Order Pursuant to Section 36 of the Securities Exchange Act of 1934 Granting Temporary Exemptions From Clearing Agency Registration Requirements Under Section 17A(b) of the Exchange Act for Entities Providing Certain Clearing Services for Security-Based Swaps, 39963-39966 [2011-17053]

Download as PDF Federal Register / Vol. 76, No. 130 / Thursday, July 7, 2011 / Notices Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR– NYSEArca–2011–40 and should be submitted on or before July 28, 2011. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.19 Cathy H. Ahn, Deputy Secretary. [FR Doc. 2011–16963 Filed 7–6–11; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–64796; File No. S7–28–11] Order Pursuant to Section 36 of the Securities Exchange Act of 1934 Granting Temporary Exemptions From Clearing Agency Registration Requirements Under Section 17A(b) of the Exchange Act for Entities Providing Certain Clearing Services for Security-Based Swaps July 1, 2011. I. Introduction Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (‘‘Dodd-Frank Act’’),1 amends the Securities Exchange Act of 1934 (‘‘Exchange Act’’) to provide for the comprehensive regulation of security-based swaps 2 by the Securities 19 17 CFR 200.30–3(a)(12). Law 111–203. 2 Section 761(a)(6) of the Dodd-Frank Act defines a ‘‘security-based swap’’ as any agreement, contract, or transaction that is a ‘‘swap,’’ as defined in section 1a(47) of the Commodity Exchange Act, 7 U.S.C. 1a(47), that is based on an index that is a narrow-based security index, a single security, or a loan, including any interest therein or on the value thereof; or the occurrence, nonoccurrence, or extent of the occurrence of an event relating to a single issuer of a security or the issuers of securities in a narrow-based security index, provided that such event directly affects the financial statements, financial condition, or financial obligations of the issuer. See section 3(a)(68) of the Securities Exchange Act of 1934 (‘‘Exchange Act’’), 15 U.S.C. 78c(a)(68) (as added by section 761(a)(6) of the Dodd-Frank Act). Section 712(d) of the Dodd-Frank Act provides that the Commission and the Commodity Futures Trading Commission (‘‘CFTC’’), in consultation with the Board of Governors of the Federal Reserve System, shall, among other things, jointly further define the terms ‘‘swap’’ and ‘‘security-based swap.’’ See SEC Release No. 9204 sroberts on DSK5SPTVN1PROD with NOTICES 1 Public VerDate Mar<15>2010 16:26 Jul 06, 2011 Jkt 223001 and Exchange Commission (‘‘Commission’’).3 Among other things, Title VII seeks to ensure that, wherever possible and appropriate, derivatives contracts formerly traded exclusively in the over-the-counter (‘‘OTC’’) market are centrally cleared.4 One of the key ways in which the Dodd-Frank Act seeks to mitigate risk in the security-based swap market is by requiring that entities that clear and settle security-based swaps be registered with the Commission. Specifically, section 763(b) of the DoddFrank Act adds a new section 17A(g) to the Exchange Act, which directs entities that use instrumentalities of interstate commerce to perform clearing agency functions for security-based swaps to register with the Commission.5 Section 763(b) of the Dodd-Frank Act also directs the Commission, by adding new sections 17A(i) and (j) of the Exchange Act, to adopt rules for the implementation of the registration requirement in new section 17A(g). The Title VII amendments for which rules are not required generally are effective on July 16, 2011 (360 days after enactment of the Dodd-Frank Act, referred to herein as the ‘‘Effective Date’’). Provisions that require rules for implementation become effective not less than 60 days after publication of the related final rule or on July 16, 2011, whichever is later.6 Section 17A(j) of the Exchange Act requires the Commission to adopt rules governing persons that are registered as clearing agencies for security-based swaps under the Exchange Act.7 Section 17A(i) of the Exchange Act provides that, to be registered and to maintain 39963 registration as a clearing agency that clears security-based swap transactions, a clearing agency must comply with such standards as the Commission may establish by rule.8 Consistent with these provisions, as well as provisions in Title VIII of the Dodd-Frank Act,9 the Commission on March 3, 2011 proposed rules regarding registration of clearing agencies and the operation and governance of clearing agencies, including clearing agencies that clear security-based swaps.10 Pursuant to section 774 of the Dodd-Frank Act, discussed above, compliance with section 17A(g) of the Exchange Act will not be required as of the Effective Date because sections 17A(i) and (j) require rulemaking to implement the registration requirement pursuant to section 17A(g) of clearing agencies that clear security-based swap transactions.11 Instead compliance with section 17A(g) of the Exchange Act will be required not less than 60 days after the publication of final rules relating to registration of clearing agencies that clear security-based swaps pursuant to sections 17A(i) and (j) of the Exchange Act. In contrast to section 17A(g) of the Exchange Act, the registration requirement of section 17A(b) of the Exchange Act, which applies to all clearing agencies, will apply to securitybased swap clearing agencies when the provision of the Dodd-Frank Act that amends the definition of ‘‘security’’ under the Exchange Act to include security-based swaps becomes effective, i.e., on the Effective Date.12 8 Id. (April 29, 2011), 76 FR 32880 (June 7, 2011) (proposing product definitions contained in Title VII of the Dodd-Frank Act). 3 Section 761(a)(2) of the Dodd-Frank Act includes security-based swaps in the definition of ‘‘security’’ in section 3(a)(10) of the Exchange Act, 15 U.S.C. 78c. See also section 768(a)(1) of the Dodd-Frank Act (amending section 2(a)(1) of the Securities Act of 1933, 15 U.S.C. 77b(a)(1), to include security-based swaps in the definition of ‘‘security’’). 4 See, e.g., Report of the Senate Committee on Banking, Housing, and Urban Affairs regarding The Restoring American Financial Stability Act of 2010, S. Rep. No. 111–176 at 34 (stating that ‘‘[s]ome parts of the OTC market may not be suitable for clearing and exchange trading due to individual business needs of certain users. Those users should retain the ability to engage in customized, uncleared contracts while bringing in as much of the OTC market under the centrally cleared and exchangetraded framework as possible.’’). 5 Public Law 111–203 § 763(b). 6 See section 774 of the Dodd-Frank Act, 15 U.S.C. 77b note. See also Exchange Act Release No. 64678 (June 15, 2011), granting temporary exemptions and other temporary relief, together with information on compliance dates for new provisions of the Exchange Act applicable to security-based swaps. 7 Public Law 111–203 § 763(b). PO 00000 Frm 00153 Fmt 4703 Sfmt 4703 9 Title VIII of the Dodd-Frank Act, entitled the Payment, Clearing, and Settlement Supervision Act of 2010 (‘‘Clearing Supervision Act’’), establishes an enhanced supervisory and risk control system for systemically important clearing agencies and other financial market utilities (‘‘FMUs’’). It provides that the Commission may prescribe regulations containing risk management standards, taking into consideration relevant international standards and existing prudential requirements, for any designated clearing entities it regulates. See section 805(a)(2) of the Clearing Supervision Act. Those regulations may govern: ‘‘(A) the operations related to payment, clearing, and settlement activities of such designated clearing entities; and (B) the conduct of designated activities by such financial institutions.’’ 