April 4, 2011

Elizabeth M. Murphy
Secretary
Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549-1090

Re: File No. S7-06-11 – Registration and Regulation of Security-Based Swap Execution
Facilities (76 Fed. Reg. 10948)

Dear Ms. Murphy,

The International Swaps and Derivatives Association 1 ("ISDA") and the Securities Industry and
Financial Markets Association 2 ("SIFMA") (hereinafter referred to as the "Associations")
appreciate this opportunity to provide comments to the Securities and Exchange Commission
(the "Commission") regarding the recently released proposed rule concerning registration and
regulation of security-based swap execution facilities ("SB SEFs").

We agree with the Commission's determination that a more flexible approach to rule-making will
best serve to accomplish the goals of the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the "Dodd-Frank Act"): migration of security-based ("SB") swaps to regulated
markets, greater transparency and increased competition. We generally support the
Commission's approach to interpreting the definition of SB SEFs and devising rules for SB SEF
regulation. However, we raise specific concerns in our comments below.

Our comments below are organized as follows: (1) the organization and operation of SB SEFs;
(2) trades exempt from mandatory execution on SB SEFs; (3) oversight and review of SB SEFs;
and (4) other issues.

1
ISDA, which represents participants in the privately negotiated derivatives industry, is among the world's largest
global financial trade associations as measured by number of member firms. ISDA was chartered in 1985 and today
has over 800 member institutions from 54 countries on six continents. ISDA's members include most of the world's
major institutions that deal in privately negotiated derivatives, as well as many of the businesses, governmental
entities and other end-users that rely on over-the-counter derivatives to manage efficiently the risks inherent in their
core economic activities. For more information, please visit: www.isda.org.
2
SIFMA brings together the shared interests of hundreds of securities firms, banks, and asset managers. SIFMA's
mission is to support a strong financial industry, investor opportunity, capital formation, job creation and economic
growth, while building trust and confidence in the financial markets. SIFMA, with offices in New York and
Washington, D.C., is the U.S. regional member of the Global Financial Markets Association. For more
information, please visit: www.sifma.org.
I. Organization and Operation of SB SEFs

1. Definition of SB SEFs.

(a) We strongly endorse the Commission's flexible and inclusive

approach in interpreting the definition of SB SEFs.

We support the Commission's principles-based approach to defining SB SEFs. The Dodd-Frank

Act does not require, and we see no benefit to, limiting SB SEFs to the specific platforms that
currently exist. We commend the Commission's efforts to "facilitate competition and
innovations in the SB swaps market." 3 We agree that this is best achieved by encouraging
existing facilities to qualify as SB SEFs while promoting the development of new types of
platforms. Existing facilities are more likely to try to become SB SEFs if the definition and
regulation are flexible enough to allow existing facilities to qualify as SB SEFs by making
modifications that are economically reasonable. Facilitating the evolution of existing platforms
into SB SEFs will provide for a more fluid transition of SB swaps to regulated markets, will
minimize market disruption and will promote greater liquidity and competition. As more trading
migrates to SB SEFs, new types of platforms are likely to develop.

A flexible approach to trading facilities will harmonize with analogous proposals by regulators
outside the United States. The European Commission stated that, in regard to a possible
definition of "organised trading facilities": "[t]he definition would be broad and capable of
applying to new organised trading facilities that may emerge in the future." 4 The International
Organization of Securities Commissions, in its recent report on the trading of OTC derivatives,
found that "[b]ased on the benefits to be gained from increased trading on organized platforms,
the Task Force recommends that a flexible approach to defining 'exchanges or electronic trading
platforms' for the purposes of addressing the G-20 objectives be taken in order to maximize the
number of standardized derivative products that can be appropriately traded on organised
platforms." 5

(b) Request For Quote ("RFQ") – we agree with allowing requesters to

choose the number and identities of recipients, and in particular to
allow RFQs to go to as few as one recipient.

