Order Extending Temporary Conditional 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 Comment, 75522-75524 [2010-30374]

Download as PDF 75522 Federal Register / Vol. 75, No. 232 / Friday, December 3, 2010 / Notices Electronic Comments (iv) the temporary conditional exemption from certain Exchange Act requirements granted to registered broker-dealers with respect to certain non-excluded CDS. • 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 S7–16–09 on the subject line; or • Use the Federal eRulemaking Portal (https://www.regulations.gov/). Follow the instructions for submitting comments. By the Commission. Elizabeth M. Murphy, Secretary. Paper Comments SECURITIES AND EXCHANGE COMMISSION conditional exemptions to the Chicago Mercantile Exchange Inc. (‘‘CME’’), and certain other parties, to permit CME to clear and settle CDS transactions.2 In response to CME’s request, the Commission temporarily extended and expanded the exemptions in December 2009 and in March 2010.3 The current exemptions pursuant to the March 2010 CME Exemptive Order are scheduled to expire on November 30, 2010, and CME has requested that the Commission extend the exemptions contained in the March 2010 CME Exemptive Order.4 [Release No. 34–63388; File No. S7–06–09] II. Discussion • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File Number S7–16–09. 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. mstockstill on DSKH9S0YB1PROD with NOTICES III. Conclusion It is hereby ordered, pursuant to Section 36(a) of the Exchange Act, that, until July 16, 2011, the following exemptions connected with CDS clearing by ICE Clear Europe contained in the April 2010 ICE Clear Europe Exemptive Order are extended: (i) The temporary conditional exemption granted to ICE Clear Europe 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; (ii) the temporary conditional exemption of ICE Clear Europe 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 certain nonexcluded CDS cleared by ICE Clear Europe; (iii) the temporary conditional exemption of ICE Clear Europe and certain eligible contract participants from certain Exchange Act requirements with respect to certain non-excluded CDS cleared by ICE Clear Europe; and VerDate Mar<15>2010 16:09 Dec 02, 2010 Jkt 223001 [FR Doc. 2010–30375 Filed 12–2–10; 8:45 am] BILLING CODE 8011–01–P Order Extending Temporary Conditional 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 Comment November 29, 2010. I. Introduction The Securities and Exchange Commission (‘‘Commission’’) has taken multiple actions designed to help foster the prompt development of credit default swap (‘‘CDS’’) central counterparties (‘‘CCP’’), including granting temporary conditional exemptions from certain provisions of the federal securities laws.1 In March 2009, the Commission issued an order providing temporary 1 See generally Securities Exchange Act Release Nos. 60372 (Jul. 23, 2009), 74 FR 37748 (Jul. 29, 2009) and 61973 (Apr. 23, 2010), 75 FR 22656 (Apr. 29, 2010) (temporary exemptions in connection with CDS clearing by ICE Clear Europe Limited); Securities Exchange Act Release Nos. 60373 (Jul. 23, 2009), 74 FR 37740 (Jul. 29, 2009) and 61975 (Apr. 23, 2010), 75 FR 22641 (Apr. 29, 2010) (temporary exemptions in connection with CDS clearing by Eurex Clearing AG); Securities Exchange Act Release Nos. 59578 (Mar. 13, 2009), 74 FR 11781 (Mar. 19, 2009), 61164 (Dec. 14, 2009), 74 FR 67258 (Dec. 18, 2009), and 61803 (Mar. 30, 2010), 75 FR 17181 (Apr. 5, 2010) (temporary exemptions in connection with CDS clearing by Chicago Mercantile Exchange Inc.); Securities Exchange Act Release Nos. 59527 (Mar. 6, 2009), 74 FR 10791 (Mar. 12, 2009), 61119 (Dec. 4, 2009), 74 FR 65554 (Dec. 10, 2009), and 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, the Commission has 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 Nos. 8999 (Jan. 14, 2009), 74 FR 3967 (Jan. 22, 2009) (initial approval), 9063 (Sep. 14, 2009), 74 FR 47719 (Sep. 17, 2009) (extension until Nov. 30, 2010), and 9158 (Nov. 30, 2010) (extension until Jul. 16, 2011). PO 00000 Frm 00072 Fmt 4703 Sfmt 4703 A. Legislative Developments Subsequent to the Commission’s issuance of the March 2010 CME Exemptive Order, the President signed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (‘‘Dodd-Frank Act’’) into law.5 The Dodd-Frank Act was enacted to, among other purposes, promote the financial stability of the United States by improving accountability and transparency in the financial system.6 To this end, the provisions of Title VII of the Dodd-Frank Act provide for the comprehensive regulation of securitybased swaps 7 by the Commission.8 The Dodd-Frank Act amends the Exchange Act to require, among other things, that 2 Securities Exchange Act Release No. 59578 (Mar. 13, 2009), 74 FR 11781 (Mar. 19, 2009) (‘‘March 2009 CME Exemptive Order’’). 