12 U.S.C. 5464(a)(2). 10 Securities Exchange Act Release No. 64017 (March 3, 2011), 76 FR 14472 (March 16, 2011) (File No. S7–08–11) (the ‘‘Clearing Agency Proposing Release’’). 11 Securities Exchange Act Release No. 64678 (June 15, 2011) 76 FR 36287 (June 22, 2011) (File No. S7–24–11) (Temporary Exemptions and Other Temporary Relief, Together With Information on Compliance Dates for New Provisions of the Securities Exchange Act of 1934 Applicable to Security-Based Swaps). 12 See section 761(a)(2) of the Dodd-Frank Act (amending section 3(a)(10) of the Exchange Act, 15 U.S.C. 78c(a)(10)). E:\FR\FM\07JYN1.SGM 07JYN1 39964 Federal Register / Vol. 76, No. 130 / Thursday, July 7, 2011 / Notices sroberts on DSK5SPTVN1PROD with NOTICES Accordingly, absent relief by the Commission, any entity that functions as a clearing agency for security-based swaps would be required to register with the Commission pursuant to section 17A(b)(1) of the Exchange Act as of the Effective Date.13 The Commission notes that the term ‘‘clearing agency’’ under section 3(a)(23)(A) of Exchange Act is defined broadly to include any person who: • Acts as an intermediary in making payments or deliveries or both in connection with transactions in securities; • Provides facilities for the comparison of data regarding the terms of settlement of securities transactions, to reduce the number of settlements of securities transactions, or for the allocation of securities settlement responsibilities; • Acts as a custodian of securities in connection with a system for the central handling of securities whereby all securities of a particular class or series of any issuer deposited within the system are treated as fungible and may be transferred, loaned, or pledged by bookkeeping entry, without physical delivery of securities certificates (such as a securities depository); or • Otherwise permits or facilitates the settlement of securities transactions or the hypothecation or lending of securities without physical delivery of securities certificates (such as a securities depository).14 Based on this broad definition, the Commission indicated in the ‘‘Clearing Agency Proposing Release’’ that it preliminarily believes that certain service providers that facilitate securitybased swap contract management may meet the clearing agency definition.15 The Clearing Agency Proposing Release has only recently been issued and the Commission is still considering these services in the context of the Clearing Agency Proposing Release and the comments received on the proposing release. Specifically, the Commission indicated it preliminarily believes that Collateral Management Services, Trade Matching Services, and Tear Up and Compression Services (as defined 13 Section 17A(b)(1) provides (with limited exceptions) that it shall be unlawful for any clearing agency, unless registered in accordance with this subsection, directly or indirectly, to make use of the mails or any means or instrumentality of interstate commerce to perform the functions of a clearing agency with respect to any security. 15 U.S.C. 78q– 1(b)(1). Upon the effective date of section 761(a)(2), security-based swaps will be included in the definition of a security in section 3(a)(10). See supra note 3. 14 15 U.S.C. 78c(a)(23)(A). 15 See Securities Exchange Act Release No. 64017, supra note 9. VerDate Mar<15>2010 16:26 Jul 06, 2011 Jkt 223001 below), if engaged in by security-based swap market participants, would qualify these participants as clearing agencies and therefore trigger the statutory requirement to register as clearing agencies: 16 • ‘‘Collateral Management Services’’: Collateral management generally involves calculating collateral requirements and facilitating the transfer of collateral between counterparties. In the Clearing Agency Proposing Release, the Commission stated that entities that calculate net payment obligations among counterparties for security-based swaps and provide instructions for payments, including with respect to quarterly interest, credit events, and upfront fees, are likely acting as intermediaries in making payments or deliveries or both in connection with transactions in securities. • ‘‘Trade Matching Services’’: Trade matching generally is the process whereby an intermediary compares each market participant’s trade data regarding the terms of settlement of securities transactions, in order to reduce the number of settlements of securities transactions, or to allocate securities settlement responsibilities. This includes activities of an intermediary that captures trade information regarding a securities transaction and performs an independent comparison of that information that results in the issuance of binding matched terms to the transaction.17 • ‘‘Tear Up and Compression Services’’: 18 Based on discussions between the Commission staff and 16 The Commission stresses that the functions highlighted herein and in the Clearing Agency Proposing Release are not an exhaustive list and urges each security-based swap service provider to consider whether its functions place it within the clearing agency definition. 17 See also Exchange Act Release No. 39829 (April 6, 1998), 63 FR 17943 (April 13, 1998) (File No. S7–10–98) (‘‘A vendor that provides a matching service will actively compare trade and allocation information and will issue the affirmed confirmation that will be used in settling the transaction.’’). 18 Tear-up or multilateral portfolio trade compression services for OTC derivatives seek to eliminate unnecessary or duplicative trades from the market while maintaining a market participant’s overall exposure or risk in the market. This allows dealers to reduce operational risk, freeing up liquidity and capital. By reducing the gross notional outstanding of OTC derivatives in normal times, portfolio trade compression provides effective measures to address the risk to individual dealers associated with uncoordinated, disorderly close-out transactions of the positions of a defaulting major dealer. Compression is offered by several vendors, and major market participants are now engaged in regular compression exercises. See Financial Stability Board, Implementing OTC Derivatives Market Reforms, (October 25, 2010), available at https://www.Financialstabilityboard.org/ publications/r_101025.pdf. PO 00000 Frm 00154 Fmt 4703 Sfmt 4703 market participants, the Commission understands that tear up and compression service providers generally operate in the following manner: • The providers execute an algorithm seeking to reduce the gross notional value of trades and the total number of trades but do not alter the counterparty risk or market risk associated with the trades beyond specified parameters. • When using a tear up and compression service, the users send all transactions they are willing to terminate to the service. Each user sets tolerances for counterparty exposures it is willing to absorb and how much money it is willing to pay in trade termination costs. The submitted transactions are matched using an algorithm and tolerances specified by the user. • The service then proposes terminations across all parties who participated, including payments for termination. The users consider the proposal, check their own records, and, if they choose to accept the proposal, fax or otherwise notify their acceptance to the service. If the service receives acceptances from all users, the transaction is considered binding, and the relevant transactions