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Daily Rules, Proposed Rules, and Notices of the Federal Government

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 242

[Release No. 34-63346; File No. S7-34-10]

RIN 3235-AK80

Regulation SBSR--Reporting and Dissemination of Security-Based Swap Information

AGENCY: Securities and Exchange Commission.
ACTION: Proposed rules.
SUMMARY: In accordance with Section 763 ("Section 763") and Section 766 ("Section 766") of Title VII ("Title VII") of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), the Securities and Exchange Commission ("SEC" or "Commission") is proposing Regulation SBSR--Reporting and Dissemination of Security-Based Swap Information ("Regulation SBSR") under the Securities Exchange Act of 1934 ("Exchange Act").1 Proposed Regulation SBSR would provide for the reporting of security-based swap information to registered security-based swap data repositories or the Commission and the public dissemination of security-based swap transaction, volume, and pricing information. Registered security-based swap data repositories would be required to establish and maintain certain policies and procedures regarding how transaction data are reported and disseminated, and participants of registered security-based swap data repositories that are security-based swap dealers or major security-based swap participants would be required to establish and maintain policies and procedures that are reasonably designed to ensure that they comply with applicable reporting obligations. Finally, proposed Regulation SBSR also would require a registered SDR to register with the Commission as a securities information processor on existing Form SIP.

115 U.S.C. 78aet seq.All references in this release to the Exchange Act refer to the Securities Exchange Act of 1934, as amended by the Dodd-Frank Act.

DATES: Comments should be received on or before January 18, 2011.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments

* Use the Commission's Internet comment form (http://www.sec.gov/rules/final.shtml); or

* Send an e-mail torule-comments@sec.gov.Please include File Number S7- on the subject line; or

* Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

* Send paper comments in triplicate to Elizabeth Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number S7-34-10. This file number should be included on the subject line if e-mail 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 Web site (http://www.sec.gov/rules/proposed.shtml). Comments are also available for Web site viewing and printing in the Commission's Public Reference Room, 100 F Street, NE., Washington, DC 20549 on official business days between the hours of 10 a.m. and 3 p.m. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly.
FOR FURTHER INFORMATION CONTACT: Michael Gaw, Assistant Director, at (202) 551-5602, David Michehl, Senior Special Counsel, at (202) 551-5627, Sarah Albertson, Special Counsel, at (202) 551-5647, Natasha Cowen, Special Counsel, at (202) 551-5652, Yvonne Fraticelli, Special Counsel, at (202) 551-5654, Geoffrey Pemble, Special Counsel, at (202) 551-5628, Brian Trackman, Special Counsel, at (202) 551-5616, Mia Zur, Special Counsel, at (202) 551-5638, Kathleen Gray, Attorney, at (202) 551-5305, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-7010.
SUPPLEMENTARY INFORMATION:

The Commission is proposing Regulation SBSR under the Exchange Act providing for the reporting of security-based swap information to registered security-based swap data repositories or the Commission, and the public dissemination of security-based swap transaction, volume, and pricing information. The Commission is soliciting comments on all aspects of the proposed rules and will carefully consider any comments received.

I. Introduction A. Background

On July 21, 2010, the President signed the Dodd-Frank Act into law.2 The Dodd-Frank Act was enacted to, among other things, promote the financial stability of the United States by improving accountability and transparency in the financial system.3 Title VII of the Dodd-Frank Act provides the Commission and the Commodity Futures Trading Commission (“CFTC”) with the authority to regulate over-the-counter (“OTC”) derivatives in light of the recent financial crisis, which demonstrated the need for enhanced regulation in the OTC derivatives markets. The Dodd-Frank Act is intended to close loopholes in the existing regulatory structure and to provide the Commission and the CFTC with effective regulatory tools to oversee the OTC derivatives markets, which have grown exponentially in recent years and are capable of affecting significant sectors of the U.S. economy. The primary goals of Title VII, among others, are to increase the transparency and efficiency of the OTC derivatives markets and to reduce the potential for counterparty and systemic risk.4

2The Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. No. 111-203, H.R. 4173).

3 See id.at Preamble.

4 See“Financial Regulatory Reform—A New Foundation: Rebuilding Financial Supervision and Regulation,” U.S. Department of the Treasury, pp. 47-48 (June 17, 2009).

The Dodd-Frank Act provides that the CFTC will regulate “swaps,” the Commission will regulate “security-based swaps” (“SBSs”), and the CFTC and the Commission will jointly regulate “mixed swaps.”5 The Dodd-Frank Act amends the Exchange Act to require the Commission to adopt rules providing for, among other things (1) the reporting of SBSs to a registered security-based swap data repository (“SDR”)6 or to the Commission; and (2) real-time public dissemination of SBS transaction, volume, and pricing information.7 To fulfill these requirements, the Commission today is proposing Regulation SBSR, which would be comprised of Rules 900 to 911 under the Exchange Act. In preparation for the rulemakings required by the Dodd-Frank Act, the Commission and the CFTC held a joint public roundtable (the “Market Data Roundtable”) on September 14, 2010, to gain further insight into many of the issues addressed in this proposal.8 In addition, the Commission has offered the opportunity for the public to express its views on the Commission rulemakings required by the Dodd-Frank prior to proposing rules.9 The rules proposed today generally take into account the views expressed at the Market Data Roundtable, as well as any comments received.

