Order Granting Temporary Exemptions Under the Securities Exchange Act of 1934 in Connection With the Pending Revision of the Definition of “Security” To Encompass Security-Based Swaps, and Request for Comment, 39927-39940 [2011-17040]
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Federal Register / Vol. 76, No. 130 / Thursday, July 7, 2011 / Notices
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1. Evaluate whether the proposed
collection of information is necessary
for the proper performance of functions
of the agency, including whether the
information will have practical utility;
2. Evaluate the accuracy of the
agency’s estimate of the burden of the
proposed collection of information,
including the validity of the
methodology and assumptions used;
3. Enhance the quality, utility, and
clarity of the information to be
collected; and
4. Minimize the burden of the
collection of information on those who
are to respond, including through the
use of appropriate automated,
electronic, mechanical, or other
technological collection techniques or
other forms of information technology,
e.g., permitting electronic submissions
of responses.
DATES: Comments are encouraged and
will be accepted until September 6,
2011. This process is conducted in
accordance with 5 CFR 1320.1.
ADDRESSES: Interested persons are
invited to submit written comments on
the proposed information collection to
U.S. Office of Personnel Management,
Linda Bradford (Acting), Deputy
Associate Director, Retirement
Operations, Retirement Services, 1900 E
Street, NW., Room 3305, Washington,
DC 20415–3500, or sent via electronic
mail to Martha.Moore@opm.gov.
FOR FURTHER INFORMATION CONTACT: A
copy of this ICR, with applicable
supporting documentation, may be
obtained by contacting the Retirement
Services Publications Team, Office of
Personnel Management, 1900 E Street,
NW., Room 4332, Washington, DC
20415, Attention: Cyrus S. Benson or
sent via electronic mail to
Cyrus.Benson@opm.gov or faxed to
(202) 606–0910.
SUPPLEMENTARY INFORMATION: SF 2800,
Application for Death Benefits under
the Civil Service Retirement System, is
needed to collect information so that
OPM can pay death benefits to the
survivors of Federal employees and
annuitants. SF 2800A, Documentation
and Elections in Support of Application
for Death Benefits When Deceased Was
an Employee at the Time of Death, is
needed for deaths in service so that
survivors can make the needed elections
regarding military service.
Analysis
Agency: Retirement Operations,
Retirement Services, Office of Personnel
Management.
Title: Application for Death Benefits
Under the Civil Service Retirement
System and Documentation and
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Elections in Support of Application for
Death Benefits When Deceased Was an
Employee at the Time of Death.
OMB Number: 3206–0156.
Frequency: On occasion.
Affected Public: Individuals or
Households.
Number of Respondents: SF 2800 =
68,000 and SF 2800A = 6,800.
Estimated Time per Respondent: 45
minutes.
Total Burden Hours: 56,100.
U.S. Office of Personnel Management.
John Berry,
Director.
[FR Doc. 2011–17080 Filed 7–6–11; 8:45 am]
BILLING CODE 6325–38–P
OFFICE OF PERSONNEL
MANAGEMENT
Submission for Review: Marital Status
Certification Survey, RI 25–7
U.S. Office of Personnel
Management.
ACTION: 60-Day Notice and request for
comments.
AGENCY:
The Retirement Services,
Office of Personnel Management (OPM)
offers the general public and other
federal agencies the opportunity to
comment on a revised information
collection request (ICR) 3206–0033,
Marital Status Certification Survey. As
required by the Paperwork Reduction
Act of 1995 (Pub. L. 104–13, 44 U.S.C.
chapter 35) as amended by the ClingerCohen Act (Pub. L. 104–106), OPM is
soliciting comments for this collection.
The Office of Management and Budget
is particularly interested in comments
that:
1. Evaluate whether the proposed
collection of information is necessary
for the proper performance of functions
of the agency, including whether the
information will have practical utility;
2. Evaluate the accuracy of the
agency’s estimate of the burden of the
proposed collection of information,
including the validity of the
methodology and assumptions used;
3. Enhance the quality, utility, and
clarity of the information to be
collected; and
4. Minimize the burden of the
collection of information on those who
are to respond, including through the
use of appropriate automated,
electronic, mechanical, or other
technological collection techniques or
other forms of information technology,
e.g., permitting electronic submissions
of responses.
DATES: Comments are encouraged and
will be accepted until September 6,
SUMMARY:
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39927
2011. This process is conducted in
accordance with 5 CFR 1320.1.
ADDRESSES: Interested persons are
invited to submit written comments on
the proposed information collection to
U.S. Office of Personnel Management,
Linda Bradford (Acting), Deputy
Associate Director, Retirement
Operations, Retirement Services, 1900 E
Street, NW., Room 3305, Washington,
DC 20415–3500, or sent via electronic
mail to Martha.Moore@opm.gov.
FOR FURTHER INFORMATION CONTACT: A
copy of this ICR, with applicable
supporting documentation, may be
obtained by contacting the Retirement
Services Publications Team, Office of
Personnel Management, 1900 E Street,
NW., Room 4332, Washington, DC
20415, Attention: Cyrus S. Benson or
sent via electronic mail to
Cyrus.Benson@opm.gov or faxed to
(202) 606–0910.
SUPPLEMENTARY INFORMATION: RI 25–7,
Marital Status Certification Survey, is
used to determine whether widows,
widowers, and former spouses receiving
survivor annuities from OPM have
remarried before reaching age 55 and,
thus, are no longer eligible for benefits.
Analysis
Agency: Retirement Operations,
Retirement Services, Office of Personnel
Management.
Title: Marital Status Certification
Survey.
OMB Number: 3206–0033.
Frequency: On occasion.
Affected Public: Individuals or
Households.
Number of Respondents: 24,000.
Estimated Time per Respondent: 15
minutes.
Total Burden Hours: 6,000.
U.S. Office of Personnel Management.
John Berry,
Director.
[FR Doc. 2011–17078 Filed 7–6–11; 8:45 am]
BILLING CODE 6325–38–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–64795; File No. S7–27–11]
Order Granting Temporary Exemptions
Under the Securities Exchange Act of
1934 in Connection With the Pending
Revision of the Definition of ‘‘Security’’
To Encompass Security-Based Swaps,
and Request for Comment
Securities and Exchange
Commission.
ACTION: Exemptive order; request for
comment.
AGENCY:
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Federal Register / Vol. 76, No. 130 / Thursday, July 7, 2011 / Notices
The Securities and Exchange
Commission (‘‘Commission’’ or ‘‘SEC’’)
is issuing an order granting temporary
exemptive relief from compliance with
certain provisions of the Securities
Exchange Act of 1934 (‘‘Exchange Act’’)
in connection with the pending revision
of the Exchange Act definition of
‘‘security’’ to encompass security-based
swaps and is requesting comments on
the temporary relief granted.
DATES: This exemptive order is effective
July 1, 2011. Comments must be
received on or before July 15, 2011.
ADDRESSES: Comments may be
submitted, identified by File Number
S7–27–11, by any of the following
methods:
SUMMARY:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/other.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number S7–27–11 on the subject line;
or
• Use the Federal Rulemaking Portal
(https://www.regulations.gov). Follow the
instructions for submitting comments.
sroberts on DSK5SPTVN1PROD with NOTICES
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090. All submissions should
refer to File Number S7–27–11. 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. The Commission will post all
comments on the Commission’s Internet
Web site (https://www.sec/gov/rules/
other.shtml). Comments are also
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street, NE.,
Washington, DC 20549, on official
business days between the hours of 10
a.m. and 3 p.m. All comments received
will be posted without charge; the
Commission does not edit personal
identifying information from
submissions. You should only submit
information that you wish to make
publicly available.
FOR FURTHER INFORMATION CONTACT: In
general, Joshua Kans, Senior Special
Counsel, at (202) 551–5550; or Leah
Drennan, Attorney-Adviser, at (202)
551–5507; in connection with the
section 5 and 6 relief, Constance
Kiggins, Special Counsel, at (202) 551–
5701; Division of Trading and Markets,
Securities and Exchange Commission,
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100 F Street, NE., Washington, DC
20549–7010.
I. Introduction and Background
On July 21, 2010, President Barack
Obama signed the Dodd-Frank Wall
Street Reform and Consumer Protection
Act (‘‘Dodd-Frank Act’’) into law.1 Title
VII of the Dodd-Frank Act (‘‘Title VII’’)
establishes a regulatory regime
applicable to the over-the-counter
(‘‘OTC’’) derivatives markets by
providing the Commission and the
Commodity Futures Trading
Commission (‘‘CFTC’’) with the
authority to oversee these heretofore
largely unregulated markets.2 The DoddFrank Act provides that the CFTC will
regulate ‘‘swaps,’’ the SEC will regulate
‘‘security-based swaps,’’ and the CFTC
and the SEC jointly will regulate ‘‘mixed
swaps.’’ 3
Title VII amends the Securities
Exchange Act of 1934 4 (‘‘Exchange
Act’’) to substantially expand the
regulation of the security-based swap
markets, establishing a new regulatory
framework within which such markets
can continue to evolve in a more
transparent, efficient, fair, accessible,
and competitive manner. Among other
aspects, Title VII amends the Exchange
Act to add new provisions concerning
security-based swaps, including those
related to: clearing; execution facilities;
segregation requirements; antifraud
prohibitions; position limits; transaction
reporting; registration and regulation of
1 The Dodd-Frank Wall Street Reform and
Consumer Protection Act, Public Law 111–203, 124
Stat. 1376 (2010).
2 See generally Securities Exchange Act Release
No. 64678 (June 15, 2011) (‘‘Effective Date
Release’’).
3 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 (‘‘Federal Reserve’’), shall 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.’’ The Commission
and the CFTC jointly have proposed to further
define these terms. See Further Definition of
‘‘Swap,’’ ‘‘Security-Based Swap,’’ and ‘‘SecurityBased Swap Agreement’’; Mixed Swaps; SecurityBased Swap Agreement Recordkeeping, Securities
Act Release No. 9204, Securities Exchange Act
Release No. 64372 (Apr. 29, 2011), 76 FR 29818
(May 23, 2011); Further Definition of ‘‘Swap
Dealer,’’ ‘‘Security-Based Swap Dealer,’’ ‘‘Major
Swap Participant,’’ ‘‘Major Security-Based Swap
Participant’’ and ‘‘Eligible Contract Participant,’’
Securities Exchange Act Release No. 63452 (Dec. 7,
2010), 75 FR 80174 (Dec. 21, 2010).
Moreover, section 712(a)(8) of the Dodd-Frank
Act provides that the Commission and the CFTC,
after consultation with the Federal Reserve, shall
jointly promulgate such regulations regarding
mixed swaps as may be necessary to carry out the
purposes of Title VII. The Commission and the
CFTC have jointly proposed such regulations. See
76 FR 29818.
4 15 U.S.C. 78a et seq.
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security-based swap dealers and major
security-based swap participants; and
registration of clearing agencies that
clear security-based swaps.5
The Title VII amendments generally
are effective on July 16, 2011 (360 days
after the enactment of the Dodd-Frank
Act, referred to herein as the ‘‘Effective
Date’’), unless a provision requires a
rulemaking.6 The Commission recently
issued a release to provide guidance in
connection with the effectiveness of
Exchange Act provisions related to
security-based swaps added by subtitle
B of Title VII (which generally creates,
and relates to, the regulatory regime for
security-based swaps), and to provide
temporary exemptions and other relief
in connection with certain of those
provisions.7 Moreover, the Commission
has proposed conditional exemptions
under the Securities Act of 1933 8
(‘‘Securities Act’’), Exchange Act and
the Trust Indenture Act of 1939 9
(‘‘Trust Indenture Act’’) for securitybased swaps issued by certain clearing
agencies.10 Also, the Commission
intends to provide temporary
conditional exemptive relief for entities
that provide certain clearing services for
security-based swaps. In addition, the
Commission will take other actions to
address certain security-based swaps,
such as providing guidance regarding—
and where appropriate, temporary relief
from—the various pre-Dodd Frank Act
provisions that would otherwise apply
to security-based swaps on the Effective
Date, as well as extending existing
temporary rules under the Securities
Act, the Exchange Act, and the Trust
Indenture Act for certain security-based
swaps.11
This Order primarily addresses a
change that the Title VII amendments
will make to an already existing
definition in the Exchange Act.12
5 See generally Effective Date Release, note 2,
supra.
6 If a Title VII provision requires a rulemaking,
the provision will go into effect not less than 60
days after the publication of the related final rule
or on the Effective Date, whichever is later. See
Sections 754 and 774 of the Dodd-Frank Act.
7 Effective Date Release, note 2, supra.
8 15 U.S.C. 77a et seq.
9 15 U.S.C. 77aaa et seq.
10 See Exemptions for Security-Based Swaps
Issued by Certain Clearing Agencies, Securities Act
Release No. 9222, Securities Exchange Act Release
No. 64639, Trust Indenture Act Release No. 2474
(June 9, 2011). These proposed exemptions will not
be in place as of the Effective Date.
11 See SEC Announces Steps to Address One-Year
Effective Date of Title VII of Dodd-Frank Act,
available at https://www.sec.gov/news/press/2011/
2011-125.htm (June 10, 2011).
12 We also are providing guidance in connection
with part I of subtitle A of Title VII, which includes
certain provisions that relate to security-based
swaps or to the Commission specifically. See part
III, infra. The Exemptive Date Release addressed
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Specifically, as of the Effective Date, the
Exchange Act definition of ‘‘security’’
will expressly encompass security-based
swaps. 13 In making this change,
Congress intended for security-based
swaps to be treated as securities under
the Exchange Act and the underlying
rules and regulations. Nonetheless, this
expansion of the scope of the regulatory
provisions of the Exchange Act raises
certain complex issues of interpretation.
Absent additional time to analyze those
issues, and to consider whether to
provide interpretive or operational
guidance, these changes may lead to
unnecessary market uncertainty.14
As is discussed in more detail below,
we are addressing those issues in part
through a temporary exemption from
the application of the Exchange Act to
security-based swaps, subject to certain
exceptions to this exemption by which
specific Exchange Act provisions
nonetheless will apply to security-based
swaps. Separate exemptions within this
Order will address registered brokerdealers and exchange registration
requirements. The overall approach is
directed toward maintaining the status
quo during the implementation process
for the Dodd-Frank Act, by preserving
the application of particular Exchange
Act requirements that already are
applicable in connection with
instruments that will be ‘‘security-based
swaps’’ following the Effective Date, but
deferring the applicability of additional
Exchange Act requirements in
connection with those instruments
explicitly being defined as ‘‘securities’’
as of the Effective Date.
The revision of the Exchange Act’s
‘‘security’’ definition raises, among
other things, issues related to the
Exchange Act definition of ‘‘broker,’’ 15
subtitle B of Title VII, while part II of subtitle A
generally creates, and relates to, the regulatory
regime for swaps. See sections 721 through 754 of
the Dodd-Frank Act.
13 See Exchange Act section 3(a)(10), 15 U.S.C.
78c(a)(10), as revised by section 761 of the DoddFrank Act.
14 The Commission has received a request for
relief by a number of industry participants in
connection with the revised scope of the Exchange
Act (as well as in connection with the new
Exchange Act provisions we have addressed in the
Effective Date Release). See letter to the
Commission from the American Bankers
Association, Financial Services Roundtable, Futures
Industry Association, Institute of International
Bankers, International Swaps and Derivatives
Association, Investment Company Institute,
Securities Industry and Financial Markets
Association and U.S. Chamber of Commerce, dated
June 10, 2011 (‘‘Trade Association Letter’’).
15 In relevant part, a ‘‘broker’’ is defined as a
person ‘‘in the business of effecting transactions in
securities for the account of others.’’ See Exchange
Act section 3(a)(4), 15 U.S.C. 78c(a)(4). The DoddFrank Act did not modify this definition. As a
result, absent an exemption or other relief, a person
who meets this definition in connection with
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particularly with regard to which
activities (such as facilitating the central
clearing of security-based swaps for
customers) may lead to the requirement
to register as a broker. The revision of
the ‘‘security’’ definition also raises
interpretive issues in the context of the
Exchange Act definition of ‘‘dealer’’ in
that, following the Effective Date, the
definition of ‘‘dealer’’ under the
Exchange Act will exclude securitybased swap dealing activities only to the
extent that these activities are with
counterparties that constitute ‘‘eligible
contract participants.’’ 16 In other words,
while an entity’s security-based swap
activities involving eligible contract
participants cannot cause the entity to
be a ‘‘dealer’’ (though the entity may
otherwise be a ‘‘security-based swap
dealer’’), an entity’s activities involving
security-based swaps with
counterparties that are not eligible
contract participants could, depending
on the facts and circumstances, still
cause the entity to fall within the
‘‘dealer’’ definition. Separately, the
Dodd-Frank Act has revised the
definition of ‘‘eligible contract
participant,’’ 17 and some market
participants have raised concerns as to
the proper interpretation of the revised
‘‘eligible contract participant’’
definition, and hence the proper
interpretation of the new exclusion from
the ‘‘dealer’’ definition.18
The expansion of the ‘‘security’’
definition, and hence the expansion of
security-based swaps activities would be a broker
and would be subject to the registration and other
regulatory requirements applicable to brokers,
absent an exception or exemption.
16 As of the July 16 effectiveness of the DoddFrank Act amendments, the definition of ‘‘dealer’’
in Exchange Act Section 3(a)(5), 15 U.S.C. 78c(a)(5),
will incorporate, in relevant part, ‘‘any person
engaged in the business of buying and selling
securities (not including security-based swaps,
other than security-based swaps with or for persons
that are not eligible contract participants), for such
person’s own account.’’
At that time, the term ‘‘eligible contract
participant’’ will be incorporated into Exchange Act
section 3(a)(65), 15 U.S.C. 78c(a)(65), and will refer
to the definition of that term in section 1a of the
Commodity Exchange Act, 7 U.S.C. 1a.
17 Most significantly, the Dodd-Frank Act revised
paragraph (A)(xi) of the ‘‘eligible contract
participant’’ definition in the Commodity Exchange
Act (which the Exchange Act cross-references).