are considered terminated. • The users generally exchange payments and confirmations outside the service. The tear up and compression service provider sends the completed files to a third party service provider for matching, and the ‘‘torn up’’ transactions are terminated in bulk at the security-based swap data repository, which maintains a record of which parties terminated the ‘‘torn up’’ trades. The Commission is using its authority under section 36 of the Exchange Act 19 to provide a conditional temporary exemption, until the compliance date for the final rules relating to registration of clearing agencies that clear securitybased swaps pursuant to sections 17A(i) and (j) of the Exchange Act, from the registration requirement in section 17A(b)(1) of the Exchange Act to any clearing agency that may be required to register with the Commission solely as a result of providing Collateral Management Services, Trade Matching Services, Tear Up and Compression Services, and/or substantially similar services for security based swaps (the ‘‘Exempted Activities’’). As discussed below, the Commission believes that such action is necessary and appropriate in the public interest and consistent with the protection of investors because this conditional temporary exemption would avoid the potential for disruption 19 15 E:\FR\FM\07JYN1.SGM U.S.C. 78mm. 07JYN1 Federal Register / Vol. 76, No. 130 / Thursday, July 7, 2011 / Notices of these important services to investors pending the implementation of the registration framework and related standards and operational requirements contemplated under sections 17A(g), (i), and (j) of the Exchange Act, and pending further consideration of the appropriate regulatory treatment of persons conducting Exempted Activities. The Commission also believes that the temporary conditional exemption is necessary and appropriate because it will provide legal certainty to the security-based swap market and security-based swap market participants. sroberts on DSK5SPTVN1PROD with NOTICES II. Discussion Our action today provides a temporary exemption, until the compliance date for the final rules relating to registration of clearing agencies that clear security-based swaps pursuant to sections 17A(i) and (j) of the Exchange Act, from section 17A(b)(1) of the Exchange Act to persons conducting Exempted Activities. This temporary exemption is subject to a condition that is designed to provide greater information regarding persons that are using this exemption to conduct Exempted Activities and the nature of these activities.20 Specifically, entities relying on the temporary exemption must provide notice to the Commission with identifying information consisting of the full legal name of the person, a description of the person’s corporate structure, contact person and contact information. Such indentifying information is needed to provide the Commission with information regarding who is seeking to use the exemption and how to contact such persons. In addition, they must provide the Commission with a detailed description of the Exempted Activities they conduct, including the nature of services performed, number and nature of parties to whom services are provided, and the volume of transactions conducted in connection with the services performed for each of the last two years. The Commission is 20 The Paperwork Reduction Act of 1993 (‘‘PRA’’), 44 U.S.C. 3501 et seq., defines a ‘‘collection of information’’ as ‘‘the obtaining, causing to be obtained, soliciting or requiring the disclosure to third parties or the public, of facts or opinions by or for an agency, regardless of form or format, calling for * * * answers to identical questions posed to, or identical reporting or recordkeeping requirements imposed on, ten or more persons * * *.’’ 44 U.S.C. 3502(3)(A). The Commission preliminarily does not believe that the reporting and recordkeeping provisions in this Order contain ‘‘collection of information requirements’’ within the meaning of the PRA because fewer than ten persons are expected to rely on the exemption based on our discussions with industry participants regarding entities engaged in Exempted Activities. VerDate Mar<15>2010 16:26 Jul 06, 2011 Jkt 223001 requiring this information in order to better understand the types of services that are being provided pursuant to this exemption and the role such services play in the security-based swap market. The notice must be provided to the Commission within twenty-one days of relying on this exemption. The Commission believes twenty-one days should provide sufficient time for an entity to prepare the information required in the notice, including a detailed description of the Exempted Activities it provides. In light of the condition to this exemptive order and the temporary duration of the relief, the Commission believes this exemption should help to facilitate the aim of the Dodd-Frank Act to ensure that clearing functions are appropriately utilized to reduce risk in the OTC market for derivatives.21 Entities that conduct Exempted Activities can play an important role in facilitating risk reduction in the security-based swap market, including by helping to reduce the outstanding number of trades and providing useful operational functions for clearing security-based swaps. Persons conducting Exempted Activities, to the extent they are required to register under section 17A(g), will need time to consider and come into compliance with requirements yet to be adopted by the Commission pertaining to clearing agencies that clear security-based swaps. As a result, absent the exemption granted by this order, the ability of such entities to continue to provide these services may be disrupted, resulting in potential lapses in the provision of these services.22 The exemption will be effective until the compliance date for the final rules relating to registration of clearing agencies that clear security-based swaps pursuant to sections 17A(i) and (j) of the Exchange Act. This limited duration will permit the Commission to implement the statutory provisions pertaining to the registration of clearing agencies that clear security-based swaps without disrupting existing services. It will also permit the Commission to gain more information concerning the number and types of entities that conduct Exempted Activities, to learn more about how those activities contribute to a national system for the supra note 4 and accompanying text. that act as central counterparties for security-based swaps will need to be registered with the Commission as clearing agencies. However, the entities that currently perform the vast majority of central counterparty services with respect to security-based swaps will be deemed registered with the Commission pursuant to Exchange Act section 17A(l). See Public Law 111–203 § 763(b). PO 00000 21 See 22 Entities Frm 00155 Fmt 4703 Sfmt 4703 39965 clearance and settlement of securitybased swap transactions, and to evaluate the appropriate regulatory treatment of those entities. The limited duration of the exemption will also permit the entities conducting Exempted Activities to review their operations, procedures and processing requirements in the context of the new requirements stemming from the Dodd-Frank Act. III. Solicitation of Comments The Commission requests comment on this exemption for clearing agencies that may be required to register with the Commission solely as a result of their conducting the Exempted Activities. The Commission is soliciting public comment on all aspects of this exemption, including whether the condition to the temporary exemption is appropriate or alternatively whether the Commission should consider modifying this condition in the future. Why or why not? Should other conditions apply? If so, what conditions and why? Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/other.shtml); • Send an e-mail to rulecomments@sec.gov. Please include File Number S7–28–11 on the subject line; or • Use the Federal eRulemaking Portal (https://www.regulations.gov/). Follow the instructions for submitting comments. Paper Comments A. Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. All submissions should refer to File Number S7–28–11. 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 public inspection and copying in the Commission’s Public Reference Room, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 1 a.m. and 3 p.m. All comments received will be posted without change; we do not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. E:\FR\FM\07JYN1.SGM 07JYN1 39966 Federal Register / Vol. 76, No. 130 / Thursday, July 7, 2011 / Notices IV. Conclusion It is hereby ordered, pursuant to section 36(a) of the Exchange Act, that, until the compliance date for final rules issued by the Commission pursuant to sections 17A(i) and (j) of the Exchange Act relating to registration of clearing agencies that clear security-based swaps: Any person that would otherwise be required to register with the Commission as a clearing agency under section 17A(b)(1) of the Exchange Act solely as a result of conducting Exempted Activities with respect to security based swaps shall be exempt from section 17A(b)(1) of the Exchange Act, provided that such person shall submit, within twenty-one days of relying on this exemption, a notice to the Commission 23 that includes the full legal name of the person, a description of the person’s corporate structure, contact person and contact information, and a detailed description of the Exempted Activities for security-based swaps conducted by the person, including the nature of services performed, number and nature of parties to whom services are provided, and the volume of transactions conducted in connection with the services performed for each of the last two years. By the Commission. Elizabeth M. Murphy, Secretary. [FR Doc. 2011–17053 Filed 7–6–11; 8:45 am] BILLING CODE 8011–01–P DEPARTMENT OF STATE [Public Notice 7518] 30-Day Notice of Proposed Information Collections: ECA/P/V Youth and Leadership Survey Questions Notice of request for public comment and submission to OMB of proposed collection of information. ACTION: The Department of State has submitted the following information collection requests to the Office of Management and Budget (OMB) for approval in accordance with the Paperwork Reduction Act of 1995. • Title of Information Collection: ECA/P/V Youth and Leadership Programs: Pre Program Survey Questions. • OMB Control Number: None. • Type of Request: New Collection. sroberts on DSK5SPTVN1PROD with NOTICES SUMMARY: 23 Any such notice should be sent to: Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549, and be noted as regarding this ‘‘File No. S7–28–11.’’ VerDate Mar<15>2010 16:26 Jul 06, 2011 Jkt 223001 • Originating Office: Bureau of Educational and Cultural Affairs, Office of Policy and Evaluation, Evaluation Division (ECA/P/V). • Form Number: SV2011–0019. • Respondents: Participants in ECA exchange programs that focus on youth and leadership. Specifically the programs that bring students to the United States. For the purposes of this collection ‘‘youth’’ is defined solely as high-school aged. • Estimated Number of Respondents: 1,500 annually. • Estimated Number of Responses: 1,500 annually. • Average Hours per Response: 20 minutes. • Total Estimated Burden: 500 hours annually. • Frequency: On Occasion. • Obligation To Respond: Voluntary. • Title of Information Collection: ECA/P/V Youth and Leadership Programs: Post Program Survey Questions. • OMB Control Number: None. • Type of Request: New Collection. • Originating Office: Bureau of Educational and Cultural Affairs, Office of Policy and Evaluation, Evaluation Division (ECA/P/V). • Form Number: SV2011–0020. • Respondents: Participants in ECA exchange programs that focus on youth and leadership. Specifically the programs that bring students to the United States. For the purposes of this collection ‘‘youth’’ is defined solely as high-school aged. • Estimated Number of Respondents: 1,500 annually. • Estimated Number of Responses: 1,500 annually. • Average Hours per Response: 25 minutes. • Total Estimated Burden: 625 hours annually. • Frequency: On Occasion. • Obligation To Respond: Voluntary. • Title of Information Collection: ECA/P/V Youth and Leadership Programs: Follow-up Program Survey Questions. • OMB Control Number: None. • Type of Request: New Collection. • Originating Office: Bureau of Educational and Cultural Affairs, Office of Policy and Evaluation, Evaluation Division (ECA/P/V). • Form Number: SV2011–0021. • Respondents: Participants in ECA exchange programs that focus on youth and leadership. Specifically the programs that bring students to the United States. For the purposes of this collection ‘‘youth’’ is defined solely as high-school aged. PO 00000 Frm 00156 Fmt 4703 Sfmt 4703 • Estimated Number of Respondents: 1,500 annually. • Estimated Number of Responses: 1,500 annually. • Average Hours per Response: 25 minutes. • Total Estimated Burden: 625 hours annually. • Frequency: On Occasion. • Obligation To Respond: Voluntary. DATES: Submit comments to the Office of Management and Budget (OMB) for up to 30 days from July 7, 2011. ADDRESSES: Direct comments to the Department of State Desk Officer in the Office of Information and Regulatory Affairs at the Office of Management and Budget (OMB). You may submit comments by the following methods: • E-mail: oira_submission@omb.eop.gov. You must include the DS form number, information collection title, and OMB control number in the subject line of your message. • Fax: 202–395–5806. Attention: Desk Officer for Department of State. FOR FURTHER INFORMATION CONTACT: You may obtain copies of the proposed information collection and supporting documents from Michelle Hale, ECA/P/ V, SA–5, C2 Floor, Department of State, Washington, DC 20522–0582, who may be reached on 202–632–6312 or at HaleMJ2@state.gov. We are soliciting public comments to permit the Department to: • Evaluate whether the proposed information collection is necessary to properly perform our functions. • Evaluate the accuracy of our estimate of the burden of the proposed collection, including the validity of the methodology and assumptions used. • Enhance the quality, utility, and clarity of the information to be collected. • Minimize the reporting burden on those who are to respond, SUPPLEMENTARY INFORMATION: Abstract of Proposed Collections These information collections will allow ECA/P/V to conduct pre-program, post-program and follow-up surveys of exchange participants from various ECA exchange programs that are focused on youth and leadership using preapproved questions. For the purposes of this collection ‘‘youth’’ is defined solely as high-school aged. Collecting this data will allow ECA/P/V to help inform the overall effectiveness of ECA youth and leadership programs, by gathering data to be used for program support, such as planning and design, as well as to help monitor the program’s performance. Respondents are the exchange E:\FR\FM\07JYN1.SGM 07JYN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 76, Number 130 (Thursday, July 7, 2011)]
[Notices]
[Pages 39963-39966]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-17053]



