
[Federal Register: March 11, 2010 (Volume 75, Number 47)]
[Notices]               
[Page 11589-11603]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11mr10-98]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61662; File No. S7-05-09]

 
Order Extending Temporary Exemptions Under the Securities 
Exchange Act of 1934 in Connection with Request of ICE Trust U.S. LLC 
Related to Central Clearing of Credit Default Swaps, and Request for 
Comments

March 5, 2010.

I. Introduction

    The Securities and Exchange Commission (``Commission'') has taken 
multiple actions \1\ designed to address concerns related to the market 
in credit default swaps (``CDS'').\2\ The over-the-

[[Page 11590]]

counter (``OTC'') market for CDS has been a source of particular 
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 impact. 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) and Securities 
Exchange Act Release No. 61164 (Dec. 14, 2009), 74 FR 67258 (Dec. 
18, 2009) (temporary exemptions in connection with CDS clearing by 
Chicago Mercantile Exchange Inc.); Securities Exchange Act Release 
No. 59527 (Mar. 6, 2009), 74 FR 10791 (Mar. 12, 2009) (hereinafter, 
the ``March 2009 ICE Trust Order'') and Securities Exchange Act 
Release No. 61119 (Dec. 4, 2009), 74 FR 65554 (Dec. 10, 2009) 
(hereinafter, the ``December 2009 ICE Trust Order,'' collectively 
with the March 2009 ICE Trust Order, the ``2009 ICE Trust Orders'') 
(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 in 
several of these orders.
    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 temporary 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, by contributing 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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    In the 2009 ICE Trust Orders, the Commission provided temporary 
conditional exemptions to ICE Trust U.S. LLC (``ICE Trust'') and 
certain other parties to permit ICE Trust to clear and settle CDS 
transactions.\6\ The current exemptions are scheduled to expire on 
March 7, 2010, and ICE Trust has requested that the Commission extend 
those exemptions.\7\
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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 ICE Trust, 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: (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). See definition in paragraph III.(f)(1) of this Order. 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 Letter from Kevin McClear, ICE Trust, to Elizabeth 
Murphy, Secretary, Commission, Mar. 5, 2010 (``March 2010 
Request'').
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    Based on the facts presented and the representations made by ICE 
Trust,\8\ and for the reasons discussed in this Order and subject to 
certain conditions, the Commission is extending each of the existing 
exemptions connected with CDS clearing by ICE Trust: The temporary 
conditional exemption granted to ICE Trust 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 temporary conditional exemption of ICE Trust 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 mark-to-market prices for non-excluded CDS cleared by 
ICE Trust; the temporary conditional exemption of eligible contract 
participants and others from certain Exchange Act requirements with 
respect to non-excluded CDS cleared by ICE Trust; the temporary 
exemption of ICE Trust clearing members and others from broker-dealer 
registration requirements and related requirements in connection with 
CDS clearing by ICE Trust (including clearing of customer CDS 
transactions); and the temporary exemption from certain Exchange Act 
requirements granted to registered broker-dealers. This extension is 
temporary, and the exemptions will expire on November 30, 2010.
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    \8\ See id. The exemptions we are granting today are based on 
all of the representations made by ICE Trust, which incorporate 
representations made by or on behalf of ICE Trust as part of the 
requests that preceded our earlier exemptions addressing CDS 
clearing by ICE Trust. 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

    In its request for an extension, ICE Trust represents that, other 
than as discussed in its request, there have been no material changes 
to the operations of ICE Trust and the representations in the 2009 ICE 
Trust Orders remain true in all material respects.\9\ These

[[Page 11591]]

representations are discussed in detail in the December 2009 ICE Trust 
Order.
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    \9\ See March 2010 Request, supra note 7. In its present 
request, ICE Trust states that, consistent with an earlier 
representation, it has adopted a requirement that clearing members 
subject to the framework are regulated by: (i) A signatory to the 
International Organization of Securities Commissions (``IOSCO'') 
Multilateral Memorandum of Understanding Concerning Consultation and 
Cooperation and the Exchange of Information, or (ii) a signatory to 
a bilateral arrangement with the Commission for enforcement 
cooperation.
    ICE Trust also states that it has commenced implementation of 
certain changes to the end-of-day settlement price process described 
in the December 2009 ICE Trust Order in connection with the clearing 
of single-name CDS. Specifically, ICE Trust has implemented required 
trading for single-name CDS on a daily basis, rather than the 
random-day basis that applies to index CDS, for the 100 basis point 
coupon for certain single-name CDS (and one tenor). As ICE Trust 
rolls out additional single names, it expects to include the 
additional single names in the required trading process. ICE Trust 
also anticipates including other coupons and tenors commencing in 
March 2010.
    Under ICE Trust's process for required trading for single-name 
CDS on a daily basis, on each business day, ICE Trust requires 
trading for a set percentage (initially set at approximately 10%) of 
the randomly selected cleared single-name reference entities. ICE 
Trust applies a filter that first selects for required trading the 
most traded ``cross points'' on a curve generated for each such 
reference entity. ICE Trust will also apply a notional ceiling with 
respect to the amount of required trades in CDS on the selected 
reference entities for any given day. The current notional ceiling 
is ten million (10,000,000) dollars per single name reference entity 
(a reference entity includes all of the coupons and tenors). The 
notional ceiling for the most traded ``cross point'' on the tenor 
curve of a particular reference entity is five million (5,000,000) 
dollars. The notional ceilings for the other ``cross points'' on the 
tenor curve is two million five hundred thousand (2,500,000) 
dollars.
    In addition to the procedures implementing required trades on 
random days for CDS indices and the required trade process described 
above with respect to single name CDS, ICE Trust regularly monitors 
the quality of the respective firm's end-of-day price submissions. 
On a regular basis, ICE Trust: (1) Performs a statistical analysis 
with respect to the dispersion of price submissions; (2) reviews the 
number of ``Advisory Trades'' for each firm; and (3) reviews any 
instances where firms have either submitted late prices or failed to 
submit prices. When appropriate in the view of ICE Trust management, 
it contacts firms to discuss the quality of their price submissions. 
In addition, on a regular basis, ICE Trust management reviews the 
default spread widths and the daily trade results (``Advisory'' and 
``Firm'') with the ICE Trust Trading Advisory Committee and the ICE 
Trust Risk Committee.
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A. ICE Trust's CDS Clearing Activities to Date

    ICE Trust has cleared proprietary CDS transactions of its clearing 
members since March 9, 2009, and has cleared CDS transactions involving 
its clearing members' clients since December 14, 2009. As of February 
11, 2010, ICE Trust had cleared approximately $3.82 trillion notional 
amount of CDS contracts based on indices of securities.\10\
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    \10\ See https://www.theice.com/marketdata/reports/
ReportCenter.shtml.
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    On December 29, 2009 ICE Trust commenced clearing CDS contracts 
based on individual reference entities or securities. As of February 
11, 2010, ICE Trust had cleared approximately $18.86 billion notional 
amount of CDS contracts based on individual reference entities or 
securities.\11\
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    \11\ See https://www.theice.com/marketdata/reports/
ReportCenter.shtml.
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B. Extended Temporary Conditional Exemption from Clearing Agency 
Registration Requirement