Prior to its amendment, one portion of that
definition encompassed individuals with ‘‘total
assets’’ in excess of $10 million (or $5 million in
the case of certain risk management agreements). As
revised, that portion of the ‘‘eligible contract
participant’’ definition instead will apply to
individuals with those same amounts ‘‘invested on
a discretionary basis.’’ See Commodity Exchange
Act section 1a(18)(A)(xi), 7 U.S.C. 1a(18)(A)(xi) (as
amended and redesignated by section 721(a)(9) of
the Dodd-Frank Act).
18 See Trade Association Letter, note 14, supra
(particularly citing issues as to the interpretation of
the term ‘‘discretionary basis’’ in the definition of
‘‘eligible contract participant’’).
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the scope of the regulatory provisions of
the Exchange Act to security-based
swaps, further raises other complex
questions of interpretation that could
warrant additional guidance by the
Commission. These include questions as
to how particular Exchange Act
requirements may apply to securitybased swap activities of registered
broker-dealers.19 We believe that it is
appropriate to provide market
participants with additional time to
consider the potential impact on their
businesses and the interpretive
questions raised, and to provide the
Commission with any related requests
for guidance or relief, along with the
underlying analysis.20 Also, as is
discussed below, application of the
exchange registration requirements of
sections 5 and 6 21 of the Exchange Act
to security-based swap activities will
not be practical until certain rulemaking
has been completed.22
In furtherance of the Dodd-Frank
Act’s stated objective of promoting
financial stability in the U.S. financial
system, the Commission intends to
move forward deliberately in
implementing the requirements of the
Dodd-Frank Act, while minimizing
unnecessary disruption and costs to the
markets. Those include the disruptions
and costs that may be expected to result
if, as of the Effective Date, existing
Exchange Act provisions were in
general deemed to apply to securitybased swap activities without additional
time to consider the potential impact of
the revision to the ‘‘security’’ definition.
Accordingly, for the reasons
discussed in this Order, the Commission
is granting temporary exemptive relief
that is necessary or appropriate in the
public interest, and consistent with the
protection of investors, from compliance
19 See id. (citing, among other aspects, issues
related to the application of certain margin and
customer protection rules to security-based swap
activities of registered broker-dealers).
20 In granting this relief, the Commission notes in
particular that the signatories to the Trade
Association Letter, note 14, supra, have represented
that within three months of the Effective Date they
will provide the Commission with a request for
permanent exemption from the application of
securities laws that they believe are particularly
inapposite in connection with security-based swap
activities. The signatories to that letter also
anticipated that Commission guidance would be
necessary with respect to some of the issues that
would arise from the change to the scope of the
Exchange Act.
The Commission expects that any industry
request for guidance or relief will also address
implementation issues related to the applicable
requirements. The Commission invites all
interested persons to submit views about whether
specific relief would be necessary or appropriate in
the public interest, and consistent with the
protection of investors.
21 15 U.S.C. 78e, 78f.
22 See parts II.C and II.D, infra.
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Federal Register / Vol. 76, No. 130 / Thursday, July 7, 2011 / Notices
with certain provisions of the Exchange
Act that otherwise would apply to
security-based swap activities as of the
Effective Date. Generally, section 36 of
the Exchange Act authorizes the
Commission to conditionally or
unconditionally exempt, by rule,
regulation, or order, any person,
security, or transaction (or any class or
classes of persons, securities, or
transactions) from any provision or
provisions of the Exchange Act or any
rule or regulation thereunder, to the
extent such exemption is necessary or
appropriate in the public interest, and is
consistent with the protection of
investors.23
The temporary exemptive relief we
are granting today in part combines an
exemption from the application of the
Exchange Act in connection with
security-based swaps with specific
exceptions from that exemption. As a
result of these exceptions, certain
provisions of the Exchange Act and
underlying rules and regulations will
apply to security-based swap activities.
For example, the instruments that
(after the Effective Date) will constitute
security-based swaps already are
generally subject to certain antifraud
and anti-manipulation provisions under
the Exchange Act. This is because those
instruments generally constitute
‘‘security-based swap agreements’’
under current law,24 and the Exchange
Act already provides that those securitybased swap agreements are subject to
certain specific antifraud and antimanipulation provisions (including
Exchange Act section 10(b)).25
Accordingly, under the exemption,
instruments that (before the Effective
Date) were security-based swap
agreements and (after the Effective Date)
constitute security-based swaps will
continue to be subject to the application
of those Exchange Act antifraud and
anti-manipulation provisions, as well as
Securities Act antifraud provisions,26
following the Effective Date. As
discussed below, the exemption also is
subject to certain other exceptions
which will provide for the application
of particular Exchange Act provisions to
security-based swap activities (e.g.,
‘‘broker’’ and ‘‘dealer’’ registration
provisions in certain circumstances, as
well as Commission authority to act
against broker-dealers and associated
persons).27
In addition, we are providing targeted
exemptive relief in connection with the
application of Exchange Act
requirements to registered brokerdealers,28 as well as in connection with
the exchange registration requirements
of Exchange Act sections 5 and 6.29 To
promote legal certainty, moreover, we
are providing temporary relief from the
rescission provisions of Exchange Act
section 29(b) 30 in connection with these
exemptions.31 Finally, we are providing
additional guidance in connection with
provisions of part I of subtitle A of Title
VII.32 The following tables summarize
the scope—and limitations—of the relief
we are granting (apart from the
Exchange Act section 29(b) relief and
the guidance related to part I of subtitle
A of Title VII):
PART II.A—EXCHANGE ACT PROVISIONS THAT WILL APPLY TO PERSONS ENGAGING IN SECURITY-BASED SWAP
ACTIVITIES NOTWITHSTANDING THE TEMPORARY EXEMPTION 33
Nature of provisions
Exchange Act sections
Antifraud and anti-manipulation .........................................
Paragraphs (2) through (5) of section 9(a), and sections 10(b), 15(c)(1), 20(d) and
21A(a)(1).34
15(a)(1), but only in connection with security-based swaps with counterparties that
are not eligible contract participants.35
15(a)(1), but only with regard to members of central counterparties holding customer
funds and securities in connection with security-based swaps.
Dealer registration requirements ........................................
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Broker registration requirements ........................................
23 15 U.S.C. 78mm. The Commission’s exemptive
authority under Exchange Act section 36 is not
available for certain specified provisions of the
Exchange Act added by Title VII that relate to
security-based swaps, see section 36(c) of the
Exchange Act, 15 U.S.C. 78mm(c). That limitation
does not apply to the provisions for which the
Commission is granting relief.
24 Under the existing (pre-Dodd-Frank)
framework, a ‘‘security-based swap agreement’’ is
defined as a ‘‘swap agreement’’ in which a material
term is based on the price, yield, value, or volatility
of any security or any group or index of securities,
or any interest therein. See section 206B of the
Gramm-Leach-Bliley Act. Under existing law,
moreover, the term ‘‘swap agreement’’ subsumes
certain types of agreements for which certain
‘‘material terms’’ are ‘‘subject to individual
negotiation.’’ See section 206A of the GrammLeach-Bliley Act. Thus, instruments that will be
‘‘security-based swaps’’ following the Effective Date
in general currently are ‘‘security-based swap
agreements’’ for purposes of the Exchange Act.
25 Currently (prior to amendment by the DoddFrank Act), the Exchange Act provides that
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instruments that meet the definition of ‘‘securitybased swap agreement’’ are subject to the following
antifraud and anti-manipulation provisions: (a)
Paragraphs (2) through (5) of Exchange Act section
9(a), 15 U.S.C. 78i(a), prohibiting the manipulation
of security prices; (b) Exchange Act section 10(b),
15 U.S.C. 78j(b), (c) Exchange Act section 15(c)(1),
15 U.S.C. 78o(c)(1), which prohibits brokers and
dealers from using manipulative or deceptive
devices; (d) Exchange Act section 20(d), 15 U.S.C.
78t(d), providing for antifraud liability in
connection with certain derivative transactions; and
(e) Exchange Act section 21A(a)(1), 15 U.S.C. 78u–
1(a)(1), related to the Commission’s authority to
impose civil penalties for insider trading violations.
In addition, Exchange Act sections 16(a) and (b), 15
U.S.C. 78p(a) and (b) specifically apply to securitybased swap agreements under current law.
Underlying rules prohibiting fraud, manipulation
and insider trading (such as Exchange Act rule 10b–
5, 17 CFR 240.10b–5, which prohibits the
employment of manipulative or deceptive devices),
also apply to security-based swap agreements.
However, as currently (prior to amendment by the
Dodd-Frank Act) provided by Exchange Act section
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3A, 15 U.S.C. 78c–1, as well as provided by
Exchange Act section 10(b), prophylactic reporting
or recordkeeping requirements (such as Exchange
Act rule 10b–10, 17 CFR 10b–10, regarding
confirmation of transactions) do not apply to
security-based swap agreements.
As of the Effective Date, Exchange Act antifraud
and insider trading provisions still will apply to
‘‘security-based swap agreements.’’ The definition
of ‘‘security-based swap agreement,’’ as revised by
the Dodd-Frank Act, however, will no longer
encompass those instruments that satisfy the
‘‘security-based swap’’ definition.
26 The antifraud provisions of Securities Act
section 17(a), 15 U.S.C. 77q(a), also apply to
‘‘security-based swap agreements’’ under current
law.
27 Also, as addressed below, the exemption does
not address certain other Exchange Act provisions.
28 See part II.B, infra.
29 See parts II.C and II.D, infra.
30 15 U.S.C. 78cc(b).
31 See part II.E, infra.
32 See part III, infra.
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39931
PART II.A—EXCHANGE ACT PROVISIONS THAT WILL APPLY TO PERSONS ENGAGING IN SECURITY-BASED SWAP
ACTIVITIES NOTWITHSTANDING THE TEMPORARY EXEMPTION 33—Continued
Nature of provisions
Exchange Act sections
Authority to take actions against broker-dealers and associated persons.
15(b)(4), 15(b)(6).
33 The general temporary exemption provided in this Order does not address the following additional provisions: securities registration, reporting, proxy, short-swing profits and related requirements (Exchange Act sections 12, 13, 14, 15(d) and 16); clearing agency registration requirements (Exchange Act section 17A); and certain provisions added by subtitle B of Title VII. We separately have addressed or are addressing certain of those other requirements in the context of security-based swaps. In addition, this exemption does not address certain provisions related to
government securities (Exchange Act sections 3(a)(42)–(45) and 15C). Exchange registration provisions are the subject of separate exemptions
in this Order. In particular, persons other than clearing agencies acting as central counterparties will be exempt from the exchange registration
requirements of Exchange Act sections 5 and 6 solely in connection with security-based swap activities, while broker-dealers effecting or reporting security-based swap transactions on those exempt exchanges will be exempt from Exchange Act section 5. In addition, three existing central
counterparties that clear CDS will be exempt from Exchange Act sections 5 and 6 (in connection with their ‘‘forced trade’’ procedures) subject to
certain conditions, and members that use those central counterparties’ clearance and risk management process to effect or report Cleared CDS
transactions will be exempt from section 5 unconditionally.
34 Underlying rules prohibiting fraud, manipulation or insider trading, such as Exchange Act rule 10b–5, also remain applicable (but not prophylactic reporting or recordkeeping requirements, such as Exchange Act rule 10b–10). This is consistent with the current application of antifraud
and anti-manipulation provisions to security-based swap agreements, as provided by Exchange Act sections 3A and 10(b) (which generally prohibit the application of ‘‘reporting or recordkeeping requirements, procedures, or standards as prophylactic measures against fraud, manipulation,
or insider trading’’ with respect to any security-based swap agreement’’). In addition, all provisions of the Exchange Act related to the Commission’s enforcement authority in connection with violations or potential violations of such provisions also remain applicable.
35 This will be based on whether a person is an ‘‘eligible contract participant’’ as set forth in the definition of that term in effect on July 20, 2010
(prior to the Dodd-Frank Act).
PART II.B—ADDITIONAL EXCHANGE ACT PROVISIONS THAT WILL APPLY TO SECURITY-BASED SWAP ACTIVITIES AND
POSITIONS OF REGISTERED BROKER-DEALERS NOTWITHSTANDING THE TEMPORARY EXEMPTION 36
Nature of provisions
Exchange Act section or rule
Extension of credit .............................................................
Extension of credit .............................................................
Rulemaking authority over broker-dealers .........................
Net capital ..........................................................................
Reserves and custody of securities ...................................
Books and records .............................................................
Records and reports ..........................................................
Quarterly security counts ...................................................
Section 7(c)
Regulation T (12 CFR 220.1 et seq.).
Section 15(c)(3).
Rule 15c3–1.
Rule 15c3–3.
Sections 17(a)–(b).
Rules 17a–3, 17a–4, 17a–5, 17a–8.
Rule 17a–13.
36 In general, these provisions will apply to security-based swap activities or positions of registered broker-dealers only to the extent that they
are applicable to those activities and positions as of July 15, 2011. Exchange Act rule 15c3–3, however, also will fully apply to the activities and
positions of a registered broker-dealer related to cleared security-based swaps, to the extent that the registered broker-dealer is a member of a
clearing agency that functions as a central counterparty for security-based swaps, and holds customer funds or securities in connection with
cleared security-based swaps.
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II. Temporary Exemption in Connection
With Certain Exchange Act
Requirements
A. Temporary Exemption From Certain
Exchange Act Requirements in
Connection With Security-Based Swaps
The Commission is issuing temporary
exemptions to address the issues and
concerns arising from the revision of the
Exchange Act ‘‘security’’ definition and
the application of the Exchange Act to
security-based swaps. These include a
temporary exemption for certain
persons, along with a temporary
exemption specific to broker-dealers;
both of those exemptions will remain in
effect until the compliance date for final
rules that we may adopt further defining
the terms ‘‘security-based swap’’ and
‘‘eligible contract participant.’’ 37 These
also include temporary exemptions
related to Exchange Act sections 5 and
6, and related to Exchange Act section
29(b), which, as addressed below, will
have other durations.
As the first part of the relief provided
by this Order, the Commission is
temporarily exempting certain persons
from the application of certain Exchange
Act provisions in connection with
security-based swaps. As discussed
below, this exemption will be subject to
certain key exceptions by which
particular statutory provisions (or
underlying rules or regulations) or
particular activities will not be
exempted.
The temporary exemption will be
available to any person that meets the
definition of ‘‘eligible contract
participant’’ that was in effect as of July
20, 2010 (the day prior to the enactment
of the Dodd-Frank Act), other than a
registered broker-dealer 38 or, except in
37 See
SEC and CFTC joint proposing releases
defining those terms, note 3, supra.
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38 A separate temporary exemption addresses the
security-based swap activities of registered brokerdealers. See part II.B, infra.
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limited circumstances, a self-regulatory
organization.39 The availability of this
39 Registered securities associations can take
advantage of this exemption in certain limited
circumstances. In particular, the exemption will be
available to any registered securities association
solely with respect to its obligations under
Exchange Act section 19(g)(1)(B), 15 U.S.C.
78s(g)(1)(B), to enforce compliance in connection
with security-based swaps with provisions of its
rules (and with provisions of the rules of the
Municipal Securities Rulemaking Board) that do not
apply to positions or activities involving securitybased swaps as of July 15, 2011. Section 19(g)(1)(B)
in relevant part requires national securities
associations to enforce compliance with their own
rules. As discussed below, see part II.B, infra, under
the Commission’s exemption registered brokerdealers will be required to comply with certain
Exchange Act requirements in connection with
security-based swaps, but not to the extent that
those provisions or rules do not apply to the
broker’s or dealer’s security-based swap positions or
activities as of July 15, 2011. The application of this
exemption to national securities associations is
consistent with that approach.
Also, we expect the Financial Industry Regulatory
Authority (‘‘FINRA’’), a national securities
association that is a self-regulatory organization for
registered broker-dealers, to file a proposed rule
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temporary exemption will be limited to
persons that meet the ‘‘eligible contract
participant’’ definition in order to
provide relief to persons currently
participating in the security-based swap
markets.40
Subject to exclusions discussed
below, persons covered by the
temporary exemption will be exempt
from the provisions of the Exchange
Act, and the applicable rules and
regulations thereunder, solely in
connection with their activities
involving security-based swaps. The
temporary exemption’s scope is to be
construed narrowly, and does not apply
to a person’s activities involving
securities other than security-based
swaps, even if those other securitiesrelated activities also involve securitybased swaps.41
As noted above, however, this
temporary exemption does not extend to
certain Exchange Act provisions and
underlying rules and regulations.
First, for the reasons discussed above,
the temporary exemption applicable to
security-based swaps does not extend to
the antifraud and anti-manipulation
provisions of the Exchange Act, and
underlying rules or regulations, that
already apply to ‘‘security-based swap
agreements’’ under current law. Thus,
even with the temporary exemption,
paragraphs (2) through (5) of section
9(a), section 10(b), section 15(c)(1),
section 20(d) and section 21A(a)(1) of
the Exchange Act 42 will apply to
security-based swaps. Underlying rules
prohibiting fraud, manipulation or
insider trading, such as Exchange Act
rule 10b–5 (but not prophylactic
reporting or recordkeeping requirements
such as the confirmation requirements
of Exchange Act rule 10b–10) also will
apply to security-based swaps.
Consistent with the Commission’s
current authority, moreover, the
temporary exemption will not affect the
Commission’s investigative,
enforcement, and procedural authority
related to those provisions and rules.43
change related to the application of FINRA’s rules
to security-based swaps.
40 The exemption relies on the pre-Dodd-Frank
Act definition of ‘‘eligible contract participant’’ due
to outstanding issues discussed above, see note 17,
supra, and accompanying text, regarding the
meaning of ‘‘eligible contract participant’’ under the
Dodd-Frank Act.
41 In other words, for example, if a person were
to enter into an arrangement involving the purchase
of a debt security in conjunction with the purchase
of credit protection in the form of a credit default
swap referencing that debt security, the person’s
credit default swap transaction would be subject the
temporary exemption, but the person’s purchase of
the debt security would not.