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SECURITIES AND EXCHANGE COMMISSION



[Release No. 34-64796; File No. S7-28-11]




Order Pursuant to Section 36 of the Securities Exchange Act of 

1934 Granting Temporary Exemptions From Clearing Agency Registration 

Requirements Under Section 17A(b) of the Exchange Act for Entities 

Providing Certain Clearing Services for Security-Based Swaps



July 1, 2011.



I. Introduction



    Title VII of the Dodd-Frank Wall Street Reform and Consumer 

Protection Act of 2010 (``Dodd-Frank Act''),\1\ amends the Securities 

Exchange Act of 1934 (``Exchange Act'') to provide for the 

comprehensive regulation of security-based swaps \2\ by the Securities 

and Exchange Commission (``Commission'').\3\ Among other things, Title 

VII seeks to ensure that, wherever possible and appropriate, 

derivatives contracts formerly traded exclusively in the over-the-

counter (``OTC'') market are centrally cleared.\4\ One of the key ways 

in which the Dodd-Frank Act seeks to mitigate risk in the security-

based swap market is by requiring that entities that clear and settle 

security-based swaps be registered with the Commission. Specifically, 

section 763(b) of the Dodd-Frank Act adds a new section 17A(g) to the 

Exchange Act, which directs entities that use instrumentalities of 

interstate commerce to perform clearing agency functions for security-

based swaps to register with the Commission.\5\

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    \1\ Public Law 111-203.

    \2\ Section 761(a)(6) of the Dodd-Frank Act defines a 

``security-based swap'' as any agreement, contract, or transaction 

that is a ``swap,'' as defined in section 1a(47) of the Commodity 

Exchange Act, 7 U.S.C. 1a(47), that is based on an index that is a 

narrow-based security index, a single security, or a loan, including 

any interest therein or on the value thereof; or the occurrence, 

nonoccurrence, or extent of the occurrence of an event relating to a 

single issuer of a security or the issuers of securities in a 

narrow-based security index, provided that such event directly 

affects the financial statements, financial condition, or financial 

obligations of the issuer. See section 3(a)(68) of the Securities 

Exchange Act of 1934 (``Exchange Act''), 15 U.S.C. 78c(a)(68) (as 

added by section 761(a)(6) of the Dodd-Frank Act). Section 712(d) of 

the Dodd-Frank Act provides that the Commission and the Commodity 

Futures Trading Commission (``CFTC''), in consultation with the 

Board of Governors of the Federal Reserve System, shall, among other 

things, jointly further define the terms ``swap'' and ``security-

based swap.'' See SEC Release No. 9204 (April 29, 2011), 76 FR 32880 

(June 7, 2011) (proposing product definitions contained in Title VII 

of the Dodd-Frank Act).

    \3\ Section 761(a)(2) of the Dodd-Frank Act includes security-

based swaps in the definition of ``security'' in section 3(a)(10) of 

the Exchange Act, 15 U.S.C. 78c. See also section 768(a)(1) of the 

Dodd-Frank Act (amending section 2(a)(1) of the Securities Act of 

1933, 15 U.S.C. 77b(a)(1), to include security-based swaps in the 

definition of ``security'').

    \4\ See, e.g., Report of the Senate Committee on Banking, 

Housing, and Urban Affairs regarding The Restoring American 

Financial Stability Act of 2010, S. Rep. No. 111-176 at 34 (stating 

that ``[s]ome parts of the OTC market may not be suitable for 

clearing and exchange trading due to individual business needs of 

certain users. Those users should retain the ability to engage in 

customized, uncleared contracts while bringing in as much of the OTC 

market under the centrally cleared and exchange-traded framework as 

possible.'').

    \5\ Public Law 111-203 Sec.  763(b).