We agree with the Commission's proposal that the RFQ requester should determine how many
recipients receive an RFQ. The statutory definition of a SB SEF is "a trading system or platform
in which multiple participants have the ability to execute or trade security-based swaps by
accepting bids and offers made by multiple participants . . . through any means of interstate
commerce . . . ." 6 We agree with the Commission that a SB SEF will satisfy this definition if it
provides the ability for multiple participants to trade SB swaps by accepting bids or offers made
by multiple participants. In our view, an RFQ system that allows a participant to send an RFQ to

3
Securities and Exchange Commission release No. 34-63825; File No. S7-06-11, p. 21; 76 Fed. Reg. 10953.
4
European Commission, "Public Consultation" on "Review of the Markets in Financial Instruments Directive
(MiFiD)" (Dec. 8, 2010), p. 9.
5
Technical Committee of the International Organization of Securities Commissions, "Report on Trading of OTC
Derivatives" (Feb. 2011), p. 48.
6
Securities Exchange Act of 1934 ("Exchange Act"), Section 3(a)(77).

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a single liquidity-providing participant would satisfy the requirements of the Dodd-Frank Act as
long as the participant may also choose to send the RFQ to multiple liquidity-providing
participants.

Setting a minimum number of recipients for an RFQ could harm market participants, particularly
end-users, by requiring action that signals their trading interest. A pre-trade broadcast of the
requester's intent to trade could enable other market participants to take action in anticipation of
the trade, potentially affecting prices and moving the market against the requester. The danger is
particularly significant for large trades that are too small to qualify as "block trades." This
situation would be exacerbated if the definition of "block trade" were too restrictive. (See further
discussion below.) The same concern would also arise for products that trade infrequently in
illiquid markets, such as certain single-name corporate credit default swaps ("CDS"). A
requirement to advertise a requester's interest to a broad portion of an illiquid market that may
have few market-makers may effectively preclude confidentiality and may result in adverse price
effects for the end-user. A wider broadcast of the RFQ provides pre-trade transparency for
market-makers to the detriment of customers, who should be the primary beneficiaries of the
regulations and the effort to increase pre-trade transparency. Each requester should be entitled to
assess for themselves the balance between the available liquidity in the market and potential
consequences of wide dissemination of the request. A restriction on customers' ability to choose
RFQ recipients will not protect the customers and may potentially harm them.

2. We are concerned about the proposal to require that SB SEFs disseminate

composite indicative quotes and, if composite indicative quotes are required,
they should not include responses to RFQs.

We are concerned about the requirement in Proposed Rule 811(e) that a SB SEF that operates an
RFQ platform must disseminate a composite indicative quote for SB swaps traded through the
SB SEF and that this quote will be made available to all participants. The composite indicative
quote is intended to provide "valuable pricing information" 7 and increase pre-trade price
transparency. However, the composite indicative quote may not provide useful information
because some indicative quotes may not be representative of execution prices and some
indicative quotes may become stale over time and as markets move. Indicative quotes differ
from execution prices for a number of reasons, including: first, execution price is often
dependent upon a related hedge execution which is not determinable until the time of actual trade
execution, and second, counterparty-specific and material agreement terms (which are of
particular importance in the RFQ context) are not usually priced into indicative quotes. As a
result, the composite indicative quote may not provide useful information, and may be
misleading.

We are also concerned about the Commission's proposal that the composite indicative quote may
also include responses to RFQs. Responses to RFQs are firm, not indicative, and RFQs are often
used for trades with specific stipulations and the requests are made in a specific context, such as
trades in large size and very illiquid SB swaps, and thus responses may not reflect the overall
market for a given SB swap. The responder may provide a quote that is only meaningful for one
particular RFQ and that the responder would not execute in the broader market. A responder

7
Securities and Exchange Commission release No. 34-63825; File No. S7-06-11, p. 94; 76 Fed. Reg. 10973.

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may provide a non-competitive quote because it wants to be responsive even though it is not able
to provide a competitive quote. Thus, the inclusion of responses to RFQs would not necessarily
result in a composite quote that reflects the market.

Should the Commission require SB SEFs to disseminate composite indicative quotes, the
Commission should clarify what is meant by such quotes and provide guidance or specify how
such quotes are to be calculated. One calculation method is to source price information from a
number of different price feeds and then determine the composite quote using a specified
algorithm that excludes the highest and lowest prices, takes the average of the remaining prices
and then incorporates a pre-determined bid-ask spread. We understand that this methodology is
currently being employed to produce composite quotes on at least one platform. We would
prefer this methodology over one that is simply constructed from the best bid and offer available
to the SB SEF at any time.