42 See note 25, supra.
43 Thus, for example, the Commission retains the
ability to investigate potential violations and bring
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The temporary exemption also does
not extend to Exchange Act provisions
related to security-based swaps that
were added or amended by Subtitle B of
Title VII of the Dodd-Frank Act. The
Commission separately has addressed
those new provisions and
amendments 44 (apart from the change
to the ‘‘security’’ definition that
underpins the exemptions that are the
subject of this Order).
In addition, even under the temporary
exemption, the Exchange Act ‘‘broker’’
registration requirements will apply to
broker activities involving securitybased swaps by persons that are
members of a clearing agency that
functions as a central counterparty 45
(‘‘CCP’’) for security-based swaps, and
that hold customer funds and securities
in connection with security-based
swaps. Based on the Commission’s
experience in granting, and
representations made by recipients of,
previous exemptive orders for CCPs, the
Commission understands that there
currently are no CCPs offering customer
clearing of security-based swaps.46
Apart from that limitation, and for the
reasons discussed above, the exemption
from registration requirements will
extend to broker activity involving
security-based swaps.47
Moreover, even under the temporary
exemption, the Exchange Act ‘‘dealer’’
registration requirements will apply to
enforcement actions in the federal courts as well as
in administrative proceedings, and to seek the full
panoply of remedies available in such cases.
44 See Effective Date Release, note 2, supra.
45 For these purposes, a ‘‘central counterparty’’
means a clearing agency that interposes itself
between the counterparties to security-based swap
transactions, acting functionally as the buyer to
every seller and the seller to every buyer.
46 The Commission has granted temporary
conditional exemptions to facilitate CDS clearing in
connection with requests on behalf of ICE Clear
Europe Limited; Eurex Clearing AG; Chicago
Mercantile Exchange Inc.; ICE Trust US LLC; and
LIFFE A&M and LCH.Clearnet Ltd. See notes 71 and
76, infra.
To the extent that CCPs plan to offer customer
clearing of security-based swaps during the
duration of this exemption, the Commission will
consider requests for relief from broker-related
requirements by such CCPs on behalf of their
participants, based on the applicable facts and
circumstances.
47 In light of the exemption from broker
registration requirements and from the dealer
registration requirements addressed below (but
subject to the exemption’s limitations associated
with those requirements), non-U.S. persons that act
as brokers or dealers solely in connection with
security-based swaps involving U.S. counterparties
need not rely on the exemptions from broker-dealer
registration requirements that are set forth in
Exchange Act rule 15a–6, 17 CFR 240.15a–6. Thus,
non-U.S. persons will not have to comply with the
requirements and conditions of rule 15a–6,
including, for example, the requirement to use a
registered U.S. broker-dealer to effect a transaction
in a security-based swap, as provided in paragraph
(a)(3) of the rule.
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security-based swap dealing activities
unless those activities involve
counterparties that meet the definition
of ‘‘eligible contract participant’’ that
was in effect as of July 20, 2010 (the day
prior to the enactment of the DoddFrank Act). Accordingly, conducting
security-based swap activities with
counterparties that do not meet that July
20, 2010 definition of ‘‘eligible contract
participant’’ could, depending on the
facts and circumstances, still cause an
entity to be a ‘‘dealer’’ under the
Exchange Act. In light of market
participants’ concerns regarding
interpretive issues resulting from the
statutory changes to the ‘‘eligible
contract participant’’ definition, the
exemption is intended to appropriately
implement the legislative goal of
applying the ‘‘dealer’’ definition to
security-based swap activities involving
counterparties that are not eligible
contract participants, while maintaining
the status quo with respect to activities
involving ‘‘eligible contract
participants’’ as that term was defined
on July 20, 2010.48
This temporary exemption further
does not excuse compliance with
certain additional provisions under the
Exchange Act. The exemption does not
apply to the exchange registration
requirements of Exchange Act sections 5
and 6, as those provisions instead are
being addressed by a separate
conditional exemption described
below.49 This exemption further does
not extend to: the requirements of
Exchange Act sections 12, 13, 14, 15(d),
and 16 50; the Commission’s
administrative proceeding authority
under Exchange Act sections 15(b)(4)
and (b)(6) 51; or to certain provisions
48 In a similar way, the Commission has targeted
the exemptive relief it previously granted in
connection with section 6(l) of the Exchange Act,
15 U.S.C. 78f(l), which was added by the DoddFrank Act. This relief will permit persons that
currently participate in the security-based swap
markets, but that potentially may not be considered
eligible contract participants under the definition as
amended by Title VII of the Dodd-Frank Act, to
continue to do so until the term ‘‘eligible contract
participant’’ is further defined in final rulemaking.
See Effective Date Release, note 2, supra.
49 See parts II.C and II.D, infra.
50 15 U.S.C. 78l, 78m, 78n, 78o(d), 78p. These
provisions address, among other things, securities
registration, reporting by issuers and other persons,
proxies and short-swing profits.
51 Exchange Act sections 15(b)(4) and 15(b)(6), 15
U.S.C. 78o(b)(4) and (b)(6), grant the Commission
authority to take action against brokers and dealers
and associated persons in certain situations.
Accordingly, while this exemption extends to
certain persons that may otherwise act as brokers
or dealers in the market for security-based swaps,
such brokers or dealers may still be subject to
actions under sections 15(b)(4) and (b)(6) of the
Exchange Act.
In addition, such brokers or dealers may be
subject to actions under Exchange Act section
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related to government securities.52 The
temporary exemption further does not
extend to the clearing agency
registration requirement of Exchange
Act section 17A,53 as the Commission
separately intends to provide targeted
exemptive relief in connection with that
requirement.
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B. Temporary Exemption From Certain
Exchange Act Requirements in
Connection With Security-Based Swap
Activities by Registered Broker-Dealers
In addition to the temporary
exemption addressed above, the
Commission separately is providing
exemptive relief to registered brokerdealers in connection with the revised
‘‘security’’ definition and the
application of existing Exchange Act
provisions to security-based swaps. In
granting this relief, we have sought to
recognize concerns raised by market
participants—e.g., the application of
current broker-dealer margin rules to
security-based swap activities—while
also being mindful that certain
regulations applicable to broker-dealers
play a critical role in promoting market
integrity and protecting customers
(including broker-dealer customers that
are not involved in security-based swap
transactions).
This temporary exemption will be
available to any registered broker-dealer
solely with respect to its activities and
positions involving security-based
swaps. In general—and subject to the
additional provisions addressed
below—this temporary exemption has
the same scope as the temporary
exemption addressed above, and is
subject to the same exclusions. Thus, for
example, security-based swap activity
by registered broker-dealers will be
subject to the same Exchange Act
antifraud and anti-manipulation
provisions as will be effective under the
temporary exemption addressed above.
Moreover, we are limiting the scope of
the exemption for registered brokerdealers in connection with certain
Exchange Act provisions and rules that
15(c)(1), 15 U.S.C. 78o(c)(1), which prohibits
brokers and dealers from using manipulative or
deceptive devices. Sections 15(b)(4), 15(b)(6) and
15(c)(1), of course, would not apply to persons
subject to this exemption who do not act as brokerdealers or associated persons of broker-dealers.
52 The exemption specifically does not extend to
the Exchange Act provisions applicable to
government securities, as set forth in section 15C,
15 U.S.C. 78o–5, and its underlying rules and
regulations. The exemption also does not extend to
related definitions found at paragraphs (42) through
(45) of section 3(a), 15 U.S.C. 78c(a). The
Commission does not have authority under section
36 to issue exemptions in connection with those
provisions. See Exchange Act section 36(b), 15
U.S.C. 78mm(b).
53 15 U.S.C. 78q–1.
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apply specifically to registered brokerdealers. In particular (and subject to
additional limitations in connection
with Exchange Act rule 15c3–3 as
addressed below), registered brokerdealers will solely be exempt from those
provisions and rules to the extent that
those provisions or rules do not apply
to the broker’s or dealer’s security-based
swap positions or activities as of July
15, 2011—the day before the
effectiveness of the change to the
‘‘security’’ definition. In other words,
during the exemptive period the
application of current law will remain
unchanged, and those particular
Exchange Act requirements will
continue to apply to registered brokerdealers’ security-based swap activities
and positions to the same extent they
apply currently. This approach is
intended to help avoid undue market
disruptions resulting from the change to
the ‘‘security’’ definition, while at the
same time preserving the current
application of those particular
provisions or rules to security-based
swap activity by registered brokerdealers.
Thus, under this approach of
preserving the status quo, no exemption
will be provided in connection with the
following requirements under the
Exchange Act to the extent that those
requirements currently apply to
registered broker-dealer activities or
positions involving instruments that
will be security-based swaps (but
registered broker-dealers will be
exempted in connection with those
requirements to the extent that the
requirements do not already apply to
activities or positions involving those
instruments): 54
• Section 7(c),55 regarding the
extension of credit by broker-dealers;
and Regulation T,56 a Federal Reserve
Board regulation regarding broker-dealer
extension of credit.
• Section 15(c)(3),57 which provides
the Commission with rulemaking
authority in connection with brokerdealer financial responsibility;
Exchange Act rule 15c3–1,58 regarding
broker-dealer net capital; and Exchange
Act rule 15c3–3,59 regarding brokerdealer reserves and custody of
54 Solely for purposes of this temporary
exemption, in addition to the general requirements
under the referenced Exchange Act sections,
registered broker-dealers shall only be subject to the
enumerated rules under the referenced Exchange
Act sections in connection with security-based
swaps.
55 15 U.S.C. 78g(c).
56 12 CFR 220.1 et seq.
57 15 U.S.C. 78o(c)(3).
58 17 CFR 240.15c3–1.
59 17 CFR 240.15c3–3.
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39933
securities. In the case of Exchange Act
rule 15c3–3, moreover, the exemption
will not be applicable to the activities
and positions of a registered brokerdealer related to cleared security-based
swaps, to the extent that the registered
broker-dealer is a member of a clearing
agency that functions as a central
counterparty for security-based swaps,
and holds customer funds or securities
in connection with cleared securitybased swaps.60
• Section 17(a),61 regarding brokerdealer obligations to make, keep and
furnish information; section 17(b),62
regarding broker-dealer records subject
to examination; Exchange Act rules
17a–3 through 17a–5,63 regarding
records to be made and preserved by
broker-dealers and reports to be made
by broker-dealers; Exchange Act rule
17a–8,64 regarding broker-dealer
recordkeeping and reporting under the
Bank Secrecy Act; and Exchange Act
rule 17a–13,65 regarding quarterly
security counts to be made by certain
exchange members and broker-dealers.
C. Temporary Exemptions From
Sections 5 and 6 of the Exchange Act for
Brokers, Dealers and Exchanges
Section 5 of the Exchange Act states
that ‘‘[i]t shall be unlawful for any
broker, dealer, or exchange,66 directly or
indirectly, to make use of the mails or
any means or instrumentality of
interstate commerce for the purpose of
using any facility of an exchange * * *
to effect any transaction in a security, or
to report any such transactions, unless
such exchange (1) Is registered as a
national securities exchange under
section 6 of [the Exchange Act], or (2)
is exempted from such registration
* * * by reason of the limited volume
60 This is consistent with the exclusion from the
temporary exemption addressed above with regard
to the broker registration requirement. See note 45,
supra, and accompanying text.
61 15 U.S.C. 78q(a).
62 15 U.S.C. 78q(b).
63 17 CFR 240.17a–3 through 17a–5
64 17 CFR 240.17a–8.
65 17 CFR 240.17a–13.
66 Section 3(a)(1) of the Exchange Act, 15 U.S.C.
78c(a)(1), defines ‘‘exchange’’ to mean ‘‘any
organization, association, or group of persons,
whether incorporated or unincorporated, which
constitutes, maintains, or provides a market place
or facilities for bringing together purchasers and
sellers of securities or for otherwise performing
with respect to securities the functions commonly
performed by a stock exchange as that term is
generally understood, and includes the market
place and the market facilities maintained by such
an exchange.’’ Rule 3b–16 under the Exchange Act,
17 CFR 240.3b–16, defines certain terms used in the
statutory definition of exchange. See Securities
Exchange Act Release No. 40760 (Dec. 8, 1998), 63
FR 70844 (Dec. 22, 1998) (‘‘Regulation ATS
Adopting Release’’) (adopting Rule 3b–16 in
addition to Regulation ATS).
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of transactions effected on such
exchange * * * .’’ Section 6 of the
Exchange Act sets forth a procedure
whereby an exchange may register as a
national securities exchange.67
Certain persons, particularly those
that would meet the statutory definition
of security-based swap execution
facility (‘‘SB SEF’’),68 may today engage
in activities that would subject them to
the restrictions and requirements of
sections 5 and 6 of the Exchange Act as
of the Effective Date, once securitybased swaps are included within the
definition of ‘‘security.’’ The
Commission has proposed, but not acted
on, registration requirements for SB
SEFs. Therefore, the Commission is
using its authority under section 36 of
the Exchange Act to provide a
temporary exemption from the
requirement to register as a national
securities exchange in sections 5 and 6
of the Exchange Act to any person, other
than a clearing agency acting as a
central counterparty in security-based
swaps,69 that, solely due to its activities
relating to security-based swaps, would
fall within the definition of exchange
and thus be required to register as an
exchange. Persons who can take
advantage of this exemption include
those entities that would meet the
statutory SB SEF definition,70 but that
otherwise would not be subject to the
67 See generally Exchange Act section 6(a) and the
rules thereunder. Section 6 of the Exchange Act also
sets forth various requirements to which a national
securities exchange is subject. See, e.g., Exchange
Act section 6(b).
68 See Exchange Act section 3(a)(77), 15 U.S.C.
78c(a)(77).
69 The status of central counterparties in securitybased swaps is addressed in part II.D, infra.
70 While the Exchange Act currently does not
prohibit registered alternative trading systems from
trading security-based swaps, after the Effective
Date any alternative trading system that meets the
definition of SB SEF would no longer be permitted
to do so absent an exemption or registration as a
national securities exchange or SB SEF. See section
763 of the Dodd-Frank Act, adding Exchange Act
section 3D(a)(1), 15 U.S.C. 78c–4(a)(1) (‘‘[n]o person
may operate a facility for the trading or processing
of security-based swaps, unless the facility is
registered as a security-based swap execution
facility or as a national securities exchange under
this section’’) and Securities Exchange Act Release
No. 34–63825 (Feb. 2, 2011), 76 FR 10948 (Feb. 28,
2011) (‘‘SB SEF Proposing Release’’) at note 10
(‘‘The Commission views [Section 3D(a)(1) of the
Exchange Act] as applying only to facilities that
meet the definition of ‘‘security-based swap
execution facility’’ in Section 3(a)(77) of the
Exchange Act). The Commission has granted
temporary relief from the requirements of section
3D(a)(1) of the Exchange Act to allow alternative
trading systems and other entities trading securitybased swaps to continue to trade security-based
swaps until the exemption expires. See Effective
Date Release, note 2, supra. Following the
expiration of the temporary exemption, any entity
trading security-based swaps that meets the
definition of SB SEF would be required to register
as a national securities exchange or a SB SEF.
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requirements under sections 5 and 6 of
the Exchange Act.
This temporary exemption will
remain in effect until the earliest
compliance date set forth in any of the
final rules regarding the registration of
SB SEFs. It specifically will permit
security-based swaps to continue to be
traded on or through entities (other than
central counterparties) following the
Effective Date, until the registration
requirements and other provisions
applicable to SB SEFs have been
implemented. As noted above, this
temporary exemption is available to
persons (other than central
counterparties) that meet the definition
of exchange solely because of their
activities relating to transactions in
security-based swaps. Thus, to the
extent that a person otherwise satisfies
the definition of ‘‘exchange’’ in section
3(a)(1) of the Exchange Act and the
criteria of rule 3b–16 under the
Exchange Act, it must register with the
Commission as a national securities
exchange under section 6 of the
Exchange Act and the rules and
regulations thereunder or comply with
the terms of another exemption.
In addition, absent an exemption,
section 5 of the Exchange Act would
prohibit brokers and dealers from
effecting transactions in security-based
swaps on an exchange that is not a
national securities exchange, even if
that exchange was operating in reliance
on the exemption addressed above. The
Commission therefore is using its
authority under section 36 of the
Exchange Act to provide a temporary
exemption to brokers and dealers that
effect transactions in security-based
swaps on an exchange that is operating
without registering as a national
securities exchange in reliance on that
exemption. Temporarily exempting
brokers and dealers that effect
transactions in security-based swaps on
such an exchange from this restriction
in section 5 will facilitate brokers’ and
dealers’ continued use of such facilities
without the disruptions and costs that
might be expected to result from the
application of those provisions prior to
the earliest compliance date of final
rules regarding the registration of SB
SEFs. Without also exempting brokers
and dealers from this section 5
requirement, the Commission’s
temporary exemption of persons that
meet the definition of exchange with
respect to the trading of security-based
swaps would be ineffective, because
brokers and dealers would not be
permitted to effect transactions on those
exchanges. A broker or dealer is exempt
from the prohibition in section 5
pursuant to this temporary exemption
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solely to the extent that it effects
transactions in security-based swaps on
an exchange operating in reliance on the
exemption addressed above, or reports
security-based swap transactions on
such an exempted exchange.
D. Exemption From Sections 5 and 6 for
Certain CCPs
The Commission is also exercising its
authority under section 36 of the
Exchange Act to extend specific existing
exemptions from the exchange
registration requirements of sections 5
and 6 of the Exchange Act provided to
three central counterparties—ICE Trust
U.S. LLC (‘‘ICE Trust’’), Chicago
Mercantile Exchange Inc. (‘‘CME’’), and
ICE Clear Europe, Limited (‘‘ICE Clear
Europe’’) (collectively, ‘‘CDS
CCPs’’) 71—that clear ‘‘Cleared CDS.’’ 72
These exemptions will remain in effect
until the earliest compliance date set
forth in any of the final rules regarding
the registration of SB SEFs.
