Order Granting Temporary Exemptions Under the Securities Exchange Act of 1934 in Connection With Request on Behalf of Eurex Clearing AG Related to Central Clearing of Credit Default Swaps, and Request for Comments, 37740-37748 [E9-17991]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 74, Number 144 (Wednesday, July 29, 2009)]
[Notices]
[Pages 37740-37748]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-17991]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60373; File No. S7-17-09]


Order Granting Temporary Exemptions Under the Securities Exchange 
Act of 1934 in Connection With Request on Behalf of Eurex Clearing AG 
Related to Central Clearing of Credit Default Swaps, and Request for 
Comments

July 23, 2009.

I. Introduction

    In response to the recent turmoil in the financial markets, the 
Securities and Exchange Commission (``Commission'') has taken multiple 
actions to protect investors and ensure the integrity of the nation's 
securities markets, including actions \1\ designed to address concerns 
related to the market in credit default swaps (``CDS'').\2\ The over-
the-counter

[[Page 37741]]

(``OTC'') market for CDS has been a source of concern to us and other 
financial regulators, and we have recognized that facilitating the 
establishment of central counterparties (``CCPs'') for CDS can play an 
important role in reducing the counterparty risks inherent in the CDS 
market, and thereby can help mitigate potential systemic impacts.\3\ 
Thus, taking action to help foster the prompt development of CCPs, 
including granting conditional exemptions from certain provisions of 
the federal securities laws, is in the public interest.
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    \1\ See generally Securities Exchange Act Release No. 59578 
(Mar. 13, 2009), 74 FR 11781 (Mar. 19, 2009) (temporary exemption in 
connection with CDS clearing by Chicago Mercantile Exchange Inc.), 
Securities Exchange Act Release No. 59527 (Mar. 6, 2009), 74 FR 
10791 (Mar. 12, 2009) (temporary exemption in connection with CDS 
clearing by ICE US Trust LLC), Securities Exchange Act Release No. 
59164 (Dec. 24, 2008), 74 FR 139 (Jan. 2, 2009) (temporary exemption 
in connection with CDS clearing by LIFFE A&M and LCH.Clearnet Ltd.) 
and other Commission actions discussed therein.
    \2\ A CDS is a bilateral contract between two parties, known as 
counterparties. The value of this financial contract is based on 
underlying obligations of a single entity or on a particular 
security or other debt obligation, or an index of several such 
entities, securities, or obligations. The obligation of a seller 
under a CDS to make payments under a CDS contract is triggered by a 
default or other credit event as to such entity or entities or such 
security or securities. Investors may use CDS for a variety of 
reasons, including to offset or insure against risk in their fixed-
income portfolios, to take positions in bonds or in segments of the 
debt market as represented by an index, or to capitalize on the 
volatility in credit spreads during times of economic uncertainty. 
In recent years, CDS market volumes have rapidly increased. See 
Semiannual OTC derivatives statistics at end-December 2008, Bank for 
International Settlement (``BIS''), available at https://www.bis.org/statistics/otcder/dt1920a.pdf.
    This growth has coincided with a significant rise in the types 
and number of entities participating in the CDS market. CDS were 
initially created to meet the demand of banking institutions looking 
to hedge and diversify the credit risk attendant with their lending 
activities. However, financial institutions such as insurance 
companies, pension funds, securities firms, and hedge funds have 
entered the CDS market.
    \3\ See generally actions referenced in note 1, supra.
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    The Commission's authority over this OTC market for CDS is limited. 
Specifically, Section 3A of the Securities Exchange Act of 1934 
(``Exchange Act'') limits the Commission's authority over swap 
agreements, as defined in Section 206A of the Gramm-Leach-Bliley 
Act.\4\ For those CDS that are swap agreements, the exclusion from the 
definition of security in Section 3A of the Exchange Act, and related 
provisions, will continue to apply. The Commission's action today does 
not affect these CDS, and this Order does not apply to them. For those 
CDS that are not swap agreements (``non-excluded CDS''), the 
Commission's action today provides conditional exemptions from certain 
requirements of the Exchange Act.
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    \4\ 15 U.S.C. 78c-1. Section 3A excludes both a non-security-
based and a security-based swap agreement from the definition of 
``security'' under Section 3(a)(10) of the Exchange Act, 15 U.S.C. 
78c(a)(10). Section 206A of the Gramm-Leach-Bliley Act defines a 
``swap agreement'' as ``any agreement, contract, or transaction 
between eligible contract participants (as defined in section 1a(12) 
of the Commodity Exchange Act * * *) * * * the material terms of 
which (other than price and quantity) are subject to individual 
negotiation.'' 15 U.S.C. 78c note.
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    The Commission believes that using well-regulated CCPs to clear 
transactions in CDS would provide a number of benefits, by helping to 
promote efficiency and reduce risk in the CDS market and among its 
participants, requiring maintenance of records of CDS transactions that 
would aid the Commission's efforts to prevent and detect fraud and 
other abusive market practices, addressing concerns about counterparty 
risk--through the novation process--by substituting the 
creditworthiness and liquidity of the CCP for the creditworthiness and 
liquidity of the counterparties to a CDS,\5\ contributing generally to 
the goal of market stability, and reducing CDS risks through 
multilateral netting of trades.\6\
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    \5\ ``Novation'' is a ``process through which the original 
obligation between a buyer and seller is discharged through the 
substitution of the CCP as seller to buyer and buyer to seller, 
creating two new contracts.'' Committee on Payment and Settlement 
Systems, Technical Committee of the International Organization of 
Securities Commissioners, Recommendations for Central Counterparties 
(November 2004) at 66. Through novation, the CCP assumes 
counterparty risk.
    \6\ See generally actions referenced in note 1, supra.
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    In this context, Eurex Clearing AG (``Eurex'') has requested that 
the Commission grant exemptions from certain requirements under the 
Exchange Act with respect to its proposed activities in clearing and 
settling certain CDS, as well as the proposed activities of certain 
other persons, as described below.\7\
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    \7\ See Letter from Paul Architzel, Alston & Bird LLP, to 
Elizabeth M. Murphy, Secretary, Commission, July 23, 2009.
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    Based on the facts presented and the representations made in the 
request on behalf of Eurex,\8\ and for the reasons discussed in this 
Order, the Commission temporarily is exempting, subject to certain 
conditions, Eurex from the requirement to register as a clearing agency 
under Section 17A of the Exchange Act solely to perform the functions 
of a clearing agency for certain non-excluded CDS transactions. The 
Commission also temporarily is exempting eligible contract participants 
and others from certain Exchange Act requirements with respect to non-
excluded CDS cleared by Eurex.\9\ The Commission's exemptions are 
temporary and will expire on April 23, 2010.\10\
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    \8\ See id. The exemptions we are granting today are based on 
representations made in the request on behalf of Eurex. We 
recognize, however, that there could be legal uncertainty in the 
event that one or more of the underlying representations were to 
become inaccurate. Accordingly, if any of these exemptions were to 
become unavailable by reason of an underlying representation no 
longer being materially accurate, the legal status of existing open 
positions in non-excluded CDS associated with persons subject to 
those unavailable exemptions would remain unchanged, but no new 
positions could be established pursuant to the exemptions until all 
of the underlying representations were again accurate.
    \9\ This Order, however, does not provide exemptive relief in 
connection with Eurex's clearing of certain customer CDS 
transactions; specifically, customer CDS transactions cleared 
through U.S. clearing members (other than registered broker-
dealers), and CDS transactions by U.S. customers cleared through 
non-U.S. clearing members. The Commission is considering the issues 
raised by that type of customer clearing activity--particularly with 
respect to the segregation of customer funds and securities that 
customers post with members as collateral, and the protection and 
transfer of those customer assets in the event of a member's 
insolvency. The Commission is working toward the goal of being able 
to provide exemptive relief to facilitate the central clearing, by 
Eurex, of these customer CDS transactions.
    \10\ To facilitate the operation of one or more CCPs for the CDS 
market, the Commission has also approved interim final temporary 
rules providing exemptions under the Securities Act of 1933 and the 
Exchange Act for non-excluded CDS. See Securities Act Release No. 
8999 (Jan. 14, 2009), 74 FR 3967 (Jan. 22, 2009).
     Further, the Commission has provided temporary exemptions in 
connection with Sections 5 and 6 of the Exchange Act for 
transactions in non-excluded CDS. See Securities Exchange Act 
Release No. 59165 (Dec. 24, 2008), 74 FR 133 (Jan. 2, 2009).
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II. Discussion

