Order Extending Temporary Exemptions Under the Securities Exchange Act of 1934 in Connection With Request of Chicago Mercantile Exchange Inc. Related to Central Clearing of Credit Default Swaps, and Request for Comments, 17181-17193 [2010-7629]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 75, Number 64 (Monday, April 5, 2010)]
[Notices]
[Pages 17181-17193]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-7629]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61803; File No. S7-06-09]


Order Extending Temporary Exemptions Under the Securities 
Exchange Act of 1934 in Connection With Request of Chicago Mercantile 
Exchange Inc. Related to Central Clearing of Credit Default Swaps, and 
Request for Comments

March 30, 2010.

I. Introduction

    The Securities and Exchange Commission (``Commission'') has taken 
multiple actions \1\ designed to address

[[Page 17182]]

concerns related to the market in credit default swaps (``CDS'').\2\ 
The over-the-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) (``March 2009 CME 
order'') and Securities Exchange Act Release No. 61164 (Dec. 14, 
2009), 74 FR 67258 (Dec. 18, 2009) (``December 2009 CME order'') 
(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), Securities Exchange Act 
Release No. 61119 (Dec. 4, 2009), 74 FR 65554 (Dec. 10, 2009), and 
Securities Exchange Act Release No. 61662 (Mar. 5, 2010), 75 FR 
11589 (Mar. 11, 2010) (temporary exemptions in connection with CDS 
clearing by 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 March 2009, the Commission issued an order \6\ providing 
temporary conditional exemptions to the Chicago Mercantile Exchange 
Inc. (``CME'') and Citadel Investment Group, LLC. (``Citadel''), and 
certain other parties to permit CME and Citadel to clear and settle CDS 
transactions.\7\ In response to CME's request, the Commission 
temporarily extended and expanded the exemptions in December 2009.\8\ 
The current exemptions are scheduled to expire on March 31, 2010, and 
CME has requested that the Commission extend those exemptions.\9\
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    \6\ Securities Exchange Act Release No. 59578 (Mar. 13, 2009), 
74 FR 11781 (Mar. 19, 2009).
    \7\ 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 CME, 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.
    \8\ Securities Exchange Act Release No. 61164 (Dec. 14, 2009), 
74 FR 67258 (Dec. 18, 2009).
    \9\ See Letter from Ann K. Shuman, Managing Director and Deputy 
General Counsel, CME, to Elizabeth Murphy, Secretary, Commission, 
Mar. 30, 2010 (``March 2010 request'').
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    Based on the facts presented and the representations made by 
CME,\10\ 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 CME: the temporary 
conditional exemption granted to CME 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 CME 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 CME; the temporary 
conditional exemption of CME and certain eligible contract participants 
from certain Exchange Act requirements with respect to non-excluded CDS 
cleared by CME; the temporary conditional exemption of certain CME 
clearing members that receive customer collateral in connection with 
non-excluded CDS cleared by CME from certain Exchange Act requirements; 
and the temporary conditional exemption from certain

[[Page 17183]]

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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    \10\ See id. The exemptions we are granting today are based on 
all of the representations made by CME in its request, which in turn 
incorporate representations made by CME in its request for relief 
granted in the December 2009 exemptions addressing CDS clearing by 
CME. 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

