Order Extending Temporary Exemptions Under the Securities Exchange Act of 1934 in Connection with Request of ICE Trust U.S. LLC Related to Central Clearing of Credit Default Swaps, and Request for Comments, 11589-11603 [2010-5222]

Download as PDF jlentini on DSKJ8SOYB1PROD with NOTICES Federal Register / Vol. 75, No. 47 / Thursday, March 11, 2010 / Notices Company a list of the names of each Fund of Funds Affiliate and Underwriting Affiliate. The Fund of Funds will notify the Unaffiliated Investment Company of any changes to the list of the names as soon as reasonably practicable after a change occurs. The Unaffiliated Investment Company and the Fund of Funds will maintain and preserve a copy of the order, the Participation Agreement, and the list with any updated information for the duration of the investment and for a period of not less than six years thereafter, the first two years in an easily accessible place. 9. Before approving any advisory contract under section 15 of the Act, the Board of each Fund of Funds, including a majority of the Independent Trustees, shall find that the advisory fees charged under such advisory contract are based on services provided that are in addition to, rather than duplicative of, services provided under the advisory contract(s) of any Underlying Fund in which the Fund of Funds may invest. Such finding and the basis upon which the finding was made will be recorded fully in the minute books of the appropriate Fund of Funds. 10. The Adviser will waive fees otherwise payable to it by a Fund of Funds in an amount at least equal to any compensation (including fees received pursuant to any plan adopted by an Unaffiliated Investment Company under rule 12b–1 under the Act) received from an Unaffiliated Fund by the Adviser, or an affiliated person of the Adviser, other than any advisory fees paid to the Adviser or its affiliated person by an Unaffiliated Investment Company, in connection with the investment by the Fund of Funds in the Unaffiliated Fund. Any Subadviser will waive fees otherwise payable to the Subadviser, directly or indirectly, by the Fund of Funds in an amount at least equal to any compensation received by the Subadviser, or an affiliated person of the Subadviser, from an Unaffiliated Fund, other than any advisory fees paid to the Subadviser or its affiliated person by an Unaffiliated Investment Company, in connection with the investment by the Fund of Funds in the Unaffiliated Fund made at the direction of the Subadviser. In the event that the Subadviser waives fees, the benefit of the waiver will be passed through to the Fund of Funds. 11. With respect to Registered Separate Accounts that invest in a Fund of Funds, no sales load will be charged at the Fund of Funds level or at the Underlying Fund level. Other sales charges and service fees, as defined in NASD Conduct Rule 2830, if any, will be charged at the Fund of Funds level VerDate Nov<24>2008 16:35 Mar 10, 2010 Jkt 220001 or at the Underlying Fund level, not both. With respect to other investments in a Fund of Funds, any sales charges and/or service fees charged with respect to shares of a Fund of Funds will not exceed the limits applicable to a fund of funds set forth in NASD Conduct Rule 2830. 12. No Underlying Fund will acquire securities of any other investment company or company relying on section 3(c)(1) or 3(c)(7) of the Act in excess of the limits contained in section 12(d)(1)(A) of the Act, except to the extent that such Underlying Fund: (a) Receives securities of another investment company as a dividend or as a result of a plan of reorganization of a company (other than a plan devised for the purpose of evading section 12(d)(1) of the Act); or (b) acquires (or is deemed to have acquired) securities of another investment company pursuant to exemptive relief from the Commission permitting such Underlying Fund to (i) acquire securities of one or more investment companies for short-term cash management purposes, or (ii) engage in interfund borrowing and lending transactions. Other Investments by Same Group Funds of Funds Applicants agree that the relief to permit Same Group Funds of Funds to invest in Other Investments shall be subject to the following condition: 13. Applicants will comply with all provisions of rule 12d1–2 under the Act, except for paragraph (a)(2), to the extent that it restricts any Same Group Fund of Funds from investing in Other Investments as described in the application. For the Commission, by the Division of Investment Management, pursuant to delegated authority. Florence E. Harmon, Deputy Secretary. [FR Doc. 2010–5213 Filed 3–10–10; 8:45 am] BILLING CODE 8011–01–P PO 00000 11589 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–61662; File No. S7–05–09] Order Extending Temporary Exemptions Under the Securities Exchange Act of 1934 in Connection with Request of ICE Trust U.S. LLC Related to Central Clearing of Credit Default Swaps, and Request for Comments March 5, 2010. I. Introduction The Securities and Exchange Commission (‘‘Commission’’) has taken multiple actions 1 designed to address concerns related to the market in credit default swaps (‘‘CDS’’).2 The over-the1 See generally Securities Exchange Act Release No. 60372 (Jul. 23, 2009), 74 FR 37748 (Jul. 29, 2009) (temporary exemptions in connection with CDS clearing by ICE Clear Europe Limited); Securities Exchange Act Release No. 60373 (Jul. 23, 2009), 74 FR 37740 (Jul. 29, 2009) (temporary exemptions in connection with CDS clearing by Eurex Clearing AG); Securities Exchange Act Release No. 59578 (Mar. 13, 2009), 74 FR 11781 (Mar. 19, 2009) and Securities Exchange Act Release No. 61164 (Dec. 14, 2009), 74 FR 67258 (Dec. 18, 2009) (temporary exemptions 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) (hereinafter, the ‘‘March 2009 ICE Trust Order’’) and Securities Exchange Act Release No. 61119 (Dec. 4, 2009), 74 FR 65554 (Dec. 10, 2009) (hereinafter, the ‘‘December 2009 ICE Trust Order,’’ collectively with the March 2009 ICE Trust Order, the ‘‘2009 ICE Trust Orders’’) (temporary exemptions in connection with CDS clearing by ICE US Trust LLC (now ‘‘ICE Trust U.S. LLC’’)); Securities Exchange Act Release No. 59164 (Dec. 24, 2008), 74 FR 139 (Jan. 2, 2009) (temporary exemptions in connection with CDS clearing by LIFFE A&M and LCH.Clearnet Ltd.) and other Commission actions discussed in several of these orders. In addition, we have issued interim final temporary rules that provide exemptions under the Securities Act of 1933 and the Securities Exchange Act of 1934 for CDS to facilitate the operation of one or more central counterparties for the CDS market. See Securities Act Release No. 8999 (Jan. 14, 2009), 74 FR 3967 (Jan. 22, 2009) (initial approval); Securities Act Release No. 9063 (Sep. 14, 2009), 74 FR 47719 (Sep. 17, 2009) (extension until Nov. 30, 2010). Further, the Commission has provided temporary exemptions in connection with Sections 5 and 6 of the Securities Exchange Act of 1934 for transactions in CDS. See Securities Exchange Act Release No. 59165 (Dec. 24, 2008), 74 FR 133 (Jan. 2, 2009) (initial exemption); Securities Exchange Act Release No. 60718 (Sep. 25, 2009), 74 FR 50862 (Oct. 1, 2009) (extension until Mar. 24, 2010). 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 (‘‘reference 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 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 Continued Frm 00085 Fmt 4703 Sfmt 4703 E:\FR\FM\11MRN1.SGM 11MRN1 11590 Federal Register / Vol. 75, No. 47 / Thursday, March 11, 2010 / Notices jlentini on DSKJ8SOYB1PROD with NOTICES counter (‘‘OTC’’) market for CDS has been a source of particular 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 thus can help mitigate potential systemic impact. We have therefore found that taking action to help foster the prompt development of CCPs, including granting temporary conditional exemptions from certain provisions of the federal securities laws, is in the public interest.3 The Commission’s authority over the 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 temporary conditional exemptions from certain requirements of the Exchange Act. The Commission believes that using well-regulated CCPs to clear transactions in CDS provides a number of benefits by helping to promote efficiency and reduce risk in the CDS market, by contributing to the goal of market stability, and by requiring maintenance of records of CDS 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 take positions on the volatility in credit spreads during times of economic uncertainty. Growth in the CDS market 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 to 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. 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. VerDate Nov<24>2008 16:35 Mar 10, 2010 Jkt 220001 transactions that would aid the Commission’s efforts to prevent and detect fraud and other abusive market practices.5 In the 2009 ICE Trust Orders, the Commission provided temporary conditional exemptions to ICE Trust U.S. LLC (‘‘ICE Trust’’) and certain other parties to permit ICE Trust to clear and settle CDS transactions.6 The current exemptions are scheduled to expire on March 7, 2010, and ICE Trust has requested that the Commission extend those exemptions.7 Based on the facts presented and the representations made by ICE Trust,8 and for the reasons discussed in this Order and subject to certain conditions, the Commission is extending each of the existing exemptions connected with CDS clearing by ICE Trust: The temporary conditional exemption 5 See generally actions referenced in note 1, supra. 6 For purposes of this Order, ‘‘Cleared CDS’’ means a credit default swap that is submitted (or offered, purchased, or sold on terms providing for submission) to ICE Trust, 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: (i) The reference entity, the issuer of the reference security, or the reference security is one of the following: (A) An entity reporting under the Exchange Act, providing Securities Act Rule 144A(d)(4) information, or about which financial information is otherwise publicly available; (B) a foreign private issuer whose securities are listed outside the United States and that has its principal trading market outside the United States; (C) a foreign sovereign debt security; (D) an asset-backed security, as defined in Regulation AB, issued in a registered transaction with publicly available distribution reports; or (E) 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 (ii) the reference index is an index in which 80 percent or more of the index’s weighting is comprised of the entities or securities described in subparagraph (i). See definition in paragraph III.(f)(1) of this Order. 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 text at note 4, supra. 7 See Letter from Kevin McClear, ICE Trust, to Elizabeth Murphy, Secretary, Commission, Mar. 5, 2010 (‘‘March 2010 Request’’). 8 See id. The exemptions we are granting today are based on all of the representations made by ICE Trust, which incorporate representations made by or on behalf of ICE Trust as part of the requests that preceded our earlier exemptions addressing CDS clearing by ICE Trust. 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 that previously had been cleared pursuant to the exemptions would remain unchanged, but no new positions could be established pursuant to the exemptions until all of the underlying representations were again accurate. PO 00000 Frm 00086 Fmt 4703 Sfmt 4703 granted to ICE Trust from clearing agency registration under Section 17A of the Exchange Act solely to perform the functions of a clearing agency for certain non-excluded CDS transactions; the temporary conditional exemption of ICE Trust and certain of its clearing members from the registration requirements of Sections 5 and 6 of the Exchange Act solely in connection with the calculation of mark-to-market prices for non-excluded CDS cleared by ICE Trust; the temporary conditional exemption of eligible contract participants and others from certain Exchange Act requirements with respect to non-excluded CDS cleared by ICE Trust; the temporary exemption of ICE Trust clearing members and others from broker-dealer registration requirements and related requirements in connection with CDS clearing by ICE Trust (including clearing of customer CDS transactions); and the temporary exemption from certain Exchange Act requirements granted to registered broker-dealers. This extension is temporary, and the exemptions will expire on November 30, 2010. II. Discussion In its request for an extension, ICE Trust represents that, other than as discussed in its request, there have been no material changes to the operations of ICE Trust and the representations in the 2009 ICE Trust Orders remain true in all material respects.9 These 9 See March 2010 Request, supra note 7. In its present request, ICE Trust states that, consistent with an earlier representation, it has adopted a requirement that clearing members subject to the framework are regulated by: (i) A signatory to the International Organization of Securities Commissions (‘‘IOSCO’’) Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information, or (ii) a signatory to a bilateral arrangement with the Commission for enforcement cooperation. ICE Trust also states that it has commenced implementation of certain changes to the end-of-day settlement price process described in the December 2009 ICE Trust Order in connection with the clearing of single-name CDS. Specifically, ICE Trust has implemented required trading for single-name CDS on a daily basis, rather than the random-day basis that applies to index CDS, for the 100 basis point coupon for certain single-name CDS (and one tenor). As ICE Trust rolls out additional single names, it expects to include the additional single names in the required trading process. ICE Trust also anticipates including other coupons and tenors commencing in March 2010. Under ICE Trust’s process for required trading for single-name CDS on a daily basis, on each business day, ICE Trust requires trading for a set percentage (initially set at approximately 10%) of the randomly selected cleared single-name reference entities. ICE Trust applies a filter that first selects for required trading the most traded ‘‘cross points’’ on a curve generated for each such reference entity. ICE Trust will also apply a notional ceiling with respect to the amount of required trades in CDS on the selected reference entities for any given day. The current notional ceiling is ten million (10,000,000) dollars E:\FR\FM\11MRN1.SGM 11MRN1 Federal Register / Vol. 75, No. 47 / Thursday, March 11, 2010 / Notices representations are discussed in detail in the December 2009 ICE Trust Order. A. ICE Trust’s CDS Clearing Activities to Date ICE Trust has cleared proprietary CDS transactions of its clearing members since March 9, 2009, and has cleared CDS transactions involving its clearing members’ clients since December 14, 2009. As of February 11, 2010, ICE Trust had cleared approximately $3.82 trillion notional amount of CDS contracts based on indices of securities.10 On December 29, 2009 ICE Trust commenced clearing CDS contracts based on individual reference entities or securities. As of February 11, 2010, ICE Trust had cleared approximately $18.86 billion notional amount of CDS contracts based on individual reference entities or securities.11 jlentini on DSKJ8SOYB1PROD with NOTICES B. Extended Temporary Conditional Exemption from Clearing Agency Registration Requirement On December 4, 2009, in connection with its efforts to facilitate the establishment of one or more central counterparties (‘‘CCP’’) for Cleared CDS, the Commission issued the December 2009 ICE Trust Order, conditionally extending the Commission’s March 2009 ICE Trust Order, which conditionally exempted ICE Trust from clearing agency registration under Section 17A of the Exchange Act on a temporary basis. Subject to the conditions in the December 2009 ICE Trust Order, ICE Trust is permitted to act as a CCP for Cleared CDS by novating trades of non-excluded CDS that are securities and generating money per single name reference entity (a reference entity includes all of the coupons and tenors). The notional ceiling for the most traded ‘‘cross point’’ on the tenor curve of a particular reference entity is five million (5,000,000) dollars. The notional ceilings for the other ‘‘cross points’’ on the tenor curve is two million five hundred thousand (2,500,000) dollars. In addition to the procedures implementing required trades on random days for CDS indices and the required trade process described above with respect to single name CDS, ICE Trust regularly monitors the quality of the respective firm’s end-ofday price submissions. On a regular basis, ICE Trust: (1) Performs a statistical analysis with respect to the dispersion of price submissions; (2) reviews the number of ‘‘Advisory Trades’’ for each firm; and (3) reviews any instances where firms have either submitted late prices or failed to submit prices. When appropriate in the view of ICE Trust management, it contacts firms to discuss the quality of their price submissions. In addition, on a regular basis, ICE Trust management reviews the default spread widths and the daily trade results (‘‘Advisory’’ and ‘‘Firm’’) with the ICE Trust Trading Advisory Committee and the ICE Trust Risk Committee. 10 See https://www.theice.com/marketdata/ reports/ReportCenter.shtml. 11 See https://www.theice.com/marketdata/ reports/ReportCenter.shtml. VerDate Nov<24>2008 16:35 Mar 10, 2010 Jkt 220001 and settlement obligations for participants without having to register with the Commission as a clearing agency. The December 2009 ICE Trust Order expires on March 7, 2010. In the 2009 ICE Trust Orders, the Commission recognized the need to ensure the prompt establishment of ICE Trust as a CCP for CDS transactions. The Commission also recognized the need to ensure that important elements of Section 17A of the Exchange Act, which sets forth the framework for the regulation and operation of the U.S. clearance and settlement system for securities, apply to the non-excluded CDS market. Accordingly, the temporary exemptions in the 2009 ICE Trust Orders were subject to a number of conditions designed to enable Commission staff to monitor ICE Trust’s clearance and settlement of CDS transactions.12 Moreover, the temporary exemptions in the 2009 ICE Trust Orders in part were based on ICE Trust’s representation that it met the standards set forth in the Committee on Payment and Settlement Systems (‘‘CPSS’’) and IOSCO report entitled: Recommendation for Central Counterparties (‘‘RCCP’’).13 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. The Commission believes that continuing to facilitate the central clearing of CDS transactions—including customer CDS transactions—through a temporary conditional exemption from Section 17A will continue to provide important risk management and systemic benefits by avoiding an interruption in those CCP clearance and settlement services. Any interruption in CCP clearance and settlement services for CDS transactions would eliminate in the future the benefits ICE Trust provides to the non-excluded CDS market. Accordingly, and consistent 12 See Securities Exchange Act Release No. 59527 (Mar. 6, 2009), 74 FR 10791 (Mar. 12, 2009) and Securities Exchange Act Release No. 61119 (Dec. 4, 2009), 74 FR 65554 (Dec. 10, 2009). 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, and the Commodity Futures Trading Commission. PO 00000 Frm 00087 Fmt 4703 Sfmt 4703 11591 with our findings in the 2009 ICE Trust Orders and for the reasons described herein, we find pursuant to Section 36 of the Exchange Act 14 that it is necessary and appropriate in the public interest and is consistent with the protection of investors for the Commission to extend, until November 30, 2010, the relief provided from the clearing agency registration requirements of Section 17A by the 2009 ICE Trust Orders. Our action today balances the aim of facilitating ICE Trust’s continued service as a CCP for non-excluded CDS transactions with ensuring that important elements of Commission oversight are applied to the nonexcluded CDS market. The temporary exemptions will permit the Commission to continue to develop direct experience with the non-excluded CDS market. During the extended exemptive period, the Commission will continue to monitor closely the impact of the CCPs on the CDS market. In particular, the Commission will seek to assure itself that ICE Trust does 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.15 This temporary extension of the December 2009 ICE Trust Order also is designed to assure that—as represented in ICE Trust’s request—information will continue to be available to market participants about the terms of the CDS cleared by ICE Trust, the creditworthiness of ICE Trust or any guarantor, and the clearance and 14 15 U.S.C. 78mm. 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. 