
[Federal Register: December 18, 2009 (Volume 74, Number 242)]
[Notices]               
[Page 67258-67269]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18de09-103]                         


[[Page 67258]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61164; File No. S7-06-09]

 
Order Extending and Modifying Temporary Exemptions Under the 
Securities Exchange Act of 1934 in Connection With Request of Chicago 
Mercantile Exchange Inc. Related to Central Clearing of Credit Default 
Swaps, and Request for Comments

December 14, 2009.

I. Introduction

    Over the past year, the Securities and Exchange Commission 
(``Commission'') has taken multiple actions to protect investors and 
ensure the integrity of the nation's securities markets, including 
actions \1\ designed to address concerns related to the market in 
credit default swaps (``CDS'').\2\ The over-the-counter (``OTC'') 
market for CDS has been a source of concern to us and other financial 
regulators, and we have recognized that facilitating the establishment 
of central counterparties (``CCPs'') for CDS can play an important role 
in reducing the counterparty risks inherent in the CDS market, and thus 
can help mitigate potential systemic impacts. We have therefore found 
that taking action to help foster the prompt development of CCPs, 
including granting temporary conditional exemptions from certain 
provisions of the Federal securities laws, is in the public 
interest.\3\
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    \1\ See generally Securities Exchange Act Release No. 60372 
(Jul. 23, 2009), 74 FR 37748 (Jul. 29, 2009) (temporary exemptions 
in connection with CDS clearing by ICE Clear Europe Limited), 
Securities Exchange Act Release No. 60373 (Jul. 23, 2009), 74 FR 
37740 (Jul. 29, 2009) (temporary exemptions in connection with CDS 
clearing by Eurex Clearing AG), Securities Exchange Act Release No. 
59578 (Mar. 13, 2009), 74 FR 11781 (Mar. 19, 2009) (temporary 
exemptions in connection with CDS clearing by Chicago Mercantile 
Exchange Inc.) (``CME Exemptive Order''), Securities Exchange Act 
Release No. 59527 (Mar. 6, 2009), 74 FR 10791 (Mar. 12, 2009) 
(temporary exemptions in connection with CDS clearing by ICE US 
Trust LLC (now ``ICE Trust U.S. LLC'')), Securities Exchange Act 
Release No. 59164 (Dec. 24, 2008), 74 FR 139 (Jan. 2, 2009) 
(temporary exemptions in connection with CDS clearing by LIFFE A&M 
and LCH.Clearnet Ltd.) and other Commission actions discussed 
therein.
    In addition, we have issued interim final temporary rules that 
provide exemptions under the Securities Act of 1933 and the 
Securities Exchange Act of 1934 for CDS to facilitate the operation 
of one or more central counterparties for the CDS market. See 
Securities Act Release No. 8999 (Jan. 14, 2009), 74 FR 3967 (Jan. 
22, 2009) (initial approval); Securities Act Release No. 9063 (Sep. 
14, 2009), 74 FR 47719 (Sep. 17, 2009) (extension until Nov. 30, 
2010).
    Further, the Commission has provided temporary exemptions in 
connection with Sections 5 and 6 of the Securities Exchange Act of 
1934 for transactions in CDS. See Securities Exchange Act Release 
No. 59165 (Dec. 24, 2008), 74 FR 133 (Jan. 2, 2009) (initial 
exemption); Securities Exchange Act Release No. 60718 (Sep. 25, 
2009), 74 FR 50862 (Oct. 1, 2009) (extension until Mar. 24, 2010).
    \2\ A CDS is a bilateral contract between two parties, known as 
counterparties. The value of this financial contract is based on 
underlying obligations of a single entity (``reference entity'') or 
on a particular security or other debt obligation, or an index of 
several such entities, securities, or obligations. The obligation of 
a seller to make payments under a CDS contract is triggered by a 
default or other credit event as to such entity or entities or such 
security or securities. Investors may use CDS for a variety of 
reasons, including to offset or insure against risk in their fixed-
income portfolios, to take positions in bonds or in segments of the 
debt market as represented by an index, or to take positions on the 
volatility in credit spreads during times of economic uncertainty.
    Growth in the CDS market has coincided with a significant rise 
in the types and number of entities participating in the CDS market. 
CDS were initially created to meet the demand of banking 
institutions looking to hedge and diversify the credit risk 
attendant to their lending activities. However, financial 
institutions such as insurance companies, pension funds, securities 
firms, and hedge funds have entered the CDS market.
    \3\ See generally actions referenced in note 1, supra.
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    The Commission's authority over the OTC market for CDS is limited. 
Specifically, Section 3A of the Securities Exchange Act of 1934 
(``Exchange Act'') limits the Commission's authority over swap 
agreements, as defined in Section 206A of the Gramm-Leach-Bliley 
Act.\4\ For those CDS that are swap agreements, the exclusion from the 
definition of security in Section 3A of the Exchange Act, and related 
provisions, will continue to apply. The Commission's action today does 
not affect these CDS, and this Order does not apply to them. For those 
CDS that are not swap agreements (``non-excluded CDS''), the 
Commission's action today provides conditional exemptions from certain 
requirements of the Exchange Act.
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    \4\ 15 U.S.C. 78c-1. Section 3A excludes both a non-security-
based and a security-based swap agreement from the definition of 
``security'' under Section 3(a)(10) of the Exchange Act, 15 U.S.C. 
78c(a)(10). Section 206A of the Gramm-Leach-Bliley Act defines a 
``swap agreement'' as ``any agreement, contract, or transaction 
between eligible contract participants (as defined in section 1a(12) 
of the Commodity Exchange Act * * *) * * * the material terms of 
which (other than price and quantity) are subject to individual 
negotiation.'' 15 U.S.C. 78c note.
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    The Commission believes that using well-regulated CCPs to clear 
transactions in CDS provides a number of benefits, by helping to 
promote efficiency and reduce risk in the CDS market and among its 
participants, contributing generally to the goal of market stability, 
and by requiring maintenance of records of CDS transactions that would 
aid the Commission's efforts to prevent and detect fraud and other 
abusive market practices.\5\
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    \5\ See generally actions referenced in note 1, supra.
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    Earlier this year, the Commission granted temporary conditional 
exemptions to the Chicago Mercantile Exchange Inc. (``CME'') and 
Citadel Investment Group, L.L.C. (``Citadel'') from certain 
requirements under the Exchange Act with respect to their proposed 
activities in clearing and settling certain CDS,\6\ as well as the 
proposed activities of certain other persons.\7\ Those exemptions are 
scheduled to expire on December 14, 2009. CME has requested that the 
Commission extend the exemptions, and expand them to address the 
calculation of settlement prices for non-excluded CDS.\8\
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    \6\ For purposes of this Order, ``Cleared CDS'' means a credit 
default swap that is submitted (or offered, purchased, or sold on 
terms providing for submission) to CME, that is offered only to, 
purchased only by, and sold only to eligible contract participants 
(as defined in Section 1a(12) of the Commodity Exchange Act 
(``CEA'') as in effect on the date of this Order (other than a 
person that is an eligible contract participant under paragraph (C) 
of that section)), and in which: (i) The reference entity, the 
issuer of the reference security, or the reference security is one 
of the following: (A) An entity reporting under the Exchange Act, 
providing Securities Act Rule 144A(d)(4) information, or about which 
financial information is otherwise publicly available; (B) a foreign 
private issuer whose securities are listed outside the United States 
and that has its principal trading market outside the United States; 
(C) a foreign sovereign debt security; (D) an asset-backed security, 
as defined in Regulation AB, issued in a registered transaction with 
publicly available distribution reports; or (E) an asset-backed 
security issued or guaranteed by the Federal National Mortgage 
Association (``Fannie Mae''), the Federal Home Loan Mortgage 
Corporation (``Freddie Mac''), or the Government National Mortgage 
Association (``Ginnie Mae''); or (ii) the reference index is an 
index in which 80 percent or more of the index's weighting is 
comprised of the entities or securities described in subparagraph 
(i). As discussed above, the Commission's action today does not 
affect CDS that are swap agreements under Section 206A of the Gramm-
Leach-Bliley Act. See text at note 4, supra.
    \7\ See CME Exemptive Order, supra note 1.
    \8\ See Letter from Ann K. Shuman, Managing Director and Deputy 
General Counsel, CME, to Elizabeth Murphy, Secretary, Commission, 
Dec. 14, 2009 (``December 2009 request'').
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    Based on the facts presented and the representations made by 
CME,\9\ and for the reasons discussed in this Order, and

[[Page 67259]]

subject to certain conditions, the Commission is extending temporarily 
the exemptions granted in the CME Exemptive Order, and is expanding 
them to accommodate CME's proposed settlement price calculation 
methodology for non-excluded CDS. Specifically, the Commission is 
extending the temporary conditional exemption granted to CME from 
clearing agency registration under Section 17A of the Exchange Act 
solely to perform the functions of a clearing agency for certain non-
excluded CDS transactions. The Commission also is extending the 
temporary exemption for eligible contract participants and others from 
certain Exchange Act requirements with respect to non-excluded CDS 
cleared by CME. In addition, this order conditionally exempts on a 
temporary basis CME and certain of its clearing members from the 
registration requirements of Sections 5 and 6 of the Exchange Act 
solely in connection with the calculation of settlement prices for non-
excluded CDS cleared by CME. These exemptions are temporary, subject to 
certain conditions, and will expire on March 31, 2010.
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    \9\ See id. The exemptions we are granting today are based on 
all of the representations made in the December 2009 request by CME. 
We recognize, however, that there could be legal uncertainty in the 
event that one or more of the underlying representations were to 
become inaccurate. Accordingly, if any of these exemptions were to 
become unavailable by reason of an underlying representation no 
longer being materially accurate, the legal status of existing open 
positions in non-excluded CDS that previously had been cleared 
pursuant to the exemptions would remain unchanged, but no new 
positions could be established pursuant to the exemptions until all 
of the underlying representations were again accurate.
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II. Discussion

