Exemptions for Security-Based Swaps Issued by Certain Clearing Agencies, 34920-34935 [2011-14717]

Download as PDF 34920 Federal Register / Vol. 76, No. 115 / Wednesday, June 15, 2011 / Proposed Rules or lacking a principal inspector, the manager of the local flight standards district office/ certificate holding district office. PART 39—AIRWORTHINESS DIRECTIVES 1. The authority citation for part 39 continues to read as follows: Authority: 49 U.S.C. 106(g), 40113, 44701. § 39.13 [Amended] 2. The FAA amends § 39.13 by adding the following new airworthiness directive (AD): The Boeing Company: Docket No. FAA– 2011–0567; Directorate Identifier 2010– NM–272–AD. Comments Due Date (a) We must receive comments by August 1, 2011. Affected ADs (b) None. Applicability (c) This AD applies to The Boeing Company Model 767–200, –300, –300F, and –400ER series airplanes, certificated in any category, as identified in Boeing Special Attention Service Bulletin 767–57–0121, dated October 7, 2010. Subject (d) Joint Aircraft System Component (JASC)/Air Transport Association (ATA) of America Code 57, Wings. Unsafe Condition (e) This AD was prompted by a design review following a ground fire incident and reports of flammable fluid leaks from the wing leading edge area onto the engine exhaust area. We are issuing this AD to prevent flammable fluid from leaking onto the engine exhaust nozzle, which could result in a fire. Compliance (f) Comply with this AD within the compliance times specified, unless already done. jlentini on DSK4TPTVN1PROD with PROPOSALS Drain Path Modification (g) Within 60 months after the effective date of this AD, modify the fluid drain path in the leading edge area of the wing, in accordance with the Accomplishment Instructions of Boeing Special Attention Service Bulletin 767–57–0121, dated October 7, 2010. Alternative Methods of Compliance (AMOCs) (h)(1) The Manager, Seattle Aircraft Certification Office, FAA, has the authority to approve AMOCs for this AD, if requested using the procedures found in 14 CFR 39.19. In accordance with 14 CFR 39.19, send your request to your principal inspector or local Flight Standards District Office, as appropriate. If sending information directly to the manager of the ACO, send it to the attention of the person identified in the Related Information section of this AD. Information may be e-mailed to: 9-ANMSeattle-ACO-AMOC-Requests@faa.gov. (2) Before using any approved AMOC, notify your appropriate principal inspector, VerDate Mar<15>2010 16:15 Jun 14, 2011 Jkt 223001 ADDRESSES: Related Information (i) For more information about this AD, contact Tung Tran, Aerospace Engineer, Propulsion Branch, ANM–140S, Seattle Aircraft Certification Office (ACO), FAA, 1601 Lind Avenue, SW., Renton, Washington 98057–3356; phone: 425–917–6505; fax: 425– 917–6590; e-mail: Tung.Tran@faa.gov. (j) For service information identified in this AD, contact Boeing Commercial Airplanes, Attention: Data & Services Management, P.O. Box 3707, MC 2H–65, Seattle, Washington 98124–2207; phone: 206–544– 5000, extension 1; fax: 206–766–5680; e-mail: me.boecom@boeing.com; Internet: https://www.myboeingfleet.com. You may review copies of the referenced service information at the FAA, Transport Airplane Directorate, 1601 Lind Avenue, SW., Renton, Washington. For information on the availability of this material at the FAA, call 425–227–1221. Electronic Comments Issued in Renton, Washington, on June 7, 2011. Ali Bahrami, Manager, Transport Airplane Directorate, Aircraft Certification Service. [FR Doc. 2011–14698 Filed 6–14–11; 8:45 am] BILLING CODE 4910–13–P SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 230, 240 and 260 [Release Nos. 33–9222; 34–64639; 39–2474; File No. S7–22–11] RIN 3235–AL16 Exemptions for Security-Based Swaps Issued by Certain Clearing Agencies Securities and Exchange Commission. ACTION: Proposed rules. AGENCY: We are proposing exemptions under the Securities Act of 1933, the Securities Exchange Act of 1934, and the Trust Indenture Act of 1939 for security-based swaps issued by certain clearing agencies satisfying certain conditions. The proposed rules would exempt transactions by clearing agencies in these security-based swaps from all provisions of the Securities Act, other than the Section 17(a) anti-fraud provisions, as well as exempt these security-based swaps from Exchange Act registration requirements and from the provisions of the Trust Indenture Act, provided certain conditions are met. DATES: Comments on the proposed rules should be received on or before July 25, 2011. SUMMARY: PO 00000 Frm 00007 Fmt 4702 Sfmt 4702 Comments may be submitted by any of the following methods: • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/proposed.shtml); • Send an e-mail to rulecomments@sec.gov. Please include File Number S7–22–11 on the subject line; or • Use the Federal Rulemaking Portal (http://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 S7–22–11. 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 (http://www.sec.gov/ rules/proposed.shtml). Comments are also available for public inspection and copying in the Commission’s Public Reference Room, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 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. FOR FURTHER INFORMATION CONTACT: Tamara Brightwell, Senior Special Counsel to the Director, Michael J. Reedich, Special Counsel, Office of Chief Counsel, or Andrew Schoeffler, Special Counsel, Office of Capital Market Trends, Division of Corporation Finance, at (202) 551–3500, U.S. Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–4561. We are proposing new Rule 239 under the Securities Act of 1933 (‘‘Securities Act’’).1 We are also proposing new Rule 12a–10 and an amendment to Rule 12h– 1 under the Securities Exchange Act of 1934 (‘‘Exchange Act’’) 2 and Rule 4d–11 under the Trust Indenture Act of 1939 (‘‘Trust Indenture Act’’).3 SUPPLEMENTARY INFORMATION: 1 15 U.S.C. 77a et seq. U.S.C. 78a et seq. 3 15 U.S.C. 77aaa et seq. 2 15 E:\FR\FM\15JNP1.SGM 15JNP1 Federal Register / Vol. 76, No. 115 / Wednesday, June 15, 2011 / Proposed Rules jlentini on DSK4TPTVN1PROD with PROPOSALS I. Background On July 21, 2010, the President signed the Dodd-Frank Act into law.4 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.5 Title VII of the Dodd-Frank Act provides the Securities and Exchange Commission (‘‘SEC’’ or the ‘‘Commission’’) and the Commodity Futures Trading Commission (‘‘CFTC’’) with the authority to regulate over-thecounter (‘‘OTC’’) derivatives in light of the recent financial crisis. The Dodd-Frank Act provides that the CFTC will regulate ‘‘swaps,’’ the SEC will regulate ‘‘security-based swaps,’’ and the CFTC and SEC will jointly regulate ‘‘mixed swaps.’’ 6 The DoddFrank Act amends the Exchange Act to require, among other things, the following: (1) Transactions in securitybased swaps must be submitted for clearing to a clearing agency if such security-based swap is one that the Commission has determined is required to be cleared, unless an exception from mandatory clearing applies; 7 (2) transactions in security-based swaps must be reported to a registered security-based swap data repository (‘‘SDR’’) or the Commission; 8 and (3) if a security-based swap is subject to mandatory clearing, transactions in security-based swaps must be executed on an exchange or a registered or exempt security-based swap execution facility (‘‘security-based SEF’’), unless 4 The Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111–203, 124 Stat. 1376 (2010). 5 See Public Law 111–203, Preamble. 6 Section 712(d) of the Dodd-Frank Act provides that the Commission and the CFTC, in consultation with the Board of Governors of the Federal Reserve System, shall jointly further define the terms ‘‘swap,’’ ‘‘security-based swap,’’ ‘‘swap dealer,’’ ‘‘security-based swap dealer,’’ ‘‘major swap participant,’’ ‘‘major security-based swap participant,’’ ‘‘eligible contract participant,’’ and ‘‘security-based swap agreement.’’ These terms are defined in Sections 721 and 761 of the Dodd-Frank Act and, with respect to the term ‘‘eligible contract participant,’’ in Section 1a(18) of the Commodity Exchange Act (‘‘CEA’’), 7 U.S.C. 1a(18), as redesignated and amended by Section 721 of the Dodd-Frank Act. See Definitions Contained in Title VII of Dodd-Frank Wall Street Reform and Consumer Protection Act, Release No. 34–62717 (Aug. 13, 2010), 75 FR 51429 (Aug. 20, 2010) (advance joint notice of proposed rulemaking regarding definitions contained in Title VII of the Dodd-Frank Act); and Product Definitions Contained in Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Release No. 33–9204; 34–64372 (Apr. 29, 2011) 76 FR 29818. 7 See Public Law 111–203, § 763(a) (adding Exchange Act Section 3C). 8 See Public Law 111–203, §§ 763(i) and 766(a) (adding Exchange Act Sections 13(m)(1)(G) and 13A(A)(1), respectively). VerDate Mar<15>2010 16:15 Jun 14, 2011 Jkt 223001 no exchange or security-based SEF makes such security-based swap available for trading or the securitybased swap transaction is subject to the clearing exception in Exchange Act Section 3C(g).9 In this release, we are proposing exemptions from the registration requirements of the Securities Act and the Exchange Act, and from the qualification requirements of the Trust Indenture Act, to facilitate implementation of these new requirements. We believe that the increased use of central clearing for security-based swaps should help to promote robust risk management, foster greater efficiencies, improve investor protection, and promote transparency in the market for security-based swaps.10 The DoddFrank Act seeks to ensure that, wherever possible and appropriate, security-based swaps are cleared.11 Paragraph (a)(1) of new Exchange Act Section 3C establishes a mandatory clearing requirement for certain security-based swaps.12 Exchange Act Section 3C(b) sets forth a process by which we would determine whether a security-based swap or any group, category, type or class of security-based swap that a clearing agency plans to accept for clearing is required to be cleared.13 If we 9 See Public Law 111–203, § 763(a) (adding Exchange Act Section 3C). See also Public Law 111–203, § 761 (adding Exchange Act Section 3(a)(77) (defining the term ‘‘security-based swap execution facility’’)), and Registration and Regulation of Security-Based Swap Execution Facilities, Release No. 34–63825 (Feb. 2, 2011) 76 FR 10948 (Feb. 28, 2011). 10 See Ownership Limitations and Governance Requirements for Security-Based Swap Clearing Agencies, Security-Based Swap Execution Facilities, and National Securities Exchanges with Respect to Security-Based Swaps under Regulation MC, Release No. 34–63107 (Oct. 14, 2010), 75 FR 65881 (Oct. 26, 2010), Section III.A.2.a. 11 See, e.g., Report of the Senate Committee on Banking, Housing, and Urban Affairs regarding The Restoring American Financial Stability Act of 2010, S. Rep. No. 111–176 at 34 (stating that ‘‘[s]ome parts of the OTC market may not be suitable for clearing and exchange trading due to individual business needs of certain users. Those users should retain the ability to engage in customized, uncleared contracts while bringing in as much of the OTC market under the centrally cleared and exchangetraded framework as possible.’’). 12 Section 763(a) of the Dodd-Frank Act added Section 3C to the Exchange Act. See also Process for Submissions for Review of Security-Based Swaps for Mandatory Clearing and Notice Filing Requirements for Clearing Agencies; Technical Amendments to Rule 19b–4 and Form 19b–4 Applicable to All Self-Regulatory Organizations, Release No. 34–63557 (Dec. 15, 2010), 75 FR 82490 (Dec. 30, 2010) (‘‘Mandatory Clearing Proposing Release’’). 13 See Exchange Act Section 3C(b) and Mandatory Clearing Proposing Release. In the Mandatory Clearing Proposing Release, we proposed rules to establish processes for (i) clearing agencies registered with the Commission to submit for review each security-based swap, or any group, category, type or class of security-based swaps, that PO 00000 Frm 00008 Fmt 4702 Sfmt 4702 34921 make a determination that a securitybased swap is required to be cleared, then parties may not engage in such a security-based swap without submitting it for clearing, unless an exception applies.14 If we make a determination that a security-based swap is not required to be cleared, such securitybased swap may still be cleared on a non-mandatory basis by the clearing agency if it has rules that permit it to clear such security-based swap.15 Clearing agencies are broadly defined under the Exchange Act and may undertake a variety of functions.16 One such function is to act as a central counterparty (‘‘CCP’’).17 For example, when a security-based swap between two counterparties that are members of a CCP is executed and submitted for clearing, the original contract is extinguished and is replaced by two new contracts where the CCP is the buyer to the seller and the seller to the buyer.18 At that point, the original counterparties are no longer counterparties to each other. As a result, the creditworthiness and liquidity of the CCP is substituted for the creditworthiness and liquidity of the original counterparties.19 the clearing agency plans to accept for clearing for a determination by the Commission of whether the security-based swap, or group, category, type or class of security-based swap is required to be cleared, and to determine the manner of notice the clearing agency must provide to its members of such submission, and (ii) how the Commission may stay the requirement that a security-based swap is subject to mandatory clearing. 14 See Exchange Act Section 3C(g) and Mandatory Clearing Proposing Release. Section 3C(g)(1) provides that a security-based swap otherwise subject to mandatory clearing is not required to be cleared if one party to the security-based swap is not a financial entity, is using security-based swaps to hedge or mitigate commercial risk, and notifies the Commission, in a manner set forth by the Commission, how it generally meets its financial obligations associated with entering into noncleared security-based swaps. 15 See 15 U.S.C. 78s(b) and 12 U.S.C. 5465(e). See also Mandatory Clearing Proposing Release. 16 See Exchange Act Section 3(a)(23). 17 A CCP is an entity that interposes itself between the counterparties to a securities transaction, acting functionally as the buyer to every seller and the seller to every buyer. See Clearing Agency Standards for Operation and Governance, Release No. 34–64017 (Mar. 3, 2011), 76 FR 14472 (Mar. 16, 2011) (‘‘Clearing Agency Standards Proposing Release’’). 18 ‘‘Novation’’ is a ‘‘process through which the original obligation between a buyer and seller is discharged through the substitution of the CCP as seller to buyer and buyer to seller, creating two new contracts.’’ Committee on Payment and Settlement Systems, Technical Committee of the International Organization of Securities Commissioners, Recommendations for Central Counterparties (November 2004) at 66. 19 See Cecchetti, Gyntelberg and Hollanders, Central counterparties for over-the-counter derivatives, BIS Quarterly Review, September 2009, available at http://www.bis.org/publ/qtrpdf/ r_qt0909f.pdf. E:\FR\FM\15JNP1.SGM 15JNP1 34922 Federal Register / Vol. 76, No. 115 / Wednesday, June 15, 2011 / Proposed Rules jlentini on DSK4TPTVN1PROD with PROPOSALS Under the rules we recently proposed regarding mandatory clearing, to meet the clearing requirement in Exchange Act Section 3C, the parties would be required to submit security-based swaps required to be cleared to a clearing agency that functions as a CCP for central clearing.20 The proposed rules also would establish procedures for a clearing agency to submit to us for a review each security-based swap, or group, category, type or class of security-based swap, that the clearing agency plans to accept for clearing. We would review the submission and make a determination about whether the security-based swap, or group, category, type or class of security-based swap, is required to be cleared.21 Under the statute and the proposed rules, the submission would be publicly available and a public comment period would be provided with respect to whether the clearing requirement will apply.22 If we determine that a security-based swap, or group, category, type, or class of security-based swap is required to be cleared, counterparties would be required to submit such security-based swaps negotiated and entered into bilaterally to the clearing agency for novation.23 Thus, for security-based swaps submitted for novation, the CCP will be the issuer of new security-based swaps. Because the definition of ‘‘security’’ in the Securities Act was amended in the Dodd-Frank Act to include security-based swaps,24 the novation of a security-based swap by a clearing agency functioning as a central counterparty involves an offer and sale by the clearing agency of a security (the security-based swap) under the Securities Act. The Securities Act requires that any offer and sale of a security must either be registered under the Securities Act or made pursuant to an exemption from registration.25 Certain provisions of the Exchange Act relating to the registration of classes of securities and the indenture qualification provisions of the Trust Indenture Act also potentially would apply to security-based swaps. The provisions of Section 12 of the Exchange Act could, without an exemption, require that security-based swaps be 20 See Mandatory Clearing Proposing Release and proposed Rule 3Ca–2. 21 See Mandatory Clearing Proposing Release and Public Law 111–203, § 763(a) (adding Exchange Act Section 3C). 22 Id. 23 See Exchange Act Section 3C and proposed Exchange Act Rule 3Ca–2. 24 See Public Law 111–203, Section 761(a) (amending Section 3(a) of the Exchange Act). 25 See Section 5 of the Securities Act [15 U.S.C. 77e]. VerDate Mar<15>2010 16:15 Jun 14, 2011 Jkt 223001 registered before a transaction could be effected on a national securities exchange.26 In addition, registration of a class of security-based swaps under Section 12(g) would be required if the security-based swap is considered an equity security and there are more than 500 record holders of a particular class of security-based swaps at the end of a fiscal year. Further, without an exemption, the Trust Indenture Act would require qualification of an indenture for security-based swaps considered to be debt.27 The provisions of the Dodd-Frank Act do not contain an exemption from Securities Act or Exchange Act registration, or from Trust Indenture Act qualification, for security-based swaps, and we believe that compliance with the registration and qualification provisions of these Acts likely would be impracticable and frustrate the purposes of the Dodd-Frank Act. We have taken action in the past to facilitate clearing of certain credit default swaps by clearing agencies functioning as CCPs. For example, prior to enactment of the Dodd-Frank Act, we permitted five clearing agencies to clear certain credit default swaps (‘‘eligible CDS’’) on a temporary conditional basis.28 To 26 We note that a registered security-based SEF would not be a national securities exchange for purposes of the Exchange Act. Therefore, Exchange Act Sections 12(a) and (b) would not be applicable to transactions effected through such facilities. 27 See 15 U.S.C. 77aaa et seq. 28 See Order Granting Temporary Exemptions under the Securities Exchange Act of 1934 in Connection with Request on Behalf of ICE Clear Europe Limited Related to Central Clearing of Credit Default Swaps, and Request for Comments, Release No. 34–60372 (Jul. 23, 2009), 74 FR 37748 (Jul. 29, 2009), Order Extending Temporary Conditional Exemptions Under the Securities Exchange Act of 1934 in Connection With Request on Behalf of ICE Clear Europe, Limited Related to Central Clearing of Credit Default Swaps, and Request for Comments, Release No. 34–61973 (Apr. 23, 2010), 75 FR 22656 (Apr. 29, 2010), and Order Extending Temporary Conditional Exemptions under the Securities Exchange Act of 1934 in Connection with Request on Behalf of ICE Clear Europe, Limited Related to Central Clearing of Credit Default Swaps and Request for Comment, Release No. 34–63389 (Nov. 29, 2010), 75 FR 75520 (Dec. 3, 2010); Order Granting Temporary Exemptions under the Securities Exchange Act of 1934 in Connection with Request on Behalf of Eurex Clearing AG Related to Central Clearing of Credit Default Swaps, and Request for Comments, Release No. 34–60373 (Jul. 23, 2009), 74 FR 37740 (Jul. 29, 2009), Order Extending and Modifying Temporary Conditional Exemptions Under the Securities Exchange Act of 1934 in Connection With Request on Behalf of Eurex Clearing AG Related to Central Clearing of Credit Default Swaps, and Request for Comment, Release No. 34–61975 (Apr. 23, 2010), 75 FR 22641 (Apr. 29, 2010), and Order Extending Temporary Conditional Exemptions under the Securities Exchange Act of 1934 in Connection with Request on Behalf of Eurex Clearing, AG Related to Central Clearing of Credit Default Swaps and Request for Comment, Release No. 34–63390 (Nov. 29, 2010), 75 FR 75518 (Dec. 3, 2010); Order PO 00000 Frm 00009 Fmt 4702 Sfmt 4702 facilitate the operation of clearing agencies as CCPs for eligible CDS, we also adopted interim temporary exemptions from certain provisions of the Securities Act, the Exchange Act and the Trust Indenture Act, subject to certain conditions.29 In the adopting release, we noted that we believed that the existence of CCPs for CDS would be important in helping to reduce counterparty risks inherent in the CDS Granting Temporary Exemptions Under the Securities Exchange Act of 1934 in Connection With Request of Chicago Mercantile Exchange Inc. and Citadel Investment Group, L.L.C. Related to Central Clearing of Credit Default Swaps, and Request for Comments, Release No. 34–59578 (Mar. 13, 2009), 74 FR 11781 (Mar. 19, 2009), Order Extending and Modifying 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, Release No. 34–61164 (Dec. 14, 2009), 74 FR 67258 (Dec. 18, 2009), 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, Release No. 34–61803 (Mar. 30, 2010), 75 FR 17181 (Apr. 5, 2010), and 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, Release No. 34–63388 (Nov. 29, 2010), 75 FR 75522 (Dec. 3, 2010); Order Granting Temporary Exemptions Under the Securities Exchange Act of 1934 in Connection With Request on Behalf of ICE US Trust LLC Related to Central Clearing of Credit Default Swaps, and Request for Comments, Release No. 34–59527 (Mar. 6, 2009), 74 FR 10791 (Mar. 12, 2009), Order Extending and Modifying Temporary Exemptions under the Securities Exchange Act of 1934 in Connection with Request from ICE Trust U.S. LLC Related to Central Clearing of Credit Default Swaps, and Request for Comments, Release No. 34–61119 (Dec. 4, 2009), 74 FR 65554 (Dec. 10, 2009); Order Extending Temporary Exemptions under the Securities Exchange Act of 1934 in Connection with Request of ICE Trust U.S. LLC Related to Central Clearing of Credit Default Swaps, and Request for Comments, Release No. 34–61662 (Mar. 5, 2010), 75 FR 11589 (Mar. 11, 2010), and Order Extending and Modifying Temporary Exemptions under the Securities Exchange Act of 1934 in Connection with Request of ICE Trust U.S. LLC Related to Central Clearing of Credit Default Swaps and Request for Comment, Release No. 34– 63387 (Nov. 29, 2010), 75 FR 75502 (Dec. 3, 2010); and Order Granting Temporary Exemptions Under the Securities Exchange Act of 1934 in Connection with Request of LIFFE Administration and Management and LCH.Clearnet Ltd. Related to Central Clearing Of Credit Default Swaps, and Request for Comments, Release No. 34–59164 (Dec. 24, 2008), 74 FR 139 (Jan. 2, 2009) (collectively, ‘‘CDS Clearing Exemption Orders’’). LIFFE A&M and LCH.Clearnet Ltd. allowed their order to lapse without seeking renewal. 29 See Temporary Exemptions for Eligible Credit Default Swaps to Facilitate Operation of Central Counterparties to Clear and Settle Credit Default Swaps, Release No. 33–8999 (Jan. 14, 2009), 74 FR 3967 (Jan. 22, 2009) (‘‘Temporary CDS Exemptions Release’’). The interim final temporary rules exempted eligible credit default swaps from all provisions of the Securities Act, other than the Section 17(a) anti-fraud provisions, the Exchange Act registration requirements, and the provisions of the Trust Indenture Act, provided certain conditions were met. E:\FR\FM\15JNP1.SGM 15JNP1 Federal Register / Vol. 76, No. 115 / Wednesday, June 15, 2011 / Proposed Rules jlentini on DSK4TPTVN1PROD with PROPOSALS market.30 In addition to those actions with respect to eligible CDS, as discussed further below, the exemptions we are proposing today are similar to exemptions under the Securities Act and the Exchange Act for security futures products and certain standardized options.31 The rules proposed in this release are intended to further the goal of central clearing of security-based swaps by providing exemptions for the issuance of security-based swaps in connection with novation by a registered or exempt clearing agency functioning as a CCP from certain regulatory provisions that might otherwise interfere with such clearing activities. Without an exemption, a clearing agency functioning as a CCP would be required to register the security-based swap transaction, which could unnecessarily impede the central clearing of securitybased swaps.32 In addition, the clearing agency would be subject to Exchange Act registration and reporting requirements, and to the requirements of the Trust Indenture Act. We believe that the proposed exemptions from the Securities Act, Exchange Act, and Trust Indenture Act are necessary to facilitate the intent of the Dodd-Frank Act with respect to mandatory clearing of security-based swaps. As noted above, these proposed exemptions are similar to the exemptions we adopted for eligible CDS and standardized options, as well as the exemptions that are provided in the Securities Act and the Exchange Act for security futures products. In addition to our interest in facilitating clearing of security-based swaps, we believe that security-based swaps can be used for financial purposes similar to those served by standardized options and security futures products, and thus we believe that it is appropriate to establish comparable regulatory treatment for security-based swaps. By doing so, we believe that the proposed exemptions would allow for economically similar 30 See id. We extended the expiration date of the final temporary rules until July 16, 2011. See Extension of Temporary Exemptions for Eligible Credit Default Swaps to Facilitate Operation of Central Counterparties to Clear and Settle Credit Default Swaps, Release No. 33–9158 (Nov. 19, 2010), 75 FR 72660 (Nov. 26, 2010). 