As described in the Temporary
Cleared CDS Exemptions,73 as part of
the clearing and risk management
71 See generally Securities Exchange Act Release
Nos. 60372 (July 23, 2009), 74 FR 37748 (July 29,
2009); 61973 (April 23, 2010), 75 FR 22656 (April
29, 2010); and 63389 (November 29, 2010), 75 FR
75520 (December 3, 2010) (temporary exemptions
in connection with CDS clearing by ICE Clear
Europe); 59578 (March 13, 2009), 74 FR 11781
(March 19, 2009); 61164 (December 14, 2009), 74 FR
67258 (December 18, 2009); 61803 (March 30,
2010), 75 FR 17181 (April 5, 2010); and 63388
(November 29, 2010), 75 FR 75522 (December 3,
2010) (temporary exemptions in connection with
CDS clearing by CME); 59527 (March 6, 2009), 74
FR 10791 (March 12, 2009); 61119 (December 4,
2009), 74 FR 65554 (December 10, 2009); 61662
(March 5, 2010), 75 FR 11589 (March 11, 2010),
63387 (November 29, 2010), 75 FR 75502
(December 3, 2010) (temporary exemptions in
connection with CDS clearing by ICE Trust)
(collectively, ‘‘Temporary Cleared CDS
Exemptions’’).
72 ‘‘Cleared CDS’’ means a credit default swaps
that is a security-based swap that is submitted (or
offered, purchased, or sold on terms providing for
submission) to a CDS CCP, and that is offered only
to, purchased only by, and sold only to persons that
meet the pre Dodd-Frank definition of eligible
contract participant. In addition, to be a Cleared
CDS, either: (i) The reference entity, the issuer of
the reference security, or the reference security is
one of the following: (A) an entity reporting under
the Exchange Act, providing Securities Act rule
144A(d)(4) (17 CFR 230.144A(d)(4)) information, or
about which financial information is otherwise
publicly available; (B) a foreign private issuer
whose securities are listed outside the United States
and that has its principal trading market outside the
United States; (C) a foreign sovereign debt security;
(D) an asset-backed security, as defined in
Regulation AB, issued in a registered transaction
with publicly available distribution reports; or (E)
an asset-backed security issued or guaranteed by the
Federal National Mortgage Association, the Federal
Home Loan Mortgage Corporation, or the
Government National Mortgage Association; or (ii)
the reference index is an index in which 80% or
more of the index’s weighting is comprised of the
entities or securities described in subparagraph (i).
73 See, e.g., 74 FR at 37748 (ICE Clear Europe); 74
FR at 65560 (ICE Trust); 74 FR at 67262 (CME).
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processes, each CDS CCP calculates,
based on prices or quotations submitted
by its participants, an end-of-day
settlement price for each contract in
which any of its participants has a
cleared position.74 As part of this
process, each CDS CCP has periodically
used a ‘‘forced trade’’ mechanism to
require clearing members at randomly
selected times to execute certain CDS
trades.75 This mechanism, which is
designed to promote the integrity of the
price-submission process, involves
bringing together buyers and sellers of
CDS. Therefore, absent an exemption,
this activity would cause each CDS CCP
to meet the definition of ‘‘exchange’’
under the Exchange Act, thereby
triggering the applicability of sections 5
and 6. Accordingly, the Commission, in
connection with previous exemptions
from clearing agency registration under
section 17A of the Exchange Act, also
provided each CDS CCP a temporary
conditional exemption from the
exchange registration requirements of
Sections 5 and 6 of the Exchange Act.
Following the Effective Date, the CDS
CCPs will not require further
exemptions from section 17A.76
74 As part of the clearing process, eligible trades
are submitted to the CDS CCP for novation, which
results in the bilateral contract being extinguished
and replaced by two new contracts where the CDS
CCP is the buyer to the seller and the seller to the
buyer. ‘‘Novation’’ is a process through with the
original obligation between a buyer and seller is
discharged through the substitute of the CCP as
functionally the seller to buyer and buyer to seller,
creating new substitute contracts. See, e.g.,
Committee on Payment and Settlement Systems,
Technical Committee of the International
Organization of Securities Commissioners,
Recommendations for Central Counterparties (Nov.
2004) at 66.
75 See Letter from Russell D. Sacks, on behalf of
ICE Clear Europe, to Elizabeth Murphy, Secretary,
Commission, Nov. 29, 2010; Letter from Ann K.
Shuman, Managing Director and Deputy General
Counsel, CME, to Elizabeth Murphy, Secretary,
Commission, Nov. 29, 2010; See Letter from Kevin
McClear, ICE Trust, to Elizabeth Murphy, Secretary,
Commission, Nov. 29, 2010.
76 Title VII of the Dodd-Frank Act provides that
a depository institution or derivatives clearing
organization registered with the Commodity
Futures Trading Commission under the Commodity
Exchange Act that is required to be registered as a
clearing agency is deemed to be registered as a
clearing agency solely for the purpose of clearing
security-based swaps to the extent that, before July
21, 2010: (A) the depository institution cleared
swaps as a multilateral clearing organization, or (B)
the derivative clearing organization cleared swaps
pursuant to an exemption from registration as a
clearing agency. See section 763(b) of the DoddFrank Act (adding new Section 17A(l) to the
Exchange Act, 15 U.S.C. 78q–1(1)) (‘‘Deemed
Registered Provision’’). The Deemed Registered
Provision, along with other general provisions of
Title VII of the Dodd-Frank Act, becomes effective
on July 16, 2011. See Effective Date Release, note
2, supra.
CME, ICE Clear Europe, and ICE Trust satisfy the
requirements of the Deemed Registered Provision
and thus will no longer need temporary exemptions
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As part of these Temporary Cleared
CDS Exemptions, the Commission also
temporarily exempted each CDS CCP’s
participants that were brokers or dealers
from the prohibitions of Section 5, to
the extent that they use a CDS CCP to
effect or report any transaction in
Cleared CDS in connection with the
CDS CCP’s calculation of settlement
prices for open positions in Cleared
CDS. The definition of ‘‘Cleared CDS’’
used here is consistent with the
Temporary Cleared CDS Exemptions.77
Consistent with our findings in
previous exemptive orders, and with the
discussion in this Order, and
particularly in light of the risk
management and systemic benefits in
continuing to facilitate CDS clearing by
CDS CCPs during the transition period
before full implementation of Title VII,
the Commission is extending the
temporary conditional exemptions of
the CDS CCPs from the registration
requirements of sections 5 and 6 of the
Exchange Act. The Commission also
finds that it is necessary or appropriate
in the public interest and is consistent
with the protection of investors to
extend the temporary exemption of any
broker or dealer effecting any
transaction in a security, or reporting
any such transaction, on a CDS CCP
with respect to section 5 of the
Exchange Act. These exemptions are
solely with respect to the ‘‘forced trade’’
mechanism used to calculate settlement
prices for Cleared CDS. The exemption
from registration as a clearing agency under Section
17A of the Exchange Act. However, because the
Deemed Registered Provision does not apply with
respect to sections 5 and 6 of the Exchange Act, the
CDS CCPs would, absent an exemption, have to
either register as national securities exchanges or
discontinue use of their forced trading mechanisms.
A fourth CCP, Eurex Clearing AG (‘‘Eurex’’), also
received from the Commission temporary
exemptions from sections 5, 6, and 17A of the
Exchange Act in relation to its CDS clearing
activities. See, e.g., Exchange Act Release No. 63390
(November 29, 2010). Unlike the CDS CCPs, Eurex
will not be deemed registered with the Commission
because it is neither a depository institution nor a
derivatives clearing organization registered with the
Commodity Futures Trading Commission under the
Commodity Exchange Act. Eurex will not be
registered with the Commission as a clearing agency
for security-based swaps as of July 16, 2011. Thus,
the Commission is not granting Eurex an exemption
from sections 5 and 6 of the Exchange Act with
respect to any activities relating to security-based
swaps. In addition, the Commission previously
extended a temporary exemption from section 17A
(but not sections 5 and 6) in connection with CDS
clearing by LIFFE A&M and LCH.Clearnet Ltd., but
that exemption has since expired. See Securities
Exchange Act Release No. 59164 (Dec. 24, 2008), 74
FR 139 (Jan. 2, 2009).
77 See, e.g., Securities Exchange Act Release No.
63387 (Nov. 29, 2010), 75 FR 75502, 75504 n. 18
(Dec. 3, 2010).
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39935
for CDS CCPs, moreover, is subject to
the following terms and conditions: 78
First, each CDS CCP, in order to rely
on the exemption, is required to report
to the Commission the following
information with respect to its
calculation of settlement prices for
Cleared CDS within 30 days of the end
of each quarter, and to preserve such
reports during the life of the enterprise
and of any successor enterprise: (a) The
total dollar volume of transactions
executed during the quarter, broken
down by reference entity, security, or
index; and (b) the total unit volume
and/or notional amount executed during
the quarter, broken down by reference
entity, security, or index. Reporting of
this information will assist the
Commission in carrying out its
responsibility to supervise and regulate
the securities markets.
Second, each CDS CCP, as a condition
to relying on the exemption, is required
to establish and maintain adequate
safeguards and procedures to protect
participants’ confidential trading
information. Such safeguards and
procedures include: (a) Limiting access
to the confidential trading information
of participants to those employees of the
CDS CCP who are operating the systems
or are responsible for their compliance
with this exemption or any other
applicable rules; and (b) establishing
and maintaining standards controlling
employees of the CDS CCP trading for
their own accounts. The CDS CCP is
required to establish and maintain
adequate oversight procedures to ensure
that the safeguards and procedures
established pursuant to this condition
are followed. This condition is designed
to prevent any misuse of trading
information that may be available to a
CDS CCP in connection with the ‘‘forced
trade’’ mechanism. This should
strengthen confidence in CCPs, thus
promoting participation.
Third, each CDS CCP, as a condition
to relying on the exemption, is required
to directly or indirectly make available
to the public on terms that are fair and
reasonable and not unreasonably
discriminatory: (a) All end-of-day
settlement prices and any other prices
with respect to Cleared CDS that it may
establish to calculate mark-to-market
margin requirements for its clearing
members; and (b) any other pricing or
valuation information with respect to
Cleared CDS as is published or
distributed by the CDS CCP. This
condition is appropriate to maintain
78 These terms and conditions are the same as the
terms and conditions of the existing exemptive
relief that is being extended. Therefore, the CDS
CCPs should already be complying with these
conditions.
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transparency by continuing to make this
useful pricing data available to the
public on terms that are fair and
reasonable and not unreasonably
discriminatory.
Finally, each CDS CCP, as a condition
to relying on the exemption, is required
to implement policies and procedures
designed to ensure compliance with
these terms and conditions, and to
conduct periodic internal reviews
related to its compliance program.
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E. Section 29(b) of the Exchange Act
Section 29(b) of the Exchange Act
generally provides that contracts made
in violation of any provision of the
Exchange Act, or the rules thereunder,
shall be void ‘‘(1) as regards the rights
of any person who, in violation of any
such provision, * * * shall have made
or engaged in the performance of any
such contract, and (2) as regards the
rights of any person who, not being a
party to such contracts, shall have
acquired any right thereunder with
actual knowledge of the facts by reason
of which the making or performance of
such contracts in violation of any such
provision * * * .’’ The Commission
does not believe that section 29(b)
would apply to provisions for which the
Commission has provided exemptive
relief. To make this clear to all market
participants, however, and to eliminate
any possible legal uncertainty or market
disruption, the Commission is granting
temporary exemptive relief from section
29(b).
In particular, the Commission is
exercising its authority under section 36
of the Exchange Act to temporarily
exempt any security-based swap
contract entered into on or after the
Effective Date from being void or
considered voidable by reason of section
29 of the Exchange Act on the basis that
any person that is a party to the
security-based swap contract is alleged
to have violated any of the provisions
for which the Commission has provided
exemptive relief herein, until the
compliance date for final rules that we
may adopt further defining the terms
‘‘security-based swap’’ and ‘‘eligible
contract participant.’’ This temporary
exemption will remain in effect until
the time the underlying exemptive relief
expires.79
79 The temporary exemption and the brokerdealer specific exemption addressed above will
remain in effect until the compliance date for final
rules that we may adopt further defining the terms
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The legal uncertainty that would
result if, for the period in which these
temporary exemptions are effective,
contracts entered into after the Effective
Date could be voided under section
29(b), would undermine the purposes of
these exemptions and lead to
unnecessary disruption and wasteful
litigation.
As previously discussed, as of the
Effective Date, persons effecting
transactions in security-based swaps, or
engaged in acts, practices, and courses
of business involving security-based
swaps, will be subject to the general
antifraud and anti-manipulation
provisions of the federal securities laws
that were in place before the enactment
of the Dodd-Frank Act. Persons would
retain all available rights as a result of
any violation of these general antifraud
and anti-manipulation provisions.
III. Guidance Related to Part I of
Subtitle A
We also are providing guidance
regarding the status, as of the Effective
Date, of certain provisions of part I of
subtitle A of Title VII (‘‘Part I’’) that
address security-based swaps. Our
recent Effective Date Release 80
separately provided guidance and
targeted exemptive relief in connection
with the status of those Exchange Act
provisions related to security-based
swaps that were added or amended by
subtitle B of Title VII.
As discussed in the Effective Date
Release, while certain Title VII
provisions applicable to security-based
swaps in general will be effective as of
the Effective Date, there are a number of
reasons why—as of that date—particular
provisions will not be effective or
compliance with particular provisions
will not be required. For example, if a
provision requires a rulemaking, that
provision will not go into effect until
after the final rulemaking.81 If a
provision expressly or implicitly applies
only to ‘‘registered’’ persons, then
persons will not have to comply with
‘‘security-based swap’’ and ‘‘eligible contract
participant.’’ The exemption from the exchange
registration requirements of sections 5 and 6 will
remain in effect until the earliest compliance date
set forth in any of the final rules regarding
registration of SB SEFs.
80 See note 2, supra.
81 See section 754 of the Dodd-Frank Act. In
particular, the Dodd-Frank Act provides that if a
Part I provision requires a rulemaking, the
provision will go into effect the later of ‘‘not less
than’’ 60 days after publication of the related final
rule or July 16.
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the provision until the related
registration processes for such persons
have been established by final
Commission rules, and such persons
have become registered.82 Other Title
VII provisions require or permit
compliance by market participants as a
result of, or in response to, Commission
action other than rulemaking, and thus
do not impose a compliance obligation
upon market participants in the absence
of such Commission action.83 Also,
certain Title VII provisions authorize or
direct the Commission or another
agency to take specified action that may
impose compliance obligations upon
market participants; 84 thus, while these
provisions will become effective on the
Effective Date, they will not require
compliance by market participants until
the relevant action has been undertaken.
The table below lists each provision
of Part I, and identifies provisions for
which compliance will be required on
the Effective Date. The table also
identifies provisions for which
compliance is predicated on some other
action (e.g., registration, adoption of
final rules, or other action by the
Commission or another agency) and
thus will not be required as of that date.
The table further addresses certain
provisions with which compliance will
be required on a date other than the
Effective Date, as specified by law.
The Commission does not believe it is
necessary to grant, and thus is not
granting, temporary relief from
compliance with those Part I provisions
for which compliance will be required
on the Effective Date, for the reasons
discussed below.
82 See, e.g., section 716(b)(2) of the Dodd-Frank
Act (providing that the term ‘‘swaps entity’’ means
any swap dealer, security-based swap dealer, major
swap participant, or major security-based swap
participant that is registered under the Commodity
Exchange Act or the Exchange Act).
83 See, e.g., section 714 of the Dodd-Frank Act
(permitting, pursuant to an exemption or rule, a
dually registered futures commission merchant and
broker-dealer to hold futures, and options on
futures, in a portfolio margining account carried as
a securities account pursuant to a portfolio
margining program approved by the CFTC and to
hold cash and securities in a portfolio margining
account carried as a futures account pursuant to a
portfolio margining program approved by the
Commission).
84 See, e.g., section 712(a)(8) of the Dodd-Frank
Act (requiring the Commission and the CFTC, after
consultation with the Board of Governors, to
prescribe jointly such regulations regarding mixed
swaps as may be necessary to carry out the
purposes of Title VII).
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TABLE—PART I OF SUBTITLE A OF TITLE VII OF THE DODD-FRANK ACT.
Compliance date
Upon effective
date (July 16,
2011)
711: Definitions ...........................................................................
712(a): Review of regulatory authority—consultation .................
712(b)(1)–(2): Review of regulatory authority—consultation;
limitation.
712(b)(3): Review of regulatory authority—consultation; prohibitions.
712(c): Objection to Commission regulation ..............................
712(d): Joint rulemaking .............................................................
712(e): Global rulemaking timeframe .........................................
712(f): Rules and registration before final effective dates .........
713(a)-(b): Portfolio margining conforming changes ..................
713(c): Portfolio margining conforming changes—duty of CFTC
714: Abusive swaps ....................................................................
715: Authority to prohibit participation in swaps activities ..........
716(a)–(j): Prohibition against federal government bailouts of
swaps entities.
716(k)–(l): Prohibition against federal government bailouts of
swaps entities; rules and authority.
716(m): Prohibition against federal government bailouts of
swaps entities; ban on proprietary trading.
717(a)–(b): New product approval CFTC—SEC process—
amendments to the Commodity Exchange Act.
717(c)–(d), 718: Determining the Status of Novel Derivative
Products.
719: Studies ................................................................................
720: Memorandum ......................................................................
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Dodd-Frank Act section
Upon registration,
publication of final
rules, or other
action 85
Authorizes/directs/
limits commission
and/or CFTC
action 86
✓
✓
✓
✓
Relief granted
No 87
N/A 88
N/A 89
No 90
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
N/A 91
N/A 92
N/A 93
N/A 94
N/A 95
N/A 96
N/A 97
N/A 98
N/A99
N/A 100
No 101
✓
✓
N/A 102
N/A103
✓
✓
N/A 104
N/A 105
85 These provisions do not require compliance by market participants on the Effective Date unless the relevant Commission action already has
been undertaken.