A. Description of CME Proposal

    The exemptive request by CME describes how its proposed 
arrangements for central clearing of CDS would operate, and makes 
representations about the safeguards associated with those 
arrangements, as described below:
1. CME Organization
    CME Group Inc. (``CME Group''), a Delaware stock corporation, is 
the holding company for CME, as well as Board of Trade of the City Of 
Chicago, Inc., New York Mercantile Exchange, Inc., Commodity Exchange, 
Inc., and their subsidiaries.
    CME is a designated contract market (``DCM''), regulated by the 
Commodity Futures Trading Commission (``CFTC''), for the trading of 
futures and options on futures contracts. In addition, CME Group 
operates its own clearing house, which is a division of CME. The CME 
clearing house is a derivatives clearing organization (``DCO'') 
regulated by the CFTC. The clearing house clears, settles, and 
guarantees the performance of all transactions matched through the 
execution facilities and on third party exchanges for which CME Group 
provides clearing services. The clearing house operates with the 
oversight of the Clearing House Risk Committee (``CHRC''). The CHRC is 
made up of a group of clearing member representatives who represent the 
interests of the clearing house as well as clearing members of CME 
Group. With respect to CDS clearing services, CME is establishing three 
additional committees: \10\ (i) A CDS Advisory Board, which will have 
oversight for certain aspects of CME's CDS clearing services; (ii) a 
CDS Determinations Committee, which will be responsible for issuing 
determinations related to CDS contract terms; and (iii) a CDS Default 
Management Committee, which will advise the clearing house on matters 
relating to managing CDS portfolio positions in the event of an actual 
or threatened default involving CDS cleared contracts.
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    \10\ These committees will generally have equal authority to the 
CHRC, but with narrower mandates and oversight that is specific to 
CDS. In some cases, the approval of the new CDS Advisory Board will 
be required, in addition to the approval of the CHRC, with respect 
to certain changes to CME's risk management of CDS. The CDS Advisory 
Board will also have approval rights with respect to certain other 
matters, such as the launch of clearing services for a new CDS 
product using the existing CDS financial safeguards package.
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    CME is required to comply with the eighteen CFTC Core Principles 
applicable to registered DCMs and the fourteen CFTC Core Principles 
applicable to DCOs.\11\ The CFTC conducts regular audits or risk 
reviews of CME with respect to these Core Principles. CME is registered 
and in good standing with the CFTC. In addition, CME is notice 
registered with the Commission as a special purpose national securities 
exchange for the purpose of trading security futures products. In the 
U.K., CME is a Recognised Overseas Investment Exchange and a Recognised 
Overseas Clearing House, subject to regulation by the U.K. Financial 
Services Authority.
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    \11\ The DCM and DCO Core Principles are set forth in 7 U.S.C. 
7(b), 7a-1(c)(2)(A).
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2. CME Central Counterparty Services for CDS
    CME as part of its clearing services will be interposed as central 
counterparty for transactions in Cleared CDS. CME will provide clearing 
and settlement services for multiple platforms, including an electronic 
trade booking and migration platform operated by CME.\12\ Specifically, 
CME will accept for clearing both (i) pre-existing non-standard trades 
that are submitted to clearing through CME's migration utility, a 
platform that provides data for converting non-standard terms to 
standard terms, allowing parties to non-standard transactions to 
substitute standard transactions for non-standard and submit the 
standard for clearing,\13\ and (ii) transactions executed on 
standardized terms, which can be submitted to CME for clearing using 
CME's trade booking facility or a confirmation service.\14\
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    \12\ CME's clearing services would be available only to persons 
that satisfy the definition of an ``eligible contract participant'' 
in Section 1a(12) of the CEA (other than paragraph (C) thereof). In 
addition, each participant must be a clearing member of CME or have 
a clearing relationship with a CME clearing member that agrees to 
assume responsibility for the participant's CDS contracts cleared by 
CME. Initially, CME would offer CDS that mirror as closely as 
possible the terms of existing OTC CDS. The coupons and maturities 
would be standardized to the extent necessary to permit centralized 
clearing.
    \13\ Non-standard trades that are migrated to CME would 
ultimately be converted to a standard, centrally cleared contract. 
Migration may only occur if both counterparties to a trade agree to 
the process and both are clearing members or have the appropriate 
relationship with a clearing member. To facilitate operational 
efficiency, CME would also supply participants a data file of the 
original bilateral positions that were accepted into clearing via 
the migration process, so that participants may send appropriate 
exit records to the DTCC Trade Information Warehouse.
    \14\ Trades may be submitted using Bloomberg's VCON confirmation 
service as of the initial launch date. CME is also working with 
other confirmation services to connect to CME clearing for 
submission of CDS transactions. See December 2009 request, supra 
note 8.
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    CME has no rule requiring an executing dealer to be a clearing 
member. In addition, CME will adopt a rule to confirm that there will 
be open access to its CDS clearing services for any execution venue or 
trade processing or confirmation service that desires to facilitate the 
submission of CDS transactions to CME for clearing, subject to CME's 
normal operational requirements applied to all such third-party 
services, including the requirement for a CME clearing member guaranty 
of all transactions submitted to clearing.
    CME clearing and settlement of Cleared CDS will operate using the 
established systems, procedures, and financial safeguards that stand 
behind trading in CME's primary futures market, and such activities 
will be subject to CFTC oversight of risk management and 
collateralization procedures. CME Rulebook Chapter 8-F sets forth the 
rules governing clearing and settlement of all products, instruments, 
and contracts in OTC derivatives, including but not limited to CDS 
contracts, swaps, and forward rate agreements that the CME 
clearinghouse has designated as eligible for clearing.
3. CME Risk Management
    CME clearing members that are broker-dealers or futures commission 
merchants (``FCMs'') maintain capital and liquidity in accordance with 
relevant SEC and CFTC rules and

[[Page 67260]]

regulations, respectively. In addition, CME has requirements for 
minimum capital contribution, contribution to the guaranty fund based 
on risk factors, maintenance margin, and mark to market with immediate 
payment of losses applicable to clearing member firms.
    CME has adopted a risk-based capital requirement. Capital 
requirements are monitored by CME's Audit Department and vary to 
reflect the risk of each clearing member's positions as well as CME's 
assessment of each clearing member's internal controls, risk management 
policies, and back office operations. CME has established additional 
capital and guaranty fund contribution requirements for clearing 
members authorized to clear CDS. To clear CDS, whether for proprietary 
or customer accounts, a clearing member must maintain $500 million in 
adjusted net capital.\15\ CDS clearing members must also make initial 
guaranty fund contributions with respect to CDS that will be a minimum 
of $50 million each.\16\ Those CDS clearing members with adjusted net 
capital of less than $1 billion must also maintain excess margin with 
the clearing house that is equal to their guaranty fund contributions; 
CDS clearing members with less than $5 billion in adjusted net capital 
are also subject to daily capital reporting.
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    \15\ CDS clearing members that are structured as hedge funds 
must also have a minimum of $5 billion in net assets under 
management.
    \16\ During an initial phase starting as early as December 15, 
2009, a limited number of CDS clearing members and customers that 
have been engaged in active testing with CME will be eligible to 
participate, and participating clearing members will make guaranty 
fund contributions of $50 million each. Clearing will be restricted 
to a small set of index products, and CME will carefully limit risk 
exposures. Thereafter, participation will be open to all eligible 
clearing members and market participants. At that time, the minimum 
initial or additional guaranty fund contribution per CDS clearing 
member will be equal to the greater of $50 million or $500 million 
divided by the total number of CDS clearing members.
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    Clearing members also have to manage appropriate requirements with 
respect to their customers. CME Rule 982 requires clearing members to 
establish written risk management policies and procedures, including 
monitoring the risks assumed by specific customers. To facilitate such 
controls with respect to CDS transactions, CME's clearing systems 
includes functionality that permits clearing members to register 
customer accounts and specify customer credit limits.
    Customer account reporting will allow CME to view the positions 
held by individual accounts. Clearing members will be required to 
register their proprietary and customer accounts in CME's EDB system, 
and report new customer positions through EDB on an ongoing basis. 
Changes in positions of each account will be analyzed throughout the 
day, and compared to intraday price movements, to monitor any accounts 
that may develop significant losses due to market moves. In addition, 
significant changes in positions from day to day will be analyzed and 
reported to CME clearing house senior management.
    In designing its margining methodology for CDS, CME conducted 
extensive testing of historical CDS data, stress testing the different 
CDS margin factors to capture moves beyond the 99% standard on its 
multi-factor risk model. The overall financial safeguards package for 
CDS has also been designed using concentration types of margining and 
routine stress testing. On an ongoing basis, CME will daily back-test 
the CDS margin factor parameters to ensure that they are providing the 
desired level of coverage. CME will also review on a daily basis the 
margin collected by CME on CDS portfolios and compare those amounts to 
next-day market moves so that actual portfolio effects can be 
determined and gauged against the margin coverage. In addition, CME 
will evaluate the concentration of CDS positions beyond the margin 
factors and compare them against overall open interest and liquidity in 
the CDS market.
    CME will extend its scenario-based stress testing techniques for 
concentration margining to Cleared CDS. The concentration stress test 
results will be evaluated relative to excess adjusted net capital for 
each segregated pool. If the hypothetical losses exceed the excess 
adjusted net capital for a clearing member's segregated pool, then an 
additional margin charge will be applied to the clearing member's 
position. The additional margin charge will be calculated based on the 
magnitude of the hypothetical losses in excess of the clearing member's 
excess adjusted net capital.
    CME determines the acceptability of different collateral types and 
determines appropriate haircuts.\17\ Collateral requirements for 
Cleared CDS will appropriately reflect the specific risks of Cleared 
CDS, including jump-to-default and the consequences of a liquidity 
event caused by the defaults.
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    \17\ A list of acceptable collateral and applicable haircuts is 
available at http://www.cme.com.
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4. Settlement Prices
    CME will determine settlement prices each business day for each 
eligible product based upon pricing data from multiple origins. Sources 
of pricing data will include: (1) Prices of OTC transactions submitted 
to CME for clearing; (2) indicative settlement prices contributed by 
CME CDS clearing members; and (3) pricing information licensed by CME 
from other third-party sources. The pricing data will be processed 
using standard validation, aggregation, and valuation analytics. 
Updated settlement prices will be made available to clearing members on 
their open positions on a regular basis (at least once a day, or more 
frequently in case of sudden market moves). As part of the CDS clearing 
process, CME will periodically require CDS clearing members to trade at 
prices generated by their indicative settlement prices where those 
indicative settlement prices generate crossed bids and offers, pursuant 
to CME's price quality auction methodology.\18\
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    \18\ Each trading day CME will randomly select 5% of its CDS 
product available for clearing (but at least one product) and will 
randomly select one tenor for each such product to evaluate for 
crossed bids and offers pursuant to CME's price quality auction 
methodology.
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5. Member Default
    If a clearing member is troubled (i.e., if it fails to meet minimum 
financial requirements or its financial or operational condition may 
jeopardize the integrity of the CME, or negatively impact the financial 
markets), CME may take action pursuant to CME Rule 974 (Failure to Meet 
Minimum Financial Requirements) or 975 (Emergency Financial 
Conditions). In the event of a default by a clearing member of CME, the 
process would be governed by applicable CME rules.\19\
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    \19\ See, e.g., CME Rulebook Chapter 8-F (Over-the-Counter 
Derivative Clearing), including but not limited to Rules 8F06 
(Clearing Member Default), 8F07 (Guaranty Fund Deposit), 8F13 
(Insolvency and Liquidation), and 8F25 (Default Management 
Committee). Chapter 8-F further incorporates the general CME Rules 
relating to defaults, including but not limited to Rules 802 
(Protection of Clearing House), 913 (Withdrawal From Clearing 
Membership), 974 (Failure to Meet Minimum Financial Requirements), 
975 (Emergency Financial Conditions), 976 (Suspension of Clearing 
Members), 978 (Open Trades of Suspended Clearing Members), and 979 
(Suspended or Expelled Clearing Members).
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    In the event of a member default, CME may access its financial 
safeguards package as necessary. CME's financial safeguard package is a 
combination of each clearing member's collateral on deposit to support 
its positions, the collateral of its customers to support their 
positions, CME surplus funds,

