ Although some commenters 
took issue with the scope of the ``U.S. person'' definition, as 
described above, commenters did not otherwise address this specific 
requirement within the application of the major security-based swap 
participant definition.
---------------------------------------------------------------------------

    \547\ See Cross-Border Proposing Release, 78 FR 31031.
    \548\ See id. at 31030 n.612.
    \549\ See CME Letter at 2-3.
    \550\ See Cross-Border Proposing Release, FR 78 31030 n.612.
    \551\ CME Letter at 3 (explaining that the requirement will 
discourage market participants from clearing through a clearing 
agency in the United States).
---------------------------------------------------------------------------

(b) Final Rule
    The final rule, like the proposal, generally requires that non-U.S. 
persons (apart from the conduit affiliates, which are addressed above) 
\552\ include in their major security-based swap participant threshold 
calculations their positions with U.S. persons.\553\
---------------------------------------------------------------------------

    \552\ See section 0, supra.
    \553\ See Exchange Act rule 3a67-10(b)(3)(i).
---------------------------------------------------------------------------

    Generally requiring non-U.S. persons to consider their security-
based swap positions with U.S. persons (except for positions with 
foreign branches of registered security-based swap dealers, as 
discussed below) will help ensure that persons whose positions are 
likely to pose a risk to the U.S. financial system at the relevant 
thresholds are subject to regulation as a major security-based swap 
participant.\554\ Security-based swap positions involving a U.S.-person 
counterparty exist within the United States by virtue of being 
undertaken with a counterparty that is a U.S. person. For these 
reasons, positions entered into with U.S. persons are likely to raise, 
at the thresholds set forth in our further definition of major 
security-based swap participant, risks to the stability of the U.S. 
financial system or of U.S. entities, including those that may be 
systemically important.\555\
---------------------------------------------------------------------------

    \554\ See Cross-Border Proposing Release, 78 FR 31030 
(explaining that the risk to the U.S. financial system would be 
measured by calculating a non-U.S. person's aggregated outward 
exposures to U.S. persons, meaning what such non-U.S. person owes, 
or potentially could owe, on its security-based swaps with U.S. 
persons).
    \555\ Cf. section 3(a)(67)(B) of the Exchange Act.
---------------------------------------------------------------------------

    While we considered one commenter's concern that the location of 
clearing should not be relevant for purposes of determining a non-U.S. 
person's major security-based swap participant status,\556\ we continue 
to believe that, as such positions are cleared through a U.S.-person 
clearing agency, they exist within the United States and create risk in 
the United States of the type the major security-based swap participant 
definition is intended to address.\557\ We note, in response to 
commenters' opinions about the risk-mitigating effects of central 
clearing, and the additional level of rigor that clearing agencies may 
have with regards to the process and procedures for collecting daily 
margin, that the final rules further defining ``substantial position'' 
provide that the potential future exposure associated with positions 
that are subject to central clearing by a registered or exempt clearing 
agency is equal to 0.1 times the potential future exposure that would 
otherwise be calculated.\558\ This treatment reflects our view that 
clearing the security-based swap substantially mitigates the risk of 
such positions but cannot eliminate such risk.\559\ We believe that 
this previously adopted provision may provide additional incentives for 
market participants to clear their positions through registered or 
exempt clearing agencies, and that the requirement to include such 
positions in the major security-based swap participant threshold 
calculations should not discourage market participants from clearing 
positions through U.S.-based clearing agencies.
---------------------------------------------------------------------------

    \556\ See CME Letter, supra, note 549.
    \557\ See section 0, supra.
    \558\ This results in a 90 percent discount on the notional 
exposure under the security-based swap. See Exchange Act rule 3a67-
3(c)(3)(i)(A); Intermediary Definitions Adopting Release, 77 FR 
30670.
    \559\ See Intermediary Definitions Adopting Release, 77 FR 
30670.
---------------------------------------------------------------------------

2. Positions With Foreign Branches of U.S. Banks
(a) Proposed Approach and Commenters' Views
    As noted above, the proposal would have required non-U.S. persons 
to include their positions with U.S. persons in their threshold 
calculations. This requirement would have extended to positions with 
foreign branches of U.S. banks.\560\ Two commenters criticized the 
proposal's requirement that a non-U.S. person would need to include 
positions with foreign branches

[[Page 39133]]

of U.S. banks.\561\ One of these commenters suggested that the 
Commission adopt the CFTC policy, which set forth an exception 
generally permitting a non-U.S. person that is a non-financial entity 
to exclude from its calculation positions with foreign branches of U.S. 
banks that are registered swap dealers.\562\ One of the commenters 
suggested that if the Commission did not allow all non-U.S. persons to 
exclude transactions with foreign branches of U.S. banks from their 
calculation, the Commission should at least adopt the approach taken by 
the CFTC in its cross-border guidance of allowing a non-U.S. person 
that is a financial entity to exclude transactions, subject to certain 
additional conditions, with foreign branches of U.S. banks that are 
registered security-based swap dealers.\563\
---------------------------------------------------------------------------

    \560\ See proposed rule 3a67-10(c)(2).
    \561\ See SIFMA/FIA/FSR Letter at A-19 to A-20 (stating that the 
proposal would result in disparate treatment of foreign branches of 
U.S. banks because non-U.S. persons could exclude such transactions 
from their dealer de minimis threshold calculations but not from 
their major security-based swap participant threshold calculations, 
and noting that the proposal differs from the CFTC Cross-Border 
Guidance, which takes the approach that non-U.S. person financial 
entities generally should exclude swaps with foreign branches of 
U.S. swap dealers, subject to certain conditions); IIB Letter at 12 
(stating that the same rationale that applies to excluding 
transactions with foreign branches of U.S. banks in the dealer 
context should apply in the major security-based swap participant 
context and that the proposed approach is inconsistent with the CFTC 
Cross-Border Guidance).
    \562\ See IIB Letter at 12-13 (suggesting that the CFTC's 
general policy of not counting non-financial entities' swaps with 
guaranteed affiliates that are swap dealers or foreign branches that 
are swap dealers reflects an understanding that non-financial 
entities present less risk than financial entities). Cf. CFTC Cross-
Border Guidance at 45324-25.
    \563\ See SIFMA/FIA/FSR Letter at A-20 (stating that the 
proposal to include transactions with foreign branches in a non-U.S. 
person's major security-based swap participant threshold 
calculations may cause non-U.S. persons that would otherwise be 
considered major security-based swap participants to limit or stop 
trading with foreign branches of U.S. banks); id. at A-20 to A-21 
(noting that the approach differs from the CFTC Cross-Border 
Guidance with respect to counting such transactions towards the 
major swap participant threshold); see also IIB Letter at 12-13 
(stating that the proposal is inconsistent with the CFTC Cross-
Border Guidance, whose exceptions demonstrate an understanding that 
the risk to the U.S. financial system can be addressed through 
different means and noting that the proposal may cause non-U.S. 
counterparties to stop transacting with foreign branches of U.S. 
banks).
---------------------------------------------------------------------------

(b) Final Rule
    The final rule has been modified from the proposal to require non-
U.S. persons (other than conduit affiliates, as discussed above) to 
count, against their major security-based swap participant threshold 
calculations, their positions with U.S. persons other than positions 
with foreign branches of registered security-based swap dealers.\564\ 
The proposal would have required non-U.S. persons to all include their 
positions with U.S. persons in their threshold calculations, including 
any positions with foreign branches of U.S. banks.\565\
---------------------------------------------------------------------------

    \564\ See Exchange Act rule 3a67-10(b)(3)(i). Exchange Act rule 
3a67-10(a)(2) defines ``foreign branch'' by referring to Exchange 
Act rule 3a71-3(a)(2). We note for clarification that the rule 
described here uses the defined term ``transactions conducted 
through a foreign branch'' (as defined in Exchange Act rule 3a71-
3(a)(3)) to describe the manner in which the U.S.-person must enter 
into the position in order for the non-U.S. person counterparty to 
avail itself of this exception. The non-U.S. person counterparty 
that is calculating its major security-based swap participant 
calculation thresholds is entering into the position with the 
foreign branch of the U.S. person.
    \565\ Proposed Exchange Act rule 3a67-10(c)(2).
---------------------------------------------------------------------------

    The final rule permits non-U.S. persons not to count certain 
positions that arise from transactions conducted through a foreign 
branch of a counterparty that is a U.S. bank.\566\ For this exclusion 
to be effective, persons located within the United States cannot be 
involved in arranging, negotiating, or executing the transaction.\567\ 
Moreover, the counterparty bank must be registered as a security-based 
swap dealer,\568\ unless the transaction occurs prior to 60 days 
following the effective date of final rules providing for the 
registration of security-based swap dealers.\569\ Registration of the 
counterparty U.S. bank would not be required for the exclusion to be 
effective before then, given that the non-U.S. person would not be able 
to know with certainty whether the U.S. bank in the future would 
register with the Commission as a security-based swap dealer.\570\
---------------------------------------------------------------------------

    \566\ See Exchange Act rule 3a67-10(b)(3)(i). See also 0 
(discussing similar exception in the context of the de minimis 
analysis).
    \567\ See Exchange Act rule 3a67-10(b)(3)(i) (using the term 
``transaction conducted through a foreign branch,'' which requires 
that ``the security-based swap transaction is arranged, negotiated, 
and executed on behalf of the foreign branch solely by persons 
located outside the United States,'' as defined in Exchange Act rule 
3a71-3(a)(3)(i)(B)).
    \568\ See Exchange Act rule 3a67-10(b)(3)(i)(A).
     A non-U.S. person would still have to count such positions for 
purposes of calculating its major security-based swap participant 
calculation thresholds if the non-U.S. person's counterparty (i.e., 
the U.S. bank) has rights of recourse against a U.S. person in the 
position with the non-U.S. person. See Exchange Act rule 3a67-
10(b)(3)(ii).
    \569\ See Exchange Act rule 3a67-10(b)(3)(i)(B).
    \570\ In other words, this provision will help to avoid 
requiring non-U.S. persons to speculate whether their counterparties 
would register, and to face the consequences of their speculation 
being wrong.
---------------------------------------------------------------------------

    We believe that the revision to the proposal allowing for an 
exclusion from counting positions that arise from transactions 
conducted through foreign branches of registered security-based swap 
dealers appropriately accounts for the risk in the U.S. financial 
system created by such positions. In our view, the risk of such 
positions is lessened when the U.S. bank itself is registered with the 
Commission as a security-based swap dealer because the U.S. bank, and 
its transactions, will be subject to the relevant Title VII provisions 
applicable to security-based swap dealers (for example, margin and 
reporting requirements).\571\ The exception is also consistent with our 
application of the dealer de minimis exception in our final rule, which 
requires non-U.S. persons, other than conduit affiliates, to include in 
their de minimis threshold calculations dealing transactions with U.S. 
persons other than the foreign branch of a registered security-based 
swap dealer (or for a temporary period of time prior to 60 days prior 
to the effectiveness of the dealer registration rules).\572\
---------------------------------------------------------------------------

    \571\ See section 0 and note 373 (discussing that the risk of 
such positions is mitigated in part because the foreign branch of a 
registered security-based swap dealer will be subject to a number of 
Title VII regulatory requirements).
    \572\ See Exchange Act rule 3a71-3(b)(1)(iii)(A); section 0, 
supra.
---------------------------------------------------------------------------

    The final rule should help mitigate concerns that non-U.S. persons 
will limit or stop trading with foreign branches of U.S. banks for fear 
of too easily triggering major security-based swap participant 
registration requirements under Title VII. Moreover, the inclusion of 
this exception in our final rule addresses comments expressing concern 
that non-U.S. persons would have to include positions with foreign 
branches of U.S. banks in their major security-based swap participant 
threshold calculations.\573\ We also note that the exception reduces 
divergence between our major participant threshold calculation and that 
outlined in the CFTC's guidance, as requested by commenters.\574\
---------------------------------------------------------------------------

    \573\ See note 561, supra.
    \574\ See notes 562 and 563, supra. Although our inclusion of 
this exception brings us closer to the general policy set forth by 
the CFTC, our approaches are not entirely identical, as the CFTC 
includes certain additional inputs for non-U.S. persons that are 
financial entities that we have determined not to incorporate in our 
final rule. See CFTC Cross-Border Guidance, 78 FR 45326-27.
---------------------------------------------------------------------------

3. Positions of Non-U.S. Persons That Are Subject to Recourse 
Guarantees by a U.S. Person
(a) Proposed Approach and Commenters' Views
    The proposal would have not required a non-U.S. person to count 
towards its major security-based swap participant calculation 
thresholds, those positions that it entered into with non-U.S.

[[Page 39134]]

persons, regardless of whether the counterparty to the position has a 
right of recourse against a U.S. person under the security-based 
swap.\575\ To address the risk posed by the existence of a recourse 
guarantee against a U.S. person, the proposal would have required that 
all security-based swaps entered into by a non-U.S. person and 
guaranteed by a U.S. person be attributed to such U.S. person guarantor 
for purposes of determining such U.S. person guarantor's major 
security-based swap participant status.\576\
---------------------------------------------------------------------------

    \575\ See Cross-Border Proposing Release, 78 FR 31031 and n.622; 
see also proposed Exchange Act rule 3a67-10(c)(2). In the proposal, 
we stated that the non-U.S. person counterparties of a non-U.S. 
person would bear the risk of loss if that non-U.S. person was 
unable to pay what it owes, and therefore, that the non-U.S. person 
need not include in its major participant threshold calculations 
positions with a non-U.S. counterparty, even if its obligations 
under the security-based swap are guaranteed by a U.S. person. See 
Cross-Border Proposing Release, 78 FR 31031.
    \576\ See id. at 31032.
---------------------------------------------------------------------------

    As noted above, one commenter supported the Commission's proposed 
approach not to require a non-U.S. person whose positions with other 
non-U.S. persons are subject to a recourse guarantee from a U.S. 
person, to include such guaranteed positions in its own major 
participant threshold calculations, expressing support for using the 
major security-based swap participant attribution requirements to 
address the risk posed to the U.S. markets by such guarantees.\577\ Two 
commenters argued that non-U.S. persons whose positions are guaranteed 
by U.S. persons should be treated as U.S. persons for purposes of the 
major participant threshold calculations, which would require them to 
include all their positions in their major participant threshold 
calculations.\578\ Additionally, although commenters did not refer 
specifically to the application of the major security-based swap 
participant definition, some commenters requested that the Commission 
generally harmonize its approach to cross-border activities with that 
of the CFTC.\579\
---------------------------------------------------------------------------

    \577\ See note 545, supra (citing SIFMA/FIA/FSR Letter).
    \578\ See note 207, supra (citing AFR Letter I and BM Letter).
    \579\ See note 25, supra.
---------------------------------------------------------------------------

(b) Final Rule
    We are adopting a final rule that requires a non-U.S. person to 
include in its major security-based swap participant threshold 
calculations those positions for which the non-U.S. person's 
counterparty has rights of recourse against a U.S. person.\580\ We 
believe that when a U.S. person guarantees a position, the position 
exists within the United States and poses risk to the U.S. person 
guarantor,\581\ and the non-U.S. person that enters directly into the 
position should be required to include the position in its major 
security-based swap participant threshold calculations. The final rule 
will also help to apply major participant regulation in a consistent 
manner to differing organizational structures that serve similar 
economic purposes, and help avoid disparities in applying major 
participant regulation to differing arrangements that pose similar 
risks to the United States.
---------------------------------------------------------------------------

    \580\ See Exchange Act rule 3a67-10(b)(3)(ii). Cf. note 350, 
supra (noting that this final rule encompasses non-U.S. persons who 
receive a guarantee from an unaffiliated U.S. person, whereas the 
final rule under the de minimis exception only encompasses non-U.S. 
persons who receive a guarantee from a U.S. affiliate).
     We note that we have retained the requirement in the proposal 
that the U.S. guarantor also attribute to itself, for purposes of 
its own major security-based swap participant threshold 
calculations, all security-based swaps entered into by a non-U.S. 
person that are guaranteed by the U.S. person. See Cross-Border 
Proposing Release, 78 FR 31032; section 0, infra.
    \581\ See section 0, supra.
---------------------------------------------------------------------------

    Accordingly, the final rule modifies the proposal by requiring a 
non-U.S. person to include in its major security-based swap participant 
threshold calculations security-based swap positions for which a 
counterparty to the security-based swap has legally enforceable rights 
of recourse against a U.S. person, even if a non-U.S. person is 
counterparty to the security-based swap.\582\ For these purposes, and 
as addressed in the context of de minimis exception to the ``security-
based swap dealer'' definition, the counterparty would be deemed to 
have a right of recourse against a U.S. person if the counterparty has 
a conditional or unconditional legally enforceable right, in whole or 
in part, to receive payments from, or otherwise collect from, a U.S. 
person in connection with the non-U.S. person's obligations under the 
security-based swap.
---------------------------------------------------------------------------

    \582\ Exchange Act rule 3a67-10(b)(3)(ii).
---------------------------------------------------------------------------

    We understand that such rights may arise in a variety of contexts. 
For example, a counterparty would have such a right of recourse against 
the U.S. person if the applicable arrangement provides the counterparty 
the legally enforceable right to demand payment from the U.S. person in 
connection with the security-based swap, without conditioning that 
right upon the non-U.S. person's non-performance or requiring that the 
counterparty first make a demand on the non-U.S. person. A counterparty 
also would have such a right of recourse if the counterparty itself 
could exercise legally enforceable rights of collection against the 
U.S. person in connection with the security-based swap, even when such 
rights are conditioned upon the non-U.S. person's insolvency or failure 
to meet its obligations under the security-based swap, and/or are 
conditioned upon the counterparty first being required to take legal 
action against the non-U.S. person to enforce its rights of collection.
    The terms of the guarantee need not necessarily be included within 
the security-based swap documentation or even otherwise reduced to 
writing (so long as legally enforceable rights are created under the 
laws of the relevant jurisdiction); for instance, such rights of 
recourse would arise when the counterparty, as a matter of law in the 
relevant jurisdiction, would have rights to payment and/or collection 
that may arise in connection with the non-U.S. person's obligations 
under the security-based swap that are enforceable. We would view the 
positions of a non-U.S. person as subject to a recourse guarantee if at 
least one U.S. person (either individually or jointly and severally 
with others) bears unlimited responsibility for the non-U.S. person's 
obligations, including the non-U.S. person's obligations to security-
based swap counterparties. Such arrangements may include those 
associated with foreign unlimited companies or unlimited liability 
companies with at least one U.S.-person member or shareholder, general 
partnerships with at least one U.S.-person general partner, or entities 
formed under similar arrangements such that at least one U.S. persons 
bears unlimited responsibility for the non-U.S. person's liabilities. 
In our view, the nature of the legal arrangement between the U.S. 
person and the non-U.S. person--which makes the U.S. person responsible 
for the obligations of the non-U.S. person--is appropriately 
characterized as a recourse guarantee, absent countervailing factors. 
More generally, a recourse guarantee is present if, in connection with 
the security-based swap, the counterparty itself has a legally 
enforceable right to payment or collection from the U.S. person, 
regardless of the form of the arrangement that provides such an 
enforceable right to payment or collection.\583\
---------------------------------------------------------------------------

    \583\ Consistent with the rule implementing the dealer de 
minimis exception, this final rule clarifies that for these purposes 
a counterparty would have rights of recourse against the U.S. person 
``if the counterparty has a conditional or unconditional legally 
enforceable right, in whole or in part, to receive payments from, or 
otherwise collect from, the U.S. person in connection with the 
security-based swap.'' See Exchange Act rule 3a67-10(b)(3)(ii).

---------------------------------------------------------------------------

[[Page 39135]]

    In light of comments received and upon further consideration, we 
believe that the revised approach addresses, in a targeted manner, the 
risk to the U.S. financial system posed by entities whose 
counterparties are able to turn to a U.S. person for performance of the 
non-U.S. person's obligations under a security-based swap 
position.\584\ We believe our final approach strikes an appropriate 
balance by directly regulating a non-U.S. person that enters into a 
position with a counterparty that has a recourse guarantee against a 
U.S. person, while not treating that non-U.S. person as a U.S. 
person.\585\
---------------------------------------------------------------------------

    \584\ We are not requiring a non-U.S. person whose performance 
with respect to one or more security-based swap positions is subject 
to a recourse guarantee to include all of its positions with non-
U.S. persons towards its major security-based swap participant 
threshold calculations. We recognize that the CFTC Cross-Border 
Guidance uses the term ``guaranteed affiliate'' and states the view 
that such entities should include all of their swap positions in 
their major swap participant threshold calculations. See CFTC Cross-
Border Guidance, 78 FR 45319. We believe that our final rule, which 
requires a non-U.S. person to include only those positions with non-
U.S. persons where the counterparty has rights of recourse to a U.S. 
person, appropriately in the context of the security-based swap 
markets reflects the risk that such positions may create within the 
United States.
    \585\ Cf. notes 577 and 578 (discussing comment letters).
---------------------------------------------------------------------------

    The final rule reflects our conclusion that a non-U.S. person--to 
the extent it enters into security-based swap positions subject to a 
recourse guarantee by a U.S. person--enters into security-based swap 
positions that exist within the United States.\586\ The economic 
reality of such positions is that by virtue of the guarantee the non-
U.S. person effectively acts together with a U.S. person to engage in 
the security-based swap activity that results in the positions, and the 
non-U.S. person's positions cannot reasonably be isolated from the U.S. 
person's engagement in providing the guarantee.\587\ Both the guarantor 
and guaranteed entity are involved in the position and may jointly seek 
to profit by engaging in such security-based swap positions.\588\ The 
final rule echoes our approach, consistent with our approach to 
regulation of security-based swap dealers that, to the extent that a 
single non-U.S. person is responsible for positions within the United 
States (whether by entering into positions with U.S.-person 
counterparties or for which its non-U.S. person counterparties have 
recourse against a U.S. person) that rise above the major participant 
thresholds, the entity that directly enters into such positions should 
be required to register as a major security-based swap participant and 
should be subject to direct regulation as a major security-based swap 
participant.
---------------------------------------------------------------------------

    \586\ See section 0, supra.
    \587\ See section 0, supra (discussing the same point in the 
context of the application of the de minimis exception).
    \588\ Cf. section 0, supra (discussing a non-U.S. person's 
dealing activity that is subject to a recourse guarantee).
---------------------------------------------------------------------------

    The final rules regarding positions for which a counterparty to the 
position has rights of recourse against a U.S. person aim to apply 
major participant regulation in similar ways to differing 
organizational structures that serve similar economic purposes, such as 
positions entered into by a non-U.S. person that are subject to a 
recourse guarantee by a U.S. person and security-based swap positions 
carried out through a foreign branch of a U.S. person.\589\ These two 
differing organizational structures serve similar economic purposes and 
thus should be treated similarly.
---------------------------------------------------------------------------

    \589\ See section 0 and note 341, supra. For the above reasons, 
we conclude that this final rule is not being applied to persons who 
are ``transact[ing] a business in security-based swaps without the 
jurisdiction of the United States,'' within the meaning of section 
30(c). See section 0, supra. We also believe, moreover, that this 
final rule is necessary or appropriate as a prophylactic measure to 
help prevent the evasion of the provisions of the Exchange Act that 
were added by the Dodd-Frank Act, and thus help ensure that the 
relevant purposes of the Dodd-Frank Act are not undermined. Without 
this rule, U.S. persons would be able to evade major participant 
regulation under Title VII simply by conducting their security-based 
swap positions via a guaranteed non-U.S. person, while still being 
subject to risks associated with those positions.
---------------------------------------------------------------------------

    As discussed below, we have maintained the proposed approach 
requiring a U.S. person to attribute to itself any position of a non-
U.S. person for which the non-U.S. person's counterparty has rights of 
recourse against the U.S. person. This attribution requirement further 
reflects the focus of the major security-based swap participant 
definition on positions that may raise systemic risk concerns within 
the United States.\590\ Such positions exist within the United States 
by virtue of the U.S. person's guarantee, which transmits risk to the 
U.S. financial system to the extent obligations are owed under the 
security-based swap by the guaranteed non-U.S. person because the non-
U.S. person's counterparty may seek recourse from the U.S. person 
guaranteeing the position.\591\ Additionally, the economic reality of 
this position, even though entered into by a non-U.S. person, is 
substantially identical, in relevant respects, to a transaction entered 
into directly by the U.S. guarantor, because a U.S. person is 
participating directly in the transaction.\592\ For these reasons the 
attribution requirement, which is consistent with our territorial 
approach and the approach taken in the proposal, reflects the focus of 
the major security-based swap participant definition.
---------------------------------------------------------------------------

    \590\ See section 0, supra.
    \591\ See section 0, infra.
    \592\ See section 0, infra.
---------------------------------------------------------------------------

    We note that, consistent with our proposal, we are not requiring 
non-U.S. persons to include in their major security-based swap 
participant threshold calculations positions for which they (as opposed 
to their counterparties) have a guarantee creating a right of recourse 
against a U.S. person. As we noted in the proposal, non-U.S. persons 
with a right of recourse against a U.S. person pursuant to a security-
based swap do not pose a direct risk to the person providing a 
guarantee, as that person's failure generally will not trigger any 
obligations under the guarantee.\593\
---------------------------------------------------------------------------

    \593\ See Cross-Border Proposing Release, 78 FR 31031 and n.622. 
We recognize that the CFTC Cross-Border Guidance does set forth the 
concept that non-U.S. persons should generally include in their 
major swap participant analysis positions with entities that fall 
within the CFTC's description of a ``guaranteed affiliate,'' subject 
to certain exceptions. See CFTC Cross-Border Guidance, 78 FR 45326-
27. We continue to believe, however, consistent with the proposal, 
that it is not necessary that such non-U.S. person that has rights 
of recourse against a U.S. person include that position in its major 
participant threshold calculations because the inability of that 
non-U.S. person counterparty to pay what it owes pursuant to a 
security-based swap will generally not pose risk to the U.S. 
financial system because it will not trigger the obligation of the 
U.S. guarantor. See Cross-Border Proposing Release, 78 FR 31031.
---------------------------------------------------------------------------

E. Attribution

    The Cross-Border Proposing Release stated the preliminary view that 
a person's security-based swap positions in the cross-border context 
would be attributed to a parent, other affiliate, or guarantor for 
purposes of the major participant analysis to the extent that the 
person's counterparties in those positions have recourse to that 
parent, other affiliate, or guarantor in connection with the position. 
Positions would not be attributed in the absence of recourse.\594\
---------------------------------------------------------------------------

    \594\ See id. 31032 and n.625 (noting that we were not proposing 
to alter the approach with respect to attribution of guarantees that 
was adopted by the Commission and the CFTC in the Intermediary 
Definitions Adopting Release, but rather proposing to apply the same 
principles in the cross-border context).
---------------------------------------------------------------------------

    The final rules codify the proposed guidance related to attribution 
of guaranteed positions to provide clarity to market participants. We 
continue to believe that a U.S. person should attribute to itself any 
positions of a non-U.S. person for which the non-U.S.

