[Federal Register Volume 75, Number 64 (Monday, April 5, 2010)]
[Notices]
[Pages 17181-17193]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-7629]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-61803; File No. S7-06-09]
Order Extending Temporary Exemptions Under the Securities
Exchange Act of 1934 in Connection With Request of Chicago Mercantile
Exchange Inc. Related to Central Clearing of Credit Default Swaps, and
Request for Comments
March 30, 2010.
I. Introduction
The Securities and Exchange Commission (``Commission'') has taken
multiple actions \1\ designed to address
[[Page 17182]]
concerns related to the market in credit default swaps (``CDS'').\2\
The over-the-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) (``March 2009 CME
order'') and Securities Exchange Act Release No. 61164 (Dec. 14,
2009), 74 FR 67258 (Dec. 18, 2009) (``December 2009 CME order'')
(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), Securities Exchange Act
Release No. 61119 (Dec. 4, 2009), 74 FR 65554 (Dec. 10, 2009), and
Securities Exchange Act Release No. 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, 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 March 2009, the Commission issued an order \6\ providing
temporary conditional exemptions to the Chicago Mercantile Exchange
Inc. (``CME'') and Citadel Investment Group, LLC. (``Citadel''), and
certain other parties to permit CME and Citadel to clear and settle CDS
transactions.\7\ In response to CME's request, the Commission
temporarily extended and expanded the exemptions in December 2009.\8\
The current exemptions are scheduled to expire on March 31, 2010, and
CME has requested that the Commission extend those exemptions.\9\
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\6\ Securities Exchange Act Release No. 59578 (Mar. 13, 2009),
74 FR 11781 (Mar. 19, 2009).
\7\ For purposes of this Order, ``Cleared CDS'' means a credit
default swap that is submitted (or offered, purchased, or sold on
terms providing for submission) to CME, that is offered only to,
purchased only by, and sold only to eligible contract participants
(as defined in Section 1a(12) of the Commodity Exchange Act 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.
\8\ Securities Exchange Act Release No. 61164 (Dec. 14, 2009),
74 FR 67258 (Dec. 18, 2009).
\9\ See Letter from Ann K. Shuman, Managing Director and Deputy
General Counsel, CME, to Elizabeth Murphy, Secretary, Commission,
Mar. 30, 2010 (``March 2010 request'').
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Based on the facts presented and the representations made by
CME,\10\ 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 CME: the temporary
conditional exemption granted to CME from clearing agency registration
under Section 17A of the Exchange Act solely to perform the functions
of a clearing agency for certain non-excluded CDS transactions; the
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 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 non-excluded CDS
cleared by CME; the temporary conditional exemption of certain CME
clearing members that receive customer collateral in connection with
non-excluded CDS cleared by CME from certain Exchange Act requirements;
and the temporary conditional exemption from certain
[[Page 17183]]
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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\10\ See id. The exemptions we are granting today are based on
all of the representations made by CME in its request, which in turn
incorporate representations made by CME in its request for relief
granted in the December 2009 exemptions addressing CDS clearing by
CME. We recognize, however, that there could be legal uncertainty in
the event that one or more of the underlying representations were to
become inaccurate. Accordingly, if any of these exemptions were to
become unavailable by reason of an underlying representation no
longer being materially accurate, the legal status of existing open
positions in non-excluded CDS that previously had been cleared
pursuant to the exemptions would remain unchanged, but no new
positions could be established pursuant to the exemptions until all
of the underlying representations were again accurate.
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II. Discussion
A. CME's CDS Clearing Activities to Date
CME's request for an extension of its current temporary conditional
exemptions incorporates representations, in its request preceding the
December 2009 CME order, explaining how CME would clear proprietary CDS
transactions of its clearing members and CDS transactions involving its
clearing members' clients.\11\ These representations are discussed in
detail in our earlier CME orders.\12\
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\11\ See March 2010 Request, supra note 9. CME represents that
there have been no material changes to the statements made in the
letter that preceded the exemptions we granted in the December 2009
CME order, apart from certain developments it described with regard
to the implementation of its price quality auction methodology, open
access to CDS clearing services, policies and procedures with regard
to securities trading by employees, enhancements related to
financial safeguards, and the status of a CME petition with the
Commodity Futures Trading Commission (``CFTC'').
