Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change To Amend FINRA Rule 4240 (Margin Requirements for Credit Default Swaps), 14850-14852 [2012-5985]

Download as PDF 14850 Federal Register / Vol. 77, No. 49 / Tuesday, March 13, 2012 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES All submissions should refer to File Number SR–FINRA–2012–014. This file number should be included on the subject line if email is used. To help the Commission 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/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be 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. Copies of such filing also will be available for inspection and copying at the principal office of FINRA. 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–FINRA–2012–014 and should be submitted on or before April 3, 2012. IV. Commission’s Findings and Order Granting Accelerated Approval of a Proposed Rule Change FINRA has requested that the Commission find good cause pursuant to Section 19(b)(2) of the Act for approving the proposed rule change prior to the 30th day after publication in the Federal Register.12 After careful consideration, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities association.13 In particular, the Commission finds that the proposed rule change is consistent with Section 15A(b)(6) of the Act, which requires, among other things, that FINRA rules be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the 12 15 U.S.C. 78s(b)(2). 13 In approving this rule change, the Commission notes that it has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). VerDate Mar<15>2010 18:29 Mar 12, 2012 Jkt 226001 public interest.14 The accelerated approval will, consistent with the goals set forth by the Commission when it adopted the interim final temporary rules with respect to the operation of central counterparties to clear and settle CDS, and pending the final implementation of new CFTC and SEC rules pursuant to Title VII of the DoddFrank Act, help to stabilize the financial markets by setting forth margin requirements for certain transactions in CDS. The Commission also finds good cause, pursuant to Section 19(b)(2) of the Act,15 for approving the proposed rule change prior to the 30th day after the date of publication of notice in the Federal Register. This accelerated approval will allow the existing pilot program to be effective retroactively to January 17, 2012, and extended through July 17, 2012, to permit the pilot program to continue without interruption and extend the benefits of a pilot program that the Commission has previously approved and extended. V. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,16 that the proposed rule change (SR–FINRA– 2012–014), be, and it hereby is, approved on an accelerated basis to July 17, 2012. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.17 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2012–5986 Filed 3–12–12; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–66527; File No. SR–FINRA– 2012–015] Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change To Amend FINRA Rule 4240 (Margin Requirements for Credit Default Swaps) March 7, 2012. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 14 15 U.S.C. 78o–3(b)(6). U.S.C. 78s(b)(2). 16 15 U.S.C. 78s(b)(2). 17 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 15 15 PO 00000 Frm 00127 Fmt 4703 Sfmt 4703 notice is hereby given that on February 23, 2012, Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I and II, below, which Items have been substantially prepared by FINRA. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. For the reasons discussed below, the Commission is granting accelerated approval of the proposed rule change. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change FINRA is proposing to amend FINRA Rule 4240 (Margin Requirements for Credit Default Swaps) to limit the application of the rule at this time to certain transactions in credit default swaps that are security-based swaps and to make other revisions to update the rule. FINRA Rule 4240 implements an interim pilot program with respect to margin requirements for certain transactions in credit default swaps. The text of the proposed rule change is available on FINRA’s Web site at https://www.finra.org, at the principal office of FINRA and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, FINRA 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. FINRA 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 On May 22, 2009, the Commission approved FINRA Rule 4240,3 