    On December 4, 2009, in connection with its efforts to facilitate 
the establishment of one or more central counterparties (``CCP'') for 
Cleared CDS, the Commission issued the December 2009 ICE Trust Order, 
conditionally extending the Commission's March 2009 ICE Trust Order, 
which conditionally exempted ICE Trust from clearing agency 
registration under Section 17A of the Exchange Act on a temporary 
basis. Subject to the conditions in the December 2009 ICE Trust Order, 
ICE Trust 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 December 2009 ICE Trust Order 
expires on March 7, 2010.
    In the 2009 ICE Trust Orders, the Commission recognized the need to 
ensure the prompt establishment of ICE Trust 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 exemptions in the 2009 ICE Trust 
Orders were subject to a number of conditions designed to enable 
Commission staff to monitor ICE Trust's clearance and settlement of CDS 
transactions.\12\ Moreover, the temporary exemptions in the 2009 ICE 
Trust Orders in part were based on ICE Trust's representation that it 
met the standards set forth in the Committee on Payment and Settlement 
Systems (``CPSS'') and IOSCO report entitled: Recommendation for 
Central Counterparties (``RCCP'').\13\ 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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    \12\ See Securities Exchange Act Release No. 59527 (Mar. 6, 
2009), 74 FR 10791 (Mar. 12, 2009) and Securities Exchange Act 
Release No. 61119 (Dec. 4, 2009), 74 FR 65554 (Dec. 10, 2009).
    \13\ 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 Commodity Futures 
Trading Commission.
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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 will 
continue to provide important risk management and systemic benefits by 
avoiding an interruption in those CCP clearance and settlement 
services. Any interruption in CCP clearance and settlement services for 
CDS transactions would eliminate in the future the benefits ICE Trust 
provides to the non-excluded CDS market. Accordingly, and consistent 
with our findings in the 2009 ICE Trust Orders and for the reasons 
described herein, we find pursuant to Section 36 of the Exchange Act 
\14\ that it is necessary and appropriate in the public interest and is 
consistent with the protection of investors for the Commission to 
extend, until November 30, 2010, the relief provided from the clearing 
agency registration requirements of Section 17A by the 2009 ICE Trust 
Orders.
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    \14\ 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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    Our action today balances the aim of facilitating ICE Trust's 
continued 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 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 
the CDS market. In particular, the Commission will seek to assure 
itself that ICE Trust 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.\15\
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    \15\ ICE Trust has no rule requiring an executing dealer to be a 
clearing member. As an operational matter, ICE Trust currently has 
one authorized trade processing platform for submission of client 
CDS transactions, ICE Link. Currently, ICE Link does not have a 
mechanism by which a non-member dealer could submit a transaction 
for clearing at ICE Trust. However, ICE Trust Clearing Rule 314 
provides for open access to ICE Trust's clearing systems for all 
reasonably qualified execution venues and trade processing 
platforms. ICE Trust has represented that it remains committed to 
work with reasonably qualified execution venues and trade processing 
platforms to facilitate functionality for submission of trades by 
non-member dealers if there is interest in such functionality. See 
March 2010 Request, supra note 7.
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    This temporary extension of the December 2009 ICE Trust Order also 
is designed to assure that--as represented in ICE Trust's request--
information will continue to be available to market participants about 
the terms of the CDS cleared by ICE Trust, the creditworthiness of ICE 
Trust or any guarantor, and the clearance and

[[Page 11592]]

settlement process for CDS.\16\ The Commission believes continued 
operation of ICE Trust consistent with the conditions of this 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 for CDS that is not centrally cleared.
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    \16\ The Commission believes that it is important in the CDS 
market, as in the market for securities generally, that parties to 
transactions should 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 December 2009 ICE Trust Order is 
subject to a number of conditions that are designed to enable 
Commission staff to continue to monitor ICE Trust's clearance and 
settlement of CDS transactions and help reduce risk in the CDS market. 
These conditions require that ICE Trust: (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 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 ICE 
Trust'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; 
(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 
\17\ and its annual audited financial statements prepared by 
independent audit personnel; and (vii) report all significant systems 
outages to the Commission.
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    \17\ See Automated Systems of Self-Regulatory Organization, 
Exchange Act Release No. 27445 (November 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 December 2009 ICE 
Trust Order is conditioned on ICE Trust, 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 ICE Trust may 
establish to calculate mark-to-market margin requirements for ICE Trust 
clearing members; and (ii) any other pricing or valuation information 
with respect to Cleared CDS as is published or distributed by ICE 
Trust.\18\
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    \18\ As a CCP, ICE Trust collects and processes information 
about CDS transactions, prices, and positions. Public availability 
of such information can improve fairness, efficiency, and 
competitiveness in the market. Moreover, with pricing and valuation 
information relating to Cleared CDS, market participants would be 
able to derive information about underlying securities and indices, 
potentially improving the efficiency and effectiveness of the 
securities markets.
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C. Extended Temporary Conditional Exemption From Exchange Registration 
Requirements

    When we initially provided exemptions in connection with CDS 
clearing by ICE Trust, we granted a temporary conditional exemption to 
ICE Trust from the requirements of Sections 5 and 6 of the Exchange 
Act, and the rules and regulations thereunder, in connection with ICE 
Trust's calculation of mark-to-market prices for open positions in 
Cleared CDS. We also temporarily exempted ICE Trust participants from 
the prohibitions of Section 5 to the extent that they use ICE Trust to 
effect or report any transaction in Cleared CDS in connection with ICE 
Trust's calculation of mark-to-market prices for open positions in 
Cleared CDS. Section 5 of the Exchange Act contains certain 
restrictions relating to the registration of national securities 
exchanges,\19\ while Section 6 provides the procedures for registering 
as a national securities exchange.\20\
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    \19\ In particular, Section 5 states:
    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.
    \20\ 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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    We granted these temporary exemptions to facilitate the 
establishment of ICE Trust's end-of-day settlement price process. ICE 
Trust had represented that in connection with its clearing and risk 
management process it would calculate an end-of-day settlement price 
for each Cleared CDS in which an ICE Trust participant has a cleared 
position, based on prices submitted by the participants. As part of 
this mark-to-market process, ICE Trust has periodically required its 
clearing members to execute certain CDS trades at the price at which 
certain quotations of the clearing members cross. ICE Trust represents 
that it wishes to continue periodically requiring clearing members to 
execute certain CDS trades in this manner.
    As discussed above, we have found in general that it is necessary 
or appropriate in the public interest, and is consistent with the 
protection of investors, to facilitate continued CDS clearing by ICE 
Trust. Consistent with that finding--and in reliance on ICE Trust's 
representation that the end-of-day settlement pricing process, 
including the periodically required trading, is integral to its risk 
management--we further find that it is necessary or appropriate in the 
public interest, and is consistent with the protection of investors 
that we exercise our authority under Section 36 of the Exchange Act to 
extend, until November 30, 2010, ICE Trust's temporary exemption from 
Sections 5 and 6 of the Exchange Act in connection with its calculation 
of mark-to-market prices for open positions in Cleared CDS, and ICE 
Trust clearing members' temporary exemption from Section 5 with respect 
to such trading activity.
    The temporary exemption for ICE Trust will continue to be subject 
to three conditions. First, ICE Trust must report the following 
information with respect to its calculation of mark-to-market prices 
for Cleared CDS to the Commission within 30 days of the end of each 
quarter, and preserve such reports during the life of the enterprise 
and of any successor enterprise:
     The total dollar volume of transactions executed during 
the quarter, broken down by reference entity, security, or index; and
     The total unit volume and/or notional amount executed 
during the quarter, broken down by reference entity, security, or 
index.
    Second, ICE Trust must establish and maintain adequate safeguards 
and procedures to protect participants' confidential trading 
information. Such safeguards and procedures shall include: (a) Limiting 
access to the

[[Page 11593]]

confidential trading information of participants to those employees of 
ICE Trust who are operating the system or responsible for its 
compliance with this exemption or any other applicable rules; and (b) 
establishing and maintaining standards controlling employees of ICE 
Trust trading for their own accounts. ICE Trust must establish and 
maintain adequate oversight procedures to ensure that the safeguards 
and procedures established pursuant to this condition are followed.
    Third, ICE Trust must comply with the conditions to the temporary 
exemption from Section 17A of the Exchange Act in this Order, given 
that this exemption is granted in the context of our goal of continuing 
to facilitate ICE Trust's ability to act as a CCP for non-excluded CDS, 
and given ICE Trust's representation that the end-of-day settlement 
pricing process, including the periodically required trading, is 
integral to its risk management.