A. Description of Eurex's Proposal

    The exemptive request on behalf of Eurex describes how its proposed 
arrangement for central clearing of CDS would operate, and makes 
representations about the safeguards associated with those 
arrangements, as described below:
1. Eurex Organization
    Eurex is a stock corporation formed and incorporated under the laws 
of Germany. It is a wholly-owned subsidiary of Eurex Frankfurt AG 
(``Eurex Frankfurt''), a German stock corporation that is itself 
wholly-owned by Eurex Z[uuml]rich AG (``Eurex Z[uuml]rich''), a Swiss 
stock corporation. Eurex Z[uuml]rich has two 50 percent parents: 
Deutsche Borse AG (``DBAG''), a German stock corporation listed on the 
Frankfurt Stock Exchange, and the SIX Swiss Exchange (``SIX'').
    Eurex is regulated as a CCP under the German Banking Act (``Banking 
Act''), which explicitly treats the provision of central counterparty 
services as a banking activity. Operation of a banking institution 
requires prior written authorization from the German Federal Financial 
Supervisory Authority (``BaFin''). On an annual basis, BaFin requires 
Eurex to undergo an audit that covers financial requirements and risk 
management.

[[Page 37742]]

    Eurex received permission to act as a CCP from BaFin on December 
12, 2006. Eurex is supervised by BaFin cooperatively with the Deutsche 
Bundesbank, the German Federal Bank. BaFin is Eurex's principal 
regulator and is responsible for all sovereign measures, including 
licensing, monitoring, and closing individual institutions. BaFin also 
can issue general instructions, including principles and regulations 
that establish rules for carrying out banking business, providing 
financial services, and limiting risk. The Deutsche Bundesbank is 
responsible for current, ongoing oversight and supervision with respect 
to the safety and soundness of the institution's operations. In the 
U.K., Eurex is a Recognised Overseas Clearing House (``ROCH''), subject 
to regulation by the U.K. Financial Services Authority.
2. Eurex Central Counterparty Services for CDS
    Eurex's CDS clearance and settlement services will accept for 
clearing bilateral CDS transactions within the product scope of its 
rules and that are recorded in the Depository Trust & Clearing 
Corporation's (``DTCC'') Deriv/SERV Trade Information Warehouse 
(``TIW'').\11\ Eurex will act as a central counterparty for entities 
that are CDS clearing members of Eurex in connection with clearing of 
CDS transactions by assuming, through novation, the obligations of all 
eligible CDS transactions accepted by it for clearing and collecting 
margin and other credit support from CDS clearing members to 
collateralize their obligations to Eurex. Eurex's trade submission 
process is designed to ensure that it maintains a matched book of 
offsetting CDS contracts.
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    \11\ Eurex will offer CDS clearance and settlement services on 
the iTraxx Europe (Main), iTraxx HiVol, and iTraxx Europe Crossover 
CDS Indices. It will also offer CDS clearance and settlement 
services on single-name reference entities that are the constituents 
of those indices. Once it has offered clearance and settlement 
services for CDS transactions on the iTraxx indices and their 
constituents, Eurex will accept bilateral transactions on the CDX 
Index. Eventually, depending on market demand, Eurex may offer 
clearance and settlement services on single-name reference entities 
on the CDX constituents.
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    Operationally, for a transaction to clear through Eurex, it must 
first be recorded in Deriv/SERV's Trade Information Warehouse 
(``TIW''). Eurex will leverage the Deriv/SERV infrastructure in 
operating its CDS clearing services by establishing an interface to 
DTCC's Deriv/SERV TIW to capture matched and confirmed trades.\12\
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    \12\ Major market participants frequently use the Deriv/SERV 
comparison and confirmation service of DTCC when documenting their 
CDS transactions. This service creates electronic records of 
transaction terms and counterparties. As part of this service, 
market participants separately submit the terms of a CDS transaction 
to Deriv/SERV in electronic form. Paired submissions are compared to 
verify that their terms match in all required respects. If a match 
is confirmed, the parties receive an electronic confirmation of the 
submitted transaction. All submitted transactions are recorded in 
the Deriv/SERV TIW, which serves as the primary registry for 
submitted transactions.
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    Under Eurex rules, each bilateral CDS contract between CDS clearing 
members that is submitted to and accepted by Eurex for clearing will be 
novated. At the time of novation, each bilateral CDS contract submitted 
to Eurex will be terminated and replaced by two CDS contracts between 
Eurex and each of the original counterparties. As central counterparty 
to each novated CDS contract, Eurex will be able to net offsetting 
positions on a multilateral basis, which will significantly reduce the 
outstanding notional amount of each CDS clearing member's CDS 
portfolio.
3. Eurex Risk Management
    Eurex represents that it will maintain strict, objectively 
determined, risk-based margin and clearing fund requirements, which 
will be subject to ongoing regulation and oversight by the BaFin. These 
requirements will also be consistent with clearing industry practice 
and international standards established for central counterparties as 
articulated in the Committee on Payment and Settlement Systems/
International Organization of Securities Commissions (``CPSS-IOSCO'') 
Recommendations for Central Counterparties (``RCCP'').\13\ Eurex has a 
multilevel system to mitigate counterparty risk. The amount of margin 
and guaranty fund required of each Eurex clearing member will be 
continuously monitored and periodically adjusted as required to reflect 
the size and profile of, and risk associated with, the Eurex clearing 
member's cleared CDS transactions (and related market factors). An 
initial level of protection is provided by a system of collateral 
margining. The margining system is supplemented by (i) mandatory 
contributions to the Eurex CDS clearing fund (``CDS Clearing Fund'') 
and (ii) reserves maintained by Eurex.
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    \13\ The RCCP was drafted by a joint task force (``Task Force'') 
composed of representative members of IOSCO and CPSS and published 
in November 2004. The Task Force consisted of securities regulators 
and central bankers from 19 countries and the European Union. The 
U.S. representatives on the Task Force included staff from the 
Commission, the Federal Reserve Board of Governors, and the 
Commodity Futures Trading Commission.
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    Eurex will calculate the amount of up-front margin required for 
cleared CDS transactions based upon the overall risk exposure of the 
CDS clearing member. The CDS clearing member's risk exposure will be 
based on five components: (i) Mark-to-market margin, based on the 
difference between the net present values based on the CDS spread in 
the agreement and the most recently observed market spread; (ii) next 
day margin, which accounts for the decay in value in liquidating 
outstanding positions of a defaulting member; (iii) liquidity margin, 
which takes into account the time necessary to unwind a position that 
is in default; (iv) accrued premium margin,\14\ which represents the 
daily value of the spread the protection buyer pays to the protection 
seller; and (v) credit event margin.\15\ Acceptable margin includes 
cash in currencies deemed acceptable by Eurex, currently the U.S. 
dollar, the Euro, the Swiss franc, and British pound, and securities in 
accordance with existing eligibility criteria.\16\ The total margin 
requirement for CDS covers the market risk of the positions held by a 
CDS clearing member so that, should a CDS clearing member default, 
Eurex would have sufficient margin to cover losses to at least the 99 
percent confidence interval without recourse to other financial 
resources.
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    \14\ Accrued premium margin is applicable to CDS protection 
buyers only.
    \15\ Credit event margin is applicable to CDS protection sellers 
only.
    \16\ See https://www.eurexclearing.com/risk/parameters_en.html 
for admission criteria and current acceptable collateral.
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    Eurex will also maintain a clearing fund to cover losses arising 
from a Eurex CDS clearing member's default on cleared CDS transactions 
that exceed the amount of margin held by Eurex from the defaulting 
Eurex CDS clearing member. Each Eurex CDS clearing member will be 
required to contribute five percent of their margin requirement to the 
clearing fund, subject to a minimum of [euro]50 million. Since the size 
of the clearing fund will grow in relation to the volume of each CDS 
clearing member's open positions, it is designed to maintain adequate, 
liquid resources to enable Eurex to handle a default in which the 
defaulting CDS clearing member's margin requirement is insufficient to 
cover the loss.
    Eurex will also establish rules that mutualize the risk of a Eurex 
CDS clearing member default across all Eurex CDS clearing members. In 
the event of a Eurex CDS clearing member's default,