5Section 712(d) of the Dodd-Frank Act provides that the Commission and the CFTC, in consultation with the Board of Governors of the Federal Reserve System (“Federal Reserve”), shall jointly further define the terms “swap,” “security-based swap,” “swap dealer,” “security-based swap dealer,” “major swap participant,” “major security-based swap participant,” “eligible contract participant,” and “security-based swap agreement.” These terms are defined in Sections 721 and 761 of the Dodd-Frank Act and, with respect to the term “eligible contract participant,” in Section 1a(18) of the Commodity Exchange Act (“CEA”), 7 U.S.C. 1a(18), as re-designated and amended by Section 721 of the Dodd-Frank Act. Further, Section 721(c) of the Dodd-Frank Act requires the CFTC to adopt a rule to further define the terms “swap,” “swap dealer,” “major swap participant,” and “eligible contract participant,” and Section 761(b) of the Dodd-Frank Act requires the Commission to adopt a rule to further define the terms “security-based swap,” “security-based swap dealer,” “major security-based swap participant,” and “eligible contract participant,” with regard to SBSs, for the purpose of including transactions and entities that have been structured to evade Title VII of the Dodd-Frank Act. Finally, Section 712(a) of the Dodd-Frank Act provides that the Commission and CFTC, after consultation with the Federal Reserve, shalljointly prescribe regulations regarding “mixed swaps,” as may be necessary to carry out the purposes of Title VII. To assist the Commission and CFTC in further defining the terms specified above, and to prescribe regulations regarding “mixed swaps” as may be necessary to carry out the purposes of Title VII, the Commission and the CFTC sought comment from interested parties.SeeSecurities Exchange Act Release No. 62717 (August 13, 2010), 75 FR 51429 (August 20, 2010) (File No. S7-16-10) (advance joint notice of proposed rulemaking regarding definitions contained in Title VII of the Dodd-Frank Act) (“Definitions Release”).

6A SDR is “any person that collects and maintains information or records with respect to transactions or positions in, or the terms and conditions of, security-based swaps entered into by third parties for the purpose of providing a centralized recordkeeping facility for security based swaps.”SeeSection 3(a)(75) of the Exchange Act, 15 U.S.C. 78c(a)(75). The Commission is also proposing today new Rules 13n-1 through 13n-11 under the Exchange Act relating to the SDR registration process, the duties of SDRs, and the core principles for operating a registered SDR.SeeSecurities Exchange Act Release No. 63347 (November 19, 2010) (“SDR Registration Proposing Release”).

7Rules governing the reporting and dissemination of swaps are the subject of a separate rulemaking by the CFTC.

8The Commission and the CFTC solicited comments on the Market Data Roundtable.SeeSecurities Exchange Act Release No. 62863 (September 8, 2010), 75 FR 55575 (September 13, 2010). Comments received by the Commission are available athttp://www.sec.gov/cgi-bin/ruling-comments?ruling=df-title-vii-real-time-reporting&rule_path=/comments/df-title-vii/real-time-reporting&file_num=DF%20Title%20VII%20-%20Real%20Time%20Reporting&action=Show_Form&title=Real-Time%20Reporting%20-%20Title%20VII%20Provisions%20of%20the%20Dodd-Frank%20Wall%20Street%20Reform%20and%20Consumer%20Protection%20Act.

9 See http://www.sec.gov/spotlight/regreformcomments.shtml.

In a separate release, the Commission is today proposing new rules under the Exchange Act governing the security-based swap data repository registration process, duties, and core principles.10 Proposed Rules 13n-1 through 13n-11 under the Exchange Act would, among other things, require SDRs to comply with the requirements and core principles described in Section 13(n) of the Exchange Act. An SDR also would be required to appoint a chief compliance officer and specify the duties of the chief compliance officer.

10 SeeSDR Registration Proposing Release,supranote 6.

Taken together, the rules that the Commission proposes today would establish comprehensive regulation of SBS data and thus provide transparency for SBSs to regulators and the markets. The proposed rules would require SBS transaction information to be (1) provided to registered SDRs in accordance with uniform data standards; (2) verified and maintained by registered SDRs, which would serve as secure, centralized recordkeeping facilities that are accessible by regulators and relevant authorities; and (3) publicly disseminated in a timely fashion by registered SDRs. In combination, these proposed rules are designed to promote transparency and efficiency in the SBS markets and create an infrastructure to assist the Commission and other regulators in performing their market oversight functions.

In proposing these rules, the Commission is mindful that there may be differences between the SBS market and the other securities markets that the Commission regulates. For example, though the marketplace has developed standardized terms for various types of SBSs, contracts are nevertheless customizable. Furthermore, unlike bonds or equity securities, SBSs are not today readily fungible. The liquidity characteristics of SBSs also may differ in comparison with other markets. Relative to the overall equity markets, SBSs trade much less frequently, though the trading frequency of some illiquid equities would be comparable to that of some SBSs. The liquidity of SBSs compared to the bond market depends on the specifics of the SBS and the bond (e.g.,Treasury, corporate, municipal). Many bonds do not have standardized SBS analogs and would therefore be more liquid than bespoke customizable SBS contracts that would function as the analog. But some market participants have found the SBSs written on some issuers and securities to be more liquid and readily tradable during certain periods of time than the underlying securities themselves.

Another notable distinction is that the SBS market does not generally have the equivalent of a “retail” segment characterized by a high-volume of small-sized trades. Though some swaps on some interest rates, indices, and currencies may support high volumes, many SBSs trade infrequently. For example, an analysis by the staff of trading in single-name credit default swaps (“CDS”) show that approximately 90% of single-name CDS on corporate issuers trade at an average of five times or less per day, with an average trade size of over $5 million.11 This same analysis shows that 89% of single-name CDS on sovereign issuers trade at an average of ten times or less per day, with an average trade size of over $12 million.

11This analysis is based on a sample of dollar-quoted, gold record transactions submitted to the Depository Trust & Clearing Corporation (“DTCC”) between August 1, 2009, and July 30, 2010.

The Commission also is mindful that, both over time and as a result of Commission proposals to implement the Dodd-Frank Act, the further development of the SBS market may alter some of the specific calculus for future regulation of reporting and real-time public dissemination of SBS transaction information. During the process of implementing the Dodd-Frank Act and beyond, the Commission will therefore closely monitor developments in the SBS market.

