
[Federal Register Volume 75, Number 232 (Friday, December 3, 2010)]
[Notices]
[Pages 75522-75524]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-30374]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63388; File No. S7-06-09]


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

November 29, 2010.

I. Introduction

    The Securities and Exchange Commission (``Commission'') has taken 
multiple actions designed to help foster the prompt development of 
credit default swap (``CDS'') central counterparties (``CCP''), 
including granting temporary conditional exemptions from certain 
provisions of the federal securities laws.\1\
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    \1\ See generally Securities Exchange Act Release Nos. 60372 
(Jul. 23, 2009), 74 FR 37748 (Jul. 29, 2009) and 61973 (Apr. 23, 
2010), 75 FR 22656 (Apr. 29, 2010) (temporary exemptions in 
connection with CDS clearing by ICE Clear Europe Limited); 
Securities Exchange Act Release Nos. 60373 (Jul. 23, 2009), 74 FR 
37740 (Jul. 29, 2009) and 61975 (Apr. 23, 2010), 75 FR 22641 (Apr. 
29, 2010) (temporary exemptions in connection with CDS clearing by 
Eurex Clearing AG); Securities Exchange Act Release Nos. 59578 (Mar. 
13, 2009), 74 FR 11781 (Mar. 19, 2009), 61164 (Dec. 14, 2009), 74 FR 
67258 (Dec. 18, 2009), and 61803 (Mar. 30, 2010), 75 FR 17181 (Apr. 
5, 2010) (temporary exemptions in connection with CDS clearing by 
Chicago Mercantile Exchange Inc.); Securities Exchange Act Release 
Nos. 59527 (Mar. 6, 2009), 74 FR 10791 (Mar. 12, 2009), 61119 (Dec. 
4, 2009), 74 FR 65554 (Dec. 10, 2009), and 61662 (Mar. 5, 2010), 75 
FR 11589 (Mar. 11, 2010) (temporary exemptions in connection with 
CDS clearing by 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, the Commission has 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 Nos. 
8999 (Jan. 14, 2009), 74 FR 3967 (Jan. 22, 2009) (initial approval), 
9063 (Sep. 14, 2009), 74 FR 47719 (Sep. 17, 2009) (extension until 
Nov. 30, 2010), and 9158 (Nov. 30, 2010) (extension until Jul. 16, 
2011).
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    In March 2009, the Commission issued an order providing temporary 
conditional exemptions to the Chicago Mercantile Exchange Inc. 
(``CME''), and certain other parties, to permit CME to clear and settle 
CDS transactions.\2\ In response to CME's request, the Commission 
temporarily extended and expanded the exemptions in December 2009 and 
in March 2010.\3\ The current exemptions pursuant to the March 2010 CME 
Exemptive Order are scheduled to expire on November 30, 2010, and CME 
has requested that the Commission extend the exemptions contained in 
the March 2010 CME Exemptive Order.\4\
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    \2\ Securities Exchange Act Release No. 59578 (Mar. 13, 2009), 
74 FR 11781 (Mar. 19, 2009) (``March 2009 CME Exemptive Order'').
    \3\ Securities Exchange Act Release Nos. 61164 (Dec. 14, 2009), 
74 FR 67258 (Dec. 18, 2009) (``December 2009 CME Exemptive Order''); 
61803 (Mar. 30, 2010), 75 FR 17181 (Apr. 5, 2010) (``March 2010 CME 
Exemptive Order'').
    \4\ See Letter from Ann K. Shuman, Managing Director and Deputy 
General Counsel, CME, to Elizabeth Murphy, Secretary, Commission, 
Nov. 29, 2010 (``November 2010 Request'').
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II. Discussion

A. Legislative Developments

    Subsequent to the Commission's issuance of the March 2010 CME 
Exemptive Order, the President signed the Dodd-Frank Wall Street Reform 
and Consumer Protection Act of 2010 (``Dodd-Frank Act'') into law.\5\ 
The Dodd-Frank Act was enacted to, among other purposes, promote the 
financial stability of the United States by improving accountability 
and transparency in the financial system.\6\ To this end, the 
provisions of Title VII of the Dodd-Frank Act provide for the 
comprehensive regulation of security-based swaps \7\ by the 
Commission.\8\ The Dodd-Frank Act amends the Exchange Act to require, 
among other things, that