\12\ In its present request, CME reiterates that it expects to
rely on procedures, pursuant to the price quality auction
methodology described in its earlier request for exemptions, whereby
CME will periodically require CDS clearing members to trade at
prices generated by their indicative settlement prices, where those
prices generate crossed bids and offers. To date, CME has yet to
require the execution of any trades through this process.
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On December 15, 2009, CME began offering clearing services for CDS
contracts on a limited basis. As of March 12, 2010, CME had cleared 33
CDS transactions, with a total $189.5 million notional amount, of CDS
contracts based on indices of securities.
B. Extended Temporary Conditional Exemption From Clearing Agency
Registration Requirement
In March 2009 and December 2009, in connection with its efforts to
facilitate the establishment of one or more CCPs for Cleared CDS, the
Commission issued orders conditionally exempting CME from clearing
agency registration under Section 17A of the Exchange Act on a
temporary basis.\13\ Subject to the conditions in those orders, CME has
been 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 current CME exemptive order
expires on March 31, 2009. Pursuant to its authority under Section 36
of the Exchange Act,\14\ for the reasons described herein, the
Commission is extending the exemption granted in that order until
November 30, 2010, subject to certain conditions.
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\13\ See supra, note 1.
\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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In the earlier exemptive orders, the Commission recognized the need
to ensure the prompt establishment of CME as a CCP for CDS
transactions. The Commission also recognized the need to ensure that
important elements of Section 17A of the Exchange Act, which sets forth
the framework for the regulation and operation of the U.S. clearance
and settlement system for securities, apply to the non-excluded CDS
market. Accordingly, the temporary exemptions in those orders were
subject to a number of conditions designed to enable Commission staff
to monitor CME's clearance and settlement of CDS transactions.\15\
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\15\ See Securities Exchange Act Release No. 59527 (Mar. 6,
2009), 74 FR 10791 (Mar. 12, 2009).
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The temporary exemptions were based, in part, on CME's
representation that it met the standards set forth in the Committee on
Payment and Settlement Systems (``CPSS'') and International
Organization of Securities Commissions (``IOSCO'') report entitled:
Recommendations for Central Counterparties (``RCCP'').\16\ 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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\16\ The RCCP was drafted by a joint task force (``Task Force'')
composed of representative members of IOSCO and CPSS and published
in November 2004. The Task Force consisted of securities regulators
and central bankers from 19 countries and the European Union. The
U.S. representatives on the Task Force included staff from the
Commission, the Federal Reserve Board, and the CFTC.
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The Commission believes that continuing to facilitate the central
clearing of CDS transactions--including customer CDS transactions--
through a temporary conditional exemption from Section 17A will
continue to provide important risk management and systemic benefits by
facilitating the prompt establishment of CCP clearance and settlement
services. Accordingly, and consistent with our findings in the CME
Exemptive Order, we find pursuant to Section 36 of the Exchange Act
that it is necessary and appropriate in the public interest and is
consistent with the protection of investors for the Commission to
extend, until November 30, 2010, CME's exemption provided from the
clearing agency registration requirements of Section 17A, subject to
certain conditions.
In granting this exemption, we are balancing the aim of
facilitating CME's service as a CCP for non-excluded CDS transactions
with ensuring that important elements of Commission oversight are
applied to the non-excluded CDS market. The continued use of temporary
exemptions will permit the Commission to continue to develop direct
experience with the non-excluded CDS market. During the extended
exemptive period, the Commission will continue to monitor closely the
impact of the CCPs on this market. In particular, the Commission will
seek to assure itself that CME has sufficient risk management controls
in place and does not act in an anticompetitive manner or indirectly
facilitate anticompetitive behavior with respect to fees charged to
members, the dissemination of market data, and the access to clearing
services by independent CDS exchanges or CDS trading platforms.
This temporary extension of this exemption also is designed to
assure that--as CME has represented--information will be available to
market participants about the terms of the CDS cleared by CME, the
creditworthiness of CME or any guarantor, and the clearance and
settlement process for CDS.\17\ The Commission believes operation of
CME consistent with the conditions of the Order will facilitate the
availability to market participants of information that should enable
them to make better informed investment decisions and better value and
evaluate their Cleared CDS and counterparty exposures relative to a
market that is not centrally cleared.
