[Federal Register Volume 87, Number 24 (Friday, February 4, 2022)]
[Proposed Rules]
[Pages 6652-6706]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-27531]



[[Page 6651]]

Vol. 87

Friday,

No. 24

February 4, 2022

Part II





Securities and Exchange Commission





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17 CFR Part 240





Prohibition Against Fraud, Manipulation, or Deception in Connection 
With Security-Based Swaps; Prohibition Against Undue Influence Over 
Chief Compliance Officers; Position Reporting of Large Security-Based 
Swap Positions; Proposed Rule

  Federal Register / Vol. 87, No. 24 / Friday, February 4, 2022 / 
Proposed Rules  

[[Page 6652]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-93784; File No. S7-32-10]
RIN 3235-AK77


Prohibition Against Fraud, Manipulation, or Deception in 
Connection With Security-Based Swaps; Prohibition Against Undue 
Influence Over Chief Compliance Officers; Position Reporting of Large 
Security-Based Swap Positions

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rules.

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SUMMARY: The Securities and Exchange Commission (``SEC'' or 
``Commission'') is re-proposing for comment a rule under the Securities 
Exchange Act of 1934 (``Exchange Act''), which would be a new rule 
designed to prevent fraud, manipulation, and deception in connection 
with effecting transactions in, or inducing or attempting to induce the 
purchase or sale of, any security-based swap. The rule is designed 
specifically to take into account the unique features of a security-
based swap and would explicitly reach misconduct in connection with the 
ongoing payments and deliveries that typically occur throughout the 
life of a security-based swap. The Commission also is proposing a new 
rule, which would make it unlawful for any officer, director, 
supervised person, or employee of a security-based swap dealer or major 
security-based swap participant, or any person acting under such 
person's direction, to directly or indirectly take any action to 
coerce, manipulate, mislead, or fraudulently influence the security-
based swap dealer's or major security-based swap participant's chief 
compliance officer (``CCO'') in the performance of their duties under 
the federal securities laws or the rules and regulations thereunder. 
Finally, the Commission is using its authority under the Exchange Act 
to propose for comment a new rule, which would require any person with 
a security-based swap position that exceeds a certain threshold to 
promptly file with the Commission a schedule disclosing certain 
information related to its security-based swap position.

DATES: Comments should be received on or before March 21, 2022.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/regulatory-actions/how-to-submit-comments); or
     Send an email to [email protected]. Please include 
File Number S7-32-10 on the subject line; or

Paper Comments

     Send paper comments to Vanessa A. Countryman, Secretary, 
Securities and Exchange Commission, 100 F Street NE, Washington, DC 
20549-1090.

All submissions should refer to File Number S7-32-10. This file number 
should be included on the subject line if email is used. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's 
internet website (http://www.sec.gov/rules/proposed.shtml). Comments 
are also available for website viewing and printing in the Commission's 
Public Reference Room, 100 F Street NE, Room 1580, Washington, DC 
20549, on official business days between the hours of 10 a.m. and 3 
p.m. Operating conditions may limit access to the Commission's public 
reference room. All comments received will be posted without change. 
Persons submitting comments are cautioned that the Commission does not 
redact or edit personal identifying information from comment 
submissions. You should submit only information that you wish to make 
publicly available.
    Studies, memoranda, or other substantive items may be added by the 
Commission or staff to the comment file during this rulemaking. A 
notification of the inclusion in the comment file of any such materials 
will be made available on the SEC's website. To ensure direct 
electronic receipt of such notifications, sign up through the ``Stay 
Connected'' option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Carol M. McGee, Assistant Director, at 
(202) 551-5870, Office of Derivatives Policy, Division of Trading and 
Markets, Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549-8010.

SUPPLEMENTARY INFORMATION: The Commission is re-proposing for comment 
17 CFR 240.9j-1 (``Rule 9j-1'') under the Exchange Act, which would be 
a new rule designed to prevent fraud, manipulation, and deception in 
connection with effecting transactions in, or inducing or attempting to 
induce the purchase or sale of, any security-based swap. The Commission 
also is proposing new 17 CFR 240.15Fh-4(c) (``Rule 15Fh-4(c)'') under 
the Exchange Act, which would make it unlawful for any officer, 
director, supervised person, or employee of a security-based swap 
dealer or major security-based swap participant, or any person acting 
under such person's direction, to directly or indirectly take any 
action to coerce, manipulate, mislead, or fraudulently influence the 
security-based swap dealer's or major security-based swap participant's 
CCO in the performance of their duties under the Federal securities 
laws or the rules and regulations thereunder. Finally, the Commission 
is using its authority under Section 10B(d) of the Exchange Act to 
propose for comment new 17 CFR 240.10B-1 (``Rule 10B-1''), which would 
require any person with a security-based swap position that exceeds a 
certain threshold to promptly file with the Commission a schedule 
disclosing among other things: (1) The applicable security-based swap 
position; (2) positions in any security or loan underlying the 
security-based swap position; and (3) any other instrument relating to 
the underlying security or loan, or group or index of securities or 
loans. Proposed Rule 10B-1 includes different reporting thresholds for 
security-based swaps tied to debt securities and security-based swaps 
tied to equity securities. The Commission would make all filings 
received pursuant to proposed Rule 10B-1 available to the public, with 
the goal of increasing transparency and oversight in the security-based 
swap market.
I. Introduction
    A. Background
    B. Observations in the Credit Default Swap Market
    C. Overview of the Proposal
    1. Re-Proposed Rule 9j-1
    2. Proposed Rule 15Fh-4(c)
    3. Proposed Rule 10B-1 20
II. Re-Proposed Rule 9j-1: Prohibition Against Fraud, Manipulation, 
and Deception in Connection With Security-Based Swaps
    A. Prior Commission Action
    B. Scope of Re-Proposed Rule 9j-1
    1. General Antifraud and Anti-Manipulation Provisions
    2. ``Purchases'' and ``Sales'' in the Context of Security-Based 
Swaps and Limited Safe Harbor for Certain Limited Actions
    3. Prohibition on Price Manipulation
    C. Liability Under Proposed Rule 9j-1 in Connection With the 
Purchase or Sale of a Security
    D. Preventing Undue Influence Over Chief Compliance Officers; 
Policies and Procedures Regarding Compliance With Re-Proposed Rule 
9j-1, Proposed Rule 10B-1 and Proposed Rule 15Fh-4(c)
    E. Request for Comment
III. Proposed Rule 10B-1: Position Reporting of Large Security-Based 
Swap Positions
    A. Proposed Definitions and Thresholds

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    1. Reporting Thresholds for Debt Security-Based Swaps (Including 
CDS)
    2. Reporting Threshold for Security-Based Swaps on Equity
    3. Amendments to a Previously Filed Schedule 10B
    B. Information Required To Be Included in Schedule 10B
    C. Cross-Border Issues
    D. Structured Data Requirement for Schedule 10B
    E. Request for Comment
IV. General Request for Comment
V. Paperwork Reduction Act
    A. Summary of Collections of Information
    B. Proposed Use of Information
    C. Respondents
    D. Total Annual Recordkeeping Burden
    1. Initial Costs and Burdens
    2. Ongoing Costs and Burdens
    E. Collection of Information Is Mandatory
    F. Confidentiality
    G. Request for Comment
VI. Economic Analysis
    A. Introduction
    B. Broad Economic Considerations
    C. Baseline
    1. Existing Regulatory Frameworks
    2. Security-Based Swap Data, Market Participants, Dealing 
Structures, Levels of Security-Based Swap Trading Activity, and 
Position Concentration
    D. Consideration of Costs and Benefits; Consideration of Burden 
on Competition and Promotion of Efficiency, Competition and Capital 
Formation
    1. Re-Proposed Rule 9j-1 and Proposed Rule 15Fh-4(c)
    i. Benefits
    ii. Costs
    2. Proposed Rule 10B-1
    i. Benefits
    ii. Costs
    iii. Reporting Thresholds
    (A) Thresholds for Credit Default Swaps
    (B) Thresholds for Non-CDS Debt Security-Based Swaps and 
Security-Based Swaps on Equity
    E. Reasonable Alternatives
    1. Implementing a More Prescriptive Approach in Re-Proposed Rule 
9j-1
    2. Safe Harbor for Hedging Exposure Arising Out of Lending 
Activities
    3. Mandating That Security-Based Swap Data Repositories Report 
or Publicly Disclose Positions
    4. Adopting Position Limits
    5. Threshold Alternatives for Security-Based Swaps Based on 
Equity and Non-CDS Debt 173
    6. Threshold Alternatives for Credit Default Swaps
    7. Information Required To Be Reported on Schedule 10B
    F. Request for Comment
VII. Consideration of Impact on the Economy
VIII. Regulatory Flexibility Act Certification
IX. Statutory Authority

I. Introduction

A. Background

    Title VII of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (``Dodd-Frank Act''),\1\ which established a regulatory 
framework for the over-the-counter (``OTC'') derivatives market, 
provides that the Commission is primarily responsible for regulating 
security-based swaps, while the Commodity Futures Trading Commission 
(``CFTC'') is primarily responsible for regulating swaps. The 
Commission has now finalized a majority of its Title VII rules related 
to security-based swaps.\2\ In accordance with those rules, a person 
who satisfies the definitions of ``security-based swap dealer'' 
(``SBSD'') or ``major security-based swap participant'' (``MSBSP'') 
(each SBSD and each MSBSP also referred to as an ``SBS Entity'' and 
together referred to as ``SBS Entities'') is now required to register 
with the Commission in such capacity and is therefore subject to the 
Commission's regime regarding margin, capital, segregation, 
recordkeeping and reporting, trade acknowledgment and verification 
requirements, risk mitigation techniques for uncleared security-based 
swaps, business conduct standards for security-based swap activity, 
including internal supervision requirements and the requirement to 
designate an individual to serve as the CCO who must take reasonable 
steps to ensure that the SBS Entity establishes, maintains, and reviews 
written policies and procedures reasonably designed to achieve 
compliance with the Exchange Act and the rules and regulations 
thereunder relating to its business as an SBS Entity.\3\ Transaction 
reporting for security-based swaps has been required since November 8, 
2021, with public dissemination to begin on February 14, 2022.\4\
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    \1\ Wall Street Transparency and Accountability Act of 2010, 
Public Law. 111-203, Sec.  761-774, 124 Stat. 1376, 1754-1802(2010). 
Unless otherwise indicated, references to ``Title VII'' in this 
release are to Subtitle B of Title VII of the Dodd-Frank Act.
    \2\ See, e.g., Regulation SBSR--Reporting and Dissemination of 
Security-Based Swap Information, Exchange Act Release No. 74244 
(Feb. 11, 2015), 80 FR 14563 (Mar. 19, 2015) (``2015 Regulation SBSR 
Adopting Release''); Security-Based Swap Data Repository 
Registration, Duties, and Core Principles, Exchange Act Release No. 
74246 (Feb. 11, 2015), 80 FR 14437 (Mar. 19, 2015); Registration 
Process for Security-Based Swap Dealers and Major Security-Based 
Swap Participants, Exchange Act Release No. 75611 (Aug. 5, 2015), 80 
FR 48963 (Aug. 14, 2015); Regulation SBSR--Reporting and 
Dissemination of Security-Based Swap Information, Exchange Act 
Release No. 78321 (July 14, 2016), 81 FR 53545 (Aug. 12, 2016) 
(``2016 Regulation SBSR Adopting Release''); Applications by 
Security-Based Swap Dealers or Major Security-Based Swap 
Participants for Statutorily Disqualified Associated Person To 
Effect or Be Involved in Effecting Security-Based Swaps, Exchange 
Act Release No. 84858 (Dec. 19, 2018), 84 FR 4906 (Feb. 19, 2019); 
Capital, Margin, and Segregation Requirements for Security-Based 
Swap Dealers and Major Security-Based Swap Participants and Capital 
and Segregation Requirements for Broker-Dealers, Exchange Act 
Release No. 86175 (June 21, 2019), 84 FR 43872 (Aug. 22, 2019) 
(``Capital, Margin, and Segregation Adopting Release''); 
Recordkeeping and Reporting Requirements for Security-Based Swap 
Dealers, Major Security-Based Swap Participants, and Broker-Dealers, 
Exchange Act Release No. 87005 (Sept. 19, 2019), 84 FR 68550 (Dec. 
16, 2019) (``Recordkeeping and Reporting Adopting Release''); Rule 
Amendments and Guidance Addressing Cross-Border Application of 
Certain Security-Based Swap Requirements, Exchange Act Release No. 
87780 (Dec. 18, 2019), 85 FR 6270 (Feb. 4, 2020) (``Cross-Border 
Amendments Release'').
    \3\ See Cross-Border Amendments Release, 85 FR at 6345-46. The 
first SBSDs were required to be conditionally registered with the 
Commission by November 1, 2021.
    \4\ See SEC Approves Registration of First Security-Based Swap 
Data Repository; Sets the First Compliance Date for Regulation SBSR 
(available at: https://www.sec.gov/news/press-release/2021-80). In 
addition, each registered security-based swap data repository 
(``SBSDR'') will be required to begin publicly disseminating 
security-based swap data as of February 14, 2022, which is the first 
Monday that is three months after the date that reporting began. See 
2016 Regulation SBSR Adopting Release, 81 FR at 53608. Finally, the 
deadline for reporting certain historical security-based swaps to an 
SBSDR is two months after the date that public dissemination is 
required to begin (i.e., April 14, 2022). See 2016 Regulation SBSR 
Adopting Release, 81 FR at 53610.
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    In addition to the operational rules for SBS Entities and security-
based swap data reporting and public dissemination, the Dodd-Frank Act 
also amended the Exchange Act in a number of important ways to prohibit 
fraud, manipulation, and deception in connection with security-based 
swaps. In particular, Section 763(g) of the Dodd-Frank Act expanded the 
anti-manipulation provisions of Section 9 of the Exchange Act to 
encompass purchases or sales of security-based swaps and requires the 
Commission to adopt rules to prevent fraud, manipulation, and deception 
in connection with security-based swaps. Specifically, paragraph (j) of 
Section 9 makes it unlawful for ``any person, directly or indirectly, 
by the use of any means or instrumentality of interstate commerce or of 
the mails, or of any facility of any national securities exchange, to 
effect any transaction in, or to induce or attempt to induce the 
purchase or sale of, any security-based swap, in connection with which 
such person engages in any fraudulent, deceptive, or manipulative act 
or practice, makes any fictitious quotation, or engages in any 
transaction, practice, or course of business which operates as a fraud 
or deceit upon any person.'' \5\ It also provides that the Commission 
``shall . . . by rules and regulations define, and prescribe means 
reasonably designed to prevent, such transactions, acts, practices, and 
courses of business as are fraudulent, deceptive, or

[[Page 6654]]

manipulative, and such quotations as are fictitious.'' \6\
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    \5\ See 15 U.S.C. 78i(j). Note that Section 9 of the Exchange 
Act erroneously contains two subsection (j)s.
    \6\ See id.
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    Additionally, Section 761 of the Dodd-Frank Act modified several 
definitions in both the Exchange Act and the Securities Act to account 
for security-based swaps. For example, the Dodd-Frank Act amended the 
definition of ``security'' in Section 3(a)(10) of the Exchange Act \7\ 
and Section 2(a)(1) of the Securities Act \8\ to include security-based 
swaps. As a result, security-based swaps, because they are securities, 
are subject to the general antifraud and anti-manipulation provisions 
of the Federal securities laws, including Sections 9(a), 10(b) and 17 
CFR 240.10b-5 (``Rule 10b-5'') under the Exchange Act,\9\ and Section 
17(a) of the Securities Act.\10\
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    \7\ 15 U.S.C. 78c(a)(10).
    \8\ 15 U.S.C. 77b(a)(1).
    \9\ 15 U.S.C. 78j(b).
    \10\ 15 U.S.C. 77q(a).
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    Moreover, the Dodd-Frank Act amended the definitions of 
``purchase'' and ``sale'' in Section 2(a)(18) of the Securities 
Act,\11\ the definitions of ``buy'' and ``purchase'' in Section 
3(a)(13) of the Exchange Act,\12\ and ``sale'' and ``sell'' in Section 
3(a)(14) of the Exchange Act,\13\ in the context of security-based 
swaps, to include the execution, termination, assignment, exchange, 
transfer, or extinguishment of rights or obligations. As a result of 
those changes, misconduct in connection with these actions will also be 
prohibited under Sections 9 and 10(b) of the Exchange Act and Rule 10b-
5 thereunder, and Section 17(a) of the Securities Act.
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    \11\ 15 U.S.C. 77b(a)(18).
    \12\ 15 U.S.C. 78c(a)(13).
    \13\ 15 U.S.C. 78c(a)(14).
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    Finally, the Dodd-Frank Act also amended the Exchange Act to 
explicitly authorize the Commission to require reporting of large 
security-based swap positions. Section 763(h) of the Dodd-Frank Act, 
entitled ``Position limits and position accountability for security-
based swaps and large trader reporting,'' added Section 10B to the 
Exchange Act. In addition to providing the Commission with authority to 
establish position limits for security-based swaps, Section 10B(d) also 
provides the Commission with rulemaking authority to require reporting 
of large security-based swap positions. Specifically, Section 10B(d) 
authorizes the Commission to:

. . . require any person that effects transactions for such person's 
own account or the account of others in any securities-based swap or 
uncleared security-based swap and any security or loan or group or 
narrow-based security index of securities or loans . . . to report 
such information as the Commission may prescribe regarding any 
position or positions in any security-based swap or uncleared 
security-based swap and any security or loan or group or narrow-
based security index of securities or loans and any other instrument 
relating to such security or loan or group or narrow-based security 
index of securities or loans . . .\14\
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    \14\ See 15 U.S.C. 78j-2(d).

    On November 3, 2010, the Commission proposed for comment new Rule 
9j-1, which would have prohibited the same categories of misconduct as 
Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and 
Section 17(a) of the Securities Act of 1933, in the context of 
security-based swaps, but would also have explicitly addressed 
misconduct that is in connection with the ``exercise of any right or 
performance of any obligation under'' a security-based swap.\15\ In 
other words, the 2010 proposed rule would have applied to offers, 
purchases, and sales of security-based swaps in the same way that the 
general antifraud provisions apply to all securities, but also would 
have explicitly applied to the cash flows, payments, deliveries, and 
other ongoing obligations and rights that are specific to security-
based swaps.\16\
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    \15\ See Prohibition Against Fraud, Manipulation, and Deception 
in Connection with Security-Based Swaps, Exchange Act Release No. 
63236 (Nov. 3, 2010), 75 FR 68560 (Nov. 8, 2010) (``2010 Rule 9j-1 
Proposing Release''). For purposes of this release, we will refer to 
the version of Rule 9j-1 that the Commission proposed in the 2010 
Rule 9j-1 Proposing Release as the ``2010 proposed rule.'' We will 
generally refer to Rule 9j-1 as we propose it here as the ``proposed 
rule'' or ``re-proposed Rule 9j-1.''
    \16\ See 2010 Rule 9j-1 Proposing Release, 75 FR at 68561-62.
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    The Commission has not yet finalized rules mandated by Section 
9(j), nor has it proposed any reporting requirements pursuant to 
Section 10B(d) of the Exchange Act. The regulatory landscape for 
security-based swaps has changed since the Commission first proposed 
Rule 9j-1 in 2010. At the time, efforts to reform the global OTC 
derivatives markets, which had been set in motion in response to the 
2008 financial crisis, had only begun, such that these markets were not 
yet subject to a comprehensive regulatory framework.\17\ Since that 
time, however, regulators overseeing the world's primary OTC 
derivatives markets have made significant progress implementing reforms 
for OTC derivatives.\18\ In addition to the progress made by the 
Commission in finalizing its Title VII rulemakings related to security-
based swaps, the CFTC has largely completed its Title VII rulemakings 
related to swaps, including by adopting antifraud and anti-manipulation 
rules under the Commodity Exchange Act (``CEA'') to implement the Dodd-
Frank Act's amendments to Section 6(c) of the CEA.\19\ In light of the 
above, the Commission believes that now is an opportune time to move 
forward with the antifraud and manipulation rules required by Section 
9(j) as well the rules contemplated by Section 10B(d). In addition, in 
recognition of the fact that CCOs of SBS Entities play an important 
role in preventing fraud and manipulation by SBS Entities and their 
personnel, in that they are tasked with designing and maintaining 
effective compliance systems, the Commission also is proposing an 
additional measure under Section 15F(h) of the Exchange Act to protect 
CCOs in the furtherance of those duties.\20\
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    \17\ Commodity Futures Trading Commission and SEC Joint Report 
on International Swap Regulation, Jan. 31, 2012 (available at: 
https://www.sec.gov/files/sec-cftc-intlswapreg.pdf).
    \18\ See Financial Stability Board, OTC Derivatives Market 
Reforms: Note on implementation progress for 2010, Nov. 25, 2020 
(available at: https://www.fsb.org/wp-content/uploads/P251120.pdf).
    \19\ 17 CFR 180.1 (``CFTC Rule 180.1'') implements the 
provisions of Section 6(c)(1) of the CEA by prohibiting, among other 
things, manipulative and deceptive devices employed intentionally or 
recklessly, regardless of whether the conduct in question was 
intended to create or did create an artificial price. CFTC Rule 
180.1 also prohibits trading on the basis of material non-public 
information in breach of a pre-existing duty (established by another 
law or rule, agreement, understanding, or some other source) and 
trading on the basis of material non-public information that was 
obtained through fraud or deception. See 17 CFR 180.1. CFTC Rule 
180.1(a) is modeled after Rule 10b-5 of the Exchange Act, although 
it contains some notable differences, such as its application to 
attempted fraud and manipulation. Id. 17 CFR 180.2 (``CFTC Rule 
180.2''), promulgated pursuant to Section 6(c)(3) of the CEA and 
CFTC's general rulemaking authority, addresses price manipulation 
and, in line with Section 6(c)(3) of the CEA, provides that ``[i]t 
shall be unlawful for any person, directly or indirectly, to 
manipulate or attempt to manipulate the price of any swap, or of any 
commodity in interstate commerce, or for future delivery on or 
subject to the rules of any registered entity.'' A violation of CFTC 
Rule 180.2 requires a showing of ``specific intent.'' See 
Prohibition on the Employment, or Attempted Employment, of 
Manipulative and Deceptive Devices and Prohibition on Price 
Manipulation, 76 FR 41398, 41707 (Jul. 14, 2011) (``[the CFTC] 
reaffirms the requirement under final Rule 180.2 that a person must 
act with the requisite specific intent. In other words, recklessness 
will not suffice under final Rule 180.2 as it will under final Rule 
180.1.'').
    \20\ To be clear, the ultimate responsibility for compliance by 
the SBS Entity with the federal securities laws, including the 
requirement to have adequate compliance systems and to avoid 
violations generally, rests with the SBS Entity itself.
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B. Observations in the Credit Default Swap Market

    In addition to the regulatory developments, there have been market 
developments. A number of press reports and academic articles since 
2010

[[Page 6655]]

have discussed manufactured credit events or other opportunistic 
strategies in the credit default swap (``CDS'') market.\21\ 
Manufactured or other opportunistic CDS strategies can take a number of 
different forms but generally involve CDS buyers or sellers taking 
steps, with or without the participation of a company whose securities 
underlie, or are referenced by, a CDS (a ``reference entity''),\22\ to 
avoid, trigger, delay, accelerate, decrease, and/or increase payouts on 
CDS.\23\ Some examples reported by academics and the press include:
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    \21\ See, e.g., Gina-Gail S. Fletcher, Engineered Credit Default 
Swaps: Innovative or Manipulative? 94 N.Y.U. L. Rev. 1073 (2019); 
see also Andras Danis & Andrea Gamba, Dark Knights: The Rise in Firm 
Intervention by CDS Investors, Ga. Inst. Of Tech. Scheller Coll. of 
Bus. Working Paper, Paper No. 3479635 & WBS Fin. Grp. Working Paper, 
Paper No. 265 (Nov. 2019) (available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3479635); see also Henry T.C. Hu, 
Corporate Distress, Credit Default Swaps, and Defaults: Information 
and Traditional, Contingent, and Empty Creditors, 13 Brook. J. Corp. 
Fin. & Com. L. 26-27 (Nov. 2018) (available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3302816).
    \22\ A security-based swap, including a CDS contract, may 
reference a number of different types of securities, including 
instruments of indebtedness, indices, interest rates, quantitative 
measures, or other financial or economic interests (each a 
``reference obligation'').
    \23\ In order to cash settle any CDS contract that relies on the 
International Swaps and Derivatives Association (``ISDA'') standard 
documentation, a Credit Derivatives Determinations Committee 
(``DC'') must make a determination that a defined default event (a 
``credit event'') occurred and vote to hold an auction to determine 
the settlement price of the CDS. A DC is generally composed of nine 
or ten dealers and five buy-side members. Once a DC determines that 
a credit event has occurred and that an auction should be held, the 
DC Secretary publishes auction terms, which include a list of 
obligations that a CDS protection buyer can deliver to the CDS 
protection seller after the auction settlement (each a ``deliverable 
obligation''). Each auction consists of two parts: (1) The first 
part of the auction, which involves submission of physical 
settlement requests by participating dealers, aims at determining 
the initial market mid-point, the net open interests, and adjustment 
amounts; and (2) the second part of the auction consists of 
calculating the final settlement price. Since a protection buyer has 
the right to deliver any of the deliverable obligations specified on 
the list, it is in the protection buyers' interest to deliver into 
the auction the cheapest deliverable obligation; as a result, the 
value of this ``cheapest to deliver'' deliverable obligation drives 
the final settlement price. See Markit and Creditex Credit Event 
Auction Primer, 1 (Feb. 2010) (available at: http://www.creditfixings.com/information/affiliations/fixings/auctions/docs/credit_event_auction_primer.pdf); see also Credit Suisse, A 
Guide to Credit Events and Auctions, Jan. 11, 2012, 5 (available at: 
https://doc.research-andanalytics.csfb.com/docView?language=ENG&source=emfromsendlink&format=PDF&document_id=803733390&serialid=FWHCx3yCrSE3FoEvAbEKa6fRKhqLoKs0jL1gR5W2Dfs%3D).
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     A CDS buyer working with a reference entity to create an 
artificial, technical, or temporary failure-to-pay credit event in 
order to trigger a payment on a CDS to the buyer (and to the detriment 
of the CDS seller).\24\
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    \24\ See Hu, supra note 21 at 26-27.
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     The strategy above (as well as other strategies) can be 
combined with causing the reference entity to issue a below-market debt 
instrument in order to artificially increase the auction settlement 
price for the CDS (i.e., by creating a new ``cheapest to deliver'' 
deliverable obligation).\25\
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    \25\ See Statement on Manufactured Credit Events by CFTC 
Divisions of Clearing and Risk, Market Oversight, and Swap Dealer 
and Intermediary Oversight (Apr. 24, 2018) (available at: https://www.cftc.gov/PressRoom/SpeechesTestimony/divisionsstatement 042418).
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     CDS buyers endeavoring to influence the timing of a credit 
event in order to ensure a payment (upon the triggering of the CDS) 
before expiration of a CDS, or a CDS seller taking similar actions to 
avoid the obligation to pay by ensuring a credit event occurs after the 
expiration of the CDS, or taking actions to limit or expand the number 
and/or kind of deliverable obligations in order to impact the recovery 
rate.\26\
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    \26\ See Hu, supra note 21 at 22-26.
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     CDS sellers offering financing to restructure a reference 
entity in such a way that ``orphans'' the CDS--eliminating or reducing 
the likelihood of a credit event by moving the debts off the balance 
sheets of the reference entity and onto the balance sheets of a 
subsidiary or an affiliate that is not referenced by the CDS.\27\
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    \27\ See Fletcher, supra note 21 at 1101.
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     Taking actions, including as part of a larger 
restructuring, to increase (or decrease) the supply of deliverable 
obligations by, for example, adding (or removing) a co-borrower to 
existing debt of a reference entity, thereby increasing (or decreasing) 
the likelihood of a credit event and the cost of CDS.\28\
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    \28\ See Fletcher, supra note 21 at 1098. See also CFTC Talks 
Podcast, Credit Derivatives, (Jul. 10, 2019) (available at: https://www.cftc.gov/Exit/index.htm?https://youtu.be/Qqo9KR6JXaM?).
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    In June 2019, the former SEC Chairman, together with the principals 
of the CFTC and the U.K. Financial Conduct Authority at the time, 
issued a public statement stating that the ``continued pursuit of 
various opportunistic strategies in the credit derivatives markets, 
including but not limited to those that have been referred to as 
`manufactured credit events,' may adversely affect the integrity, 
confidence and reputation of the credit derivatives markets, as well as 
markets more generally'' (``2019 Joint Statement'').\29\ Additionally, 
in April 2018 the Board of Directors of ISDA stated their belief that 
``narrowly tailored defaults . . . could negatively impact the 
efficiency, reliability and fairness of the overall CDS market.'' \30\ 
Following this statement, in March 2019, ISDA introduced amendments to 
its Credit Derivatives Definitions designed to address certain issues 
related to manufactured credit events, which ISDA termed ``narrowly 
tailored credit events'' (``ISDA Amendments'').\31\
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    \29\ See Joint Statement on Opportunistic Strategies in the 
Credit Derivatives Market (June 24, 2019) (available at: https://www.sec.gov/news/press-release/2019-106).
    \30\ See ISDA Board Statement on Narrowly Tailored Credit Events 
(April 11, 2018) (available at: ISDA Board Statement on Narrowly 
Tailored Credit Events--International Swaps and Derivatives 
Association).
    \31\ See Proposed Amendments to the 2014 ISDA Credit Derivatives 
Definitions Relating to Narrowly Tailored Credit Event (Mar. 6, 
2019) (available at: https://www.isda.org/2019/03/06/proposed-amendments-to-the-2014-isda-credit-derivatives-definitions-relating-to-narrowly-tailored-credit-events/). On September 19, 2019, an 
update to the 2019 Joint Statement was issued. See Update to Joint 
Statement (Sept. 19, 2019) (available at: https://www.sec.gov/news/public-statement/update-june-2019-joint-statement-opportunistic-strategies-credit-derivatives). The updated statement welcomed 
ISDA's efforts, but also noted that the ISDA Amendments would not 
address all of the concerns identified in the 2019 Joint Statement, 
including but not limited to addressing opportunistic strategies 
that do not involve narrowly tailored credit events.
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C. Overview of the Proposal

1. Re-Proposed Rule 9j-1
    The Commission has decided to re-propose Rule 9j-1. As described in 
detail below, re-proposed Rule 9j-1 follows the same general approach 
as the 2010 proposed rule in that it would prohibit the same categories 
of misconduct as Section 10(b) of the Exchange Act and Rule 10b-5 
thereunder, and Section 17(a) of the Securities Act of 1933 in the 
context of security-based swaps, including misconduct that is in 
connection with the exercise of any right or performance of any 
obligation under a security-based swap.\32\ Unlike the 2010 proposed 
rule, however, this new proposal also includes an anti-manipulation 
provision similar to 17 CFR 108.2 (``CFTC Rule 180.2'').\33\ Further, 
re-proposed Rule 9j-1 would provide that: (1) A person with material 
non-public information about a security cannot avoid liability under 
the securities laws by making purchases or sales in the security-based 
swap (as opposed to purchasing or selling the underlying security), and 
(2) a person cannot avoid liability under Section 9(j) or re-proposed 
Rule 9j-1 in connection with a fraudulent scheme involving a security-
based swap by instead making purchases or sales in the underlying

[[Page 6656]]

security (as opposed to purchases or sales in -the security-based 
swap).\34\
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    \32\ See re-proposed Rule 9j-1(a) and (e).
    \33\ See re-proposed Rule 9j-1(b).
    \34\ See re-proposed Rule 9j-1(c) and (d).
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    The Commission recognizes that CDS buyers and sellers regularly 
engage in legitimate interactions with reference entities, and often 
offer critical means of restructuring and funding for reference 
entities. Moreover, we also understand that CDS transactions are an 
important means by which debt holders hedge their underlying debt 
instruments, and that the absence of such hedging opportunities could 
impact prospective investors' willingness and ability to invest in that 
underlying market. The Commission preliminarily believes the proposal 
is sufficiently tailored to balance these concerns but, in section II.E 
below, is also soliciting comment on how it can address manufactured or 
other opportunistic strategies that involve fraudulent, deceptive, or 
manipulative activity, or that involve such quotations as are 
fictitious, without impairing the proper functioning of the security-
based swap markets or other securities markets.
    Further, the scope of re-proposed Rule 9j-1 is not limited to CDS. 
Fraudulent, deceptive, or manipulative conduct, such as providing false 
or incomplete information to a counterparty to secure better terms or 
pricing or to alter the performance of ongoing rights and obligations, 
has the potential to harm counterparties to all forms of swaps, 
including equity and non-CDS debt security-based swaps. Manipulation of 
the underlying reference security can affect the pricing of an equity 
or debt security-based swaps, as well as the ongoing payments and 
obligations that are based on the value of that reference security. 
Further, in some cases, particularly in instances involving security-
based swaps transactions that are effected over the internet, there is 
a potential for trading software to distort pricing and payouts on 
security-based swaps.\35\ Finally, to the extent an opportunistic 
strategy alters the operations of a reference entity, counterparties to 
any security-based swap based on that reference entity could be 
impacted; the potential harm is not limited to CDS holders. As a 
result, re-proposed Rule 9j-1 applies to all transactions in security-
based swaps, consistent with the 2010 proposed rule.
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    \35\ See e.g., SEC Investor Alert: Binary Options Fraud 
available at: https://www.investor.gov/protect-your-investments/fraud/types-fraud/binary-options-fraud. (stating that the SEC has 
received numerous complaints alleging that certain ``internet-based 
binary options trading platforms manipulate the trading software to 
distort binary options prices and payouts.''). The SEC Investor 
Alert represents the views of the staff of the Office Investor 
Education and Advocacy. It is not a rule, regulation, or statement 
of the Commission. The Commission has neither approved nor 
disapproved its content. The SEC Investor Alert, like all staff 
statements, has no legal force or effect: It does not alter or amend 
applicable law, and it creates no new or additional obligations for 
any person. Depending on the facts and circumstances, binary options 
based on securities may be security-based swaps.
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2. Proposed Rule 15Fh-4(c)
    The Commission also is proposing a rule aimed at protecting the 
independence and objectivity of an SBS Entity's CCO by preventing the 
personnel of an SBS Entity from taking actions to coerce, mislead, or 
otherwise interfere with the CCO. The Commission recognizes that SBS 
Entities dominate the security-based swap market and also recognizes 
the important role that CCOs of SBS Entities play in ensuring 
compliance by SBS Entities and their personnel with the federal 
securities laws. As a result, the Commission is proposing Rule15Fh-4(c) 
which would make it unlawful for any officer, director, supervised 
person, or employee of an SBS Entity, or any person acting under such 
person's direction, to directly or indirectly take any action to 
coerce, manipulate, mislead, or fraudulently influence the SBS Entity's 
CCO in the performance of their duties under the Federal securities 
laws or the rules and regulations thereunder.
3. Proposed Rule 10B-1
    Finally, the Commission also recognizes that transparency can be 
beneficial to market participants so that they can act in an informed 
manner to protect their own interests. One example involves what some 
legal observers refer to as ``net-short debt activism''--where a market 
participant with a large CDS position and a controlling voting interest 
in the debt of a reference entity votes against its interest as a debt 
holder to ensure that a credit event occurs (such as by blocking a 
restructuring or voting against curing a technical default under the 
terms of a loan).\36\ In such instances, both the Commission and 
relevant market participants--particularly issuers of the underlying 
debt securities--could benefit from having access to information that 
may indicate that one or more market participants has a financial 
incentive to take an action that would be harmful to the issuer, which 
in turn could impact the issuer's other security holders.\37\ In 
particular, such notice would provide the relevant parties with the 
ability to take appropriate action to limit any potential harmful 
consequences. Given such benefits to the market, which may accrue even 
where the facts and circumstances of a particular situation are not 
indicative of potentially fraudulent, manipulative, or deceptive 
conduct, the Commission believes that public reporting of large CDS 
positions would help to provide such advance notice.
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    \36\ See Joshua A. Feltman, Emil A. Kleinhaus, and John R. 
Sobolewski, Wachtell, Lipton, Rosen & Katz, The Rise of Net-Short 
Debt Activism, Harvard Law School Forum on Corporate Governance and 
Financial Regulation (Aug. 7, 2018) (available at: https://corpgov.law.harvard.edu/2018/08/07/the-rise-of-the-net-short-debt-activist/). See also Matt Levine, Aurelius Broke Windstream's Bonds 
to Save Them, Bloomberg View (Feb. 27, 2019).
    \37\ Harm to the issuer could lead to harm to its employees, 
customers, and business partners, among others. Any one of these 
indirect effects could create further harm to the issuer and its 
security holders.
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    Additional transparency regarding large security-based swap 
positions also could alert market participants, including 
counterparties, as well as issuers of securities and their security 
holders, to the risk posed by the concentrated exposure of a 
counterparty. Such transparency also could enhance risk management by 
security-based swap counterparties and inform pricing of the security-
based swaps. For example, if a single counterparty has a $5 billion 
security-based swap position distributed equally among five different 
dealers on the same underlying equity security, public reporting of 
that security-based swap position would alert each dealer to the total 
exposure of the reporting counterparty. In the event of an issue 
involving the underlying security or the counterparty's ability to make 
a payment on the security-based swaps composing the large position, 
some or all of those dealers could then take actions to protect their 
positions, such as increasing their hedges against the relevant 
security-based swaps or calling for additional margin, if permitted. 
Knowledge of the total position of a counterparty also may inform a 
dealer's actions in the event that the counterparty defaults on its 
obligations under the security-based swap.
    Finally, transparency about security-based swap positions could 
play an important role in protecting market integrity, including by 
providing the Commission and other regulators with access to 
information that may indicate that a person (or a group of persons) is 
building up a large security-based swap position, which may be relevant 
for a number of reasons, as discussed in greater detail in section III. 
As previously discussed, the manufactured or other opportunistic 
strategies that have been reported to have taken place in the CDS 
markets take on a variety of

[[Page 6657]]

forms. Although some of those strategies may have involved fraudulent 
or manipulative conduct, including those that involve parties acting to 
artificially inflate CDS payments, others do not necessarily constitute 
prohibited activity. The common thread to all of those strategies, 
however, is one or more parties taking affirmative steps to avoid, 
trigger, delay, accelerate, decrease, and/or increase payouts on 
CDS.\38\ Given the importance of the CDS market and its 
interconnectedness with the underlying debt securities that CDS may be 
used to hedge, the Commission believes that additional transparency in 
the CDS market can help to ensure that it remains fair, orderly, and 
efficient. For similar reasons, such transparency also should benefit 
the market for other types of security-based swaps.
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    \38\ See Fletcher, supra note 21 at 1098 (``[I]t is evident that 
engineered CDS transactions are unfair, create the perception of the 
market being rigged, and undermine the integrity of the market. . . 
. Fundamentally, parties enter into CDS expecting that the ultimate 
determination of whether the contract pays off rests with market 
forces, over which neither party has control. However, when a 
counterparty interferes and skews the outcome of the CDS contract to 
her benefit, she undercuts her counterparties' reasonable 
expectations and unjustly transfers wealth from her counterparty to 
herself.'').
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    Accordingly, the Commission has decided to utilize its rulemaking 
authority under Section 10B of the Exchange Act to propose new Rule 
10B-1, which would be a large trader position reporting rule for 
security-based swaps. Specifically, proposed Rule 10B-1 would require 
public reporting of, among other things: (1) Certain large positions in 
security-based swaps; (2) positions in any security or loan underlying 
the security-based swap position; and (3) positions in any other 
instrument relating to the underlying security or loan or group or 
index of securities or loans. As described in detail below, proposed 
Rule 10B-1 would, among other things, include a specific quantitative 
threshold for when public reporting is required.
    The Commission recognizes that market participants are already 
subject to the requirements of 17 CFR 242.900 through 242.909 
(``Regulation SBSR''), which governs regulatory reporting of security-
based swap transactions to security-based swap data repositories 
(``SBSDRs'') and public dissemination of some of that transaction data 
pursuant to Section 13(m) of the Exchange Act.\39\ Although both sets 
of requirements are intended to provide greater transparency in the 
security-based swap market, certain differences between the two 
highlight the need to propose Rule 10B-1. For example, pursuant to the 
statutory authority in Section 13(m)(1), Regulation SBSR requires real-
time public reporting to SBSDRs and public dissemination of security-
based swap transaction data but not of position data as is contemplated 
by Section 10B and proposed Rule 10B-1.\40\ Although registered SBSDRs 
are required to establish, maintain, and enforce written policies and 
procedures reasonably designed to calculate positions for all persons 
with open security-based swaps for which the SBSDR maintains 
records,\41\ they are not required to make those reports public.\42\ As 
a result, any public position reporting pursuant to Regulation SBSR 
would need to be completely anonymous with respect to both the person 
building up large, concentrated security-based swap positions, and each 
of its counterparties. Finally, Regulation SBSR only requires reporting 
and public dissemination of security-based swaps, in contrast to 
Section 10B, which authorizes the Commission to require reporting of 
positions in both security-based swaps and related securities.\43\ The 
Commission believes that requiring reporting of related securities 
serves an important function in allowing both the Commission and the 
public to develop a greater understanding of the impact that a large 
security-based swap position can have on the broader securities 
markets.
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    \39\ See supra note 4 and accompanying text (explaining that 
transaction reporting for security-based swaps has been required 
since November 8, 2021, with public dissemination to begin on 
February 14, 2022).
    \40\ See, e.g., Section 13(m)(1)(C) of the Exchange Act, which 
provides that ``[t]he Commission is authorized to provide by rule 
for the public availability of security-based swap transaction, 
volume, and pricing data'' subject to certain conditions and 
requirements. 15 U.S.C. 78m(m)(1)(C).
    \41\ See 17 CFR 240.13n-5(b)(2).
    \42\ In fact, Section 13(m)(1)(C)(iii) of the Exchange Act 
provides that any Commission rulemaking pursuant to Section 13(m) 
(i.e., Regulation SBSR) ``shall require real-time public reporting 
for [security-based swap] transactions, in a manner that does not 
disclose the business transactions and market positions of any 
person.'' See 15 U.S.C. 78m(m)(1)(C)(iii). By contrast, Section 
10B(d), which is titled ``Large Trader Reporting,'' does not contain 
a limitation on disclosing the identity of security-based swap 
counterparties in connection with security-based swap position 
reporting. As discussed in section III, however, a person subject to 
the reporting requirements of proposed Rule 10B-1 would have to 
report its own identity and the size of its aggregate security-based 
swap position, but the person would not be required to report any 
information about its counterparties, including their identities.
    \43\ See supra note 14 and accompanying text.
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II. Re-Proposed Rule 9j-1: Prohibition Against Fraud, Manipulation, and 
Deception in Connection With Security-Based Swaps