[[Page 75523]]

transactions in security-based swaps be cleared through a clearing 
agency that is registered with the Commission or that is exempt from 
registration if they are of a type that the Commission determines must 
be cleared, unless an exception or exemption from mandatory clearing 
applies.\9\ Furthermore, Title VII of the Dodd-Frank Act provides that 
a derivatives clearing organization registered with the CFTC that 
cleared swaps pursuant to an exemption from registration as a clearing 
agency prior to the date of enactment of the Dodd-Frank Act, such as 
CME, is deemed registered as a clearing agency for the purposes of 
clearing security-based swaps (``Deemed Registered Provision'').\10\ 
The Deemed Registered Provision, along with other general provisions 
under Title VII of the Dodd-Frank Act, becomes effective on July 16, 
2011.\11\ As a result, CME will no longer need the exemption from 
registration as a clearing agency under Section 17A of the Exchange Act 
provided by the March 2010 CME Exemptive Order, and previous orders, to 
clear security-based swaps after the Deemed Registered Provision 
becomes effective.
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    \5\ Public Law 111-203 (July 21, 2010).
    \6\ See Public Law 111-203, Preamble.
    \7\ Section 761(a)(6) of the Dodd-Frank Act defines a 
``security-based swap'' as any agreement, contract, or transaction 
that is a ``swap,'' as defined in Section 1a(47) of the Commodity 
Exchange Act, 7 U.S.C. 1a(47), that is based on an index that is a 
narrow-based security index, a single security, or a loan, including 
any interest therein or on the value thereof; or the occurrence, 
nonoccurrence, or extent of the occurrence of an event relating to a 
single issuer of a security or the issuers of securities in a 
narrow-based security index, provided that such event directly 
affects the financial statements, financial condition, or financial 
obligations of the issuer. See Section 3(a)(68) of the Securities 
Exchange Act of 1934 (``Exchange Act''), 15 U.S.C. 78c(a)(68) (as 
added by Section 761(a)(6) of the Dodd-Frank Act). Section 712(d) of 
the Dodd-Frank Act provides that the Commission and the Commodity 
Futures Trading Commission (``CFTC''), in consultation with the 
Board of Governors of the Federal Reserve System, shall, among other 
things, jointly further define the terms ``swap'' and ``security-
based swap.''
    \8\ Section 761(a)(2) of the Dodd-Frank Act explicitly includes 
security-based swaps in the definition of ``security'' in Section 
3(a)(10) of the Exchange Act, 15 U.S.C. 78c.
    \9\ See Section 763(a) of the Dodd-Frank Act (adding new Section 
3C to the Exchange Act, 15 U.S.C. 78c-2).
    \10\ See Section 763(b) of the Dodd-Frank Act (adding new 
Section 17A(l) to the Exchange Act, 15 U.S.C. 78q-1(1)). Under this 
Deemed Registered Provision, CME will be required to comply with all 
requirements of the Exchange Act, and the rules thereunder, 
applicable to registered clearing agencies to the extent it clears 
security-based swaps after the effective date of the Deemed 
Registered Provision, including, for example, the obligation to file 
proposed rule changes under Section 19(b) of the Exchange Act.
    \11\ Section 774 of the Dodd-Frank Act states, ``[u]nless 
otherwise provided, the provisions of this subtitle shall take 
effect on the later of 360 days after the date of the enactment of 
this subtitle or, to the extent a provision of this subtitle 
requires a rulemaking, not less than 60 days after publication of 
the final rule or regulation implementing such provision of this 
subtitle.''
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B. CME's Request for Extension of March 2010 CME Exemptive Order