[[Page 39136]]

person's counterparty has rights of recourse against the U.S. person, 
as the position exists within the United States by virtue of the U.S. 
person guarantor's involvement in the position.\595\ Similarly, a non-
U.S. person should attribute to itself any positions of a U.S. person 
for which that U.S. person's counterparty has rights of recourse 
against the non-U.S. person.\596\ We also continue to believe that when 
a non-U.S. person guarantor has extended a recourse guarantee on the 
obligations of a U.S. person, those positions exist within the United 
States by virtue of the guaranteed U.S. person's involvement in the 
positions as a direct counterparty to the transaction and therefore the 
positions should be attributed to the non-U.S. person guarantor that is 
participating in that position through providing its guarantee. The 
final rules requiring attribution also aim to apply major participant 
regulation in similar ways to differing organizational structures that 
serve similar economic purposes, thus helping to ensure that the 
relevant purposes of the Dodd-Frank Act are not undermined.
---------------------------------------------------------------------------

    \595\ As discussed above in section 0, the economic reality of 
this position, even though entered into by a non-U.S. person, is 
substantially identical, in relevant respects, to a transaction 
entered into directly by the U.S. guarantor.
    \596\ The economic reality of the non-U.S. person's position is 
substantially identical, in relevant respects, to a position entered 
into directly by the non-U.S. person.
---------------------------------------------------------------------------

1. Positions Attributed to U.S. Person Guarantors
(a) Proposed Approach and Commenters' Views
    Our preliminary view was that a U.S. person would attribute to 
itself all security-based swap positions for which it provides a 
guarantee for performance on the obligations of a non-U.S. person, 
other than in limited circumstances.\597\ We noted that the proposed 
approach did not alter the guidance regarding attribution that was 
adopted in the Intermediary Definitions Adopting Release, but proposed 
an approach in the cross-border context applying the principles set 
forth in the Intermediary Definitions Adopting Release.\598\ This 
attribution standard was based on our preliminary view that, when a 
U.S. person acts as a guarantor of a position of a non-U.S. person, the 
guarantee creates risks within the United States whether the underlying 
security-based swaps that they guarantee are entered into with U.S. 
persons or with non-U.S. persons.\599\ One commenter argued that 
attribution is beyond the scope of section 30(c) of the Exchange 
Act.\600\ One commenter argued that our preliminary view regarding 
attribution for entities guaranteed by U.S. persons would result in 
``double-counting'' and that security-based swap positions should only 
be attributed to a U.S. guarantor where the direct counterparty to the 
security-based swap is not otherwise required to count those positions 
toward its own calculation.\601\
---------------------------------------------------------------------------

    \597\ Cross-Border Proposing Release, 78 FR 31032 and n.628. See 
also Cross-Border Proposing Release, 78 FR 31033 and section 0, 
infra (discussing limited circumstances where attribution of 
guaranteed security-based swap positions do not apply).
    \598\ See Cross-Border Proposing Release, 78 FR 31032 n.624; see 
also Intermediary Definitions Adopting Release, 77 FR 30689 n.1132.
    \599\ Cross-Border Proposing Release, 78 FR 31032.
    \600\ SIFMA/FIA/FSR Letter at A-20 to A-21 (asserting that only 
the guaranteed entity, which is the direct counterparty to the 
security-based swap transactions, should include the positions and 
that to require the guarantor to include the positions goes ``beyond 
the intended limits of Section 30(c) of the Exchange Act'').
    \601\ See id. at A-20 to A-21.
---------------------------------------------------------------------------

(b) Final Rule
    We are adopting rules that codify the preliminary views set forth 
in our proposal: A U.S. person is required to attribute to itself any 
security-based swap position of a non-U.S. person for which the non-
U.S. person's counterparty to the security-based swap has rights of 
recourse against that U.S. person.\602\ Although we considered 
commenters' objections to our proposed attribution requirement, we 
continue to believe that this approach is necessary because, as stated 
in the Intermediary Definitions Adopting Release, attribution is 
intended to reflect the risk posed to the U.S. financial system when a 
counterparty to a position has recourse against a U.S. person.\603\ The 
final rule also includes a note to clarify that a U.S. person is still 
expected to attribute to itself positions of other U.S. persons for 
which the counterparty to that U.S. person has a recourse guarantee 
against the U.S.-person guarantor, as explained in interpretation in 
the Intermediary Definitions Adopting Release.\604\
---------------------------------------------------------------------------

    \602\ Exchange Act rule 3a67-10(c)(1)(i).
    \603\ See Intermediary Definitions Adopting Release, 77 FR 30689 
n.1135 (stating that the type of attribution addressed at that time 
may also be expected to raise special issues in the context of 
guarantees involving security-based swap positions of non-U.S. 
entities). As noted in the Cross-Border Proposing Release, these 
risk concerns are the same regardless of whether the underlying 
security-based swap positions of the non-U.S. person that the U.S. 
person guarantees are entered into with U.S. persons or non-U.S. 
persons. See Cross-Border Proposing Release, 78 FR 31032.
    \604\ See Intermediary Definitions Adopting Release, 77 FR 
30689.
---------------------------------------------------------------------------

    We believe that attribution of positions to guarantors is 
consistent with Exchange Act section 30(c), notwithstanding the 
argument by one commenter that attribution to a guarantor ``extends 
beyond the intended limits of [s]ection 30(c) of the Exchange Act.'' 
\605\ As we discuss in more detail above, the major security-based swap 
participant definition focuses on positions that may raise systemic 
risk concerns within the United States.\606\ It is our view that a 
security-based swap position exists within the United States when it is 
held by or with a U.S. person, or when a counterparty to the security-
based swap has recourse against a U.S. person, as the risks associated 
with such positions are borne within the United States, and given the 
involvement of U.S. persons may, at the thresholds established for the 
major security-based swap participant definition, give rise to the 
types of systemic risk within the United States that major security-
based swap participant regulation is intended to address.\607\
---------------------------------------------------------------------------

    \605\ See SIFMA/FIA/FSR Letter at A-21.
    \606\ See section 0, supra.
    \607\ See id.
---------------------------------------------------------------------------

    As discussed above, the final rules regarding positions for which a 
counterparty to the position has rights of recourse against a U.S. 
person aim to apply major participant regulation to in similar ways to 
differing organizational structures that serve similar economic 
purposes, including structures such as security-based swap positions 
entered into by a non-U.S. person that are subject to a recourse 
guarantee by a U.S. person and security-based swap positions carried 
out through a foreign branch.\608\
---------------------------------------------------------------------------

    \608\ See section 0, supra. For the above reasons, we conclude 
that this final rule is not being applied to persons who are 
``transact[ing] a business in security-based swaps without the 
jurisdiction of the United States,'' within the meaning of Exchange 
Act section 30(c). See section 0, supra. We also believe, moreover, 
that this final rule is necessary or appropriate as a prophylactic 
measure to help prevent the evasion of the provisions of the 
Exchange Act that were added by the Dodd-Frank Act, and thus help 
ensure that the relevant purposes of the Dodd-Frank Act are not 
undermined. Without this rule, U.S. persons would be able to evade 
major participant regulation under Title VII simply by conducting 
their security-based swap positions via a guaranteed non-U.S. 
person, while still being subject to the risks associated with those 
positions.
---------------------------------------------------------------------------

    While we recognize one commenter's concern that attribution would 
require ``double counting'' certain positions, we do not agree with 
that commenter's assertion that the final rule constitutes double-
counting, given that both entities assume the risk of the position by 
either entering into it directly or by guaranteeing it. Because both 
entities are involved in the position that poses risk to the U.S. 
financial system, both entities are required to include it in their 
respective major participant

[[Page 39137]]

threshold calculations, at least until the entity whose position is 
guaranteed is required to register as a major security-based swap 
participant.\609\
---------------------------------------------------------------------------

    \609\ See Exchange Act rule 3a67-10(c)(2)(i).
---------------------------------------------------------------------------

2. Positions Attributed to Non-U.S. Person Guarantors
(a) Proposed Approach and Commenters' Views
    In the proposal, we expressed our preliminary view that a non-U.S. 
person that provides a recourse guarantee for performance on the 
obligations of a U.S. person should attribute to itself the security-
based swap positions of the U.S. person that are subject to guarantees 
by the non-U.S. person.\610\ However, when a non-U.S. person provides a 
guarantee to another non-U.S. person, the non-U.S. person providing the 
guarantee would have been required to attribute to itself only those 
positions for which a U.S. person counterparty has rights of recourse 
against the non-U.S. person guarantor under the security-based swap. As 
noted above, one commenter argued that attribution is beyond the scope 
of section 30(c) of the Exchange Act.\611\
---------------------------------------------------------------------------

    \610\ See Cross-Border Proposing Release, 78 FR 31032-33.
    \611\ See note 600, supra.
---------------------------------------------------------------------------

(b) Final Rule
    Consistent with our preliminary view, the final rule requires a 
non-U.S. person to attribute to itself any security-based swap 
positions of a U.S. person that are subject to a guarantee by the non-
U.S. person.\612\ In other words, the non-U.S. person guarantor will 
attribute to itself all security-based swap positions of the U.S. 
person for which a counterparty of the U.S. person has rights of 
recourse against the non-U.S. person guaranteeing the position.\613\ 
The rule reflects our view that the guarantee may enable the U.S. 
person to enter into significantly more security-based swap positions 
with both U.S.-person and non-U.S. person counterparties than it would 
be able to absent the guarantee, increasing the risk that such persons 
could incur, amplifying the risk of the non-U.S. person's inability to 
carry out its obligations under the guarantee.\614\
---------------------------------------------------------------------------

    \612\ Exchange Act rule 3a67-10(c)(1)(ii)(A).
    \613\ Exchange Act rule 3a67-10(c)(1)(ii)(A) may be broader than 
the CFTC Cross-Border Guidance in this context because the final 
rule requires the non-U.S. person to attribute to itself all the 
positions of the U.S. person that are guaranteed by the non-U.S. 
person, whereas the CFTC Cross-Border Guidance states that the non-
U.S. person would generally not attribute to itself positions of the 
U.S. person that it guarantees where the counterparty is another 
non-U.S. person that is not guaranteed by a U.S. person. See CFTC 
Cross-Border Guidance at 45326 (stating that a non-U.S. person would 
generally consider in its own calculation (i.e., attribute to 
itself) any swap position (of a U.S. or non-U.S. person) that it 
guarantees in which the counterparty is a U.S. person or a 
guaranteed affiliate).
    \614\ See Cross-Border Proposing Release, 78 FR 31032-33.
---------------------------------------------------------------------------

    Under the final rule, if a U.S. person in a transaction with a non-
U.S. person counterparty has rights of recourse against another non-
U.S. person under the security-based swap, the non-U.S. person 
guaranteeing the transaction must attribute the security-based swap to 
itself for purposes of its major security-based swap participant 
threshold calculations.\615\ We note that, consistent with the rule 
requiring non-U.S. persons to count positions entered into with U.S. 
persons, a non-U.S. person that attributes a position of another non-
U.S. person to itself does not need to attribute to itself positions 
arising from a transaction conducted through a foreign branch of the 
U.S.-person counterparty when the counterparty is a registered 
security-based swap dealer or positions arising from a transaction 
conducted through a foreign branch of a U.S.-person counterparty, when 
the transaction is entered into prior to 60 days following the earliest 
date on which registration of security-based swap dealers is first 
required.\616\
---------------------------------------------------------------------------

    \615\ Exchange Act rule 3a67-10(c)(ii)(B).
    \616\ See section 0 (describing exception for transaction 
conducted through a foreign branch of a registered security-based 
swap dealer), supra; Exchange Act rule 3a67-10(c)(ii)(B) 
(incorporating Exchange Act rule 3a67-10(b)(3)(i)(A) and (B)).
---------------------------------------------------------------------------

    As explained above, we believe that attribution of positions to 
guarantors is consistent with Exchange Act section 30(c), 
notwithstanding the argument by one commenter that attribution to a 
guarantor ``goes beyond the intended limits of section 30(c) of the 
Exchange Act.'' \617\ As we discuss in more detail above, the major 
security-based swap participant definition focuses on positions that 
may raise systemic risk concerns within the United States.\618\ It is 
our view that a security-based swap position exists within the United 
States when it is held by or with a U.S. person, or when it is 
guaranteed by a U.S. person, as the risks associated with such 
positions are borne within the United States, and given the involvement 
of U.S. persons may give rise, at the thresholds established for the 
major security-based swap participant definition, to the types of 
systemic risk within the United States that major security-based swap 
participant regulation is intended to address.\619\
---------------------------------------------------------------------------

    \617\ See SIFMA/FIA/FSR Letter at A-20 to A-21.
    \618\ See section 0, supra.
    \619\ See id.
---------------------------------------------------------------------------

    The final rules requiring non-U.S. persons to attribute certain 
positions to themselves for purposes of calculating their own major 
security-based swap participant calculation thresholds aims to apply 
major participant regulation in similar ways to differing 
organizational structures that serve similar economic purposes. For 
example, when a U.S. person has rights of recourse against a non-U.S. 
person, the economic reality of the position is substantially 
identical, in relevant respects, to a position entered into directly by 
the non-U.S. person with the U.S. person. The relevant attribution 
requirements reflect that a non-U.S. person would need to include such 
positions were it to enter into them directly.\620\
---------------------------------------------------------------------------

    \620\ See section 0, supra. For the above reasons, we conclude 
that this final rule is not being applied to persons who are 
``transact[ing] a business in security-based swaps without the 
jurisdiction of the United States,'' within the meaning of section 
30(c). See section 0, supra. We also believe, moreover, that this 
final rule is necessary or appropriate as a prophylactic measure to 
help prevent the evasion of the provisions of the Exchange Act that 
were added by the Dodd-Frank Act, and thus help ensure that the 
relevant purposes of the Dodd-Frank Act are not undermined. Without 
this rule, non-U.S. persons would be able to evade major participant 
regulation under Title VII simply by conducting their security-based 
swap positions by guaranteeing another entity that would then enter 
into the positions.
---------------------------------------------------------------------------

3. Limited Circumstances Where Attribution of Guaranteed Security-Based 
Swap Positions Does Not Apply
(a) Proposed Approach and Commenters' Views
    The proposal stated our preliminary view that a guarantor would not 
be required to attribute to itself the security-based swap positions it 
guarantees, and, therefore, may exclude those positions from its 
threshold calculations, if the person whose positions it guarantees is 
already subject to capital regulation by the Commission or the CFTC 
(for example, by virtue of being regulated as a swap dealer, security-
based swap dealer, major swap participant, major security-based swap 
participant, FCMs, brokers, or dealers), is regulated as a bank in the 
United States, or is subject to capital standards adopted by its home 
country supervisor that are consistent in all respects with the Capital 
Accord of the Basel Committee on Banking Supervision (``Basel 
Accord'').\621\ This preliminary

[[Page 39138]]

view applied both to U.S. persons and non-U.S. persons that are subject 
to registration and regulation in the enumerated categories.\622\ Our 
preliminary view was that such consistent foreign regulatory capital 
requirements would adequately address the risks arising from such 
positions, making it unnecessary to separately address the risks 
associated with guarantees of those same positions.\623\ We noted that 
this approach was consistent with the capital standards of the 
prudential regulators with respect to foreign banks that are bank 
holding companies subject to the Federal Reserve Board of Governors' 
supervision.\624\
---------------------------------------------------------------------------

    \621\ See Cross-Border Proposing Release, 78 FR 31033 
(explaining that the non-U.S. person must be subject to capital 
standards that are consistent with the capital standards such non-
U.S. person would have been subject to if it was a bank subject to 
the prudential regulators' capital regulation, i.e., the Basel 
Accord); see also Intermediary Definitions Adopting Release, 77 FR 
30689 (stating that it is not necessary to attribute a person's 
positions to a parent or other guarantor if the person already is 
subject to capital regulation by the CFTC or SEC or if the person is 
a U.S. person regulated as a bank in the United States). Thus, once 
the person whose position is guaranteed registers as a major 
security-based swap participant, attribution would no longer be 
required.
    \622\ See Cross-Border Proposing Release, 78 FR 31033 at n. 636.
    \623\ See id. at 31033-34.
    \624\ See id. at 31033 (citing Sec.  225.2(r)(3) of Regulation 
Y, which states that ``[f]or purposes of determining whether a 
foreign banking organization qualifies under paragraph (r)(1) of 
this section: (A) A foreign banking organization whose home country 
supervisor . . . has adopted capital standards consistent in all 
respects with the Basel Accord may calculate its capital ratios 
under the home country standard . . .'').
---------------------------------------------------------------------------

    One commenter supported our preliminary view that a non-U.S. 
person's guaranteed positions would not be attributed to the guarantor 
if the guaranteed non-U.S. person is subject to capital regulation by 
the Commission, the CFTC, or capital standards in its home jurisdiction 
that are consistent with the Basel Accord.\625\ Another commenter 
sought clarification that a U.S. guarantor will not be required to 
attribute transactions of guaranteed entities while the guaranteed 
person's registration as a major security-based swap participant is 
pending.\626\
---------------------------------------------------------------------------

    \625\ See SIFMA/FIA/FSR Letter at A-21 to A-22; see also Cross-
Border Proposing Release, 78 FR 31033.
    \626\ See AFGI Letter I at 3 (stating that this clarification 
would be within the spirit and language of the proposed rules).
---------------------------------------------------------------------------

(b) Final Rules
    Although the final rules require, in some circumstances, both the 
guarantor and the guaranteed person to include guaranteed positions in 
their respective major security-based swap participant threshold 
calculations, the final rules do not require a guarantor to attribute 
guaranteed positions to itself when the guaranteed person is subject to 
capital regulation by the Commission or the CFTC (including, but not 
limited to regulation as a swap dealer, major swap participant, 
security-based swap dealer, major security-based swap participant, 
futures commission merchant, broker, or dealer).\627\ This codifies our 
preliminary view.\628\ The final rule, moreover, does not require a 
guarantor to attribute to itself positions that it guarantees when the 
guaranteed person is regulated as a bank in the United States, or is 
subject to capital standards adopted by its home country supervisor 
that are consistent in all respects with the Basel Accord.\629\ 
Consistent with our preliminary view, we believe that consistent 
foreign regulatory capital requirements would adequately address the 
risks arising from such positions, making it unnecessary to separately 
address the risks associated with guarantees of those same 
positions.\630\ We continue to view such regulatory treatment as 
adequate to address the risks that the attribution requirement is 
intended to address. We also note that this approach is consistent with 
the capital standards of the prudential regulators with respect to 
foreign banks that are bank holding companies subject to the Federal 
Reserve Board of Governors' supervision.
---------------------------------------------------------------------------

    \627\ See Exchange Act rule 3a67-10(c)(2)(i).
    \628\ See Cross-Border Proposing Release, 78 FR 31032-33, notes 
629, 632, and 634.
    \629\ Exchange Act rule Sec.  240.3a67-10(c)(2)(ii) and (iii). 
See Cross-Border Proposing Release, 78 FR 31033 (explaining that the 
non-U.S. person must be subject to capital standards that are 
consistent with the capital standards such non-U.S. person would 
have been subject to if it were a bank subject to the prudential 
regulators' capital regulation, i.e., the Basel Accord); 
Intermediary Definitions Adopting Release, 77 FR 30689. This 
approach generally is consistent with the CFTC Cross-Border 
Guidance. See CFTC Cross-Border Guidance, 78 FR 45326 (stating that 
``where a subsidiary is subject to Basel-compliant capital standards 
and oversight by a G20 prudential supervisor, the subsidiary's 
positions would generally not be attributed to a parental guarantor 
in the computation of the parent's outward exposure under the MSP 
definition'').
    \630\ See Cross-Border Proposing Release, 78 FR 31033-34.
---------------------------------------------------------------------------

    As noted above, one commenter requested that a U.S. guarantor not 
be required to attribute to itself a person's positions for which it 
provides a guarantee while that person's registration as a major 
security-based swap participant is pending.\631\ Upon further 
consideration, we believe that it is appropriate to permit a guarantor 
not to attribute the positions of such entities to itself. This change 
will mitigate market disruption that may otherwise result due to the 
prospect of a person intermittently exceeding the major participant 
threshold when a person that it guarantees is in the process of 
registering as a major security-based swap participant. This approach 
is also consistent with the approach under the application of the de 
minimis exception that allows a person not to count the transactions of 
its affiliates that are in the process of registering as dealers.\632\
---------------------------------------------------------------------------

    \631\ See note 626, supra.
    \632\ See Exchange Act rule 3a67-10(c)(2)(iv) (referring to rule 
3a67-8(a)); see also Exchange Act rule 3a71-4 (addressing persons 
who have exceeded the de minimis thresholds but are in the process 
of registering); section 0, supra.
---------------------------------------------------------------------------

F. Other Issues Related to the Application of the Major Security-Based 
Swap Participant Definition

1. Threshold for Registration as a Major Security-Based Swap 
Participant
    One commenter commented generally that the threshold for having to 
register as a major-security-based swap participant is too high.\633\ 
This threshold, however, was adopted in the Intermediary Definitions 
Adopting Release and is not under consideration in this rulemaking. In 
addition, the Intermediary Definitions Adopting Release provided that 
the Commission staff will prepare a report subsequent to the 
effectiveness of the security-based swap reporting requirements that 
will examine a number of aspects of our definitional rules and related 
interpretations, including relevant major security-based swap 
participant thresholds.\634\
---------------------------------------------------------------------------

    \633\ BM Letter at 15-16 (stating that the excessively high 
major participant threshold excludes most market participants, thus 
leaving large, non-U.S. entities that are active in the market 
subject only to dealer requirements).
    \634\ See Intermediary Definitions Adopting Release, 77 FR 
30697-30699.
---------------------------------------------------------------------------

2. Entities That Maintain Legacy Portfolios
    The Cross-Border Proposing Release did not address the treatment of 
legacy portfolios, but we stated in the Intermediary Definitions 
Adopting Release that ``the fact that these entities no longer engage 
in new swap or security-based swap transactions does not overcome the 
fact that entities that are major participants will have portfolios 
that are quite large and could pose systemic risk to the U.S. financial 
system.'' \635\ Based on this understanding, the Commissions jointly 
determined that such entities should not be excluded from major 
participant regulation but explained that the Commissions would pay 
particular attention to special issues raised by the application of 
substantive rules to those legacy portfolios.\636\
---------------------------------------------------------------------------

    \635\ Id. at 30691.
    \636\ Id. at 30691 and n. 1170.
---------------------------------------------------------------------------

    In the Commission's proposed capital and margin requirements, we 
proposed exceptions from certain account equity requirements, such as 
collection of

[[Page 39139]]

margin, for non-bank security-based swap dealers' and non-bank major 
security-based swap participants' accounts holding legacy security-
based swaps and we requested comment on these proposals.\637\ As 
explained in the Intermediary Definitions Adopting Release, we may 
entertain requests for relief or guidance on a case-by-case basis.\638\ 
One commenter requested that, at a minimum, the Commission provide 
flexibility in any requirements that require a person to register as a 
major security-based swap participant solely due to activity related to 
its legacy portfolios.\639\ With respect to the activities of financial 
guaranty insurers, one commenter suggested that amendments made to an 
existing insured security-based swap or entry into a new security-based 
swap with the same or a substituted counterparty in connection with 
loss mitigation or risk reduction efforts, should receive the same 
regulatory treatment given to legacy portfolio security-based swaps 
because such security-based swaps do not increase notional 
exposure.\640\
---------------------------------------------------------------------------