A. Prior Commission Action

    As initially proposed in 2010, Rule 9j-1 would have prohibited the 
same categories of misconduct addressed by Section 10(b) of the 
Exchange Act \44\ and Rule 10b-5 thereunder,\45\ as well as Section 
17(a) of the Securities Act,\46\ but specifically in the context of 
security-based swaps. The 2010 proposed rule explicitly reached 
misconduct in connection with the ongoing payments and deliveries that 
are typical of security-based swaps, which occur throughout the life of 
the security-based swap.\47\ Specifically, the 2010 proposed rule would 
have made it unlawful for any person, directly or indirectly, in 
connection with the offer, purchase or sale of any security-based swap, 
in the exercise of any right or performance of any obligation under a 
security-based swap, or the avoidance of such exercise or performance: 
(a) To employ any device, scheme, or artifice to defraud or manipulate; 
(b) to knowingly or recklessly make any untrue statement of a material 
fact, or to knowingly or recklessly omit to state a material fact 
necessary in order to make the statements made, in the light of the 
circumstances under which they were made, not misleading; (c) to obtain 
money or property by means of any untrue statement of a material fact 
or any omission to state a material fact necessary in order to make the 
statements made, in light of the circumstances under which they were 
made, not misleading; or (d) to engage in any act, practice, or course 
of business which operates or would operate as a fraud or deceit upon 
any person.\48\
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    \44\ 15 U.S.C. 78j(b).
    \45\ 17 CFR 240.10b-5.
    \46\ 15 U.S.C. 77q(a).
    \47\ 2010 Rule 9j-1 Proposing Release, 75 FR at 68561.
    \48\ 2010 Rule 9j-1 Proposing Release, 75 FR at 68568.
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    Most commenters on the 2010 proposed rule generally supported the 
Commission's goal of adopting antifraud standards to ensure the 
integrity of the security-based swap market.\49\ Some commenters 
expressed strong support for the 2010 proposed rule, stating that the 
rule would encourage investor confidence in the security-based swap 
market and would help ensure that the Commission has the ability to 
respond through enforcement mechanisms to

[[Page 6658]]

misconduct interfering with the independence and proper functioning of 
the market.\50\ In addition, one commenter specifically requested that 
the Commission require disclosure of debt security-based swap 
positions.\51\
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    \49\ The comment letters can be found at: http://www.sec.gov/comments/s7-32-10/s73210.shtml.
    \50\ See, e.g., Letter from Laurel Leitner, Council for 
Institutional Investors, dated Dec. 16, 2010, at 1-2; Letter from 
Dennis Kelleher and Wallace Turbeville, Better Markets, dated Dec. 
23, 2010, at 1-2; Letter from Chris Bernard, dated Nov. 21, 2010, at 
1.
    \51\ See Letter from Suzanne H. Shatto, dated Jan. 27, 2011.
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    However, some commenters stated that the 2010 proposed rule 
exceeded the Commission's authority by addressing activities involving 
the exercise of any rights and performance of any obligations during 
the life of a security-based swap, as opposed to addressing only 
misconduct taking place in connection with the ``purchase'' and 
``sale'' of a security-based swap.\52\ Those commenters all generally 
argued that unless modified, the 2010 proposed rule would have a 
negative impact or chilling effect on the security-based swap market by 
unintentionally prohibiting the legitimate exercise of rights and 
performance of obligations under a security-based swap and by leading 
to costly unintended consequences. Section II.B.2. includes a 
discussion of the concerns raised by these commenters.
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    \52\ See Letter from Stuart J. Kaswell, Managed Funds 
Association (``MFA''), dated Dec. 23, 2010 (``December 2010 MFA 
Comment Letter'') at 2-10; Letter from Stuart J. Kaswell, MFA, dated 
Mar. 29, 2011 (``March 2011 MFA Comment Letter'') at 3-9; Letter 
from Kenneth E. Bentsen, Jr., Securities Industry and Financial 
Markets Association (``SIFMA'') and Robert G. Pickel, ISDA, dated 
Dec. 23, 2010 (``SIFMA/ISDA Joint Comment Letter'') at 9-10, 13; 
Letter from Kenneth E. Bentsen, Jr., SIFMA, dated July 8, 2011 
(``July 2011 SIFMA Comment Letter'') at 2-8; and Letter from R. Bram 
Smith, Loan Syndications and Trading Association (``LSTA''), dated 
Dec. 23, 2010 (``LSTA Comment Letter'') at 2-10.
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B. Scope of Re-Proposed Rule 9j-1

1. General Antifraud and Anti-Manipulation Provisions
    The general antifraud and anti-manipulation provisions in re-
proposed Rule 9j-1(a) would make it unlawful for any person, directly 
or indirectly, (i) to purchase or sell, or attempt to induce the 
purchase or sale of, any security-based swap; \53\ (ii) to effect any 
transaction in, or attempt to effect any transaction in, any security-
based swap; (iii) to take any action to exercise any right, or any 
action related to performance of any obligation, under any security-
based swap, including in connection with any payments, deliveries, 
rights, or obligations or alterations of any rights thereunder; or (iv) 
to terminate (other than on its scheduled maturity date) or settle any 
security-based swap, in connection with which such person:
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    \53\ See proposed Rule 9j-1(e), which provides that the terms 
``purchase'' and ``sale'' would have the same meaning as set forth 
in Sections 3(a)(13) and (14) of the Exchange Act. 15 U.S.C. 
78c(a)(13) and (14).
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    (1) Employs or attempts to employ any device, scheme, or artifice 
to defraud or manipulate; or
    (2) Makes or attempts to make any untrue statement of a material 
fact, or omits to state a material fact necessary in order to make the 
statements made, in the light of the circumstances under which they 
were made, not misleading; or
    (3) Obtains or attempts to obtain money or property by means of any 
untrue statement of a material fact or any omission to state a material 
fact necessary in order to make the statements made, in light of the 
circumstances under which they were made, not misleading; or
    (4) Engages or attempts to engage in any act, practice, or course 
of business which operates or would operate as a fraud or deceit upon 
any person.
    Like the 2010 proposed rule, the current proposal generally relies 
on language from Section 10(b) of the Exchange Act \54\ and Rule 10b-5 
thereunder,\55\ and Section 17(a) of the Securities Act,\56\ as it 
relates to the specific types of fraudulent, manipulative, or deceptive 
conduct that re-proposed Rule 9j-1(a) is designed to address. In 
addition, re-proposed Rule 9j-1(a) describes the particular types of 
activity that would be covered by the rule, to the extent that a person 
engages in specified types of fraudulent, manipulative, or deceptive 
conduct in connection with such activities.\57\ Specifically, the 
proposed rule would apply not only to the ``purchase'' or ``sale'' of 
security-based swaps, as such terms are defined in the Exchange 
Act,\58\ but also to: (1) Effecting transactions, or attempts to effect 
transactions in, security-based swaps, (2) taking actions to exercise 
any right or actions related to performance of any obligation pursuant 
to any security-based swap including any payments, deliveries, rights, 
or obligations or alterations of any rights thereunder, or (3) 
terminating (other than on its scheduled maturity date) or settling any 
security-based swap, in connection with which such person engages in 
the specified fraudulent, manipulative, or deceptive conduct.
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    \54\ Section 10(b) of the Exchange Act provides that ``[i]t 
shall be unlawful for any person, directly or indirectly . . . (b) 
to use or employ, in connection with the purchase or sale of any 
security . . . any manipulative or deceptive device or contrivance 
in contravention of such rules and regulations as the Commission may 
prescribe as necessary or appropriate in the public interest or for 
the protection of investors.'' See 15 U.S.C. 78j(b).
    \55\ Rule 10b-5 under the Exchange Act provides that ``[i]t 
shall be unlawful for any person, directly or indirectly . . . (a) 
to employ any device, scheme, or artifice to defraud, (b) to make 
any untrue statement of a material fact or to omit to state a 
material fact necessary in order to make the statements made, in 
light of the circumstances under which they are made, not 
misleading, or (c) to engage in any act, practice, or course of 
business which operates or would operate as a fraud or deceit upon 
any person, in connection with the purchase or sale of any 
security.'' See 17 CFR 240.10b-5.
    \56\ Section 17(a) of the Securities Act provides that ``[i]t 
shall be unlawful for any person in the offer or sale of securities 
. . . directly or indirectly--(1) to employ any device, scheme, or 
artifice to defraud, or (2) to obtain money or property by means of 
any untrue statement of a material fact or any omission to state a 
material fact necessary in order to make the statements made, in 
light of the circumstances under which they are made, not 
misleading, or (3) to engage in any transaction, practice, or course 
of business which operates or would operate as a fraud or deceit 
upon the purchaser.'' See 15 U.S.C. 77q(a). In contrast to the 2010 
proposed rule, the current proposal does not contain a provision 
based on Section 17(a)(2) of the Securities Act. Given that the 
current proposal itself relies on the statutory authority in Section 
9(j) of the Exchange Act, the Commission has determined to retain 
the language from the 2010 proposed rule that is based on an 
existing Exchange Act rule.
    \57\ See proposed Rule 9j-1(a). The introductory language in 
paragraph (a) follows Section 9(j) of the Exchange Act, in that it 
would prohibit specified activities in connection with which any 
person engages in the prohibited conduct set forth in paragraphs (1) 
through (4). By contrast, the corresponding language in the 2010 
proposed rule followed the format used in Section 10(b) and applied 
solely to conduct that is in connection with the offer, purchase or 
sale of any security-based swap, the exercise of any right or 
performance of any obligation under a security-based swap, or the 
avoidance of such exercise or performance. The re-proposed language 
is intended to more closely track the authorizing statutory language 
in Section 9(j), and to make clear that under the proposed rule an 
activity would only be unlawful when done in connection with 
fraudulent, manipulative, or deceptive conduct.
    \58\ See proposed Rule 9j-1(e).
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    With respect to the operative paragraphs in re-proposed Rule 9j-
1(a) describing the fraudulent, manipulative or deceptive conduct that 
the rule prohibits, those provisions have been structured to combine 
the antifraud and anti-manipulation provisions in Rule 10b-5 that apply 
to all securities (including security-based swaps) with the additional 
antifraud and anti-manipulative authority specific to security-based 
swaps provided to the Commission in Section 9(j). For example, re-
proposed Rule 9j-1(a)(1) would explicitly prohibit employing or 
attempting to employ any device, scheme, or artifice to defraud or 
manipulate. Although most of that language is derived from Section 
10(b)

[[Page 6659]]

of the Exchange Act,\59\ Rule 10b-5 thereunder,\60\ and Section 
17(a)(1) of the Securities Act,\61\ the inclusion of ``manipulate'' and 
the extension of the prohibition to include an ``attempt'' to employ 
any device, scheme, or artifice to defraud or manipulate comes directly 
from the statutory authority in Section 9(j).\62\ Paragraph (a)(2) of 
re-proposed Rule 9j-1, which prohibits the making of material 
misstatements or omissions, also is based on Rule 10b-5 and also 
contemplates an attempt to make a material misstatement or omission.
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    \59\ See supra note 54.
    \60\ See supra note 55.
    \61\ See supra note 56.
    \62\ See supra note 5 and accompanying text. The application to 
attempted conduct also appears in other places in the Exchange Act 
and the rules and regulations thereunder. For example, Section 
15(c)(1)(A) of the Exchange Act makes it unlawful for any broker-
dealer ``to effect any transaction in, or to induce or attempt to 
induce the purchase or sale of, any security (other than commercial 
paper, bankers' acceptances, or commercial bills), or any security-
based swap agreement by means of any manipulative, deceptive, or 
other fraudulent device or contrivance.'' 15 U.S.C. 78o(c)(1)(A). 
See also Commission Guidance Regarding Prohibited Conduct in 
Connection with IPO Allocations, Exchange Release No. 51500 (Apr. 7, 
2005), 70 FR 19672, 19673 (Apr. 13, 2005) (``Regulation M applies to 
`attempts,' thus proscribing a distribution participant's conduct 
irrespective of whether it actually results in market activity by 
others. It is the inducement or the attempt to induce during the 
restricted period that Regulation M prohibits.'') (internal 
citations omitted).
---------------------------------------------------------------------------

    Finally, paragraphs (a)(3) and (4) of re-proposed Rule 9j-1 are 
based on Sections 17(a)(2) and (3) of the Securities Act.\63\ Again, 
however, the re-proposed rule would now extend those provisions to 
attempted conduct, such that they would prohibit a person from (i) 
obtaining or attempting to obtain money or property by means of any 
untrue statement of a material fact or any omission to state a material 
fact necessary in order to make the statements made, in light of the 
circumstances under which they were made, not misleading; and (ii) 
engaging or attempting to engage in any act, practice, or course of 
business which operates or would operate as a fraud or deceit upon any 
person.
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    \63\ See supra note 56.
---------------------------------------------------------------------------

    As the Commission explained in the 2010 Rule 9j-1 Proposing 
Release, the provisions described above have been designed generally to 
prohibit a range of fraudulent, manipulative and deceptive conduct in 
the security-based swap market, such as, among other things, ``engaging 
in fraudulent and deceptive schemes in order to increase or decrease 
the price or value of a security-based swap, or disseminating false or 
misleading statements that affect or otherwise manipulate the price or 
value of the reference underlying of a security-based swap for the 
purpose of benefiting such person's position in the security-based 
swap.'' \64\ Re-proposed Rule 9j-1(a) also would prohibit, for example, 
disseminating false financial information or data in connection with 
the sale of a security-based swap or insider trading in a security-
based swap. It also would prevent misconduct that affects the market 
value of the security-based swap for purposes of posting collateral or 
making payments or deliveries under such security-based swap.\65\
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    \64\ See 2010 Rule 9j-1 Proposing Release, 75 FR at 68569.
    \65\ See id.
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    Re-proposed Rule 9j-1(a) also would prohibit fraudulent conduct in 
connection with a security-based swap that affects the value of cash 
flow, payments, or deliveries, such as by triggering the obligation of 
a counterparty to make a large payment or to post additional 
collateral. It would also prohibit a person from taking fraudulent or 
manipulative action with respect to the reference entity or asset of 
the security-based swap that triggers the exercise of a right or 
performance of an obligation or affects the payments to be made.\66\
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    \66\ See id.
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    Re-proposed Rules 9j-1(a)(1) and (2), consistent with Section 10(b) 
of the Exchange Act and Rule 10b-5 thereunder,\67\ and Section 17(a)(1) 
of the Securities Act,\68\ would require scienter.\69\ In contrast, re-
proposed Rules 9j-1(a)(3) and (4) would not require scienter consistent 
with Sections 17(a)(2) and (3) of the Securities Act.\70\
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    \67\ To state a claim under Section 10(b) of the Exchange Act 
and Rule 10b-5, the Commission must establish that the misstatements 
or omissions were made with scienter. See, e.g., Ernst & Ernst v. 
Hochfelder, 425 U.S. 185, 193 (1976). The Supreme Court has defined 
scienter as ``a mental state embracing intent to deceive, manipulate 
or defraud.'' Id. Recklessness will generally satisfy the scienter 
requirement. See, e.g., Sunstrand Corp. v. Sun Chemical Corp., 553 
F.2d 1033, 1045 (7th Cir. 1977). See also Greebel v. FTP Software, 
Inc., 194 F.3d 185, 198 (1st Cir. 1999); SEC v. Environmental, Inc., 
155 F.3d 107, 111 (2d Cir. 1998).
    \68\ Establishing violations of Securities Act Section 17(a)(1) 
requires a showing of scienter. See, e.g., Aaron v. SEC, 446 U.S. 
680, 701-02 (1980). Scienter is the ``mental state embracing intent 
to deceive, manipulate or defraud.'' Ernst & Ernst v. Hochfelder, 
425 U.S. 185, 193 (1976). See also Section 206(1) of the Investment 
Advisers Act of 1940 (``Advisers Act'), which makes it unlawful for 
an investment adviser to employ any device, scheme, or artifice to 
defraud any client or prospective client. 15 U.S.C. 80b-6(1). Claims 
arising under Section 206(1) of the Advisers Act require scienter. 
See, e.g., Robare Grp. LTD v. SEC, 922 F.3d 468, 472 (D.C. Cir. 
2019); SEC v. Moran, 922 F. Supp. 867, 896 (S.D.N.Y. 1996); Carroll 
v. Bear, Stearns & Co., 416 F. Supp. 998, 1001 (S.D.N.Y. 1976).
    \69\ The language in the 2010 proposed rule that corresponds to 
re-proposed Rule 9j-1(a)(2) included the phrase ``knowingly or 
recklessly'' when describing the prohibited conduct. The Commission 
has not included such phrase in the current proposal to remain 
consistent with similar language in Rule 10b-5. See 17 CFR 240.10b-
5(b).
    \70\ Actions pursuant to Sections 17(a)(2) and 17(a)(3) of the 
Securities Act do not require a showing of scienter. See, e.g., 
Aaron, 446 U.S. at 701-02. In Aaron, the Supreme Court sought to 
determine whether scienter was required in a Commission injunctive 
proceeding pursuant to the antifraud provisions of Section 10(b) of 
the Exchange Act and Section 17(a) of the Securities Act. The Court 
examined the language of both sections and determined that scienter 
was required under Section 10(b) because the words ``manipulative,'' 
``device,'' and ``contrivance,'' which are used in the statute, 
evidenced a Congressional intent to proscribe only knowing or 
intentional misconduct. Similarly, the Court concluded that 
subsection (1) of Section 17(a) required proof of scienter because 
Congress used such words as ``device,'' ``scheme,'' and ``artifice 
to defraud.'' Aaron, 446 U.S. at 696. In contrast, the Court 
concluded that the absence of such words under subsections (2) and 
(3) of Section 17(a) demonstrated that no scienter was required. 
Section 17(a)(2) prohibits any person from obtaining money or 
property ``by means of any untrue statement of a material fact or 
omission to state a material fact,'' which the Court found to be 
``devoid of any suggestion whatsoever of a scienter requirement.'' 
Aaron, 446 U.S. at 696. Similarly, the Court found, in construing 
Section 17(a)(3), under which it is unlawful for any person ``to 
engage in any transaction, practice, or course of business which 
operates or would operate as a fraud or deceit,'' that scienter was 
not required because it ``quite plainly focuses upon the effect of 
particular conduct on members of the investing public, rather than 
upon the culpability of the person responsible.'' Aaron, 446 U.S. at 
697. See also Section 206(2) of the Advisers Act, which makes it 
unlawful for an investment adviser to engage in any transaction, 
practice or course of business which operates as a fraud or deceit 
upon any client or prospective client. 15 U.S.C. 80b-6(2). The 
Commission is not required to demonstrate that an adviser acted with 
scienter in order to prove a Section 206(2) violation. SEC v. 
Steadman, 967 F.2d 636, 643 (D.C. Cir. 1992) (citing SEC v. Capital 
Gains Research Bureau, Inc., 375 U.S. 180, 191-92 (1963)).
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    While both re-proposed Rules 9j-1(a)(2) and (3) would prohibit 
material misstatements and omissions,\71\ they would address different 
levels of culpability.\72\ Specifically, re-proposed

[[Page 6660]]

Rule 9j-1(a)(2) would apply when there is evidence of scienter (e.g., 
when a party to a security-based swap knowingly or recklessly makes a 
false statement even though the party may not receive any money or 
property as a result). In contrast, re-proposed Rule 9j-1(a)(3) would 
extend to conduct that is at least negligent (e.g., when a party to a 
security-based swap knows or reasonably should know that a statement 
was false or misleading and directly or indirectly obtains money or 
property by means of such statement).
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    \71\ Consistent with Section 10(b) of the Exchange Act, such 
misstatements and omissions must be material to be actionable. ``The 
question of materiality, it is universally agreed, is an objective 
one, involving the significance of an omitted or misrepresented fact 
to a reasonable investor . . . there must be a substantial 
likelihood that the disclosure of the omitted fact would have been 
viewed by the reasonable investor as having significantly altered 
the ``total mix'' of information made available.'' TSC Indus., Inc. 
v. Northway, Inc., 426 U.S. 438, 445, 449 (1976). See also Basic v. 
Levinson, 485 U.S. 224, 233 (1988).
    \72\ In addition to differences in the standard of care, there 
are additional deviations between re-proposed Rules 9j-1(a)(2) and 
(3), notwithstanding the significant overlap in the rule text. For 
example, while paragraph (a)(2), like Rule 10b-5(b), makes it 
unlawful to make any untrue statement of a material fact, paragraph 
(a)(3), like Section 17(a)(2) of the Securities Act does not use the 
word ``make.'' Based on that difference courts have contrasted the 
application of Rule 10b-5(b) from the application of Section 
17(a)(2) of the Securities Act as it relates to determining who is 
the maker of a material misstatement. See, e.g., SEC v. Big Apple 
Consulting USA, Inc., 783 F.3d 786, 797 (11th Cir. 2015) (``[W]e . . 
. agree with the Securities and Exchange Commission's recent 
opinion, which held `Janus's limitation on primary liability under 
Rule 10b-5(b) does not apply to claims arising under Section 
17(a)(2).' ''); SEC v. Tambone, 597 F.3d 436, 444 (1st Cir. 2010) 
(en banc) (contrasting the language of Rule 10b-5(b) with ``the 
expansive language of section 17(a)(2),'' which covers ``the `use' 
of an untrue statement of material fact (regardless of who created 
or composed the statement)'').
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    The Commission recognizes that two commenters to the 2010 proposed 
rule opposed not requiring scienter with respect to paragraphs (3) and 
(4) of re-proposed Rule 9j-1(a) (which were paragraphs (c) and (d) in 
the 2010 proposed rule). Specifically, SIFMA and ISDA argued that 
applying a negligence standard to those provisions did not account for 
the unique aspects of the security-based swap market and, when 
``coupled with the rights and responsibilities provision and 
enforcement exposure for omissions of disclosure, potentially would 
make illegal a wide range of ordinary course activities that may relate 
to an SBS transaction.'' \73\ Those commenters explained that 
``[s]ubjecting every trading decision or payment under an SBS to an 
enforcement claim that someone knew or should have known that the 
action would operate as a fraud or deceit on a person could potentially 
deter many parties from entering into SBS, increase their cost and have 
other distorting effects on the markets.'' \74\
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    \73\ See SIFMA/ISDA Joint Comment Letter at 12.
    \74\ See SIFMA/ISDA Joint Comment Letter at 3.
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    Although the Commission recognizes the concerns raised by these 
commenters, we have determined to re-propose Rule 9j-1(a) using the 
same standards of care as proposed in 2010. As previously noted, each 
of those provisions is based on an existing statutory and regulatory 
provision that is supported by a large body of case law.\75\ In that 
respect, the Commission does not believe it is appropriate to treat 
negligent conduct that would have been deemed a violation under the 
existing antifraud and anti-manipulation provisions of the Federal 
securities laws and the rules and regulations thereunder as not 
violative under proposed Rule 9j-1(a) solely because security-based 
swaps contracts by their nature may require the counterparties to take 
ongoing actions to satisfy their rights and obligations. Such an 
approach would be particularly untenable in light of the fact that 
security-based swaps are included in the definition of ``security'', 
and therefore are also subject to such general antifraud and anti-
manipulation provisions, including the relevant non-scienter-based 
prohibitions. To the extent that there is any overlap between re-
proposed Rule 9j-1(a) and those existing provisions, introducing a 
different standard of care would create unnecessary confusion.
---------------------------------------------------------------------------

    \75\ See supra notes 67-71 and accompanying text.
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    Moreover, having two nearly identical antifraud and anti-
manipulation rules (e.g., re-proposed Rule 9j-1(a)(1) and Rule 10b-
5(b)) that are subject to two different standards of care--one for 
security-based swaps and one for other types of securities--is likely 
to lead to confusion among market participants and could potentially 
undermine the effectiveness of both provisions in certain 
circumstances, such as when the case law applicable to one provision 
contradicts the other in a way that is not able to be rationalized by 
the differences in the underlying instruments. Although the Commission 
preliminarily believes the re-proposed rule is not overly broad, in 
section II.E below, the Commission is requesting comment on whether 
there are potential ways to minimize the impact of the rule on non-
fraudulent and non-manipulative ordinary course activities in 
connection with security-based swap transactions.
2. ``Purchases'' and ``Sales'' in the Context of Security-Based Swaps 
and Limited Safe Harbor for Certain Limited Actions
    As previously noted, a number of commenters on the 2010 proposed 
rule argued that the Commission exceeded its statutory authority in the 
course of proposing Rule 9j-1 by explicitly applying the rule to 
activities involving the exercise of any rights and performance of any 
obligations during the life of a security-based swap, as opposed to 
limiting the proposed rule to misconduct taking place in connection 
with the ``purchase'' and ``sale'' of a security-based swap.\76\ For 
example, MFA argued that the Commission exceeded delegated authority in 
proposing that the prohibitions in Rule 9j-1 extend ``beyond purchases 
and sales to acts and omissions occurring during the term of a 
security-based swap,'' explaining that ``[i]n clarifying the terms 
`purchase' and `sale' in the security-based swap context, Congress 
chose specifically not to include ongoing obligations, which are 
dictated by the contract between the two parties underlying the 
security-based swap and which bear no relation to execution, 
termination, assignment, exchange and transfer or extinguishment of 
rights.'' \77\ MFA also expressed its view that ``Section 763(g) of 
Dodd-Frank is aimed at preventing fraudulent, deceptive, or 
manipulative acts in connection with: (i) The entry into a securit[y]-
based swap; (ii) the novation or assignment of a securit[y]-based swap; 
and (iii) the unwind of a securit[y]-based swap,'' and that the statute 
should not be read to encompass the settlement of a security-based 
swap, or the ongoing payments or collateral postings that take place 
throughout the life of the transaction.\78\
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    \76\ See supra note 52 and accompanying text.
    \77\ See December 2010 MFA Letter at 2-3. MFA provided examples 
of the types of ongoing obligations that it believed should not be 
covered by the rule, which included, among other things, certain 
periodic or other types of payments under the terms of the security-
based swap as well as many forms of collateral or margin payments, 
and related obligations.
    \78\ See March 2011 MFA Comment Letter at 3-6.
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    Similarly, SIFMA and ISDA expressed the view that ``[t]he 
rulemaking authority provided by Section 763(g) only extends to 
transactions, acts, practices, or courses of business in connection 
with (i) effecting any transaction in [a security-based swap] and (ii) 
inducing or attempting to induce the purchase or sale of [a security-
based swap].'' \79\ SIFMA also separately shared its concerns that the 
application of proposed Rule 9j-1 to the ongoing, ``non-volitional'' 
rights and obligations that occur throughout the life of a security-
based swap could be particularly problematic in the event that a 
counterparty came into possession of material non-public information 
relating to the underlying security, even if such information had no 
bearing on such non-volitional actions.\80\ Further, the LSTA argued 
that

[[Page 6661]]

the 2010 proposed rule would ``create uncertainty that undermines 
investors' willingness to enter [the security-based swap] market,'' 
explaining that if the rule were to apply to any activity that 
potentially affects the stream of payments, deliveries or other ongoing 
obligations or rights between parties to a security-based swap, ``each 
party will have to implement controls and mechanisms to track decisions 
it may take that could affect each such payment, delivery, obligation 
or right as well as to track changes in its positions in the security-
based swap and reference underlying.'' \81\
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    \79\ See SIFMA/ISDA Joint Comment Letter at 13.
    \80\ See July 2011 SIFMA Comment Letter at 2-7. SIFMA also 
requested that proposed Rule 9j-1 be modified to include a safe 
harbor, such as one that is similar to Rule 10b5-1(c)(2), which 
provides that an entity may demonstrate that a purchase or sale of 
securities is not ``on the basis of'' material non-public 
information if the person demonstrates that: (i) The individual 
making the investment decision on behalf of the person to purchase 
or sell the securities was not aware of the information; and (ii) 
the entity had implemented reasonable policies and procedures, 
taking into consideration the nature of the person's business, to 
ensure that individuals making investment decisions would not 
violate the laws prohibiting trading on the basis of material non-
public information. Such policies and procedures may include those 
that restrict any purchase, sale, and causing any purchase or sale 
of any security as to which the person has material non-public 
information, or those that prevent such individuals from becoming 
aware of such information. See 17 CFR 240.10b5-1(c)(2).
    \81\ See LSTA Comment Letter at 2-8. As an example, the LSTA 
noted its concern that a decision to allow a borrower to avoid a 
bankruptcy filing or payment default could be construed as 
manipulation in connection with the subsequent exercise of a right 
or performance of an obligation (whether such action is volitional 
or non-volitional).
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    The Commission has carefully considered these comments, but 
disagrees with the narrow interpretation of the terms ``purchase'' and 
``sale'' when used in the context of security-based swaps, as espoused 
by commenters. Specifically, the Commission does not believe that the 
definitions of ``purchase'' and ``sale'' in Section 2(a)(18) of the 
Securities Act, the definitions of ``buy'' and ``purchase'' in Section 
3(a)(13) of the Exchange Act, and the definitions of ``sale'' and 
``sell'' in Section 3(a)(14) of the Exchange Act are limited to actions 
involving all of the rights and obligations under a security-based 
swap. Rather, the Commission believes that those definitions 
incorporate partial executions, terminations, assignments, exchanges, 
transfers, or extinguishments of rights or obligations. Put another 
way, those definitions incorporate actions that have an impact on some, 
but not all, rights and obligations, such as a margin payment that 
represents only part of what one counterparty owes the other.
    In addition, Congress could have specifically limited the statutory 
definitions of ``purchase'' or ``sale'' to actions involving all of the 
rights and obligations under a security-based swap, and the Commission, 
therefore, does not believe it necessary to apply limitations to those 
definitions that do not appear in the statute given that even partial 
payments or deliveries over the course of a security-based swap are 
likely to be meaningful to most security-based swap transactions. 
Accordingly, we continue to believe the statute provides the Commission 
with authority to make explicit the liability of persons that engage in 
misconduct to trigger, avoid, or affect the value of ongoing payments 
or deliveries as a means reasonably designed to prevent fraud, 
manipulation, and deception in connection with security-based swap 
transactions.
    To be clear, the Commission is not taking the position that every 
payment or delivery made during the course of a security-based swap 
transaction is itself a purchase or sale of a security-based swap under 
the applicable statutory authority. Rather, fraudulent or manipulative 
conduct would be in connection with the purchase or sale of a security-
based swap if it either alters any material terms of the security-based 
swap (as set forth in the applicable trading relationship 
documentation) or has a material impact on any payment or delivery 
under the security-based swap, such that it would not be consistent 
with what a reasonable person would have expected to pay, deliver, or 
receive absent such conduct. The Commission took a similar position 
when it defined certain Title VII terms, including ``swap'' and 
``security-based swap,'' in a joint release with the CFTC, explaining 
that ``[i]f 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.'' \82\ If a party engages in 
fraudulent or manipulative conduct that impacts the amount of payment 
or delivery in a way that is materially different from the amount a 
reasonable person would have expected to pay, deliver, or receive (or 
where such person would not have expected a payment or delivery to be 
required at all), such actions would be a new purchase or sale of the 
security-based swap. For example, and without limitation, such a 
scenario could involve a counterparty misstating certain information 
about a transaction (or any related transactions) resulting in a missed 
or late payment or loss of an opportunity to request additional 
collateral under a security-based swap.
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    \82\ See Further Definition of ``Swap,'' ``Security-Based 
Swap,'' and ``Security-Based Swap Agreement''; Mixed Swaps; 
Security-Based Swap Agreement Recordkeeping, 77 FR 48208, 48286 
(Aug. 13, 2012) (``Products Release'').
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    Moreover, even if those statutory definitions were interpreted 
narrowly, the Commission's rulemaking authority under Section 9(j) of 
the Exchange Act to adopt prophylactic rules is not limited solely to 
purchases and sales of security-based swaps.\83\ Section 9(j) of the 
Exchange Act provides that the Commission ``shall . . . by rules and 
regulations define, and prescribe means reasonably designed to prevent, 
such transactions, acts, practices, and courses of business as are 
fraudulent, deceptive, or manipulative, and such quotations as are 
fictitious.'' \84\ Without limiting what is already covered by Section 
9(j), the Commission is using that statutory authority to prohibit 
actions to exercise any right, or any action related to performance of 
any obligation, under any security-based swap, including in connection 
with any payments, deliveries, rights, or obligations or alterations of 
any rights thereunder; or to terminate (other than on its scheduled 
maturity date) or settle any security-based swap, in each case so long 
as those actions are taken in connection with fraud, manipulation, or 
deception. The Commission believes that by prohibiting actions that 
directly impact a counterparty's rights and obligations under a 
security-based swap--when such actions are in connection with specified 
fraudulent, manipulative, or deceptive conduct--re-proposed Rule 9j-1 
represents a means reasonably designed to prevent fraud, manipulation, 
and deception in the security-based swap market.
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    \83\ See, e.g., U.S. v. O'Hagan, 521 U.S. 642 (1997) (``[a] 
prophylactic measure, because its mission is to prevent, typically 
encompasses more than the core activity prohibited''). In O'Hagan, 
the Supreme Court held that under Section 14(e) of the Exchange Act 
(which includes the same ``reasonably designed to prevent fraudulent 
activity'' rulemaking language as Section 763(g) of the Dodd-Frank 
Act) the Commission may prohibit acts not themselves fraudulent 
under the common law or Section 10(b), provided that the prohibition 
is ``reasonably designed to prevent . . . acts and practices [that] 
are fraudulent.''
    \84\ See 15 U.S.C. 78i(j).
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    Furthermore, in the course of using its rulemaking authority under 
Section 9(j), the Commission looked not only to the antifraud and anti-
manipulation provisions in Section 10(b) of the Exchange Act, Rule 10b-
5 thereunder, and Section 17(a) of the Securities Act, but also to the 
operative provisions of Section 9(j) itself, which makes it unlawful 
``to effect any transaction in, or to induce or attempt to induce the 
purchase or sale of, any security-based swap, in connection with which 
such person engages in any fraudulent, deceptive, or manipulative act 
or practice, makes any fictitious quotation, or engages in any 
transaction, practice, or course of business which operates as

[[Page 6662]]

a fraud or deceit upon any person.'' At a minimum, that provision 
prohibits fraud, manipulation, or deception in the context of both 
inducements or attempts to induce the purchase or sale of a security-
based swap, and effecting security-based swap transactions. As the 
Commission has previously explained in other contexts, ``effecting'' 
transactions in securities has been interpreted broadly and includes 
more than just executing trades or forwarding orders for execution.\85\ 
Generally, effecting securities transactions also can include, for 
example, participating in the transactions through a number of 
activities such as screening potential participants in a transaction 
for creditworthiness, facilitating the execution of a transaction, and 
handling customer funds and securities.\86\
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    \85\ See Registration Adopting Release, 80 FR at 48976, n. 99 
(citing, for example, Definition of Terms in and Specific Exemptions 
for Banks, Savings Associations, and Savings Banks Under Sections 
3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934, Exchange 
Act Release No. 44291 (May 11, 2001), 66 FR 27760, 27772-73 (May 18, 
2001)).
    \86\ See id.
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    As discussed above, we disagree with the narrow interpretation of 
the statutory changes to the definitions of ``purchase'' and ``sale'' 
in the context of a security-based swap, as suggested by some 
commenters. That said, the Commission is sensitive to the operational 
concerns raised by commenters in response to the 2010 proposed rule and 
is therefore proposing two limited safe harbors from re-proposed Rule 
9j-1(a) to address situations when a counterparty to a security-based 
swap is required to take certain actions while in possession of 
material non-public information.\87\
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    \87\ Specifically, in its comment letter on the 2010 proposed 
rule, SIFMA explained that ``[u]nder the proposed rule, the 
counterparty would be required to disclose the [material non-public 
information] or abstain from performing its obligations under the 
contract, even though the [material non-public information] plays no 
role in its obligation to make payment. Requiring parties to 
``disclose or abstain'' [material non-public information], as in the 
securities context, would leave market participants in the position 
of choosing among: Disclosing information to counterparties who may 
not want to know it because of the effect on their trading activity, 
violating the antifraud rule by performing their obligations under 
the SBS contract while in possession of [material non-public 
information] or abstaining from performance and defaulting on the 
contract.'' See July 2011 SIFMA Comment Letter at 3.
---------------------------------------------------------------------------

    Specifically, re-proposed Rule 9j-1(f)(1) would provide that a 
person would not be liable under re-proposed Rule 9j-1(a) solely for 
reason of being aware of material non-public information while taking 
certain actions, the first of which includes actions taken in 
accordance with binding contractual rights and obligations under a 
security-based swap (as reflected in the written security-based swap 
documentation governing such transaction or any amendment thereto) so 
long as the person could demonstrate that: (1) The security-based swap 
was entered into, or the amendment was made, before the person became 
aware of such material non-public information; and (2) that the entry 
into, and the terms of, the security-based swap are themselves not a 
violation of any provision of re-proposed Rule 9j-1(a).\88\ The 
Commission believes that limiting the safe harbor to circumstances 
where the activity is taken in accordance with the written agreements 
governing the security-based swap would help to ensure that such action 
is taken in the ordinary course of the transaction. Further, the safe 
harbor would apply only so long as the entry into, and the terms of, 
the security-based swap do not otherwise violate re-proposed Rule 9j-1.
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    \88\ See re-proposed Rule 9j-1(f)(1). In general, for uncleared 
security-based swap transactions, the relevant documentation should 
include the written security-based swap trading relationship 
documentation executed by the counterparties. For cleared security-
based swap transactions, the relevant documentation should include 
the written agreement between the applicable counterparty and the 
clearing agency. For SBS Entities, existing 17 CFR 240.15Fi-5 
(``Rule 15Fi-5'') requires each SBS Entity to establish, maintain, 
and follow written policies and procedures reasonably designed to 
ensure that it executes written trading relationship documentation 
with each of its counterparties, subject to certain exceptions, 
prior to, or contemporaneously with, executing a security-based swap 
transaction, in each case in the manner as provided for in the rule. 
That documentation is also subject to the Commission's recordkeeping 
requirements in 17 CFR 240.17a-4 or 17 CFR 240.18a-6, as applicable.
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    As a result, the proposed safe harbor would generally apply to, for 
example, making a standardized coupon payment or delivering collateral 
to a counterparty (and would also permit the counterparty to receive 
the coupon payment or collateral), while such person is aware of 
material non-public information, so long as both actions are explicitly 
required by the terms of the transaction and documented in writing. 
However, the safe harbor would not apply if a counterparty took some 
action to fraudulently increase (in the case of the receiving 
counterparty) or decrease (in the case of the delivering counterparty) 
the amount of such payment or collateral transfer.
    The second proposed safe harbor would apply to transactions 
effected pursuant to certain types of compression exercises. 
Specifically, proposed Rule 9j-1(f)(2) would provide that a person 
would not be liable under re-proposed Rule 9j-1(a) solely for reason of 
being aware of material non-public information when effecting security-
based swap transactions pursuant to a bilateral portfolio compression 
exercise (as defined in 17 CFR 240.15Fi-1(a) (``Rule 15Fi-1(a)'') of 
the Exchange Act) or a multilateral portfolio compression exercise (as 
defined Rule 15Fi-1(j)) so long as: (1) Any such transactions are 
consistent with all of the terms of a bilateral portfolio compression 
exercise or multilateral portfolio compression exercise, including as 
it relates to, without limitation, the transactions to be included in 
the exercise, the risk tolerances of the persons participating in the 
exercise, and the methodology used in the exercise, and (2) all such 
terms were agreed to by all participants of the bilateral portfolio 
compression exercise or multilateral portfolio compression exercise 
prior to the commencement of the applicable exercise.\89\
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    \89\ See re-proposed Rule 9j-1(f)(2). Rule 15Fi-1(a) defines the 
term ``bilateral portfolio compression exercise'' to mean ``an 
exercise by which two security-based swap counterparties wholly 
terminate or change the notional value of some or all of the 
security-based swaps submitted by the counterparties for inclusion 
in the portfolio compression exercise and, depending on the 
methodology employed, replace the terminated security-based swaps 
with other security-based swaps whose combined notional value (or 
some other measure of risk) is less than the combined notional value 
(or some other measure of risk) of the terminated security-based 
swaps in the exercise.'' 17 CFR 240.15Fi-1(a). Rule 15Fi-1(j) 
defines the term ``multilateral portfolio compression exercise'' to 
mean ``an exercise by which multiple security-based swap 
counterparties wholly terminate or change the notional value of some 
or all of the security-based swaps submitted by the counterparties 
for inclusion in the portfolio compression exercise and, depending 
on the methodology employed, replace the terminated security-based 
swaps with other security-based swaps whose combined notional value 
(or some other measure of risk) is less than the combined notional 
value (or some other measure of risk) of the terminated security-
based swaps in the exercise.'' 17 CFR 240.15Fi-1(j).
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    As the Commission explained when it adopted portfolio compression 
requirements for SBS Entities, portfolio compression generally refers 
to a post-trade processing exercise that allows two or more market 
participants to eliminate redundant derivatives transactions within 
their portfolios in a manner that does not change their net exposure, 
and is intended to help market participants manage their post-traded 
risk.\90\ For example, reducing the number of outstanding contracts 
provides important operational benefits and efficiencies for market 
participants in that there are fewer open contracts to