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

    As we recognized when we initially provided temporary exemptions in 
connection with CDS clearing by ICE Trust, 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.\21\
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    \21\ 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 to apply 
temporarily 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 ICE Trust, and certain members and eligible 
contract participants, from a number of Exchange Act requirements, 
subject to certain conditions, 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 ICE Trust through this type of temporary exemption 
will provide important risk management benefits 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 ICE Trust 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 exercise 
its authority to grant an exemption until November 30, 2010 from 
certain requirements under the Exchange Act.
    As before, this temporary conditional exemption applies to ICE 
Trust and to any eligible contract participants \22\--including any ICE 
Trust clearing member--other than eligible contract participants that 
are self-regulatory organizations or eligible contract participants 
that are registered brokers or dealers.\23\
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    \22\ This exemption in general applies 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 persons that 
are eligible contract participants under paragraph (C) of that 
section.
    \23\ 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 conditional 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 would still be subject to those Exchange Act requirements 
that explicitly are applicable in connection with security-based swap 
agreements.\24\ 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 would remain applicable.\25\ 
In this way, the temporary conditional exemption would apply the same 
Exchange Act requirements in connection with non-excluded CDS as apply 
in connection with OTC credit default swaps.
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    \24\ See note 40, infra.
    \25\ 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 the December 2009 ICE Trust Order exemptions, this 
temporary conditional exemption does not extend to: The exchange 
registration requirements of Exchange Act Sections 5 and 6; \26\ the 
clearing agency registration requirements of Exchange Act Section 17A; 
the requirements of Exchange Act Sections 12, 13, 14, 15(d), and 16; 
\27\ the broker-dealer registration requirements of Section 15a(1) \28\ 
and the other requirements of the Exchange Act, including paragraphs 
(4) and (6) of Section 15(b),\29\ and the rules and regulations 
thereunder that apply to a broker or dealer that is not registered with 
the Commission; or certain provisions related to government 
securities.\30\
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    \26\ 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 mark-to-market process of 
ICE Trust, discussed above, at note 19 and accompanying text.
    \27\ 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.
    \28\ 15 U.S.C. 78o(a)(1).
    \29\ 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.
    \30\ 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. The exemption also does not extend to related 
definitions found at paragraphs (42) through (45) of Section 3(a), 
15 U.S.C. 78c(a). The Commission does not have authority under 
Section 36 to issue exemptions in connection with those provisions. 
See Exchange Act Section 36(b), 15 U.S.C. 78mm(b).

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[[Page 11594]]

    As before, ICE Trust clearing members must be in material 
compliance with ICE Trust rules to be eligible for this temporary 
conditional exemption from Exchange Act requirements. ICE Trust 
clearing members that participate in the clearing of Cleared CDS 
transactions on behalf of other persons annually must provide a 
certification to ICE Trust that attests to whether the clearing member 
is relying on the temporary conditional exemption from broker-dealer 
related requirements described below.\31\
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    \31\ To the extent we extend this temporary conditional 
exemption and include the same type of certification requirement, 
the clearing member then would annually renew the certification.
    This condition requiring clearing members to convey information 
to ICE Trust as a repository for regulators, and other conditions of 
this Order that require clearing members or others to convey 
information (e.g., an audit report related to the clearing member's 
compliance with exemptive conditions) to ICE Trust, does not impose 
upon ICE Trust any independent duty to audit or otherwise review 
that information. These conditions also do not impose on ICE Trust 
any independent fiduciary or other obligation to any customer of a 
clearing member.
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E. Conditional Temporary Exemption From Broker-Dealer Related 
Requirements for Certain Clearing Members of ICE Trust and Others

    In the December 2009 ICE Trust Order, we granted a conditional 
temporary exemption from particular Exchange Act requirements to 
certain clearing members of ICE Trust, and to certain eligible contract 
participants, in connection with CDS cleared on ICE Trust. 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.\32\ Certain 
reporting and other requirements of the Exchange Act could apply to 
such persons, as broker-dealers, regardless of whether they are 
registered with the Commission.
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    \32\ 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 excludes 
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.\33\ We 
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 customer CDS transactions, to the detriment of 
the markets and market participants generally. We concluded that those 
factors, along with certain representations of ICE Trust,\34\ argued in 
favor of flexibility in applying the requirements of the Exchange Act 
to these intermediaries, conditioned on requiring the intermediaries to 
take reasonable steps to help increase the likelihood that their 
customers would be protected in the event the intermediary became 
insolvent, even if those safeguards are as not as strong as those 
required of registered broker-dealers.
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    \33\ 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.
    \34\ We noted that in granting the temporary exemption, we also 
relied on ICE Trust's representation that before offering the Non-
Member Framework, it will adopt a requirement that non-U.S. clearing 
members subject to the framework are regulated by: (i) A signatory 
to the IOSCO Multilateral Memorandum of Understanding Concerning 
Consultation and Cooperation and the Exchange of Information, or 
(ii) a signatory to a bilateral arrangement with the Commission for 
enforcement cooperation. We further noted that non-U.S. clearing 
members that do not meet these criteria would not be eligible to 
rely on this exemption.
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    As a result, and solely with respect to Cleared CDS, we provided a 
temporary conditional exemption from the broker-dealer registration 
requirements of Section 15(a)(1), and the other requirements of the 
Exchange Act (other than paragraphs (4) and (6) of Section 15(b) \35\) 
and the rules and regulations thereunder that apply to a broker or 
dealer that is not registered with the Commission, to: (i) ICE Trust 
clearing members other than registered broker-dealers; and (ii) any 
eligible contract participant, other than a registered broker-dealer, 
that does not receive or hold funds or securities for the purpose of 
purchasing, selling, clearing, settling, or holding Cleared CDS 
positions for other persons.\36\
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    \35\ As noted above, see note 29, supra, Exchange Act Sections 
15(b)(4) and 15(b)(6) grant the Commission authority to take action 
against broker-dealers and associated persons in certain situations. 
Accordingly, while the exemption we granted from broker-dealer 
requirements generally extended to persons that act as broker-
dealers in the market for Cleared CDS (potentially including inter-
dealer brokers that do not hold funds or securities for others), 
such persons may be subject to actions under Sections 15(b)(4) and 
(b)(6) of the Exchange Act.
    In addition, such persons 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.
    \36\ In some circumstances, an eligible contract participant 
that does not hold customer funds or securities nonetheless may act 
as a dealer in securities transactions, or as a broker (such as an 
inter-dealer broker).
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    That exemption was subject to a number of conditions. For ICE Trust 
clearing members that receive or hold funds or securities of U.S. 
persons (or who receive or hold funds or securities of any person in 
the case of a U.S. clearing member)--other than for an affiliate that 
controls, is controlled by, or is under common control with the 
clearing member--in connection with Cleared CDS, these included a 
condition requiring the clearing member, as promptly as practicable 
after receipt, to transfer such funds and securities (other than those 
promptly returned to such other persons) to either the Custodial Client 
Omnibus Margin Account at ICE Trust or to an account held by a third-
party custodian. Additional related conditions addressed the types of 
permissible arrangements for holding collateral at a third-party 
custodian, and permissible custodians.\37\
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    \37\ Other conditions of this exemption precluded the clearing 
of CDS transaction for natural persons, required certain risk 
disclosures to customers, required the clearing member also must 
annually provide ICE Trust 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, and required the clearing member to agree to provide the 
Commission with access to information related to Cleared CDS 
transactions.

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[[Page 11595]]

    These conditions requiring customer collateral to be segregated 
from clearing members address only the initial margin that customers 
post in connection with Cleared CDS. In the December 2009 ICE Trust 
Order we noted, however, that we would evaluate the protections 
afforded to customers' mark-to-market profits associated with Cleared 
CDS positions, and consider the potential benefits of requiring 
clearing members to segregate customers' variation margin in connection 
with Cleared CDS positions.
    As before, we are required to balance the goals of promoting the 
central clearing of customer CDS transactions against the goal of 
protecting customers, and to be mindful that these conditions cannot 
provide legal certainty that customer collateral in fact would be 
protected in the event an ICE Trust clearing member were to become 
insolvent. We believe that the segregation framework set forth in our 
earlier order represents a reasonable step to help protect the 
collateral posted by customers of ICE Trust's clearing members from the 
threat of loss in the event of clearing member insolvency.
    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 exercise 
its authority to grant a conditional exemption until November 30, 2010, 
with respect to certain Exchange Act requirements related to broker-
dealers.\38\ As before, this exemption is available to ICE Trust 
clearing members other than registered broker-dealers, and to any 
eligible contract participant, other than a registered broker-dealer, 
that does not receive or hold funds or securities for the purpose of 
purchasing, selling, clearing, settling, or holding Cleared CDS 
positions for other persons.\39\ As before, and solely with respect to 
Cleared CDS, those persons temporarily will be exempt from the broker-
dealer registration requirements of Section 15(a)(1), and the other 
requirements of the Exchange Act (other than paragraphs (4) and (6) of 
Section 15(b)) and the rules and regulation thereunder that apply to a 
broker or dealer that is not registered with the Commission.
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    \38\ As before, in granting this relief we are relying on 
representations by ICE Trust that non-U.S. clearing members that 
provide their customers with access to CDS clearing on ICE Trust are 
regulated by: (i) A signatory to the IOSCO Multilateral Memorandum 
of Understanding Concerning Consultation and Cooperation and the 
Exchange of Information, or (ii) a signatory to a bilateral 
arrangement with the Commission for enforcement cooperation. Non-
U.S. clearing members that do not meet these criteria would not be 
eligible to rely on this exemption.
    \39\ In some circumstances, an eligible contract participant 
that does not hold customer funds or securities nonetheless may act 
as a dealer in securities transactions, or as a broker (such as an 
inter-dealer broker).
    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 under the 
analysis used for determining whether certain persons would 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).
---------------------------------------------------------------------------