[[Page 67261]]

security deposits, and CME's assessment powers.\20\
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    \20\ CME indicates that, excluding performance bond collateral 
supporting open positions, which totals approximately $85 billion, 
the total financial safeguards package is greater than $7.5 billion, 
comprised of: (1) CME surplus funds of $177 million; (2) clearing 
member security deposits of approximately $1.973 billion; and (3) 
assessment powers of approximately $5.426 billion (as of September 
30, 2009). Clearing members that clear Cleared CDS would be subject 
to additional guaranty fund deposit requirements. Furthermore, the 
calculation of that portion of a clearing member's security deposit 
that is related to the risk of its CDS position would be scaled 
upward by a factor of four.
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6. Customer Rules and Other Requirements
    Prior to any issuance of an order from the CFTC under Section 4d of 
the CEA (``4d order''), described below, all Cleared CDS submitted to 
CME for clearing for the account of a clearing member's customer must 
be assigned and held in an account subject to CFTC Regulation 30.7.\21\ 
Regulation 30.7 requires customer positions and property to be 
separately held and accounted for from the positions and property of 
the FCM, and customer property to be deposited under an account name 
that clearly identifies it as customer property. CME Rule 8F03 also 
provides that ``[a]ll collateral deposited as performance bond to 
support positions in such Regulation Sec.  30.7 account and all 
positions, collateral or cash in such account shall be segregated from 
the Clearing Member's proprietary account.'' \22\ CME notes, however, 
that ``[n]either the CFTC nor the courts have issued an interpretation 
with regard to the bankruptcy protections that would be afforded to 
customers clearing OTC positions in 30.7 accounts, and it is therefore 
unclear whether they would receive the same protections as foreign 
futures customers.'' \23\
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    \21\ 17 CFR 30.7.
    \22\ As discussed below, the exemptions related to CDS customer 
clearing require CME clearing members to satisfy additional 
conditions, including conditions specific to the use of a 30.7 
account.
    \23\ December 2009 request, supra note 8.
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    In the event the CFTC issues a 4d order,\24\ the segregation and 
protection of customer funds and property would be controlled by 
Section 4d of the CEA and the related regulations; all funds and 
property received from customers of FCMs in connection with purchasing, 
selling, or holding CDS positions would be subject to the requirements 
of CFTC Regulation 1.20, et seq. promulgated under Section 4d. This 
regulation requires that customer positions and property be separately 
accounted for and segregated from the positions and property of the 
FCM. Customer property would be deposited under an account name that 
clearly identifies it as such and shows it is appropriately segregated 
as required by the CEA and Regulation 1.20, et seq.
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    \24\ CME petitioned the CFTC on June 15, 2009 for a 4d order 
covering cleared CDS transactions. See December 2009 request, supra 
note 8. More specifically, CME's petition requested that the CFTC 
issue an Order pursuant to Section 4d that would permit CME and its 
clearing members that are FCMs to commingle customer funds used to 
margin, secure, or guarantee CDS cleared by CME with other funds 
held in segregated accounts maintained in accordance with Section 4d 
of the CEA and CFTC regulations. See http://www.cftc.gov/stellent/
groups/public/@requestsandactions/documents/ifdocs/
cme4drequestcds.pdf.
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    In addition, customer margin requirements for a broker-dealer are 
generally set by the broker-dealer's self-regulatory organizations 
(e.g., the Financial Industry Regulatory Authority, or FINRA). One 
purpose for customer margin requirements is to assure that broker-
dealers collect sufficient margin from customers to protect the broker-
dealer in the event that an adverse price move causes a customer 
default, leaving the broker-dealer with responsibility for the 
transaction. FINRA has amended its customer margin rule to implement an 
interim pilot program with respect to margin requirements for 
transactions in CDS.\25\
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    \25\ See Securities Exchange Act No. 60722 (Sept. 25, 2009), 74 
FR 50856 (Oct. 1, 2009) (File No. SR-FINRA-2009-063) (extending the 
implementation of FINRA Rule 4240, Margin Requirements for Credit 
Default Swaps, to Nov. 30, 2010).
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B. Extended Temporary Conditional Exemption From Clearing Agency 
Registration Requirement

    On March 13, 2009, in connection with its efforts to facilitate the 
establishment of one or more CCPs for Cleared CDS, the Commission 
issued the CME Exemptive Order, conditionally exempting CME from 
clearing agency registration under Section 17A of the Exchange Act on a 
temporary basis.\26\ Subject to the conditions in that Order, CME is 
permitted to act as a CCP for Cleared CDS by novating trades of non-
excluded CDS that are securities and generating money and settlement 
obligations for participants without having to register with the 
Commission as a clearing agency. The CME Exemptive Order expires on 
December 14, 2009. Pursuant to its authority under Section 36 of the 
Exchange Act,\27\ for the reasons described herein, the Commission is 
extending the exemption granted in that order until March 31, 2010, 
subject to certain conditions.
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    \26\ See supra, note 1.
    \27\ 15 U.S.C. 78mm. Section 36 of the Exchange Act authorizes 
the Commission to conditionally or unconditionally exempt any 
person, security, or transaction, or any class or classes of 
persons, securities, or transactions, from any provision or 
provisions of the Exchange Act or any rule or regulation thereunder, 
by rule, regulation, or order, to the extent that such exemption is 
necessary or appropriate in the public interest, and is consistent 
with the protection of investors.
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    In the CME Exemptive Order, the Commission recognized the need to 
ensure the prompt establishment of CME as a CCP for CDS transactions. 
The Commission also recognized the need to ensure that important 
elements of Section 17A of the Exchange Act, which sets forth the 
framework for the regulation and operation of the U.S. clearance and 
settlement system for securities, apply to the non-excluded CDS market. 
Accordingly, the temporary exemption in the CME Exemptive Order was 
subject to a number of conditions designed to enable Commission staff 
to monitor CME's clearance and settlement of CDS transactions.\28\
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    \28\ See Securities Exchange Act Release No. 59527 (Mar. 6, 
2009), 74 FR 10791 (Mar. 12, 2009).
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    The temporary exemption was based, in part, on CME's representation 
that it met the standards set forth in the Committee on Payment and 
Settlement Systems (``CPSS'') and International Organization of 
Securities Commissions (``IOSCO'') report entitled: Recommendation for 
Central Counterparties (``RCCP'').\29\ The RCCP establishes a framework 
that requires a CCP to have: (i) The ability to facilitate the prompt 
and accurate clearance and settlement of CDS transactions and to 
safeguard its users' assets; and (ii) sound risk management, including 
the ability to appropriately determine and collect clearing fund and 
monitor its users' trading. This framework is generally consistent with 
the requirements of Section 17A of the Exchange Act.
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    \29\ The RCCP was drafted by a joint task force (``Task Force'') 
composed of representative members of IOSCO and CPSS and published 
in November 2004. The Task Force consisted of securities regulators 
and central bankers from 19 countries and the European Union. The 
U.S. representatives on the Task Force included staff from the 
Commission, the Federal Reserve Board, and the CFTC.
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    The Commission believes that continuing to facilitate the central 
clearing of CDS transactions--including customer CDS transactions--
through a temporary conditional exemption from Section 17A would 
provide important risk management and systemic benefits by facilitating 
the prompt establishment of CCP clearance and settlement services. 
Accordingly, and consistent with our findings in the CME Exemptive 
Order, we find pursuant to Section 36 of the Exchange Act that it is 
necessary and appropriate in the public interest

[[Page 67262]]