3. The Commission should provide that RFQ requesters may choose freely
among existing firm interest and RFQ responses.

(a) The Commission should not impose any hierarchy or preference in

execution on the requester.

The release accompanying the proposed rules on SB SEFs (the "Release") states (footnote 163)
that if a SB SEF has both an order book system and a separate RFQ mechanism, any trade in the
RFQ system must interact with existing firm interest on the order book at the same or better price
before interacting with interests on the RFQ platform. This requirement is not stated in the
proposed rules and we strongly encourage the Commission not to impose such a requirement.
The proposed rule should make it clear that the requester has full discretion to execute trades
based on whatever factors the requester deems relevant. In addition to price, this may include
size and factors affecting the "total price" of the transaction, such as execution efficiency,
performance reliability and possible cross-product margining.

Any requirement to accept existing firm interest for less than the full RFQ amount may have
adverse consequences for the RFQ requesters. These consequences are likely to be worse in the
SB swaps markets than in existing securities and futures markets because of the relatively lower
level of liquidity in the SB swaps markets. If the customer is required to accept existing firm
interest for less than the total amount of the RFQ, this may harm the price that the RFQ requester
will receive. For example: an RFQ is made for offers of 50MM in an SB swap; there are
existing firm offers for 5MM each at 191, 192, 193, 194; and the best response to the RFQ is an
offer for 50MM at 195. Under a preference regime as suggested by the Commission, the
requester would have to execute the smaller trades for a total of 20MM and a trade with the RFQ
responder for 30MM (assuming the responder will sell only 30MM at that price), resulting in
five trades with five different liquidity providers. The weighted average price of the trade is then
194, but the price differential may not compensate the requester for other "costs" related to
having to trade with four additional and unknown parties. If the response to the RFQ of 50MM
at 195 is "all or none" and the best RFQ response that will fill 30MM is at 198, then the requester
will be forced to execute with the four partial offers and the one offer at 198, for a weighted
average price of 195.8, resulting in a worse price for the requester than if the requester been able
to buy all 50MM at 195 from the best RFQ responder.

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Imposing a hierarchy and execution requirement is also likely to generate a larger number of
transactions for a given notional amount if the requester is required to execute trades with
existing firm interest in amounts smaller than that of the RFQ. Unnecessarily high trading
volume is contrary to the aim of established regulatory and industry initiatives such as tear-ups
and compression. Also, as multiple market-makers simultaneously attempt to execute the same
hedge, other market participants may interpret the action as an indication of a directional shift in
market sentiment and cause the market price for the related SB swap to move in an adverse
direction to the RFQ requester.

The requester of an RFQ should be able to choose the bids and offers with which it wishes to
execute a trade. There is no policy reason and no directive in the Dodd-Frank Act that requires
trade prioritization and execution with existing firm interest.

(b) "Interaction" between RFQs and existing firm interest should be

limited to the communication of such bids/offers to the requester.

As stated above, the Release requires that an RFQ must "interact" with existing firm interest.
The Release does not define "interact." We request that the Commission provide that the only
requirement for RFQs and existing quotes is that SB SEFs communicate relevant existing quotes
to RFQ requesters.

SB SEFs should be given discretion to determine what quotes qualify as existing firm interest
and what criteria will apply, such as term to expiration and size restrictions. Otherwise,
requesters may be inundated with stale or possibly misleading information. Also, the
information flow between the requester and the SB SEF should be one-way: the SB SEF should
inform the RFQ requester of the relevant existing quotes but should not inform the participants
giving the quotes of the relevant RFQs. This will prevent possible abuse by market participants
seeking disclosure of relevant market information by submitting quotes for small transactions or
off-market stub quotes.

In our view, only firm interest for a size of transaction that is at least equal to the quote size
requested by the RFQ should be communicated to the requester. Without this limitation, an RFQ
may result in quotes being reported to the RFQ requester that are for transaction sizes smaller
than being sought by the requester. In addition to not meeting the requester's desire to execute a
particular transaction size, the smaller quotes may provide the requester with misleading
information if the sizes are too disparate. Communication of smaller quotes also would likely
result in a higher volume of trades, which would be contrary to the outcome favored by long-
standing regulatory and industry initiatives.