[[Page 37743]]

Eurex will look to the following resources, in order: (i) The 
defaulting CDS clearing member's margin; (ii) the defaulting CDS 
clearing member's contribution to the clearing fund; (iii) Eurex's 
reserve fund; (iv) non-defaulting CDS clearing members' contribution to 
the clearing fund; and (v) a one-time assessment to non-defaulting CDS 
clearing members.
    Eurex will conduct routine stress testing periodically throughout 
the trading day to ensure that it can meet its obligations as a CCP in 
normal and extreme market conditions to a 99.9 percent confidence 
level. Each CDS clearing member's risk exposure will be stress-tested 
against a comprehensive set of scenarios for all product groups that it 
clears. Stress-testing scenarios include the worst historical 
observations experienced in each of the product groups as well as 
Eurex's expectation on worst potential future price movements. 
Potential losses based on stress scenarios are compared to each CDS 
clearing member's additional margin. Losses beyond additional margin 
are then compared to the clearing fund. As soon as the consumption of 
the clearing fund by any CDS clearing member--irrespective of the CDS 
clearing member's credit quality--breaches a defined threshold, Eurex 
will take risk-mitigating actions. These risk-mitigating actions may be 
CDS clearing member-specific, such as imposing extra margin 
requirements, or general, such as calling for additional clearing fund 
contributions by all CDS clearing members.
4. Member Default
    Following a default by a CDS clearing member, Eurex would follow a 
procedure to help ensure an orderly liquidation and unwinding of the 
open positions of the defaulting member. First, the defaulting CDS 
clearing member is required to close its existing cleared CDS contracts 
and notify its customers so that they can transfer their transactions 
to another Eurex CDS clearing member. If the Eurex CDS clearing member 
does not close or transfer cleared CDS contracts within a reasonable 
period of time, Eurex can close the positions on behalf of the 
defaulting CDS clearing member. If Eurex is unable to close the cleared 
CDS contracts within a reasonable period, it may use a voluntary 
auction process to liquidate the defaulting CDS clearing member's 
position as a whole or in meaningful amounts. Finally, Eurex may assign 
any remaining positions to non-defaulting CDS clearing members on a pro 
rata basis.