3 Securities Exchange Act Release Nos. 61164 (Dec. 14, 2009), 74 FR 67258 (Dec. 18, 2009) (‘‘December 2009 CME Exemptive Order’’); 61803 (Mar. 30, 2010), 75 FR 17181 (Apr. 5, 2010) (‘‘March 2010 CME Exemptive Order’’). 4 See Letter from Ann K. Shuman, Managing Director and Deputy General Counsel, CME, to Elizabeth Murphy, Secretary, Commission, Nov. 29, 2010 (‘‘November 2010 Request’’). 5 Public Law 111–203 (July 21, 2010). 6 See Public Law 111–203, Preamble. 7 Section 761(a)(6) of the Dodd-Frank Act defines a ‘‘security-based swap’’ as any agreement, contract, or transaction that is a ‘‘swap,’’ as defined in Section 1a(47) of the Commodity Exchange Act, 7 U.S.C. 1a(47), that is based on an index that is a narrowbased security index, a single security, or a loan, including any interest therein or on the value thereof; or the occurrence, nonoccurrence, or extent of the occurrence of an event relating to a single issuer of a security or the issuers of securities in a narrow-based security index, provided that such event directly affects the financial statements, financial condition, or financial obligations of the issuer. See Section 3(a)(68) of the Securities Exchange Act of 1934 (‘‘Exchange Act’’), 15 U.S.C. 78c(a)(68) (as added by Section 761(a)(6) of the Dodd-Frank Act). Section 712(d) of the Dodd-Frank Act provides that the Commission and the Commodity Futures Trading Commission (‘‘CFTC’’), in consultation with the Board of Governors of the Federal Reserve System, shall, among other things, jointly further define the terms ‘‘swap’’ and ‘‘security-based swap.’’ 8 Section 761(a)(2) of the Dodd-Frank Act explicitly includes security-based swaps in the definition of ‘‘security’’ in Section 3(a)(10) of the Exchange Act, 15 U.S.C. 78c. E:\FR\FM\03DEN1.SGM 03DEN1 Federal Register / Vol. 75, No. 232 / Friday, December 3, 2010 / Notices transactions in security-based swaps be cleared through a clearing agency that is registered with the Commission or that is exempt from registration if they are of a type that the Commission determines must be cleared, unless an exception or exemption from mandatory clearing applies.9 Furthermore, Title VII of the Dodd-Frank Act provides that a derivatives clearing organization registered with the CFTC that cleared swaps pursuant to an exemption from registration as a clearing agency prior to the date of enactment of the Dodd-Frank Act, such as CME, is deemed registered as a clearing agency for the purposes of clearing security-based swaps (‘‘Deemed Registered Provision’’).10 The Deemed Registered Provision, along with other general provisions under Title VII of the Dodd-Frank Act, becomes effective on July 16, 2011.11 As a result, CME will no longer need the exemption from registration as a clearing agency under Section 17A of the Exchange Act provided by the March 2010 CME Exemptive Order, and previous orders, to clear security-based swaps after the Deemed Registered Provision becomes effective. mstockstill on DSKH9S0YB1PROD with NOTICES B. CME’s Request for Extension of March 2010 CME Exemptive Order CME seeks an extension of the temporary exemptions of the March 2010 CME Exemptive Order under the same terms and conditions contained in the March 2010 CME Exemptive Order.12 CME’s request for an extension of the March 2010 CME Exemptive Order incorporates representations made in the requests preceding the March 2010 CME Exemptive Order, the December 2009 CME Exemptive Order, and the March 2009 CME Exemptive Order,13 which are discussed in detail in our earlier CME orders. CME represents that there have been no 9 See Section 763(a) of the Dodd-Frank Act (adding new Section 3C to the Exchange Act, 15 U.S.C. 78c–2). 10 See Section 763(b) of the Dodd-Frank Act (adding new Section 17A(l) to the Exchange Act, 15 U.S.C. 78q–1(1)). Under this Deemed Registered Provision, CME will be required to comply with all requirements of the Exchange Act, and the rules thereunder, applicable to registered clearing agencies to the extent it clears security-based swaps after the effective date of the Deemed Registered Provision, including, for example, the obligation to file proposed rule changes under Section 19(b) of the Exchange Act. 11 Section 774 of the Dodd-Frank Act states, ‘‘[u]nless otherwise provided, the provisions of this subtitle shall take effect on the later of 360 days after the date of the enactment of this subtitle or, to the extent a provision of this subtitle requires a rulemaking, not less than 60 days after publication of the final rule or regulation implementing such provision of this subtitle.’’ 12 See November 2010 Request, supra note 4. 