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\17\ The Commission believes that it is important in the CDS
market, as in the securities market generally, that parties to
transactions have access to financial information that would allow
them to evaluate appropriately the risks relating to a particular
investment and make more informed investment decisions. See
generally Policy Statement on Financial Market Developments, The
President's Working Group on Financial Markets, March 13, 2008,
available at: http://www.treas.gov/press/releases/reports/pwgpolicystatemktturmoil_03122008.pdf.
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This temporary extension of this exemption is subject to a number
of conditions that are designed to enable
[[Page 17184]]
Commission staff to monitor CME's clearance and settlement of CDS
transactions and help reduce risk in the CDS market. These conditions
require that CME: (i) Make available on its Web site its annual audited
financial statements; (ii) preserve records related to the conduct of
its Cleared CDS clearance and settlement services for at least five
years (in an easily accessible place for the first two years); (iii)
provide information relating to its Cleared CDS clearance and
settlement services to the Commission and provide access to the
Commission to conduct on-site inspections of facilities, records, and
personnel related to its Cleared CDS clearance and settlement services;
(iv) notify the Commission on a monthly basis about material
disciplinary actions taken against any of its members utilizing its
Cleared CDS clearance and settlement services, and about the
involuntary termination of the membership of an entity that is
utilizing CME's Cleared CDS clearance and settlement services; (v)
provide the Commission with changes to rules, procedures, and any other
material events affecting its Cleared CDS clearance and settlement
services not less than one day prior to effectiveness or implementation
of such rule changes, or in exigent circumstances, as promptly as
reasonably practicable under the circumstances; (vi) provide the
Commission with reports prepared by independent audit personnel that
are generated in accordance with risk assessment of the areas set forth
in the Commission's Automation Review Policy Statements \18\ and its
annual audited financial statements prepared by independent audit
personnel; and (vii) report all significant systems outages to the
Commission within specified timeframes.
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\18\ See Automated Systems of Self-Regulatory Organization,
Exchange Act Release No. 27445 (Nov. 16, 1989), File No. S7-29-89,
and Automated Systems of Self-Regulatory Organization (II), Exchange
Act Release No. 29185 (May 9, 1991), File No. S7-12-91.
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Also, the temporary extension of this exemption is conditioned on
CME, directly or indirectly, making available to the public on terms
that are fair and reasonable and not unreasonably discriminatory: (i)
All end-of-day settlement prices and any other prices with respect to
Cleared CDS that CME may establish to calculate settlement variation or
margin requirements for CME clearing members; and (ii) any other
pricing or valuation information with respect to Cleared CDS as is
published or distributed by CME.
As a CCP, CME will collect and process information about CDS
transactions, prices, and positions from all of its participants. With
this information, it will calculate and disseminate current values for
open positions for the purpose of setting appropriate margin levels.
The availability of such information can improve fairness, efficiency,
and competitiveness of the market--all of which enhance investor
protection and facilitate capital formation. Moreover, with pricing and
valuation information relating to Cleared CDS, market participants
would be able to derive information about underlying securities and
indexes. This may improve the efficiency and effectiveness of the
securities markets by allowing investors to better understand credit
conditions generally.
In addition, the temporary extension of this exemption is
conditioned on CME not materially changing its methodology for
determining Cleared CDS margin levels without prior written approval
from the Commission staff,\19\ and from FINRA with respect to customer
margin requirements that would apply to broker-dealers.
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\19\ This condition has been modified from the equivalent
condition in the December 2009 CME order, to provide that prior
written approval may be given by Commission staff.
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C. Extended Temporary Conditional Exemption From Exchange Registration
Requirements
In our December 2009 order in connection with CDS clearing by CME,
we granted a temporary conditional exemption for CME from the
requirements of Sections 5 and 6 of the Exchange Act, and the rules and
regulations thereunder, in connection with CME's methodology for
determining CDS settlement prices, including its price quality auction
methodology. We also temporarily exempted CME clearing members from the
prohibitions of Section 5 to the extent they use CME to effect or
report any transaction in Cleared CDS in connection with CME'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,\20\ while Section 6
provides the procedures for registering as a national securities
exchange.\21\
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\20\ In particular, Section 5 provides:
It shall be unlawful for any broker, dealer, or exchange,
directly or indirectly, to make use of the mails or any means or
instrumentality of interstate commerce for the purpose of using any
facility of an exchange * * * to effect any transaction in a
security, or to report any such transactions, unless such exchange
(1) is registered as a national securities exchange under section 6
of [the Exchange Act], or (2) is exempted from such registration * *
* by reason of the limited volume of transactions effected on such
exchange. * * *
15 U.S.C. 78e.
\21\ 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 CME's settlement price process. CME had represented
that updated settlement prices will be made available to clearing
members on their open positions on a regular basis (at least once a
day, or more frequently in case of sudden market moves), and that, as
part of the CDS clearing process, CME would periodically require CDS
clearing members to trade at prices generated by their indicative
settlement prices where those indicative settlement prices generate
crossed bids and offers, pursuant to CME's price quality auction
methodology.
As part of its current request, CME states that it continues to
want to be able to make use of procedures that periodically will
require clearing members to execute certain CDS trades in this
manner.\22\
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\22\ See note 12, supra.
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As discussed above, we have found in general that it is necessary
or appropriate in the public interest, and is consistent with the
protection of investors, to facilitate continued CDS clearing by CME.
Consistent with that finding--and in reliance on CME's representation
that the settlement pricing process, including the periodically
required trading, is part of its clearing process--we further find that
it is necessary or appropriate in the public interest, and is
consistent with the protection of investors that we exercise our
authority under Section 36 of the Exchange Act to extend, until
November 30, 2010, CME's temporary exemption from Sections 5 and 6 of
the Exchange Act in connection with its calculation of settlement
variation prices for open positions in Cleared CDS, and CME clearing
members' temporary exemption from Section 5 with respect to such
trading activity, subject to certain conditions.
The temporary exemption for CME will continue to be subject to
three conditions. First, CME must report the following information with
respect to its determination of daily settlement prices for cleared CDS
to the Commission within 30 days of the end of each quarter, and
preserve such reports for as long as CME offers CDS clearing services
and for a period of at least five years thereafter:
The total dollar volume of CDS transactions executed
during the quarter
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pursuant to CME's price quality auction methodology, broken down by
reference entity, security, or index; and
The total unit volume or notional amount executed during
the quarter pursuant to CME's price quality auction methodology, broken
down by reference entity, security, or index.
Second, CME must establish and maintain adequate safeguards and
procedures to protect participants' confidential trading information
related to Cleared CDS. Such safeguards and procedures shall include:
(a) Limiting access to the confidential trading information of
participants to those CME employees who have a need to access such
information in connection with the provision of CME CDS clearing
services or who are responsible for compliance with this exemption or
any other applicable rules; and (b) implementing policies and
procedures for CME employees with access to such information with
respect to trading for their own accounts. CME must adopt and implement
adequate oversight procedures to ensure that the policies and
procedures established pursuant to this condition are followed.
Third, CME must comply with the conditions to the temporary
exemption from registration as a clearing agency extended by this
Order, given that this exemption is granted in the context of our goal
of continuing to facilitate CME's ability to act as a CCP for non-
excluded CDS, and given CME's representation that the forced trade
process is an important component of CME's overall settlement price
determination process.
The Commission also is continuing to temporarily exempt each CME
clearing member, until November 30, 2010, from the prohibition in
Section 5 of the Exchange Act to the extent that such CME clearing
member uses any facility of CME to effect any transaction in Cleared
CDS, or to report any such transaction, in connection with CME's
calculation of mark-to-market prices for open positions in Cleared CDS.
Absent an exemption, Section 5 would prohibit any CME clearing member
that is a broker or dealer from effecting transactions in Cleared CDS
on CME, which will rely on this Order for an exemption from exchange
registration. The Commission believes that temporarily exempting CME
clearing members from the restriction in Section 5 is necessary and
appropriate in the public interest and is consistent with the
protection of investors because it will facilitate their use of CME's
CCP for Cleared CDS, which for the reasons set forth in this Order the
Commission believes to be beneficial. Without also temporarily
exempting CME clearing members from this Section 5 requirement, the
Commission's temporary exemption of CME from Sections 5 and 6 of the
Exchange Act would be ineffective, because CME clearing members that
are brokers or dealers would not be permitted to effect transactions on
CME in connection with the end-of-day settlement price process.