31 See Exemption for Standardized Options From Provisions of the Securities Act of 1933 and From the Registration Requirements of the Securities Exchange Act of 1934, Release No. 33–8171 (Dec. 23, 2002), 68 FR 1 (Jan. 2, 2003) (‘‘Standardized Options Release’’). 32 In addition, because the novation generally occurs after the counterparties have agreed to enter into the bilateral security-based swap being novated the investment decision by the counterparties already has occurred. VerDate Mar<15>2010 16:15 Jun 14, 2011 Jkt 223001 regulatory treatment under the Securities Act and Exchange Act.33 II. Discussion of the Proposed Rules and Amendments We are proposing rules and amendments to existing rules (collectively, ‘‘proposed rules’’) to provide certain exemptions under the Securities Act, the Exchange Act, and the Trust Indenture Act for securitybased swaps issued by clearing agencies functioning as CCPs. A. Securities Act Rule 239 We are proposing Securities Act Rule 239 to exempt the offer and sale of security-based swaps that are or will be issued to eligible contract participants by, and in a transaction involving, a clearing agency that is registered under Section 17A of the Exchange Act 34 or exempt from such registration 35 by rule, regulation or order of the Commission (‘‘registered or exempt clearing agency’’) in its function as a CCP, from all provisions of the Securities Act, except the anti-fraud provisions of Section 17(a), subject to certain conditions.36 33 Standardized options and security futures products are only traded on a national securities exchange and thus are subject to listing standards. This differs from the regulatory treatment of security-based swaps under the provisions of the Dodd-Frank Act, which provide that a securitybased swap may be cleared by the clearing agency but does not require such security-based swap to be traded on a national securities exchange. We note, however, that security-based swap transactions must be registered under the Securities Act and traded on an exchange if offered or sold to noneligible contract participants. See Public Law 111– 203 § 768(b) (adding Securities Act Section 5(d)) and Public Law 111–203 § 763(e) (adding Exchange Act Section 6(l)). 34 Section 763(b) of the Dodd-Frank Act provides that certain security-based swap clearing agencies will be deemed registered as clearing agencies for the purpose of clearing security-based swaps. The deemed registered provision, which becomes effective on July 16, 2011, applies if the entity is: (i) A depository institution that cleared swaps as a multilateral clearing organization before July 21, 2010, or (ii) a derivatives clearing organization registered with the CFTC that cleared swaps pursuant to a clearing agency exemption of the Commission before July 21, 2010. Currently, four security-based swap clearing agencies have temporary conditional exemptions from clearing agency registration under Section 17A solely to perform the functions of a clearing agency for certain CDS. See CDS Clearing Exemption Orders. 35 The Dodd-Frank Act contains provisions permitting the Commission to provide exemptions from clearing agency registration with respect to security-based swaps in limited instances. See footnote 42 below. The Commission has the authority to, jointly with the CFTC, prescribe regulations regarding mixed swaps as may be necessary to carry out the provisions of Title VII of the Dodd-Frank Act. The proposed rules would cover security-based swaps, including mixed swaps, issued by clearing agencies that the Commission specifically exempts from registration by rule, regulation, or order. 36 15 U.S.C. 77q. This exemption is similar to the Securities Act exemptions for standardized options PO 00000 Frm 00010 Fmt 4702 Sfmt 4702 34923 Thus, proposed Securities Act Rule 239 will permit the offer and sale of security-based swaps to eligible contract participants that are or will be issued by, and in a transaction involving, a registered or exempt clearing agency in its function as a CCP without requiring compliance with Section 5 of the Securities Act.37 For the reasons described below, under the proposed rule, the offer and sale of a security-based swap would be exempt from the provisions of the Securities Act, other than Section 17(a), if the following conditions are satisfied: • The security-based swap is or will be issued by a clearing agency that is registered with us or exempt from such registration by rule, regulation or order of the Commission; • The Commission has determined that the security-based swap is required to be cleared or the registered or exempt clearing agency is permitted to clear the security-based swap pursuant to its rules; • The security-based swap is sold only to an eligible contract participant (as defined in Section 1a(18) of the Commodity Exchange Act) in a transaction involving the registered or exempt clearing agency in its function as a CCP with respect to the securitybased swap; 38 and and security futures products. See Securities Act Rule 238 [17 CFR 230.238] and Section 3(a)(14) [15 U.S.C. 77c(a)(14)]. 37 The proposed exemption for the security-based swap transaction from Securities Act registration would not apply to any securities that may be delivered in settlement or payment of any obligations under the security-based swap (e.g. a physically settled credit default swap). With respect to such securities transactions, the parties to the security-based swap must either be able to rely on another exemption from the registration requirements of the Securities Act or must register such transaction. In evaluating the availability of an exemption from the Securities Act registration requirements, if such a security-based swap may be settled or paid through the delivery of a security, then the transaction in the underlying or referenced security will be considered to occur at the same time as the transaction in the related security-based swap. In this connection, we note that the DoddFrank Act amended Section 2(a)(3) of the Securities Act to provide that security-based swaps could not be used by an issuer, its affiliates, or underwriters to circumvent the registration requirements of Securities Act Section 5 with respect to the issuer’s securities underlying the security-based swap. As amended, Section 2(a)(3) provides that ‘‘[a]ny offer or sale of a security-based swap by or on behalf of the issuer of the securities upon which such security-based swap is based or is referenced, an affiliate of the issuer, or an underwriter, shall constitute a contract for sale of, sale of, offer to for sale, or offer to sell such securities.’’ As a result, such issuer, affiliate, or underwriter would have to comply with the registration requirements of the Securities Act with respect to such underlying or referenced security, unless another exemption from registration was available. 38 Eligible contract participant is defined in CEA Section 1a(18) (as re-designated and amended by E:\FR\FM\15JNP1.SGM Continued 15JNP1 34924 Federal Register / Vol. 76, No. 115 / Wednesday, June 15, 2011 / Proposed Rules jlentini on DSK4TPTVN1PROD with PROPOSALS • For each security-based swap that would be offered or sold in reliance upon this exemption, the following information is included in an agreement covering the security-based swap the registered or exempt clearing agency provides to, or makes available to, its counterparty or is posted on a publicly available Web site maintained by the registered or exempt clearing agency: • A statement identifying any security, issuer, loan, or narrow-based security index underlying the securitybased swap; • A statement indicating the security or loan to be delivered (or class of securities or loans), or if cash settled, the security, loan or narrow-based security index (or class of securities or loans) whose value is to be used to determine the amount of the settlement obligation under the security-based swap; and • A statement of whether the issuer of any security or loan, each issuer of a security in a narrow-based security index, or each referenced issuer underlying the security-based swap is subject to the reporting requirements of Exchange Act Section 13 or Section 15(d) and, if not subject to such reporting requirements, whether public information, including financial information, about any such issuer is available and where the information is available. We believe that the proposed rule exempting offers and sales of such security-based swaps by a registered or exempt clearing agency in its function as a CCP will further the goal in the Dodd-Frank Act of central clearing of security-based swaps. Without exempting the offers and sales of such security-based swaps by a registered or exempt clearing agency in its function as a CCP from the Securities Act (other than Section 17(a)), we believe that a registered or exempt clearing agency may not be able to clear security-based swaps in the manner contemplated by the Dodd-Frank Act and our proposed Section 721 of the Dodd-Frank Act. See also Public Law 111–203, § 761(a) (adding Exchange Act Section 3(a)(65), which refers to the definition of eligible contract participant in the CEA. The definition of eligible contract participant contained the CEA (as amended by the Dodd-Frank Act) includes: financial institutions; insurance companies; investment companies; other entities and employee benefit plans; State and local municipal entities; market professionals, such as broker dealers, futures commission merchants, floor brokers, and investment advisors; and natural persons with a specified dollar amount invested on a discretionary basis. For certain of the entities and market professionals, the definition also contains certain conditions relating to the amount of assets or amount of monies invested on a discretionary basis. For a complete description of the definition, see CEA Section 1a(18) and Section 721 of the Dodd-Frank Act. VerDate Mar<15>2010 16:15 Jun 14, 2011 Jkt 223001 rules implementing its provisions. Further, we believe that with the above conditions, an exemption from the Securities Act is necessary and appropriate in the public interest and consistent with the protection of investors.39 Request for Comment 1. Should we provide an exemption from the provisions of the Securities Act, other than the antifraud provisions of Section 17(a), for the offer and sale of security-based swaps that are or will be issued to eligible contract participants by, and in a transaction involving, a registered or exempt clearing agency in its function as a CCP? Why or why not? 2. If we provide an exemption, are the proposed conditions to the exemption appropriate? Why or why not? Are there additional or different conditions that we should impose? Should we require more specificity as to the terms of the security-based swaps? 1. Registered or Exempt Clearing Agency Issuing Security-Based Swaps in Its Function as a CCP The proposed Securities Act exemption would apply only to offers and sales of security-based swaps that are or will be issued by, and in a transaction involving, a clearing agency in its function as a CCP that is either registered with us or exempt from such registration by rule, regulation or order of the Commission. Registered clearing agencies are regulated by us under the Exchange Act and must comply with the standards in Exchange Act Section 17A.40 The activities of such clearing agencies relating to the clearing or submission for clearing of securitybased swaps are subject to regulation under the Exchange Act and applicable rules thereunder.41 The proposed rule also would be available for securitybased swaps that are issued by a clearing agency that we have exempted 39 We believe that if the conditions to the proposed exemption are satisfied, then the protections provided for in the exemption for security futures arising from the requirement for exchange trading, such as compliance with the statutory listing standards, are not needed here. See Section 6(h) of the Exchange Act [15 U.S.C. 78f(h)]. Unlike security future products that may be purchased by any person, security-based swaps issued by a registered or exempt clearing agency in its function as a CCP may only be entered into by eligible contract participants (unless the securitybased swap transaction is on a national securities exchange and there is an effective registration statement under the Securities Act covering transactions in such security-based swap). See Public Law 111–203, § 763(e) (adding Exchange Act Section 6(l)) and § 768(b) (adding Securities Act Section 5(d)). 40 15 U.S.C. 78q–1. See also discussion in Mandatory Clearing Proposing Release. 41 Id. PO 00000 Frm 00011 Fmt 4702 Sfmt 4702 from registration with us by rule, regulation, or order, subject to such terms and conditions contained in any exemption.42 We believe it is appropriate to make the proposed Securities Act exemption available to security-based swaps issued by exempt clearing agencies because in granting an exemption the Commission could impose conditions to the availability of the exemption that would provide protection to investors. The proposed exemption would only apply to the extent the clearing agency will issue or is issuing the securitybased swap in its function as a CCP and will apply to transactions involving such clearing agency.43 We note that a clearing agency’s role as a CCP and an issuer of security-based swaps is similar to a clearing agency’s role with respect to standardized options.44 We believe that a clearing agency’s role as a CCP for security-based swaps, similar to a clearing agency’s role with respect to standardized options, is fundamentally different from a conventional issuer that registers transactions in its securities under the Securities Act. For example, the purchaser of a security-based swap does not, except in the most formal sense, make an investment decision regarding the clearing agency.45 Rather, the security-based swap investment decision is based on the referenced security, loan, narrow-based security index, or issuer. In this circumstance, coupled with the other conditions to the 42 Section 763(b) of the Dodd-Frank Act amended the Exchange Act and added Section 17(k), which provides that ‘‘[t]he Commission may exempt, conditionally or unconditionally, a clearing agency from registration under this section for the clearing of security-based swaps if the Commission determines that the clearing agency is subject to comparable, comprehensive supervision and regulation by the Commodity Futures Trading Commission or the appropriate government authorities in the home country of the agency. Such conditions may include, but are not limited to, requiring that the clearing agency be available for inspection by the commission and make available all information requested by the Commission.’’ Thus, although we have the authority under the Exchange Act, as amended by the Dodd-Frank Act, to provide exemptions from clearing agency registration, our authority to grant an exemption from registration for clearing agencies that clear security-based swaps is more limited than it is for other clearing agencies. 43 As we noted above, when functioning as a CCP, a clearing agency’s creditworthiness and liquidity are substituted for the creditworthiness and liquidity of the original counterparties. See footnote 19 above and accompanying text. 44 See Standardized Options Release. 45 We note, however, that a member or other user of a clearing agency may have an interest in the financial condition of the clearinghouse because the member or user will be relying on the ability of the clearinghouse to meet its obligations with respect to cleared transactions. Registered clearing agencies are required to make their audited financial statements and other information about themselves publicly available. See 15 U.S.C. 78j(b). E:\FR\FM\15JNP1.SGM 15JNP1 Federal Register / Vol. 76, No. 115 / Wednesday, June 15, 2011 / Proposed Rules proposed exemption, we do not believe that Securities Act registration of the offer and sale of security-based swaps by a clearing agency in its function as a CCP to eligible contract participants is necessary. jlentini on DSK4TPTVN1PROD with PROPOSALS Request for Comment 3. Is the proposed exemption appropriately conditioned on the registered or exempt clearing agency issuing the security-based swap in its function as a CCP? Why or why not? Should there be a distinction between registered and exempt clearing agencies for this purpose? 2. Security-Based Swaps the Commission Determines Are Required To Be Cleared or That a Clearing Agency Is Permitted To Clear Pursuant to Its Rules We recently proposed rules to implement the provisions of the DoddFrank Act regarding mandatory and voluntary clearing of security-based swaps, or groups, categories, or types or classes of security-based swaps.46 Our proposed rules would establish procedures for a clearing agency to submit for a review the security-based swap, or group, category, type or class of security-based swap, that the clearing agency plans to accept for clearing. As proposed, we would review the submission and make a determination of whether the security-based swap, or group, category, type or class of security-based swap, is required to be cleared.47 Consistent with the purposes of the Dodd-Frank Act, our proposed exemption is intended to facilitate clearing of security-based swaps that the Commission determines are subject to mandatory clearing, or that are permitted to be cleared pursuant to the clearing agency’s rules. Consequently, under proposed Rule 239, a registered or exempt clearing agency would be entitled to rely on the exemption to issue, in its function as a CCP, securitybased swaps that we determine are required to be cleared. In addition, the exemption would be available to a registered or exempt clearing agency issuing a security-based swap, in its function as a CCP, that is not subject to mandatory clearing but is permitted to be cleared pursuant to the clearing agency’s rules. The proposed exemption would not be available for securitybased swaps issued by a registered or 46 See Mandatory Clearing Proposing Release. Mandatory Clearing Proposing Release. For those security-based swaps that are submitted and not required to be cleared, the clearing agency in its function as a CCP may still clear those securitybased swaps if it is permitted by its rules. 47 See VerDate Mar<15>2010 16:15 Jun 14, 2011 Jkt 223001 exempt clearing agency in its function as a CCP that are not required to be cleared or permitted by its rules to be cleared. The Dodd-Frank Act also provides that if a security-based swap is subject to the mandatory clearing requirement, it must be traded on an exchange or a registered or exempt security-based SEF, unless no security-based SEF makes such security-based swap available for trading.48 Thus, it is possible that a security-based swap could be subject to mandatory clearing without being traded on an exchange or security-based SEF. Proposed Rule 239 would be available for security-based swaps that are subject to the mandatory clearing requirement or are permitted to be cleared pursuant to the clearing agency’s rules,49 regardless of whether such security-based swaps also are traded on a national securities exchange or through a security-based SEF.50 We believe that if the conditions to the proposed exemption are satisfied, then the protections provided for in the analogous exemption for security futures arising from the requirement for exchange trading, such as compliance with the statutory listing standards, are not needed here. Unlike security future products that may be purchased by any person, under the Dodd-Frank Act security-based swaps may only be offered and sold to eligible contract participants either pursuant to an exemption from the registration requirements of the Securities Act and in transactions not effected on a national securities exchange or in registered offerings effected on a national securities exchange. No offers or sales of security-based swaps may be 48 Exchange Act Section 3C(h) specifies that transactions in security-based swaps that are subject to the clearing requirement of Exchange Act Section 3C(a)(1) must be executed on an exchange or on a security-based SEF registered with us (or a securitybased SEF exempt from registration), unless no exchange or security-based SEF makes the securitybased swap available to trade or the security-based swap transaction is subject to the clearing exception in Exchange Act Section 3C(g). See Public Law 111– 203, § 763 (adding Section 3C(h) of the Exchange Act) Exchange Act Section 3D(e) allows the Commission to exempt a security-based SEF from registration if the Commission finds that the security-based SEF is subject to comparable comprehensive supervision and regulation on a consolidated basis by the CFTC. 49 The exemption would be limited to securitybased swaps issued by and in a transaction involving a registered or exempt clearing agency in its function as a CCP. 50 See Registration and Regulation of SecurityBased Swap Execution Facilities, Release No. 34– 63825 (Feb. 2, 2011), 76 FR 10948 (Feb. 28, 2011). In this regard, we note that a security-based swap may be required or permitted to be cleared, but neither a national securities exchange nor a security-based SEF may make the security-based swap available for trading. PO 00000 Frm 00012 Fmt 4702 Sfmt 4702 34925 made to non-eligible contract participants unless there is an effective registration statement under the Securities Act covering transactions in such security-based swap 51 and any security-based swap transaction with a non-eligible contract participant must be effected on a national securities exchange.52 As a result, security-based swaps issued by a registered or exempt clearing agency in its function as a CCP may only be offered and sold to eligible contract participants, unless there is an effective registration statement and the transaction is on a national securities exchange. Thus, because only eligible contract participants may enter into the security-based swaps not traded on a national securities exchange, we do not believe it is necessary to condition the exemption on whether the securitybased swap is traded on a national securities exchange. In addition, including such a provision could frustrate the goals of the provisions of the Dodd-Frank Act because the DoddFrank Act did not restrict transactions with eligible contract participants to transactions on national securities exchanges. Consequently, the proposed exemption does not include such a requirement. Request for Comment 4. Should we condition the availability of the exemption on the security-based swap being subject to the mandatory clearing requirement, or being permitted to be cleared pursuant to the clearing agency’s rules, as proposed? 5. Should the exemption be limited to security-based swaps that are subject to the mandatory clearing requirement, and not include those that are permitted to be cleared? 6. Should the exemption be available to security-based swaps that are not traded on an exchange or a securitybased SEF, as proposed? 3. Sales Only to Eligible Contract Participants Under the Dodd-Frank Act, only an eligible contract participant may enter into security-based swaps other than on a national securities exchange.53 In addition, security-based swaps that are not registered pursuant to the Securities Act can only be sold to eligible contract 51 See Public Law 111–203, § 768(b) (adding Securities Act Section 5(d)). 52 See Public Law 111–203, § 763(e) (adding Exchange Act Section 6(l)). 