13 See id. VerDate Mar<15>2010 16:09 Dec 02, 2010 Jkt 223001 material changes to the statements made in the previous requests, apart from CME’s adoption of substantive rules for the treatment of customer cleared OTC derivatives.14 Furthermore, CME represents that it will implement policies and procedures designed to ensure compliance with the terms of the Exemptive Orders and conduct an internal review related to its compliance program. Accordingly, consistent with our findings in the March 2010 CME Exemptive Order, and, in particular, in light of the risk management and systemic benefits in continuing to facilitate CDS clearing by CME until Title VII of the Dodd-Frank Act becomes fully effective, 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 extend the exemptive relief granted in the March 2010 CME Exemptive Order until July 16, 2011. Specifically, pursuant to the Commission’s authority under Section 36 of the Exchange Act,15 based on the facts presented and the representations made by CME,16 the Commission is extending until July 16, 2011, under the same terms and conditions in the March 2010 CME Exemptive Order, each of the existing exemptions connected with CDS clearing by CME, which include: 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 14 See infra note 17. CME also notes that it is evaluating the creation of a separate guaranty fund for its CDS and futures business. See November 2010 Request, supra note 4. 15 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 of 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. 16 See November 2010 Request, supra note 4. The exemptions we are granting today are based on all of the representations made by CME in its request, which incorporate representations made by CME in its requests for relief in connection with the March 2010 CME Exemptive Order, the December 2009 CME Exemptive Order, and the March 2009 CME Exemptive Order. 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 (as defined in the March 2010 CME Exemptive Order) 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 00073 Fmt 4703 Sfmt 4703 75523 non-excluded CDS; 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 certain nonexcluded CDS cleared by CME; the temporary conditional exemption of CME and certain eligible contract participants from certain Exchange Act requirements with respect to certain non-excluded CDS cleared by CME; the temporary conditional exemption of certain CME clearing members that receive customer collateral in connection with certain non-excluded CDS cleared by CME from certain Exchange Act requirements;17 and the temporary conditional exemption from certain Exchange Act requirements granted to registered broker-dealers with respect to certain non-excluded CDS.18 C. Solicitation of Comments When we granted the March 2010 CME Exemptive Order, we requested comment on all aspects of the exemptions. We received one comment in response to this request, the content of which is outside of the scope of the Commission’s jurisdiction.19 In connection with this Order extending the exemptions granted in connection with CDS clearing by CME, we reiterate our request for comments on all aspects of the exemptions. 17 The March 2010 CME Exemptive 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 Commodity Exchange Act; (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 (see 17 CFR 190.01 et seq.), established for a futures commission merchant (‘‘FCM’’) to hold its customers’ positions and collateral in cleared OTC derivatives; or (iii) if both of those alternatives are not available, in an account established in accordance with CFTC Rule 30.7 (with additional disclosures to be made to the customer). The CFTC has taken final action on proposed rules to establish a new account class that is applicable to positions in ‘‘Cleared OTC Derivatives,’’ which became effective on May 6, 2010. See 75 FR 17297 (Apr. 6, 2010). On October 4, 2010, CME implemented rules with substantive requirements for the treatment of customer cleared OTC derivatives, and as of that date all CME cleared customer CDS positions and related collateral previously held in CFTC Rule 30.7 accounts are required to be held in ‘‘cleared OTC Derivatives Customer Sequestered Accounts.’’ Given these developments, the terms of the March 2010 CME Exemptive Order, and this Order, require customer collateral to be held in an account established pursuant to a 4d Order or an account that is part of a separate account class established for an FCM to hold its customers’ positions and collateral in Cleared OTC Derivatives. 18 See March 2010 CME Exemptive Order, supra note 3. 19 See Comment from Richard Gaib, Apr. 5, 2010, commenting on the farm credit system. E:\FR\FM\03DEN1.SGM 03DEN1 75524 Federal Register / Vol. 75, No. 232 / Friday, December 3, 2010 / Notices Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/other.