D. Extended Temporary Conditional General Exemption for CME and Certain
Eligible Contract Participants
As we recognized in our earlier orders in connection with CDS
clearing by CME, applying the full panoply of Exchange Act requirements
to participants in transactions in non-excluded CDS likely would deter
some participants from using CCPs to clear CDS transactions. We also
recognized that it is important that the antifraud provisions of the
Exchange Act apply to transactions in non-excluded CDS, particularly
given that OTC transactions subject to individual negotiation that
qualify as security-based swap agreements already are subject to those
provisions.\23\
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\23\ 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 in those orders that it is appropriate in
the public interest and consistent with the protection of investors
temporarily to apply substantially the same framework to transactions
by market participants in non-excluded CDS that applies to transactions
in security-based swap agreements. We thus temporarily exempted CME and
certain eligible contract participants from a number of Exchange Act
requirements, while excluding certain enforcement-related and other
provisions from the scope of the exemption.
We believe that continuing to facilitate the central clearing of
CDS transactions by CME through this type of temporary conditional
exemption will provide important risk management and systemic benefits.
We also believe that facilitating the central clearing of customer CDS
transactions, subject to the conditions in this Order, will provide an
opportunity for the customers of CME clearing members to control
counterparty risk.
Accordingly, pursuant to Section 36 of the Exchange Act, the
Commission finds that it is necessary or appropriate in the public
interest and is consistent with the protection of investors to grant an
exemption until November 30, 2010, from the requirements of the
Exchange Act discussed below, subject to certain conditions. As before,
this temporary exemption applies to CME and to eligible contract
participants \24\ other than: Eligible contract participants that
receive or hold funds or securities for the purpose of purchasing,
selling, clearing, settling, or holding Cleared CDS positions for other
persons; \25\ eligible contract participants that are self-regulatory
organizations; or eligible contract participants that are registered
brokers or dealers.\26\
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\24\ This exemption in general applies to eligible contract
participants, as defined in Section 1a(12) of the Commodity Exchange
Act (``CEA'') as in effect on the date of this Order, other than
persons that are eligible contract participants under paragraph (C)
of that section.
\25\ Solely for purposes of this requirement, an eligible
contract participant would not be viewed as receiving or holding
funds or securities for purpose of purchasing, selling, clearing,
settling, or holding Cleared CDS positions for other persons, if the
other persons involved in the transaction would not be considered
``customers'' of the eligible contract participant in a parallel
manner when certain persons would not be considered ``customers'' of
a broker-dealer under Exchange Act Rule 15c3-3(a)(1). For these
purposes, and for the purpose of the definition of ``Cleared CDS,''
the terms ``purchasing'' and ``selling'' mean the execution,
termination (prior to its scheduled maturity date), assignment,
exchange, or similar transfer or conveyance of, or extinguishing the
rights or obligations under, a Cleared CDS, as the context may
require. This is consistent with the meaning of the terms
``purchase'' or ``sale'' under the Exchange Act in the context of
security-based swap agreements. See Exchange Act Section 3A(b)(4). A
separate temporary conditional exemption addresses members of CME
that hold funds or securities for the purpose of purchasing,
selling, clearing, settling, or holding Cleared CDS positions for
other persons. See Part II.E, infra.
\26\ 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
[[Page 17186]]
generally are exempt from the provisions of the Exchange Act and the
rules and regulations thereunder that do not apply to security-based
swap agreements. Thus, those persons will still be subject to those
Exchange Act requirements that explicitly are applicable in connection
with security-based swap agreements.\27\ In addition, all provisions of
the Exchange Act related to the Commission's enforcement authority in
connection with violations or potential violations of such provisions
remain applicable.\28\ In this way, the temporary exemption applies the
same Exchange Act requirements in connection with non-excluded CDS as
apply in connection with OTC credit default swaps that are security-
based swap agreements.
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\27\ See note 23, supra.
\28\ Thus, for example, the Commission retains the ability to
investigate potential violations and bring enforcement actions in
the federal courts as well as in administrative proceedings, and to
seek the full panoply of remedies available in such cases.