B. Temporary Conditional Exemption From Clearing Agency Registration 
Requirement

    Section 17A of the Exchange Act sets forth the framework for the 
regulation and operation of the U.S. clearance and settlement system, 
including CCPs. Specifically, Section 17A directs the Commission to use 
its authority to promote enumerated Congressional objectives and to 
facilitate the development of a national clearance and settlement 
system for securities transactions. Absent an exemption, a CCP that 
novates trades of non-excluded CDS that are securities and generates 
money and settlement obligations for participants is required to 
register with the Commission as a clearing agency.
    Section 36 of the Exchange Act authorizes the Commission to 
conditionally or unconditionally exempt any person, security, or 
transaction, or any class or classes of persons, securities, or 
transactions, from any provision or provisions of the Exchange Act or 
any rule or regulation thereunder, by rule, regulation, or order, to 
the extent that such exemption is necessary or appropriate in the 
public interest, and is consistent with the protection of 
investors.\17\
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    \17\ 15 U.S.C. 78mm.
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    Accordingly, pursuant to Section 36 of the Exchange Act, the 
Commission finds that it is necessary or appropriate in the public 
interest and is consistent with the protection of investors to exercise 
its authority to grant an exemption until April 23, 2010 to Eurex from 
Section 17A of the Exchange Act, solely to perform the functions of a 
clearing agency for Cleared CDS,\18\ subject to the conditions 
discussed below.
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    \18\ For purposes of this exemption, and the other exemptions 
addressed in this Order, ``Cleared CDS'' means a credit default swap 
that is submitted (or offered, purchased, or sold on terms providing 
for submission) to Eurex, that is offered only to, purchased only 
by, and sold only to eligible contract participants (as defined in 
Section 1a(12) of the Commodity Exchange Act as in effect on the 
date of this Order (other than a person that is an eligible contract 
participant under paragraph (C) of that section)), and in which: (1) 
The reference entity, the issuer of the reference security, or the 
reference security is one of the following: (i) an entity reporting 
under the Exchange Act, providing Securities Act Rule 144A(d)(4) 
information, or about which financial information is otherwise 
publicly available; (ii) a foreign private issuer whose securities 
are listed outside the United States and that has its principal 
trading market outside the United States; (iii) a foreign sovereign 
debt security; (iv) an asset-backed security, as defined in 
Regulation AB, issued in a registered transaction with publicly 
available distribution reports; or (v) an asset-backed security 
issued or guaranteed by the Federal National Mortgage Association 
(``Fannie Mae''), the Federal Home Loan Mortgage Corporation 
(``Freddie Mac''), or the Government National Mortgage Association 
(``Ginnie Mae''); or (2) the reference index is an index in which 
80% or more of the index's weighting is comprised of the entities or 
securities described in subparagraph (1). As discussed above, the 
Commission's action today does not affect CDS that are swap 
agreements under Section 206A of the Gramm-Leach-Bliley Act. See 
note 4, supra. The Commission's action today also does not affect 
activities in CDS that are outside the jurisdiction of the United 
States.
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    Our action today balances the aim of facilitating the prompt 
establishment of Eurex as a CCP for non-excluded CDS transactions--
which should help reduce systemic risks--with ensuring that important 
elements of Commission oversight are applied to the non-excluded CDS 
market. In doing so, we are mindful that applying the full scope of the 
Exchange Act to transactions involving non-excluded CDS could deter the 
prompt establishment of Eurex as a CCP to settle those transactions.
    While we are acting so that the prompt establishment of Eurex as a 
CCP for non-excluded CDS will not be delayed by the need to apply the 
full scope of Exchange Act Section 17A's requirements that govern 
clearing agencies, the relief we are providing is temporary and 
conditional. The limited duration of the exemptions will permit the 
Commission to continue to gain more direct experience with the non-
excluded CDS market after Eurex becomes operational, giving the 
Commission the ability to oversee the development of the centrally 
cleared non-excluded CDS market as it evolves. During the exemptive 
period, the Commission will closely monitor the impact of the CCPs on 
the CDS market. In particular, the Commission will seek to assure 
itself that the CCPs do not act in an anticompetitive manner or 
indirectly facilitate anticompetitive behavior with respect to fees 
charged to members, the dissemination of market data and the access to 
clearing services by independent CDS exchanges or CDS trading 
platforms. The Commission will take that experience into account in 
future actions.
    Moreover, this temporary exemption in part is based on Eurex's 
representation that it meets the standards set forth in the CPSS-IOSCO 
RCCP report. The RCCP establishes a framework that requires a CCP to 
have: (i) the ability to facilitate the prompt and accurate clearance 
and settlement of CDS transactions and to safeguard its users' assets; 
and (ii) sound risk management, including the ability to appropriately 
determine and collect clearing fund and monitor its users' trading. 
This framework is generally consistent with the requirements of Section 
17A of the Exchange Act.

[[Page 37744]]

    In addition, this Order is designed to assure that--as represented 
in the request on behalf of Eurex--information will be available to 
market participants about the terms of the CDS cleared by Eurex, the 
creditworthiness of Eurex or any guarantor, and the clearing and 
settlement process for the CDS. Moreover, to be within the definition 
of Cleared CDS for purposes of this exemption (as well as the other 
exemptions granted through this Order), a CDS may only involve a 
reference entity, a reference security, an issuer of a reference 
security, or a reference index that satisfies certain conditions 
relating to the availability of information about such persons or 
securities. For non-excluded CDS that are index-based, the definition 
provides that at least 80 percent of the weighting of the index must be 
comprised of reference entities, issuers of a reference security, or 
reference securities that satisfy the information conditions. The 
definition does not prescribe the type of financial information that 
must be available or the location of the particular information, 
recognizing that eligible contract participants have access to 
information about reference entities and reference securities through 
multiple sources. The Commission believes, however, that it is 
important in the CDS market, as in the market for securities generally, 
that parties to transactions should have access to financial 
information that would allow them to appropriately evaluate the risks 
relating to a particular investment and make more informed investment 
decisions.\19\ Such information availability also will assist Eurex and 
the buyers and sellers in valuing their Cleared CDS and their 
counterparty exposures. As a result of the Commission's actions today, 
the Commission believes that information should be available for market 
participants to be able to make informed investment decisions, and 
value and evaluate their Cleared CDS and their counterparty exposures.
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    \19\ The Commission notes the recommendations of the President's 
Working Group on Financial Markets regarding the informational needs 
and due diligence responsibilities of investors. See Policy 
Statement on Financial Market Developments, The President's Working 
Group on Financial Markets, Mar. 13, 2008, available at: https://www.ustreas.gov/press/releases/reports/pwgpolicystatemktturmoil_03122008.pdf.
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    This temporary exemption is subject to a number of conditions that 
are designed to enable Commission staff to monitor Eurex's clearance 
and settlement of CDS transactions, cooperate with BaFin, and help 
reduce risk in the CDS market. These conditions require that Eurex: (i) 
Make available on its Web site annual audited financial statements; 
(ii) preserve records of all activities related to the business of 
Eurex as a CCP for Cleared CDS for at least five years (in an easily 
accessible place for the first two years); (iii) supply information 
relating to its Cleared CDS clearance and settlement services as may be 
reasonably requested by the Commission and provide access to the 
Commission to conduct on-site inspections of facilities, records and 
personnel related to its Cleared CDS clearance and settlement services; 
\20\ (iv) notify the Commission about material disciplinary actions 
taken against any of its members with respect to Cleared CDS clearance 
and settlement services, and about the involuntary termination of the 
membership of an entity using those services; (v) notify the Commission 
not less than one day prior to implementation or effectiveness of 
changes to its rules, procedures, and any other material events 
affecting its Cleared CDS clearance and settlement services, or, in 
exigent circumstances, as promptly as reasonably practicable under the 
circumstances; (vi) provide the Commission with reports prepared by 
independent audit personnel that are generated in accordance with risk 
assessment of the areas set forth in the Commission's Automation Review 
Policy Statements \21\ and its annual audited financial statements 
prepared by independent audit personnel; and (vii) report all 
significant systems outages to the Commission.
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    \20\ The Commission's inspections shall be subject to 
cooperation with BaFin and upon terms and conditions agreed to 
between the Commission and BaFin in the bilateral MOU related to 
cooperation and information-sharing. ``Memorandum of Understanding 
Concerning Consultation, Cooperation, and the Exchange of 
Information Related to Market Oversight and the Supervision of 
Financial Services Firms,'' Apr. 26, 2007.
    \21\ See Automated Systems of Self-Regulatory Organizations, 
Securities Exchange Act Release No. 27445 (Nov. 16, 1989), 54 FR 
48703 (Nov. 24, 1989), and Automated Systems of Self-Regulatory 
Organizations, Securities Exchange Act Release No. 29185 (May 9, 
1991), 56 FR 22490 (May 15, 1991).
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    In addition, this relief is conditioned on Eurex, directly or 
indirectly, making available to the public on terms that are fair and 
reasonable and not unreasonably discriminatory: (i) all end-of-day 
settlement prices and any other prices with respect to Cleared CDS that 
Eurex may establish to calculate mark-to-market margin requirements for 
Eurex clearing members; and (ii) any other pricing or valuation 
information with respect to Cleared CDS as is published or distributed 
by Eurex. The Commission believes this is an appropriate condition for 
Eurex's exemption from registration as a clearing agency. In Section 
11A of the Exchange Act, Congress found that ``[i]t is in the public 
interest and appropriate for the protection of investors and the 
maintenance of fair and orderly markets to assure . . . the 
availability to brokers, dealers, and investors of information with 
respect to quotations for and transactions in securities.'' \22\ The 
President's Working Group on Financial Markets has stated that 
increased transparency is a policy objective for the over-the-counter 
derivatives market,\23\ which includes the market for CDS. The 
condition is designed to further this policy objective of both Congress 
and the President's Working Group by requiring Eurex to make useful 
pricing data available to the public on terms that are fair and 
reasonable and not unreasonably discriminatory. Congress adopted these 
standards for the distribution of data in Section 11A. The Commission 
long has applied the standards in the specific context of securities 
market data,\24\ and it anticipates that Eurex will distribute its data 
on terms that generally are consistent with the application of these 
standards to securities market data. For example, data distributors 
generally are required to treat subscribers equally and not grant 
special access, fees, or other privileges to favored customers of the 
distributor. Similarly, distributors must make their data feeds 
reasonably available to data vendors for those subscribers who wish to 
receive their data indirectly through a vendor rather than directly 
from the distributor. In addition, a distributor's attempt to tie data 
products that must be made available to the public with other products 
or services of the distributor would be inconsistent with the statutory 
requirements.\25\ The Commission