53 See also Public Law 111–203, § 763(e) (adding Exchange Act Section 6(l)) . E:\FR\FM\15JNP1.SGM 15JNP1 34926 Federal Register / Vol. 76, No. 115 / Wednesday, June 15, 2011 / Proposed Rules participants.54 New Section 5(d) of the Securities Act specifically provides that it is unlawful to offer to buy, purchase, or sell a security-based swap to any person that is not an eligible contract participant, unless the transaction is registered under the Securities Act.55 Given that Congress determined it is appropriate to limit the availability of registration exemptions under the Securities Act to eligible contract participants, we believe it is appropriate to limit the proposed Securities Act exemption to security-based swaps entered into with eligible contract participants. Request for Comment 7. Should we limit the Securities Act exemption to transactions with eligible contract participants, as proposed? jlentini on DSK4TPTVN1PROD with PROPOSALS 4. Disclosures Relating to the SecurityBased Swaps The proposed rule would require the registered or exempt clearing agency to disclose, either in its agreement regarding the security-based swap or on its publicly available Web site, certain information with respect to the securitybased swap. This information would include the following: • A statement identifying any security, issuer, loan, or narrow-based security index underlying the securitybased swap; • A statement indicating the security or loan to be delivered (or class of securities or loans), or if cash settled, the security, loan, or narrow-based security index (or class of securities or loans) whose value is to be used to determine the amount of the settlement obligation under the security-based swap; and • A statement of whether the issuer of any security or loan, each issuer of a security in a narrow-based security index, or each referenced issuer underlying the security-based swap is subject to the reporting requirements of Exchange Act Section 13 or Section 15(d) and, if not subject to such reporting requirements, whether public information, including financial 54 See Public Law 111–203, § 768(b) (adding Securities Act Section 5(d)). 55 See Section 768(b) of the Dodd-Frank Act (adding new Securities Act Section 5(d)) (‘‘Notwithstanding the provisions of section 3 or 4, unless a registration statement meeting the requirements of section 10(a) is in effect as to a security-based swap, it shall be unlawful for any person, directly or indirectly, to make use of any means or instruments of transportation or communication in interstate commerce or of the mails to offer to sell, offer to buy or purchase or sell a security-based swap to any person who is not an eligible contract participant as defined in section 1a(18) of the Commodity Exchange Act (7 U.S.C. 1a(18)).’’). VerDate Mar<15>2010 16:15 Jun 14, 2011 Jkt 223001 information, about any such issuer is available, and, if so, the location where the information is available. The purpose of the proposed requirement relating to the availability of information is to inform investors about whether there is publicly available information about the issuer of the referenced security or the referenced issuer.56 We are not proposing to condition the exemption on whether the issuer is subject to Exchange Act reporting or whether there is publicly available financial information about such issuer. As noted above, the proposed exemption for offers and sales of security-based swaps issued by, and in a transaction involving, a registered or exempt clearing agency in its function as a CCP would be limited to security-based swaps entered into with an eligible contract participant. The Dodd-Frank Act did not restrict eligible contract participants’ ability to enter into security-based swaps based on whether or not there is publiclyavailable information about the issuer of the referenced security or loan or the referenced issuer.57 As a result, and in light of the nature of the other regulatory safeguards,58 we are not 56 For issuers that are not subject to Exchange Act reporting requirements, the following are some nonexclusive examples of issuers that may have information publicly available, including financial information about the issuer, or circumstances in which public information about a security may be available: (1) An entity that voluntarily files Exchange Act reports; (2) an entity that makes Securities Act Rule 144(d)(4) information available to any person; (3) a foreign private issuer whose securities are listed outside the United States; (4) a foreign sovereign issuer with outstanding debt; (5) for periods before July 21, 2010 an asset-backed security issued in a registered transaction with publicly available distribution reports (for periods after July 21, 2010, asset-backed issuers will continue to be subject to reporting); and (6) 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’’). 57 We note that eligible contract participants may enter into security-based swaps on a bilateral basis in reliance on an available exemption from the registration requirements of the Securities Act. The proposed exemption in this release to facilitate clearing of security-based swaps does not apply to these bilateral transactions. 58 As part of the process for submitting securitybased swaps to us for a determination of whether such security-based swaps are subject to mandatory clearing, the Dodd-Frank Act requires us to take into account several factors, such as the existence of significant outstanding notional exposures, trading liquidity, and adequate pricing data, when reviewing a submission to clear security-based swaps by a clearing agency. Much of the information that the registered or exempt clearing agency will be required to include in its agreement or on its Web site, as a condition to the proposed exemption, likely will already be included in the description of the security-based swaps that the clearing agency identifies publicly that it is going to clear. In addition to the security-based swap PO 00000 Frm 00013 Fmt 4702 Sfmt 4702 proposing to condition the proposed exemption on the actual availability or delivery of such information. While the Dodd-Frank Act does not condition clearing of security-based swaps on the availability of such information, we believe it is important for eligible contract participants to understand whether such information is publicly available. The availability (or absence) of public information is generally important to eligible contract participants and the registered or exempt clearing agency in evaluating and pricing the security-based swap. Therefore, our proposed rule would require disclosure about whether such information is available. If the issuer of the referenced security or loan or the referenced issuer is not subject to Exchange Act reporting, but there is publicly available information about the issuer, the clearing agency would be required under the proposal to disclose that fact and disclose where the information is available. This disclosure could include, for example, a statement that the issuer is listed on a particular foreign exchange and where information about issuers on such exchange can be found. Under our proposal, the required information could be provided in the agreement covering the security-based swap the registered or exempt clearing agency provides or makes available to the counterparty or on a publicly available Web site maintained by the clearing agency. We understand that master agreements and related schedules for security-based swaps generally contain detailed information about the terms of the security-based swaps.59 In addition, each registered submission provisions, the Dodd-Frank Act and the rules proposed under the Act relating to reporting requirements, trade acknowledgments and verification, and business conduct would require certain disclosures relating to security-based swaps, some of which would overlap with the information requirement we are proposing. See, e.g., Mandatory Clearing Proposing Release and Trade Acknowledgment and Verification of SecurityBased Swap Transactions, Release No. 34–63727 (Jan. 14, 2011), 76 FR 3859 (Jan. 21, 2011) (‘‘Trade Acknowledgement and Verification Proposing Release’’). 59 In addition, under the rules proposed in the Trade Acknowledgement and Verification Proposing Release and Regulation SBSR—Reporting and Dissemination of Security-Based Swap Information, Release No. 63346 (Nov. 19, 2010), 75 FR 75207 (Dec. 2, 2010) (‘‘SBSR Proposing Release’’), which were proposed under the DoddFrank Act and for which action has not yet been taken with respect to final rules, the information that would be required to be reported to the security-based swap data repository includes the basic terms of the security-based swap: the asset class of the security-based swap, identification of the security-based swap instrument and the specific asset(s) or issuer of a security on which the security-based swap is based; the notional E:\FR\FM\15JNP1.SGM 15JNP1 Federal Register / Vol. 76, No. 115 / Wednesday, June 15, 2011 / Proposed Rules proposed? Should we require that all agreements include the information, or, alternatively, require the information to be posted on the clearing agency’s publicly available Web site in any case? As another alternative, should we require that the information be made available to clearing members and eligible contract participants rather than require that the information be publicly available? Will the registered or exempt clearing agency already provide some or all of the proposed disclosures on its Web site? If so, what information? Is the information proposed to be required to be provided publicly available from sources other than the registered or exempt clearing agency? If so, where? Request for Comment 8. Should we require a registered or exempt clearing agency to provide or make available information about the security-based swap it will issue, as proposed? 9. Is the proposed requirement that a registered or exempt clearing agency indicate whether there is public information available about the referenced issuer or security upon which the security-based swap is based appropriate? If not, why not? 10. Should we require a registered or exempt clearing agency to provide or make available any additional or different information? Are any of the proposed disclosures unnecessary? 11. Should the exemption be limited to circumstances where the securitybased swap relates to an Exchange Act reporting issuer? 12. Should we require, as proposed, that if the issuer is not an Exchange Act reporting company but there is publicly available information, that the location of that information be disclosed? 13. Should we provide the alternatives of including the disclosure in the agreement covering the securitybased swap or on the clearing agency’s publicly available Web site, as jlentini on DSK4TPTVN1PROD with PROPOSALS clearing agency is required to post and maintain a current and complete version of its rules on its Web site. Thus, we believe that parties engaging in securitybased swaps transactions would be familiar with looking to the agreements or a clearing agency’s Web site to obtain information. Given that clearing agencies generally provide information in agreements and maintain publicly available Web sites, we believe that providing the information we are proposing be required to be disclosed in the agreement for the security-based swap or on the clearing agency’s publicly available Web site would not pose significant burdens for clearing agencies. B. Exchange Act Rule 12a–10 and Rule 12h–1(h) Section 12(a) of the Exchange Act makes it unlawful for any broker or dealer to effect a transaction in a nonexempt security on a national securities exchange unless the security has been registered under Section 12(b) for trading on that exchange. Section 12(g)(1), as modified by rule, requires any issuer with more than $10,000,000 in total assets and a class of equity securities held by 500 or more persons to register such security with us.60 Rule 12b–1 under the Exchange Act prescribes the procedures for registration under both Section 12(b) and Section 12(g). Absent an exemption, security-based swaps that will be traded on national securities exchanges would be required to be registered under Section 12(b) of the Exchange Act. A registered or exempt clearing agency issuing a security-based swap as a result of novation would be required, without an available exemption, to register the security-based swaps under Section 12(b) before such security-based swaps could be traded on a national securities exchange. In addition, if the securitybased swaps were considered equity securities of the registered or exempt clearing agency, the registration provisions of Section 12(g) of the Exchange Act could apply. As noted above, just as a registered or exempt clearing agency is different from a conventional issuer that registers transactions in its securities under the Securities Act, it is also different with respect to registering a class of its securities, in this case the securitybased swap issued by the registered or exempt clearing agency, under the Exchange Act. Therefore, we are proposing two rules relating to Exchange Act registration of security- amount(s), and the currenc(ies) in which the notional amount(s) is expressed; the date and time of execution, and the effective date and scheduled termination date; the price; the terms of any fixed or floating rate payments, and the frequency of any payments; the amount(s) and currenc(ies) of any upfront payment(s) and a description of the terms and contingencies of the payment streams of each counterparty to the other; the title of any master agreement, or any other agreement governing the transaction (including the title of any document governing the satisfaction of margin obligations), incorporated by reference and the date of any such agreement; and the data elements necessary for a person to determine the market value of the transaction. To the extent we adopt these or similar information reporting requirements, the parties to the security-based swap transaction would have to know detailed information about the terms of the security-based swap transaction to comply with the reporting requirements. VerDate Mar<15>2010 16:15 Jun 14, 2011 Jkt 223001 60 15 U.S.C. 78l(g) and Rule 12g-1 (17 CFR 240.12g–1). PO 00000 Frm 00014 Fmt 4702 Sfmt 4702 34927 based swaps that are or have been issued by a registered or exempt clearing agency in its function as a CCP. We are proposing new Exchange Act Rule 12a–10 to exempt security-based swaps that are or have been issued by a registered or exempt clearing agency in reliance on the proposed exemption under the Securities Act from Section 12(a) of the Exchange Act under certain conditions.61 Specifically, proposed Exchange Act Rule 12a–10 would provide that Exchange Act Section 12(a) does not apply to any security-based swap that: • Is or will be issued by a registered or exempt clearing agency in its function as a CCP with respect to the security-based swap; • The Commission has determined is required to be cleared, or that the clearing agency is permitted to clear pursuant to its rules; • Is sold to an eligible contract participant in reliance on Securities Act Rule 239; and • Is traded on a national securities exchange registered pursuant to Section 6(a) of the Exchange Act. We also are proposing an amendment to Exchange Act Rule 12h–1 to exempt security-based swaps that are or have been issued by a registered or exempt clearing agency from the provisions of Section 12(g) of the Exchange Act under certain conditions.62 Proposed Exchange Act Rule 12h–1(h) would exempt from Section 12(g) of the Exchange Act security-based swaps that are issued by a registered or exempt clearing agency in its function as a CCP, whether or not such security-based swap is traded on a national securities exchange registered pursuant to Section 6(a) of the Exchange Act or a registered or exempt security-based SEF.63 In addition, the security-based swaps being issued by the registered or exempt clearing agency in its function as a CCP must be required to be cleared, or be permitted to be cleared pursuant to the clearing agency’s rules, and may only be sold to eligible contract participants. As we noted in the discussion of the proposed Securities Act exemption, we believe the interest of investors in the security-based swap is primarily with respect to the referenced security or loan, referenced issuer or referenced narrow-based security index, and not with respect to the registered or exempt clearing agency functioning as the 61 15 U.S.C. 78l(a). U.S.C. 78l(g). 63 Exchange Act Rules 12h–1(d) and 12h–1(e) provide similar exemptions for options and futures, respectively. 62 15 E:\FR\FM\15JNP1.SGM 15JNP1 34928 Federal Register / Vol. 76, No. 115 / Wednesday, June 15, 2011 / Proposed Rules jlentini on DSK4TPTVN1PROD with PROPOSALS CCP.64 Therefore, we preliminarily believe that requiring clearing agencies to register security-based swaps under the Exchange Act would not provide additional useful information or meaningful protection to investors with respect to the security-based swap. In addition, the other consequences of Exchange Act registration, such as requirements for ongoing periodic reporting and application of the proxy rules to the clearing agency, would not be meaningful in the context of securitybased swaps. At the same time, requiring such registration likely would impose burdens on clearing agencies issuing security-based swaps.65 Therefore, we believe that subjecting the registered or exempt clearing agency to the requirements of the Exchange Act arising from Section 12(a) or 12(g) is not necessary or appropriate in the public interest. In addition, we note that similar Exchange Act exemptions exist for standardized options issued by a registered options clearing agency and security futures products issued by a registered or exempt clearing agency.66 We believe that it is appropriate to establish comparable regulatory treatment for security-based swaps issued by a registered or exempt clearing agency with respect to the applicability of Section 12 of the Exchange Act to security-based swaps issued by a registered or exempt clearing agency. Moreover, we believe it is important to further the goal of facilitating clearing of security-based swaps while maintaining appropriate investor protection. Security-based swaps that will not be cleared by a registered or exempt clearing agency in its function as a CCP but are listed for trading on a national securities exchange or registered or exempt security-based SEF will not be able to rely on the proposed exemption from registration under Section 12(b) or Section 12(g) of the Exchange Act.67 64 As noted above, a member or other user of the clearing agency may have an interest in the financial condition of the clearinghouse. 65 See Public Law 111–203 § 763(b). 66 See Exchange Act Section 12(a) [15 U.S.C. 78l(a)] and Exchange Act Rule 12a–9 [17 CFR 240.12a–9] and Rules 12h–1(d) and (e) [17 CFR 240.12h–1(d) and (e)]. 67 We recognize that security-based swaps that will be issued by a clearing agency, as well as security-based swaps that will not be cleared, may be traded on or through a national securities exchange or a security-based SEF. If the national securities exchange or security-based SEF is acting only in its capacity as a system or platform for trading securities, we do not believe it would be offering or selling the security-based swaps that are being traded or transacted by market participants on or through its system or platform, for purposes of either the Securities Act or the Exchange Act VerDate Mar<15>2010 16:15 Jun 14, 2011 Jkt 223001 Request for Comment 14. Should we provide an exemption, as proposed, from Section 12(a) and Section 12(g) of the Exchange Act for security-based swaps that are or have been issued to eligible contract participants by a registered or exempt clearing agency in its function as a CCP? Why or why not? 15. If we should provide an exemption, are the proposed conditions to the exemption appropriate? Why or why not? Are there additional conditions that we should impose? 16. Should we provide an exemption from Section 12(a) and Section 12(g) of the Exchange Act for security-based swaps traded on a national securities exchange but that are not cleared? Why or why not? 17. Should we provide an exemption from Section 12(g) of the Exchange Act for security-based swaps traded on a registered or exempt security-based SEF but that are not cleared? Why or why not? C. Implications of Security-Based Swaps as Securities Transactions involving the offer and sale of security-based swaps that are not issued by, and in a transaction involving, a registered or exempt clearing agency in its function as a CCP would not be able to rely on the proposed exemptions under the Securities Act and Exchange Act. Thus, the proposed exemptions would not be available for transactions involving security-based swaps that will not be cleared (‘‘uncleared security-based swaps’’) that may be entered into on organized markets, such as a securitybased SEF or a national securities exchange. It is our understanding that transactions involving uncleared security-based swaps occur today on organized platforms that would likely register as security-based SEFs, and we expect this activity will continue after the effective date of the Dodd-Frank Act.68 As of the effective date of the registration provisions applicable to security-based swaps. If the security-based swap being traded on or through the national securities exchange or security-based SEF will, by its terms, be cleared by a clearing agency in its function as a CCP, the security-based swap will be issued by such clearing agency, similar to standardized options and security-future products that are traded on national securities exchanges and cleared by registered clearing agencies. For a security-based swap that will not, by its terms, be cleared by a clearing agency in its function as a CCP, market participants must evaluate the availability of exemptions under the Securities Act and the Exchange Act for their security-based swap transactions. 68 See Registration and Regulation of SecurityBased Swap Execution Facilities, Release No. 34– 63825 (Feb. 2, 2011), 76 FR 10948 (Feb. 28, 2011) (proposed rules relating to security-based SEFs PO 00000 Frm 00015 Fmt 4702 Sfmt 4702 Dodd-Frank Act, however, such security-based swaps will be included in the definition of security under the Securities Act and the Exchange Act and subject to the full panoply of the Federal securities laws, including the registration requirements of Section 5 of the Securities Act and Section 12 of the Exchange Act. Because the proposed exemptions are limited to security-based swaps that are issued or will be issued by, and in a transaction involving, a registered or exempt clearing agency in its function as a CCP, counterparties engaging in an uncleared security-based swap would have to either rely on other available exemptions from the registration requirements of the Securities Act, the Exchange Act, and, if applicable, the Trust Indenture Act or consider whether to register such transaction or class of security. Request for Comment 18. How will the proposed exemptions affect, if at all, the manner in which security-based swaps are transacted today and are expected to be transacted once the provisions of Title VII of the Dodd-Frank Act become effective? 19. Will the counterparties to uncleared security-based swaps be able to rely on other available exemptions from registration under the Securities Act and Exchange Act? If not, why? Is further guidance or rules needed in this regard? If so, what type of guidance or rules would be helpful? 20. Are security-based swaps transacted today or expected to be transacted once the provisions of Title VII of the Dodd-Frank Act become effective in a manner that would not permit the parties to rely on existing exemptions under the Securities Act and Exchange Act? If so, please explain in detail why existing exemptions would not be available. 21. Should we consider additional exemptions under the Securities Act and Exchange Act for security-based swaps traded on a national securities exchange or security-based SEFs with eligible contract participants but that are not cleared? Should an exemption from Exchange Act registration be provided if all holders of the class of security-based swap are eligible contract participants? Why or why not? What conditions to any such exemption would be appropriate, if any? 22. Should we consider providing an exemption under the Securities Act that would allow a public offering of would allow for transactions in uncleared securitybased swaps to occur on registered security-based SEFs). E:\FR\FM\15JNP1.SGM 15JNP1 Federal Register / Vol. 76, No. 115 / Wednesday, June 15, 2011 / Proposed Rules security-based swaps to eligible contract participants on a registered securitybased SEF or national securities exchange? Why or why not? What conditions to any such exemption would be appropriate, if any? D. Trust Indenture Act Rule 4d–11 jlentini on DSK4TPTVN1PROD with PROPOSALS We are proposing Rule 4d–11 under Section 304(d) of the Trust Indenture Act that would exempt any securitybased swap offered and sold in reliance on Securities Act Rule 239 from having to comply with the provisions of the Trust Indenture Act.69 We adopted a similar exemption on a temporary basis for eligible CDS.70 The Trust Indenture Act is aimed at addressing problems that unregulated debt offerings posed for investors and the public,71 and provides a mechanism for debtholders to protect and enforce their rights with respect to the debt. We do not believe that the protections contained in the Trust Indenture Act are needed to protect eligible contract participants to whom a sale of a security-based swap is made in reliance on proposed Securities Act Rule 239. The identified problems that the Trust Indenture Act is intended to address generally do not occur in the offer and sale of security-based swaps.72 For example, security-based swaps are contracts between two parties and, as a result, do not raise the same problem regarding the ability of parties to enforce their rights under the instruments as would, for example, a debt offering to the public. Moreover, through novation, the clearing agency functionally becomes the counterparty to the buyer and the seller, and, in the case where buyer and seller are both members of the CCP, each would look directly to the clearing agency to satisfy the obligations under the security-based swap. As a consequence, enforcement of contractual rights and obligations under the security-based swap would occur directly between such parties, and the Trust Indenture Act provisions would 69 The Trust Indenture Act applies to debt securities sold through the use of the mails or interstate commerce. Section 304 of the Trust Indenture Act exempts from the Trust Indenture Act a number of securities and transactions. Section 304(a) of the Trust Indenture Act exempts securities that are exempt under Securities Act Section 3(a) but does not exempt from the Trust Indenture Act securities that are exempt by Commission rule. Accordingly, while proposed Securities Act Rule 239 would exempt the offer and sale of securitybased swaps satisfying certain conditions from all the provisions of the Securities Act (other than Section 17(a)), the Trust Indenture Act would continue to apply absent proposed Rule 4d–11. 