    As before, for all ICE Trust clearing members--regardless of 
whether they receive or hold customer collateral in connection with 
Cleared CDS--this temporary exemption is conditioned on the clearing 
member being in material compliance with ICE Trust's rules, as well as 
on the clearing member being in 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.
    Additional conditions apply to ICE Trust clearing members that 
receive or hold funds or securities of U.S. persons (or that receive or 
hold funds or securities of any person in the case of a U.S. clearing 
member)--other than for an affiliate that controls, is controlled by, 
or is under common control with the clearing member--in connection with 
Cleared CDS. For those ICE Trust clearing members, this temporary 
exemption is conditioned on the customer not being a natural person, 
and on the clearing member providing certain risk disclosures to the 
customer.\40\
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    \40\ The clearing member must disclose that it is not regulated 
by the Commission and that U.S. broker-dealer segregation 
requirements and protections under the Securities Investor 
Protection Act will not apply, that the insolvency law of the 
applicable jurisdiction may affect the customer's ability to recover 
funds and securities or the speed of any such recovery, and (if 
applicable) that non-U.S. members may be subject to an insolvency 
regime that is materially different from that applicable to U.S. 
persons.
---------------------------------------------------------------------------

    In addition, under this revised temporary exemption, such clearing 
members must, as promptly as practical after receipt, transfer such 
funds and securities--other than those promptly returned to such other 
person--to either the Custodial Client Omnibus Margin Account at ICE 
Trust \41\ or an account held by a third-party custodian, as described 
below.
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    \41\ Cash collateral transferred to ICE Trust may be invested in 
``Eligible Custodial Assets,'' as defined in ICE Trust's ``Custodial 
Asset Policies.'' Also, collateral transferred to ICE Trust may be 
held at a subcustodian.
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    As before, collateral that is held at a third-party custodian must 
either be held: (1) In the name of the customer, subject to an 
agreement in which the customer, the clearing member and the custodian 
are parties, acknowledging that the assets held therein are customer 
assets used to collateralize obligations of the customer to the 
clearing member, and that the assets held in the account may not 
otherwise be pledged or rehypothecated by the clearing member or the 
custodian; or (2) in an omnibus account for which the clearing member 
maintains daily records as to the amount owing to each customer, and 
which is subject to an agreement between the clearing member and the 
custodian specifying: (i) That all account assets are held for the 
exclusive benefit of the clearing member's customers and are being kept 
separate from any other accounts that the clearing member maintains 
with the custodian; (ii) that the account assets may not be used as 
security for a loan to the clearing member by the custodian, and shall 
be subject to no right, charge, security interest, lien, or claim of 
any kind in favor of the custodian or any person claiming through the 
custodian; and (iii) that the assets may not otherwise be pledged or 
rehypothecated by the clearing member or the custodian.\42\ Under 
either approach, the third-party custodian cannot be affiliated with 
the clearing member.\43\ Moreover, if the third-party custodian is a 
U.S. entity, it must be a

[[Page 11596]]

bank (as that term is defined in Section 3(a)(6) of the Exchange Act), 
have total regulatory capital of at least $1 billion,\44\ and have been 
approved to engage in a trust business by an appropriate regulatory 
agency. A custodian that is not a U.S. entity must have regulatory 
capital of at least $1 billion,\45\ and must provide the clearing 
member, the customer and ICE Trust with a legal opinion providing that 
the account assets are subject to regulatory requirements in the 
custodian's home jurisdiction designed to protect, and provide for the 
prompt return of, custodial assets in the event of the custodian's 
insolvency, and that the assets held in that account reasonably could 
be expected to be legally separate from the clearing member's assets in 
the event of the clearing member's insolvency. Also, cash collateral 
posted with the third-party custodian may be invested in other assets, 
consistent with the investment policies that govern collateral held at 
ICE Trust.\46\ Finally, a clearing member that uses a third-party 
custodian to hold customer collateral must notify ICE Trust of that 
use.
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    \42\ We do not contemplate that either of these approaches 
involving the use of a third-party custodian would interfere with 
the ability of a clearing member and its customer to agree as to how 
any return or losses earned on those assets would be distributed 
between the clearing member and its customer.
    Also, the restriction in both approaches on the clearing 
member's and the custodian's ability to rehypothecate these customer 
funds and securities does not preclude that collateral from being 
transferred to ICE Trust as necessary to satisfy variation margin 
requirements in connection with the customer's CDS position.
    \43\ For purposes of the Order, an ``affiliated person'' of a 
clearing member mean any person who directly or indirectly controls 
a clearing member or any person who is directly or indirectly 
controlled by or under common control with a clearing member; 
ownership of 10 percent or more of an entity's common stock will be 
deemed prima facie control of that entity. See definition in 
paragraph III.(f)(2) of this Order. This standard is analogous to 
the standard used to identify affiliated persons of broker-dealers 
under Exchange Act Rule 15c3-3(a)(13), 17 CFR 240.15c3-3(a)(13).
    \44\ In particular, custodians that are U.S. entities must have 
total capital, as calculated to meet the applicable requirements 
imposed by the entity's appropriate regulatory agency of at least $1 
billion. The term ``appropriate regulatory agency'' is defined in 
Section 3(a)(34) of the Exchange Act, 15 U.S.C. 78c(a)(34).
    \45\ Custodians that are non-U.S. entities must have total 
capital, as calculated to meet the applicable requirements imposed 
by the foreign financial regulatory authority of at least $1 
billion. The term ``foreign financial regulatory authority'' is 
defined in Section 3(a)(52) of the Exchange Act, 15 U.S.C. 
78c(a)(52).
    \46\ See note 41, supra.
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    As before, to the extent there is any delay in the clearing member 
transferring such funds and securities to ICE Trust or a third-party 
custodian,\47\ the clearing member must effectively segregate the 
collateral in a way that, pursuant to applicable law, could reasonably 
be expected to effectively protect the collateral from the clearing 
member's creditors. The clearing member may not permit customers to 
``opt out'' of such segregation even if applicable regulations or laws 
otherwise would permit such ``opt out.''
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    \47\ This provision is intended to address short-term technology 
or operational issues. ICE Trust rules require collateral to be 
transferred promptly on receipt, with the expectation that margin 
would be transferred on the same business day.
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    Also, as before, this temporary exemption is conditioned on 
clearing member compliance with a self-assessment and audit 
requirement,\48\ and on the clearing member's agreement to provide the 
Commission with access to information related to Cleared CDS 
transactions.\49\
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    \48\ In particular, to facilitate compliance with the 
segregation practices that are required as a condition to this 
temporary exemption, the clearing member must annually provide ICE 
Trust 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.
    As the self-assessment is intended to serve as the basis for the 
third-party auditor's report, we expect the self-assessment to be 
generally contemporaneous with that report.
    \49\ Specifically, to support these segregation practices and 
enhance the ability to detect and deter circumstances in which 
clearing members fail to segregate customer collateral consistent 
with the exemption, this temporary exemption is conditioned on the 
clearing member agreeing to provide the Commission with access to 
information related to Cleared CDS transactions. This requirement is 
consistent with a requirement in Exchange Act Rule 15a-
6(a)(3)(i)(B), which exempts certain foreign broker-dealers from 
registering with the Commission. See Exchange Act Rule 15a-
6(a)(3)(i)(B).
    Under this condition, the clearing member would provide the 
Commission (upon request and subject to agreements reached between 
the Commission or the U.S. Government and an appropriate foreign 
securities authority, see Section 3(a)(50) of the Exchange Act, 15 
U.S.C. 78c(a)(50)), with information or documents within the 
clearing member's possession, custody, or control, as well as 
testimony of clearing member personnel and assistance in taking the 
evidence of other persons, that relates to Cleared CDS transactions. 
If, after the clearing member has exercised its best efforts to 
provide this information (including requesting the appropriate 
governmental body and, if legally necessary, its customers), the 
clearing member nonetheless is prohibited from providing the 
information by applicable foreign law or regulations, this temporary 
conditional exemption would no longer be available to the clearing 
member.
    Consistent with the discussion above as to the loss of an 
exemption due to an underlying representation no longer being 
accurate, see note 8, supra, if a clearing member were to lose the 
benefit of this exemption due to the failure to provide information 
to the Commission as the result of a prohibition by an applicable 
foreign law or regulation, the legal status of existing open 
positions in non-excluded CDS associated with those clearing members 
and its customers would remain unchanged, but the clearing member 
could not establish new CDS positions pursuant to the exemption.
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    As we discussed in the December 2009 ICE Trust order, requiring 
clearing members that receive or hold customer collateral to satisfy 
such conditions will not guarantee that a customer would receive the 
return of its collateral in the event of a clearing member's 
insolvency, particularly in light of the fact-specific nature of the 
insolvency process and the multiplicity of insolvency regimes that may 
apply to ICE Trust's members clearing for U.S. customers. We believe, 
however, that these are reasonable steps for increasing the likelihood 
that customers would be able to access collateral in such an insolvency 
event. We also recognize that these customers generally may be expected 
to be sophisticated market participants that should be able to weigh 
the risks associated with entering into arrangements with 
intermediaries that are not registered broker-dealers, particularly in 
light of the disclosure required as a condition to this temporary 
exemption.