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    Section 763(b) of the Dodd-Frank Act also directs the Commission, 

by adding new sections 17A(i) and (j) of the Exchange Act, to adopt 

rules for the implementation of the registration requirement in new 

section 17A(g). The Title VII amendments for which rules are not 

required generally are effective on July 16, 2011 (360 days after 

enactment of the Dodd-Frank Act, referred to herein as the ``Effective 

Date''). Provisions that require rules for implementation become 

effective not less than 60 days after publication of the related final 

rule or on July 16, 2011, whichever is later.\6\

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    \6\ See section 774 of the Dodd-Frank Act, 15 U.S.C. 77b note. 

See also Exchange Act Release No. 64678 (June 15, 2011), granting 

temporary exemptions and other temporary relief, together with 

information on compliance dates for new provisions of the Exchange 

Act applicable to security-based swaps.

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    Section 17A(j) of the Exchange Act requires the Commission to adopt 

rules governing persons that are registered as clearing agencies for 

security-based swaps under the Exchange Act.\7\ Section 17A(i) of the 

Exchange Act provides that, to be registered and to maintain 

registration as a clearing agency that clears security-based swap 

transactions, a clearing agency must comply with such standards as the 

Commission may establish by rule.\8\ Consistent with these provisions, 

as well as provisions in Title VIII of the Dodd-Frank Act,\9\ the 

Commission on March 3, 2011 proposed rules regarding registration of 

clearing agencies and the operation and governance of clearing 

agencies, including clearing agencies that clear security-based 

swaps.\10\ Pursuant to section 774 of the Dodd-Frank Act, discussed 

above, compliance with section 17A(g) of the Exchange Act will not be 

required as of the Effective Date because sections 17A(i) and (j) 

require rulemaking to implement the registration requirement pursuant 

to section 17A(g) of clearing agencies that clear security-based swap 

transactions.\11\ Instead compliance with section 17A(g) of the 

Exchange Act will be required not less than 60 days after the 

publication of final rules relating to registration of clearing 

agencies that clear security-based swaps pursuant to sections 17A(i) 

and (j) of the Exchange Act.

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    \7\ Public Law 111-203 Sec.  763(b).

    \8\ Id.

    \9\ Title VIII of the Dodd-Frank Act, entitled the Payment, 

Clearing, and Settlement Supervision Act of 2010 (``Clearing 

Supervision Act''), establishes an enhanced supervisory and risk 

control system for systemically important clearing agencies and 

other financial market utilities (``FMUs''). It provides that the 

Commission may prescribe regulations containing risk management 

standards, taking into consideration relevant international 

standards and existing prudential requirements, for any designated 

clearing entities it regulates. See section 805(a)(2) of the 

Clearing Supervision Act. Those regulations may govern: ``(A) the 

operations related to payment, clearing, and settlement activities 

of such designated clearing entities; and (B) the conduct of 

designated activities by such financial institutions.'' 12 U.S.C. 

5464(a)(2).

    \10\ Securities Exchange Act Release No. 64017 (March 3, 2011), 

76 FR 14472 (March 16, 2011) (File No. S7-08-11) (the ``Clearing 

Agency Proposing Release'').

    \11\ Securities Exchange Act Release No. 64678 (June 15, 2011) 

76 FR 36287 (June 22, 2011) (File No. S7-24-11) (Temporary 

Exemptions and Other Temporary Relief, Together With Information on 

Compliance Dates for New Provisions of the Securities Exchange Act 

of 1934 Applicable to Security-Based Swaps).

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    In contrast to section 17A(g) of the Exchange Act, the registration 

requirement of section 17A(b) of the Exchange Act, which applies to all 

clearing agencies, will apply to security-based swap clearing agencies 

when the provision of the Dodd-Frank Act that amends the definition of 

``security'' under the Exchange Act to include security-based swaps 

becomes effective, i.e., on the Effective Date.\12\



[[Page 39964]]



Accordingly, absent relief by the Commission, any entity that functions 

as a clearing agency for security-based swaps would be required to 

register with the Commission pursuant to section 17A(b)(1) of the 

Exchange Act as of the Effective Date.\13\

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    \12\ See section 761(a)(2) of the Dodd-Frank Act (amending 

section 3(a)(10) of the Exchange Act, 15 U.S.C. 78c(a)(10)).

    \13\ Section 17A(b)(1) provides (with limited exceptions) that 

it shall be unlawful for any clearing agency, unless registered in 

accordance with this subsection, directly or indirectly, to make use 

of the mails or any means or instrumentality of interstate commerce 

to perform the functions of a clearing agency with respect to any 

security. 15 U.S.C. 78q-1(b)(1). Upon the effective date of section 

761(a)(2), security-based swaps will be included in the definition 

of a security in section 3(a)(10). See supra note 3.

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    The Commission notes that the term ``clearing agency'' under 

section 3(a)(23)(A) of Exchange Act is defined broadly to include any 

person who:

     Acts as an intermediary in making payments or deliveries 

or both in connection with transactions in securities;

     Provides facilities for the comparison of data regarding 

the terms of settlement of securities transactions, to reduce the 

number of settlements of securities transactions, or for the allocation 

of securities settlement responsibilities;

     Acts as a custodian of securities in connection with a 

system for the central handling of securities whereby all securities of 

a particular class or series of any issuer deposited within the system 

are treated as fungible and may be transferred, loaned, or pledged by 

bookkeeping entry, without physical delivery of securities certificates 

(such as a securities depository); or

     Otherwise permits or facilitates the settlement of 

securities transactions or the hypothecation or lending of securities 

without physical delivery of securities certificates (such as a 

securities depository).\14\

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    \14\ 15 U.S.C. 78c(a)(23)(A).