which implements an interim pilot program (‘‘Interim Pilot Program’’) with respect to margin requirements for certain transactions in credit default swaps (‘‘CDS’’). FINRA has filed a proposed 3 See Securities Exchange Act Release No. 59955 (May 22, 2009), 74 FR 25586 (May 28, 2009) (Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change, as Modified by Amendment No. 1 [File No. SR–FINRA–2009–012]) (‘‘Approval Order’’). E:\FR\FM\13MRN1.SGM 13MRN1 Federal Register / Vol. 77, No. 49 / Tuesday, March 13, 2012 / Notices rule change to extend the implementation of Rule 4240 to July 17, 2012.4 As explained in the Approval Order,5 FINRA Rule 4240, coterminous with certain Commission actions,6 is intended to address concerns arising from counterparty credit risk posed by CDS, including, among other things, risks to the financial system arising from credit risk resulting from bilateral CDS transactions and from a concentration of credit risk to a central counterparty that clears and settles CDS. On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (‘‘Dodd-Frank Act’’),7 Title VII of which established a comprehensive new regulatory framework for swaps and security-based swaps,8 including certain CDS. The new legislation was intended among other things to enhance the authority of regulators to implement new rules designed to reduce risk, increase 4 See SR–FINRA–2012–014. 74 FR 25588 through 25589. 6 In early 2009, the Commission enacted interim final temporary rules providing enumerated exemptions under the federal securities laws for certain CDS to facilitate the operation of one or more central clearing counterparties in such CDS. See Securities Act Release No. 8999 (January 14, 2009), 74 FR 3967 (January 22, 2009) (Temporary Exemptions for Eligible Credit Default Swaps To Facilitate Operation of Central Counterparties To Clear and Settle Credit Default Swaps); Securities Act Release No. 9063 (September 14, 2009), 74 FR 47719 (September 17, 2009) (Extension of Temporary Exemptions for Eligible Credit Default Swaps to Facilitate Operation of Central Counterparties to Clear and Settle Credit Default Swaps); Securities Act Release No. 9158 (November 19, 2010), 75 FR 72660 (November 26, 2010) (Extension of Temporary Exemptions for Eligible Credit Default Swaps to Facilitate Operation of Central Counterparties to Clear and Settle Credit Default Swaps). See also Securities Exchange Act Release No. 59578 (March 13, 2009), 74 FR 11781 (March 19, 2009) (Order Granting Temporary Exemptions in Connection with Request of Chicago Mercantile Exchange Inc. and Citadel Investment Group, L.L.C. Related to Central Clearing of Credit Default Swaps, and Request for Comments); Securities Exchange Act Release No. 59165 (December 24, 2008), 74 FR 133 (January 2, 2009) (Order Pursuant to Section 36 of the Securities Exchange Act of 1934 Granting Temporary Exemptions from Sections 5 and 6 of the Exchange Act for Broker-Dealers and Exchanges Effecting Transactions in Credit Default Swaps). 7 Public Law 111–203, 124 Stat. 1376 (2010). 8 The terms ‘‘swap’’ and ‘‘security-based swap’’ are defined in Sections 721 and 761 of the DoddFrank Act. The Commission and the CFTC jointly have proposed to further define these terms. See Securities Exchange Act Release No. 64372 (Apr. 29, 2011), 76 FR 29818 (May 23, 2011) (Further Definition of ‘‘Swap,’’ ‘‘Security-Based Swap,’’ and ‘‘Security-Based Swap Agreement’’; Mixed Swaps; Security-Based Swap Agreement Recordkeeping); Securities Exchange Act Release No. 63452 (Dec. 7, 2010), 75 FR 80174 (Dec. 21, 2010) (Further Definition of ‘‘Swap Dealer,’’ ‘‘Security-Based Swap Dealer,’’ ‘‘Major Swap Participant,’’ ‘‘Major Security-Based Swap Participant’’ and ‘‘Eligible Contract Participant’’). mstockstill on DSK4VPTVN1PROD with NOTICES 5 See VerDate Mar<15>2010 18:29 Mar 12, 2012 Jkt 226001 transparency, and promote market integrity with respect to such products. As noted earlier, FINRA has filed a proposed rule change to extend the implementation of FINRA Rule 4240 to July 17, 2012.9 In this filing, FINRA is proposing to make certain revisions to FINRA Rule 4240 in light of the continuing development of the CDS business within the framework of the Dodd-Frank Act. Specifically, FINRA is limiting the application of FINRA Rule 4240 at this time to CDS that are security-based swaps under Section 3(a)(68) of the Act,10 pending further development of federal regulations governing margin for swaps and security-based swaps and further consideration of potential portfolio margin methodologies for cleared