B. Overview of Security-Based Swap Reporting and Dissemination Requirements in the Dodd-Frank Act 1. Security-Based Swap Reporting Requirements

The Dodd-Frank Act adds several provisions to the Exchange Act that require the reporting of information relating to SBSs. Section 3C(e) of the Exchange Act12 requires the Commission to adopt rules that provide for the reporting of SBS data as follows: (1) SBSs entered into before the date of enactment of Section 3C shall be reported to a registered SDR or the Commission no later than 180 days after the effective date of Section 3C (i.e.,540 days after the enactment of the Dodd-Frank Act); and (2) SBSs entered into on or after the date of enactment of Section 3C shall be reported to a registered SDR or to the Commission no later than the later of (1) 90 days after the effective date of Section 3C (i.e.,450 days after the enactment of the Dodd-Frank Act),or (2) such other time after entering into the SBS as the Commission may prescribe by rule or regulation.

1215 U.S.C. 78c-3(e).

In addition, Section 13A(a)(1) of the Exchange Act13 requires that each SBS that is not accepted for clearing by any clearing agency or derivatives clearing organization be reported to (1) an SDR, or (2) in the case in which there is no SDR that would accept such SBS, to the Commission, within such time period as the Commission may by rule or regulation prescribe. Section 13(m)(1)(G) of the Exchange Act14 provides, further, that each SBS (whether cleared or uncleared) shall be reported to a registered SDR. Section 13(m)(1)(F) of the Exchange Act15 states that the parties to a SBS, including agents of the parties to a SBS, shall be responsible for reporting SBS transaction information to the appropriate registered entity in a timely manner as may be prescribed by the Commission.16

1315 U.S.C. 78m-1(a)(1).

1415 U.S.C. 78m(1)(G).

1515 U.S.C. 78m(m)(1)(F).

16In addition, Section 13A(a)(2) of the Exchange Act requires the Commission to adopt an interim final rule providing for the reporting of SBSs entered into before the date of enactment of the Dodd-Frank Act the terms of which had not expired as of that date. To satisfy this requirement, the Commission adopted Rule 13Aa-2T under the Exchange Act, an interim final temporary rule for the reporting of such SBSs.SeeSecurities Exchange Act Release No. 63094 (“Interim Rule Release”).

Section 13(n)(4)(A)(i) of the Exchange Act17 requires the Commission to prescribe standards that specify the data elements for each SBS that must be collected and maintained by each registered SDR. Further, Section 13(n)(4)(A)(ii) of the Exchange Act18 requires the Commission, in carrying out Section 13(n)(4)(A)(i) of the Exchange Act, to prescribe consistent data element standards applicable to registered entities and reporting counterparties. Under Section 13(n)(5) of the Exchange Act, a registered SDR must, among other things, maintain the SBS data it collects in the form and manner prescribed by the Commission, provide the Commission or its designee with direct electronic access, and make SBS data available on a confidential basis, upon request, to certain regulatory authorities.19

1715 U.S.C. 78(n)(4)(A)(i).

1815 U.S.C. 78(n)(4)(A)(ii).

19These responsibilities of registered SDRs under Section 13(n)(5) of the Exchange Act, 15 U.S.C. 78m(n)(5), will be the subject of a separate Commission rulemaking.SeeSDR Registration Proposing Release,supranote 6.

2. Security-Based Swap Dissemination Requirements

Section 13(m)(1)(B) of the Exchange Act20 authorizes the Commission to make SBS transaction and pricing data available to the public in such form and at such times as the Commission determines appropriate to enhance price discovery, subject to the general requirement in Section 13(m)(1)(C) of the Exchange Act21 that all SBS transactions be subject to real-time public reporting. Section 13(m)(1)(C) authorizes the Commission to provide by rule for the public availability of SBS transaction, volume, and pricing data as follows:

2015 U.S.C. 78m(m)(1)(B).

2115 U.S.C. 78m(m)(1)(C).

(1) With respect to those SBSs that are subject to the mandatory clearing requirement described in Section 3C(a)(1) of the Exchange Act (including those SBSs that are excepted from the requirement pursuant to Section 3C(g) of the Exchange Act), the Commission shall require real-time public reporting for such transactions;22

22Section 3C(a)(1) of the Exchange Act provides that it shall be unlawful for any person to engage in a SBS unless that person submits such SBS for clearing to a clearing agency that is registered under the Exchange Act or a clearing agency that is exempt from registration under the Exchange Act if the SBS is required to be cleared. Section 3C(g)(1) of the Exchange Act provides that requirements of Section 3C(a)(1) will not apply to a SBS if one of the counterparties to the SBS (1) is not a financial entity; (2) is using SBSs to hedge or mitigate commercial risk; and (3) notifies the Commission, in a manner set forth by the Commission, how it generally meets its financial obligations associated with entering into non-cleared SBSs.

(2) With respect to those SBSs that are not subject to the mandatory clearing requirement described in Section 3C(a)(1) of the Exchange Act, but are cleared at a registered clearing agency, the Commission shall require real-time public reporting for such transactions;

(3) With respect to SBSs that are not cleared at a registered clearing agency and which are reported to a SDR or the Commission under Section 3C(a)(6),23 the Commission shall require real-time public reporting for such transactions, in a manner that does not disclose the business transactions and market positions of any person; and

23The reference in Section 13(m)(1)(C)(iii) of the Exchange Act to Section 3C(a)(6) of the Exchange Act is incorrect. Section 3C of the Exchange Act does not contain a paragraph (a)(6).

(4) With respect to SBSs that are determined to be required to be cleared under Section 3C(b) of the Exchange Act but are not cleared, the Commission shall require real-time public reporting for such transactions.24

24Section 3C(b)(1) of the Exchange Act requires the Commission to review on an ongoing basis each SBS, or any group, category, type, or class of SBS to make a determination that such SBS, or group, category, type, or class of SBS should be required to be cleared.

Section 13(m)(1)(A) of the Exchange Act25 states that the term “real-time public reporting” means to report data relating to a SBS transaction, including price and volume, as soon as technologically practicable after the time at which the SBS transaction has been executed.