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    Based on this broad definition, the Commission indicated in the 

``Clearing Agency Proposing Release'' that it preliminarily believes 

that certain service providers that facilitate security-based swap 

contract management may meet the clearing agency definition.\15\ The 

Clearing Agency Proposing Release has only recently been issued and the 

Commission is still considering these services in the context of the 

Clearing Agency Proposing Release and the comments received on the 

proposing release. Specifically, the Commission indicated it 

preliminarily believes that Collateral Management Services, Trade 

Matching Services, and Tear Up and Compression Services (as defined 

below), if engaged in by security-based swap market participants, would 

qualify these participants as clearing agencies and therefore trigger 

the statutory requirement to register as clearing agencies: \16\

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    \15\ See Securities Exchange Act Release No. 64017, supra note 

9.

    \16\ The Commission stresses that the functions highlighted 

herein and in the Clearing Agency Proposing Release are not an 

exhaustive list and urges each security-based swap service provider 

to consider whether its functions place it within the clearing 

agency definition.

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     ``Collateral Management Services'': Collateral management 

generally involves calculating collateral requirements and facilitating 

the transfer of collateral between counterparties. In the Clearing 

Agency Proposing Release, the Commission stated that entities that 

calculate net payment obligations among counterparties for security-

based swaps and provide instructions for payments, including with 

respect to quarterly interest, credit events, and upfront fees, are 

likely acting as intermediaries in making payments or deliveries or 

both in connection with transactions in securities.

     ``Trade Matching Services'': Trade matching generally is 

the process whereby an intermediary compares each market participant's 

trade data regarding the terms of settlement of securities 

transactions, in order to reduce the number of settlements of 

securities transactions, or to allocate securities settlement 

responsibilities. This includes activities of an intermediary that 

captures trade information regarding a securities transaction and 

performs an independent comparison of that information that results in 

the issuance of binding matched terms to the transaction.\17\

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    \17\ See also Exchange Act Release No. 39829 (April 6, 1998), 63 

FR 17943 (April 13, 1998) (File No. S7-10-98) (``A vendor that 

provides a matching service will actively compare trade and 

allocation information and will issue the affirmed confirmation that 

will be used in settling the transaction.'').

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     ``Tear Up and Compression Services'': \18\ Based on 

discussions between the Commission staff and market participants, the 

Commission understands that tear up and compression service providers 

generally operate in the following manner:

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    \18\ Tear-up or multilateral portfolio trade compression 

services for OTC derivatives seek to eliminate unnecessary or 

duplicative trades from the market while maintaining a market 

participant's overall exposure or risk in the market. This allows 

dealers to reduce operational risk, freeing up liquidity and 

capital. By reducing the gross notional outstanding of OTC 

derivatives in normal times, portfolio trade compression provides 

effective measures to address the risk to individual dealers 

associated with uncoordinated, disorderly close-out transactions of 

the positions of a defaulting major dealer. Compression is offered 

by several vendors, and major market participants are now engaged in 

regular compression exercises. See Financial Stability Board, 

Implementing OTC Derivatives Market Reforms, (October 25, 2010), 

available at https://www.Financialstabilityboard.org/publications/r_101025.pdf.

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     The providers execute an algorithm seeking to reduce the 

gross notional value of trades and the total number of trades but do 

not alter the counterparty risk or market risk associated with the 

trades beyond specified parameters.

     When using a tear up and compression service, the users 

send all transactions they are willing to terminate to the service. 

Each user sets tolerances for counterparty exposures it is willing to 

absorb and how much money it is willing to pay in trade termination 

costs. The submitted transactions are matched using an algorithm and 

tolerances specified by the user.

     The service then proposes terminations across all parties 

who participated, including payments for termination. The users 

consider the proposal, check their own records, and, if they choose to 

accept the proposal, fax or otherwise notify their acceptance to the 

service. If the service receives acceptances from all users, the 

transaction is considered binding, and the relevant transactions are 

considered terminated.

     The users generally exchange payments and confirmations 

outside the service. The tear up and compression service provider sends 

the completed files to a third party service provider for matching, and 

the ``torn up'' transactions are terminated in bulk at the security-

based swap data repository, which maintains a record of which parties 

terminated the ``torn up'' trades.

    The Commission is using its authority under section 36 of the 

Exchange Act \19\ to provide a conditional temporary exemption, until 

the compliance date for the final rules relating to registration of 

clearing agencies that clear security-based swaps pursuant to sections 

17A(i) and (j) of the Exchange Act, from the registration requirement 

in section 17A(b)(1) of the Exchange Act to any clearing agency that 

may be required to register with the Commission solely as a result of 

providing Collateral Management Services, Trade Matching Services, Tear 

Up and Compression Services, and/or substantially similar services for 

security based swaps (the ``Exempted Activities''). As discussed below, 

the Commission believes that such action is necessary and appropriate 

in the public interest and consistent with the protection of investors 

because this conditional temporary exemption would avoid the potential 

for disruption



[[Page 39965]]



of these important services to investors pending the implementation of 

the registration framework and related standards and operational 

requirements contemplated under sections 17A(g), (i), and (j) of the 

Exchange Act, and pending further consideration of the appropriate 

regulatory treatment of persons conducting Exempted Activities. The 

Commission also believes that the temporary conditional exemption is 

necessary and appropriate because it will provide legal certainty to 

the security-based swap market and security-based swap market 

participants.

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    \19\ 15 U.S.C. 78mm.

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II. Discussion



    Our action today provides a temporary exemption, until the 

compliance date for the final rules relating to registration of 

clearing agencies that clear security-based swaps pursuant to sections 

17A(i) and (j) of the Exchange Act, from section 17A(b)(1) of the 

Exchange Act to persons conducting Exempted Activities. This temporary 

exemption is subject to a condition that is designed to provide greater 

information regarding persons that are using this exemption to conduct 

Exempted Activities and the nature of these activities.\20\ 

Specifically, entities relying on the temporary exemption must provide 

notice to the Commission with identifying information consisting of the 

full legal name of the person, a description of the person's corporate 

structure, contact person and contact information. Such indentifying 

information is needed to provide the Commission with information 

regarding who is seeking to use the exemption and how to contact such 

persons. In addition, they must provide the Commission with a detailed 

description of the Exempted Activities they conduct, including the 

nature of services performed, number and nature of parties to whom 

services are provided, and the volume of transactions conducted in 

connection with the services performed for each of the last two years. 