    \637\ See Exchange Act proposed rules 18a-3(c)(1)(iii)(D) and 
18a-3(c)(2)(iii)(C); see also Capital and Margin Proposing Release, 
77 FR 70214, 70247, 70265, 70269-70, 70271-72 (proposed capital, 
margin and segregation requirements for security-based swap dealers 
and major security-based swap participants).
    \638\ Intermediary Definitions Adopting Release, 77 FR 30691.
    \639\ AFGI Letter I at 2 (suggesting that the Commission 
consider providing an exemption from major security-based swap 
participant registration for entities that will be required to 
register solely due to their legacy portfolios, if their legacy 
positions are expected to decline below the major security-based 
swap participant threshold within 12 to 14 months of the effective 
date due to projected run-off or terminations); AFGI Letter II at 2-
5; AFGI letter, dated February 18, 2011 (``AFGI Letter V'') at 11 
(stating that attribution to a financial guaranty insurer is not 
appropriate when the insurer guarantees a security-based swap 
obligation of an unaffiliated entity) (incorporated by reference in 
AFGI Letter I).
    \640\ AFGI Letter I at 3 (stating that such activities, like 
activities related to legacy swaps, do not constitute new business 
and that regulators should implement consistent regulatory treatment 
in this area to reduce exposure resulting from these legacy 
transactions); AFGI Letter II at 2-3. See also AFGI Letter III at 5 
(arguing that an amendment to a legacy account for loss mitigation 
or credit strengthening without increasing notional exposure should 
still be considered the legacy account instead of a new security-
based swap); AFGI letter, dated July 20, 2011 (``AFGI Letter IV'') 
at 2-4 (supporting exclusion for state-regulated insurers) 
(incorporated by reference in AFGI Letter I); AFGI Letter V at 3 
(same).
---------------------------------------------------------------------------

    In the context of the cross-border application of the major 
security-based swap participant definition, we are maintaining our 
approach to legacy portfolios as described in the Intermediary 
Definitions Adopting Release and are not excluding entities that 
maintain legacy portfolios from the major security-based swap 
participant definition.\641\ Given the foregoing, we are not adopting 
an exclusion from the cross-border application of the major security-
based swap participant definition for entities that maintain legacy 
portfolios.
---------------------------------------------------------------------------

    \641\ See Intermediary Definitions Adopting Release, 77 FR 
30691.
---------------------------------------------------------------------------

G. Foreign Public Sector Financial Institutions and Government-Related 
Entities

    In the Cross-Border Proposing Release, we did not propose to 
specifically address the treatment of entities such as foreign central 
banks, international financial institutions, multilateral development 
banks, and sovereign wealth funds in the context of the major security-
based swap participant definition and instead sought comment regarding 
the types, levels, and natures of security-based swap activity that 
such organizations regularly engage in in order to allow us to better 
understand the roles of these organizations in the security-based swap 
markets.\642\
---------------------------------------------------------------------------

    \642\ See Cross-Border Proposing Release, 78 FR 31034-35. See 
section 0 and Exchange Act rule 3a71-3(a)(4)(iii) (listing the 
international organizations that are excluded from the definition of 
``U.S. person'').
---------------------------------------------------------------------------

    The final rule defining ``U.S. person'' (like the proposed 
definition of that term) specifically excludes several foreign public 
sector financial institutions and their agencies and pension plans, and 
more generally excludes any other similar international organization 
and its agencies and pension plans.\643\ As explained in the context of 
the de minimis exception, certain commenters requested that we take 
further action to address the application of the dealer definition and 
its de minimis exception to security-based swap activities involving 
such organizations.\644\ Additionally, we noted that two commenters 
stated that they should not be subject to the possibility of dealer 
regulation for comity reasons, on the grounds that they were arms of a 
foreign government.\645\ Commenters did not make arguments specific to 
the application of the major security-based swap participant definition 
but articulated their arguments in conjunction with their arguments 
related to the application of the dealer definition. However, one 
commenter explained that, though it understands that multilateral 
development banks do not currently engage in security-based swap at the 
level that would trigger major security-based swap participant 
registration, even if they did, regulation would violate their 
privileges and immunities.\646\
---------------------------------------------------------------------------

    \643\ See section 0, supra.
    \644\ See, e.g., WB/IFC Letter at 2-4, 6-7 (also stating that 
such organizations should not be required to register as major 
participants or to clear security-based swaps, and that affiliates 
of such organizations should be excluded from the ``U.S. person'' 
definition); SC Letter at 16-24 (contending that the privileged and 
immunities afforded such organizations would be violated by their 
direct regulation as dealers or major participants, or by direct 
regulation equivalents, and that affiliates of such organizations 
also are immune from regulation); IDB Letter at 5. See note 420, 
supra.
    \645\ See note 422, supra.
    \646\ See SC Letter at 16.
---------------------------------------------------------------------------

    As discussed in the context of the de minimis exception, it is our 
view that such issues are outside the scope of this release given that 
the source of any such privileges and immunities is found outside of 
the Dodd-Frank Act and the federal securities laws.\647\
---------------------------------------------------------------------------

    \647\ See section 0, supra.
---------------------------------------------------------------------------

    Similar to the discussion in the context of the de minimis 
exception, commenters also stated that non-U.S. persons should not have 
to count their security-based swap positions involving these 
organizations against their major security-based swap participant 
threshold calculations on the basis that counting such positions would 
constitute the impermissible regulation of such organizations.\648\ As 
discussed in the context of the de minimis exception, we do not agree 
with the suggestion that counting a person's positions with such 
organizations against the major participant calculation thresholds--
when otherwise provided for by the rules--involves the regulation of 
such organizations.\649\ Requiring a person to count, against their 
major participant calculation thresholds, the person's positions 
involving such an international organization as counterparty simply 
reflects the application of the federal securities laws to that person 
and its positions, and does not constitute the regulation of the 
international organization.\650\ A person's security-based swap 
positions with such an international organization are considered the 
same, for purposes of applying the major participant calculation 
thresholds and other Title VII requirements, as a position with some 
other non-U.S. person counterparty.
---------------------------------------------------------------------------

    \648\ See section 0, supra; SC Letter at 18-19; WB/IFC Letter 
(incorporating SC Letter).
    \649\ See 0, supra.
    \650\ See id.
---------------------------------------------------------------------------

H. Economic Analysis of Final Rules Regarding ``Major Security-Based 
Swap Participants''

    These final rules and guidance regarding the cross-border

[[Page 39140]]

implementation of the application of the definition of major security-
based swap participants will affect the costs and benefits of major 
security-based swap participant regulation by determining which 
positions will be counted against a market participant's major 
security-based swap participant calculation thresholds.\651\ The cross-
border rules have the potential to be important in determining the 
extent to which the risk mitigation and other benefits of Title VII are 
achieved, by identifying those market participants with sufficiently 
large exposures to raise the types of systemic risk concerns that the 
major security-based swap participant definition was intended to 
address.\652\
---------------------------------------------------------------------------

    \651\ See section 0, supra; see also Intermediary Definitions 
Adopting Release, 77 FR 30666 (explaining that in developing the 
rules further defining ``substantial position,'' we were mindful of 
the costs associated with regulating major participants and 
considered cost and benefit principles as part of that analysis).
    \652\ See section 0, supra.
---------------------------------------------------------------------------

    As discussed in the context of the cost-benefit analysis of the 
application of the de minimis exception in the cross-border context, 
commenters addressed cost-benefit issues from a variety of 
perspectives, including arguing that cost-benefit principles warranted 
greater harmonization with the approaches taken by the CFTC or foreign 
regulators.\653\ Commenters, however, did not separately address cost-
benefit issues related to the application of the major security-based 
swap participant definition.
---------------------------------------------------------------------------

    \653\ See section 0, supra.
---------------------------------------------------------------------------

    We have taken economic effects into account in adopting these final 
cross-border rules and providing guidance. Because security-based swap 
contracts are associated with complex risks and the markets are highly 
interconnected, we believe that positions that exist within the United 
States, which are most likely to expose the U.S. financial system to 
financial risk, should generally be included in the major security-
based swap participant threshold calculations. At the same time, we 
recognize that the cross-border application of Title VII has the 
potential to reduce liquidity within the U.S. market to the extent it 
increases the costs of entering into security-based swaps or provides 
incentives for particular market participants to avoid the U.S. market 
to operate wholly outside the Title VII framework.\654\
---------------------------------------------------------------------------

    \654\ See id., supra.
---------------------------------------------------------------------------

    As addressed in the analysis of the costs and benefits of our 
application of the de minimis rule, the application of the major 
security-based swap participant definition implicates two types of 
costs and benefits: Assessment costs and programmatic costs and 
benefits.\655\ First, certain current and future participants in the 
security-based swap market will incur assessment costs in connection 
with determining whether they fall within the ``major security-based 
swap participant'' definition and thus would have to register with the 
Commission.
---------------------------------------------------------------------------

    \655\ See id., supra.
---------------------------------------------------------------------------

    Second, the registration and regulation of some entities as major 
security-based swap participants will lead to programmatic costs and 
benefits arising as a consequence of the Title VII requirements that 
apply to registered major security-based swap participants.\656\
---------------------------------------------------------------------------

    \656\ See Cross-Border Proposing Release, 78 FR 31139.
---------------------------------------------------------------------------

    We discuss these costs and benefits associated with the final rules 
more fully below. We also discuss the economic impact of certain 
potential alternatives to the approach taken in the final rules.
1. Programmatic Costs and Benefits
(a) Cost-Benefit Considerations of the Final Rules
    Exchange Act rule 3a67-10 will permit market participants to 
exclude certain of their positions from their major security-based swap 
participant threshold calculations, and thus may cause particular 
entities that engage in security-based swap transactions not to be 
regulated as major security-based swap participants. The rules 
accordingly may be expected to affect the programmatic costs and 
benefits associated with the regulation of major security-based swap 
participants under Title VII, given that those costs and benefits are 
determined in part by which persons will be regulated as major 
security-based swap participants.\657\
---------------------------------------------------------------------------

    \657\ See Intermediary Definitions Adopting Release, 77 FR 
30727.
---------------------------------------------------------------------------

    As discussed in the context of the application of the de minimis 
exception, this does not mean that there is a one-to-one relationship 
between a person not being a ``major security-based swap participant'' 
as a result of these cross-border rules, and the resulting change to 
programmatic benefits and costs.\658\ In practice, we believe that 
these rules will focus the regulation of major security-based swap 
participants on those market participants whose security-based swap 
positions may expose the U.S. financial system to the levels of risk we 
identified as warranting regulation as a major security-based swap 
participant in the Intermediary Definitions Adopting Release, or on the 
prevention of evasion. To the extent that a person's positions within 
the United States remain below these thresholds, we believe that 
regulating it as a major security-based swap participant under Title 
VII would be less likely to produce the types of programmatic benefits 
that Title VII was intended to address. In other words, these 
requirements will direct the application of the major security-based 
swap participant definition--which itself is the product of cost-
benefit considerations--towards those entities whose security-based 
swap positions are most likely to pose the type and level of risk to 
the U.S. financial system that Title VII was intended to mitigate.
---------------------------------------------------------------------------

    \658\ See section 0 and note 431, supra (discussing various 
fixed and variable costs).
---------------------------------------------------------------------------

    As such, the rules reflect our assessment and evaluation of 
programmatic costs and benefits:
     Positions of U.S. persons--Requiring U.S. persons, as 
defined in the final rules (including the foreign branches of such 
persons), to include all of their positions in their major participant 
threshold calculations, addresses risks that these positions pose to 
the U.S. financial system.
     Positions guaranteed by U.S. persons--Requiring non-U.S. 
persons to include in their major security-based swap participant 
threshold calculations all their positions that are guaranteed by a 
U.S. person, where their counterparties have recourse to the guarantor, 
reflects both the economic reality of the position--that the position 
exists within the United States--and addresses the risks posed to the 
U.S. financial system by the positions of such persons that are 
guaranteed by U.S. persons.\659\
---------------------------------------------------------------------------

    \659\ See Exchange Act rule 3a67-10(b)(3)(ii); section 0, supra.
---------------------------------------------------------------------------

     Positions with U.S.-person counterparties--Requiring non-
U.S. persons to include their positions with counterparties that are 
U.S. persons, unless the positions are with a foreign branch of a 
registered security-based swap dealer, addresses risks to the U.S. 
financial system arising from positions entered into with U.S. 
persons.\660\
---------------------------------------------------------------------------

    \660\ See Exchange Act rule 3a67-10(b)(3)(i); section 0; see 
also note 437, supra (discussing rationale for this limitation in 
context of de minimis exception).
---------------------------------------------------------------------------

     Attribution of certain positions to guarantors of 
performance under a security-based swap--Requiring guarantors of 
performance under security-based swaps to attribute to themselves, for 
purposes of their own major security-based swap participant threshold 
calculations, positions that they guarantee, addresses risks that

[[Page 39141]]

guarantees pose to the U.S. financial system. To the extent that the 
guarantee involves a position within the United States or brings a 
position within the United States, our final rules would typically 
require attribution to the guarantor. These requirements are intended 
to help ensure that positions that pose risks to the U.S. financial 
system are included in the guarantor's major participant threshold 
calculations.\661\
---------------------------------------------------------------------------

    \661\ See Exchange Act rule 3a67-10(c); section 0, supra.
---------------------------------------------------------------------------

     Positions subject to anti-evasion provisions--Requiring 
conduit affiliates to include all of their positions in their major 
participant threshold calculations addresses, in a targeted manner, the 
potential for evasion of the major security-based swap participant 
requirements of Title VII.\662\ As noted above we are adopting a 
definition of ``conduit affiliate'' that excludes affiliates of 
registered security-based swap dealers and major security-based swap 
participants to avoid imposing costs on registered persons in 
situations that would not appear to implicate the types of evasion 
concerns that the conduit affiliate definition is intended to address.
---------------------------------------------------------------------------

    \662\ See Exchange Act rule 3a67-10(b)(2); section 0, supra.
---------------------------------------------------------------------------

    In short, these final rules apply the major security-based swap 
participant definition--which itself reflects cost-benefit 
considerations \663\--to cross-border security-based swap positions in 
a way that directs the focus of major participant regulation toward 
those entities whose security-based swap positions may expose the U.S. 
financial system to the levels of risk we identified as warranting 
regulation as a major security-based swap participant.
---------------------------------------------------------------------------

    \663\ See Intermediary Definitions Adopting Release, 77 FR 30666 
(explaining that in developing the rules further defining 
``substantial position,'' we were mindful of the costs associated 
with regulating major participants and considered cost and benefit 
principles as part of that analysis).
---------------------------------------------------------------------------

(b) Evaluation of Programmatic Impacts
    In defining ``substantial position'' and ``substantial counterparty 
exposure'' as part of the Intermediary Definitions Adopting Release, we 
sought to capture persons whose security-based swap positions pose 
sufficient risk to counterparties and the markets generally that 
regulation as a market participant was warranted, without imposing 
costs of Title VII on those entities for which regulation currently may 
not be justified in light of the purposes of the statute.\664\ As 
discussed above in the context of the dealer analysis, we estimated in 
the Intermediary Definitions Adopting Release that, under those rules, 
approximately 12 entities had outstanding positions large enough that 
they would likely carry out threshold calculations and that fewer than 
five entities, and potentially zero, would ultimately be required to 
register as major security-based swap participants.\665\ Those 
estimates provide a baseline against which the Commission can analyze 
the programmatic costs and benefits and assessment costs of the final 
rules applying the major security-based swap participant definition to 
cross-border activities.
---------------------------------------------------------------------------

    \664\ See id. at 30724-25.
    \665\ See id. at 30727 and note 1529; section 0.
    That methodology determined that an entity that margins its 
positions would need to have security-based swap positions 
approaching $100 billion to reach the levels of potential future 
exposure required to meet the substantial position threshold, even 
before accounting for the impact of netting, while an entity that 
clears its security based swaps generally would need to have 
positions approaching $200 billion. We believed that it was 
reasonable to assume that most entities that will have security-
based swap positions large enough to potentially cause them to be 
major participants in practice will post variation margin in 
connection with those positions that they do not clear, making $100 
billion the relevant measure. The available data from 2011 showed 
that only one entity had aggregate gross notional positions (i.e., 
aggregate buy and sell notional positions) in single-name CDS 
exceeding $100 billion, and three other entities had aggregate gross 
notional positions between $50 and $100 billion. We explained, 
however, that an entity's positions reflecting single-name credit 
protection sold to its counterparties, as opposed to purchased, may 
be expected to be a more key determinant of potential future 
exposure under those rules. The data showed that zero entities had 
more than $100 billion in positions arising from selling single-name 
credit protection and that only two entities had between $50 and 
$100 billion arising from such positions. See id. at 30727, 30734 
and note 1529.
    In the Intermediary Definitions Adopting Release, we noted that 
to the extent that an entity's security-based swap positions are not 
cleared or associated with the posting of variation margin, 
security-based swap positions of $20 billion may lead to sufficient 
potential future exposure to cause the entity to be a major 
participant, though we believed that few, if any, entities would 
have a significant number of such positions. The data indicated that 
only 32 entities have notional CDS positions in excess of $10 
billion. See id. at note 1529.
---------------------------------------------------------------------------

    We believe the methodology used in the Intermediary Definitions 
Adopting Release also is appropriate for considering the potential 
programmatic costs and benefits associated with the final cross-border 
rules. This methodology particularly can help provide context as to how 
rules regarding the cross-border application of the definition of major 
security-based swap participant may change the number of entities that 
must register as major security-based swap participants, and thus help 
provide perspective regarding the corresponding impact on the 
programmatic costs and benefits of Title VII. Applying that methodology 
to 2012 data regarding the single-name CDS market suggests that under 
these final rules five or fewer entities may have to register as major 
security-based swap participants--a number that is consistent with our 
estimates in the Intermediary Definitions Adopting Release.\666\
---------------------------------------------------------------------------

    \666\ See note 444, supra (noting that the data on which the 
methodology is based has been updated).
    Consistent with the methodology used in the Intermediary 
Definitions Adopting Release, the 2012 data indicated that two 
entities had aggregate gross notional positions (i.e., aggregate buy 
and sell notional positions) in single-name CDS exceeding $100 
billion. Applying the principles reflected in these final rules 
regarding the counting of positions against the major security-based 
swap participant thresholds suggests that two entities would have 
aggregate gross notional positions in single name CDS exceeding $100 
billion. No additional entities would be required to register as a 
result of aggregation. Based on this data, we believe that it is 
reasonable to conclude that five or fewer entities ultimately may 
register as major security-based swap participants.
---------------------------------------------------------------------------

    The factors that are described in more detail in section IV.I.1(b) 
regarding the application of the de minimis exception are also relevant 
to and may impact the programmatic benefits and costs associated with 
the implementation of the cross-border application of the major 
security-based swap participant definition. Those factors include 
limitations of the methodology and data used, the impact of the not yet 
finalized rules implementing Title VII entity-level and transaction-
level requirements applicable to major security-based swap 
participants, market participants' modifications to their business 
structure or practices in response to the final rules, and the impact 
on market participants of other regulatory requirements that are 
analogous to the major security-based swap participant 
requirements.\667\
---------------------------------------------------------------------------

    \667\ See section 0, supra.
---------------------------------------------------------------------------

    In general, however, and consistent with our territorial approach, 
we believe that these rules are targeted appropriately and do not apply 
major security-based swap participant regulation to those entities 
whose positions have a more limited impact on the U.S. financial system 
and hence whose regulation as a major security-based swap participant 
under Title VII would be less linked to programmatic benefits (i.e., 
non-U.S. persons that engage in security-based swap transactions 
entirely, or almost entirely, outside the United States with non-U.S. 
persons or with certain foreign branches), while applying major 
participant regulation to those entities whose positions would be more 
likely to produce programmatic benefits under Title VII. The nexus 
between specific

[[Page 39142]]

aspects of these requirements and the programmatic costs and benefits 
also is addressed below in connection with our consideration of various 
alternatives to the approach taken in the final rules.
    Finally, as discussed in the context of the de minimis exception, 
we recognize that the U.S. market participants and positions regulated 
under Title VII are a subset of the overall global security-based swap 
market and that shocks to risk or liquidity arising from a foreign 
entity's positions outside the United States may spill into the United 
States.\668\ We also have considered these spillovers in connection 
with our analysis of the effects of these final cross-border rules on 
efficiency, competition, and capital formation.\669\
---------------------------------------------------------------------------

    \668\ See section 0, supra (describing spillover risks).
    \669\ See section 0, infra.
---------------------------------------------------------------------------

2. Assessment Costs
    The analysis of how these cross-border rules will affect the 
assessment costs associated with the ``major security-based swap 
participant'' definition is related to the assessment cost analysis 
described in the Intermediary Definitions Adopting Release,\670\ but 
must also account for certain issues specific to these cross-border 
rules. While in certain regards those assessment costs can more readily 
be estimated than the programmatic effects discussed above, the 
assessment costs associated with the cross-border application of the 
Title VII major participant requirements will be considerably less 
significant than those programmatic effects.
---------------------------------------------------------------------------

    \670\ See Intermediary Definitions Adopting Release, 77 FR 
30733-36.
---------------------------------------------------------------------------

    The Intermediary Definitions Adopting Release addressed how certain 
market participants could be expected to incur costs in connection with 
their determination of whether they have a ``substantial position'' in 
security-based swaps or pose ``substantial counterparty exposure'' 
created by their security-based swaps, which is necessary for 
determining whether they are major security-based swap 
participants.\671\ In that release we estimated that as many as 12 
entities would likely perceive the need to perform these calculations, 
given the size of their security-based swap positions.\672\ We 
preliminarily believed that entities that perceive the need to perform 
the threshold calculations as a result of the proposed rules and 
guidance set forth in the Cross-Border Proposing Release would incur 
only relatively minor incremental costs to those described in the 
Intermediary Definitions Adopting Release.\673\ Based on the estimate 
that no more than 12 entities would perceive the need to engage in the 
analysis of whether they are a major security-based swap participant, 
we estimated that the total legal costs associated with evaluating the 
various elements of the definition may approach $360,000.\674\
---------------------------------------------------------------------------

    \671\ See id. at 30734-36.
    \672\ See id. at 30734.
    \673\ See Cross-Border Proposing Release, 77 FR 31141.
    \674\ See Intermediary Definitions Adopting Release, 77 FR 
30736. We also noted in that release that if 32 entities were to 
perform the analysis, the market wide legal costs would total 
$960,000. See id. at 30736 n. 1539; see also note 665, supra (noting 
that if an entity did not clear or post variation margin, $20 
billion in notional CDS positions may be sufficient exposure to 
cause the entity to be a major participant and that 32 entities have 
notional CDS positions exceeding $10 billion).
---------------------------------------------------------------------------

    As discussed in the context of the de minimis exception, 
application of these cross-border rules can be expected to affect the 
assessment costs that market participants will incur. In part, certain 
non-U.S. persons may be expected to incur personnel costs and legal 
costs--beyond the legal costs addressed as part of the Intermediary 
Definitions Adopting Release--associated with analyzing these cross-
border rules and developing systems and procedures to assess which 
transactions would have to be counted against the major security-based 
swap participant calculation thresholds (or with the purpose of 
avoiding positions that pose risk to the United States financial system 
that would be sufficient to meet the applicable thresholds). On the 
other hand, while certain market participants also would incur 
additional legal costs associated with the major security-based swap 
participant determination (i.e., the assessment of whether particular 
positions should be included in the major participant threshold 
calculations) addressed in the Intermediary Definitions Adopting 
Release, the application of the cross-border rules may reduce the 
number of entities that incur such legal costs.\675\
---------------------------------------------------------------------------

    \675\ See section 0, supra.
---------------------------------------------------------------------------

    In adopting these rules we estimate the assessment costs that 
market participants may incur as a result. As discussed below, however, 
these costs in practice may be mitigated in large part by steps that 
market participants already have taken in response to other regulatory 
initiatives, including compliance actions taken in connection with the 
requirements applicable to swaps.
(a) Legal Costs
    The implementation of these cross-border rules in some 
circumstances has the potential to change the legal costs identified in 
the Intermediary Definitions Adopting Release, including by adding new 
categories of legal costs that non-U.S. persons may incur in connection 
with applying the major security-based swap participant definition in 
the cross-border context.
    Legal costs related to the cross-border application of major 
security-based swap participant definition--As discussed in the 
Intermediary Definitions Adopting Release, certain market participants 
will incur assessment costs related to the analysis of whether their 
positions rise to the levels set by the major security-based swap 
participant definition. For purposes of that release, we assumed that 
entities with aggregate gross notional single-name CDS positions 
exceeding $25 billion may identify a need to perform the major 
participant analysis.\676\ Based on that figure, we estimated that 12 
entities would perceive the need to perform the major participant 
analysis.\677\
---------------------------------------------------------------------------

    \676\ See Intermediary Definitions Adopting Release, 77 FR note 
1529.
    \677\ Based on data as of December 2011, in that release we 
found that 1 entity had aggregate gross notional positions from 
bought and sold credit protection exceeding $100 billion, 4 entities 
had aggregate gross notional single-name CDS positions exceeding $50 
million, and 12 entities had aggregate gross notional CDS positions 
exceeding $25 billion. See id. at 30734 n. 1529.
---------------------------------------------------------------------------

    Under the final rules described above, available data from 2012 
indicates that approximately nine persons will have relevant positions 
exceeding $25 billion, and we continue to believe that firms whose 
positions exceed this amount will be likely to perform the major 
participant threshold analysis.\678\ Of those nine, five entities are 
not domiciled in the United States. Consistent with our view in the 
proposing release, we expect that non-U.S. firms in this set will incur 
additional costs beyond those described in the Intermediary Definitions 
Adopting Release. These additional costs would arise due to information 
that non-U.S. market participants would have to collect and maintain in 
order to calculate the size of positions that count towards the major 
participant thresholds. Consistent with our analysis in the 
Intermediary Definitions Adopting Release, we believe that it is 
reasonable to conclude that at least some entities with security-based 
swap positions approaching the major participant thresholds are likely 
to seek