A. CME's CDS Clearing Activities to Date

    CME's request for an extension of its current temporary conditional 
exemptions incorporates representations, in its request preceding the 
December 2009 CME order, explaining how CME would clear proprietary CDS 
transactions of its clearing members and CDS transactions involving its 
clearing members' clients.\11\ These representations are discussed in 
detail in our earlier CME orders.\12\
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    \11\ See March 2010 Request, supra note 9. CME represents that 
there have been no material changes to the statements made in the 
letter that preceded the exemptions we granted in the December 2009 
CME order, apart from certain developments it described with regard 
to the implementation of its price quality auction methodology, open 
access to CDS clearing services, policies and procedures with regard 
to securities trading by employees, enhancements related to 
financial safeguards, and the status of a CME petition with the 
Commodity Futures Trading Commission (``CFTC'').
    \12\ In its present request, CME reiterates that it expects to 
rely on procedures, pursuant to the price quality auction 
methodology described in its earlier request for exemptions, whereby 
CME will periodically require CDS clearing members to trade at 
prices generated by their indicative settlement prices, where those 
prices generate crossed bids and offers. To date, CME has yet to 
require the execution of any trades through this process.
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    On December 15, 2009, CME began offering clearing services for CDS 
contracts on a limited basis. As of March 12, 2010, CME had cleared 33 
CDS transactions, with a total $189.5 million notional amount, of CDS 
contracts based on indices of securities.

B. Extended Temporary Conditional Exemption From Clearing Agency 
Registration Requirement

    In March 2009 and December 2009, in connection with its efforts to 
facilitate the establishment of one or more CCPs for Cleared CDS, the 
Commission issued orders conditionally exempting CME from clearing 
agency registration under Section 17A of the Exchange Act on a 
temporary basis.\13\ Subject to the conditions in those orders, CME has 
been 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 current CME exemptive order 
expires on March 31, 2009. Pursuant to its authority under Section 36 
of the Exchange Act,\14\ for the reasons described herein, the 
Commission is extending the exemption granted in that order until 
November 30, 2010, subject to certain conditions.
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    \13\ See supra, note 1.
    \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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    In the earlier exemptive orders, the Commission recognized the need 
to ensure the prompt establishment of CME 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 those orders were 
subject to a number of conditions designed to enable Commission staff 
to monitor CME's clearance and settlement of CDS transactions.\15\
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    \15\ See Securities Exchange Act Release No. 59527 (Mar. 6, 
2009), 74 FR 10791 (Mar. 12, 2009).
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    The temporary exemptions were based, in part, on CME's 
representation that it met the standards set forth in the Committee on 
Payment and Settlement Systems (``CPSS'') and International 
Organization of Securities Commissions (``IOSCO'') report entitled: 
Recommendations for Central Counterparties (``RCCP'').\16\ 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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    \16\ 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 CFTC.
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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 
facilitating the prompt establishment of CCP clearance and settlement 
services. Accordingly, and consistent with our findings in the CME 
Exemptive Order, we find pursuant to Section 36 of the Exchange Act 
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, CME's exemption provided from the 
clearing agency registration requirements of Section 17A, subject to 
certain conditions.
    In granting this exemption, we are balancing the aim of 
facilitating CME's 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 continued use of 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 this market. In particular, the Commission will 
seek to assure itself that CME has sufficient risk management controls 
in place and 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.
    This temporary extension of this exemption also is designed to 
assure that--as CME has represented--information will be available to 
market participants about the terms of the CDS cleared by CME, the 
creditworthiness of CME or any guarantor, and the clearance and 
settlement process for CDS.\17\ The Commission believes operation of 
CME consistent with the conditions of the 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 that is not centrally cleared.
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    \17\ The Commission believes that it is important in the CDS 
market, as in the securities market generally, that parties to 
transactions 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.
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    This temporary extension of this exemption is subject to a number 
of conditions that are designed to enable