70 See Rule 4d–11T [17 CFR 260.4d-11T]. 71 See 15 U.S.C.77bbb(a). 72 15 U.S.C. 77bbb(a). VerDate Mar<15>2010 16:15 Jun 14, 2011 Jkt 223001 not provide any additional meaningful substantive or procedural protections. Accordingly, due to the nature of security-based swaps as contracts that will be or have been issued by a registered or exempt clearing agency in its function as a CCP, we do not believe the protections contained in the Trust Indenture Act are needed with respect to these instruments. Therefore, we believe the proposed exemption is necessary or appropriate in the public interest, consistent with the protection of investors and the purposes fairly intended by the Trust Indenture Act. Request for Comment 23. The proposed rules include an exemption from the application of the Trust Indenture Act for security-based swaps that are offered and sold in reliance on proposed Securities Act Rule 239. Is this exemption appropriate or are there contractual protections in the Trust Indenture Act that should be included as mandatory provisions of a security-based swap contract that is or will be issued by a registered or exempt clearing agency? If yes, please explain in detail. E. Transition Matters As we discuss above, we adopted temporary rules to exempt eligible credit default swaps from all provisions of the Securities Act (other than the Section 17(a) anti-fraud provisions), Exchange Act registration requirements, and the provisions of the Trust Indenture Act, provided certain conditions were met.73 We subsequently extended the expiration date of the temporary rules until July 16, 2011.74 The rules proposed in this release would create permanent exemptions that would supplant the temporary rules. However, the current termination date for the temporary rules may pass before the rules proposed in this release are adopted. We plan to provide an appropriate transition from the temporary rules to any permanent rules. In the event the permanent rules are not in place by July 16, 2011, we may consider extending the temporary rules in order to continue facilitating the clearing of certain credit default swaps by clearing agencies functioning as CCPs. III. General Request for Comment We request and encourage any interested person to submit comments regarding the proposed rules. In particular, we solicit comment on the following questions: 73 See 74 See PO 00000 Temporary CDS Exemptions Release. footnote 30 above. Frm 00016 Fmt 4702 Sfmt 4702 34929 24. We are interested in understanding what type of securitybased swaps would not be eligible for these proposed exemptions. We noted above that the proposed exemptions would not be available for transactions involving uncleared security-based swaps that may be entered into on organized markets, such as a securitybased SEF or a national securities exchange. Are there other security-based swaps that would not be encompassed within the scope of the proposed exemptions? Should these other security-based swaps be covered by the proposed exemptions? If so, why? 25. What are the amounts and types of security-based swaps that may not satisfy the conditions for the proposed exemptions? 26. We have not proposed an amendment to Securities Act Rule 146 for security-based swaps transactions because the Dodd-Frank Act provides that states may not regulate these transactions (except under their general antifraud authority).75 Therefore, we do not believe it is necessary to propose that eligible contract participants that are sold security-based swaps in reliance on proposed Securities Act Rule 239 be defined as ‘‘qualified purchasers’’ under Section 18(b)(3) of the Securities Act. Were we to add such a definition, such security-based swaps that are or will be issued by a registered or exempt clearing agency would be included as ‘‘covered securities’’ under Section 18 of the Securities Act and exempt from state securities registration (‘‘blue sky’’) laws. Would defining eligible contract participants that are sold security-based swaps pursuant to Securities Act Rule 239 as ‘‘qualified purchasers’’ for purposes of Section 18 of the Securities Act (and thus making the security-based swaps that are or will be issued by a registered or exempt clearing agency ‘‘covered securities,’’) provide any benefit or greater certainty than that provided by the language in Exchange Act Section 28(a)(4)? 27. The conditions of the proposed Exchange Act and Trust Indenture Act exemptions are the same as the conditions to the proposed Securities Act exemption. Is this appropriate or should there be different conditions relating to the Exchange Act and Trust Indenture Act exemptions? If yes, please explain. 28. Are there transition issues we should consider relating to the temporary rules for eligible CDS and the proposed permanent rules? 75 Exchange Act Section 28(a)(4) (added by Section 767 of the Dodd-Frank Act). E:\FR\FM\15JNP1.SGM 15JNP1 34930 Federal Register / Vol. 76, No. 115 / Wednesday, June 15, 2011 / Proposed Rules IV. Paperwork Reduction Act jlentini on DSK4TPTVN1PROD with PROPOSALS A. Background Certain provisions of proposed Securities Act Rule 239 would result in ‘‘collection of information requirements’’ within the meaning of the Paperwork Reduction Act of 1995 (‘‘PRA’’).76 The Commission is submitting proposed Rule 239 to the Office of Management and Budget (‘‘OMB’’) for review in accordance with the PRA.77 An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid control number. The title for this collection of information is: • ‘‘Rule 239’’ (a proposed new collection of information). Rule 239 is a newly proposed collection of information under the Securities Act. This new collection of information relates to the proposed information requirements for clearing agencies seeking to rely on the proposed exemption. There is no mandatory retention period for the information disclosed, and the information disclosed would be made publicly available on the clearing agency’s Web site or in an agreement the clearing agency provides or makes available to its counterparty to the security-based swap transaction. The collection of information would be mandatory and it would not be kept confidential. B. Summary of Collection of Information As discussed above, one condition to the availability of the exemption provided in proposed Securities Act Rule 239 for offers and sales of securitybased swaps issued by, and in a transaction involving, a registered or exempt clearing agency in its function as a CCP is that such registered or exempt clearing agency has an agreement covering the security-based swap that is provided or made available to its counterparty or a publicly available Web site maintained by the registered or exempt clearing agency that contains the following: • A statement identifying any security, issuer, loan, or narrow-based security index underlying the securitybased swap; • A statement indicating the security or loan to be delivered (or class of securities or loans), or if cash settled, the security, loan or narrow-based 76 44 U.S.C. 3501 et seq. we are proposing additional rule amendments, we do not anticipate burdens or costs associated with those rules for purposes of the PRA because eligibility for those rules will be dependent on reliance on proposed Rule 239. 77 Although VerDate Mar<15>2010 16:15 Jun 14, 2011 Jkt 223001 security index (or class of securities or loans) whose value is to be used to determine the amount of the settlement obligation under the security-based swap; and • A statement of whether the issuer of any security or loan, each issuer of a security in a narrow-based security index, or each referenced issuer underlying the security-based swap is subject to the reporting requirements of Exchange Act Section 13 or Section 15(d) and, if not subject to such reporting requirements, whether public information, including financial information, about any such issuer is available and where the information is available. The other provisions of proposed Rule 239 and other rules we are proposing relate to exemptions and eligibility requirements for those exemptions; therefore, we do not expect that those other provisions would create any new filing, reporting, recordkeeping, or disclosure requirement for registered or exempt clearing agencies. C. Paperwork Reduction Act Burden Estimates For purposes of the Paperwork Reduction Act, we estimate that there will be an annual incremental increase in the paperwork burden for clearing agencies as issuers of security-based swaps to comply with our proposed collection of information requirements. The disclosure provisions of proposed Rule 239 would apply to registered or exempt clearing agencies relying on the proposed exemption from the registration requirements of the Securities Act of 1933. The disclosure provisions of the proposed rule would make certain information about security-based swaps that may be cleared by the registered or exempt clearing agency available to eligible contract participants and other market participants. Currently, four clearing agencies are authorized to clear credit default swaps, which include security-based swaps,78 pursuant to temporary conditional exemptions under Exchange Act Section 36.79 The obligation to centrally clear certain security-based swap transactions is a new requirement under Title VII of the Dodd-Frank Act, and we anticipate 78 These clearing agencies are ICE Trust, CME, ICE Clear Europe, and Eurex. The Commission authorized five entities to clear credit default swaps. See CDS Clearing Exemption Orders. LIFFE A&M and LCH.Clearnet Ltd. allowed their order to lapse without seeking renewal. 79 15 U.S.C. 78mm. Of the four clearing agencies granted temporary exemptions from registration, only three have cleared products that likely are classified as security-based swaps under Title VII of the Dodd-Frank Act. PO 00000 Frm 00017 Fmt 4702 Sfmt 4702 that clearing agencies operating under temporary conditional exemptions will register or will be deemed registered as clearing agencies eligible to clear security-based swaps.80 Based on the fact that there are currently four clearing agencies authorized to clear securitybased swaps and that there could conceivably be a few more in the foreseeable future,81 we preliminarily estimate that four to six clearing agencies may plan to centrally clear security-based swaps and seek to rely on the proposed exemptions, and therefore, would be subject to the collection of information. For purposes of the PRA, we estimate six clearing agencies would seek to rely on the proposed exemptions. We preliminarily believe that a registered or exempt clearing agency issuing security-based swaps in its function as a CCP could incur some costs associated with disclosing, or providing or making available, certain information in accordance with proposed Rule 239, either in its agreement regarding the security-based swap or on its publicly available Web site, with respect to the security-based swap. A clearing agency also could incur costs associated with updating the information on its Web site or in its agreements, if necessary. The purpose of the proposed requirement is to inform investors about whether there is publicly available information about the issuer of the referenced security or referenced issuer and we believe that a clearing agency likely already would be collecting and making public the type of information required by the proposed rule.82 We preliminarily estimate that each registered or exempt clearing agency issuing security-based swaps in its function as a CCP will spend approximately 2 hours each time it provides or updates the information in its agreements relating to security-based 80 See Public Law 111–203, § 763(b). do not expect there to be a large number of clearing agencies that clear security-based swaps, based on the significant level of capital and other financial resources necessary for the formation of a clearing agency. 82 As noted above, we proposed rules in the Mandatory Clearing Proposing Release and the SBSR Proposing Release that would require some of the same information as the requirements proposed here (e.g., information relating to the identity of the security or issuer underlying the security-based swap). Although the proposed information requirements also may be required to be made public by the registered or exempt clearing agencies by these other proposed rules, we are calculating the PRA burden for each process individually without accounting for any reduction due to the anticipated overlap. We have decided to calculate the burdens in this manner in order to provide a conservative estimate. 81 We E:\FR\FM\15JNP1.SGM 15JNP1 Federal Register / Vol. 76, No. 115 / Wednesday, June 15, 2011 / Proposed Rules swaps or on its Web site.83 We estimate that each registered or exempt clearing agency will provide or update the information 20 times per year.84 Therefore, we preliminarily estimate that the total annual reporting burden for clearing agencies to provide the information in their agreements relating to security-based swaps or on their Web site to comply with proposed Rule 239(c) will be 240 hours (20 × 2 hours × 6 respondents). We estimate that 75% of the burden of preparation is carried by the clearing agency internally and that 25% of the burden is carried by outside professionals retained by the clearing agency at an average cost of $400 per hour. We request comment on all of the above estimates. D. Recordkeeping Requirements There is no recordkeeping requirement associated with proposed Rule 239. jlentini on DSK4TPTVN1PROD with PROPOSALS E. Request for Comment Pursuant to 44 U.S.C. 3506(c)(2), we request comments in order to evaluate: • Whether the proposed collection of information is necessary for the proper performance of the functions of the agency, including whether the information would have practical utility; • The accuracy of our estimate of the burden of the proposed collection of information; • Whether there are ways to enhance the quality, utility, and clarity of the information to be collected; and • Whether there are ways to minimize the burden of the collection of information on those who are to respond, including through the use of automated collection techniques or other forms of information technology. Any member of the public may direct to us any comments concerning the accuracy of these burden estimates and any suggestions for reducing these burdens. 83 In the Mandatory Clearing Proposing Release, we estimated that four hours would be required by a clearing agency to post a security-based swap submission on its Web site to comply with proposed Rule 19b–4(o)(5). We believe that the information that would be required to rely on the exemptions proposed in this release is less extensive than the information that would be required in a security-based swap submission. Therefore, we estimate that the burden to include the information that would be required to rely on the proposed exemptions in an agreement or on the clearing agency’s Web site would be less than the burden to post a security-based swap submission. 84 In the Mandatory Clearing Proposing Release, we estimated that each clearing agency will submit 20 security-based swap submissions annually. Thus, we are using that estimate as the basis for our estimate as to how many times per year a clearing agency would be required to provide the information in reliance on the proposed exemptions. VerDate Mar<15>2010 16:15 Jun 14, 2011 Jkt 223001 The Commission requests comment on all aspects of its burden estimates. In particular, we request comment on the following: 1. Is the proposed collection of information important for eligible contract participants and other market participants? 2. How many entities would incur collection of information burdens pursuant to Rule 239? 3. Should the estimates be different depending on whether a clearing agency chooses to include information required to rely on proposed Rule 239 in an agreement relating to a security-based swap or on its publicly available Web site? 4. Are there additional burdens that we have not addressed in our preliminary burden estimates? Persons wishing to submit comments on the collection of information requirements should direct them to the following persons: (1) Desk Officer for the Securities and Exchange Commission, Office of Information and Regulatory Affairs, Office of Management and Budget, Room 3208, New Executive Office Building, Washington, DC 20503; and (2) Elizabeth Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549– 1090 with reference to File No. S7–22– 11. OMB is required to make a decision concerning the collection of information between 30 and 60 days after publication, so a comment to OMB is best assured of having its full effect if OMB receives it within 30 days of publication. The Commission has submitted the proposed collection of information to OMB for approval. Requests for the materials submitted to OMB by the Commission with regard to this collection of information should be in writing, refer to File No. S7–22–11, and be submitted to the Securities and Exchange Commission, Records Management, Office of Investor Education and Advocacy, 100 F Street, NE., Washington, DC 20549–0213. V. Cost-Benefit Analysis As discussed above, we are proposing rules and amendments to existing rules to provide certain exemptions under the Securities Act, the Exchange Act, and the Trust Indenture Act for securitybased swaps issued by a registered or exempt clearing agency in its function as a CCP. A. Benefits The proposed rules are intended to further the goal of central clearing of security-based swaps by providing exemptions for the issuance of security- PO 00000 Frm 00018 Fmt 4702 Sfmt 4702 34931 based swaps by a registered or exempt clearing agency in its function as a CCP from certain regulatory provisions that might otherwise interfere with such clearing activities. Without an exemption, (1) a clearing agency issuing a security-based swap in its function as a CCP would be required to register the security-based swap transaction; (2) the security-based swaps that are or have been issued or cleared by a registered or exempt clearing agency in its function as a CCP would have to be registered as a class of securities under the Exchange Act; and (3) the provisions of the Trust Indenture Act would apply. We believe that requiring compliance with these provisions likely would unnecessarily impede central clearing of securitybased swaps and that the proposed exemptions are necessary to facilitate the intent of the Dodd-Frank Act with respect to mandatory clearing of security-based swaps. Absent these proposed exemptions, we believe that registered or exempt clearing agencies would incur additional costs due to compliance with the registration requirements of the Securities Act and the Exchange Act solely because of their clearing functions.85 The proposed exemptions would treat security-based swaps issued or cleared by a registered or exempt clearing agency in its function as a CCP in the same manner as similar types of securities, such as security futures products and standardized options.86 The proposed exemptions are similar to those provided for CDS under our temporary rules.87 A registered or exempt clearing agency issuing securitybased swaps in its function as a CCP would benefit from the proposed exemptions because it would not have to file registration statements covering the offer and sale of the security-based swaps. If a registered or exempt clearing agency is not required to register the offer and sale of security-based swaps, it would not have to incur the costs of such registration, including legal and accounting costs. Some of these costs, such as the costs of obtaining audited financial statements, may still be incurred by the clearing agency as a result of other regulatory requirements for clearing agencies. Proposed Exchange Act Rule 12a–10 would provide that the Exchange Act 85 See, e.g., the rules proposed in the Mandatory Clearing Proposing Release and the Clearing Agencies Proposing Release. 86 See, e.g., Securities Act Section 3(a)(14) [15 U.S.C. 77c(a)(14)]; Securities Act Rule 238 [17 CFR 230.238]; Exchange Act Section 12(a) [15 U.S.C. 78l]; and Exchange Act Rules 12h–1(d) and (e) [17 CFR 240.12h–1(d) and (e)]. 87 See Temporary CDS Exemptions Release. E:\FR\FM\15JNP1.SGM 15JNP1 34932 Federal Register / Vol. 76, No. 115 / Wednesday, June 15, 2011 / Proposed Rules jlentini on DSK4TPTVN1PROD with PROPOSALS Section 12(a) does not apply to any security-based swap that is issued by a registered or exempt clearing agency in reliance on proposed Securities Act Rule 239 and traded on a national securities exchange. In addition, proposed Exchange Act Rule 12h–1(h) would exempt from Section 12(g) security-based swaps that are issued by a registered or exempt clearing agency in reliance on proposed Securities Act Rule 239, whether or not such securitybased swap is traded on a national securities exchange or a registered or exempt security-based SEF. Thus, the clearing agency would not incur the costs of registration or the costs associated with Exchange Act periodic reporting. The availability of exemptions under the Securities Act, the Exchange Act, and the Trust Indenture Act would mean that registered or exempt clearing agencies would not incur the costs associated with registering transactions or classes of securities, such as costs associated with preparing documents describing security-based swaps, preparing indentures, or arranging for the services of a trustee. B. Costs The proposed rules exempting offers and sales of security-based swaps that are or will be issued by, and in a transaction involving, a registered or exempt clearing agency in its function as a CCP should facilitate the use by eligible contract participants at minimal cost to the CCP or eligible contract participants. Because reliance on the proposed exemptions will not require any filing with or submission to us, other than costs incurred to comply with the information condition of proposed Rule 239, the costs of being able to rely on such exemptions, we believe, are minimal. We recognize that a consequence of the proposed exemptions would be the unavailability of certain remedies under the Securities Act and the Exchange Act and certain protections under the Trust Indenture Act. Absent an exemption, a clearing agency may have to file a registration statement covering the offer and sale of the security-based swaps, may have to register the class of eligible security-based swaps that it has issued or cleared under the Exchange Act, and may have to satisfy the applicable provisions of the Trust Indenture Act, which would provide investors with civil remedies in addition to antifraud remedies. A registration statement covering the offer and sale of securitybased swaps may provide certain information about the clearing agency, security-based swap contract terms, and VerDate Mar<15>2010 16:15 Jun 14, 2011 Jkt 223001 the identification of the particular reference securities, issuers, loans underlying the security-based swap. However, it would not necessarily provide the type of information necessary to assess the risk of the reference issuer, security, narrow-based security index, or loan. Further, while a registration statement would provide information to eligible contract participants, as well as to the market as a whole, registered clearing agencies already are required to make their audited financial statements and other information about themselves publicly available.88 While an investor would be able to pursue an antifraud action in connection with the purchase and sale of security-based swaps under Exchange Act Section 10(b),89 it would not be able to pursue civil remedies under Sections 11 or 12 of the Securities Act.90 We could still pursue an antifraud action in the offer and sale of security-based swaps issued by a clearing agency.91 As previously discussed in the PRA, proposed Rule 239(c) would require a clearing agency availing itself of the Securities Act exemption to include in an agreement covering the securitybased swap the clearing agency provides or makes available to its counterparty or include on a publicly available Web site maintained by the clearing agency: • A statement identifying any security, issuer, loan, or narrow-based security index underlying the securitybased swap; • A statement indicating the securities or loans to be delivered (or class of securities or loans), or if cash settled, the securities, loans or narrowbased security index (or class of securities or loans) whose value will determine the settlement obligation under the security-based swap; and • A statement of whether the issuer of any security or loan, each issuer of a security in a narrow-based security index, or each referenced issuer underlying the security-based swap is subject to the reporting requirements of Exchange Act Section 13 or Section 15(d) and, if not subject to such reporting requirements, whether public information, including financial information, about any such issuer is available and where the information is available. We preliminarily believe some of the information the clearing agency would make available would be the same 88 See Regulation of Clearing Agencies, Release No. 34–16900 and Exchange Act Rule 19b–4(l) and (m). 