[[Page 39143]]

legal counsel for interpretation of various aspects of the rules 
pertaining to the major participant definition.\679\ Though the costs 
associated with obtaining such legal services would vary depending on 
the facts and circumstances regarding an entity's positions, we believe 
that $40,000 is a reasonable estimate of the upper end of the range of 
the costs of obtaining the services of outside counsel in undertaking 
the legal analysis of the entity's status as a major security-based 
swap participant.\680\
---------------------------------------------------------------------------

    \678\ See section 0, supra. The difference between this and our 
previous estimate of 12 entities reflects changes in security-based 
swap activity since the Intermediary Definitions Adopting Release 
and the final rules' treatment of positions between non-U.S. persons 
in the absence of guarantees from U.S. persons.
    \679\ See Intermediary Definitions Adopting Release, 77 FR 
30735.
    \680\ The average cost incurred by such entities in connection 
with outside counsel is based on staff experience in undertaking 
legal analysis of status under federal securities laws. The staff 
believes that costs associated with obtaining outside legal counsel 
relating to such determinations range from $20,000 to $40,000 
depending on the complexity of the entity. See id. at 30735-36 n. 
1537 (estimating the upper bound of such costs at $30,000). We note 
that the additional $10,000 added to the estimate in the 
Intermediary Definitions Adopting Release is intended to account for 
the additional complexity that non-U.S. persons may face in 
performing the analysis.
    These estimates do not reflect a new category of costs arising 
from the cross-border rules. They instead are a revision of a 
category of previously identified costs that market participants may 
incur in obtaining legal services to assist in performing the major 
participant analysis, using newer data and reflecting only positions 
that are counted under the final cross-border rules.
---------------------------------------------------------------------------

    Legal costs related to systems analysis--As noted in the assessment 
cost analysis related to the de minimis exception (and in addition to 
the estimates in the Cross-Border Proposing Release), we believe that 
it is reasonable to conclude that those five entities not domiciled in 
the United States may have to incur one-time legal expenses related to 
the development of systems and analysis expenses--discussed below--to 
identify which of their security-based swap positions potentially must 
be counted for purposes of the major security-based swap participant 
analysis, consistent with these cross-border rules. As in the dealer 
context, this additional cost estimate reflects the fact that the 
development of such systems and procedures must address cross-border 
rules that require accounting for factors such as whether an entity's 
security-based swaps are subject to guarantees from U.S. persons, 
whether its counterparties are U.S. persons, and, specific to the major 
security-based swap participant analysis, whether the entity must 
attribute the position to itself pursuant to the attribution rules. As 
in the analysis of assessment costs related to the dealer definition, 
we estimate that such legal costs would amount to approximately $30,400 
per entity, and that those five entities would incur total costs of 
approximately $152,000.\681\
---------------------------------------------------------------------------

    \681\ See section 0 and note 460 (addressing calculations of 
costs), supra.
---------------------------------------------------------------------------

(b) Costs Related to New Systems, Analysis, and Representations
    Transaction-monitoring systems--The elements introduced by the 
final cross-border rules may cause certain non-U.S. persons to 
implement systems to identify whether their positions exceed the major 
security-based swap participant calculation thresholds. Such systems 
may reflect the need for non-U.S. persons to: (i) Identify whether 
their counterparties are ``U.S. persons''; (ii) determine whether their 
positions with U.S. persons arise from transactions conducted through a 
foreign branch (which itself requires consideration of whether their 
counterparty is a ``foreign branch'') and--of those--determine which 
positions involve a foreign branch of a U.S. bank that itself is a 
registered security-based swap dealer; (iii) determine whether 
particular positions are subject to a recourse guarantee against a U.S. 
person; and (iv) evaluate the applicability of the attribution 
rules.\682\ Our estimates for the required systems are the same in the 
major participant analysis as they are in the dealer analysis: One-time 
programming costs of $14,904 and ongoing annual systems costs of 
$16,612 per entity.\683\
---------------------------------------------------------------------------

    \682\ We do not believe that a potential major security-based 
swap participant will need to use any systems to determine if it is 
a ``conduit affiliate.'' See note 462, supra.
    \683\ See section 0 and note 464, supra.
---------------------------------------------------------------------------

    Analysis of counterparty status, including representations--As 
discussed in the context of the de minimis exception, non-U.S. market 
participants would be likely to incur costs arising from the need to 
assess the potential U.S.-person status of their counterparties, which 
we would typically expect to be dealers, and in some cases to obtain 
and maintain records related to representations regarding their 
counterparty's U.S.-person status.\684\ We anticipate that non-U.S. 
persons are likely to review existing information about their 
counterparties to assess whether those counterparties are U.S. 
persons.\685\ Non-U.S. persons at times may also request and maintain 
representations from their dealer and non-dealer counterparties to help 
determine or confirm their counterparties' status.\686\ Accordingly, as 
in the discussion of dealer assessment costs, in our view, such 
assessment costs primarily would encompass one-time costs to review and 
assess existing information regarding counterparty domicile, principal 
place of business, and other factors relevant to potential U.S.-person 
status, as well as one-time costs associated with requesting and 
collecting representations from counterparties.\687\ The costs 
associated with representations in the context of the major participant 
analysis would be one-time costs of approximately $24,200 per 
firm.\688\
---------------------------------------------------------------------------

    \684\ See Exchange Act rule 3a67-10(a)(4) and (3) (incorporating 
the definitions of ``U.S. person'' ``transaction conducted through a 
foreign branch,'' including provisions permitting reliance on 
representations); see also section 0 and note 465, supra (noting 
that non-U.S. market participants may seek representations as to 
whether positions arise from transactions conducted through a 
foreign branch of a U.S. bank that is registered as a security-based 
swap dealer and also noting our understanding that few, if any, U.S. 
persons may participant in the single-name CDS market through their 
foreign branches).
    \685\ See section 0, supra.
    \686\ See id.
    \687\ See section 0 and note 466, supra (explaining that 
determination of U.S.-person status generally will not vary over 
time absent changes involving corporate reorganizations).
    \688\ See section 0, supra. The cumulative estimate is based on 
the same methodology and SIFMA Management & Professional Earnings in 
the Securities Industry 2013 data that we used to estimate these 
one-time costs for dealers. See note 467, supra. With respect to 
major security-based swap participants, we conservatively assume 
that each of the non-U.S. firms will have 30 single-name CDS 
counterparties (based on data indicating that the five non-U.S. 
firms persons with total single-name CDS positions in 2012 exceeding 
$25 billion all had fewer than 45 counterparties in connection with 
single-name CDS, which produces an estimate of 15 hours of 
compliance staff time and 15 hours of legal staff time per firm. 
Based upon data from SIFMA's Management & Professional Earnings in 
the Securities Industry 2013 (modified by the Commission staff to 
account for an 1800-hour-work-year and multiplied by 5.35 to account 
for bonuses, firm size, employee benefits, and overhead), the staff 
estimates that the average national hourly rate for a senior 
compliance examiner is $217 and that the average national hourly 
rate for an in-house attorney is $380; this leads to a cumulative 
estimate of $9,000 per firm for such costs.
    Consistent with the Cross-Border Proposing Release, moreover, 
this estimate is further based on estimated 40 hours of in-house 
legal or compliance staff's time (based on the above rate of $380 
per hour for an in-house attorney) to establish a procedure of 
requesting and collecting representations from trading 
counterparties, taking into account that such representation may be 
incorporated into standardized trading documentation used by market 
participants. This leads to an estimate of $15,200 per firm for such 
costs. See section 0 and note 467, supra.
---------------------------------------------------------------------------

    Monitoring of counterparty status--Also as addressed in the context 
of the de minimis exception, market participants may be expected to 
adapt their systems to monitor the status of their counterparties for 
purposes of future security-based swap activities, which would allow 
market participants to maintain records of counterparty status for 
purposes of conducting the

[[Page 39144]]

major participant assessment.\689\ Market participants also may need to 
monitor for the presence of information that may indicate that the 
representations they have received are outdated or otherwise are not 
valid.\690\ The costs associated with adapting the systems described 
above to monitor the status of their counterparties for purposes of 
their future security-based swaps would be the same as the costs in the 
dealer analysis: One-time costs of approximately $12,436.\691\
---------------------------------------------------------------------------

    \689\ We also recognize that the final rules requiring 
attribution may impose certain additional monitoring costs on market 
participants whose position in a security-based swap is guaranteed 
by another entity and on the entities that provide the guarantee. We 
anticipate that the guarantors may receive reports from the market 
participants whose position is guaranteed in order to allow the 
guarantors to monitor the amount of such positions for purposes of 
determining whether the positions attributed to the guarantor rise 
to the level that would require them to register as a major 
security-based swap participant.
    \690\ See section 0 and note 469, supra.
    \691\ See section 0 and note 468 (noting that parties may 
structure their relationships in a way that will not require a 
separate representation in conjunction with each individual 
position) and 470, supra (describing calculations for this 
estimate).
---------------------------------------------------------------------------

    Summary of systems, analysis, and representation costs--The summary 
of costs that certain non-U.S. market participants would incur in 
connection with systems, analysis of counterparty status and 
representations in connection with these cross-border rules would be 
approximately $51,500 in one-time costs \692\ and $16,612 in estimated 
annual ongoing costs.\693\ Based on our estimate, subject to the 
limitations associated with the use of data analysis discussed above, 
that five non-U.S. domiciled entities will incur these assessment 
costs, we estimate that the total one-time industry-wide costs 
associated with establishing such systems would amount to approximately 
$257,500 and total ongoing costs would amount to approximately $83,100.
---------------------------------------------------------------------------

    \692\ Consistent with the above discussion, the estimated one-
time costs of $51,500 represent: The costs to establish a system to 
assess the status of their positions under the definitions and other 
provisions specific to these cross-border rules ($14,904); the costs 
related to the assessment of counterparty status, including costs of 
assessing existing information and of requesting and obtaining 
representations, as well as costs of related procedures ($24,200); 
and the costs for monitoring the status of their counterparties for 
purposes of their future security-based swap activities ($12,436). 
See section 0 and note 471, supra.
    \693\ See section 0, supra.
---------------------------------------------------------------------------

(c) Overall Considerations Related to Assessment Costs
    In sum, we believe that the effect of these final cross-border 
rules would be an increase over the amounts that otherwise would be 
incurred by certain non-U.S. market participants, both in terms of 
additional categories of legal costs and in terms of the need to 
develop certain systems and procedures. As discussed in the context of 
the assessment costs applicable to the dealer analysis, we believe that 
requiring certain non-U.S. persons to incur such assessment costs is an 
unavoidable adjunct to the implementation of a set of rules that are 
appropriately tailored to apply the ``major security-based swap 
participant'' definition under Title VII to a global security-based 
swap market in a way that yields the relevant benefits associated with 
the regulation of major participants and achieves the benefits of Title 
VII.\694\ The benefits of Title VII's regulatory requirements 
applicable to major security-based swap participants could be 
undermined if a significant portion of positions held by non-U.S. 
persons that impose risk on the U.S. financial system were excluded 
from the Title VII framework. In certain respects, however, decisions 
embedded in these final rules are designed to avoid imposing assessment 
costs upon market participants.\695\
---------------------------------------------------------------------------

    \694\ See section 0, supra.
    \695\ See id.
---------------------------------------------------------------------------

    As explained in the context of the analysis for dealers, we 
recognize that our estimates of assessment costs may result in an 
overestimation as such costs may be tempered to the extent that market 
participants' assessments correspond to the assessments they otherwise 
would follow due to other regulatory requirements or business 
practices, particularly with respect to assessments they may have made 
regarding the U.S.-person status of their counterparties.\696\
---------------------------------------------------------------------------

    \696\ See id.
---------------------------------------------------------------------------

    Also as noted in the dealer discussion, we acknowledge that certain 
aspects of the final rules may differ from those of the CFTC, which may 
result in higher costs for market participants, but we believe that 
such differences are justified and we discuss those differences in the 
substantive discussions of the specific rules.\697\ We also recognize 
other factors that may impact the assessment costs for potential major 
security-based swap participants, such as the possibility that certain 
market participants will choose to restructure their business to avoid 
major security-based swap participant regulation.\698\
---------------------------------------------------------------------------

    \697\ See id.
    \698\ See id.
---------------------------------------------------------------------------

3. Alternative Approaches
    As discussed above, the final rules incorporate a number of 
provisions designed to focus Title VII major security-based swap 
participant regulation upon those persons whose security-based swap 
positions may raise the risks within the United States that the major 
participant definition was intended to address.\699\
---------------------------------------------------------------------------

    \699\ See section 0, supra.
---------------------------------------------------------------------------

    In adopting these final rules we have considered alternative 
approaches suggested by commenters, including the economic effects of 
following such alternative approaches. In considering the economic 
impact of potential alternatives, we have sought to isolate the 
individual alternatives to the extent practicable, while recognizing 
that many of those alternatives are not mutually exclusive.\700\
---------------------------------------------------------------------------

    \700\ Cf. section 0, supra.
---------------------------------------------------------------------------

    We further have considered such potential alternatives in light of 
the methodologies discussed above, by assessing the extent to which 
following particular alternatives would be expected to increase or 
decrease the number of entities that ultimately would be expected to be 
regulated as major security-based swap participants under the final 
rules, as well as the corresponding economic impact. Analysis of the 
available data would tend to suggest that various alternative 
approaches suggested by commenters would not produce any changes in the 
numbers of market participants that may have to be regulated as major 
security-based swap participants. These results are subject to the 
above limitations, however, including limitations regarding the ability 
to quantitatively assess how market participants may adjust their 
future activities in response to the rules we adopt or for independent 
reasons. Accordingly, while such analyses provide some context 
regarding alternatives, their use as tools for illustrating the 
economic effects of such alternatives is limited.
(a) Security-Based Swap Positions Held by Foreign Branches of U.S. 
Banks
    As with the final rules in the context of the de minimis exception, 
the final rules applying the major security-based swap participant 
definition require U.S. banks to count all positions of their foreign 
branches against the major participant calculation thresholds, even 
when the counterparty is a non-U.S. person or another foreign branch of 
a U.S. person. The proposed definition of ``U.S. person'' plays a 
central role in the application of Title VII in the cross-border 
context, directly affecting which

[[Page 39145]]

positions a person must include in its major security-based swap 
participant threshold calculations and ultimately, the number of 
entities that will register as major security-based swap participants. 
An alternative approach would permit U.S. persons not to include the 
positions of their foreign branches in their major security based swap 
participant calculation thresholds. As discussed above, we believe our 
approach to U.S. persons as described above, is consistent with our 
overall territorial approach to the application of Title VII 
requirements to the cross-border security-based swap market, because it 
requires that major security-based swap participant calculation 
thresholds include the positions of such persons that are most likely 
to cause risk to the U.S. financial system at the threshold levels set 
in the major security-based swap participant definition.\701\ For the 
reasons discussed above, we believe that it is appropriate for a U.S. 
person to include in its calculation thresholds positions conducted 
through foreign branches to the same extent as other positions help by 
U.S. persons.\702\
---------------------------------------------------------------------------

    \701\ See section 0, supra.
    \702\ See section 0, supra.
---------------------------------------------------------------------------

    As in the dealer analysis, using the 2012 data to assess the impact 
associated with this alternative does not indicate a change to our 
estimate that up to five entities potentially would register as major 
security-based swap participants, and the analysis is subject to the 
limitations discussed in the context of the dealer analysis.\703\ 
Adopting an alternative approach that does not require foreign branches 
to count their positions with non-U.S. persons could incentivize U.S. 
persons to execute higher volumes through their branches.\704\
---------------------------------------------------------------------------

    \703\ See section 0 and note 477, supra.
    \704\ See section 0, supra (discussing the same issue in the 
dealer context).
---------------------------------------------------------------------------

(b) Positions of Non-U.S. Persons for Which the Counterparty Has Rights 
of Recourse Against a U.S. Person
    The final rules require a non-U.S. person to count, against its 
major security-based swap participant calculation thresholds, positions 
for which the non-U.S. person's performance in connection with the 
transaction is subject to a recourse guarantee against a U.S. person. 
Although the proposal instead would have treated such guaranteed 
affiliates like any other non-U.S. persons, we believe that this 
provision is appropriate for the reasons discussed above, including the 
fact that such recourse guarantees pose risks to the U.S. financial 
system via the guarantor.\705\
---------------------------------------------------------------------------

    \705\ See section 0, supra (addressing similar discussion in the 
context of the dealer analysis).
---------------------------------------------------------------------------

    This aspect of the final rules reflects a middle ground between 
commenter views, as is discussed above regarding the approach taken in 
the dealer analysis.\706\ The same two alternatives that are presented 
in the analysis of alternatives to the approach to the dealer final 
rules are relevant to the discussion of the application of the major 
security-based swap participant definition--one alternative in which 
the final rules do not address guarantees at all, and one in which 
(based on the concept of a de facto guarantee) all affiliates of a U.S. 
person should have to count their security-based swap positions against 
the calculation thresholds, with a potential exception if they 
demonstrate to the market that there will be no guarantee.\707\ A third 
alternative and the approach taken in the proposal would require the 
non-U.S. person to include in its threshold calculations only those 
positions with U.S. persons that are not guaranteed but would require 
those positions that are guaranteed to be attributed to the U.S. person 
guarantor for purposes of its own threshold calculations.
---------------------------------------------------------------------------

    \706\ See id., supra.
    \707\ See id.
---------------------------------------------------------------------------

    The analysis of the first two alternatives discussed in the context 
of the application of the dealer requirements above also applies in the 
context of applying the major security-based swap participant 
definition.\708\ The third alternative, which is the approach taken in 
the proposal, may have reduced programmatic benefits by increasing the 
likelihood that, even when a person exceeds the thresholds by virtue of 
its own positions, which exist within the United States by virtue of 
the U.S. person guarantor, it will not be subject to direct regulation 
as a major participant.\709\ Under the proposed approach, only the U.S. 
person guarantor would have counted the positions for which the non-
U.S. person's counterparty had rights of recourse against the U.S. 
person, meaning that such positions would not be accounted for in the 
major participant threshold calculations of the entity that directly 
enters into the positions. The economic reality of such positions is 
that by virtue of the guarantee the non-U.S. person effectively acts 
together with a U.S. person to engage in the security-based swap 
activity that results in the positions, and the non-U.S. person's 
positions cannot reasonably be isolated from the U.S. person's 
engagement in providing the guarantee.\710\ The final rule reflects 
this economic reality by requiring the non-U.S. person whose position 
is guaranteed to include such positions in its major security-based 
swap participant threshold calculations.\711\
---------------------------------------------------------------------------

    \708\ See section 0, supra (explaining that not requiring non-
U.S. persons to include positions for which their counterparty has a 
recourse guarantee against a U.S. person could incentivize U.S. 
persons to use such guarantees, whereas an approach that requires an 
affiliate of a non-U.S. person to include all of its positions in 
its major security-based swap participant calculation thresholds may 
negatively impact liquidity).
    \709\ See section 0, supra.
    \710\ See section 0, supra.
    \711\ See id.
---------------------------------------------------------------------------

    For the foregoing reasons, we believe that the approach taken in 
the final rules is appropriate. We note that an assessment of the data 
regarding the first alternative does not indicate a change in the 
number of entities that may be expected to register as major security-
based swap participants.\712\ Due to data limitations that prevent us 
from identifying which individual transactions of non-U.S. persons are 
subject to guarantees by U.S. persons and data limitations preventing 
us from obtaining information about the single-name security-based swap 
transactions of non-U.S. domiciled persons for single-name CDS 
involving a non-U.S. reference entity, the available data does not 
enable us to assess the second and third alternatives.\713\
---------------------------------------------------------------------------

    \712\ See section 0 and note 481 (explaining that the data does 
not enable us to identify which positions of non-U.S. persons are 
subject to guarantees by U.S. persons).
    \713\ See section 0 and notes 481 and 482, supra.
---------------------------------------------------------------------------

(c) Positions of Conduit Affiliates
    The final rules require conduit affiliates to count all of their 
security-based swap positions in their major security-based swap 
participant threshold calculations. The available data does not permit 
us to identify which market participants would be deemed conduit 
affiliates.\714\ As explained in the corollary discussion in the dealer 
analysis, we believe the alternative of not requiring such entities to 
count their positions would remove a tool that should help to deter 
market participants from seeking to evade regulation.
---------------------------------------------------------------------------

    \714\ See section 0, supra.
---------------------------------------------------------------------------

    As addressed in the dealer analysis another alternative to address 
such evasive activity could be to narrow the inter-affiliate exception, 
such as by making the exception unavailable when non-U.S. persons enter 
into positions

[[Page 39146]]

with their U.S. affiliates.\715\ While this alternative may be expected 
to reduce costs to such entities, we believe the final rules will 
achieve comparable anti-evasion purposes with less cost and 
disruption.\716\
---------------------------------------------------------------------------

    \715\ See id.
    \716\ See id.
---------------------------------------------------------------------------

(d) Positions of Non-U.S. Persons With Foreign Branches of U.S. Banks 
and Certain Other Counterparties
    The final rules require non-U.S. persons to include their positions 
arising from transactions conducted through foreign branches of U.S. 
banks unless the U.S. bank is registered as a security-based swap 
dealer. This reflects a change from the proposal, which would have 
required non-U.S. persons to include all positions with foreign 
branches of U.S. banks without exception. The final approach, as in the 
context of the dealer analysis, reflects a middle ground between 
commenter views, which provided two alternatives: That all positions 
arising from transactions conducted through foreign branches be counted 
or that no such position be counted against a non-U.S. person's major 
security-based swap participant calculation thresholds.\717\ Adopting 
the first alternative requiring non-U.S. persons to include all 
positions with foreign branches would raise the potential for disparate 
impacts upon U.S. persons with foreign branches, along with associated 
concerns about liquidity impacts.\718\ Adopting the second alternative 
excluding all such positions from being counted, could incentivize U.S. 
market participants that are not registered as dealers to execute 
higher volumes of security-based swaps through their foreign branches, 
resulting in higher levels of risk being transmitted to the United 
States without the risk-mitigating attributes of having a registered 
dealer involved in the position.\719\
---------------------------------------------------------------------------

    \717\ See section 0, supra.
    \718\ See id.
    \719\ See id.
---------------------------------------------------------------------------

    The available data related to these alternatives is subject to the 
limitations discussed above and does not indicate a change to our 
assessment of the number of entities that may be expected to register 
as major security-based swap participants.\720\
---------------------------------------------------------------------------

    \720\ See id.
---------------------------------------------------------------------------

    Another alternative approach would require non-U.S. persons to 
include in their major security-based swap participant threshold 
calculations those positions for which they have rights of recourse 
against a U.S. person or their positions with counterparties that are 
conduit affiliates.\721\ We believe that the positions of such non-U.S. 
persons do not transmit risk to the United States in the same way as if 
the potential major security-based swap participant is the entity whose 
performance is guaranteed by a U.S. person because the default of the 
non-U.S. person who holds the right of recourse against the U.S. person 
guarantor will not impact the outward exposure of the U.S. person or 
the non-U.S. person whose position is guaranteed. While these 
alternatives may potentially increase programmatic benefits associated 
with Title VII major participant regulation, they would also likely 
increase assessment costs by requiring such non-U.S. persons to 
evaluate and track whether they have a right of recourse against a U.S. 
person, potentially reducing liquidity available to U.S. corporate 
groups that provide guarantees to non-U.S. persons.\722\ We note that, 
under the final rules regarding guaranteed positions, the entity 
involved in the position with the closest connection to the United 
States, the non-U.S. person whose position is guaranteed, as well as 
the U.S. guarantor itself, will already be including the position in 
each of their calculations. Thus we believe such benefits would be more 
attenuated than those associated with the final rules' approach of 
directly counting the positions of such guaranteed non-U.S. persons. 
Accordingly, we do not believe these alternatives would generate 
significant additional programmatic benefits.
---------------------------------------------------------------------------

    \721\ See note 576 (describing CFTC approach) and note 189 
(describing comments suggesting to treat guaranteed entities as U.S. 
persons), supra.
    \722\ See section 0.
---------------------------------------------------------------------------

(e) Attribution
i. Attribution to U.S. Persons
    Our final attribution approach requires U.S. persons to include, 
for purposes of their major security-based swap participant calculation 
thresholds, those positions for which a non-U.S. person's counterparty 
has rights of recourse against the U.S. person.
    An alternative approach would not require a U.S. person to include 
such positions in its threshold calculations. This alternative 
potentially reduces the programmatic costs and benefits of major 
participant regulation because it would reduce the number of positions 
that U.S. guarantors would include in their calculations. By reducing 
the costs associated with providing guarantees, such an alternative 
could reduce the barriers to participation in the security-based swap 
market faced by participants who might benefit from risk sharing 
afforded by security-based swap positions but cannot credibly provide 
sufficient information for their counterparties to assess 
creditworthiness. We further believe that such an approach would only 
reduce the assessment costs associated with major participant 
regulation to the extent that U.S. guarantors do not have private 
incentives in place to collect information about positions they 
guarantee.
    As noted in section V.D.3, however, we believe it is important to 
account for the risk to the U.S. financial system transmitted by such 
guaranteed positions. Ensuring that a U.S. person counts positions of 
potentially several entities whose counterparties have rights of 
recourse against it, where each of those entities may be individually 
below the major participant threshold, will generate the types of 
benefits that Title VII was intended to produce. The benefits of 
including these positions are significant because, through the U.S. 
guarantor, these positions expose the U.S. financial system to the type 
of risk that the definition of major security-based swap participant is 
intended to address.
ii. Attribution to Non-U.S. Persons
    Under the final rules a non-U.S. person must include security-based 
swap positions of a U.S. person for which that person's counterparty 
has rights of recourse against the non-U.S. person, and security-based 
swap positions of another non-U.S. person that are with a U.S.-person 
counterparty who has rights of recourse against the non-U.S. person 
that is the potential major security-based swap participant.
    An alternative approach to these requirements would be to not 
require non-U.S. persons to include such positions, even when those 
positions are entered into by U.S. persons or when a U.S. person has a 
right of recourse against them under those positions. Not requiring 
these positions to be attributed to the non-U.S. person could reduce 
assessment costs for non-U.S. persons and potentially result in fewer 
non-U.S. persons ultimately registering as major security-based swap 
participants. This alternative potentially improves risk sharing by 
U.S. persons who must rely on guarantees in order to participate in the 
security-based swap market by reducing the costs incurred by non-U.S. 
person guarantors. It likely would, however, also reduce programmatic 
benefits to the extent that non-U.S. persons that guarantee positions 
within the United States of multiple entities, each of which is below 
the major participant threshold, are not required

