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



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SECURITIES AND EXCHANGE COMMISSION



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




Order Pursuant to Section 36 of the Securities Exchange Act of 

1934 Granting Temporary Exemptions From Clearing Agency Registration 

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

Providing Certain Clearing Services for Security-Based Swaps



July 1, 2011.



I. Introduction



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

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

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

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

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

VII seeks to ensure that, wherever possible and appropriate, 

derivatives contracts formerly traded exclusively in the over-the-

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

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

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

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

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

Exchange Act, which directs entities that use instrumentalities of 

interstate commerce to perform clearing agency functions for security-

based swaps to register with the Commission.\5\

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    \1\ Public Law 111-203.

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

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

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

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

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

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

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

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

narrow-based security index, provided that such event directly 

affects the financial statements, financial condition, or financial 

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

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

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

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

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

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

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

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

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

of the Dodd-Frank Act).

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

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

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

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

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

definition of ``security'').

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

Housing, and Urban Affairs regarding The Restoring American 

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

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

clearing and exchange trading due to individual business needs of 

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

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

market under the centrally cleared and exchange-traded framework as 

possible.'').

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

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

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

rules for the implementation of the registration requirement in new 

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

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

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

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

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

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

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

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

temporary exemptions and other temporary relief, together with 

information on compliance dates for new provisions of the Exchange 

Act applicable to security-based swaps.

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

rules governing persons that are registered as clearing agencies for 

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

Exchange Act provides that, to be registered and to maintain 

registration as a clearing agency that clears security-based swap 

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

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

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

Commission on March 3, 2011 proposed rules regarding registration of 

clearing agencies and the operation and governance of clearing 

agencies, including clearing agencies that clear security-based 

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

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

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

require rulemaking to implement the registration requirement pursuant 

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

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

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

publication of final rules relating to registration of clearing 

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

and (j) of the Exchange Act.

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

    \8\ Id.

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

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

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

control system for systemically important clearing agencies and 

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

Commission may prescribe regulations containing risk management 

standards, taking into consideration relevant international 

standards and existing prudential requirements, for any designated 

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

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

operations related to payment, clearing, and settlement activities 

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

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

5464(a)(2).

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

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

Agency Proposing Release'').

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

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

Exemptions and Other Temporary Relief, Together With Information on 

Compliance Dates for New Provisions of the Securities Exchange Act 

of 1934 Applicable to Security-Based Swaps).

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

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

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

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

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

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



[[Page 39964]]



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

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

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

Exchange Act as of the Effective Date.\13\

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

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

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

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

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

of the mails or any means or instrumentality of interstate commerce 

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

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

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

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

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

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

person who:

     Acts as an intermediary in making payments or deliveries 

or both in connection with transactions in securities;

     Provides facilities for the comparison of data regarding 

the terms of settlement of securities transactions, to reduce the 

number of settlements of securities transactions, or for the allocation 

of securities settlement responsibilities;

     Acts as a custodian of securities in connection with a 

system for the central handling of securities whereby all securities of 

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

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

bookkeeping entry, without physical delivery of securities certificates 

(such as a securities depository); or

     Otherwise permits or facilitates the settlement of 

securities transactions or the hypothecation or lending of securities 

without physical delivery of securities certificates (such as a 

securities depository).\14\

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

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    Based on this broad definition, the Commission indicated in the 

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

that certain service providers that facilitate security-based swap 

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

Clearing Agency Proposing Release has only recently been issued and the 

Commission is still considering these services in the context of the 

Clearing Agency Proposing Release and the comments received on the 

proposing release. Specifically, the Commission indicated it 

preliminarily believes that Collateral Management Services, Trade 

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

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

qualify these participants as clearing agencies and therefore trigger 

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

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

9.

    \16\ The Commission stresses that the functions highlighted 

herein and in the Clearing Agency Proposing Release are not an 

exhaustive list and urges each security-based swap service provider 

to consider whether its functions place it within the clearing 

agency definition.

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     ``Collateral Management Services'': Collateral management 

generally involves calculating collateral requirements and facilitating 

the transfer of collateral between counterparties. In the Clearing 

Agency Proposing Release, the Commission stated that entities that 

calculate net payment obligations among counterparties for security-

based swaps and provide instructions for payments, including with 

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

likely acting as intermediaries in making payments or deliveries or 

both in connection with transactions in securities.

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

the process whereby an intermediary compares each market participant's 

trade data regarding the terms of settlement of securities 

transactions, in order to reduce the number of settlements of 

securities transactions, or to allocate securities settlement 

responsibilities. This includes activities of an intermediary that 

captures trade information regarding a securities transaction and 

performs an independent comparison of that information that results in 

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

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

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

provides a matching service will actively compare trade and 

allocation information and will issue the affirmed confirmation that 

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

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

discussions between the Commission staff and market participants, the 

Commission understands that tear up and compression service providers 

generally operate in the following manner:

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    \18\ Tear-up or multilateral portfolio trade compression 

services for OTC derivatives seek to eliminate unnecessary or 

duplicative trades from the market while maintaining a market 

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

dealers to reduce operational risk, freeing up liquidity and 

capital. By reducing the gross notional outstanding of OTC 

derivatives in normal times, portfolio trade compression provides 

effective measures to address the risk to individual dealers 

associated with uncoordinated, disorderly close-out transactions of 

the positions of a defaulting major dealer. Compression is offered 

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

regular compression exercises. See Financial Stability Board, 

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

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

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     The providers execute an algorithm seeking to reduce the 

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

not alter the counterparty risk or market risk associated with the 

trades beyond specified parameters.