[[Page 6663]]

manage, maintain, and settle, resulting in fewer opportunities for 
processing errors, failures, or other problems that could develop 
throughout the lifecycle of a transaction.\91\ Given these important 
benefits, as well as the largely administrative nature of the portfolio 
compression process, the Commission believes it to be appropriate to 
provide a safe harbor for this activity in circumstances where the 
security-based swap counterparty is in possession of material non-
public information with respect to a reference entity underlying an 
applicable security-based swap.
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    \90\ See Risk Mitigation Techniques for Uncleared Security-Based 
Swaps, Exchange Act Release No. 87762 (Dec. 18, 2019), 85 FR 6359 at 
6391 (Feb. 4, 2020) (``Risk Mitigation Adopting Release'').
    \91\ See id.
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    However, the proposed safe harbor would apply only so long as: (1) 
Any such transactions are consistent with all of the terms of a 
bilateral portfolio compression exercise or multilateral portfolio 
compression exercise, including as it relates to, without limitation, 
the transactions to be included in the exercise, the risk tolerances of 
the persons participating in the exercise, and the methodology used in 
the exercise, and (2) all such terms were agreed to by all participants 
of the bilateral portfolio compression exercise or multilateral 
portfolio compression exercise prior to the commencement of the 
applicable exercise. This condition, which the Commission believes is 
consistent with how portfolio compression exercises typically operate, 
is intended to help ensure that most, if not all, of the opportunities 
to take a discretionary action to impact the outcome of the compression 
exercise occur before the process begins, and therefore before specific 
security-based swap transactions are identified to be added or 
eliminated. Finally, this safe harbor, which is limited to 
circumstances involving the misuse of material non-public information, 
would not apply where the portfolio compression exercise itself was 
part of a fraudulent or manipulative scheme to increase (in the case of 
the receiving counterparty) or decrease (in the case of the delivering 
counterparty) the amount of any payment made or received in connection 
with a terminated or replacement security-based swap transaction 
resulting from the portfolio compression exercise, as applicable.
3. Prohibition on Price Manipulation
    In addition to the general antifraud and anti-manipulation 
provisions discussed above, re-proposed Rule 9j-1 also contains 
provisions designed to address price manipulation similar to CFTC Rule 
180.2.\92\ Specifically, re-proposed Rule 9j-1 includes a prohibition 
on attempted manipulation. Re-proposed Rule 9j-1(b) would make it 
unlawful for any person to, directly or indirectly, manipulate or 
attempt to manipulate the price or valuation of any security-based 
swap, or any payment or delivery related thereto. Among other things, 
this language is intended to address a number of the manufactured or 
other opportunistic CDS strategies observed over the last decade, and 
summarized above in section I.B, including situations where a party 
intentionally distorts any payment related to a security-based swap for 
the benefit of one of the security-based swap counterparties, such as 
actions that serve little to no economic purpose other than to 
artificially influence the composition of the deliverable obligations 
in a CDS auction.\93\
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    \92\ See 17 CFR 180.2.
    \93\ See Fletcher, supra note 21 at 1096-98.
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    Re-proposed Rule 9j-1(b) also is intended to prohibit, among other 
things, a situation where a person (or group of persons) improperly and 
intentionally causes or avoids the purchase or sale of a security-based 
swap for the benefit of a counterparty to an SBS, such as intentionally 
and improperly orphaning a CDS, avoiding termination of a CDS for a 
period of time, or causing the termination of a CDS. As previously 
noted, ``orphaning'' a CDS refers to a situation where the debt of a 
reference entity is eliminated or reduced for the purposes of moving 
the price of CDS.\94\ The end result of such activity is that CDS 
buyers continue to pay (and CDS sellers continue to receive) premiums 
on CDS that will never default. Similarly, a CDS protection seller 
could offer financing to the company to avoid a credit event and 
subsequent CDS payout, with the financing timed so that the company's 
bankruptcy is merely delayed until after the CDS expires.\95\ To be 
clear, a person simply profiting from a CDS position after a company's 
bankruptcy, which such person could have prevented by participating in 
a financing to the company, without more is not in and of itself 
improper conduct for purposes of re-proposed Rule 9j-1(b).
---------------------------------------------------------------------------

    \94\ See supra note 27 and accompanying text.
    \95\ See Fletcher, supra note 21 at 1101.
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    Moreover, the Commission does not intend for re-proposed Rule 9j-
1(b) to apply to taking affirmative actions in the ordinary course of a 
security-based swap transaction or the underlying referenced security. 
Specifically, re-proposed Rule 9j-1(b) is designed to capture 
situations when a payment under the security-based swap is 
intentionally distorted. A determination as to whether a payment is 
intentionally distorted will largely depend on the facts and 
circumstances of each particular situation, but as a general matter the 
Commission would expect to use its authority to bring an enforcement 
action under re-proposed Rule 9j-1(b) when a party takes action for the 
purposes of avoiding or causing, or increasing or decreasing, a payment 
under a security-based swap in a manner that would not have occurred, 
but for such actions.
    The Commission recognizes that reference entities often rely on 
financing and other forms of relief to avoid defaulting on their debt, 
and the proposed rule is not intended to discourage lenders and 
prospective lenders from discussing or providing such financing or 
relief, even when those persons also hold CDS positions. Rather, the 
Commission is proposing Rule 9j-1(b) to account for actions taken 
outside the ordinary course of a typical lender-borrower relationship 
(or a prospective lender-borrower relationship). Although any such 
determination would need to be based on the facts and circumstances of 
a particular situation, as a general matter the Commission believes 
that an action that appears to be designed almost exclusively to harm 
one or more CDS counterparties would likely fall within the prohibition 
in re-proposed Rule 9j-1(b).

C. Liability Under Proposed Rule 9j-1 in Connection With the Purchase 
or Sale of a Security

    Finally, and consistent with the long-standing principle that 
parties cannot do indirectly what they are prohibited from doing 
directly, paragraphs (c) and (d) of re-proposed Rule 9j-1 would make it 
clear that market participants cannot avoid liability under the rule by 
effecting a fraudulent scheme through the purchase or sale of an 
underlying security, rather than the purchase or sale of the security-
based swap on which it is based, and vice versa. The first of those two 
provisions would provide that a person could not escape liability for 
trading based on possession of material non-public information about a 
security by purchasing or selling a security-based swap based on that 
security (as opposed to trading in the security itself) and the second 
provision provides that a person could not escape liability under 
Section 9(j) or re-proposed Rule 9j-1 by purchasing or selling the 
underlying security (as opposed to purchasing or selling a security-
based swap that is based on that security).

[[Page 6664]]

    Specifically, re-proposed Rule 9j-1(c) would provide that wherever 
communicating, or purchasing or selling a security (other than a 
security-based swap) while in possession of, material non-public 
information would violate, or result in liability to any purchaser or 
seller of the security, under either the Exchange Act or the Securities 
Act, or any rule or regulation thereunder, such conduct in connection 
with a purchase or sale of a security-based swap with respect to such 
security or with respect to a group or index of securities including 
such security shall also violate, and result in comparable liability to 
any purchaser or seller of that security under, such provision, rule, 
or regulation. Rule 9j-1(c) would be modeled after Section 20(d) of the 
Exchange Act, which is substantially similar to the proposal, except 
that the statutory provision applies to ``a put, call, straddle, 
option, privilege or security-based swap agreement''--i.e., it does not 
expressly include the term security-based swap.\96\
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    \96\ See 15 U.S.C. 78t(d). Re-proposed Rule 9j-1(c) also differs 
from Section 20(d) in two other ways. First, the statutory provision 
refers to insider trading violations under the entirety of Title 15 
of the U.S.C., the proposed rule refers only to the Exchange Act and 
the Securities Act, which are the two most common bases for 
asserting the Commission's authority for insider trading violations. 
Second, re-proposed Rule 9j-1(c) makes clear that the reference to a 
``security'' does not include a security-based swap. This is 
intended solely to avoid confusion given that a security-based swap 
is included in the definition of ``security'' in Section 3(a)(10) of 
the Exchange Act [15 U.S.C. 78c(a)(10)] and Section 2(a)(1) of the 
Securities Act [15 U.S.C. 77b(a)(1)].
---------------------------------------------------------------------------

    Although the Commission generally believes that a situation where a 
person uses material non-public information in a security in connection 
with the purchase and sale of a security-based swap would be subject to 
the existing antifraud authority under the Federal securities laws, 
particularly Section 10(b) of the Exchange Act and Rule 10b-5 
thereunder, the Commission also believes that market participants would 
benefit from a clarified interpretation of that statutory provision in 
this rulemaking.\97\ This is particularly true given that the issuer of 
a security-based swap (i.e., each counterparty to the transaction) is 
different from the issuer of the underlying security (i.e., the 
reference entity). Accordingly, the Commission is now proposing new 
Rule 9j-1(c) to provide that a person making a purchase or sale of a 
security-based swap while in possession of material non-public 
information with respect to the security underlying such security-based 
swap is subject to liability.
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    \97\ Pursuant to Section 20(d), a person with material non-
public information about a security cannot avoid liability under the 
securities laws by making purchases and sales in a swap on a broad-
based index containing the security (e.g., the S&P 500), which would 
be a security-based swap agreement, whereas the statute is silent as 
to the permissibility of trading on such material non-public 
information by making purchases and sales of a security-based swap 
(e.g., a swap on the security itself).
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    Lastly, the Commission also is proposing new Rule 9j-1(d), which is 
intended to address a situation similar to the one described above, but 
in the other direction. Specifically, re-proposed Rule 9j-1(d) would 
provide that whenever purchasing or selling a security-based swap would 
violate, or result in liability under Section 9(j) of the Exchange Act 
or re-proposed Rule 9j-1(a) or (b), such conduct, when taken by a 
counterparty to such security-based swap (or any affiliate of, or a 
person acting in concert with, such security-based swap counterparty in 
furtherance of such prohibited activity), in connection with a purchase 
or sale of a security or group or index of securities on which such 
security-based swap is based shall also violate, and shall be deemed a 
violation of, Section 9(j) or re-proposed Rule 9j-1(a) or (b).
    This provision is designed so that a person cannot escape liability 
under Section 9(j) or re-proposed Rule 9j-1(a) or (b) with respect to a 
security-based swap by limiting all of its actions to purchases and 
sales of the security or narrow-based security index underlying that 
security-based swap. For example, if a person with an existing total 
return swap on equity securities issued by XYZ Corporation subsequently 
engages in a number of wash trades to artificially inflate the price of 
the equity securities in order to benefit from the manipulated price by 
way of their existing security-based swap position, such person would 
be liable for violations of Section 9(j) and re-proposed Rule 9j-1 
regardless of the fact the manipulation was conducted through purchases 
and sales of the equity securities.
    To be clear, re-proposed Rule 9j-1(d) is not intended to create a 
separate category of prohibited activity. Rather, this provision is 
designed to specify that many of the activities that would be 
considered fraud, manipulation, or deceit with respect to a security-
based swap are typically effected through transactions in the 
underlying reference entity, security, loan, or group or index of 
securities or loans. The Commission believes that this provision is 
important to include in the rule because security-based swaps by their 
nature are tied intrinsically to activity in other securities markets.
    Moreover, this provision is not intended to suggest that a person 
could be liable for violations of Section 9(j) and re-proposed Rule 9j-
1 based solely on the impact of its transactions on the equity, debt, 
or loan markets. In that regard, the rule would state that the person 
engaged in prohibited activities in the equity, debt, or loan markets 
must be a counterparty to a security-based swap that references such 
equity or debt securities or loans, or be an affiliate of, or a person 
acting in concert with, such security-based swap counterparty in 
furtherance of such prohibited activity. Finally, and in addition to 
analyzing whether transactions in the underlying equity or debt 
securities or loans have been used as the mechanism for violations of 
Section 9(j) and re-proposed Rule 9j-1, the Commission also would 
expect to analyze the same activities to determine whether they 
independently would also constitute violations under the existing 
antifraud and anti-manipulation provisions of the securities laws, 
including Sections 9 and 10(b) of the Exchange Act and Rule 10b-5 
thereunder, as well as Section 17(a) of the Securities Act, as it 
relates the market for those underlying equity or debt securities or 
loans.

D. Preventing Undue Influence Over Chief Compliance Officers; Policies 
and Procedures Regarding Compliance With Re-Proposed Rule 9j-1, 
Proposed Rule 10B-1 and Proposed Rule 15Fh-4(c)

    In addition to proposing rules to prevent fraudulent, manipulative, 
or deceptive conduct in connection with security-based swaps, the 
Commission also is proposing a rule aimed at protecting the 
independence and objectivity of an SBS Entity's CCO by preventing the 
personnel of an SBS Entity from taking actions to coerce, mislead, or 
otherwise interfere with the CCO. Specifically, new Rule 15Fh-4(c) 
would make it unlawful for any officer, director, supervised person, or 
employee of an SBS Entity, or any person acting under such person's 
direction, to directly or indirectly take any action to coerce, 
manipulate, mislead, or fraudulently influence the SBS Entity's CCO in 
the performance of their duties under the Federal securities laws or 
the rules and regulations thereunder.
    The Commission previously considered whether to adopt a similar 
requirement when it adopted business conduct standards for SBS Entities 
in 2016.\98\ That rulemaking included, among other things, 17 CFR 
240.15Fk-1 (``Rule 15Fk-1''), which requires an

[[Page 6665]]

SBS Entity to designate a CCO and imposes certain duties and 
responsibilities on that CCO,\99\ and Rule 15Fh-4(a), which makes it 
unlawful for an SBS Entity to: (i) Employ any device, scheme, or 
artifice to defraud any special entity or prospective customer who is a 
special entity; (ii) engage in any transaction, practice, or course of 
business that operates as a fraud or deceit on any special entity or 
prospective customer who is a special entity; or (iii) engage in any 
act, practice, or course of business that is fraudulent, deceptive, or 
manipulative.\100\ In the course of that rulemaking, one commenter 
requested that the Commission adopt a rule prohibiting attempts by 
officers, directors, or employees to coerce, mislead, or otherwise 
interfere with the CCO.\101\ The Commission considered that request, 
but ultimately concluded not to adopt such a rule, explaining that 
``requiring a majority of the board to approve the compensation and 
removal of the CCO is appropriate to promote the CCO's independence and 
effectiveness. . . .'' \102\
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    \98\ See Business Conduct Standards for Security-Based Swap 
Dealers and Major Security-Based Swap Participants, Release No. 
77617 (Apr. 14, 2016), 81 FR 29960 (``Business Conduct Standards 
Adopting Release'').
    \99\ See 17 CFR 240.15Fk-1.
    \100\ See 17 CFR 240.15Fh-4(a).
    \101\ See Business Conduct Standards Adopting Release, 81 FR at 
30053, n. 1166 and accompanying text.
    \102\ See id. at 30054-55.
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    Moreover, at the time the Commission declined to include a rule 
regarding undue influence over the CCO, the Commission had not yet 
finalized most of the requirements for which the CCO of an SBS Entity 
would be responsible and had not yet proposed rules relating to trading 
relationship documentation, dispute resolution, portfolio 
reconciliation or portfolio compression (``Risk Mitigation 
Rules'').\103\ As the Commission explained when adopting the Risk 
Mitigation Rules, those rules were designed to further effective risk 
management by requiring the existence of sound documentation, periodic 
reconciliation of portfolios, rigorously tested valuation 
methodologies, and sound collateralization practices.\104\ Attempts by 
officers, directors or employees to hide transactions, submit false 
valuations or manipulate or fraudulently influence the CCO in the 
performance of their duties related to the Risk Mitigation Rules would 
undermine the SBS Entity's risk management and could pose risk to the 
market.
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    \103\ See supra note 2. The Commission first proposed the Risk 
Mitigation Rules in December 2018. See Risk Mitigation Techniques 
for Uncleared Security-Security-Based Swaps, Exchange Act Release 
No. 87782 (Dec. 19, 2018), 84 FR 4614 (Feb. 15, 2019).
    \104\ See Risk Mitigation Adopting Release, 85 FR at 6390.
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    In light of the re-proposal of Rule 9j-1 and the proposal of 10B-1 
as well as the rules finalized subsequent to the CCO rules, the 
Commission believes it is appropriate to reconsider the need for a rule 
expressly prohibiting interference with the performance of a CCO's 
duties, even if not directly related to compensation or the threat of 
removal of the CCO to help ensure the independence and effectiveness of 
the CCO function.\105\ In connection with re-proposed Rule 9j-1 and 
proposed Rule 10B-1, as well as other rules for which the CCO is 
responsible, undue influence could arise from many actors (and many 
actions), and not merely from those actors with the power to set 
compensation or with hiring and firing authority over the CCO. For 
example, an employee at an SBS Entity planning an opportunistic 
strategy could attempt to mislead the CCO by submitting false 
documentation to the CCO in order to avoid disclosing the build-up of a 
large position that would require public reporting and thwart the plans 
of the employee.
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    \105\ As the Commission explained when adopting similar rules 
prohibiting persons from unduly influencing auditors pursuant to 
Section 303(a) of the Sarbanes Oxley Act of 2002 (``Sarbanes-Oxley 
Act), activities by persons acting ``under the direction'' of 
officers and directors of the issuer ``currently may constitute 
violations of the antifraud or other provisions of the securities 
laws or aiding or abetting or causing an issuer's violations of the 
securities laws.'' See Improper Influence on Conduct of Audits, 
Exchange Act Release No. 47890 (May 20, 2003), 68 FR 31820, 31821 
(May 28, 2003) (internal citations omitted). Nevertheless, like the 
rule implementing Section 303(a) of the Sarbanes-Oxley Act, proposed 
Rule 15Fh-4(c) would provide the Commission with an additional means 
of addressing efforts by persons acting under the direction of an 
officer or director to thwart the responsibilities of the CCO. See 
also Compliance Programs of Investment Companies and Investment 
Advisers, Investment Advisers Act Release No. 2204 (Dec. 17, 2003), 
68 FR 74714 at 74721-22 (Dec. 24, 2003).
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    Although re-proposed Rule 9j-1 and proposed Rule 10B-1 apply to any 
person, without exception, and not just SBS Entities, as discussed in 
the Economic Analysis, the security-based swap market is dominated by 
dealers. The Commission estimates that dealing activity in security-
based swap markets is highly concentrated among a small number of firms 
who are or will be registered with the Commission as SBS Entities.\106\ 
Because of the concentration of security-based swap activities in a 
small number of firms that are SBS Entities, their compliance with the 
Federal securities laws, including those adopted since 2016 and any 
rules adopted as a result of this proposal, is critically important to 
fostering integrity in the security-based swap market.
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    \106\ See infra section VI.C.2. See also Applications by 
Security-Based Swap Dealers or Major Security-Based Swap 
Participants for Statutory Disqualified Associated Persons to Effect 
or Be Involved in Effecting Security-Based Swaps, Exchange Act 
Release No. 84858 (Dec. 19, 2018), 84 FR 4906, 4923 (Feb. 19, 2019) 
(``[t]he Commission estimates that dealing activity in security-
based swap markets is highly concentrated among a small number of 
dealers, with the top five dealer accounts intermediating 
approximately 55 percent of all SBS Entity transactions, and 
reaching hundreds and even thousands of counterparties.'') (internal 
citations omitted).
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    Moreover, existing 17 CFR 240.15Fh-3(h) (``Rule 15Fh-3(h)'') 
requires an SBS Entity to establish and maintain a system to supervise 
its business and the activities of its associated persons which must be 
reasonably designed to prevent violations of the provisions of 
applicable Federal securities laws and the rules and regulations 
thereunder.\107\ In addition, existing Rule 15Fk-1 requires an SBS 
Entity to designate a CCO, who must comply with certain duties, 
including to ``[t]ake reasonable steps to ensure that the [SBS Entity] 
establishes, maintains and reviews written policies and procedures 
reasonably designed to achieve compliance with the [Exchange Act] and 
the rules and regulations thereunder relating to its business as [an 
SBS Entity].'' \108\ Failure to establish, maintain, and review written 
policies and procedures reasonably designed to achieve compliance with 
the Exchange Act and the rules and regulations thereunder (including 
re-proposed Rule 9j-1, and proposed rules 10B-1 and 15Fh-4(c) if 
adopted), may result in violations by the SBS Entity of Rule 15Fh-3(h), 
as well as Rule 15Fk-1.\109\ Proposed Rule 15Fh-4(c) is designed to 
protect investors and promote the fairness of the markets by supporting 
the ability of the CCO to meet the CCO's important obligations to 
foster compliance without undue influence, which should ultimately 
support the integrity of SBS Entities and the markets.
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    \107\ See 17 CFR 240.15Fh-3(h).
    \108\ See 17 CFR 240.15k-1. Additionally, in its application for 
registration, an SBS Entity is required to include a senior 
officer's certification that the SBS Entity has developed and 
implemented written policies and procedures reasonably designed to 
prevent violation of federal securities laws and the rules 
thereunder. See 17 CFR 240.15Fb2-1(b) (``Rule 15Fb2-1(b)'').
    \109\ The SBS Entity could also face liability under Rules 
15Fb2-1(b) and (h) under such circumstances.
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E. Request for Comment

    The Commission generally requests comments on all aspects of re-
proposed Rule 9j-1. In addition, the Commission requests comments on 
the following specific issues:

[[Page 6666]]

     Do commenters agree or disagree with any particular 
aspects of re-proposed Rule 9j-1? If so, which ones and why? If 
commenters disagree with any provision of the re-proposed rule, how 
should such provision be modified and why?
     As noted in section I.A, the existing antifraud and anti-
manipulation provisions of the securities laws, including Sections 9 
and 10(b) of the Exchange Act and Rule 10b-5 thereunder, as well as 
Section 17(a) of the Securities Act, already apply to security-based 
swaps because they fall within the definition of ``security'' in each 
of those statutes. Are there particular aspects of security-based swap 
transactions and the security-based swap markets that the Commission 
should specifically address? If so, does re-proposed Rule 9j-1 address 
those areas? If not, what types of fraudulent or manipulative activity, 
if any, might not be captured by the existing antifraud or anti-
manipulation provisions or re-proposed Rule 9j-1, and how might new 
rules be drafted to address such activity?
     Do commenters agree with the inclusion and scope of the 
proposed safe harbors in re-proposed Rule 9j-1(f)? Why or why not? 
Should the actions permitted under the proposed safe harbor be limited 
solely to circumstances involving actions taken when a person is aware 
of material nonpublic information? Why or why not? Should the 
Commission include additional safe harbors in re-proposed Rule 9j-1 to 
address other types of ordinary course business activities, both in 
relation to a security-based swap transaction or any reference 
obligation? If so, how should the Commission define such activities?
     As discussed above, in response to operational concerns 
raised by commenters on the 2010 proposed rule, the Commission is 
proposing two limited safe harbors from re-proposed Rule 9j-1(a) to 
address situations when a counterparty to a security-based swap is 
required to take certain actions while in possession of material non-
public information. Should the Commission also create a safe harbor for 
entering into security-based swap transactions for purposes of hedging 
some or all of their exposure arising out of lending activities with a 
reference entity or the syndication of such lending activities? Why or 
why not? If such a safe harbor is necessary, should ``hedging'' be 
defined and if so, how should it be defined? What types of activities 
should be included and/or excluded in such a safe harbor? What 
conditions should be included to protect other market participants and 
to ensure that any such safe harbor is not overly broad? For example, 
should the safe harbor require that a person using a security-based 
swap to hedge their interest in a loan while in possession of material 
nonpublic information provide certain information to their counterparty 
about the underlying borrower/reference entity? If so, what information 
should be required to be provided, and why? Should the safe harbor be 
conditioned on the person using a security-based swap to hedge their 
interest in a loan being a particular type of financial institution, 
such as a bank? Why or why not? Should the safe harbor be time limited, 
for example by requiring that the security-based swap be executed 
contemporaneously with the execution of the loan or the syndication of 
the loan? If so, how should such condition be structured? Could a safe 
harbor for hedging be constructed in a way to always distinguish 
legitimate hedging activity from other types of transactions? If so, 
how?
     As previously noted, re-proposed Rules 9j-1(a)(1) and (2), 
consistent with Section 10(b) of the Exchange Act and Rule 10b-5 
thereunder, and Section 17(a)(1) of the Securities Act, require 
scienter. In contrast, re-proposed Rules 9j-1(a)(3) and (4) would not 
require scienter, consistent with Sections 17(a)(2) and (a)(3) of the 
Securities Act. Do commenters agree with the proposed standards of care 
in re-proposed Rule 9j-1(a)? Why or why not? If not, what should be the 
standard of care for each aspect of re-proposed Rule 9j-1(a) and why? 
Also, should the standard of care be different from the existing 
provision on which it was based, and if so, how and why? For example, 
if re-proposed Rules 9j-1(a)(1) and (2) continue to be based on Section 
10(b) of the Exchange Act and Rule 10b-5 thereunder, and Section 
17(a)(1) of the Securities Act, which require scienter, why should the 
proposed provisions rely on a different standard of care?
     One difference between re-proposed Rule 9j-1(a) and the 
2010 proposed rule is that the four provisions based on Section 10(b) 
of the Exchange Act and Rule 10b-5 thereunder, and Section 17(a) of the 
Securities Act now refer to both actual conduct and attempted conduct. 
Do commenters agree with the change, as compared to the 2010 proposed 
rule, to extend those provisions in this manner? Why or why not?
     Do commenters agree with the application of re-proposed 
Rule 9j-1(a) to actions to exercise or any action related to 
performance pursuant to any security-based swap including any payments, 
deliveries, rights, or obligations or alterations of any rights 
thereunder; or to terminate (other than on its scheduled maturity date) 
or settle any security-based swap (in addition to, among other things, 
purchases or sales of, or actions to effect transactions in, security 
based swaps)? Why or why not?
     Re-proposed Rule 9j-1(a) differs from the 2010 proposed 
rule in that the current proposal is structured such that that the 
exercise of authority under the rule applies to certain specified 
actions being taken ``in connection'' with the fraudulent or 
manipulative conduct specified in paragraphs (1) through (4) of the re-
proposed rule. By contrast, the 2010 proposed rule required that the 
fraudulent or manipulative conduct be ``in connection'' with the offer, 
purchase or sale of any security-based swap, the exercise of any right 
or performance of any obligation under a security-based swap, or the 
avoidance of such exercise or performance. The Commission is proposing 
the change to more closely track the language of Section 9(j) of the 
Exchange Act. Do commenters believe that this change better delineates 
the actions that would be subject to the rule or does it create 
confusion?
     Do commenters agree with the inclusion of re-proposed Rule 
9j-1(b), which makes it unlawful for any person to, directly or 
indirectly, manipulate or attempt to manipulate the price or valuation 
of any security-based swap, or any payment or delivery related thereto? 
Why or why not? Should the Commission modify the proposed rule to 
expressly apply to the types of manufactured or other opportunistic 
behavior that have been occurring in the credit derivatives market and 
that are discussed in section II.B.3? If so, which ones and why? Are 
there additional types of manufactured or other opportunistic behavior 
that have been observed in the credit derivatives market that may be 
considered transactions, acts, practices, and courses of business that 
are fraudulent, deceptive, or manipulative, or involve such quotations 
as are fictitious? If so, which activities should be expressly 
prohibited and why?
     Re-proposed Rule 9j-1(c) would generally provide that a 
person could not avoid liability for insider trading by purchasing or 
selling a security-based swap while in possession of material non-
public information with respect to a security or group or index of 
securities underlying such security-based swap if the person would 
otherwise have been liable had they purchased or sold the relevant 
securities. Do commenters agree with the inclusion of this provision? 
Why or why not? If not, how

[[Page 6667]]

should this provision be modified and why?
     Re-proposed Rule 9j-1(d) would generally provide that a 
person could not avoid liability under Section 9(j) of the Exchange Act 
or re-proposed Rule 9j-1 by purchasing or selling one or more 
securities underlying a security-based swap, as opposed to purchasing 
or selling the security-based swap itself if the person would otherwise 
have been liable under Section 9(j) of the Exchange Act or re-proposed 
Rule 9j-1 had they purchased or sold the security-based swap. Do 
commenters agree with the inclusion of this provision? Why or why not? 
If not, how should this provision be modified and why?
     Should the Commission adopt proposed Rule 15Fh-4(c), which 
would make it unlawful for any officer, director, supervised person, or 
employee of a security-based swap dealer or major security-based swap 
participant, or any person acting under such person's direction, to 
directly or indirectly take any action to coerce, manipulate, mislead, 
or fraudulently influence the security-based swap dealer's or major 
security-based swap participant's chief compliance officer in the 
performance of their duties under the Federal securities laws or the 
rules and regulations thereunder? Why or why not?
     Should proposed Rule 15Fh-4(c) only apply to officers or 
directors? Why or why not?
     Should proposed Rule 15Fh-4(c) apply to any person? Why or 
why not?
     Should proposed Rule 15Fh-4(c) be limited to actions to 
coerce, manipulate, or fraudulently influence the CCO? Should the 
proposed rule be limited to actions to mislead? Should the types of 
actions explicitly prohibited be expanded? If so, how and why?
     Should the Commission consider other means to protect the 
CCO in the performance of their duties?
     Should the Commission consider expanding proposed Rule 
15Fh-4(c) to protect other officers of an SBS Entity in the performance 
of their duties? If so, which officers and why?

III. Proposed Rule 10B-1: Position Reporting of Large Security-Based 
Swap Positions

    As previously noted, Section 10B of the Exchange Act, which 
provides the Commission with authority to establish position limits for 
security-based swaps, also provides the Commission with rulemaking 
authority to require reporting of large security-based swap positions. 
Specifically, Section 10B(d) authorizes the Commission to:

``. . . require any person that effects transactions for such 
person's own account or the account of others in any securities-
based swap or uncleared security-based swap and any security or loan 
or group or narrow-based security index of securities or loans . . . 
to report such information as the Commission may prescribe regarding 
any position or positions in any security-based swap or uncleared 
security-based swap and any security or loan or group or narrow-
based security index of securities or loans and any other instrument 
relating to such security or loan or group or narrow-based security 
index of securities or loans . . .'' \110\
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    \110\ See 15 U.S.C. 78j-2.

    The Commission has not previously proposed rules using its 
authority under Section 10B with respect to either position limits or 
reporting of large positions in security-based swaps. However, the 
Commission's observations of the security-based swap market suggest a 
number of potential benefits of requiring reporting. Those benefits, 
which are described in greater detail above in section I.C. include: 
(1) Providing market participants (including counterparties, issuers 
and issuers' stakeholders) and regulators with access to information 
that may indicate that a person (or a group of persons) is building up 
a large security-based swap position, which in some cases could be 
indicative of potentially fraudulent or manipulative purposes; (2) 
alerting market participants and regulators to the existence of 
concentrated exposures to a limited number of counterparties, which 
should inform those market participants and regulators of the attendant 
risks, allow counterparties to risk manage and lead to better pricing 
of the security-based swaps with respect to transactions with persons 
holding large positions in those security-based swaps; and (3) in the 
case of manufactured or other opportunistic strategies in the CDS 
market, providing market participants and regulators with advance 
notice that a person (or a group of persons) is building up a large CDS 
position which could create an incentive to vote against their 
interests as a debt holder, possibly with an intent to harm the 
company, even if such conduct is not inherently fraudulent.
    Moreover, given that a number of these benefits accrue not only to 
the Commission, as the primary regulator of the security-based swap 
market (and potentially other regulators), but also to market 
participants (including reference entities), the Commission also 
believes that such reports should be made publicly available.\111\ At 
the same time, however, the Commission understands that certain aspects 
of a security-based swap transaction may be sensitive or proprietary, 
particularly as they relate to a market participant's relationship with 
its counterparties, and accordingly we are not proposing to require 
reporting persons to publicly disclose any information about their 
counterparties, including their identities. Rather, under the proposed 
rule persons subject to the reporting requirement would only need to 
report the amount of their aggregated positions in a security-based 
swap on a single reference underlier, as well as any underlying or 
related positions.\112\ However, to the extent that Commission staff 
believes it important to obtain counterparty information as part of our 
regulatory mission as it relates to one or more particular filings, 
staff would endeavor to obtain such information either directly from 
the filer (if so registered with the Commission) or from a registered 
SBSDR pursuant to Regulation SBSR.
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    \111\ See supra section I.C. Several academics discuss 
disclosure as a potential solution to some of the manufactured or 
other opportunistic CDS strategies described in section I.C. See 
Fletcher, supra note 21 at 1139-40 (``By requiring disclosure of 
plans to engage in an engineered CDS transaction, traders are able 
to reject counterparties that have indicated their intentions to 
intervene in the market. Alternatively, it allows CDS traders to 
decide if they want to charge or demand a higher price from the 
counterparty to offset the risk of loss. Disclosure, therefore, 
minimizes informational asymmetry between the counterparties, which 
would increase the cost of engineered transactions and in turn lower 
their profitability and their occurrence. Additionally, this 
disclosure requirement may also enhance market discipline, enabling 
CDS traders to avoid counterparties that might engage in engineered 
transactions or have done so in the past.''). Other academics have 
made similar points in the broader context, some as far back as 
2008. See Henry T.C. Hu and Bernard S. Black, Debt, Equity, and 
Hybrid Decoupling: Governance and Systemic Risk Implications, U of 
Texas Law, Law and Econ Research Paper No. 120, 31 (June 1, 2008) 
(``. . . to address debt . . . decoupling, we propose . . . 
disclosure of their aggregate holdings of debt and debt 
derivatives''); see also Patrick Bolton and Martin Oehmke, Credit 
Default Swaps and the Empty Creditor Problem 24:8 Rev. Fin. Stud., 7 
(Jan. 4, 2011) (``. . . disclosure of CDS positions may mitigate the 
inefficiencies resulting from the empty creditor problem, without 
undermining the ex ante commitment effect of CDS. In particular, if 
public disclosure allows borrowers and lenders to contract on CDS 
positions, they may allow the lender to commit not to over-insure 
once he has acquired the bond. More generally, public disclosure of 
positions may also be beneficial by giving investors a more complete 
picture of creditors' incentives in restructuring.''); see also 
Danis and Gamba, supra note 21 at 33 (``The CDS market is very 
opaque, and no regular investor knows how many protection sellers 
there are, how much protection they have sold, and whether they have 
deep pockets to inject cash into the underlying firm. Therefore, we 
argue that it is possible that regulation that improves the 
transparency of the CDS market can increase firm value. Other 
authors have proposed disclosure requirements in the CDS market as 
well . . . , although for different reasons.'')
    \112\ See infra section III.B.
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    Accordingly, the Commission is proposing to use its rulemaking

[[Page 6668]]

authority under Section 10B of the Exchange Act to propose a large 
trader position reporting rule for security-based swaps. That proposal 
is described in detail below.