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Consistent with our earlier exemptions, and for the same reasons,
this temporary exemption also does not extend to: The exchange
registration requirements of Exchange Act Sections 5 and 6; \29\ the
clearing agency registration requirements of Exchange Act Section 17A;
the requirements of Exchange Act Sections 12, 13, 14, 15(d), and 16;
\30\ the Commission's administrative proceeding authority under
Sections 15(b)(4) and (b)(6); \31\ or certain provisions related to
government securities.\32\ CME clearing members relying on this
temporary exemption must be in material compliance with CME rules.
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\29\ These are subject to a separate temporary class exemption.
See note 1, supra. A national securities exchange that effects
transactions in Cleared CDS would continue to be required to comply
with all requirements under the Exchange Act applicable to such
transactions. A national securities exchange could form subsidiaries
or affiliates that operate exchanges exempt under that order. Any
subsidiary or affiliate of a registered exchange could not
integrate, or otherwise link, the exempt CDS exchange with the
registered exchange including the premises or property of such
exchange for effecting or reporting a transaction without being
considered a ``facility of the exchange.'' See Section 3(a)(2), 15
U.S.C. 78c(a)(2).
This Order also includes a separate temporary exemption from
Sections 5 and 6 in connection with the settlement price calculation
methodology of CME, discussed above. See Part II.C, supra.
\30\ 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.
\31\ Exchange Act Sections 15(b)(4) and 15(b)(6), 15 U.S.C.
78o(b)(4) and (b)(6), grant the Commission authority to take action
against broker-dealers and associated persons in certain situations.
Accordingly, while this exemption generally extends to persons that
act as inter-dealer brokers in the market for Cleared CDS and do not
hold funds or securities for others, such inter-dealer brokers may
be subject to actions under Sections 15(b)(4) and (b)(6) of the
Exchange Act. In addition, such inter-dealer brokers may be subject
to actions under Exchange Act Section 15(c)(1), 15 U.S.C. 78o(c)(1),
which prohibits brokers and dealers from using manipulative or
deceptive devices. As noted above, Section 15(c)(1) explicitly
applies to security-based swap agreements. Sections 15(b)(4),
15(b)(6), and 15(c)(1), of course, would not apply to persons
subject to this exemption who do not act as broker-dealers or
associated persons of broker-dealers.
\32\ This exemption specifically does not extend to the Exchange
Act provisions applicable to government securities, as set forth in
Section 15C, 15 U.S.C. 78o-5, and its underlying rules and
regulations; nor does the exemption extend to related definitions
found at paragraphs (42) through (45) of Section 3(a), 15 U.S.C.
78c(a). The Commission does not have authority under Section 36 to
issue exemptions in connection with those provisions. See Exchange
Act Section 36(b), 15 U.S.C. 78mm(b).
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E. Extension of Conditional Temporary Exemption for Certain Clearing
Members of CME
In our December 2009 order, we granted a temporary conditional
exemption from the same Exchange Act requirements discussed above to
CME clearing members that receive or hold customer funds or securities
for the purpose of purchasing, selling, clearing, settling or holding
Cleared CDS positions for customers. 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.\33\
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\33\ 15 U.S.C. 78o(a)(1). This section generally provides that,
absent an exception or exemption, a broker or dealer that uses the
mails or any means of interstate commerce to effect transactions in,
or to induce or attempt to induce the purchase or sale of, any
security must register with the Commission.
Section 3(a)(4) of the Exchange Act generally defines a
``broker'' as ``any person engaged in the business of effecting
transactions in securities for the account of others,'' but provides
11 exceptions for certain bank securities activities. 15 U.S.C.
78c(a)(4). Section 3(a)(5) of the Exchange Act generally defines a
``dealer'' as ``any person engaged in the business of buying and
selling securities for his own account,'' but includes exceptions
for certain bank activities. 15 U.S.C. 78c(a)(5). Exchange Act
Section 3(a)(6) defines a ``bank'' as a bank or savings association
that is directly supervised and examined by state or federal banking
authorities (with certain additional requirements for banks and
savings associations that are not chartered by a federal authority
or a member of the Federal Reserve System). 15 U.S.C. 78c(a)(6).
Certain reporting and other requirements of the Exchange Act may
also apply to such persons, as broker-dealers, regardless of whether
they are registered with the Commission.