and is consistent with the protection of investors for the Commission 
to extend, until March 31, 2010, CME's exemption provided from the 
clearing agency registration requirements of Section 17A, subject to 
certain conditions.
    In granting this exemption, we are balancing the aim of 
facilitating CME's service as a CCP for non-excluded CDS transactions 
with ensuring that important elements of Commission oversight are 
applied to the non-excluded CDS market. The continued use of temporary 
exemptions will permit the Commission to continue to develop direct 
experience with the non-excluded CDS market. During the extended 
exemptive period, the Commission will continue to monitor closely the 
impact of the CCPs on this market. In particular, the Commission will 
seek to assure itself that CME has sufficient risk management controls 
in place and does not act in an anticompetitive manner or indirectly 
facilitate anticompetitive behavior with respect to fees charged to 
members, the dissemination of market data, and the access to clearing 
services by independent CDS exchanges or CDS trading platforms.
    This temporary extension of the CME Exemptive Order also is 
designed to assure that--as CME has represented--information will be 
available to market participants about the terms of the CDS cleared by 
CME, the creditworthiness of CME or any guarantor, and the clearance 
and settlement process for the CDS.\30\ The Commission believes 
operation of CME consistent with the conditions of the Order will 
facilitate the availability to market participants of information that 
should enable them to make better informed investment decisions and 
better value and evaluate their Cleared CDS and counterparty exposures 
relative to a market that is not centrally cleared.
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    \30\ The Commission believes that it is important in the CDS 
market, as in the securities market generally, that parties to 
transactions have access to financial information that would allow 
them to evaluate appropriately the risks relating to a particular 
investment and make more informed investment decisions. See 
generally Policy Statement on Financial Market Developments, The 
President's Working Group on Financial Markets, March 13, 2008, 
available at: http://www.treas.gov/press/releases/reports/
pwgpolicystatemktturmoil_03122008.pdf.
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    This temporary extension of the CME Exemptive Order is subject to a 
number of conditions that are designed to enable Commission staff to 
monitor CME's clearance and settlement of CDS transactions and help 
reduce risk in the CDS market. These conditions require that CME: (i) 
Make available on its Web site its annual audited financial statements; 
(ii) preserve records related to the conduct of its Cleared CDS 
clearance and settlement services for at least five years (in an easily 
accessible place for the first two years); (iii) provide information 
relating to its Cleared CDS clearance and settlement services to the 
Commission and provide access to the Commission to conduct on-site 
inspections of facilities, records, and personnel related to its 
Cleared CDS clearance and settlement services; (iv) notify the 
Commission on a monthly basis about material disciplinary actions taken 
against any of its members utilizing its Cleared CDS clearance and 
settlement services, and about the involuntary termination of the 
membership of an entity that is utilizing CME's Cleared CDS clearance 
and settlement services; (v) provide the Commission with changes to 
rules, procedures, and any other material events affecting its Cleared 
CDS clearance and settlement services not less than one day prior to 
effectiveness or implementation of such rule changes, or in exigent 
circumstances, as promptly as reasonably practicable under the 
circumstances; (vi) provide the Commission with reports prepared by 
independent audit personnel that are generated in accordance with risk 
assessment of the areas set forth in the Commission's Automation Review 
Policy Statements \31\ and its annual audited financial statements 
prepared by independent audit personnel; and (vii) report all 
significant systems outages to the Commission within specified 
timeframes.
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    \31\ See Automated Systems of Self-Regulatory Organization, 
Exchange Act Release No. 27445 (Nov. 16, 1989), File No. S7-29-89, 
and Automated Systems of Self-Regulatory Organization (II), Exchange 
Act Release No. 29185 (May 9, 1991), File No. S7-12-91.
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    In addition, this temporary extension of the CME Exemptive Order is 
conditioned on CME, directly or indirectly, making available to the 
public on terms that are fair and reasonable and not unreasonably 
discriminatory: (i) All end-of-day settlement prices and any other 
prices with respect to Cleared CDS that CME may establish to calculate 
settlement variation or margin requirements for CME clearing members; 
and (ii) any other pricing or valuation information with respect to 
Cleared CDS as is published or distributed by CME.
    As a CCP, CME will collect and process information about CDS 
transactions, prices, and positions from all of its participants. With 
this information, it will calculate and disseminate current values for 
open positions for the purpose of setting appropriate margin levels. 
The availability of such information can improve fairness, efficiency, 
and competitiveness of the market--all of which enhance investor 
protection and facilitate capital formation. Moreover, with pricing and 
valuation information relating to Cleared CDS, market participants 
would be able to derive information about underlying securities and 
indexes. This may improve the efficiency and effectiveness of the 
securities markets by allowing investors to better understand credit 
conditions generally.

C. Temporary Conditional Exemption From Exchange Registration 
Requirements

    CME has requested that the Commission expand its exemptive relief 
to include a temporary conditional exemption for CME from the 
requirements of Sections 5 and 6 of the Exchange Act, and the rules and 
regulations thereunder, in connection with CME's methodology for 
determining CDS settlement prices, including its price quality auction 
methodology. Section 5 of the Exchange Act contains certain 
restrictions relating to the registration of national securities 
exchanges,\32\ while Section 6 provides the procedures for registering 
as a national securities exchange.\33\
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    \32\ In particular, Section 5 provides:
    It shall be unlawful for any broker, dealer, or exchange, 
directly or indirectly, to make use of the mails or any means or 
instrumentality of interstate commerce for the purpose of using any 
facility of an exchange * * * to effect any transaction in a 
security, or to report any such transactions, unless such exchange 
(1) is registered as a national securities exchange under section 6 
of [the Exchange Act], or (2) is exempted from such registration * * 
* by reason of the limited volume of transactions effected on such 
exchange * * * 15 U.S.C. 78e.
    \33\ 15 U.S.C. 78f. Section 6 of the Exchange Act also sets 
forth various requirements to which a national securities exchange 
is subject.
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    The temporary exemption would facilitate the establishment of CME's 
settlement price process. CME represents that updated settlement prices 
will be made available to clearing members on their open positions on a 
regular basis (at least once a day, or more frequently in case of 
sudden market moves). As part of the CDS clearing process, CME will 
periodically require CDS clearing members to trade at prices generated 
by their indicative settlement prices where those indicative settlement 
prices generate crossed bids and offers, pursuant to CME's price 
quality auction methodology.\34\
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    \34\ See note 18, supra.
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    As discussed above, we have found in general that it is necessary 
or appropriate in the public interest, and is

[[Page 67263]]

consistent with the protection of investors, to facilitate CDS clearing 
by CME. Consistent with that finding--and in reliance on CME's 
representation that the settlement pricing process, including the 
periodically required trading, is part of its clearing process--we 
further find that it is necessary or appropriate in the public 
interest, and is consistent with the protection of investors to grant, 
pursuant to Section 36 of the Exchange Act, a temporary exemption until 
March 31, 2010, to CME from Sections 5 and 6 of the Exchange Act in 
connection with its calculation of settlement variation prices for open 
positions in Cleared CDS, and a temporary exemption to CME clearing 
members from Section 5 with respect to such trading activity, subject 
to certain conditions.
    The temporary exemption for CME is subject to three conditions. 
First, CME must report the following information with respect to its 
determination of daily settlement prices for cleared CDS to the 
Commission within 30 days of the end of each quarter, and preserve such 
reports for as long as CME offers CDS clearing services and for a 
period of at least five years thereafter:
     The total dollar volume of CDS transactions executed 
during the quarter pursuant to CME's price quality auction methodology, 
broken down by reference entity, security, or index; and
     The total unit volume or notional amount executed during 
the quarter pursuant to CME's price quality auction methodology, broken 
down by reference entity, security, or index.

Reporting of this information will assist the Commission in carrying 
out its responsibility to supervise and regulate the securities 
markets.
    Second, CME must establish and maintain adequate safeguards and 
procedures to protect participants' confidential trading information 
related to Cleared CDS. Such safeguards and procedures shall include: 
(a) Limiting access to the confidential trading information of 
participants to those CME employees who have a need to access such 
information in connection with the provision of CME CDS clearing 
services or who are responsible for compliance with this exemption or 
any other applicable rules; and (b) implementing policies and 
procedures for CME employees with access to such information with 
respect to trading for their own accounts. CME must adopt and implement 
adequate oversight procedures to ensure that the policies and 
procedures established pursuant to this condition are followed. This 
condition is designed to prevent any misuse of CME clearing member 
trading information that may be available to CME in connection with the 
daily settlement variation of open positions in Cleared CDS. This 
should strengthen confidence in CME as a CCP for CDS, thus promoting 
participation in central clearing of CDS.
    Third, CME must comply with the conditions to the temporary 
exemption from Section 17A of the Exchange Act in this Order. This 
exemption from exchange registration is granted in the context of our 
goal of facilitating CME's ability to act as a CCP for non-excluded 
CDS. We note that CME has represented that given the requirement for 
CDS clearing members periodically to trade at prices generated by their 
indicative settlement prices where those indicative settlement prices 
generate crossed bids and offers, pursuant to CME's price quality 
auction methodology, its price auction methodology will be part of its 
CDS clearing process.

D. Extended Temporary Conditional General Exemption for CME and Certain 
Eligible Contract Participants

    As we recognized when we initially provided temporary conditional 
exemptions in connection with CDS clearing by CME, applying the full 
panoply of Exchange Act requirements to participants in transactions in 
non-excluded CDS likely would deter some participants from using CCPs 
to clear CDS transactions. We also recognized that it is important that 
the antifraud provisions of the Exchange Act apply to transactions in 
non-excluded CDS, particularly given that OTC transactions subject to 
individual negotiation that qualify as security-based swap agreements 
already are subject to those provisions.\35\
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    \35\ While Section 3A of the Exchange Act excludes ``swap 
agreements'' from the definition of ``security,'' certain antifraud 
and insider trading provisions under the Exchange Act explicitly 
apply to security-based swap agreements. See (a) paragraphs (2) 
through (5) of Section 9(a), 15 U.S.C. 78i(a), prohibiting the 
manipulation of security prices; (b) Section 10(b), 15 U.S.C. 
78j(b), and underlying rules prohibiting fraud, manipulation or 
insider trading (but not prophylactic reporting or recordkeeping 
requirements); (c) Section 15(c)(1), 15 U.S.C. 78o(c)(1), which 
prohibits brokers and dealers from using manipulative or deceptive 
devices; (d) Sections 16(a) and (b), 15 U.S.C. 78p(a) and (b), which 
address disclosure by directors, officers and principal 
stockholders, and short-swing trading by those persons, and rules 
with respect to reporting requirements under Section 16(a); (e) 
Section 20(d), 15 U.S.C. 78t(d), providing for antifraud liability 
in connection with certain derivative transactions; and (f) Section 
21A(a)(1), 15 U.S.C. 78u-1(a)(1), related to the Commission's 
authority to impose civil penalties for insider trading violations.
    ``Security-based swap agreement'' is defined in Section 206B of 
the Gramm-Leach-Bliley Act as a swap agreement in which a material 
term is based on the price, yield, value, or volatility of any 
security or any group or index of securities, or any interest 
therein.
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    As a result, we concluded that it is appropriate in the public 
interest and consistent with the protection of investors temporarily to 
apply substantially the same framework to transactions by market 
participants in non-excluded CDS that applies to transactions in 
security-based swap agreements. Consistent with that conclusion, we 
temporarily exempted CME and certain eligible contract participants 
from a number of Exchange Act requirements, while excluding certain 
enforcement-related and other provisions from the scope of the 
exemption.
    We believe that continuing to facilitate the central clearing of 
CDS transactions by CME through this type of temporary conditional 
exemption will provide important risk management and systemic benefits. 
We also believe that facilitating the central clearing of customer CDS 
transactions, subject to the conditions in this Order, will provide an 
opportunity for the customers of CME clearing members to control 
counterparty risk.
    Accordingly, pursuant to Section 36 of the Exchange Act, the 
Commission finds that it is necessary or appropriate in the public 
interest and is consistent with the protection of investors to grant an 
exemption until March 31, 2010, from the requirements of the Exchange 
Act discussed below, subject to certain conditions. This temporary 
exemption applies to CME and to eligible contract participants \36\ 
other than: Eligible contract participants that receive or hold funds 
or securities for the purpose of purchasing, selling, clearing, 
settling, or holding Cleared CDS positions for other persons; \37\ 
eligible contract