15 ICE Trust has no rule requiring an executing dealer to be a clearing member. As an operational matter, ICE Trust currently has one authorized trade processing platform for submission of client CDS transactions, ICE Link. Currently, ICE Link does not have a mechanism by which a non-member dealer could submit a transaction for clearing at ICE Trust. However, ICE Trust Clearing Rule 314 provides for open access to ICE Trust’s clearing systems for all reasonably qualified execution venues and trade processing platforms. ICE Trust has represented that it remains committed to work with reasonably qualified execution venues and trade processing platforms to facilitate functionality for submission of trades by non-member dealers if there is interest in such functionality. See March 2010 Request, supra note 7. E:\FR\FM\11MRN1.SGM 11MRN1 11592 Federal Register / Vol. 75, No. 47 / Thursday, March 11, 2010 / Notices jlentini on DSKJ8SOYB1PROD with NOTICES settlement process for CDS.16 The Commission believes continued operation of ICE Trust consistent with the conditions of this Order will facilitate the availability to market participants of information that should enable them to make better informed investment decisions and better value and evaluate their Cleared CDS and counterparty exposures relative to a market for CDS that is not centrally cleared. This temporary extension of the December 2009 ICE Trust Order is subject to a number of conditions that are designed to enable Commission staff to continue to monitor ICE Trust’s clearance and settlement of CDS transactions and help reduce risk in the CDS market. These conditions require that ICE Trust: (i) Make available on its Web site its annual audited financial statements; (ii) preserve records related to the conduct of its Cleared CDS clearance and settlement services for at least five years (in an easily accessible place for the first two years); (iii) provide information relating to its Cleared CDS clearance and settlement services to 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; (iv) notify the Commission about material disciplinary actions taken against any of its members utilizing its Cleared CDS clearance and settlement services, and about the involuntary termination of the membership of an entity that is utilizing ICE Trust’s Cleared CDS clearance and settlement services; (v) provide the Commission with changes to rules, procedures, and any other material events affecting its Cleared CDS clearance and settlement services; (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 17 and its annual audited 16 The Commission believes 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 evaluate appropriately the risks relating to a particular investment and make more informed investment decisions. See generally Policy Statement on Financial Market Developments, The President’s Working Group on Financial Markets, March 13, 2008, available at: https://www.treas.gov/ press/releases/reports/ pwgpolicystatemktturmoil_03122008.pdf. 17 See Automated Systems of Self-Regulatory Organization, Exchange Act Release No. 27445 (November 16, 1989), File No. S7–29–89, and Automated Systems of Self-Regulatory Organization (II), Exchange Act Release No. 29185 (May 9, 1991), File No. S7–12–91. VerDate Nov<24>2008 16:35 Mar 10, 2010 Jkt 220001 financial statements prepared by independent audit personnel; and (vii) report all significant systems outages to the Commission. In addition, this temporary extension of the December 2009 ICE Trust Order is conditioned on ICE Trust, 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 ICE Trust may establish to calculate markto-market margin requirements for ICE Trust clearing members; and (ii) any other pricing or valuation information with respect to Cleared CDS as is published or distributed by ICE Trust.18 C. Extended Temporary Conditional Exemption From Exchange Registration Requirements When we initially provided exemptions in connection with CDS clearing by ICE Trust, we granted a temporary conditional exemption to ICE Trust from the requirements of Sections 5 and 6 of the Exchange Act, and the rules and regulations thereunder, in connection with ICE Trust’s calculation of mark-to-market prices for open positions in Cleared CDS. We also temporarily exempted ICE Trust participants from the prohibitions of Section 5 to the extent that they use ICE Trust to effect or report any transaction in Cleared CDS in connection with ICE Trust’s calculation of mark-to-market prices for open positions in Cleared CDS. Section 5 of the Exchange Act contains certain restrictions relating to the registration of national securities exchanges,19 while Section 6 provides the procedures for registering as a national securities exchange.20 18 As a CCP, ICE Trust collects and processes information about CDS transactions, prices, and positions. Public availability of such information can improve fairness, efficiency, and competitiveness in the market. Moreover, with pricing and valuation information relating to Cleared CDS, market participants would be able to derive information about underlying securities and indices, potentially improving the efficiency and effectiveness of the securities markets. 19 In particular, Section 5 states: It shall be unlawful for any broker, dealer, or exchange, directly or indirectly, to make use of the mails or any means or instrumentality of interstate commerce for the purpose of using any facility of an exchange * * * to effect any transaction in a security, or to report any such transactions, unless such exchange (1) is registered as a national securities exchange under section 6 of [the Exchange Act], or (2) is exempted from such registration * * * by reason of the limited volume of transactions effected on such exchange. * * * 15 U.S.C. 78e. 20 15 U.S.C. 78f. Section 6 of the Exchange Act also sets forth various requirements to which a national securities exchange is subject. PO 00000 Frm 00088 Fmt 4703 Sfmt 4703 We granted these temporary exemptions to facilitate the establishment of ICE Trust’s end-of-day settlement price process. ICE Trust had represented that in connection with its clearing and risk management process it would calculate an end-of-day settlement price for each Cleared CDS in which an ICE Trust participant has a cleared position, based on prices submitted by the participants. As part of this mark-to-market process, ICE Trust has periodically required its clearing members to execute certain CDS trades at the price at which certain quotations of the clearing members cross. ICE Trust represents that it wishes to continue periodically requiring clearing members to execute certain CDS trades in this manner. As discussed above, we have found in general that it is necessary or appropriate in the public interest, and is consistent with the protection of investors, to facilitate continued CDS clearing by ICE Trust. Consistent with that finding—and in reliance on ICE Trust’s representation that the end-ofday settlement pricing process, including the periodically required trading, is integral to its risk management—we further find that it is necessary or appropriate in the public interest, and is consistent with the protection of investors that we exercise our authority under Section 36 of the Exchange Act to extend, until November 30, 2010, ICE Trust’s temporary exemption from Sections 5 and 6 of the Exchange Act in connection with its calculation of mark-to-market prices for open positions in Cleared CDS, and ICE Trust clearing members’ temporary exemption from Section 5 with respect to such trading activity. The temporary exemption for ICE Trust will continue to be subject to three conditions. First, ICE Trust must report the following information with respect to its calculation of mark-to-market prices for Cleared CDS to the Commission within 30 days of the end of each quarter, and preserve such reports during the life of the enterprise and of any successor enterprise: • The total dollar volume of transactions executed during the quarter, broken down by reference entity, security, or index; and • The total unit volume and/or notional amount executed during the quarter, broken down by reference entity, security, or index. Second, ICE Trust must establish and maintain adequate safeguards and procedures to protect participants’ confidential trading information. Such safeguards and procedures shall include: (a) Limiting access to the E:\FR\FM\11MRN1.SGM 11MRN1 Federal Register / Vol. 75, No. 47 / Thursday, March 11, 2010 / Notices confidential trading information of participants to those employees of ICE Trust who are operating the system or responsible for its compliance with this exemption or any other applicable rules; and (b) establishing and maintaining standards controlling employees of ICE Trust trading for their own accounts. ICE Trust must establish and maintain adequate oversight procedures to ensure that the safeguards and procedures established pursuant to this condition are followed. Third, ICE Trust must comply with the conditions to the temporary exemption from Section 17A of the Exchange Act in this Order, given that this exemption is granted in the context of our goal of continuing to facilitate ICE Trust’s ability to act as a CCP for nonexcluded CDS, and given ICE Trust’s representation that the end-of-day settlement pricing process, including the periodically required trading, is integral to its risk management. jlentini on DSKJ8SOYB1PROD with NOTICES D. Extended Temporary Conditional General Exemption for ICE Trust and Certain Eligible Contract Participants As we recognized when we initially provided temporary exemptions in connection with CDS clearing by ICE Trust, applying the full panoply of Exchange Act requirements to participants in transactions in nonexcluded CDS likely would deter some participants from using CCPs to clear CDS transactions. We also recognized that it is important that the antifraud provisions of the Exchange Act apply to transactions in non-excluded CDS, particularly given that OTC transactions subject to individual negotiation that qualify as security-based swap agreements already are subject to those provisions.21 21 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 securitybased 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 VerDate Nov<24>2008 16:35 Mar 10, 2010 Jkt 220001 As a result, we concluded that it is appropriate in the public interest and consistent with the protection of investors to apply temporarily substantially the same framework to transactions by market participants in non-excluded CDS that applies to transactions in security-based swap agreements. Consistent with that conclusion, we temporarily exempted ICE Trust, and certain members and eligible contract participants, from a number of Exchange Act requirements, subject to certain conditions, while excluding certain enforcement-related and other provisions from the scope of the exemption. We believe that continuing to facilitate the central clearing of CDS transactions by ICE Trust through this type of temporary exemption will provide important risk management benefits and systemic benefits. We also believe that facilitating the central clearing of customer CDS transactions, subject to the conditions in this Order, will provide an opportunity for the customers of ICE Trust clearing members to control counterparty risk. 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 November 30, 2010 from certain requirements under the Exchange Act. As before, this temporary conditional exemption applies to ICE Trust and to any eligible contract participants 22— including any ICE Trust clearing member—other than eligible contract participants that are self-regulatory organizations or eligible contract participants that are registered brokers or dealers.23 As before, under this temporary conditional exemption, and solely with respect to Cleared CDS, those 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 security or any group or index of securities, or any interest therein. 22 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. 23 A separate temporary exemption addresses the Cleared CDS activities of registered broker-dealers. See Part II.F, 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. PO 00000 Frm 00089 Fmt 4703 Sfmt 4703 11593 agreements. Thus, those persons would still be subject to those Exchange Act requirements that explicitly are applicable in connection with securitybased swap agreements.24 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.25 In this way, the temporary conditional exemption would apply the same Exchange Act requirements in connection with non-excluded CDS as apply in connection with OTC credit default swaps. Consistent with the December 2009 ICE Trust Order exemptions, this temporary conditional exemption does not extend to: The exchange registration requirements of Exchange Act Sections 5 and 6; 26 the clearing agency registration requirements of Exchange Act Section 17A; the requirements of Exchange Act Sections 12, 13, 14, 15(d), and 16; 27 the broker-dealer registration requirements of Section 15a(1) 28 and the other requirements of the Exchange Act, including paragraphs (4) and (6) of Section 15(b),29 and the rules and regulations thereunder that apply to a broker or dealer that is not registered with the Commission; or certain provisions related to government securities.30 24 See note 40, infra. for example, the Commission retains the ability to investigate potential violations and bring enforcement actions in the federal courts as well as in administrative proceedings, and to seek the full panoply of remedies available in such cases. 26 These are subject to a separate temporary class exemption. See note 1, 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). This Order also includes a separate temporary exemption from Sections 5 and 6 in connection with the mark-to-market process of ICE Trust, discussed above, at note 19 and accompanying text. 27 15 U.S.C. 78l, 78m, 78n, 78o(d), 78p. Eligible contract participants and other persons instead should refer to the interim final temporary rules issued by the Commission. See note 1, supra. 28 15 U.S.C. 78o(a)(1). 29 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. 30 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. The exemption also does not extend to 25 Thus, E:\FR\FM\11MRN1.SGM Continued 11MRN1 11594 Federal Register / Vol. 75, No. 47 / Thursday, March 11, 2010 / Notices As before, ICE Trust clearing members must be in material compliance with ICE Trust rules to be eligible for this temporary conditional exemption from Exchange Act requirements. ICE Trust clearing members that participate in the clearing of Cleared CDS transactions on behalf of other persons annually must provide a certification to ICE Trust that attests to whether the clearing member is relying on the temporary conditional exemption from broker-dealer related requirements described below.31 jlentini on DSKJ8SOYB1PROD with NOTICES E. Conditional Temporary Exemption From Broker-Dealer Related Requirements for Certain Clearing Members of ICE Trust and Others In the December 2009 ICE Trust Order, we granted a conditional temporary exemption from particular Exchange Act requirements to certain clearing members of ICE Trust, and to certain eligible contract participants, in connection with CDS cleared on ICE Trust. Absent an exception or exemption, persons that effect transactions in non-excluded CDS that are securities may be required to register as broker-dealers pursuant to Section 15(a)(1) of the Exchange Act.32 Certain 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). 31 To the extent we extend this temporary conditional exemption and include the same type of certification requirement, the clearing member then would annually renew the certification. This condition requiring clearing members to convey information to ICE Trust as a repository for regulators, and other conditions of this Order that require clearing members or others to convey information (e.g., an audit report related to the clearing member’s compliance with exemptive conditions) to ICE Trust, does not impose upon ICE Trust any independent duty to audit or otherwise review that information. These conditions also do not impose on ICE Trust any independent fiduciary or other obligation to any customer of a clearing member. 32 15 U.S.C. 78o(a)(1). This section generally provides that, absent an exception or exemption, a broker or dealer that uses the mails or any means of interstate commerce to effect transactions in, or to induce or attempt to induce the purchase or sale of, any security must register with the Commission. Section 3(a)(4) of the Exchange Act generally defines a ‘‘broker’’ as ‘‘any person engaged in the business of effecting transactions in securities for the account of others,’’ but excludes certain bank securities activities. 15 U.S.C. 78c(a)(4). Section 3(a)(5) of the Exchange Act generally defines a ‘‘dealer’’ as ‘‘any person engaged in the business of buying and selling securities for his own account,’’ but includes exceptions for certain bank activities. 15 U.S.C. 78c(a)(5). Exchange Act Section 3(a)(6) defines a ‘‘bank’’ as a bank or savings association that is directly supervised and examined by state or federal banking authorities (with certain additional requirements for banks and savings associations that are not chartered by a federal authority or a member of the Federal Reserve System). 15 U.S.C. 78c(a)(6). VerDate Nov<24>2008 16:35 Mar 10, 2010 Jkt 220001 reporting and other requirements of the Exchange Act could apply to such persons, as broker-dealers, regardless of whether they are registered with the Commission. In granting that exemption, we noted that it is consistent with our investor protection mandate to require securities intermediaries that receive or hold funds and securities on behalf of others to comply with standards that safeguard the interests of their customers.33 We recognized, however, that requiring intermediaries that receive or hold funds and securities on behalf of customers in connection with transactions in non-excluded CDS to register as broker-dealers may deter the use of CCPs in customer CDS transactions, to the detriment of the markets and market participants generally. We concluded that those factors, along with certain representations of ICE Trust,34 argued in favor of flexibility in applying the requirements of the Exchange Act to these intermediaries, conditioned on requiring the intermediaries to take reasonable steps to help increase the likelihood that their customers would be protected in the event the intermediary became insolvent, even if those safeguards are as not as strong as those required of registered brokerdealers. As a result, and solely with respect to Cleared CDS, we provided a temporary conditional exemption from the brokerdealer registration requirements of Section 15(a)(1), and the other requirements of the Exchange Act (other 33 Registered broker-dealers are required to segregate assets held on behalf of customers from proprietary assets, because segregation will assist customers in recovering assets in the event the intermediary fails. Absent such segregation, collateral could be used by an intermediary to fund its own business, and could be attached to satisfy the intermediary’s debts were it to fail. Moreover, the maintenance of adequate capital and liquidity protects customers, CCPs, and other market participants. Adequate books and records (including both transactional and position records) are necessary to facilitate day to day operations as well as to help resolve situations in which an intermediary fails and either a regulatory authority or receiver is forced to liquidate the firm. Appropriate records also are necessary to allow examiners to review for improper activities, such as insider trading or fraud. 34 We noted that in granting the temporary exemption, we also relied on ICE Trust’s representation that before offering the Non-Member Framework, it will adopt a requirement that nonU.S. clearing members subject to the framework are regulated by: (i) A signatory to the IOSCO Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information, or (ii) a signatory to a bilateral arrangement with the Commission for enforcement cooperation. We further noted that non-U.S. clearing members that do not meet these criteria would not be eligible to rely on this exemption. PO 00000 Frm 00090 Fmt 4703 Sfmt 4703 than paragraphs (4) and (6) of Section 15(b) 35) and the rules and regulations thereunder that apply to a broker or dealer that is not registered with the Commission, to: (i) ICE Trust clearing members other than registered brokerdealers; and (ii) any eligible contract participant, other than a registered broker-dealer, that does not receive or hold funds or securities for the purpose of purchasing, selling, clearing, settling, or holding Cleared CDS positions for other persons.36 That exemption was subject to a number of conditions. For ICE Trust clearing members that receive or hold funds or securities of U.S. persons (or who receive or hold funds or securities of any person in the case of a U.S. clearing member)—other than for an affiliate that controls, is controlled by, or is under common control with the clearing member—in connection with Cleared CDS, these included a condition requiring the clearing member, as promptly as practicable after receipt, to transfer such funds and securities (other than those promptly returned to such other persons) to either the Custodial Client Omnibus Margin Account at ICE Trust or to an account held by a thirdparty custodian. Additional related conditions addressed the types of permissible arrangements for holding collateral at a third-party custodian, and permissible custodians.37 35 As noted above, see note 29, supra, Exchange Act Sections 15(b)(4) and 15(b)(6) grant the Commission authority to take action against brokerdealers and associated persons in certain situations. Accordingly, while the exemption we granted from broker-dealer requirements generally extended to persons that act as broker-dealers in the market for Cleared CDS (potentially including inter-dealer brokers that do not hold funds or securities for others), such persons may be subject to actions under Sections 15(b)(4) and (b)(6) of the Exchange Act. In addition, such persons 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. 