[[Page 37745]]

carefully evaluates any type of discrimination with respect to 
subscribers and vendors to assess whether there is a reasonable basis 
for the discrimination given, among other things, the Exchange Act 
objective of promoting price transparency.\26\ Moreover, preventing 
unreasonable discrimination is a practical means to promote fair and 
reasonable terms for data distribution because distributors are more 
likely to act appropriately when the terms applicable to the broader 
public also must apply to any favored classes of customers.\27\
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    \22\ 15 U.S.C. 78k-1(a)(1)(C)(iii). See also 15 U.S.C. 78k-
1(a)(1)(D).
    \23\ See President's Working Group on Financial Markets, Policy 
Objectives for the OTC Derivatives Market (Nov. 14, 2008), available 
at https://www.ustreas.gov/press/releases/reports/policyobjectives.pdf (``Public reporting of prices, trading volumes 
and aggregate open interest should be required to increase market 
transparency for participants and the public.''). See also 
Department of the Treasury, Financial Regulatory Reform: A New 
Foundation, available at https://www.financialstability.gov/docs/regs/FinalReport_web.pdf, at p.48 (``[m]arket efficiency and price 
transparency should be improved in derivatives markets . . . by 
requiring development of a system for timely reporting of trades and 
prompt dissemination of prices and other trade information.'').
    \24\ See Securities Exchange Act Release No. 42209 (Dec. 9, 
1999), 64 FR 70613, 70621-70623 (Dec. 17, 1999) (``Market 
Information Concept Release'') (discussion of legal standards 
applicable to market data distribution since Section 11A was adopted 
in 1975).
    \25\ See Securities Exchange Act Release No. 59039 (Dec. 2, 
2008), 73 FR 74770, 74793 (Dec. 9, 2008) (``NYSE ArcaBook Order'') 
(``[S]ection 6 and Exchange Act Rule 603(a) require NYSE Arca to 
distribute the ArcaBook data on terms that are not tied to other 
products in a way that is unfairly discriminatory or 
anticompetitive.'').
    \26\ See Market Information Concept Release, 64 FR at 70630 
(``The most important objectives for the Commission to consider in 
evaluating fees are to assure (1) the wide availability of market 
information, (2) the neutrality of fees among markets, vendors, 
broker-dealers, and users, (3) the quality of market information--
its integrity, reliability, and accuracy, and (4) fair competition 
and equal regulation among markets and broker-dealers.'').
    \27\ See NYSE ArcaBook Order, 73 FR at 74794 (``[T]he proposed 
fees for ArcaBook data will apply equally to all professional 
subscribers and all non-professional subscribers . . . The fees 
therefore do not unreasonably discriminate among types of 
subscribers, such as by favoring participants in the NYSE Arca 
market or penalizing participants in other markets.'').
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    As a CCP, Eurex will collect and process information about CDS 
transactions, prices, and positions from all of its clearing members. 
With this information, a CCP will, among other things, calculate and 
disseminate current values for open positions for the purpose of 
setting appropriate margin levels. The availability of such information 
can improve fairness, efficiency, and competitiveness of the market--
all of which enhance investor protection and facilitate capital 
formation. Moreover, with pricing and valuation information relating to 
Cleared CDS, market participants would be able to derive information 
about underlying securities and indexes. This may improve the 
efficiency and effectiveness of the securities markets by allowing 
investors to better understand credit conditions generally.