2515 U.S.C. 78m(m)(1)(A).

With respect to SBSs that are subject to Sections 13(m)(1)(C)(i) and (ii) of the Exchange—i.e.,SBSs that are subject to the mandatory clearing requirement in Section 3C(a)(1) (including those SBSs that are not cleared pursuant to the exception in Section 3C(g)(1)) and SBSs that are not subject to the mandatory clearing requirement in Section 3C(a)(1) but are cleared—Section 13(m)(1)(E) of the Exchange Act26 requires that the Commission's rule providing for the public availability of SBS transaction and pricing data contain provisions to: (1) Ensure that such information does not identify the participants; (2) specify the criteria for determining what constitutes a large notional SBS transaction (block trade) for particular markets and contracts; (3) specify the appropriate time delay for reporting large notional SBS transactions (block trades) to the public; and (4) that take into account whether public disclosure will materially reduce market liquidity.

2615 U.S.C. 78m(m)(1)(E).

Section 13(m)(1)(D) of the Exchange Act27 authorizes the Commission to require registered entities28 to publicly disseminate the SBS transaction and pricing data required to be reported under Section 13(m)(1) of the Exchange Act. In addition, Section 13(n)(5)(D)(ii) of the Exchange Act states that a registered SDR shall provide data “in such form and at such frequency as the Commission may require to comply with the public reporting requirements set forth in subsection (m).”29

2715 U.S.C. 78m(m)(1)(D).

28The Exchange Act does not define the term “registered entity” or “registered entities.” The Commission believes that the term “registered entities” in Sections 13(m)(1)(F) and 13(n)(4)(A)(ii) of the Exchange Act includes registered SDRs because SDRs are required to register with the Commission pursuant to Section 13(n) of the Exchange Act, 15 U.S.C. 78m(n).

2915 U.S.C. 78m(n)(5)(D)(ii).

II. Description of Proposed Rules A. Overview

In general, proposed Regulation SBSR would provide for the reporting of three broad categories of SBS information: (1) Information that would be required to be reported to a registered SDR in realtime and publicly disseminated;30 (2) additional information that would be required to be reported to a registered SDR or, if there is no registered SDR that would receive such information, to the Commission, within specified timeframes, but that would not be publicly disseminated; and (3) information about “life cycle events”, as defined in proposed Rule 90031 and discussed below, that would be reported as a result of a change to information previously reported for a SBS. As described in greater detail below, proposed Regulation SBSR would identify the SBS transaction information that would be required to be reported, establish reporting obligations, and specify the timeframes for reporting and disseminating information.

30 Seeproposed Rule 900 (defining “real time” to mean, with respect to the reporting of SBS information, as soon as technologically practicable, but in no event later than 15 minutes after the time of execution of the SBS, and defining “time of execution” as the point at which the counterparties to a SBS become irrevocably bound under applicable law).See also infraSection III (discussing proposed rules relating to real-time public dissemination of SBS transaction information).

31Proposed Rule 900 would provide definitions of various terms used in proposed Regulation SBSR and further provide that terms that appear in Section 3 of the Exchange Act, 15 U.S.C. 78c, would have the same meaning as in Section 3 and the rules or regulations thereunder.

In addition, proposed Regulation SBSR would require a registered SDR to publicly disseminate the SBS information that would be required to be reported in real time. Proposed Regulation SBSR also would require a registered SDR to register with the Commission as a securities information processor (“SIP”) on existing Form SIP.

B. Who Must Report

Section 13(m)(1)(F) of the Exchange Act32 provides that parties to a SBS (including agents of parties to a SBS) shall be responsible for reporting SBS transaction information to the appropriate registered entity in a timely manner as may be prescribed by the Commission. Section 13A(a)(3) of the Exchange Act33 specifies the party obligated to report SBSs that are not accepted by any clearing agency or derivative clearing organization. Proposed Rule 901(a) would specify which counterparty is the “reporting party” for a SBS, thereby implementing Sections 13(m)(1)(F) and 13A(a)(3) of the Exchange Act, as follows:

3215 U.S.C. 78m(m)(1)(F).

3315 U.S.C. 78m[A(a)(3)].

• With respect to a SBS in which only one counterparty is a security-based swap dealer (“SBS dealer”) or major security-based swap participant (“major SBS participant”),34 the SBS dealer or major SBS participant shall be the reporting party;

34 See15 U.S.C. 78c(a)(71) (defining “security-based swap dealer”); 15 U.S.C. 78c(a)(67) (defining “major security-based swap participant”).See also supranote 5.

• With respect to a SBS in which one counterparty is a SBS dealer and the other counterparty is a major SBS participant, the SBS dealer shall be the reporting party; and

• With respect to any other SBS not described in the first two cases, the counterparties to the SBS shall select a counterparty to be the reporting party.

The Exchange Act, as modified by the Dodd-Frank Act, does not explicitly specify which counterparty should be the reporting party for those SBSs that are cleared by a clearing agency or derivative clearing organization. The Commission preliminarily believes that, for the sake of uniformity and ease of applicability, the duty to report a SBS should attach to the same counterparty regardless of whether the SBS is cleared or uncleared. In addition, the Commission preliminarily believes that SBS dealers and major SBS participants generally should have the responsibility to report SBS transactions, as they are more likely than other counterparties to have appropriate systems in place to facilitate reporting.

Accordingly, with respect to a SBS where both counterparties are U.S. persons,35 proposed Rule 901(a) would assign reporting responsibilities as follows:

35 Seeproposed Rule 900 (defining “U.S. person” to mean a natural person that is a U.S. citizen or U.S. resident or a legal person that is organized under the corporate laws of any part of the United States or has its principal place of business in the United States).See also infraSection VIII (discussing application of proposed Regulation SBSR to cross-border SBS transactions).

• With respect to a SBS in which only one counterparty is a SBS dealer or major SBS participant, the SBS dealer or major SBS participant would be the reporting party;

• With respect to a SBS in which one counterparty is a SBS dealer and the other counterparty is a major SBS participant, the SBS dealer would be the reporting party; and

• With respect to any other SBS not described in the first two cases, the counterparties to the SBS would select a counterparty to be the reporting party.

Proposed Rule 901(a)(1) would provide that, where only one counterparty to a SBS is a U.S. person, the U.S. person would be the reporting party. The Commission preliminarily believes that, where only one counterparty is a U.S. person, assigning the reporting duty to the counterparty that is a U.S. person would help to assure compliance with the reporting requirements of proposed Regulation SBSR.