CDS that include both swaps and security-based swaps. Based on these factors, FINRA may propose to extend FINRA Rule 4240 to encompass CDS that are swaps under Section 1a(47) of the Commodity Exchange Act 11 at a later date. Accordingly, FINRA is revising the definition of ‘‘CDS’’ set forth in paragraph (a) of FINRA Rule 4240 to provide that, for purposes of the rule, the term CDS includes any product that is commonly known to the trade as a credit default swap and is a securitybased swap as defined pursuant to Section 3(a)(68) of the Act or the rules and guidance of the SEC and its staff.12 Consistent with this change, FINRA is eliminating the grid set forth under paragraph (a) of FINRA Rule 4240.01 as to CDS contracts where the underlying obligation is a debt index rather than a single name bond, because such grid is for broad-based indexes. As revised, the rule provides that with respect to CDS contracts where the underlying obligation is a narrow-based debt index, rather than a single name bond, the margin requirement shall be based upon a margin methodology using the member’s internal models the use of which has been approved by FINRA. In addition, FINRA is revising paragraphs (a), (b) and (c)(1) of the rule to remove references to derivatives clearing organizations. Further, in the interest of regulatory clarity and efficiency, and based upon FINRA’s experience in the administration of the rule, FINRA has revised the grid set forth under FINRA Rule 4240.01(a) as to CDS contracts where the underlying obligation is a 9 See supra note 4. U.S.C. 78c(a)(68). 11 7 U.S.C. 1a(47). 12 See Exhibit 5 attached to SR–FINRA–2012–015. See also supra note 8. 10 15 PO 00000 Frm 00128 Fmt 4703 Sfmt 4703 14851 single name debt security. Specifically, the revised grid sets forth more calibrated ranges with respect to the length of time to maturity of the relevant CDS contract and percentages with respect to the required margin. FINRA has made minor edits to paragraph (e) of the rule to align the terms ‘‘current exposure’’ and ‘‘maximum potential exposure’’ with the definitions set forth in Act Rule 15c3–1e(c)(4) and to make other minor clarifications. In addition, in the interest of clarification, FINRA has replaced references to use of an ‘‘approved margin methodology’’ in paragraphs (a), (c)(1) and (c)(2) of the rule with ‘‘using’’ or ‘‘use’’ a ‘‘margin methodology the use of which has been approved by FINRA as announced in a Regulatory Notice.’’ Lastly, FINRA has made clarifying edits to paragraph (c) of Supplementary Material .01 to provide that in instances where the customer or broker-dealer maintains both long and short CDS, the member may elect to collect 50% of the relevant margin requirements on the lesser of the long or short position within the same Bloomberg CDS sector (or, if the long and short positions are equal, the long position), provided those long and short positions are in the same spread and maturity bucket, plus the relevant margin requirements on the excess long or short position, if any. The proposed rule change will become effective upon approval by the SEC. FINRA has requested the Commission to find good cause pursuant to Section 19(b)(2) of the Act 13 for approving the proposed rule change prior to the 30th day after its publication in the Federal Register. 2. Statutory Basis FINRA believes that the proposed rule change is consistent with the provisions of Section 15A(b)(6) of the Act,14 which requires, among other things, that FINRA rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. FINRA believes that the proposed rule change will further the purposes of the Act because, consistent with the goals set forth by the Commission when it adopted the interim final temporary rules with respect to the operation of central counterparties to clear and settle CDS, and pending the final implementation of new CFTC and SEC rules pursuant to Title VII of the Dodd-Frank Act, the margin requirements set forth by the 13 15 14 15 E:\FR\FM\13MRN1.SGM U.S.C. 78s(b)(2). U.S.C. 78o–3(b)(6). 13MRN1 14852 Federal Register / Vol. 77, No. 49 / Tuesday, March 13, 2012 / Notices proposed rule change will help to stabilize the financial markets. B. Self-Regulatory Organization’s Statement on Burden on Competition FINRA does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments were neither solicited nor received. IV. Commission’s Findings and Order Granting Accelerated Approval of a Proposed Rule Change III. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: mstockstill on DSK4VPTVN1PROD with NOTICES Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rulecomments@sec.gov. Please include File Number SR–FINRA–2012–015 on the subject line. 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 SR–FINRA–2012–015. This file number should be included on the subject line if email is used. To help the Commission 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/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be 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. Copies of such filing VerDate Mar<15>2010 18:29 Mar 12, 2012 Jkt 226001 also will be available for inspection and copying at the principal office of FINRA. 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–FINRA–2012–015 and should be submitted on or before April 3, 2012. FINRA has requested that the Commission find good cause pursuant to Section 19(b)(2) of the Act for approving the proposed rule change prior to the 30th day after publication in the Federal Register.15 After careful consideration, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities association.16 In particular, the Commission finds that the proposed rule change is consistent with Section 15A(b)(6) of the Act, which requires, among other things, that FINRA rules be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest.17 Specifically, as noted above, FINRA is limiting the application of FINRA Rule 4240 at this time to CDS that are security-based swaps under Section 3(a)(68) of the Act,18 pending further development of federal regulations governing margin for swaps and security-based swaps and further consideration of potential portfolio margin methodologies for cleared CDS that include both swaps and securitybased swaps. This is consistent with the goals of Title VII of the Dodd-Frank Act.19 In addition, the Commission believes that the proposed alternative tables that may be used by market participants to compute the required margin will provide market participants with some flexibility in computing margin, while still permitting the continued use of the existing margin tables in FINRA Rule 4240 Supplementary Material .01. 15 15 U.S.C. 78s(b)(2). approving this rule change, the Commission notes that it has considered the proposed rule’s impact on efficiency, competition, and capital formation. See 15 U.S.C. 78c(f). 17 15 U.S.C. 78o–3(b)(6). 18 15 U.S.C. 78c(a)(68). 19 Public Law 111–203, 124 Stat. 1376 (2010). 16 In PO 00000 Frm 00129 Fmt 4703 Sfmt 4703 The accelerated approval will, consistent with the goals set forth by the Commission when it adopted the interim final temporary rules with respect to the operation of central counterparties to clear and settle CDS, and pending the final implementation of new CFTC and SEC rules pursuant to Title VII of the Dodd-Frank Act, help to stabilize the financial markets by setting forth margin requirements for certain transactions in CDS. Therefore, the Commission finds good cause, pursuant to Section 19(b)(2) of the Act, for approving the proposed rule change prior to the 30th day after the date of publication of note in the Federal Register.20 V. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,21 that the proposed rule change (SR–FINRA– 2012–015) be, and hereby is, approved on an accelerated basis. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.22 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2012–5985 Filed 3–12–12; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [File No. 500–1] Advanced Growing Systems, Inc., Advantage Capital Development Corp., Amazon Biotech, Inc., Andover Holdings, Inc. a/k/a Andover Energy Holdings, Inc., Bravo! Brands, Inc., and BSML, Inc., Order of Suspension of Trading March 9, 2012. It appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities of Advanced Growing Systems, Inc. because it has not filed any periodic reports since the period ended June 30, 2009. It appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities of Advantage Capital Development Corp. because it has not filed any periodic reports since the period ended December 31, 2006. It appears to the Securities and Exchange Commission that there is a lack of current and accurate information concerning the securities of Amazon 20 15 U.S.C. 78(b)(2). U.S.C. 78(b)(2). 22 17 CFR 200.30–3(a)(12). 21 15 E:\FR\FM\13MRN1.SGM 13MRN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 77, Number 49 (Tuesday, March 13, 2012)]
[Notices]
[Pages 14850-14852]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-5985]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66527; File No. SR-FINRA-2012-015]

Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing and Order Granting Accelerated
Approval of Proposed Rule Change To Amend FINRA Rule 4240 (Margin
Requirements for Credit Default Swaps)

March 7, 2012.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on February 23, 2012, Financial Industry Regulatory Authority, Inc.
(``FINRA'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') the proposed rule change as described in Items I and
II, below, which Items have been substantially prepared by FINRA. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons. For the reasons discussed
below, the Commission is granting accelerated approval of the proposed
rule change.
---------------------------------------------------------------------------

\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

FINRA is proposing to amend FINRA Rule 4240 (Margin Requirements
for Credit Default Swaps) to limit the application of the rule at this
time to certain transactions in credit default swaps that are security-
based swaps and to make other revisions to update the rule. FINRA Rule
4240 implements an interim pilot program with respect to margin
requirements for certain transactions in credit default swaps.
The text of the proposed rule change is available on FINRA's Web
site at https://www.finra.org, at the principal office of FINRA and at
the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, FINRA 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. FINRA 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
On May 22, 2009, the Commission approved FINRA Rule 4240,\3\ which
implements an interim pilot program (``Interim Pilot Program'') with
respect to margin requirements for certain transactions in credit
default swaps (``CDS''). FINRA has filed a proposed

[[Page 14851]]

rule change to extend the implementation of Rule 4240 to July 17,
2012.\4\
---------------------------------------------------------------------------

\3\ See Securities Exchange Act Release No. 59955 (May 22,
2009), 74 FR 25586 (May 28, 2009) (Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change, as Modified
by Amendment No. 1 [File No. SR-FINRA-2009-012]) (``Approval
Order'').
\4\ See SR-FINRA-2012-014.
---------------------------------------------------------------------------

As explained in the Approval Order,\5\ FINRA Rule 4240, coterminous
with certain Commission actions,\6\ is intended to address concerns
arising from counterparty credit risk posed by CDS, including, among
other things, risks to the financial system arising from credit risk
resulting from bilateral CDS transactions and from a concentration of
credit risk to a central counterparty that clears and settles CDS. On
July 21, 2010, President Obama signed into law the Dodd-Frank Wall
Street Reform and Consumer Protection Act (``Dodd-Frank Act''),\7\
Title VII of which established a comprehensive new regulatory framework
for swaps and security-based swaps,\8\ including certain CDS. The new
legislation was intended among other things to enhance the authority of
regulators to implement new rules designed to reduce risk, increase
transparency, and promote market integrity with respect to such
products.
---------------------------------------------------------------------------

\5\ See 74 FR 25588 through 25589.
\6\ In early 2009, the Commission enacted interim final
temporary rules providing enumerated exemptions under the federal
securities laws for certain CDS to facilitate the operation of one
or more central clearing counterparties in such CDS. See Securities
Act Release No. 8999 (January 14, 2009), 74 FR 3967 (January 22,
2009) (Temporary Exemptions for Eligible Credit Default Swaps To
Facilitate Operation of Central Counterparties To Clear and Settle
Credit Default Swaps); Securities Act Release No. 9063 (September
14, 2009), 74 FR 47719 (September 17, 2009) (Extension of Temporary
Exemptions for Eligible Credit Default Swaps to Facilitate Operation
of Central Counterparties to Clear and Settle Credit Default Swaps);
Securities Act Release No. 9158 (November 19, 2010), 75 FR 72660
(November 26, 2010) (Extension of Temporary Exemptions for Eligible
Credit Default Swaps to Facilitate Operation of Central
Counterparties to Clear and Settle Credit Default Swaps). See also
Securities Exchange Act Release No. 59578 (March 13, 2009), 74 FR
11781 (March 19, 2009) (Order Granting Temporary Exemptions in
Connection with Request of Chicago Mercantile Exchange Inc. and
Citadel Investment Group, L.L.C. Related to Central Clearing of
Credit Default Swaps, and Request for Comments); Securities Exchange
Act Release No. 59165 (December 24, 2008), 74 FR 133 (January 2,
2009) (Order Pursuant to Section 36 of the Securities Exchange Act
of 1934 Granting Temporary Exemptions from Sections 5 and 6 of the
Exchange Act for Broker-Dealers and Exchanges Effecting Transactions
in Credit Default Swaps).
\7\ Public Law 111-203, 124 Stat. 1376 (2010).
\8\ The terms ``swap'' and ``security-based swap'' are defined
in Sections 721 and 761 of the Dodd-Frank Act. The Commission and
the CFTC jointly have proposed to further define these terms. See
Securities Exchange Act Release No. 64372 (Apr. 29, 2011), 76 FR
29818 (May 23, 2011) (Further Definition of ``Swap,'' ``Security-
Based Swap,'' and ``Security-Based Swap Agreement''; Mixed Swaps;
Security-Based Swap Agreement Recordkeeping); Securities Exchange
Act Release No. 63452 (Dec. 7, 2010), 75 FR 80174 (Dec. 21, 2010)
(Further Definition of ``Swap Dealer,'' ``Security-Based Swap
Dealer,'' ``Major Swap Participant,'' ``Major Security-Based Swap
Participant'' and ``Eligible Contract Participant'').
---------------------------------------------------------------------------