F. Extended Temporary General Exemption for Certain Registered Broker-
Dealers

    The 2009 ICE Trust Orders included 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 ICE Trust through targeted 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 registered broker-dealer 
exemption from certain Exchange Act requirements until November 30, 
2010.\50\
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    \50\ The temporary exemptions addressed above--with regard to 
ICE Trust, 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).
---------------------------------------------------------------------------

    Consistent with the temporary exemptions discussed above, and 
solely with respect to Cleared CDS, we are temporarily exempting 
registered broker-dealers from provisions of the Exchange Act and the 
rules and regulations thereunder that do not apply to security-based 
swap agreements. As discussed above, we are not excluding registered 
broker-dealers from Exchange Act provisions that explicitly apply in 
connection with security-based swap agreements or from related 
enforcement authority provisions.\51\ As above, and

[[Page 11597]]

for similar reasons, we are not exempting registered broker-dealers 
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.\52\
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    \51\ See notes 41 and 45, 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.
    \52\ We also are not exempting those members from provisions 
related to government securities, as discussed above.
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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),\53\ regarding the unlawful extension of credit by broker-dealers; 
(2) Section 15(c)(3),\54\ regarding the use of unlawful or manipulative 
devices by broker-dealers; (3) Section 17(a),\55\ regarding broker-
dealer obligations to make, keep and furnish information; (4) Section 
17(b),\56\ regarding broker-dealer records subject to examination; (5) 
Regulation T,\57\ a Federal Reserve Board regulation regarding 
extension of credit by broker-dealers; (6) Exchange Act Rule 15c3-1, 
regarding broker-dealer net capital; (7) Exchange Act Rule 15c3-3, 
regarding broker-dealer reserves and custody of securities; (8) 
Exchange Act Rules 17a-3 through 17a-5, 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, regarding quarterly security 
counts to be made by certain exchange members and broker-dealers.\58\ 
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.\59\
---------------------------------------------------------------------------

    \53\ 15 U.S.C. 78g(c).
    \54\ 15 U.S.C. 78o(c)(3).
    \55\ 15 U.S.C. 78q(a).
    \56\ 15 U.S.C. 78q(b).
    \57\ 12 CFR 220.1 et seq.
    \58\ 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.
    \59\ 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.
---------------------------------------------------------------------------

G. Solicitation of Comments

    When we granted the December 2009 ICE Trust Order extending the 
exemptions granted in connection with CDS clearing by ICE Trust and 
expanding that relief to accommodate central clearing of customer CDS 
transactions, we requested comment on all aspects of the exemptions and 
particularly requested comments as to the relief we granted in 
connection with customer clearing. We received two comments in response 
to this request.\60\
---------------------------------------------------------------------------

    \60\ See Comment from Kristie L. Lovelady (Dec. 9, 2009) 
(requesting stronger restrictions generally); Comment from JP Morgan 
(Mar. 2, 2010) (opposing application of segregation conditions to 
variation margin transfers, and raising issues as to application of 
segregation conditions in the context of portfolio margining 
practices; both issues are the subject of additional requests for 
comment in this Order).
    We also solicited comments earlier as part of the March 2009 ICE 
Trust Order, but received no comments in response to that request.
---------------------------------------------------------------------------

    In connection with this Order extending the exemptions granted in 
connection with CDS clearing by ICE Trust, we reiterate our request for 
comments on all aspects of the exemptions. We particularly request 
comments as to whether the conditions we have placed on the relief 
adequately protect customer collateral from the threat posed by 
clearing member insolvency, whether additional conditions or 
requirements are appropriate to promote compliance with the 
requirements of the exemptions, and what, if any, additional conditions 
would be appropriate.
    We also request comment as to whether the segregation conditions of 
this Order should extend to certain transfers of variation margin 
associated with Cleared CDS, as well as whether CDS customers are able 
to easily access mark-to-market profits associated with Cleared CDS. Do 
any practices (such as, for example, negotiated ``thresholds'' in 
credit support annexes between clearing members and customers) impede 
customers from demanding and receiving the timely return of such mark-
to-market profits? Should the Commission condition any future 
exemptions on segregating the mark-to-market profits associated with 
Cleared CDS if they are not returned to customers within a certain 
amount of time following demand (subject to provisions regarding 
reasonable minimum transfer amounts, and provisions permitting offset 
against amounts owing from the customer directly to the clearing 
member)? Would such a condition impose significant operational or other 
costs that may deter the clearing of customer CDS transactions? Are 
there other factors (e.g., costs, benefits, market conditions, economic 
considerations, or availability of credit hedges) that may reduce the 
significance of any customer protection benefits provided by requiring 
segregation of such mark-to-market profits? We also invite comment on 
whether differences among CDS CCPs regarding protection of mark-to-
market profits may have competitive impacts.
    In addition, we request comment on how clearing members intend to 
comply with this Order's (and have complied with the December 2009 ICE 
Trust Order's) condition requiring the segregation of all margin posted 
by customers connected with purchasing, selling, clearing, settling or 
holding Cleared CDS positions--not only the gross margin required by 
ICE Trust rules. To what extent would clearing firms typically require 
certain customers to post such ``excess'' margin above the ICE Trust 
requirements in connection with Cleared CDS transactions?
    Finally, to what extent do clearing members and customers seek to 
include Cleared CDS positions within portfolio margining calculations 
that include other instruments (e.g., non-cleared CDS, other OTC 
derivatives or securities)? If portfolio margining is used, how do 
clearing members allocate the total collateral required by a clearing 
member from a customer between the portion posted in connection with 
Cleared CDS (and hence subject to this Order's segregation conditions) 
and the portion attributable to other derivatives transactions 
involving that clearing member and customer? To the extent a clearing 
member's portfolio margin calculations include a customer's Cleared CDS 
positions, is it reasonable to conclude that any portion of the 
customer margin is not connected with Cleared CDS, and thus does not 
need to be segregated? Would a dealer's inclusion of Cleared CDS 
positions in its portfolio margin calculation interfere with the 
customer protection benefits of CDS clearing in the event of a dealer's 
insolvency? In other words, would the dealer's cleared CDS customer 
positions be portable to another dealer if collateralized solely by the 
ICE Trust-required margin, or would the dealer's cleared CDS customers 
be placed at a disadvantage in an insolvency situation because of this 
practice? Should the Commission provide firms with further guidance 
regarding the inclusion of Cleared CDS in portfolio margin 
calculations?
    Comments may be submitted by any of the following methods:

[[Page 11598]]