4. SB SEFs should not be required to provide a mechanism to disseminate firm

quotes from participants.

Although the proposed rules themselves do not include this requirement, the Release states that a
SB SEF "must provide a mechanism for the dissemination of firm quotes, if any, submitted by
participants." 8 The commentary indicates that this would "allow a 'limit order-book' model to

8
Securities and Exchange Commission release No. 34-63825; File No. S7-06-11, p. 36; 76 Fed. Reg. 10957.

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emerge in parallel with other trading models on the SB SEF." 9 We disagree with this
requirement. We agree with Commissioner Sommers, who objected to a requirement in the
Commodity Futures Trading Commission (the "CFTC") proposed rules that SEFs provide a
centralized electronic screen on the basis that, "this provision is not mandated by the Dodd-Frank
Act and may limit competition by shutting out applicants who wish to offer request for quote
services without this functionality." 10 We respectfully recommend that the proposed rules allow
SB SEFs to provide a mechanism for the dissemination of firm quotes submitted by participants
on the SB SEF, but not require them to do so.

We are concerned about the statement in the Release that "if a SB SEF displays firm, executable
trading interest, it must display such interest to all parties." 11 If a market participant posts quotes
on a centralized screen, it should be able to do so only to a limited group of recipients. A
requirement that all executable trading interests displayed on a SB SEF be displayed to all parties
will deter market participants from submitting information and executing trades and thereby
reduce transparency and liquidity. This will be particularly true for trading interest in illiquid SB
swaps and SB swaps in large size. Market participants will be concerned that broad exposure of
such interest may cause the market to move against them. As a result, market participants may
decide to forgo execution, which would result in less liquidity.

5. We agree with the Commission's view that a SB SEF may determine access
based on objective and non-discriminatory standards.

We support the Commission's proposal to allow SB SEFs to establish impartial requirements for
access and to permit SB SEFs not to grant access to eligible contract participants that are not
registered SB swap dealers, major SB swap participants or brokers. We believe this will help SB
SEFs meet their obligations under Core Principle 6, which calls for procedures to ensure the
financial integrity of SB SEFs. Core Principle 2 requires SB SEFs to "provide market
participants with impartial access (emphasis added) to the market . . . ." 12 In light of Core
Principle 6, impartial access need not and should not be interpreted to mean access to any and all
possible participants.

6. The SB SEF regulations should permit a SB SEF to develop protocols for

swaps that cannot be cleared and should permit differential pricing for
swaps using different SB swap clearing agencies ("SB SCAs").

Parties that execute SB swaps through a SB SEF will do so in the expectation that the SB swap
will settle through a particular SB SCA. The proposed rules do not address what will happen if
a SB swap fails to clear through the relevant SB SCA after the SB swap is executed on a SB
SEF. We recommend that the Commission allow a SB SEF, together with its participants, to
develop protocols to address the failure of a SB swap to clear after execution. These protocols
should address the processes to be used if a SB swap fails to clear, including legally sufficient

9
Securities and Exchange Commission release No. 34-63825; File No. S7-06-11, p. 36; 76 Fed. Reg. 10957; see
also Securities and Exchange Commission release No. 34-63825; File No. S7-06-11, p. 25; 76 Fed. Reg. 10954.
10
76 Fed. Reg. 1259, col. 2.
11
Securities and Exchange Commission release No. 34-63825; File No. S7-06-11, p. 89; 76 Fed. Reg. 10972.
12
Securities Exchange Act of 1934, Section 3D(d)(2)(B)(i).

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documentation (such as confirmations) and credit requirements. The Commission should also
explicitly permit bilateral trading for SB swaps that fail to clear.

Also, if a SB swap can clear on more than one SB SCA, the market value of the SB swap may
vary depending on the SB SCA that will be used. This variation could occur because of
differences in costs of clearing, in execution capabilities, or in creditworthiness of different SB
SCAs. Therefore, the Commission should permit SB SEFs to allow differential pricing for SB
swaps using different SB SCAs.

II. Exemptions from mandatory execution requirement

1. Block Trades.

(a) The Commission should exempt block trades from SB SEF

requirements.