C. Temporary General Exemption for Eurex and Certain Eligible Contract 
Participants

    Applying the full panoply of Exchange Act requirements to 
participants in transactions in non-excluded CDS likely would deter 
some participants from using CCPs to clear CDS transactions. At the 
same time, it is important that the antifraud provisions of the 
Exchange Act apply to transactions in non-excluded CDS; indeed, OTC 
transactions subject to individual negotiation that qualify as 
security-based swap agreements already are subject to these antifraud 
provisions.\28\
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    \28\ While Section 3A of the Exchange Act excludes ``swap 
agreements'' from the definition of ``security,'' certain antifraud 
and insider trading provisions under the Exchange Act explicitly 
apply to security-based swap agreements. See (a) paragraphs (2) 
through (5) of Section 9(a), 15 U.S.C. 78i(a), prohibiting the 
manipulation of security prices; (b) Section 10(b), 15 U.S.C. 
78j(b), and underlying rules prohibiting fraud, manipulation or 
insider trading (but not prophylactic reporting or recordkeeping 
requirements); (c) Section 15(c)(1), 15 U.S.C. 78o(c)(1), which 
prohibits brokers and dealers from using manipulative or deceptive 
devices; (d) Sections 16(a) and (b), 15 U.S.C. 78p(a) and (b), which 
address disclosure by directors, officers and principal 
stockholders, and short-swing trading by those persons, and rules 
with respect to reporting requirements under Section 16(a); (e) 
Section 20(d), 15 U.S.C. 78t(d), providing for antifraud liability 
in connection with certain derivative transactions; and (f) Section 
21A(a)(1), 15 U.S.C. 78u-1(a)(1), related to the Commission's 
authority to impose civil penalties for insider trading violations.
    ``Security-based swap agreement'' is defined in Section 206B of 
the Gramm-Leach-Bliley Act as a swap agreement in which a material 
term is based on the price, yield, value, or volatility of any 
security or any group or index of securities, or any interest 
therein.
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    We thus believe that it is appropriate in the public interest and 
consistent with the protection of investors temporarily to apply 
substantially the same framework to transactions by market participants 
in non-excluded CDS that applies to transactions in security-based swap 
agreements. Applying substantially the same set of requirements to 
participants in transactions in non-excluded CDS as apply to 
participants in OTC CDS transactions will avoid deterring market 
participants from promptly using CCPs, which would detract from the 
potential benefits of central clearing.
    Accordingly, pursuant to Section 36 of the Exchange Act, the 
Commission finds that it is necessary or appropriate in the public 
interest and is consistent with the protection of investors to exercise 
its authority to grant an exemption until April 23, 2010 from certain 
requirements under the Exchange Act. This temporary exemption in part 
applies to Eurex, and to any Eurex U.S. Clearing Member \29\ or Eurex 
non-U.S. Clearing Member \30\ that is not a broker or dealer registered 
under Section 15(b) of the Exchange Act (other than paragraph (11) 
thereof). This temporary exemption also applies to certain eligible 
contract participants \31\ other than: eligible contract participants 
that receive or hold funds or securities for the purpose of purchasing, 
selling, clearing, settling or holding Cleared CDS positions for other 
persons; \32\ eligible contract participants that are self-regulatory 
organizations; or eligible contract participants that are registered 
brokers or dealers.\33\
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    \29\ For Purposes of this Order, a ``Eurex U.S. Clearing 
Member'' means any U.S. clearing member of Eurex that submits 
Cleared CDS to Eurex for clearance and settlement exclusively (i) 
for its own account or (ii) for the account of an affiliate that 
controls, is controlled by, or is under common control with the U.S. 
clearing member of Eurex.
    \30\ For Purposes of this Order, a ``Eurex non-U.S. Clearing 
Member'' means any Eurex clearing member, other than a clearing 
member that is a U.S. person, that submits Cleared CDS to Eurex for 
clearance and settlement exclusively (i) for its own account, (ii) 
for the account of an affiliate (including a U.S. affiliate) that 
controls, is controlled by, or is under common control with the non-
U.S. clearing member of Eurex, or (iii) for the account of any other 
person except a U.S. person.
    Consistent with these definitions of ``Eurex U.S. Clearing 
Member'' and ``Eurex non-U.S. Clearing Member,'' this exemption is 
available to Eurex members that clear CDS transactions for 
themselves and their affiliates, or, in the case of non-U.S. members 
of Eurex, that clear CDS transactions on behalf of non-U.S. 
customers. The exemption otherwise does not extend to persons who 
engage in customer clearing activities on Eurex (e.g., customer 
clearing by a U.S. member of Eurex for any persons, or customer 
clearing by a non-U.S. member of Eurex for U.S. persons). See note 
9, supra.
    The exemptive relief for Eurex non-U.S. Clearing Members is 
intended to provide legal certainty for these non-U.S. persons in 
those circumstances when their activities in Cleared CDS are within 
the jurisdiction of the United States. The exemptive relief is not 
necessary for these non-U.S. persons when their activities in 
Cleared CDS are not otherwise subject to the federal securities 
laws.
    \31\ This exemption in general applies to eligible contract 
participants, as defined in Section 1a(12) of the Commodity Exchange 
Act as in effect on the date of this Order, other than persons that 
are eligible contract participants under paragraph (C) of that 
section.
    \32\ Solely for purposes of this requirement, an eligible 
contract participant would not be viewed as receiving or holding 
funds or securities for purpose of purchasing, selling, clearing, 
settling, or holding Cleared CDS positions for other persons, if the 
other persons involved in the transaction would not be considered 
``customers'' of the eligible contract participant under the 
analysis used for determining whether certain persons would be 
considered ``customers'' of a broker-dealer under Exchange Act Rule 
15c3-3(a)(1). For these purposes, and for the purpose of the 
definition of ``Cleared CDS,'' the terms ``purchasing'' and 
``selling'' mean the execution, termination (prior to its scheduled 
maturity date), assignment, exchange, or similar transfer or 
conveyance of, or extinguishing the rights or obligations under, a 
Cleared CDS, as the context may require. This is consistent with the 
meaning of the terms ``purchase'' or ``sale'' under the Exchange Act 
in the context of security-based swap agreements. See Exchange Act 
Section 3A(b)(4).
    \33\ A separate temporary exemption addresses the Cleared CDS 
activities of registered broker-dealers. See Part II.D, infra. 
Solely for purposes of this Order, a registered broker-dealer, or a 
broker or dealer registered under Section 15(b) of the Exchange Act, 
does not refer to someone that would otherwise be required to 
register as a broker or dealer solely as a result of activities in 
Cleared CDS in compliance with this Order.
---------------------------------------------------------------------------