[[Page 67264]]

participants that are self-regulatory organizations; or eligible 
contract participants that are registered brokers or dealers.\38\
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    \36\ This exemption in general applies to eligible contract 
participants, as defined in Section 1a(12) of the CEA as in effect 
on the date of this Order, other than persons that are eligible 
contract participants under paragraph (C) of that section.
    \37\ Solely for purposes of this requirement, an eligible 
contract participant would not be viewed as receiving or holding 
funds or securities for purpose of purchasing, selling, clearing, 
settling, or holding Cleared CDS positions for other persons, if the 
other persons involved in the transaction would not be considered 
``customers'' of the eligible contract participant in a parallel 
manner when certain persons would not be considered ``customers'' of 
a broker-dealer under Exchange Act Rule 15c3-3(a)(1). For these 
purposes, and for the purpose of the definition of ``Cleared CDS,'' 
the terms ``purchasing'' and ``selling'' mean the execution, 
termination (prior to its scheduled maturity date), assignment, 
exchange, or similar transfer or conveyance of, or extinguishing the 
rights or obligations under, a Cleared CDS, as the context may 
require. This is consistent with the meaning of the terms 
``purchase'' or ``sale'' under the Exchange Act in the context of 
security-based swap agreements. See Exchange Act Section 3A(b)(4). A 
separate temporary conditional exemption addresses members of CME 
that hold funds or securities for the purpose of purchasing, 
selling, clearing, settling, or holding Cleared CDS positions for 
other persons. See Part II.E, infra.
    \38\ A separate temporary exemption addresses the Cleared CDS 
activities of registered-broker-dealers. See Part II.F, infra. 
Solely for purposes of this Order, a registered broker-dealer, or a 
broker or dealer registered under Section 15(b) of the Exchange Act, 
does not refer to someone that would otherwise be required to 
register as a broker or dealer solely as a result of activities in 
Cleared CDS in compliance with this Order.
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    As before, under this temporary exemption, and solely with respect 
to Cleared CDS, those persons generally are exempt from the provisions 
of the Exchange Act and the rules and regulations thereunder that do 
not apply to security-based swap agreements. Thus, those persons will 
still be subject to those Exchange Act requirements that explicitly are 
applicable in connection with security-based swap agreements.\39\ In 
addition, all provisions of the Exchange Act related to the 
Commission's enforcement authority in connection with violations or 
potential violations of such provisions remain applicable.\40\ In this 
way, the temporary exemption applies the same Exchange Act requirements 
in connection with non-excluded CDS as apply in connection with OTC 
credit default swaps that are security-based swap agreements.
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    \39\ See note 35, supra.
    \40\ Thus, for example, the Commission retains the ability to 
investigate potential violations and bring enforcement actions in 
the Federal courts as well as in administrative proceedings, and to 
seek the full panoply of remedies available in such cases.
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    Consistent with our earlier exemptions, and for the same reasons, 
this temporary exemption also does not extend to: the exchange 
registration requirements of Exchange Act Sections 5 and 6; \41\ the 
clearing agency registration requirements of Exchange Act Section 17A; 
the requirements of Exchange Act Sections 12, 13, 14, 15(d), and 16; 
\42\ the Commission's administrative proceeding authority under 
Sections 15(b)(4) and (b)(6); \43\ or certain provisions related to 
government securities.\44\ CME clearing members relying on this 
temporary exemption must be in material compliance with CME rules.
---------------------------------------------------------------------------

    \41\ These are subject to a separate temporary class exemption. 
See note 1, supra. A national securities exchange that effects 
transactions in Cleared CDS would continue to be required to comply 
with all requirements under the Exchange Act applicable to such 
transactions. A national securities exchange could form subsidiaries 
or affiliates that operate exchanges exempt under that order. Any 
subsidiary or affiliate of a registered exchange could not 
integrate, or otherwise link, the exempt CDS exchange with the 
registered exchange including the premises or property of such 
exchange for effecting or reporting a transaction without being 
considered a ``facility of the exchange.'' See Section 3(a)(2), 15 
U.S.C. 78c(a)(2).
    This Order also includes a separate temporary exemption from 
Sections 5 and 6 in connection with the settlement price calculation 
methodology of CME, discussed above. See Part II.C, supra.
    \42\ 15 U.S.C. 78l, 78m, 78n, 78o(d), 78p. Eligible contract 
participants and other persons instead should refer to the interim 
final temporary rules issued by the Commission. See note 1, supra.
    \43\ Exchange Act Sections 15(b)(4) and 15(b)(6), 15 U.S.C. 
78o(b)(4) and (b)(6), grant the Commission authority to take action 
against broker-dealers and associated persons in certain situations. 
Accordingly, while this exemption generally extends to persons that 
act as inter-dealer brokers in the market for Cleared CDS and do not 
hold funds or securities for others, such inter-dealer brokers may 
be subject to actions under Sections 15(b)(4) and (b)(6) of the 
Exchange Act. In addition, such inter-dealer brokers may be subject 
to actions under Exchange Act Section 15(c)(1), 15 U.S.C. 78o(c)(1), 
which prohibits brokers and dealers from using manipulative or 
deceptive devices. As noted above, Section 15(c)(1) explicitly 
applies to security-based swap agreements. Sections 15(b)(4), 
15(b)(6), and 15(c)(1), of course, would not apply to persons 
subject to this exemption who do not act as broker-dealers or 
associated persons of broker-dealers.
    \44\ This exemption specifically does not extend to the Exchange 
Act provisions applicable to government securities, as set forth in 
Section 15C, 15 U.S.C. 78o-5, and its underlying rules and 
regulations; nor does the exemption extend to related definitions 
found at paragraphs (42) through (45) of Section 3(a), 15 U.S.C. 
78c(a). The Commission does not have authority under Section 36 to 
issue exemptions in connection with those provisions. See Exchange 
Act Section 36(b), 15 U.S.C. 78mm(b).
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E. Conditional Temporary Exemption for Certain Clearing Members of CME

    In the CME Exemptive Order, we granted a conditional temporary 
exemption from particular Exchange Act requirements to certain clearing 
members of CME that hold funds and securities of others in connection 
with Cleared CDS transactions. Absent an exception or exemption, 
persons that effect transactions in non-excluded CDS that are 
securities may be required to register as broker-dealers pursuant to 
Section 15(a)(1) of the Exchange Act.\45\ Certain reporting and other 
requirements of the Exchange Act may also apply to such persons, as 
broker-dealers, regardless of whether they are registered with the 
Commission.
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    \45\ 15 U.S.C. 78o(a)(1). This section generally provides that, 
absent an exception or exemption, a broker or dealer that uses the 
mails or any means of interstate commerce to effect transactions in, 
or to induce or attempt to induce the purchase or sale of, any 
security must register with the Commission.
    Section 3(a)(4) of the Exchange Act generally defines a 
``broker'' as ``any person engaged in the business of effecting 
transactions in securities for the account of others,'' but provides 
11 exceptions for certain bank securities activities. 15 U.S.C. 
78c(a)(4). Section 3(a)(5) of the Exchange Act generally defines a 
``dealer'' as ``any person engaged in the business of buying and 
selling securities for his own account,'' but includes exceptions 
for certain bank activities. 15 U.S.C. 78c(a)(5). Exchange Act 
Section 3(a)(6) defines a ``bank'' as a bank or savings association 
that is directly supervised and examined by state or Federal banking 
authorities (with certain additional requirements for banks and 
savings associations that are not chartered by a Federal authority 
or a member of the Federal Reserve System). 15 U.S.C. 78c(a)(6).
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    In granting that exemption, we noted that it is consistent with our 
investor protection mandate to require securities intermediaries that 
receive or hold funds and securities on behalf of others to comply with 
standards that safeguard the interests of their customers.\46\ We also 
recognized, however, that requiring intermediaries that receive or hold 
funds and securities on behalf of customers in connection with 
transactions in non-excluded CDS to register as broker-dealers may 
deter the use of CCPs in CDS transactions, to the detriment of the 
markets and market participants generally. We concluded that those 
factors, along with certain representations by CME, argued in favor of 
flexibility in applying the requirements of the Exchange Act to these 
intermediaries. As a result, we provided a temporary conditional 
exemption to any CME clearing member registered as an FCM pursuant to 
Section 4f(a)(1) of the CEA (but not registered as a broker-dealer 
under Section 15(b) of the Exchange Act (other than paragraph (11) 
thereof)) that receives or holds funds or securities for the purpose of 
purchasing, selling, clearing, settling, or holding Cleared CDS 
positions for other persons. Solely with respect to Cleared CDS, those 
members generally were exempted from provisions of the Exchange Act and 
the underlying rules and regulations that do not apply to security-
based swap agreements.
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    \46\ Registered broker-dealers are required to segregate assets 
held on behalf of customers from proprietary assets, because 
segregation will assist customers in recovering assets in the event 
the intermediary fails. Absent such segregation, collateral could be 
used by an intermediary to fund its own business, and could be 
attached to satisfy the intermediary's debts were it to fail. 
Moreover, the maintenance of adequate capital and liquidity protects 
customers, CCPs, and other market participants. Adequate books and 
records (including both transactional and position records) are 
necessary to facilitate day to day operations as well as to help 
resolve situations in which an intermediary fails and either a 
regulatory authority or receiver is forced to liquidate the firm. 
Appropriate records also are necessary to allow examiners to review 
for improper activities, such as insider trading or fraud.
---------------------------------------------------------------------------

    When CME requested the exemptions that we granted in March, it 
stated that pending a receipt of an order from the CFTC pursuant to 
Section 4d of the CEA and related regulations, to permit CME

[[Page 67265]]

and its members to establish segregated accounts for holding collateral 
posted by cleared CDS customers, FCMs would hold customer collateral 
within accounts established pursuant to CFTC Rule 30.7. Rule 30.7 
provides a mechanism for establishing accounts for holding collateral 
posted by foreign futures customers.
    We understand that the protections associated with using CFTC Rule 
30.7 to segregate collateral associated with over-the-counter 
derivatives is untested,\47\ and thus less certain than the protections 
that would be afforded to collateral protected by Section 4d. Also, we 
note that the CFTC has proposed a rule--not yet adopted--that would 
provide for the establishment of an account class, with respect to the 
bankruptcy of a commodity broker that is an FCM, that would be 
applicable to positions in cleared over-the-counter derivatives and 
collateral securing such positions.\48\
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    \47\ See text at note 23, supra.
    \48\ See 74 FR 40794 (Aug. 13, 2009).
---------------------------------------------------------------------------