In addition, it is possible that a SBS executed in the United States or through any means of interstate commerce, or that is cleared through a clearing agency having its principal place of business in the United States, could be executed between two counterparties neither of which is a U.S. person. Proposed Rule 901(a)(3) would provide that, if neither party is a U.S. person but the SBS is executed in the United States or through any means of interstate commerce, or is cleared through a clearing agency having its principal place of business in the United States,36 the counterparties to the SBS would be required to select a counterparty to be the reporting party.37

36 Seeproposed Rules 908(a)(2) and (3) andinfraSection VIII.

37 See infraSection VIII (discussing the requirements for the reporting of a SBS if the SBS is executed in the United States or through any means of interstate commerce, or is cleared through a registered clearing agency having its principal place of business in the United States).

To comply with the duty to report in real time itself, a reporting party likely would need to develop and maintain an internal order management system (“OMS”) capable of capturing all relevant SBS data and sending it in real time. The Commission further believes that each reporting party likely would need to establish and maintain an appropriate compliance program and support for the operation of the OMS and reporting mechanism, which could include transaction verification and validation protocols, and necessary technical, administrative, and legal support. However, proposed Rule 901(a) would not prevent a reporting party to a SBS from entering into an agreement with a third party to report the transaction on behalf of the reporting party. For example, for a SBS executed on a security-based swap execution facility (“SB SEF”)38 or a national securities exchange, the SB SEF or national securities exchange could transmit a transaction report for the SBS to a registered SDR. By specifying the reporting party with the duty to report SBS information under proposed Regulation SBSR, the Commission does not intend to inhibit the development of commercial ventures to provide trade processing services to SBS counterparties. Nevertheless, a SBS counterparty that is a reporting party would retain the obligation to ensurethat information is provided to a registered SDR in the manner and form required by proposed Regulation SBSR, even if the reporting party has entered into an agreement with a third party to report on its behalf.39

38 See15 U.S.C. 78c(a)(77) (defining “security-based swap execution facility”). The registration and regulation of SB SEFs is the subject of a separate Commission rulemaking.

39Thus, a reporting party would be liable for a violation of proposed Rule 901 if, for example, a SB SEF acting on the reporting party's behalf reported a SBS transaction to a registered SDR late or inaccurately.

Request for Comment

The Commission requests comment on all aspects of the proposal as to who would be responsible for reporting SBSs to a registered SDR.

1. Do any entities currently have the functionality to report SBSs, as proposed, to data repositories? If so, who? Do commenters think it is likely that entities other than SBS counterparties will develop the functionality to report SBSs to registered SDRs? If so, what are these entities and how will they operate?

2. Should the Commissionrequireone or more entities other than a SBS counterparty, such as a registered SB SEF, a national securities exchange, a clearing agency, or a broker, to report SBSs? Or do commenters agree with the Commission's approach of assigning the responsibility to report to a counterparty, while allowing the counterparty to have an agent (such as a SB SEF) act on its behalf?

3. In practice, would reporting parties employ agents? Should the Commission encourage this?

4. Are the obligations assigned in proposed Rule 901(a) sufficiently clear?

5. For SBSs executed on a SB SEF or national securities exchange, would the counterparties to the SBS have the information necessary to know which counterparty would incur the reporting obligation? For example, for an anonymous SBS executed on a SB SEF and cleared by a clearing agency, would the counterparties know each other's identities? If not, what steps could they take to obtain enough information to be able to ascertain which party has the reporting obligation? Could the SB SEF provide that information to the counterparties? Alternatively, should the reporting obligation be assigned to the SB SEF or other trading venue?

6. In cases where counterparties would be required to select which counterparty would report the transaction, is additional Commission guidance likely to be necessary? Should the Commission adopt a default mechanism to allocate the reporting obligation in such cases? For example, if a SBS is between two SBS dealers, should the Commission mandate that the “seller” always have the responsibility for reporting?

7. Do commenters agree with the Commission's proposed approach for reporting for SBSs where only one counterparty is a U.S. person? If not, how should it be revised?

8. Do commenters agree with the Commission's proposed approach for reporting for SBSs where neither counterparty is a U.S. person? If not, how should it be revised?

9. To what extent would reporting parties have to obtain new or update existing OMSs and establish appropriate compliance programs to satisfy the real-time reporting obligations of proposed Rule 901(c)? Would current systems be able to handle this responsibility? Could current systems be upgraded or would they have to be replaced completely?

C. Where Information Is Reported

Proposed Rule 901(b) would require a reporting party to report the information required under proposed Regulation SBSR to a registered SDR or, if there is no registered SDR that would accept the information, to the Commission. The Commission believes that it would be very unlikely that there would be a situation where a reporting party would be required to report to the Commission rather than a registered SDR. Proposed Rule 13n-5(b)(1)(ii) under the Exchange Act would require a registered SDR that accepts reports for any SBS in a particular asset class to accept reports for all SBSs in that asset class.40 Thus, a reporting party would not be able to report a SBS transaction to the Commission unless no registered SDR accepts transaction information for any SBS in the same asset class as the transaction. In addition, there currently exist entities that accept SBS transaction data in CDS and equity swaps that would likely be required to register as a SDR.

40 SeeSDR Registration Proposing Release,supranote 6.

Request for Comment

10. Is the Commission's belief that it would be unlikely to have a situation where a reporting party must report to the Commission rather than a registered SDR reasonable?