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Commission staff to monitor CME's clearance and settlement of CDS 
transactions and help reduce risk in the CDS market. These conditions 
require that CME: (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 on a monthly basis 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 CME'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 not less than one day prior to effectiveness or implementation 
of such rule changes, or in exigent circumstances, as promptly as 
reasonably practicable under the circumstances; (vi) provide the 
Commission with reports prepared by independent audit personnel that 
are generated in accordance with risk assessment of the areas set forth 
in the Commission's Automation Review Policy Statements \18\ and its 
annual audited financial statements prepared by independent audit 
personnel; and (vii) report all significant systems outages to the 
Commission within specified timeframes.
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    \18\ See Automated Systems of Self-Regulatory Organization, 
Exchange Act Release No. 27445 (Nov. 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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    Also, the temporary extension of this exemption is conditioned on 
CME, 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 CME may establish to calculate settlement variation or 
margin requirements for CME clearing members; and (ii) any other 
pricing or valuation information with respect to Cleared CDS as is 
published or distributed by CME.
    As a CCP, CME will collect and process information about CDS 
transactions, prices, and positions from all of its participants. With 
this information, it will calculate and disseminate current values for 
open positions for the purpose of setting appropriate margin levels. 
The availability of such information can improve fairness, efficiency, 
and competitiveness of the market--all of which enhance investor 
protection and facilitate capital formation. Moreover, with pricing and 
valuation information relating to Cleared CDS, market participants 
would be able to derive information about underlying securities and 
indexes. This may improve the efficiency and effectiveness of the 
securities markets by allowing investors to better understand credit 
conditions generally.
    In addition, the temporary extension of this exemption is 
conditioned on CME not materially changing its methodology for 
determining Cleared CDS margin levels without prior written approval 
from the Commission staff,\19\ and from FINRA with respect to customer 
margin requirements that would apply to broker-dealers.
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    \19\ This condition has been modified from the equivalent 
condition in the December 2009 CME order, to provide that prior 
written approval may be given by Commission staff.
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C. Extended Temporary Conditional Exemption From Exchange Registration 
Requirements

    In our December 2009 order in connection with CDS clearing by CME, 
we granted a temporary conditional exemption for CME from the 
requirements of Sections 5 and 6 of the Exchange Act, and the rules and 
regulations thereunder, in connection with CME's methodology for 
determining CDS settlement prices, including its price quality auction 
methodology. We also temporarily exempted CME clearing members from the 
prohibitions of Section 5 to the extent they use CME to effect or 
report any transaction in Cleared CDS in connection with CME'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,\20\ while Section 6 
provides the procedures for registering as a national securities 
exchange.\21\
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    \20\ In particular, Section 5 provides:
    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.
    \21\ 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 CME's settlement price process. CME had represented 
that updated settlement prices will be made available to clearing 
members on their open positions on a regular basis (at least once a 
day, or more frequently in case of sudden market moves), and that, as 
part of the CDS clearing process, CME would periodically require CDS 
clearing members to trade at prices generated by their indicative 
settlement prices where those indicative settlement prices generate 
crossed bids and offers, pursuant to CME's price quality auction 
methodology.
    As part of its current request, CME states that it continues to 
want to be able to make use of procedures that periodically will 
require clearing members to execute certain CDS trades in this 
manner.\22\
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    \22\ See note 12, supra.
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    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 CME. 
Consistent with that finding--and in reliance on CME's representation 
that the settlement pricing process, including the periodically 
required trading, is part of its clearing process--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, CME's temporary exemption from Sections 5 and 6 of 
the Exchange Act in connection with its calculation of settlement 
variation prices for open positions in Cleared CDS, and CME clearing 
members' temporary exemption from Section 5 with respect to such 
trading activity, subject to certain conditions.
    The temporary exemption for CME will continue to be subject to 
three conditions. First, CME must report the following information with 
respect to its determination of daily settlement prices for cleared CDS 
to the Commission within 30 days of the end of each quarter, and 
preserve such reports for as long as CME offers CDS clearing services 
and for a period of at least five years thereafter:
     The total dollar volume of CDS transactions executed 
during the quarter