36 In some circumstances, an eligible contract participant that does not hold customer funds or securities nonetheless may act as a dealer in securities transactions, or as a broker (such as an inter-dealer broker). 37 Other conditions of this exemption precluded the clearing of CDS transaction for natural persons, required certain risk disclosures to customers, required the clearing member also must annually provide ICE Trust with a self-assessment that it is in compliance with the requirements along with a report by the clearing member’s independent thirdparty auditor that attests to that assessment, and required the clearing member to agree to provide the Commission with access to information related to Cleared CDS transactions. E:\FR\FM\11MRN1.SGM 11MRN1 Federal Register / Vol. 75, No. 47 / Thursday, March 11, 2010 / Notices These conditions requiring customer collateral to be segregated from clearing members address only the initial margin that customers post in connection with Cleared CDS. In the December 2009 ICE Trust Order we noted, however, that we would evaluate the protections afforded to customers’ mark-to-market profits associated with Cleared CDS positions, and consider the potential benefits of requiring clearing members to segregate customers’ variation margin in connection with Cleared CDS positions. As before, we are required to balance the goals of promoting the central clearing of customer CDS transactions against the goal of protecting customers, and to be mindful that these conditions cannot provide legal certainty that customer collateral in fact would be protected in the event an ICE Trust clearing member were to become insolvent. We believe that the segregation framework set forth in our earlier order represents a reasonable step to help protect the collateral posted by customers of ICE Trust’s clearing members from the threat of loss in the event of clearing member insolvency. 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 a conditional exemption until November 30, 2010, with respect to certain Exchange Act requirements related to broker-dealers.38 As before, this exemption is available to ICE Trust clearing members other than registered broker-dealers, and to any eligible contract participant, other than a registered broker-dealer, that does not receive or hold funds or securities for the purpose of purchasing, selling, clearing, settling, or holding Cleared CDS positions for other persons.39 As jlentini on DSKJ8SOYB1PROD with NOTICES 38 As before, in granting this relief we are relying on representations by ICE Trust that non-U.S. clearing members that provide their customers with access to CDS clearing on ICE Trust are regulated by: (i) A signatory to the IOSCO Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information, or (ii) a signatory to a bilateral arrangement with the Commission for enforcement cooperation. Non-U.S. clearing members that do not meet these criteria would not be eligible to rely on this exemption. 39 In some circumstances, an eligible contract participant that does not hold customer funds or securities nonetheless may act as a dealer in securities transactions, or as a broker (such as an inter-dealer broker). 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 VerDate Nov<24>2008 16:35 Mar 10, 2010 Jkt 220001 before, and solely with respect to Cleared CDS, those persons temporarily will be exempt from the broker-dealer registration requirements of Section 15(a)(1), and the other requirements of the Exchange Act (other than paragraphs (4) and (6) of Section 15(b)) and the rules and regulation thereunder that apply to a broker or dealer that is not registered with the Commission. As before, for all ICE Trust clearing members—regardless of whether they receive or hold customer collateral in connection with Cleared CDS—this temporary exemption is conditioned on the clearing member being in material compliance with ICE Trust’s rules, as well as on the clearing member being in compliance with applicable laws and regulations relating to capital, liquidity, and segregation of customers’ funds and securities (and related books and records provisions) with respect to Cleared CDS. Additional conditions apply to ICE Trust clearing members that receive or hold funds or securities of U.S. persons (or that receive or hold funds or securities of any person in the case of a U.S. clearing member)—other than for an affiliate that controls, is controlled by, or is under common control with the clearing member—in connection with Cleared CDS. For those ICE Trust clearing members, this temporary exemption is conditioned on the customer not being a natural person, and on the clearing member providing certain risk disclosures to the customer.40 In addition, under this revised temporary exemption, such clearing members must, as promptly as practical after receipt, transfer such funds and securities—other than those promptly returned to such other person—to either the Custodial Client Omnibus Margin 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). 40 The clearing member must disclose that it is not regulated by the Commission and that U.S. broker-dealer segregation requirements and protections under the Securities Investor Protection Act will not apply, that the insolvency law of the applicable jurisdiction may affect the customer’s ability to recover funds and securities or the speed of any such recovery, and (if applicable) that nonU.S. members may be subject to an insolvency regime that is materially different from that applicable to U.S. persons. PO 00000 Frm 00091 Fmt 4703 Sfmt 4703 11595 Account at ICE Trust 41 or an account held by a third-party custodian, as described below. As before, collateral that is held at a third-party custodian must either be held: (1) In the name of the customer, subject to an agreement in which the customer, the clearing member and the custodian are parties, acknowledging that the assets held therein are customer assets used to collateralize obligations of the customer to the clearing member, and that the assets held in the account may not otherwise be pledged or rehypothecated by the clearing member or the custodian; or (2) in an omnibus account for which the clearing member maintains daily records as to the amount owing to each customer, and which is subject to an agreement between the clearing member and the custodian specifying: (i) That all account assets are held for the exclusive benefit of the clearing member’s customers and are being kept separate from any other accounts that the clearing member maintains with the custodian; (ii) that the account assets may not be used as security for a loan to the clearing member by the custodian, and shall be subject to no right, charge, security interest, lien, or claim of any kind in favor of the custodian or any person claiming through the custodian; and (iii) that the assets may not otherwise be pledged or rehypothecated by the clearing member or the custodian.42 Under either approach, the third-party custodian cannot be affiliated with the clearing member.43 Moreover, if the third-party custodian is a U.S. entity, it must be a 41 Cash collateral transferred to ICE Trust may be invested in ‘‘Eligible Custodial Assets,’’ as defined in ICE Trust’s ‘‘Custodial Asset Policies.’’ Also, collateral transferred to ICE Trust may be held at a subcustodian. 42 We do not contemplate that either of these approaches involving the use of a third-party custodian would interfere with the ability of a clearing member and its customer to agree as to how any return or losses earned on those assets would be distributed between the clearing member and its customer. Also, the restriction in both approaches on the clearing member’s and the custodian’s ability to rehypothecate these customer funds and securities does not preclude that collateral from being transferred to ICE Trust as necessary to satisfy variation margin requirements in connection with the customer’s CDS position. 43 For purposes of the Order, an ‘‘affiliated person’’ of a clearing member mean any person who directly or indirectly controls a clearing member or any person who is directly or indirectly controlled by or under common control with a clearing member; ownership of 10 percent or more of an entity’s common stock will be deemed prima facie control of that entity. See definition in paragraph III.(f)(2) of this Order. This standard is analogous to the standard used to identify affiliated persons of broker-dealers under Exchange Act Rule 15c3– 3(a)(13), 17 CFR 240.15c3–3(a)(13). E:\FR\FM\11MRN1.SGM 11MRN1 11596 Federal Register / Vol. 75, No. 47 / Thursday, March 11, 2010 / Notices jlentini on DSKJ8SOYB1PROD with NOTICES bank (as that term is defined in Section 3(a)(6) of the Exchange Act), have total regulatory capital of at least $1 billion,44 and have been approved to engage in a trust business by an appropriate regulatory agency. A custodian that is not a U.S. entity must have regulatory capital of at least $1 billion,45 and must provide the clearing member, the customer and ICE Trust with a legal opinion providing that the account assets are subject to regulatory requirements in the custodian’s home jurisdiction designed to protect, and provide for the prompt return of, custodial assets in the event of the custodian’s insolvency, and that the assets held in that account reasonably could be expected to be legally separate from the clearing member’s assets in the event of the clearing member’s insolvency. Also, cash collateral posted with the third-party custodian may be invested in other assets, consistent with the investment policies that govern collateral held at ICE Trust.46 Finally, a clearing member that uses a third-party custodian to hold customer collateral must notify ICE Trust of that use. As before, to the extent there is any delay in the clearing member transferring such funds and securities to ICE Trust or a third-party custodian,47 the clearing member must effectively segregate the collateral in a way that, pursuant to applicable law, could reasonably be expected to effectively protect the collateral from the clearing member’s creditors. The clearing member may not permit customers to ‘‘opt out’’ of such segregation even if applicable regulations or laws otherwise would permit such ‘‘opt out.’’ Also, as before, this temporary exemption is conditioned on clearing member compliance with a selfassessment and audit requirement,48 44 In particular, custodians that are U.S. entities must have total capital, as calculated to meet the applicable requirements imposed by the entity’s appropriate regulatory agency of at least $1 billion. The term ‘‘appropriate regulatory agency’’ is defined in Section 3(a)(34) of the Exchange Act, 15 U.S.C. 78c(a)(34). 45 Custodians that are non-U.S. entities must have total capital, as calculated to meet the applicable requirements imposed by the foreign financial regulatory authority of at least $1 billion. The term ‘‘foreign financial regulatory authority’’ is defined in Section 3(a)(52) of the Exchange Act, 15 U.S.C. 78c(a)(52). 46 See note 41, supra. 47 This provision is intended to address shortterm technology or operational issues. ICE Trust rules require collateral to be transferred promptly on receipt, with the expectation that margin would be transferred on the same business day. 48 In particular, to facilitate compliance with the segregation practices that are required as a condition to this temporary exemption, the clearing member must annually provide ICE Trust with a self-assessment that it is in compliance with the VerDate Nov<24>2008 16:35 Mar 10, 2010 Jkt 220001 and on the clearing member’s agreement to provide the Commission with access to information related to Cleared CDS transactions.49 As we discussed in the December 2009 ICE Trust order, requiring clearing members that receive or hold customer collateral to satisfy such conditions will not guarantee that a customer would receive the return of its collateral in the event of a clearing member’s insolvency, particularly in light of the fact-specific nature of the insolvency process and the multiplicity of insolvency regimes that may apply to ICE Trust’s members clearing for U.S. customers. We believe, however, that these are reasonable steps for increasing the likelihood that customers would be able to access collateral in such an insolvency event. We also recognize that these customers requirements, along with a report by the clearing member’s independent third-party auditor that attests to that assessment. The report must be dated the same date as the clearing member’s annual audit report (but may be separate from it), and must be produced in accordance with the standards that the auditor follows in auditing the clearing member’s financial statements. As the self-assessment is intended to serve as the basis for the third-party auditor’s report, we expect the self-assessment to be generally contemporaneous with that report. 49 Specifically, to support these segregation practices and enhance the ability to detect and deter circumstances in which clearing members fail to segregate customer collateral consistent with the exemption, this temporary exemption is conditioned on the clearing member agreeing to provide the Commission with access to information related to Cleared CDS transactions. This requirement is consistent with a requirement in Exchange Act Rule 15a–6(a)(3)(i)(B), which exempts certain foreign broker-dealers from registering with the Commission. See Exchange Act Rule 15a– 6(a)(3)(i)(B). Under this condition, the clearing member would provide the Commission (upon request and subject to agreements reached between the Commission or the U.S. Government and an appropriate foreign securities authority, see Section 3(a)(50) of the Exchange Act, 15 U.S.C. 78c(a)(50)), with information or documents within the clearing member’s possession, custody, or control, as well as testimony of clearing member personnel and assistance in taking the evidence of other persons, that relates to Cleared CDS transactions. If, after the clearing member has exercised its best efforts to provide this information (including requesting the appropriate governmental body and, if legally necessary, its customers), the clearing member nonetheless is prohibited from providing the information by applicable foreign law or regulations, this temporary conditional exemption would no longer be available to the clearing member. Consistent with the discussion above as to the loss of an exemption due to an underlying representation no longer being accurate, see note 8, supra, if a clearing member were to lose the benefit of this exemption due to the failure to provide information to the Commission as the result of a prohibition by an applicable foreign law or regulation, the legal status of existing open positions in non-excluded CDS associated with those clearing members and its customers would remain unchanged, but the clearing member could not establish new CDS positions pursuant to the exemption. PO 00000 Frm 00092 Fmt 4703 Sfmt 4703 generally may be expected to be sophisticated market participants that should be able to weigh the risks associated with entering into arrangements with intermediaries that are not registered broker-dealers, particularly in light of the disclosure required as a condition to this temporary exemption. F. Extended Temporary General Exemption for Certain Registered Broker-Dealers The 2009 ICE Trust Orders included limited exemptions from Exchange Act requirements to registered brokerdealers in connection with their activities involving Cleared CDS. In crafting these temporary exemptions, we balanced the need to avoid creating disincentives to the prompt use of CCPs against the critical role that certain broker-dealers play in promoting market integrity and protecting customers (including broker-dealer customers that are not involved with CDS transactions). In light of the risk management and systemic benefits in continuing to facilitate CDS clearing by ICE Trust through targeted exemptions to registered broker-dealers, the Commission finds pursuant to Section 36 of the Exchange Act that it is necessary or appropriate in the public interest and is consistent with the protection of investors to exercise its authority to extend this temporary registered broker-dealer exemption from certain Exchange Act requirements until November 30, 2010.50 Consistent with the temporary exemptions discussed above, and solely with respect to Cleared CDS, we are temporarily exempting registered broker-dealers from provisions of the Exchange Act and the rules and regulations thereunder that do not apply to security-based swap agreements. As discussed 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.51 As above, and 50 The temporary exemptions addressed above— with regard to ICE Trust, certain clearing members and certain eligible contract participants—are not available to persons that are registered as brokerdealers with the Commission (other than those that are notice registered pursuant to Exchange Act Section 15(b)(11)). 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). 51 See notes 41 and 45, 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 E:\FR\FM\11MRN1.SGM 11MRN1 Federal Register / Vol. 75, No. 47 / Thursday, March 11, 2010 / Notices jlentini on DSKJ8SOYB1PROD with NOTICES 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.52 Further we are not exempting registered broker-dealers from the following additional provisions under the Exchange Act: (1) Section 7(c),53 regarding the unlawful extension of credit by broker-dealers; (2) Section 15(c)(3),54 regarding the use of unlawful or manipulative devices by brokerdealers; (3) Section 17(a),55 regarding broker-dealer obligations to make, keep and furnish information; (4) Section 17(b),56 regarding broker-dealer records subject to examination; (5) Regulation T,57 a Federal Reserve Board regulation regarding extension of credit by brokerdealers; (6) Exchange Act Rule 15c3–1, regarding broker-dealer net capital; (7) Exchange Act Rule 15c3–3, regarding broker-dealer reserves and custody of securities; (8) Exchange Act Rules 17a– 3 through 17a–5, regarding records to be made and preserved by broker-dealers and reports to be made by brokerdealers; and (9) Exchange Act Rule 17a– 13, regarding quarterly security counts to be made by certain exchange members and broker-dealers.58 Registered broker-dealers must comply with these provisions in connection with their activities involving nonexcluded CDS because these provisions are especially important to helping protect customer funds and securities, ensure proper credit practices and safeguard against fraud and abuse.59 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. 52 We also are not exempting those members from provisions related to government securities, as discussed above. 53 15 U.S.C. 78g(c). 54 15 U.S.C. 78o(c)(3). 55 15 U.S.C. 78q(a). 56 15 U.S.C. 78q(b). 57 12 CFR 220.1 et seq. 58 Solely for purposes of this temporary 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. 