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 S7-05-09 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 S7-05-09. 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 Web site viewing and printing in the Commission's Public Reference 
Room, 100 F Street, NE., Washington, DC 20549, on official business 
days between the hours of 10 a.m. and 3 p.m. All comments received will 
be posted without 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 November 30, 2010:
    (a) Exemption from Section 17A of the Exchange Act.
    ICE Trust U.S. LLC (``ICE Trust'') 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)(1) of this Order), 
subject to the following conditions:
    (1) ICE Trust shall make available on its Web site its annual 
audited financial statements.
    (2) ICE Trust shall keep and preserve at least one copy of all 
documents, including all correspondence, memoranda, papers, books, 
notices, accounts, and other such records as shall be made or received 
by it relating to its Cleared CDS clearance and settlement services. 
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) ICE Trust shall supply information and periodic reports 
relating to its Cleared CDS clearance and settlement services as may be 
reasonably requested by the Commission, and shall provide access to the 
Commission to conduct on-site inspections of all facilities (including 
automated systems and systems environment), records, and personnel 
related to ICE Trust's Cleared CDS clearance and settlement services.
    (4) ICE Trust shall notify the Commission, on a monthly basis, of 
any material disciplinary actions taken against any of its members 
utilizing its Cleared CDS clearance and settlement services, including 
the denial of services, fines, or penalties. ICE Trust shall notify the 
Commission promptly when ICE Trust involuntarily terminates the 
membership of an entity that is utilizing ICE Trust's Cleared CDS 
clearance and settlement services. Both notifications shall describe 
the facts and circumstances that led to ICE Trust's disciplinary 
action.
    (5) ICE Trust shall notify the Commission of all changes to rules, 
procedures, and any other material events affecting its Cleared CDS 
clearance and settlement services, including its fee schedule and 
changes to risk management practices, the day before effectiveness or 
implementation of such rule changes or, in exigent circumstances, as 
promptly as reasonably practicable under the circumstances. All such 
rule changes will be posted on ICE Trust's Web site. Such notifications 
will not be deemed rule filings that require Commission approval.
    (6) ICE Trust shall 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. ICE Trust shall provide the Commission (beginning in 
its first year of operation) with its annual audited financial 
statements prepared by independent audit personnel.
    (7) ICE Trust shall report all significant systems outages to the 
Commission. If it appears that the outage may extend for 30 minutes or 
longer, ICE Trust shall report the systems outage immediately. If it 
appears that the outage will be resolved in less than 30 minutes, ICE 
Trust shall report the systems outage within a reasonable time after 
the outage has been resolved.
    (8) ICE Trust, 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 ICE Trust may establish to 
calculate mark-to-market margin requirements for ICE Trust clearing 
members; and (ii) any other pricing or valuation information with 
respect to Cleared CDS as is published or distributed by ICE Trust.
    (b) Exemption from Sections 5 and 6 of the Exchange Act.
    (1) ICE Trust 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 mark-to-market prices for open 
positions in Cleared CDS, subject to the following conditions:
    (i) ICE Trust shall report the following information with respect 
to the calculation of mark-to-market prices for Cleared CDS to the 
Commission within 30 days of the end of each quarter, and preserve such 
reports during the life of the enterprise and of any successor 
enterprise:
    (A) The total dollar volume of transactions executed during the 
quarter, broken down by reference entity, security, or index; and
    (B) The total unit volume and/or notional amount executed during 
the quarter, broken down by reference entity, security, or index;
    (ii) ICE Trust shall establish and maintain adequate safeguards and 
procedures to protect clearing members' confidential trading 
information. Such safeguards and procedures shall include:
    (A) Limiting access to the confidential trading information of 
clearing members to those employees of ICE Trust who are operating the 
system or responsible for its compliance with this exemption or any 
other applicable rules; and
    (B) Establishing and maintaining standards controlling employees of 
ICE Trust trading for their own accounts. ICE Trust must establish and 
maintain adequate oversight procedures to ensure that the safeguards 
and procedures established pursuant to this condition are followed; and
    (iii) ICE Trust shall satisfy the conditions of the temporary 
exemption from Section 17A of the Exchange Act set forth in paragraphs 
(a)(1)-(8) of this Order.
    (2) Any ICE Trust clearing member shall be exempt from the 
requirements of Section 5 of the Exchange Act to the extent such ICE 
Trust clearing member uses any facility of ICE Trust to effect any 
transaction in Cleared CDS, or to report any such transaction, in 
connection with ICE Trust's clearance and risk management process for 
Cleared CDS.

[[Page 11599]]

    (c) Exemption for ICE Trust, ICE Trust clearing members, and 
certain eligible contract participants.
    (1) Persons eligible. The exemption in paragraph (c)(2) is 
available to:
    (i) ICE Trust; 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)), including any ICE Trust clearing 
member, other than:
    (A) 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
    (B) 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 conditions specified in paragraph 
(c)(3) of this subsection, 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 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), paragraphs (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) The broker-dealer registration requirements of Section 
15(a)(1), and the other requirements of the Exchange Act (including 
paragraphs (4) and (6) of Section 15(b)) and the rules and regulations 
thereunder that apply to a broker or dealer that is not registered with 
the Commission;
    (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) Conditions for ICE Trust clearing members.
    (i) Any ICE Trust clearing member relying on this exemption must be 
in material compliance with the rules of ICE Trust.
    (ii) Any ICE Trust clearing member relying on this exemption that 
participates in the clearing of Cleared CDS transactions on behalf of 
other persons must annually provide a certification to ICE Trust that 
attests to whether the clearing member is relying on the exemption from 
broker-dealer related requirements set forth in paragraph (d) of this 
Order.
    (d) Exemption from broker-dealer related requirements for ICE Trust 
clearing members and certain eligible contract participants.
    (1) Persons eligible. The exemption in paragraph (d)(2) is 
available to:
    (i) Any ICE Trust clearing member (other than one that is 
registered as a broker or dealer under Section 15(b) of the Exchange 
Act (other than paragraph (11) thereof)); and
    (ii) Any eligible contract participant that does not receive or 
hold funds or securities for the purpose of purchasing, selling, 
clearing, settling, or holding Cleared CDS positions for other persons 
(other than one that is registered as a broker or dealer under Section 
15(b) of the Exchange Act (other than paragraph (11) thereof)).
    (2) Scope of exemption. The persons described in paragraph (d)(1) 
shall, solely with respect to Cleared CDS, be exempt from the broker-
dealer registration requirements of Section 15(a)(1) and the other 
requirements of the Exchange Act (other than Sections 15(b)(4) and 
15(b)(6)) and the rules and regulations thereunder that apply to a 
broker or dealer that is not registered with the Commission, subject to 
the conditions set forth in paragraph (d)(3) with respect to ICE Trust 
clearing members.
    (3) Conditions for ICE Trust clearing members.
    (i) General condition for ICE Trust clearing members. An ICE Trust 
clearing member relying on this exemption must be in material 
compliance with the rules of ICE Trust, and also must 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.
    (ii) Additional conditions for ICE Trust clearing members that 
receive or hold customer funds or securities. Any ICE Trust clearing 
member that receives or holds funds or securities for the purpose of 
purchasing, selling, clearing, settling, or holding Cleared CDS 
positions for U.S. persons (or for any person if the clearing member is 
a U.S. clearing member)--other than for an affiliate that controls, is 
controlled by, or is under common control with the clearing member--
also shall comply with the following conditions with respect to such 
activities:
    (A) The U.S. person (or any person if the clearing member is a U.S. 
clearing member) for whom the clearing member receives or holds such 
funds or securities shall not be natural persons;
    (B) The clearing member shall disclose to such U.S. person (or to 
any such person if the clearing member is a U.S. clearing member) that 
the clearing member is not regulated by the Commission and 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, that the insolvency law of the 
applicable jurisdiction may affect such persons' ability to recover 
funds and securities, or the speed of any such recovery, in an 
insolvency proceeding, and, if applicable, that non-U.S. clearing 
members may be subject to an insolvency regime that is materially 
different from that applicable to U.S. persons;
    (C) As promptly as practicable after receipt, the clearing member 
shall transfer such funds and securities (other than those promptly 
returned to such other person) to:
    (I) The clearing member's Custodial Client Omnibus Margin Account 
at ICE Trust; or
    (II) An account held by a third-party custodian, subject to the 
following requirements:
    (a) The funds and securities must be held either:
    (1) In the name of a customer, subject to an agreement to which the 
customer, the clearing member and the custodian are parties, 
acknowledging that the assets held therein are customer assets used to 
collateralize obligations of the customer to the clearing member, and 
that the assets held in that account may not otherwise be pledged or 
rehypothecated by the clearing member or the custodian; or

[[Page 11600]]