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pursuant to CME's price quality auction methodology, broken down by 
reference entity, security, or index; and
     The total unit volume or notional amount executed during 
the quarter pursuant to CME's price quality auction methodology, broken 
down by reference entity, security, or index.
    Second, CME must establish and maintain adequate safeguards and 
procedures to protect participants' confidential trading information 
related to Cleared CDS. Such safeguards and procedures shall include: 
(a) Limiting access to the confidential trading information of 
participants to those CME employees who have a need to access such 
information in connection with the provision of CME CDS clearing 
services or who are responsible for compliance with this exemption or 
any other applicable rules; and (b) implementing policies and 
procedures for CME employees with access to such information with 
respect to trading for their own accounts. CME must adopt and implement 
adequate oversight procedures to ensure that the policies and 
procedures established pursuant to this condition are followed.
    Third, CME must comply with the conditions to the temporary 
exemption from registration as a clearing agency extended by this 
Order, given that this exemption is granted in the context of our goal 
of continuing to facilitate CME's ability to act as a CCP for non-
excluded CDS, and given CME's representation that the forced trade 
process is an important component of CME's overall settlement price 
determination process.
    The Commission also is continuing to temporarily exempt each CME 
clearing member, until November 30, 2010, from the prohibition in 
Section 5 of the Exchange Act to the extent that such CME clearing 
member uses any facility of CME to effect any transaction in Cleared 
CDS, or to report any such transaction, in connection with CME's 
calculation of mark-to-market prices for open positions in Cleared CDS. 
Absent an exemption, Section 5 would prohibit any CME clearing member 
that is a broker or dealer from effecting transactions in Cleared CDS 
on CME, which will rely on this Order for an exemption from exchange 
registration. The Commission believes that temporarily exempting CME 
clearing members from the restriction in Section 5 is necessary and 
appropriate in the public interest and is consistent with the 
protection of investors because it will facilitate their use of CME's 
CCP for Cleared CDS, which for the reasons set forth in this Order the 
Commission believes to be beneficial. Without also temporarily 
exempting CME clearing members from this Section 5 requirement, the 
Commission's temporary exemption of CME from Sections 5 and 6 of the 
Exchange Act would be ineffective, because CME clearing members that 
are brokers or dealers would not be permitted to effect transactions on 
CME in connection with the end-of-day settlement price process.

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

    As we recognized in our earlier orders in connection with CDS 
clearing by CME, 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.\23\
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    \23\ 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 in those orders that it is appropriate in 
the public interest and consistent with the protection of investors 
temporarily to apply substantially the same framework to transactions 
by market participants in non-excluded CDS that applies to transactions 
in security-based swap agreements. We thus temporarily exempted CME and 
certain eligible contract participants from a number of Exchange Act 
requirements, 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 CME through this type of temporary conditional 
exemption will provide important risk management 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 CME 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 grant an 
exemption until November 30, 2010, from the requirements of the 
Exchange Act discussed below, subject to certain conditions. As before, 
this temporary exemption applies to CME and to eligible contract 
participants \24\ other than: Eligible contract participants that 
receive or hold funds or securities for the purpose of purchasing, 
selling, clearing, settling, or holding Cleared CDS positions for other 
persons; \25\ eligible contract participants that are self-regulatory 
organizations; or eligible contract participants that are registered 
brokers or dealers.\26\
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    \24\ This exemption in general applies to eligible contract 
participants, as defined in Section 1a(12) of the Commodity Exchange 
Act (``CEA'') as in effect on the date of this Order, other than 
persons that are eligible contract participants under paragraph (C) 
of that section.
    \25\ 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 in a parallel 
manner when certain persons would not 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). A 
separate temporary conditional exemption addresses members of CME 
that hold funds or securities for the purpose of purchasing, 
selling, clearing, settling, or holding Cleared CDS positions for 
other persons. See Part II.E, infra.
    \26\ 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

[[Page 17186]]