As noted earlier, FINRA has filed a proposed rule change to extend
the implementation of FINRA Rule 4240 to July 17, 2012.\9\ In this
filing, FINRA is proposing to make certain revisions to FINRA Rule 4240
in light of the continuing development of the CDS business within the
framework of the Dodd-Frank Act.
---------------------------------------------------------------------------

\9\ See supra note 4.
---------------------------------------------------------------------------

Specifically, FINRA is limiting the application of FINRA Rule 4240
at this time to CDS that are security-based swaps under Section
3(a)(68) of the Act,\10\ pending further development of federal
regulations governing margin for swaps and security-based swaps and
further consideration of potential portfolio margin methodologies for
cleared CDS that include both swaps and security-based swaps. Based on
these factors, FINRA may propose to extend FINRA Rule 4240 to encompass
CDS that are swaps under Section 1a(47) of the Commodity Exchange Act
\11\ at a later date.
---------------------------------------------------------------------------

\10\ 15 U.S.C. 78c(a)(68).
\11\ 7 U.S.C. 1a(47).
---------------------------------------------------------------------------

Accordingly, FINRA is revising the definition of ``CDS'' set forth
in paragraph (a) of FINRA Rule 4240 to provide that, for purposes of
the rule, the term CDS includes any product that is commonly known to
the trade as a credit default swap and is a security-based swap as
defined pursuant to Section 3(a)(68) of the Act or the rules and
guidance of the SEC and its staff.\12\ Consistent with this change,
FINRA is eliminating the grid set forth under paragraph (a) of FINRA
Rule 4240.01 as to CDS contracts where the underlying obligation is a
debt index rather than a single name bond, because such grid is for
broad-based indexes. As revised, the rule provides that with respect to
CDS contracts where the underlying obligation is a narrow-based debt
index, rather than a single name bond, the margin requirement shall be
based upon a margin methodology using the member's internal models the
use of which has been approved by FINRA. In addition, FINRA is revising
paragraphs (a), (b) and (c)(1) of the rule to remove references to
derivatives clearing organizations.
---------------------------------------------------------------------------

\12\ See Exhibit 5 attached to SR-FINRA-2012-015. See also supra
note 8.
---------------------------------------------------------------------------

Further, in the interest of regulatory clarity and efficiency, and
based upon FINRA's experience in the administration of the rule, FINRA
has revised the grid set forth under FINRA Rule 4240.01(a) as to CDS
contracts where the underlying obligation is a single name debt
security. Specifically, the revised grid sets forth more calibrated
ranges with respect to the length of time to maturity of the relevant
CDS contract and percentages with respect to the required margin.
FINRA has made minor edits to paragraph (e) of the rule to align
the terms ``current exposure'' and ``maximum potential exposure'' with
the definitions set forth in Act Rule 15c3-1e(c)(4) and to make other
minor clarifications. In addition, in the interest of clarification,
FINRA has replaced references to use of an ``approved margin
methodology'' in paragraphs (a), (c)(1) and (c)(2) of the rule with
``using'' or ``use'' a ``margin methodology the use of which has been
approved by FINRA as announced in a Regulatory Notice.''
Lastly, FINRA has made clarifying edits to paragraph (c) of
Supplementary Material .01 to provide that in instances where the
customer or broker-dealer maintains both long and short CDS, the member
may elect to collect 50% of the relevant margin requirements on the
lesser of the long or short position within the same Bloomberg CDS
sector (or, if the long and short positions are equal, the long
position), provided those long and short positions are in the same
spread and maturity bucket, plus the relevant margin requirements on
the excess long or short position, if any.
The proposed rule change will become effective upon approval by the
SEC. FINRA has requested the Commission to find good cause pursuant to
Section 19(b)(2) of the Act \13\ for approving the proposed rule change
prior to the 30th day after its publication in the Federal Register.
---------------------------------------------------------------------------