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number S7–06–09 on the subject line; or • Use the Federal eRulemaking Portal (https://www.regulations.gov/). Follow the instructions for submitting comments. mstockstill on DSKH9S0YB1PROD with NOTICES Paper Comments • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File Number S7–06–09. 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. III. Conclusion It is hereby ordered, pursuant to Section 36(a) of the Exchange Act, that, until July 16, 2011, the following exemptions connected with CDS clearing by CME contained in the March 2010 CME Exemptive Order are extended: (i) 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; (ii) 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 certain non-excluded CDS cleared by CME; (iii) the temporary conditional exemption of CME and certain eligible contract participants from certain Exchange Act requirements with respect to certain non-excluded CDS cleared by CME; (iv) the temporary conditional VerDate Mar<15>2010 16:09 Dec 02, 2010 Jkt 223001 exemption of certain CME clearing members that receive customer collateral in connection with certain non-excluded CDS cleared by CME from certain Exchange Act requirements; and (v) the temporary conditional exemption from certain Exchange Act requirements granted to registered broker-dealers with respect to certain non-excluded CDS. By the Commission. Elizabeth M. Murphy, Secretary. [FR Doc. 2010–30374 Filed 12–2–10; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–63381; File No. SR– NYSEAMEX–2010–106] Self-Regulatory Organizations; Notice of Filing and Immediate Effectiveness of Proposed Rule Change by NYSE Amex LLC Amending NYSE Amex Equities Rule 5190 To Correspond With Rule Changes Filed by the Financial Industry Regulatory Authority, Inc. November 29, 2010. Pursuant to Section 19(b)(1) 1 of the Securities Exchange Act of 1934 (the ‘‘Act’’) 2 and Rule 19b–4 thereunder,3 notice is hereby given that on November 19, 2010, NYSE Amex LLC (the ‘‘Exchange’’ or ‘‘NYSE Amex’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the NYSE Amex. The Exchange has designated the proposed rule change as constituting a ‘‘noncontroversial’’ rule change under Section 19(b)(3)(A) of the Act,4 and Rule 19b–4(f)(6) thereunder,5 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. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend NYSE Amex Equities Rule 5190 to correspond with rule changes filed by the Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) and approved by the Commission. The text of the proposed rule change is available at the 1 15 U.S.C. 78s(b)(1). U.S.C. 78a. 3 17 CFR 240.19b–4. 4 15 U.S.C. 78s(b)(3)(A). 5 17 CFR 240.19b–4(f)(6). 2 15 PO 00000 Frm 00074 Fmt 4703 Sfmt 4703 Exchange, the Commission’s Public Reference Room, and https:// www.nyse.com. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, NYSE Amex 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 those statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose The purpose of the proposed rule changes is to amend NYSE Amex Equities Rule 5190 (Notification Requirements for Offering Participants) to correspond with rule changes filed by FINRA and approved by the Commission. Background: On July 30, 2007, FINRA’s predecessor, the National Association of Securities Dealers, Inc. (‘‘NASD’’), and NYSE Regulation, Inc. (‘‘NYSER’’) consolidated their member firm regulation operations into a combined organization, FINRA. Pursuant to Rule 17d–2 under the Securities Exchange Act of 1934, as amended (the ‘‘Act’’), NYSE, NYSER and FINRA entered into an agreement (the ‘‘Agreement’’) to reduce regulatory duplication for their members by allocating to FINRA certain regulatory responsibilities for certain NYSE rules and rule interpretations (‘‘FINRA Incorporated NYSE Rules’’). NYSE Amex LLC (‘‘NYSE Amex’’) became a party to the Agreement effective December 15, 2008.6 As part of its effort to reduce regulatory duplication and relieve firms that are members of FINRA, NYSE, and NYSE Amex of conflicting or unnecessary regulatory burdens, FINRA 6 See Securities Exchange Act Release Nos. 56148 (July 26, 2007); 72 FR 42146 (Aug. 1, 2007) (order approving the Agreement), 56147 (July 26, 2007); 72 FR 42166 (Aug. 1, 2007) (SR–NASD–2007–054) (order approving the incorporation of certain NYSE Rules as ‘‘Common Rules’’), and 60409 (July 30, 2009); 74 FR 39353 (Aug. 6, 2009) (order approving the amended and restated Agreement, adding NYSE Amex LLC as a party). Paragraph 2(b) of the Agreement sets forth procedures regarding proposed changes by FINRA, NYSE, or NYSE Amex to the substance of any of the Common Rules. E:\FR\FM\03DEN1.SGM 03DEN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 75, Number 232 (Friday, December 3, 2010)]
[Notices]
[Pages 75522-75524]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-30374]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63388; File No. S7-06-09]