59 Indeed, Congress directed the Commission to promulgate broker-dealer financial responsibility rules, including rules relating to custody, the use of customer securities, the use of customers’ deposits or credit balances, and the establishment of minimum financial requirements. VerDate Nov<24>2008 16:35 Mar 10, 2010 Jkt 220001 G. Solicitation of Comments When we granted the December 2009 ICE Trust Order extending the exemptions granted in connection with CDS clearing by ICE Trust and expanding that relief to accommodate central clearing of customer CDS transactions, we requested comment on all aspects of the exemptions and particularly requested comments as to the relief we granted in connection with customer clearing. We received two comments in response to this request.60 In connection with this Order extending the exemptions granted in connection with CDS clearing by ICE Trust, we reiterate our request for comments on all aspects of the exemptions. We particularly request comments as to whether the conditions we have placed on the relief adequately protect customer collateral from the threat posed by clearing member insolvency, whether additional conditions or requirements are appropriate to promote compliance with the requirements of the exemptions, and what, if any, additional conditions would be appropriate. We also request comment as to whether the segregation conditions of this Order should extend to certain transfers of variation margin associated with Cleared CDS, as well as whether CDS customers are able to easily access mark-to-market profits associated with Cleared CDS. Do any practices (such as, for example, negotiated ‘‘thresholds’’ in credit support annexes between clearing members and customers) impede customers from demanding and receiving the timely return of such mark-to-market profits? Should the Commission condition any future exemptions on segregating the mark-tomarket profits associated with Cleared CDS if they are not returned to customers within a certain amount of time following demand (subject to provisions regarding reasonable minimum transfer amounts, and provisions permitting offset against amounts owing from the customer directly to the clearing member)? Would such a condition impose significant operational or other costs that may deter the clearing of customer CDS 60 See Comment from Kristie L. Lovelady (Dec. 9, 2009) (requesting stronger restrictions generally); Comment from JP Morgan (Mar. 2, 2010) (opposing application of segregation conditions to variation margin transfers, and raising issues as to application of segregation conditions in the context of portfolio margining practices; both issues are the subject of additional requests for comment in this Order). We also solicited comments earlier as part of the March 2009 ICE Trust Order, but received no comments in response to that request. PO 00000 Frm 00093 Fmt 4703 Sfmt 4703 11597 transactions? Are there other factors (e.g., costs, benefits, market conditions, economic considerations, or availability of credit hedges) that may reduce the significance of any customer protection benefits provided by requiring segregation of such mark-to-market profits? We also invite comment on whether differences among CDS CCPs regarding protection of mark-to-market profits may have competitive impacts. In addition, we request comment on how clearing members intend to comply with this Order’s (and have complied with the December 2009 ICE Trust Order’s) condition requiring the segregation of all margin posted by customers connected with purchasing, selling, clearing, settling or holding Cleared CDS positions—not only the gross margin required by ICE Trust rules. To what extent would clearing firms typically require certain customers to post such ‘‘excess’’ margin above the ICE Trust requirements in connection with Cleared CDS transactions? Finally, to what extent do clearing members and customers seek to include Cleared CDS positions within portfolio margining calculations that include other instruments (e.g., non-cleared CDS, other OTC derivatives or securities)? If portfolio margining is used, how do clearing members allocate the total collateral required by a clearing member from a customer between the portion posted in connection with Cleared CDS (and hence subject to this Order’s segregation conditions) and the portion attributable to other derivatives transactions involving that clearing member and customer? To the extent a clearing member’s portfolio margin calculations include a customer’s Cleared CDS positions, is it reasonable to conclude that any portion of the customer margin is not connected with Cleared CDS, and thus does not need to be segregated? Would a dealer’s inclusion of Cleared CDS positions in its portfolio margin calculation interfere with the customer protection benefits of CDS clearing in the event of a dealer’s insolvency? In other words, would the dealer’s cleared CDS customer positions be portable to another dealer if collateralized solely by the ICE Trustrequired margin, or would the dealer’s cleared CDS customers be placed at a disadvantage in an insolvency situation because of this practice? Should the Commission provide firms with further guidance regarding the inclusion of Cleared CDS in portfolio margin calculations? Comments may be submitted by any of the following methods: E:\FR\FM\11MRN1.SGM 11MRN1 11598 Federal Register / Vol. 75, No. 47 / Thursday, March 11, 2010 / Notices Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/other.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number S7–05–09 on the subject line; or • Use the Federal eRulemaking Portal (https://www.regulations.gov/). Follow the instructions for submitting comments. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File Number S7–05–09. 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/other.shtml ). Comments are also available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. All comments received will be posted without change; we do not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. jlentini on DSKJ8SOYB1PROD with NOTICES III. Conclusion It is hereby ordered, pursuant to Section 36(a) of the Exchange Act, that, until November 30, 2010: (a) Exemption from Section 17A of the Exchange Act. ICE Trust U.S. LLC (‘‘ICE Trust’’) 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 (f)(1) of this Order), subject to the following conditions: (1) ICE Trust shall make available on its Web site its annual audited financial statements. (2) ICE Trust 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) ICE Trust shall supply information and periodic reports relating to its VerDate Nov<24>2008 16:35 Mar 10, 2010 Jkt 220001 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 ICE Trust’s Cleared CDS clearance and settlement services. (4) ICE Trust shall notify the Commission, on a monthly basis, of any material disciplinary actions taken against any of its members utilizing its Cleared CDS clearance and settlement services, including the denial of services, fines, or penalties. ICE Trust shall notify the Commission promptly when ICE Trust involuntarily terminates the membership of an entity that is utilizing ICE Trust’s Cleared CDS clearance and settlement services. Both notifications shall describe the facts and circumstances that led to ICE Trust’s disciplinary action. (5) ICE Trust shall notify the Commission of all changes to 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, the day before effectiveness or implementation of such rule changes or, in exigent circumstances, as promptly as reasonably practicable under the circumstances. All such rule changes will be posted on ICE Trust’s Web site. Such notifications will not be deemed rule filings that require Commission approval. (6) ICE Trust shall 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. ICE Trust shall provide the Commission (beginning in its first year of operation) with its annual audited financial statements prepared by independent audit personnel. (7) ICE Trust shall report all significant systems outages to the Commission. If it appears that the outage may extend for 30 minutes or longer, ICE Trust shall report the systems outage immediately. If it appears that the outage will be resolved in less than 30 minutes, ICE Trust shall report the systems outage within a reasonable time after the outage has been resolved. (8) ICE Trust, 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 PO 00000 Frm 00094 Fmt 4703 Sfmt 4703 that ICE Trust may establish to calculate mark-to-market margin requirements for ICE Trust clearing members; and (ii) any other pricing or valuation information with respect to Cleared CDS as is published or distributed by ICE Trust. (b) Exemption from Sections 5 and 6 of the Exchange Act. (1) ICE Trust shall be exempt from the requirements of Sections 5 and 6 of the Exchange Act and the rules and regulations thereunder in connection with its calculation of mark-to-market prices for open positions in Cleared CDS, subject to the following conditions: (i) ICE Trust shall report the following information with respect to the calculation of mark-to-market prices for Cleared CDS to the Commission within 30 days of the end of each quarter, and preserve such reports during the life of the enterprise and of any successor enterprise: (A) The total dollar volume of transactions executed during the quarter, broken down by reference entity, security, or index; and (B) The total unit volume and/or notional amount executed during the quarter, broken down by reference entity, security, or index; (ii) ICE Trust shall establish and maintain adequate safeguards and procedures to protect clearing members’ confidential trading information. Such safeguards and procedures shall include: (A) Limiting access to the confidential trading information of clearing members to those employees of ICE Trust who are operating the system or responsible for its compliance with this exemption or any other applicable rules; and (B) Establishing and maintaining standards controlling employees of ICE Trust trading for their own accounts. ICE Trust must establish and maintain adequate oversight procedures to ensure that the safeguards and procedures established pursuant to this condition are followed; and (iii) ICE Trust shall satisfy the conditions of the temporary exemption from Section 17A of the Exchange Act set forth in paragraphs (a)(1)–(8) of this Order. (2) Any ICE Trust clearing member shall be exempt from the requirements of Section 5 of the Exchange Act to the extent such ICE Trust clearing member uses any facility of ICE Trust to effect any transaction in Cleared CDS, or to report any such transaction, in connection with ICE Trust’s clearance and risk management process for Cleared CDS. E:\FR\FM\11MRN1.SGM 11MRN1 jlentini on DSKJ8SOYB1PROD with NOTICES Federal Register / Vol. 75, No. 47 / Thursday, March 11, 2010 / Notices (c) Exemption for ICE Trust, ICE Trust clearing members, and certain eligible contract participants. (1) Persons eligible. The exemption in paragraph (c)(2) is available to: (i) ICE Trust; and (ii) Any eligible contract participant (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)), including any ICE Trust clearing member, other than: (A) An eligible contract participant that is a self-regulatory organization, as that term is defined in Section 3(a)(26) of the Exchange Act; or (B) A broker or dealer registered under Section 15(b) of the Exchange Act (other than paragraph (11) thereof). (2) Scope of exemption. (i) In general. Subject to the conditions specified in paragraph (c)(3) of this subsection, such persons generally shall, solely with respect to Cleared CDS, be exempt from the provisions of the Exchange Act and the rules and regulations thereunder that do not apply in connection with securitybased swap agreements. Accordingly, under this exemption, those persons remain subject to those Exchange Act requirements that explicitly are applicable in connection with securitybased swap agreements (i.e., paragraphs (2) through (5) of Section 9(a), Section 10(b), Section 15(c)(1), paragraphs (a) and (b) of Section 16, Section 20(d) and Section 21A(a)(1) and the rules thereunder that explicitly are applicable to security-based swap agreements). All provisions of the Exchange Act related to the Commission’s enforcement authority in connection with violations or potential violations of such provisions also remain applicable. (ii) Exclusions from exemption. The exemption in paragraph (c)(2)(i), however, does not extend to the following provisions under the Exchange Act: (A) Paragraphs (42), (43), (44), and (45) of Section 3(a); (B) Section 5; (C) Section 6; (D) Section 12 and the rules and regulations thereunder; (E) Section 13 and the rules and regulations thereunder; (F) Section 14 and the rules and regulations thereunder; (G) The broker-dealer registration requirements of Section 15(a)(1), and the other requirements of the Exchange Act (including paragraphs (4) and (6) of Section 15(b)) and the rules and regulations thereunder that apply to a VerDate Nov<24>2008 16:35 Mar 10, 2010 Jkt 220001 broker or dealer that is not registered with the Commission; (H) Section 15(d) and the rules and regulations thereunder; (I) Section 15C and the rules and regulations thereunder; (J) Section 16 and the rules and regulations thereunder; and (K) Section 17A (other than as provided in paragraph (a)). (3) Conditions for ICE Trust clearing members. (i) Any ICE Trust clearing member relying on this exemption must be in material compliance with the rules of ICE Trust. (ii) Any ICE Trust clearing member relying on this exemption that participates in the clearing of Cleared CDS transactions on behalf of other persons must annually provide a certification to ICE Trust that attests to whether the clearing member is relying on the exemption from broker-dealer related requirements set forth in paragraph (d) of this Order. (d) Exemption from broker-dealer related requirements for ICE Trust clearing members and certain eligible contract participants. (1) Persons eligible. The exemption in paragraph (d)(2) is available to: (i) Any ICE Trust clearing member (other than one that is registered as a broker or dealer under Section 15(b) of the Exchange Act (other than paragraph (11) thereof)); and (ii) Any eligible contract participant that does not receive or hold funds or securities for the purpose of purchasing, selling, clearing, settling, or holding Cleared CDS positions for other persons (other than one that is registered as a broker or dealer under Section 15(b) of the Exchange Act (other than paragraph (11) thereof)). (2) Scope of exemption. The persons described in paragraph (d)(1) shall, solely with respect to Cleared CDS, be exempt from the broker-dealer registration requirements of Section 15(a)(1) and the other requirements of the Exchange Act (other than Sections 15(b)(4) and 15(b)(6)) and the rules and regulations thereunder that apply to a broker or dealer that is not registered with the Commission, subject to the conditions set forth in paragraph (d)(3) with respect to ICE Trust clearing members. (3) Conditions for ICE Trust clearing members. (i) General condition for ICE Trust clearing members. An ICE Trust clearing member relying on this exemption must be in material compliance with the rules of ICE Trust, and also must be in material compliance with applicable laws and regulations relating to capital, PO 00000 Frm 00095 Fmt 4703 Sfmt 4703 11599 liquidity, and segregation of customers’ funds and securities (and related books and records provisions) with respect to Cleared CDS. (ii) Additional conditions for ICE Trust clearing members that receive or hold customer funds or securities. Any ICE Trust clearing member that receives or holds funds or securities for the purpose of purchasing, selling, clearing, settling, or holding Cleared CDS positions for U.S. persons (or for any person if the clearing member is a U.S. clearing member)—other than for an affiliate that controls, is controlled by, or is under common control with the clearing member—also shall comply with the following conditions with respect to such activities: (A) The U.S. person (or any person if the clearing member is a U.S. clearing member) for whom the clearing member receives or holds such funds or securities shall not be natural persons; (B) The clearing member shall disclose to such U.S. person (or to any such person if the clearing member is a U.S. clearing member) that the clearing member is not regulated by the Commission and that U.S. broker-dealer segregation requirements and protections under the Securities Investor Protection Act will not apply to any funds or securities held by the clearing member, that the insolvency law of the applicable jurisdiction may affect such persons’ ability to recover funds and securities, or the speed of any such recovery, in an insolvency proceeding, and, if applicable, that nonU.S. clearing members may be subject to an insolvency regime that is materially different from that applicable to U.S. persons; (C) As promptly as practicable after receipt, the clearing member shall transfer such funds and securities (other than those promptly returned to such other person) to: (I) The clearing member’s Custodial Client Omnibus Margin Account at ICE Trust; or (II) An account held by a third-party custodian, subject to the following requirements: (a) The funds and securities must be held either: (1) In the name of a customer, subject to an agreement to which the customer, the clearing member and the custodian are parties, acknowledging that the assets held therein are customer assets used to collateralize obligations of the customer to the clearing member, and that the assets held in that account may not otherwise be pledged or rehypothecated by the clearing member or the custodian; or E:\FR\FM\11MRN1.SGM 11MRN1 jlentini on DSKJ8SOYB1PROD with NOTICES 11600 Federal Register / Vol. 75, No. 47 / Thursday, March 11, 2010 / Notices (2) In an omnibus account for which the clearing member maintains a daily record as to the amount held in the account that is owed to each customer, and which is subject to an agreement between the clearing member and the custodian specifying that: (i) All assets in that account are held for the exclusive benefit of the clearing member’s customers and are being kept separate from any other accounts maintained by the clearing member with the custodian; (ii) The assets held in that account shall at no time be used directly or indirectly as security for a loan to the clearing member by the custodian and shall be subject to no right, charge, security interest, lien, or claim of any kind in favor of the custodian or any person claiming through the custodian; and (iii) The assets held in that account may not otherwise be pledged or rehypothecated by the clearing member or the custodian; (b) The custodian may not be an affiliated person of the clearing member (as defined at paragraph (f)(2)); and (1) If the custodian is a U.S. entity, it must be a bank (as that term is defined in section 3(a)(6) of the Exchange Act), have total capital, as calculated to meet the applicable requirements imposed by the entity’s appropriate regulatory agency (as defined in section 3(a)(34) of the Exchange Act), of at least $1 billion, and have been approved to engage in a trust business by its appropriate regulatory agency; (2) If the custodian is not a U.S. entity, it must have total capital, as calculated to meet the applicable requirements imposed by the foreign financial regulatory authority (as defined in section 3(a)(52) of the Exchange Act) responsible for setting capital requirements for the entity, equating to at least $1 billion, and provide the clearing member, the customer and ICE Trust with a legal opinion providing that the assets held in the account are subject to regulatory requirements in the custodian’s home jurisdiction designed to protect, and provide for the prompt return of, custodial assets in the event of the insolvency of the custodian, and that the assets held in that account reasonably could be expected to be legally separate from the clearing member’s assets in the event of the clearing member’s insolvency; (c) Such funds may be invested in Eligible Custodial Assets as that term is defined in ICE Trust’s Custodial Asset Policies; and (d) The clearing member must provide notice to ICE Trust that it is using the VerDate Nov<24>2008 16:35 Mar 10, 2010 Jkt 220001 third-party custodian to hold customer collateral. (D) To the extent there is any delay in transferring such funds and securities to the third-parties identified in paragraph (C), the clearing member shall effectively segregate the collateral in a way that, pursuant to applicable law, is reasonably expected to effectively protect such funds and securities from the clearing member’s creditors. The clearing member shall not permit such persons to ‘‘opt out’’ of such segregation even if regulations or laws otherwise would permit such ‘‘opt out.’’ (E) The clearing member annually must provide ICE Trust with (I) An assessment by the clearing member that it is in compliance with all the provisions of paragraphs (d)(3)(ii)(A) through (D) in connection with such activities, and (II) A report by the clearing member’s independent third-party auditor that attests to, and reports on, the clearing member’s assessment described in paragraph (d)(3)(ii)(E)(I) and that is (a) Dated as of the same date as, but which may be separate and distinct from, the clearing member’s annual audit report; (b) Produced in accordance with the auditing standards followed by the independent third party auditor in its audit of the clearing member’s financial statements. (F) The clearing member shall provide the Commission (upon request or pursuant to agreements reached between the Commission or the U.S. Government and any foreign securities authority (as defined in Section 3(a)(50) of the Exchange Act)) with any information or documents within the possession, custody, or control of the clearing member, any testimony of personnel of the clearing member, and any assistance in taking the evidence of other persons, wherever located, that the Commission requests and that relates to Cleared CDS transactions, except that if, after the clearing member has exercised its best efforts to provide the information, documents, testimony, or assistance, including requesting the appropriate governmental body and, if legally necessary, its customers (with respect to customer information) to permit the clearing member to provide the information, documents, testimony, or assistance to the Commission, the clearing member is prohibited from providing this information, documents, testimony, or assistance by applicable foreign law or regulations, then this exemption shall not longer be available to the clearing member. (e) Exemption for certain registered broker-dealers. PO 00000 Frm 00096 Fmt 4703 Sfmt 4703 A broker or dealer registered under Section 15(b) of the Exchange Act (other than paragraph (11) thereof) shall be exempt from the provisions of the Exchange Act and the rules and regulations thereunder specified in paragraph (c)(2), solely with respect to Cleared CDS, except: (1) Section 7(c); (2) Section 15(c)(3); (3) Section 17(a); (4) Section 17(b); (5) Regulation T, 12 CFR 200.1 et seq.; (6) Rule 15c3–1; (7) Rule 15c3–3; (8) Rule 17a–3; (9) Rule 17a–4; (10) Rule 17a–5; and (11) Rule 17a–13. (f) Definitions. (1) For purposes of this Order, the term ‘‘Cleared CDS’’ shall mean a credit default swap that is submitted (or offered, purchased, or sold on terms providing for submission) to ICE Trust, 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: (i) The reference entity, the issuer of the reference security, or the reference security is one of the following: (A) An entity reporting under the Exchange Act, providing Securities Act Rule 144A(d)(4) information, or about which financial information is otherwise publicly available; (B) A foreign private issuer whose securities are listed outside the United States and that has its principal trading market outside the United States; (C) A foreign sovereign debt security; (D) An asset-backed security, as defined in Regulation AB, issued in a registered transaction with publicly available distribution reports; or (E) An asset-backed security issued or guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae; or (ii) The reference index is an index in which 80 percent or more of the index’s weighting is comprised of the entities or securities described in subparagraph (1). (2) For purposes of this Order, the term ‘‘Affiliated Person of the Clearing Member’’ shall mean any person who directly or indirectly controls a clearing member or any person who is directly or indirectly controlled by or under common control with the clearing member. Ownership of 10 percent or more of the common stock of the relevant entity will be deemed prima facie control of that entity. E:\FR\FM\11MRN1.SGM 11MRN1 Federal Register / Vol. 75, No. 47 / Thursday, March 11, 2010 / Notices IV. Paperwork Reduction Act Certain provisions of this Order contain ‘‘collection of information requirements’’ within the meaning of the Paperwork Reduction Act of 1995.61 The Commission has submitted the proposed amendments to the Office of Management and Budget (‘‘OMB’’) for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid control number. A. Collection of Information The Commission found it to be necessary or appropriate in the public interest and consistent with the protection of investors to grant the conditional temporary exemptions discussed in this Order until November 30, 2010. Among other things, the Order would require an ICE Trust clearing member that receives or holds customers’ funds or securities for the purpose of purchasing, selling, clearing, settling, or holding Cleared CDS positions to: (i) Provide ICE Trust with certain certifications/notifications, (ii) make certain disclosures to cleared CDS customers, (iii) enter into certain agreements to protect customer assets, (iv) maintain a record of each customer’s share of assets maintained in an omnibus account, and (v) obtain a separate report, as part of its annual audit report, as to its compliance with the conditions of the ICE Trust Order regarding protection of customer assets. jlentini on DSKJ8SOYB1PROD with NOTICES B. Proposed Use of Information These collection of information requirements are designed, among other things, to inform cleared CDS customers that their ability to recover assets placed with the clearing member are dependent on the applicable insolvency regime, provide Commission staff with access to information regarding whether clearing members are complying with the conditions of the ICE Trust order, and provide documentation helpful for the protection of cleared CDS customers’ funds and securities. C. Respondents Based on conversations with industry participants, the Commission understands that approximately 12 firms may be presently engaged as CDS dealers and thus may seek to be a clearing member of ICE Trust. In addition, 8 more firms may enter into this business. Consequently, the Commission estimates that ICE Trust, 61 44 U.S.C. 3501 et seq. VerDate Nov<24>2008 16:35 Mar 10, 2010 Jkt 220001 like the other CCPs that clear CDS transactions, may have up to 20 clearing members. D. Total Annual Reporting and Recordkeeping Burden Paragraph III.(c)(3)(ii) of this Order requires any ICE Trust clearing member relying on the exemptive relief specified in paragraph (c) that participates in the clearing of cleared CDS transactions on behalf of other persons to annually provide a certification to ICE Trust that attests to whether the clearing member is relying on the exemption from brokerdealer related requirements set forth in paragraph (d) of that Order. The Commission estimates that it would take a clearing member approximately one half hour each year to complete the certification and provide it to ICE Trust, resulting in an aggregate burden of 10 hours per year for all 20 clearing members to comply with this requirement on an annual basis.62 Paragraph III.(d)(3)(ii)(C)(II)(d) of this Order requires that a clearing member notify ICE Trust if it is using a thirdparty custodian to hold customer collateral. The Commission estimates that it would take a clearing member approximately one half hour each year to draft a notification and provide it to ICE Trust, which would result in an aggregate burden of 10 hours per year for all 20 clearing members to comply with this requirement on an annual basis.63 Paragraph III.(d)(3)(ii)(B) of this Order requires an ICE Trust clearing member to disclose to its U.S. customers 64 that it is not regulated by the Commission and that U.S. broker-dealer segregation requirements and protections under the Securities Investor Protection Act will not apply to any funds or securities it holds, that the insolvency law of the applicable jurisdiction may affect the customers’ ability to recover funds and securities, or the speed of any such recovery, in an insolvency proceeding, and, if it is not a U.S. entity, that it may be subject to an insolvency regime that is materially different from that applicable to U.S. persons. The Commission believes that clearing members could use the language in the 62 10 hours = (20 clearing members × 1⁄2 hour per clearing member). This estimate is based on burden estimates published with respect to other Commission actions that contained similar certification requirements (see e.g., Exchange Act Release No. 41661 (Jul 27, 1999) (64 FR 42012 (Aug. 3, 1999)), and the burden associated with the Year 2000 Operational Capability Requirements, including notification and certifications required by Rule 15b7–3T(e). 63 Id. 64 If the clearing member is a U.S. entity, it must make this disclosure to all of its customers. PO 00000 Frm 00097 Fmt 4703 Sfmt 4703 11601 ICE Trust order that describes the disclosure that must be made as a template to draft the disclosure. Consequently the Commission estimates, based on staff experience, that it would take a clearing member approximately one hour to draft the disclosure. Further, the Commission believes clearing members will include this disclosure with other documents or agreements provided to cleared CDS customers and a clearing member may take approximately one half hour to determine how the disclosure should be integrated into those other documents or agreements, resulting in a one-time aggregate burden of 30 hours for all 20 clearing members to comply with this requirement.65 Paragraph III.(d)(3)(ii)(C)(II)(a)(1 ) of this Order requires that, if an ICE Trust clearing member chooses to segregate each of its customers’ funds and securities in a separate account, it must obtain a tri-party agreement for each such account acknowledging that the assets held in the account are customer assets used to collateralize obligations of the customer to the clearing member, and that the assets held in the account may not otherwise be pledged or rehypothecated by the clearing member or the custodian. Paragraph III.(d)(ii)(C)(II)(a)(2 ) of the ICE Trust order requires that, if an ICE Trust clearing member chooses to segregate its customers’ funds and securities on an omnibus basis, it must obtain an agreement with the custodian with respect to the omnibus account acknowledging that the assets held in the account (i) are customer assets and are being kept separate from any other accounts maintained by the clearing member with the custodian, (ii) may at no time be used directly or indirectly as security for a loan to the clearing member by the custodian and shall be subject to no right, charge, security interest, lien, or claim of any kind in favor of the custodian or any person claiming through the custodian, and (iii) may not otherwise be pledged or rehypothecated by the clearing member or the custodian. Opening a bank account generally includes discussions regarding the purpose for the account and a determination as to the terms and conditions applicable to such an account. We understand that most banks presently maintain omnibus and other similar types of accounts that are designed to recognize legally that the 65 30 hours = (1 hour per clearing member to draft the disclosure + 1⁄2 hour per clearing member to determine how the disclosure should be integrated into those other documents or agreements) 20 clearing members. E:\FR\FM\11MRN1.SGM 11MRN1 11602 Federal Register / Vol. 75, No. 47 / Thursday, March 11, 2010 / Notices jlentini on DSKJ8SOYB1PROD with NOTICES assets in the account may not be attached to cover debts of the account holder. Thus the standard agreement for this type of account used by banks should contain the representations and disclosures required by the proposed amendment. However, a small percentage of clearing members may need to work with a bank to modify its standard agreement. We estimate that 5% of the 20 clearing members, or 1 firm, may use a bank with a standard agreement that does not contain the required language.66 We further estimate each clearing member that uses a bank with a standard agreement that does not contain the required language would spend approximately 20 hours of employee resources working with the bank to update its standard agreement template. Therefore, we estimate that the total one-time burden to the industry as a result of this proposed requirement would be approximately 20 hours.67 Paragraph III.(d)(3)(ii)(C)(II)(a)(2 ) of this Order further requires that the clearing member maintain a daily record as to the amount held in the omnibus account that is owed to each customer. The Commission included this requirement in the ICE Trust order to stress the importance of such a record. However it believes that a prudent clearing member likely would create and maintain such a record for business purposes. Consequently, the Commission believes this requirement would not create any additional paperwork burden. Paragraph III.(d)(3)(ii)(E) of this Order requires ICE Trust clearing members that receive or hold customers’ funds or securities for the purpose of purchasing, selling, clearing, settling, or holding cleared CDS positions annually to provide ICE Trust with an assessment that it is in compliance with all the provisions of paragraphs III.(d)(3)(ii)(A) through (D) of that order in connection with such activities, and a report by the clearing member’s independent thirdparty auditor, as of the same date as the firm’s annual audit report,68 that attests to, and reports on, the clearing 66 This estimate is based on burden estimates published with respect to other Commission actions that contained similar certification requirements (see e.g., Exchange Act Release No. 55431 (Mar. 9, 2007) (72 FR 12862 (Mar. 19, 2007)), and the burden associated with the amendments to the financial responsibility rules, including language required in securities lending agreements). 67 20 hours = (20 clearing members × 5%) × 20 hours to work with a bank to update its standard agreement template to include the necessary language. 68 The Commission intends for this requirement to be performed in conjunction with the firm’s annual audit report. VerDate Nov<24>2008 16:35 Mar 10, 2010 Jkt 220001 member’s assessment. The Commission estimates that it will take each clearing member approximately five hours each year to assess its compliance with the requirements of the order relating to segregation of customer assets and attest that it is in compliance with those requirements.69 Further, the Commission estimates that it will cost each clearing member approximately $200,000 more each year to have its auditor prepare this special report as part of its audit of the clearing member.70 Consequently, the Commission estimates that compliance with this requirement will result in an aggregate annual burden of 100 hours for all 20 clearing members, and that the total additional cost of this requirement will be approximately $4,000,000 each year.71 E. Collection of Information Is Mandatory The collections of information contained in the conditions to this Order are mandatory for any entity wishing to rely on the exemptions granted by this Order. F. Confidentiality Certain of the conditions of this Order that address collections of information require ICE Trust clearing members to make disclosures to their customers, or to provide other information to ICE Trust (and in some cases also to customers). Apart from those requirements, the provisions of this Order that address collections of 69 This estimate is based on burden estimates published with respect to other Commission actions that contained similar certification requirements (see e.g., Securities Act Release No. 8138 (Oct. 9, 2002) (67 FR 66208 (Oct. 30, 2002)), and the burden associated with the Disclosure Required by the Sarbanes-Oxley Act of 2002, including requirements relating to internal control reports). 70 This estimate is based on staff conversations with an audit firm. That firm suggested that the cost of such an audit report could range from $10,000 to $1 million, depending on the size of the clearing member, the complexity of its systems, and whether the work included a review of other systems already being reviewed as part of audit work the firms is already providing to the clearing member. The staff understands that it would be less costly to perform this type of audit if the clearing member chooses to forward all customer collateral to ICE Trust (an option allowed by this Order) and does not use any third party. Finally, the staff understands that most ICE Trust clearing members are large dealers whose audits likely include internal control reviews and SAS 70 reports regarding custody of customer assets, which would require a review of the same or similar systems used to comply with the audit report requirement in this order. 71 100 hours = (5 hours for each clearing member to assess its compliance with the requirements of the order relating to segregation of customer assets and attest that it is in compliance with those requirements × 20 clearing members). $4 million = $200,000 per clearing member × 20 clearing members. PO 00000 Frm 00098 Fmt 4703 Sfmt 4703 information do not address or restrict the confidentiality of the documentation prepared by ICE Trust clearing members under the exemptive conditions. Accordingly, ICE Trust clearing members would have to make the applicable information available to regulatory authorities or other persons to the extent otherwise provided by law. G. Request for Comment on Paperwork Reduction Act The Commission requests, pursuant to 44 U.S.C. 3506(c)(2)(B), comment on the collections of information contained in this Order to: (i) Evaluate whether the collections of information are necessary for the proper performance of the functions of the Commission, including whether the information would have practical utility; (ii) Evaluate the accuracy of the Commission’s estimates of the burden of the collections of information; (iii) Determine whether there are ways to enhance the quality, utility, and clarity of the information to be collected; and (iv) Evaluate whether there are ways to minimize the burden of the collections of information on those required to respond, including through the use of automated collection techniques or other forms of information technology. Persons who desire to submit comments on the collection of information requirements should direct their comments to the OMB, Attention: Desk Officer for the Securities and Exchange Commission, Office of Information and Regulatory Affairs, Washington, DC 20503, and should also send a copy of their comments to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090, and refer to File No. S7– 05–09. OMB is required to make a decision concerning the collections of information between 30 and 60 days after publication of this document in the Federal Register; therefore, comments to OMB are best assured of having full effect if OMB receives them within 30 days of this publication. The Commission has submitted the proposed collections of information to OMB for approval. Requests for the materials submitted to OMB by the Commission with regard to these collections of information should be in writing, refer to File No. S7–05–09, and be submitted to the Securities and Exchange Commission, Records Management Office, 100 F Street, NE., Washington, DC 20549. E:\FR\FM\11MRN1.SGM 11MRN1 Federal Register / Vol. 75, No. 47 / Thursday, March 11, 2010 / Notices By the Commission. Florence E. Harmon, Deputy Secretary. become effective immediately upon its filing with the SEC. The text of the proposed rule change is available on the MSRB’s Web site (https://www.msrb.org/msrb1/sec.asp), at the MSRB’s principal office, and at the Commission’s Public Reference Room. [FR Doc. 2010–5222 Filed 3–10–10; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–61647; File No. SR–MSRB– 2010–01] Self-Regulatory Organizations; Municipal Securities Rulemaking Board; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Consisting of Revised Interpretive Questions & Answers on the Application of Rule G–37 March 4, 2010. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on February 25, 2010, the Municipal Securities Rulemaking Board (‘‘MSRB’’), filed with the Securities and Exchange Commission (‘‘Commission’’ or ‘‘SEC’’) the proposed rule change as described in Items I, II and III below, which Items have been prepared by the MSRB. The MSRB has designated the proposed rule change as constituting a stated policy, practice, or interpretation with respect to the meaning, administration, or enforcement of an existing rule of the self-regulatory organization pursuant to Section 19(b)(3)(A)(i) of the Act,3 and Rule 19b–4(f)(1) thereunder,4 which renders the proposal effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. jlentini on DSKJ8SOYB1PROD with NOTICES I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The MSRB has filed with the Commission a proposed rule change consisting of revisions to certain of the existing Rule G–37 interpretive Questions & Answers (‘‘Qs&As’’) to reflect the new rule language as contained in recently adopted amendments to Rule G–37 5, concerning disclosure of certain contributions to bond ballot campaigns. The MSRB requested that the proposed rule change 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 15 U.S.C. 78s(b)(3)(A)(i). 4 17 CFR 240.19b–4(f)(1). 5 Securities Exchange Act Release No. 61381, File No. SR–MSRB–2009–18 (January 20, 2010). 2 17 VerDate Nov<24>2008 16:35 Mar 10, 2010 Jkt 220001 II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the MSRB included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The MSRB has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose Since the adoption of Rule G–37, on political contributions and prohibitions on municipal securities business, the MSRB has received numerous inquiries concerning the application of the rule. In order to assist the municipal securities industry in understanding and complying with the provisions of the rule, the MSRB has published a series of interpretive notices that set forth, in Q & A format, general guidance on Rule G–37. On February 1, 2010, amendments to Rule G–37 became effective concerning disclosure of certain contributions to bond ballot campaigns. The proposed rule change revises certain of the Rule G–37 Qs&As to reflect the new rule language as contained in the amendments. 2. Statutory Basis The MSRB believes that the proposed rule change is consistent with Section 15B(b)(2)(C) of the Act,6 which provides that the MSRB’s rules shall: Be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in municipal securities, to remove impediments to and perfect the mechanism of a free and open market in municipal securities, and, in general, to protect investors and the public interest. 6 15 PO 00000 U.S.C. 78o-4(b)(2)(C). Frm 00099 Fmt 4703 Sfmt 4703 11603 The MSRB believes that the proposed rule change is consistent with the Act in that it provides guidance to brokers, dealers, and municipal securities dealers in complying with existing MSRB rules. B. Self-Regulatory Organization’s Statement on Burden on Competition The MSRB does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act, since it would apply equally to all dealers. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others Written comments were neither solicited nor received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The proposed rule change has become effective pursuant to Section 19(b)(3)(A)(i) of the Act 7 and Rule 19b– 4(f)(1) thereunder,8 in that the proposed rule change constitutes a stated policy, practice, or interpretation with respect to the meaning, administration, or enforcement of an existing rule of the MSRB. At any time within 60 days of the filing of the proposed rule change, the Commission may summarily abrogate such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act.9 IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–MSRB–2010–01 on the subject line. Paper Comments • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, 7 15 U.S.C. 78s(b)(3)(A)(i). CFR 240.19b–4(f)(1). 9 See Section 19(b)(3)(C) of the Act, 15 U.S.C. 78s(b)(3)(C). 8 17 E:\FR\FM\11MRN1.SGM 11MRN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 75, Number 47 (Thursday, March 11, 2010)]
[Notices]
[Pages 11589-11603]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-5222]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61662; File No. S7-05-09]