86 A number of Title VII provisions expressly (or implicitly) apply only to ‘‘registered’’ persons. As discussed above, until the related registration
processes for such persons have been established by final Commission or other rules, and such persons have become registered pursuant to
such rules, they will not be required to comply with these Title VII provisions. Similarly, if a Title VII provision requires a rulemaking, such provision will not necessarily go into effect on the Effective Date, but instead will go into effect ‘‘not less than’’ 60 days after publication of the related
final rule or on July16, 2011, whichever is later. See section 754 of the Dodd-Frank Act, 7 U.S.C. 1a note. Provisions for which compliance is not
required as of the Effective Date for some other reason, such as another effective date specified by law, are also included in this column and
noted below.
87 Section 711 of the Dodd-Frank Act provides that certain definitions in subtitle A of Title VII have the meaning given in section 1a of the
Commodity Exchange Act, 7 U.S.C. 1a.
88 Section 712(a) of the Dodd-Frank Act requires the Commission and the CFTC to consult and coordinate with each other before commencing
rulemaking or issuing orders in certain Title VII areas and also specifies certain requirements and parameters regarding such activity by the
Commission and the CFTC.
89 Sections 712(b)(1) and (2) of the Dodd-Frank Act relate to the authority of the Commission and the CFTC under Title VII.
90 Section 712(b)(3) of the Dodd-Frank Act provides that, unless otherwise authorized by Title VII and except for enforcement of, and examination for compliance with, its rules on capital adequacy, no futures association registered under section 17 of the Commodity Exchange Act, 7
U.S.C. 21, may regulate security-based swaps and no national securities associations registered under section 15A of the Exchange Act, 15
U.S.C. 78o–3, may regulate swaps. This provision will require compliance as of the Effective Date.
91 Section 712(c) of the Dodd-Frank Act outlines a process by which the Commission and the CFTC may request by filing a petition in court,
under certain circumstances, that a rule published by the other be set aside.
92 Section 712(d) of the Dodd-Frank Act requires certain joint rulemaking by the Commission and the CFTC and prescribes certain requirements for such joint rulemaking, as well as for interpretations and guidance by the Commission and the CFTC. It also requires the CFTC to
share information with the Commission about security-based swap agreements that are not cleared.
93 Section 712(e) of the Dodd-Frank Act requires the Commission and the CFTC, unless otherwise provided in Title VII or an amendment
thereto, to promulgate rules required under Title VII not later than the Effective Date.
94 Section 712(f) of the Dodd-Frank Act details actions the Commission and the CFTC are permitted to take to prepare for the effective dates
of the provisions of the Dodd-Frank Act.
95 Sections 713(a) and (b) of the Dodd-Frank Act provide that, pursuant to an exemption or rule, a dually registered futures commission merchant and broker-dealer may hold futures, and options on futures, in a portfolio margining account carried as a securities account pursuant to a
portfolio margining program approved by the CFTC and may hold cash and securities in a portfolio margining account carried as a futures account pursuant to a portfolio margining program approved by the Commission. Persons cannot comply with this provision in the absence of an
appropriate exemption or rule.
96 Section 713(c) of the Dodd-Frank Act amends the Commodity Exchange Act to require to CFTC to exercise its authority to ensure that securities held in a portfolio margining account carried as a futures account are customer property and the owners of those accounts are customers
for the purposes of the Bankruptcy Code, 11 U.S.C. 1 et seq.
97 Section 714 of the Dodd-Frank Act provides that the Commission, the CFTC, or both may collect information as may be necessary concerning the markets for swaps and security-based swaps and issue a report regarding abusive swaps and security-based swaps that the Commission or the CFTC determine are detrimental to the stability of a financial market or participants in a financial market.
98 Section 715 of the Dodd-Frank Act provides that, if the Commission or the CFTC determine that a foreign country’s swap or security-based
swap regulation undermines the stability of the United States financial system, either the Commission or the CFTC, in consultation with the Secretary of the Treasury, may prohibit an entity domiciled in the foreign country from participating in the United States in swap or security-based
swap activities.
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99 Section 716(a) of the Dodd-Frank Act prohibits any ‘‘swaps entity’’ from receiving Federal assistance with respect to any swap, securitybased swap, or other activity of the swaps entity. Section 716(h) of the Dodd-Frank Act provides that the prohibition in section 716(a) of the
Dodd-Frank Act ‘‘shall be effective 2 years following the date on which this Act is effective.’’ In addition, the term ‘‘swaps entity’’ is defined in section 716(b)(2) of the Dodd-Frank Act to mean a swap dealer, security-based swap dealer, major swap participant, or major security-based swap
participant that is registered under the Commodity Exchange Act or the Exchange Act, meaning that the prohibition in section 716(a) of the
Dodd-Frank is not applicable unless a registration regime exists for such persons under either the Commodity Exchange Act or Exchange Act.
Many of the other provisions of section 716 of the Dodd-Frank Act relate to the prohibition in section 716(a) of the Dodd-Frank Act and thus
will not require compliance until such prohibition is in effect. See, e.g., section 716(e) of the Dodd-Frank Act (limiting the scope of the prohibition
in section 716(a) of the Dodd-Frank Act). Other provisions of section 716 of the Dodd-Frank Act relate to the applicability of the term ‘‘swaps entity’’ and thus will not require compliance until persons can become ‘‘swaps entities,’’ which requires registration regimes to be in place. See,
e.g., sections 716(g) and (l) of the Dodd-Frank Act (limiting the applicability of the term ‘‘swaps entity’’ and detailing certain liquidation and other
requirements for certain swaps entities, respectively).
100 Section 716(k) of the Dodd-Frank Act states that, ‘‘[i]n prescribing rules, the prudential regulator for a swaps entity shall consider’’ certain
factors. Section 716(l) of the Dodd-Frank Act provides the Financial Stability Oversight Council authority to make certain determinations regarding swaps entities.
101 Section 716(m) of the Dodd-Frank Act requires insured depository institutions to comply with the prohibition on proprietary trading in derivatives in section 619 of the Dodd-Frank Act, which adds new section 13 to the Bank Holding Company Act of 1956, 12 U.S.C. 1841 et seq. (‘‘BHC
Act’’). Section 13 of the BHC Act, 12 U.S.C. 1851, pursuant to section 13(c)(1) thereof, 12 U.S.C. 1851(c)(1), takes effect on the earlier of 12
months after final rules are issued under section 13(b) of the BHC Act, 12 U.S.C. 1851(b), or 2 years after the date of enactment of the DoddFrank Act. As a general matter, a banking entity must bring its activities and investments into compliance with section 13 of the BHC Act not
later than 2 years after that section becomes effective. Section 716(m) of the Dodd-Frank Act thus does not impose any compliance obligations
until insured depository institutions are required to comply with section 13 of the BHC Act.
102 Section 717(a) of the Dodd-Frank Act amends section 2(a)(1)(C) of the Commodity Exchange Act, 7 U.S.C. 2a(1)(C), to provide that the
CFTC shall have jurisdiction over certain accounts, agreements, and transactions that the Commission has exempted under section 36(a)(1) of
the Exchange Act, 15 U.S.C. 78mm(a)(1), with the condition that the CFTC exercise concurrent jurisdiction over such accounts, agreements, and
transactions. Section 717(b) of the Dodd-Frank Act adds new section 3B of the Exchange Act, 15 U.S.C. 78c–2, which provides that an agreement, contract, or transaction (or class thereof) that is exempted by the CFTC pursuant to section 4(c)(1) of the Commodity Exchange Act, 7
U.S.C. 6(c)(1), with the condition that the Commission exercise concurrent jurisdiction over it shall be deemed a security for purposes of the securities laws and includes certain details regarding the applicability of the federal securities laws to such deemed securities. These provisions relate to the jurisdiction and authority of the Commission and the CFTC and do not themselves impose compliance obligations upon market participants. Action by the Commission or the CFTC to which these provisions are applicable however, could result in compliance obligations for market participants. For example, an agreement, contract, or transaction that is deemed a security as a result of section 717(b) of the Dodd-Frank
Act would, as a security, be subject to the requirements of the federal securities laws.
103 Section 718 of the Dodd-Frank Act creates a process through which a person filing a proposal to list or trade a novel derivative product that
may have elements of both securities and contracts of sale of a commodity for future delivery (or options on such contracts or options on commodities) may concurrently provide notice and a copy of such filing to the Commission and the CFTC and details the specific requirements of the
process and obligations of the Commission and the CFTC pursuant to the process. Market participants are not obligated to make submissions
pursuant to this provision. Sections 717(c) and (d) of the Dodd-Frank Act make related amendments to section 19(b) of the Exchange Act, 15
U.S.C. 78s(b), and section 5c(c)(1) of the Commodity Exchange Act, 7 U.S.C. 7a–2(c)(1), respectively.
104 Section 719 of the Dodd-Frank Act requires the Commission and the CFTC to undertake a number of studies.
105 Section 720 of the Dodd-Frank Act includes two provisions requiring the CTFC and the Federal Energy Regulatory Commission to negotiate a memorandum of understanding.
sroberts on DSK5SPTVN1PROD with NOTICES
IV. Solicitation of Comments
The Commission intends to monitor
closely the transition of the derivatives
markets to regulated markets and to
determine to what extent, if any,
additional regulatory action may be
necessary. The Commission is soliciting
public comment on all aspects of these
exemptions, including:
1. Does the approach set forth by
these exemptions—including the
approach of continuing to apply certain
regulatory requirements that already are
applicable to instruments that will be
security-based swaps following the
Effective Date, but not adding new
regulatory requirements in connection
with those instruments—appropriately
serve the goals of providing for the
effective implementation of the DoddFrank Act without causing unwarranted
market disruption during the
implementation process? Would
alternative approaches be more
effective?
2. Are there other provisions of the
Exchange Act as amended by the DoddFrank Act for which temporary
exemptive relief should be granted?
Alternatively, are there particular
provisions, for which relief has been
granted here, that do not warrant an
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16:26 Jul 06, 2011
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exemption? Please provide section
references and provide a detailed
explanation of why granting such an
exemption, or terminating an existing
exemption, would be necessary or
appropriate in the public interest, and
consistent with the protection of
investors.
3. What should be the appropriate
duration of the temporary exemptions
granted in this Order?
4. Should any additional conditions
be placed on any of these exemptions,
or should any conditions that have been
placed on any of these exemptions be
removed or modified? If so, which
exemptions? Please explain and provide
specific examples.
V. Conclusion
For the reasons discussed above, the
Commission finds that the temporary
exemptions provided in this Order are
necessary or appropriate in the public
interest, and are consistent with the
protection of investors, to avoid
unnecessary disruption and uncertainty
among participants in activities
involving security-based swaps, and to
provide for the orderly implementation
of the requirements of the Dodd-Frank
Act. Accordingly,
PO 00000
Frm 00128
Fmt 4703
Sfmt 4703
It Is Hereby Ordered, pursuant to
section 36 of the Exchange Act, that,
until the compliance date for final rules
that we may adopt further defining the
terms ‘‘security-based swap’’ and
‘‘eligible contract participant,’’ the
following exemptions from Exchange
Act requirements will apply:
(a) Temporary exemption in
connection with security-based swap
activity:
(1) Persons eligible. The exemption in
paragraph (a)(2) of this exemption is
available to any person that meets the
definition of eligible contract
participant as set forth in section 1a(12)
of the Commodity Exchange Act (as in
effect on July 20, 2010), other than:
(i) A broker or dealer registered under
section 15(b) of the Exchange Act (other
than paragraph (11) thereof); 106 or
(ii) A self-regulatory organization, as
defined in section 3(a)(26) of the
Exchange Act; provided, however, that
this temporary exemption shall be
available to a registered securities
association solely with respect to its
obligations under section 19(g)(1)(B) of
the Exchange Act to enforce compliance
with provisions of its rules (and
106 Registered broker-dealers are addressed in
paragraph (b) of this exemption.
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provisions of the rules of the Municipal
Securities Rulemaking Board) that do
not apply to positions or activities
involving security-based swaps as of
July 15, 2011.
(2) General scope of exemption.
Subject to the exclusions in paragraph
(a)(3) of this exemption, such person
shall be exempt from the provisions of
the Exchange Act, and the rules and
regulations thereunder, solely in
connection with the person’s activities
involving security-based swaps.
(3) Exclusions from exemption. The
exemption in paragraph (a)(2) of this
exemption does not extend to the
following provisions under the
Exchange Act, and the applicable rules
or regulations thereunder:
(i) Antifraud and anti-manipulation
provisions. The antifraud and antimanipulation provisions of sections
9(a)(2)–(5), 10(b), 15(c)(1), 20(d) and
21A(a)(1) of the Exchange Act, as well
as underlying rules prohibiting fraud,
manipulation or insider trading (but not
prophylactic reporting or recordkeeping
requirements), and any provision of the
Exchange Act related to the
Commission’s enforcement authority in
connection with violations or potential
violations of such provisions.
(ii) Provisions added or amended by
subtitle B of Title VII of the Dodd-Frank
Act. All Exchange Act provisions
related to security-based swaps added or
amended by subtitle B of Title VII of the
Dodd-Frank Act, including the amended
definition of ‘‘security’’ in section
3(a)(10) of the Exchange Act.
(iii) Provisions applicable to certain
securities brokers. The broker
registration requirements of section
15(a)(1) of the Exchange Act, and the
other requirements of the Exchange Act
and the rules and regulations
thereunder that apply to a broker that is
not registered with the Commission;
provided, however, that this exclusion
shall apply only to broker activities by
persons that are members of a clearing
agency that functions as a central
counterparty for security-based swaps
and that hold customer funds or
securities in connection with securitybased swaps. Otherwise, paragraph
(a)(2) of this exemption will be available
in connection with broker activities
involving security-based swaps by
persons other than registered brokerdealers or self-regulatory organizations.
For these purposes, the term ‘‘central
counterparty’’ means a clearing agency
that interposes itself between the
counterparties to security-based swap
transactions, acting functionally as the
buyer to every seller and the seller to
every buyer.
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16:26 Jul 06, 2011
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(iv) Provisions applicable to certain
securities dealers. The dealer
registration requirements of section
15(a)(1) of the Exchange Act, and the
other requirements of the Exchange Act
and the rules and regulations
thereunder that apply to a dealer that is
not registered with the Commission;
provided, however, that this exclusion
shall not apply, and paragraph (a)(2) of
this exemption will be available, in
connection with dealing activities
involving security-based swaps with
counterparties that meet the definition
of eligible contract participant as set
forth in section 1a(12) of the Commodity
Exchange Act (as in effect on July 20,
2010).
(v) Additional provisions. The
following additional provisions under
the Exchange Act, or the rules and
regulations thereunder:
(A) Paragraphs (42), (43), (44), and
(45) of Section 3(a);
(B) Section 5;
(C) Section 6; 107
(D) Section 12;
(E) Section 13;
(F) Section 14;
(G) Paragraphs (4) and (6) of Section
15(b);
(H) Section 15(d);
(I) Section 15C;
(J) Section 16; and
(K) Section 17A.
(b) Temporary exemption specific to
security-based swap activities by
registered brokers and dealers.
(1) In general. Subject to paragraph
(b)(2) of this exemption, a broker or
dealer registered under section 15(b) of
the Exchange Act (other than paragraph
(11) thereof) shall be exempt from the
provisions of the Exchange Act and the
rules and regulations thereunder
specified in paragraph (a)(2) (subject to
the exclusions in paragraph (a)(3) of this
exemption) solely with respect to
security-based swaps.
(2) Limited exemption in connection
with certain provisions and rules. A
registered broker or dealer shall be
exempt from the following provisions
and rules in connection with securitybased swaps solely to the extent that
those provisions or rules do not apply
to the broker’s or dealer’s security-based
swap positions or activities as of July
15, 2011; provided, however, that the
exemption from rule 15c3–3 under the
Exchange Act shall not be available for
activities and positions of the registered
broker or dealer related to cleared
security-based swaps, to the extent that
the registered broker or dealer is a
member of a clearing agency that
107 Exchange Act sections 5 and 6 are addressed
in a separate exemption in this Order.
PO 00000
Frm 00129
Fmt 4703
Sfmt 4703
39939
functions as a central counterparty for
security-based swaps, and holds
customer funds or securities in
connection with cleared security-based
swaps: 108
(i) Section 7(c);
(ii) Section 15(c)(3);
(iii) Section 17(a);
(iv) Section 17(b);
(v) Regulation T, 12 CFR 220.1 et seq.;
(vi) Rule 240.15c3–1;
(vii) Rule 240.15c3–3;
(viii) Rule 240.17a–3;
(ix) Rule 240.17a–4;
(x) Rule 240.17a–5;
(xi) Rule 240.17a–8; and
(xii) Rule 240.17a–13.
It Is Hereby Further Ordered, pursuant
to section 36 of the Exchange Act, that,
until the earliest compliance date set
forth in any of the final rules regarding
registration of security-based swap
execution facilities, the following
exceptions from Exchange Act
requirements will apply:
(a) Temporary exemption from
sections 5 and 6 of the Exchange Act.
(1) Any person other than a clearing
agency acting as a central counterparty
in security-based swaps shall be exempt
from the requirements to register as a
national securities exchange under
sections 5 and 6 of the Exchange Act
and the rules and regulations
thereunder solely in connection with
the person’s activities involving
security-based swaps.
(2) A broker or dealer shall be exempt
from section 5 of the Exchange Act
solely in connection with the broker’s or
dealer’s activities involving securitybased swaps that it effects or reports on
an exchange that is exempted from
registration pursuant to paragraph (a)(1)
of this exemption.
(3) Each CDS CCP shall be exempt
from the requirements of sections 5 and
6 of the Exchange Act and the rules and
regulations thereunder solely in
connection with its calculation of markto-market prices for open positions in
Cleared CDS, subject to the following
conditions:
(i) Each CDS CCP shall report the
following information with respect to
the calculation of mark-to-market prices
for Cleared CDS to the Commission
within 30 days of the end of each
quarter, and preserve such reports
during the life of the enterprise and of
any successor enterprise:
(A) The total dollar volume of
transactions executed during the
108 Solely for purposes of this temporary
exemption, in addition to the general requirements
under the referenced Exchange Act sections,
registered broker-dealers shall only be subject to the
enumerated rules under the referenced Exchange
Act sections in connection with security-based
swaps.