    In light of the risk management and systemic benefits in continuing 
to facilitate CDS clearing by CME, while promoting customer protection 
in connection with those CDS transactions, the Commission finds 
pursuant to Section 36 of the Exchange Act that it is necessary or 
appropriate in the public interest and is consistent with the 
protection of investors to extend this temporary conditional exemption 
for certain CME clearing members from certain requirements of the 
Exchange Act in connection with Cleared CDS until March 31, 2010. As 
discussed below, this exemption has been modified in certain respects 
from the exemption that we previously granted to CME clearing members 
that receive or hold customer funds or securities in connection with 
Cleared CDS.
    As before, this revised exemption will be available to any CME 
clearing member that is also an FCM (other than one that either is 
registered pursuant to Section 4f(a)(2) or is registered as a broker or 
dealer under Section 15(b) of the Exchange Act (other than paragraph 
(11) thereof)) that receives or holds funds or securities for the 
purpose of purchasing, selling, clearing, settling, or holding Cleared 
CDS positions for other persons. Solely with respect to Cleared CDS, 
those members generally will be exempt from those provisions of the 
Exchange Act and the underlying rules and regulations that do not apply 
to security-based swap agreements. As with the exemption discussed 
above that is applicable to CME and certain eligible contract 
participants, and for the same reasons, this exemption for CME clearing 
members that receive or hold funds and securities does not extend to 
Exchange Act provisions that explicitly apply in connection with 
security-based swap agreements,\49\ or to related enforcement authority 
provisions.\50\ As with the exemption discussed above, we also are not 
exempting those members from Sections 5, 6, 12(a) and (g), 13, 14, 
15(b)(4), 15(b)(6), 15(d), 16, and 17A of the Exchange Act.\51\
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    \49\ See note 35, supra.
    \50\ See note 40, supra.
    \51\ See notes 41 through 43, supra, and accompanying text. Nor 
are we exempting those members from provisions related to government 
securities, as discussed above. See note 44, supra.
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    This temporary exemption is subject to the member complying with 
conditions that are important for protecting customer funds and 
securities. Any CME clearing member relying on this exemption must be 
in material compliance with the rules of CME (including Rules 971 and 
973 relating to Segregation and Secured Requirements and Customer 
Accounts with the Clearing House). Such clearing members also must be 
in material compliance with applicable laws and regulations relating to 
capital, liquidity, and segregation of customers' \52\ funds and 
securities (and related books and records provisions) with respect to 
Cleared CDS.\53\
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    \52\ The term ``customer,'' solely for purposes of Part III(d) 
and (e), infra, and corresponding references in this Order, means a 
``customer'' as defined under CFTC Regulation 1.3(k). 17 CFR 1.3(k).
    \53\ This condition is similar to a condition in the earlier 
Order.
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    Such CME clearing members must also comply with certain additional 
conditions--not in the earlier Order--with respect to such activities. 
The customers for whom the clearing member receives or holds such funds 
or securities may not be natural persons. In addition, the clearing 
member must make certain risk disclosures to those customers.\54\
---------------------------------------------------------------------------

    \54\ The clearing member must disclose that it is not regulated 
by the Commission, that U.S. broker-dealer segregation requirements 
and protections under the Securities Investor Protection Act will 
not apply to any funds or securities held by the clearing member to 
collateralize Cleared CDS, and that the applicable insolvency law 
may affect such customers' ability to recover funds and securities, 
or the speed of any such recovery, in an insolvency proceeding.
---------------------------------------------------------------------------

    This exemption is further conditioned on funds or securities 
received or held by the clearing member for the purpose of purchasing, 
selling, clearing, settling, or holding cleared CDS positions for those 
customers being held in one of three manners. First, such funds and 
securities may be held in an account established in accordance with 
Section 4d of the CEA and CFTC Rules 1.20 through 1.30 and 1.32 
thereunder.
    Alternatively, in the absence of a 4d order from the CFTC, those 
funds and securities may be held in an account that is part of a 
separate account class, specified by CFTC Bankruptcy Rules,\55\ 
established for an FCM to hold its customers' positions in cleared OTC 
derivatives (and funds and securities posted to margin, guarantee, or 
secure such positions).
---------------------------------------------------------------------------

    \55\ 17 CFR 190.01 et seq.
---------------------------------------------------------------------------

    Finally, if neither of those other accounts is available, those 
funds and securities must be held in an account established in 
accordance with CFTC Rule 30.7.\56\ In that situation, the clearing 
member must disclose to Cleared CDS customers that uncertainty exists 
as to whether they would receive priority in bankruptcy (vis-[agrave]-
vis other customers) with respect to any funds or securities held by 
the clearing member to collateralize Cleared CDS positions.
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    \56\ The conditions in this Order require that any FCM that 
holds Cleared CDS customer funds and securities in a 30.7 account 
must segregate all such customer funds and securities in a 30.7 
account. It is our understanding that this is consistent with CME 
Rule 8F03.
---------------------------------------------------------------------------

    To facilitate compliance with the segregation practices that are 
required as a condition to this temporary exemption, the clearing 
member--regardless of the type of account discussed above that it 
uses--also must annually provide CME with a self-assessment that it is 
in compliance with the requirements, along with a report by the 
clearing member's independent third-party auditor that attests to that 
assessment. The report must be dated the same date as the clearing 
member's annual audit report (but may be separate from it), and must be 
produced in accordance with the standards that the auditor follows in 
auditing the clearing member's financial statements.\57\
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    \57\ This condition requiring the clearing member to convey a 
third-party audit report to CME as a repository for regulators does 
not impose upon CME any independent duty to audit or otherwise 
review that information. This condition also does not impose on CME 
any independent fiduciary or other obligation to any customer of a 
clearing member.
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    Finally, consistent with the CME Exemptive Order, a CME clearing 
member that receives or holds funds or securities of customers for the 
purpose of purchasing, selling, clearing, settling, or holding Cleared 
CDS positions shall segregate such funds and securities of customers 
from the CME clearing member's own assets (i.e., the member may not 
permit the customers to ``opt out'' of applicable segregation 
requirements for such funds and securities even if regulations or laws

[[Page 67266]]

would permit the customer to ``opt out'').

F. Extended Temporary Conditional General Exemption for Certain 
Registered Broker-Dealers Including Certain Broker-Dealer-FCMs

    The CME Exemptive Order granted temporary limited exemptions from 
Exchange Act requirements to registered broker-dealers in connection 
with their activities involving Cleared CDS. In crafting these 
temporary exemptions, we balanced the need to avoid creating 
disincentives to the prompt use of CCPs against the critical role that 
certain broker-dealers play in promoting market integrity and 
protecting customers (including broker-dealer customers that are not 
involved with CDS transactions).
    In light of the risk management and systemic benefits in continuing 
to facilitate CDS clearing by CME through targeted conditional 
exemptions to registered broker-dealers, the Commission finds pursuant 
to Section 36 of the Exchange Act that it is necessary or appropriate 
in the public interest and is consistent with the protection of 
investors to exercise its authority to extend this temporary 
conditional registered broker-dealer exemption from certain Exchange 
Act requirements until March 31, 2010.\58\
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    \58\ The temporary exemptions addressed above--with regard to 
CME, certain clearing members, and certain eligible contract 
participants--are not available to persons that are registered as 
broker-dealers with the Commission (other than those that are notice 
registered pursuant to Exchange Act Section 15(b)(11)). Exchange Act 
Section 15(b)(11) provides for notice registration of certain 
persons that effect transactions in security futures products. 15 
U.S.C. 78o(b)(11).
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    Consistent with the temporary exemptions discussed above, and 
solely with respect to Cleared CDS, we are temporarily exempting 
registered broker-dealers (including registered broker-dealers that are 
also FCMs (``BD-FCMs'')) from provisions of the Exchange Act and the 
rules and regulations thereunder that do not apply to security-based 
swap agreements, subject to certain conditions. As discussed above, we 
are not excluding registered broker-dealers, including BD-FCMs, from 
Exchange Act provisions that explicitly apply in connection with 
security-based swap agreements or from related enforcement authority 
provisions.\59\ As above, and for similar reasons, we are not exempting 
registered broker-dealers, including BD-FCMs, from: Sections 5, 6, 
12(a) and (g), 13, 14, 15(b)(4), 15(b)(6), 15(d), 16 and 17A of the 
Exchange Act.\60\
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    \59\ See notes 35 and 40, supra. As noted above, broker-dealers 
also would be subject to Section 15(c)(1) of the Exchange Act, which 
prohibits brokers and dealers from using manipulative or deceptive 
devices, because that provision explicitly applies in connection 
with security-based swap agreements. In addition, to the extent the 
Exchange Act and any rule or regulation thereunder imposes any other 
requirement on a broker-dealer with respect to security-based swap 
agreements (e.g., requirements under Rule 17h-1T to maintain and 
preserve written policies, procedures, or systems concerning the 
broker or dealer's trading positions and risks, such as policies 
relating to restrictions or limitations on trading financial 
instruments or products), these requirements would continue to apply 
to broker-dealers' activities with respect to Cleared CDS.
    \60\ See notes 41 through 43, supra, and accompanying text. We 
also are not exempting those members from provisions related to 
government securities, as discussed above. See note 44, supra.
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    Further, we are not exempting registered broker-dealers from the 
following additional provisions under the Exchange Act: (1) Section 
7(c),\61\ regarding the unlawful extension of credit by broker-dealers; 
(2) Section 15(c)(3),\62\ regarding the use of unlawful or manipulative 
devices by broker-dealers; (3) Section 17(a),\63\ regarding broker-
dealer obligations to make, keep, and furnish information; (4) Section 
17(b),\64\ regarding broker-dealer records subject to examination; (5) 
Regulation T,\65\ a Federal Reserve Board regulation regarding 
extension of credit by broker-dealers; (6) Exchange Act Rule 15c3-
1,\66\ regarding broker-dealer net capital; (7) Exchange Act Rule 15c3-
3,\67\ regarding broker-dealer reserves and custody of securities; (8) 
Exchange Act Rules 17a-3 through 17a-5,\68\ regarding records to be 
made and preserved by broker-dealers and reports to be made by broker-
dealers; and (9) Exchange Act Rule 17a-13,\69\ regarding quarterly 
security counts to be made by certain exchange members and broker-
dealers.\70\ Registered broker-dealers must comply with these 
provisions in connection with their activities involving non-excluded 
CDS because these provisions are especially important to helping 
protect customer funds and securities, ensure proper credit practices, 
and safeguard against fraud and abuse.\71\
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    \61\ 15 U.S.C. 78g(c).
    \62\ 15 U.S.C. 78o(c)(3).
    \63\ 15 U.S.C. 78q(a).
    \64\ 15 U.S.C. 78q(b).
    \65\ 12 CFR 220.1 et seq.
    \66\ 17 CFR 240.15c3-1.
    \67\ 17 CFR 240.15c3-3.
    \68\ 17 CFR 240.17a-3 through 240.17a-5.
    \69\ 17 CFR 240.17a-13.
    \70\ Solely for purposes of this temporary exemption, in 
addition to the general requirements under the referenced Exchange 
Act sections, registered broker-dealers shall only be subject to the 
enumerated rules under the referenced Exchange Act sections.
    \71\ Indeed, Congress directed the Commission to promulgate 
broker-dealer financial responsibility rules, including rules 
relating to custody, the use of customer securities, the use of 
customers' deposits or credit balances, and the establishment of 
minimum financial requirements. See Exchange Act Section 15(c)(3).
---------------------------------------------------------------------------