Order Extending Temporary Exemptions Under the Securities 
Exchange Act of 1934 in Connection with Request of ICE Trust U.S. LLC 
Related to Central Clearing of Credit Default Swaps, and Request for 
Comments

March 5, 2010.

I. Introduction

    The Securities and Exchange Commission (``Commission'') has taken 
multiple actions \1\ designed to address concerns related to the market 
in credit default swaps (``CDS'').\2\ The over-the-

[[Page 11590]]

counter (``OTC'') market for CDS has been a source of particular 
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 thus can help 
mitigate potential systemic impact. We have therefore found that taking 
action to help foster the prompt development of CCPs, including 
granting temporary conditional exemptions from certain provisions of 
the federal securities laws, is in the public interest.\3\
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    \1\ See generally Securities Exchange Act Release No. 60372 
(Jul. 23, 2009), 74 FR 37748 (Jul. 29, 2009) (temporary exemptions 
in connection with CDS clearing by ICE Clear Europe Limited); 
Securities Exchange Act Release No. 60373 (Jul. 23, 2009), 74 FR 
37740 (Jul. 29, 2009) (temporary exemptions in connection with CDS 
clearing by Eurex Clearing AG); Securities Exchange Act Release No. 
59578 (Mar. 13, 2009), 74 FR 11781 (Mar. 19, 2009) and Securities 
Exchange Act Release No. 61164 (Dec. 14, 2009), 74 FR 67258 (Dec. 
18, 2009) (temporary exemptions 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) (hereinafter, 
the ``March 2009 ICE Trust Order'') and Securities Exchange Act 
Release No. 61119 (Dec. 4, 2009), 74 FR 65554 (Dec. 10, 2009) 
(hereinafter, the ``December 2009 ICE Trust Order,'' collectively 
with the March 2009 ICE Trust Order, the ``2009 ICE Trust Orders'') 
(temporary exemptions in connection with CDS clearing by ICE US 
Trust LLC (now ``ICE Trust U.S. LLC'')); Securities Exchange Act 
Release No. 59164 (Dec. 24, 2008), 74 FR 139 (Jan. 2, 2009) 
(temporary exemptions in connection with CDS clearing by LIFFE A&M 
and LCH.Clearnet Ltd.) and other Commission actions discussed in 
several of these orders.
    In addition, we have issued interim final temporary rules that 
provide exemptions under the Securities Act of 1933 and the 
Securities Exchange Act of 1934 for CDS to facilitate the operation 
of one or more central counterparties for the CDS market. See 
Securities Act Release No. 8999 (Jan. 14, 2009), 74 FR 3967 (Jan. 
22, 2009) (initial approval); Securities Act Release No. 9063 (Sep. 
14, 2009), 74 FR 47719 (Sep. 17, 2009) (extension until Nov. 30, 
2010).
    Further, the Commission has provided temporary exemptions in 
connection with Sections 5 and 6 of the Securities Exchange Act of 
1934 for transactions in CDS. See Securities Exchange Act Release 
No. 59165 (Dec. 24, 2008), 74 FR 133 (Jan. 2, 2009) (initial 
exemption); Securities Exchange Act Release No. 60718 (Sep. 25, 
2009), 74 FR 50862 (Oct. 1, 2009) (extension until Mar. 24, 2010).
    \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 (``reference 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 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 take positions on the 
volatility in credit spreads during times of economic uncertainty.
    Growth in the CDS market 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 to 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 the 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 temporary 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 provides a number of benefits by helping to promote 
efficiency and reduce risk in the CDS market, by contributing to the 
goal of market stability, and by requiring maintenance of records of 
CDS transactions that would aid the Commission's efforts to prevent and 
detect fraud and other abusive market practices.\5\
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    \5\ See generally actions referenced in note 1, supra.
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    In the 2009 ICE Trust Orders, the Commission provided temporary 
conditional exemptions to ICE Trust U.S. LLC (``ICE Trust'') and 
certain other parties to permit ICE Trust to clear and settle CDS 
transactions.\6\ The current exemptions are scheduled to expire on 
March 7, 2010, and ICE Trust has requested that the Commission extend 
those exemptions.\7\
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    \6\ For purposes of this Order, ``Cleared CDS'' means a credit 
default swap that is submitted (or offered, purchased, or sold on 
terms providing for submission) to ICE Trust, 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: (i) The reference entity, the issuer of the 
reference security, or the reference security is one of the 
following: (A) An entity reporting under the Exchange Act, providing 
Securities Act Rule 144A(d)(4) information, or about which financial 
information is otherwise publicly available; (B) a foreign private 
issuer whose securities are listed outside the United States and 
that has its principal trading market outside the United States; (C) 
a foreign sovereign debt security; (D) an asset-backed security, as 
defined in Regulation AB, issued in a registered transaction with 
publicly available distribution reports; or (E) 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 (ii) the reference index is an 
index in which 80 percent or more of the index's weighting is 
comprised of the entities or securities described in subparagraph 
(i). See definition in paragraph III.(f)(1) of this Order. 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 text at note 4, supra.
    \7\ See Letter from Kevin McClear, ICE Trust, to Elizabeth 
Murphy, Secretary, Commission, Mar. 5, 2010 (``March 2010 
Request'').
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    Based on the facts presented and the representations made by ICE 
Trust,\8\ and for the reasons discussed in this Order and subject to 
certain conditions, the Commission is extending each of the existing 
exemptions connected with CDS clearing by ICE Trust: The temporary 
conditional exemption granted to ICE Trust from clearing agency 
registration under Section 17A of the Exchange Act solely to perform 
the functions of a clearing agency for certain non-excluded CDS 
transactions; the temporary conditional exemption of ICE Trust and 
certain of its clearing members from the registration requirements of 
Sections 5 and 6 of the Exchange Act solely in connection with the 
calculation of mark-to-market prices for non-excluded CDS cleared by 
ICE Trust; the temporary conditional exemption of eligible contract 
participants and others from certain Exchange Act requirements with 
respect to non-excluded CDS cleared by ICE Trust; the temporary 
exemption of ICE Trust clearing members and others from broker-dealer 
registration requirements and related requirements in connection with 
CDS clearing by ICE Trust (including clearing of customer CDS 
transactions); and the temporary exemption from certain Exchange Act 
requirements granted to registered broker-dealers. This extension is 
temporary, and the exemptions will expire on November 30, 2010.
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    \8\ See id. The exemptions we are granting today are based on 
all of the representations made by ICE Trust, which incorporate 
representations made by or on behalf of ICE Trust as part of the 
requests that preceded our earlier exemptions addressing CDS 
clearing by ICE Trust. 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 that 
previously had been cleared pursuant to the exemptions would remain 
unchanged, but no new positions could be established pursuant to the 
exemptions until all of the underlying representations were again 
accurate.
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II. Discussion

    In its request for an extension, ICE Trust represents that, other 
than as discussed in its request, there have been no material changes 
to the operations of ICE Trust and the representations in the 2009 ICE 
Trust Orders remain true in all material respects.\9\ These

[[Page 11591]]

representations are discussed in detail in the December 2009 ICE Trust 
Order.
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    \9\ See March 2010 Request, supra note 7. In its present 
request, ICE Trust states that, consistent with an earlier 
representation, it has adopted a requirement that clearing members 
subject to the framework are regulated by: (i) A signatory to the 
International Organization of Securities Commissions (``IOSCO'') 
Multilateral Memorandum of Understanding Concerning Consultation and 
Cooperation and the Exchange of Information, or (ii) a signatory to 
a bilateral arrangement with the Commission for enforcement 
cooperation.
    ICE Trust also states that it has commenced implementation of 
certain changes to the end-of-day settlement price process described 
in the December 2009 ICE Trust Order in connection with the clearing 
of single-name CDS. Specifically, ICE Trust has implemented required 
trading for single-name CDS on a daily basis, rather than the 
random-day basis that applies to index CDS, for the 100 basis point 
coupon for certain single-name CDS (and one tenor). As ICE Trust 
rolls out additional single names, it expects to include the 
additional single names in the required trading process. ICE Trust 
also anticipates including other coupons and tenors commencing in 
March 2010.
    Under ICE Trust's process for required trading for single-name 
CDS on a daily basis, on each business day, ICE Trust requires 
trading for a set percentage (initially set at approximately 10%) of 
the randomly selected cleared single-name reference entities. ICE 
Trust applies a filter that first selects for required trading the 
most traded ``cross points'' on a curve generated for each such 
reference entity. ICE Trust will also apply a notional ceiling with 
respect to the amount of required trades in CDS on the selected 
reference entities for any given day. The current notional ceiling 
is ten million (10,000,000) dollars per single name reference entity 
(a reference entity includes all of the coupons and tenors). The 
notional ceiling for the most traded ``cross point'' on the tenor 
curve of a particular reference entity is five million (5,000,000) 
dollars. The notional ceilings for the other ``cross points'' on the 
tenor curve is two million five hundred thousand (2,500,000) 
dollars.
    In addition to the procedures implementing required trades on 
random days for CDS indices and the required trade process described 
above with respect to single name CDS, ICE Trust regularly monitors 
the quality of the respective firm's end-of-day price submissions. 
On a regular basis, ICE Trust: (1) Performs a statistical analysis 
with respect to the dispersion of price submissions; (2) reviews the 
number of ``Advisory Trades'' for each firm; and (3) reviews any 
instances where firms have either submitted late prices or failed to 
submit prices. When appropriate in the view of ICE Trust management, 
it contacts firms to discuss the quality of their price submissions. 
In addition, on a regular basis, ICE Trust management reviews the 
default spread widths and the daily trade results (``Advisory'' and 
``Firm'') with the ICE Trust Trading Advisory Committee and the ICE 
Trust Risk Committee.
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A. ICE Trust's CDS Clearing Activities to Date