11. Do commenters believe that there will be at least one registered SDR in each SBS asset class?

12. Are there any SBS asset classes for which there might not be a registered SDR?

III. Information To Be Reported in Real Time A. Introduction

Proposed Rule 901 divides the SBS information that would be required to be reported into three broad categories: (1) Information that would be required to be reported in real time pursuant to proposed Rule 901(c)41 and publicly disseminated pursuant to proposed Rule 902; (2) additional information that would be required to be reported (but not publicly disseminated) pursuant to proposed Rule 901(d)(1)42 within the timeframes specified in proposed Rule 901(d)(2), which would vary depending on whether the transaction was executed and confirmed electronically or manually; and (3) life cycle event information that would be required to be reported under proposed Rule 901(e).43

41 See infraSection III.B (discussing the categories of information to be provided for real-time reporting).

42 See infraSection IV.B (discussing those data elements required under Rule 901(d)(1)).

43 See infraSection IV.D (discussing the reporting of life cycle event information). A registered SDR would be required to adopt policies and procedures to determine, among other things, whether and how it would publicly disseminate reports of life cycle events.Seeproposed Rule 907(a)(4).

The Commission notes that, although only the information specified in proposed Rule 901(c) would be required to be reported in real time, proposed Rule 901(c) would not prevent a reporting party from reporting some or all of the additional information required under proposed Rule 901(d)(1) at the same time that it reports the information required under proposed Rule 901(c). In other words, proposed Rule 901 would not mandate separate reports for the SBS information required under paragraphs (c) and (d) of proposed Rule 901; if a reporting party wished to provide all of the information required under proposed Rule 901 in a single transaction report, it would be free to do so—provided it could provide all of the information within the timeframe required by proposed Rule 901(c).

B. Categories of Information To Be Provided for Real-time Reporting

Proposed Rule 901(c) would set forth the categories of information pertaining to a SBS transaction that a reporting party would be required to report to a registered SDR in real time. For the reasons discussed below, the Commission preliminarily believes that the SBS information required to be reported under proposed Rule 901(c)—which the registered SDR would publicly disseminate pursuant toproposed Rule 902—would serve the objectives of Section 13(m) of the Exchange Act by enhancing price discovery in the SBS market.

The Commission recognizes that the SBS market involves complex instruments and that reporting conventions continue to evolve. Consequently, in developing proposed Rule 901, the Commission explored various alternative approaches, including mandating by rule an enumerated list of all specific data elements to be reported. The Commission believes that such a list likely would have to vary by asset class (e.g.,CDS and equity-based swaps), and would require further variations based on sub-asset type.44 The Commission understands, based on discussion with industry participants, that between 50 and 100 or more separate data elements could be used to express a typical CDS.

44For example, the following types of CDS could each require a different list of data elements: Single-name CDS, index CDS, loan CDS, and CDS on asset-backed securities.

A Commission rule that attempted to identify each data element for each SBS asset class or sub-asset type could be less flexible in responding to changes in the marketplace, including the introduction of new types of SBSs, because it would be necessary for the Commission to amend its rules each time it sought to require the reporting of additional or different data elements. Accordingly, rather than enumerating each data element for each SBS asset class or sub-asset type that would be required to be reported, proposed Rule 901(c) would instead specify the categories of information that would be required to be reported for each SBS transaction. Furthermore, proposed Rule 907, discussed more fully below, would require each registered SDR to establish, maintain, and make publicly available policies and procedures that, among other things, specify the data elements of a SBS (or a life cycle event) that a reporting party would be required to report. These data elements would be required to include, at a minimum, the data elements required under proposed Rule 901(c) (for information that will be publicly disseminated) and proposed Rule 901(d) (for non-disseminated regulatory information). The Commission preliminarily believes that proposed Rule 901(c), together with these policies and procedures, would promote the reporting of uniform, material information for each SBS, while providing flexibility to account for changes to the SBS market over time.

The Commission discusses below the SBS data that would be required to be reported in real time, and which would be publicly disseminated.

1. Asset Class

Proposed Rule 901(c)(1) would require the reporting party to report the asset class of the SBS and, if the SBS is an equity derivative, whether the SBS is a total return swap or is otherwise designed to offer risks and returns proportional to a position in the equity security or securities on which the SBS is based. Proposed Rule 900 would define “asset class” to mean those SBSs in a particular broad category, including, but not limited to, credit derivatives, equity derivatives, and loan-based derivatives. The Commission believes that identifying the asset class would provide market participants with basic information about the SBS transaction to identify the type of SBS being publicly reported. In addition, requiring the reporting party to indicate whether the SBS is an equity total return swap or is otherwise designed to offer risks and returns proportional to a position in the equity security or securities on which the SBS is based would enable a registered SDR to know if the SBS was excluded from being a block trade.45

45 Seeproposed Rule 907(b)(4)(ii).

2. Date and Time of Execution

Proposed Rule 901(c)(4) would require the reporting party to report the date and time, to the second, of execution of a SBS, so that prices of transactions that are disseminated in real time can be properly ordered, and so the Commission can have a detailed record of when any given SBS was executed. In the absence of this information, market participants and regulators would not know whether transaction reports they are seeing reflect the current state of the market.

The Commission preliminarily believes that the time at which the SBS transaction has been executed should be the point at which the counterparties to a SBS become irrevocably bound under applicable law.46 For example, in the context of SBSs, an oral agreement over the phone will create an enforceable contract, and the time of execution would be deemed to be the time that the parties to the telephone call agree to the material terms.47 The Commission recognizes that trades agreed to over the phone would need to be systematized for purposes of fulfilling this reporting requirement (as well as real-time reporting of other data elements) by being entered in an electronic system that assigns a time stamp. The Commission believes that it is consistent with Congress' intent for orally negotiated SBS transactions to be systematized as quickly as possible so that they could be publicly disseminated using electronic means.48

46 Seeproposed Rule 900. Section 13(m)(1)(A) of the Exchange Act defines “real time” in relation to the “execution” of the SBS, not when it is confirmed or cleared.

47The Dodd-Frank Act amends the definition of “security” under the Securities Act and Exchange Act to explicitly include SBSs, and the execution of the transaction will be the sale for purposes of the federal securities laws.SeeSecurities Act Release No. 3591 (July 19, 2005), 70 FR 44722 (August 3, 2005), notes 391 and 394 (explaining when a sale occurs under the Securities Act).

