[Federal Register Volume 86, Number 19 (Monday, February 1, 2021)]
[Rules and Regulations]
[Pages 7637-7643]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-28194]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-90667; File No. S7-08-11]
RIN 3235-AK74


Exemption From the Definition of ``Clearing Agency'' for Certain 
Activities of Security-Based Swap Dealers and Security-Based Swap 
Execution Facilities

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
adopting a rule pursuant to Section 36 of the Securities Exchange Act 
of 1934 (``Exchange Act'') to exempt from the definition of ``clearing 
agency'' in Section 3(a)(23) of the Exchange Act certain activities of 
a registered security-based swap dealer, a registered security-based 
swap execution facility, and a person engaging in dealing activity in 
security-based swaps that is eligible for an exception from 
registration as a security-based swap dealer because the quantity of 
dealing activity is de minimis.

DATES: Effective date: April 2, 2021.

FOR FURTHER INFORMATION CONTACT: Matthew Lee, Assistant Director, or 
Jesse Capelle, Special Counsel, Office of Clearance and Settlement, 
Division of Trading and Markets, Securities and Exchange Commission, 
100 F Street NE, Washington, DC 20549-7010, at (202) 551-5710.

SUPPLEMENTARY INFORMATION: The Commission is adopting 17 CFR 240.17Ad-
24 (``Rule 17Ad-24'') to exempt certain activities of a registered 
security-based swap execution facility,\1\ a registered security-based 
swap dealer,\2\ and an entity that is eligible for an exception under 
17 CFR 240.3a71-2(a) (or subject to the period set forth in 17 CFR 
240.3a71-2(b)) \3\ from the definition of ``clearing agency.''
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    \1\ 15 U.S.C. 78c-4(a) (setting forth the registration 
requirement for security-based swap execution facilities). The 
Commission has not yet adopted rules regarding the registration of 
security-based swap execution facilities. The Commission has granted 
a temporary exemption from the registration requirement for 
security-based swap execution facilities. See Release No. 34-64678 
(June 15, 2011), 76 FR 36287, 36292-93, 36306 (June 22, 2011). This 
exemption will expire on the earliest compliance date set forth in 
any of the final rules regarding registration of security-based swap 
execution facilities. See id. at 36292-93, 36306.
    \2\ 15 U.S.C. 78o-10(a)(1); see also Release No. 34-75611 (Aug. 
5, 2015), 80 FR 48964, 48988 (Aug. 14, 2015). A security-based swap 
market participant that meets the definition of ``security-based 
swap dealer'' as of August 6, 2021 is required to register with the 
Commission no later than November 1, 2021. See Release No. 34-87780 
(Dec. 18, 2019), 85 FR 6270, 6345-46 (Feb. 4, 2020).
    \3\ In contrast to the definition of ``dealer'' in Section 
3(a)(5) of the Exchange Act, Section 3(a)(71)(D) of the Exchange Act 
and 17 CFR 240.3a71-2(a) thereunder contain an exception from the 
definition of ``security-based swap dealer'' for any entity that 
engages in a de minimis quantity of security-based swap dealing in 
connection with transactions with or on behalf of its customers. See 
15 U.S.C. 78c(a)(71)(D); 17 CFR 240.3a71-2(a). In addition, 17 CFR 
240.3a71-2(b) provides that a person that has not registered as a 
security-based swap dealer by virtue of satisfying the requirements 
of paragraph (a) of the rule, but that no longer can take advantage 
of the de minimis exception, will be deemed not to be a security-
based swap dealer under section 3(a)(71) of the Act (15 U.S.C. 
78c(a)(71)) and subject to the requirements of section 15F of the 
Act (15 U.S.C. 78o-10) and the rules, regulations and 
interpretations issued thereunder until the earlier of the date on 
which it submits a complete application for registration pursuant to 
section 15F(b) (15 U.S.C. 78o-10(b)) or two months after the end of 
the month in which that person becomes no longer able to take 
advantage of the exception.
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Table of Contents

I. Background
II. New Rule 17Ad-24
    A. Proposed Rule Text
    B. Comment Received
    C. Final Rule
III. Economic Analysis
    A. Baseline
    B. Consideration of Benefits, Costs, and the Effect on 
Competition, Efficiency, and Capital Formation
IV. Paperwork Reduction Act
V. Regulatory Flexibility Act Certification
VI. Other Matters
VII. Statutory Authority

I. Background

    The term ``clearing agency'' is broadly defined in Section 
3(a)(23)(A) of the Exchange Act and includes a variety of functions.\4\ 
Section 3(a)(23)(B) of the Exchange Act excludes a number of

[[Page 7638]]