Order Extending Temporary Conditional 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 Comment

November 29, 2010.

I. Introduction

The Securities and Exchange Commission (``Commission'') has taken
multiple actions designed to help foster the prompt development of
credit default swap (``CDS'') central counterparties (``CCP''),
including granting temporary conditional exemptions from certain
provisions of the federal securities laws.\1\
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\1\ See generally Securities Exchange Act Release Nos. 60372
(Jul. 23, 2009), 74 FR 37748 (Jul. 29, 2009) and 61973 (Apr. 23,
2010), 75 FR 22656 (Apr. 29, 2010) (temporary exemptions in
connection with CDS clearing by ICE Clear Europe Limited);
Securities Exchange Act Release Nos. 60373 (Jul. 23, 2009), 74 FR
37740 (Jul. 29, 2009) and 61975 (Apr. 23, 2010), 75 FR 22641 (Apr.
29, 2010) (temporary exemptions in connection with CDS clearing by
Eurex Clearing AG); Securities Exchange Act Release Nos. 59578 (Mar.
13, 2009), 74 FR 11781 (Mar. 19, 2009), 61164 (Dec. 14, 2009), 74 FR
67258 (Dec. 18, 2009), and 61803 (Mar. 30, 2010), 75 FR 17181 (Apr.
5, 2010) (temporary exemptions in connection with CDS clearing by
Chicago Mercantile Exchange Inc.); Securities Exchange Act Release
Nos. 59527 (Mar. 6, 2009), 74 FR 10791 (Mar. 12, 2009), 61119 (Dec.
4, 2009), 74 FR 65554 (Dec. 10, 2009), and 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, the Commission has 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 Nos.
8999 (Jan. 14, 2009), 74 FR 3967 (Jan. 22, 2009) (initial approval),
9063 (Sep. 14, 2009), 74 FR 47719 (Sep. 17, 2009) (extension until
Nov. 30, 2010), and 9158 (Nov. 30, 2010) (extension until Jul. 16,
2011).
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In March 2009, the Commission issued an order providing temporary
conditional exemptions to the Chicago Mercantile Exchange Inc.
(``CME''), and certain other parties, to permit CME to clear and settle
CDS transactions.\2\ In response to CME's request, the Commission
temporarily extended and expanded the exemptions in December 2009 and
in March 2010.\3\ The current exemptions pursuant to the March 2010 CME
Exemptive Order are scheduled to expire on November 30, 2010, and CME
has requested that the Commission extend the exemptions contained in
the March 2010 CME Exemptive Order.\4\
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\2\ Securities Exchange Act Release No. 59578 (Mar. 13, 2009),
74 FR 11781 (Mar. 19, 2009) (``March 2009 CME Exemptive Order'').
\3\ Securities Exchange Act Release Nos. 61164 (Dec. 14, 2009),
74 FR 67258 (Dec. 18, 2009) (``December 2009 CME Exemptive Order'');
61803 (Mar. 30, 2010), 75 FR 17181 (Apr. 5, 2010) (``March 2010 CME
Exemptive Order'').
\4\ See Letter from Ann K. Shuman, Managing Director and Deputy
General Counsel, CME, to Elizabeth Murphy, Secretary, Commission,
Nov. 29, 2010 (``November 2010 Request'').
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II. Discussion

A. Legislative Developments

Subsequent to the Commission's issuance of the March 2010 CME
Exemptive Order, the President signed the Dodd-Frank Wall Street Reform
and Consumer Protection Act of 2010 (``Dodd-Frank Act'') into law.\5\
The Dodd-Frank Act was enacted to, among other purposes, promote the
financial stability of the United States by improving accountability
and transparency in the financial system.\6\ To this end, the
provisions of Title VII of the Dodd-Frank Act provide for the
comprehensive regulation of security-based swaps \7\ by the
Commission.\8\ The Dodd-Frank Act amends the Exchange Act to require,
among other things, that