A. Proposed Definitions and Thresholds

    Proposed Rule 10B-1(a)(1) would require any person (and any entity 
controlling, controlled by or under common control with such person), 
or group of persons, who through any contract, arrangement, 
understanding or relationship, after acquiring or selling directly or 
indirectly, any security-based swap, is directly or indirectly the 
owner or seller of a Security-Based Swap Position that exceeds the 
Reporting Threshold Amount, to promptly file with the Commission a 
statement containing the information required by 17 CFR 240.10B-101 
(``Schedule 10B'') on the Commission's Electronic Data Gathering, 
Analysis, and Retrieval system (``EDGAR'').\113\ These reports would be 
made publicly available immediately upon filing.
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    \113\ See proposed Rule 10B-1(a). Because these position reports 
on proposed Schedule 10B would be made publicly available, the 
Commission is proposing to require them to be filed on EDGAR, 
similar to the way that beneficial ownership reports are filed 
pursuant to Sections 13(d) and (g) of the Exchange Act. See Rule 
101(a)(1)(iii) of Regulation S-T (17 CFR 232.101(a)(1)(iii)) 
(requiring all statements, reports, and schedules filed with the 
Commission pursuant to Section 13 of the Exchange Act, among other 
provisions, to be submitted to the Commission in electronic form). 
If commenters believe that an alternate means of submission would be 
more appropriate, the Commission welcomes such feedback and 
encourages commenters to be as detailed as possible when specifying 
how such an alternative process would work, either in addition to or 
in lieu of the requirement to file proposed Schedule 10B on EDGAR.
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    Additionally, a person owns a Security-Based Swap Position by 
virtue of participation in a group of persons pursuant to any contract, 
arrangement, understanding or relationship, the proposed rule would 
provide that the group's filing obligation may be satisfied either by a 
single joint filing or by each of the group members making an 
individual filing.\114\ If the group's members elect to make their own 
filings, each filing would be required to identify all members of the 
group, but the information provided concerning the other persons making 
the filing would need only to reflect information which the filing 
person knows or has reason to know.\115\
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    \114\ See proposed Rule 10B-1(a)(3).
    \115\ See id. The requirements related to the process for 
satisfying a group's filing obligations are similar to how the issue 
is addressed in 17 CFR 240.13d-1 (``Rule 13d-1''), which relates to 
the filing of Schedules 13D and 13G. Specifically, Rule 13d-1(k)(2) 
provides that ``[a] group's filing obligation may be satisfied 
either by a single joint filing or by each of the group's members 
making an individual filing. If the group's members elect to make 
their own filings, each such filing should identify all members of 
the group but the information provided concerning the other persons 
making the filing need only reflect information which the filing 
person knows or has reason to know.'' 17 CFR 240.13d-1(k)(2).
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    Moreover, the proposed rule also contains a provision intended to 
prevent evasion of the reporting requirement. Specifically, proposed 
Rule 10B-1(b)(4) provides that any person who, directly or indirectly, 
creates or uses a trust, proxy, power of attorney, pooling arrangement 
or any other contract, arrangement, or device as part of a plan or 
scheme to evade the reporting requirements of paragraph (a)(1) of this 
section with respect to a Security-Based Swap Position shall be deemed 
for purposes of this section to be the owner of such Security-Based 
Swap Position.\116\ For example, if a number of entities agreed to 
acquire separate Security-Based Swap Positions that each fell below the 
relevant threshold in order to evade the requirement to report the 
larger, aggregated Security-Based Swap Position that exceeded the 
relevant threshold), proposed Rule 10B-1(a)(4) would deem each entity 
that was party to the arrangement to be the owner of the aggregated 
Security-Based Swap Position.
---------------------------------------------------------------------------

    \116\ See proposed Rule 10B-1(a)(4).
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    With respect to the scope of persons subject to this proposal, 
Section 10B provides the Commission with authority to require reporting 
by ``any person that effects transactions for such person's own account 
or the account of others [in security-based swaps and related financial 
instruments].'' \117\ The Commission considered whether to limit this 
reporting requirement to certain types of persons, such as SBS 
Entities. However, and as described above, proposed Rule 10B-1 is 
ultimately intended to provide both the Commission and the market with 
information about any large positions in security-based swaps and any 
related securities that, in the event of a default, could have an 
impact on the markets, counterparties, or other market participants. 
This includes those positions that could adversely impact issuers of 
reference entities and their stakeholders, and those that could 
influence counterparties' risk management decisions or pricing of 
security-based swaps. Accordingly, the requirements in proposed Rule 
10B-1 apply to ``any person,'' regardless of whether they are 
registered with the Commission in any capacity.
---------------------------------------------------------------------------

    \117\ See 15 U.S.C. 78j-2.
---------------------------------------------------------------------------

    In terms of timing, proposed Rule 10B-1(a)(2) would provide that 
any Schedule 10B required by the rule shall be filed promptly, but in 
no event later than the end of the first business day following the day 
of execution of the security-based swap transaction that results in the 
Security-Based Swap Position first exceeding the Reporting Threshold 
Amount. That timing is consistent with the requirement in existing 17 
CFR 240.15Fi-2(b) (``Rule 15Fi-2(b)''), which governs the timeframe for 
when an SBS Entity is required to provide a trade acknowledgment to its 
counterparty after executing a security-based swap transaction.\118\ 
The Commission believes using a similar approach in proposed Rule 10B-1 
is appropriate given that once a security-based swap transaction 
reaches the point when an SBS Entity is required to deliver a trade 
acknowledgment of a security-based swap to its counterparty, both sides 
to the transaction should then have the information about the size of 
the transaction so that each can determine whether any applicable 
Security-Based Swap Position has exceeded the Reporting Threshold 
Amount.\119\
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    \118\ See 17 CFR 240.15Fi-2(b).
    \119\ Rule 15Fi-2 also contains a second step once the 
applicable SBS Entity provides its counterparty with the required 
trade acknowledgment. Specifically, the rule also requires that the 
SBS Entity: (i) Establish, maintain, and enforce written policies 
and procedures that are reasonably designed to obtain prompt 
verification of the terms of a trade acknowledgment; and (ii) 
promptly verify the accuracy of, or dispute with its counterparty, 
the terms of a trade acknowledgment that it receives. See 17 CFR 
240.15Fi-2(d). The Commission has determined to base the timing 
requirement in proposed Rule 10B-1 on the requirement to deliver a 
trade acknowledgment of a security-based swap, as opposed to the 
requirement to verify the trade acknowledgment due to the fact the 
rule does not require a counterparty that is not an SBS Entity to 
verify the trade acknowledgment. Rather, the regulatory obligation 
runs only to the SBS Entity, which is required to establish, 
maintain, and enforce written policies and procedures that are 
reasonably designed to obtain prompt verification of the terms of a 
trade acknowledgment. Moreover, while the Commission recognizes that 
the amount of the security-based swap transaction is clearly a term 
that would need to be resolved during the trade verification process 
if there is a dispute as to such value, the Commission believes that 
in most cases any such dispute would be resolved on a near real-time 
basis given the importance of that term as it relates to all of the 
other terms of the transaction.
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    Proposed Rule 10B-1 also contains key definitions for determining 
the scope of the position to be disclosed. In particular, the term 
``Security-Based Swap Position'' would be defined to mean all security-
based swaps based on: (a) A single security or loan, or a narrow-based 
security index, or any interest therein or based on the value thereof; 
(b) any securities issued by the

[[Page 6669]]

same issuer (each, an ``issuing entity'') of the securities, loans, or 
securities included in the narrow-based index (including any interest 
therein or based on the value thereof) described in (a); or (c) any 
narrow-based security index that includes any of those issuing entities 
or their securities (including any interest therein or based on the 
value thereof), in each case as applicable.\120\ To the extent that a 
Security-Based Swap Position is based on a single security or loan that 
is included in a narrow-based security index, the calculation of the 
Security-Based Swap Position with respect to a particular component of 
the index would be based on the weighting of the reference entity or 
securities as a component of the index. With respect to security-based 
swaps based on equity securities, a Security-Based Swap Position shall 
include all security-based swaps based on a single class of equity 
securities.\121\
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    \120\ See proposed Rule 10B-1(b)(3).
    \121\ See id.
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    Under this definition, a security-based swap that is based on a 
narrow-based security-index could trigger a reporting obligation under 
proposed Rule 10B-1 in two different ways. First, reporting under 
proposed Rule 10B-1 would be required if a person had a Security-Based 
Swap Position composed of security-based swaps based on a narrow-based 
security index that itself exceeded the relevant Reporting Threshold 
Amount. Second, if a person had a Security-Based Swap Position composed 
of security-based swaps based on a single security or loan, that person 
would need to include in the calculation of that position all security-
based swaps based on the applicable single security or loan, in an 
amount proportionate to the weighting of the security or loan in the 
narrow-based security index. As a hypothetical example, if a person is 
a counterparty to a security-based swap on a narrow-based security 
index composed of equity securities with a notional amount of $100 
million, the Security-Based Swap Position on the index itself would 
also be $100 million. In addition, if one security makes up 40% of that 
index by weight, that person would also be considered to have a 
Security-Based Swap Position of $40,000,000 attributable to such 
security for purposes of that transaction (which would need to be added 
to any other security-based swaps based on the same security in 
calculating the entire Security-Based Swap Position with respect such 
security).\122\
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    \122\ As discussed below, for equity-based Security-Based Swap 
Positions the proposed rule would include both a notional threshold 
and a threshold based on the number of shares attributable to the 
Security-Based Swap Position. As a result, a person would need to 
convert the proportionate notional amount of a component security of 
a narrow-based security-index into a share count. In the above 
example, the notional amount of $40,000,000 would need to be 
converted into a share count using the methodologies set forth in 
proposed Rule 10B-1(b)(4). See infra section III.A.2.
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    The Commission believes that the reporting requirement in proposed 
Rule 10B-1 should represent a person's gross position in a security-
based swap \123\ due to the fact that the proposed rule is intended to, 
among other things, identify circumstances when a market participant 
has a large, concentrated position in a security-based swap on a single 
issuer, which has the potential to impact not only the market for other 
security-based swaps on the same issuer, but also the applicable 
reference securities, even if that gross position consists of smaller 
positions that offset each other.\124\ In such an instance, the gross 
position would be particularly informative where the offsetting 
positions are not with the same counterparty, where it may not be 
possible to net out any payment obligations between any two 
counterparties. For example, if a reporting person was long a total 
return swap with one counterparty and short a total return swap with a 
second counterparty (on the same reference equity security), a large 
decline in the price of the underlying security could trigger large 
payment obligations under both transactions, which could require one or 
more persons to liquidate some or all of the securities held to hedge 
the applicable total return swap. Under those circumstances, reporting 
the gross position would alert each of the two counterparties to the 
reporting person's overall exposure, which may be relevant to the 
extent that the counterparty to the other transaction is unable to 
satisfy its payment or delivery obligations.
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    \123\ For purposes of this release, the term ``gross'' means the 
sum of the absolute values of notional amounts outstanding of all of 
the security-based swaps included in a Security-Based Swap Position. 
For example, if a person has a $75 million long CDS position and a 
$75 million short CDS position on the same reference entity or 
security, the person will have a Security-Based Swap Position of 
$150 million.
    \124\ As a hypothetical, if a person has a large, hedged 
position in an equity swap and is required to quickly liquidate its 
hedged positions in the reference securities in order to close out 
the security-based swap position, the transactions made to liquidate 
the reference securities could potentially impact the price of those 
securities depending on the size of the hedged position.
---------------------------------------------------------------------------

    The Commission also believes that requiring reporting of a person's 
aggregate Security-Based Swap Position (i.e., all security-based swaps 
on the same reference entity, security, loan, or group or index of 
securities or loans that a person has with all their counterparties) is 
important for identifying positions that may have a significant impact 
on the person's counterparties, companies whose securities are 
referenced by a security-based swap, and the market as a whole, as 
discussed above in section I.C. For example, if a person has a large 
Security-Based Swap Position that is broken up between a number of 
different counterparties, reporting of the aggregated position could 
alert each individual counterparty to the fact that the reporting 
person also has significant exposure to other individual counterparties 
with respect to the same security-based swap.
    For purposes of the definition of ``Security-Based Swap Position,'' 
security-based swaps based on a single class of equity securities 
issued by a reference entity would constitute a separate Security-Based 
Swap Position than security-based swaps based on debt securities of the 
same reference entity. A Security-Based Swap Position based on CDS also 
would constitute a separate Security-Based Swap Position.\125\ As a 
result, there is a separate definition of ``Reporting Threshold 
Amount'' (as discussed in detail below) for Security-Based Swap 
Positions in each of: (i) CDS, (ii) debt security-based swaps 
(excluding CDS), and (iii) equity security-based swaps. For example, 
under that definition, a Security-Based Swap Position would include all 
security-based swaps on equity securities issued by XYZ Corporation, 
regardless of the fact that the position may be split among a number of 
counterparties. If the same reporting person also had CDS positions 
based on debt securities issued by XYZ Corporation, those CDS positions 
would constitute a separate Security-Based Swap Position. Lastly, if 
the same reporting person was also party to security-based swaps based 
on debt securities issued by XYZ Corporation that were not CDS, those 
transactions would constitute yet another separate Security-Based Swap 
Position.
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    \125\ See id.
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    However, proposed Schedule 10B would require the reporting party to 
report other securities (including other security-based swaps) that are 
related to the applicable Security-Based Swap Position.\126\ Thus, if a 
reporting party has a Security-Based Swap Position composed of non-CDS 
security-based swaps on debt securities of XYZ Corporation that exceeds 
the relevant

[[Page 6670]]

threshold, as well as a Security-Based Swap Position composed of 
security-based swaps on equity securities of XYZ Corporation that does 
not exceed the threshold for reporting, such person would be required 
to report the debt-based Security-Based Swap Position on proposed 
Schedule 10B on which the person would need to report the equity-based 
security-based swaps as related securities.\127\ If both the debt-based 
Security-Based Swap Position and the equity-based Security-Based Swap 
Position exceeded the applicable threshold, the reporting party would 
need to file a separate Schedule 10B for each position, which could 
cross-reference to the other filing for purposes of disclosing related 
securities.
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    \126\ Section III.B. below discussed the information required to 
be included in proposed Schedule 10B.
    \127\ As previously noted, Section 10B(d) provides the 
Commission with the authority to require ``any person that effects 
transactions for such person's own account or the account of others 
in any securities-based swap or uncleared security-based swap and 
any security or loan or group or narrow-based security index of 
securities or loans . . . to report such information as the 
Commission may prescribe regarding any position or positions in any 
security-based swap or uncleared security-based swap and any 
security or loan or group or narrow-based security index of 
securities or loans and any other instrument relating to such 
security or loan or group or narrow-based security index of 
securities or loans . . .'' See 15 U.S.C. 78j-2(d) (emphasis added).
---------------------------------------------------------------------------

1. Reporting Thresholds for Debt Security-Based Swaps (Including CDS)
    Proposed Rule 10B-1(b)(1) sets forth the definition of ``Reporting 
Threshold Amount.'' That definition is bifurcated depending on whether 
the security-based swap is based on equity or debt, with a further 
delineation for CDS. For CDS (including CDS where the underlying 
reference is a group or index of entities or obligations of entities 
that is a narrow-based security index), the threshold is the lesser of: 
(i) A long notional amount of $150 million, calculated by subtracting 
the notional amount of any long positions in a deliverable debt 
security underlying a security-based swap included in the Security-
Based Swap Position from the long notional amount of the Security-Based 
Swap Position; (ii) a short notional amount of $150 million; or (iii) a 
gross notional amount of $300 million.\128\
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    \128\ See proposed Rule 10B-1(b)(1)(i). These proposed 
thresholds are based, at least in part, on individual CDS exposure 
data from the Depository Trust and Clearing Corporation (``DTCC'') 
Trade Information Warehouse (``TIW''). This information is made 
available to the Commission voluntarily in accordance with an 
agreement between the DTCC-TIW and the OTC Derivatives Regulators' 
Forum, of which the Commission is a member. In reviewing the DTCC-
TIW data, Commission staff attempted to identify notional amounts 
that would be low enough to capture any positions that could 
potentially have an effect on either the reference entity and/or the 
CDS or bond market (or both), yet also high enough to avoid over-
reporting, which could limit the effectiveness of the rule. See 
infra section VI.D.2.iii. In developing these thresholds, staff also 
considered the opportunistic CDS strategies described in the 
relevant academic literature, and summarized in section I.C.
---------------------------------------------------------------------------

    With respect to the $150 million long notional threshold for CDS 
positions, the Commission believes that a threshold that identifies 
parties with a significant naked CDS long exposure (or a CDS exposure 
that significantly exceeds its position in deliverable bonds) could 
help to more accurately identify situations where a CDS counterparty 
may be incentivized to act against their own interest as a debt holder 
(i.e., because they stand more to gain from their CDS than they would 
lose on their bonds) which, as described above, is a possible indicator 
of an incentive to create a manufactured or other opportunistic credit 
event.\129\ Put another way, if a bondholder uses long CDS positions 
solely to hedge their underlying bonds, payments received in connection 
with the CDS (upon a trigger) generally would be offset by losses on 
the bonds, leaving the person flat, and therefore not required to 
report under proposed Rule 10B-1. The Commission believes that $150 
million, which again was based on staff's review of the available DTCC-
TIW data,\130\ appropriately captures naked CDS positions that carry 
the potential to be used in connection with a manufactured or other 
opportunistic credit event, even if such an activity would be unlikely 
to result in a broader impact on the CDS and bond markets.
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    \129\ See supra section I.C. Proposed Rule 10B-1(b)(1)(iv) 
provides that for purposes of the rule, a ``debt security underlying 
a security-based swap included in the Security-Based Swap Position'' 
means any security that could potentially be deliverable into a CDS 
auction in the event of a default.
    \130\ See infra section VI.D.2.iii.
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    The Commission also is proposing to use a $150 million notional 
threshold for short CDS positions. In particular, we believe that this 
threshold should capture situations where a CDS seller has a large 
enough position to potentially utilize an opportunistic strategy to 
avoid or delay a credit event, such as by ensuring a credit event 
occurs after the expiration of the CDS, or taking actions to limit the 
number and/or kind of deliverable obligations in order to impact the 
recovery rate following a credit event.\131\ However, because the same 
dynamic described in the previous paragraph--vis-[agrave]-vis the 
potential motivations of a person with a significant naked CDS long 
exposure to vote against their own interests as a bondholder--may not 
exist in the case of a CDS seller, the $150 million notional threshold 
for short CDS positions does not include a provision allowing the 
reporting person to net out any deliverable bonds from the calculation.
---------------------------------------------------------------------------

    \131\ See supra note 26 and accompanying text.
---------------------------------------------------------------------------

    Accordingly, the Commission is proposing a third threshold to 
capture the positions of market participants with significant gross CDS 
positions, notwithstanding the direction of the person's CDS positions 
or their positions in deliverable bonds. Specifically, the Commission 
believes that a gross CDS position that equals or exceeds $300 million 
would likely create enough counterparty concentration risk to 
potentially have other impacts on the market, even in the absence of a 
manufactured or other opportunistic credit event. As an example, if a 
person held $125 million in bonds on ABC Corporation and purchased $200 
million in CDS on those bonds (or any other obligations that could be 
deliverable into an auction after a Credit Event), those two positions 
would offset each other, such that the net Security-Based Swap Position 
would be $75 million, and reporting pursuant to proposed Rule 10B-1 
would not be required given that the net exposure falls below $150 
million. By contrast, if a person held $250 million in bonds on ABC 
Corporation and purchased $325 million in CDS on those bonds, the 
person would be required to report that position pursuant to proposed 
Rule 10B-1 given that the gross Security-Based Swap Position exceeds 
$300 million, even though those two positions would offset each other 
to create a net $75 million exposure.
    With respect to all other Security-Based Swap Positions based on 
debt securities (i.e., not CDS), the Commission is proposing that the 
threshold be a gross notional amount of $300 million, without regard to 
direction of the person's CDS positions and without excluding any debt 
securities underlying a security-based swap included in the Security-
Based Swap Position.\132\ The Commission does not believe it to be 
appropriate to allow these positions to be netted against any 
underlying debt securities given that these types of security-based 
swap transactions operate differently than CDS transactions. For 
example, a CDS buyer whose security-based swaps are used to hedge some 
or all of their positions in an underlying bond will likely be less 
inclined to take actions that would result in a CDS default,

[[Page 6671]]

given that the payment received should correspond to their losses from 
the bond. By contrast, a CDS buyer who does not hold the underlying 
bond may be incentivized to take actions that would result in a CDS 
default given that the resulting payment would not be offset by the 
buyer's losses from the bond. Such a dynamic--i.e., where there are 
conflicting motivations as between the CDS transaction and any debt 
securities underlying that CDS transaction--is less likely to occur in 
connection with other types of security-based swaps.\133\ For similar 
reasons, the threshold for these types of security-based swaps also 
does not include a lower threshold for long and short positions.
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    \132\ See proposed Rule 10B-1(b)(1)(ii).
    \133\ See supra note 129 and accompanying text.
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2. Reporting Threshold for Security-Based Swaps on Equity
    For Security-Based Swap Positions based on equity securities, the 
Commission is proposing that the ``Reporting Threshold Amount'' in 
proposed Rule 10B-1(b)(1) be bifurcated, such that it would be defined 
to include both a threshold based on the notional amount of the 
Security-Based Swap Position, and a threshold based on the total number 
of shares attributable to the Security-Based Swap Position as a 
percentage of the outstanding number of shares of that class of equity 
securities. Those thresholds, which are specified below, are based on a 
review of all available information, including the data the Commission 
collects from Form N-PORT, which requires certain registered investment 
companies to report information about their monthly portfolio holdings 
to the Commission.\134\ As with the threshold for Security-Based Swap 
Positions based on CDS, these thresholds were constructed to be low 
enough to capture any positions that could potentially have a 
significant effect on the equities markets, and potentially issuers of 
equity securities and their security holders, yet also high enough to 
avoid over-reporting, which could limit the effectiveness of the rule. 
In other words, the Commission has endeavored to set these thresholds 
at a level that should limit the reporting burden to include only those 
positions that are most likely to achieve the underlying purposes of 
the rule.
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    \134\ See infra section VI.D.2.iii.
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    As of November 8, 2021, the Commission now has access to additional 
equity security-based swap transaction data from registered SBSDRs 
pursuant to Regulation SBSR.\135\ In addition, equity securities are 
more widely traded in the secondary markets than debt securities, such 
that trading volume could be a key metric for measuring the potential 
market impact of a large equity swap position but not as relevant a 
metric for measuring the potential market impact of a large CDS 
position. The Commission intends to consider this newly available data 
in determining thresholds to use in connection with Security-Based Swap 
Positions based on equity securities when adopting a final rule.
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    \135\ See supra note 4. By contrast, CDS data has been 
voluntarily reported and available to the Commission for more than a 
decade.
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Notional Threshold
    Pursuant to proposed Rule 10B-1(b)(1)(iii), the term ``Reporting 
Threshold Amount'' with respect to Security-Based Swap Positions on 
equity securities is defined to mean the lesser of two different 
thresholds, one based on the notional amount of the position and one 
based on the percentage of outstanding of shares attributable to the 
position. With respect to the notional amount, a person would be 
required to file a Schedule 10B once a Security-Based Swap Position 
based on equity meets or exceeds $300 million, calculated on a gross 
basis (i.e., including both long and short positions). However, the 
Commission also recognizes that people may attempt to evade the 
reporting requirements in proposed Rule 10B-1 by making efforts to keep 
a Security-Based Swap Position below the $300 million gross notional 
threshold, while also building up a position in the underlying equity 
securities and/or other types of non-security-based swap derivatives on 
such underlying security. Accordingly, proposed Rule 10B-
1(b)(1)(iii)(A) would provide that once a Security-Based Swap Position 
exceeds a gross notional amount of $150 million, the calculation of the 
Security-Based Swap Position shall also include the value of all of the 
underlying equity securities owned by the holder of the Security-Based 
Swap Position (based on the most recent closing price of shares), as 
well as the delta-adjusted notional amount of any options, security 
futures, or any other derivative instruments based on the same class of 
equity securities.\136\ The Commission believes that the proposed 
approach would provide greater transparency with respect to a person 
with significant exposure to a particular equity security, which 
includes a large Security-Based Swap Position, even if that position by 
itself would not be large enough to require the person to file a 
Schedule 10B.\137\ In such instance, the total exposure could carry the 
same risks in terms of potential effects on the securities markets 
(including the market for security-based swaps) and to security-based 
swap counterparties as a Security-Based Swap Position that meets or 
exceeds the $300 million gross notional threshold.
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    \136\ Proposed Rule 10B-1(b)(6) defines the term ``delta'' to 
mean the ratio that that is obtained by comparing (x) the change in 
the value of a derivative instrument to (y) the change in the value 
of the reference equity security. If a derivative instrument does 
not have a fixed delta, then generally the delta should be 
calculated on a daily basis, based on the most recent closing price 
of shares of the reference equity security. The Commission is not 
proposing a specific definition of ``delta-adjusted notional 
amount'' in order to allow for flexibility in how it is computed, 
but as a general matter the calculation should involve multiplying 
the notional amount of the derivative by the delta adjustment.
    \137\ The Commission recognizes, however, the limited value that 
would be obtained by including in the calculation equity securities 
held by an intermediary, such as a broker-dealer or a bank, in 
street name for the benefit of the person with the actual economic 
or beneficial ownership of such securities. Accordingly, proposed 
Rule 10B-1(b)(7) provides that for purposes of the $300 million 
gross notional threshold (and the 5% threshold discussed below), a 
person that is a member of a national securities exchange shall not 
be deemed to be the owner of any equity securities that they hold 
directly or indirectly on behalf of another person solely because 
such person is the record holder of such securities and, pursuant to 
the rules of such exchange, may direct the vote of such securities, 
without instruction, on other than contested matters or matters that 
may affect substantially the rights or privileges of the holders of 
the securities to be voted, but is otherwise precluded by the rules 
of such exchange from voting without instruction. Proposed Rule 10B-
1(b)(7) is similar to existing Rule 13d-3(d)(2) under the Exchange 
Act, which provides a similar exclusion for purposes the beneficial 
ownership requirements in Sections 13(d) and (g) of the Exchange 
Act. See 17 CFR 240.13d-3(d)(2).
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Percentage Threshold
    The Commission believes that including a second test that is based 
on the number of applicable shares represented by the Security-Based 
Swap Position is likely important for a number of reasons, particularly 
as it relates to security-based swaps based on equity securities issued 
by companies with a smaller market capitalization. Under those 
circumstances, the notional amount of such security-based swaps may not 
trigger either the $150 million or $300 million gross notional 
thresholds, and may not be likely to have a broad impact on the 
securities markets, but may represent a significant number of shares of 
the issuer and therefore carry the potential to impact the issuer.
    A person would be required to file a Schedule 10B once the 
``Security-Based Swap Equivalent Position'' (discussed

[[Page 6672]]

below) represents more than 5% of a class of equity securities.\138\ 
People may attempt to evade the reporting requirements in proposed Rule 
10B-1 by keeping a Security-Based Swap Equivalent Position below the 
threshold, while also building up a position in the underlying equity 
securities and/or other types of non-security-based swap derivatives on 
such underlying security. Accordingly, proposed Rule 10B-
1(b)(1)(iii)(B) would provide that once a Security-Based Swap 
Equivalent Position represents more than 2.5% of a class of equity 
securities, the calculation of the Security-Based Swap Equivalent 
Position shall also include in the numerator all of the underlying 
equity securities owned by the holder of the Security-Based Swap 
Position, as well as the number of shares attributable to any options, 
security futures, or any other derivative instruments based on the same 
class of equity securities.
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    \138\ Because the definition of ``Reporting Threshold Amount'' 
with respect to Security-Based Swap Positions on equity securities 
is defined in proposed Rule 10B-1(b)(1)(iii) to mean the lesser of 
two different thresholds, one based on the notional amount of the 
position and one based on the percentage of outstanding shares 
attributable to the position, the applicable Security-Based Swap 
Position may have already exceeded the notional threshold. To the 
extent that the holder of such Security-Based Swap Position has 
already filed the applicable Schedule 10B with the Commission, such 
person would not need to file a new or amended Schedule 10B if the 
position subsequently exceeds the percentage threshold (or vice 
versa), unless an amendment to the previously-filed Schedule 10B is 
required pursuant to proposed Rule 10B-1(c). See infra section 
III.A.iii.
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    For purposes of this threshold, proposed Rule 10B-1(b)(2) would 
define the term ``Security-Based Swap Equivalent Position'' to mean the 
number of shares attributable to all of the security-based swaps 
composing a Security-Based Swap Position, as determined in accordance 
with proposed Rule 10B-1(b)(4). That rule defines the phrase ``number 
of shares attributable'' to a derivative instrument (including a 
security-based swap) to mean the larger of (in each case as 
applicable):
    (i) The number of shares of the reference equity security that may 
be delivered upon on the exercise of the rights under the derivative 
instrument, as determined in accordance with the terms of the 
applicable documentation;
    (ii) The number of shares of the reference equity security 
determined by multiplying (x) the number of shares by reference to 
which the amount payable under the derivative instrument is determined 
by (y) the delta of the applicable derivative instrument; and
    (iii) The number of shares of the reference equity security 
determined by (x) dividing the notional amount of such derivative 
instrument by the most recent closing price of shares of the reference 
equity security, and then (y) multiplying such quotient by the delta of 
the applicable derivative instrument.\139\
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    \139\ Proposed Rule 10B-1(b)(4) defines the phrase ``number of 
shares attributable to'' for purposes of proposed Rule 10B-1(b)(2), 
which relates to determining the number for shares attributable to 
the Security-Based Swap Position when calculating the ``Security-
Based Swap Equivalent Position'' and for purposes of proposed Rule 
10B-1(b)(1)(iii)(B), which relates to determining the number of 
shares attributable to other derivatives that would be required to 
be added to a Security-Based Swap Equivalent Position that 
represents more than 2.5% of a class of equity securities.
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    The first prong of the definition is intended to apply primarily to 
physically settled instruments. Thus, if the applicable documentation 
refers to a specific number of shares of the reference security or 
provides a formula to determine the number of shares to be delivered, 
that number would be used for purposes of this prong. The second prong 
of the definition is intended to apply primarily to a cash-settled 
instruments that provide for a way to calculate the number of shares of 
the reference security based on the amount payable, with an adjustment 
to account for derivative instruments with a delta that is not equal to 
one. Finally, the third prong is intended to apply primarily to a cash-
settled instrument where no such methodology exists. In that case, the 
number of shares attributable to the instrument would be calculated by 
dividing the notional amount of the instrument by the most recent 
closing price of the reference equity security, and multiplying the 
quotient by the delta of the instrument.
    The above calculations would apply not only to all security-based 
swaps based on a single equity security, but also to security-based 
swaps based on a narrow-based security index containing that reference 
security. As an example, if a person has a Security-Based Swap Position 
consisting of security-based swaps on the common shares of XYZ 
Corporation and security-based swaps on a narrow-based security index 
that contains XYZ Corporation, the number of shares attributable to the 
index-based security-based swaps would need to be added to the number 
of shares attributable to the single-name security based swaps for 
purposes of calculating the percentage of those shares by reference to 
the number of outstanding shares. With respect to the index-based 
security-based swaps, if the documentation contained no methodology for 
calculating the number of shares of the reference equity security by 
reference to which the amount payable under the derivative instrument 
is determined, the third prong of proposed Rule 10B-1(b)(4) would 
apply. Thus, if the notional amount of security-based swaps based on 
the index was $100 million, and XYZ Corporation common stock 
constituted 40% of the index, the notional amount for these purposes 
would be $40 million, which would then be divided by the most recent 
closing price of XYZ Corporation common stock to determine the number 
of shares attributable to the index-based security-based swaps.\140\
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    \140\ This assumes that the delta of the applicable security-
based swaps was one. If not, or if the relevant instrument was one 
that is generally not a delta one derivative (e.g., an option), the 
number of shares resulting from the calculation would then need to 
be multiplied by the delta.
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3. Amendments to a Previously Filed Schedule 10B
    Proposed Rule 10B-1(c) would require a person who has previously 
filed a Schedule 10B with the Commission to file an amendment if any 
material change occurs in the facts set forth in a previously filed 
Schedule 10B including, but not limited to, any material increase in 
the Security-Based Swap Positions or if a Security-Based Swap Position 
falls back below the applicable Reporting Threshold Amount. Any such 
amendment would be required to be filed on EDGAR promptly, but in no 
event later than the end of the first business day following the 
material change.
    For purposes of the proposed rule, an acquisition or disposition in 
an amount equal to 10% or more of the position previously disclosed in 
Schedule 10B would be deemed ``material'' for purposes of this 
requirement. The Commission believes that this requirement will help 
ensure that regulators and market participants continue to have updated 
information about reportable Security-Based Swap Positions, but only so 
far as the updated information is material. Accordingly, proposed Rule 
10B-1(c) would require a person who has previously filed a Schedule 10B 
to file an amendment if the amount of the Security-Based Swap Position 
that was previously reported increases or decreases by 10% or more. The 
Commission welcomes and encourages comments as to when commenters 
believe that an amendment should be required to be filed, any 
thresholds used to make such a determination, and the timeframe for 
making such submission.

[[Page 6673]]

B. Information Required To Be Included in Schedule 10B

    Pursuant to proposed Schedule 10B, persons subject to the proposed 
rule would be required to report the following information:

    (1) Name of reporting person (or names of reporting persons if 
making a joint filing as a group), whether reporting person is a 
member of a group and names of the members of the group if the 
members of the group are satisfying the group's Rule 10B-1(a)(1) 
filing obligation by making individual filings.
    (2) Residency or place of organization of the reporting 
person(s).
    (3) Type of reporting person(s).
    (4) For reporting persons that are legal entities, the Legal 
Entity Identifier (``LEI'') of the reporting person, if such person 
has an LEI.
    (5) Notional amount of the applicable Security-Based Swap 
Position(s) of the reporting person, along with summary information 
about the composition of the position as it relates to the direction 
(i.e., long or short) and the tenor/expiration of the underlying 
security-based swap transactions and the product ID (such as the 
Unique Product Identifier, or ``UPI'') of the security-based swap(s) 
included in the Security-Based Swap Position, if applicable.
    (6) In the case of a Security-Based Swap Position based on debt 
securities (including credit default swaps), ownership of: (i) All 
debt securities underlying a security-based swap included in the 
Security-Based Swap Position, including the Financial Instrument 
Global Identifier (``FIGI'') of each underlying debt security, if 
applicable, and the LEI of the issuer of each underlying debt 
security, if the issuer has an LEI; and (ii) all security-based 
swaps based on equity securities issued by the same reference 
entity, including the FIGI of each underlying equity security, if 
applicable. In addition to the FIGI, other unique security 
identifier(s) may be included at the filer's option.
    (7) In the case of a Security-Based Swap Position based on 
equity securities, ownership of: (i) All equity securities 
underlying a security-based swap included in the Security-Based Swap 
Position, including the FIGI of each underlying equity security and 
the LEI of the issuer of each underlying equity security, if the 
issuer has an LEI; and (ii) all security-based swaps based on debt 
securities issued by the same reference entity (including credit 
default swaps), including the FIGI of each underlying debt security, 
if applicable. In addition to the FIGI, other unique security 
identifier(s) may be included at the filer's option.
    (8) Ownership of any other instrument relating to the Security-
Based Swap Position and/or any underlying security or loan or group 
or index of securities or loans, or any security or group or index 
of securities, the price, yield, value, or volatility of which, or 
of which any interest therein, is the basis for a material term of a 
security-based swap included in the Security-Based Swap Position, if 
not otherwise disclosed pursuant to Items 6 or 7 of this form. For 
any underlying security disclosed pursuant to this Item, disclose 
the FIGI of the security, if applicable, and the LEI of the issuer 
of the security, if the issuer has an LEI. In addition to the FIGI, 
other unique security identifier(s) may be included at the filer's 
option.
    (9) To the extent that the Reporting Threshold Amount is based 
on the number of shares corresponding to a Security-Based Swap 
Position based on equity securities, the number of shares 
attributable to the Security-Based Swap Position, along with the 
closing price used in the calculation and the date of such closing 
price.

    The first four items relate to the identity of the reporting 
person. With respect to item (3), the reference to ``type'' of 
reporting person would include the following categories: (i) Broker-
dealer; (ii) security-based swap dealer or major security-based swap 
participant; (iii) bank; (iv) insurance company; (v) investment 
company; (vi) investment adviser; (vii) employee benefit plan or 
endowment fund; (viii) parent holding company/control person; (ix) 
savings association; (x) church plan; (xi) corporation; (xii) 
partnership; (xiii) individual; and (xiv) other. These categories are 
identical to those included in Schedule 13D, other than the addition of 
SBS Entities in item (ii).\141\
---------------------------------------------------------------------------

    \141\ See 17 CFR 240.13d-101.
---------------------------------------------------------------------------

    Items (5) through (8) require reporting of the Security-Based Swap 
Position, the loans or securities underlying that position, any related 
securities and loans, and other security-based swaps related to the 
applicable Security-Based Swap Position.\142\ Item (9) applies only to 
Security-Based Swap Positions based on equity securities where the 
Reporting Threshold Amount is based on the number of shares 
corresponding to a Security-Based Swap Position and is intended to 
provide basic information as to how the number of shares was 
calculated.
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    \142\ As previously explained, for purposes of the definition of 
``Security-Based Swap Position,'' security-based swaps based on 
equity securities issued by a reference entity would constitute a 
separate Security-Based Swap Position as compared to security-based 
swaps based on debt securities of the same reference entity. See 
supra note 125 and accompanying text. As a result, if a reporting 
party had a Security-Based Swap Position composed of security-based 
swaps based on equity securities and separate security-based swaps 
based on debt securities of the same issuer, the Security-Based 
Position would be disclosed pursuant to Item (5), and the debt 
security-based swaps would be disclosed pursuant to Item (6). In the 
reverse scenario, a Security-Based Position composed of security-
based swaps based on debt securities would be disclosed pursuant to 
Item (5), and the equity security-based swaps would be disclosed 
pursuant to Item (7). Item (8) would include any other instrument 
relating to the Security-Based Swap Position and/or any underlying 
security or loan or group or index of securities or loans.
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    At the same time, however, the Commission also understands that 
certain aspects of a security-based swap transaction may be sensitive 
or proprietary information. As previously noted, the intent of proposed 
Rule 10B-1 is to alert regulators and the market, including 
counterparties to security-based swap trades and the companies whose 
securities underlie security-based swaps, that one or more market 
participants are amassing a large position in security-based swaps. The 
items listed above are intended to achieve that objective without 
requiring market participants to publicly disclose sensitive or 
proprietary information about their Security-Based Swap Positions. In 
particular, Schedule 10B does not require reporting persons to disclose 
any information about their counterparties, including their identities, 
to any security-based swap or other related derivatives; only the 
aggregated positions would need to be disclosed. Moreover, Schedule 10B 
only requires reporting persons to include a ``brief description'' of 
any contracts, arrangements, understandings or relationships with 
respect to any security-based swaps included in the Security-Based Swap 
Position or any underlying or related securities (including security-
based swaps) or loans required to be disclosed pursuant the form; the 
agreements themselves would not need to be disclosed. The Commission 
believes that structuring Schedule 10B in such a manner would help to 
alleviate concerns regarding the potential public disclosure of 
sensitive or proprietary information, and we encourage commenters to 
provide information as to whether the Commission should take any 
additional measures to accomplish that goal, consistent with the 
underlying objectives of proposed Rule 10B-1.
    Finally, proposed Rule 10B-1(e) would provide that if some or all 
of the information required to be disclosed on proposed Schedule 10B is 
publicly available on EDGAR at the time the Schedule 10B is required to 
be filed, such information may be incorporated by reference in answer, 
or partial answer, to any item of Schedule 10B. This provision is 
intended to make the proposed rule more efficient in cases where any 
required information is publicly available on EDGAR. In such cases, the 
Schedule 10B need only cite to the filing where the information can be 
found.\143\
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    \143\ The Commission has previously allowed people subject to 
reporting and other disclosure obligations to incorporate certain 
information by reference into those filings. See e.g., Rule 12b-23 
under the Exchange Act, which establishes requirements for 
incorporating information by reference into any Commission 
registration statement or report filed pursuant to Sections 12(b) 
and 12(g), 13 or 15(d) of the Exchange Act. 17 CFR 240.12b-21 and 
12b-23. Consistent with Exchange Act Rule 12b-23, information cannot 
be incorporated by reference if such incorporation would make the 
disclosure incomplete, unclear, or confusing.

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[[Page 6674]]

C. Cross-Border Issues

    As the Commission has stated in prior releases, security-based swap 
transactions currently take place across national borders, with 
agreements negotiated and executed between counterparties in different 
jurisdictions (which might then be booked and risk-managed in still 
other jurisdictions).\144\ Given the global nature of the security-
based swap market, an effective application of proposed Rule 10B-1 
necessitates identifying which transactions in this global market will 
be subject to these reporting requirements.
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    \144\ 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, 30976 n. 48 and accompanying text (May 23, 
2013).
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    To achieve that objective, proposed Rule 10B-1(d) would provide 
that the reporting requirements of the rule would apply to all 
Security-Based Swap Positions so long as: (1) Any of the transactions 
that compose the Security-Based Swap Position would be required to be 
reported pursuant to 17 CFR 242.908 (``Rule 908'') of Regulation SBSR; 
\145\ or (2) the reporting person holds any amount of reference 
securities underlying the Security-Based Swap Position (or would be 
deemed to be the beneficial owner of such reference securities, 
pursuant to Section 13(d) of the Exchange Act and the rules and 
regulations thereunder) and: (i) The issuer of such reference security 
is a partnership, corporation, trust, investment vehicle, or other 
legal person organized, incorporated, or established under the laws of 
the U.S. or having its principal place of business in the U.S.; or (ii) 
such reference security is part of a class of securities registered 
under Section 12 or 15(d) of the Exchange Act.\146\
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    \145\ See 17 CFR 242.908.
    \146\ See proposed Rule 10B-1(d).
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    Rule 908(a) provides that a security-based swap is subject to 
regulatory reporting and public dissemination if: (i) There is a direct 
or indirect counterparty that is a U.S. person on either or both sides 
of the transaction; or (ii) the security-based swap is accepted for 
clearing by a clearing agency having its principal place of business in 
the United States.\147\ The rule also provides that a security-based 
swap that is not included in the above provisions is subject to 
regulatory reporting but not public dissemination if there is a direct 
or indirect counterparty on either or both sides of the transaction 
that is a registered security-based swap dealer or a registered major 
security-based swap participant.\148\
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    \147\ See 17 CFR 242.908(a). Rule 908 defines ``U.S. person'' by 
cross-referencing to 17 CFR 240.3a71-3(a)(4) (``Rule 3a71-3(a)(4)'') 
of the Exchange Act, which provides that, subject to certain 
exceptions, a ``U.S. person'' means any person that is: (i) A 
natural person resident in the United States; (ii) 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; (iii) an account (whether discretionary or non-
discretionary) of a U.S. person; or (iv) an estate of a decedent who 
was a resident of the United States at the time of death. See 17 CFR 
240.3a71-3(a)(4).
    \148\ See 17 CFR 242.908(a).
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    The Commission believes that tying the reporting requirements in 
proposed Rule 10B-1 to the regulatory reporting and public 
dissemination requirements in Regulation SBSR is appropriate for 
similar reasons set forth when Rule 908 was adopted. Specifically, the 
Commission at the time explained that when a U.S. person enters into a 
security-based swap, the security-based swap necessarily exists at 
least in part within the United States, such that requiring regulatory 
reporting and requiring public dissemination would be consistent with 
the Commission's territorial approach in a number of areas, including 
the application of Title VII requirements.\149\
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    \149\ See 2015 Regulation SBSR Adopting Release, 80 FR at 14649-
14650.
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    In addition to tying the reporting requirement in proposed Rule 
10B-1 to regulatory reporting and public dissemination, the proposed 
rule also would apply when the reporting person holds any amount of 
reference securities underlying the Security-Based Swap Position (or 
would be deemed to be the beneficial owners of such reference 
securities, pursuant to Section 13(d) of the Exchange Act and the rules 
and regulations thereunder) and: (i) The issuer of such reference 
security is a partnership, corporation, trust, investment vehicle, or 
other legal person organized, incorporated, or established under the 
laws of the U.S. or having its principal place of business in the U.S.; 
or (ii) such reference security is part of a class of securities 
registered under Section 12 or 15(d) of the Exchange Act.\150\ As 
explained above, the Commission has previously applied a territorial 
approach to the application of Title VII--including the requirements 
relating to regulatory reporting and public dissemination of security-
based swap transactions--that is grounded in the text of the relevant 
statutory provisions and is designed to help ensure that the 
Commission's application of the relevant provisions is consistent with 
the goals that the statute was intended to achieve.\151\ Under this 
approach, the first step is to identify the congressional focus of the 
statutory provision. If the activity that is the focus of the statutory 
provision occurs here, then application of the statutory provision to 
that activity is a permissible domestic application of the statute. 
When the statutory text provides for further Commission interpretation 
of statutory terms or requirements, this analysis may require the 
Commission to identify through rulemaking or other regulatory action, a 
reasonable understanding (which may look to prior interpretations of 
the relevant statutory text) the specific activity that is relevant 
under the statute.\152\
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    \150\ See proposed Rule 10B-1(d).
    \151\ See 2015 Regulation SBSR Adopting Release, 80 FR at 14649-
14650, n. 790 (citing Morrison v. Nat'l Australia Bank, Ltd., 130 S. 
Ct. 2869, 2884 (2010) (explaining that in order to determine whether 
a particular application of a statutory provision is a domestic 
application of that provision, it is necessary to identify the 
congressional focus of the statutory provision and then determine 
whether the subject the congressional focus is in the United States 
or overseas)).
    \152\ See 2015 Regulation SBSR Adopting Release, 80 FR at 14649-
14650, n. 791 and accompanying text.
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    Section 10B generally provides the Commission with authority to 
require any person effecting transactions for such person's own account 
or the account of others in any security-based swap and any underlying 
security or loan or group or index of securities or loans (as well as 
any related securities) to report such information as the Commission 
may prescribe regarding any position or positions in any security-based 
swap and any underlying or related securities, loans, or indexes.\153\ 
In considering this statutory text, the Commission understands that a 
congressional focus of Section 10B to be the promotion of transparency 
through disclosure within the U.S. securities markets of security-based 
swap positions that (at least in part) occur in the United States or 
other security-based swap transactions that involve persons who have 
positions in U.S. issuers or U.S. registrants. This congressional focus 
is reasonably understood to include U.S. security-based swaps that are 
at least partially within the U.S.