89 15 U.S.C. 78j(b). 90 15 U.S.C. 77k and 77l. 91 See 15 U.S.C. 77q and 15 U.S.C. 78j(b). PO 00000 Frm 00019 Fmt 4702 Sfmt 4702 information the clearing agency would be required to provide us under proposed Rule 19b–4 in connection with the mandatory clearing requirement, and the same information is collected and analyzed in making its business decision to plan to accept the security-based swap, or any group, category, type, or class of security-based swaps, for clearing. A clearing agency may incur costs in providing or making available this information in order to rely on the proposed exemption. We believe that the information requirements of proposed Rule 239 would be less burdensome to the clearing agency to the extent that it is already required to provide the information pursuant to Rule 19b–4 if adopted as proposed. C. Request for Comment We request that commentators provide views and supporting information regarding the costs and benefits associated with the proposed rules. We seek estimates of these costs and benefits, as well as any costs and benefits not already identified herein. We also request comment on whether other provisions of the Dodd-Frank Act for which Commission rulemaking is required are likely to have an effect on the costs and benefits of the proposed rules. VI. Consideration of Burden on Competition and Promotion of Efficiency, Competition and Capital Formation Section 23(a)(2) of the Exchange Act 92 requires us, when adopting rules under the Exchange Act, to consider the impact that any new rule would have on competition. Section 23(a)(2) prohibits us from adopting any rule that would impose a burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act. In addition, Section 2(b) 93 of the Securities Act and Section 3(f) 94 of the Exchange Act require us, when engaging in rulemaking where we are required to consider or determine whether an action is necessary or appropriate in the public interest, to also consider whether the action will promote efficiency, competition, and capital formation. The rules we are proposing would exempt offers and sales of securitybased swaps that are or will be issued to eligible contract participants by, and in a transaction involving, a registered or exempt clearing agency in its 92 15 U.S.C. 78w(a)(2). U.S.C. 77b(b). 94 15 U.S.C. 78c(f). 93 15 E:\FR\FM\15JNP1.SGM 15JNP1 jlentini on DSK4TPTVN1PROD with PROPOSALS Federal Register / Vol. 76, No. 115 / Wednesday, June 15, 2011 / Proposed Rules function as a CCP from all provisions of the Securities Act, other than the Section 17(a) antifraud provision, as well as from the registration requirements under Section 12 of the Exchange Act and the provisions of the Trust Indenture Act. Because these exemptions are available to any registered or exempt clearing agency offering and selling security-based swaps to an eligible contract participant, in its function as a CCP, we do not believe that the proposed exemptions impose a burden on competition. In contrast, we believe the proposed exemption would facilitate moving security-based swaps into centralized clearing, furthering the goal of the Dodd-Frank Act to reduce systemic risk while improving market access to hedging instruments that can contribute to lower costs of raising capital. In addition, we believe the proposal would promote efficiency by treating securitybased swaps issued by clearing agencies in a manner similar to standardized options and security futures issued by clearing agencies. Harmonizing the regulatory treatment of these securities under the Securities Act, Exchange Act, and the Trust Indenture Act should reduce the potential for regulatory arbitrage between such products. We also believe that the ability to novate security-based swaps with registered or exempt clearing agencies functioning as CCPs would improve the transparency of the security-based swap market and provide greater assurance to participants as to the capacity of the counterparty to perform its obligations under the security-based swap. We preliminarily believe that clearing agencies providing the information as would be required by proposed Rule 239(c) may promote competition and transparency among clearing agencies because it will make it easier for clearing agencies and eligible contract participants to determine what securitybased swaps are being cleared. We preliminarily believe that increased transparency in the security-based swap market could help to limit market turmoil and thereby facilitate the capital formation process. We generally request comment on the competitive or anticompetitive effects of the proposed exemptions on any market participants if adopted as proposed. We also request comment on what impact the exemptions, if adopted, would have on efficiency and capital formation. We request that commentators provide analysis and empirical data, if available, to support their views regarding any such effects. We also request comment regarding the competitive effects of pursuing alternative regulatory VerDate Mar<15>2010 16:15 Jun 14, 2011 Jkt 223001 approaches that are consistent with the Dodd-Frank Act. In addition, we request comment on how the other provisions of the Dodd-Frank Act for which Commission rulemaking is required, will interact with and influence the competitive effects of the proposed exemptions. VII. Consideration of Impact on the Economy Under the Small Business Regulatory Enforcement Fairness Act of 1996,95 a rule is considered ‘‘major’’ where, if adopted, it results or is likely to result in: (i) an annual effect on the economy of $100 million or more (either in the form of an increase or a decrease); (ii) a major increase in costs or prices for consumers or individual industries; or (iii) significant adverse effect on competition, investment or innovation. We request comment on the potential impact of the proposed exemptions on the economy on an annual basis, any potential increase in costs or prices for consumers or individual industries, and any potential effect on competition, investment or innovation. Commentators are requested to provide empirical data and other factual support for their view to the extent possible. VIII. Regulatory Flexibility Certification The Regulatory Flexibility Act (‘‘RFA’’) 96 requires the Commission, in promulgating rules, to consider the impact of those rules on small entities. Section 603(a) 97 of the Administrative Procedure Act,98 as amended by the RFA, generally requires the Commission to undertake a regulatory flexibility analysis of all proposed rules to determine the impact of such rulemaking on ‘‘small entities.’’ 99 Section 605(b) of the RFA states that this requirement shall not apply to any proposed rule which, if adopted, would not have a significant economic impact on a substantial number of small entities.100 The exemptions would apply to all registered or exempt clearing agencies that issue or will issue security-based swaps in its function as a CCP. As noted 95 Public Law 104–121, Title II, 110 Stat. 857 (1996) (codified in various sections of 5 U.S.C., 15 U.S.C. and as a note to 5 U.S.C. 601). 96 5 U.S.C. 601 et seq. 97 5 U.S.C. 603(a). 98 5 U.S.C. 551 et seq. 99 Section 601(b) of the RFA permits agencies to formulate their own definitions of ‘‘small entities.’’ The Commission has adopted definitions for the term ‘‘small entity’’ for the purposes of rulemaking in accordance with the RFA. These definitions, as relevant to this proposed rulemaking, are set forth in Rule 0–10 [17 CFR 240.0–10]. 100 See 5 U.S.C. 605(b). PO 00000 Frm 00020 Fmt 4702 Sfmt 4702 34933 above, four entities are currently exempt from registration as a clearing agency under Exchange Act Section 17A to provide central clearing services for CDS, a class of security-based swaps. Based on our understanding of the market, we preliminarily believe that between four and six clearing agencies will clear security-based swaps and would seek to avail themselves of the proposed exemptions.101 For the purposes of our rulemaking in connection with the RFA, a small entity includes, when used with reference to a clearing agency, a clearing agency that: (i) compared, cleared and settled less than $500 million in securities transactions during the preceding fiscal year; (ii) had less than $200 million of funds and securities in its custody or control at all times during the preceding fiscal year (or at any time that it has been in business, if shorter); and (iii) is not affiliated with any person (other than a natural person) that is not a small business or small organization.102 Under the standards adopted by the Small Business Administration, small entities in the finance industry include the following: (i) For entities engaged in investment banking, securities dealing and securities brokerage activities, entities with $6.5 million or less in annual receipts; (ii) for entities engaged in trust, fiduciary and custody activities, entities with $6.5 million or less in annual receipts; and (iii) funds, trusts and other financial vehicles with $6.5 million or less in annual receipts.103 Based on our existing information about the entities likely to register to clear security-based swaps, the Commission preliminarily believes that such entities will not be small entities, but rather part of large business entities that exceed the thresholds defining ‘‘small entities’’ set out above. Additionally, while other clearing agencies may become eligible to operate as central counterparties for securitybased swaps, we preliminarily do not believe that any such entities would be ‘‘small entities’’ as defined in Exchange Act Rule 0–10.104 Furthermore, we believe it is unlikely that clearing agencies functioning as CCPs for security-based swaps would have annual receipts of less than $6.5 million. Accordingly, we believe that any clearing agencies issuing securitybased swaps in their function as CCPs in such transactions will exceed the thresholds for ‘‘small entities’’ set forth 101 See also Section VIII. of the Mandatory Clearing Proposing Release. 102 17 CFR 240.0–10(d). 103 13 CFR 121.201, Sector 52. 104 See 17 CFR 240.0–10(d). E:\FR\FM\15JNP1.SGM 15JNP1 34934 Federal Register / Vol. 76, No. 115 / Wednesday, June 15, 2011 / Proposed Rules in Exchange Act Rule 0–12. We encourage written comments regarding this certification. IX. Statutory Authority and Text of the Rules and Amendments The rules and amendments described in this release are being proposed under the authority set forth in Sections 19 and 28 of the Securities Act; Sections 3C, 12(h), 23(a) and 36 of the Exchange Act; and Section 304(d) of the Trust Indenture Act. List of Subjects in 17 CFR Parts 230, 240 and 260 Reporting and recordkeeping requirements, Securities. Text of the Rules and Amendments For the reasons set out in the preamble, the Commission is proposing to amend Title 17, Chapter II, of the Code of Federal Regulations as follows: PART 230—GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933 1. The authority citation for Part 230 continues to read, in part, as follows: Authority: 15 U.S.C. 77b, 77c, 77d, 77f, 77g, 77h, 77j, 77r, 77s, 77z–3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78t, 78w, 78ll(d), 78mm, 80a–8, 80a–24, 80a–28, 80a–29, 80a– 30, and 80a–37, unless otherwise noted. * * * * * 2. Section 230.239 is added to read as follows: jlentini on DSK4TPTVN1PROD with PROPOSALS § 230.239 Exemption for offers and sales of certain security-based swaps. (a) Provided that the conditions of paragraph (b) of this section are satisfied and except as expressly provided in paragraph (c) of this section, the Act does not apply to any offer or sale of a security-based swap that: (1) Is issued or will be issued by a clearing agency that is either registered as a clearing agency under Section 17A of the Securities Exchange Act of 1934 (15 U.S.C. 78q–1) or exempt from registration under Section 17A of the Securities Exchange Act of 1934 pursuant to a rule, regulation, or order of the Commission (‘‘eligible clearing agency’’), and (2) The Commission has determined is required to be cleared or that is permitted to be cleared pursuant to the eligible clearing agency’s rules. (b) The exemption provided in paragraph (a) of this section applies only to an offer or sale of a securitybased swap described in paragraph (a) of this section if the following conditions are satisfied: (1) The security-based swap is offered or sold in a transaction involving the VerDate Mar<15>2010 16:15 Jun 14, 2011 Jkt 223001 eligible clearing agency in its function as a central counterparty with respect to such security-based swap; (2) The security-based swap is sold only to an eligible contract participant (as defined in Section 1a(18) of the Commodity Exchange Act (7 U.S.C. 1a(12)); and (3) The eligible clearing agency posts on its publicly available Web site at a specified Internet address or includes in its agreement covering the securitybased swap that the eligible clearing agency provides or makes available to its counterparty the following: (i) A statement identifying any security, issuer, loan, or narrow-based security index underlying the securitybased swap; (ii) A statement indicating the security or loan to be delivered (or class of securities or loans), or if cash settled, the security, loan, or narrow-based security index (or class of securities or loans) whose value is to be used to determine the amount of the settlement obligation under the security-based swap; and (iii) A statement of whether the issuer of any security or loan, each issuer of a security in a narrow-based security index, or each referenced issuer underlying the security-based swap is subject to the reporting requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m and 78o) and, if not subject to such reporting requirements, whether public information, including financial information, about any such issuer is available and where the information is available. (c) The exemption provided in paragraph (a) of this section does not apply to the provisions of Section 17(a) of the Act (15 U.S.C. 77q(a)). PART 240—GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934 3. The authority citation for Part 240 continues to read, in part, as follows: Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 78j, 78j–1, 78k, 78k–1, 78l, 78m, 78n, 78n–1, 78o, 78o–4, 78p, 78q, 78s, 78u–5, 78w, 78x, 78ll, 78mm, 80a–20, 80a–23, 80a–29, 80a–37, 80b– 3, 80b–4, 80b–11, and 7201 et seq., 18 U.S.C. 1350, and 12 U.S.C. 5221(e)(3), unless otherwise noted. * * * * * 4. Section 240.12a–10 is added to read as follows: PO 00000 Frm 00021 Fmt 4702 Sfmt 4702 § 240.12a–10 Exemption of security-based swaps from section 12(a) of the Act. The provisions of Section 12(a) of the Act (15 U.S.C. 78l(a)) do not apply to any security-based swap that: (a) Is issued or will be issued by a clearing agency registered as a clearing agency under Section 17A of the Act (15 U.S.C. 78q–1) or exempt from registration under Section 17A of the Act pursuant to a rule, regulation, or order of the Commission, in its function as a central counterparty with respect to the security-based swap; (b) The Commission has determined is required to be cleared or that is permitted to be cleared pursuant to the clearing agency’s rules; (c) Is sold to an eligible contract participant (as defined in Section 1a(18) of the Commodity Exchange Act (7 U.S.C. 1a(18)) in reliance on Rule 239 under the Securities Act of 1933 (17 CFR 230.239); and (d) Is traded on a national securities exchange registered pursuant to Section 6(a) of the Act (15 U.S.C. 78f(a)). 5. Section 240.12h–1 is amended by adding paragraph (h) to read as follows: § 240.12h–1 Exemptions from registration under section 12(g) of the Act. * * * * * (h) Any security-based swap that is issued by a clearing agency registered as a clearing agency under Section 17A of the Act (15 U.S.C. 78q–1) or exempt from registration under Section 17A of the Act pursuant to a rule, regulation, or order of the Commission in its function as a central counterparty that the Commission has determined must be cleared or that is permitted to be cleared pursuant to the clearing agency’s rules, and that was sold to an eligible contract participant (as defined in Section 1a(18) of the Commodity Exchange Act (7 U.S.C. 1a(18)) in reliance on Rule 239 under the Securities Act of 1933. PART 260—GENERAL RULES AND REGULATIONS, TRUST INDENTURE ACT OF 1939 6. The authority citation for Part 260 continues to read as follows: Authority: 15 U.S.C. 77eee, 77ggg, 77nnn, 77sss, 78ll(d), 80b–3, 80b–4, and 80b–11. 7. Section 260.4d–11 is added to read as follows: § 260.4d–11 Exemption for security-based swaps offered and sold in reliance on Rule 239 under the Securities Act of 1933 (17 CFR 230.239). Any security-based swap offered and sold in reliance on Rule 239 of this chapter (17 CFR 230.239), whether or not issued under an indenture, is exempt from the Act. E:\FR\FM\15JNP1.SGM 15JNP1 Federal Register / Vol. 76, No. 115 / Wednesday, June 15, 2011 / Proposed Rules By the Commission. Dated: June 9, 2011. Elizabeth M. Murphy, Secretary. [FR Doc. 2011–14717 Filed 6–14–11; 8:45 am] BILLING CODE 8011–01–P ENVIRONMENTAL PROTECTION AGENCY 40 CFR Part 52 [EPA–R04–OAR–2011–0414–201134; FRL– 9319–1] Approval and Promulgation of Implementation Plans and Designations of Areas for Air Quality Planning Purposes; Kentucky and Indiana; Louisville; Determination of Attainment by Applicable Attainment Date for the 1997 Annual Fine Particulate Standards Environmental Protection Agency (EPA). ACTION: Proposed rule. AGENCY: EPA is proposing to determine pursuant to the Clean Air Act (CAA), that the bi-state Louisville, Kentucky-Indiana, fine particulate (PM2.5) nonattainment area (hereafter referred to as ‘‘the Louisville Area’’ or ‘‘the Area’’) has attained the 1997 annual PM2.5 national ambient air quality standards (NAAQS) by its applicable attainment date of April 5, 2010. The determination of attainment was previously made by EPA on March 9, 2011, based on quality-assured and certified monitoring data for the 2007– 2009 monitoring period. EPA is now proposing to find that the Louisville Area attained the 1997 annual PM2.5 NAAQS by its applicable attainment date. EPA is proposing this action because it is consistent with the CAA and its implementing regulations. DATES: Comments must be received on or before July 15, 2011. ADDRESSES: Submit your comments, identified by Docket ID No. EPA–R04– OAR–2011–0414, by one of the following methods: 1. http://www.regulations.gov: Follow the on-line instructions for submitting comments. 2. E-mail: benjamin.lynorae@epa.gov. 3. Fax: (404) 562–9019. 4. Mail: EPA–R04–OAR–2011–0414, Regulatory Development Section, Air Planning Branch, Air, Pesticides and Toxics Management Division, U.S. Environmental Protection Agency, Region 4, 61 Forsyth Street, SW., Atlanta, Georgia 30303–8960. 5. Hand Delivery or Courier: Ms. Lynorae Benjamin, Chief, Regulatory jlentini on DSK4TPTVN1PROD with PROPOSALS SUMMARY: VerDate Mar<15>2010 16:15 Jun 14, 2011 Jkt 223001 Development Section, Air Planning Branch, Air, Pesticides and Toxics Management Division, U.S. Environmental Protection Agency, Region 4, 61 Forsyth Street, SW., Atlanta, Georgia 30303–8960. Such deliveries are only accepted during the Regional Office’s normal hours of operation. The Regional Office’s official hours of business are Monday through Friday, 8:30 to 4:30, excluding Federal holidays. Instructions: Direct your comments to Docket ID No. EPA–R04–OAR–2011– 0414. EPA’s policy is that all comments received will be included in the public docket without change and may be made available online at http:// www.regulations.gov, including any personal information provided, unless the comment includes information claimed to be Confidential Business Information (CBI) or other information whose disclosure is restricted by statute. Do not submit through http:// www.regulations.gov or e-mail, information that you consider to be CBI or otherwise protected. The http:// www.regulations.gov Web site is an ‘‘anonymous access’’ system, which means EPA will not know your identity or contact information unless you provide it in the body of your comment. If you send an e-mail comment directly to EPA without going through http:// www.regulations.gov, your e-mail address will be automatically captured and included as part of the comment that is placed in the public docket and made available on the Internet. If you submit an electronic comment, EPA recommends that you include your name and other contact information in the body of your comment and with any disk or CD–ROM you submit. If EPA cannot read your comment due to technical difficulties and cannot contact you for clarification, EPA may not be able to consider your comment. Electronic files should avoid the use of special characters, any form of encryption, and be free of any defects or viruses. For additional information about EPA’s public docket visit the EPA Docket Center homepage at http:// www.epa.gov/epahome/dockets.htm. Docket: All documents in the electronic docket are listed in the http://www.regulations.gov index. Although listed in the index, some information is not publicly available, i.e., CBI or other information whose disclosure is restricted by statute. Certain other material, such as copyrighted material, is not placed on the Internet and will be publicly available only in hard copy form. Publicly available docket materials are available either electronically in http:// PO 00000 Frm 00022 Fmt 4702 Sfmt 4702 34935 www.regulations.gov or in hard copy at the Regulatory Development Section, Air Planning Branch, Air, Pesticides and Toxics Management Division, U.S. Environmental Protection Agency, Region 4, 61 Forsyth Street, SW., Atlanta, Georgia 30303–8960. EPA requests that if at all possible, you contact the person listed in the FOR FURTHER INFORMATION CONTACT section to schedule your inspection. The Regional Office’s official hours of business are Monday through Friday, 8:30 to 4:30, excluding Federal holidays. FOR FURTHER INFORMATION CONTACT: In Region 4, Sara Waterson or Joel Huey, Regulatory Development Section, Air Planning Branch, Air, Pesticides and Toxics Management Division, U.S. Environmental Protection Agency, Region 4, 61 Forsyth Street, SW., Atlanta, Georgia 30303–8960. Ms. Waterson may be reached by telephone at (404) 562–9061 or via electronic mail at waterson.sara@epa.gov. Mr. Huey may be reached by telephone at (404) 562–9104. Mr. Huey can also be reached via electronic mail at huey.joel@epa.gov. In Region 5, John Summerhays, Attainment Planning and Maintenance Section, Air Programs Branch (AR–18J), U.S. Environmental Protection Agency, Region 5, 77 West Jackson Boulevard, Chicago, Illinois 60604. The telephone number is (312) 886–6067. Mr. Summerhays can also be reached via electronic mail at summerhays.john@epa.gov. SUPPLEMENTARY INFORMATION: I. What action is EPA taking? II. What is the background for this action? III. What is the air quality in the Louisville Area for the 1997 annual PM2.5 NAAQS for the 2007–2009 monitoring period? IV. What is the proposed action, and what is the effect of this action? V. Statutory and Executive Order Reviews I. What action is EPA taking? Based on EPA’s review of the qualityassured and certified monitoring data for 2007–2009, and in accordance with section 179(c)(1) of the CAA and EPA’s regulations, EPA proposes to determine that the Louisville Area has attained the 1997 annual PM2.5 NAAQS by the applicable attainment date of April 5, 2010. The Louisville Area is comprised of Jefferson County in Kentucky, and Clark, Floyd and a portion of Jefferson Counties in Indiana. On March 9, 2011, EPA published a final rulemaking making a determination of attainment to suspend the requirements for the Louisville Area to submit an attainment demonstration and associated reasonably available control measures (RACM), a reasonable further progress (RFP) plan, contingency E:\FR\FM\15JNP1.SGM 15JNP1