     When using a tear up and compression service, the users 

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

Each user sets tolerances for counterparty exposures it is willing to 

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

costs. The submitted transactions are matched using an algorithm and 

tolerances specified by the user.

     The service then proposes terminations across all parties 

who participated, including payments for termination. The users 

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

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

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

transaction is considered binding, and the relevant transactions are 

considered terminated.

     The users generally exchange payments and confirmations 

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

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

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

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

terminated the ``torn up'' trades.

    The Commission is using its authority under section 36 of the 

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

the compliance date for the final rules relating to registration of 

clearing agencies that clear security-based swaps pursuant to sections 

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

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

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

providing Collateral Management Services, Trade Matching Services, Tear 

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

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

the Commission believes that such action is necessary and appropriate 

in the public interest and consistent with the protection of investors 

because this conditional temporary exemption would avoid the potential 

for disruption



[[Page 39965]]



of these important services to investors pending the implementation of 

the registration framework and related standards and operational 

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

Exchange Act, and pending further consideration of the appropriate 

regulatory treatment of persons conducting Exempted Activities. The 

Commission also believes that the temporary conditional exemption is 

necessary and appropriate because it will provide legal certainty to 

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

participants.

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

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II. Discussion



    Our action today provides a temporary exemption, until the 

compliance date for the final rules relating to registration of 

clearing agencies that clear security-based swaps pursuant to sections 

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

Exchange Act to persons conducting Exempted Activities. This temporary 

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

information regarding persons that are using this exemption to conduct 

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

Specifically, entities relying on the temporary exemption must provide 

notice to the Commission with identifying information consisting of the 

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

structure, contact person and contact information. Such indentifying 

information is needed to provide the Commission with information 

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

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

description of the Exempted Activities they conduct, including the 

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

services are provided, and the volume of transactions conducted in 

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

The Commission is requiring this information in order to better 

understand the types of services that are being provided pursuant to 

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

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

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

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

the information required in the notice, including a detailed 

description of the Exempted Activities it provides.

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

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

obtaining, causing to be obtained, soliciting or requiring the 

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

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

answers to identical questions posed to, or identical reporting or 

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

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

that the reporting and recordkeeping provisions in this Order 

contain ``collection of information requirements'' within the 

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

rely on the exemption based on our discussions with industry 

participants regarding entities engaged in Exempted Activities.

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

duration of the relief, the Commission believes this exemption should 

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

clearing functions are appropriately utilized to reduce risk in the OTC 

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

can play an important role in facilitating risk reduction in the 

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

outstanding number of trades and providing useful operational functions 

for clearing security-based swaps. Persons conducting Exempted 

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

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

requirements yet to be adopted by the Commission pertaining to clearing 

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

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

continue to provide these services may be disrupted, resulting in 

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

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    \21\ See supra note 4 and accompanying text.

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

based swaps will need to be registered with the Commission as 

clearing agencies. However, the entities that currently perform the 

vast majority of central counterparty services with respect to 

security-based swaps will be deemed registered with the Commission 

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

Sec.  763(b).

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    The exemption will be effective until the compliance date for the 

final rules relating to registration of clearing agencies that clear 

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

Exchange Act. This limited duration will permit the Commission to 

implement the statutory provisions pertaining to the registration of 

clearing agencies that clear security-based swaps without disrupting 

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

information concerning the number and types of entities that conduct 

Exempted Activities, to learn more about how those activities 

contribute to a national system for the clearance and settlement of 

security-based swap transactions, and to evaluate the appropriate 

regulatory treatment of those entities. The limited duration of the 

exemption will also permit the entities conducting Exempted Activities 

to review their operations, procedures and processing requirements in 

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



III. Solicitation of Comments



    The Commission requests comment on this exemption for clearing 

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

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

soliciting public comment on all aspects of this exemption, including 

whether the condition to the temporary exemption is appropriate or 

alternatively whether the Commission should consider modifying this 

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

If so, what conditions and why?

    Comments may be submitted by any of the following methods:



Electronic Comments



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

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

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

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



Paper Comments



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

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



All submissions should refer to File Number S7-28-11. This file number 

should be included on the subject line if e-mail is used. To help us 

process and review your comments more efficiently, please use only one 

method. The Commission will post all comments on the Commission's 

Internet Web site (http://www.sec.gov/rules/other.shtml). Comments are 

also available for public inspection and copying in the Commission's 

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

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

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

personal identifying information from submissions. You should submit 

only information that you wish to make available publicly.



[[Page 39966]]



IV. Conclusion



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

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

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

relating to registration of clearing agencies that clear security-based 

swaps:

    Any person that would otherwise be required to register with the 

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

Act solely as a result of conducting Exempted Activities with respect 

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

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

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

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

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

and a detailed description of the Exempted Activities for security-

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

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

and the volume of transactions conducted in connection with the 

services performed for each of the last two years.

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

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

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



By the Commission.

Elizabeth M. Murphy,

Secretary.

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

BILLING CODE 8011-01-P