entities and activities from the definition of ``clearing agency,'' 
including certain activities of, among other types of market 
intermediaries, national securities exchanges and securities dealers 
that are also clearing agency functions.\5\ These exclusions are 
designed to limit the potential for overlapping or duplicative 
requirements that may otherwise be imposed on these regulated 
entities.\6\
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    \4\ Specifically, the term ``clearing agency'' includes, among 
other things, any person who acts as an intermediary in making 
payments or deliveries or both in connection with transactions in 
securities or that provides the facilities for comparison of data 
respecting the terms of settlement of securities transactions, to 
reduce the number of settlements of securities transactions, or for 
the allocation of securities settlement responsibilities. The 
definition also includes any person, such as a securities 
depository, who (i) acts as a custodian of securities in connection 
with a system for the central handling of securities whereby all 
securities of a particular class or series of any issuer deposited 
within the system are treated as fungible and may be transferred, 
loaned, or pledged by bookkeeping entry without physical delivery of 
securities certificates, or (ii) otherwise permits or facilitates 
the settlement of securities transactions or the hypothecation or 
lending of securities without physical delivery of securities 
certificates. 15 U.S.C. 78c(a)(23)(A); see also Release Nos. 34-
71699 (Mar. 12, 2014), 79 FR 16865 (Mar. 26, 2014), corrected at 79 
FR 29507, 29510-11 (May 22, 2014); 34-68080 (Oct. 22, 2012), 77 FR 
66219, 66221-22 (Nov. 2, 2012) (``Clearing Agency Standards adopting 
release'') (discussing the same).
    \5\ See 15 U.S.C. 78c(a)(23)(B).
    \6\ Release No. 34-64017 (Mar. 3, 2011), 76 FR 14472, 14531 
(Mar. 16, 2011) (``proposing release'').
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    Title VII of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act of 2010 (``Dodd-Frank Act'') created new categories of 
entities in the security-based swap market that may perform clearing 
agency functions similar to the functions performed by entities 
excluded from the definition of ``clearing agency'' in Section 
3(a)(23)(B) of the Exchange Act in the traditional securities markets. 
However, Title VII did not amend the scope of the term ``clearing 
agency'' to address these new types of financial intermediaries for the 
security-based swap markets or their potential clearing agency 
functions, even if those new intermediaries perform similar functions 
as entities excluded from the ``clearing agency'' definition, such as a 
national securities exchange or a securities dealer. As a result, 
certain activities performed for security-based swaps by security-based 
swap dealers and security-based swap execution facilities are also 
clearing agency functions that trigger the requirement to either 
register as a clearing agency or obtain an exemption from registration 
as a clearing agency, while the same activities performed for 
securities that are not security-based swaps do not carry the same 
legal and regulatory implications.\7\
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    \7\ See 15 U.S.C. 78q-1(b)(1).
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    Specifically, Section 3(a)(23)(B)(ii) of the Exchange Act provides 
that the term ``clearing agency'' does not include, among other things, 
any national securities exchange solely by reason of its providing 
facilities for comparison of data respecting the terms of settlement of 
securities transactions effected on such exchange.\8\ As noted above, 
the Dodd-Frank Act did not amend the Exchange Act definition of 
``clearing agency'' to provide a comparable exclusion for a registered 
security-based swap execution facility. A security-based swap execution 
facility is a trading system or platform in which multiple participants 
have the ability to execute or trade security-based swaps by accepting 
bids and offers made by multiple participants in the facility or 
system.\9\ This function, similar to that provided by a national 
securities exchange, facilitates the execution of a security-based swap 
transaction between two counterparties by providing facilities for the 
comparison of data respecting the terms of settlement of that 
transaction.\10\ Accordingly, although a national securities exchange 
performing this clearing agency function is excluded under Section 
3(a)(23)(B)(ii) from the definition of ``clearing agency,'' a 
registered security-based swap execution facility performing this 
function is not.
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    \8\ 15 U.S.C. 78c(a)(23)(B).
    \9\ The Exchange Act definition of ``security-based swap 
execution facility'' states that a security-based swap execution 
facility is not a national securities exchange. 15 U.S.C. 
78c(a)(77).
    \10\ A registered security-based swap execution facility may 
facilitate trade processing of any security-based swap. See 15 
U.S.C. 78c-4(b)(2).
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    Similarly, Section 3(a)(23)(B)(iii) provides that the term 
``clearing agency'' does not include, among other things, any dealer if 
such dealer would be deemed to be a clearing agency solely by reason of 
functions performed by such institution as part of customary brokerage 
or dealing activities, or solely by reason of acting on behalf of a 
clearing agency or a participant therein in connection with the 
furnishing by the clearing agency of services to its participants or 
the use of services of the clearing agency by its participants.\11\ As 
with security-based swap execution facilities, the Exchange Act 
definition of ``clearing agency'' does not provide an exclusion for a 
registered security-based swap dealer.\12\ Section 3(a)(71) of the 
Exchange Act defines ``security-based swap dealer'' as any person that: 
(i) Holds itself out as a dealer in security-based swaps; (ii) makes a 
market in security-based swaps; (iii) regularly enters into security-
based swaps with counterparties as an ordinary course of business for 
its own account; or (iv) engages in any activity causing it to be 
commonly known in the trade as a dealer or market maker in security-
based swaps.\13\ These functions are similar to those provided by a 
dealer for securities that are not security-based swaps.\14\ 
Accordingly, although a dealer performing these functions is excluded 
from the definition of ``clearing agency,'' a registered security-based 
swap dealer performing the same functions is not.\15\
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    \11\ 15 U.S.C. 78c(a)(23)(B).
    \12\ See 15 U.S.C. 78c(a)(5) (defining ``dealer'' to exclude a 
dealer for security-based swaps, other than security-based swaps 
with or for persons that are not eligible contract participants); 
see also, supra, note 3 (discussing the same).
    \13\ 15 U.S.C. 78c(a)(71). In 2012, the Commission and the 
Commodity Futures Trading Commission further defined a number of 
terms defining the intermediaries in the swap and security-based 
swap markets, including ``security-based swap dealer.'' See Release 
No. 34-66868 (Apr. 27, 2012), 77 FR 30596 (May 23, 2012) (``Entity 
Definitions adopting release''). Among other things, the release 
adopted 17 CFR 240.3a71-1 through 3a71-5, which further define 
``security-based swap dealer.'' Furthermore, the definition of 
``dealer'' in Section 3(a)(5) of the Exchange Act provides that an 
entity transacting as a dealer in security-based swaps would not 
need to separately register with the Commission as a broker-dealer 
so long as its security-based swap transactions are solely with 
persons that satisfy the definition of ``eligible contract 
participant.'' See 17 U.S.C. 78c(a)(5) (defining ``dealer''); 17 
U.S.C. 78(a)(65) (defining ``eligible contract participant'' by 
reference to Section 1a(18) of the Commodity Exchange Act (7 U.S.C. 
1a(18)).
    \14\ See supra note 3 (noting that, in contrast to the 
definition of ``dealer'' in Section 3(a)(5) of the Exchange Act, 
Section 3(a)(71)(D) of the Exchange Act and 17 CFR 240.3a71-2(a) 
thereunder contain an exception from the definition of ``security-
based swap dealer'' for any entity that engages in a de minimis 
quantity of security-based swap dealing in connection with 
transactions with or on behalf of its customers).
    \15\ See supra note 2 (noting the adoption of final rules for 
security-based swap dealers in 2019 and the compliance date for 
registration of November 1, 2021).
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    To address the disparate treatment of similarly situated entities 
performing potential clearing agency functions, the Commission proposed 
Rule 17Ad-24 in 2011.\16\ The Commission explained that the rule would 
avoid imposing overlapping or duplicative requirements on these 
entities with marginal or no benefit to safeguarding securities and 
funds and protecting investors.\17\ As described in the proposing 
release,\18\ Rule 17Ad-24 would provide exemptions from the Exchange 
Act term ``clearing agency'' for certain activities of registered 
security-based swap dealers and registered security-based swap 
execution facilities that are also clearing agency functions, mirroring 
the exclusions from the definition described above for national 
securities exchanges and dealers. A person acting as a security-based 
swap dealer may make payments or deliveries or both in connection with 
transactions in securities, in a manner that could require that person 
to register as a clearing agency under the Exchange Act.\19\ In 
particular, over the life of a security-based swap transaction, a 
security-based swap dealer may facilitate the transfer of collateral, 
periodic fixed amount payments, or termination payments between the 
counterparties to a transaction, which would constitute making payments 
or deliveries or both in connection with transactions in securities 
under the ``clearing agency'' definition. Similarly,