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 will still be subject to those 
Exchange Act requirements that explicitly are applicable in connection 
with security-based swap agreements.\27\ 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 
remain applicable.\28\ In this way, the temporary exemption applies the 
same Exchange Act requirements in connection with non-excluded CDS as 
apply in connection with OTC credit default swaps that are security-
based swap agreements.
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    \27\ See note 23, supra.
    \28\ 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 our earlier exemptions, and for the same reasons, 
this temporary exemption also does not extend to: The exchange 
registration requirements of Exchange Act Sections 5 and 6; \29\ the 
clearing agency registration requirements of Exchange Act Section 17A; 
the requirements of Exchange Act Sections 12, 13, 14, 15(d), and 16; 
\30\ the Commission's administrative proceeding authority under 
Sections 15(b)(4) and (b)(6); \31\ or certain provisions related to 
government securities.\32\ CME clearing members relying on this 
temporary exemption must be in material compliance with CME rules.
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    \29\ 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 settlement price calculation 
methodology of CME, discussed above. See Part II.C, supra.
    \30\ 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.
    \31\ Exchange Act Sections 15(b)(4) and 15(b)(6), 15 U.S.C. 
78o(b)(4) and (b)(6), grant the Commission authority to take action 
against broker-dealers and associated persons in certain situations. 
Accordingly, while this exemption generally extends to persons that 
act as inter-dealer brokers in the market for Cleared CDS and do not 
hold funds or securities for others, such inter-dealer brokers may 
be subject to actions under Sections 15(b)(4) and (b)(6) of the 
Exchange Act. In addition, such inter-dealer brokers may be subject 
to actions under Exchange Act Section 15(c)(1), 15 U.S.C. 78o(c)(1), 
which prohibits brokers and dealers from using manipulative or 
deceptive devices. As noted above, Section 15(c)(1) explicitly 
applies to security-based swap agreements. Sections 15(b)(4), 
15(b)(6), and 15(c)(1), of course, would not apply to persons 
subject to this exemption who do not act as broker-dealers or 
associated persons of broker-dealers.
    \32\ This exemption specifically does not extend to the Exchange 
Act provisions applicable to government securities, as set forth in 
Section 15C, 15 U.S.C. 78o-5, and its underlying rules and 
regulations; nor does the exemption extend to related definitions 
found at paragraphs (42) through (45) of Section 3(a), 15 U.S.C. 
78c(a). The Commission does not have authority under Section 36 to 
issue exemptions in connection with those provisions. See Exchange 
Act Section 36(b), 15 U.S.C. 78mm(b).
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E. Extension of Conditional Temporary Exemption for Certain Clearing 
Members of CME

    In our December 2009 order, we granted a temporary conditional 
exemption from the same Exchange Act requirements discussed above to 
CME clearing members that receive or hold customer funds or securities 
for the purpose of purchasing, selling, clearing, settling or holding 
Cleared CDS positions for customers. 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.\33\
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    \33\ 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 provides 
11 exceptions for 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).
    Certain reporting and other requirements of the Exchange Act may 
also apply to such persons, as broker-dealers, regardless of whether 
they are registered with the Commission.
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    As we noted in our earlier orders, 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.\34\ At the 
same time, we recognized 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 CDS transactions, to the detriment of the 
markets and market participants generally. We concluded that those 
factors, along with certain representations by CME, argued in favor of 
flexibility in applying the requirements of the Exchange Act to these 
intermediaries.
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    \34\ 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.
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    Accordingly, in December 2009 (as in March 2009) we provided a 
temporary conditional exemption to CME clearing members registered as 
FCMs that receive or hold funds or securities for the purpose of 
purchasing, selling, clearing, settling, or holding Cleared CDS 
positions for other persons. Solely with respect to Cleared CDS, those 
CME clearing members generally were exempted from provisions of the 
Exchange Act and the underlying rules and regulations that do not apply 
to security-based swap agreements.
    Our December 2009 order--in contrast to the March 2009 order--
required CME clearing members relying on this exemption to hold 
customer collateral in one of three types of accounts: (i) In an 
account established pursuant to Section 4d of the CEA; \35\ or (ii) in 
the absence of a 4d Order from the CFTC, in an account that is part of 
a separate account class, specified by CFTC Bankruptcy Rules, 
established for an FCM to hold its customers' positions