[[Page 75523]]

transactions in security-based swaps be cleared through a clearing
agency that is registered with the Commission or that is exempt from
registration if they are of a type that the Commission determines must
be cleared, unless an exception or exemption from mandatory clearing
applies.\9\ Furthermore, Title VII of the Dodd-Frank Act provides that
a derivatives clearing organization registered with the CFTC that
cleared swaps pursuant to an exemption from registration as a clearing
agency prior to the date of enactment of the Dodd-Frank Act, such as
CME, is deemed registered as a clearing agency for the purposes of
clearing security-based swaps (``Deemed Registered Provision'').\10\
The Deemed Registered Provision, along with other general provisions
under Title VII of the Dodd-Frank Act, becomes effective on July 16,
2011.\11\ As a result, CME will no longer need the exemption from
registration as a clearing agency under Section 17A of the Exchange Act
provided by the March 2010 CME Exemptive Order, and previous orders, to
clear security-based swaps after the Deemed Registered Provision
becomes effective.
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\5\ Public Law 111-203 (July 21, 2010).
\6\ See Public Law 111-203, Preamble.
\7\ Section 761(a)(6) of the Dodd-Frank Act defines a
``security-based swap'' as any agreement, contract, or transaction
that is a ``swap,'' as defined in Section 1a(47) of the Commodity
Exchange Act, 7 U.S.C. 1a(47), that is based on an index that is a
narrow-based security index, a single security, or a loan, including
any interest therein or on the value thereof; or the occurrence,
nonoccurrence, or extent of the occurrence of an event relating to a
single issuer of a security or the issuers of securities in a
narrow-based security index, provided that such event directly
affects the financial statements, financial condition, or financial
obligations of the issuer. See Section 3(a)(68) of the Securities
Exchange Act of 1934 (``Exchange Act''), 15 U.S.C. 78c(a)(68) (as
added by Section 761(a)(6) of the Dodd-Frank Act). Section 712(d) of
the Dodd-Frank Act provides that the Commission and the Commodity
Futures Trading Commission (``CFTC''), in consultation with the
Board of Governors of the Federal Reserve System, shall, among other
things, jointly further define the terms ``swap'' and ``security-
based swap.''
\8\ Section 761(a)(2) of the Dodd-Frank Act explicitly includes
security-based swaps in the definition of ``security'' in Section
3(a)(10) of the Exchange Act, 15 U.S.C. 78c.
\9\ See Section 763(a) of the Dodd-Frank Act (adding new Section
3C to the Exchange Act, 15 U.S.C. 78c-2).
\10\ See Section 763(b) of the Dodd-Frank Act (adding new
Section 17A(l) to the Exchange Act, 15 U.S.C. 78q-1(1)). Under this
Deemed Registered Provision, CME will be required to comply with all
requirements of the Exchange Act, and the rules thereunder,
applicable to registered clearing agencies to the extent it clears
security-based swaps after the effective date of the Deemed
Registered Provision, including, for example, the obligation to file
proposed rule changes under Section 19(b) of the Exchange Act.
\11\ Section 774 of the Dodd-Frank Act states, ``[u]nless
otherwise provided, the provisions of this subtitle shall take
effect on the later of 360 days after the date of the enactment of
this subtitle or, to the extent a provision of this subtitle
requires a rulemaking, not less than 60 days after publication of
the final rule or regulation implementing such provision of this
subtitle.''
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B. CME's Request for Extension of March 2010 CME Exemptive Order