[[Page 7639]]

a security-based swap execution facility that provides a trading system 
or platform in which multiple participants have the ability to execute 
or trade security-based swaps by accepting bids and offers made by 
multiple participants in the facility or system also may provide 
facilities for comparison of data respecting the terms of settlement of 
securities transactions, to reduce the number of settlements of 
securities transactions, or for the allocation of securities settlement 
responsibilities, in a manner that could require that entity to 
register as a clearing agency.\20\
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    \16\ See proposing release, supra note 6.
    \17\ Id. at 14531.
    \18\ See id. at 14494-95.
    \19\ Compare 15 U.S.C. 78c(a)(71) with 15 U.S.C. 78c(a)(23).
    \20\ Compare 15 U.S.C. 78c(a)(77) with 15 U.S.C. 78c(a)(23).
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    The Commission received one comment regarding the proposed 
rule,\21\ as discussed in Part II.B below. The Commission is now 
adopting Rule 17Ad-24, as discussed in Part II.C below.
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    \21\ See Letter from Jeff Gooch, Chief Executive Officer, 
MarkitSERV (Apr. 29, 2011) (``MarkitSERV Letter''). The comment 
letter is available on the Commission's website at https://www.sec.gov/comments/s7-08-11/s70811.shtml.
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II. New Rule 17Ad-24

A. Proposed Rule Text

    Proposed Rule 17Ad-24 provided that a registered security-based 
swap dealer and a registered security-based swap execution facility 
shall be exempt from inclusion in the term ``clearing agency,'' as 
defined in section 3(a)(23)(A) of the Act, where such registered 
security-based swap dealer or registered security-based swap execution 
facility would be deemed to be a clearing agency solely by reason of 
functions performed by such institution as part of customary dealing 
activities or providing facilities for comparison of data respecting 
the terms of settlement of securities transactions effected on such 
registered security-based swap execution facility, respectively, or 
acting on behalf of a clearing agency or participant therein in 
connection with the furnishing by the clearing agency of services to 
its participants or the use of services of the clearing agency by its 
participants.