[[Page 17187]]

and collateral in cleared OTC derivatives; or (iii) if both of those 
other two alternatives are not available, in an account established in 
accordance with CFTC Rule 30.7 (with additional disclosures to be made 
to the customer).\36\
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    \35\ If the CFTC were to issue an order pursuant to Section 4d 
of the CEA (``4d Order''), Section 4d of the CEA and the related 
regulations would control the segregation and protection of customer 
funds and property. In that event, all collateral received from 
customers of FCMs in connection with purchasing, selling, or holding 
CDS positions would be subject to the requirements of CFTC 
Regulation 1.20, et seq. promulgated under Section 4d. These 
regulations require that customer positions and property be 
separately accounted for and segregated from the positions and 
property of an FCM. Customer property would be held under an account 
name that clearly identifies it as customer property and 
demonstrates that it is appropriately segregated as required by the 
CEA and Regulation 1.20, et seq.
    \36\ Rule 30.7 provides a mechanism for establishing accounts 
for holding collateral posted by foreign futures customers. When CME 
requested the exemptions that we granted in March 2009, it stated 
that, pending the receipt of the 4d Order, FCMs would hold customer 
collateral within accounts established pursuant to Rule 30.7.
     When CME requested the relief granted to it in December 2009, 
it recognized the uncertainty associated with the protections 
provided by Rule 30.7, stating that ``[n]either the CFTC nor the 
courts have issued an interpretation with regard to the bankruptcy 
protections that would be afforded to customers clearing OTC 
positions in 30.7 accounts, and it is therefore unclear whether they 
would receive the same protections as foreign futures customers.'' 
See Letter from Ann K. Shuman, Managing Director and Deputy General 
Counsel, CME, to Elizabeth Murphy, Secretary, Commission, Dec. 14, 
2009.
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    Those conditions reflected our understanding that the protections 
associated with using CFTC Rule 30.7 to segregate collateral associated 
with over-the-counter derivatives are untested, and thus are less 
certain than those protections that would be afforded to collateral 
protected by Section 4d. The conditions also reflected the CFTC's 
proposal of a rule (on which CFTC has not taken action) to provide for 
the establishment of a new account class that would be designed to 
protect positions in cleared over-the-counter derivatives and 
collateral securing such positions in the event an FCM became 
insolvent.\37\
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    \37\ See 74 FR 40794 (Aug. 13, 2009).
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    To date, the CFTC has not issued the 4d Order, and it has not taken 
final action on proposed rules that would establish a new account 
class. We remain mindful, however, of the benefits that may be expected 
to accompany central clearing of customer CDS transactions by CME. In 
that light, we have determined to renew this exemption on a temporary 
basis.\38\
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    \38\ During the exemptive period we intend to monitor 
developments with regard to the protection afforded this collateral.
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    Accordingly, in light of the risk management and systemic benefits 
in continuing to facilitate CDS clearing by CME while promoting 
customer protection in connection with those CDS transactions, 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 extend this temporary conditional 
exemption for certain CME clearing members from certain requirements of 
the Exchange Act in connection with Cleared CDS until November 30, 
2010.
    As before, this temporary conditional exemption will be available 
to any CME clearing member that is also an FCM (other than one that 
either is registered pursuant to Section 4f(a)(2) or is registered as a 
broker or dealer under Section 15(b) of the Exchange Act (other than 
paragraph (11) thereof)) that receives or holds funds or securities for 
the purpose of purchasing, selling, clearing, settling, or holding 
Cleared CDS positions for other persons. Solely with respect to Cleared 