Agencies

[Federal Register Volume 76, Number 115 (Wednesday, June 15, 2011)]
[Proposed Rules]
[Pages 34920-34935]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-14717]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 230, 240 and 260

[Release Nos. 33-9222; 34-64639; 39-2474; File No. S7-22-11]
RIN 3235-AL16


Exemptions for Security-Based Swaps Issued by Certain Clearing 
Agencies

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rules.

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SUMMARY: We are proposing exemptions under the Securities Act of 1933, 
the Securities Exchange Act of 1934, and the Trust Indenture Act of 
1939 for security-based swaps issued by certain clearing agencies 
satisfying certain conditions. The proposed rules would exempt 
transactions by clearing agencies in these security-based swaps from 
all provisions of the Securities Act, other than the Section 17(a) 
anti-fraud provisions, as well as exempt these security-based swaps 
from Exchange Act registration requirements and from the provisions of 
the Trust Indenture Act, provided certain conditions are met.

DATES: Comments on the proposed rules should be received on or before 
July 25, 2011.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml);
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number S7-22-11 on the subject line; or
     Use the Federal Rulemaking Portal (http://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 S7-22-11. 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 
(http://www.sec.gov/rules/proposed.shtml). Comments are also available 
for public inspection and copying in the Commission's Public Reference 
Room, 100 F Street, NE., Washington, DC 20549, on official business 
days between the hours of 10 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.

FOR FURTHER INFORMATION CONTACT: Tamara Brightwell, Senior Special 
Counsel to the Director, Michael J. Reedich, Special Counsel, Office of 
Chief Counsel, or Andrew Schoeffler, Special Counsel, Office of Capital 
Market Trends, Division of Corporation Finance, at (202) 551-3500, U.S. 
Securities and Exchange Commission, 100 F Street, NE., Washington, DC 
20549-4561.

SUPPLEMENTARY INFORMATION: We are proposing new Rule 239 under the 
Securities Act of 1933 (``Securities Act'').\1\ We are also proposing 
new Rule 12a-10 and an amendment to Rule 12h-1 under the Securities 
Exchange Act of 1934 (``Exchange Act'') \2\ and Rule 4d-11 under the 
Trust Indenture Act of 1939 (``Trust Indenture Act'').\3\
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    \1\ 15 U.S.C. 77a et seq.
    \2\ 15 U.S.C. 78a et seq.
    \3\ 15 U.S.C. 77aaa et seq.

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[[Page 34921]]

I. Background

    On July 21, 2010, the President signed the Dodd-Frank Act into 
law.\4\ 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.\5\ Title VII 
of the Dodd-Frank Act provides the Securities and Exchange Commission 
(``SEC'' or the ``Commission'') and the Commodity Futures Trading 
Commission (``CFTC'') with the authority to regulate over-the-counter 
(``OTC'') derivatives in light of the recent financial crisis.
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    \4\ The Dodd-Frank Wall Street Reform and Consumer Protection 
Act, Public Law 111-203, 124 Stat. 1376 (2010).
    \5\ See Public Law 111-203, Preamble.
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    The Dodd-Frank Act provides that the CFTC will regulate ``swaps,'' 
the SEC will regulate ``security-based swaps,'' and the CFTC and SEC 
will jointly regulate ``mixed swaps.'' \6\ The Dodd-Frank Act amends 
the Exchange Act to require, among other things, the following: (1) 
Transactions in security-based swaps must be submitted for clearing to 
a clearing agency if such security-based swap is one that the 
Commission has determined is required to be cleared, unless an 
exception from mandatory clearing applies; \7\ (2) transactions in 
security-based swaps must be reported to a registered security-based 
swap data repository (``SDR'') or the Commission; \8\ and (3) if a 
security-based swap is subject to mandatory clearing, transactions in 
security-based swaps must be executed on an exchange or a registered or 
exempt security-based swap execution facility (``security-based SEF''), 
unless no exchange or security-based SEF makes such security-based swap 
available for trading or the security-based swap transaction is subject 
to the clearing exception in Exchange Act Section 3C(g).\9\ In this 
release, we are proposing exemptions from the registration requirements 
of the Securities Act and the Exchange Act, and from the qualification 
requirements of the Trust Indenture Act, to facilitate implementation 
of these new requirements.
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    \6\ Section 712(d) of the Dodd-Frank Act provides that the 
Commission and the CFTC, in consultation with the Board of Governors 
of the Federal Reserve System, shall jointly further define the 
terms ``swap,'' ``security-based swap,'' ``swap dealer,'' 
``security-based swap dealer,'' ``major swap participant,'' ``major 
security-based swap participant,'' ``eligible contract 
participant,'' and ``security-based swap agreement.'' These terms 
are defined in Sections 721 and 761 of the Dodd-Frank Act and, with 
respect to the term ``eligible contract participant,'' in Section 
1a(18) of the Commodity Exchange Act (``CEA''), 7 U.S.C. 1a(18), as 
re-designated and amended by Section 721 of the Dodd-Frank Act. See 
Definitions Contained in Title VII of Dodd-Frank Wall Street Reform 
and Consumer Protection Act, Release No. 34-62717 (Aug. 13, 2010), 
75 FR 51429 (Aug. 20, 2010) (advance joint notice of proposed 
rulemaking regarding definitions contained in Title VII of the Dodd-
Frank Act); and Product Definitions Contained in Title VII of the 
Dodd-Frank Wall Street Reform and Consumer Protection Act, Release 
No. 33-9204; 34-64372 (Apr. 29, 2011) 76 FR 29818.
    \7\ See Public Law 111-203, Sec.  763(a) (adding Exchange Act 
Section 3C).
    \8\ See Public Law 111-203, Sec. Sec.  763(i) and 766(a) (adding 
Exchange Act Sections 13(m)(1)(G) and 13A(A)(1), respectively).
    \9\ See Public Law 111-203, Sec.  763(a) (adding Exchange Act 
Section 3C). See also Public Law 111-203, Sec.  761 (adding Exchange 
Act Section 3(a)(77) (defining the term ``security-based swap 
execution facility'')), and Registration and Regulation of Security-
Based Swap Execution Facilities, Release No. 34-63825 (Feb. 2, 2011) 
76 FR 10948 (Feb. 28, 2011).
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    We believe that the increased use of central clearing for security-
based swaps should help to promote robust risk management, foster 
greater efficiencies, improve investor protection, and promote 
transparency in the market for security-based swaps.\10\ The Dodd-Frank 
Act seeks to ensure that, wherever possible and appropriate, security-
based swaps are cleared.\11\ Paragraph (a)(1) of new Exchange Act 
Section 3C establishes a mandatory clearing requirement for certain 
security-based swaps.\12\ Exchange Act Section 3C(b) sets forth a 
process by which we would determine whether a security-based swap or 
any group, category, type or class of security-based swap that a 
clearing agency plans to accept for clearing is required to be 
cleared.\13\ If we make a determination that a security-based swap is 
required to be cleared, then parties may not engage in such a security-
based swap without submitting it for clearing, unless an exception 
applies.\14\ If we make a determination that a security-based swap is 
not required to be cleared, such security-based swap may still be 
cleared on a non-mandatory basis by the clearing agency if it has rules 
that permit it to clear such security-based swap.\15\
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    \10\ See Ownership Limitations and Governance Requirements for 
Security-Based Swap Clearing Agencies, Security-Based Swap Execution 
Facilities, and National Securities Exchanges with Respect to 
Security-Based Swaps under Regulation MC, Release No. 34-63107 (Oct. 
14, 2010), 75 FR 65881 (Oct. 26, 2010), Section III.A.2.a.
    \11\ See, e.g., Report of the Senate Committee on Banking, 
Housing, and Urban Affairs regarding The Restoring American 
Financial Stability Act of 2010, S. Rep. No. 111-176 at 34 (stating 
that ``[s]ome parts of the OTC market may not be suitable for 
clearing and exchange trading due to individual business needs of 
certain users. Those users should retain the ability to engage in 
customized, uncleared contracts while bringing in as much of the OTC 
market under the centrally cleared and exchange-traded framework as 
possible.'').
    \12\ Section 763(a) of the Dodd-Frank Act added Section 3C to 
the Exchange Act. See also Process for Submissions for Review of 
Security-Based Swaps for Mandatory Clearing and Notice Filing 
Requirements for Clearing Agencies; Technical Amendments to Rule 
19b-4 and Form 19b-4 Applicable to All Self-Regulatory 
Organizations, Release No. 34-63557 (Dec. 15, 2010), 75 FR 82490 
(Dec. 30, 2010) (``Mandatory Clearing Proposing Release'').
    \13\ See Exchange Act Section 3C(b) and Mandatory Clearing 
Proposing Release. In the Mandatory Clearing Proposing Release, we 
proposed rules to establish processes for (i) clearing agencies 
registered with the Commission to submit for review each security-
based swap, or any group, category, type or class of security-based 
swaps, that the clearing agency plans to accept for clearing for a 
determination by the Commission of whether the security-based swap, 
or group, category, type or class of security-based swap is required 
to be cleared, and to determine the manner of notice the clearing 
agency must provide to its members of such submission, and (ii) how 
the Commission may stay the requirement that a security-based swap 
is subject to mandatory clearing.
    \14\ See Exchange Act Section 3C(g) and Mandatory Clearing 
Proposing Release. Section 3C(g)(1) provides that a security-based 
swap otherwise subject to mandatory clearing is not required to be 
cleared if one party to the security-based swap is not a financial 
entity, is using security-based swaps to hedge or mitigate 
commercial risk, and notifies the Commission, in a manner set forth 
by the Commission, how it generally meets its financial obligations 
associated with entering into non-cleared security-based swaps.
    \15\ See 15 U.S.C. 78s(b) and 12 U.S.C. 5465(e). See also 
Mandatory Clearing Proposing Release.
---------------------------------------------------------------------------

    Clearing agencies are broadly defined under the Exchange Act and 
may undertake a variety of functions.\16\ One such function is to act 
as a central counterparty (``CCP'').\17\ For example, when a security-
based swap between two counterparties that are members of a CCP is 
executed and submitted for clearing, the original contract is 
extinguished and is replaced by two new contracts where the CCP is the 
buyer to the seller and the seller to the buyer.\18\ At that point, the 
original counterparties are no longer counterparties to each other. As 
a result, the creditworthiness and liquidity of the CCP is substituted 
for the creditworthiness and liquidity of the original 
counterparties.\19\
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    \16\ See Exchange Act Section 3(a)(23).
    \17\ A CCP is an entity that interposes itself between the 
counterparties to a securities transaction, acting functionally as 
the buyer to every seller and the seller to every buyer. See 
Clearing Agency Standards for Operation and Governance, Release No. 
34-64017 (Mar. 3, 2011), 76 FR 14472 (Mar. 16, 2011) (``Clearing 
Agency Standards Proposing Release'').
    \18\ ``Novation'' is a ``process through which the original 
obligation between a buyer and seller is discharged through the 
substitution of the CCP as seller to buyer and buyer to seller, 
creating two new contracts.'' Committee on Payment and Settlement 
Systems, Technical Committee of the International Organization of 
Securities Commissioners, Recommendations for Central Counterparties 
(November 2004) at 66.
    \19\ See Cecchetti, Gyntelberg and Hollanders, Central 
counterparties for over-the-counter derivatives, BIS Quarterly 
Review, September 2009, available at http://www.bis.org/publ/qtrpdf/r_qt0909f.pdf.