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sroberts on DSK5SPTVN1PROD with NOTICES
39940
Federal Register / Vol. 76, No. 130 / Thursday, July 7, 2011 / Notices
quarter, broken down by reference
entity, security, or index; and
(B) The total unit volume and/or
notional amount executed during the
quarter, broken down by reference
entity, security, or index;
(ii) The CDS CCP shall establish and
maintain adequate safeguards and
procedures to protect members’
confidential trading information. Such
safeguards and procedures shall
include:
(A) Limiting access to the confidential
trading information of members to those
employees of the CDS CCP who are
operating the system or responsible for
its compliance with this exemption or
any other applicable rules; and
(B) Establishing and maintaining
standards controlling employees of the
CDS CCP trading for their own accounts.
The CDS CCP must establish and
maintain adequate oversight procedures
to ensure that the safeguards and
procedures established pursuant to this
condition are followed; and
(iii) Each CDS CCP shall directly or
indirectly make available to the public
on terms that are fair and reasonable
and not unreasonably discriminatory:
(A) All end-of-day settlement prices
and any other prices with respect to
Cleared CDS that it may establish to
calculate mark-to-market margin
requirements for its clearing members;
and
(B) Any other pricing or valuation
information with respect to Cleared CDS
as is published or distributed by the
CDS CCP.
(4) Any member of an CDS CCP shall
be exempt from the requirements of
section 5 of the Exchange Act solely to
the extent such member uses any
facility of the CDS CCP to effect any
transaction in Cleared CDS, or to report
any such transaction, in connection
with the CDS CCP’s clearance and risk
management process for Cleared CDS.
(b) Definitions.
(1) For purposes of this exemption,
the term ‘‘central counterparty’’ means a
clearing agency that interposes itself
between the counterparties to securitybased swap transactions, acting
functionally as the buyer to every seller
and the seller to every buyer.
(2) For purposes of this exemption,
the term ‘‘CDS CCP’’ shall mean ICE
Trust U.S. LLC, Chicago Mercantile
Exchange Inc., and ICE Clear Europe,
Limited.
(3) For purposes of this exemption,
the term ‘‘Cleared CDS’’ shall mean a
credit default swap that is a securitybased swap that is submitted (or offered,
purchased, or sold on terms providing
for submission) to a CDS CCP, that is
offered only to, purchased only by, and
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16:26 Jul 06, 2011
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sold only to persons that meet the
definition of eligible contract
participant as set forth in section 1a(12)
of the Commodity Exchange Act (as in
effect on July 20, 2010), and in which:
(i) The reference entity, the issuer of
the reference security, or the reference
security is one of the following:
(A) An entity reporting under the
Exchange Act, providing Securities Act
rule 144A(d)(4) information, or about
which financial information is
otherwise publicly available;
(B) A foreign private issuer whose
securities are listed outside the United
States and that has its principal trading
market outside the United States;
(C) A foreign sovereign debt security;
(D) An asset-backed security, as
defined in Regulation AB, issued in a
registered transaction with publicly
available distribution reports; or
(E) An asset-backed security issued or
guaranteed by the Federal National
Mortgage Association, the Federal Home
Loan Mortgage Corporation, or the
Government National Mortgage
Association; or
(ii) The reference index is an index in
which 80% or more of the index’s
weighting is comprised of the entities or
securities described in subparagraph (i).
It Is Hereby Further Ordered, pursuant
to section 36 of the Exchange Act, that
no contract entered into on or after July
16, 2011 shall be void or considered
voidable by reason of section 29(b) of
the Exchange Act because any person
that is a party to the contract violated a
provision of the Exchange Act for which
the Commission has provided
exemptive relief herein, until such time
as the underlying exemptive relief
expires.
By the Commission.
Dated: July 1, 2011.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011–17040 Filed 7–6–11; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–64779; File No. SR–BX–
2011–041]
Self-Regulatory Organizations;
NASDAQ OMX BX, Inc.; Notice of Filing
and Immediate Effectiveness of a
Proposal To Extend a Pilot Program
That Permits BOX to Have No Minimum
Size Requirement for Orders Entered
Into the Price Improvement Period
(PIP) Process Until July 18, 2012
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
Frm 00130
Fmt 4703
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
The Exchange proposes to amend
proposes to amend [sic] the
Supplementary Material to Chapter V,
Section 18 (The Price Improvement
Period ‘‘PIP’’) of the Rules of the Boston
Options Exchange Group, LLC (‘‘BOX’’)
to extend a pilot program that permits
BOX to have no minimum size
requirement for orders entered into the
PIP process (‘‘PIP Pilot Program’’). The
text of the proposed rule change is
available at the Exchange’s principal
office, at https://www.nasdaqomx.com, at
the Commission’s Public Reference
Room, and at the Commission’s Web
site at https://www.sec.gov.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in Sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of the proposed rule
change is to extend the PIP Pilot
Program under the BOX Rules for
1 15
June 30, 2011.
PO 00000
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on June 29,
2011, NASDAQ OMX BX, Inc.
(‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been
substantially prepared by the Exchange.
The Exchange has filed the proposed
rule change pursuant to Section
19(b)(3)(A) of the Act,3 and Rule 19b–
4(f)(6) thereunder,4 which renders the
proposal effective upon filing with the
Commission. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
Sfmt 4703
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A).
4 17 CFR 240.19b–4(f)(6).
2 17
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Agencies
[Federal Register Volume 76, Number 130 (Thursday, July 7, 2011)]
[Notices]
[Pages 39927-39940]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-17040]
=======================================================================
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-64795; File No. S7-27-11]
Order Granting Temporary Exemptions Under the Securities Exchange
Act of 1934 in Connection With the Pending Revision of the Definition
of ``Security'' To Encompass Security-Based Swaps, and Request for
Comment
AGENCY: Securities and Exchange Commission.
ACTION: Exemptive order; request for comment.
-----------------------------------------------------------------------
[[Page 39928]]
SUMMARY: The Securities and Exchange Commission (``Commission'' or
``SEC'') is issuing an order granting temporary exemptive relief from
compliance with certain provisions of the Securities Exchange Act of
1934 (``Exchange Act'') in connection with the pending revision of the
Exchange Act definition of ``security'' to encompass security-based
swaps and is requesting comments on the temporary relief granted.
DATES: This exemptive order is effective July 1, 2011. Comments must be
received on or before July 15, 2011.
ADDRESSES: Comments may be submitted, identified by File Number S7-27-
11, by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/other.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number S7-27-11 on the subject line; or
Use the Federal Rulemaking Portal (https://www.regulations.gov). Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090. All submissions should refer to File Number
S7-27-11. 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. The Commission will post all
comments on the Commission's Internet Web site (https://www.sec/gov/rules/other.shtml). Comments are also available for Web site viewing
and printing in the Commission's Public Reference Room, 100 F Street,
NE., Washington, DC 20549, on official business days between the hours
of 10 a.m. and 3 p.m. All comments received will be posted without
charge; the Commission does not edit personal identifying information
from submissions. You should only submit information that you wish to
make publicly available.
FOR FURTHER INFORMATION CONTACT: In general, Joshua Kans, Senior
Special Counsel, at (202) 551-5550; or Leah Drennan, Attorney-Adviser,
at (202) 551-5507; in connection with the section 5 and 6 relief,
Constance Kiggins, Special Counsel, at (202) 551-5701; Division of
Trading and Markets, Securities and Exchange Commission, 100 F Street,
NE., Washington, DC 20549-7010.
I. Introduction and Background
On July 21, 2010, President Barack Obama signed the Dodd-Frank Wall
Street Reform and Consumer Protection Act (``Dodd-Frank Act'') into
law.\1\ Title VII of the Dodd-Frank Act (``Title VII'') establishes a
regulatory regime applicable to the over-the-counter (``OTC'')
derivatives markets by providing the Commission and the Commodity
Futures Trading Commission (``CFTC'') with the authority to oversee
these heretofore largely unregulated markets.\2\ The Dodd-Frank Act
provides that the CFTC will regulate ``swaps,'' the SEC will regulate
``security-based swaps,'' and the CFTC and the SEC jointly will
regulate ``mixed swaps.'' \3\
---------------------------------------------------------------------------
\1\ The Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law 111-203, 124 Stat. 1376 (2010).
\2\ See generally Securities Exchange Act Release No. 64678
(June 15, 2011) (``Effective Date Release'').
\3\ 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 (``Federal Reserve''), shall 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.'' The Commission
and the CFTC jointly have proposed to further define these terms.
See Further Definition of ``Swap,'' ``Security-Based Swap,'' and
``Security-Based Swap Agreement''; Mixed Swaps; Security-Based Swap
Agreement Recordkeeping, Securities Act Release No. 9204, Securities
Exchange Act Release No. 64372 (Apr. 29, 2011), 76 FR 29818 (May 23,
2011); Further Definition of ``Swap Dealer,'' ``Security-Based Swap
Dealer,'' ``Major Swap Participant,'' ``Major Security-Based Swap
Participant'' and ``Eligible Contract Participant,'' Securities
Exchange Act Release No. 63452 (Dec. 7, 2010), 75 FR 80174 (Dec. 21,
2010).
Moreover, section 712(a)(8) of the Dodd-Frank Act provides that
the Commission and the CFTC, after consultation with the Federal
Reserve, shall jointly promulgate such regulations regarding mixed
swaps as may be necessary to carry out the purposes of Title VII.
The Commission and the CFTC have jointly proposed such regulations.
See 76 FR 29818.
---------------------------------------------------------------------------
Title VII amends the Securities Exchange Act of 1934 \4\
(``Exchange Act'') to substantially expand the regulation of the
security-based swap markets, establishing a new regulatory framework
within which such markets can continue to evolve in a more transparent,
efficient, fair, accessible, and competitive manner. Among other
aspects, Title VII amends the Exchange Act to add new provisions
concerning security-based swaps, including those related to: clearing;
execution facilities; segregation requirements; antifraud prohibitions;
position limits; transaction reporting; registration and regulation of
security-based swap dealers and major security-based swap participants;
and registration of clearing agencies that clear security-based
swaps.\5\
---------------------------------------------------------------------------
\4\ 15 U.S.C. 78a et seq.
\5\ See generally Effective Date Release, note 2, supra.
---------------------------------------------------------------------------
The Title VII amendments generally are effective on July 16, 2011
(360 days after the enactment of the Dodd-Frank Act, referred to herein
as the ``Effective Date''), unless a provision requires a
rulemaking.\6\ The Commission recently issued a release to provide
guidance in connection with the effectiveness of Exchange Act
provisions related to security-based swaps added by subtitle B of Title
VII (which generally creates, and relates to, the regulatory regime for
security-based swaps), and to provide temporary exemptions and other
relief in connection with certain of those provisions.\7\ Moreover, the
Commission has proposed conditional exemptions under the Securities Act
of 1933 \8\ (``Securities Act''), Exchange Act and the Trust Indenture
Act of 1939 \9\ (``Trust Indenture Act'') for security-based swaps
issued by certain clearing agencies.\10\ Also, the Commission intends
to provide temporary conditional exemptive relief for entities that
provide certain clearing services for security-based swaps. In
addition, the Commission will take other actions to address certain
security-based swaps, such as providing guidance regarding--and where
appropriate, temporary relief from--the various pre-Dodd Frank Act
provisions that would otherwise apply to security-based swaps on the
Effective Date, as well as extending existing temporary rules under the
Securities Act, the Exchange Act, and the Trust Indenture Act for
certain security-based swaps.\11\
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\6\ If a Title VII provision requires a rulemaking, the
provision will go into effect not less than 60 days after the
publication of the related final rule or on the Effective Date,
whichever is later. See Sections 754 and 774 of the Dodd-Frank Act.
\7\ Effective Date Release, note 2, supra.
\8\ 15 U.S.C. 77a et seq.
\9\ 15 U.S.C. 77aaa et seq.
\10\ See Exemptions for Security-Based Swaps Issued by Certain
Clearing Agencies, Securities Act Release No. 9222, Securities
Exchange Act Release No. 64639, Trust Indenture Act Release No. 2474
(June 9, 2011). These proposed exemptions will not be in place as of
the Effective Date.
\11\ See SEC Announces Steps to Address One-Year Effective Date
of Title VII of Dodd-Frank Act, available at https://www.sec.gov/news/press/2011/2011-125.htm (June 10, 2011).
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This Order primarily addresses a change that the Title VII
amendments will make to an already existing definition in the Exchange
Act.\12\
[[Page 39929]]
Specifically, as of the Effective Date, the Exchange Act definition of
``security'' will expressly encompass security-based swaps.\ 13\ In
making this change, Congress intended for security-based swaps to be
treated as securities under the Exchange Act and the underlying rules
and regulations. Nonetheless, this expansion of the scope of the
regulatory provisions of the Exchange Act raises certain complex issues
of interpretation. Absent additional time to analyze those issues, and
to consider whether to provide interpretive or operational guidance,
these changes may lead to unnecessary market uncertainty.\14\
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\12\ We also are providing guidance in connection with part I of
subtitle A of Title VII, which includes certain provisions that
relate to security-based swaps or to the Commission specifically.
See part III, infra. The Exemptive Date Release addressed subtitle B
of Title VII, while part II of subtitle A generally creates, and
relates to, the regulatory regime for swaps. See sections 721
through 754 of the Dodd-Frank Act.
\13\ See Exchange Act section 3(a)(10), 15 U.S.C. 78c(a)(10), as
revised by section 761 of the Dodd-Frank Act.
\14\ The Commission has received a request for relief by a
number of industry participants in connection with the revised scope
of the Exchange Act (as well as in connection with the new Exchange
Act provisions we have addressed in the Effective Date Release). See
letter to the Commission from the American Bankers Association,
Financial Services Roundtable, Futures Industry Association,
Institute of International Bankers, International Swaps and
Derivatives Association, Investment Company Institute, Securities
Industry and Financial Markets Association and U.S. Chamber of
Commerce, dated June 10, 2011 (``Trade Association Letter'').
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As is discussed in more detail below, we are addressing those
issues in part through a temporary exemption from the application of
the Exchange Act to security-based swaps, subject to certain exceptions
to this exemption by which specific Exchange Act provisions nonetheless
will apply to security-based swaps. Separate exemptions within this
Order will address registered broker-dealers and exchange registration
requirements. The overall approach is directed toward maintaining the
status quo during the implementation process for the Dodd-Frank Act, by
preserving the application of particular Exchange Act requirements that
already are applicable in connection with instruments that will be
``security-based swaps'' following the Effective Date, but deferring
the applicability of additional Exchange Act requirements in connection
with those instruments explicitly being defined as ``securities'' as of
the Effective Date.
The revision of the Exchange Act's ``security'' definition raises,
among other things, issues related to the Exchange Act definition of
``broker,'' \15\ particularly with regard to which activities (such as
facilitating the central clearing of security-based swaps for
customers) may lead to the requirement to register as a broker. The
revision of the ``security'' definition also raises interpretive issues
in the context of the Exchange Act definition of ``dealer'' in that,
following the Effective Date, the definition of ``dealer'' under the
Exchange Act will exclude security-based swap dealing activities only
to the extent that these activities are with counterparties that
constitute ``eligible contract participants.'' \16\ In other words,
while an entity's security-based swap activities involving eligible
contract participants cannot cause the entity to be a ``dealer''
(though the entity may otherwise be a ``security-based swap dealer''),
an entity's activities involving security-based swaps with
counterparties that are not eligible contract participants could,
depending on the facts and circumstances, still cause the entity to
fall within the ``dealer'' definition. Separately, the Dodd-Frank Act
has revised the definition of ``eligible contract participant,'' \17\
and some market participants have raised concerns as to the proper
interpretation of the revised ``eligible contract participant''
definition, and hence the proper interpretation of the new exclusion
from the ``dealer'' definition.\18\
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\15\ In relevant part, a ``broker'' is defined as a person ``in
the business of effecting transactions in securities for the account
of others.'' See Exchange Act section 3(a)(4), 15 U.S.C. 78c(a)(4).
The Dodd-Frank Act did not modify this definition. As a result,
absent an exemption or other relief, a person who meets this
definition in connection with security-based swaps activities would
be a broker and would be subject to the registration and other
regulatory requirements applicable to brokers, absent an exception
or exemption.
\16\ As of the July 16 effectiveness of the Dodd-Frank Act
amendments, the definition of ``dealer'' in Exchange Act Section
3(a)(5), 15 U.S.C. 78c(a)(5), will incorporate, in relevant part,
``any person engaged in the business of buying and selling
securities (not including security-based swaps, other than security-
based swaps with or for persons that are not eligible contract
participants), for such person's own account.''
At that time, the term ``eligible contract participant'' will
be incorporated into Exchange Act section 3(a)(65), 15 U.S.C.
78c(a)(65), and will refer to the definition of that term in section
1a of the Commodity Exchange Act, 7 U.S.C. 1a.
\17\ Most significantly, the Dodd-Frank Act revised paragraph
(A)(xi) of the ``eligible contract participant'' definition in the
Commodity Exchange Act (which the Exchange Act cross-references).
Prior to its amendment, one portion of that definition encompassed
individuals with ``total assets'' in excess of $10 million (or $5
million in the case of certain risk management agreements). As
revised, that portion of the ``eligible contract participant''
definition instead will apply to individuals with those same amounts
``invested on a discretionary basis.'' See Commodity Exchange Act
section 1a(18)(A)(xi), 7 U.S.C. 1a(18)(A)(xi) (as amended and
redesignated by section 721(a)(9) of the Dodd-Frank Act).
\18\ See Trade Association Letter, note 14, supra (particularly
citing issues as to the interpretation of the term ``discretionary
basis'' in the definition of ``eligible contract participant'').
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The expansion of the ``security'' definition, and hence the
expansion of the scope of the regulatory provisions of the Exchange Act
to security-based swaps, further raises other complex questions of
interpretation that could warrant additional guidance by the
Commission. These include questions as to how particular Exchange Act
requirements may apply to security-based swap activities of registered
broker-dealers.\19\ We believe that it is appropriate to provide market
participants with additional time to consider the potential impact on
their businesses and the interpretive questions raised, and to provide
the Commission with any related requests for guidance or relief, along
with the underlying analysis.\20\ Also, as is discussed below,
application of the exchange registration requirements of sections 5 and
6 \21\ of the Exchange Act to security-based swap activities will not
be practical until certain rulemaking has been completed.\22\
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\19\ See id. (citing, among other aspects, issues related to the
application of certain margin and customer protection rules to
security-based swap activities of registered broker-dealers).
