[Federal Register Volume 75, Number 233 (Monday, December 6, 2010)]
[Notices]
[Pages 75722-75724]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-30430]
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DEPARTMENT OF THE TREASURY
Order Extending Temporary Exemptions From Certain Government
Securities Act Provisions and Regulations in Connection With a Request
From ICE Trust U.S. LLC Related to Central Clearing of Credit Default
Swaps
AGENCY: Office of the Assistant Secretary for Financial Markets,
Department of the Treasury.
ACTION: Notice of extension of temporary exemptions.
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SUMMARY: The Department of the Treasury (Treasury) is extending its
temporary exemptions from certain Government Securities Act provisions
and regulations regarding the central clearing of credit default swaps
that reference government securities. The extension of these temporary
exemptions was requested by ICE Trust U.S. LLC.
DATES: Effective Date: Effective November 30, 2010.
FOR FURTHER INFORMATION CONTACT: Lori Santamorena, Lee Grandy, or Kevin
Hawkins, Bureau of the Public Debt, Department of the Treasury, at 202-
504-3632.
SUPPLEMENTARY INFORMATION: The following is Treasury's order extending
the temporary exemptions:
I. Introduction
Treasury regulations govern transactions in government securities
\1\ by government securities brokers \2\ and government securities
dealers \3\ under
[[Page 75723]]
Section 15C of the Securities Exchange Act of 1934 (Exchange Act), as
amended by the Government Securities Act of 1986 (GSA). These
regulations impose obligations concerning financial responsibility,
protection of customer securities and balances, and recordkeeping and
reporting.
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\1\ The term government securities is defined at 15 U.S.C.
78c(a)(42).
\2\ A government securities broker generally is ``any person
regularly engaged in the business of effecting transactions in
government securities for the account of others,'' with certain
exclusions. 15 U.S.C. 78c(a)(43).
\3\ A government securities dealer generally is ``any person
engaged in the business of buying and selling government securities
for his own account, through a broker or otherwise,'' with certain
exclusions. 15 U.S.C. 78c(a)(44).
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Treasury has previously issued orders providing temporary
exemptions to permit ICE Trust U.S. LLC (ICE Trust) to clear and settle
transactions in credit default swaps (CDS) \4\ that reference
government securities.
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\4\ 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.
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Specifically, on March 6, 2009, Treasury granted a temporary
exemption \5\ from certain GSA provisions and regulations to ICE Trust,
certain ICE Trust participants, and certain eligible contract
participants (ECPs).\6\ In the same order Treasury also granted a
limited temporary exemption from certain GSA regulatory requirements to
government securities brokers and government securities dealers that
are not financial institutions. On December 7, 2009, Treasury extended
the expiration date of these temporary exemptions until March 7,
2010.\7\ On January 28, 2010, Treasury granted a temporary, conditional
exemption until March 7, 2010, to certain ICE Trust clearing members
and certain ECPs to accommodate using ICE Trust to clear customer CDS
transactions.\8\ On March 7, 2010, Treasury granted a conditional,
temporary exemption from certain GSA provisions and regulations to
certain ICE Trust participants, and certain ECPs (the March 2010
order).\9\ In the same order Treasury also granted a temporary
exemption from certain Treasury regulatory requirements for registered
or noticed government securities brokers and government securities
dealers that are not financial institutions. The temporary exemptions
expire on November 30, 2010. Treasury has received no comments on its
previous orders.
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\5\ 74 FR 10647, March 11, 2009 Order Granting Temporary
Exemptions from Certain Provisions of the Government Securities Act
and Treasury's Government Securities Act Regulations in Connection
with a Request on Behalf of ICE US Trust LLC Related to Central
Clearing of Credit Default Swaps, and Request for Comments,
available at: http:[sol][sol]www.treasurydirect.gov/instit/statreg/
gsareg/gsareq_treasexemptiveorder309.pdf.
\6\ ECPs are defined in Section 1a(12) of the Commodity Exchange
Act, 7 U.S.C. 1 et seq. The use of the term ECPs in this order
refers to the definition of ECPs in effect on the date of this
order, and excludes persons that are ECPs under Section 1a(12)(C).
The temporary exemption provided to ECPs in this order also applies
to interdealer brokers that are ECPs.