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[[Page 34922]]

    Under the rules we recently proposed regarding mandatory clearing, 
to meet the clearing requirement in Exchange Act Section 3C, the 
parties would be required to submit security-based swaps required to be 
cleared to a clearing agency that functions as a CCP for central 
clearing.\20\ The proposed rules also would establish procedures for a 
clearing agency to submit to us for a review each security-based swap, 
or group, category, type or class of security-based swap, that the 
clearing agency plans to accept for clearing. We would review the 
submission and make a determination about whether the security-based 
swap, or group, category, type or class of security-based swap, is 
required to be cleared.\21\ Under the statute and the proposed rules, 
the submission would be publicly available and a public comment period 
would be provided with respect to whether the clearing requirement will 
apply.\22\
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    \20\ See Mandatory Clearing Proposing Release and proposed Rule 
3Ca-2.
    \21\ See Mandatory Clearing Proposing Release and Public Law 
111-203, Sec.  763(a) (adding Exchange Act Section 3C).
    \22\ Id.
---------------------------------------------------------------------------

    If we determine that a security-based swap, or group, category, 
type, or class of security-based swap is required to be cleared, 
counterparties would be required to submit such security-based swaps 
negotiated and entered into bilaterally to the clearing agency for 
novation.\23\ Thus, for security-based swaps submitted for novation, 
the CCP will be the issuer of new security-based swaps. Because the 
definition of ``security'' in the Securities Act was amended in the 
Dodd-Frank Act to include security-based swaps,\24\ the novation of a 
security-based swap by a clearing agency functioning as a central 
counterparty involves an offer and sale by the clearing agency of a 
security (the security-based swap) under the Securities Act.
---------------------------------------------------------------------------

    \23\ See Exchange Act Section 3C and proposed Exchange Act Rule 
3Ca-2.
    \24\ See Public Law 111-203, Section 761(a) (amending Section 
3(a) of the Exchange Act).
---------------------------------------------------------------------------

    The Securities Act requires that any offer and sale of a security 
must either be registered under the Securities Act or made pursuant to 
an exemption from registration.\25\ Certain provisions of the Exchange 
Act relating to the registration of classes of securities and the 
indenture qualification provisions of the Trust Indenture Act also 
potentially would apply to security-based swaps. The provisions of 
Section 12 of the Exchange Act could, without an exemption, require 
that security-based swaps be registered before a transaction could be 
effected on a national securities exchange.\26\ In addition, 
registration of a class of security-based swaps under Section 12(g) 
would be required if the security-based swap is considered an equity 
security and there are more than 500 record holders of a particular 
class of security-based swaps at the end of a fiscal year. Further, 
without an exemption, the Trust Indenture Act would require 
qualification of an indenture for security-based swaps considered to be 
debt.\27\
---------------------------------------------------------------------------

    \25\ See Section 5 of the Securities Act [15 U.S.C. 77e].
    \26\ We note that a registered security-based SEF would not be a 
national securities exchange for purposes of the Exchange Act. 
Therefore, Exchange Act Sections 12(a) and (b) would not be 
applicable to transactions effected through such facilities.
    \27\ See 15 U.S.C. 77aaa et seq.
---------------------------------------------------------------------------

    The provisions of the Dodd-Frank Act do not contain an exemption 
from Securities Act or Exchange Act registration, or from Trust 
Indenture Act qualification, for security-based swaps, and we believe 
that compliance with the registration and qualification provisions of 
these Acts likely would be impracticable and frustrate the purposes of 
the Dodd-Frank Act. We have taken action in the past to facilitate 
clearing of certain credit default swaps by clearing agencies 
functioning as CCPs. For example, prior to enactment of the Dodd-Frank 
Act, we permitted five clearing agencies to clear certain credit 
default swaps (``eligible CDS'') on a temporary conditional basis.\28\ 
To facilitate the operation of clearing agencies as CCPs for eligible 
CDS, we also adopted interim temporary exemptions from certain 
provisions of the Securities Act, the Exchange Act and the Trust 
Indenture Act, subject to certain conditions.\29\ In the adopting 
release, we noted that we believed that the existence of CCPs for CDS 
would be important in helping to reduce counterparty risks inherent in 
the CDS

[[Page 34923]]

market.\30\ In addition to those actions with respect to eligible CDS, 
as discussed further below, the exemptions we are proposing today are 
similar to exemptions under the Securities Act and the Exchange Act for 
security futures products and certain standardized options.\31\
---------------------------------------------------------------------------

    \28\ See Order Granting Temporary Exemptions under the 
Securities Exchange Act of 1934 in Connection with Request on Behalf 
of ICE Clear Europe Limited Related to Central Clearing of Credit 
Default Swaps, and Request for Comments, Release No. 34-60372 (Jul. 
23, 2009), 74 FR 37748 (Jul. 29, 2009), Order Extending Temporary 
Conditional Exemptions Under the Securities Exchange Act of 1934 in 
Connection With Request on Behalf of ICE Clear Europe, Limited 
Related to Central Clearing of Credit Default Swaps, and Request for 
Comments, Release No. 34-61973 (Apr. 23, 2010), 75 FR 22656 (Apr. 
29, 2010), and Order Extending Temporary Conditional Exemptions 
under the Securities Exchange Act of 1934 in Connection with Request 
on Behalf of ICE Clear Europe, Limited Related to Central Clearing 
of Credit Default Swaps and Request for Comment, Release No. 34-
63389 (Nov. 29, 2010), 75 FR 75520 (Dec. 3, 2010); Order Granting 
Temporary Exemptions under the Securities Exchange Act of 1934 in 
Connection with Request on Behalf of Eurex Clearing AG Related to 
Central Clearing of Credit Default Swaps, and Request for Comments, 
Release No. 34-60373 (Jul. 23, 2009), 74 FR 37740 (Jul. 29, 2009), 
Order Extending and Modifying Temporary Conditional Exemptions Under 
the Securities Exchange Act of 1934 in Connection With Request on 
Behalf of Eurex Clearing AG Related to Central Clearing of Credit 
Default Swaps, and Request for Comment, Release No. 34-61975 (Apr. 
23, 2010), 75 FR 22641 (Apr. 29, 2010), and Order Extending 
Temporary Conditional Exemptions under the Securities Exchange Act 
of 1934 in Connection with Request on Behalf of Eurex Clearing, AG 
Related to Central Clearing of Credit Default Swaps and Request for 
Comment, Release No. 34-63390 (Nov. 29, 2010), 75 FR 75518 (Dec. 3, 
2010); Order Granting Temporary Exemptions Under the Securities 
Exchange Act of 1934 in Connection With Request of Chicago 
Mercantile Exchange Inc. and Citadel Investment Group, L.L.C. 
Related to Central Clearing of Credit Default Swaps, and Request for 
Comments, Release No. 34-59578 (Mar. 13, 2009), 74 FR 11781 (Mar. 
19, 2009), Order Extending and Modifying 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, Release No. 34-61164 
(Dec. 14, 2009), 74 FR 67258 (Dec. 18, 2009), 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, Release No. 34-61803 (Mar. 30, 2010), 75 FR 17181 (Apr. 5, 
2010), and 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, Release No. 34-63388 
(Nov. 29, 2010), 75 FR 75522 (Dec. 3, 2010); Order Granting 
Temporary Exemptions Under the Securities Exchange Act of 1934 in 
Connection With Request on Behalf of ICE US Trust LLC Related to 
Central Clearing of Credit Default Swaps, and Request for Comments, 
Release No. 34-59527 (Mar. 6, 2009), 74 FR 10791 (Mar. 12, 2009), 
Order Extending and Modifying Temporary Exemptions under the 
Securities Exchange Act of 1934 in Connection with Request from ICE 
Trust U.S. LLC Related to Central Clearing of Credit Default Swaps, 
and Request for Comments, Release No. 34-61119 (Dec. 4, 2009), 74 FR 
65554 (Dec. 10, 2009); Order Extending Temporary Exemptions under 
the Securities Exchange Act of 1934 in Connection with Request of 
ICE Trust U.S. LLC Related to Central Clearing of Credit Default 
Swaps, and Request for Comments, Release No. 34-61662 (Mar. 5, 
2010), 75 FR 11589 (Mar. 11, 2010), and Order Extending and 
Modifying Temporary Exemptions under the Securities Exchange Act of 
1934 in Connection with Request of ICE Trust U.S. LLC Related to 
Central Clearing of Credit Default Swaps and Request for Comment, 
Release No. 34-63387 (Nov. 29, 2010), 75 FR 75502 (Dec. 3, 2010); 
and Order Granting Temporary Exemptions Under the Securities 
Exchange Act of 1934 in Connection with Request of LIFFE 
Administration and Management and LCH.Clearnet Ltd. Related to 
Central Clearing Of Credit Default Swaps, and Request for Comments, 
Release No. 34-59164 (Dec. 24, 2008), 74 FR 139 (Jan. 2, 2009) 
(collectively, ``CDS Clearing Exemption Orders''). LIFFE A&M and 
LCH.Clearnet Ltd. allowed their order to lapse without seeking 
renewal.
    \29\ See Temporary Exemptions for Eligible Credit Default Swaps 
to Facilitate Operation of Central Counterparties to Clear and 
Settle Credit Default Swaps, Release No. 33-8999 (Jan. 14, 2009), 74 
FR 3967 (Jan. 22, 2009) (``Temporary CDS Exemptions Release''). The 
interim final temporary rules exempted eligible credit default swaps 
from all provisions of the Securities Act, other than the Section 
17(a) anti-fraud provisions, the Exchange Act registration 
requirements, and the provisions of the Trust Indenture Act, 
provided certain conditions were met.
    \30\ See id. We extended the expiration date of the final 
temporary rules until July 16, 2011. See Extension of Temporary 
Exemptions for Eligible Credit Default Swaps to Facilitate Operation 
of Central Counterparties to Clear and Settle Credit Default Swaps, 
Release No. 33-9158 (Nov. 19, 2010), 75 FR 72660 (Nov. 26, 2010).
    \31\ See Exemption for Standardized Options From Provisions of 
the Securities Act of 1933 and From the Registration Requirements of 
the Securities Exchange Act of 1934, Release No. 33-8171 (Dec. 23, 
2002), 68 FR 1 (Jan. 2, 2003) (``Standardized Options Release'').
---------------------------------------------------------------------------

    The rules proposed in this release are intended to further the goal 
of central clearing of security-based swaps by providing exemptions for 
the issuance of security-based swaps in connection with novation by a 
registered or exempt clearing agency functioning as a CCP from certain 
regulatory provisions that might otherwise interfere with such clearing 
activities. Without an exemption, a clearing agency functioning as a 
CCP would be required to register the security-based swap transaction, 
which could unnecessarily impede the central clearing of security-based 
swaps.\32\ In addition, the clearing agency would be subject to 
Exchange Act registration and reporting requirements, and to the 
requirements of the Trust Indenture Act. We believe that the proposed 
exemptions from the Securities Act, Exchange Act, and Trust Indenture 
Act are necessary to facilitate the intent of the Dodd-Frank Act with 
respect to mandatory clearing of security-based swaps. As noted above, 
these proposed exemptions are similar to the exemptions we adopted for 
eligible CDS and standardized options, as well as the exemptions that 
are provided in the Securities Act and the Exchange Act for security 
futures products. In addition to our interest in facilitating clearing 
of security-based swaps, we believe that security-based swaps can be 
used for financial purposes similar to those served by standardized 
options and security futures products, and thus we believe that it is 
appropriate to establish comparable regulatory treatment for security-
based swaps. By doing so, we believe that the proposed exemptions would 
allow for economically similar regulatory treatment under the 
Securities Act and Exchange Act.\33\
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    \32\ In addition, because the novation generally occurs after 
the counterparties have agreed to enter into the bilateral security-
based swap being novated the investment decision by the 
counterparties already has occurred.
    \33\ Standardized options and security futures products are only 
traded on a national securities exchange and thus are subject to 
listing standards. This differs from the regulatory treatment of 
security-based swaps under the provisions of the Dodd-Frank Act, 
which provide that a security-based swap may be cleared by the 
clearing agency but does not require such security-based swap to be 
traded on a national securities exchange. We note, however, that 
security-based swap transactions must be registered under the 
Securities Act and traded on an exchange if offered or sold to non-
eligible contract participants. See Public Law 111-203 Sec.  768(b) 
(adding Securities Act Section 5(d)) and Public Law 111-203 Sec.  
763(e) (adding Exchange Act Section 6(l)).
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II. Discussion of the Proposed Rules and Amendments

    We are proposing rules and amendments to existing rules 
(collectively, ``proposed rules'') to provide certain exemptions under 
the Securities Act, the Exchange Act, and the Trust Indenture Act for 
security-based swaps issued by clearing agencies functioning as CCPs.

A. Securities Act Rule 239

    We are proposing Securities Act Rule 239 to exempt the offer and 
sale of security-based swaps that are or will be issued to eligible 
contract participants by, and in a transaction involving, a clearing 
agency that is registered under Section 17A of the Exchange Act \34\ or 
exempt from such registration \35\ by rule, regulation or order of the 
Commission (``registered or exempt clearing agency'') in its function 
as a CCP, from all provisions of the Securities Act, except the anti-
fraud provisions of Section 17(a), subject to certain conditions.\36\ 
Thus, proposed Securities Act Rule 239 will permit the offer and sale 
of security-based swaps to eligible contract participants that are or 
will be issued by, and in a transaction involving, a registered or 
exempt clearing agency in its function as a CCP without requiring 
compliance with Section 5 of the Securities Act.\37\
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    \34\ Section 763(b) of the Dodd-Frank Act provides that certain 
security-based swap clearing agencies will be deemed registered as 
clearing agencies for the purpose of clearing security-based swaps. 
The deemed registered provision, which becomes effective on July 16, 
2011, applies if the entity is: (i) A depository institution that 
cleared swaps as a multilateral clearing organization before July 
21, 2010, or (ii) a derivatives clearing organization registered 
with the CFTC that cleared swaps pursuant to a clearing agency 
exemption of the Commission before July 21, 2010. Currently, four 
security-based swap clearing agencies have temporary conditional 
exemptions from clearing agency registration under Section 17A 
solely to perform the functions of a clearing agency for certain 
CDS. See CDS Clearing Exemption Orders.
    \35\ The Dodd-Frank Act contains provisions permitting the 
Commission to provide exemptions from clearing agency registration 
with respect to security-based swaps in limited instances. See 
footnote 42 below. The Commission has the authority to, jointly with 
the CFTC, prescribe regulations regarding mixed swaps as may be 
necessary to carry out the provisions of Title VII of the Dodd-Frank 
Act. The proposed rules would cover security-based swaps, including 
mixed swaps, issued by clearing agencies that the Commission 
specifically exempts from registration by rule, regulation, or 
order.
    \36\ 15 U.S.C. 77q. This exemption is similar to the Securities 
Act exemptions for standardized options and security futures 
products. See Securities Act Rule 238 [17 CFR 230.238] and Section 
3(a)(14) [15 U.S.C. 77c(a)(14)].
    \37\ The proposed exemption for the security-based swap 
transaction from Securities Act registration would not apply to any 
securities that may be delivered in settlement or payment of any 
obligations under the security-based swap (e.g. a physically settled 
credit default swap). With respect to such securities transactions, 
the parties to the security-based swap must either be able to rely 
on another exemption from the registration requirements of the 
Securities Act or must register such transaction. In evaluating the 
availability of an exemption from the Securities Act registration 
requirements, if such a security-based swap may be settled or paid 
through the delivery of a security, then the transaction in the 
underlying or referenced security will be considered to occur at the 
same time as the transaction in the related security-based swap. In 
this connection, we note that the Dodd-Frank Act amended Section 
2(a)(3) of the Securities Act to provide that security-based swaps 
could not be used by an issuer, its affiliates, or underwriters to 
circumvent the registration requirements of Securities Act Section 5 
with respect to the issuer's securities underlying the security-
based swap. As amended, Section 2(a)(3) provides that ``[a]ny offer 
or sale of a security-based swap by or on behalf of the issuer of 
the securities upon which such security-based swap is based or is 
referenced, an affiliate of the issuer, or an underwriter, shall 
constitute a contract for sale of, sale of, offer to for sale, or 
offer to sell such securities.'' As a result, such issuer, 
affiliate, or underwriter would have to comply with the registration 
requirements of the Securities Act with respect to such underlying 
or referenced security, unless another exemption from registration 
was available.
---------------------------------------------------------------------------

    For the reasons described below, under the proposed rule, the offer 
and sale of a security-based swap would be exempt from the provisions 
of the Securities Act, other than Section 17(a), if the following 
conditions are satisfied:
     The security-based swap is or will be issued by a clearing 
agency that is registered with us or exempt from such registration by 
rule, regulation or order of the Commission;
     The Commission has determined that the security-based swap 
is required to be cleared or the registered or exempt clearing agency 
is permitted to clear the security-based swap pursuant to its rules;
     The security-based swap is sold only to an eligible 
contract participant (as defined in Section 1a(18) of the Commodity 
Exchange Act) in a transaction involving the registered or exempt 
clearing agency in its function as a CCP with respect to the security-
based swap; \38\ and
---------------------------------------------------------------------------

    \38\ Eligible contract participant is defined in CEA Section 
1a(18) (as re-designated and amended by Section 721 of the Dodd-
Frank Act. See also Public Law 111-203, Sec.  761(a) (adding 
Exchange Act Section 3(a)(65), which refers to the definition of 
eligible contract participant in the CEA. The definition of eligible 
contract participant contained the CEA (as amended by the Dodd-Frank 
Act) includes: financial institutions; insurance companies; 
investment companies; other entities and employee benefit plans; 
State and local municipal entities; market professionals, such as 
broker dealers, futures commission merchants, floor brokers, and 
investment advisors; and natural persons with a specified dollar 
amount invested on a discretionary basis. For certain of the 
entities and market professionals, the definition also contains 
certain conditions relating to the amount of assets or amount of 
monies invested on a discretionary basis. For a complete description 
of the definition, see CEA Section 1a(18) and Section 721 of the 
Dodd-Frank Act.