    (2) In an omnibus account for which the clearing member maintains a 
daily record as to the amount held in the account that is owed to each 
customer, and which is subject to an agreement between the clearing 
member and the custodian specifying that:
    (i) All assets in that account are held for the exclusive benefit 
of the clearing member's customers and are being kept separate from any 
other accounts maintained by the clearing member with the custodian;
    (ii) The assets held in that account shall at no time be used 
directly or indirectly as security for a loan to the clearing member by 
the custodian and shall be subject to no right, charge, security 
interest, lien, or claim of any kind in favor of the custodian or any 
person claiming through the custodian; and
    (iii) The assets held in that account may not otherwise be pledged 
or rehypothecated by the clearing member or the custodian;
    (b) The custodian may not be an affiliated person of the clearing 
member (as defined at paragraph (f)(2)); and
    (1) If the custodian is a U.S. entity, it must be a bank (as that 
term is defined in section 3(a)(6) of the Exchange Act), have total 
capital, as calculated to meet the applicable requirements imposed by 
the entity's appropriate regulatory agency (as defined in section 
3(a)(34) of the Exchange Act), of at least $1 billion, and have been 
approved to engage in a trust business by its appropriate regulatory 
agency;
    (2) If the custodian is not a U.S. entity, it must have total 
capital, as calculated to meet the applicable requirements imposed by 
the foreign financial regulatory authority (as defined in section 
3(a)(52) of the Exchange Act) responsible for setting capital 
requirements for the entity, equating to at least $1 billion, and 
provide the clearing member, the customer and ICE Trust with a legal 
opinion providing that the assets held in the account are subject to 
regulatory requirements in the custodian's home jurisdiction designed 
to protect, and provide for the prompt return of, custodial assets in 
the event of the insolvency of the custodian, and that the assets held 
in that account reasonably could be expected to be legally separate 
from the clearing member's assets in the event of the clearing member's 
insolvency;
    (c) Such funds may be invested in Eligible Custodial Assets as that 
term is defined in ICE Trust's Custodial Asset Policies; and
    (d) The clearing member must provide notice to ICE Trust that it is 
using the third-party custodian to hold customer collateral.
    (D) To the extent there is any delay in transferring such funds and 
securities to the third-parties identified in paragraph (C), the 
clearing member shall effectively segregate the collateral in a way 
that, pursuant to applicable law, is reasonably expected to effectively 
protect such funds and securities from the clearing member's creditors. 
The clearing member shall not permit such persons to ``opt out'' of 
such segregation even if regulations or laws otherwise would permit 
such ``opt out.''
    (E) The clearing member annually must provide ICE Trust with
    (I) An assessment by the clearing member that it is in compliance 
with all the provisions of paragraphs (d)(3)(ii)(A) through (D) 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 paragraph (d)(3)(ii)(E)(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.
    (F) The clearing member shall provide the Commission (upon request 
or pursuant to agreements reached between the Commission or the U.S. 
Government and any foreign securities authority (as defined in Section 
3(a)(50) of the Exchange Act)) with any information or documents within 
the possession, custody, or control of the clearing member, any 
testimony of personnel of the clearing member, and any assistance in 
taking the evidence of other persons, wherever located, that the 
Commission requests and that relates to Cleared CDS transactions, 
except that if, after the clearing member has exercised its best 
efforts to provide the information, documents, testimony, or 
assistance, including requesting the appropriate governmental body and, 
if legally necessary, its customers (with respect to customer 
information) to permit the clearing member to provide the information, 
documents, testimony, or assistance to the Commission, the clearing 
member is prohibited from providing this information, documents, 
testimony, or assistance by applicable foreign law or regulations, then 
this exemption shall not longer be available to the clearing member.
    (e) Exemption for certain registered broker-dealers.
    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:
    (1) Section 7(c);
    (2) Section 15(c)(3);
    (3) Section 17(a);
    (4) Section 17(b);
    (5) Regulation T, 12 CFR 200.1 et seq.;
    (6) Rule 15c3-1;
    (7) Rule 15c3-3;
    (8) Rule 17a-3;
    (9) Rule 17a-4;
    (10) Rule 17a-5; and
    (11) Rule 17a-13.
    (f) Definitions.
    (1) For purposes of this Order, the term ``Cleared CDS'' shall mean 
a credit default swap that is submitted (or offered, purchased, or sold 
on terms providing for submission) to ICE Trust, 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:
    (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 Fannie Mae, 
Freddie Mac or 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 (1).
    (2) For purposes of this Order, the term ``Affiliated Person of the 
Clearing Member'' shall mean any person who directly or indirectly 
controls a clearing member or any person who is directly or indirectly 
controlled by or under common control with the clearing member. 
Ownership of 10 percent or more of the common stock of the relevant 
entity will be deemed prima facie control of that entity.

[[Page 11601]]

IV. Paperwork Reduction Act

    Certain provisions of this Order contain ``collection of 
information requirements'' within the meaning of the Paperwork 
Reduction Act of 1995.\61\ The Commission has submitted the proposed 
amendments to the Office of Management and Budget (``OMB'') for review 
in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. An agency may 
not conduct or sponsor, and a person is not required to respond to, a 
collection of information unless it displays a currently valid control 
number.
---------------------------------------------------------------------------

    \61\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

A. Collection of Information

    The Commission found it to be necessary or appropriate in the 
public interest and consistent with the protection of investors to 
grant the conditional temporary exemptions discussed in this Order 
until November 30, 2010. Among other things, the Order would require an 
ICE Trust clearing member that receives or holds customers' funds or 
securities for the purpose of purchasing, selling, clearing, settling, 
or holding Cleared CDS positions to: (i) Provide ICE Trust with certain 
certifications/notifications, (ii) make certain disclosures to cleared 
CDS customers, (iii) enter into certain agreements to protect customer 
assets, (iv) maintain a record of each customer's share of assets 
maintained in an omnibus account, and (v) obtain a separate report, as 
part of its annual audit report, as to its compliance with the 
conditions of the ICE Trust Order regarding protection of customer 
assets.

B. Proposed Use of Information

    These collection of information requirements are designed, among 
other things, to inform cleared CDS customers that their ability to 
recover assets placed with the clearing member are dependent on the 
applicable insolvency regime, provide Commission staff with access to 
information regarding whether clearing members are complying with the 
conditions of the ICE Trust order, and provide documentation helpful 
for the protection of cleared CDS customers' funds and securities.

C. Respondents

    Based on conversations with industry participants, the Commission 
understands that approximately 12 firms may be presently engaged as CDS 
dealers and thus may seek to be a clearing member of ICE Trust. In 
addition, 8 more firms may enter into this business. Consequently, the 
Commission estimates that ICE Trust, like the other CCPs that clear CDS 
transactions, may have up to 20 clearing members.

D. Total Annual Reporting and Recordkeeping Burden

    Paragraph III.(c)(3)(ii) of this Order requires any ICE Trust 
clearing member relying on the exemptive relief specified in paragraph 
(c) that participates in the clearing of cleared CDS transactions on 
behalf of other persons to annually provide a certification to ICE 
Trust that attests to whether the clearing member is relying on the 
exemption from broker-dealer related requirements set forth in 
paragraph (d) of that Order. The Commission estimates that it would 
take a clearing member approximately one half hour each year to 
complete the certification and provide it to ICE Trust, resulting in an 
aggregate burden of 10 hours per year for all 20 clearing members to 
comply with this requirement on an annual basis.\62\
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    \62\ 10 hours = (20 clearing members x \1/2\ hour per clearing 
member). This estimate is based on burden estimates published with 
respect to other Commission actions that contained similar 
certification requirements (see e.g., Exchange Act Release No. 41661 
(Jul 27, 1999) (64 FR 42012 (Aug. 3, 1999)), and the burden 
associated with the Year 2000 Operational Capability Requirements, 
including notification and certifications required by Rule 15b7-
3T(e).
---------------------------------------------------------------------------

    Paragraph III.(d)(3)(ii)(C)(II)(d) of this Order requires that a 
clearing member notify ICE Trust if it is using a third-party custodian 
to hold customer collateral. The Commission estimates that it would 
take a clearing member approximately one half hour each year to draft a 
notification and provide it to ICE Trust, which would result in an 
aggregate burden of 10 hours per year for all 20 clearing members to 
comply with this requirement on an annual basis.\63\
---------------------------------------------------------------------------

    \63\ Id.
---------------------------------------------------------------------------