[[Page 6675]]

securities markets or any other securities that trade within the U.S. 
securities markets where at least one party has an ownership interest 
in any of the underlying or related U.S. securities or loans. This 
understanding of the congressional focus is based in part on the fact 
that paragraph (a) of Section 10B applies to the Commission's authority 
to establish position limits in security-based swaps (on which the 
Commission has not yet acted), and paragraph (d), which is titled 
``Large Trader Reporting'' applies to the Commission's authority to 
promulgate rules regarding reporting of positions in security-based 
swaps.\154\
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    \153\ See 15 U.S.C. 78j-2.
    \154\ See id. Paragraph (d) of Section 10B provides the 
Commission with authority to require reporting of positions by any 
person that ``effects transactions for such person's own account or 
the account of others.'' That provision incorporates paragraph (a) 
to define the scope of the security-based swaps and other related 
securities that would be subject to the reporting requirement. 
Notably, paragraphs (a)(1) and (2) of Section 10B focus on the 
Commission's authority to establish position limits in security-
based swaps and related securities as necessary and appropriate in 
the public interest or for the protection of investors, does not 
focus on where the transactions underlying those positions were 
``effected.''
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    The proposed rule would apply when the reporting person holds any 
amount of reference securities underlying the Security-Based Swap 
Position (or would be deemed to be the beneficial owner of such 
reference securities, pursuant to Section 13(d) of the Exchange Act and 
the rules and regulations thereunder), so long as one of two conditions 
are satisfied.\155\ In particular, such underlying securities or loans 
must either be: (1) Issued by an entity subject to U.S. jurisdiction 
(i.e., such issuer is either a partnership, corporation, trust, 
investment vehicle, or other legal person organized, incorporated, or 
established under the laws of the U.S. or having its principal place of 
business in the U.S.) or (2) subject to ongoing reporting obligations 
under the Federal securities laws (i.e., Section 12 or 15(d) of the 
Exchange Act).\156\
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    \155\ In particular, Rule 13d-3 under the Exchange Act, which 
was adopted pursuant to Section 13(d), establishes the standards for 
determining when a person is the beneficial owner of a relevant 
security. Among other things, that rule provides that for the 
purposes of Sections 13(d) and 13(g), a beneficial owner of a 
security includes any person who, directly or indirectly, through 
any contract, arrangement, understanding, relationship, or otherwise 
has or shares: (1) Voting power which includes the power to vote, or 
to direct the voting of, such security; and/or, (2) investment power 
which includes the power to dispose, or to direct the disposition 
of, such security. See 17 CFR 240.13d-3(a).
    \156\ See 15 U.S.C. 78l or 78o(d).
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D. Structured Data Requirement for Schedule 10B

    To facilitate analysis of the reports submitted on Schedule 10B via 
EDGAR, the Commission is proposing to require filers to submit Schedule 
10B using a structured, machine-readable data language. In particular, 
the Commission is proposing that Schedule 10B be structured using 
Financial Information eXchange Markup Language (``FIXML''), a 
structured data language built on the open Financial Information 
eXchange (``FIX'') standard used by market participants to communicate 
information about securities transactions and markets to each 
other.\157\
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    \157\ FIXML and the underlying FIX communications protocol is 
maintained by the FIX Trading Community, a not-for-profit industry-
driven standards-setting body. Current FIXML uses include 
derivatives post-trade clearing, settlement, and reporting. More 
information about FIXML and the FIX Trading Community is available 
at the ``FIXML'' and ``FIX Trading Community'' web pages on the FIX 
Trading website (available at: https://www.fixtrading.org/standards/fixml/ and https://www.fixtrading.org/overview/).
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    The Commission believes a FIXML requirement for Schedule 10B will 
further the goal of increasing transparency in the security-based swaps 
market. Because the reports on Schedule 10B would be publicly available 
in a machine-readable data language, the information disclosed by 
filing persons would be much more readily accessible and usable for 
extraction, filtering, comparison, threshold notification, and other 
analyses on a large scale by the public and the Commission.
    To allow for flexibility in complying with this requirement, the 
Commission would provide filing persons with a fillable web form that 
would convert inputted reports into FIXML, allowing filers to, at their 
option, either submit Schedule 10B directly in FIXML, or use the 
fillable web form to generate the Schedule 10B in FIXML.\158\ In 
addition, the Commission would develop electronic ``style sheets'' 
that, when applied to the reported FIXML data on Schedule 10B, would 
represent that data in human-readable form.
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    \158\ See EDGAR Filer Manual (Volume II) version 59 (September 
2021), Chapter 8 (discussing the preparation and transmission of 
online submissions to the EDGAR system).
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E. Request for Comment

    The Commission generally requests comments on all aspects of 
proposed Rule 10B-1. In addition, the Commission requests comments on 
the following specific issues:

     Should the Commission utilize its authority under 
Section 10B(d) of the Exchange Act to require public reporting of 
certain Security-Based Swap Positions, any security or loan or group 
or index of securities or loans underlying the Security-Based Swap 
Position, and any other instrument relating to such security or loan 
or group or index of securities or loans? Why or why not?
     Do commenters agree with the requirement that the 
Schedule 10B be filed promptly, but in any event no later than the 
end of the first business day following the day of execution of the 
security-based swap transaction that results in the Security-Based 
Swap Position first exceeding the Reporting Threshold Amount? Does 
that timing allow for sufficient time to perform the calculations 
necessary to determine whether a Schedule 10B must be filed or 
amended and to ensure that the form contains all of the required 
information? Why or why not? If commenters disagree with the 
proposed timing, what alternative timeframe should be used for 
purposes of the proposed rule and why?
     Do commenters agree with the scope of the definition of 
``Security-Based Swap Position,'' which determines which security-
based swaps should be aggregated for purposes of determining when 
reporting is required and the security-based swaps that must be 
disclosed? Why or why not? Should this definition be amended in any 
way? If so, how should the definition be modified and why?
     Should the definition of ``Security-Based Swap 
Position'' aggregate only security-based swaps of the same type 
(i.e., security-based swaps based on equity securities or security-
based swaps based on debt (including CDS)) and the same underlying 
security or reference entity? Why or why not? If not, should a 
Security-Based Swap Position include all security-based swaps based 
on the same underlying security or reference entity, regardless of 
whether they are debt (including CDS) or equity-based? Similarly, 
should a Security-Based Swap Position include all security-based 
swaps on the same underlying security or reference entity, as well 
as similar or related securities or reference entities? If so, how 
should the proposed rule define what is ``similar'' for these 
purposes?
     Should proposed Rule 10B-1 require reporting of large 
positions in security-based swaps, regardless of the underlying 
reference entity, security, loan, or group or index of securities or 
loans that a person has with all their counterparties, as a means of 
identifying persons with positions large enough to have a material 
impact on the securities markets in general? Why or why not? For 
example, 17 CFR 240.13h-1 (``Rule 13h-1'') requires traders who 
engage in a substantial level of trading activity to identify 
themselves to the Commission by filing a Form 13H with the 
Commission. Pursuant to Rule 13h-1, a ``large trader'' includes a 
person whose transactions in exchange-listed securities equal or 
exceed two million shares or $20 million during any calendar day, or 
20 million shares or $200 million during any calendar month. Those 
thresholds are calculated based on the trader's entire position in 
all NMS securities, as opposed to its positions in the securities of 
the same

[[Page 6676]]

issuer. Should the Commission consider adopting a similar 
requirement for positions in security-based swaps? Why or why not?
     Should proposed Rule 10B-1 require that persons subject 
to the reporting requirement of the rule submit Schedule 10B on 
EDGAR? Why or why not? Should the rule require or permit a different 
means of submitting Schedule 10B, either in lieu of, or in addition 
to, EDGAR? If so, how should the form be submitted and why? Also, 
how would such additional or substitute means of submission satisfy 
the objective of Rule 10B-1 to make the information included in 
Schedule 10B publicly available?
     Should the Commission require Schedule 10B to be 
submitted in a structured data language? Why or why not? If so, is 
the proposed FIXML data language the most appropriate structured 
data language to use for Schedule 10B, or would another structured 
data language be more appropriate? If the latter, please specify the 
structured data language that would be more appropriate for Schedule 
10B, and explain why.
     Do commenters agree with the proposed definition of 
``Reporting Threshold Amount'' in the context of CDS? Why or why 
not? Is basing the reporting requirement in proposed Rule 10B-1 on 
the notional amount of CDS positions appropriate? Why or why not? Is 
there a better method for triggering the requirement? If so, what 
method should be used and why? Are the proposed $150 million long, 
$150 million short, and $300 million gross notional thresholds for 
CDS positions appropriate? Why or why not? Should the Commission 
further specify which debt securities would be permitted to be 
netted against the aggregate long CDS position? Should additional 
types of netting be permitted, such as by allowing additional types 
of securities to be netted against the aggregate CDS position or by 
allowing long and short CDS transactions to net against each other? 
Should the rule permit people to net their short positions in 
deliverable bonds against their short CDS positions? Why or why not? 
To the extent that commenters believe that additional netting should 
be permitted, please provide as much detail as possible as to any 
limitations in scope or amount that should be included in the 
calculation and why such limitations should be included?
     Do commenters agree with the proposed definition of 
``Reporting Threshold Amount'' in the context of security-based 
swaps on debt securities that are not CDS? Why or why not? Is basing 
the reporting requirement in proposed Rule 10B-1 on the notional 
amount of the position appropriate? Why or why not? Is there a 
better method for triggering the requirement? If so, what method 
should be used and why? Is the proposed threshold of $300 million on 
a gross notional basis appropriate? Why or why not? Should proposed 
Rule 10B-1 allow for netting when calculating the Security-Based 
Swap Position on debt security-based swaps, such as by allowing any 
underlying or related debt securities to be netted against the 
aggregate position or by allowing long and short security-based swap 
transactions to net against each other? To the extent that 
commenters believe that netting should be permitted, please provide 
as much detail as possible as to any limitations in scope or amount 
that should be included in the calculation and why such limitations 
should be included.
     Should the proposed definition of ``Reporting Threshold 
Amount'' in the context of either CDS or security-based swaps based 
on debt securities that are not CDS (or both) also include a 
percentage threshold, similar to what the Commission proposed in the 
context of security-based swaps based equity securities, in order to 
account for smaller issuers of debt? Why or why not? If commenters 
believe that such an approach would be useful for CDS, should the 
threshold be based on the outstanding number of potentially 
deliverable obligations or the outstanding amount of CDS? Commenters 
are encouraged to be as specific as possible in explaining how such 
a test would work.
     Do commenters agree with the proposed definition of 
``Reporting Threshold Amount'' in the context of security-based 
swaps on equity securities, including having both a threshold based 
on the notional amount of the Security-Based Swap Position and a 
threshold based on the number of shares attributable to the 
Security-Based Swap Position? Why or why not? Do commenters agree 
with the proposed $300 million and 5% thresholds? If not, how should 
they be modified? Should the Commission require people to include 
all related securities in the calculation of their Security-Based 
Swap Positions once they exceed an intermediate threshold in order 
to prevent evasion? If commenters agree with this approach, are $150 
million and 2.5% appropriate thresholds to use for these purposes? 
Why or why not?
     Should the Commission consider a different methodology 
for purposes of the definition of ``Reporting Threshold Amount'' in 
the context of security-based swaps on equity securities? For 
example, should proposed Rule 10B-1 include a threshold based on 
number of shares represented by the Security-Based Swap Position as 
a percentage of the average daily trading volume of those shares, as 
measured by the number of shares traded and calculated over a fixed 
period (e.g., the preceding six months)?
     Do commenters agree with the proposed requirements 
regarding the submission of amendments to Schedule 10B, as set forth 
in proposed Rule 10B-1(c), including the 10% threshold for increases 
or decreases of the Security-Based Swap Position? Why or why not? If 
not, what should be modified and why?
     Do commenters agree with information the Commission is 
proposing to be required to be disclosed on Schedule 10B? Why or why 
not? Should other information be required? If so, what information 
should be added and why? Should information currently proposed to be 
included not be required? If so, what information should be deleted 
from the proposed schedule and why?
     Do commenters agree with the Commission's proposal not 
to require reporting of a reporting party's counterparties? Why or 
why not? How much does the absence of counterparty information 
impact the usefulness of the reporting? Is there any other 
information that should not be required to be disclosed on Schedule 
10B due to it being sensitive or proprietary in nature? If so, what 
information should not be disclosed and why?
     In cases where a Schedule 10B filing is made for a 
group of persons, should the Commission require any additional 
information about the group, such as a brief description of any 
contracts, arrangements, understandings or relationships among the 
persons in the group, as set forth in Item (10) of proposed Schedule 
10B? Why or why not? What other information should be included?
     Do commenters agree with the form and scope of proposed 
Rule 10B-1(d), which would identify when the reporting requirements 
of the rule would apply to all Security-Based Swap Positions, 
including in the context of cross-border security-based swap 
transactions? Why or why not? Are there any changes to the proposal 
that the Commission should make to modify the scope of the positions 
that would be subject to the rule? If so, what changes should be 
made and why?
     Proposed Rule 10B-1(e) would provide that if some or 
all of the information required to be disclosed on proposed Schedule 
10B is publicly available on EDGAR at the time the Schedule 10B is 
required to be filed, such information may be incorporated by 
reference in answer, or partial answer, to any item of Schedule 10B. 
Should the Commission allow reporting persons to incorporate 
information by reference in proposed Schedule 10B? Why or why not? 
Should proposed Rule 10B-1(e) be modified in any way? If so, how? 
Are there any aspects of this proposal that should be modified or 
added to help make the filing requirement under proposed Schedule 
10B more efficient? If so, which ones and why? If the Commission 
were to adopt this provision, do commenters anticipate that large 
portions of these filings would be incorporated by reference? If so, 
what burdens, if any, could this provision create for persons 
utilizing the data reported in the schedule?

IV. General Request for Comment

    We request and encourage any interested person to submit comments 
regarding the proposed rules, specific issues discussed in this 
release, and other matters that may have an effect on the proposed 
rules. With regard to any comments, we note that such comments are of 
particular assistance to our rulemaking initiative if accompanied by 
supporting data and analysis of the issues addressed in those comments.

V. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \159\ imposes certain 
requirements on Federal agencies in connection with the conducting or 
sponsoring of any ``collection of

[[Page 6677]]

information.'' \160\ For example, 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 information; (2) a summary of the collected 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.\161\
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    \159\ 44 U.S.C. 3501 et seq.
    \160\ See 44 U.S.C. 3502(3).
    \161\ See 44 U.S.C. 3507(a)(1)(D); see also 5 CFR 
1320.5(a)(1)(iv).
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    Certain provisions of the proposed rules contain ``collection of 
information'' requirements within the meaning of the PRA. The 
Commission is submitting these collections of information to OMB for 
review in accordance with 44 U.S.C. 3507 and 5 CFR 1320.11. 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.
    Specifically, proposed Rule 10B-1 (including Schedule 10B) would 
impose new collection of information requirements.\162\ The title of 
the new collections of information is ``Schedule 10B--Reporting of 
Security-Based Swap Positions.'' OMB has not yet assigned a control 
number to this new collection of information. The Commission is not 
proposing to amend the collection of information entitled ``Form ID'' 
(OMB Control No. 3235-0328).\163\
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    \162\ The Commission does not believe that re-proposed Rule 9j-
h1 or proposed Rule 15Fh-4(c) contain a collection of information 
requirement within the meaning of the PRA. Specifically, re-proposed 
Rule 9j-1 contains prohibitions designed to prevent fraud, 
manipulation, and deception in connection with effecting 
transactions in, or inducing or attempting to induce the purchase or 
sale of, any security-based swap. Proposed Rule 15Fh-4(c) would 
generally make it unlawful for certain specified persons to directly 
or indirectly take any action to coerce, manipulate, mislead, or 
fraudulently influence an SBS Entity's CCO in the performance of 
their duties under the federal securities laws or the rules and 
regulations thereunder. Neither of those rules require a person to 
establish, maintain, and enforce written policies and procedures 
reasonably designed to ensure compliance with the applicable rule. 
However, to the extent that a person is already subject to a similar 
policies and procedures requirement, any updates to those policies 
and procedures would likely be captured by an existing collection of 
information. For example, as previously explained, Rule 15Fh-3(h) 
requires an SBS Entity to establish and maintain a system to 
supervise its business and the activities of its associated persons 
and that system must be reasonably designed to prevent violations of 
the provisions of applicable federal securities laws and the rules 
and regulations thereunder. In the PRA analysis when that rule was 
adopted, the Commission estimated that each SBS Entity would spend 
60 hours per year to update each of the policies and procedures 
required by Rule 15Fh-3. See Business Conduct Standards Adopting 
Release, 81 FR at 30094. Given that both re-proposed Rule 9j-1 and 
proposed Rule 15Fh-4(c) are intended solely to identify actions that 
an SBS Entity is not permitted to take, and as such do not make 
substantive modifications to any existing collection of information 
or impose new information collection requirements within the meaning 
of the PRA. Accordingly, we are not revising any burden and cost 
estimates in connection with these amendments.
    \163\ To the extent that a person subject to a reporting 
requirement pursuant to proposed Rule 10B-1 has not previously made 
at least one filing with the Commission via EDGAR, such person would 
need to file a Form ID with the Commission in order to gain access 
to EDGAR. Form ID is used to request the assignment of access codes 
to file on EDGAR. Upon successfully filing a Form ID, a person will 
be provided with, among other things, a given a Central Index Key 
(``CIK'') number that uniquely identifies each filer. Given that the 
thresholds in proposed Rule 10B-1 are set at a level that will 
likely only capture persons previously subject to an EDGAR filing 
requirement (such as, among others, SBS Entities, large traders, 
broker-dealers, or Exchange Act reporting companies), the Commission 
estimates that most, if not all, persons required to submit a 
Schedule 10B will already have a CIK and the ability to access 
EDGAR. Thus, the Commission believes that the proposed rules would 
not impose substantive new burdens on the overall population of 
respondents or affect the current overall cost estimates for Form 
ID. Therefore, we believe that the current burden and cost estimates 
for Form ID remain appropriate. Accordingly, we are not revising the 
current burden or cost estimates for Form ID.
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A. Summary of Collections of Information

    Proposed Rule 10B-1(a)(1) would require any person (and any entity 
controlling, controlled by or under common control with such person), 
or group of persons, who through any contract, arrangement, 
understanding or relationship, after acquiring or selling directly or 
indirectly, any security-based swap, is directly or indirectly the 
owner or seller of a Security-Based Swap Position \164\ that exceeds 
the Reporting Threshold Amount, \165\ shall file with the Commission a 
statement containing the information required by Schedule 10B using 
EDGAR in FIXML. Pursuant to proposed Rule 10B-1(a)(2), each person 
subject to the rule would be required to file its Schedule 10B 
promptly, but in no event later than the end of the first business day 
following the day of execution of the security-based swap transaction 
that results in the Security-Based Swap Position first exceeding the 
Reporting Threshold Amount.
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    \164\ See supra notes 120-121 and accompanying text (describing 
proposed Rule 10B-1(b)(3), which defines the term ``Security-Based 
Swap Position'').
    \165\ Proposed Rule 10B-1 would include specific quantitative 
thresholds for when reporting would be required. See supra sections 
III.A.1 (defining ``Reporting Threshold Amount'' for purposes of 
Security-Based Swap Positions consisting of CDS and other security-
based swaps based on debt securities) and III.A.2 (defining 
``Reporting Threshold Amount'' for purposes of Security-Based Swap 
Positions consisting of security-based swaps based on equity 
securities).
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    Proposed Rule 10B-1(c) would require a person who has previously 
filed a Schedule 10B with the Commission to file an amendment if any 
material change occurs in the facts set forth in a previously filed 
Schedule 10B including, but not limited to, any material increase in 
the Security-Based Swap Positions or if a Security-Based Swap Position 
falls back below the applicable Reporting Threshold Amount. Any such 
amendment would be required to be filed on EDGAR promptly, but in no 
event later than the end of the first business day following the 
material change. Moreover, for purposes of the proposed rule, an 
acquisition in an amount equal to 10% or more of the position 
previously disclosed in Schedule 10B would be deemed ``material'' for 
purposes of this requirement.
    Pursuant to proposed Schedule 10B, persons subject to proposed Rule 
10B-1 would generally be required to report, among other things, 
certain information about their Security-Based Swap Positions, as well 
as positions in any security or loan underlying the Security-Based Swap 
Position, and positions in any other instrument relating to the 
underlying security or loan or group or index of securities or 
loans.\166\ Schedule 10B also generally requires information regarding 
the identity and type of the applicable reporting person or group of 
persons.\167\
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    \166\ See supra section III.B.
    \167\ See id.
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B. Proposed Use of Information

    The Commission believes that the information required to be 
disclosed on Schedule 10B will be used as follows: (1) To provide 
market participants (including counterparties, issuers and their 
stakeholders) and regulators with access to information that may 
indicate that a person (or a group of persons) is building up a large 
security-based swap position, which in some cases could be indicative 
of potentially fraudulent or manipulative purposes; (2) to alert market 
participants and regulators to the existence of concentrated exposures 
to a limited number of counterparties, which should inform those market 
participants

[[Page 6678]]

and regulators of the attendant risks, allow counterparties to risk 
manage and lead to better pricing of the security-based swaps (as a 
result of all market participants having access to the information 
about the positions), and (3) in the case of manufactured or other 
opportunistic strategies in the CDS market, to provide market 
participants and regulators with advance notice that a person (or a 
group of persons) is building up a large CDS position with an incentive 
to vote against their interests as a debt holder, possibly with an 
intent to harm the company, even if such conduct is not inherently 
fraudulent.

C. Respondents

    Based on the information in Figure 6 in section VI.D.2.iii.(A) 
(Economic Analysis), the Commission believes that up to 400 persons 
will be required to file at least one Schedule 10B with the Commission 
with respect to Security-Based Swap Positions consisting of CDS 
annually. Because reporting transaction data regarding other types of 
security-based swaps has only recently become mandatory, the Commission 
does not yet have a precise estimate as to the number of persons we 
would expect to file reports with respect to Security-Based Swap 
Positions consisting of security-based swaps based on equity securities 
and other debt securities (non-CDS).
    However, in describing the security-based swap market as a whole, 
the Commission has previously stated that it believes that single-name 
CDS contracts make up a majority of that market.\168\ Thus, the 
Commission expects that the number of persons that would submit reports 
with respect to Security-Based Swap Positions consisting of security-
based swaps based on equity securities and other debt securities should 
not exceed the 400 persons we expect to submit reports related to CDS 
positions annually. Although the Commission recognizes that there is 
likely to a considerable number of people who will have both equity- 
and debt-based Security Based Swap Positions that will be required to 
be reported, to be conservative, the Commission is doubling the 
estimate; we estimate the total number of persons who will be subject 
to the proposed rule. Accordingly, the Commission estimates that 800 
respondents will be subject to at least one reporting requirement 
pursuant to proposed Rule 10B-1 annually.
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    \168\ See Risk Mitigation Adopting Release, 85 FR at 6391-92.
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    At the same time, however, the Commission also understands that 
some number of persons may have Security-Based Swap Positions that, 
while not large enough to trigger a reporting requirement under 
proposed Rule 10B-1, will be close enough to the threshold to warrant 
active monitoring of those positions. Accordingly, the Commission 
estimates that 850 respondents will likely need to develop a 
technological infrastructure to monitor their Security-Based Swap 
Positions, which includes the 800 respondents estimated to be subject 
to a reporting requirement pursuant to proposed Rule 10B-1 and an 
additional 50 respondents whose positions may not ever trigger a 
reporting requirement.

D. Total Annual Recordkeeping Burden

1. Initial Costs and Burdens
    As discussed above, the Commission believes that up to 850 
respondents will likely need to develop a technological infrastructure 
to calculate and monitor their Security-Based Swap Positions, even if 
some of those entities do not have at least one Security-Based Swap 
Position that is required to be reported pursuant to proposed Rule 10B-
1(a). The Commission believes that most, if not all, persons who are 
likely to have Security-Based Swap Positions large enough to trigger 
the reporting thresholds will have the resources to develop and 
implement this technological infrastructure using internal personnel 
and resources. The Commission also believes that each respondent will 
incur a one-time initial internal burden of approximately 355 hours (or 
$101,740) per respondent to develop such technological infrastructure, 
which amounts to 301,750 hours (or $86,479,000) in the aggregate for 
all 850 respondents.\169\ These estimates are similar to the estimates 
the Commission used in connection with Regulation SBSR.\170\ Although 
the Commission recognizes that the system referred to in the Regulation 
SBSR Adopting Release involved capturing security-based swap 
transaction data, whereas the requirement in proposed Rule 10B-1 
relates to aggregated security-based swap positions (as well as related 
securities that are not security-based swaps), we also believe that the 
costs of each system, regardless of whether it collects transaction or 
position data are sufficiently similar.
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    \169\ This estimate is based on the following internal costs: 
[(Sr. Programmer (160 hours) at $303 per hour) + (Sr. Systems 
Analyst (160 hours) at $260 per hour) + (Compliance Manager (10 
hours) at $283 per hour) + (Director of Compliance (5 hours) at $446 
per hour) + (Compliance Attorney (20 hours) at $334 per hour)] = 
$101,740 per respondent x 850 respondents = $86,479,000. All hourly 
cost figures are based upon data from SIFMA's Management & 
Professional Earnings in the Securities Industry 2013 (modified by 
the 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).
    \170\ See 2015 Regulation SBSR Adopting Release, 80 FR at 14701 
n. 1232. Specifically, the Commission estimated the burden of 
building an internal order and trade management system capable of 
capturing the relevant transaction information.
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    Because many of these 850 respondents may also be reporting parties 
pursuant to Regulation SBSR, it is possible that such persons may be 
able to leverage some of the technology used in connection with the 
transaction reporting system to build the system necessary to comply 
with proposed Rule 10B-1. Nevertheless, the Commission believes it 
appropriate to use the more conservative estimate in this proposing 
release given that the Commission has not previously proposed or 
adopted position reporting requirements with respect to security-based 
swaps.
2. Ongoing Costs and Burdens
    In addition to developing the technological infrastructure to 
calculate and monitor their Security-Based Swap Positions in order to 
comply with the requirements of proposed Rule 10B-1, each respondent 
will be required to maintain and operate such system on an ongoing 
basis. As before, the Commission believes that the persons who are 
likely to be subject to the rule will likely have the personnel and 
resources to maintain these systems internally. As such, the Commission 
estimates that reach respondent will incur an annual internal burden of 
436 hours (or $77,000), which amounts to 370,600 hours (or $65,450,000) 
in the aggregate for all 850 respondents.\171\
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    \171\ This estimate is based on the following internal costs: 
[(Sr. Programmer (32 hours) at $303 per hour) + (Sr. Systems Analyst 
(32 hours) at $260 per hour) + (Compliance Manager (60 hours) at 
$283 per hour) + (Compliance Clerk (240 hours) at $64 per hour) + 
(Director of Compliance (24 hours) at $446 per hour) + (Compliance 
Attorney (48 hours) at $334 per hour)] = $77,092 per respondent x 
850 respondents = $65,450,000.
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    In addition to maintaining and operating such technological 
infrastructure, the Commission also believes that each respondent will 
incur a $1,000 annual internal cost for the technology necessary to 
store such security-based swap position data, or $850,000 in the 
aggregate for all 850 respondents.\172\ As before, these estimates are 
similar to the estimates the

[[Page 6679]]

Commission used in connection with Regulation SBSR.\173\ Also 
consistent with the calculation of the initial burdens, the Commission 
believes it appropriate to use the more conservative estimate in this 
proposing release (i.e., without regard to the possibility of 
leveraging some parts of the Regulations SBSR transaction reporting 
systems) given that the Commission has not previously proposed or 
adopted position reporting requirements with respect to security-based 
swaps.
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    \172\ This estimate is based on the following internal: [($250/
gigabyte of storage capacity) x (4 gigabytes of storage)] = $1,000 x 
850 respondents = $850,000.
    \173\ See 2015 Regulation SBSR Adopting Release, 80 FR at 14701 
nn. 1235 and 1236.
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    Finally, the collection of information includes the filings 
required to be reported to the Commission pursuant to Rule 10B-1. The 
Commission believes that persons that exceed the reporting thresholds 
in proposed Rule 10B-1(b)(1) will submit an estimated 1,000 reports per 
week. This number is based on information in section VI.D.2.iii.(A) 
(Economic Analysis), which estimates that the Commission will receive 
approximately 362 reports related to Security-Based Swap Positions that 
are CDS from U.S. persons, and 291 reports related to Security-Based 
Swap Positions that are CDS from non-U.S. persons.\174\ However, given 
that such range may be overestimating the number of reports on both 
ends of that spectrum, as discussed in section VI.D.2.iii.(A), the 
Commission believes it reasonable to use an aggregate number of 
approximately 500 reports per week.
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    \174\ See infra note 252.
---------------------------------------------------------------------------

    In addition, because the Commission does not yet have the data 
necessary to make a similar estimate for security-based swaps based on 
equity securities or other debt securities, we are doubling the 
estimate provided for CDS positions, for a total of 1,000 reports per 
week. As explained in connection with estimating the number of 
respondents that will be required to submit reports pertaining to CDS 
positions, we believe that doubling the estimate related to CDS 
positions is reasonable given what we know about the composition of the 
security-based swap market.\175\ Accordingly, the Commission believes 
that it will receive 52,000 reports annually.\176\
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    \175\ See supra section V.C (explaining that because the 
Commission believes that single-name CDS contracts make up a 
majority of security-based swaps, we have decided to use a 
conservative approach by estimating that the an equal number of 
respondents would be required to file at least one report related to 
CDS positions as would be required to file at least one report 
related to Security-Based Swap Positions consisting of other types 
of security-based swaps. The same rationale applies with respect to 
the estimated number of reports that the Commission would expect 
those respondents to file with respect to Security-Based Swap 
Positions consisting of security-based swaps based on equity 
securities and other debt securities (non-CDS).
    \176\ This estimate is based on the following: [(1,000 reports/
week) x (52 weeks)] = 52,000 reports. In addition, the Commission 
previously estimated that 800 respondents will be subject to at 
least one reporting requirement pursuant to proposed Rule 10B-1. See 
supra section V.C. This estimate results in an average of 65 reports 
per respondent.
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    The Commission also estimates that each of those estimated 52,000 
reports will take approximately 14.5 hours to complete. This number is 
consistent with the estimate used in the collection of information for 
Schedule 13D.\177\ Although the Commission recognizes that proposed 
Rule 10B-1 and Regulation 13D-G differ in terms of both purpose and 
scope, we believe that the process of completing both forms would be 
similar. Accordingly, the Commission estimates that all respondents 
will incur an annual burden of 754,000 hours in the aggregate to 
complete these 52,000 reports on proposed Schedule 10B.
---------------------------------------------------------------------------

    \177\ See Proposed Collection; Comment Request; Extension: 
Regulation 13D and Regulation 13G, Schedule 13D and Schedule 13G; 
SEC File No. 270-137, 85 FR 25503 (May 1, 2020). The Commission 
recognizes that the 14.5 hour estimate for Schedule 13D is 
subsequently broken down based on the proportion of hours that would 
be carried internally by each respondent (25%), such that the other 
75% would be carried by outside counsel (which was then monetized 
for purposes of the estimated burden). Because the Commission does 
not yet know what proportion of proposed Schedule 10B filings would 
be prepared externally, these estimates all assume that the entire 
14.5 hour burden would be carried as internal costs by each 
respondent.
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E. Collection of Information Is Mandatory

    The collection of information for proposed Rule 10B-1 (including 
Schedule 10B) is a mandatory collection of information.

F. Confidentiality

    Given the intended benefits of public reporting of the information 
required to be reported on Schedule 10B pursuant to proposed Rule 10B-
1, as set forth in section I.C and reiterated in section V.B., 
responses made pursuant to this collection of information would not be 
confidential and would be publicly available.

G. Request for Comment

    We request comment on whether our estimates are reasonable. 
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments 
to: (1) Evaluate whether the proposed collection of information is 
necessary for the proper performance of the functions of the 
Commission, including whether the information will have practical 
utility; (2) evaluate the accuracy of the Commission's estimate of the 
burden of the proposed collection of information; (3) determine whether 
there are ways to enhance the quality, utility, and clarity of the 
information to be collected; and (4) determine whether there are ways 
to minimize the burden of the collection of information on those who 
are to respond, including through the use of automated collection 
techniques or other forms of information technology. Persons wishing to 
submit comments on the collection of information requirements of the 
proposed amendments should direct them to the OMB Desk Officer for the 
Securities and Exchange Commission, 
[email protected], and should send a copy to 
Vanessa A. Countryman, Secretary, Securities and Exchange Commission, 
100 F Street NE, Washington, DC 20549-1090, with reference to File No. 
S7-32-10. OMB is required to make a decision concerning the collections 
of information between 30 and 60 days after publication of this 
release; therefore a comment to OMB is best assured of having its full 
effect if OMB receives it within 30 days after publication of this 
release. Requests for materials submitted to OMB by the Commission with 
regard to these collections of information should be in writing, refer 
to File No. S7-32-10, and be submitted to the Securities and Exchange 
Commission, Office of FOIA Services, 100 F Street NE, Washington, DC 
20549-2736.

VI. Economic Analysis

A. Introduction

    The Commission is mindful of the economic effects, including the 
costs and benefits, of re-proposed Rule 9j-1, proposed Rule 10B-1, and 
proposed Rule 15Fh-4(c). Section 3(f) of the Exchange Act requires the 
Commission, whenever it engages in rulemaking pursuant to the Exchange 
Act and is required to consider or determine whether an action is 
necessary or appropriate in the public interest, also to consider, in 
addition to the protection of investors, whether the action will 
promote efficiency, competition, and capital formation.\178\ In 
addition, Section 23(a)(2) of the Exchange Act requires the Commission, 
when making rules under the Exchange Act, to consider the impact the 
proposed rules would have on competition.\179\ Section 23(a)(2) of the 
Exchange Act also provides that the Commission shall not adopt any rule 
that would impose a

[[Page 6680]]

burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Exchange Act.
---------------------------------------------------------------------------

    \178\ See 15 U.S.C. 78c(f).
    \179\ See 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The analysis below addresses the likely economic effects of re-
proposed Rule 9j-1, proposed Rule 10B-1, and proposed Rule 15Fh-4(c), 
including the anticipated benefits and costs of the rules and their 
likely effects on efficiency, competition, and capital formation. Many 
of the benefits and costs of re-proposed Rule 9j-1, proposed Rule 10B-
1, and proposed Rule 15Fh-4(c) discussed below are difficult to 
quantify. For example, the Commission cannot quantify the impact of 
litigation and litigation risk to counterparties and underlying 
entities or the overall impact to the credibility and reputation of the 
security-based swap market. The extent of some of these impacts will 
depend, in part, on events difficult to predict that might affect 
security-based swaps such as changes in counterparty behavior. 
Reputational and credibility effects also are difficult to measure. 
Therefore, while the Commission has attempted to quantify economic 
effects where possible, much of the discussion of the anticipated 
economic effects below is qualitative and descriptive in nature.

B. Broad Economic Considerations

Credit Default Swaps
    The single-name CDS market is a specialized venue for the transfer 
of credit, or default, risk of individual companies. This type of 
security-based swap allows market participants to obtain (or unload) 
exposure to the credit risk of an issuer without having to purchase (or 
sell) the issuer's bonds; the de-coupling allows for more precise 
targeting of credit risk exposure levels and lower transaction 
costs.\180\ Active participants in the CDS market tend to be (a) 
highly-informed investors, such as hedge funds, pension funds, 
endowments, etc., that have a directional view on the economic 
prospects of an issuer; and (b) participants who have some natural 
exposure to the credit risk they want to hedge, such as ownership of 
the issuer's bonds or counterparty exposure to the issuer.\181\ The 
latter category tends to include, for example, insurance companies, 
fixed-income investment funds, and broker-dealers. In general terms, 
the CDS market has the characteristics of a zero-sum game, where losses 
by one party to a transaction are offset by gains by the other party. 
The market provides incentives for participants to compete by 
leveraging marginal informational advantages, thereby forming 
information asymmetries among participants.
---------------------------------------------------------------------------

    \180\ CDS prices primarily relate to the credit risk component 
of a bond, while bond prices reflect both credit risk and the risk 
free rate. Hence, to replicate the bond, the CDS market participant 
needs exposure to both the CDS and the risk free bond, which has an 
additional cost.
    \181\ Martin Oehmke & Adam Zawadowski, The Anatomy of the CDS 
Market, 30 The Rev. of Fin. Stud., (Jan. 2017), at 80, 80-119 
(available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2023108).
---------------------------------------------------------------------------

    One example of material information that could lead to such an 
asymmetry is the trading characteristics of the issuer's related 
instruments, including the number of contracts that a market 
participant holds on a specific bond issue. This data is important 
because some market participants in the past have engaged in tactics 
that academics and media have described as ``opportunistic 
strategies.'' \182\ Opportunistic strategies usually leverage large 
positions relative to the overall credit market for a specific issuer 
and can take a number of different forms. However, as a general matter, 
these strategies often involve CDS buyers or sellers taking steps, 
either with or without the participation of the underlying entity, to 
avoid, trigger, delay, accelerate, decrease, and/or increase payouts on 
CDS defaults. The larger the directional position, the greater the 
economic motivation to enter into these types of trades. When market 
participants employ one of these strategies, they intend to obtain 
gains from the positions they hold that go beyond those corresponding 
to the initial profit and loss expectation (the initial payoff 
function) at trade execution. This additional gain would be obtained to 
the direct detriment of a counterparty that is unaware of that 
additional loss potential.\183\ Currently there is limited, if any, 
public information about the size of security-based swap positions held 
by a counterparty, so the average CDS market participant, despite being 
sophisticated and well-informed, is often unaware of the risk of being 
on the losing side of an opportunistic strategy. Because market 
participants could incur heavier-than-expected losses if their 
counterparty employed such a strategy, they may be disincentivized to 
participate in the market. This type of scenario--where a party's need 
to anticipate a bad outcome in a future transaction without full 
information could disincentivize certain behavior--is referred to as 
``adverse selection.''
---------------------------------------------------------------------------

    \182\ Researchers, using a sample period from the fourth quarter 
of 2010 to the second quarter of 2018, have argued that these types 
of strategies have likely increased over time. See Danis & Gamba, 
supra note 22 at Figure 1.
    \183\ The market participant's gain from the transaction is 
inversely proportional to the gain of the counterparty, so the 
larger the market participant's position (and gain), the larger the 
counterparty's loss.
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    Adverse selection has been thoroughly documented in the economic 
literature, and its deleterious effects on market participation and 
efficiency are well known in sectors such as banking,\184\ 
insurance,\185\ and used cars.\186\ Though the Commission lacks data 
that would show the direct link between the current CDS market 
condition (and the degree of adverse selection) and participants' 
appetite to trade, ``opportunistic strategies'' (which are symptomatic 
of a market with adverse selection) increase inefficiency in the 
market. To the extent that market participants anticipate 
``opportunistic strategies,'' the CDS spread or price becomes a 
reflection of the likelihood of a ``manufactured'' strategy being 
announced (or, if already announced, of succeeding) and decouples from 
the credit fundamentals of the reference entity. This effect reduces 
the utility of the market as a venue to offload or take on the credit 
risk of a company because prices no longer reflect credit risk; bona 
fide hedgers or speculators in this market would be more likely to 
exit, as they cannot readily ``trade'' the credit of a company.\187\
---------------------------------------------------------------------------

    \184\ Joseph E. Stiglitz & Andrew Weiss, Credit Rationing in 
Markets with Imperfect Information, 71 The Am. Econ. Rev., at 393 
(June 1981) (presenting a model showing that, in a world with 
imperfect information, the use of interest rates or collateral in 
the screening process can introduce adverse selection and reduce 
overall expected loan profitability).
    \185\ See Amy Finkelstein & James M. Poterba, Adverse Selection 
in Insurance Markets: Policyholder Evidence from the U.K. Annuity 
Market, Nat'l Bureau of Econ. Rsch. NBER Working Paper, Paper No. 
8045 (Dec. 2000), (available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=489682).
    \186\ George A. Akerlof, The Market for `Lemons': Quality 
Uncertainty and the Market Mechanism, 84 Q. J. of Econ., at 488, 
488-500 (Aug. 1970) (discussing a single-sided market for used cars 
where the seller is more informed then the buyer, leading to 
asymmetric information and potential market failure).
    \187\ See Fletcher, supra note 21 (explaining that 
``engineered'' or ``manufactured'' transactions distort the 
information reflected in CDS spreads, to the point where the default 
risk expressed in CDS spreads is no longer connected to the 
financial condition of the underlying entity).
---------------------------------------------------------------------------

    Furthermore, the adverse selection problem in the CDS market runs 
in both directions. In contrast to the used car market, where the 
seller nearly always has more information and therefore the buyer must 
preempt the possibility of buying a ``lemon,'' in the CDS markets both 
buyers and sellers have the potential to leverage their market 
positions and engage in ``opportunistic

[[Page 6681]]

strategies,'' to the detriment of their counterparties.
    In addition to the market imperfection mentioned above, the 
resemblance of a CDS contract to an insurance policy on an asset may 
give rise to information asymmetries amongst its counterparties. Since 
buying a CDS contract offers insurance to bondholders in the case of 
default, bondholders who buy CDS (pay a periodic premium) are less 
concerned about the health of the cash flows of the underlying asset, 
and in general less likely to renegotiate the terms in a bond 
contract.\188\ This divergence in the expected outcomes of a 
transaction after a transaction occurs is called ``moral hazard'' or, 
specific to the CDS market, an ``empty creditor.'' \189\ In this 
particular scenario, CDS sellers would likely prefer not to transact 
with such CDS buyers or could have trouble pricing this risk, to the 
extent they are unaware of which counterparty is such an empty 
creditor.\190\ Additional information for market participants in the 
form of reporting, however, may also alleviate part of this information 
asymmetry \191\ by making it easier for CDS sellers to identify such 
counterparties, thus mitigating the potential for moral hazard.
---------------------------------------------------------------------------

    \188\ Bolton & Oehmke, supra note 112 at 2617, 2617-2655; see 
also Andr[aacute]s Danis, Do Empty Creditors Matter? Evidence from 
Distressed Exchange Offers, 63 Mgmt Sci., at 1271, 1271-1656 (Oct. 
2015) (available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2001467).
    \189\ Bengt Holmstr[ouml]m, Moral Hazard and Observability, 10 
The Bell J. of Econ., at 74, 74-91 (Spring, 1979).
    \190\ There is evidence that even sophisticated market 
participants were unable to ex-ante price events characterized as 
``empty creditor'' scenarios. See Solus Alternative Asset Management 
LP v. GSO Capital Partners L.P., No. 18 CV 232-LTS-BCM (SDNY Jan. 
29, 2018).
    \191\ The additional reporting could inform the market of the 
filer's interest in the underlying entity's solvency by allowing the 
observance of a conventional, hedging CDS position. For example, a 
CDS participant with a large long CDS position may be less 
interested in the underlying entity's solvency as compared to the 
issuing entity itself or to a bond investor without CDS insurance. 
Further, to the extent that a counterparty has not reported pursuant 
to the proposed rule, a market participant could infer information 
about a potentially lower level of risk associated with transacting 
with that counterparty.
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Total Return Swaps
    The total return swap (TRS) \192\ market differs from the CDS 
market in that the counterparties in a TRS take on the price and 
dividend risk of a reference stock and not the risk of default. 
Counterparties in the TRS market use the contracts to obtain exposure, 
usually leveraged, to the price movement and dividend payments of a 
stock or index and benefit from not having to own the stock itself. 
Market participants, such as mutual funds, hedge funds, and endowments, 
use TRS to obtain exposure in markets where they would face 
difficulties \193\ purchasing or selling the underlying stock while 
taking advantage of the capital efficiencies of not holding shares in 
their inventories.
---------------------------------------------------------------------------

    \192\ TRS include non-CDS debt-based security swaps, equity-
based security swaps, and mixed swaps.
    \193\ A market participant may find it difficult to buy stock of 
a foreign company, or may have trouble locating a stock to sell 
short.
---------------------------------------------------------------------------

    The risks attendant to the accumulation of large positions in TRS 
are different from CDS: With TRS, the main risk is that highly 
leveraged positions are very sensitive to price fluctuations of the 
underlying asset. The larger the position, the higher the risk that 
drastic price fluctuations may impair the solvency of the investor and, 
as a result, may create default risk for the security-based swap 
counterparty.
    As in the CDS market,\194\ the lack of public information about 
market positions means that market participants may not be aware of the 
risk of default of their counterparties, especially to those with 
concentrated, large positons who would be more prone to risks from 
price fluctuations. While counterparties could attempt to price in the 
risk of additional default risk, they currently lack the information 
necessary to accurately calculate the magnitude of that additional 
risk.
---------------------------------------------------------------------------

    \194\ Navneet Arora, Priyank Gandhi & Francis A. Longstaff, 
Counterparty Credit Risk and the Credit Default Swap Market, 103 J. 
of Fin. Econ., at 280, 280-293 (March 1, 2011) (available at: 
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1830321) 
(arguing that, ''[they] find that counterparty credit risk is priced 
in the CDS market.'').
---------------------------------------------------------------------------

    The existence of this information asymmetry that ensues from the 
party attaining the large position may create an economic externality. 
This externality is one where a market participant who decides to take 
on a large leveraged position in the underlying entity through a TRS 
will not internalize the total societal cost of a negative outcome 
where it declares bankruptcy. When the market participant amassing the 
large position fails, the costs of the participant's behavior on the 
issuer of the security, its counterparty, and the reputation of the 
market could be larger than those internalized by the failing party. 
Reporting could alleviate the externality by making information public 
that could be incorporated into TRS prices, thus requiring the party 
with the equity exposure to fully pay for the additional risks that it 
is incurring. Counterparties that have amassed large economic exposures 
in a specific security or TRS on that security (or both) and are 
therefore at greater risk of default could then be more easily 
identified.