\20\ In granting this relief, the Commission notes in particular
that the signatories to the Trade Association Letter, note 14,
supra, have represented that within three months of the Effective
Date they will provide the Commission with a request for permanent
exemption from the application of securities laws that they believe
are particularly inapposite in connection with security-based swap
activities. The signatories to that letter also anticipated that
Commission guidance would be necessary with respect to some of the
issues that would arise from the change to the scope of the Exchange
Act.
The Commission expects that any industry request for guidance or
relief will also address implementation issues related to the
applicable requirements. The Commission invites all interested
persons to submit views about whether specific relief would be
necessary or appropriate in the public interest, and consistent with
the protection of investors.
\21\ 15 U.S.C. 78e, 78f.
\22\ See parts II.C and II.D, infra.
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In furtherance of the Dodd-Frank Act's stated objective of
promoting financial stability in the U.S. financial system, the
Commission intends to move forward deliberately in implementing the
requirements of the Dodd-Frank Act, while minimizing unnecessary
disruption and costs to the markets. Those include the disruptions and
costs that may be expected to result if, as of the Effective Date,
existing Exchange Act provisions were in general deemed to apply to
security-based swap activities without additional time to consider the
potential impact of the revision to the ``security'' definition.
Accordingly, for the reasons discussed in this Order, the
Commission is granting temporary exemptive relief that is necessary or
appropriate in the public interest, and consistent with the protection
of investors, from compliance
[[Page 39930]]
with certain provisions of the Exchange Act that otherwise would apply
to security-based swap activities as of the Effective Date. Generally,
section 36 of the Exchange Act authorizes the Commission to
conditionally or unconditionally exempt, by rule, regulation, or order,
any person, security, or transaction (or any class or classes of
persons, securities, or transactions) from any provision or provisions
of the Exchange Act or any rule or regulation thereunder, to the extent
such exemption is necessary or appropriate in the public interest, and
is consistent with the protection of investors.\23\
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\23\ 15 U.S.C. 78mm. The Commission's exemptive authority under
Exchange Act section 36 is not available for certain specified
provisions of the Exchange Act added by Title VII that relate to
security-based swaps, see section 36(c) of the Exchange Act, 15
U.S.C. 78mm(c). That limitation does not apply to the provisions for
which the Commission is granting relief.
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The temporary exemptive relief we are granting today in part
combines an exemption from the application of the Exchange Act in
connection with security-based swaps with specific exceptions from that
exemption. As a result of these exceptions, certain provisions of the
Exchange Act and underlying rules and regulations will apply to
security-based swap activities.
For example, the instruments that (after the Effective Date) will
constitute security-based swaps already are generally subject to
certain antifraud and anti-manipulation provisions under the Exchange
Act. This is because those instruments generally constitute ``security-
based swap agreements'' under current law,\24\ and the Exchange Act
already provides that those security-based swap agreements are subject
to certain specific antifraud and anti-manipulation provisions
(including Exchange Act section 10(b)).\25\ Accordingly, under the
exemption, instruments that (before the Effective Date) were security-
based swap agreements and (after the Effective Date) constitute
security-based swaps will continue to be subject to the application of
those Exchange Act antifraud and anti-manipulation provisions, as well
as Securities Act antifraud provisions,\26\ following the Effective
Date. As discussed below, the exemption also is subject to certain
other exceptions which will provide for the application of particular
Exchange Act provisions to security-based swap activities (e.g.,
``broker'' and ``dealer'' registration provisions in certain
circumstances, as well as Commission authority to act against broker-
dealers and associated persons).\27\
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\24\ Under the existing (pre-Dodd-Frank) framework, a
``security-based swap agreement'' is defined as a ``swap agreement''
in which a material term is based on the price, yield, value, or
volatility of any security or any group or index of securities, or
any interest therein. See section 206B of the Gramm-Leach-Bliley
Act. Under existing law, moreover, the term ``swap agreement''
subsumes certain types of agreements for which certain ``material
terms'' are ``subject to individual negotiation.'' See section 206A
of the Gramm-Leach-Bliley Act. Thus, instruments that will be
``security-based swaps'' following the Effective Date in general
currently are ``security-based swap agreements'' for purposes of the
Exchange Act.
\25\ Currently (prior to amendment by the Dodd-Frank Act), the
Exchange Act provides that instruments that meet the definition of
``security-based swap agreement'' are subject to the following
antifraud and anti-manipulation provisions: (a) Paragraphs (2)
through (5) of Exchange Act section 9(a), 15 U.S.C. 78i(a),
prohibiting the manipulation of security prices; (b) Exchange Act
section 10(b), 15 U.S.C. 78j(b), (c) Exchange Act section 15(c)(1),
15 U.S.C. 78o(c)(1), which prohibits brokers and dealers from using
manipulative or deceptive devices; (d) Exchange Act section 20(d),
15 U.S.C. 78t(d), providing for antifraud liability in connection
with certain derivative transactions; and (e) Exchange Act section
21A(a)(1), 15 U.S.C. 78u-1(a)(1), related to the Commission's
authority to impose civil penalties for insider trading violations.
In addition, Exchange Act sections 16(a) and (b), 15 U.S.C. 78p(a)
and (b) specifically apply to security-based swap agreements under
current law.
Underlying rules prohibiting fraud, manipulation and insider
trading (such as Exchange Act rule 10b-5, 17 CFR 240.10b-5, which
prohibits the employment of manipulative or deceptive devices), also
apply to security-based swap agreements. However, as currently
(prior to amendment by the Dodd-Frank Act) provided by Exchange Act
section 3A, 15 U.S.C. 78c-1, as well as provided by Exchange Act
section 10(b), prophylactic reporting or recordkeeping requirements
(such as Exchange Act rule 10b-10, 17 CFR 10b-10, regarding
confirmation of transactions) do not apply to security-based swap
agreements.
As of the Effective Date, Exchange Act antifraud and insider
trading provisions still will apply to ``security-based swap
agreements.'' The definition of ``security-based swap agreement,''
as revised by the Dodd-Frank Act, however, will no longer encompass
those instruments that satisfy the ``security-based swap''
definition.
\26\ The antifraud provisions of Securities Act section 17(a),
15 U.S.C. 77q(a), also apply to ``security-based swap agreements''
under current law.
\27\ Also, as addressed below, the exemption does not address
certain other Exchange Act provisions.
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In addition, we are providing targeted exemptive relief in
connection with the application of Exchange Act requirements to
registered broker-dealers,\28\ as well as in connection with the
exchange registration requirements of Exchange Act sections 5 and
6.\29\ To promote legal certainty, moreover, we are providing temporary
relief from the rescission provisions of Exchange Act section 29(b)
\30\ in connection with these exemptions.\31\ Finally, we are providing
additional guidance in connection with provisions of part I of subtitle
A of Title VII.\32\ The following tables summarize the scope--and
limitations--of the relief we are granting (apart from the Exchange Act
section 29(b) relief and the guidance related to part I of subtitle A
of Title VII):
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\28\ See part II.B, infra.
\29\ See parts II.C and II.D, infra.
\30\ 15 U.S.C. 78cc(b).
\31\ See part II.E, infra.
\32\ See part III, infra.
Part II.A--Exchange Act Provisions That Will Apply to Persons Engaging
in Security-Based Swap Activities Notwithstanding the Temporary
Exemption \33\
------------------------------------------------------------------------
Nature of provisions Exchange Act sections
------------------------------------------------------------------------
Antifraud and anti-manipulation... Paragraphs (2) through (5) of
section 9(a), and sections 10(b),
15(c)(1), 20(d) and 21A(a)(1).\34\
Dealer registration requirements.. 15(a)(1), but only in connection
with security-based swaps with
counterparties that are not
eligible contract participants.\35\
Broker registration requirements.. 15(a)(1), but only with regard to
members of central counterparties
holding customer funds and
securities in connection with
security-based swaps.
[[Page 39931]]
Authority to take actions against 15(b)(4), 15(b)(6).
broker-dealers and associated
persons.
------------------------------------------------------------------------
\33\ The general temporary exemption provided in this Order does not
address the following additional provisions: securities registration,
reporting, proxy, short-swing profits and related requirements
(Exchange Act sections 12, 13, 14, 15(d) and 16); clearing agency
registration requirements (Exchange Act section 17A); and certain
provisions added by subtitle B of Title VII. We separately have
addressed or are addressing certain of those other requirements in the
context of security-based swaps. In addition, this exemption does not
address certain provisions related to government securities (Exchange
Act sections 3(a)(42)-(45) and 15C). Exchange registration provisions
are the subject of separate exemptions in this Order. In particular,
persons other than clearing agencies acting as central counterparties
will be exempt from the exchange registration requirements of Exchange
Act sections 5 and 6 solely in connection with security-based swap
activities, while broker-dealers effecting or reporting security-based
swap transactions on those exempt exchanges will be exempt from
Exchange Act section 5. In addition, three existing central
counterparties that clear CDS will be exempt from Exchange Act
sections 5 and 6 (in connection with their ``forced trade''
procedures) subject to certain conditions, and members that use those
central counterparties' clearance and risk management process to
effect or report Cleared CDS transactions will be exempt from section
5 unconditionally.
\34\ Underlying rules prohibiting fraud, manipulation or insider
trading, such as Exchange Act rule 10b-5, also remain applicable (but
not prophylactic reporting or recordkeeping requirements, such as
Exchange Act rule 10b-10). This is consistent with the current
application of antifraud and anti-manipulation provisions to security-
based swap agreements, as provided by Exchange Act sections 3A and
10(b) (which generally prohibit the application of ``reporting or
recordkeeping requirements, procedures, or standards as prophylactic
measures against fraud, manipulation, or insider trading'' with
respect to any security-based swap agreement''). In addition, all
provisions of the Exchange Act related to the Commission's enforcement
authority in connection with violations or potential violations of
such provisions also remain applicable.
\35\ This will be based on whether a person is an ``eligible contract
participant'' as set forth in the definition of that term in effect on
July 20, 2010 (prior to the Dodd-Frank Act).
Part II.B--Additional Exchange Act Provisions That Will Apply to
Security-Based Swap Activities and Positions of Registered Broker-
Dealers Notwithstanding the Temporary Exemption 36
------------------------------------------------------------------------
Nature of provisions Exchange Act section or rule
------------------------------------------------------------------------
Extension of credit............... Section 7(c)
Extension of credit............... Regulation T (12 CFR 220.1 et seq.).
Rulemaking authority over broker- Section 15(c)(3).
dealers.
Net capital....................... Rule 15c3-1.
Reserves and custody of securities Rule 15c3-3.
Books and records................. Sections 17(a)-(b).
Records and reports............... Rules 17a-3, 17a-4, 17a-5, 17a-8.
Quarterly security counts......... Rule 17a-13.
------------------------------------------------------------------------
\36\ In general, these provisions will apply to security-based swap
activities or positions of registered broker-dealers only to the
extent that they are applicable to those activities and positions as
of July 15, 2011. Exchange Act rule 15c3-3, however, also will fully
apply to the activities and positions of a registered broker-dealer
related to cleared security-based swaps, to the extent that the
registered broker-dealer is a member of a clearing agency that
functions as a central counterparty for security-based swaps, and
holds customer funds or securities in connection with cleared security-
based swaps.
II. Temporary Exemption in Connection With Certain Exchange Act
Requirements
The Commission is issuing temporary exemptions to address the
issues and concerns arising from the revision of the Exchange Act
``security'' definition and the application of the Exchange Act to
security-based swaps. These include a temporary exemption for certain
persons, along with a temporary exemption specific to broker-dealers;
both of those exemptions will remain in effect until the compliance
date for final rules that we may adopt further defining the terms
``security-based swap'' and ``eligible contract participant.'' \37\
These also include temporary exemptions related to Exchange Act
sections 5 and 6, and related to Exchange Act section 29(b), which, as
addressed below, will have other durations.
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\37\ See SEC and CFTC joint proposing releases defining those
terms, note 3, supra.
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A. Temporary Exemption From Certain Exchange Act Requirements in
Connection With Security-Based Swaps
As the first part of the relief provided by this Order, the
Commission is temporarily exempting certain persons from the
application of certain Exchange Act provisions in connection with
security-based swaps. As discussed below, this exemption will be
subject to certain key exceptions by which particular statutory
provisions (or underlying rules or regulations) or particular
activities will not be exempted.
The temporary exemption will be available to any person that meets
the definition of ``eligible contract participant'' that was in effect
as of July 20, 2010 (the day prior to the enactment of the Dodd-Frank
Act), other than a registered broker-dealer \38\ or, except in limited
circumstances, a self-regulatory organization.\39\ The availability of
this
[[Page 39932]]
temporary exemption will be limited to persons that meet the ``eligible
contract participant'' definition in order to provide relief to persons
currently participating in the security-based swap markets.\40\
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\38\ A separate temporary exemption addresses the security-based
swap activities of registered broker-dealers. See part II.B, infra.
\39\ Registered securities associations can take advantage of
this exemption in certain limited circumstances. In particular, the
exemption will be available to any registered securities association
solely with respect to its obligations under Exchange Act section
19(g)(1)(B), 15 U.S.C. 78s(g)(1)(B), to enforce compliance in
connection with security-based swaps with provisions of its rules
(and with provisions of the rules of the Municipal Securities
Rulemaking Board) that do not apply to positions or activities
involving security-based swaps as of July 15, 2011. Section
19(g)(1)(B) in relevant part requires national securities
associations to enforce compliance with their own rules. As
discussed below, see part II.B, infra, under the Commission's
exemption registered broker-dealers will be required to comply with
certain Exchange Act requirements in connection with security-based
swaps, but not to the extent that those provisions or rules do not
apply to the broker's or dealer's security-based swap positions or
activities as of July 15, 2011. The application of this exemption to
national securities associations is consistent with that approach.
Also, we expect the Financial Industry Regulatory Authority
(``FINRA''), a national securities association that is a self-
regulatory organization for registered broker-dealers, to file a
proposed rule change related to the application of FINRA's rules to
security-based swaps.
\40\ The exemption relies on the pre-Dodd-Frank Act definition
of ``eligible contract participant'' due to outstanding issues
discussed above, see note 17, supra, and accompanying text,
regarding the meaning of ``eligible contract participant'' under the
Dodd-Frank Act.
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Subject to exclusions discussed below, persons covered by the
temporary exemption will be exempt from the provisions of the Exchange
Act, and the applicable rules and regulations thereunder, solely in
connection with their activities involving security-based swaps. The
temporary exemption's scope is to be construed narrowly, and does not
apply to a person's activities involving securities other than
security-based swaps, even if those other securities-related activities
also involve security-based swaps.\41\
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\41\ In other words, for example, if a person were to enter into
an arrangement involving the purchase of a debt security in
conjunction with the purchase of credit protection in the form of a
credit default swap referencing that debt security, the person's
credit default swap transaction would be subject the temporary
exemption, but the person's purchase of the debt security would not.
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As noted above, however, this temporary exemption does not extend
to certain Exchange Act provisions and underlying rules and
regulations.
First, for the reasons discussed above, the temporary exemption
applicable to security-based swaps does not extend to the antifraud and
anti-manipulation provisions of the Exchange Act, and underlying rules
or regulations, that already apply to ``security-based swap
agreements'' under current law. Thus, even with the temporary
exemption, paragraphs (2) through (5) of section 9(a), section 10(b),
section 15(c)(1), section 20(d) and section 21A(a)(1) of the Exchange
Act \42\ will apply to security-based swaps. Underlying rules
prohibiting fraud, manipulation or insider trading, such as Exchange
Act rule 10b-5 (but not prophylactic reporting or recordkeeping
requirements such as the confirmation requirements of Exchange Act rule
10b-10) also will apply to security-based swaps. Consistent with the
Commission's current authority, moreover, the temporary exemption will
not affect the Commission's investigative, enforcement, and procedural
authority related to those provisions and rules.\43\
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\42\ See note 25, supra.
\43\ Thus, for example, the Commission retains the ability to
investigate potential violations and bring enforcement actions in
the federal courts as well as in administrative proceedings, and to
seek the full panoply of remedies available in such cases.
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The temporary exemption also does not extend to Exchange Act
provisions related to security-based swaps that were added or amended
by Subtitle B of Title VII of the Dodd-Frank Act. The Commission
separately has addressed those new provisions and amendments \44\
(apart from the change to the ``security'' definition that underpins
the exemptions that are the subject of this Order).
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\44\ See Effective Date Release, note 2, supra.
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In addition, even under the temporary exemption, the Exchange Act
``broker'' registration requirements will apply to broker activities
involving security-based swaps by persons that are members of a
clearing agency that functions as a central counterparty \45\ (``CCP'')
for security-based swaps, and that hold customer funds and securities
in connection with security-based swaps. Based on the Commission's
experience in granting, and representations made by recipients of,
previous exemptive orders for CCPs, the Commission understands that
there currently are no CCPs offering customer clearing of security-
based swaps.\46\ Apart from that limitation, and for the reasons
discussed above, the exemption from registration requirements will
extend to broker activity involving security-based swaps.\47\
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\45\ For these purposes, a ``central counterparty'' means a
clearing agency that interposes itself between the counterparties to
security-based swap transactions, acting functionally as the buyer
to every seller and the seller to every buyer.
\46\ The Commission has granted temporary conditional exemptions
to facilitate CDS clearing in connection with requests on behalf of
ICE Clear Europe Limited; Eurex Clearing AG; Chicago Mercantile
Exchange Inc.; ICE Trust US LLC; and LIFFE A&M and LCH.Clearnet Ltd.
See notes 71 and 76, infra.
To the extent that CCPs plan to offer customer clearing of
security-based swaps during the duration of this exemption, the
Commission will consider requests for relief from broker-related
requirements by such CCPs on behalf of their participants, based on
the applicable facts and circumstances.