B. Comment Received

    One commenter agreed with the Commission's proposed approach that a 
security-based swap execution facility not be required to register as a 
clearing agency solely because it performs trade data comparison as 
part of the trade execution process for security-based swaps.\22\ 
However, the commenter also stated that a security-based swap execution 
facility should not have a blanket exemption from clearing agency 
registration for activities related to matching or trade verification 
services because, in the commenter's view, such an approach would 
result in the rule applying differently to third-party providers of 
such services than it would to a security-based swap execution 
facility.\23\
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    \22\ See MarkitSERV Letter.
    \23\ See id. at 6.
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    By its terms, proposed Rule 17Ad-24 would not provide a blanket 
exemption from clearing agency registration to a security-based swap 
execution facility to provide matching or trade verification services 
that otherwise are clearing agency functions as defined in the Exchange 
Act. Rather, the Commission's approach under Rule 17Ad-24 specifies 
that a registered security-based swap execution facility would not be 
required to register as a clearing agency solely based upon the fact 
that such an entity provides facilities for comparison of data 
respecting the terms of settlement of securities transactions effected 
on such registered security-based swap execution facility.\24\ As noted 
in the proposing release and restated here,\25\ were a security-based 
swap execution facility to engage in activity that is outside the scope 
of the exemption provided in Rule 17Ad-24 and that falls within the 
definition of ``clearing agency'' under the Exchange Act, it would be 
required to register as a clearing agency or obtain a separate 
exemption from clearing agency registration.\26\
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    \24\ This approach is consistent with the approach that applies 
to a national securities exchange when performing the same activity 
for transactions in securities that are not security-based swaps.
    \25\ See proposing release, supra note 6, at 14495.
    \26\ See id. For example, with respect to transactions in 
securities that are not security-based swaps, the Commission has 
explained that ``matching'' is a clearing agency function. Release 
No. 34-39829 (Apr. 6, 1998), 63 FR 17943 (Apr. 13, 1998).
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C. Final Rule

    Pursuant to the Commission's authority under Section 36 of the 
Exchange Act,\27\ the Commission is adopting Rule 17Ad-24, and the 
Commission is making two modifications from the proposal. First, since 
the Commission proposed Rule 17Ad-24, the Commission adopted 17 CFR 
240.3a71-2 to provide an exception from the definition of ``security-
based swap dealer'' to any entity that engages in a de minimis quantity 
of security-based swap dealing activity in connection with transactions 
with or on behalf of its customers.\28\ In adopting the de minimis 
exception, the Commission explained that the exception should be 
interpreted to address amounts of dealing activity that are 
sufficiently small that they do not warrant registration to address 
concerns implicated by the regulations governing swap dealers and 
security-based swap dealers.\29\ The Commission similarly noted in 
proposing Rule 17Ad-24 that the exemptions in the rule are intended to 
avoid imposing requirements with marginal or no benefit to safeguarding 
securities and funds and protecting investors.\30\ Accordingly, the 
Commission is adding persons eligible for this exception under 17 CFR 
240.3a71-2 to the exemption in Rule 17Ad-24 because imposing clearing 
agency registration on persons solely to regulate functions performed 
by such persons as part of customary dealing activity for security-
based swaps, and where that dealing activity is sufficiently small that 
it does not warrant registration as a security-based swap dealer, would 
present only marginal or no benefit to safeguarding securities and 
funds and protecting investors. Second, to improve clarity and 
readability, the Commission is dividing the rule text into 
subparagraphs (a) and (b).
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    \27\ 15 U.S.C. 78mm. Section 36 of the Exchange Act authorizes 
the Commission to conditionally or unconditionally exempt any 
person, security, or transaction, or any class of classes of 
persons, securities, or transactions, from any provision or 
provisions of the Exchange Act or any rule or regulation thereunder, 
by rule, regulation, or order, to the extent that such exemption is 
necessary or appropriate in the public interest, and is consistent 
with the protection of investors.
    \28\ See supra notes 3 and 14 and accompanying text.
    \29\ See Entity Definitions adopting release, supra note 13, at 
30626.
    \30\ See proposing release, supra note 6, at 14531.
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    Accordingly, new Rule 17Ad-24 provides that a registered security-
based swap dealer, a registered security-based swap execution facility, 
or an entity engaging in dealing activity in security-based swaps that 
is eligible for an exception under 17 CFR 240.3a71-2(a) (or subject to 
the period set forth in 17 CFR 240.3a71-2(b)) \31\ is exempt from 
inclusion in the term ``clearing agency,'' as defined in Section 
3(a)(23)(A) of the Exchange Act, where such registered security-based 
swap dealer, registered security-based swap execution facility, or 
entity engaging in dealing activity in security-based swaps that is 
eligible for an exception under 17 CFR 240.3a71-2(a) (or subject to the 
period set forth in 17 CFR 240.3a71-2(b)) would be deemed to be a 
clearing agency solely by

[[Page 7640]]

reason of: (a) Functions performed by such institution as part of 
customary dealing activities or providing facilities for comparison of 
data respecting the terms of settlement of securities transactions 
effected on such registered security-based swap execution facility, 
respectively, or (b) acting on behalf of a clearing agency or 
participant therein in connection with the furnishing by the clearing 
agency of services to its participants or the use of services of the 
clearing agency by its participants.
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    \31\ See supra note 3 (providing the text of 17 CFR 240.3a71-
2(a) and (b)). Accordingly, an entity subject to the period set 
forth in 17 CFR 240.3a71-2(b) will continue to be exempt from 
inclusion in the term ``clearing agency'' during the period after it 
is no longer able to able to rely on the de minimis exception but 
before it is deemed to be a security-based swap dealer.
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    In addition, as noted above, the Commission has granted a temporary 
exemption from the registration requirement for security-based swap 
execution facilities. The temporary exemption from the registration 
requirement for security-based swap execution facilities will expire on 
the earliest compliance date set forth in any of the final rules 
regarding registration of security-based swap execution facilities.\32\ 
To the extent an entity relying on the temporary exemption from the 
registration requirement for security-based swap execution facilities 
also performs the activities of a registered security-based swap 
execution facility as described in Rule 17Ad-24, the Commission notes 
that it has provided a separate, temporary exemption from clearing 
agency registration for entities providing certain clearing services 
for security-based swaps, including trade matching services.\33\
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    \32\ See supra note 1.
    \33\ See Release No. 34-64796 (July 1, 2011), 76 FR 39963, 39964 
(July 7, 2011).
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III. Economic Analysis