C. Baseline

1. Existing Regulatory Frameworks
    As discussed in section I.A, because security-based swaps are 
included in the Exchange Act's definition of ``security,'' participants 
in the SBS market are currently subject to the general antifraud and 
anti-manipulation provisions of the Federal securities laws, including 
Sections 9(a), 10(b) and Rule 10b-5 under the Exchange Act, and Section 
17(a) of the Securities Act. In addition, the Dodd-Frank Act expanded 
the anti-manipulation provisions of Section 9 of the Exchange Act to 
encompass security-based swap transactions and requires the Commission 
to adopt rules to prevent fraud, manipulation, and deception in 
connection with security-based swaps.\195\
---------------------------------------------------------------------------

    \195\ See supra note 5 and accompanying text.
---------------------------------------------------------------------------

    In addition, the Commission has now finalized a majority of its 
Title VII rules related to SBS Entities, including rules that allow 
such persons to manage the market, counterparty, operational and legal 
risks associated with their security-based swap business. These include 
the Risk Mitigation Rules; rules relating to capital, margin, and 
segregation requirements for SBSDs, MSBSPs, and broker-dealers (the 
``Capital, Margin, and Segregation Rules''); \196\ and rules relating 
to recordkeeping and reporting requirements for SBSDs, MSBSPs, and 
broker-dealers (the ``Recordkeeping Rules'').\197\ The Risk Mitigation 
Rules, which consist of 17 CFR 240.15Fi-3 (``Rule 15Fi-3''), 17 CFR 
240.15Fi-4 (``Rule 15Fi-4''), and Rule 15Fi-5, relate to, other things, 
reconciling outstanding security-based swaps with applicable 
counterparties on a periodic basis, engaging in certain forms of 
portfolio compression exercises, as appropriate, and executing written 
security-based swap trading relationship documentation with each of its 
counterparties prior to, or contemporaneously with, executing a 
security-based swap transaction. When the Commission adopted those 
rules in December 2019, we explained that they were intended to play an 
important role in addressing risks to an SBS Entity as a whole, 
including risks related to the

[[Page 6682]]

entity's safety and soundness.\198\ For example, portfolio 
reconciliation is designed to allow SBS Entities to manage their 
internal risks by better ensuring agreement with their counterparties 
with respect to the material terms and valuation of each transaction 
(and thereby avoiding complications at various points throughout the 
life of the transaction).\199\ Further, requiring an SBS Entity to 
document the terms of the trading relationship with each of its 
counterparties before executing a new security-based swap transaction 
should promote sound collateral and risk management practices by 
enhancing transparency and legal certainty regarding each party's 
rights and obligations under the transaction.\200\ Similarly, portfolio 
compression, by allowing an SBS Entity to potentially eliminate 
offsetting and redundant uncleared derivatives transactions--as 
measured both by the number of contracts and the total notional value--
reduces its gross exposure to its direct counterparties, including by 
eliminating all exposure (and credit risk) to certain 
counterparties.\201\
---------------------------------------------------------------------------

    \196\ See Capital, Margin, and Segregation Adopting Release, 84 
FR 43872.
    \197\ See Recordkeeping and Reporting Adopting Release, 84 FR 
68550.
    \198\ See Risk Mitigation Adopting Release, 85 FR at 6378-79.
    \199\ See Risk Mitigation Adopting Release, 85 FR at 6361.
    \200\ See id. Both of the portfolio reconciliation and 
documentation requirements should also help to reduce counterparty 
credit risk and promote certainty regarding the agreed upon 
valuation and other material terms of a security-based swap. See id.
    \201\ See id.
---------------------------------------------------------------------------

    The Capital, Margin, and Segregation Rules, among other things: (1) 
Established minimum capital requirements for non-bank SBSDs and MSBSPs 
(i.e., SBSDs and MSBSPs for which there is not a prudential regulator); 
(2) increased the minimum tentative net capital and net capital 
requirements for broker-dealers that use internal models to compute net 
capital; (3) established capital requirements tailored to security-
based swaps and swaps for broker-dealers that are not registered as an 
SBSD or MSBSP to the extent they trade these instruments; and (4) 
established margin requirements for non-bank SBSDs and MSBSPs with 
respect to non-cleared security-based swaps.\202\ That rulemaking also 
established segregation requirements for SBSDs and notification 
requirements with respect to segregation for SBSDs and MSBSPs.\203\
---------------------------------------------------------------------------

    \202\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 43874.
    \203\ See id.
---------------------------------------------------------------------------

    When the Commission adopted the Capital, Margin, and Segregation 
Rules, we explained that the capital requirements were designed to 
ensure that non-bank SBSDs and stand-alone broker-dealers, 
respectively, have sufficient liquidity to meet all unsubordinated 
obligations to customers and counterparties and, consequently, if the 
non-bank SBSD or stand-alone broker-dealer fails, sufficient resources 
to wind-down in an orderly manner without the need for a formal 
proceeding.\204\ Similarly, in the course of discussing the margin 
requirements, the Commission explained that ``[i]n the market for non-
cleared security-based swaps and in the market for OTC derivatives 
generally, collateral is the means for mitigating counterparty credit 
risk.'' \205\ Finally, the Commission explained that segregation 
requirements were designed ``to protect the rights of security-based 
swap customers and their ability to promptly obtain their property from 
an SBSD or stand-alone broker-dealer.'' \206\
---------------------------------------------------------------------------

    \204\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 43959.
    \205\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 44012.
    \206\ See Capital, Margin, and Segregation Adopting Release, 84 
FR at 43959.
---------------------------------------------------------------------------

    The Commission's Recordkeeping Rules also play an important role in 
reducing certain types of risk. Among other things, those rules, which 
also were adopted in 2019, establish recordkeeping, reporting, and 
notification requirements for SBSDs and MSBSPs and securities count 
requirements for stand-alone SBSDs, and also establish additional 
recordkeeping requirements applicable to stand-alone broker-dealers to 
the extent they engage in security-based swap or swap activities.\207\ 
Many of those rules have been designed expressly to ``promote 
compliance with the financial responsibility requirements for broker-
dealers, SBSDs, and MSBSPs, facilitate regulators' oversight and 
examinations of such firms, and promote transparency of their financial 
condition and operation.'' \208\
---------------------------------------------------------------------------

    \207\ See Recordkeeping and Reporting Adopting Release, 84 FR at 
68607.
    \208\ See id.
---------------------------------------------------------------------------

    Market participants are already subject to the requirements of 
Regulation SBSR, which governs regulatory reporting of security-based 
swap transactions to SBSDRs. Regulation SBSR provides for real-time 
public reporting of individual security-based swap transactions to a 
SBSDR within 24 hours of the trade execution and the immediate public 
dissemination by the SBSDR of security-based swap transaction 
information, including pricing and volume information. Regulation SBSR 
requires certain items to be reported about each security-based swap 
transaction, such as the ``product ID'' \209\; date and time of the 
transaction; price and amount of up-front payments; notional amount; 
indication of whether the transaction will be submitted to clearing; 
and identification of the parties to the transaction. On November 8, 
2021, mandatory reporting of new security-based swap transactions to 
SBSDRs began, with public dissemination of those transactions set to 
begin on February 14, 2022.\210\ As of November 9, 2021, there are 
currently two registered SDRs: DTCC Data Repository (``DDR'') and ICE 
Trade Vault (``ITV''). As discussed above, any position reporting 
pursuant to Regulation SBSR is completely anonymous, and would 
therefore not inform participants that a specific counterparty was 
building up large, concentrated security-based swap positions.\211\
---------------------------------------------------------------------------

    \209\ The term ``product ID'' is defined in Regulation SBSR to 
mean the ``unique identification code'' assigned to a product. See 
17 CFR 242.900(bb) (defining ``product ID'') and 900(qq) (defining 
``unique identification code''). Pursuant to Rule 901(c)(1) of 
Regulation SBSR, if there is no product ID, the reporting party is 
required to report certain information about the security-based 
swap, including, among other things, the asset class of the 
security-based swap, the specific underlying security, effective 
date, termination date, and certain payment terms.
    \210\ See 17 CFR 242.901(c).
    \211\ See supra note 5 and accompanying text.
---------------------------------------------------------------------------

    In addition, section 30(b) and 17 CFR 270.30b1-9 (``Rule 30b1-9'') 
of the Investment Company Act of 1940 require that registered 
investment companies and certain exchange-traded funds report 
information quarterly about their portfolios and each of their 
portfolio holdings, including security-based swaps, as of the last 
business day, or last calendar day, of each month. With the exception 
of certain non-public information, the information reported on Form N-
PORT for the third month of each fund's fiscal quarter is made publicly 
available.
    Finally, Rule 15Fk-1 requires an SBS Entity to designate a CCO and 
imposes certain duties and responsibilities on that CCO.\212\ Further, 
existing rules require that a majority of the board approve the 
compensation and removal of the CCO.\213\ Rule 15Fh-4(a) makes it 
unlawful for an SBS Entity to: (i) Employ any device, scheme, or 
artifice to defraud any special entity or prospective customer who is a 
special entity; (ii) engage in any transaction, practice, or course of 
business that operates as a fraud or deceit on any special entity or 
prospective customer

[[Page 6683]]

who is a special entity; or (iii) to engage in any act, practice, or 
course of business that is fraudulent, deceptive, or manipulative. 
Further, existing Rule 15Fh-3(h) requires an SBS Entity to establish 
and maintain a system to supervise its business and the activities of 
its associated persons; the system must be reasonably designed to 
prevent violations of the provisions of applicable Federal securities 
laws and the rules and regulations thereunder.\214\ In addition, the 
Commission's Risk Mitigation Rules are designed to foster effective 
risk management by requiring the existence of sound documentation, 
periodic reconciliation of portfolios, rigorously tested valuation 
methodologies, and sound collateralization practices.\215\ Attempts by 
officers, directors or employees to hide transactions, submit false 
valuations or manipulate or fraudulently influence CCOs in the 
performance of their duties related to the Risk Mitigation Rules would 
undermine the SBS Entity's risk management.\216\
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    \212\ See 17 CFR 240.15Fk-1.
    \213\ See supra section II.D.
    \214\ See 17 CFR 240.15Fh-3(h).
    \215\ See Risk Mitigation Adopting Release, 85 FR 6359.
    \216\ See supra section II.D.
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2. Security-Based Swap Data, Market Participants, Dealing Structures, 
Levels of Security-Based Swap Trading Activity, and Position 
Concentration
    As of November 9, 2021, there are 41 entities registered with the 
Commission as SBSDs, and no entities have registered as MSBSPs. 
According to data published by the Bank for International Settlements 
(``BIS''), as of December 2020, there was approximately: (i) $3.5 
trillion \217\ in global notional amount outstanding of single-name 
CDS; (ii) $4.5 trillion in multi-name index CDS outstanding; and (iii) 
$347 billion in multi-name, non-index CDS outstanding.\218\ The total 
gross market value outstanding in single-name CDS was approximately $77 
billion, and in multi-name CDS instruments, there was approximately 
$125 billion outstanding. The global notional amount outstanding in 
equity forwards and swaps was $3.6 trillion, with total gross market 
value of $321 billion.\219\
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    \217\ The global notional amount outstanding represents the 
total face amount used to calculate payments under outstanding 
contracts. The gross market value is the cost of replacing all open 
contracts at current market prices.
    \218\ See BIS, Semi-annual OTC derivatives statistics at 
December 2020, Table D5.2, (available at: https://stats.bis.org/statx/srs/table/d5.2 (accessed Aug. 18, 2021).
    \219\ These totals include swaps and security-based swaps, as 
well as products that are excluded from the definition of ``swap,'' 
such as certain equity forwards. See OTC, equity-linked derivatives 
statistics, Table D5.1, available at https://stats.bis.org/statx/srs/table/d5.1 (accessed Aug. 18, 2021). For the purposes of this 
analysis, the Commission assumes that multi-name index CDS are not 
narrow-based index CDS and therefore, do not fall within the 
`security-based swap' definition. See 15 U.S.C. 78c(a)(68)(A); see 
also Products Release, 77 FR 48208. The Commission also assumes 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. Therefore, when measured on the basis of gross notional 
outstanding single-name CDS contracts appear to constitute roughly 
49% of the security-based swap market. Although the BIS data reflect 
the global OTC derivatives market, and not just the U.S. market, the 
Commission has no reason to believe that these percentages differ 
significantly in the U.S. market. Note that these data do not 
include TRS on debt which are covered by the proposal.
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    The above-described data is provided on an aggregate and global 
basis. The Commission's primary source for disaggregated transactions 
and positions in the market for security-based swaps is the DTCC 
Derivatives Repository Limited Trade Information Warehouse (``DTCC-
TIW''). DTCC-TIW provides data regarding the activity of market 
participants in the single-name CDS market during the period from 2006 
to the end of 2020.\220\ The Commission acknowledges that limitations 
in the data constrain the extent to which it is possible to 
quantitatively characterize the security-based swap market.\221\ Based 
on an analysis of DTCC-TIW data, staff concluded that there are 2,321 
transacting agents that engaged directly in trading between November 
2006 and December 2020 with 15,187 accounts.\222\
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    \220\ DTCC Derivatives Repository Limited Trade Information 
Warehouse provides weekly positions and monthly transaction files on 
a voluntary basis for single-name and index-based CDS. These data 
cover all positions and transactions where one of the counterparties 
is a U.S. entity or the reference entity is U.S. entity, with status 
as a U.S. entity determined by DTCC-TIW. In DTCC-TIW, the Commission 
observes end of week CDS positions for all U.S. entities, foreign 
counterparties to a U.S. entity, or foreign counterparties trading a 
CDS referencing a U.S. underlying entity. The DTCC-TIW data have 
limitations. Data do not address two foreign counterparties with CDS 
referencing foreign underlying entities. In addition, the DTCC-TIW 
data does not provide any intra-weekly CDS position information, nor 
any information on the underlying security holdings of reference 
entities. Further, DTCC-TIW is a voluntary database where market 
participants on a voluntary basis submit transactions, and end of 
week holdings.
    \221\ While the Commission has limited data regarding the 
activity of market participants in equity swaps, the Commission 
believes that the market for security-based swaps is sufficiently 
representative of the market. DTCC Derivatives Repository Limited 
Trade Information Warehouse provides weekly positions and monthly 
transaction files on a voluntary basis for single-name and index-
based CDS. These data cover all positions and transactions where one 
of the counterparties is a U.S. entity or the reference entity is 
U.S. entity, with status as a U.S. entity determined by DTCC-TIW. 
The Commission also relies on qualitative information regarding 
market structure and evolving market practices provided by 
commenters and the knowledge and expertise of Commission staff.
    \222\ These 2,321 entities, which are presented in more detail 
in Table 1, below, include all DTCC-TIW-defined ``firms'' shown in 
DTCC-TIW as transaction counterparties that report at least one 
transaction to DTCC-TIW as of December 2017. The staff in the 
Division of Economic and Risk Analysis classified these firms, by 
machine-matching names to known third-party databases and by manual 
classification. See, e.g., Dealing Activity Adopting Release, 81 FR 
8602, n.43. 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 website or the 
public website of the account represented by a firm. As mentioned 
above, data on CDS market participants come from DTCC-TIW. Principal 
holders of CDS risk exposure are represented by ``accounts'' in the 
DTCC-TIW. ``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). One entity or 
legal person (known as ``transacting agent'' in the terminology of 
TIW) may have multiple accounts. For example, a bank that is a 
transacting agent may have one DTCC-TIW account for its U.S. 
headquarters and one DTCC-TIW account for one of its foreign 
branches.
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    Data from the DTCC-TIW show that activity in the single-name CDS 
market is concentrated among a relatively small number of entities, 
predominantly ISDA-recognized dealers and large banks, who act as 
dealers in this market.\223\ The top five dealers (when accounts are 
sorted by number of counterparties) when combined transact with over a 
thousand counterparty accounts, consisting of both other dealers and 
non-dealers. The next 23% of dealers transacted with 500 to 1,000 
counterparty accounts; 38% transacted with 100 to 500 unique accounts; 
and 31% of dealer accounts intermediated security-based swaps with 
fewer than 100 unique counterparties accounts in 2020. The median 
number of counterparty accounts across dealers is 276 (the mean is 
approximately 570). Dealer-intermediated transactions reached a gross 
notional amount of approximately $1.99 trillion, approximately 55% of 
which was intermediated by the top five dealer accounts. The median 
non-dealer counterparty transacted with only two dealer accounts (with 
an average of approximately 2.5 dealer accounts) in 2020.
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    \223\ Dealers are generally persons engaged in the business of 
buying and selling securities for their own account, through a 
broker or otherwise. 15 U.S.C.78c(a)(5). Security-based swap dealers 
are generally defined as persons who hold themselves out as dealers 
in security-based swaps; make markets in security-based swaps; 
regularly enter into security-based swaps as an ordinary course of 
business for their own account; or engages in any activity causing 
them to be commonly known in the trade as a dealer or market maker 
in security-based swaps. 17 CFR 240.3a71-1.
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    Non-dealer single-name CDS market participants include, but are not 
limited

[[Page 6684]]

to, investment companies, pension funds, private funds, sovereign 
entities, and industrial companies. We observe that most non-dealer 
market participants of single-name CDS do not engage directly in the 
trading of security-based swaps, but trade through banks, investment 
advisers or funds, or other types of firms, which we refer to as 
transacting parties, consistent with DTCC-TIW terminology.\224\ As 
shown in Table 1, close to 78 percent of transacting parties are 
identified as investment advisers or funds, of which approximately 40 
percent (about 32 percent of all transacting parties) are registered as 
investment advisers under the Advisers Act.\225\ Although investment 
advisers and funds are the vast majority of transacting parties, the 
transactions they executed account for only 9.5 percent of all single-
name CDS trading activity reported to the DTCC-TIW, measured by the 
number of transaction sides.\226\ The vast majority of transactions, 
82.1 percent, measured by number of transaction-sides were executed by 
ISDA-recognized dealers.
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    \224\ See 15 U.S.C. 80b1 through 80b21. Transacting parties 
participate directly in the security-based swap market, without 
relying on an intermediary, on behalf of their principals, 
investment companies, pension funds, private funds, sovereign 
entities, and industrial companies. For example, a university 
endowment may hold a position in a security-based swap that is 
established 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 party.
    \225\ DTCC-defined ``firms'' shown in DTCC-TIW, which we refer 
to here as ``transacting parties.''
    \226\ Each transaction has two transaction sides, i.e., two 
transaction counterparties.
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BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TP04FE22.000

    Figure 1 describes the percentage of global, notional transaction 
volume in North American corporate single-name CDS reported to the 
DTCC-TIW from January 2011 through December 2020, separated by whether 
transactions are between two ISDA-recognized dealers (interdealer 
transactions) or whether a transaction has at least one non-dealer 
counterparty. As proposed Rule 10B-1 would affect U.S. market 
participants as well as foreign entities who trade in both the 
security-based swap and underlying asset, Figure 1 compares the 
notional trading volume of all North American corporate single-name CDS 
to notional trading of U.S. counterparties. The observed declining 
trend seems to impact proportionally all types of exposures. As Figure 
1 shows, all types of exposures have declined approximately 
proportionally since 2011.

[[Page 6685]]

[GRAPHIC] [TIFF OMITTED] TP04FE22.001

BILLING CODE 8011-01-C
    As mentioned above, DTCC-TIW data covers only CDS positions. 
However, the Commission staff has access to some information on 
affected parties using filings from Form N-PORT. As discussed above, 
certain registered investment companies must report information 
quarterly about their portfolios to the Commission in Form N-PORT. 
DTCC-TIW data is summarized in Table 1, indicate that in the CDS 
market, mutual funds and Exchange Traded Funds (ETFs) that report on 
Form N-PORT represent approximately 17% of firms in DTCC-TIW, and make 
up approximately 6% of all transactions available in DTCC-TIW.\227\ As 
a percentage of US-only firms, mutual funds and ETFs that report on 
Form N-PORT represent approximately 29% of firms in the U.S. and 
approximately 5% of total U.S. transactions reported in DTCC-TIW. These 
transactions provide a sample of the entities participating in the CDS 
market that are mutual funds and ETFs, which are required to file Form 
N-PORT.\228\
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    \227\ The analysis in Table 1 using DTCC-TIW data is performed 
on transacting party level, while analysis of Form N-PORT data is 
performed at fund level. Due to data limitations and no direct 
linkages between DTCC-TIW and N-PORT data, the Commission cannot 
directly compare entities reporting to DTCC-TIW to entities that 
file Form N-PORT.
    \228\ Form N-PORT is to be used by a registered management 
investment company, or an exchange-traded fund organized as a unit 
investment trust, or series thereof (``Fund''), other than a Fund 
that is regulated as a money market fund (``money market fund'') 
under 17 CFR 270.2a-7 (``Rule 2a-7'') under the Investment Company 
Act of 1940, 15 U.S.C. 80a (``Act'') or a small business investment 
company (``SBIC'') registered on Form N-5 (17 CFR 239.24 and 274.5), 
to file reports of monthly portfolio holdings pursuant to Rule 30b1-
9 under the Act (17 CFR 270.30b1-9).
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D. Consideration of Costs and Benefits; Consideration of Burden on 
Competition and Promotion of Efficiency, Competition and Capital 
Formation

1. Re-proposed Rule 9j-1 and Proposed Rule 15Fh-4(c)
i. Benefits
    The Commission believes that re-proposed Rule 9j-1 would decrease 
fraudulent activity, affect compliance costs, and lower litigation 
costs. In addition, re-proposed Rule 9j-1 may indirectly increase price 
efficiency and decrease capital costs of underlying entities. The 
Commission discusses each of these individual benefits in more detail 
below.
    The Commission believes that re-proposed Rule 9j-1 would reduce the 
risk of fraud in the security-based swap market, including risk of 
fraudulent behavior undertaken in connection with opportunistic trading 
strategies. The additional specificity offered by re-proposed Rule 9j-1 
may enhance Commission oversight of the security-based swap market, 
which may ultimately benefit market participants through reducing the 
risk of fraud. Further, by reducing these risks, re-proposed Rule 9j-1 
could encourage participation in the market, which may result in 
increased competition.\229\ More security-based swap entities would be 
willing to supply (issue) and/or demand (buy) security-based swaps, 
with increased confidence that their

[[Page 6686]]

counterparties would have limited abilities to impact the market using, 
among other things, opportunistic strategies.
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    \229\ See Joint Statement, supra note 29.
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    The Commission also believes that, by providing additional 
precision and specificity regarding the application of existing 
antifraud and anti-manipulation laws to misconduct in the security-
based swap market, re-proposed Rule 9j-1 could prompt some market 
participants to devote greater resources to ensure that they are 
compliant with their obligations under antifraud and anti-manipulation 
law, which could also decrease the risk of fraud in the security-based 
swap market. Because of this decreased risk of fraud, market 
participants may have fewer disputes with their counterparties 
regarding security-based swap contracts, which in turn, could lower 
litigation costs for security-based swap participants and underlying 
entities. Lower litigation costs could contribute to reducing the cost 
of CDS and, to the extent that the cost of CDS is reduced, lower costs 
of borrowing. Conversely, by providing additional precision and 
specificity regarding the application of existing antifraud and anti-
manipulation provisions of the Federal securities laws to misconduct in 
the security-based swap market, the re-proposed Rule 9j-1 could 
decrease compliance costs for some market participants who may, as a 
result of the additional specificity of the rule, need to spend fewer 
resources determining appropriate compliance under Section 9(j).
    Decreased risk of fraud, including risk of fraudulent behavior 
undertaken in connection with opportunistic trading strategies, in the 
security-based swap market may also lead to increased price efficiency, 
as new trading could lead to a greater exchange of market expectations 
from buyers and sellers transacting in the market. This would 
consequently lead to greater security-based swap market efficiency, as 
security-based swap prices would provide greater confidence that their 
prices more likely reflect fundamental values and risk in more liquid 
markets. For example, prices of single-name CDS contracts would more 
likely reflect the fundamental credit risk of the underlying entity, as 
opposed to counterparty credit risk or the probability that an 
``opportunistic'' or ``manufactured credit'' strategy were 
successful.\230\ Further, by providing specificity, re-proposed Rule 
9j-1 would help prevent prohibited conduct from distorting the market 
and artificially increasing or decreasing prices for security-based 
swaps. Thus, we believe the proposed rules would help to ensure more 
efficient pricing.
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    \230\ See Fletcher, supra note 21.
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    In addition, the Commission expects the price efficiency in the 
underlying securities markets to have a positive impact on capital 
formation and the cost of capital for the underlying entities. The 
market participation increases in security-based swaps may enhance 
liquidity in the underlying market and related swap indices, and in 
general, lower debt and equity capital costs for security-based swaps 
referenced entities. For example, if prices of single-name CDS are more 
reflective of the fundamental credit risk of the underlying entity, as 
a second order effect, participants in the market for the underlying 
security would be better informed about the underlying security's 
attributes through the price signal, likely increasing their 
willingness to re-enter or engage in the underlying security's market. 
Specifically, the underlying security market uses the derivative market 
to assess its quality, as the derivative market in some circumstances 
is forward looking, liquid, and more informative than the underlying 
market.\231\ Greater activity in the underlying security market due to 
price efficiency and greater availability to hedge these securities in 
the security-based swap market could lead to lower capital costs and 
increase capital formation for the underlying entities.
---------------------------------------------------------------------------

    \231\ See Haibin Zhu, An Empirical Comparison of Credit Spreads 
between the Bond Market and the Credit Default Swap Market, EFMA 
2004 Basel Meetings Paper, BIS Working Paper No. 160, (Aug. 2004) 
(available at: https://ssrn.com/abstract=477501); see also Jongsub 
Lee, Andy Naranjo, and Guner Velioglu, When do CDS Spreads Lead? 
Rating Events, Private Entities, and Firm-specific Information 
Flows, 13 J. of Fin. Econ., 556, at 556-578 (2017) (available at: 
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2933052) 
(addressing the size of US single-name reference entities).
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    Proposed Rule 15Fh-4(c) would make it unlawful for any officer, 
director, supervised person, or employee of an SBS Entity, or any 
person acting under such person's direction, to directly or indirectly 
take any action to coerce, mislead, or otherwise interfere with the SBS 
Entity's CCO. This prohibition would support the ability of the CCO to 
meet the CCO's important obligations to foster compliance in its role 
of overseeing compliance within the SBS Entity. We expect that this 
rule change would make it more likely that a CCO would be able to more 
efficiently and effectively execute the CCO's responsibilities to 
foster compliance, including for example, by ensuring that the SBS 
Entity maintains and reviews written policies and procedures reasonably 
designed to achieve compliance with the rules and regulations relating 
to the business of the security-based swap entity. Ultimately, we 
expect that these effects would likely also reduce the risk of fraud, 
market manipulation, or other fraudulent activities in the security-
based swap market, providing additional protection for both 
counterparties in the security-based swap transaction and the 
underlying entity.
    Proposed Rule 15Fh-4(c) would likely have minor indirect positive 
impacts on price efficiency, competition, and capital formation. 
Because Rule 15Fh-4(c) would support the ability of the CCO to oversee 
compliance with the federal securities laws within the SBS Entity and 
likely reduce the risk of fraud, security-based swaps would be more 
likely to be reflective of the fundamental credit risk of the 
underlying entity, positively influencing price efficiency and 
competition among market participants. Capital formation could, as a 
result, further indirectly increase, as greater price efficiency and 
competition among market participants could lead to a decrease in 
security-based swaps prices, in turn, lower costs of borrowing (as a 
result of cheaper CDS).
ii. Costs
    Some security-based swap market participants may incur costs 
associated taking actions to update existing compliance systems for 
compliance with re-proposed Rule 9(j)-1. We expect, however, that these 
additional costs would be relatively small because many of these 
practices and systems are already in place to ensure compliance with 
Section 9(j) of the Exchange Act and the other general antifraud and 
anti-manipulation statutory and regulatory provisions.\232\
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    \232\ As noted above, some commenters to the 2010 proposed rule 
argued that not requiring scienter with respect to paragraphs (3) 
and (4) of re-proposed Rule 9j-1(a) (which were paragraphs (c) and 
(d) in the 2010 proposed rule) ``could potentially deter many 
parties from entering into SBS, increase their cost and have other 
distorting effects on the markets.'' Because Rule 9j-1(a), as 
discussed above, does not apply a new scienter standard to market 
conduct, we do not expect such increases in costs or distorting 
effects on the market. See supra section II.B.1.
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    In addition, the proposed rule could discourage some legitimate 
market activities, including some hedging activity, because of concerns 
that such activities might be viewed as rule violations. As a result, 
compliance costs related to evaluating whether or not

[[Page 6687]]

certain activities are permissible may increase for some market 
participants. However, because re-proposed Rule 9j-1 would provide 
additional precision and specificity regarding the application of 
existing antifraud and anti-manipulation laws to misconduct in the 
security-based swap market, the Commission believes that these costs 
would not be significant. Further, these costs would be mitigated to 
the extent that the limited safe harbor from certain provisions of re-
proposed Rule 9(j)-1 addresses situations in which a counterparty is 
required to take certain pre-agreed actions with respect to the 
security-based swap, or to effect certain transactions related to 
portfolio compression exercises, in each case while in possession of 
material non-public information.
    Proposed Rule 15Fh-4(c)'s prohibition on taking actions to coerce, 
mislead, or otherwise interfere with the SBS Entity's CCO, may create 
additional costs for SBS Entities. For example, to the extent that any 
current practices of an SBS Entity may include activities that would be 
explicitly prohibited under Rule 15Fh-4(c), applicable policies and 
procedures would need to be updated. In addition, it is possible that 
the proposed rule could cause SBS Entity employees to be overly 
cautious when consulting with a CCO. We do not, however, believe that 
any such effects will be significant, given the specificity of the 
rule's prohibition on certain interference with the SBS Entity's CCO.
2. Proposed Rule 10B-1
i. Benefits
    Proposed Rule 10B-1 could increase market integrity, increase 
liquidity, decrease counterparty risk, lower litigation costs, decrease 
cost of capital for underlying entities, decrease contagion risk in the 
market, and assist the Commission in identifying concentrated position 
and holdings in related securities. We discuss each of these benefits 
below.
    The Commission expects proposed Rule 10B-1 reporting requirements 
to enhance the integrity of the security-based swap market. The 
proposed reporting requirements would inform market participants of 
large concentrated positions that might give the holder incentives to 
affect the timing or the payoff size of the CDS contract for the CDS 
buyer's benefit. As a result, market participants would be better able 
to assess counterparty risk. In this respect, the Commission recognizes 
that the Risk Mitigation Rules; Capital, Margin, and Segregation Rules; 
and Recordkeeping Rules may address similar risks, to the extent that 
these rules are intended to, among other things, promote safety and 
soundness of SBS Entities, enhance the transparency of obligations 
under transactions with SBS Entities, protect the ability of security-
based swap customers to promptly obtain their property, and promote 
compliance with financial responsibility requirements for broker-
dealers, SBSDs, and MSBSPs. However, because of proposed Rule 10B-1's 
application to non-SBS Entities, in addition to SBS Entities, and the 
proposed rule's reporting-based method to the reduction of counterparty 
risk, the proposed rule would afford additional protections to market 
participants, including with respect to large position concentration 
risk. In contrast to the Risk Mitigation Rules; Capital, Margin, and 
Segregation Rules; and Recordkeeping Rules, proposed Rule 10B-1 would 
provide information to market participants for them to take specific 
mitigating actions to limit counterparty risk exposure.
    Further, to the extent that market participants are better able to 
assess counterparty risk as a result of the reporting that would be 
required under proposed Rule 10B-1, it would likely become more 
expensive to build such positions, because market participants may 
refrain from trading with a reporting counterparty, trade only at 
prices that account for additional risk, or ask for larger margin 
postings of collateral. These actions would likely make it unprofitable 
to create market conditions that would impact the timing or the size 
payoff of the CDS contract. Further, because the reporting required 
under proposed Rule 10B-1 would inform the Commission of material, 
directional positions, it may enhance Commission oversight of the 
security-based swap market, which may ultimately benefit market 
participants. In particular, it would provide the Commission tools to 
monitor for large concentrated positions, counterparty risk, and 
potentially detect fraudulent behavior, as the Commission would have 
access and complete visibility to both the security-based swap and the 
related underlying asset for participants that would be required to 
report.
    Because proposed Rule 10B-1 would make it more challenging to 
create market conditions that would affect the timing or the size 
payoff of the CDS contract, proposed Rule 10B-1 would likely result in 
greater overall market integrity. Through better information for market 
participants, the Commission expects proposed Rule 10B-1 to encourage 
participants to increase capital buffers (i.e., both initial and 
variation margins) where needed and help to prevent the impact of 
defaults from spreading through exposed counterparties, thereby 
limiting ``contagion risk'' (i.e., risk that might result from indirect 
counterparty risk) in the market.
    Further, by requiring large CDS buyers to report their positions, 
proposed Rule 10B-1 may help reduce the presence of moral hazard in 
single-name CDS markets. As described in the Broad Economic 
Considerations, in the presence of asymmetric information, bondholders 
who are also CDS buyers may become disinterested in the solvency of the 
underlying asset, and may become less inclined to renegotiate contracts 
in order to avoid a default in bond payments. Proposed Rule 10B-1 would 
benefit market participants by requiring reporting of large CDS 
positions and allowing market participants to identify counterparty 
risk, adjust prices for counterparty risk, and limit the scope of moral 
hazard.
    Such increases in market integrity may allow market participants to 
trade with more and with greater confidence in the market. As a result, 
proposed Rule 10B-1 could lead to increased supply and demand for 
security-based swaps, leading to greater competition as more security-
based swap market participants enter the market. Further, this would 
consequently lead to greater security-based swap market efficiency, as 
security-based swap prices would more likely reflect fundamental values 
and risk in more liquid markets. For example, prices of single-name CDS 
contracts would more likely reflect the fundamental credit risk of the 
underlying entity. Thus, we expect the proposed rules would help to 
ensure more efficient pricing in the security-based swap market. Price 
efficiency would increase, as participants would be better informed of 
likely outcomes. Further, we expect that such increases in price 
efficiency in the underlying securities markets would have some 
positive impact on capital formation and capital costs for the 
underlying entities, similar to the effect described above for re-
proposed Rule 9j-1. As security-based swap prices become more 
informative, more likely reflecting the fundamental risk of the 
underlying entity, more market activity could follow.
    Because of both the decreased counterparty risk and greater market 
integrity, the proposed Rule 10B-1 reporting requirements may also lead 
to lower litigation costs between security-based swap participants. As 
discussed above, the proposed rule would likely

[[Page 6688]]

limit or constrain exposure buildup in the security-based swap market, 
making it less profitable to accumulate positions at sizes that might 
incentivize market participants to affect the timing or the size payoff 
of the CDS contract. Although those actions may not be fraudulent, 
manipulative, or deceptive, there are situations (which are discussed 
in section I.B) where the accumulation of a large CDS position could 
signify misconduct. To the extent that an increased risk of litigation 
is associated with such potentially manipulative or unexpected 
behavior, proposed Rule 10B-1 would make it more likely that market 
participants can avoid such costs.
    With respect to the requirements to report certain 
information,\233\ public reporting of certain identifying information 
would have the benefit of increasing market liquidity, as a result of 
the counterparties being able to identify the market participant who 
exceeded the reporting threshold and limit their counterparty risk 
exposure to them.\234\ In that regard, the use of standard 
identifiers--namely, the product ID for the security-based swaps, the 
FIGI for securities (or any other unique security identifier(s) that 
may be included at the filer's option), and the LEI for legal 
entities--on Schedule 10B would augment transparency by providing 
consistent identification of entities and securities across datasets 
and jurisdictions, allowing market participants to cross-reference the 
data reported on Schedule 10B with data reported from any other sources 
that use those standard identifiers.\235\ In turn, enhanced 
transparency would reduce transactional and operational costs of 
trading, making transactions cheaper and more frequent.
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    \233\ See proposed Rule 10B-1(a) and Schedule 10B (providing a 
complete list of information required to be disclosed). Proposed 
Rule 10B-1 would require persons subject to the proposed rule to 
report, among other things: (1) Identifying information, including 
for example, the name of reporting party, the reporting party's LEI 
and the LEIs of the issuers of underlying and related securities (if 
available), place of organization, type of reporting person; and (2) 
the notional amount of the applicable related security-based swap, 
the underlying security's FIGI, and the FIGIs of related securities 
that share the same underlying asset.
    \234\ Having a reporting requirement with no identification 
might only partially solve the informational asymmetry problem 
described in the Basic Economic Considerations section. For example, 
if the report was designed to only disclose information about the 
security-based swap and underlying securities, but withheld 
information about the security-based swap participant, it would 
potentially lead to all market participants to believe their 
particular counterparty was the one that breached the threshold. The 
missing information would likely cause market participants to 
unnecessarily withdraw from the market, decreasing either supply or 
demand.
    \235\ Product IDs, if available, are a required element of 
security-based swap reporting obligations under Regulation SBSR. See 
17 CFR 242.901(c)(1). Regulation SBSR reporting obligations do not 
require LEI or FIGI.
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    Requiring the reporting of the notional amount of the applicable 
security-based swap, and related securities with the same underlying 
asset would allow market participants to quantify the size of the 
position in the security-based swap, the underlying security, and 
related securities, meaning that participants would know the exact size 
of the concentrated position that led to the threshold being exceeded. 
The information required to be reported by proposed Rule 10B-1 
complements what is required to be reported pursuant to Regulation 
SBSR, and because market participants would, as a result of the 
proposed rule, be aware of counterparty risks, proposed Rule 10B-1 may 
encourage more participation in the market, which would increase 
liquidity in the market for security-based swaps.
    In addition, as a second order effect, the proposed Rule 10B-1 
could have positive spillover benefits in markets of the specific 
underlying entity, i.e., bond markets for CDS and bond swaps, or equity 
markets for TRS, respectively. Specifically, the increased liquidity in 
the security-based swap market could allow participants in capital 
markets to more easily hedge capital investments they make in 
underlying entity securities (e.g., both bond and equities). To the 
extent that capital investments are more easily hedged, capital market 
participants may be more likely to participate in these markets and 
hence more likely to provide capital to the underlying entities.
    As discussed above, the Commission has access to single-name CDS 
data through DTCC-TIW and a subsample of TRS data through Form N-
PORT.\236\ In addition, reporting of security-based swap transactions 
is now required.\237\ The Commission's oversight of the security-based 
swap market would be enhanced by the proposed reporting requirement in 
the proposed Rule 10B regarding related securities, which are not 
reported through DTCC-TIW or security-based swap transaction reporting. 
Proposed Rule 10B-1 would give the Commission access to information 
that would allow it to better evaluate a reporting firm's security-
based swap positions (and in many cases, information about other 
securities positions), thereby allowing the Commission to identify 
potential market misconduct (e.g., insider trading or market 
manipulation), default and contagion risk related to large concentrated 
positions.
---------------------------------------------------------------------------