The Exchange Act has not been modified by the Dodd-Frank Act in the same way as the
Commodity Exchange Act ("CEA"): the Commission was not given the same authority with
respect to SB SEFs as the CFTC was given with respect to SEFs to "promulgate rules defining
the universe of swaps that can be executed on a swap execution facility." 13 We see no reason for
a difference and think a technical correction would be appropriate. The Commission should
have the same authority and, along with the CFTC, should exclude block trades from the
mandatory execution requirement. If block trades are not excluded from the execution
requirement then the requirements should be kept to a minimum, as discussed further below.

Although the Release permits SB SEFs to establish different trading rules for block trades
generally, it states that block trades would be subject to various minimum requirements with
respect to pre-trade transparency and interaction with other trading interests. 14 We are concerned
that such requirements may not be appropriately calibrated to block trades and may restrict
customer choice. Because block trades are large and illiquid, as the Commission has recognized,
reporting these trades does not contribute to the transparency of the market. For example,
including the response to an RFQ for a block trade in a composite quote may produce a
misleading result because the terms, including price and size, of the block trade may not reflect
market volumes or prices that are generally available.

As discussed above, we strongly recommend that the Commission not impose any execution
hierarchy or preference with respect to the interaction with other trading interests. We are
particularly concerned about the imposition of an execution hierarchy on block trades. The
parties to block trades may reach a price after negotiations over very specific terms, including
size. If one of the parties was required to accept existing firm quotes rather than the quote of its
counterparty, there would be no negotiation. It is particularly troublesome to impose a partial
execution requirement for block trades because they are specifically structured in relation to the
size of the trade. We urge the Commission to avoid establishing any execution priorities for
block trades.

13
7 U.S.C. §5h(d). We note that the CEA permits the Commission (as well as the CFTC) to "promulgate rules
defining the universe of swaps that can be executed on a swap execution facility."
14
Securities and Exchange Commission release No. 34-63825; File No. S7-06-11, p. 97; 76 Fed. Reg. 10974.

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We request that the rules provide an appropriate reporting delay for block trades and provide that
trade size need not be disclosed. As noted in the ISDA/SIFMA Block Trading Study, reporting
exemptions are often employed by market regulators to preserve a high level of liquidity. 15 A
reporting delay should provide enough time to allow market participants to hedge the market risk
of a block trade. We reiterate the position stated in our letter regarding proposed Regulation
SBSR, that the size of a block trade (other than the fact that it is a block trade) should not be
disclosed at any time. Such treatment of block trades would be similar to the treatment under
FINRA's TRACE system. 16

(b) The definition of "block trade" should not be too restrictive.

We commend the Commission for acknowledging the significance of large-size trades in the SB
swaps market and soliciting input from market participants on how block trades should be
defined and the potential ramifications of the definition. We urge the Commission to define
"block trade" in a manner that does not overly restrict qualifying trades and that would result in a
consistent definition across the relevant rules.

Trading in the swaps market is fragmented, product-specific and concentrated in larger

transaction sizes, as shown in the ISDA/SIFMA Block Trading Study. 17 A definition that is
overly restrictive has great potential to adversely affect the ability of end-users and others to
execute and hedge large transactions because informing the market of a potential large
transaction may move the market against the person seeking the transaction. Market-based
research and analysis should be employed to provide the basis for the determination of well-
calibrated block trading exemption rules, and these rules should be updated quarterly. We are
happy to provide assistance, having performed a similar study.

2. Available to Trade.

(a) We strongly agree with the Commission's view that "available to

trade" requires more than mere listing or trading on a SB SEF and
we ask that "available to trade" be defined to reflect minimum
liquidity levels.

We strongly support the statement in the Release that the Commission would in effect interpret
the phrase "made available to trade" as something more than the decision to simply trade the
swap on a SB SEF or exchange. 18 In the absence of liquidity, a SB SEF listing does not enable
participants to trade a SB swap. For example, even if equity or CDS swaps of different types
become traded on a SB SEF, the liquidity of any single equity or CDS swap may be very limited.
The ISDA/SIFMA Block Trading Study determined that "[l]iquidity in OTC derivative markets
is fragmented and varies considerably depending on the specific product and terms of the

15
ISDA/SIFMA Block Trading Study, attached to ISDA and SIFMA joint comment letter on Proposed Regulation
SBSR – Reporting and Dissemination of Security-Based Swap Information (75 Fed. Reg. 75208), dated January
18, 2011, Annex 2, p. 5.
16
ISDA and SIFMA joint comment letter on Proposed Regulation SBSR – Reporting and Dissemination of
Security-Based Swap Information (75 Fed. Reg. 75208), dated January 18, 2011, p. 5.
17
ISDA/SIFMA Block Trading Study, (See fn. 15), Annex 2.
18
Securities and Exchange Commission release No. 34-63825; File No. S7-06-11, p. 79; 76 Fed. Reg. 10969.