    Under this temporary exemption, and solely with respect to Cleared 
CDS,

[[Page 37746]]

these persons generally are exempt from the provisions of the Exchange 
Act and the rules and regulations thereunder that do not apply to 
security-based swap agreements. Those persons thus would still be 
subject to those Exchange Act requirements that explicitly are 
applicable in connection with security-based swap agreements.\34\ In 
addition, all provisions of the Exchange Act related to the 
Commission's enforcement authority in connection with violations or 
potential violations of such provisions would remain applicable.\35\ In 
this way, the temporary exemption would apply the same Exchange Act 
requirements in connection with non-excluded CDS as apply in connection 
with OTC credit default swaps.
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    \34\ See note 28, supra.
    \35\ Thus, for example, the Commission retains the ability to 
investigate potential violations and bring enforcement actions in 
the federal courts and administrative proceedings, and to seek the 
full panoply of remedies available in such cases.
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    This temporary exemption, however, does not extend to Sections 5 
and 6 of the Exchange Act. The Commission separately issued a 
conditional exemption from these provisions to all broker-dealers and 
exchanges.\36\ This temporary exemption also does not extend to Section 
17A of the Exchange Act; instead, Eurex is exempt from registration as 
a clearing agency under the conditions discussed above. In addition, 
this temporary exemption does not apply to Exchange Act Sections 12, 
13, 14, 15(d) and 16; \37\ eligible contract participants and other 
persons instead should refer to the interim final temporary rules 
issued by the Commission. Finally, this temporary exemption does not 
extend to the Commission's administrative proceeding authority under 
Sections 15(b)(4) and (b)(6),\38\ or to certain provisions related to 
government securities.\39\
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    \36\ See note 10, supra. A national securities exchange that 
effects transactions in Cleared CDS would continue to be required to 
comply with all requirements under the Exchange Act applicable to 
such transactions. A national securities exchange could form 
subsidiaries or affiliates that operate exchanges exempt under that 
order. Any subsidiary or affiliate of a registered exchange could 
not integrate, or otherwise link, the exempt CDS exchange with the 
registered exchange including the premises or property of such 
exchange for effecting or reporting a transaction without being 
considered a ``facility of the exchange.'' See Section 3(a)(2), 15 
U.S.C. 78c(a)(2).
    \37\ 15 U.S.C. 78l, 78m, 78n, 78o(d), 78p.
    \38\ Exchange Act Sections 15(b)(4) and 15(b)(6), 15 U.S.C. 
78o(b)(4) and (b)(6), grant the Commission authority to take action 
against broker-dealers and associated persons in certain situations. 
Accordingly, while this exemption generally extends to persons that 
act as inter-dealer brokers in the market for Cleared CDS and do not 
hold funds or securities for others, such inter-dealer brokers may 
be subject to actions under Sections 15(b)(4) and (b)(6) of the 
Exchange Act.
    In addition, such inter-dealer brokers may be subject to actions 
under Exchange Act Section 15(c)(1), 15 U.S.C. 78o(c)(1), which 
prohibits brokers and dealers from using manipulative or deceptive 
devices. As noted above, Section 15(c)(1) explicitly applies to 
security-based swap agreements. Sections 15(b)(4), 15(b)(6) and 
15(c)(1), of course, would not apply to persons subject to this 
exemption who do not act as broker-dealers or associated persons of 
broker-dealers.
    \39\ This exemption specifically does not extend to the Exchange 
Act provisions applicable to government securities, as set forth in 
Section 15C, 15 U.S.C. 78o-5, and its underlying rules and 
regulations; nor does the exemption extend to related definitions 
found at paragraphs (42) through (45) of Section 3(a), 15 U.S.C. 
78c(a). The Commission does not have authority under Section 36 to 
issue exemptions in connection with those provisions. See Exchange 
Act Section 36(b), 15 U.S.C. 78mm(b).
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D. Temporary General Exemption for Certain Registered Broker-Dealers

    The temporary exemptions addressed above--with regard to Eurex and 
certain eligible contract participants--are not available to persons 
that are registered as broker-dealers with the Commission (other than 
those that are notice registered pursuant to Section 15(b)(11)).\40\ 
The Exchange Act and its underlying rules and regulations require 
broker-dealers to comply with a number of obligations that are 
important to protecting investors and promoting market integrity. We 
are mindful of the need to avoid creating disincentives to the prompt 
use of CCPs, and we recognize that the factors discussed above suggest 
that the full panoply of Exchange Act requirements should not 
immediately be applied to registered broker-dealers that engage in 
transactions involving Cleared CDS. At the same time, we also are 
sensitive to the critical importance of certain broker-dealer 
requirements to promoting market integrity and protecting customers 
(including those broker-dealer customers that are not involved with CDS 
transactions).
---------------------------------------------------------------------------

    \40\ Exchange Act Section 15(b)(11) provides for notice 
registration of certain persons that effect transactions in security 
futures products. 15 U.S.C. 78o(b)(11).
---------------------------------------------------------------------------

    This calls for balancing the facilitation of the development and 
prompt implementation of CCPs with the preservation of certain key 
investor protections. Pursuant to Section 36 of the Exchange Act, the 
Commission finds that it is necessary or appropriate in the public 
interest and is consistent with the protection of investors to exercise 
its authority to grant an exemption until April 23, 2010 from certain 
Exchange Act requirements. Consistent with the temporary exemptions 
discussed above, and solely with respect to Cleared CDS, we are 
exempting registered broker-dealers in general from the provisions of 
the Exchange Act and its underlying rules and regulations that do not 
apply to security-based swap agreements. As above, we are not excluding 
registered broker-dealers from Exchange Act provisions that explicitly 
apply in connection with security-based swap agreements or from related 
enforcement authority provisions.\41\ As above, and for similar 
reasons, we are not exempting registered broker-dealers from: Sections 
5, 6, 12(a) and (g), 13, 14, 15(b)(4), 15(b)(6), 15(d), 16 and 17A of 
the Exchange Act.\42\
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    \41\ See notes 28 and 35, supra. As noted above, broker-dealers 
also would be subject to Section 15(c)(1) of the Exchange Act, which 
prohibits brokers and dealers from using manipulative or deceptive 
devices, because that provision explicitly applies in connection 
with security-based swap agreements. In addition, to the extent the 
Exchange Act and any rule or regulation thereunder imposes any other 
requirement on a broker-dealer with respect to security-based swap 
agreements (e.g., requirements under Rule 17h-1T to maintain and 
preserve written policies, procedures, or systems concerning the 
broker or dealer's trading positions and risks, such as policies 
relating to restrictions or limitations on trading financial 
instruments or products), these requirements would continue to apply 
to broker-dealers' activities with respect to Cleared CDS.
    \42\ We also are not exempting those members from provisions 
related to government securities, as discussed above.
---------------------------------------------------------------------------

    Further we are not exempting registered broker-dealers from the 
following additional provisions under the Exchange Act: (i) Section 
7(c),\43\ which addresses the unlawful extension of credit by broker-
dealers; (ii) Section 15(c)(3),\44\ which addresses the use of unlawful 
or manipulative devices by broker-dealers; (iii) Section 17(a),\45\ 
regarding broker-dealer obligations to make, keep and furnish 
information; (iv) Section 17(b),\46\ regarding broker-dealer records 
subject to examination; (v) Regulation T,\47\ a Federal Reserve Board 
regulation regarding extension of credit by broker-dealers; (vi) 
Exchange Act Rule 15c3-1, regarding broker-dealer net capital; (vii) 
Exchange Act Rule 15c3-3, regarding broker-dealer reserves and custody 
of securities; (viii) Exchange Act Rules 17a-3 through 17a-5, regarding 
records to be made and preserved by broker-dealers and reports to be 
made by broker-dealers; and (ix) Exchange Act Rule 17a-13, regarding 
quarterly security counts to be made by certain exchange members and 
broker-dealers.\48\ Registered broker-dealers