    CME seeks an extension of the temporary exemptions of the March 
2010 CME Exemptive Order under the same terms and conditions contained 
in the March 2010 CME Exemptive Order.\12\ CME's request for an 
extension of the March 2010 CME Exemptive Order incorporates 
representations made in the requests preceding the March 2010 CME 
Exemptive Order, the December 2009 CME Exemptive Order, and the March 
2009 CME Exemptive Order,\13\ which are discussed in detail in our 
earlier CME orders. CME represents that there have been no material 
changes to the statements made in the previous requests, apart from 
CME's adoption of substantive rules for the treatment of customer 
cleared OTC derivatives.\14\ Furthermore, CME represents that it will 
implement policies and procedures designed to ensure compliance with 
the terms of the Exemptive Orders and conduct an internal review 
related to its compliance program.
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    \12\ See November 2010 Request, supra note 4.
    \13\ See id.
    \14\ See infra note 17. CME also notes that it is evaluating the 
creation of a separate guaranty fund for its CDS and futures 
business. See November 2010 Request, supra note 4.
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    Accordingly, consistent with our findings in the March 2010 CME 
Exemptive Order, and, in particular, in light of the risk management 
and systemic benefits in continuing to facilitate CDS clearing by CME 
until Title VII of the Dodd-Frank Act becomes fully effective, 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 extend the exemptive relief granted in the March 2010 
CME Exemptive Order until July 16, 2011. Specifically, pursuant to the 
Commission's authority under Section 36 of the Exchange Act,\15\ based 
on the facts presented and the representations made by CME,\16\ the 
Commission is extending until July 16, 2011, under the same terms and 
conditions in the March 2010 CME Exemptive Order, each of the existing 
exemptions connected with CDS clearing by CME, which include: The 
temporary conditional exemption granted to CME from clearing agency 
registration under Section 17A of the Exchange Act solely to perform 
the functions of a clearing agency for certain non-excluded CDS; the 
temporary conditional exemption of CME and certain of its clearing 
members from the registration requirements of Sections 5 and 6 of the 
Exchange Act solely in connection with the calculation of mark-to-
market prices for certain non-excluded CDS cleared by CME; the 
temporary conditional exemption of CME and certain eligible contract 
participants from certain Exchange Act requirements with respect to 
certain non-excluded CDS cleared by CME; the temporary conditional 
exemption of certain CME clearing members that receive customer 
collateral in connection with certain non-excluded CDS cleared by CME 
from certain Exchange Act requirements;\17\ and the temporary 
conditional exemption from certain Exchange Act requirements granted to 
registered broker-dealers with respect to certain non-excluded CDS.\18\
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    \15\ 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 of 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.
    \16\ See November 2010 Request, supra note 4. The exemptions we 
are granting today are based on all of the representations made by 
CME in its request, which incorporate representations made by CME in 
its requests for relief in connection with the March 2010 CME 
Exemptive Order, the December 2009 CME Exemptive Order, and the 
March 2009 CME Exemptive Order. 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 (as 
defined in the March 2010 CME Exemptive Order) 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.
    \17\ The March 2010 CME Exemptive Order required CME clearing 
members relying on this exemption to hold customer collateral in one 
of three types of accounts: (i) in an account established pursuant 
to Section 4d of the Commodity Exchange Act; (ii) in the absence of 
a 4d Order from the CFTC, in an account that is part of a separate 
account class, specified by CFTC Bankruptcy Rules (see 17 CFR 190.01 
et seq.), established for a futures commission merchant (``FCM'') to 
hold its customers' positions and collateral in cleared OTC 
derivatives; or (iii) if both of those alternatives are not 
available, in an account established in accordance with CFTC Rule 
30.7 (with additional disclosures to be made to the customer). The 
CFTC has taken final action on proposed rules to establish a new 
account class that is applicable to positions in ``Cleared OTC 
Derivatives,'' which became effective on May 6, 2010. See 75 FR 
17297 (Apr. 6, 2010). On October 4, 2010, CME implemented rules with 
substantive requirements for the treatment of customer cleared OTC 
derivatives, and as of that date all CME cleared customer CDS 
positions and related collateral previously held in CFTC Rule 30.7 
accounts are required to be held in ``cleared OTC Derivatives 
Customer Sequestered Accounts.'' Given these developments, the terms 
of the March 2010 CME Exemptive Order, and this Order, require 
customer collateral to be held in an account established pursuant to 
a 4d Order or an account that is part of a separate account class 
established for an FCM to hold its customers' positions and 
collateral in Cleared OTC Derivatives.
    \18\ See March 2010 CME Exemptive Order, supra note 3.
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C. Solicitation of Comments

    When we granted the March 2010 CME Exemptive Order, we requested 
comment on all aspects of the exemptions. We received one comment in 
response to this request, the content of which is outside of the scope 
of the Commission's jurisdiction.\19\
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    \19\ See Comment from Richard Gaib, Apr. 5, 2010, commenting on 
the farm credit system.
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    In connection with this Order extending the exemptions granted in 
connection with CDS clearing by CME, we reiterate our request for 
comments on all aspects of the exemptions.

[[Page 75524]]

    Comments may be submitted by any of the following methods:

Electronic Comments

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

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number S7-06-09. This file number 
should be included on the subject line if e-mail is used. To help us 
process and review your comments more efficiently, please use only one 
method. We will post all comments on the Commission's Internet Web site 
(http://www.sec.gov/rules/other.shtml). Comments are also available for 
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 July 16, 2011, the following exemptions connected with 
CDS clearing by CME contained in the March 2010 CME Exemptive Order are 
extended: (i) The temporary conditional exemption granted to CME from 
clearing agency registration under Section 17A of the Exchange Act 
solely to perform the functions of a clearing agency for certain non-
excluded CDS; (ii) the temporary conditional exemption of CME and 
certain of its clearing members from the registration requirements of 
Sections 5 and 6 of the Exchange Act solely in connection with the 
calculation of mark-to-market prices for certain non-excluded CDS 
cleared by CME; (iii) the temporary conditional exemption of CME and 
certain eligible contract participants from certain Exchange Act 
requirements with respect to certain non-excluded CDS cleared by CME; 
(iv) the temporary conditional exemption of certain CME clearing 
members that receive customer collateral in connection with certain 
non-excluded CDS cleared by CME from certain Exchange Act requirements; 
and (v) the temporary conditional exemption from certain Exchange Act 
requirements granted to registered broker-dealers with respect to 
certain non-excluded CDS.

    By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-30374 Filed 12-2-10; 8:45 am]
BILLING CODE 8011-01-P