48The Senate Report accompanying the Dodd-Frank Act indicates that “[m]arket participants—including exchanges, contract markets, brokers, clearing houses and clearing agencies-were consulted and affirmed that the existing communications and data infrastructure for the swaps markets could accommodate real time swap transaction and price reporting.” The Senate Report stated, further, that real time swap transaction and price reporting would narrow swap bid/ask spreads, make for a more efficient swaps market and benefit consumers and counterparties overall.See156 Cong. Rep. S5921 (July 15, 2010). In light of this acknowledgement of the benefits of real-time SBS transaction and price reporting, and the apparent feasibility of such reporting, the Commission believes that Congress intended for orally negotiated SBS transactions to be systematized as quickly as possible and reported in real time.

The Commission is proposing that the date and time of execution be expressed using Coordinated Universal Time (“UTC”), a slight variation on Greenwich Mean Time.49 SBSs are traded globally, and the Commission expects that many SBSs subject to these reporting and dissemination rules would be executed between counterparties in different time zones. In the absence of a uniform standard, it might not be clear whether the date and time of execution were being expressed from the standpoint of the time zone of the first counterparty, the second counterparty, or the registered SDR itself. Mandating a common standard for expressing date and time is designed to alleviate any potential confusion on the part of registered SDRs, counterparties, other market participants, and the public as to when the SBS was executed. The Commission believes that UTC is an appropriate and well known standardsuitable for purposes of reporting the time of execution of SBSs.

49The generally acknowledged acronym for Coordinated Universal Time is “UTC,” rather than “CUT.” The International Telecommunication Union, an agency of the United Nations that oversees information and communication technology issues, wanted Coordinated Universal Time to have the same symbol in all languages. English and French speakers wanted the initials of both their respective language's terms to be used internationally: “CUT” for “coordinated universal time” and “TUC” for “temps universel coordonné.” This resulted in the final compromise of “UTC.”See http://www.nist.gov/physlab/div847/utenist.cfm#cut.

3. Price

Proposed Rule 901(c)(7) would require the reporting of the price of a SBS transaction, expressed in terms of the commercial conventions used in that asset class.50 The Commission recognizes that the price of a SBS generally would not be a simple number, as with stocks, but would be expressed in terms of the quoting conventions for that SBS. For example, a CDS may be quoted in terms of the economic spread—which is variously referred to as the “traded spread,” “quote spread,” or “composite spread”—expressed as a number of basis points per annum. Alternately, CDS can be quoted in terms of prices representing a discount or premium over par. In contrast, an equity or loan total return swap may be quoted in terms of a LIBOR-based floating rate payment, expressed as a floating rate plus a fixed number of basis points.

50One commenter identified the traded price as one of the elements that should be included in a SBS transaction report.Seeletter from James W. Toffey, Chief Executive Officer, Benchmark Solutions, to David A. Stawick, Secretary, CFTC, and Elizabeth M. Murphy, Secretary, Commission, dated October 1, 2010 (“Benchmark Letter”) at 2.

The Commission preliminarily believes that, because these quoting conventions are widely used and understood by SBS market participants, requiring the price of a SBS to be reported in terms of one of these existing quoting conventions would be consistent with the mandate in Section 13(m)(1)(B) of the Exchange Act to enhance price discovery. As discussed further below, however, proposed Rule 907(a)(1) would require a registered SDR to establish, maintain, and make publicly available policies and procedures that specify the data elements of a SBS that a reporting party must report, which would include the elements that constitute the price. The Commission preliminarily believes that, because of the many different conventions that exist to express the price in various SBS markets and the new conventions that might arise in the future, some flexibility should be given to registered SDRs to select appropriate conventions for denoting the price of different asset classes of SBSs.

4. Other Terms of the SBS

Proposed Rule 901(c) would require the reporting of, among other things, information that identifies the SBS instrument51 and the specific asset(s) or issuer(s) of a security or indexes on which the SBS is based; the notional amount(s) of the SBS and the currenc(ies) in which the notional amount(s) is expressed; the effective date of the SBS; the scheduled termination date of the SBS; and the terms of any fixed or floating rate payments and the frequency of any payments. The Commission preliminarily believes that this information is fundamental to understanding the SBS transaction being publicly reported, and that a SBS transaction report that lacked such information would not be meaningful.

51 Seeproposed Rule 900 (defining “security-based swap instrument” to mean each SBS in the same asset class, with the same underlying reference asset, reference issuer, or reference index).

For example, some types of SBSs are contractual agreements that generally involve the periodic exchange of cash flows from specified assets over a defined time period. These cash flows are based on the notional amount(s) of the SBS—i.e.,the notional principal(s) of the SBS is used to calculate the periodic payments made under the agreement. Accordingly, information that identifies the asset(s), including a narrow-based index, or issuer(s) of the security or securities on which a SBS is based, the notional amount(s) of the SBS (including the currenc(ies) in which it is expressed), the effective date, and the scheduled termination date of that SBS are fundamental elements of the transaction that would enhance price discovery.52

52One commenter believed that a SBS transaction report should include: (1) The traded price and execution time; (2) the counterparty type, including a designation for an “end user;” (3) the notional size of the transaction; and (4) contract “open interest.”SeeBenchmark Letter at 2. In addition, the commenter believed that the reference data for a SBS must include “standard attributes necessary to derive cash flows and any contingent claims that can alter or terminate payments” of the SBS.See id.at 1. As described above, the proposed rules would require the real-time reporting of price and time of execution, notional size, and an indication of whether a SBS is between two dealers. The proposed rules would not require the reporting of “open interest.” However, another Commission rulemaking will provide regulators with the ability to monitor open SBS positions.SeeSDR Registration Proposing Release,supranote 6.

The Commission anticipates that, for at least some standardized instruments, conventions about how a SBS instrument is referred to can become so well known that certain terms of the underlying contract can be assumed, and thus would not need to be specifically provided pursuant to other provisions of proposed Rule 901(c).