\7\ 74 FR 64127, December 7, 2009 Order Extending Temporary
Exemptions from Certain Government Securities Act Provisions and
Regulations in Connection with a Request from ICE Trust U.S. LLC
Related to Central Clearing of Credit Default Swaps, available at:
http:[sol][sol]www.treasurydirect.gov/instit/statreg/gsareg/FR--
Treasury--Order--ICE--Extension--(12-7-09).pdf.
\8\ 75 FR 4626, January 28, 2010 Order Granting a Temporary
Exemption from Certain Government Securities Act Provisions and
Regulations in Connection with a Request from ICE Trust U.S. LLC
Related to Central Clearing of Credit Default Swaps, and Request for
Comments, available at: http:[sol][sol]www.treasurydirect.gov/
instit/statreg/gsareg/TreasuryICEOrderFedRegisterJan282010.pdf.
\9\ 75 FR 11627, March 11, 2010 Order Granting Temporary
Exemptions from Certain Government Securities Act Provisions and
Regulations in Connection with a Request From ICE Trust U.S. LLC
Related to Central Clearing of Credit Default Swaps, and Request for
Comments, available at: http:[sol][sol]www.treasurydirect.gov/
instit/statreg/gsareg/
TreasuryExemptiveOrderMarch112010FedRegister.pdf.
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Subsequent to the March 2010 order, the Dodd-Frank Wall Street
Reform and Consumer Protection Act (Dodd-Frank Act) was enacted on July
21, 2010.\10\ Title VII of the Dodd-Frank Act establishes a
comprehensive new regulatory framework for swaps and security-based
swaps, and provides the Securities and Exchange Commission (SEC) and
the Commodity Futures Trading Commission (CFTC) with the authority to
regulate over-the-counter (OTC) derivatives. The SEC and CFTC are
working together to address the regulation of CDS, in consultation with
Treasury and other regulators.
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\10\ Public Law 111-203, 124 Stat. 1376.
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II. Discussion
On November 26, 2010, Treasury received a letter (the request) \11\
from ICE Trust asking that Treasury extend the temporary exemptions in
the March 2010 order. ICE Trust has stated in its request that the
existing order has allowed the financial industry to advance the goal
of central clearing of CDS, pending regulatory action to require such
clearing. It also states that the order should be extended because
allowing it to expire may jeopardize the ability of ICE Trust to
continue its operations and that any regulatory uncertainty to the use
of ICE Trust as a central counterparty (CCP) could create a significant
barrier to Treasury's goal of encouraging the use of CCPs in the
clearing of CDS. ICE Trust also notes that the order provides
regulatory agencies with adequate authority to monitor its activities,
and that it is also comprehensively monitored and regulated by State
and Federal banking supervisors. ICE Trust believes the extension is
warranted to avoid creating regulatory uncertainty with respect to the
significant amounts of current open interest.
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\11\ Letter from Kevin R. McClear, General Counsel, ICE Trust to
the Commissioner of the Public Debt, Van Zeck, November 26, 2010,
available at: http:[sol][sol]www.treasurydirect.gov/instit/statreg/
gsareg/gsareg.htm.
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The request states that, to date, the products eligible for
clearing at ICE Trust include CDS transactions involving certain
indices and CDS contracts based on individual reference entities or
securities (single-name CDS contracts) that meet ICE Trust's risk
management and other criteria. The request also states that since the
date of the March 2009 order, ICE Trust has cleared approximately $7.3
trillion in notional amount of index-based CDS contracts and
approximately $461.5 billion in notional amount of single-name CDS
contracts. We understand that, to date, ICE Trust has not cleared any
CDS contracts that reference U.S. government securities.
In its request for an extension of the temporary exemptions, ICE
Trust represents that there have been no material changes to its
operations or the representations made in its previous letters
requesting the exemptive relief.\12\
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\12\ ICE Trust indicated that on November 12, 2010, it applied
to the CFTC for registration as a derivatives clearing organization
(DCO) in advance of the date Title VII of the Dodd-Frank Act goes
into effect in order to facilitate implementation of the Dodd-Frank
Act requirements. As part of the transition to DCO status, ICE Trust
expects to admit futures commission merchants registered with the
CFTC (which may be registered as government securities brokers or
government securities dealers) as clearing members for customer
clearing and may introduce related changes to its rules. Treasury
has not determined whether these developments would be material for
purposes of this order.