    The Commission is sensitive to the economic consequences and 
effects of the adopted amendments, including their benefits and costs. 
Under Section 3(f) of the Exchange Act, whenever the Commission engages 
in rulemaking under the Exchange Act and is required to consider or 
determine whether an action is necessary or appropriate in the public 
interest, it must consider, in addition to the protection of investors, 
whether the action will promote efficiency, competition, and capital 
formation.\34\ Section 23(a)(2) of the Exchange Act 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.\35\
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    \34\ See 15 U.S.C. 78c(f).
    \35\ See 15 U.S.C. 78w(a)(2).
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    The Commission is exempting entities engaging in dealing activity 
in security-based swaps and registered security-based swap execution 
facilities from inclusion in the term ``clearing agency'' under the 
Exchange Act for the following functions: (a) Performing customary 
dealing activities or providing facilities for the comparison of data 
respecting the settlement of securities transactions; or (b) acting on 
behalf of a clearing agency or participant in connection with the 
furnishing of clearing services.\36\ Section 3(a)(23)(B) of the 
Exchange Act excludes national securities exchanges and securities 
dealers from the definition of ``clearing agency,'' to limit the 
potential for overlapping or duplicative requirements that may 
otherwise be imposed on these regulated entities. Entities engaging in 
dealing activity in security-based swaps and security-based swap 
execution facilities perform similar functions for the security-based 
swap market as securities dealers and national securities exchanges 
perform for the general securities industry. Accordingly, new Rule 
17Ad-24 is intended to avoid imposing requirements on these entities 
with marginal or no benefit to safeguarding securities and funds and 
protecting investors by mirroring the existing exemption from the 
definition of ``clearing agency'' for entities engaging in dealing 
activity in security-based swaps and security-based swap execution 
facilities.\37\ Under new Rule 17Ad-24, these entities will not have to 
expend additional resources determining their registration 
requirements, registering as a clearing agency, or meeting the 
standards required of registered clearing agencies as long as their 
activities do not fall outside the scope of the exemption in new Rule 
17Ad-24. Excluding either entities engaging in dealing activity in 
security-based swaps or security-based swap execution facilities from 
the requirements applicable to clearing agencies should not hinder the 
Dodd-Frank Act's goals of greater transparency and financial stability 
of the security-based swap market because the Commission has or will 
have a regulatory framework for these entities targeted to dealing 
activity in security-based swaps or the functions performed by 
security-based swap execution facilities, rather than incidental 
functions that may be similar to those performed by a clearing agency. 
Just as de minimis amounts of dealing activity are sufficiently small 
so as not to warrant registration to address concerns implicated by the 
regulations governing security-based swap dealers, they are also 
sufficiently small such that they do not implicate the concerns 
underpinning the regulations governing clearing agencies.
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    \36\ See supra Part II.C (setting forth the final rule text). 
For purposes of this economic analysis, ``entities engaging in 
dealing activity in security-based swaps'' includes both registered 
security-based swap dealers and entities engaging in dealing 
activity in security-based swaps that are eligible for an exception 
under 17 CFR 240.3a71-2(a) (or subject to the period set forth in 17 
CFR 240.3a71-2(b)).
    \37\ See supra note 5 and accompanying text.
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A. Baseline

    To assess the economic impact of new Rule 17Ad-24, the Commission 
is using as its baseline the security-based swap market as it exists at 
the time of this release. This analysis uses existing Commission 
analyses of security-based swap market in rules adopted pursuant to 
Title VII of the Dodd-Frank Act, updated using data from the DTCC 
Derivatives Repository Limited Trade Information Warehouse (``TIW'') to 
calendar year 2019.\38\ The data available to the Commission from TIW 
do not encompass those transactions that both: (i) Do not involve U.S. 
counterparties, and (ii) are based on non-U.S. reference entities.
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    \38\ See, e.g., infra note 40; supra note 13.
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    The Commission estimates, based on an analysis of TIW data that out 
of more than 4,000 entities engaged in single name CDS activity 
worldwide in 2019, 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.\39\ Ten 
entities that engaged in dealing activity had less than $3 billion of 
notional transacted in single-name credit default swaps, so they could 
use the de minimis exception for the definition of ``security-based 
swap dealer.'' \40\
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    \39\ See Release No. 34-75611 (Aug. 14, 2015), 80 FR 48963, 
49000 (Aug. 14, 2015). The estimate has been updated for data for 
calendar year 2019.
    \40\ See Entity Definitions adopting release, supra note 13, at 
30636. To identify dealing activity, the Commission counted the 
number of entities that had three or more counterparties in a 
calendar year that were not recognized as dealers by the 
International Swaps and Derivatives Association. The estimate has 
been updated with data for calendar year 2019.
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    In addition, eighteen swap execution facilities have permanent or 
temporary registration with the Commodity Futures Trading 
Commission.\41\ Of those, nine allow trading of credit default swap 
indices; if these nine allow trading of single-name credit default 
swaps, they would be required to register as security-based swap