[[Page 39147]]

to include such positions in their own calculations.
    Such non-U.S. persons who provide guarantees ultimately bear the 
risk of positions they guarantee, and the aggregate risk exposure of 
the U.S. financial system to a non-U.S. person guarantor varies more 
directly with the notional amount of positions involving U.S. persons 
that are guaranteed than with the number of entities to which it 
provides guarantees. As a result, the Commission believes it is 
appropriate to apply attribution requirements that treat non-U.S. 
person guarantors of positions to which U.S. persons are counterparties 
as if they were direct counterparties. With respect to guarantees 
provided by non-U.S. persons to U.S. persons, the Commission believes 
it is appropriate to attribute guaranteed positions because U.S. 
persons bear the risk that non-U.S. person guarantors will be unable to 
fulfill obligations under the guarantees they provide.
(f) Positions Cleared Through a Clearing Agency in the United States
    The final approach requires non-U.S. persons to include in their 
major participant threshold calculations those positions that are 
entered into with U.S. persons, including positions that are cleared 
through a registered clearing agency in the United States. An 
alternative raised by a commenter suggested that the location of 
clearing not be relevant for purposes of determining whether a non-U.S. 
person is a major security-based swap participant.\723\ This 
alternative would ignore the risk that is posed to the U.S. financial 
system by positions cleared through a U.S.-person clearing agency, and 
would be inconsistent with the general approach that all positions with 
U.S. counterparties should be counted towards the major security-based 
swap participant threshold calculation. For this reason, we believe the 
alternative would ignore important programmatic benefits that are 
incorporated in the final approach.
---------------------------------------------------------------------------

    \723\ See section 0 and note 549, supra. See also section 
VIII.A, infra.
---------------------------------------------------------------------------

(g) Foreign Government-Related Entities
    Several commenters suggested that foreign government-related 
entities, such as sovereign wealth funds and MDBs, should be excluded 
from the U.S. person, security-based swap dealer, and major security-
based swap participant definitions.\724\ By potentially capturing fewer 
major security-based swap participants, this alternative approach would 
correspondingly decrease the programmatic costs and benefits associated 
with Title VII regulation of major security-based swap participants. We 
believe that security-based swap transactions entered into by these 
types of foreign government-related entities with U.S. persons pose the 
same risks to the U.S. security-based swap markets as transactions 
entered into by entities that are not foreign-government related. 
Moreover, as noted above,\725\ we understand that foreign government-
related entities rarely enter into security-based swap transactions (as 
opposed to other types of swap transactions) in amounts that would 
trigger the obligation to register as a major security-based swap 
participant. To the extent that such entities do enter into security-
based swaps with U.S. persons, however, we believe such requiring such 
entities to include those positions in their major participant 
threshold calculations will generate programmatic benefits, as such 
positions introduce risk into the United States of the type title VII 
intended to address.
---------------------------------------------------------------------------

    \724\ See section 0 and note 420 (addressing comments in de 
minimis context and citing WB/IFC Letter SC Letter and IDB Letter at 
5), supra.
    \725\ See section 0, supra.
---------------------------------------------------------------------------

VI. Substituted Compliance Procedural Rule

A. Proposed Approach and Commenters' Views

    The Cross-Border Proposing Release addressed a range of substantive 
issues regarding the potential availability of substituted compliance, 
whereby a market participant could satisfy certain Title VII 
obligations by complying with comparable foreign requirements. These 
included issues regarding which requirements might be satisfied via 
substituted compliance, and regarding the showings necessary to obtain 
a substituted compliance order from the Commission.
    The release also proposed to amend the Commission's Rules of 
General Application to establish procedures for considering substituted 
compliance requests, similar to the procedures that the Commission uses 
to consider exemptive order applications under section 36 of the 
Exchange Act.\726\ Among other aspects, proposed Exchange Act rule 0-13 
would require that substituted compliance applications be in writing 
and include any supporting documentation necessary to make the 
application complete--``including information regarding applicable 
requirements established by the foreign financial regulatory authority 
or authorities, as well as the methods used by the foreign financial 
regulatory authority or authorities to monitor compliance with such 
rules''--and that applications cite applicable precedent.\727\ The 
proposed rule also stated that the Commission may choose to publish 
requests in the Federal Register, and stated that requestors may seek 
confidential treatment.\728\ We preliminarily concluded that those 
proposed procedures would provide sufficient guidance regarding the 
submission process.\729\ We also solicited comment regarding the 
sufficiency of the guidance provided by the proposed rule, and 
regarding whether foreign regulatory authorities should be able to 
submit substituted compliance requests.\730\
---------------------------------------------------------------------------

    \726\ See generally Cross-Border Proposing Release, 78 FR 31087-
88.
    \727\ See proposed Exchange Act rule 0-13(a), (e). Proposed 
Exchange Act rule 0-13 further would provide that applications must 
comply with Commission rule 0-3 (regarding the filing of materials 
with the Commission). Under the proposal, all applications would be 
submitted to the Commission's Office of the Secretary electronically 
or in paper format, and in the English language. If an application 
is incomplete, the Commission may request that the application be 
withdrawn unless the applicant can justify why supporting materials 
have not been submitted and undertakes to submit promptly the 
omitted materials. The Commission would not consider hypothetical or 
anonymous requests for a substituted compliance order. The proposed 
rule further addressed issues regarding contact information, 
amendments to the application, the review process, and potential 
hearings regarding the application. See proposed Exchange Act rule 
0-13; see also Cross-Border Proposing Release, 78 FR 31087-88.
    \728\ See proposed Exchange Act rule 0-13(a), (h). The proposal 
stated that requests for confidential treatment would be permitted 
to the extent provided under 17 CFR 200.81. See proposed Exchange 
Act rule 0-13(a); Cross-Border Proposing Release, 78 FR 31087-88. 
Under 17 CFR 200.81, persons submitting exemptions and related 
relief may also request that it be accorded confidential treatment 
for a specified period of time not exceeding 120 days. If the 
Commission staff determines that the request is reasonable and 
appropriate it will be granted and the letter or other communication 
will not be made available for public inspection or copying until 
the expiration of the specified period. If the staff determines that 
the request for confidential treatment should be denied, the staff 
shall advise the person making the request and the person may 
withdraw the letter or other communication within 30 days.
    \729\ See Cross-Border Proposing Release, 78 FR 31088.
    \730\ See id.
---------------------------------------------------------------------------

    One commenter raised concerns that the proposed availability of 
confidential treatment ``would foreclose any public comment, debate or 
analysis of the applicant's claims about the foreign regulatory regime, 
leading to an industry-led process.'' That commenter urged us to 
disallow confidential treatment of applications, and to invite public 
comment as foreign jurisdictions are considered for comparability.'' 
\731\
---------------------------------------------------------------------------

    \731\ See AFR Letter I at 11-12.

---------------------------------------------------------------------------

[[Page 39148]]

    Commenters also asked for greater clarity regarding the information 
to be provided in connection with substituted compliance requests.\732\ 
Commenters also asked that the Commission coordinate with the CFTC and 
foreign regulators in making substituted compliance 
determinations.\733\
---------------------------------------------------------------------------

    \732\ See FOA Letter at 4 (stating that the proposed requirement 
that an application include supporting documentation that the 
applicant believes necessary for the Commission to make the 
determination ``puts the burden of interpretation wholly on the 
applicant''; requesting additional guidance regarding the 
information needed to accompany requests, and greater specificity to 
ensure ``that the applications it receives address a similar range 
of compliance issues and contain a similar amount of supporting 
detail''); SIFMA/FIA/FSR Letter at A-38 (urging the Commission ``to 
provide a more granular and detailed framework regarding the 
considerations relevant to evaluating substituted compliance 
requests'').
    \733\ See, e.g., FOA Letter at 8 (requesting that the Commission 
and the CFTC coordinate in making substituted compliance 
determinations and that the Commissions consider whether to accept 
joint submissions from foreign regulators or foreign market 
participants); CEDU Letter at 2 (stating that the Commission should 
work closely with the CFTC ``when determining whether substituted 
compliance is applicable with respect to a particular 
jurisdiction'').
---------------------------------------------------------------------------

    Other commenters addressed a related issue regarding whether 
foreign regulators could submit substituted compliance requests. 
Proposed Exchange Act rule 3a71-5, regarding substituted compliance for 
foreign security-based swap dealers, specified that such requests may 
be filed by a foreign security-based swap dealer or group of dealers. A 
number of commenters took the contrasting position that foreign 
regulators should be able to submit substituted compliance 
requests.\734\ Some commenters further stated that such requests solely 
should be submitted by foreign regulators.\735\ Two commenters 
particularly emphasized the importance of the Commission's substituted 
compliance assessments taking into account foreign enforcement and 
supervisory practices.\736\
---------------------------------------------------------------------------

    \734\ See, e.g., SIFMA/FIA/FSR Letter at A-36 (``Foreign 
regulators are often best placed to describe their rules and provide 
information for the purposes of a comparability analysis. Such an 
approach would also allow for a more efficient use of resources.'').
    \735\ See EC Letter at 3 (suggesting that ``the review of a 
foreign regime should be conducted in cooperation solely with the 
relevant foreign regulators or legislators, as opposed to firms'' to 
avoid duplication or confusion); ESMA Letter at 3.
    \736\ See AFR Letter I at 12 (supporting ability to reject or 
withdraw substituted compliance determinations based on the failure 
of a foreign regime to exercise supervisory or enforcement 
authority); BM Letter at 30-31 (criticizing Cross-Border Proposing 
Release for including ``only passing reference to foreign 
supervision and enforcement as discretionary factors the SEC may 
consider in making a substituted compliance determination,'' and 
stating that any substituted compliance determinations be predicated 
on evaluation of ``a host of factors regarding the foreign 
regulatory system, including staff expertise, agency funding, agency 
independence, technological capacity, supervision in fact, and 
enforcement in fact'').
---------------------------------------------------------------------------

B. Final Rule

    In large part, we expect to address issues regarding the 
availability of substituted compliance as part of future rulemakings, 
in conjunction with considering the cross-border application of the 
relevant substantive rules. As discussed above, we believe that it is 
appropriate to address issues regarding the cross-border application of 
the substantive requirements under Title VII in conjunction with 
considering the final rules to implement those substantive 
requirements, as substituted compliance potentially will constitute an 
integral part of the final approach toward cross-border application.
    At this time, however, we believe that it is appropriate to adopt a 
final rule to address the procedures for submitting substituted 
compliance requests. Using the same general procedural requirements 
would facilitate the efficient consideration of substituted compliance 
requests. Proposed Exchange Act rule 0-13, moreover, is sufficiently 
flexible to accommodate requests related to a range of regulatory 
requirements, even when the requirements necessitate different 
approaches toward substituted compliance.
    Accordingly, we are adopting Exchange Act rule 0-13 largely as 
proposed. In response to commenter input, however, the final rule has 
been modified from the proposal to provide that a request for a 
substituted compliance order may be submitted either by a party that 
potentially would comply with requirements under the Exchange Act 
pursuant to a substituted compliance order, or by a relevant foreign 
financial regulatory authority or authorities.\737\ We are persuaded 
that allowing foreign regulators to submit such requests would promote 
the completeness of requests and promote efficiency in the process for 
considering such requests, in light of foreign regulators' expertise 
regarding their domestic regulatory system, including the effectiveness 
of their compliance and enforcement mechanisms, and to allow for a 
single point of contact to facilitate the consideration of substituted 
compliance requests associated with the jurisdiction. We are not, 
however, foreclosing the ability of a market participant itself to 
submit a request that it be able to comply with Exchange Act 
requirements pursuant to a substituted compliance order.\738\
---------------------------------------------------------------------------

    \737\ The decision to permit foreign regulators to submit 
substituted compliance requests may impact our future consideration 
of proposed rule 3a71-5(c), which specified that applications for 
substituted compliance determinations in connection with security-
based swap dealer requirements may be made by foreign dealers or by 
groups of foreign dealers.
    \738\ To the extent we receive multiple requests in connection 
with a particular jurisdiction, we may consider such requests 
together.
---------------------------------------------------------------------------

    The final rule further revises the proposal to provide that 
applications should include supporting documentation regarding the 
methods that foreign financial regulatory authorities use to enforce 
compliance with the applicable rules.\739\ This type of information--
which we expect would be best provided by the relevant foreign 
regulator--is consistent with the fact that our substituted compliance 
assessments will not be limited to a comparison of applicable rules and 
their underlying goals, but also will take into account the capability 
of a foreign financial regulatory authority to monitor compliance with 
its rules and take appropriate enforcement action in response to 
violations of such rules.\740\
---------------------------------------------------------------------------

    \739\ See Exchange Act rule 0-13(e). The final rule addresses 
the need for applications to provide information regarding how 
foreign regulatory authorities ``monitor and enforce'' compliance 
with the applicable rules. The relevant language of the proposal 
simply referred to ``monitor.''
     In addition, the final rule revises the proposed language 
regarding the Commission's ability to request applications to be 
withdrawn, by omitting the proposed reference to the Commission 
acting ``through its staff.'' See Exchange Act rule 0-13(a).
     The final rule further revises the proposed language regarding 
the process for considering applications, by providing that an 
appropriate response will be issued following ``a vote by'' the 
Commission. See Exchange Act rule 0-13(g).
    \740\ We note that assessments of analogous factors occur in 
other contexts. For example, assessments conducted by the Federal 
Reserve in connection with applications by foreign banks to 
establish a branch, agency or commercial lending company in the 
United States consider--and the Federal Reserve requires 
applications to provide information regarding--the following factors 
regarding the role played by the foreign bank's home country 
supervisor: (a) The scope and frequency of on-site examinations by 
the home-country supervisor; (b) off-site monitoring by the home-
country supervisor; (c) the role of external auditors; (d) 
regulation and monitoring of affiliate transactions; (e) other 
applicable prudential requirements (including capital adequacy, 
asset classification and provisioning, single or aggregate credit 
and foreign currency exposure limits, and liquidity) and associated 
supervisor monitoring; (f) remedial authority of the home-country 
supervisor to enforce compliance with prudential controls and other 
supervisory or regulatory requirements; and (g) prior approval 
requirements (related to investments in other companies or the 
establishment of overseas offices). See Federal Reserve Board, 
``International Applications and Prior Notifications under Subpart B 
of Regulation K,'' (http://www.federalreserve.gov/reportforms/forms/FR_K-220110331_f.pdf). In noting this analogous requirement, we 
are not predicting the extent to which such factors may or may not 
be considered as part of the Commission's substituted compliance 
assessments.

---------------------------------------------------------------------------

[[Page 39149]]

    Finally, the final rule revises the proposal by removing a 
provision that would have stated that requestors may seek confidential 
treatment of their application to the extent provided by Exchange Act 
rule 200.81. This change reflects the fact that under the final rules 
substituted compliance applications may be submitted by foreign 
financial regulatory authorities, and recognizes the importance of 
having the assessment consider potentially sensitive information 
regarding a foreign regime's compliance and enforcement capabilities 
and practices. Accordingly, requests for confidential treatment may be 
submitted pursuant to any applicable provisions governing 
confidentiality under the Exchange Act.\741\ We expect confidential 
treatment requests will seek protection for privileged information 
obtained from foreign regulators.\742\ Recognizing the significance of 
commenter concerns regarding the need for public comment, debate and 
analysis of substituted compliance requests, moreover, rule 0-13 
provides that the Commission shall provide public notice of requests 
and solicit public comment when a complete application has been 
submitted.\743\ We recognize that public comment regarding substituted 
compliance requests may be helpful to our consideration of particular 
requests.\744\
---------------------------------------------------------------------------

    \741\ For example, Exchange Act rule 24b-2 addresses the 
potential availability of confidential treatment in connection with 
any registration statement, report, application, correspondence or 
other document filed pursuant to the Exchange Act. The rule provides 
that the person filing the information must make written objection 
to its public disclosure at the time of the filing. See 17 CFR 
240.24b-2.
    Separately, Commission Rule 200.83 is a procedural rule that 
addresses how persons submitting information to the Commission may 
request that the information not be disclosed pursuant to a request 
under the Freedom of Information Act for reasons permitted by 
Federal law. The rule does not apply when any other statute or 
Commission rule provides procedures for confidential treatment 
regarding particular categories of information, or where the 
Commission has specified that an alternative procedure be utilized 
in connection with a particular study, report, investigation or 
other matter. Under this rule, a person submitting information to 
the Commission must request confidential treatment at the time of 
the submission. See 17 CFR 200.83.
    \742\ Exchange Act Section 24(d) provides that the Commission 
generally shall not be compelled to disclose records obtained from a 
foreign securities authority if: (1) The foreign authority in good 
faith determines and represents that public disclosure of the 
records would violate the laws applicable to that foreign securities 
authority; and (2) the Commission obtains the records pursuant to 
procedures authorized for use in connection with the administration 
or enforcement of the securities laws, or a memorandum of 
understanding.
     Exchange Act Section 24(f)(2) further provides that the 
Commission shall not be compelled to disclose privileged information 
obtain from any foreign securities authority or law enforcement 
authority if the foreign authority in good faith has determined and 
represented that the information is privileged.
    \743\ The text of the final rule has been revised from the 
proposal to eliminate a reference to the Commission having ``sole 
discretion'' to choose to publish a notice, and to provide that 
publication would occur following submission of a ``complete'' 
application. See Exchange Act rule 0-13(h).
    \744\ The final rule also makes technical change to the proposal 
by replacing references to the Commission's Division of Trading and 
Markets with general references to the ``staff,'' consistent with 
the broad range of issues that will likely arise in connection with 
evaluating substituted compliance requests. See Exchange Act rule 0-
13(a), (g).
---------------------------------------------------------------------------

    In adopting rule 0-13, we recognize that the requirement that an 
application ``include any supporting documents necessary to make the 
application complete'' implicates commenter concerns regarding the need 
for further guidance regarding what information must be submitted as 
part of substituted compliance requests. We expect to address such 
issues regarding supporting documentation in the future, as we consider 
the potential availability of substituted compliance in connection with 
particular Title VII requirements.

C. Economic Analysis

    The availability of substituted compliance has the potential to 
impact the interplay between programmatic costs and benefits associated 
with the Title VII regulation of security-based swap dealers and major 
security-based swap participants, as well as those associated with 
other Title VII requirements. For example, substituted compliance 
potentially may permit the risk management and other programmatic 
benefits of dealer regulation to be achieved while avoiding costs that 
market participants otherwise may incur. At the same time, the process 
of making substituted compliance requests may cause certain market 
participants to incur extra costs, although that possibility may be 
obviated in part by the provision that permits foreign financial 
authorities to make such requests.
    As discussed throughout this release, the security-based swap 
market is a global market that is subject to regulatory requirements 
that may vary by jurisdiction. As a result, market participants that 
operate globally potentially could be subject to overlapping or 
conflicting regulations. If Title VII requirements for non-U.S. market 
participants conflict with regulations in local jurisdictions, Title 
VII could act as a barrier to entry to the U.S. security-based swap 
market. In such cases, allowing market participants to comply with 
Title VII via substituted compliance could act as a mechanism to 
preserve access for non-U.S. persons to the U.S. security-based swap 
market, reducing the likelihood that non-U.S. persons exit the U.S. 
market entirely. Therefore, we expect that substituted compliance--so 
long as it is conditioned on a foreign regime's comparability to the 
relevant requirements under the Dodd-Frank Act, and on the foreign 
regime having adequate compliance and enforcement capabilities--would 
help preserve access and competition in the U.S. market, and thus 
benefit non-dealer participants in the security-based swap market.\745\
---------------------------------------------------------------------------

    \745\ Cf. Institute of International Finance (``IIF'') Letter 
(making a similar point).
---------------------------------------------------------------------------

    Although the costs associated with the process of making 
substituted compliance request may be uncertain at this time, the 
decision to request substituted compliance is purely voluntary. To the 
extent such requests are made by market participants, moreover, such 
participants would request substituted compliance only if, in their own 
assessment, compliance with applicable requirements under a foreign 
regulatory system was less costly than compliance with both the foreign 
regulatory regime and the relevant Title VII requirement. Even after a 
substituted compliance determination is made, market participants would 
only choose substituted compliance if the private benefits they expect 
to receive from participating in the U.S. market exceeds the private 
costs they expect to bear, including any conditions the Commission may 
attach to the substituted compliance determination. Where substituted 
compliance increases the number of dealers or other participants in the 
U.S. security-based swap market, or prevents existing participants from 
leaving the U.S. market, this may help mitigate the programmatic costs 
associated with the applicable Title VII requirements, while helping to 
ensure that the associated programmatic benefits are achieved.
    The costs particularly associated with making substituted 
compliance requests, as well as the general costs and benefits 
associated with allowing substituted compliance, may be expected to 
vary between the various categories of Title VII requirements. Relevant 
considerations may include: Whether (and to what extent) substituted 
compliance is permitted in connection with a requirement; the relevant 
information required to demonstrate consistency between the foreign 
regulatory requirements and the Commission's analogous dealer 
requirements; the relevant information required to demonstrate the 
adequacy of the foreign regime's compliance and

[[Page 39150]]

enforcement mechanisms; and whether substituted compliance requests are 
made by market participants or by foreign regulatory authorities. These 
factors limit our ability to further predict the economic consequences 
of this procedural rule.
    We recognize that commenters have asked that the Commission 
coordinate with the CFTC and foreign regulators in making substituted 
compliance determinations. As discussed above, the Commission is 
subject to obligations to consult and coordinate with the CFTC and 
foreign regulators in connection with Title VII.\746\ Our revision of 
the final rule to permit foreign regulators to submit substituted 
compliance requests also helps address goals of increased coordination. 
Moreover, our substituted compliance assessments regarding particular 
requirements applicable to security-based swap dealers also as 
appropriate may take into account the way that other regulators address 
similar issues, subject to the need for any allowance of substituted 
compliance to be predicated on the extent to which compliance with 
another regulatory regime will help achieve the goals of Title VII.
---------------------------------------------------------------------------

    \746\ See section II.B, supra.
---------------------------------------------------------------------------

VII. Antifraud Authority

A. Final Rule

    The provisions of the rules and guidance, discussed above, do not 
limit the cross-border reach of the antifraud provisions or other 
provisions of the federal securities laws that are not specifically 
addressed by this release.
    In section 929P(b) of the Dodd-Frank Act, Congress added provisions 
to the federal securities laws confirming the Commission's broad cross-
border antifraud authority.\747\ Congress enacted section 929P(b) in 
the wake of the Supreme Court's decision in Morrison v. National 
Australia Bank,\748\ which created uncertainty about the Commission's 
cross-border enforcement authority under the antifraud provisions of 
the federal securities laws. Before Morrison, the federal courts of 
appeals for nearly four decades had construed the antifraud provisions 
to reach cross-border securities frauds when the fraud either involved 
significant conduct within the United States causing injury to overseas 
investors, or had substantial foreseeable effects on investors or 
markets within the United States.\749\ With respect to the Commission's 
enforcement authority, section 929P(b) codified the courts of appeals' 
prior interpretation of the scope of the antifraud provisions' cross-
border reach. Section 929P(b) also made clear that the scope of 
subject-matter jurisdiction was coextensive with the cross-border reach 
of the antifraud provisions.\750\
---------------------------------------------------------------------------

    \747\ The antifraud provisions of the securities laws include 
section 17(a) of the Securities Act, 15 U.S.C. 77q(a); sections 9, 
10(b), 14(e), and 15(c)(1)-(2) & (7) of the Exchange Act, 15 U.S.C. 
78i, 78j, 78n, 78o(c)(1)-(2); section 206 of the Investment Advisers 
Act of 1940, 15 U.S.C. 80b-6; and any rule or regulation of the 
Commission promulgated under these statutory authorities.
    \748\ See 130 S. Ct. 2869, 2888 (2010) (holding in a section 
10(b) class action that ``it is . . . only transactions in 
securities listed on domestic exchanges, and domestic transactions 
in other securities, to which Sec.  10(b) applies'').
    \749\ See, e.g., Schoenbaum v. Firstbrook, 405 F.2d 200, 206 (2d 
Cir. 1968), modified on other grounds, 405 F.2d 215 (1968) (en 
banc).
    \750\ See 156 Cong. Rec. H5237 (daily ed. June 30, 2010) 
(statement of Rep. Kanjorski, author of section 929P(b)) (``In the 
case of Morrison v. National Australia Bank, the Supreme Court last 
week held that section 10(b) of the Exchange Act applies only to 
transactions in securities listed on United States exchanges and 
transactions in other securities that occur in the United States. In 
this case, the Court also said that it was applying a presumption 
against extraterritoriality. This bill's provisions concerning 
extraterritoriality, however, are intended to rebut that presumption 
by clearly indicating that Congress intends extraterritorial 
application in cases brought by the SEC or the Justice Department. 
Thus, the purpose of the language of section 929P(b) of the bill is 
to make clear that in actions and proceedings brought by the SEC or 
the Justice Department, the specified provisions of the Securities 
Act, the Exchange Act and the Investment Advisers Act may have 
extraterritorial application, and that extraterritorial application 
is appropriate, irrespective of whether the securities are traded on 
a domestic exchange or the transactions occur in the United States, 
when the conduct within the United States is significant or when 
conduct outside the United States has a foreseeable substantial 
effect within the United States.''). See also 156 Cong. Rec. S5915-
16 (daily ed. July 15, 2010) (statement of Senator Reed).
---------------------------------------------------------------------------