    Paragraph III.(d)(3)(ii)(B) of this Order requires an ICE Trust 
clearing member to disclose to its U.S. customers \64\ that it is not 
regulated by the Commission and that U.S. broker-dealer segregation 
requirements and protections under the Securities Investor Protection 
Act will not apply to any funds or securities it holds, that the 
insolvency law of the applicable jurisdiction may affect the customers' 
ability to recover funds and securities, or the speed of any such 
recovery, in an insolvency proceeding, and, if it is not a U.S. entity, 
that it may be subject to an insolvency regime that is materially 
different from that applicable to U.S. persons. The Commission believes 
that clearing members could use the language in the ICE Trust order 
that describes the disclosure that must be made as a template to draft 
the disclosure. Consequently the Commission estimates, based on staff 
experience, that it would take a clearing member approximately one hour 
to draft the disclosure. Further, the Commission believes clearing 
members will include this disclosure with other documents or agreements 
provided to cleared CDS customers and a clearing member may take 
approximately one half hour to determine how the disclosure should be 
integrated into those other documents or agreements, resulting in a 
one-time aggregate burden of 30 hours for all 20 clearing members to 
comply with this requirement.\65\
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    \64\ If the clearing member is a U.S. entity, it must make this 
disclosure to all of its customers.
    \65\ 30 hours = (1 hour per clearing member to draft the 
disclosure + \1/2\ hour per clearing member to determine how the 
disclosure should be integrated into those other documents or 
agreements) 20 clearing members.
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    Paragraph III.(d)(3)(ii)(C)(II)(a)(1 ) of this Order requires that, 
if an ICE Trust clearing member chooses to segregate each of its 
customers' funds and securities in a separate account, it must obtain a 
tri-party agreement for each such account acknowledging that the assets 
held in the account are customer assets used to collateralize 
obligations of the customer to the clearing member, and that the assets 
held in the account may not otherwise be pledged or re-hypothecated by 
the clearing member or the custodian. Paragraph III.(d)(ii)(C)(II)(a)(2 
) of the ICE Trust order requires that, if an ICE Trust clearing member 
chooses to segregate its customers' funds and securities on an omnibus 
basis, it must obtain an agreement with the custodian with respect to 
the omnibus account acknowledging that the assets held in the account 
(i) are customer assets and are being kept separate from any other 
accounts maintained by the clearing member with the custodian, (ii) may 
at no time be used directly or indirectly as security for a loan to the 
clearing member by the custodian and shall be subject to no right, 
charge, security interest, lien, or claim of any kind in favor of the 
custodian or any person claiming through the custodian, and (iii) may 
not otherwise be pledged or re-hypothecated by the clearing member or 
the custodian. Opening a bank account generally includes discussions 
regarding the purpose for the account and a determination as to the 
terms and conditions applicable to such an account. We understand that 
most banks presently maintain omnibus and other similar types of 
accounts that are designed to recognize legally that the

[[Page 11602]]

assets in the account may not be attached to cover debts of the account 
holder. Thus the standard agreement for this type of account used by 
banks should contain the representations and disclosures required by 
the proposed amendment. However, a small percentage of clearing members 
may need to work with a bank to modify its standard agreement. We 
estimate that 5% of the 20 clearing members, or 1 firm, may use a bank 
with a standard agreement that does not contain the required 
language.\66\ We further estimate each clearing member that uses a bank 
with a standard agreement that does not contain the required language 
would spend approximately 20 hours of employee resources working with 
the bank to update its standard agreement template. Therefore, we 
estimate that the total one-time burden to the industry as a result of 
this proposed requirement would be approximately 20 hours.\67\
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    \66\ This estimate is based on burden estimates published with 
respect to other Commission actions that contained similar 
certification requirements (see e.g., Exchange Act Release No. 55431 
(Mar. 9, 2007) (72 FR 12862 (Mar. 19, 2007)), and the burden 
associated with the amendments to the financial responsibility 
rules, including language required in securities lending 
agreements).
    \67\ 20 hours = (20 clearing members x 5%) x 20 hours to work 
with a bank to update its standard agreement template to include the 
necessary language.
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    Paragraph III.(d)(3)(ii)(C)(II)(a)(2 ) of this Order further 
requires that the clearing member maintain a daily record as to the 
amount held in the omnibus account that is owed to each customer. The 
Commission included this requirement in the ICE Trust order to stress 
the importance of such a record. However it believes that a prudent 
clearing member likely would create and maintain such a record for 
business purposes. Consequently, the Commission believes this 
requirement would not create any additional paperwork burden.
    Paragraph III.(d)(3)(ii)(E) of this Order requires ICE Trust 
clearing members that receive or hold customers' funds or securities 
for the purpose of purchasing, selling, clearing, settling, or holding 
cleared CDS positions annually to provide ICE Trust with an assessment 
that it is in compliance with all the provisions of paragraphs 
III.(d)(3)(ii)(A) through (D) of that order in connection with such 
activities, and a report by the clearing member's independent third-
party auditor, as of the same date as the firm's annual audit 
report,\68\ that attests to, and reports on, the clearing member's 
assessment. The Commission estimates that it will take each clearing 
member approximately five hours each year to assess its compliance with 
the requirements of the order relating to segregation of customer 
assets and attest that it is in compliance with those requirements.\69\ 
Further, the Commission estimates that it will cost each clearing 
member approximately $200,000 more each year to have its auditor 
prepare this special report as part of its audit of the clearing 
member.\70\ Consequently, the Commission estimates that compliance with 
this requirement will result in an aggregate annual burden of 100 hours 
for all 20 clearing members, and that the total additional cost of this 
requirement will be approximately $4,000,000 each year.\71\
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    \68\ The Commission intends for this requirement to be performed 
in conjunction with the firm's annual audit report.
    \69\ This estimate is based on burden estimates published with 
respect to other Commission actions that contained similar 
certification requirements (see e.g., Securities Act Release No. 
8138 (Oct. 9, 2002) (67 FR 66208 (Oct. 30, 2002)), and the burden 
associated with the Disclosure Required by the Sarbanes-Oxley Act of 
2002, including requirements relating to internal control reports).
    \70\ This estimate is based on staff conversations with an audit 
firm. That firm suggested that the cost of such an audit report 
could range from $10,000 to $1 million, depending on the size of the 
clearing member, the complexity of its systems, and whether the work 
included a review of other systems already being reviewed as part of 
audit work the firms is already providing to the clearing member. 
The staff understands that it would be less costly to perform this 
type of audit if the clearing member chooses to forward all customer 
collateral to ICE Trust (an option allowed by this Order) and does 
not use any third party. Finally, the staff understands that most 
ICE Trust clearing members are large dealers whose audits likely 
include internal control reviews and SAS 70 reports regarding 
custody of customer assets, which would require a review of the same 
or similar systems used to comply with the audit report requirement 
in this order.
    \71\ 100 hours = (5 hours for each clearing member to assess its 
compliance with the requirements of the order relating to 
segregation of customer assets and attest that it is in compliance 
with those requirements x 20 clearing members). $4 million = 
$200,000 per clearing member x 20 clearing members.
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E. Collection of Information Is Mandatory

    The collections of information contained in the conditions to this 
Order are mandatory for any entity wishing to rely on the exemptions 
granted by this Order.

F. Confidentiality

    Certain of the conditions of this Order that address collections of 
information require ICE Trust clearing members to make disclosures to 
their customers, or to provide other information to ICE Trust (and in 
some cases also to customers). Apart from those requirements, the 
provisions of this Order that address collections of information do not 
address or restrict the confidentiality of the documentation prepared 
by ICE Trust clearing members under the exemptive conditions. 
Accordingly, ICE Trust clearing members would have to make the 
applicable information available to regulatory authorities or other 
persons to the extent otherwise provided by law.

G. Request for Comment on Paperwork Reduction Act

    The Commission requests, pursuant to 44 U.S.C. 3506(c)(2)(B), 
comment on the collections of information contained in this Order to:
    (i) Evaluate whether the collections of information are necessary 
for the proper performance of the functions of the Commission, 
including whether the information would have practical utility;
    (ii) Evaluate the accuracy of the Commission's estimates of the 
burden of the collections of information;
    (iii) Determine whether there are ways to enhance the quality, 
utility, and clarity of the information to be collected; and
    (iv) Evaluate whether there are ways to minimize the burden of the 
collections of information on those required to respond, including 
through the use of automated collection techniques or other forms of 
information technology.
    Persons who desire to submit comments on the collection of 
information requirements should direct their comments to the OMB, 
Attention: Desk Officer for the Securities and Exchange Commission, 
Office of Information and Regulatory Affairs, Washington, DC 20503, and 
should also send a copy of their comments to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090, and refer to File No. S7-05-09. OMB is 
required to make a decision concerning the collections of information 
between 30 and 60 days after publication of this document in the 
Federal Register; therefore, comments to OMB are best assured of having 
full effect if OMB receives them within 30 days of this publication. 
The Commission has submitted the proposed collections of information to 
OMB for approval. Requests for the materials submitted to OMB by the 
Commission with regard to these collections of information should be in 
writing, refer to File No. S7-05-09, and be submitted to the Securities 
and Exchange Commission, Records Management Office, 100 F Street, NE., 
Washington, DC 20549.


[[Page 11603]]


    By the Commission.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-5222 Filed 3-10-10; 8:45 am]
BILLING CODE 8011-01-P