\13\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

2. Statutory Basis
FINRA believes that the proposed rule change is consistent with the
provisions of Section 15A(b)(6) of the Act,\14\ which requires, among
other things, that FINRA rules must be designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest. FINRA believes that the proposed rule change will
further the purposes of the Act because, consistent with the goals set
forth by the Commission when it adopted the interim final temporary
rules with respect to the operation of central counterparties to clear
and settle CDS, and pending the final implementation of new CFTC and
SEC rules pursuant to Title VII of the Dodd-Frank Act, the margin
requirements set forth by the

[[Page 14852]]

proposed rule change will help to stabilize the financial markets.
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\14\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

FINRA does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others

Written comments were neither solicited nor received.

III. Solicitation of Comments

Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:

Electronic Comments

Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-FINRA-2012-015 on the subject line.

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 SR-FINRA-2012-015. This
file number should be included on the subject line if email is used. To
help the Commission 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/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be 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. Copies of such filing also will be available for
inspection and copying at the principal office of FINRA. 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-FINRA-2012-015 and should be
submitted on or before April 3, 2012.

IV. Commission's Findings and Order Granting Accelerated Approval of a
Proposed Rule Change

FINRA has requested that the Commission find good cause pursuant to
Section 19(b)(2) of the Act for approving the proposed rule change
prior to the 30th day after publication in the Federal Register.\15\
After careful consideration, the Commission finds that the proposed
rule change is consistent with the requirements of the Act and the
rules and regulations thereunder applicable to a national securities
association.\16\
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\15\ 15 U.S.C. 78s(b)(2).
\16\ In approving this rule change, the Commission notes that it
has considered the proposed rule's impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f).
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In particular, the Commission finds that the proposed rule change
is consistent with Section 15A(b)(6) of the Act, which requires, among
other things, that FINRA rules be designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest.\17\ Specifically, as noted above, FINRA is limiting
the application of FINRA Rule 4240 at this time to CDS that are
security-based swaps under Section 3(a)(68) of the Act,\18\ pending
further development of federal regulations governing margin for swaps
and security-based swaps and further consideration of potential
portfolio margin methodologies for cleared CDS that include both swaps
and security-based swaps. This is consistent with the goals of Title
VII of the Dodd-Frank Act.\19\ In addition, the Commission believes
that the proposed alternative tables that may be used by market
participants to compute the required margin will provide market
participants with some flexibility in computing margin, while still
permitting the continued use of the existing margin tables in FINRA
Rule 4240 Supplementary Material .01.
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\17\ 15 U.S.C. 78o-3(b)(6).
\18\ 15 U.S.C. 78c(a)(68).
\19\ Public Law 111-203, 124 Stat. 1376 (2010).
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The accelerated approval will, consistent with the goals set forth
by the Commission when it adopted the interim final temporary rules
with respect to the operation of central counterparties to clear and
settle CDS, and pending the final implementation of new CFTC and SEC
rules pursuant to Title VII of the Dodd-Frank Act, help to stabilize
the financial markets by setting forth margin requirements for certain
transactions in CDS. Therefore, the Commission finds good cause,
pursuant to Section 19(b)(2) of the Act, for approving the proposed
rule change prior to the 30th day after the date of publication of note
in the Federal Register.\20\
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\20\ 15 U.S.C. 78(b)(2).
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V. Conclusion

It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\21\ that the proposed rule change (SR-FINRA-2012-015) be, and
hereby is, approved on an accelerated basis.
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\21\ 15 U.S.C. 78(b)(2).

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\22\
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\22\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-5985 Filed 3-12-12; 8:45 am]
BILLING CODE 8011-01-P

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