    Specifically, the Commission's antifraud enforcement authority 
under section 17(a) of the Securities Act and the antifraud provisions 
of the Exchange Act--including sections 9(j) and 10(b)--extends to 
``(1) conduct within the United States that constitutes significant 
steps in furtherance of [the antifraud violation], even if the 
securities transaction occurs outside the United States and involves 
only foreign investors,'' and ``(2) conduct occurring outside the 
United States that has a foreseeable substantial effect within the 
United States.'' \751\ Similarly, the Commission's enforcement 
authority under section 206 of the Investment Advisers Act applies 
broadly to reach ``(1) conduct within the United States that 
constitutes significant steps in furtherance of the violation, even if 
the violation is committed by a foreign adviser and involves only 
foreign investors,'' and ``(2) conduct occurring outside the United 
States that has a foreseeable substantial effect within the United 
States.'' \752\
---------------------------------------------------------------------------

    \751\ Section 22 of the Securities Act, 15 U.S.C. 77v(a); 
section 27 of the Exchange Act, 15 U.S.C. 78aa.
    \752\ Section 214 of the Investment Advisers Act, 15 U.S.C. 80b-
14.
---------------------------------------------------------------------------

    Although no commenters challenged the Commission's interpretation 
of its cross-border antifraud authority, we are aware that a federal 
district court recently expressed the view that the statutory language 
may be unclear.\753\ We therefore have determined to adopt a rule that 
clearly sets forth our interpretation of the Commission's cross-border 
antifraud authority.\754\ We believe that our interpretation is not 
only the better reading of the antifraud authorities and the statutory 
text added by section 929P(b), but that our reading is consistent with 
section 929P(b)'s legislative history and purpose.\755\
---------------------------------------------------------------------------

    \753\ See SEC v. A Chicago Convention Center, LLC, 961 F. Supp. 
2d 905 (N.D. Ill. 2013); see also Richard W. Painter et al., ``When 
Courts and Congress Don't Say What They Mean: Initial Reactions to 
Morrison v. National Australia Bank and to the Extraterritorial 
Jurisdiction Provisions of the Dodd-Frank Act,'' 20 Minn. J. of 
Inter. L. 1 (Winter 2011). But see Liu v. Siemens A.G., 2013 WL 
5692504, *3 (S.D.N.Y. Oct. 21, 2013) (``Section 929P(b) permits the 
SEC to bring enforcement actions for certain conduct or transactions 
outside the United States.''); SEC v. Tourre, 2013 WL 2407172, *1 
n.4 (S.D.N.Y. June 4, 2013) (929P(b) ``effectively reversed Morrison 
in the context of SEC enforcement actions''); In re Optimal U.S. 
Litig., 865 F. Supp. 2d 451, 456 n.28 (S.D.N.Y. 2012) (``Congress 
has . . . restor[ed] the conducts and effects test for SEC 
enforcement actions.''); SEC v. Gruss, 2012 WL 3306166, *3 (S.D.N.Y. 
Aug. 13, 2012) (``Section 929P(b) . . . allows the SEC to commence 
civil actions extraterritorially in certain cases.''); SEC v. 
Compania Internacional Financiera S.A., 2011 WL 3251813, *6 n.2 
(S.D.N.Y. July 29, 2011) (``It may be that [929P(b)] was 
specifically designed to reinstate the Second Circuit's `conduct and 
effects' test.''); Cornwell v. Credit Suisse Grp., 729 F. Supp. 2d 
620, 627 n.3 (S.D.N.Y. 2010) (``[I]n legislation recently enacted, 
Congress explicitly granted federal courts extraterritorial 
jurisdiction under the conduct or effect test for proceedings 
brought by the SEC.'').
    \754\ See rule 250.1.
    \755\ The Morrison decision does not preclude the Commission's 
interpretation. When the Supreme Court construed section 10(b) in 
Morrison to determine its territorial scope, it acknowledged that 
the language of section 10(b) neither required nor precluded 
extraterritorial application. Morrison, 130 S.Ct. at 2881-82. It was 
merely silent. The Court also looked to other provisions of the 
Exchange Act for evidence of extraterritorial intent, but found 
none. The Court thus applied a default ``presumption'' against 
extraterritoriality to find that section 10(b) lacked 
extraterritorial effect, while making clear that this presumption 
was not ``a limit upon Congress's power to legislate'' and only 
applied ``unless a contrary intent appears.'' Id. at 2877. Section 
929P(b) now provides that contrary intent---in the words of 
Morrison, it supplies the ``indication of an extraterritorial 
application'' that had been missing. Our interpretation is thus, at 
a minimum, a reasonable reading of the antifraud provisions in light 
of section 929P(b)'s enactment.
---------------------------------------------------------------------------

    Further, we believe that our interpretation of the cross-border 
antifraud enforcement authority best advances the strong interest of 
the United States in applying the antifraud

[[Page 39151]]

provisions to cross-border frauds that implicate U.S. territory, U.S. 
markets, U.S. investors, other U.S. market participants, or other U.S. 
interests.\756\ We believe that our interpretation of the cross-border 
antifraud authority is necessary to ensure honest securities markets 
and high ethical standards in the U.S. securities industry, and thereby 
to promote confidence in our securities markets among both domestic and 
foreign investors. Our interpretation of the cross-border antifraud 
authority will also allow us to better protect U.S. investors from 
securities frauds executed outside of the United States where those 
frauds may involve non-domestic securities transactions but nonetheless 
threaten to produce, foreseeably do produce, or were otherwise intended 
to produce effects upon U.S. markets, U.S. investors, other U.S. market 
participants, or other U.S. interests.
---------------------------------------------------------------------------

    \756\ See generally Restatement (Third) of Foreign Relations Law 
of the United States Sec.  402 (1987) (stating that ``the United 
States has authority to prescribe law with respect to . . . conduct 
that, wholly or in substantial part, takes place within its 
territory; the status of persons, or interests in things, present 
within its territory'' and ``conduct outside its territory that has 
or is intended to have substantial effect within its territory'').
---------------------------------------------------------------------------

B. Economic Analysis

    This rule is designed to ensure the antifraud provisions of the 
securities laws are provided broad cross-border reach. Effective cross-
border enforcement of the antifraud provisions should help detect and 
deter or stop transnational securities frauds the final rule may 
mitigate inefficiencies in allocation of capital. For example, by 
directly diverting financial resources from more productive projects to 
less productive projects, serious transnational securities frauds can 
generate welfare losses.
    Further, in the absence of the cross-border application of the 
antifraud provisions, the perceived risk of fraud may indirectly result 
in less efficient capital allocation if it reduces investors' trust in 
the securities market. \757\ Additionally, given the global nature of 
the securities market, ensuring that antifraud provisions of the 
securities laws have cross-border reach will reduce the likelihood of a 
fragmented market. As a result of reduced ambiguity over the degree to 
which they are protected from fraud, U.S. market participants will have 
fewer incentives to avoid cross-border activity because, as explained 
above, they will have increased confidence in the integrity of the 
market. Through this channel, the final rules support a market that 
provides greater opportunities for U.S. market participants to share 
risks with market participants in other jurisdictions.
---------------------------------------------------------------------------

    \757\ See e.g., Luigi Guiso, Paola Sapienza, and Luigi Zingales. 
``Trusting the stock market,'' 63 J. Fin. Vol. 63, No. 6: 2557 2600 
(2008); see also David Easley and Maureen O'Hara, Microstructure and 
Ambiguity, 65 J. Fin. 1817 (2010).
---------------------------------------------------------------------------

VIII. Impacts on Efficiency, Competition, and Capital Formation

    In developing our approach to the cross-border application of the 
Title VII security-based swap dealer and major participant definitions, 
we have focused on meeting the goals of Title VII, including the 
promotion of the financial stability of the United States, by the 
improvement of accountability and transparency in the U.S. financial 
system and the protection of counterparties to security-based swaps. We 
also have considered the effects of our policy choices on competition, 
efficiency, and capital formation as mandated under section 3(f) of the 
Exchange Act. That section requires us, whenever we engage in 
rulemaking pursuant to the Exchange Act and are required to consider or 
determine whether an action is necessary or appropriate in the public 
interest, to consider, in addition to the protection of investors, 
whether the action will promote efficiency, competition, and capital 
formation.\758\ In addition, section 23(a)(2) of the Exchange Act 
requires us, when making rules under the Exchange Act, to consider the 
impact such rules would have on competition. Section 23(a)(2) also 
prohibits the Commission from adopting any rule that would impose a 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Exchange Act.\759\
---------------------------------------------------------------------------

    \758\ 15 U.S.C. 78c(f).
    \759\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    In this section, we focus particularly on these effects. In 
adopting these final rules, we recognize that the most significant 
impact of the cross-border implementation of the dealer and major 
participant definitions will derive from the role of the definitions in 
determining which market entities are subject to security-based swap 
dealer and major security-based swap participant regulation under Title 
VII and which entities are not. That is, the scope of the final 
definitions will affect the ultimate regulatory costs and benefits that 
will accompany the full implementation of Title VII rules aimed at 
increasing transparency, accountability, and financial stability. 
Furthermore, the final cross-border rules may create incentives for 
market participants, including dealers as well as non-dealers and other 
non-registered entities who transact with dealers, to structure their 
businesses to operate wholly outside of the Title VII framework. This 
incentive may be particularly strong for entities at the boundaries of 
the definitions--for example, entities with relatively limited contact 
with U.S. persons--for whom the benefits of operating outside of Title 
VII may exceed the costs of restructuring or forgoing trading 
opportunities with U.S. counterparties.

A. Competition

    As noted above, a key goal of Title VII of the Dodd-Frank Act is to 
promote the financial stability of the United States by improving 
accountability and transparency in the financial system. To that end, 
Title VII imposes new regulatory requirements on market participants 
who register as security-based swap dealers or major participants. The 
final cross-border implementation of the dealer and major participant 
definitions discussed in this release, including the cross-border 
implementation of the de minimis exception, will likely affect 
competition in the U.S. security-based swap market and potentially 
change the set of available counterparties that would compete for 
business and provide liquidity to U.S. market participants. Though 
these substantive Title VII requirements have not been finalized, 
application of Title VII to registered dealers and major participants 
may directly affect the competitive landscape of the security-based 
swap market.
    As detailed above, the security-based swap market is a global, 
interconnected market. Within this global market, foreign and domestic 
dealers compete for business from counterparties, while non-dealers 
(including major participants) that participate in the market use 
security-based swaps for purposes that can include speculation and 
hedging. Because the market for security-based swaps is a global market 
and some participants may not engage in relevant security-based swap 
activity within the United States, the rules we adopt pursuant to Title 
VII will not reach all participants or all transactions in the global 
market. We are aware that application of rules to a subset of 
participants in the worldwide security-based swap market would change 
the costs and benefits of market participation for one group (those 
that engage in relevant security-based swap activity within the United 
States) relative to another (those that do not) and therefore create 
competitive effects.
    More specifically, in addition to requiring U.S. dealers to 
register, our

[[Page 39152]]

final rules implementing the cross-border approach to the security-
based swap dealer definition would generally apply dealer registration 
and other Title VII requirements to non-U.S. entities that conduct 
dealing activity (as defined in the Intermediary Definitions Adopting 
Release) in excess of the de minimis threshold, but where calculation 
of the threshold depends on various features of the person's 
transactions (e.g., whether the person's counterparty is a U.S. or non-
U.S. person, whether the transaction is guaranteed by a U.S. person, 
whether the counterparty is a registered or non-registered foreign 
branch of a U.S. person, and whether the person is a conduit affiliate 
of a U.S. person). Similarly, our final rules implementing cross-border 
application of the major security-based swap participant definition 
would apply major participant registration and other Title VII 
requirements to entities that have exposures to U.S. persons that 
exceed the major participant thresholds (as defined in the Intermediary 
Definitions Adopting Release). Given the approach we are adopting with 
respect to application of the dealer de minimis and major participant 
threshold calculation requirements, U.S. persons should have no 
incentive to favor a non-U.S. person counterparty over a U.S.-person 
counterparty.
    However, we recognize that the final rule treats U.S. persons and 
different types of non-U.S. persons differently. Unless their dealing 
activity is guaranteed by a U.S. person, non-U.S. persons may exclude 
from their de minimis calculations dealing activity with other non-U.S. 
persons. Similarly, unless their security-based swap activity is 
guaranteed by a U.S. person, non-U.S. persons may exclude from their 
major participant threshold calculations their positions with non-U.S. 
persons. U.S. persons, non-U.S. persons whose security-based swap 
transactions are guaranteed by a U.S. person, and conduit affiliates 
cannot exclude such transactions or positions from their own 
calculations. This differential treatment makes it more likely that 
non-U.S. persons will not be subject to the regulatory requirements 
associated with dealer and major participant registration. Furthermore, 
because transactions with U.S. persons in excess of the de minimis and 
major participant thresholds trigger registration requirements, non-
U.S. dealers and other market participants may be reluctant to trade 
with U.S. counterparties or clear security-based swap transactions 
through U.S. person clearing agencies because of the potential 
application of Title VII regulation. For example, our final rules may 
produce competitive frictions insofar as market participants prefer to 
clear transactions using non-U.S. person clearing agencies who may have 
U.S. person members instead of U.S. person clearing agencies, because 
only positions held against the latter would count against their major 
participant thresholds.\760\ Indeed, some entities may determine that 
the compliance costs arising from the requirements of Title VII warrant 
exiting the security-based swap market in the United States entirely. 
Non-U.S. persons may find this option more attractive than U.S. persons 
because they may find it easier to structure their foreign business so 
as to prevent it from falling within the scope of Title VII. However, 
U.S. entities may also have an incentive to establish separately-
capitalized foreign subsidiaries to conduct their security-based swap 
operations, since such subsidiaries would qualify as non-U.S. 
persons.\761\ In this case, the cross-border application of Title VII 
rules may affect participants depending on their size, as larger 
participants could be better-equipped to set up offshore vehicles 
enabling them to transact as non-U.S. persons.
---------------------------------------------------------------------------

    \760\ See section 0.
    \761\ The rules we are adopting regarding conduit affiliates 
should mitigate this risk to some degree, as the foreign affiliate's 
non-U.S. person counterparties would not generally be able to engage 
in security-based swap dealing activity on behalf of its U.S.-person 
affiliate without itself being required to include those 
transactions in its own de minimis calculations.
---------------------------------------------------------------------------

    To the extent that entities engaged in dealing activity exit the 
U.S. security-based swap market, the end result could be a U.S. market 
where fewer intermediaries compete less intensively for business. These 
exits could result in higher spreads and reduced liquidity, and could 
affect the ability and willingness of non-dealers within the United 
States to engage in security-based swaps. The concentrated nature of 
dealing activity suggests that there are high barriers to entry in 
connection with security-based swap dealing activity, which could 
preclude the ability of new dealers to enter the security-based swap 
market and compete away spreads.
    Notwithstanding the potential that our final rule may reduce 
competition, the Commission believes it appropriate to require U.S. 
persons to count all dealing transactions towards the de minimis 
threshold and all positions toward the major security-based swap 
participant thresholds, given the potential for these transactions to 
create risk to U.S. persons and in the U.S. financial system. We also 
note that it is uncertain that such requirements will reduce 
competition. In fact, the final rule may enhance competition among 
dealers, as the Title VII regulatory requirements and the ability to 
meet the standards set by Title VII may allow registered dealers to 
credibly signal high quality, better risk management, and better 
counterparty protection relative to foreign unregistered dealers that 
compete for the same order flow. In this scenario, non-dealers in the 
U.S. market may be willing to pay higher prices for higher-quality 
services in regulated markets, and registration requirements may 
separate high-quality intermediaries that are willing and able to 
register from low-quality firms that are not.\762\ Furthermore, while 
dealers and speculative traders may prefer to transact in opaque 
markets, transparency requirements that apply to U.S. dealers and 
transactions that occur within the scope of Title VII may be attractive 
to hedgers and other market participants who do not benefit from 
opacity. Therefore, Title VII requirements may promote liquidity in the 
U.S.; liquid markets should attract additional participants, thereby 
enhancing risk sharing and making markets more competitive. These 
regulatory benefits could mitigate the competitive burdens imposed by 
the proposed and anticipated final cross-border rules and substantive 
Title VII requirements applicable to registered security-based swap 
dealers by, for example, reducing incentives for firms to exit the 
market.
---------------------------------------------------------------------------

    \762\ Cf. Carl Shapiro, ``Investment, Moral Hazard, and 
Occupational Licensing,'' The Review of Economic Studies, Vol. 53, 
No. 5 (1986) (using a theoretical model to show ``that licensing and 
certification tend to benefit customers who value quality highly at 
the expense of those who do not''). Oren Fuerst, ``A Theoretical 
Analysis of the Investor Protection Regulations Argument for Global 
Listing of Stocks,'' Working Paper (1998) (using a theoretical model 
of the listing decision to show how managers of high quality firms 
signal their quality more effectively in a strict regulatory 
regime). Craig Doidge, G. Andrew Karolyi, and Rene M. Stulz, ``Why 
are Foreign Firms Listed in the U.S. Worth More?'' Journal of 
Financial Economics, Vol. 71, Issue 2 (2004) (hypothesizing that 
firms cross-listed in the United States are better able to take 
advantage of growth opportunities, and finding that ``expected sales 
growth is valued more highly for firms listing in the U.S. and that 
this effect is greater for firms from countries with poorer investor 
rights''). While economic theory supports the assertion that 
registration can separate high-quality dealers from low-quality 
dealers, with corresponding differences in pricing, we received no 
comments either agreeing or disagreeing with the assertion that some 
market participants may be willing to pay higher prices to trade 
with a high-quality intermediary.
---------------------------------------------------------------------------

    Similarly, the cross-border application of the de minimis exception

[[Page 39153]]

could reduce the number of entities likely to exit the U.S. market 
entirely because it would enable an established foreign entity to 
transact a de minimis amount of security-based swap dealing activity in 
the U.S. market before it determines whether to expand its U.S. 
business and become a registered security-based swap dealer.\763\ 
However, since the ability of smaller entities to access the U.S. 
security-based swap market without registration would be limited to 
conducting dealing activity below the de minimis threshold, these 
entities would have an incentive to curtail their security-based swap 
dealing activity with U.S. persons as they approach the de minimis 
threshold to avoid dealer registration requirements.
---------------------------------------------------------------------------

    \763\ See IIF Letter (noting that, ``. . . the rule proposal if 
adopted would make it much easier for foreign market participants to 
offer services in the U.S., providing greater choice and 
competition, and making it easier for instance for corporates to 
hedge their risks).''
---------------------------------------------------------------------------

    Finally, incentives to restructure ultimately depend on future 
regulatory developments, both with respect to final Title VII rules and 
foreign regulatory frameworks; the differences in regulatory 
requirements across jurisdictions; and strategic interactions with non-
dealer participants. For example, although pre-and post-trade 
transparency requirements provide a number of benefits both to 
financial markets and the real economy, dealers benefit from operating 
in opaque markets. To the extent that foreign jurisdictions require 
only regulatory reporting, without public dissemination requirements, 
dealers may wish to operate in jurisdictions where they can continue to 
benefit from opaque markets.
    Other market participants, however, may prefer transparency, and 
the availability of transparent trading venues that result from Title 
VII pre- and post-trade transparency requirements could shift market 
power away from dealers. If non-dealer market participants are able to 
demand transparent trade execution, the incentives to restructure may 
be tempered, particularly if transparent venues attract liquidity away 
from opaque markets. Ultimately, the effects of transparency 
requirements on dealers' incentives to restructure depend on 
differences across jurisdictions, as well as whether non-dealer 
participants prefer transparency. These preferences may, in turn, 
depend on motives for trading among non-dealers. Hedgers and 
participants that need liquidity may prefer transparent venues while 
participants who believe they have private information about asset 
values may prefer opaque markets that allow them to trade more 
profitably on their information.
    The potential restructurings and exits described above may impact 
competition in the U.S. market in different ways. On one hand, the 
ability to restructure one's business rather than exit the U.S. market 
entirely to avoid application of Title VII to a person's non-U.S. 
operations may reduce the number of entities that exit the market, thus 
mitigating the negative effects on competition described above. On the 
other hand, U.S. non-dealers may find that the only foreign security-
based swap dealers that are willing to deal with them are those whose 
security-based swap business is sufficiently large to afford the costs 
of restructuring as well as registration and the ensuing compliance 
costs associated with applicable Title VII requirements. To the extent 
that smaller dealers continue to have an incentive to exit the market, 
the overall level of competition in the market may decline.
    Moreover, regardless of the response of dealers to our approach, we 
cannot preclude the possibility that large non-dealer financial 
entities and other non-dealer market participants in the United States, 
such as investment funds, who have the resources to restructure their 
business also may pursue restructuring and move part of their business 
offshore in order to transact with dealers outside the reach of Title 
VII, either because liquidity has moved offshore or because these 
participants want to avoid Title VII requirements (such as transparency 
requirements) that may reveal information about trading strategies. 
This may reduce liquidity within the U.S. market and provide additional 
incentives for U.S. persons and non-U.S. persons to shift a higher 
proportion of their security-based swap business offshore, further 
reducing the level of competition within the United States. In this 
scenario, the competitive frictions caused by the application, in the 
cross-border context, of a de minimis threshold for dealing activity 
may affect the ability of small market participants of security-based 
swaps to access the security-based swap market more than large ones, as 
smaller participants are less likely to have the resources that would 
enable or justify a restructuring of their business.
    In addition to the global nature of the security-based swap market 
and the implications for the reach of Title VII dealer and major 
participant registration requirements, we also noted above the current 
opacity of the over-the-counter derivatives market and the 
informational advantage that dealers currently have over non-dealers. 
By having greater private order flow information, dealers are in a 
position to make more-informed assessments of market values and can use 
that information to extract rents from less-informed counterparties. 
While this issue will be the focus of future Commission rulemaking 
covering pre- and post-trade transparency, we note that the final rule 
to exclude cleared, anonymous transactions from the de minimis 
threshold for non-U.S. persons has implications for competition in the 
security-based swap market. Because cleared, anonymous transactions 
will not trigger registration requirements, the exclusion strengthens 
incentives for trading in transparent venues, reducing market power and 
the competitive advantage currently enjoyed by dealers over non-dealer 
market participants. Furthermore, while Title VII rules governing 
clearing, trade execution, and trade reporting have not been finalized, 
providing stronger incentives to trade on transparent venues and 
through CCPs increases the likelihood that the benefits of Title VII, 
including increased transparency and reduced potential for risk 
spillovers, will be realized.\764\
---------------------------------------------------------------------------

    \764\ The exclusion for cleared, anonymous transactions does not 
require participants to use a registered clearing agency. Therefore, 
this benefit may be limited if final Title VII rules for registered 
clearing agencies create incentives for market participants to trade 
through CCPs that are not registered and regulated under Title VII.
---------------------------------------------------------------------------

    The overall effects of the final approach described in this release 
on competition among dealing entities in the U.S. security-based swap 
market will depend on the way market participants ultimately respond to 
different elements of Title VII. Application of the dealer and major 
participant registration requirements may create incentives for dealers 
and market participants to favor non-U.S. counterparties; incentives to 
restructure due to inconsistent regulatory requirements may increase 
concentration among security-based swap dealers providing services to 
U.S. non-dealers. However, registration and compliance with Title VII 
may signal high quality and mitigate the incentive to restructure and 
exit U.S. markets for intermediaries with the ability to meet the 
standards set by Title VII. Furthermore, if hedgers and other market 
participants who do not benefit from opacity demand transparency and 
counterparty protections that come from trading with a registered 
dealer, dealers may prefer to register if serving this market is 
profitable. Finally, while fewer dealing entities could lead to 
decreased competition and wider

[[Page 39154]]

spreads in the security-based swap market, exclusion of cleared, 
anonymous trades from the de minimis threshold strengthen incentives to 
trade in transparent venues, reducing the ability of dealing entities 
to post wider spreads and reducing the competitive advantage over 
access to information enjoyed by dealers.