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[[Page 34924]]

     For each security-based swap that would be offered or sold 
in reliance upon this exemption, the following information is included 
in an agreement covering the security-based swap the registered or 
exempt clearing agency provides to, or makes available to, its 
counterparty or is posted on a publicly available Web site maintained 
by the registered or exempt clearing agency:
     A statement identifying any security, issuer, loan, or 
narrow-based security index underlying the security-based swap;
     A statement indicating the security or loan to be 
delivered (or class of securities or loans), or if cash settled, the 
security, loan or narrow-based security index (or class of securities 
or loans) whose value is to be used to determine the amount of the 
settlement obligation under the security-based swap; and
     A statement of whether the issuer of any security or loan, 
each issuer of a security in a narrow-based security index, or each 
referenced issuer underlying the security-based swap is subject to the 
reporting requirements of Exchange Act Section 13 or Section 15(d) and, 
if not subject to such reporting requirements, whether public 
information, including financial information, about any such issuer is 
available and where the information is available.
    We believe that the proposed rule exempting offers and sales of 
such security-based swaps by a registered or exempt clearing agency in 
its function as a CCP will further the goal in the Dodd-Frank Act of 
central clearing of security-based swaps. Without exempting the offers 
and sales of such security-based swaps by a registered or exempt 
clearing agency in its function as a CCP from the Securities Act (other 
than Section 17(a)), we believe that a registered or exempt clearing 
agency may not be able to clear security-based swaps in the manner 
contemplated by the Dodd-Frank Act and our proposed rules implementing 
its provisions. Further, we believe that with the above conditions, an 
exemption from the Securities Act is necessary and appropriate in the 
public interest and consistent with the protection of investors.\39\
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    \39\ We believe that if the conditions to the proposed exemption 
are satisfied, then the protections provided for in the exemption 
for security futures arising from the requirement for exchange 
trading, such as compliance with the statutory listing standards, 
are not needed here. See Section 6(h) of the Exchange Act [15 U.S.C. 
78f(h)]. Unlike security future products that may be purchased by 
any person, security-based swaps issued by a registered or exempt 
clearing agency in its function as a CCP may only be entered into by 
eligible contract participants (unless the security-based swap 
transaction is on a national securities exchange and there is an 
effective registration statement under the Securities Act covering 
transactions in such security-based swap). See Public Law 111-203, 
Sec.  763(e) (adding Exchange Act Section 6(l)) and Sec.  768(b) 
(adding Securities Act Section 5(d)).
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Request for Comment
    1. Should we provide an exemption from the provisions of the 
Securities Act, other than the antifraud provisions of Section 17(a), 
for the offer and sale of security-based swaps that are or will be 
issued to eligible contract participants by, and in a transaction 
involving, a registered or exempt clearing agency in its function as a 
CCP? Why or why not?
    2. If we provide an exemption, are the proposed conditions to the 
exemption appropriate? Why or why not? Are there additional or 
different conditions that we should impose? Should we require more 
specificity as to the terms of the security-based swaps?
1. Registered or Exempt Clearing Agency Issuing Security-Based Swaps in 
Its Function as a CCP
    The proposed Securities Act exemption would apply only to offers 
and sales of security-based swaps that are or will be issued by, and in 
a transaction involving, a clearing agency in its function as a CCP 
that is either registered with us or exempt from such registration by 
rule, regulation or order of the Commission. Registered clearing 
agencies are regulated by us under the Exchange Act and must comply 
with the standards in Exchange Act Section 17A.\40\ The activities of 
such clearing agencies relating to the clearing or submission for 
clearing of security-based swaps are subject to regulation under the 
Exchange Act and applicable rules thereunder.\41\ The proposed rule 
also would be available for security-based swaps that are issued by a 
clearing agency that we have exempted from registration with us by 
rule, regulation, or order, subject to such terms and conditions 
contained in any exemption.\42\ We believe it is appropriate to make 
the proposed Securities Act exemption available to security-based swaps 
issued by exempt clearing agencies because in granting an exemption the 
Commission could impose conditions to the availability of the exemption 
that would provide protection to investors.
---------------------------------------------------------------------------

    \40\ 15 U.S.C. 78q-1. See also discussion in Mandatory Clearing 
Proposing Release.
    \41\ Id.
    \42\ Section 763(b) of the Dodd-Frank Act amended the Exchange 
Act and added Section 17(k), which provides that ``[t]he Commission 
may exempt, conditionally or unconditionally, a clearing agency from 
registration under this section for the clearing of security-based 
swaps if the Commission determines that the clearing agency is 
subject to comparable, comprehensive supervision and regulation by 
the Commodity Futures Trading Commission or the appropriate 
government authorities in the home country of the agency. Such 
conditions may include, but are not limited to, requiring that the 
clearing agency be available for inspection by the commission and 
make available all information requested by the Commission.'' Thus, 
although we have the authority under the Exchange Act, as amended by 
the Dodd-Frank Act, to provide exemptions from clearing agency 
registration, our authority to grant an exemption from registration 
for clearing agencies that clear security-based swaps is more 
limited than it is for other clearing agencies.
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    The proposed exemption would only apply to the extent the clearing 
agency will issue or is issuing the security-based swap in its function 
as a CCP and will apply to transactions involving such clearing 
agency.\43\ We note that a clearing agency's role as a CCP and an 
issuer of security-based swaps is similar to a clearing agency's role 
with respect to standardized options.\44\ We believe that a clearing 
agency's role as a CCP for security-based swaps, similar to a clearing 
agency's role with respect to standardized options, is fundamentally 
different from a conventional issuer that registers transactions in its 
securities under the Securities Act. For example, the purchaser of a 
security-based swap does not, except in the most formal sense, make an 
investment decision regarding the clearing agency.\45\ Rather, the 
security-based swap investment decision is based on the referenced 
security, loan, narrow-based security index, or issuer. In this 
circumstance, coupled with the other conditions to the

[[Page 34925]]

proposed exemption, we do not believe that Securities Act registration 
of the offer and sale of security-based swaps by a clearing agency in 
its function as a CCP to eligible contract participants is necessary.
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    \43\ As we noted above, when functioning as a CCP, a clearing 
agency's creditworthiness and liquidity are substituted for the 
creditworthiness and liquidity of the original counterparties. See 
footnote 19 above and accompanying text.
    \44\ See Standardized Options Release.
    \45\ We note, however, that a member or other user of a clearing 
agency may have an interest in the financial condition of the 
clearinghouse because the member or user will be relying on the 
ability of the clearinghouse to meet its obligations with respect to 
cleared transactions. Registered clearing agencies are required to 
make their audited financial statements and other information about 
themselves publicly available. See 15 U.S.C. 78j(b).
---------------------------------------------------------------------------

Request for Comment
    3. Is the proposed exemption appropriately conditioned on the 
registered or exempt clearing agency issuing the security-based swap in 
its function as a CCP? Why or why not? Should there be a distinction 
between registered and exempt clearing agencies for this purpose?
 2. Security-Based Swaps the Commission Determines Are Required To Be 
Cleared or That a Clearing Agency Is Permitted To Clear Pursuant to Its 
Rules
    We recently proposed rules to implement the provisions of the Dodd-
Frank Act regarding mandatory and voluntary clearing of security-based 
swaps, or groups, categories, or types or classes of security-based 
swaps.\46\ Our proposed rules would establish procedures for a clearing 
agency to submit for a review the security-based swap, or group, 
category, type or class of security-based swap, that the clearing 
agency plans to accept for clearing. As proposed, we would review the 
submission and make a determination of whether the security-based swap, 
or group, category, type or class of security-based swap, is required 
to be cleared.\47\
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    \46\ See Mandatory Clearing Proposing Release.
    \47\ See Mandatory Clearing Proposing Release. For those 
security-based swaps that are submitted and not required to be 
cleared, the clearing agency in its function as a CCP may still 
clear those security-based swaps if it is permitted by its rules.
---------------------------------------------------------------------------

    Consistent with the purposes of the Dodd-Frank Act, our proposed 
exemption is intended to facilitate clearing of security-based swaps 
that the Commission determines are subject to mandatory clearing, or 
that are permitted to be cleared pursuant to the clearing agency's 
rules. Consequently, under proposed Rule 239, a registered or exempt 
clearing agency would be entitled to rely on the exemption to issue, in 
its function as a CCP, security-based swaps that we determine are 
required to be cleared. In addition, the exemption would be available 
to a registered or exempt clearing agency issuing a security-based 
swap, in its function as a CCP, that is not subject to mandatory 
clearing but is permitted to be cleared pursuant to the clearing 
agency's rules. The proposed exemption would not be available for 
security-based swaps issued by a registered or exempt clearing agency 
in its function as a CCP that are not required to be cleared or 
permitted by its rules to be cleared.
    The Dodd-Frank Act also provides that if a security-based swap is 
subject to the mandatory clearing requirement, it must be traded on an 
exchange or a registered or exempt security-based SEF, unless no 
security-based SEF makes such security-based swap available for 
trading.\48\ Thus, it is possible that a security-based swap could be 
subject to mandatory clearing without being traded on an exchange or 
security-based SEF. Proposed Rule 239 would be available for security-
based swaps that are subject to the mandatory clearing requirement or 
are permitted to be cleared pursuant to the clearing agency's 
rules,\49\ regardless of whether such security-based swaps also are 
traded on a national securities exchange or through a security-based 
SEF.\50\ We believe that if the conditions to the proposed exemption 
are satisfied, then the protections provided for in the analogous 
exemption for security futures arising from the requirement for 
exchange trading, such as compliance with the statutory listing 
standards, are not needed here. Unlike security future products that 
may be purchased by any person, under the Dodd-Frank Act security-based 
swaps may only be offered and sold to eligible contract participants 
either pursuant to an exemption from the registration requirements of 
the Securities Act and in transactions not effected on a national 
securities exchange or in registered offerings effected on a national 
securities exchange. No offers or sales of security-based swaps may be 
made to non-eligible contract participants unless there is an effective 
registration statement under the Securities Act covering transactions 
in such security-based swap \51\ and any security-based swap 
transaction with a non-eligible contract participant must be effected 
on a national securities exchange.\52\ As a result, security-based 
swaps issued by a registered or exempt clearing agency in its function 
as a CCP may only be offered and sold to eligible contract 
participants, unless there is an effective registration statement and 
the transaction is on a national securities exchange. Thus, because 
only eligible contract participants may enter into the security-based 
swaps not traded on a national securities exchange, we do not believe 
it is necessary to condition the exemption on whether the security-
based swap is traded on a national securities exchange. In addition, 
including such a provision could frustrate the goals of the provisions 
of the Dodd-Frank Act because the Dodd-Frank Act did not restrict 
transactions with eligible contract participants to transactions on 
national securities exchanges. Consequently, the proposed exemption 
does not include such a requirement.
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    \48\ Exchange Act Section 3C(h) specifies that transactions in 
security-based swaps that are subject to the clearing requirement of 
Exchange Act Section 3C(a)(1) must be executed on an exchange or on 
a security-based SEF registered with us (or a security-based SEF 
exempt from registration), unless no exchange or security-based SEF 
makes the security-based swap available to trade or the security-
based swap transaction is subject to the clearing exception in 
Exchange Act Section 3C(g). See Public Law 111-203, Sec.  763 
(adding Section 3C(h) of the Exchange Act) Exchange Act Section 
3D(e) allows the Commission to exempt a security-based SEF from 
registration if the Commission finds that the security-based SEF is 
subject to comparable comprehensive supervision and regulation on a 
consolidated basis by the CFTC.
    \49\ The exemption would be limited to security-based swaps 
issued by and in a transaction involving a registered or exempt 
clearing agency in its function as a CCP.
    \50\ See Registration and Regulation of Security-Based Swap 
Execution Facilities, Release No. 34-63825 (Feb. 2, 2011), 76 FR 
10948 (Feb. 28, 2011). In this regard, we note that a security-based 
swap may be required or permitted to be cleared, but neither a 
national securities exchange nor a security-based SEF may make the 
security-based swap available for trading.
    \51\ See Public Law 111-203, Sec.  768(b) (adding Securities Act 
Section 5(d)).
    \52\ See Public Law 111-203, Sec.  763(e) (adding Exchange Act 
Section 6(l)).
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Request for Comment
    4. Should we condition the availability of the exemption on the 
security-based swap being subject to the mandatory clearing 
requirement, or being permitted to be cleared pursuant to the clearing 
agency's rules, as proposed?
    5. Should the exemption be limited to security-based swaps that are 
subject to the mandatory clearing requirement, and not include those 
that are permitted to be cleared?
    6. Should the exemption be available to security-based swaps that 
are not traded on an exchange or a security-based SEF, as proposed?
3. Sales Only to Eligible Contract Participants
    Under the Dodd-Frank Act, only an eligible contract participant may 
enter into security-based swaps other than on a national securities 
exchange.\53\ In addition, security-based swaps that are not registered 
pursuant to the Securities Act can only be sold to eligible contract

[[Page 34926]]

participants.\54\ New Section 5(d) of the Securities Act specifically 
provides that it is unlawful to offer to buy, purchase, or sell a 
security-based swap to any person that is not an eligible contract 
participant, unless the transaction is registered under the Securities 
Act.\55\ Given that Congress determined it is appropriate to limit the 
availability of registration exemptions under the Securities Act to 
eligible contract participants, we believe it is appropriate to limit 
the proposed Securities Act exemption to security-based swaps entered 
into with eligible contract participants.
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    \53\ See also Public Law 111-203, Sec.  763(e) (adding Exchange 
Act Section 6(l)) .
    \54\ See Public Law 111-203, Sec.  768(b) (adding Securities Act 
Section 5(d)).
    \55\ See Section 768(b) of the Dodd-Frank Act (adding new 
Securities Act Section 5(d)) (``Notwithstanding the provisions of 
section 3 or 4, unless a registration statement meeting the 
requirements of section 10(a) is in effect as to a security-based 
swap, it shall be unlawful for any person, directly or indirectly, 
to make use of any means or instruments of transportation or 
communication in interstate commerce or of the mails to offer to 
sell, offer to buy or purchase or sell a security-based swap to any 
person who is not an eligible contract participant as defined in 
section 1a(18) of the Commodity Exchange Act (7 U.S.C. 1a(18)).'').
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Request for Comment
    7. Should we limit the Securities Act exemption to transactions 
with eligible contract participants, as proposed?
4. Disclosures Relating to the Security-Based Swaps
    The proposed rule would require the registered or exempt clearing 
agency to disclose, either in its agreement regarding the security-
based swap or on its publicly available Web site, certain information 
with respect to the security-based swap. This information would include 
the following:
     A statement identifying any security, issuer, loan, or 
narrow-based security index underlying the security-based swap;
     A statement indicating the security or loan to be 
delivered (or class of securities or loans), or if cash settled, the 
security, loan, or narrow-based security index (or class of securities 
or loans) whose value is to be used to determine the amount of the 
settlement obligation under the security-based swap; and
     A statement of whether the issuer of any security or loan, 
each issuer of a security in a narrow-based security index, or each 
referenced issuer underlying the security-based swap is subject to the 
reporting requirements of Exchange Act Section 13 or Section 15(d) and, 
if not subject to such reporting requirements, whether public 
information, including financial information, about any such issuer is 
available, and, if so, the location where the information is available.

The purpose of the proposed requirement relating to the availability of 
information is to inform investors about whether there is publicly 
available information about the issuer of the referenced security or 
the referenced issuer.\56\ We are not proposing to condition the 
exemption on whether the issuer is subject to Exchange Act reporting or 
whether there is publicly available financial information about such 
issuer. As noted above, the proposed exemption for offers and sales of 
security-based swaps issued by, and in a transaction involving, a 
registered or exempt clearing agency in its function as a CCP would be 
limited to security-based swaps entered into with an eligible contract 
participant. The Dodd-Frank Act did not restrict eligible contract 
participants' ability to enter into security-based swaps based on 
whether or not there is publicly-available information about the issuer 
of the referenced security or loan or the referenced issuer.\57\ As a 
result, and in light of the nature of the other regulatory 
safeguards,\58\ we are not proposing to condition the proposed 
exemption on the actual availability or delivery of such information. 
While the Dodd-Frank Act does not condition clearing of security-based 
swaps on the availability of such information, we believe it is 
important for eligible contract participants to understand whether such 
information is publicly available. The availability (or absence) of 
public information is generally important to eligible contract 
participants and the registered or exempt clearing agency in evaluating 
and pricing the security-based swap. Therefore, our proposed rule would 
require disclosure about whether such information is available.

    \56\ For issuers that are not subject to Exchange Act reporting 
requirements, the following are some non-exclusive examples of 
issuers that may have information publicly available, including 
financial information about the issuer, or circumstances in which 
public information about a security may be available: (1) An entity 
that voluntarily files Exchange Act reports; (2) an entity that 
makes Securities Act Rule 144(d)(4) information available to any 
person; (3) a foreign private issuer whose securities are listed 
outside the United States; (4) a foreign sovereign issuer with 
outstanding debt; (5) for periods before July 21, 2010 an asset-
backed security issued in a registered transaction with publicly 
available distribution reports (for periods after July 21, 2010, 
asset-backed issuers will continue to be subject to reporting); and 
(6) 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'').
    \57\ We note that eligible contract participants may enter into 
security-based swaps on a bilateral basis in reliance on an 
available exemption from the registration requirements of the 
Securities Act. The proposed exemption in this release to facilitate 
clearing of security-based swaps does not apply to these bilateral 
transactions.
    \58\ As part of the process for submitting security-based swaps 
to us for a determination of whether such security-based swaps are 
subject to mandatory clearing, the Dodd-Frank Act requires us to 
take into account several factors, such as the existence of 
significant outstanding notional exposures, trading liquidity, and 
adequate pricing data, when reviewing a submission to clear 
security-based swaps by a clearing agency. Much of the information 
that the registered or exempt clearing agency will be required to 
include in its agreement or on its Web site, as a condition to the 
proposed exemption, likely will already be included in the 
description of the security-based swaps that the clearing agency 
identifies publicly that it is going to clear. In addition to the 
security-based swap submission provisions, the Dodd-Frank Act and 
the rules proposed under the Act relating to reporting requirements, 
trade acknowledgments and verification, and business conduct would 
require certain disclosures relating to security-based swaps, some 
of which would overlap with the information requirement we are 
proposing. See, e.g., Mandatory Clearing Proposing Release and Trade 
Acknowledgment and Verification of Security-Based Swap Transactions, 
Release No. 34-63727 (Jan. 14, 2011), 76 FR 3859 (Jan. 21, 2011) 
(``Trade Acknowledgement and Verification Proposing Release'').
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    If the issuer of the referenced security or loan or the referenced 
issuer is not subject to Exchange Act reporting, but there is publicly 
available information about the issuer, the clearing agency would be 
required under the proposal to disclose that fact and disclose where 
the information is available. This disclosure could include, for 
example, a statement that the issuer is listed on a particular foreign 
exchange and where information about issuers on such exchange can be 
found.
    Under our proposal, the required information could be provided in 
the agreement covering the security-based swap the registered or exempt 
clearing agency provides or makes available to the counterparty or on a 
publicly available Web site maintained by the clearing agency. We 
understand that master agreements and related schedules for security-
based swaps generally contain detailed information about the terms of 
the security-based swaps.\59\ In addition, each registered

[[Page 34927]]

clearing agency is required to post and maintain a current and complete 
version of its rules on its Web site. Thus, we believe that parties 
engaging in security-based swaps transactions would be familiar with 
looking to the agreements or a clearing agency's Web site to obtain 
information. Given that clearing agencies generally provide information 
in agreements and maintain publicly available Web sites, we believe 
that providing the information we are proposing be required to be 
disclosed in the agreement for the security-based swap or on the 
clearing agency's publicly available Web site would not pose 
significant burdens for clearing agencies.
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    \59\ In addition, under the rules proposed in the Trade 
Acknowledgement and Verification Proposing Release and Regulation 
SBSR--Reporting and Dissemination of Security-Based Swap 
Information, Release No. 63346 (Nov. 19, 2010), 75 FR 75207 (Dec. 2, 
2010) (``SBSR Proposing Release''), which were proposed under the 
Dodd-Frank Act and for which action has not yet been taken with 
respect to final rules, the information that would be required to be 
reported to the security-based swap data repository includes the 
basic terms of the security-based swap: the asset class of the 
security-based swap, identification of the security-based swap 
instrument and the specific asset(s) or issuer of a security on 
which the security-based swap is based; the notional amount(s), and 
the currenc(ies) in which the notional amount(s) is expressed; the 
date and time of execution, and the effective date and scheduled 
termination date; the price; the terms of any fixed or floating rate 
payments, and the frequency of any payments; the amount(s) and 
currenc(ies) of any up-front payment(s) and a description of the 
terms and contingencies of the payment streams of each counterparty 
to the other; the title of any master agreement, or any other 
agreement governing the transaction (including the title of any 
document governing the satisfaction of margin obligations), 
incorporated by reference and the date of any such agreement; and 
the data elements necessary for a person to determine the market 
value of the transaction. To the extent we adopt these or similar 
information reporting requirements, the parties to the security-
based swap transaction would have to know detailed information about 
the terms of the security-based swap transaction to comply with the 
reporting requirements.
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Request for Comment
    8. Should we require a registered or exempt clearing agency to 
provide or make available information about the security-based swap it 
will issue, as proposed?
    9. Is the proposed requirement that a registered or exempt clearing 
agency indicate whether there is public information available about the 
referenced issuer or security upon which the security-based swap is 
based appropriate? If not, why not?
    10. Should we require a registered or exempt clearing agency to 
provide or make available any additional or different information? Are 
any of the proposed disclosures unnecessary?
    11. Should the exemption be limited to circumstances where the 
security-based swap relates to an Exchange Act reporting issuer?
    12. Should we require, as proposed, that if the issuer is not an 
Exchange Act reporting company but there is publicly available 
information, that the location of that information be disclosed?
    13. Should we provide the alternatives of including the disclosure 
in the agreement covering the security-based swap or on the clearing 
agency's publicly available Web site, as proposed? Should we require 
that all agreements include the information, or, alternatively, require 
the information to be posted on the clearing agency's publicly 
available Web site in any case? As another alternative, should we 
require that the information be made available to clearing members and 
eligible contract participants rather than require that the information 
be publicly available? Will the registered or exempt clearing agency 
already provide some or all of the proposed disclosures on its Web 
site? If so, what information? Is the information proposed to be 
required to be provided publicly available from sources other than the 
registered or exempt clearing agency? If so, where?

B. Exchange Act Rule 12a-10 and Rule 12h-1(h)

    Section 12(a) of the Exchange Act makes it unlawful for any broker 
or dealer to effect a transaction in a non-exempt security on a 
nation