CME seeks an extension of the temporary exemptions of the March
2010 CME Exemptive Order under the same terms and conditions contained
in the March 2010 CME Exemptive Order.\12\ CME's request for an
extension of the March 2010 CME Exemptive Order incorporates
representations made in the requests preceding the March 2010 CME
Exemptive Order, the December 2009 CME Exemptive Order, and the March
2009 CME Exemptive Order,\13\ which are discussed in detail in our
earlier CME orders. CME represents that there have been no material
changes to the statements made in the previous requests, apart from
CME's adoption of substantive rules for the treatment of customer
cleared OTC derivatives.\14\ Furthermore, CME represents that it will
implement policies and procedures designed to ensure compliance with
the terms of the Exemptive Orders and conduct an internal review
related to its compliance program.
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\12\ See November 2010 Request, supra note 4.
\13\ See id.
\14\ See infra note 17. CME also notes that it is evaluating the
creation of a separate guaranty fund for its CDS and futures
business. See November 2010 Request, supra note 4.
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Accordingly, consistent with our findings in the March 2010 CME
Exemptive Order, and, in particular, in light of the risk management
and systemic benefits in continuing to facilitate CDS clearing by CME
until Title VII of the Dodd-Frank Act becomes fully effective, 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 extend the exemptive relief granted in the March 2010
CME Exemptive Order until July 16, 2011. Specifically, pursuant to the
Commission's authority under Section 36 of the Exchange Act,\15\ based
on the facts presented and the representations made by CME,\16\ the
Commission is extending until July 16, 2011, under the same terms and
conditions in the March 2010 CME Exemptive Order, each of the existing
exemptions connected with CDS clearing by CME, which include: 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; 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 certain 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
certain non-excluded CDS cleared by CME; the temporary conditional
exemption of certain CME clearing members that receive customer
collateral in connection with certain non-excluded CDS cleared by CME
from certain Exchange Act requirements;\17\ and the temporary
conditional exemption from certain Exchange Act requirements granted to
registered broker-dealers with respect to certain non-excluded CDS.\18\
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\15\ 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 of 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.
\16\ See November 2010 Request, supra note 4. The exemptions we
are granting today are based on all of the representations made by
CME in its request, which incorporate representations made by CME in
its requests for relief in connection with the March 2010 CME
Exemptive Order, the December 2009 CME Exemptive Order, and the
March 2009 CME Exemptive Order. 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 (as
defined in the March 2010 CME Exemptive Order) 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.
\17\ The March 2010 CME Exemptive 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 Commodity Exchange Act; (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 (see 17 CFR 190.01
et seq.), established for a futures commission merchant (``FCM'') to
hold its customers' positions and collateral in cleared OTC
derivatives; or (iii) if both of those alternatives are not
available, in an account established in accordance with CFTC Rule
30.7 (with additional disclosures to be made to the customer). The
CFTC has taken final action on proposed rules to establish a new
account class that is applicable to positions in ``Cleared OTC
Derivatives,'' which became effective on May 6, 2010. See 75 FR
17297 (Apr. 6, 2010). On October 4, 2010, CME implemented rules with
substantive requirements for the treatment of customer cleared OTC
derivatives, and as of that date all CME cleared customer CDS
positions and related collateral previously held in CFTC Rule 30.7
accounts are required to be held in ``cleared OTC Derivatives
Customer Sequestered Accounts.'' Given these developments, the terms
of the March 2010 CME Exemptive Order, and this Order, require
customer collateral to be held in an account established pursuant to
a 4d Order or an account that is part of a separate account class
established for an FCM to hold its customers' positions and
collateral in Cleared OTC Derivatives.
\18\ See March 2010 CME Exemptive Order, supra note 3.
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C. Solicitation of Comments

When we granted the March 2010 CME Exemptive Order, we requested
comment on all aspects of the exemptions. We received one comment in
response to this request, the content of which is outside of the scope
of the Commission's jurisdiction.\19\
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\19\ See Comment from Richard Gaib, Apr. 5, 2010, commenting on
the farm credit system.
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In connection with this Order extending the exemptions granted in
connection with CDS clearing by CME, we reiterate our request for
comments on all aspects of the exemptions.

[[Page 75524]]

Comments may be submitted by any of the following methods:

Electronic Comments

Use the Commission's Internet comment form (https://www.sec.gov/rules/other.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number S7-06-09 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 Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.

All submissions should refer to File Number S7-06-09. 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.

III. Conclusion

It is hereby ordered, pursuant to Section 36(a) of the Exchange
Act, that, until July 16, 2011, the following exemptions connected with
CDS clearing by CME contained in the March 2010 CME Exemptive Order are
extended: (i) 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; (ii) 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 certain non-excluded CDS
cleared by CME; (iii) the temporary conditional exemption of CME and
certain eligible contract participants from certain Exchange Act
requirements with respect to certain non-excluded CDS cleared by CME;
(iv) the temporary conditional exemption of certain CME clearing
members that receive customer collateral in connection with certain
non-excluded CDS cleared by CME from certain Exchange Act requirements;
and (v) the temporary conditional exemption from certain Exchange Act
requirements granted to registered broker-dealers with respect to
certain non-excluded CDS.

By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-30374 Filed 12-2-10; 8:45 am]
BILLING CODE 8011-01-P

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