[[Page 37747]]

should comply with these provisions in connection with their activities 
involving non-excluded CDS because these provisions are especially 
important to helping protect customer funds and securities, ensure 
proper credit practices and safeguard against fraud and abuse.\49\
---------------------------------------------------------------------------

    \43\ 15 U.S.C. 78g(c).
    \44\ 15 U.S.C. 78o(c)(3).
    \45\ 15 U.S.C. 78q(a).
    \46\ 15 U.S.C. 78q(b).
    \47\ 12 CFR 220.1 et seq.
    \48\ Solely for purposes of this exemption, in addition to the 
general requirements under the referenced Exchange Act sections, 
registered broker-dealers shall only be subject to the enumerated 
rules under the referenced Exchange Act sections.
    \49\ Indeed, Congress directed the Commission to promulgate 
broker-dealer financial responsibility rules, including rules 
regarding custody, the use of customer securities and the use of 
customers' deposits or credit balances, and regarding establishment 
of minimum financial requirements.
---------------------------------------------------------------------------

E. Solicitation of Comments

    The Commission is continuing to monitor closely the development of 
the CDS market and intends to determine to what extent, if any, 
additional regulatory action may be necessary. For example, as 
circumstances warrant, certain conditions could be added, altered, or 
eliminated. Moreover, because these exemptions are temporary, the 
Commission will in the future consider whether they should be extended 
or allowed to expire. The Commission believes it would be prudent to 
solicit public comment on its action today, and on what action it 
should take with respect to the CDS market in the future. The 
Commission is soliciting public comment on all aspects of these 
temporary exemptions, including:
    1. Whether the length of this temporary exemption (until April 23, 
2010) is appropriate. If not, what should the appropriate duration be?
    2. Whether the conditions to these temporary exemptions are 
appropriate. Why or why not? Should other conditions apply? Are any of 
the present conditions to the temporary exemptions provided in this 
Order unnecessary? If so, please specify and explain why such 
conditions are not needed.
    3. Whether Eurex ultimately should be required to register as a 
clearing agency under the Exchange Act. Why or why not?
    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (https://www.sec.gov/rules/other.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number S7-17-09 on the subject line.

Paper Comments

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

All submissions should refer to File Number S7-17-09. 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. We will post all comments on the Commission's Internet Web site 
(https://www.sec.gov/rules/exorders.shtml). Comments are also available 
for public inspection and copying in the Commission's Public Reference 
Room, 100 F Street, NE., Washington, DC 20549, on official business 
days between the hours of 10 am and 3 pm. All comments received will be 
posted without change; we do not edit personal identifying information 
from submissions. You should submit only information that you wish to 
make available publicly.

III. Conclusion

    It is hereby ordered, pursuant to Section 36(a) of the Exchange 
Act, that, until April 23, 2010:
    (a) Exemption from Section 17A of the Exchange Act.
    Eurex Clearing AG (``Eurex'') shall be exempt from Section 17A of 
the Exchange Act solely to perform the functions of a clearing agency 
for Cleared CDS (as defined in paragraph (d)(1) of this Order), subject 
to the following conditions:
    (1) Eurex shall make available on its Web site its annual audited 
financial statements.
    (2) Eurex shall keep and preserve at least one copy of all 
documents, including all correspondence, memoranda, papers, books, 
notices, accounts and other such records as shall be made or received 
by it relating to its Cleared CDS clearance and settlement services. 
These records shall be kept for at least five years and for the first 
two years shall be held in an easily accessible place.
    (3) Eurex shall supply information and periodic reports relating to 
its Cleared CDS clearance and settlement services as may be reasonably 
requested by the Commission, and shall provide access to the Commission 
to conduct on-site inspections of all facilities (including automated 
systems and systems environment), records, and personnel related to 
Eurex's Cleared CDS clearance and settlement services.
    (4) Eurex shall notify the Commission, on a monthly basis, of any 
material disciplinary actions taken against any of its members using 
its Cleared CDS clearance and settlement services, including the denial 
of services, fines, or penalties. Eurex shall notify the Commission 
promptly when it terminates on an involuntary basis the membership of 
an entity that is using Eurex's Cleared CDS clearance and settlement 
services. Both notifications shall describe the facts and circumstances 
that led to Eurex's disciplinary action.
    (5) Eurex shall notify the Commission of all changes to its rules, 
procedures, and any other material events affecting its Cleared CDS 
clearance and settlement services, including its fee schedule and 
changes to risk management practices, not less than one day prior to 
effectiveness or implementation of such changes or, in exigent 
circumstances, as promptly as reasonably practicable under the 
circumstances. All such rule changes will be posted on Eurex's Web 
site. Such notifications will not be deemed rule filings that require 
Commission approval.
    (6) Eurex shall provide the Commission with reports prepared by 
independent audit personnel concerning its Cleared CDS clearance and 
settlement services that are generated in accordance with risk 
assessment of the areas set forth in the Commission's Automation Review 
Policy Statements. Eurex shall provide the Commission with annual 
audited financial statements for Eurex prepared by independent audit 
personnel.
    (7) Eurex shall report all significant systems outages to the 
Commission. If it appears that the outage may extend for 30 minutes or 
longer, Eurex shall report the systems outage immediately. If it 
appears that the outage will be resolved in fewer than 30 minutes, 
Eurex shall report the systems outage within a reasonable time after 
the outage has been resolved.
    (8) Eurex, directly or indirectly, shall make available to the 
public on terms that are fair and reasonable and not unreasonably 
discriminatory: (i) all end-of-day settlement prices and any other 
prices with respect to Cleared CDS that Eurex may establish to 
calculate mark-to-market margin requirements for Eurex clearing 
members; and (ii) any other pricing or valuation information with 
respect to Cleared CDS as is published or distributed by Eurex.
    (b) Exemption for Eurex, certain Eurex clearing members, and 
certain eligible contract participants.
    (1) Persons eligible. The exemption in paragraph (b)(2) is 
available to:
    (i) Eurex;
    (ii) Any Eurex U.S. Clearing Member (as defined in paragraph (d)(2) 
of this Order) that is not a broker or dealer registered under Section 
15(b) of the Exchange Act (other than paragraph (11) thereof);

[[Page 37748]]

    (iii) Any Eurex non-U.S. Clearing Member (as defined in paragraph 
(d)(3) of this Order) that is not a broker or dealer registered under 
Section 15(b) of the Exchange Act (other than paragraph (11) thereof); 
and
    (iv)