[[Page 7641]]

execution facilities with the Commission.\42\
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    \41\ CFTC, Trading Organizations--Swap Execution Facilities 
(SEF), https://sirt.cftc.gov/SIRT/SIRT.aspx?Topic=SwapExecutionFacilities.
    \42\ Compare BGC Swap Execution Facility, http://www.bgcsef.com/
; Bloomberg Professional Swap Execution Facility Historical Data, 
https://data.bloombergsef.com/; GFI Swaps Exchange Trade Data, 
http://www.gfigroup.com/markets/gfi-sef/trade-data/; ICE Swap Trade, 
https://www.theice.com/swap-trade; MarketAxess Credit Default Swaps, 
https://www.marketaxess.com/trade/credit-default-swaps; tpSEF CDS 
Data, https://www.tpinformation.com/In-Depth-Data/Credit/Credit-Default-Swaps; Tradeweb and Dealerweb Swap Execution Facilities, 
https://www.tradeweb.com/our-markets/market-regulation/sef/; 
TraditionSEF Daily Activity, http://www.traditionsef.com/market-activity/ (which allow trading of credit default swap indices), with 
360T Swap Execution Facilitiy, https://www.360t.com/trading-solutions/sef/; Cboe Swap Execution Facility, https://markets.cboe.com/global/fx/sef/; Clearmarkets CM-SEF Center, https://www.clear-markets.com/cm-sef-centre/; LatAmSEF Market Activity, 
http://latamsef.com/marketactivity.phtml; LedgerX, https://www.ledgerx.com/; NEX SEF Data, http://www.nexsef.com/; Refinitiv 
SEF Volumes, https://www.refinitiv.com/en/products/sef-swap-execution-facility#sef-volumes; SwapEx, http://www.swapex.com/swapex/market-data/NDF/; TeraExchange Instruments, https://teraexchange.com/Home/Instruments (which do not host trading of 
credit default swap indices).
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    Security-based swap dealers must register with the Commission and 
comply with prudential and conduct standards of the Dodd-Frank Act.\43\ 
Security-based swap dealers are subject to a registration and 
regulatory framework that is tailored to the functions they serve and 
risks they pose. These risks, and the corresponding Commission analysis 
of costs and benefits of the ensuring requirements, are discussed in 
the Security-Based Swap Entity Registration, Security-Based Swap 
Recordkeeping and Reporting, Security-Based Swap Capital, Margin, and 
Segregation, and Security-Based Swap Business Conduct Standards 
releases.\44\ Entities that engage in dealing activity in security-
based swaps below the de minimis threshold of $3 billion of notional 
activity in a twelve-month period are excepted from the definition of 
``security-based swap dealer.'' \45\ The Dodd-Frank Act also requires 
security-based swap-execution facilities, as therein defined, to be 
registered with and comply with prudential and conduct standards to be 
set forth by the Commission.\46\
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    \43\ Id.
    \44\ See Release Nos. 34-756711 (Aug. 5, 2015), 80 FR 48963 
(Aug. 14, 2015) (``Security-Based Swap Entity Registration''); 34-
87782 (Dec. 18, 2019), 85 FR 6270 (Feb. 4, 2020) (``Risk Mitigation 
Techniques''); 34-87005 (Sep. 19, 2019), 84 FR 68550 (Dec. 16, 2019) 
(``Security-Based Swap Recordkeeping and Reporting''); 34-86175 
(Jun. 21, 2019), 84 FR 43872 (Aug. 22, 2019) (``Security-Based Swap 
Capital, Margin, and Segregation''); 34-77617 (Apr. 14, 2016), 81 FR 
29959 (May 13, 2016) (``Security-Based Swap Business Conduct 
Standards'').
    \45\ See Entity Definitions adopting release, supra note 13, at 
30639.
    \46\ See 15 U.S.C. 78c-4.
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B. Consideration of Benefits, Costs, and the Effect on Competition, 
Efficiency, and Capital Formation