CDS, those members generally will be exempt from those provisions of 
the Exchange Act and the underlying rules and regulations that do not 
apply to security-based swap agreements. As with the exemption 
discussed above that is applicable to CME and certain eligible contract 
participants, and for the same reasons, this exemption for CME clearing 
members that receive or hold funds and securities does not extend to 
Exchange Act provisions that explicitly apply in connection with 
security-based swap agreements,\39\ or to related enforcement authority 
provisions.\40\ As with the exemption discussed above, we also are not 
exempting those members 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.\41\
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    \39\ See note 23, supra.
    \40\ See note 28, supra.
    \41\ See notes 29 through 31, supra, and accompanying text. Nor 
are we exempting those members from provisions related to government 
securities, as discussed above. See note 32, supra.
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    This temporary exemption is subject to the member complying with 
conditions that are important for protecting customer funds and 
securities. Any CME clearing member relying on this temporary exemption 
must be in material compliance with the rules of CME,\42\ and in 
material 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.\43\ In addition, the customers for whom the clearing member 
receives or holds such funds or securities may not be natural persons, 
and the clearing member must make certain risk disclosures to those 
customers.\44\
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    \42\ These include Rules 971 and 973 relating to Segregation and 
Secured Requirements and Customer Accounts with the Clearing House.
    \43\ The term ``customer,'' solely for purposes of Part III.(d) 
and (e), infra, and corresponding references in this Order, means a 
``customer'' as defined under CFTC Regulation 1.3(k). 17 CFR 1.3(k).
    \44\ The clearing member must disclose that it is not regulated 
by the Commission, 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 to 
collateralize Cleared CDS, and that the applicable insolvency law 
may affect such customers' ability to recover funds and securities, 
or the speed of any such recovery, in an insolvency proceeding.
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    As discussed above, this temporary exemption is further conditioned 
on funds or securities received or held by the clearing member for the 
purpose of purchasing, selling, clearing, settling, or holding cleared 
CDS positions for those customers being held: (i) In an account 
established in accordance with Section 4d of the CEA and CFTC Rules 
1.20 through 1.30 and 1.32 thereunder, or (ii) in the absence of a 4d 
order from the CFTC, in an account that is part of a separate account 
class, specified by CFTC Bankruptcy Rules,\45\ established for an FCM 
to hold its customers' positions in cleared OTC derivatives (and funds 
and securities posted to margin, guarantee, or secure such positions); 
or (iii) if neither of those other accounts is available, those funds 
and securities must be held in an account established in accordance 
with CFTC Rule 30.7.\46\
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    \45\ 17 CFR 190.01 et seq.
    \46\ In that situation, the clearing member must disclose to 
Cleared CDS customers that uncertainty exists as to whether they 
would receive priority in bankruptcy (vis-[agrave]-vis other 
customers) with respect to any funds or securities held by the 
clearing member to collateralize Cleared CDS positions.
    The conditions in this Order require that any FCM that holds 
Cleared CDS customer funds and securities in a 30.7 account must 
segregate all such customer funds and securities in a 30.7 account. 
It is our understanding that this is consistent with CME Rule 8F03.
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    To facilitate compliance with these segregation conditions, the 
clearing member--regardless of the type of account discussed above that 
it uses--also must annually provide CME 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.\47\ Finally, a CME clearing member that receives or holds 
funds or securities of customers for the purpose of purchasing, 
selling,