B. Efficiency

    As noted above, in adopting the rules and guidance discussed in 
this release, we are required to consider whether these actions would 
promote efficiency. In significant part, the effect of these rules on 
efficiency is linked to the effect of these rules on competition. 
Definitional rules that promote, or do not unduly restrict, competition 
can be accompanied by regulatory benefits that minimize the risk of 
liquidity crises, aggregate capital shortfalls, and other 
manifestations of contagion. Furthermore, by reducing the costs that 
individual market participants impose on others through their trades--
that is, by imposing registration requirements and substantive 
regulations on dealers and major participants who, by virtue of the 
volume of their transactions, their number of counterparties, and their 
aggregate positions and exposures, are most likely to contribute to 
risk spillovers--the rules promote efficiency within the market. 
Generally, rules and interpretations that promote competitive capital 
markets can be expected to promote the efficient allocation of risk, 
capital, and other resources by facilitating price discovery and 
reducing costs associated with dislocations in the market for security-
based swaps.\765\
---------------------------------------------------------------------------

    \765\ Definitional rules do not promote efficiency by 
themselves; rather, the effect is through the number of entities 
required to register as dealers and major participants, and the 
corresponding effect on the programmatic costs and benefits 
associated with registration requirements.
---------------------------------------------------------------------------

    As discussed several times throughout this release, the global 
nature of the security-based swap market suggests that the regulatory 
framework adopted under Title VII may not reach all participants or all 
transactions. Additionally, differing regulatory timelines and 
differences in regulatory scope may moderate the benefits flowing from 
Title VII. In particular, if other regulatory regimes offer more 
opacity in transactions, those who are most harmed by transparency 
(including dealers who currently benefit from privately observing order 
flow) have incentives to restructure their business to operate abroad 
or otherwise take advantage of regulatory gaps. Restructuring itself, 
while potentially optimal for an individual participant, represents a 
form of inefficiency for the overall market in that firms expend 
resources simply to circumvent regulation and not for any productive 
purpose.
    More importantly, altering business models to take advantage of 
looser regulatory regimes undermines other efficiency benefits to Title 
VII. For example, U.S. dealers may have an incentive to restructure 
their businesses by setting up separately capitalized entities in non-
U.S. jurisdictions, through which they would continue their dealing 
operations in order to take advantage of the rules applicable to non-
U.S. persons. As discussed above, if some market participants choose to 
operate wholly outside of the Title VII regulatory framework, risk and 
liquidity may concentrate in less regulated, opaque corners of the 
market, undermining the benefits of Title VII. Moreover, insofar as the 
types of restructuring contemplated above purely constitute attempts at 
arbitraging regulations, including regulations applied to registered 
dealers, such as capital and reporting regulations, they represent a 
use of resources that could potentially be put to more productive uses. 
Ultimately, the incentive to restructure, and the corresponding loss of 
benefits, depends on the extent to which other jurisdictions implement 
comprehensive OTC derivatives regulations. If foreign jurisdictions 
subject security-based swap transactions to regulatory oversight 
consistent with Title VII, the ability to arbitrage regulations will be 
limited.\766\
---------------------------------------------------------------------------

    \766\ See Section 0, supra (discussing global regulatory 
efforts).
---------------------------------------------------------------------------

    Nevertheless, two features of our rules adopted today may mitigate 
the incentive for market participants to undermine the benefits of 
Title VII through inefficient restructuring or evasion. First, the 
requirement that conduit affiliates count all dealing activity towards 
the de minimis threshold closes one potential path for evasion. We have 
tailored the application of these requirements in connection with 
affiliates of registered security-based swap dealers and major 
security-based swap participants, as we do not believe that 
transactions involving these types of registered entities and their 
foreign affiliates raise the types of evasion concerns that the conduit 
affiliate concept is designed to address.\767\ Second, the exclusion of 
cleared, anonymous transactions from the de minimis threshold for non-
U.S. persons strengthens incentives for trading in transparent venues, 
reducing the incentive to trade in opaque corners of the market in 
order to avoid the reach of Title VII. Strengthening incentives for 
non-U.S. persons to trade in transparent venues reduces the likelihood 
that liquidity will fragment to opaque corners of the market and 
increases the likelihood that risks that non-U.S. persons present to 
the U.S. financial system will be covered by the Title VII regulatory 
framework. Furthermore, shifting trades to transparent venues produces 
benefits associated with pre- and post-trade price transparency, 
including more efficient valuations of financial assets.\768\
---------------------------------------------------------------------------

    \767\ See note 320, supra.
    \768\ As discussed above, this benefit may be limited if final 
Title VII rules for registered clearing agencies create incentives 
for market participants to trade through CCPs that are not 
registered and regulated under Title VII.
---------------------------------------------------------------------------

    Finally, we received several comments from outside commenters 
urging us to harmonize our final rules with interpretations set forth 
in the CFTC's guidance.\769\ While our final rules track the CFTC's 
guidance in many respects--for example, in the treatment of conduit 
affiliates, the treatment of transactions with foreign branches, and 
the exclusion for cleared, anonymous transactions from non-U.S. 
persons' de minimis calculations--we are not adopting rules identical 
to the policies and interpretations in the guidance. For example, our 
treatment of investment funds with respect to the U.S. person 
definition differs from the CFTC's, which, in addition to looking to 
the location of incorporation and principal place of business, 
considers majority-ownership. While we acknowledge the benefits of 
harmonization, we believe our rules meet the goals of Title VII while 
appropriately minimizing the costs to security-based swap market 
participants. More specifically, our rules are designed to capture 
transactions and entities that pose risk to U.S. persons and 
potentially to the U.S. financial system, while excluding those 
transactions and entities that do not warrant regulation under Title 
VII. In the case of investment funds, we have decided not to look to 
majority-ownership for determining U.S.-person status, notwithstanding 
that the CFTC Cross-Border Guidance articulates such an approach. Our 
belief is that, by adopting an approach that generally focuses on the 
location of economic decisions made on behalf of a fund, we are more 
accurately measuring whether a fund poses risks to U.S. persons and to 
the U.S. financial system of the type that Title VII was intended to

[[Page 39155]]

address.\770\ Nevertheless, we acknowledge that different regulations 
for swaps and security-based swaps may create inefficiencies for market 
participants due to conflicting or overlapping requirements, 
particularly for those participants who deal in both swaps and 
security-based swaps.
---------------------------------------------------------------------------

    \769\ See note 193, supra.
    \770\ For instance, as discussed above, LTCM demonstrated that 
an investment vehicle could have a negative impact on U.S. financial 
institutions and on the stability of the U.S. financial system more 
generally when the vehicle is directed, controlled, or coordinated 
from within the United States. See note 271, supra.
---------------------------------------------------------------------------

C. Capital Formation

    We believe that many aspects of the final cross-border approach to 
the dealer and major participant definitions are likely to promote 
capital formation, by focusing dealer and major participant regulation 
on activity and entities that are most likely to serve as conduits of 
risk to U.S. persons and potentially to the U.S. financial system. We 
also believe that applying the full range of Title VII requirements to 
this group of entities will increase the likelihood that the benefits 
of Title VII, including increased transparency, accountability, and 
financial stability, will be realized. To the extent that these 
requirements reduce asymmetric information about market valuations, we 
expect that a security-based swap market with enhanced transparency and 
enhanced regulatory oversight may facilitate entry by a wide range of 
market participants seeking to engage in a broad range of hedging and 
trading activities.
    Additionally, strengthening incentives for non-U.S. persons to 
trade in transparent venues encourages market participants to express 
their true valuations for security-based swaps; information revealed 
through transparent trades allows market participants to derive more-
informed assessments with respect to asset valuations, leading to more 
efficient capital allocation. This should be true for the underlying 
assets as well. That is, information learned from security-based swap 
trading provides signals not only about security-based swap valuation, 
but also about the value of the reference assets underlying the 
swap.\771\ Similarly, we expect transparency to benefit the real 
economy as well. Transparent prices provide better signals about the 
quality of a business investment, promoting capital formation in the 
real economy by helping managers to make more-informed decisions and 
making it easier for firms to obtain new financing for new business 
opportunities.\772\
---------------------------------------------------------------------------

    \771\ See Sugato Chakravarty, Huseyin Gulen, and Stewart Mayhew, 
``Informed Trading in Stock and Option Markets,'' Journal of 
Finance, Vol. 59, No. 3 (2004) (estimating that the proportion of 
information about underlying stocks revealed first in option markets 
ranges from 10 to 20 percent).
    \772\ See Philip Bond, Alex Edmans, and Itay Goldstein, ``The 
Real Effects of Financial Markets,'' Annual Review of Financial 
Markets, Vol. 4 (Oct. 2012) (reviewing the theoretical literature on 
the feedback between financial market prices and the real economy).
---------------------------------------------------------------------------

    However, the Commission recognizes that, to the extent that the 
cross-border implementation of the dealer and major participant 
definitions encourages inefficient restructuring or results in market 
fragmentation, the final rules may impair capital formation and result 
in a redistribution of capital across jurisdictional boundaries. We 
note that, unlike in the proposed rules, we are requiring non-U.S. 
persons with U.S. guarantees to include all transactions that benefit 
from a U.S. guarantee in their de minimis calculations. Similarly, we 
are requiring conduit affiliates to include all transactions in their 
de minimis calculations, whether with a U.S. person or not. Inclusion 
of these transactions will limit the risk these participants pose to 
U.S. persons and to the U.S. financial system. More generally, the 
definition of ``U.S. person'' mitigates the risk of contagion affecting 
U.S. markets as a result of cross-border swap activity. To the extent 
that future substantive regulation under Title VII is conditioned on 
entities' registration status, this definition may also improve 
transparency and provide increased customer protection for U.S. persons 
who participate in the security-based swap market. Nevertheless, 
expanding the scope of transactions that must be included in these 
calculations may also increase the scope of potential market 
fragmentation, to the extent that it raises the costs that market 
participants will incur if they engage in security-based swap activity 
through guaranteed non-U.S. persons or conduit affiliates.

IX. Paperwork Reduction Act

A. Introduction

    The Paperwork Reduction Act of 1995 (``PRA'') \773\ imposes certain 
requirements on Federal agencies in connection with their conducting or 
sponsoring any ``collection of information.'' \774\ An agency may not 
conduct or sponsor, and a person is not required to respond to, a 
collection of information unless it displays a currently valid control 
number. In addition, 44 U.S.C. 3507(a)(1)(D) provides that before 
adopting (or revising) a collection of information requirement, an 
agency must, among other things, publish a notice in the Federal 
Register stating that the agency has submitted the proposed collection 
of information to the Office of Management and Budget (``OMB'') and 
setting forth certain required information, including: (1) A title for 
the collection of information; (2) a summary of the collection of 
information; (3) a brief description of the need for the information 
and the proposed use of the information; (4) a description of the 
likely respondents and proposed frequency of response to the collection 
of information; (5) an estimate of the paperwork burden that shall 
result from the collection of information; and (6) notice that comments 
may be submitted to the agency and director of OMB.\775\
---------------------------------------------------------------------------

    \773\ 44 U.S.C. 3501 et seq.
    \774\ 44 U.S.C. 3502(3).
    \775\ 44 U.S.C. 3507(a)(1)(D) (internal formatting omitted); see 
also 5 CFR 1320.5(a)(1)(iv).
---------------------------------------------------------------------------

    In the Cross-Border Proposing Release, we identified a number of 
proposed rules that contained ``collection of information 
requirements'' within the meaning of the PRA.\776\ The majority of 
those proposed rules and forms are outside of the scope of the dealer 
and major participant definitions at issue in this release.\777\ In two 
areas, however, Exchange Act rule 3a71-3 which we are adopting today 
contains collections of information requirements. First, the rule's 
definition of ``transaction conducted through a foreign branch,'' which 
we are adopting largely as proposed, contains a representation 
provision that constitutes a collection of information. Moreover, the 
rule's final definition of ``U.S. person'' incorporates, as an addition 
to the proposal, a representation provision that constitutes a 
collection of information.\778\ Commenters did not

[[Page 39156]]

address Paperwork Reduction Act issues in connection with the proposal.
---------------------------------------------------------------------------

    \776\ See Cross-Border Proposing Release, 77 FR 31103.
    \777\ In particular, the present release does not address the 
following proposed rules and forms that implicated collections of 
information under the Paperwork Reduction Act: Proposed Rule 3Ch-2; 
reproposed Forms SBSE, SBSE-A and SBSE-BD; proposed Rule 18a-4, and 
reproposed Rules 242.900 through 242.911 of Regulation SBSR. We 
expect to address those Paperwork Reduction Act issues in connection 
with our consideration of those proposed rules and forms.
    In addition, the representation provision of the proposed 
definition of ``transaction conducted within the United States'' 
contained a collection of information. These final rules do not 
encompass that collection of information requirement, however, 
because we are not adopting the ``transaction conducted within the 
United States'' element of the proposed rule in this release. See 
section I.A, supra.
    \778\ We also note that Exchange Act rule 0-13, which we are 
adopting today, determines the procedures for market participants 
and foreign regulatory authorities to submit substituted compliance 
requests. The rule, however, does not provide any substituted 
compliance rights, and its applicability will be determined solely 
by the substituted compliance provisions of the substantive 
rulemakings. Accordingly, collection of information arising from 
substituted compliance requests, including associated control 
numbers, will be addressed in connection with any applicable 
substantive rulemakings that provide for substituted compliance.
---------------------------------------------------------------------------

    The Commission previously submitted proposed rule 3a71-3, as well 
as certain other rules proposed as part of the Cross-Border Proposing 
Release, to OMB for review in accordance with 44 U.S.C. 3507 and 5 CFR 
1320.11. The title of the collection related to proposed rule 3a71-3 is 
``Reliance on Counterparty Representations Regarding Activity Within 
the United States.'' OMB has not yet assigned Control Numbers in 
connection with rule 3a71-3 or the other rules submitted in connection 
with the proposal.

B. Reliance on Counterparty Representations Regarding Transactions 
Conducted Through a Foreign Branch

1. Summary of Collection of Information
    When determining whether a security-based swap transaction 
constitutes a ``transaction conducted through a foreign branch,'' a 
person may rely on its counterparty's representation that the 
transaction ``was arranged, negotiated, and executed on behalf of the 
foreign branch solely by persons located outside the United States, 
unless such person knows or has reason to know that the representation 
is not accurate.'' \779\
---------------------------------------------------------------------------

    \779\ See Exchange Act rule 3a71-3(a)(3)(ii).
---------------------------------------------------------------------------

2. Proposed Use of Information
    Under the final rules, a non-U.S. person need not count, against 
the applicable thresholds of the dealer exception and the major 
security-based swap participant definition, dealing transactions with 
foreign branches of U.S. banks that are registered as security-based 
swap dealers. For these purposes, the foreign branch must be the 
counterparty to the security-based swap transaction, and the 
transaction must be arranged, negotiated, and executed on behalf of the 
foreign branch solely by persons located outside the United 
States.\780\
---------------------------------------------------------------------------

    \780\ See Exchange Act rule 3a71-3(a)(3)(i).
---------------------------------------------------------------------------

    As discussed in the Cross-Border Proposing Release, the Commission 
acknowledges that verifying whether a security-based swap transaction 
falls within the definition of ``transaction conducted through a 
foreign branch'' could require significant due diligence. The 
definition's representation provision would mitigate the operational 
difficulties and costs that otherwise could arise in connection with 
investigating the activities of a counterparty to ensure compliance 
with the corresponding rules.\781\
---------------------------------------------------------------------------

    \781\ See Cross-Border Proposing Release, 78 FR 31107.
---------------------------------------------------------------------------

    These representations would be provided voluntarily by the 
counterparties to certain security-based swap transactions to other 
counterparties; therefore, the Commission would not typically receive 
confidential information as a result of this collection of information. 
However, to the extent that the Commission receives confidential 
information described in this representation provision through our 
examination and oversight program, an investigation, or some other 
means, such information would be kept confidential, subject to the 
provisions of applicable law.\782\
---------------------------------------------------------------------------

    \782\ See, e.g., 5 U.S.C. 552 (Exemption 4 of the Freedom of 
Information Act provides an exemption for ``trade secrets and 
commercial or financial information obtained from a person and 
privileged or confidential.'' 5 U.S.C. 552(b)(4). Exemption 8 of the 
Freedom of Information Act provides an exemption for matters that 
are ``contained in or related to examination, operating, or 
condition reports prepare by, or on behalf of, or for the use of an 
agency responsible for the regulation or supervision of financial 
institutions.'' 5 U.S.C. 552(b)(8)).
---------------------------------------------------------------------------

3. Respondents
    Based on our understanding of the OTC derivatives markets, 
including the size of the market, the number of counterparties that are 
active in the market, and how market participants currently structure 
security-based swap transactions, the Commission estimates that up to 
15 entities that are registered as security-based swap dealers may 
include a representation that a security-based swap is a ``transaction 
conducted through a foreign branch'' in their trading relationship 
documentation (e.g., the schedule to a master agreement).\783\
---------------------------------------------------------------------------

    \783\ We have estimated that up to 50 entities may register with 
the Commission as security-based swap dealers, based on an analysis 
of 2012 data indicating that 27 entities had $3 billion or more in 
notional transactions that would be counted against the thresholds 
under the final rules, and further accounting for new entrants into 
the market. See note 444, supra, and accompanying text. Because six 
of those 27 entities are domiciled in the United States, we 
conservatively estimate that it is possible that new entrants may 
lead up to 15 registered dealers to be U.S. banks. Although not all 
U.S. banks engaged in security-based swap dealing activity currently 
operate foreign branches, we also conservatively estimate that all 
such dealers that are U.S. banks would do so.
    In the Cross-Border Proposing Release, we preliminarily 
estimated that 50 entities may include a representation that a 
transaction constitutes a ``transaction conducted through a foreign 
branch.'' See Cross-Border Proposing Release, 78 FR 31108. This 
revised estimate reflects the fact that under the final rules such a 
representation would be relevant only if provided by a person that 
is registered with the Commission as a security-based swap dealer. 
In practice, however, based on our understanding of changes in the 
way major U.S. dealers engage with non-U.S. counterparties in the 
single-name CDS market following the issuance of the CFTC Cross-
Border Guidance, we believe that few, if any, U.S. persons currently 
may participate in the single-name CDS market through their foreign 
branches. Also, as noted above, moreover, we recognize that other 
regulatory provisions may limit the ability of U.S. banks to conduct 
security-based swap activity. See note 366, supra.
---------------------------------------------------------------------------

4. Total Initial and Annual Reporting and Recordkeeping Burdens
    The estimates in this section reflect the Commission's experience 
with burden estimates for similar requirements and discussions by our 
staff with market participants. The Commission believes that, in most 
cases, the representations associated with the definition of 
``transaction conducted through a foreign branch'' would be made 
through amendments to the parties' existing trading documentation 
(e.g., the schedule to a master agreement).\784\ Because these 
representations relate to new regulatory requirements, the Commission 
anticipates that counterparties may elect to develop and incorporate 
these representations in trading documentation soon after the effective 
date of the Commission's security-based swap regulations, rather than 
incorporating specific language on a transactional basis. The 
Commission believes that parties would be able to adopt, where 
appropriate, standardized language across all of their security-based 
swap trading relationships. This language may be developed by 
individual firms or through a combination of trade associations and 
industry working groups.
---------------------------------------------------------------------------

    \784\ The Commission believes that because trading relationship 
documentation is established between two counterparties, the 
question of whether one of those counterparties, that is registered 
with the Commission as a security-based swap dealer, is able to 
represent that it is entering into a ``transaction conducted through 
a foreign branch'' would not change on a transaction-by-transaction 
basis and, therefore, such representations would generally be made 
in the schedule to a master agreement, rather than in individual 
confirmations.
---------------------------------------------------------------------------

    The Commission estimates the maximum total paperwork burden 
associated with developing new representations would be, for each U.S. 
bank registered as a security-based swap dealer that may make such 
representations, no more than five hours, and up to $2,000 for the 
services of outside professionals, for an estimate of approximately 75 
hours and $30,000 across all security-based swap counterparties that 
may make such representations. This estimate assumes

[[Page 39157]]

little or no reliance on standardized disclosure language.
    The Commission expects that the majority of the burden associated 
with the new disclosure requirements will be experienced during the 
first year as language is developed and trading documentation is 
amended. After the new representations are developed and incorporated 
into trading documentation, the Commission believes that the annual 
paperwork burden associated with this requirement would be no more than 
approximately 10 hours per counterparty for verifying representations 
with existing counterparties and onboarding new counterparties, for a 
maximum of approximately 150 hours across all applicable security-based 
swap counterparties.\785\
---------------------------------------------------------------------------

    \785\ The Commission staff estimates that this burden would 
consist of 10 hours of in-house counsel time for each security-based 
swap market participant that may make such representations.
---------------------------------------------------------------------------

C. Reliance on Counterparty Representations Regarding Non-U.S. Person 
Status

1. Summary of Collection of Information
    When determining whether its counterparty is a U.S. person for 
purposes of the application of the dealer and major participant 
analyses, a person may rely on its counterparty's representation that 
the counterparty does not meet the applicable criteria to be a U.S. 
person, unless the person knows or has reason to know that the 
representation is not accurate.\786\
---------------------------------------------------------------------------

    \786\ See Exchange Act rule 3a71-3(a)(4)(iv).
---------------------------------------------------------------------------

2. Proposed Use of Information
    Under the final rules, a non-U.S. person's dealer and major 
participant analysis require it to determine whether its security-based 
swap counterparties are U.S. persons because certain security-based 
swaps in which the counterparty is not a U.S. person will not have to 
be counted against the applicable thresholds.
    The Commission recognizes that the ``U.S. person'' definition 
encompasses a number of distinct components, and that in some 
circumstances verifying whether a security-based swap counterparty is a 
``U.S. person'' could require significant due diligence. As a result, 
the final rules have added a representation provision to that 
definition, to help mitigate the operational difficulties and costs 
that could arise in connection with investigating the status of a 
counterparty.
    As with the representations associated with the ``transaction 
conducted through a foreign branch'' definition, these representations 
would be provided voluntarily by the counterparties to certain 
security-based swap transactions to other counterparties. The 
Commission would not typically receive confidential information as a 
result of this collection of information. However, to the extent that 
the Commission receives confidential information described in this 
representation provision through our examination and oversight program, 
an investigation, or some other means, such information would be kept 
confidential, subject to the provisions of applicable law.\787\
---------------------------------------------------------------------------

    \787\ See note 782, supra.
---------------------------------------------------------------------------

3. Respondents
    Based on our understanding of the OTC derivatives markets, 
including the domiciles of counterparties that are active in the 
market, the Commission estimates that up to 2400 entities may provide 
representations that they do not meet the criteria necessary to be U.S. 
persons.\788\
---------------------------------------------------------------------------

    \788\ Data regarding activity from 2012 indicates that a total 
of 4452 accounts had positions in single-name CDS, with those 
activities conducted by a total 1030 transacting agents such as 
investment advisers. Of those 4452 accounts, 1199 are domiciled 
outside of the United States. Accounting for potential growth in the 
number of market participants domiciled outside of the United 
States--particularly in light of information suggesting there has 
been some shifting of derivatives activities to non-U.S. entities--
leads to our estimate that such representations may be made on 
behalf of 2400 accounts. To the extent that one transacting agent 
such as an investment adviser conducts derivatives activities on 
behalf of multiple accounts, it is possible that a single 
representation by a transacting agent would address the U.S.-person 
status of multiple accounts.
---------------------------------------------------------------------------

4. Total Initial and Annual Reporting and Recordkeeping Burdens
    The estimates in this section reflect the Commission's experience 
with burden estimates for similar requirements and discussions by our 
staff with market participants. Consistent with the discussion above 
related to the representation provision of the ``transaction conducted 
through a foreign branch'' definition, the Commission believes that in 
most cases the representations associated with the ``U.S. person'' 
definition would be made through amendments to the parties' existing 
trading documentation (e.g., the schedule to a master agreement).\789\ 
Here too, because these representations relate to new regulatory 
requirements, the Commission anticipates that counterparties may elect 
to develop and incorporate these representations in trading 
documentation soon after the effective date of the Commission's 
security-based swap regulations, rather than incorporating specific 
language on a transactional basis. The Commission believes that parties 
would be able to adopt, where appropriate, standardized language across 
all of their security-based swap trading relationships. This language 
may be developed by individual firms or through a combination of trade 
associations and industry working groups.
---------------------------------------------------------------------------

    \789\ See section 0, supra.
---------------------------------------------------------------------------

    As above, the Commission estimates the maximum total paperwork 
burden associated with developing new representations would be, for 
each counterparty that may make such representations, no more than five 
hours and up to $2,000 for the services of outside professionals, for a 
maximum of approximately 12,000 hours and $4.8 million across all 
security-based swap counterparties that may make such representations. 
This estimate assumes little or no reliance on standardized disclosure 
language.
    The Commission expects that the majority of the burden associated 
with the new disclosure requirements will be experienced during the 
first year as language is developed and trading documentation is 
amended. After the new representations are developed and incorporated 
into trading documentation, the Commission believes that the annual 
paperwork burden associated with this requirement would be no more than 
approximately 10 hours per counterparty for verifying representations 
with existing counterparties and onboarding new counterparties, for a 
maximum of approximately 24,000 hours across all applicable security-
based swap counterparties.\790\
---------------------------------------------------------------------------

    \790\ The Commission staff estimates that this burden would 
consist of 10 hours of in-house counsel time for each security-based 
swap market participant that may make such representations.
---------------------------------------------------------------------------

X. Regulatory Flexibility Act Certification

    The Regulatory Flexibility Act (``RFA'') \791\ requires Federal 
agencies, in promulgating rules, to consider the impact of those rules 
on small entities. Section 603(a) of the Administrative Procedure 
Act,\792\ as amended by the RFA, generally requires the Commission to 
undertake a regulatory flexibility analysis of all proposed rules, or 
proposed rule amendments, to determine the impact of such rulemaking on 
``small entities.'' \793\

[[Page 39158]]

Section 605(b) of the RFA \794\ provides that this requirement shall 
not apply to any proposed rule or proposed rule amendment which, if 
adopted, would not have a significant economic impact on a substantial 
number of small entities.
---------------------------------------------------------------------------