    The exemption in new Rule 17Ad-24 is designed to avoid imposing 
requirements with marginal or no benefit to safeguarding securities and 
funds and protecting investors on entities engaging in dealing activity 
in security-based swaps and security-based swap execution facilities, 
which will benefit these entities since they will not be required to 
register as a clearing agency or comply with the Commission's 
requirements for clearing agencies. Since these types of entities also 
each have their own registration and regulatory frameworks or are 
exempt due to a de minimis level of activity,\47\ the Commission does 
not expect new Rule 17Ad-24 to impose substantial costs, and there 
should be minimal impacts on transparency and financial stability. 
Lastly, new Rule 17Ad-24 may improve competition and efficiency in the 
security-based swap dealer and security-based swap execution facility 
markets.
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    \47\ See supra notes 44, 46, and accompanying text.
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    The cost savings to both entities engaging in dealing activity in 
security-based swaps and security-based swap execution facilities under 
new Rule 17Ad-24 are likely to be significant. New Rule 17Ad-24 will 
benefit entities engaging in dealing activity in security-based swaps 
and security-based swap execution facilities to the extent that 
additional clarity regarding registration requirements reduces the 
costs they may incur to determine which requirements apply to their 
activities. Furthermore, although no entities engaging in dealing 
activity in security-based swaps or security-based swap execution 
facilities are currently registered as clearing agencies with the 
Commission, exempted entities engaging in dealing activity in security-
based swaps and future exempted security-based swap execution 
facilities and security-based swap dealers will not have to incur 
registration and compliance costs for clearing agencies.\48\ Many of 
the costs of complying with requirements for clearing agencies involve 
collecting information, and the Commission has estimated the monetized 
burden of these standards per clearing agency at $0.5 million in 
initial costs and $1.2 million in annual ongoing costs, adjusted to 
2020 dollars.\49\ Absent the exemption, entities engaging in dealing 
activity in security-based swaps and security-based swap execution 
facilities may have to incur these costs. However, as existing clearing 
agencies follow the Principles for Financial Market Infrastructures, 
many of the Commission's requirements for clearing agencies had minimal 
additional per-entity costs.\50\ Since these requirements are not 
common practice for entities engaging in dealing activity in security-
based swaps and security-based swap execution facilities, applying the 
Commission's clearing agency requirements to these entities would 
likely have higher per-entity costs than the Commission's past 
estimates for clearing agencies.\51\ The Commission does not expect 
either security-based swap execution facilities or security-based swap 
dealers will face new costs from relying on new Rule 17Ad-24.
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    \48\ Though a registered clearing agency may be affiliated with 
a security-based swap execution facility, none of the registered 
clearing agencies are either a registered security-based swap dealer 
or security-based swap execution facility.
    \49\ See Clearing Agency Standards adopting release, supra note 
4, at 66273. The estimates were updated on a per entity basis using 
SIFMA's Management & Professional Earnings in the Securities 
Industry 2013, modified to account for an 1,800-hour work year; 
multiplied by 5.35 to account for bonuses, firm size, employee 
benefits and overhead.
    Because the exempted activities are not among the core central 
counterparty or central securities depository functions of a 
clearing agency, security-based swap execution facilities and 
security-based swap dealers would not unduly benefit from avoiding 
the higher standards of a ``covered clearing agency.'' See generally 
Release No. 34-78961 (Apr 9, 2020), 85 FR 28853 (May 14, 2020) 
(adopting an amendment to the definition of ``covered clearing 
agency'' such that ``covered clearing agency'' means a clearing 
agency that provides the services of a central counterparty or 
central securities depository).
    \50\ See Clearing Agency Standards adopting release, supra note 
4, at 66274.
    \51\ However, many of the clearing agency requirements would not 
apply to entities engaging in dealing activity and security-based 
swap execution facilities because these entities are not likely to 
provide central counterparty or central securities depository 
services, which are the focus of the compliance costs associated 
with the SEC's regulatory framework for registered clearing 
agencies.
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    The Commission also does not expect new Rule 17Ad-24 to impose 
costs on security-based swap markets. Many of the requirements that 
apply to registered security-based swap dealers, such as recordkeeping, 
governance, margin, and capital requirements, cover risks that overlap 
with those facing clearing agencies.\52\ Other aspects of clearing 
agency regulation, such as standards addressing settlement risk or 
participation requirements, are either not applicable to entities 
engaging in

[[Page 7642]]

dealing activity in security-based swaps or may place an undue burden 
on access to this market.\53\ In crafting the security-based swap 
dealer requirements, the Commission has considered the benefits for 
financial stability as well as the burden on competition and the 
promotion of efficiency, competition, and capital formation.\54\ As 
such, in the Commission's view, applying requirements for clearing 
agencies to entities engaging in dealing activity in security-based 
swaps for performing customary dealing activity is not necessary to 
achieve the goals of the Dodd-Frank Act.
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    \52\ The Commission has exempted entities that engage in 
security-based swap dealing activity below the de minimis threshold 
from these requirements since these entities do not implicate the 
concerns that these requirements address.
    \53\ See Clearing Agency Standards adopting release, supra note 
4, at 66242-43. In particular, security-based swap dealers do not 
have members like clearing agencies do. Requiring that they accept 
any participant that has net capital above $50 million may unduly 
restrict their ability to mitigate risks and function as a dealer.
    \54\ See, e.g., Risk Mitigation Techniques adopting release, 
supra note 44, at 6390 (requiring certain risk mitigation techniques 
for registered security-based swap dealers who hold uncleared swaps 
because ``the risks of the counterparties' failure to manage credit 
risk adequately may not become apparent until the onset of a 
financial crisis,'' as well as discussing the rule's burden on 
competition and promotion of efficiency, competition, and capital 
formation).
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    Similarly, security-based swap execution facilities will have to 
register with the Commission and abide by the standards listed in the 
Dodd-Frank Act, as implemented by future Commission rules.\55\ 
Providing data to participants to compare settlement terms or acting on 
behalf of a clearing agency to facilitate clearing services to the 
security-based swap execution facilities' customers, while related to 
clearing and settlement, does not expose the security-based swap 
execution facility to market volatility, so the Commission does not 
believe that these activities alone justify requiring security-based 
swap execution facilities to adopt the risk management practices 
required of clearing agencies.
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    \55\ See 15 U.S.C. 78c-4.
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    The cost savings associated with new Rule 17Ad-24 may promote 
competition among entities engaging in dealing activity in security-
based swaps and security-based swap execution facilities. For example, 
new Rule 17Ad-24 may lower barriers to entry for entities engaging in 
dealing activity in security-based swaps, promoting competition among 
liquidity providers in the security-based swap market. Similarly, lower 
costs for security-based swap execution facilities that provide trade 
processing services should increase competition in providing these 
services, which may reduce the price and/or increase the quality of 
these services. To the extent that new Rule 17Ad-24 increases the 
availability of and competition between either liquidity providers or 
trade execution services, it may marginally improve efficiency of these 
services. The Commission does not anticipate new Rule 17Ad-24 to have a 
substantial impact on capital formation.