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contract . . . traded . . . ." 19 The study found that the markets for interest rate and credit
derivatives are characterized by low volumes concentrated in large transaction sizes, across a
large number of available instruments. 20 Accordingly, a SB swap of a type that is listed may
actually rarely be traded.

We request that the Commission clarify the parameters of what is "available to trade" to reflect
measures of liquidity on a SB swap-specific basis. At a minimum, a particular SB swap should
trade multiple times daily with multiple distinct swap counterparties in order to be considered
"available to trade." We urge the Commission to perform an in-depth study of the markets on a
SB swap-specific basis, in conjunction with market participants, to determine other appropriate
criteria for "available to trade." The study and resultant criteria should be appropriately tailored
at the SB swap product level. For example, a study of aggregate trading volumes of all IBM
CDS across all tenors and coupons would not provide useful data from which individual
thresholds for IBM 3 month CDS and IBM 5 year CDS could be derived. The study should
capture relevant SB swap-specific characteristics, such as cycles in trading volumes. For
example, a study encompassing one month of trading data would be insufficient for a product
that experiences volume spikes on roll months that occur quarterly.

Initial criteria for "available to trade" should be set at a high level of liquidity to ensure that SB
swaps that generally trade infrequently would not initially be "available to trade." The
Commission should provide for ongoing monitoring and periodic review and allow for dynamic
modifications to the criteria for "available to trade" as appropriate, to minimize the possible
harmful effects of a mistake in the initial criteria. Application of the initial criteria over different
economic cycles and market environments will generate information that will enable the
Commission to determine how the criteria should be adjusted. This applies to designating new
products that are "available to trade" as well as identifying products that are no longer "available
to trade." Products and trading volumes on the SB swaps market are not static and regulation
must be flexible to respond to trends that signal fundamental changes at the product level.

(b) We agree that the Commission should define criteria that determine
whether a SB swap is "available to trade" and we ask that the
Commission make the determination as to whether a SB swap is
"available to trade."

We support the proposal in the Release that the Commission should determine the objective
measures that will be used to determine what is "available to trade." 21 The Release is not entirely
clear, however, as to who will make the actual determination whether a particular SB swap is
available to trade or not. We believe the Commission should make that determination because
the SB SEF itself will have an economic incentive to encourage trading on the SB SEF. An
approach under which SB SEFs are allowed to determine what is "available to trade" could
encourage SB SEFs, for competitive reasons, to prematurely determine that a SB swap is
"available to trade" even though that determination would not be supported by the actual trading
volume, in order to gain market share. This is not in keeping with the intent of the Dodd-Frank

19
ISDA/SIFMA Block Trading Study, (see fn. 15), Annex 2, p. 2.
20
ISDA/SIFMA Block Trading Study, (see fn. 15), Annex 2, pp. 15-22.
21
Securities and Exchange Commission release No. 34-63825; File No. S7-06-11, p.78; 76 Fed. Reg. 10969.

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Act provisions applicable to SB SEFs to foster a marketplace where SB SEFs compete with one
another. As a result, and in view of the broad significance of this determination, we believe the
Commission, rather than the SB SEFs, should make the determination, subject to requirements of
notice, public comment and opportunity for a hearing. The Commission should also make the
determination of what is no longer "available to trade," again based on objective measures
determined by the Commission. However, the Commission must be able to make determinations
of what is no longer "available to trade" rapidly, in order to address markets in which liquidity
rapidly declines. As a result, in determining whether a SB swap is no longer "available to trade,"
the Commission should not be required to provide for notice, public comment and opportunity
for a hearing.

3. Combination/package trades and inter-affiliate SB swaps should be excluded

from mandatory execution on a SB SEF.

(a) Combination trades.