    \236\ See supra section VI.C.2 (describing security-based swap 
data).
    \237\ See supra section VI.C.1 (describing existing major 
regulatory reporting regimes for security-based swap market).
---------------------------------------------------------------------------

    Reporting entities would be required to file Schedule 10B on EDGAR 
in a structured, machine-readable data language (specifically, FIXML). 
This would benefit market participants by improving the usability, 
accessibility, and reliability of the Schedule 10B reports. By 
requiring a machine-readable language and a centralized, publicly 
accessible filing location for Schedule 10B, the Commission would 
enable market participants to download the reported information 
directly into their databases and analyze the information using various 
tools and applications, thus augmenting the informational benefits that 
Rule 10B-1 would create. The requirement to use FIXML, an open standard 
maintained by a market standard setting organization, for the Schedule 
10B reports would allow those market participants that already use 
FIXML for financial information exchange to leverage their existing 
systems and processes in preparing the reports (if applicable) and/or 
using the reports for analysis. Use of FIXML may also allow greater 
comparability of the data to that from other reports to the Commission. 
Furthermore, because the EDGAR system provides basic validation 
capabilities, the requirement to submit Schedule 10B on EDGAR would 
reduce the incidence of non-discretionary errors of Schedule 10B, 
thereby improving the quality of Schedule 10B reports.
    Concerning timing, proposed Rule 10B-1 would require security-based 
swap entities to file promptly, but in no event later than the end of 
the first business day following the day of execution of the security-
based swap transaction that results in the exposure exceeding the 
reporting threshold. The benefit of filing promptly would likely lead 
to increases in market and price efficiency as prices would reflect 
this information quickly. That is, counterparties would be able to 
react quickly if warranted to this additional information by adjusting 
their security-based swap, underlying security, or related security 
positions, or margin requirements.
ii. Costs
    The Commission expects Rule 10B-1 to create reporting costs for 
counterparties that have large concentrated exposures that breach the 
reporting thresholds, and decrease liquidity or increase trading costs 
for

[[Page 6689]]

entities who have triggered reporting thresholds. As discussed above, 
to the extent that market participants are better able to assess 
counterparty risk as a result of the reporting that would be required 
under proposed Rule 10B-1, market participants may limit their 
security-based swap activity with counterparties who have triggered the 
proposed rule's reporting thresholds. A market participant may 
determine that a counterparty that has triggered the reporting 
thresholds is too risky to trade with, or may increase initial or 
variation margins. While we believe that, as discussed above, liquidity 
for the overall market would improve as a result of the proposed rule, 
we believe that this the rule could decrease liquidity for these 
particular market participants.
    Proposed Rule 10B-1 would impose reporting costs on market 
participants who trigger the proposed rule's thresholds. The Commission 
estimates that the number of reports would generally be less than 136 
reports per week for U.S. security-based swap participants in the 
single-name CDS market.\238\ The Commission expects this number to 
represent an upper limit for reports, as it is possible that some CDS 
counterparties would refrain to some extent from acquiring exposures 
that would require reporting. Additionally, the Commission expects the 
number of reports related to TRS positions to be smaller than the 
number of reports related to CDS positions, although the Commission 
cannot yet estimate a precise number due to the data limitations 
discussed above.\239\ Some market participants are already subject to 
the reporting obligations of Regulation SBSR or SDR or Section 30(b) 
and Rule 30b1-9 of the Investment Company Act of 1940, so these 
entities may have already made previous relevant expenditures to build 
a technology system for reporting. Nonetheless, the monitoring of 
positions and, to the extent thresholds are triggered, public reporting 
of positions represents an additional reporting expense for all market 
participants, some of whom may not be familiar with reporting to the 
Commission.
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    \238\ The Commission estimates, at most, approximately, 136 
reports per week (79 as a result of net threshold breaches, and 57 
as a result of gross thresholds breaches) related to single-name 
thresholds. The analysis is based on DTCC-TIW data, which uses 
weekly holdings of single-name. See infra section VI.D.2.iii.(A).
    \239\ The Commission believes that the market for TRS is smaller 
than the market for CDS, and the CDS single name market is the 
representative market for security-based swaps in general, hence the 
Commission expects fewer reports from TRS compared to single-name 
CDS.
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    As discussed above, up to 850 respondents will likely need to 
develop a technological infrastructure to calculate and monitor their 
security-based swap positions, even if some of those entities do not 
have at least one Security-Based Swap Position that is required to be 
reported pursuant to proposed Rule 10B-1(a).\240\ We estimate that each 
respondent will incur a one-time initial cost of approximately $101,740 
to develop such technological infrastructure, or $86,479,000 in the 
aggregate for all 850 respondents. In addition to developing the 
technological infrastructure to calculate and monitor their Security-
Based Swap Positions in order to comply with the requirements of 
proposed Rule 10B-1, each respondent will be required to maintain and 
operate such system on an ongoing basis. The Commission estimates such 
annual costs will be $77,000 per respondent, or $65,450,000 in the 
aggregate for all 850 respondents. In addition to maintaining and 
operating such technological infrastructure, the Commission also 
believes that each respondent will incur a $1,000 annual cost to store 
such security-based swap position data, or $850,000 in the aggregate 
for all 850 respondents.
---------------------------------------------------------------------------

    \240\ See supra section V (quantifying a subset of the costs 
associated with proposed Rule 10B-1--specifically, the burden of 
information collection costs estimated for the purposes of the 
Paperwork Reduction Act).
---------------------------------------------------------------------------

    In addition, to the extent that market participants are better able 
to assess counterparty risk as a result of the reporting that would be 
required under proposed Rule 10B-1, market participants may limit their 
security-based swap activity with counterparties who have triggered the 
proposed rules' reporting thresholds. Where a counterparty has 
triggered reporting thresholds, the market participant may determine 
that the party is too risky to trade with, or may increase initial or 
variation margins. Under these circumstances, market participants may 
not trade with a reporting counterparty, trade only at prices that 
account for additional risk, or ask for larger margin postings of 
collateral.
    As discussed above, proposed Rule 10B-1 would require persons 
subject to the proposed rule to report, among other things, identifying 
information, the notional amount of the applicable security-based swap 
(and in the case of equity-based security-based swaps, the percentage 
of shares represented by the security-based swap as a percentage of the 
outstanding number of shares), and related securities. The requirement 
to report information that identifies the market participant, for 
example the LEI, would allow market participants to identify the 
security-based swap participant that breached the threshold. With 
respect to the LEI requirement in particular, the Commission does not 
expect the requirement would impose compliance costs on reporting 
persons, because reporting persons would only have to provide LEIs only 
if they possess one at the time of submitting the report, and thus 
would not have to incur the cost to obtain and renew an LEI for the 
purpose of filing Schedule 10B.\241\
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    \241\ Should a reporting entity choose to obtain an LEI, the 
initial and renewal fees would vary based on the home jurisdiction 
of the reporting entity. See https://www.gleif.org/en/about-lei/get-an-lei-find-lei-issuing-organizations. A U.S. entity can obtain for 
a one-time fee of $65 and an annual maintenance fee of $50 per year. 
See, e.g., https://lei.bloomberg.com/docs/faq#what-fees-are-involved. Prices were retrieved from Bloomberg Finance, L.P., one of 
twelve LEI Operating Units that are accredited to issue LEIs to U.S. 
entities. Similarly, the other standard identifier requirements 
(FIGI for securities and product ID for security-based swaps) are 
not expected to result in compliance costs for reporting persons. 
FIGIs are automatically assigned and are retrievable and 
redistributable at no cost. Product IDs are required to be reported 
for all security-based swap transactions per Rule 901 of Regulation 
SBSR, so a reporting person would not incur any incremental cost 
associated with obtaining a product ID for the purposes of Schedule 
10B. See 17 CFR 242.901(c)(1).
---------------------------------------------------------------------------

    Other components of the reporting requirements would be costly to 
market participants because these reports could make their trading 
strategies public (by virtue of disclosing the size of their position), 
potentially causing their strategy to be less profitable in the future. 
For example, this information might lead other parties to replicate and 
use the reporting party's trading strategy for their own purpose. 
However, the information provided would be limited to only security-
based swaps and related securities, and would not include information 
about the reporting parties' entire portfolios.
    The requirement to file Schedule 10B reports on EDGAR would impose 
upon those reporting parties without prior access to EDGAR a one-time 
compliance burden of submitting a Form ID as required by Rule 10(b) of 
Regulation S-T and following the processes detailed in Volume I of the 
EDGAR Filer Manual. The FIXML data language requirement for Schedule 
10B would not impose additional incremental compliance costs on 
reporting parties, because any reporting party without experience or 
expertise surrounding FIXML could choose to input its Schedule 10B 
reports in a fillable online form, rather than submit its reports 
directly in the FIXML data language. Filers who choose the

[[Page 6690]]

submit the required Schedule 10B reports directly in FIXML rather than 
use the online form, and who do not have experience structuring data in 
FIXML, would incur incremental implementation costs associated with 
developing the necessary expertise and establishing the necessary 
compliance processes (e.g., encoding and maintaining the required data 
in FIXML and transmitting the data to EDGAR) to comply with the FIXML 
requirement. For those filers, and for other filers choosing to submit 
Schedule 10B reports directly in FIXML, the Commission expects that the 
automated processing enabled by the structured data requirement would 
make subsequent compliance costs lower than the compliance costs of 
manually inputting Schedule 10B reporting into the web form with each 
submission.
    With respect to timing, proposed Rule 10B-1 would require security-
based swap entities to file promptly but in no event later than the end 
of the first business day following the day of execution of the 
security-based swap transaction that results in the security-based swap 
exposure exceeding the reporting threshold. The cost of filing no later 
than the end of the first business day following the day of execution 
of the security-based swap transaction would likely not require the 
reporting party to invest in new IT infrastructure and automation. As 
discussed above, the Commission estimates 136 reports from U.S. 
entities per week in the single-name CDS market.\242\
---------------------------------------------------------------------------

    \242\ See supra section VI.D.2.iii (disclosure thresholds) on 
discussion related to how the Commission estimated the number of 
reports for single-name CDS market.
---------------------------------------------------------------------------

    In addition, proposed Rule 10B-1 may impact how security-based swap 
transactions take place across national borders. As discussed above, 
the reporting requirements of proposed Rule 10B-1 would be based on the 
reporting and public dissemination requirements in Regulation SBSR and, 
in addition, apply under certain circumstances when the reporting 
person holds any amount of reference securities underlying the 
Security-Based Swap Position (or would be deemed to be the beneficial 
owner of such reference securities, pursuant to Section 13(d) of the 
Exchange Act and the rules and regulations thereunder). This could 
place reporting persons at a disadvantage compared to non-reporting 
ones. U.S. security-based swap market participants and some foreign 
entities that would be required to report would be at a disadvantage, 
because they would be required to comply with proposed 10B-1 while some 
foreign participants would not be required to comply, while they would 
be able to access the publicly available reports required by proposed 
Rule 10B-1. As a result, a portion of reporting entities for whom these 
reporting costs are large might be incentivized to change their 
geographical location of operation to a non-U.S. jurisdiction and limit 
their participation in the underlying securities' markets. On the other 
hand, proposed Rule 10B-1 would likely increase the trading of non-
reporting U.S. persons, as these thresholds would not affect them while 
providing them with additional transparency and reporting in the 
security-based swap market. Because of lower counterparty risk and 
improved market conditions, non-reporting U.S. persons may become more 
active in the security-based swap market.
iii. Reporting Thresholds
    The costs and benefits of proposed Rule 10B-1 are dependent, in 
part, on which parties would be subject to the reporting requirements, 
as determined by the selected thresholds for each type of security-
based swap. As a general matter, a higher threshold will lead to fewer 
reports. This may limit the benefits of the proposed rule, but decrease 
both the direct compliance costs and costs that investors face, as 
discussed above, when revealing information to the market that they 
consider material. In other words, a higher threshold would likely 
decrease reporting costs, but higher thresholds would resolve fewer of 
the asymmetric information scenarios that amplify the market 
imperfection. Similarly, a lower threshold, with more reports, may 
increase benefits associated with the proposed rule, but increase 
costs. We discuss below the expected number of affected parties at 
various thresholds, including the thresholds proposed in the rule.
(A) Thresholds for Credit Default Swaps
    For single-name CDS and for narrow index-based CDS, the Commission 
has identified the threshold as the lesser of: (i) A long notional 
amount of $150 million, calculated by subtracting the notional amount 
of any long positions in a deliverable debt security underlying a 
security-based swap included in the CDS from the long notional amount 
of the CDS (the ``$150 million long threshold''); (ii) a short notional 
amount of $150 million; or (iii) a gross notional amount of $300 
million. Calculations for the short notional amount threshold of $150 
million would not add or subtract the notional amount of any positions 
in a deliverable underlying debt security, and calculations for the 
both the long and short $150 million notional amount thresholds would 
not net out any other Security Based Swap. In addition, persons who 
have previously filed a Schedule 10B with the Commission would be 
required to file amendments if any material change occurs in the facts 
set forth in a previously filed Schedule 10B including, but not limited 
to, acquisitions in an amount equal to 10% or more of the position 
previously reported in Schedule 10B.
    Reporting following a trigger of the $150 million long or short 
threshold would inform the Commission, market participants, and the 
public in general about market positions with large potential market 
impact, which could lead to significant reduction of asymmetric 
information when reported. Further, the calculation method for the $150 
million long threshold would limit reporting and reporting costs by 
excluding deliverable bonds, and help market participants identify 
situations where a counterparty has a higher likelihood of having 
incentives to undertake opportunistic trading strategies. However, at 
larger notional amounts, quickly converting to a long position 
potentially netted by deliverable bonds to only a long gross positon 
presents additional risk; \243\ accordingly, the Commission is 
proposing a second larger threshold, $300 million notional on a gross 
basis, to capture overall large exposures.\244\ By knowing that a 
counterparty has a large gross notional amount and is directionally 
\245\ neutral, the party could accordingly adjust its price 
expectations and margin requirement of trading with that counterparty. 
This adjustment would account for the risk associated with trading with 
a counterparty that could quickly transform its directionally

[[Page 6691]]

neutral position to one directional in nature.
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    \243\ For example, a market participant may hold a large gross 
position that is net neutral (non-directional), just below the gross 
reporting threshold and not be required to file Schedule 10B. 
Thereafter, the participant quickly converts the gross position to a 
directional position by offloading the more liquid side of the 
trade, thus quickly converting the net neutral to a large 
directional position.
    \244\ The Commission believes that these thresholds, together 
with those described below for non-CDS debt security-based swaps and 
security-based swaps on equity, would likely have triggered position 
reporting under circumstances similar to those described above with 
respect to observed instances of ``opportunistic strategies'' and 
scenarios of high counterparty risk. See supra section I.B.
    \245\ Directional positions are holdings where market 
participants are not net neutral (i.e., their long and short 
positions do not net out) because said participants have an 
expectation about the future movement of an asset and expect to 
profit from the risk taken with the position.
---------------------------------------------------------------------------

    These thresholds limit the number of reporting parties that would 
be required to report and the related costs (including related to 
compliance and analyzing this information), while still addressing the 
market failure as a result of the adverse selection caused by 
asymmetric information in the market. For example, if the thresholds 
were lower the Commission would expect a larger number of reports, 
likely more uninformative ones with not sizable exposure, while 
increasing the burden to understand the reports, limiting the benefit 
of the overall reporting.
    The Commission used single-name CDS positions data from DTCC-TIW to 
estimate: (a) The number of market counterparties in the CDS market 
affected by proposed Rule 10B-1 for various thresholds; (b) the number 
of initial reports that would likely need to be filed on a weekly basis 
for various thresholds, as well as the number or amendments that might 
as a result of material changes; and (c) the percent of market 
participants that would be required to file no reports per week, (0-10) 
reports per week, [10-20) reports per week, or more than 20 reports per 
week, based on data from January 1, 2020 to December 31, 2020.\246\ We 
discuss these estimates in detail below.
---------------------------------------------------------------------------

    \246\ For specific notation, the following bucket, [0-50), means 
that 0 is included in this bucket, while 50 is not included in the 
bucket.
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Estimate of the Number of Market Counterparties in the CDS Market 
Affected by Proposed Rule 10B-1
    To understand the number of market counterparties in the CDS market 
affected by proposed Rule 10B-1 at potentially different threshold 
levels, the Commission calculated concentration statistics for the year 
2020, as shown in Figure 2 below. To perform this estimate, the 
Commission calculated the number of parties that might be impacted at 
different long/short notional amounts and gross thresholds represented 
with seven buckets: [0-50), [50-100), [100-150), [150-200), [200-250), 
[250-300), and [300+) in millions of US dollars. Each bucket represents 
the percent of accounts with exposure in a week for at least one 
underlying entity.\247\
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    \247\ DTCC-TIW includes weekly CDS positions for all U.S. 
entities, or foreign counterparties to a U.S. entity, or foreign 
counterparties trading CDS referencing a U.S. underlying entity. By 
aggregating available position information, the Commission is able 
to calculate exposure.
[GRAPHIC] [TIFF OMITTED] TP04FE22.002

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

    \248\ A long notional exposure is indicated with positive 
values, while a short notional exposure is indicated with negative 
values.
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    As shown in Figure 2 (left), roughly 88% of accounts--hold a 
position larger than the short notional exposure of $150 million, and 
less than the long net exposure of $150 million. 5% of accounts have a 
position larger short position than the $150 million short notional 
exposure, while 7% of accounts have a larger long position than the 
$150 million long notional exposure. This estimate for accounts 
affected by the long dollar exposure threshold is an upper bound, as it 
does not account for offsetting holdings in the deliverable bonds. 
\249\ The Commission does not have access to granular data on bond 
holdings and so cannot compute the net positions if these positions 
were hedged by deliverable bonds. Hence, the Commission expects that 
fewer than 12% (5% from short positions larger than $150 million, and 
7% from long positions larger than $150 million) of market participants 
would be impacted by the reporting requirements in proposed Rule 10B-1, 
as a result of the $150 million notional amount threshold for both long 
and short positions. Similarly, only 9% of accounts on average hold a 
gross exposure on a single name underlying entity of more than $300 
million, the last of the thresholds, [300, +).
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    \249\ Bonds of the underlying entity that are delivered in the 
auction are a subset of all underlying referenced debt that the 
underlying entity may have. This subset more closely tracks the 
value of the CDS as only those bonds would determine the final 
recovery value and the CDS payoff. See, e.g., the Big Bang protocol: 
https://www.cdsdeterminationscommittees.org/companies/auctionhardwiring/auctionhardwiring.html.
---------------------------------------------------------------------------

    Further, to understand the size and jurisdiction of underlying 
entities referenced by single-name CDS, Commission staff performed 
additional

[[Page 6692]]

analysis using the DTCC-TIW data. The left chart shows the size 
distribution of US firms. Most US firms that have a referencing CDS are 
large, with 57% of them having an average of $10 billion or more in 
total book value of assets at the end of year from 2009 to 2020.\250\ 
The right chart shows the country distribution of single-name CDS 
reported in DTCC-TIW. 33% are underlying entities referenced in the US, 
followed by approximately 22% in the European Union.
---------------------------------------------------------------------------

    \250\ This value represents the average end of year book value 
for each firm, as reported in Compustat. Similar statistics 
regarding the size of the single-name CDS are reported in Lee, 
Naranjo, and Velioglu, supra note 229 at 556-78.
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BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TP04FE22.003

    Commission staff used single-name CDS positions data from DTCC-TIW 
to evaluate the number of initial reporting that would likely need to 
be filed on a weekly basis, as well as the number of amendments that 
may need to be filed because of the requirement to file amendments in 
connection with material changes. Commission staff performed this 
analysis on two samples. The first sample, shown in Figure 4, uses all 
exposures on single name North-American CDS underlying entities and all 
exposures of U.S. single-name CDS participants. The second sample, 
shown in Figure 5, narrows the analysis to only U.S. single-name CDS 
participants (counterparties), and does not consider foreign single-
name counterparties who have exposure to North-American CDS.\251\ This 
is a subset of the DTCC-TIW data, which includes U.S. counterparties in 
the single-name CDS market, and covers both U.S. counterparties' North 
American and foreign underlying entities CDS holdings. The left charts 
in Figure 4 and Figure 5 show the number of reports the Commission 
expects to receive weekly (y-axis) for each sample across various long/
short thresholds (x-axis) and for different material percent changes, 
represented by different lines in the chart. The black line represents 
the threshold levels selected by the Commission.
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    \251\ Commission staff considered all DTCC-TIW entities' 
aggregate weekly holdings across accounts all single-name CDS in 
2020, for 52 weeks. Commission staff then assumed that the proposed 
reporting requirements from proposed Rule 10B-1 were implemented 
from the first week of 2020. For entities on an aggregate level, 
Commission staff then assessed the number of reports different 
potential reporting thresholds and weekly material changes would 
have. The analysis then aggregates the number of triggers for each 
firm's entire single-name CDS positions in 2020 across 52 weeks. For 
example, Figure 5, considers the following reporting net (left plot) 
and gross (right plot) thresholds listed on the x-axis: $50 million, 
$100 million, $150 million, $200 million, $250 million, $300 million 
and $500 million and material percentage change (lines at 1%, 5%, 
10%, 20%, and 30%).

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[[Page 6693]]

[GRAPHIC] [TIFF OMITTED] TP04FE22.004


[[Page 6694]]


[GRAPHIC] [TIFF OMITTED] TP04FE22.005

    The left chart in Figure 5 shows that the Commission expects 
slightly more than 79 reports per week as a result of U.S. entities 
triggering the long/short proposed thresholds of $150 million with a 
material percent change threshold of 10%, as it relates to CDS. 
Similarly, the right chart in Figure 5 represents the number of reports 
the Commission expects to receive weekly from U.S. entities across 
gross thresholds (x-axis) and different material percent changes. The 
right chart in Figure 5 shows that the Commission expects an additional 
57 reports per week as a result of U.S. entities exceeding the gross 
proposed threshold of $300 million with a percent change of 10%. In 
total, the Commission expects at most 136 reports per week from U.S. 
entities with respect to CDS positions, 79 reports as a result of the 
long/short thresholds and 57 reports as a result of the gross 
threshold.\252\
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    \252\ In addition to these 136 reports, the Commission also 
expects a number of foreign entities to report based on a similar 
analysis using DTCC-TIW data. Including foreign entities, the 
Commission believes that there will be is a total of 362 reports a 
week as a result of the net threshold, 79 reports from U.S. entities 
and 283 from foreign entities. If the gross threshold is used, the 
Commission estimates 291 reports a week, including 57 reports from 
U.S. entities and 234 reports from foreign entities. The Commission 
believes that these numbers may be overestimated because: (i) Only 
foreign entities that hold underlying U.S. securities would need to 
report; (ii) the Commission's analysis considers aggregate holdings 
across all accounts, hence this methodology correctly captures 
entities that might directly report to DTCC-TIW across several 
account, but overestimates the size of holdings of parties that 
directly report to DTCC-TIW, but while acting as dealers in the 
single-name CDS market by having accounts other participants; and 
(iii) there may be entities that trigger both thresholds 
simultaneously (e.g., if an entity hold as a gross position of $300 
million with a net position of $150 million) so those entities would 
be double counted in these figures.
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    These estimates are upper bounds for U.S. entities because 
Commission staff cannot net out deliverable bonds due to limited data. 
Such data limitations relate to the bond holdings of security-based 
swap participants that would be eligible to offset the net positions 
and that would decrease the single-name net exposure. In addition, the 
proposal would require reporting by the party with the swap exposure 
(e.g., a pension fund or industrial company, but not the investment 
adviser who trades on behalf of this party). Because Commission staff 
analysis is at the level of entities in Table 1, which pools exposures 
of the underlying parties, the analysis overestimates the right-
skewness of the distribution of exposures, and hence overestimates the 
number of entities reporting. As a result, this methodology correctly 
captures entities that might directly report to DTCC-TIW across several 
of their individual accounts, as the methodology captures the entities' 
aggregate exposure. Parallel to this, the methodology overestimates the 
size of the holdings of parties that act as dealers in the single-name 
CDS market because it aggregates the accounts of market participants 
that are reported to DTCC-TIW as being held by the dealer. In addition, 
Commission staff only observed end-of-week exposures, hence intra-
weekly changes in position that might breach these thresholds were not 
accounted for. There are a limited

[[Page 6695]]

number of such dynamic intra-weekly changes in positions, as 
participants are more likely to hold longer-term swaps positions.\253\ 
In addition, the analysis does not account for reports that might be 
filed as a result of an entity triggering both long/short and gross 
threshold breaches in the same week. For example, a large long or short 
position and a large gross position happening contemporaneously would 
be counted twice in the estimation (once in each sample). These 
overestimations, for the number of U.S. entities and for all reporting 
parties in DTCC-TIW, lead the Commission to believe that the estimated 
number of weekly reports are likely overestimated, and the Commission 
expects significantly fewer reports per week in practice.
Estimate of the Percent of Market Participants That Would be Required 
To File Certain Numbers of Reports
    In Figure 6 below, using DTCC-TIW data, the Commission estimated 
the percent of market participants that would be required to file 
reports based on data as of January 1, 2020. Specifically, the analysis 
breaks down how many participants would file, on average, no reports 
per week, (0-10) reports per week, [10-20) reports per week, or more 
than 20 reports per week.\254\ Figure 6, is based on global security-
based swap participants with exposure to North American single-name CDS 
and U.S. security-based swap participants with exposure to any single-
name CDS. Because Figure 6 includes all available positions in the 
DTCC-TIW data (including some positions of foreign entities not trading 
securities referencing U.S. entities, who would not be required to 
report under the proposed rule), this analysis likely overestimates the 
percent of the market participants required to report. The Commission 
has, therefore, provided a second estimate in Figure 7, below, which 
represents only U.S. security-based swap participants' exposure to any 
single-name CDS. The Commission expects that many reports will be filed 
by SBSDs because, as liquidity providers, they will likely interact 
with clients executing large positions in CDS or TRS, and further, 
SBSDs are likely to hedge these positions.
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    \254\ The following bucket, (0-10), means that neither 0 nor 10 
are included in this bucket.
[GRAPHIC] [TIFF OMITTED] TP04FE22.006


[[Page 6696]]


[GRAPHIC] [TIFF OMITTED] TP04FE22.007

    As shown in the left chart in Figure 6, the Commission estimates 
that 22% of global security-based swap participants with exposure to 
North American single name CDS and U.S. entities with exposure to 
single-name CDS would be required to file, on average, fewer than 10 
reports per week as a result of reaching the $150 million long/short 
thresholds and the 10% change in position that would require the filing 
of an amendment. Furthermore, the Commission estimates that only 1% of 
global participants in the security-based swap market with exposure to 
North American single name CDS and U.S. entities with exposure to 
single name CDS would be required to file more than 20 initial reports 
or amendments on average in a week as a result of the $150 million 
threshold. Similar estimates are shown for U.S. entities alone in 
Figure 7, with a cumulative 99% of U.S. entities filling less than 10 
initial reports or amendments on average a week. Likewise, only 1% of 
U.S. single-name CDS market participants would need to file more than 
10 initial reports or amendments per week on average. Similar to 
previous estimates, long/short threshold estimates presented in Figures 
6 and 7 are conservative upper bound estimates, as the Commission 
cannot adjust for bond positions that would offset the size of the CDS 
holdings, as well as aggregate positions that might be reported in 
DTCC-TIW across one or many different dealers.
    Commission staff performed a similar analysis for the gross 
threshold at $300 million for both groups of participants. As shown in 
Figure 7, the Commission estimates that 90% of U.S. single-name CDS 
market participants will, on average, not be required to file any 
reports under the proposed Rule 10B-1 for the gross threshold, while if 
required to file, 9% of U.S. single-name CDS participants would be 
required to file fewer than 10 reports on an average week, and only 1% 
of U.S. security-based swap market participants would be required to 
file more than 20 initial reports or amendments per week on 
average.\255\
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    \255\ The analysis has a similar limitation as noted above in 
``Estimate of the number of reports to be filed on a weekly basis.''
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(B) Thresholds for Non-CDS Debt Security-Based Swaps and Security-Based 
Swaps on Equity
    As discussed above, the Commission is proposing: (i) For security-
based swaps based on equity, a bifurcated approach, such that a 
reporting obligation would be triggered by exceeding the lesser of a 
threshold based on the notional amount of the Security-Based Swap 
Position, and a threshold based on the total number of shares 
attributable to the Security-Based Swap Position as a percentage of the 
outstanding number of shares of that class of equity securities and 
(ii) for other non-CDS debt security-based swaps, a notional based 
threshold approach. In addition, persons who have previously filed a 
Schedule 10B with the Commission would be required to file amendments 
if any material change occurs in the facts set forth in a previously 
filed Schedule 10B including, but not limited to, acquisitions in an 
amount equal to 10% or more of the position previously reported in 
Schedule 10B.
    The Commission believes that these thresholds achieve the goal of 
informing the market and the public about impactful and directional 
positions in TRS, which could lead to significant reduction of 
asymmetric information when reported. The notional thresholds of $300 
million (which includes not only the TRS or other equity security-based 
swaps and related securities) of which $150 million (which includes 
only the TRS or other equity security-based swaps) provides a bright-
line, absolute measure of position size and is similar to the approach 
proposed for CDS. The bright-line provides a simple and specific 
reporting threshold for participants. We are also proposing a threshold 
based on the total number of shares attributable to the Security-Based 
Swap Position as a percentage of the outstanding number of shares of 
that class of equity securities. The 5% threshold relative to market 
capitalization (out of which 2.5% are in TRS and equity security-based 
swaps) is required because there are a large number of firms in the 
market that would not be captured by the notional thresholds, which the 
Commission believes should be captured in order to reduce asymmetric 
information problems in the TRS market. Based on the Commission's 
analysis, smaller underlying entities make up a significant portion of 
the U.S. firms referenced by TRS. For smaller underlying entities to be 
adequately captured and thereby effectively to reduce asymmetric 
information in the market for swaps referencing their securities, the 
Commission believes a percentage threshold is required. This is 
demonstrated in Figure 7.
    In evaluating the effect of these thresholds, the Commission used 
data from Form N-PORT filings, which include information on holdings 
of, among other things, security-based swaps, to (a) estimate the 
number of

[[Page 6697]]

market counterparties affected by proposed Rule 10B-1's notional 
thresholds for non-CDS debt security-based swaps and security-based 
swaps on equity and (b) analyze the size and jurisdiction of underlying 
entities referenced by total return, equity, and other non-CDS, debt 
security-based swaps. We discuss these analyses in detail below.
Estimate of the Number of Market Counterparties in the Market for Non-
CDS Debt Security-Based Swaps and Security-Based Swaps on Equity 
Affected by Proposed Rule 10B-1
    Using data from each fund's \256\ latest Form N-PORT filing as of 
November 15, 2021, Commission staff estimated the percent of accounts 
with TRS aggregate positions within certain buckets of notional size, 
where each bucket represents the percent of accounts with TRS aggregate 
positions within the corresponding notional size. For example, 84% of 
funds reporting on Form N-PORT hold an aggregate position of $300 
million or less in TRS, while 16% of these funds have an aggregate 
position to TRS of $300 million or more.
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    \256\ For purposes of this discussion, ``funds'' are series of 
registered investment companies or registered investment companies 
if there are no series.
[GRAPHIC] [TIFF OMITTED] TP04FE22.008

    In addition, based on data from each fund's latest Form N-PORT 
filing as of November 15, 2021, the Commission provides several 
relevant summary statistics: First, there are 21,211 TRS being reported 
across 652 funds from Form N-PORT fillings; second, the median size of 
aggregate TRS positions of N-PORT reporting filers' funds is $131,000, 
while the average size is $10.6 million. These summary statistics imply 
that the TRS holdings of N-PORT-reporting filers' funds are right-
skewed \257\ and that these entities in aggregate hold a very limited 
position in total returns swaps. Lastly, the 25th and 75th percentiles 
are $24,000 and $713,000, which implies that 75% of N-PORT reporting 
filers' funds participate in the TRS market hold less than $713,000 in 
these products.\258\ Based on the distribution demonstrated by this 
analysis, the Commission believes only a limited number of N-PORT 
filers' funds would be exceed the 10B-1 reporting requirement.\259\
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    \257\ A ``right-skewed'' distribution is one in which the tail 
is on the right side, and typically the mean (average) is greater 
than the median.
    \258\ Due to data limitations, the Commission's analysis does 
not separate the analysis into individual types of TRS.
    \259\ The Commission recognizes that Form N-PORT reporting 
filers may not be representative of the ``average'' trading entity 
in the security-based swap market and in particular, the ``average'' 
trading entity in the total return, or equity swap market. The 
Commission believes that Form N-PORT-reporting investment funds are 
likely to be less leveraged and participate in a smaller number of 
transactions compared to other entities that participate TRS market. 
See generally 17 CFR 270.18f-4 (``Rule 18f-4'') (limiting the 
ability of registered investment companies and business development 
companies to engage in transactions that involve potential future 
payment obligations, including obligations under derivatives such as 
forwards, futures, swaps and written options). Hence, the 
quantitative analysis provided on TRS using Form N-PORT reporting 
entities is likely to be biased towards TRS market participants that 
are more risk averse, less active in the TRS market, and more likely 
to currently be subject to reporting requirements and leverage 
limitations. This will result in estimates that would likely suggest 
a lower bound on the number of potential entities subject to the 
Rule 10B-1 disclosure requirement. In addition, due to data 
constraints, offsetting positions are not being reflected in this 
analysis. This would mean that the ``average'' TRS market 
participant is likely to be more active, less risk averse, and 
likely have larger exposures and positions in the TRS market. 
Despite the Commission's current data constraints regarding TRS, the 
Commission believes that these data provide useful market insight 
into the number of participants in the TRS market that might be 
impacted by the new reporting requirements. Certain information on 
Form N-PORT is non-public, while certain information reported on 
Form N-PORT for the third month of each filer's fiscal quarter is 
made publicly available upon filing.
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Evaluation of Size and Jurisdiction of Underlying Entities Referenced 
by Total Return, Equity, and Other Non-CDS, Debt Security-Based Swaps

[[Page 6698]]

    Commission staff also analyzed the size and jurisdiction of 
underlying entities referenced by TRS, equity security-based swaps, and 
other non-CDS, debt security-based swaps. In Figure 9, the Commission 
performed a name matching procedure across Compustat \260\ and N-PORT 
data as of November 15, 2021 determine the size of U.S. entities 
referenced by total return, equity, and other non-CDS, debt security-
based swaps, and jurisdiction of entities referenced by total return, 
equity, and other non-CDS, debt security-based swaps.\261\ Using total 
assets and two digit ISIN country identifiers available from Compustat 
for the merged dataset, the analysis resulted in two distributions. The 
left distribution shows that 44% of entities referenced by TRS, equity 
security-based swaps, and other non-CDS, debt security-based swaps 
reported in Form N-PORT have total asset size less than $2 billion. The 
right figure shows that a significant majority, 59%, of entities 
referenced by TRS, equity security-based swaps, and other non-CDS, debt 
security-based swaps reported in Form N-PORT have underlying securities 
traded in the U.S.
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    \260\ The analysis uses Compustat Global and Compustat North 
America. Compustat Global provides authoritative financial and 
market data covering publicly traded companies in more than 80 
countries, representing over 90% of the world's market 
capitalization. Compustat Global includes coverage of over 96% of 
European market capitalization and 88% of Asian market 
capitalization.
    \261\ This analysis was subject to certain data limitations. In 
particular, the Compustat and N-PORT data contain no common 
identifiers between the two datasets. As a result, this might lead 
to potential mismatches because the merge was performed through a 
name-matching algorithm.
[GRAPHIC] [TIFF OMITTED] TP04FE22.009

BILLING CODE 8011-01-C
    This analysis indicates that there is likely a significant 
proportion of smaller to medium sized firms--including, for example, 
firms with less than $2 billion and between $2 and $6 billion in total 
book value of assets, respectively--which are underlying entities to 
total return, equity security-based swaps, and other non-CDS, debt 
security-based swaps as reported by funds that file Form N-PORT. In 
addition, the analysis indicates that the majority of these underlying 
entities have securities issued in the U.S. as identified by their two-
digit ISIN code. A notional threshold (such as $300 million) would not 
capture the security-based swap exposure in the initial stages of 
accumulating a large position for a significant portion of smaller to 
medium sized firms. A $300 million notional exposure would correspond 
to a 5% percent threshold of an underlying entity with a $6 billion 
market capitalization. This would correspond to less than approximately 
34% of underlying entities, entities with total assets greater than $6 
billion. Hence, the requirement of a percent threshold would help 
inform the market of total return, equity security-based swaps, and 
other non-CDS, debt security-based swaps exposures for medium and 
smaller underlying entities.
    While the Commission acknowledges that TRS, equity security-based 
swaps, and other non-CDS, debt security-based swaps exposures to the 
medium and smaller underlying entities do not pose large counterparty 
default risk compared to swap exposure on larger

[[Page 6699]]

firms, security-based swaps based on securities issued by medium and 
smaller underlying entities have the potential to impact the underlying 
entity and its shareholders. This is likely because the underlying 
security referenced by such security-based swaps is more likely to be 
less liquid than underlying securities of large entities. The lower 
liquidity levels in the underlying security would be more prone to 
movement away from fundamentals because of offsetting activity in the 
total return, equity security-based swaps, and other non-CDS, debt 
security-based swaps. For example, Firm XYZ might buy TRS on underlying 
Firm ABC from Firm 123. To hedge its short exposure to the issued TRS, 
Firm 123 buys the underlying security of Firm ABC. Volatile market 
activity can result in margin calls from Firm 123 to Firm XYZ leading 
Firm 123 to sell some or all of its position in the underlying 
security. This quick and large selling of the underlying security by 
only one agent may trigger a more pronounced fire sale, which is a 
large sale of securities below market value. These sales dislocate the 
price away from its fundamental value.
    A threshold based on the total number of shares attributable to the 
security-based swap position (as a percentage of the outstanding number 
of shares of that class of equity securities) could, however, help 
alleviate large changes in prices due to purchase or sales of the 
underlying security. Because this threshold would be tied to the 
outstanding number of shares, this threshold would effectively be lower 
for smaller firms--which would ensure that, when large positions are 
acquired, market participants could be made aware through Schedule 10B 
reports.
    In addition, data analysis undertaken by the Commission staff shows 
that the number of investment companies that file Form N-PORT who would 
be captured by this new reporting requirement is likely to be 
small.\262\ Other types of market participants that are not registered 
with the Commission under the Investment Company Act, such as family 
offices, endowments and private funds, may have lower risk aversion, 
higher TRS exposures, and may trigger the reporting threshold more than 
N-PORT filers.\263\ The Commission estimates that 84% of the funds 
reporting on Form N-PORT as of November 15, 2021 hold an aggregate 
exposure of less than $300 million in TRS, while 14% of reporting funds 
have an aggregate exposure to TRS of $300 million or more. These 
percent estimates may not be indicative of the number of reports the 
Commission expect to receive.
---------------------------------------------------------------------------

    \262\ See discussion related to the size of TRS holdings in 
Evaluation of Size and Jurisdiction of Underlying Entities 
Referenced by Total Return, Equity, and Other Non-CDS, Debt 
Security-Based Swaps.
    \263\ See discussion related to the limitation of Form N-PORT 
data in Evaluation of Size and Jurisdiction of Underlying Entities 
Referenced by Total Return, Equity, and Other Non-CDS, Debt 
Security-Based Swaps.
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E. Reasonable Alternatives