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Treasury believes that continuing to facilitate the central
clearing of CDS transactions--including customer CDS transactions--
through an extension of the temporary exemptions in this order will
continue to provide important risk management and systemic benefits by
avoiding an interruption in those CCP clearance and settlement services
pending the effective date of Title VII of the Dodd-Frank Act. Any
interruption in CCP clearance and settlement services for CDS
transactions could eliminate the benefits ICE Trust provides. Treasury
also believes that facilitating the central clearing of CDS
transactions will continue to improve transparency, enhance
counterparty risk management, and contribute generally to the goal of
mitigating systemic risk.
Treasury finds that the circumstances upon which it issued the
previous order
[[Page 75724]]
to ICE Trust still exist and, therefore, Treasury believes that
extending the temporary exemptions is warranted and appropriate.
Accordingly, consistent with our findings in the March 2010 order, and,
in particular, in light of the risk management and systemic benefits in
continuing to accommodate clearing CDS that reference government
securities by ICE Trust, the Secretary of the Treasury (Secretary)
finds that it is consistent with the public interest, the protection of
investors, and the purposes of the Exchange Act to extend the exemptive
relief granted in the March 2010 order. The extension of the temporary
exemptions will expire on July 16, 2011, unless revoked or modified by
Treasury. In extending these temporary exemptions, Treasury has
consulted with and considered the views of the staffs of the SEC, the
CFTC, and the appropriate regulatory agencies for financial
institutions.\13\ The extension of these temporary exemptions is
consistent with temporary exemptions the SEC has granted to ICE Trust
related to the central clearing of CDS.\14\
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\13\ The definition of appropriate regulatory agency with
respect to a government securities broker or a government securities
dealer is set out at 15 U.S.C. 78c(a)(34)(G). The definition
includes the Board of Governors of the Federal Reserve System, the
Comptroller of the Currency, the Federal Deposit Insurance
Corporation, the Director of Thrift Supervision, and in limited
circumstances the SEC.
\14\ See the SEC's Web site at http://www.sec.gov for the recent
Order Extending and Modifying 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 Comment.
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In providing the extension of these temporary exemptions from
certain provisions of Section 15C of the Exchange Act, Treasury is not
determining whether particular CDS are ``government securities'' under
15 U.S.C. 78c(a)(42).
III. Conclusion
It is hereby ordered, pursuant to Section 15C(a)(5) of the Exchange
Act, that the order Treasury issued effective March 7, 2010 (75 FR
11627, March 11, 2010) is amended by replacing the expiration date of
November 30, 2010, with a new expiration date of July 16, 2011, and in
all other respects that order remains in effect.
The temporary exemptions contained in this order are based on the
facts and circumstances about ICE Trust's current operations presented
in the request. These temporary exemptions could become unavailable if
the facts or circumstances change such that the representations in the
request are no longer materially accurate. If the SEC were to withdraw
its order or modify the terms of its order, Treasury may revoke or
modify this order accordingly. The status of cleared CDS submitted to
ICE Trust prior to such change would be unaffected.
IV. Paperwork Reduction Act
This order extends the March 2010 order that included two requests
that fall within the definition of ``information'' under the
regulations implementing the Paperwork Reduction Act (PRA). 5 CFR
1320.3(h). One is the certification that ICE Trust clearing members
must provide to ICE Trust under paragraph (a)(3)(ii) of the March 2010
order concerning their reliance on Treasury's temporary exemption. The
second is the disclosures that certain ICE Trust clearing members must
make if they receive or hold funds or securities for the purpose of
purchasing, selling, clearing, settling, or holding cleared CDS
positions for U.S. persons, under paragraph (a)(4)(ii) of that same
order.
However, Treasury continues to estimate that there will not be 10
or more ICE Trust clearing members that will be relying on this order
to clear CDS that reference a government security. As a result, these
requests do not constitute ``collections of information'' subject to
the PRA. 5 CFR 1320.3(c). Therefore, the PRA does not apply.
Mary J. Miller,
Assistant Secretary for Financial Markets.
[FR Doc. 2010-30430 Filed 12-3-10; 8:45 am]
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