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Federal Register / Vol. 86, No. 19 / Monday, February 1, 2021 / Rules and Regulations
entities and activities from the definition of clearing agency, including certain activities of, among other types of market intermediaries, national securities exchanges and securities dealers that are also clearing agency functions.5 These exclusions are designed to limit the potential for overlapping or duplicative requirements that may otherwise be imposed on these regulated entities.6
Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 Dodd-Frank Act created new categories of entities in the security-based swap market that may perform clearing agency functions similar to the functions performed by entities excluded from the definition of clearing agency in Section 3a23B
of the Exchange Act in the traditional securities markets. However, Title VII
did not amend the scope of the term clearing agency to address these new types of financial intermediaries for the security-based swap markets or their potential clearing agency functions, even if those new intermediaries perform similar functions as entities excluded from the clearing agency definition, such as a national securities exchange or a securities dealer. As a result, certain activities performed for security-based swaps by security-based swap dealers and security-based swap execution facilities are also clearing agency functions that trigger the requirement to either register as a clearing agency or obtain an exemption from registration as a clearing agency, while the same activities performed for securities that are not security-based swaps do not carry the same legal and regulatory implications.7
Specifically, Section 3a23Bii of the Exchange Act provides that the term clearing agency does not include, among other things, any national securities exchange solely by reason of its providing facilities for comparison of data respecting the terms of settlement of securities transactions effected on such exchange.8 As noted above, the Dodd-Frank Act did not amend the Exchange Act definition of clearing agency to provide a comparable exclusion for a registered security-based swap execution facility. A securitybased swap execution facility is a trading system or platform in which multiple participants have the ability to execute or trade security-based swaps by accepting bids and offers made by 5 See
15 U.S.C. 78ca23B.
No. 3464017 Mar. 3, 2011, 76 FR
14472, 14531 Mar. 16, 2011 proposing release.
7 See 15 U.S.C. 78q1b1.
8 15 U.S.C. 78ca23B.
6 Release
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multiple participants in the facility or system.9 This function, similar to that provided by a national securities exchange, facilitates the execution of a security-based swap transaction between two counterparties by providing facilities for the comparison of data respecting the terms of settlement of that transaction.10
Accordingly, although a national securities exchange performing this clearing agency function is excluded under Section 3a23Bii from the definition of clearing agency, a registered security-based swap execution facility performing this function is not.
Similarly, Section 3a23Biii provides that the term clearing agency does not include, among other things, any dealer if such dealer would be deemed to be a clearing agency solely by reason of functions performed by such institution as part of customary brokerage or dealing activities, or solely by reason of acting on behalf of a clearing agency or a participant therein in connection with the furnishing by the clearing agency of services to its participants or the use of services of the clearing agency by its participants.11 As with security-based swap execution facilities, the Exchange Act definition of clearing agency does not provide an exclusion for a registered security-based swap dealer.12 Section 3a71 of the Exchange Act defines security-based swap dealer as any person that: i Holds itself out as a dealer in securitybased swaps; ii makes a market in security-based swaps; iii regularly enters into security-based swaps with counterparties as an ordinary course of business for its own account; or iv engages in any activity causing it to be commonly known in the trade as a dealer or market maker in securitybased swaps.13 These functions are 9 The Exchange Act definition of security-based swap execution facility states that a security-based swap execution facility is not a national securities exchange. 15 U.S.C. 78ca77.
10 A registered security-based swap execution facility may facilitate trade processing of any security-based swap. See 15 U.S.C. 78c4b2.
11 15 U.S.C. 78ca23B.
12 See 15 U.S.C. 78ca5 defining dealer to exclude a dealer for security-based swaps, other than security-based swaps with or for persons that are not eligible contract participants; see also, supra, note 3 discussing the same.
13 15 U.S.C. 78ca71. In 2012, the Commission and the Commodity Futures Trading Commission further defined a number of terms defining the intermediaries in the swap and security-based swap markets, including security-based swap dealer.
See Release No. 3466868 Apr. 27, 2012, 77 FR
30596 May 23, 2012 Entity Definitions adopting release. Among other things, the release adopted 17 CFR 240.3a711 through 3a715, which further define security-based swap dealer. Furthermore, the definition of dealer in Section 3a5 of the
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similar to those provided by a dealer for securities that are not security-based swaps.14 Accordingly, although a dealer performing these functions is excluded from the definition of clearing agency, a registered security-based swap dealer performing the same functions is not.15
To address the disparate treatment of similarly situated entities performing potential clearing agency functions, the Commission proposed Rule 17Ad24 in 2011.16 The Commission explained that the rule would avoid imposing overlapping or duplicative requirements on these entities with marginal or no benefit to safeguarding securities and funds and protecting investors.17 As described in the proposing release,18
Rule 17Ad24 would provide exemptions from the Exchange Act term clearing agency for certain activities of registered security-based swap dealers and registered security-based swap execution facilities that are also clearing agency functions, mirroring the exclusions from the definition described above for national securities exchanges and dealers. A person acting as a security-based swap dealer may make payments or deliveries or both in connection with transactions in securities, in a manner that could require that person to register as a clearing agency under the Exchange Act.19 In particular, over the life of a security-based swap transaction, a security-based swap dealer may facilitate the transfer of collateral, periodic fixed amount payments, or termination payments between the counterparties to a transaction, which would constitute making payments or deliveries or both in connection with transactions in securities under the clearing agency definition. Similarly, Exchange Act provides that an entity transacting as a dealer in security-based swaps would not need to separately register with the Commission as a brokerdealer so long as its security-based swap transactions are solely with persons that satisfy the definition of eligible contract participant. See 17
U.S.C. 78ca5 defining dealer; 17 U.S.C.
78a65 defining eligible contract participant by reference to Section 1a18 of the Commodity Exchange Act 7 U.S.C. 1a18.
14 See supra note 3 noting that, in contrast to the definition of dealer in Section 3a5 of the Exchange Act, Section 3a71D of the Exchange Act and 17 CFR 240.3a712a thereunder contain an exception from the definition of security-based swap dealer for any entity that engages in a de minimis quantity of security-based swap dealing in connection with transactions with or on behalf of its customers.
15 See supra note 2 noting the adoption of final rules for security-based swap dealers in 2019 and the compliance date for registration of November 1, 2021.
16 See proposing release, supra note 6.
17 Id. at 14531.
18 See id. at 1449495.
19 Compare 15 U.S.C. 78ca71 with 15 U.S.C.
78ca23.

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