5. Whether the SBS Will Be Cleared by a Clearing Agency

Proposed Rule 901(c)(9) would require the reporting party to indicate whether or not the SBS will be cleared by a clearing agency. This factor can impact the price of the SBS. If a SBS is not cleared, one counterparty might charge a higher price to do the trade because of the counterparty credit risk it would incur (which might be significantly diminished if the SBS were centrally cleared). Because the use of a clearing agency to clear a SBS would thus impact price, knowing whether a SBS will be cleared should provide market participants with additional information that would be useful in assessing the reported price for a SBS, thus enhancing price discovery. Therefore, the Commission is proposing to require that this data element be reported in real time and publicly disseminated.

6. Indication That a Transaction Is Between Two SBS Dealers

Proposed Rule 901(c)(10) would require the reporting party to indicate if both counterparties to the SBS are SBS dealers. The Commission preliminarily believes that such an indication would enhance market transparency and provide more accurate information about the pricing of the SBS transaction, and thus about trading activity in the SBS market. Prices of transactions involving a dealer and non-dealer are typically “all-in” prices that include a mark-up or mark-down, while interdealer transaction prices typically do not. Thus, the Commission believes that requiring an indication of whether a SBS was an interdealer transaction or a transaction between a dealer and a non-dealer counterparty would enhance transparency by allowing market participants to more accurately assess the reported price for a SBS.

7. If Applicable, an Indication That the SBS Transaction Does Not Accurately Reflect the Market

In some instances, a SBS transaction might not reflect the current state of the market. Thus, publicly disseminating a report of that transaction without an indication to that effect could mislead market participants and other observers. The Commission does not expect that a registered SDR would be able to identify such cases. Therefore, proposed Rule 901(c)(11) would require the reporting party to alert the registered SDR in such cases. This could occur, for example, if the reporting party were reporting the transaction late (i.e.,over 15 minutes after the time of execution). An aged transaction by definition no longer represents the current state of the market, and a reporting party would therefore be required to indicate that thetransaction is being reported late.53 Other situations where this could occur are inter-affiliate transfers and assignments where the new counterparty has no opportunity to negotiate the terms, including the price, of taking on the position. In such cases, there might not be an arm's length negotiation over the terms of the SBS transaction, and disseminating a report of the transaction report without noting that fact would be inimical to price discovery. Accordingly, the Commission preliminarily believes that a reporting party must note such circumstances in its real-time transaction report to a registered SDR.

53The registered SDR could deduce that a transaction has been reported late by looking to the time of execution, a data element required to be reported by proposed Rule 901(c)(4). However, if a registered SDR received a transaction report submitted with an anomalous time stamp, the registered SDR might not know whether the time stamp was correct and the trade was reported late, or whether the trade was reported in a timely fashion but the time stamp was inaccurate. Supplementing the time stamp with a “late” indicator would confirm to the registered SDR that the transaction was in fact being reported late.

The Commission further notes that a registered SDR would be required to have policies and procedures that, among other things, describe how reporting parties shall report SBS transactions that, in the estimation of the registered SDR, do not accurately reflect the market.54 The Commission expects that these policies and procedures would require, among other things, different indicators being applied in different situations.

54 Seeproposed Rule 907(a)(4);infraSection VI.A.

8. Indication for Customized Trades

Proposed Rule 901(c)(12) would provide that the reporting party must indicate if the SBS is customized to the extent that the other information provided pursuant to proposed Rule 901(c) does not provide all of the material information necessary to identify such customized SBS or does not contain the data elements necessary to calculate the price of the SBS. The Commission believes that reporting highly customized SBS in this manner would promote transparency by providing market participants with knowledge of the transaction in a given asset class and on certain reference securities or issuers while, at the same time, making clear that the reported data elements would not, and would not be required to, provide sufficient information to fully understand all aspects of the customized transaction. The Commission preliminarily believes that requiring public dissemination of more detailed information about customized SBSs would be of limited utility in facilitating price discovery because of the unique nature of such transactions.

Request for Comment

The Commission requests comment generally on all aspects of the categories of information that would be required to be reported in real time for public dissemination.

13. Do commenters agree with the proposed categories of information that would be required to be reported in real time for public dissemination? If not, what additional specific categories of information should be required to be reported in real time for public dissemination, and why? How would public dissemination of such additional information enhance price discovery or market liquidity?

14. What categories of information, if any, should not be required to be reported in real time for public dissemination, and why? Would the public dissemination of certain information materially reduce market liquidity? If so, how, specifically, would dissemination of the particular information affect liquidity? Please supply data to support your answer.

15. Does proposed Rule 901(c) provide adequate guidance with respect to the information that must be reported? If not, what additional guidance do commenters believe is necessary?

16. Would the real-time dissemination of the categories of information specified in proposed Rule 901(c) serve the objectives of Section 13(m) of the Exchange Act by enhancing price discovery in the SBS market? If so, how? Would disclosure of certain categories of information not further price discovery? If so, why not? Please provide examples.

17. Is it necessary to require dissemination of the date of execution, unless it is a date other than the current date?

18. Do commenters agree that it would be feasible to require SBSs agreed to by phone to be entered into an electronic system that assigns a time stamp? Why or why not?

19. Do commenters agree that the time of execution should be reported to the second? Why or why not? Should it be reported in a finer increment?

20. Would requiring the reporting and dissemination of price in terms of the existing quoting conventions provide adequate information regarding the price of a SBS? Where more than one quoting or pricing convention exists within an asset class, what convention should be used? Should proposed Regulation SBSR require specific conventions to be used?

21. Are there specific data elements that should be required to be reported to help understand the price of a SBS? If so, what are they, and do they vary by asset class? Or by some further categorization?

22. Are there categories of SBSs that do not have an existing quoting convention? If so, how should “price” be expressed for those SBSs? What data elements should be required to be reported and disseminated to capture the price of such SBSs?

23. Would information regarding whether a SBS is cleared impact the price of the SBS? If not, why not? Would the reporting party in all cases know whether the SBS transaction will be cleared?

24. Would information concerning whether a SBS is a transaction between two SBS dealers enhance transparency and provide more accurate information about the pricing of the SBS? If not, why not?

25. In a SBS executed on a SB SEF or national securities exchange,