    ICE Trust has cleared proprietary CDS transactions of its clearing 
members since March 9, 2009, and has cleared CDS transactions involving 
its clearing members' clients since December 14, 2009. As of February 
11, 2010, ICE Trust had cleared approximately $3.82 trillion notional 
amount of CDS contracts based on indices of securities.\10\
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    \10\ See https://www.theice.com/marketdata/reports/ReportCenter.shtml.
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    On December 29, 2009 ICE Trust commenced clearing CDS contracts 
based on individual reference entities or securities. As of February 
11, 2010, ICE Trust had cleared approximately $18.86 billion notional 
amount of CDS contracts based on individual reference entities or 
securities.\11\
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    \11\ See https://www.theice.com/marketdata/reports/ReportCenter.shtml.
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B. Extended Temporary Conditional Exemption from Clearing Agency 
Registration Requirement

    On December 4, 2009, in connection with its efforts to facilitate 
the establishment of one or more central counterparties (``CCP'') for 
Cleared CDS, the Commission issued the December 2009 ICE Trust Order, 
conditionally extending the Commission's March 2009 ICE Trust Order, 
which conditionally exempted ICE Trust from clearing agency 
registration under Section 17A of the Exchange Act on a temporary 
basis. Subject to the conditions in the December 2009 ICE Trust Order, 
ICE Trust is permitted to act as a CCP for Cleared CDS by novating 
trades of non-excluded CDS that are securities and generating money and 
settlement obligations for participants without having to register with 
the Commission as a clearing agency. The December 2009 ICE Trust Order 
expires on March 7, 2010.
    In the 2009 ICE Trust Orders, the Commission recognized the need to 
ensure the prompt establishment of ICE Trust as a CCP for CDS 
transactions. The Commission also recognized the need to ensure that 
important elements of Section 17A of the Exchange Act, which sets forth 
the framework for the regulation and operation of the U.S. clearance 
and settlement system for securities, apply to the non-excluded CDS 
market. Accordingly, the temporary exemptions in the 2009 ICE Trust 
Orders were subject to a number of conditions designed to enable 
Commission staff to monitor ICE Trust's clearance and settlement of CDS 
transactions.\12\ Moreover, the temporary exemptions in the 2009 ICE 
Trust Orders in part were based on ICE Trust's representation that it 
met the standards set forth in the Committee on Payment and Settlement 
Systems (``CPSS'') and IOSCO report entitled: Recommendation for 
Central Counterparties (``RCCP'').\13\ 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.
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    \12\ See Securities Exchange Act Release No. 59527 (Mar. 6, 
2009), 74 FR 10791 (Mar. 12, 2009) and Securities Exchange Act 
Release No. 61119 (Dec. 4, 2009), 74 FR 65554 (Dec. 10, 2009).
    \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, and the Commodity Futures 
Trading Commission.
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    The Commission believes that continuing to facilitate the central 
clearing of CDS transactions--including customer CDS transactions--
through a temporary conditional exemption from Section 17A will 
continue to provide important risk management and systemic benefits by 
avoiding an interruption in those CCP clearance and settlement 
services. Any interruption in CCP clearance and settlement services for 
CDS transactions would eliminate in the future the benefits ICE Trust 
provides to the non-excluded CDS market. Accordingly, and consistent 
with our findings in the 2009 ICE Trust Orders and for the reasons 
described herein, we find pursuant to Section 36 of the Exchange Act 
\14\ that it is necessary and appropriate in the public interest and is 
consistent with the protection of investors for the Commission to 
extend, until November 30, 2010, the relief provided from the clearing 
agency registration requirements of Section 17A by the 2009 ICE Trust 
Orders.
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    \14\ 15 U.S.C. 78mm. 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.
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    Our action today balances the aim of facilitating ICE Trust's 
continued service as a CCP for non-excluded CDS transactions with 
ensuring that important elements of Commission oversight are applied to 
the non-excluded CDS market. The temporary exemptions will permit the 
Commission to continue to develop direct experience with the non-
excluded CDS market. During the extended exemptive period, the 
Commission will continue to monitor closely the impact of the CCPs on 
the CDS market. In particular, the Commission will seek to assure 
itself that ICE Trust does 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.\15\
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    \15\ ICE Trust has no rule requiring an executing dealer to be a 
clearing member. As an operational matter, ICE Trust currently has 
one authorized trade processing platform for submission of client 
CDS transactions, ICE Link. Currently, ICE Link does not have a 
mechanism by which a non-member dealer could submit a transaction 
for clearing at ICE Trust. However, ICE Trust Clearing Rule 314 
provides for open access to ICE Trust's clearing systems for all 
reasonably qualified execution venues and trade processing 
platforms. ICE Trust has represented that it remains committed to 
work with reasonably qualified execution venues and trade processing 
platforms to facilitate functionality for submission of trades by 
non-member dealers if there is interest in such functionality. See 
March 2010 Request, supra note 7.
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    This temporary extension of the December 2009 ICE Trust Order also 
is designed to assure that--as represented in ICE Trust's request--
information will continue to be available to market participants about 
the terms of the CDS cleared by ICE Trust, the creditworthiness of ICE 
Trust or any guarantor, and the clearance and

[[Page 11592]]

settlement process for CDS.\16\ The Commission believes continued 
operation of ICE Trust consistent with the conditions of this Order 
will facilitate the availability to market participants of information 
that should enable them to make better informed investment decisions 
and better value and evaluate their Cleared CDS and counterparty 
exposures relative to a market for CDS that is not centrally cleared.
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    \16\ The Commission believes 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 evaluate appropriately the risks relating to a 
particular investment and make more informed investment decisions. 
See generally Policy Statement on Financial Market Developments, The 
President's Working Group on Financial Markets, March 13, 2008, 
available at: https://www.treas.gov/press/releases/reports/pwgpolicystatemktturmoil_03122008.pdf.
---------------------------------------------------------------------------

    This temporary extension of the December 2009 ICE Trust Order is 
subject to a number of conditions that are designed to enable 
Commission staff to continue to monitor ICE Trust's clearance and 
settlement of CDS transactions and help reduce risk in the CDS market. 
These conditions require that ICE Trust: (i) Make available on its Web 
site its annual audited financial statements; (ii) preserve records 
related to the conduct of its Cleared CDS clearance and settlement 
services for at least five years (in an easily accessible place for the 
first two years); (iii) provide information relating to its Cleared CDS 
clearance and settlement services to 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; (iv) notify the Commission about material disciplinary 
actions taken against any of its members utilizing its Cleared CDS 
clearance and settlement services, and about the involuntary 
termination of the membership of an entity that is utilizing ICE 
Trust's Cleared CDS clearance and settlement services; (v) provide the 
Commission with changes to rules, procedures, and any other material 
events affecting its Cleared CDS clearance and settlement services; 
(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 
\17\ 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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    \17\ See Automated Systems of Self-Regulatory Organization, 
Exchange Act Release No. 27445 (November 16, 1989), File No. S7-29-
89, and Automated Systems of Self-Regulatory Organization (II), 
Exchange Act Release No. 29185 (May 9, 1991), File No. S7-12-91.
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    In addition, this temporary extension of the December 2009 ICE 
Trust Order is conditioned on ICE Trust, 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 ICE Trust may 
establish to calculate mark-to-market margin requirements for ICE Trust 
clearing members; and (ii) any other pricing or valuation information 
with respect to Cleared CDS as is published or distributed by ICE 
Trust.\18\
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    \18\ As a CCP, ICE Trust collects and processes information 
about CDS transactions, prices, and positions. Public availability 
of such information can improve fairness, efficiency, and 
competitiveness in the market. Moreover, with pricing and valuation 
information relating to Cleared CDS, market participants would be 
able to derive information about underlying securities and indices, 
potentially improving the efficiency and effectiveness of the 
securities markets.
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C. Extended Temporary Conditional Exemption From Exchange Registration 
Requirements

    When we initially provided exemptions in connection with CDS 
clearing by ICE Trust, we granted a temporary conditional exemption to 
ICE Trust from the requirements of Sections 5 and 6 of the Exchange 
Act, and the rules and regulations thereunder, in connection with ICE 
Trust's calculation of mark-to-market prices for open positions in 
Cleared CDS. We also temporarily exempted ICE Trust participants from 
the prohibitions of Section 5 to the extent that they use ICE Trust to 
effect or report any transaction in Cleared CDS in connection with ICE 
Trust's calculation of mark-to-market prices for open positions in 
Cleared CDS. Section 5 of the Exchange Act contains certain 
restrictions relating to the registration of national securities 
exchanges,\19\ while Section 6 provides the procedures for registering 
as a national securities exchange.\20\
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    \19\ In particular, Section 5 states:
    It shall be unlawful for any broker, dealer, or exchange, 
directly or indirectly, to make use of the mails or any means or 
instrumentality of interstate commerce for the purpose of using any 
facility of an exchange * * * to effect any transaction in a 
security, or to report any such transactions, unless such exchange 
(1) is registered as a national securities exchange under section 6 
of [the Exchange Act], or (2) is exempted from such registration * * 
* by reason of the limited volume of transactions effected on such 
exchange. * * *
    15 U.S.C. 78e.
    \20\ 15 U.S.C. 78f. Section 6 of the Exchange Act also sets 
forth various requirements to which a national securities exchange 
is subject.
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    We granted these temporary exemptions to facilitate the 
establishment of ICE Trust's end-of-day settlement price process. ICE 
Trust had represented that in connection with its clearing and risk 
management process it would calculate an end-of-day settlement price 
for each Cleared CDS in which an ICE Trust participant has a cleared 
position, based on prices submitted by the participants. As part of 
this mark-to-market process, ICE Trust has periodically required its 
clearing members to execute certain CDS trades at the price at which 
certain quotations of the clearing members cross. ICE Trust represents 
that it wishes to continue periodically requiring clearing members to 
execute certain CDS trades in this manner.
    As discussed above, we have found in general that it is necessary 
or appropriate in the public interest, and is consistent with the 
protection of investors, to facilitate continued CDS clearing by ICE 
Trust. Consistent with that finding--and in reliance on ICE Trust's 
representation that the end-of-day settlement pricing process, 
including the periodically required trading, is integral to its risk 
management--we further find that it is necessary or appropriate in the 
public interest, and is consistent with the protection of investors 
that we exercise our authority under Section 36 of the Exchange Act to 
extend, until November 30, 2010, ICE Trust's temporary exemption from 
Sections 5 and 6 of the Exchange Act in connection with its calculation 
of mark-to-market prices for open positions in Cleared CDS, and ICE 
Trust clearing members' temporary exemption from Section 5 with respect 
to such trading activity.
    The temporary exemption for ICE Trust will continue to be subject 
to three conditions. First, ICE Trust must report the following 
information with respect to its calculation of mark-to-market prices 
for Cleared CDS to the Commission within 30 days of the end of each 
quarter, and preserve such reports during the life of the enterprise 
and of any successor enterprise:
     The total dollar volume of transactions executed during 
the quarter, broken down by reference entity, security, or index; and
     The total unit volume and/or notional amount executed 
during the quarter, broken down by reference entity, security, or 
index.
    Second, ICE Trust must establish and maintain adequate safeguards 
and procedures to protect participants' confidential trading 
information. Such safeguards and procedures shall include: (a) Limiting 
access to the

[[Page 11593]]

confidential trading information of participants to those employees of 
ICE Trust who are operating the system or responsible for its 
compliance with this exemption or any other applicable rules; and (b) 
establishing and maintaining standards controlling employees of ICE 
Trust trading for their own accounts. ICE Trust must establish and 
maintain adequate oversight procedures to ensure that the safeguards 
and procedures established pursuant to this condition are followed.
    Third, ICE Trust must comply with the conditions to the temporary 
exemption from Section 17A of the Exchange Act in this Order, given 
that this exemption is granted in the context of our goal of continuing 
to facilitate ICE Trust's ability to act as a CCP for non-excluded CDS, 
and given ICE Trust's representation that the end-of-day settlement 
pricing process, including the periodically required trading, is 
integral to its risk management.

D. Extended Temporary Conditional General Exemption for ICE Trust and 
Certain Eligible Contract Participants

    As we recognized when we initially provided temporary exemptions in 
connection with CDS clearing by ICE Trust, 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. We also recognized that it is important that 
the antifraud provisions of the Exchange Act apply to transactions in 
non-excluded CDS, particularly given that OTC transactions subject to 
individual negotiation that qualify as security-based swap agreements 
already are subject to those provisions.\21\
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    \21\ 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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    As a result, we concluded that it is appropriate in the public 
interest and consistent with the protection of investors to apply 
temporarily substantially the same framework to transactions by market 
participants in non-excluded CDS that applies to transactions in 
security-based swap agreements. Consistent with that conclusion, we 
temporarily exempted ICE Trust, and certain members and eligible 
contract participants, from a number of Exchange Act requirements, 
subject to certain conditions, while excluding certain enforcement-
related and other provisions from the scope of the exemption.
    We believe that continuing to facilitate the central clearing of 
CDS transactions by ICE Trust through this type of temporary exemption 
will provide important risk management benefits and systemic benefits. 
We also believe that facilitating the central clearing of customer CDS 
transactions, subject to the conditions in this Order, will provide an 
opportunity for the customers of ICE Trust clearing members to control 
counterparty risk.
    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 November 30, 2010 from 
certain requirements under the Exchange Act.
    As before, this temporary conditional exemption applies to ICE 
Trust and to any eligible contract participants \22\--including any ICE 
Trust clearing member--other than eligible contract participants that 
are self-regulatory organizations or eligible contract participants 
that are registered brokers or dealers.\23\
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    \22\ 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.
    \23\ A separate temporary exemption addresses the Cleared CDS 
activities of registered broker-dealers. See Part II.F, 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.
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    As before, under this temporary conditional exemption, and solely 
with respect to Cleared CDS, those 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. Thus, 
those persons would still be subject to those Exchange Act requirements 
that explicitly are applicable in connection with security-based swap 
agreements.\24\ 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.\25\ 
In this way, the temporary conditional 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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    \24\ See note 40, infra.
    \25\ Thus, for example, the Commission retains the ability to 
investigate potential violations and bring enforcement actions in 
the federal courts as well as in administrative proceedings, and to 
seek the full panoply of remedies available in such cases.
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    Consistent with the December 2009 ICE Trust Order exemptions, this 
temporary conditional exemption does not extend to: The exchange 
registration requirements of Exchange Act Sections 5 and 6; \26\ the 
clearing agency registration requirements of Exchange Act Section 17A; 
the requirements of Exchange Act Sections 12, 13, 14, 15(d), and 16; 
\27\ the broker-dealer registration requirements of Section 15a(1) \28\ 
and the other requirements of the Exchange Act, including paragraphs 
(4) and (6) of Section 15(b),\29\ and the rules and regulations 
thereunder that apply to a broker or dealer that is not registered with 
the Commission; or certain provisions related to government 
securities.\30\
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    \26\ These are subject to a separate temporary class exemption. 
See note 1, 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).
    This Order also includes a separate temporary exemption from 
Sections 5 and 6 in connection with the mark-to-market process of 
ICE Trust, discussed above, at note 19 and accompanying text.
    \27\ 15 U.S.C. 78l, 78m, 78n, 78o(d), 78p. Eligible contract 
participants and other persons instead should refer to the interim 
final temporary rules issued by the Commission. See note 1, supra.
    \28\ 15 U.S.C. 78o(a)(1).
    \29\ 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.
    \30\ 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. The exemption also does not 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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[[Page 11594]]