    However, CME clearing members that are BD-FCMs and that receive or 
hold customer funds or securities for the purpose of purchasing, 
selling, clearing, settling, or holding CDS positions cleared by CME in 
a futures account (as that term is defined in Rule 15c3-3(a)(15) \72\) 
also shall be exempt from Exchange Act Rule 15c3-3, subject to 
conditions that are similar to those--discussed above--that are 
applicable to CME that are not broker-dealers and that hold customer 
funds and securities in connection with Cleared CDS transactions. Thus, 
such BD-FCMs must be in material compliance with CME rules, as well as 
and applicable laws and regulations relating to capital, liquidity, and 
segregation of customers' funds and securities (and related books and 
records provisions) with respect to Cleared CDS. A BD-FCM may not 
receive or hold funds or securities relating to Cleared CDS 
transactions and positions for customers who are natural persons. In 
addition, the BD-FCM must make certain risk disclosures to each such 
customer.\73\ Further, the BD-FCM must hold the customer funds or 
securities in the same type of account (e.g., in a 4d account) as is 
required for other clearing members that hold customer funds and 
securities in connection with Cleared CDS transactions.\74\ The BD-FCM 
also must

[[Page 67267]]

segregate the funds and securities of customers from the CME clearing 
member's own assets (i.e., the member may not permit the customers to 
``opt out'' of applicable segregation requirements for such funds and 
securities even if regulations or laws would permit the customer to 
``opt out''). In addition, the BD-FCM also must annually provide CME 
with a self-assessment that it is in compliance with the requirements, 
along with a report by the clearing member's independent third-party 
auditor that attests to that assessment.\75\
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    \72\ 17 CFR 240.15c3-3(a)(15).
    \73\ The BD-FCM must disclose that U.S. broker-dealer 
segregation requirements and protections under the Securities 
Investor Protection Act will not apply to any funds or securities 
held by the clearing member to collateralize Cleared CDS positions, 
and that the applicable insolvency law may affect such customers' 
ability to recover funds and securities, or the speed of any such 
recovery, in an insolvency proceeding.
    This BD-FCM condition differs from the analogous disclosure 
condition related to other CME clearing members that hold customer 
funds and securities, in that the other condition also requires 
disclosure that the clearing member is not regulated by the 
Commission.
    \74\ As with the exemption applicable to those other CME 
clearing members, in the absence of a 4d order from the CFTC, the 
BD-FCM may hold the funds and securities in an account that is part 
of a separate account class, specified by CFTC Bankruptcy Rules, 
established for an FCM to hold its customers' positions in cleared 
OTC derivatives (and funds and securities posted to margin, 
guarantee, or secure such positions). See Part II.E, supra.
    If that alternative also is not available, the BD-FCM must hold 
the funds and securities in an account established in accordance 
with CFTC Rule 30.7. In that situation, the clearing member must 
disclose to Cleared CDS customers that uncertainty exists as to 
whether they would receive priority in bankruptcy (vis-[agrave]-vis 
other customers) with respect to any funds or securities held by the 
clearing member to collateralize Cleared CDS positions.
    As above, the conditions in this Order require that BD-FCM (as 
well as any other FCM) that holds Cleared CDS customer funds and 
securities in a 30.7 account must segregate all such customer funds 
and securities in a 30.7 account.
    \75\ The report must be dated the same date as the clearing 
member's annual audit report (but may be separate from it), and must 
be produced in accordance with the standards that the auditor 
follows in auditing the clearing member's financial statements. See 
text accompanying note 57, supra.
---------------------------------------------------------------------------

    Finally--and in addition to the conditions that are applicable to 
CME that are not broker-dealers and that hold customer funds and 
securities in connection with Cleared CDS transactions--the CME 
clearing member must comply with the margin rules for Cleared CDS of 
the self-regulatory organization that is its designated examining 
authority \76\ (e.g., FINRA).
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    \76\ See 17 CFR 240.17d-1 for a description of a designated 
examining authority.
---------------------------------------------------------------------------

G. Solicitation of Comments

    When we granted our initial temporary conditional exemptions in 
connection with CDS clearing by CME, we solicited comment on all 
aspects of the exemptions, and specifically requested comment as to the 
duration of the temporary exemptions, the appropriateness of the 
exemptive conditions, and whether CME should be required to register as 
a clearing agency under the Exchange Act. We received no comments in 
response to this request.
    In connection with this Order extending the temporary conditional 
exemptions granted in connection with CDS clearing by CME, and 
expanding that relief to accommodate CME's settlement price calculation 
methodology, we reiterate our request for comments on all aspects of 
the exemptions. We particularly request comments as to the exemption we 
are granting in connection with the calculation of settlement prices, 
including whether the conditions on the exemption promote fair and 
accurate settlement prices and include adequate safeguards and 
procedures to protect clearing members' confidential trading 
information. We also request comment on the adequacy of the proposed 
conditions for the protection of customer assets, including whether it 
is appropriate to permit such assets to be protected in an account that 
is subject to the framework provided by CFTC Rule 30.7, and, if so, 
whether the conditions associated with the use of that account are 
adequate. In addition, we request comment on whether additional 
conditions or requirements are appropriate to promote compliance with 
the requirements of the temporary conditional exemptions, and what, if 
any, additional conditions would be appropriate.
    Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/other.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number S7-06-09 on the subject line; or
     Use the Federal eRulemaking Portal (http://
www.regulations.gov/). Follow the instructions for submitting comments.

Paper Comments

     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 S7-06-09. This file number 
should be included on the subject line if e-mail is used. To help us 
process and review your comments more efficiently, please use only one 
method. We will post all comments on the Commission's Internet Web site 
(http://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 10 a.m. and 3 p.m. All comments received will 
be posted without change; we do not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly.

III. Conclusion

    It is hereby ordered, pursuant to Section 36(a) of the Exchange 
Act, that, until March 31, 2010:
    (a) Exemption from Section 17A of the Exchange Act.
    The Chicago Mercantile Exchange Inc. (``CME'') shall be exempt from 
Section 17A of the Exchange Act solely to perform the functions of a 
clearing agency for Cleared CDS (as defined in paragraph (f) of this 
Order), subject to the following conditions:
    (1) CME shall make available on its Web site its annual audited 
financial statements.
    (2) CME shall keep and preserve records of all activities related 
to the business of CME as a central counterparty for Cleared CDS. These 
records shall be kept for at least five years and for the first two 
years shall be held in an easily accessible place.
    (3) CME shall supply such information and periodic reports relating 
to its Cleared CDS clearance and settlement services as may be 
reasonably requested by the Commission. CME shall also provide access 
to the Commission to conduct on-site inspections of all facilities 
(including automated systems and systems environment), and records 
related to its Cleared CDS clearance and settlement services. CME will 
provide the Commission with access to its personnel to answer 
reasonable questions during any such inspections related to its Cleared 
CDS clearance and settlement services.
    (4) CME shall notify the Commission, on a monthly basis, of any 
material disciplinary actions taken against any CME clearing members 
utilizing its Cleared CDS clearance and settlement services, including 
the denial of services, fines, or penalties. CME shall notify the 
Commission promptly when CME involuntarily terminates the membership of 
an entity that is utilizing CME's Cleared CDS clearance and settlement 
services. Both notifications shall describe the facts and circumstances 
that led to CME's disciplinary action.
    (5) CME shall notify the Commission of all changes to rules as 
defined under the CFTC rules, fees, and any other material events 
affecting its Cleared CDS clearance and settlement services, including 
material changes to risk management models. In addition, CME will post 
any rule or fee changes on the CME Web site. CME shall provide the 
Commission with notice of all changes to its rules not less than one 
day prior to effectiveness or implementation of such rule changes or, 
in exigent circumstances, as promptly as reasonably practicable under 
the circumstances. Such notifications will not be deemed rule filings 
that require Commission approval.
    (6) CME shall provide the Commission with annual reports and any 
associated field work concerning its Cleared CDS clearance and 
settlement services prepared by independent audit personnel that are 
generated in accordance with risk assessment of the

[[Page 67268]]