    \791\ 5 U.S.C. 601 et seq.
    \792\ 5 U.S.C. 603(a).
    \793\ Although section 601(b) of the RFA defines the term 
``small entity,'' the statute permits agencies to formulate their 
own definitions. The Commission has adopted definitions for the term 
``small entity'' for the purposes of Commission rulemaking in 
accordance with the RFA. Those definitions, as relevant to this 
proposed rulemaking, are set forth in Rule 0-10 under the Exchange 
Act, 17 CFR 240.0-10. See Exchange Act Release No. 18451 (Jan, 28, 
1982), 47 FR 5215 (Feb, 4, 1982) (File No. AS-305).
    \794\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------

    For purposes of Commission rulemaking in connection with the RFA, a 
small entity includes: (1) When used with reference to an ``issuer'' or 
a ``person,'' other than an investment company, an ``issuer'' or 
``person'' that, on the last day of its most recent fiscal year, had 
total assets of $5 million or less; \795\ or (2) a broker-dealer with 
total capital (net worth plus subordinated liabilities) of less than 
$500,000 on the date in the prior fiscal year as of which its audited 
financial statements were prepared pursuant to Rule 17a-5(d) under the 
Exchange Act,\796\ or, if not required to file such statements, a 
broker-dealer with total capital (net worth plus subordinated 
liabilities) of less than $500,000 on the last day of the preceding 
fiscal year (or in the time that it has been in business, if shorter); 
and is not affiliated with any person (other than a natural person) 
that is not a small business or small organization.\797\ Under the 
standards adopted by the Small Business Administration, small entities 
in the finance and insurance industry include the following: (i) For 
entities engaged in credit intermediation and related activities, 
entities with $175 million or less in assets; \798\ (ii) for entities 
engaged in non-depository credit intermediation and certain other 
activities, entities with $7 million or less in annual receipts; \799\ 
(iii) for entities engaged in financial investments and related 
activities, entities with $7 million or less in annual receipts; \800\ 
(iv) for insurance carriers and entities engaged in related activities, 
entities with $7 million or less in annual receipts; \801\ and (v) for 
funds, trusts, and other financial vehicles, entities with $7 million 
or less in annual receipts.\802\
---------------------------------------------------------------------------

    \795\ See 17 CFR 240.0-10(a).
    \796\ 17 CFR 240.17a-5(d).
    \797\ See 17 CFR 240.0-10(c).
    \798\ See 13 CFR 121.201 (Subsector 522).
    \799\ See id. at Subsector 522.
    \800\ See id. at Subsector 523.
    \801\ See id. at Subsector 524.
    \802\ See id. at Subsector 525.
---------------------------------------------------------------------------

    The Cross-Border Proposal stated that, based on feedback from 
industry participants and our own information about the security-based 
swap markets, we preliminarily believed that non-U.S. entities that 
would be required to register and be regulated as security-based swap 
dealers and major security-based swap participants exceed the 
thresholds defining ``small entities'' set out above. Thus, we noted 
that we preliminarily believed it is unlikely that the proposed rules 
regarding registration of security-based swap dealers and major 
security-based swap market participants would have a significant 
economic impact any small entity. As a result, we certified that the 
proposed rules would not have a significant economic impact on a 
substantial number of small entities for purposes of the RFA and 
requested written comments regarding this certification.\803\
---------------------------------------------------------------------------

    \803\ See Cross-Border Proposing Release, 78 FR 31205.
---------------------------------------------------------------------------

    While we received comment letters that addressed cost issues in 
connection with the proposed rules, we did not receive any comments 
that specifically addressed whether the rules applying the definitions 
of ``security-based swap dealer'' or ``major security-based swap 
participant'' to the cross-border context would have a significant 
economic impact on small entities.
    We continue to believe that the types of entities that would engage 
in more than a de minimis amount of dealing activity involving 
security-based swaps--which generally would be major banks--would not 
be ``small entities'' for purposes of the RFA. Similarly, we believe 
that only the largest financial companies would be likely to develop 
security-based swap exposures of the size that would be required to 
cross the major security-based swap participant definition thresholds. 
Accordingly, the SEC certifies that the final rules applying the 
definitions of ``security-based swap dealer'' or ``major security-based 
swap participant'' to the cross-border context will not have a 
significant economic impact on a substantial number of small entities 
for purposes of the RFA.

XI. Effective Date and Implementation

    These final rules will be effective 60 days following publication 
in the Federal Register.
    If any provision of these rules, or the application thereof to any 
person or circumstance, is held to be invalid, such invalidity shall 
not affect other provisions or application of such provisions to other 
persons or circumstances that can be given effect without the invalid 
provision or application.
    Because Exchange Act rules 3a67-10 and 3a71-3 through 3a71-5 
address the application of the dealer and major participant definitions 
to cross-border security-based swap activities, those rules will not 
immediately impose requirements upon market participants even after the 
rules become effective. In the Intermediary Definitions Adopting 
Release, we noted that because the Commission has not yet promulgated 
final rules implementing the substantive requirements imposed on 
dealers and major participants by Title VII, persons determined to be 
dealers or major participants under the regulations adopted in that 
release need not register as such until the dates provided in the 
Commission's final rules regarding security-based swap dealer and major 
security-based swap participant registration requirements, and will not 
be subject to the requirements applicable to those dealers and major 
participants until the dates provided in the applicable final 
rules.\804\ Those principles apply here too.
---------------------------------------------------------------------------

    \804\ See Intermediary Definitions Adopting Release, 77 FR 
30700. We also noted that an extended compliance period was 
available with regard to the applicable thresholds used in the de 
minimis exception to the dealer definition. See id.; see also 
section 0, supra.
---------------------------------------------------------------------------

    Although Exchange Act rule 0-13--regarding the procedures for the 
submission of substituted compliance requests--also will become 
effective at that time, we would not expect to receive any such 
requests until relevant substantive rulemakings have been completed. 
Those rulemakings are necessary to determine when substituted 
compliance may be available, and to promulgate the requirements against 
which we may assess comparability for purposes of making substituted 
compliance determinations.

Statutory Authority and Text of Final Rules

    Pursuant to the Exchange Act, 15 U.S.C. 78a et seq., and 
particularly, sections 3(b), 23(a)(1), and 30(c) thereof, sections 
761(b), and 929P(b) of the Dodd-Frank Act, the SEC is adopting rules 0-
13, 3a67-10, 3a71-3, 3a71-4, and 3a71-5 under the Exchange Act, and the 
SEC is adding Part 250 to chapter II of Title 17 of the Code of Federal 
Regulations.

[[Page 39159]]

List of Subjects

17 CFR Part 240

    Brokers, Confidential business information, Fraud, Reporting and 
recordkeeping requirements, Securities.

 17 CFR Parts 241 and 250

    Securities.

Text of Final Rules

    For the reasons stated in the preamble, the SEC is amending Title 
17, Chapter II, of the Code of Federal Regulations as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

0
1. The general authority citation for part 240 continues to read, and a 
sectional authority is added in numerical order to read as follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20, 
80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et seq., and 
8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); and 18 U.S.C. 1350, 
unless otherwise noted.
* * * * *
    Sections 240.3a67-10, 240.3a71-3, 240.3a71-4, and 240.3a71-5 are 
also issued under Pub. L. 111-203, section 761(b), 124 Stat. 1754 
(2010), and 15 U.S.C. 78dd(c).
* * * * *

0
2. Add Sec.  240.0-13 to read as follows:


Sec.  240.0-13  Commission procedures for filing applications to 
request a substituted compliance order under the Exchange Act.

    (a) The application shall be in writing in the form of a letter, 
must include any supporting documents necessary to make the application 
complete, and otherwise must comply with Sec.  240.0-3. All 
applications must be submitted to the Office of the Secretary of the 
Commission, by a party that potentially would comply with requirements 
under the Exchange Act pursuant to a substituted compliance order, or 
by the relevant foreign financial regulatory authority or authorities. 
If an application is incomplete, the Commission may request that the 
application be withdrawn unless the applicant can justify, based on all 
the facts and circumstances, why supporting materials have not been 
submitted and undertakes to submit the omitted materials promptly.
    (b) An applicant may submit a request electronically. The 
electronic mailbox to use for these applications is described on the 
Commission's Web site at www.sec.gov in the ``Exchange Act Substituted 
Compliance Applications'' section. In the event electronic mailboxes 
are revised in the future, applicants can find the appropriate mailbox 
by accessing the ``Electronic Mailboxes at the Commission'' section.
    (c) All filings and submissions filed pursuant to this rule must be 
in the English language. If a filing or submission filed pursuant to 
this rule requires the inclusion of a document that is in a foreign 
language, a party must submit instead a fair and accurate English 
translation of the entire foreign language document. A party may submit 
a copy of the unabridged foreign language document when including an 
English translation of a foreign language document in a filing or 
submission filed pursuant to this rule. A party must provide a copy of 
any foreign language document upon the request of Commission staff.
    (d) An applicant also may submit a request in paper format. Five 
copies of every paper application and every amendment to such an 
application must be submitted to the Office of the Secretary at 100 F 
Street NE., Washington, DC 20549-1090. Applications must be on white 
paper no larger than 8\1/2\ by 11 inches in size. The left margin of 
applications must be at least 1\1/2\ inches wide, and if the 
application is bound, it must be bound on the left side. All 
typewritten or printed material must be set forth in black ink so as to 
permit photocopying.
    (e) Every application (electronic or paper) must contain the name, 
address, telephone number, and email address of each applicant and the 
name, address, telephone number, and email address of a person to whom 
any questions regarding the application should be directed. The 
Commission will not consider hypothetical or anonymous requests for a 
substituted compliance order. Each applicant shall provide the 
Commission with any supporting documentation it believes necessary for 
the Commission to make such determination, including information 
regarding applicable requirements established by the foreign financial 
regulatory authority or authorities, as well as the methods used by the 
foreign financial regulatory authority or authorities to monitor and 
enforce compliance with such rules. Applicants should also cite to and 
discuss applicable precedent.
    (f) Amendments to the application should be prepared and submitted 
as set forth in these procedures and should be marked to show what 
changes have been made.
    (g) After the filing is complete, the staff will review the 
application. Once all questions and issues have been answered to the 
satisfaction of the staff, the staff will make an appropriate 
recommendation to the Commission. After consideration of the 
recommendation and a vote by the Commission, the Commission's Office of 
the Secretary will issue an appropriate response and will notify the 
applicant.
    (h) The Commission shall publish in the Federal Register a notice 
that a complete application has been submitted. The notice will provide 
that any person may, within the period specified therein, submit to the 
Commission any information that relates to the Commission action 
requested in the application. The notice also will indicate the 
earliest date on which the Commission would take final action on the 
application, but in no event would such action be taken earlier than 25 
days following publication of the notice in the Federal Register.
    (i) The Commission may, in its sole discretion, schedule a hearing 
on the matter addressed by the application.

0
3. Add Sec.  240.3a67-10 to read as follows:


Sec.  240.3a67-10  Foreign major security-based swap participants.

    (a) Definitions. As used in this section, the following terms shall 
have the meanings indicated:
    (1) Conduit affiliate has the meaning set forth in Sec.  240.3a71-
3(a)(1).
    (2) Foreign branch has the meaning set forth in Sec.  240.3a71-
3(a)(2).
    (3) Transaction conducted through a foreign branch has the meaning 
set forth in Sec.  240.3a71-3(a)(3).
    (4) U.S. person has the meaning set forth in Sec.  240.3a71-
3(a)(4).
    (b) Application of major security-based swap participant tests in 
the cross-border context. For purposes of calculating a person's status 
as a major security-based swap participant as defined in section 
3(a)(67) of the Act (15 U.S.C. 78c(a)(67)), and the rules and 
regulations thereunder, a person shall include the following security-
based swap positions:
    (1) If such person is a U.S. person, all security-based swap 
positions that are entered into by the person, including positions 
entered into through a foreign branch;
    (2) If such person is a conduit affiliate, all security-based swap 
positions that are entered into by the person; and
    (3) If such person is a non-U.S. person other than a conduit 
affiliate, all of the following types of security-based swap

[[Page 39160]]

positions that are entered into by the person:
    (i) Security-based swap positions that are entered into with a U.S. 
person; provided, however, that this paragraph (b)(3)(i) shall not 
apply to:
    (A) Positions with a U.S. person counterparty that arise from 
transactions conducted through a foreign branch of the counterparty, 
when the counterparty is a registered security-based swap dealer; and
    (B) Positions with a U.S. person counterparty that arise from 
transactions conducted through a foreign branch of the counterparty, 
when the transaction is entered into prior to 60 days following the 
earliest date on which the registration of security-based swap dealers 
is first required pursuant to the applicable final rules and 
regulations; and
    (ii) Security-based swap positions for which the non-U.S. person's 
counterparty to the security-based swap has rights of recourse against 
a U.S. person; for these purposes a counterparty has rights of recourse 
against the U.S. person if the counterparty has a conditional or 
unconditional legally enforceable right, in whole or in part, to 
receive payments from, or otherwise collect from, the U.S. person in 
connection with the security-based swap.
    (c) Attributed positions--(1) In general. For purposes of 
calculating a person's status as a major security-based swap 
participant as defined in section 3(a)(67) of the Act (15 U.S.C. 
78c(a)(67)), and the rules and regulations thereunder, a person also 
shall include the following security-based swap positions:
    (i) If such person is a U.S. person, any security-based swap 
position of a non-U.S. person for which the non-U.S. person's 
counterparty to the security-based swap has rights of recourse against 
that U.S. person.

    Note to paragraph (c)(1)(i). This paragraph describes 
attribution requirements for a U.S. person solely with respect to 
the guarantee of the obligations of a non-U.S. person under a 
security-based swap. The Commission and the Commodity Futures 
Trading Commission previously provided an interpretation about 
attribution to a U.S. parent, other affiliate, or guarantor to the 
extent that the counterparties to those positions have recourse 
against that parent, other affiliate, or guarantor in connection 
with the position. See Intermediary Definitions Adopting Release, 
http://www.gpo.gov/fdsys/pkg/FR-2012-08-13/pdf/2012-18003.pdf. The 
Commission explained that it intended to issue separate releases 
addressing the application of the major participant definition, and 
Title VII generally, to non-U.S. persons. See id. at note 1041.

    (ii) If such person is a non-U.S. person:
    (A) Any security-based swap position of a U.S. person for which 
that person's counterparty has rights of recourse against the non-U.S. 
person; and
    (B) Any security-based swap position of another non-U.S. person 
entered into with a U.S. person counterparty who has rights of recourse 
against the first non-U.S. person, provided, however, that this 
paragraph (c)(1)(ii)(B) shall not apply to positions described in Sec.  
240.3a67-10(b)(3)(i)(A) and (B).
    (2) Exceptions. Notwithstanding paragraph (c)(1) of this section, a 
person shall not include such security-based swap positions if the 
person whose performance is guaranteed in connection with the security-
based swap is:
    (i) Subject to capital regulation by the Commission or the 
Commodity Futures Trading Commission (including, but not limited to 
regulation as a swap dealer, major swap participant, security-based 
swap dealer, major security-based swap participant, futures commission 
merchant, broker, or dealer);
    (ii) Regulated as a bank in the United States;
    (iii) Subject to capital standards, adopted by the person's home 
country supervisor, that are consistent in all respects with the 
Capital Accord of the Basel Committee on Banking Supervision; or
    (iv) Deemed not to be a major security-based swap participant 
pursuant to Sec.  240.3a67-8(a).

0
4. Add Sec. Sec.  240.3a71-3, 240.3a71-4, and 240.3a71-5 to read as 
follows:
* * * * *
Sec.
240.3a71-3 Cross-border security-based swap dealing activity.
240.3a71-4 Exception from aggregation for affiliated groups with 
registered security-based swap dealers.
240.3a71-5 Substituted compliance for foreign security-based swap 
dealers.
* * * * *


Sec.  240.3a71-3  Cross-border security-based swap dealing activity.

    (a) Definitions. As used in this section, the following terms shall 
have the meanings indicated:
    (1) Conduit affiliate--(i) Definition. Conduit affiliate means a 
person, other than a U.S. person, that:
    (A) Is directly or indirectly majority-owned by one or more U.S. 
persons; and
    (B) In the regular course of business enters into security-based 
swaps with one or more other non-U.S. persons, or with foreign branches 
of U.S. banks that are registered as security-based swap dealers, for 
the purpose of hedging or mitigating risks faced by, or otherwise 
taking positions on behalf of, one or more U.S. persons (other than 
U.S. persons that are registered as security-based swap dealers or 
major security-based swap participants) who are controlling, controlled 
by, or under common control with the person, and enters into offsetting 
security-based swaps or other arrangements with such U.S. persons to 
transfer risks and benefits of those security-based swaps.
    (ii) Majority-ownership standard. The majority-ownership standard 
in paragraph (a)(1)(i)(A) of this section is satisfied if one or more 
persons described in Sec.  240.3a71-3(a)(4)(i)(B) directly or 
indirectly own a majority interest in the non-U.S. person, where 
``majority interest'' is the right to vote or direct the vote of a 
majority of a class of voting securities of an entity, the power to 
sell or direct the sale of a majority of a class of voting securities 
of an entity, or the right to receive upon dissolution, or the 
contribution of, a majority of the capital of a partnership.
    (2) Foreign branch means any branch of a U.S. bank if:
    (i) The branch is located outside the United States;
    (ii) The branch operates for valid business reasons; and
    (iii) The branch is engaged in the business of banking and is 
subject to substantive banking regulation in the jurisdiction where 
located.
    (3) Transaction conducted through a foreign branch--(i) Definition. 
Transaction conducted through a foreign branch means a security-based 
swap transaction that is arranged, negotiated, and executed by a U.S. 
person through a foreign branch of such U.S. person if:
    (A) The foreign branch is the counterparty to such security-based 
swap transaction; and
    (B) The security-based swap transaction is arranged, negotiated, 
and executed on behalf of the foreign branch solely by persons located 
outside the United States.
    (ii) Representations. A person shall not be required to consider 
its counterparty's activity in connection with paragraph (a)(3)(i)(B) 
of this section in determining whether a security-based swap 
transaction is a transaction conducted through a foreign branch if such 
person receives a representation from its counterparty that the 
security-based swap transaction is arranged, negotiated, and executed 
on behalf of the foreign branch solely by persons located outside the 
United States, unless such person knows or has reason to know that the 
representation is not accurate; for the purposes of this

[[Page 39161]]

final rule a person would have reason to know the representation is not 
accurate if a reasonable person should know, under all of the facts of 
which the person is aware, that it is not accurate.
    (4) U.S. person. (i) Except as provided in paragraph (a)(4)(iii) of 
this section, U.S. person means any person that is:
    (A) A natural person resident in the United States;
    (B) A partnership, corporation, trust, investment vehicle, or other 
legal person organized, incorporated, or established under the laws of 
the United States or having its principal place of business in the 
United States;
    (C) An account (whether discretionary or non-discretionary) of a 
U.S. person; or
    (D) An estate of a decedent who was a resident of the United States 
at the time of death.
    (ii) For purposes of this section, principal place of business 
means the location from which the officers, partners, or managers of 
the legal person primarily direct, control, and coordinate the 
activities of the legal person. With respect to an externally managed 
investment vehicle, this location is the office from which the manager 
of the vehicle primarily directs, controls, and coordinates the 
investment activities of the vehicle.
    (iii) The term U.S. person does not include the International 
Monetary Fund, the International Bank for Reconstruction and 
Development, the Inter-American Development Bank, the Asian Development 
Bank, the African Development Bank, the United Nations, and their 
agencies and pension plans, and any other similar international 
organizations, their agencies and pension plans.
    (iv) A person shall not be required to consider its counterparty to 
a security-based swap to be a U.S. person if such person receives a 
representation from the counterparty that the counterparty does not 
satisfy the criteria set forth in paragraph (a)(4)(i) of this section, 
unless such person knows or has reason to know that the representation 
is not accurate; for the purposes of this final rule a person would 
have reason to know the representation is not accurate if a reasonable 
person should know, under all of the facts of which the person is 
aware, that it is not accurate.
    (5) United States means the United States of America, its 
territories and possessions, any State of the United States, and the 
District of Columbia.
    (b) Application of de minimis exception to cross-border dealing 
activity. For purposes of calculating the amount of security-based swap 
positions connected with dealing activity under Sec.  240.3a71-2(a)(1), 
except as provided in Sec.  240.3a71-5, a person shall include the 
following security-based swap transactions:
    (1)(i) If such person is a U.S. person, all security-based swap 
transactions connected with the dealing activity in which such person 
engages, including transactions conducted through a foreign branch;
    (ii) If such person is a conduit affiliate, all security-based swap 
transactions connected with the dealing activity in which such person 
engages; and
    (iii) If such person is a non-U.S. person other than a conduit 
affiliate, all of the following types of transactions:
    (A) Security-based swap transactions connected with the dealing 
activity in which such person engages that are entered into with a U.S. 
person; provided, however, that this paragraph (b)(1)(iii)(A) shall not 
apply to:
    (1) Transactions with a U.S. person counterparty that constitute 
transactions conducted through a foreign branch of the counterparty, 
when the counterparty is a registered security-based swap dealer; and
    (2) Transactions with a U.S. person counterparty that constitute 
transactions conducted through a foreign branch of the counterparty, 
when the transaction is entered into prior to 60 days following the 
earliest date on which the registration of security-based swap dealers 
is first required pursuant to the applicable final rules and 
regulations; and
    (B) Security-based swap transactions connected with the dealing 
activity in which such person engages for which the counterparty to the 
security-based swap has rights of recourse against a U.S. person that 
is controlling, controlled by, or under common control with the non-
U.S. person; for these purposes a counterparty has rights of recourse 
against the U.S. person if the counterparty has a conditional or 
unconditional legally enforceable right, in whole or in part, to 
receive payments from, or otherwise collect from, the U.S. person in 
connection with the security-based swap; and
    (2) If such person engages in transactions described in paragraph 
(b)(1) of this section, except as provided in Sec.  240.3a71-4, all of 
the following types of security-based swap transactions:
    (i) Security-based swap transactions connected with the dealing 
activity in which any U.S. person controlling, controlled by, or under 
common control with such person engages, including transactions 
conducted through a foreign branch;
    (ii) Security-based swap transactions connected with the dealing 
activity in which any conduit affiliate controlling, controlled by, or 
under common control with such person engages; and
    (iii) Security-based swap transactions connected with the dealing 
activity of any non-U.S. person, other than a conduit affiliate, that 
is controlling, controlled by, or under common control with such 
person, that are described in paragraph (b)(1)(iii) of this section.


Sec.  240.3a71-4  Exception from aggregation for affiliated groups with 
registered security-based swap dealers.

    Notwithstanding Sec. Sec.  240.3a71-2(a)(1) and 240.3a71-3(b)(2), a 
person shall not include the security-based swap transactions of 
another person (an ``affiliate'') controlling, controlled by, or under 
common control with such person where such affiliate either is:
    (a) Registered with the Commission as a security-based swap dealer; 
or
    (b) Deemed not to be a security-based swap dealer pursuant to Sec.  
240.3a71-2(b).


Sec.  240.3a71-5  Exception for cleared transactions executed on a swap 
execution facility.

    (a) For purposes of Sec.  240.3a71-3(b)(1), a non-U.S. person, 
other than a conduit affiliate, shall not include its security-based 
swap transactions that are entered into anonymously on an execution 
facility or national securities exchange and are cleared through a 
clearing agency; and
    (b) For purposes of Sec.  240.3a71-3(b)(2), a person shall not 
include security-based swap transactions of an affiliated non-U.S. 
person, other than a conduit affiliate, when such transactions are 
entered into anonymously on an execution facility or national 
securities exchange and are cleared through a clearing agency.

PART 241--INTERPRETIVE RELEASES RELATING TO THE SECURITIES EXCHANGE 
ACT OF 1934 AND GENERAL RULES AND REGULATIONS THEREUNDER

0
5. Part 241 is amended by adding Release No. 34-72472 to the list of 
interpretive releases as follows:

[[Page 39162]]



----------------------------------------------------------------------------------------------------------------
            Subject               Release No.           Date                Federal Register Vol. and Page
----------------------------------------------------------------------------------------------------------------
Application of ``Security-            34-72472  June 25, 2014......  79 FR [Insert FR Page Number].
 Based Swap Dealer'' and
 ``Major Security-Based Swap
 Participant'' Definitions to
 Cross-Border Security-Based
 Swap Activities.
----------------------------------------------------------------------------------------------------------------


0
6. Part 250, consisting of Sec.  250.1, is added to read as follows:

PART 250--CROSS-BORDER ANTIFRAUD LAW-ENFORCEMENT AUTHORITY

    Authority: 15 U.S.C. 77s, 77v(c), 78w, 78aa(b), 80b-11, and 80b-
14(b).


Sec.  250.1  Cross-border antifraud law-enforcement authority.

    (a) Notwithstanding any other Commission rule or regulation, the 
antifraud provisions of the securities laws apply to:
    (1) Conduct within the United States that constitutes significant 
steps in furtherance of the violation; or
    (2) Conduct occurring outside the United States that has a 
foreseeable substantial effect within the United States.
    (b) The antifraud provisions of the securities laws apply to 
conduct described in paragraph (a)(1) of this section even if:
    (1) The violation relates to a securities transaction or securities 
transactions occurring outside the United States that involves only 
foreign investors; or
    (2) The violation is committed by a foreign adviser and involves 
only foreign investors.
    (c) Violations of the antifraud provisions of the securities laws 
described in this section may be pursued in judicial proceedings 
brought by the Commission or the United States.

    By the Commission.

    Date: June 25, 2014.
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-15337 Filed 7-3-14; 8:45 am]
BILLING CODE 8011-01-P