Combination trades are transactions in which parties concurrently trade, on an integrated basis, a
SB swap that must be executed on a SB SEF or exchange and another transaction that is not a SB
swap that must be executed on a SB SEF or exchange. For example, two parties may trade a
total return swap and an underlying equity security as part of one unified package with a single
price. After the Dodd-Frank Act becomes effective, some trades may also involve combinations
of two swaps, one of which is subject to the execution requirement, and the other of which is not
subject to the execution requirement.

Because the price and execution for each leg of such a trade is dependent on the other leg,
requiring the SB swap to be traded on a SB SEF would effectively prevent these trades. To
avoid this result, SB swaps involved in these combination trades should not have to be executed
through a SB SEF. Such combinations could be executed as packages, similar to exchanges of
futures for related positions, with the SB swap leg submitted to a SB SEF post-trade, thereby
satisfying clearing, reporting and other related regulatory obligations.

(b) Inter-affiliate swaps.

We urge the Commission to exempt SB swaps between affiliates from the mandatory execution
requirement for SB SEFs. First, ISDA has separately requested the Commission to determine
that inter-affiliate swaps are exempt from mandatory clearing. 22 If the Commission makes such a
determination, then under Section 3C(h) of the Exchange Act, an inter-affiliate SB swap would
not be required to be executed through a SB SEF because it is not subject to the clearing
requirement. Thus, if the Commission determines that inter-affiliate SB swaps are not subject to
the clearing requirement, we request that the Commission recognize that inter-affiliate SB swaps
need not be executed on a SB SEF.

Second, inter-affiliate SB swaps should not, in any event, be required to be executed on SB

SEFs. SB swaps between persons under common control simply represent allocations of risk

22
See ISDA comment letter on Notice of Proposed Rulemaking: Process for Review of Security-Based Swaps for
Mandatory Clearing (75 Fed. Reg. 82490), dated February 14, 2011, p. 10.

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within a corporate group. 23 The size, frequency, and in certain instances, pricing levels, of inter-
affiliate SB swaps will likely have no informational value for the broader market and the
reporting of such SB swaps could have the unintended result of confusing market participants as
to the true depth and liquidity of the market. As a result, executing these SB swaps through a SB
SEF will not improve pre-trade price transparency and could be misleading. Requiring SB SEF
execution of inter-affiliate trades will reduce a company's ability to accomplish risk management
objectives on a cost-effective basis. In the futures markets, despite the general rule that futures
contracts must be executed through a designated contract market ("DCM"), there is a
longstanding practice of affiliates trading among themselves outside DCMs.

III. Oversight and Review

1. We support the proposal to require a swap review committee and the

required composition of the committee.

We support the Commission's concept of a swap review committee to monitor the trading of SB
swaps on the SB SEF, and the proposal that the committee should be constituted with a fair
representation of market participants. However, the Commission should also provide that
membership on the swap review committee requires appropriate market expertise for each
member. We reiterate the concern set out in ISDA's previous letter on proposed Regulation MC
that a rule that mandates certain percentages of public director representation on a committee is
less effective than focusing on the expertise of each director. 24 We also recommend that the
swap review committee determine which trades are block trades, based on criteria established
and set by the Commission.

Proposed rule §811(c) provides that the swap review committee must periodically "determine
whether the trading characteristics of each security-based swap justify a change to the trading
platform for each security-based swap." 25 We recommend that the Commission allow the swap
review committee to make such determinations, but not require it to have such a periodic review.
SB SEFs and their participants should have procedural flexibility in determining when and if
trading platforms are no longer appropriate for certain SB swaps.

2. Proposed Regulation MC.

The proposed rules regarding conflict of interest refer to the prior proposed rules on ownership
and governance for SB SEFs (Regulation MC). 26 ISDA has previously expressed its concerns
about certain requirements under Regulation MC, including the requirement that at least 51% of
the directors of a SB SEF be public directors. 27 We disagree with this requirement for public