    As before, ICE Trust clearing members must be in material 
compliance with ICE Trust rules to be eligible for this temporary 
conditional exemption from Exchange Act requirements. ICE Trust 
clearing members that participate in the clearing of Cleared CDS 
transactions on behalf of other persons annually must provide a 
certification to ICE Trust that attests to whether the clearing member 
is relying on the temporary conditional exemption from broker-dealer 
related requirements described below.\31\
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    \31\ To the extent we extend this temporary conditional 
exemption and include the same type of certification requirement, 
the clearing member then would annually renew the certification.
    This condition requiring clearing members to convey information 
to ICE Trust as a repository for regulators, and other conditions of 
this Order that require clearing members or others to convey 
information (e.g., an audit report related to the clearing member's 
compliance with exemptive conditions) to ICE Trust, does not impose 
upon ICE Trust any independent duty to audit or otherwise review 
that information. These conditions also do not impose on ICE Trust 
any independent fiduciary or other obligation to any customer of a 
clearing member.
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E. Conditional Temporary Exemption From Broker-Dealer Related 
Requirements for Certain Clearing Members of ICE Trust and Others

    In the December 2009 ICE Trust Order, we granted a conditional 
temporary exemption from particular Exchange Act requirements to 
certain clearing members of ICE Trust, and to certain eligible contract 
participants, in connection with CDS cleared on ICE Trust. Absent an 
exception or exemption, persons that effect transactions in non-
excluded CDS that are securities may be required to register as broker-
dealers pursuant to Section 15(a)(1) of the Exchange Act.\32\ Certain 
reporting and other requirements of the Exchange Act could apply to 
such persons, as broker-dealers, regardless of whether they are 
registered with the Commission.
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    \32\ 15 U.S.C. 78o(a)(1). This section generally provides that, 
absent an exception or exemption, a broker or dealer that uses the 
mails or any means of interstate commerce to effect transactions in, 
or to induce or attempt to induce the purchase or sale of, any 
security must register with the Commission.
    Section 3(a)(4) of the Exchange Act generally defines a 
``broker'' as ``any person engaged in the business of effecting 
transactions in securities for the account of others,'' but excludes 
certain bank securities activities. 15 U.S.C. 78c(a)(4). Section 
3(a)(5) of the Exchange Act generally defines a ``dealer'' as ``any 
person engaged in the business of buying and selling securities for 
his own account,'' but includes exceptions for certain bank 
activities. 15 U.S.C. 78c(a)(5). Exchange Act Section 3(a)(6) 
defines a ``bank'' as a bank or savings association that is directly 
supervised and examined by state or federal banking authorities 
(with certain additional requirements for banks and savings 
associations that are not chartered by a federal authority or a 
member of the Federal Reserve System). 15 U.S.C. 78c(a)(6).
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    In granting that exemption, we noted that it is consistent with our 
investor protection mandate to require securities intermediaries that 
receive or hold funds and securities on behalf of others to comply with 
standards that safeguard the interests of their customers.\33\ We 
recognized, however, that requiring intermediaries that receive or hold 
funds and securities on behalf of customers in connection with 
transactions in non-excluded CDS to register as broker-dealers may 
deter the use of CCPs in customer CDS transactions, to the detriment of 
the markets and market participants generally. We concluded that those 
factors, along with certain representations of ICE Trust,\34\ argued in 
favor of flexibility in applying the requirements of the Exchange Act 
to these intermediaries, conditioned on requiring the intermediaries to 
take reasonable steps to help increase the likelihood that their 
customers would be protected in the event the intermediary became 
insolvent, even if those safeguards are as not as strong as those 
required of registered broker-dealers.
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    \33\ Registered broker-dealers are required to segregate assets 
held on behalf of customers from proprietary assets, because 
segregation will assist customers in recovering assets in the event 
the intermediary fails. Absent such segregation, collateral could be 
used by an intermediary to fund its own business, and could be 
attached to satisfy the intermediary's debts were it to fail. 
Moreover, the maintenance of adequate capital and liquidity protects 
customers, CCPs, and other market participants. Adequate books and 
records (including both transactional and position records) are 
necessary to facilitate day to day operations as well as to help 
resolve situations in which an intermediary fails and either a 
regulatory authority or receiver is forced to liquidate the firm. 
Appropriate records also are necessary to allow examiners to review 
for improper activities, such as insider trading or fraud.
    \34\ We noted that in granting the temporary exemption, we also 
relied on ICE Trust's representation that before offering the Non-
Member Framework, it will adopt a requirement that non-U.S. clearing 
members subject to the framework are regulated by: (i) A signatory 
to the IOSCO Multilateral Memorandum of Understanding Concerning 
Consultation and Cooperation and the Exchange of Information, or 
(ii) a signatory to a bilateral arrangement with the Commission for 
enforcement cooperation. We further noted that non-U.S. clearing 
members that do not meet these criteria would not be eligible to 
rely on this exemption.
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    As a result, and solely with respect to Cleared CDS, we provided a 
temporary conditional exemption from the broker-dealer registration 
requirements of Section 15(a)(1), and the other requirements of the 
Exchange Act (other than paragraphs (4) and (6) of Section 15(b) \35\) 
and the rules and regulations thereunder that apply to a broker or 
dealer that is not registered with the Commission, to: (i) ICE Trust 
clearing members other than registered broker-dealers; and (ii) any 
eligible contract participant, other than a registered broker-dealer, 
that does not receive or hold funds or securities for the purpose of 
purchasing, selling, clearing, settling, or holding Cleared CDS 
positions for other persons.\36\
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    \35\ As noted above, see note 29, supra, Exchange Act Sections 
15(b)(4) and 15(b)(6) grant the Commission authority to take action 
against broker-dealers and associated persons in certain situations. 
Accordingly, while the exemption we granted from broker-dealer 
requirements generally extended to persons that act as broker-
dealers in the market for Cleared CDS (potentially including inter-
dealer brokers that do not hold funds or securities for others), 
such persons may be subject to actions under Sections 15(b)(4) and 
(b)(6) of the Exchange Act.
    In addition, such persons 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.
    \36\ In some circumstances, an eligible contract participant 
that does not hold customer funds or securities nonetheless may act 
as a dealer in securities transactions, or as a broker (such as an 
inter-dealer broker).
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    That exemption was subject to a number of conditions. For ICE Trust 
clearing members that receive or hold funds or securities of U.S. 
persons (or who receive or hold funds or securities of any person in 
the case of a U.S. clearing member)--other than for an affiliate that 
controls, is controlled by, or is under common control with the 
clearing member--in connection with Cleared CDS, these included a 
condition requiring the clearing member, as promptly as practicable 
after receipt, to transfer such funds and securities (other than those 
promptly returned to such other persons) to either the Custodial Client 
Omnibus Margin Account at ICE Trust or to an account held by a third-
party custodian. Additional related conditions addressed the types of 
permissible arrangements for holding collateral at a third-party 
custodian, and permissible custodians.\37\
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    \37\ Other conditions of this exemption precluded the clearing 
of CDS transaction for natural persons, required certain risk 
disclosures to customers, required the clearing member also must 
annually provide ICE Trust with a self-assessment that it is in 
compliance with the requirements along with a report by the clearing 
member's independent third-party auditor that attests to that 
assessment, and required the clearing member to agree to provide the 
Commission with access to information related to Cleared CDS 
transactions.

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[[Page 11595]]

    These conditions requiring customer collateral to be segregated 
from clearing members address only the initial margin that customers 
post in connection with Cleared CDS. In the December 2009 ICE Trust 
Order we noted, however, that we would evaluate the protections 
afforded to customers' mark-to-market profits associated with Cleared 
CDS positions, and consider the potential benefits of requiring 
clearing members to segregate customers' variation margin in connection 
with Cleared CDS positions.
    As before, we are required to balance the goals of promoting the 
central clearing of customer CDS transactions against the goal of 
protecting customers, and to be mindful that these conditions cannot 
provide legal certainty that customer collateral in fact would be 
protected in the event an ICE Trust clearing member were to become 
insolvent. We believe that the segregation framework set forth in our 
earlier order represents a reasonable step to help protect the 
collateral posted by customers of ICE Trust's clearing members from the 
threat of loss in the event of clearing member insolvency.
    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 a conditional exemption until November 30, 2010, 
with respect to certain Exchange Act requirements related to broker-
dealers.\38\ As before, this exemption is available to ICE Trust 
clearing members other than registered broker-dealers, and to any 
eligible contract participant, other than a registered broker-dealer, 
that does not receive or hold funds or securities for the purpose of 
purchasing, selling, clearing, settling, or holding Cleared CDS 
positions for other persons.\39\ As before, and solely with respect to 
Cleared CDS, those persons temporarily will be exempt from the broker-
dealer registration requirements of Section 15(a)(1), and the other 
requirements of the Exchange Act (other than paragraphs (4) and (6) of 
Section 15(b)) and the rules and regulation thereunder that apply to a 
broker or dealer that is not registered with the Commission.
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    \38\ As before, in granting this relief we are relying on 
representations by ICE Trust that non-U.S. clearing members that 
provide their customers with access to CDS clearing on ICE Trust are 
regulated by: (i) A signatory to the IOSCO Multilateral Memorandum 
of Understanding Concerning Consultation and Cooperation and the 
Exchange of Information, or (ii) a signatory to a bilateral 
arrangement with the Commission for enforcement cooperation. Non-
U.S. clearing members that do not meet these criteria would not be 
eligible to rely on this exemption.
    \39\ In some circumstances, an eligible contract participant 
that does not hold customer funds or securities nonetheless may act 
as a dealer in securities transactions, or as a broker (such as an 
inter-dealer broker).
    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).
---------------------------------------------------------------------------

    As before, for all ICE Trust clearing members--regardless of 
whether they receive or hold customer collateral in connection with 
Cleared CDS--this temporary exemption is conditioned on the clearing 
member being in material compliance with ICE Trust's rules, as well as 
on the clearing member being in compliance with applicable laws and 
regulations relating to capital, liquidity, and segregation of 
customers' funds and securities (and related books and records 
provisions) with respect to Cleared CDS.
    Additional conditions apply to ICE Trust clearing members that 
receive or hold funds or securities of U.S. persons (or that receive or 
hold funds or securities of any person in the case of a U.S. clearing 
member)--other than for an affiliate that controls, is controlled by, 
or is under common control with the clearing member--in connection with 
Cleared CDS. For those ICE Trust clearing members, this temporary 
exemption is conditioned on the customer not being a natural person, 
and on the clearing member providing certain risk disclosures to the 
customer.\40\
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    \40\ The clearing member must disclose that it is not regulated 
by the Commission and that U.S. broker-dealer segregation 
requirements and protections under the Securities Investor 
Protection Act will not apply, that the insolvency law of the 
applicable jurisdiction may affect the customer's ability to recover 
funds and securities or the speed of any such recovery, and (if 
applicable) that non-U.S. members may be subject to an insolvency 
regime that is materially different from that applicable to U.S. 
persons.
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    In addition, under this revised temporary exemption, such clearing 
members must, as promptly as practical after receipt, transfer such 
funds and securities--other than those promptly returned to such other 
person--to either the Custodial Client Omnibus Margin Account at ICE 
Trust \41\ or an account held by a third-party custodian, as described 
below.
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    \41\ Cash collateral transferred to ICE Trust may be invested in 
``Eligible Custodial Assets,'' as defined in ICE Trust's ``Custodial 
Asset Policies.'' Also, collateral transferred to ICE Trust may be 
held at a subcustodian.
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    As before, collateral that is held at a third-party custodian must 
either be held: (1) In the name of the customer, subject to an 
agreement in which the customer, the clearing member and the custodian 
are parties, acknowledging that the assets held therein are customer 
assets used to collateralize obligations of the customer to the 
clearing member, and that the assets held in the account may not 
otherwise be pledged or rehypothecated by the clearing member or the 
custodian; or (2) in an omnibus account for which the clearing member 
maintains daily records as to the amount owing to each customer, and 
which is subject to an agreement between the clearing member and the 
custodian specifying: (i) That all account assets are held for the 
exclusive benefit of the clearing member's customers and are being kept 
separate from any other accounts that the clearing member maintains 
with the custodian; (ii) that the account assets may not be used as 
security for a loan to the clearing member by the custodian, and shall 
be subject to no right, charge, security interest, lien, or claim of 
any kind in favor of the custodian or any person claiming through the 
custodian; and (iii) that the assets may not otherwise be pledged or 
rehypothecated by the clearing member or the custodian.\42\ Under 
either approach, the third-party custodian cannot be affiliated with 
the clearing member.\43\ Moreover, if the third-party custodian is a 
U.S. entity, it must be a

[[Page 11596]]

bank (as that term is defined in Section 3(a)(6) of the Exchange Act), 
have total regulatory capital of at least $1 billion,\44\ and have been 
approved to engage in a trust business by an appropriate regulatory 
agency. A custodian that is not a U.S. entity must have regulatory 
capital of at least $1 billion,\45\ and must provide the clearing 
member, the customer and ICE Trust with a legal opinion providing that 
the account assets are subject to regulatory requirements in the 
custodian's home jurisdiction designed to protect, and provide for the 
prompt return of, custodial assets in the event of the custodian's 
insolvency, and that the assets held in that account reasonably could 
be expected to be legally separate from the clearing member's assets in 
the event of the clearing member's insolvency. Also, cash collateral 
posted with the third-party custodian may be invested in other assets, 
consistent with the investment policies that govern collateral held at 
ICE Trust.\46\ Finally, a clearing member that uses a third-party 
custodian to hold customer collateral must notify ICE Trust of that 
use.
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    \42\ We do not contemplate that either of these approaches 
involving the use of a third-party custodian would interfere with 
the ability of a clearing member and its customer to agree as to how 
any return or losses earned on those assets would be distributed 
between the clearing member and its customer.
    Also, the restriction in both approaches on the clearing 
member's and the custodian's ability to rehypothecate these customer 
funds and securities does not preclude that collateral from being 
transferred to ICE Trust as necessary to satisfy variation margin 
requirements in connection with the customer's CDS position.
    \43\ For purposes of the Order, an ``affiliated person'' of a 
clearing member mean any person who directly or indirectly controls 
a clearing member or any person who is directly or indirectly 
controlled by or under common control with a clearing member; 
ownership of 10 percent or more of an entity's common stock will be 
deemed prima facie control of that entity. See definition in 
paragraph III.(f)(2) of this Order. This standard is analogous to 
the standard used to identify affiliated persons of broker-dealers 
under Exchange Act Rule 15c3-3(a)(13), 17 CFR 240.15c3-3(a)(13).
    \44\ In particular, custodians that are U.S. entities must have 
total capital, as calculated to meet the applicable requirements 
imposed by the entity's appropriate regulatory agency of at least $1 
billion. The term ``appropriate regulatory agency'' is defined in 
Section 3(a)(34) of the Exchange Act, 15 U.S.C. 78c(a)(34).
    \45\ Custodians that are non-U.S. entities must have total 
capital, as calculated to meet the applicable requirements imposed 
by the foreign financial regulatory authority of at least $1 
billion. The term ``foreign financial regulatory authority'' is 
defined in Section 3(a)(52) of the Exchange Act, 15 U.S.C. 
78c(a)(52).
    \46\ See note 41, supra.
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    As before, to the extent there is any delay in the clearing member 
transferring such funds and securities to ICE Trust or a third-party 
custodian,\47\ the clearing member must effectively segregate the 
collateral in a way that, pursuant to applicable law, could reasonably 
be expected to effectively protect the collateral from the clearing 
member's creditors. The clearing member may not permit customers to 
``opt out'' of such segregation even if applicable regulations or laws 
otherwise would permit such ``opt out.''
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    \47\ This provision is intended to address short-term technology 
or operational issues. ICE Trust rules require collateral to be 
transferred promptly on receipt, with the expectation that margin 
would be transferred on the same business day.
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    Also, as before, this temporary exemption is conditioned on 
clearing member compliance with a self-assessment and audit 
requirement,\48\ and on the clearing member's agreement to provide the 
Commission with access to information related to Cleared CDS 
transactions.\49\
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