1. Implementing a More Prescriptive Approach in Re-Proposed Rule 9j-1
    One potential alternative to the approach taken in re-proposed Rule 
9j-1 would be to identify and prohibit within the rule specific types 
of events (for example, market behavior around certain events and fact 
patterns) and ``opportunistic trading'' behavior that have been 
observed. This alternative approach could provide even more certainty 
and precision with respect to the particular types of activities that 
are prohibited in the security-based swap market. This approach could, 
however, lead to greater uncertainty with respect to circumstances not 
explicitly contemplated in the rule, which could increase litigation 
costs for market participants involved in such transactions. This may 
also decrease the integrity of the market for security-based swaps, and 
in addition, could cause market participants to bear greater compliance 
costs in connection with the evaluation of circumstances not explicitly 
contemplated in the rule. As a result, the more prescriptive 
alternative approach would have limited benefits and greater costs as 
compared to the proposed approach in the market for security-based 
swaps, as well as the market for the referenced underlying of such 
security-based swaps.
2. Safe Harbor for Hedging Exposure Arising Out of Lending Activities
    The Commission could add a conditional safe harbor from re-proposed 
Rule 9j-1 for entering into security-based swap transactions, while in 
possession of material non-public information, for purposes of hedging 
some or all exposure arising out of lending activities with a reference 
entity or the syndication of such lending activities. Such a 
conditional safe harbor could minimize the effects of the re-proposed 
rule on risk-reducing hedging activity, which is one of the central 
purposes of CDS contracts and which provides important benefits to the 
lending market. We believe that identifying legitimate, risk-reducing 
hedging activity--undertaken with the intent of covering potential 
losses in a position--and distinguishing such activity from other types 
of speculative transactions would likely be difficult. Hence, even a 
conditional safe harbor designed to apply solely to legitimate hedging 
transactions could unintentionally apply to activities proposed Rule 
9j-1 is designed to prohibit, reducing the benefits of the rule. 
Further, such a conditional safe harbor would need to be balanced 
against the risk that market participants undertake transactions for 
which their counterparties should have the protections of the re-
proposed Rule 9j-1, including in circumstances involving potentially 
opportunistic trading strategies.
3. Mandating That Security-Based Swap Data Repositories Report or 
Publicly Disclose Positions
    The Commission could consider placing the reporting obligations on 
registered SBSDRs. Although this alternative would relieve market 
participants of additional reporting obligations and, given some 
reporting requirements are already in place, eliminate some additional 
reporting costs, this alternative would preclude inclusion in the 
reported data of key aspects of the reporting requirement proposed to 
be required by Rule 10B-1--the identity of the person building up a 
large security-based swap position and information regarding the 
underlying entity. Requiring that the SBSDRs report the applicable 
information would be subject to significant limitations that could 
undermine the effectiveness of the rule. Specifically, and as discussed 
above, Section 13(m)(1)(C)(iii) of the Exchange Act provides that any 
rulemaking pursuant to Section 13(m) (i.e., Regulation SBSR) must be 
structured in such a manner ``that does not disclose the business 
transactions and market positions of any person.'' \264\ Accordingly, 
such an alternative could involve only anonymized reporting, thereby 
negating one of the key benefits of the rule, i.e., providing 
counterparties an opportunity to take certain protective actions when 
transacting with counterparties with a large, concentrated security-
based swap position.
---------------------------------------------------------------------------

    \264\ See 15 U.S.C. 78m(m)(1)(C)(iii).
---------------------------------------------------------------------------

    Further, this alternative would likely impose significant burdens 
on the SBSDRs, who would be required to report when the security-based 
swap entity breaches the specified gross

[[Page 6700]]

thresholds. This would likely require investments from the SBSDR in an 
automated reporting system, which would track, aggregate, monitor, and 
report exposures. In addition, given SBSDRs may not be aware of all 
positions held by a market participant, this alternative would limit 
the potential thresholds to only gross thresholds. These limitations 
could substantially undermine the benefits of the proposed rule.\265\ 
This additional data provides important context for the information, 
such as whether holdings are hedged or not. In addition, if the rule 
were to require reporting of only gross thresholds, market participants 
may learn of large position buildup only. For example, a market 
participant may hold a large gross position that is net neutral (non-
directional), just below the gross reporting threshold and not be 
required to report on Schedule 10B. Thereafter, the participant could 
quickly convert the gross position to a directional position by 
offloading the more liquid side of the trade, thus quickly converting 
the net neutral to a large directional position. As a result, the 
Commission does not believe this is the appropriate method of 
reporting.
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    \265\ Even to the extent that anonymized data would be 
sufficient, the data provided to the SBSDRs pursuant to Regulation 
SBSR is unlikely to be useful as a way of potentially alleviating 
the compliance burdens of Rule 10B-1, absent a rulemaking to amend 
Regulation SBSR. For example, SBSDRs are currently permitted to 
apply a cap to the anonymized dissemination of CDS transactions, 
such that if the trade exceeds $5 million, it will be disseminated 
as ``$5MM+'' in lieu of the actual amount, mirroring how cash 
corporate bonds are disseminated by TRACE. In addition, data 
reported to an SBSDR relates only the security-based swaps 
themselves. By contrast, Section 10B-1 allows the Commission to 
require reporting of both a security-based swap position and any 
security or loan or group or narrow-based security index of 
securities or loans related to the security-based swap.
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4. Adopting Position Limits
    Another possible alternative to proposed Rule 10B-1 and 9j-1 would 
be to adopt position limits in lieu of reporting requirements. These 
position limits would prohibit market participants from building up 
large, concentrated positions in security-based swaps. As compared with 
reporting, this would limit the ability of market participants to hedge 
underlying exposures. Further, given that transparency allows market 
participants to adjust counterparty exposures, it is unclear whether 
position limits would have substantially greater benefits to risk 
reduction and exposure to opportunistic strategies as compared with the 
proposed reporting. The Commission acknowledges, however, that to the 
extent that market participants would not make such adjustments, 
position limits could have risk reduction benefits beyond those 
associated with reporting.
5. Threshold Alternatives for Security-Based Swaps Based on Equity and 
Non-CDS Debt
    The Commission could consider alternative approaches for 
calculating potential thresholds for security-based swaps based on 
equity and non-CDS debt. Specifically, the Commission could consider 
proposing reporting thresholds based on:

     The average daily trading volume (``ADTV'') of the 
relevant securities, such that reporting would be required if the 
number of shares represented by the security-based swap exceeded a 
certain percentage of ADTV.
     Notional values that vary based on types of equity 
underlying the equity-based swap, including for example, equity 
issued by emerging market issuers or large and small capitalization 
issuers. Such an alternative could resemble existing industry 
methodologies for calculating margin on derivatives.\266\
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    \266\ See, e.g., ``ISDA SIMM Methodology, version 2.3,'' 
available at: https://www.isda.org/a/oDHTE/ISDA-SIMM-v2.3-PUBLIC.pdf.
---------------------------------------------------------------------------

     For non-CDS debt, a bifurcated approach, such that the 
threshold would be defined to include both a threshold based on the 
notional amount of the position, and a threshold based on the 
percentage component (for example, notional divided by market value 
of total issuance).

    Using a threshold that would adjust based on ADTV could better 
approximate when the market for an underlying security could be 
impacted with a large security-based swap, as compared to the proposed 
approach. For example, large positions relative to ADTV could affect 
the market for the underlying security if a party needed to exit that 
position in a short period of time, which could require having to 
liquidate any securities being held to hedge the security-based swap. 
Such a metric may not, however, be meaningful with respect to non-CDS 
debt security-based swaps, given that debt securities do not trade 
widely in the secondary market.
    However, because these alternatives would be inconsistent with the 
proposed thresholds for CDS and be more complicated to calculate, they 
could increase compliance costs for market participants. Moreover, a 
metric based on ADTV would require security-based swap counterparties 
to monitor the trading volume of those shares, and because ADTV can 
fluctuate on a day-to-day basis, particularly during times of high 
volatility, such fluctuations could require persons trading large 
positions in security-based swaps to develop more sophisticated systems 
for monitoring those positions as a function of ADTV. A threshold that 
would vary based on the types of equity underlying the equity-based 
swap could potentially lead to additional computation complications. 
For example, it would require security-based swap market participants 
to track different thresholds for different types of underlying 
securities.
    With respect to the potential inclusion of a bifurcated approach 
for non-CDS debt swaps, there would potentially not be a substantial 
benefit to including a percent component in this threshold. 
Specifically, comparing a notional amount to a bond market 
capitalization denominator would likely not indicate meaningful 
information about the holder's ability to affect the market for the 
underlying bond market. In addition, a calculation based on a bond 
market capitalization denominator \267\ would be bond issue specific, 
making the calculation unique to every bond. This would likely increase 
the costs to market participants to maintain compliance.
---------------------------------------------------------------------------

    \267\ In addition, this methodology would not capture private 
placement bonds as they are unregistered debt securities only sold 
to accredited investors.
---------------------------------------------------------------------------

6. Threshold Alternatives for Credit Default Swaps
    An alternative approach to the public reporting requirement in Rule 
10B-1 would be to consider different methodologies for calculating the 
reporting thresholds for single-name CDS. When considering different 
reporting methodologies for single-name CDS, the Commission also could 
consider proposing:

     A single gross threshold that would require single-name 
CDS trading entities to report their exposure and related holdings 
after the entity exceeds a certain level of their aggregate CDS 
exposure for a single underlying entity without accounting for 
offsetting deliverable securities. For example, even if a CDS market 
participant were net neutral (i.e., no directional exposure), 
because it has large exposures both in the long and short direction 
it would have to reveal this information to the market at certain 
thresholds.
     A single net threshold that would require single-name 
CDS trading entities to report their exposure and related holdings 
after the entity exceeds a certain level of their net single-name 
CDS position (i.e., allows the reporting entity to offset or account 
for hedged positions). This is one of the two components of the 10B-
1 reporting threshold. This alternative would thus only capture 
large directional exposure.

[[Page 6701]]

     Thresholds based on net or gross notional of single-
name CDS positions relative to total net or gross outstanding CDS, 
outstanding bonds, or total deliverable bonds related to the single-
name CDS. For example, market participants could be required to 
report if their net CDS position, as discussed above, divided by 
total outstanding bonds exceeds, for example, a 5% threshold or 
other percent threshold.\268\
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    \268\ For some underlying reference entities, it might be the 
case that there are significantly more CDS outstanding than bonds. 
Hence, the percent threshold could be greater than 100%.
---------------------------------------------------------------------------

     Calculating the short notional amount threshold of $150 
million by adding or subtracting the notional amount of any 
positions in a deliverable underlying debt security and/or 
calculating both the long and short $150 million notional amount 
thresholds by netting out any other Security Based Swap, 
specifically, single-name CDS with the same maturity, referencing 
the same underlying entity.

    The first two alternative approaches may be a less burdensome means 
of achieving the goal of disclosing concentrated positions, as fewer 
reports would be required. We believe, however, that requiring only 
gross or netted reporting would substantially reduce the benefits of 
the proposed rule. Specifically, without a netted reporting 
requirement, market participants would not be aware of the true market 
exposure, while without a gross reporting requirement, a single-name 
CDS entity could present substantial systematic risks without 
triggering a reporting obligation. For example, if there is no 
requirement to report a net neutral position even though the aggregate 
gross position is significant, then the entity's position could quickly 
become directional by closing the offsetting position.\269\ The same 
situation might happen for a small net exposure that is below the net 
reporting threshold, but with a large aggregate gross exposure.
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    \269\ We provide an example of how a reporting entity might be 
able to ``hide'': The entity bought $300 million in CDS and 
simultaneously sold $300 million CDS, which yields a net exposure of 
zero and therefore no need to report under the net thresholds. When 
it becomes beneficial, the entity can relatively quickly obtain a 
directional net position of $300 million by selling either leg of 
the initial trade. This new position needs to be reported but the 
position is already in place and does not leave time for 
counterparties to adjust their positions in a timely manner.
---------------------------------------------------------------------------

    Further, if the Commission were to use a single gross threshold, a 
selected threshold would have to be significantly lower than the one 
included in the proposal to capture market events similar to those 
captured under the proposed threshold. This would increase the overall 
number of reports and would likely capture a large number of positions 
immaterial to addressing asymmetric information problems. Each 
uninformative report would dilute the value of each informative report 
by increasing overall costs of processing and providing the required 
information to other market participants.
    With respect to the third alternative, a threshold based on the 
notional of single-name CDS positions relative to total outstanding 
CDS, outstanding bonds, or total deliverable bonds would have the 
benefit of capturing more positions related to smaller underlying 
entities, which might be more prone to being impacted by opportunistic 
strategies compared to larger firms. This alternative could, however, 
be challenging for market participants to implement. First, it not 
clear how market participants would calculate total outstanding CDS, 
which could increase the costs of implementing the alternative. Second, 
unlike underlying securities for equity swaps, bonds with different 
vintages and yields are not fungible securities, meaning that they are 
not equivalent or interchangeable. As a result, selecting the ones to 
aggregate uniformly across all underlying entities when calculating the 
denominator increases the difficulty and costs of the calculation. For 
example, not all bonds would be deliverable into the auction for each 
of the CDS.
    With respect to both (i) calculating the notional amount subject to 
the short notional amount threshold of $150 million by adding or 
subtracting the notional amount of any positions in a deliverable 
underlying debt security and (ii) calculating both the long and short 
$150 million notional amount thresholds by netting out the notional 
amount of any other Security Based Swap, specifically for single-name 
CDS where security-based swap would match the reference entity and the 
tenor, would reduce costs for market participants by potentially 
reducing the number of reports they would be required to file. However, 
these calculation methods would reduce the amount of information 
available to other market participants and, therefore, may not present 
the same counterparty risk reduction benefits.
7. Information Required To Be Reported on Schedule 10B
    The Commission could propose that different information be reported 
on Schedule 10B. For example, the Commission could propose a version of 
Schedule 10B that would not require the public reporting of the 
identity of the filer. In this case, the market participant would 
inform the Commission about having exceeded the reporting threshold, 
but other market participants (counterparties, underlying reference 
entity, and other regulators) would not know or be able to identify the 
market participant that triggered the reporting obligation. This 
alternative would not allow market participants to know which 
counterparty they should change their behavior towards in order to 
reduce counterparty risk (for example, by adjusting prices to capture 
additional risk, increasing margin requirements, or decreasing trading 
activity). Market participants could treat all of their counterparties 
as if they exceeded the reporting threshold, potentially creating a 
chilling effect on the market. Accordingly, this alternative would not 
afford the same benefits of our proposed approach.
    Alternatively, the Commission could propose that the rule require 
reporting the identity of the filer and not the underlying reference 
entity. Similarly, the Commission could propose the filer not to 
specify the size of the position, or information about the 
corresponding trading strategy. These alternatives would have the 
benefit of limiting the potential market reaction to the filer's trades 
and strategies, such as strategy replication or attempts to anticipate 
the filer's trading patterns. They would not, however, allow market 
participants to fully quantify nor understand the complete relationship 
the filer has with the underlying entity. This could cause an 
overreaction similar to the ones previously discussed, such as 
incentivizing counterparties to treat larger threshold breaches equally 
as smaller ones, or misinterpreting the strategy of the filer. 
Accordingly, the Commission does not believe that these alternatives 
would afford the same benefits of our proposed approach.

F. Request for Comment

    The Commission requests comment on any aspect of the above economic 
analysis, including our description of the current economic baseline, 
the potential costs and benefits of the proposed amendments, their 
effect on efficiency, competition, and capital formation, and any 
reasonable alternatives we should consider. In addition, we request 
comment on the following aspects of the proposal:
     The Commission requests comment on the potential costs for 
security-based swap market participants, including costs attributable 
to the modification of market participants' business operations or 
supervisory practices or systems. The Commission also requests comments 
about any potential benefits resulting from the proposed Rule 9j-1, 
10B-1, and 15Fh-4(c) for market participants and underlying entities. 
The

[[Page 6702]]

Commission also seeks comments on the accuracy of any of the benefits 
identified and welcomes comments on any of the costs identified here. 
Finally, the Commission encourages commenters to identify, discuss, 
analyze, and supply relevant data, information, or statistics regarding 
any such costs or benefits. The Commission seeks specific comment and 
empirical data, if available, on the potential impact of the proposed 
rule.
     We solicit comment on any additional short-term and long-
term benefits that could be realized with re-proposed Rule 9j-1, 
proposed Rule 10B-1, and proposed Rule 15Fh-4(c). Specifically, we 
solicit comment regarding benefits to the efficient operation of the 
security-based swap market, price efficiency, market integrity, and 
investor protection.
     We request comment on whether re-proposed Rule 9j-1, 
proposed Rule 10B-1, or proposed Rule 15Fh-4(c) would promote 
efficiency, competition, and capital formation or have an impact or 
burden on competition both in the security-based swap market and the 
underlying markets. Commenters are requested to provide empirical data 
and other factual support for their view to the extent possible.
     We solicit comment on costs associated with re-proposed 
Rule 9j-1, including whether the rule could discourage certain 
legitimate market activities, because of concern that such activities 
might be viewed as a violation of the rule. The Commission also 
requests specific comment on any changes to business operations or 
supervisory practices or systems that might be necessary to implement 
the proposed rule. In addition, the Commission solicits comment on any 
additional short-term and long-term costs that could result from 
proposed Rule 9j-1. Specifically, the Commission solicits comment 
regarding costs to the efficient operation of the security-based swap 
market, price efficiency, market integrity, and investor protection.
     The Commission solicits comment on the costs and benefits 
associated with the reporting thresholds for single-name CDS and TRS. 
Should these thresholds be lower or higher, and are there other 
alternative thresholds?
     The Commission solicits comment on the complexity of the 
reporting thresholds for single-name CDS, equity, and non-CDS security-
based swaps. Should these thresholds be more complex, difficult to 
calculate, and precise, or simpler, easier to calculate, and broader, 
and are there other alternative thresholds?
     We solicit comment on costs associated with reporting of 
security-based swap positions as a result of proposed Rule 10B-1, 
including whether the rule would impose costs that could discourage 
market activity by creating indirectly position limits or liquidity 
pools.
     We solicit comment on any additional short-term and long-
term benefits that could be realized with proposed Rule 10B-1. 
Specifically, the Commission solicits comment regarding benefits to the 
efficient operation of the security-based swap market, price 
efficiency, market integrity, and investor protection.
     The Commission solicits comment on benefits associated 
with reporting of security-based swap positions because of proposed 
Rule 10B-1, including whether the rule would give rise to additional 
benefits that could encourage capital formation for underlying 
entities. The Commission solicits comment on any long-term or short-
term costs that might influence underlying entities because of 
reporting thresholds. How might underlying entities change funding 
practices or procedures under proposed Rule 10B-1?

VII. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996, (``SBREFA''),\270\ the Commission requests comment on the 
potential effect of the proposed rules on the economy on an annual 
basis. The Commission also requests comment on any potential increases 
in costs or prices for consumers or individual industries, and any 
potential effect on competition, investment, or innovation. Commenters 
are requested to provide empirical data and other factual support for 
their views to the extent possible.
---------------------------------------------------------------------------

    \270\ Public Law 104-121, Title II, 110 Stat. 857 (1996) 
(codified in various sections of 5 U.S.C., 15 U.S.C., and as a note 
to 5 U.S.C. 601).
---------------------------------------------------------------------------

VIII. Regulatory Flexibility Act Certification

    The Regulatory Flexibility Act (``RFA'') \271\ requires Federal 
agencies, in promulgating rules, to consider the impact of those rules 
on small entities. Section 603(a) of the Administrative Procedure 
Act,\272\ 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.'' \273\ Section 605(b) of the RFA states 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.\274\
---------------------------------------------------------------------------

    \271\ 5 U.S.C. 601 et seq.
    \272\ 5 U.S.C. 603(a).
    \273\ 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 17 CFR 240.0-10 (``Rule 0-
10'') under the Exchange Act. See Exchange Act Release No. 18452 
(Jan. 28, 1982), 47 FR 5215 (Feb. 4, 1982) (File No. AS-305).
    \274\ See 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; \275\ 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 17 CFR 240.17a-5(d) 
(``Rule 17a-5(d)'') under the Exchange Act,\276\ 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 
business 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.\277\
---------------------------------------------------------------------------

    \275\ See 17 CFR 240.0-10(a).
    \276\ 17 CFR 240.17a-5(d).
    \277\ See 17 CFR 240.0-10(c).
---------------------------------------------------------------------------

    Based on available information about the security-based swap 
market, the market, while broad in scope, is largely dominated by 
entities such as those that will be covered by the SBSD and MSBSP 
definitions. Based on feedback from industry participants about the 
security-based swap market, the Commission continues to believe that: 
(1) The types of entities that are and will continue to register with 
the Commission as SBSDs (i.e., because they engage in more than a de 
minimis amount of dealing activity involving security-based swaps)--
which generally would be large financial institutions--would not be 
``small entities'' for purposes of the RFA; and (2) the types of 
entities that may have security-based swap positions above the level 
required to register as MSBSPs would not be

[[Page 6703]]

``small entities'' for purposes of the RFA.
    Although proposed Rule 15Fh-4(c) would apply only to SBS Entities, 
re-proposed Rule 9j-1 and proposed Rule 10B-1 (including proposed 
Schedule 10B) are not on their face limited to SBS Entities. However, 
while it is possible that other parties may engage in security-based 
swap transactions, the Commission does not believe that any such 
entities would be ``small entities'' as defined in Exchange Act Rule 0-
10.\278\ Feedback from industry participants about the security-based 
swap market indicates that only persons or entities with assets 
significantly in excess of $5 million (or with annual receipts 
significantly in excess of $7 million) participate in the security-
based swap market. With respect to re-proposed Rule 9j-1, even to the 
extent that a small number transactions did have a counterparty that 
was defined as a ``small entity'' under the Rule 0-10, the Commission 
believes it unlikely that the re-proposed rule would have a significant 
economic impact on such entities, as the rule prohibits fraudulent and 
manipulative acts, activities which are in most cases already 
prohibited. Finally, the Commission believes that the proposed 
reporting thresholds in proposed Rule 10B-1 are set sufficiently high 
as to further mitigate against the possibility of proposed Rule 10B-1 
(including Schedule 10B) applying to persons who would be considered 
``small entities'' under Rule 0-10.
---------------------------------------------------------------------------

    \278\ See 17 CFR 240.0-10(a).
---------------------------------------------------------------------------

    For the foregoing reasons, the Commission certifies that proposed 
Rules 9j-1, 10B-1 (including Schedule 10B), and 15Fh-4(c), if adopted, 
would not have a significant economic impact on a substantial number of 
small entities for purposes of the RFA. The Commission invites 
commenters to address whether the proposed rules would have a 
significant economic impact on a substantial number of small entities, 
and, if so, what would be the nature of any impact on small entities. 
The Commission requests that commenters provide empirical data to 
illustrate the extent of the impact.

IX. Statutory Authority

    The Commission is proposing the new rules and rule amendment 
contained in this release under the authority set forth in the Exchange 
Act, 15 U.S.C. 78a et seq., as amended, and, particularly Sections 2, 
3(b), 9(i), 9(j), 10, 10B, 15, 15F, and 23(a) thereof (15 U.S.C. 78b, 
78c(b), 78i(i), 78i(j), 78j, 78j-2, 78o, 78o-10, and 78w(a)).

List of Subjects in 17 CFR Part 240

    Administrative practice and procedure, Brokers, Confidential 
business information, Fraud, Reporting and recordkeeping requirements, 
Securities, Swaps.

Text of the Proposed Rule

    For the reasons set forth in the preamble, title 17, chapter II of 
the Code of Federal Regulations is proposed to be amended as follows:

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

0
1. The general authority citation for part 240 is revised to read as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c3, 78c-5, 78d, 78e, 78f, 
78g, 78i, 78j, 78j-1, 78j-2, 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. Add Sec.  240.9j-1 to read as follows:


Sec.  240.9j-1  Prohibition against fraud, manipulation, or deception 
in connection with security-based swaps.

    (a) It shall be unlawful for any person, directly or indirectly, to 
purchase or sell, or attempt to induce the purchase or sale of, any 
security-based swap; to effect any transaction in, or attempt to effect 
any transaction in, any security-based swap; to take any action to 
exercise any right, or any action related to performance of any 
obligation, under any security-based swap, including in connection with 
any payments, deliveries, rights, or obligations or alterations of any 
rights thereunder; or to terminate (other than on its scheduled 
maturity date) or settle any security-based swap, in connection with 
which such person:
    (1) Employs or attempts to employ any device, scheme, or artifice 
to defraud or manipulate; or
    (2) Makes or attempts to make any untrue statement of a material 
fact, or omits to state a material fact necessary in order to make the 
statements made, in the light of the circumstances under which they 
were made, not misleading; or
    (3) Obtains or attempts to obtain money or property by means of any 
untrue statement of a material fact or any omission to state a material 
fact necessary in order to make the statements made, in light of the 
circumstances under which they were made, not misleading; or
    (4) Engages or attempts to engage in any act, practice, or course 
of business which operates or would operate as a fraud or deceit upon 
any person;
    (b) It shall be unlawful for any person to, directly or indirectly, 
manipulate or attempt to manipulate the price or valuation of any 
security-based swap, or any payment or delivery related thereto.
    (c) Wherever communicating, or purchasing or selling a security 
(other than a security-based swap) while in possession of, material 
nonpublic information would violate, or result in liability to any 
purchaser or seller of the security under either the Act or the 
Securities Act of 1933, or any rule or regulation thereunder, such 
conduct in connection with a purchase or sale of a security-based swap 
with respect to such security or with respect to a group or index of 
securities including such security shall also violate, and result in 
comparable liability to any purchaser or seller of that security under, 
such provision, rule, or regulation.
    (d) Whenever taking any of the actions set forth in paragraphs (a) 
or (b) of this section involving a security-based swap would violate, 
or result in liability under Section 9(j) of the Act or this section, 
such conduct, when taken by a counterparty to such security-based swap 
(or any affiliate of, or a person acting in concert with, such 
security-based swap counterparty in furtherance of such prohibited 
activity), in connection with a purchase or sale of a security or group 
or index of securities on which such security-based swap is based, 
shall also violate, and shall be deemed a violation of, Section 9(j) of 
the Act or paragraphs (a) or (b) of this section.
    (e) For purposes of this section, the terms ``purchase'' and 
``sale'' shall have the same meanings as set forth in Sections 3(a)(13) 
(15 U.S.C. 78c(a)(13)) and 3(a)(14) (15 U.S.C. 78c(a)(14)) of the Act.
    (f) A person shall not be liable under paragraph (a) of this 
section solely for reason of being aware of material non-public 
information while taking the following actions:
    (1) Actions taken by a person in accordance with binding 
contractual rights and obligations under a security-based swap (as 
reflected in the written security-based swap documentation governing 
such transaction or any amendment thereto) so long as:
    (i) The security-based swap was entered into, or the amendment was 
made, before the person came into

[[Page 6704]]

possession of such material non-public information; and
    (ii) The entry into, and the terms of, the security-based swap are 
themselves not a violation of any provision of this section.
    (2) Security-based swap transactions effected by a person pursuant 
to a bilateral portfolio compression exercise (as defined in Sec.  
240.15Fi-1(a)) or a multilateral portfolio compression exercise (as 
defined in Sec.  240.15Fi-1(j)) so long as:
    (i) Any such transactions are consistent with all of the terms of a 
bilateral portfolio compression exercise or multilateral portfolio 
compression exercise, including as it relates to, without limitation, 
the transactions to be included in the exercise, the risk tolerances of 
the persons participating in the exercise, and the methodology used in 
the exercise; and
    (ii) All such terms were agreed to by all participants of the 
bilateral portfolio compression exercise or multilateral portfolio 
compression exercise prior to the commencement of the applicable 
exercise.
0
3. Add an undesignated center heading and Sec.  240.10B-1 to read as 
follows:

Requirements and Reports Under Section 10B


Sec.  240.10B-1  Reporting of Security-based Swap Positions.

    (a) Reporting obligation.
    (1) Any person (and any entity controlling, controlled by or under 
common control with such person), or group of persons, who through any 
contract, arrangement, understanding or relationship, after acquiring 
or selling directly or indirectly, any security-based swap, is directly 
or indirectly the owner or seller of a security-based swap position 
that exceeds the reporting threshold amount, shall file with the 
Commission a statement containing the information required by Sec.  
240.10B-101 (Schedule 10B) on the Commission's Electronic Data 
Gathering, Analysis and Retrieval System (EDGAR).
    (2) Any Schedule 10B required by this section shall be filed 
promptly, but in no event later than the end of the first business day 
following the day of execution of the security-based swap transaction 
that results in the security-based swap position first exceeding the 
reporting threshold amount.
    (3) A group's filing obligation pursuant to paragraph (a)(1) of 
this section may be satisfied either by a single joint filing or by 
each of the group's members making an individual filing. If the group's 
members elect to make their own filings, each such filing should 
identify all members of the group but the information provided 
concerning the other persons making the filing need only reflect 
information which the filing person knows or has reason to know.
    (4) Any person who, directly or indirectly, creates or uses a 
trust, proxy, power of attorney, pooling arrangement or any other 
contract, arrangement, or device as part of a plan or scheme to evade 
the reporting requirements of paragraph (a)(1) of this section with 
respect to a security-based swap position shall be deemed for purposes 
of this section to be the owner of such security-based swap position.
    (b) Definitions. For purposes of this section:
    (1) The term reporting threshold amount shall mean:
    (i) With respect to credit default swaps (including credit default 
swaps where the underlying reference is a group or index of entities or 
obligations of entities that is a narrow-based security index), the 
lesser of:
    (A) A long notional amount of $150 million, calculated by 
subtracting the notional amount of any long positions in a deliverable 
debt security underlying a security-based swap included in the 
security-based swap position from the long notional amount of the 
security-based swap position;
    (B) A short notional amount of $150 million; or
    (C) A gross notional amount of $300 million.
    (ii) With respect to security-based swap positions based on debt 
securities that are not credit default swaps, a gross notional amount 
of $300 million.
    (iii) With respect to security-based swap positions based on equity 
securities, the lesser of:
    (A) A gross notional amount of $300 million; provided, however, 
that if the gross notional amount of the security-based swap position 
exceeds $150 million, the calculation of the security-based swap 
position shall also include the value of all of the underlying equity 
securities owned by the holder of the security-based swap position 
(based on the most recent closing price of shares), as well as the 
delta-adjusted notional amount of any options, security futures, or any 
other derivative instruments based on the same class of equity 
securities; or
    (B) A security-based swap equivalent position that represents more 
than 5% of a class of equity securities; provided, however, that if the 
security-based swap equivalent position represents more than 2.5% of a 
class of equity securities, the calculation of the security-based swap 
equivalent position shall also include in the numerator all of the 
underlying equity securities owned by the holder of the security-based 
swap position, as well as the number of shares attributable to any 
options, security futures, or any other derivative instruments based on 
the same class of equity securities.
    (2) The term security-based swap equivalent position shall mean the 
number of shares attributable to all of the security-based swaps 
comprising a security-based swap position, as determined in accordance 
with paragraph (b)(4) of this section.
    (3) The term security-based swap position shall mean all security-
based swaps based on:
    (i) A single security or loan, or a narrow-based security index, or 
any interest therein or based on the value thereof;
    (ii) Any securities issued by the same issuer (each, an ``issuing 
entity'') the securities, loans, or securities included in the narrow-
based index (including any interest therein or based on the value 
thereof) described in paragraph (b)(3)(i); or
    (iii) Any narrow-based security index that includes any of those 
issuing entities or their securities (including any interest therein or 
based on the value thereof), in each case as applicable. To the extent 
that a security-based swap position is based on a single security or 
loan that is included in a narrow-based security index, the calculation 
of the security-based swap position with respect to a particular 
component of the index would be based on the weighting of the reference 
entity or securities as a component of the index. With respect to 
security-based swaps based on equity securities, a security-based swap 
position shall include all security-based swaps based on a single class 
of equity securities.
    (4) When used in paragraphs (b)(1)(iii)(B) and (b)(2) of this 
section, the ``number of shares attributable'' to a derivative 
instrument (including a security-based swap) shall mean the larger of 
(in each case as applicable):
    (i) The number of shares of the reference equity security that may 
be delivered upon on the exercise of the rights under the derivative 
instrument, as determined in accordance with the terms of the 
applicable documentation;
    (ii) The number of shares of the reference equity security 
determined by multiplying the number of shares by reference to which 
the amount payable under the derivative instrument is determined by the 
delta of the applicable derivative instrument; and

[[Page 6705]]

    (iii) The number of shares of the reference equity determined by:
    (A) Dividing the notional amount of such derivative instrument by 
the most recent closing price of shares of the reference equity 
security; and then
    (B) Multiplying such quotient by the delta of the applicable 
derivative instrument.
    (5) For purposes of paragraph (b)(1)(i) of this section, a ``debt 
security underlying a security-based swap included in the security-
based swap position'' means any security that could potentially be 
deliverable into a credit default swap auction in the event of a 
default.
    (6) For purposes of paragraphs (b)(1)(iii)(A) and (b)(4) of this 
section, the term ``delta'' shall mean the ratio that that is obtained 
by comparing (x) the change in the value of a derivative instrument to 
(y) the change in the value of the reference equity security. If a 
derivative instrument does not have a fixed delta, then the delta 
should be calculated on a daily basis, based on the most recent closing 
price of shares of the reference equity security.
    (7) For purposes of paragraph (b)(1)(iii)(A) and (B) of this 
section, a person that is a member of a national securities exchange 
shall not be deemed to be the owner of any equity securities that they 
hold directly or indirectly on behalf of another person solely because 
such person is the record holder of such securities and, pursuant to 
the rules of such exchange, may direct the vote of such securities, 
without instruction, on other than contested matters or matters that 
may affect substantially the rights or privileges of the holders of the 
securities to be voted, but is otherwise precluded by the rules of such 
exchange from voting without instruction.
    (c) Amendments. If any material change occurs in the facts set 
forth in a previously filed Schedule 10B including, but not limited to, 
any material increase in the security-based swap positions or if a 
security-based swap position falls back below the applicable reporting 
threshold amount, the person or persons who were required to file the 
statement shall file or cause to be filed with the Commission an 
amendment disclosing that change. All such amendments shall be filed on 
EDGAR promptly, but in no event later than the end of the first 
business day following the material change. For purposes of this 
paragraph (c), a change equal to 10% or more of a position previously 
disclosed in Schedule 10B shall be deemed ``material'' for purposes of 
this section.
    (d) Applicability. The requirements of this section shall apply to 
all security-based swap positions so long as:
    (1) Any of the transactions that comprise the security-based swap 
position would be required to be reported pursuant to Sec.  242.908(a) 
of this chapter (Rule 908 of Regulation SBSR); or
    (2) The reporting person holds any amount of reference securities 
underlying the security-based swap position (or would be deemed to be 
the beneficial owner of such reference securities, pursuant to Section 
13(d) of the Act (15 U.S.C. 78m) and the rules and regulations 
thereunder), and:
    (i) The issuer of such reference security is a partnership, 
corporation, trust, investment vehicle, or other legal person 
organized, incorporated, or established under the laws of the U.S. or 
having its principal place of business in the U.S.; or
    (ii) Such reference security is part a class of securities 
registered under Section 12 or 15(d) of the Exchange Act.
    (e) If some or all of the information required to be disclosed on 
Schedule 10B is publicly available on EDGAR at the time the Schedule 
10B is required to be filed, such information may be incorporated by 
reference in answer, or partial answer, to any item of Schedule 10B.
0
4. Add Sec.  240.10B-101 to read as follows:


Sec.  240.10B-101  Schedule 10B--Information to be included in 
statements filed pursuant to Sec.  240.10B-1(a) and amendments thereto 
filed pursuant to Sec.  240.10B-1(c).

    Securities and Exchange Commission, Washington, DC 20549 
Schedule 10B Under the Securities Exchange Act of 1934 (Amendment 
No. _) * (Name, Address, Email Address and Telephone Number of 
Person Authorized To Receive Notices and Communications) (Date of 
Event Which Requires Filing of This Statement or Any Amendment 
Thereto As Required by Rule 10B-1(c))
    (1) State the name of the reporting person (or names of 
reporting persons if making a joint filing as a group). State if the 
reporting person is a member of a group. If the reporting person is 
a member of a group and the members of the group are satisfying the 
group's Rule 10B-1(a)(1) (Sec.  240.10B-1(a)(1)) filing obligation 
by making individual filings, identify all members of the group.
    (2) State the residency or place of organization of the 
reporting person(s).
    (3) State the type of reporting person(s) (see instructions).
    (4) For reporting persons that are legal entities, state the 
Legal Entity Identifier (LEI) of the reporting person(s), if such 
person(s) has an LEI.
    (5) State the notional amount of the applicable security-based 
swap position(s), as defined in Rule 10B-1(b)(3) (Sec.  240.10B-
1(b)(3)), of the reporting person(s), along with summary information 
about the composition of the position as it relates to the direction 
(i.e., long or short) and the tenor/expiration of the underlying 
security-based swap transactions and the product ID (17 CFR 
242.900(bb)) of the security-based swap(s) included in the security-
based swap position, if applicable.
    (6) In the case of a security-based swap position based on debt 
securities (including credit default swaps), state the ownership of: 
(i) All debt securities underlying a security-based swap included in 
the security-based swap position, including the Financial Instrument 
Global Identifier (FIGI) of each underlying debt security, if 
applicable, and the LEI of the issuer of each underlying debt 
security, if the issuer has an LEI; and (ii) all security-based 
swaps based on equity securities issued by the same reference 
entity, including the FIGI of each underlying equity security, if 
applicable. In addition to the FIGI, other unique security 
identifier(s) may be included at the filer's option.
    (7) In the case of a security-based swap position based on 
equity securities, state the ownership of: (i) All equity securities 
underlying a security-based swap included in the security-based swap 
position, including the FIGI of each underlying equity security, if 
applicable, and the LEI of the issuer of each underlying equity 
security, if the issuer has an LEI; and (ii) all security-based 
swaps based on debt securities issued by the same reference entity 
(including credit default swaps), including the FIGI of each 
underlying debt security, if applicable. In addition to the FIGI, 
other unique security identifier(s) may be included at the filer's 
option.
    (8) State the ownership of any other instrument relating to the 
security-based swap position and/or any underlying security or loan 
or group or index of securities or loans, or any security or group 
or index of securities, the price, yield, value, or volatility of 
which, or of which any interest therein, is the basis for a material 
term of a security-based swap included in the security-based swap 
position, if not otherwise disclosed pursuant to Items 6 or 7 of 
this statement. For any underlying security disclosed pursuant to 
this Item, disclose the FIGI of the security, if applicable, and the 
LEI of the issuer of the security, if the issuer has an LEI. In 
addition to the FIGI, other unique security identifier(s) may be 
included at the filer's option.
    (9) To the extent that the reporting threshold amount, as 
defined in Rule 10B-1(b)(1) (Sec.  240.10B-1(b)(1)), is based on the 
number of shares corresponding to a security-based swap position 
based on equity securities, state the number of shares attributable 
to the security-based swap position, along with the closing price 
used in the calculation and the date of such closing price.
Instructions to Schedule 10B
    (1) Type of Reporting Person--Please classify each ``reporting 
person'' according to the following breakdown and place the appropriate 
symbol (or symbols, i.e., if more than one is

[[Page 6706]]

applicable, insert all applicable symbols) on the form:
[GRAPHIC] [TIFF OMITTED] TP04FE22.010

    (2) Incorporation by Reference--Rule 10B-1(e) (Sec.  240.10B-1(e)) 
provides that if some or all of the information required to be 
disclosed on Schedule 10B is publicly available on EDGAR at the time 
the Schedule 10B is required to be filed, such information may be 
incorporated by reference in answer, or partial answer, to any item of 
Schedule 10B. Include an express statement clearly describing the 
specific location of the information you are incorporating by 
reference. You must include an active hyperlink to information 
incorporated into Schedule 10B to the applicable link to EDGAR). The 
information must not be incorporated by reference in any case where 
such incorporation would render the disclosure incomplete, unclear, or 
confusing. For example, disclosure must not be incorporated by 
reference from a second document if that second document incorporates 
information pertinent to such disclosure by reference to a third 
document.
    Signature. After reasonable inquiry and to the best of my knowledge 
and belief, I certify that the information set forth in this statement 
is true, complete and correct.
    Date
    Signature
    Name/Title
    The original statement shall be signed by each person on whose 
behalf the statement is filed or their authorized representative. If 
the statement is signed on behalf of a person by their authorized 
representative (other than an executive officer or general partner of 
the reporting person), evidence of the representative's authority to 
sign on behalf of such person shall be filed with the statement, 
provided however, that a power of attorney for this purpose which is 
already on file with the Commission may be incorporated by reference.
    Attention--Intentional misstatements or omissions of fact 
constitute Federal criminal violations (See 18 U.S.C. 1001).
0
5. Amend Sec.  240.15Fh-4 by adding paragraph (c) to read as follows:


Sec.  240.15Fh-4  Antifraud provisions for security-based swap dealers 
and major security-based swap participants; special requirements for 
security-based swap dealers acting as advisors to special entities.

* * * * *
    (c) No undue influence over chief compliance officer. It shall be 
unlawful for any officer, director, supervised person, or employee of a 
security-based swap dealer or major security-based swap participant, or 
any person acting under such person's direction, to directly or 
indirectly take any action to coerce, manipulate, mislead, or 
fraudulently influence the security-based swap dealer's or major 
security-based swap participant's chief compliance officer in the 
performance of their duties under the Federal securities laws or the 
rules and regulations thereunder.

    By the Commission.

    Dated: December 15, 2021.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2021-27531 Filed 2-3-22; 8:45 am]
BILLING CODE 8011-01-P