IV. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') imposes certain 
requirements on Federal agencies in connection with the conducting or 
sponsoring of any ``collection of information.'' \56\ 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. Further, 44 U.S.C. 3507(a) provides that, before adopting or 
revising a collection of information requirement, an agency must, among 
other things, publish 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 (i) a title for the collection of 
information; (ii) a summary of the collection of information; (iii) a 
brief description of the need for the information and the proposed use 
of the information; (iv) a description of the likely respondents and 
proposed frequency of response to the collection of information; (v) an 
estimate of the paperwork burden that shall result from the collection 
of information; and (vi) notice that comments may be submitted to the 
agency and director of OMB.\57\
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    \56\ See 44 U.S.C. 3501 et seq.; 44 U.S.C. 3502(3).
    \57\ See 44 U.S.C. 3507(a)(1)(D); see also 5 CFR 
1320.5(a)(1)(iv).
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    The proposing release provided notice that Rule 17Ad-24 does not 
impose recordkeeping or information collection requirements and would 
not be a ``collection of information'' within the meaning of the PRA. 
The Commission received no comments in response, and the Commission 
continues to believe that Rule 17Ad-24 does not impose a recordkeeping 
burden.

V. Regulatory Flexibility Act Certification

    The Regulatory Flexibility Act (``RFA'') requires the Commission, 
in promulgating rules, to consider the impact of those rules on small 
entities.\58\ Section 603(a) of the Administrative Procedure Act,\59\ 
as amended by the RFA, generally requires the Commission to undertake a 
regulatory flexibility analysis of all proposed rules to determine the 
impact of such rulemaking on ``small entities.'' \60\ The Commission 
certified in the proposing release, pursuant to Section 605(b) of the 
RFA, that Rule 17Ad-24 would not, if adopted, have a significant impact 
on a substantial number of small entities.\61\ The Commission received 
no comments on this certification.
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    \58\ See 5 U.S.C. 601 et seq.
    \59\ 5 U.S.C. 603(a).
    \60\ Section 601(b) of the RFA permits agencies to formulate 
their own definitions of ``small entities.'' See 5 U.S.C. 601(b). 
The Commission has adopted definitions for the term ``small entity'' 
for the purposes of rulemaking in accordance with the RFA. These 
definitions, as relevant to this rulemaking, are set forth in 17 CFR 
240.0-10.
    \61\ See 5 U.S.C. 605(b).
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    Because the exemptions provided in Rule 17Ad-24 ensure that certain 
activities of registered security-based swap dealers, registered 
security-based swap execution facilities, and entities engaging in 
dealing activity in security-based swaps that are eligible for an 
exception under 17 CFR 240.3a71-2(a) (or subject to the period set 
forth in 17 CFR 240.3a71-2(b)) do not trigger the requirement to 
register as a clearing agency,\62\ the Commission certifies that Rule 
17Ad-24 will not have a significant economic impact on a substantial 
number of small entities.
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    \62\ See supra Part III.
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VI. Other Matters

    If any of the provisions of this rule, 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.
    Pursuant to the Congressional Review Act,\63\ the Office of 
Information and Regulatory Affairs has designated these rules as not a 
``major rule,'' as defined by 5 U.S.C. 804(2).
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    \63\ 5 U.S.C. 801 et seq.
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VII. Statutory Authority

    Pursuant to the Exchange Act, particularly Sections 17A and 36 
thereof, 15 U.S.C. 78q-1 and 15 U.S.C. 78mm, the Commission is adopting 
Rule 17Ad-24.

List of Subjects in 17 CFR Part 240

    Reporting and recordkeeping requirements, Securities.

Text of Amendment

    In accordance with the foregoing, title 17, chapter II of the Code 
of Federal Regulations is amended as follows:

[[Page 7643]]

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

0
1. The general authority citation for part 240 continues to read, in 
part, 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, 78dd, 78ll, 78mm, 
80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 7201 et 
seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 
1350; Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-
106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *

0
2. Section 240.17Ad-24 is added to read as follows:


Sec.  240.17Ad-24   Exemption from clearing agency definition for 
certain registered security-based swap dealers, registered security-
based swap execution facilities, and entities engaging in dealing 
activity in security-based swaps that are eligible for an exception 
under Sec.  240.3a71-2(a) (or subject to the period set forth in Sec.  
240.3a71-2(b)).

    A registered security-based swap dealer, a registered security-
based swap execution facility, or an entity engaging in dealing 
activity in security-based swaps that is eligible for an exception 
under Sec.  240.3a71-2(a) (or subject to the period set forth in Sec.  
240.3a71-2(b)) shall be exempt from inclusion in the term ``clearing 
agency,'' as defined in section 3(a)(23)(A) of the Act, where such 
registered security-based swap dealer, registered security-based swap 
execution facility, or entity engaging in dealing activity in security-
based swaps that is eligible for an exception under Sec.  240.3a71-2(a) 
(or subject to the period set forth in Sec.  240.3a71-2(b)) would be 
deemed to be a clearing agency solely by reason of:
    (a) Functions performed by such institution as part of customary 
dealing activities or providing facilities for comparison of data 
respecting the terms of settlement of securities transactions effected 
on such registered security-based swap execution facility, 
respectively; or
    (b) Acting on behalf of a clearing agency or participant therein in 
connection with the furnishing by the clearing agency of services to 
its participants or the use of services of the clearing agency by its 
participants.

    By the Commission.
    Dated: December 16, 2020.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2020-28194 Filed 1-29-21; 8:45 am]
BILLING CODE 8011-01-P