areas set forth in the Commission's Automation Review Policy 
Statements. CME shall provide the Commission (beginning in its first 
year of operation) with its annual audited financial statements 
prepared by independent audit personnel for CME.
    (7) CME shall report to the Commission all significant outages of 
clearing systems having a material impact on its Cleared CDS clearance 
and settlement services. If it appears that the outage may extend for 
30 minutes or longer, CME shall report the systems outage immediately. 
If it appears that the outage will be resolved in less than 30 minutes, 
CME shall report the systems outage within a reasonable time after the 
outage has been resolved.
    (8) CME, directly or indirectly, shall make available to the public 
on terms that are fair and reasonable and not unreasonably 
discriminatory: (i) All end-of-day settlement prices and any other 
prices with respect to Cleared CDS that CME may establish to calculate 
settlement variation or margin requirements for CME clearing members; 
and (ii) any other pricing or valuation information with respect to 
Cleared CDS as is published or distributed by CME.
    (9) CME shall not materially change its methodology for determining 
Cleared CDS margin levels without prior written approval from the 
Commission, and from FINRA with respect to customer margin requirements 
that would apply to broker-dealers.
    (b) Exemption from Sections 5 and 6 of the Exchange Act
    (1) CME shall be exempt from the requirements of Sections 5 and 6 
of the Exchange Act and the rules and regulations thereunder in 
connection with its calculation of settlement prices for Cleared CDS, 
subject to the following conditions:
    (i) CME shall report the following information with respect to its 
determination of daily settlement prices for Cleared CDS to the 
Commission within 30 days of the end of each quarter, and preserve such 
reports for as long as CME offers CDS clearing services and for a 
period of at least five years thereafter:
    (A) The total dollar volume of CDS transactions executed during the 
quarter pursuant to CME's price quality auction methodology, broken 
down by reference entity, security, or index; and
    (B) The total unit volume or notional amount executed during the 
quarter pursuant to CME's price quality auction methodology, broken 
down by reference entity, security, or index;
    (ii) CME shall establish and maintain adequate safeguards and 
procedures to protect participants' confidential trading information 
related to Cleared CDS. Such safeguards and procedures shall include:
    (A) Limiting access to the confidential trading information of 
participants to those CME employees who have a need to access such 
information in connection with the provision of CME CDS clearing 
services or who are responsible for compliance with this exemption or 
any other applicable rules; and
    (B) Implementing policies and procedures for CME employees with 
access to such information with respect to trading for their own 
accounts. CME shall adopt and implement adequate oversight procedures 
to ensure that the policies and procedures established pursuant to this 
condition are followed; and
    (iii) CME shall satisfy the conditions of the temporary exemption 
from Section 17A of the Exchange Act set forth in paragraphs (a)(1)--
(9) of this Order.
    (2) Any CME clearing member shall be exempt from the requirements 
of Section 5 of the Exchange Act to the extent such CME clearing member 
uses any facility of CME to effect any transaction in Cleared CDS, or 
to report any such transaction, in connection with CME's clearance and 
risk management process for Cleared CDS.
    (c) Exemption for CME and certain eligible contract participants.
    (1) Persons eligible. The exemption in paragraph (c)(2) is 
available to:
    (i) CME; and
    (ii) Any eligible contract participant (as defined in Section 
1a(12) of the Commodity Exchange Act as in effect on the date of this 
Order (other than a person that is an eligible contract participant 
under paragraph (C) of that section)), other than:
    (A) An eligible contract participant that receives or holds funds 
or securities for the purpose of purchasing, selling, clearing, 
settling, or holding Cleared CDS positions for other persons;
    (B) An eligible contract participant that is a self-regulatory 
organization, as that term is defined in Section 3(a)(26) of the 
Exchange Act; or
    (C) A broker or dealer registered under Section 15(b) of the 
Exchange Act (other than paragraph (11) thereof).
    (2) Scope of exemption.
    (i) In general. Subject to the condition specified in paragraph 
(c)(3), such persons generally shall, solely with respect to Cleared 
CDS, be exempt from the provisions of the Exchange Act and the rules 
and regulations thereunder that do not apply in connection with 
security-based swap agreements. Accordingly, under this exemption, 
those persons would remain subject to those Exchange Act requirements 
that explicitly are applicable in connection with security-based swap 
agreements (i.e., paragraphs (2) through (5) of Section 9(a), Section 
10(b), Section 15(c)(1), subsections (a) and (b) of Section 16, Section 
20(d), and Section 21A(a)(1), and the rules thereunder that explicitly 
are applicable to security-based swap agreements). All provisions of 
the Exchange Act related to the Commission's enforcement authority in 
connection with violations or potential violations of such provisions 
also remain applicable.
    (ii) Exclusions from exemption. The exemption in paragraph 
(c)(2)(i), however, does not extend to the following provisions under 
the Exchange Act:
    (A) Paragraphs (42), (43), (44), and (45) of Section 3(a);
    (B) Section 5;
    (C) Section 6;
    (D) Section 12 and the rules and regulations thereunder;
    (E) Section 13 and the rules and regulations thereunder;
    (F) Section 14 and the rules and regulations thereunder;
    (G) Paragraphs (4) and (6) of Section 15(b);
    (H) Section 15(d) and the rules and regulations thereunder;
    (I) Section 15C and the rules and regulations thereunder;
    (J) Section 16 and the rules and regulations thereunder; and
    (K) Section 17A (other than as provided in paragraph (a)).
    (3) Condition for CME clearing members. Any CME clearing member 
relying on this exemption must be in material compliance with the rules 
of CME.
    (d) Exemption for certain CME clearing members.
    Any CME clearing member registered as a futures commission merchant 
pursuant to Section 4f(a)(1) of the Commodity Exchange Act (but that is 
not registered as a broker or dealer under Section 15(b) of the 
Exchange Act (other than paragraph (11) thereof)) that receives or 
holds funds or securities for the purpose of purchasing, selling, 
clearing, settling, or holding Cleared CDS for other persons shall be 
exempt from the provisions of the Exchange Act and the rules and 
regulations thereunder specified in paragraph (c)(2), solely with 
respect to Cleared CDS, subject to the following conditions:
    (1) The clearing member shall be in material compliance with the 
rules of CME (including Rules 971 and 973 relating to Segregation and 
Secured

[[Page 67269]]

Requirements and Customer Accounts with the Clearing House), and also 
shall be in material compliance with applicable laws and regulations, 
relating to capital, liquidity, and segregation of customers' funds and 
securities (and related books and records provisions) with respect to 
Cleared CDS;
    (2) The customers for whom the clearing member receives or holds 
such funds or securities shall not be natural persons;
    (3) The clearing member shall disclose to such customers that the 
clearing member is not regulated by the Commission, that U.S. broker-
dealer segregation requirements and protections under the Securities 
Investor Protection Act will not apply to any funds or securities held 
by the clearing member to collateralize Cleared CDS positions, and that 
the applicable insolvency law may affect such customers' ability to 
recover funds and securities, or the speed of any such recovery, in an 
insolvency proceeding;
    (4) Customer funds and securities received or held by the clearing 
member for the purpose of purchasing, selling, clearing, settling, or 
holding Cleared CDS positions for such customers shall be held in one 
of the following manners:
    (i) In an account established in accordance with section 4d of the 
Commodity Exchange Act and CFTC Rules 1.20 through 1.30 and 1.32 [17 
CFR 1.20 through 1.30 and 1.32] thereunder;
    (ii) In the absence of an Order from the Commodity Futures Trading 
Commission (``CFTC'') permitting the use of an account specified in 
subparagraph (d)(4)(i) for holding such funds and securities, in an 
account that is part of a separate account class, specified by CFTC 
Bankruptcy Rules [17 CFR 190.01 et seq.], established for a futures 
commission merchant to hold its customers' positions in cleared OTC 
derivatives (and funds and securities posted to margin, guarantee, or 
secure such positions); or
    (iii) If the clearing member is unable to hold such funds and 
securities as specified in subparagraph (d)(4)(i) or (ii), the clearing 
member shall:
    (A) Hold such funds and securities in a separate account that is 
established in accordance with CFTC Rule 30.7 [17 CFR 30.7], and
    (B) Disclose to such customers that uncertainty exists as to 
whether they would receive priority in bankruptcy (vis-[aacute]-vis 
other customers) with respect to any funds or securities held by the 
clearing member to collateralize Cleared CDS positions.
    (5) The clearing member annually shall provide CME with
    (i) An assessment by the clearing member that it is in compliance 
with all the provisions of subparagraphs (d)(4)(i) through (iii) in 
connection with such activities, and
    (ii) A report by the clearing member's independent third-party 
auditor that attests to, and reports on, the clearing member's 
assessment described in subparagraph (d)(5)(i) and that is:
    (A) Dated as of the same date as, but which may be separate and 
distinct from, the clearing member's annual audit report;
    (B) Produced in accordance with the auditing standards followed by 
the independent third-party auditor in its audit of the clearing 
member's financial statements.
    (6) To the extent that the clearing member receives or holds funds 
or securities of customers for the purpose of purchasing, selling, 
clearing, settling, or holding Cleared CDS positions, the clearing 
member shall segregate such funds and securities of customers from the 
clearing member's own assets (i.e., the member may not permit such 
customers to ``opt out'' of applicable segregation requirements for 
such funds and securities even if regulations or laws would permit the 
customer to ``opt out'').
    (e) Exemption for certain registered broker-dealers.
    (1) In general. A broker or dealer registered under Section 15(b) 
of the Exchange Act (other than paragraph (11) thereof) shall be exempt 
from the provisions of the Exchange Act and the rules and regulations 
thereunder specified in paragraph (c)(2), solely with respect to 
Cleared CDS, except:
    (i) Section 7(c);
    (ii) Section 15(c)(3);
    (iii) Section 17(a);
    (iv) Section 17(b);
    (v) Regulation T, 12 CFR 200.1 et seq.;
    (vi) Rule 15c3-1;
    (vii) Rule 15c3-3;
    (viii) Rule 17a-3;
    (ix) Rule 17a-4;
    (x) Rule 17a-5; and
    (xi) Rule 17a-13.
    (2) Broker-dealers that also are futures commission merchants. A 
CME clearing member that is a broker or dealer registered under Section 
15(b) of the Exchange Act (other than paragraph (11) thereof) and that 
is also registered as a futures commission merchant pursuant to Section 
4f(a)(1) of the Commodity Exchange Act and that receives or holds 
customer funds and securities for the purpose of purchasing, selling, 
clearing, settling, or holding Cleared CDS in a futures account (as 
that term is defined in Rule 15c3-3(a)(15) [17 CFR 240.15c3-3(a)(15)]) 
also shall be exempt from Exchange Act Rule 15c3-3, subject to the 
following conditions:
    (i) The clearing member shall comply with the conditions set forth 
in paragraphs (d)(1), (2), (4), (5), and (6) above;
    (ii) The clearing member shall disclose to Cleared CDS customers 
that the U.S. broker-dealer segregation requirements and protections 
under the Securities Investor Protection Act will not apply to funds or 
securities held by the clearing member to collateralize Cleared CDS 
positions, and that the applicable insolvency law may affect such 
customers' ability to recover funds and securities, or the speed of any 
such recovery, in an insolvency proceeding; and
    (iii) The CME clearing member shall collect from each customer the 
amount of margin that is not less than the amount required for Cleared 
CDS under the margin rule of the self-regulatory organization that is 
its designated examining authority.
    (f) For purposes of this Order, ``Cleared CDS'' shall mean a credit 
default swap that is submitted (or offered, purchased, or sold on terms 
providing for submission) to CME, that is offered only to, purchased 
only by, and sold only to eligible contract participants (as defined in 
Section 1a(12) of the Commodity Exchange Act as in effect on the date 
of this Order (other than a person that is an eligible contract 
participant under paragraph (C) of that section)), and in which:
    (1) The reference entity, the issuer of the reference security, or 
the reference security is one of the following:
    (i) An entity reporting under the Exchange Act, providing 
Securities Act Rule 144A(d)(4) information, or about which financial 
information is otherwise publicly available;
    (ii) A foreign private issuer whose securities are listed outside 
the United States and that has its principal trading market outside the 
United States;
    (iii) A foreign sovereign debt security;
    (iv) An asset-backed security, as defined in Regulation AB, issued 
in a registered transaction with publicly available distribution 
reports; or
    (v) An asset-backed security issued or guaranteed by Fannie Mae, 
Freddie Mac, or Ginnie Mae; or
    (2) The reference index is an index in which 80 percent or more of 
the index's weighting is comprised of the entities or securities 
described in subparagraph (1).

    By the Commission.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-30087 Filed 12-17-09; 8:45 am]

BILLING CODE 8011-01-P