[[Page 17188]]

clearing, settling, or holding Cleared CDS positions shall segregate 
such funds and securities of customers from the CME clearing member's 
own assets (i.e., the member may not permit the customers to ``opt 
out'' of applicable segregation requirements for such funds and 
securities even if regulations or laws would permit the customer to 
``opt out'').
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    \47\ 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.
    This condition requiring the clearing member to convey a third-
party audit report to CME as a repository for regulators does not 
impose upon CME any independent duty to audit or otherwise review 
that information. This condition also does not impose on CME any 
independent fiduciary or other obligation to any customer of a 
clearing member.
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F. Extended Temporary Conditional General Exemption for Certain 
Registered Broker-Dealers Including Certain Broker-Dealer-FCMs

    The March 2009 and December 2009 CME exemptive orders granted 
temporary limited exemptions from Exchange Act requirements to 
registered broker-dealers 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 CME through targeted conditional 
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 
conditional registered broker-dealer exemption from certain Exchange 
Act requirements until November 30, 2010.\48\
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    \48\ The temporary exemptions addressed above--with regard to 
CME, certain clearing members, and certain eligible contract 
participants--are not available to persons that are registered as 
broker-dealers with the Commission (other than those that are notice 
registered pursuant to 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).
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    As before, consistent with the temporary exemptions discussed 
above, and solely with respect to Cleared CDS, we are temporarily 
exempting registered broker-dealers (including registered broker-
dealers that are also FCMs (``BD-FCMs'')) from provisions of the 
Exchange Act and the rules and regulations thereunder that do not apply 
to security-based swap agreements, subject to certain conditions. As 
discussed above, we are not excluding registered broker-dealers, 
including BD-FCMs, from Exchange Act provisions that explicitly apply 
in connection with security-based swap agreements or from related 
enforcement authority provisions.\49\ As above, and for similar 
reasons, we are not exempting registered broker-dealers, including BD-
FCMs, from: Sections 5, 6, 12, 13, 14, 15(b)(4), 15(b)(6), 15(d), 16 
and 17A of the Exchange Act.\50\
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    \49\ See notes 23 and 28, supra. As noted above, broker-dealers 
also would be subject to Section 15(c)(1) of the Exchange Act, which 
prohibits brokers and dealers from using manipulative or deceptive 
devices, because that provision explicitly applies in connection 
with security-based swap agreements. In addition, to the extent the 
Exchange Act and any rule or regulation thereunder imposes any other 
requirement on a broker-dealer with respect to security-based swap 
agreements (e.g., requirements under Rule 17h-1T to maintain and 
preserve written policies, procedures, or systems concerning the 
broker or dealer's trading positions and risks, such as policies 
relating to restrictions or limitations on trading financial 
instruments or products), these requirements would continue to apply 
to broker-dealers' activities with respect to Cleared CDS.
    \50\ See notes 29 through 31, supra, and accompanying text. We 
also are not exempting those members from provisions related to 
government securities, as discussed above. See note 32, supra.
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    Further, we are not exempting registered broker-dealers from the 
following additional provisions under the Exchange Act: (1) Section 
7(c),\51\ regarding the unlawful extension of credit by broker-dealers; 
(2) Section 15(c)(3),\52\ regarding the use of unlawful or manipulative 
devices by broker-dealers; (3) Section 17(a),\53\ regarding broker-
dealer obligations to make, keep, and furnish information; (4) Section 
17(b),\54\ regarding broker-dealer records subject to examination; (5) 
Regulation T,\55\ a Federal Reserve Board regulation regarding 
extension of credit by broker-dealers; (6) Exchange Act Rule 15c3-
1,\56\ regarding broker-dealer net capital; (7) Exchange Act Rule 15c3-
3,\57\ regarding broker-dealer reserves and custody of securities; (8) 
Exchange Act Rules 17a-3 through 17a-5,\58\ regarding records to be 
made and preserved by broker-dealers and reports to be made by broker-
dealers; and (9) Exchange Act Rule 17a-13,\59\ regarding quarterly 
security counts to be made by certain exchange members and broker-
dealers.\60\ Registered broker-dealers must comply with these 
provisions in connection with their activities involving non-excluded 
CDS because these provisions are especially important to helping 
protect customer funds and securities, ensure proper credit practices, 
and safeguard against fraud and abuse.\61\
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    \51\ 15 U.S.C. 78g(c).
    \52\ 15 U.S.C. 78o(c)(3).
    \53\ 15 U.S.C. 78q(a).
    \54\ 15 U.S.C. 78q(b).
    \55\ 12 CFR 220.1 et seq.
    \56\ 17 CFR 240.15c3-1.
    \57\ 17 CFR 240.15c3-3.
    \58\ 17 CFR 240.17a-3 through 240.17a-5.
    \59\ 17 CFR 240.17a-13.
    \60\ 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.
    \61\ Indeed, Congress directed the Commission to promulgate 
broker-dealer financial responsibility rules, including rules 
relating to custody, the use