23
See "Further Definition of 'Swap Dealer', 'Security-Based Swap Dealer', 'Major Swap Participant'', 'Major
Security-Based Swap Participant' and 'Eligible Contract Participant'", 75 Fed. Reg. 80183.
24
ISDA comment letter on Ownership Limitations and Governance Requirements for Security-Based Swap Clearing
Agencies, Security-Based Swap Execution Facilities, and National Securities Exchanges with Respect to
Security-Based Swaps under Regulation MC (75 Fed. Reg. 65882), dated November 23, 2010, p. 7.
25
Securities and Exchange Commission release No. 34-63825; File No. S7-06-11, p. 424; 76 Fed. Reg. 11061.
26
See SEC Release No. 34-63107, File No. S7-27-10, 75 Fed. Reg. 65882, (October 26, 2010).
27
ISDA comment letter on Ownership Limitations and Governance Requirements for Security-Based Swap Clearing
Agencies, Security-Based Swap Execution Facilities, and National Securities Exchanges with Respect to
Security-Based Swaps under Regulation MC (75 Fed. Reg. 65882), dated November 23, 2010, p. 7.

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directors. Governance requirements for SB SEFs should be consistent with those adopted for SB
SCAs.

We also are concerned about the requirement that SB SEFs have a Regulatory Oversight
Committee comprised solely of independent public directors. (Proposed 242.702(e), 75 FR
65932). As ISDA has previously stated, we think that requiring SB SEFs to establish a
Regulatory Oversight Committee risks a duplication of functions between the committee and the
Chief Compliance Officer, who has specific and extensive duties under the proposed rules. 28

IV. Other

1. The Commission should adopt a staged implementation of the proposed

rules.

Many of the proposed rules will pose significant operational and administrative hurdles for
market participants and SB SEFs. For example, the proposed rules have requirements for system
safeguards that will require time and systems expertise to implement fully. We strongly suggest
that SB SEFs be allowed to adopt the rules on a staged basis so that the basic functioning of the
SB SEF and the market can be established before all requirements are imposed.

2. The Commission should indicate what treatment will be given to foreign SB

SEFs.

Some SB SEFs will need to operate on a cross-border basis and the Dodd-Frank Act does not
give the same exemptive authority to the Commission with regard to foreign SB SEFs as it has
given to the CFTC with regard to foreign SEFs. 29 This inconsistency needs to be rationalized
and the Commission should be given broader exemptive authority. Without such authority, the
Commission will need to consider how it will regulate non-U.S. SB SEFs that wish to include
U.S. participants. In particular, the Commission should provide specialized treatment with
regard to registration and supervision for a SB SEF that is adequately regulated by its home
country.

28
ISDA comment letter on Ownership Limitations and Governance Requirements for Security-Based Swap Clearing
Agencies, Security-Based Swap Execution Facilities, and National Securities Exchanges with Respect to
Security-Based Swaps under Regulation MC (75 Fed. Reg. 65882), dated November 23, 2010, p. 6.
29
The Exchange Act, in §3D(e) provides that "[t]he Commission may exempt, conditionally or unconditionally, a
security-based swap execution facility from registration under this section if the Commission finds that the
facility is subject to comparable, comprehensive supervision and regulation on a consolidated basis by the
Commodity Futures Trading Commission." The Commodity Exchange Act, in §5h(g) provides that the CFTC
"may exempt, conditionally or unconditionally, a swap execution facility from registration under this section if
the [CFTC] finds that the facility is subject to comparable, comprehensive supervision and regulation on a
consolidated basis by the Securities and Exchange Commission, a prudential regulator, or the appropriate
governmental authorities in the home country of the facility."

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 3. The Commission, the CFTC and foreign regulators should ensure
harmonization and flexibility amongst their rules.

The Dodd-Frank Act puts the Commission, the CFTC and foreign regulators in the position of
designing the structure and regulation of significant and novel market architecture in the swap
markets. For this reason, we urge the Commission, the CFTC and foreign regulators to
coordinate their efforts in devising the new market rules. Because swaps in one market are often
hedged in or linked to other markets, it is critical that SB SEFs (or their equivalents) in different
jurisdictions operate in a compatible manner.

* * *

The Associations appreciate the opportunity to comment on the proposed requirements for SB
SEFs. We trust this submission is helpful to you. Please feel free to contact us or our staff at
your convenience.

Sincerely,

Robert Pickel
Executive Vice Chairman
ISDA

Kenneth E. Bentsen, Jr.

Executive Vice President
Public Policy and Advocacy
SIFMA

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