The Commission is requiring this information in order to better 

understand the types of services that are being provided pursuant to 

this exemption and the role such services play in the security-based 

swap market. The notice must be provided to the Commission within 

twenty-one days of relying on this exemption. The Commission believes 

twenty-one days should provide sufficient time for an entity to prepare 

the information required in the notice, including a detailed 

description of the Exempted Activities it provides.

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    \20\ The Paperwork Reduction Act of 1993 (``PRA''), 44 U.S.C. 

3501 et seq., defines a ``collection of information'' as ``the 

obtaining, causing to be obtained, soliciting or requiring the 

disclosure to third parties or the public, of facts or opinions by 

or for an agency, regardless of form or format, calling for * * * 

answers to identical questions posed to, or identical reporting or 

recordkeeping requirements imposed on, ten or more persons * * *.'' 

44 U.S.C. 3502(3)(A). The Commission preliminarily does not believe 

that the reporting and recordkeeping provisions in this Order 

contain ``collection of information requirements'' within the 

meaning of the PRA because fewer than ten persons are expected to 

rely on the exemption based on our discussions with industry 

participants regarding entities engaged in Exempted Activities.

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    In light of the condition to this exemptive order and the temporary 

duration of the relief, the Commission believes this exemption should 

help to facilitate the aim of the Dodd-Frank Act to ensure that 

clearing functions are appropriately utilized to reduce risk in the OTC 

market for derivatives.\21\ Entities that conduct Exempted Activities 

can play an important role in facilitating risk reduction in the 

security-based swap market, including by helping to reduce the 

outstanding number of trades and providing useful operational functions 

for clearing security-based swaps. Persons conducting Exempted 

Activities, to the extent they are required to register under section 

17A(g), will need time to consider and come into compliance with 

requirements yet to be adopted by the Commission pertaining to clearing 

agencies that clear security-based swaps. As a result, absent the 

exemption granted by this order, the ability of such entities to 

continue to provide these services may be disrupted, resulting in 

potential lapses in the provision of these services.\22\

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    \21\ See supra note 4 and accompanying text.

    \22\ Entities that act as central counterparties for security-

based swaps will need to be registered with the Commission as 

clearing agencies. However, the entities that currently perform the 

vast majority of central counterparty services with respect to 

security-based swaps will be deemed registered with the Commission 

pursuant to Exchange Act section 17A(l). See Public Law 111-203 

Sec.  763(b).

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    The exemption will be effective until the compliance date for the 

final rules relating to registration of clearing agencies that clear 

security-based swaps pursuant to sections 17A(i) and (j) of the 

Exchange Act. This limited duration will permit the Commission to 

implement the statutory provisions pertaining to the registration of 

clearing agencies that clear security-based swaps without disrupting 

existing services. It will also permit the Commission to gain more 

information concerning the number and types of entities that conduct 

Exempted Activities, to learn more about how those activities 

contribute to a national system for the clearance and settlement of 

security-based swap transactions, and to evaluate the appropriate 

regulatory treatment of those entities. The limited duration of the 

exemption will also permit the entities conducting Exempted Activities 

to review their operations, procedures and processing requirements in 

the context of the new requirements stemming from the Dodd-Frank Act.



III. Solicitation of Comments



    The Commission requests comment on this exemption for clearing 

agencies that may be required to register with the Commission solely as 

a result of their conducting the Exempted Activities. The Commission is 

soliciting public comment on all aspects of this exemption, including 

whether the condition to the temporary exemption is appropriate or 

alternatively whether the Commission should consider modifying this 

condition in the future. Why or why not? Should other conditions apply? 

If so, what conditions and why?

    Comments may be submitted by any of the following methods:



Electronic Comments



     Use the Commission's Internet comment form (https://www.sec.gov/rules/other.shtml);

     Send an e-mail to rule-comments@sec.gov. Please include 

File Number S7-28-11 on the subject line; or

     Use the Federal eRulemaking Portal (https://www.regulations.gov/). Follow the instructions for submitting comments.



Paper Comments



    A. Send paper comments in triplicate to Secretary, Securities and 

Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.



All submissions should refer to File Number S7-28-11. 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 public inspection and copying in the Commission's 

Public Reference Room, 100 F Street, NE., Washington, DC 20549, on 

official business days between the hours of 1 a.m. and 3 p.m. All 

comments received will be posted without change; we do not edit 

personal identifying information from submissions. You should submit 

only information that you wish to make available publicly.



[[Page 39966]]



IV. Conclusion



    It is hereby ordered, pursuant to section 36(a) of the Exchange 

Act, that, until the compliance date for final rules issued by the 

Commission pursuant to sections 17A(i) and (j) of the Exchange Act 

relating to registration of clearing agencies that clear security-based 

swaps:

    Any person that would otherwise be required to register with the 

Commission as a clearing agency under section 17A(b)(1) of the Exchange 

Act solely as a result of conducting Exempted Activities with respect 

to security based swaps shall be exempt from section 17A(b)(1) of the 

Exchange Act, provided that such person shall submit, within twenty-one 

days of relying on this exemption, a notice to the Commission \23\ that 

includes the full legal name of the person, a description of the 

person's corporate structure, contact person and contact information, 

and a detailed description of the Exempted Activities for security-

based swaps conducted by the person, including the nature of services 

performed, number and nature of parties to whom services are provided, 

and the volume of transactions conducted in connection with the 

services performed for each of the last two years.

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    \23\ Any such notice should be sent to: Secretary, Securities 

and Exchange Commission, 100 F Street, NE., Washington, DC 20549, 

and be noted as regarding this ``File No. S7-28-11.''



By the Commission.

Elizabeth M. Murphy,

Secretary.

[FR Doc. 2011-17053 Filed 7-6-11; 8:45 am]

BILLING CODE 8011-01-P

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