\47\ In light of the exemption from broker registration
requirements and from the dealer registration requirements addressed
below (but subject to the exemption's limitations associated with
those requirements), non-U.S. persons that act as brokers or dealers
solely in connection with security-based swaps involving U.S.
counterparties need not rely on the exemptions from broker-dealer
registration requirements that are set forth in Exchange Act rule
15a-6, 17 CFR 240.15a-6. Thus, non-U.S. persons will not have to
comply with the requirements and conditions of rule 15a-6,
including, for example, the requirement to use a registered U.S.
broker-dealer to effect a transaction in a security-based swap, as
provided in paragraph (a)(3) of the rule.
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Moreover, even under the temporary exemption, the Exchange Act
``dealer'' registration requirements will apply to security-based swap
dealing activities unless those activities involve counterparties that
meet the definition of ``eligible contract participant'' that was in
effect as of July 20, 2010 (the day prior to the enactment of the Dodd-
Frank Act). Accordingly, conducting security-based swap activities with
counterparties that do not meet that July 20, 2010 definition of
``eligible contract participant'' could, depending on the facts and
circumstances, still cause an entity to be a ``dealer'' under the
Exchange Act. In light of market participants' concerns regarding
interpretive issues resulting from the statutory changes to the
``eligible contract participant'' definition, the exemption is intended
to appropriately implement the legislative goal of applying the
``dealer'' definition to security-based swap activities involving
counterparties that are not eligible contract participants, while
maintaining the status quo with respect to activities involving
``eligible contract participants'' as that term was defined on July 20,
2010.\48\
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\48\ In a similar way, the Commission has targeted the exemptive
relief it previously granted in connection with section 6(l) of the
Exchange Act, 15 U.S.C. 78f(l), which was added by the Dodd-Frank
Act. This relief will permit persons that currently participate in
the security-based swap markets, but that potentially may not be
considered eligible contract participants under the definition as
amended by Title VII of the Dodd-Frank Act, to continue to do so
until the term ``eligible contract participant'' is further defined
in final rulemaking. See Effective Date Release, note 2, supra.
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This temporary exemption further does not excuse compliance with
certain additional provisions under the Exchange Act. The exemption
does not apply to the exchange registration requirements of Exchange
Act sections 5 and 6, as those provisions instead are being addressed
by a separate conditional exemption described below.\49\ This exemption
further does not extend to: the requirements of Exchange Act sections
12, 13, 14, 15(d), and 16 \50\; the Commission's administrative
proceeding authority under Exchange Act sections 15(b)(4) and (b)(6)
\51\; or to certain provisions
[[Page 39933]]
related to government securities.\52\ The temporary exemption further
does not extend to the clearing agency registration requirement of
Exchange Act section 17A,\53\ as the Commission separately intends to
provide targeted exemptive relief in connection with that requirement.
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\49\ See parts II.C and II.D, infra.
\50\ 15 U.S.C. 78l, 78m, 78n, 78o(d), 78p. These provisions
address, among other things, securities registration, reporting by
issuers and other persons, proxies and short-swing profits.
\51\ Exchange Act sections 15(b)(4) and 15(b)(6), 15 U.S.C.
78o(b)(4) and (b)(6), grant the Commission authority to take action
against brokers and dealers and associated persons in certain
situations. Accordingly, while this exemption extends to certain
persons that may otherwise act as brokers or dealers in the market
for security-based swaps, such brokers or dealers may still be
subject to actions under sections 15(b)(4) and (b)(6) of the
Exchange Act.
In addition, such brokers or dealers may be subject to actions
under Exchange Act section 15(c)(1), 15 U.S.C. 78o(c)(1), which
prohibits brokers and dealers from using manipulative or deceptive
devices. Sections 15(b)(4), 15(b)(6) and 15(c)(1), of course, would
not apply to persons subject to this exemption who do not act as
broker-dealers or associated persons of broker-dealers.
\52\ The exemption specifically does not extend to the Exchange
Act provisions applicable to government securities, as set forth in
section 15C, 15 U.S.C. 78o-5, and its underlying rules and
regulations. The exemption also does not extend to related
definitions found at paragraphs (42) through (45) of section 3(a),
15 U.S.C. 78c(a). The Commission does not have authority under
section 36 to issue exemptions in connection with those provisions.
See Exchange Act section 36(b), 15 U.S.C. 78mm(b).
\53\ 15 U.S.C. 78q-1.
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B. Temporary Exemption From Certain Exchange Act Requirements in
Connection With Security-Based Swap Activities by Registered Broker-
Dealers
In addition to the temporary exemption addressed above, the
Commission separately is providing exemptive relief to registered
broker-dealers in connection with the revised ``security'' definition
and the application of existing Exchange Act provisions to security-
based swaps. In granting this relief, we have sought to recognize
concerns raised by market participants--e.g., the application of
current broker-dealer margin rules to security-based swap activities--
while also being mindful that certain regulations applicable to broker-
dealers play a critical role in promoting market integrity and
protecting customers (including broker-dealer customers that are not
involved in security-based swap transactions).
This temporary exemption will be available to any registered
broker-dealer solely with respect to its activities and positions
involving security-based swaps. In general--and subject to the
additional provisions addressed below--this temporary exemption has the
same scope as the temporary exemption addressed above, and is subject
to the same exclusions. Thus, for example, security-based swap activity
by registered broker-dealers will be subject to the same Exchange Act
antifraud and anti-manipulation provisions as will be effective under
the temporary exemption addressed above.
Moreover, we are limiting the scope of the exemption for registered
broker-dealers in connection with certain Exchange Act provisions and
rules that apply specifically to registered broker-dealers. In
particular (and subject to additional limitations in connection with
Exchange Act rule 15c3-3 as addressed below), registered broker-dealers
will solely be exempt from those provisions and rules to the extent
that those provisions or rules do not apply to the broker's or dealer's
security-based swap positions or activities as of July 15, 2011--the
day before the effectiveness of the change to the ``security''
definition. In other words, during the exemptive period the application
of current law will remain unchanged, and those particular Exchange Act
requirements will continue to apply to registered broker-dealers'
security-based swap activities and positions to the same extent they
apply currently. This approach is intended to help avoid undue market
disruptions resulting from the change to the ``security'' definition,
while at the same time preserving the current application of those
particular provisions or rules to security-based swap activity by
registered broker-dealers.
Thus, under this approach of preserving the status quo, no
exemption will be provided in connection with the following
requirements under the Exchange Act to the extent that those
requirements currently apply to registered broker-dealer activities or
positions involving instruments that will be security-based swaps (but
registered broker-dealers will be exempted in connection with those
requirements to the extent that the requirements do not already apply
to activities or positions involving those instruments): \54\
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\54\ Solely for purposes of this temporary exemption, in
addition to the general requirements under the referenced Exchange
Act sections, registered broker-dealers shall only be subject to the
enumerated rules under the referenced Exchange Act sections in
connection with security-based swaps.
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Section 7(c),\55\ regarding the extension of credit by
broker-dealers; and Regulation T,\56\ a Federal Reserve Board
regulation regarding broker-dealer extension of credit.
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\55\ 15 U.S.C. 78g(c).
\56\ 12 CFR 220.1 et seq.
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Section 15(c)(3),\57\ which provides the Commission with
rulemaking authority in connection with broker-dealer financial
responsibility; Exchange Act rule 15c3-1,\58\ regarding broker-dealer
net capital; and Exchange Act rule 15c3-3,\59\ regarding broker-dealer
reserves and custody of securities. In the case of Exchange Act rule
15c3-3, moreover, the exemption will not be applicable to the
activities and positions of a registered broker-dealer related to
cleared security-based swaps, to the extent that the registered broker-
dealer is a member of a clearing agency that functions as a central
counterparty for security-based swaps, and holds customer funds or
securities in connection with cleared security-based swaps.\60\
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\57\ 15 U.S.C. 78o(c)(3).
\58\ 17 CFR 240.15c3-1.
\59\ 17 CFR 240.15c3-3.
\60\ This is consistent with the exclusion from the temporary
exemption addressed above with regard to the broker registration
requirement. See note 45, supra, and accompanying text.
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Section 17(a),\61\ regarding broker-dealer obligations to
make, keep and furnish information; section 17(b),\62\ regarding
broker-dealer records subject to examination; Exchange Act rules 17a-3
through 17a-5,\63\ regarding records to be made and preserved by
broker-dealers and reports to be made by broker-dealers; Exchange Act
rule 17a-8,\64\ regarding broker-dealer recordkeeping and reporting
under the Bank Secrecy Act; and Exchange Act rule 17a-13,\65\ regarding
quarterly security counts to be made by certain exchange members and
broker-dealers.
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\61\ 15 U.S.C. 78q(a).
\62\ 15 U.S.C. 78q(b).
\63\ 17 CFR 240.17a-3 through 17a-5
\64\ 17 CFR 240.17a-8.
\65\ 17 CFR 240.17a-13.
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C. Temporary Exemptions From Sections 5 and 6 of the Exchange Act for
Brokers, Dealers and Exchanges
Section 5 of the Exchange Act states that ``[i]t shall be unlawful
for any broker, dealer, or exchange,\66\ directly or indirectly, to
make use of the mails or any means or instrumentality of interstate
commerce for the purpose of using any facility of an exchange * * * to
effect any transaction in a security, or to report any such
transactions, unless such exchange (1) Is registered as a national
securities exchange under section 6 of [the Exchange Act], or (2) is
exempted from such registration * * * by reason of the limited volume
[[Page 39934]]
of transactions effected on such exchange * * * .'' Section 6 of the
Exchange Act sets forth a procedure whereby an exchange may register as
a national securities exchange.\67\
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\66\ Section 3(a)(1) of the Exchange Act, 15 U.S.C. 78c(a)(1),
defines ``exchange'' to mean ``any organization, association, or
group of persons, whether incorporated or unincorporated, which
constitutes, maintains, or provides a market place or facilities for
bringing together purchasers and sellers of securities or for
otherwise performing with respect to securities the functions
commonly performed by a stock exchange as that term is generally
understood, and includes the market place and the market facilities
maintained by such an exchange.'' Rule 3b-16 under the Exchange Act,
17 CFR 240.3b-16, defines certain terms used in the statutory
definition of exchange. See Securities Exchange Act Release No.
40760 (Dec. 8, 1998), 63 FR 70844 (Dec. 22, 1998) (``Regulation ATS
Adopting Release'') (adopting Rule 3b-16 in addition to Regulation
ATS).
\67\ See generally Exchange Act section 6(a) and the rules
thereunder. Section 6 of the Exchange Act also sets forth various
requirements to which a national securities exchange is subject.
See, e.g., Exchange Act section 6(b).
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Certain persons, particularly those that would meet the statutory
definition of security-based swap execution facility (``SB SEF''),\68\
may today engage in activities that would subject them to the
restrictions and requirements of sections 5 and 6 of the Exchange Act
as of the Effective Date, once security-based swaps are included within
the definition of ``security.'' The Commission has proposed, but not
acted on, registration requirements for SB SEFs. Therefore, the
Commission is using its authority under section 36 of the Exchange Act
to provide a temporary exemption from the requirement to register as a
national securities exchange in sections 5 and 6 of the Exchange Act to
any person, other than a clearing agency acting as a central
counterparty in security-based swaps,\69\ that, solely due to its
activities relating to security-based swaps, would fall within the
definition of exchange and thus be required to register as an exchange.
Persons who can take advantage of this exemption include those entities
that would meet the statutory SB SEF definition,\70\ but that otherwise
would not be subject to the requirements under sections 5 and 6 of the
Exchange Act.
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\68\ See Exchange Act section 3(a)(77), 15 U.S.C. 78c(a)(77).
\69\ The status of central counterparties in security-based
swaps is addressed in part II.D, infra.
\70\ While the Exchange Act currently does not prohibit
registered alternative trading systems from trading security-based
swaps, after the Effective Date any alternative trading system that
meets the definition of SB SEF would no longer be permitted to do so
absent an exemption or registration as a national securities
exchange or SB SEF. See section 763 of the Dodd-Frank Act, adding
Exchange Act section 3D(a)(1), 15 U.S.C. 78c-4(a)(1) (``[n]o person
may operate a facility for the trading or processing of security-
based swaps, unless the facility is registered as a security-based
swap execution facility or as a national securities exchange under
this section'') and Securities Exchange Act Release No. 34-63825
(Feb. 2, 2011), 76 FR 10948 (Feb. 28, 2011) (``SB SEF Proposing
Release'') at note 10 (``The Commission views [Section 3D(a)(1) of
the Exchange Act] as applying only to facilities that meet the
definition of ``security-based swap execution facility'' in Section
3(a)(77) of the Exchange Act). The Commission has granted temporary
relief from the requirements of section 3D(a)(1) of the Exchange Act
to allow alternative trading systems and other entities trading
security-based swaps to continue to trade security-based swaps until
the exemption expires. See Effective Date Release, note 2, supra.
Following the expiration of the temporary exemption, any entity
trading security-based swaps that meets the definition of SB SEF
would be required to register as a national securities exchange or a
SB SEF.
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This temporary exemption will remain in effect until the earliest
compliance date set forth in any of the final rules regarding the
registration of SB SEFs. It specifically will permit security-based
swaps to continue to be traded on or through entities (other than
central counterparties) following the Effective Date, until the
registration requirements and other provisions applicable to SB SEFs
have been implemented. As noted above, this temporary exemption is
available to persons (other than central counterparties) that meet the
definition of exchange solely because of their activities relating to
transactions in security-based swaps. Thus, to the extent that a person
otherwise satisfies the definition of ``exchange'' in section 3(a)(1)
of the Exchange Act and the criteria of rule 3b-16 under the Exchange
Act, it must register with the Commission as a national securities
exchange under section 6 of the Exchange Act and the rules and
regulations thereunder or comply with the terms of another exemption.
In addition, absent an exemption, section 5 of the Exchange Act
would prohibit brokers and dealers from effecting transactions in
security-based swaps on an exchange that is not a national securities
exchange, even if that exchange was operating in reliance on the
exemption addressed above. The Commission therefore is using its
authority under section 36 of the Exchange Act to provide a temporary
exemption to brokers and dealers that effect transactions in security-
based swaps on an exchange that is operating without registering as a
national securities exchange in reliance on that exemption. Temporarily
exempting brokers and dealers that effect transactions in security-
based swaps on such an exchange from this restriction in section 5 will
facilitate brokers' and dealers' continued use of such facilities
without the disruptions and costs that might be expected to result from
the application of those provisions prior to the earliest compliance
date of final rules regarding the registration of SB SEFs. Without also
exempting brokers and dealers from this section 5 requirement, the
Commission's temporary exemption of persons that meet the definition of
exchange with respect to the trading of security-based swaps would be
ineffective, because brokers and dealers would not be permitted to
effect transactions on those exchanges. A broker or dealer is exempt
from the prohibition in section 5 pursuant to this temporary exemption
solely to the extent that it effects transactions in security-based
swaps on an exchange operating in reliance on the exemption addressed
above, or reports security-based swap transactions on such an exempted
exchange.
D. Exemption From Sections 5 and 6 for Certain CCPs
The Commission is also exercising its authority under section 36 of
the Exchange Act to extend specific existing exemptions from the
exchange registration requirements of sections 5 and 6 of the Exchange
Act provided to three central counterparties--ICE Trust U.S. LLC (``ICE
Trust''), Chicago Mercantile Exchange Inc. (``CME''), and ICE Clear
Europe, Limited (``ICE Clear Europe'') (collectively, ``CDS CCPs'')
\71\--that clear ``Cleared CDS.'' \72\ These exemptions will remain in
effect until the earliest compliance date set forth in any of the final
rules regarding the registration of SB SEFs.
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\71\ See generally Securities Exchange Act Release Nos. 60372
(July 23, 2009), 74 FR 37748 (July 29, 2009); 61973 (April 23,
2010), 75 FR 22656 (April 29, 2010); and 63389 (November 29, 2010),
75 FR 75520 (December 3, 2010) (temporary exemptions in connection
with CDS clearing by ICE Clear Europe); 59578 (March 13, 2009), 74
FR 11781 (March 19, 2009); 61164 (December 14, 2009), 74 FR 67258
(December 18, 2009); 61803 (March 30, 2010), 75 FR 17181 (April 5,
2010); and 63388 (November 29, 2010), 75 FR 75522 (December 3, 2010)
(temporary exemptions in connection with CDS clearing by CME); 59527
(March 6, 2009), 74 FR 10791 (March 12, 2009); 61119 (December 4,
2009), 74 FR 65554 (December 10, 2009); 61662 (March 5, 2010), 75 FR
11589 (March 11, 2010), 63387 (November 29, 2010), 75 FR 75502
(December 3, 2010) (temporary exemptions in connection with CDS
clearing by ICE Trust) (collectively, ``Temporary Cleared CDS
Exemptions'').
\72\ ``Cleared CDS'' means a credit default swaps that is a
security-based swap that is submitted (or offered, purchased, or
sold on terms providing for submission) to a CDS CCP, and that is
offered only to, purchased only by, and sold only to persons that
meet the pre Dodd-Frank definition of eligible contract participant.
In addition, to be a Cleared CDS, either: (i) The reference entity,
the issuer of the reference security, or the reference security is
one of the following: (A) an entity reporting under the Exchange
Act, providing Securities Act rule 144A(d)(4) (17 CFR
230.144A(d)(4)) information, or about which financial information is
otherwise publicly available; (B) a foreign private issuer whose
securities are listed outside the United States and that has its
principal trading market outside the United States; (C) a foreign
sovereign debt security; (D) an asset-backed security, as defined in
Regulation AB, issued in a registered transaction with publicly
available distribution reports; or (E) an asset-backed security
issued or guaranteed by the Federal National Mortgage Association,
the Federal Home Loan Mortgage Corporation, or the Government
National Mortgage Association; or (ii) the reference index is an
index in which 80% or more of the index's weighting is comprised of
the entities or securities described in subparagraph (i).
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As described in the Temporary Cleared CDS Exemptions,\73\ as part
of the clearing and risk management
[[Page 39935]]
processes, each CDS CCP calculates, based on prices or quotations
submitted by its participants, an end-of-day settlement price for each
contract in which any