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As we noted in our earlier orders, 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.\34\ At the
same time, we recognized that requiring intermediaries that receive or
hold funds and securities on behalf of customers in connection with
transactions in non-excluded CDS to register as broker-dealers may
deter the use of CCPs in CDS transactions, to the detriment of the
markets and market participants generally. We concluded that those
factors, along with certain representations by CME, argued in favor of
flexibility in applying the requirements of the Exchange Act to these
intermediaries.
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\34\ 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.
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Accordingly, in December 2009 (as in March 2009) we provided a
temporary conditional exemption to CME clearing members registered as
FCMs that receive or hold funds or securities for the purpose of
purchasing, selling, clearing, settling, or holding Cleared CDS
positions for other persons. Solely with respect to Cleared CDS, those
CME clearing members generally were exempted from provisions of the
Exchange Act and the underlying rules and regulations that do not apply
to security-based swap agreements.
Our December 2009 order--in contrast to the March 2009 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 CEA; \35\ or (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,
established for an FCM to hold its customers' positions
[[Page 17187]]
and collateral in cleared OTC derivatives; or (iii) if both of those
other two alternatives are not available, in an account established in
accordance with CFTC Rule 30.7 (with additional disclosures to be made
to the customer).\36\
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\35\ If the CFTC were to issue an order pursuant to Section 4d
of the CEA (``4d Order''), Section 4d of the CEA and the related
regulations would control the segregation and protection of customer
funds and property. In that event, all collateral received from
customers of FCMs in connection with purchasing, selling, or holding
CDS positions would be subject to the requirements of CFTC
Regulation 1.20, et seq. promulgated under Section 4d. These
regulations require that customer positions and property be
separately accounted for and segregated from the positions and
property of an FCM. Customer property would be held under an account
name that clearly identifies it as customer property and
demonstrates that it is appropriately segregated as required by the
CEA and Regulation 1.20, et seq.
\36\ Rule 30.7 provides a mechanism for establishing accounts
for holding collateral posted by foreign futures customers. When CME
requested the exemptions that we granted in March 2009, it stated
that, pending the receipt of the 4d Order, FCMs would hold customer
collateral within accounts established pursuant to Rule 30.7.
When CME requested the relief granted to it in December 2009,
it recognized the uncertainty associated with the protections
provided by Rule 30.7, stating that ``[n]either the CFTC nor the
courts have issued an interpretation with regard to the bankruptcy
protections that would be afforded to customers clearing OTC
positions in 30.7 accounts, and it is therefore unclear whether they
would receive the same protections as foreign futures customers.''
See Letter from Ann K. Shuman, Managing Director and Deputy General
Counsel, CME, to Elizabeth Murphy, Secretary, Commission, Dec. 14,
2009.
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Those conditions reflected our understanding that the protections
associated with using CFTC Rule 30.7 to segregate collateral associated
with over-the-counter derivatives are untested, and thus are less
certain than those protections that would be afforded to collateral
protected by Section 4d. The conditions also reflected the CFTC's
proposal of a rule (on which CFTC has not taken action) to provide for
the establishment of a new account class that would be designed to
protect positions in cleared over-the-counter derivatives and
collateral securing such positions in the event an FCM became
insolvent.\37\
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\37\ See 74 FR 40794 (Aug. 13, 2009).
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To date, the CFTC has not issued the 4d Order, and it has not taken
final action on proposed rules that would establish a new account
class. We remain mindful, however, of the benefits that may be expected
to accompany central clearing of customer CDS transactions by CME. In
that light, we have determined to renew this exemption on a temporary
basis.\38\
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\38\ During the exemptive period we intend to monitor
developments with regard to the protection afforded this collateral.
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Accordingly, in light of the risk management and systemic benefits
in continuing to facilitate CDS clearing by CME while promoting
customer protection in connection with those CDS transactions, the
Commission finds pursuant to Section 36 of the Exchange Act that it is
necessary or appropriate in the public interest and is consistent with
the protection of investors to extend this temporary conditional
exemption for certain CME clearing members from certain requirements of
the Exchange Act in connection with Cleared CDS until November 30,
2010.
As before, this temporary conditional exemption will be available
to any CME clearing member that is also an FCM (other than one that
either is registered pursuant to Section 4f(a)(2) or is registered as a
broker or dealer under Section 15(b) of the Exchange Act (other than
paragraph (11) thereof)) that receives or holds funds or securities for
the purpose of purchasing, selling, clearing, settling, or holding
Cleared CDS positions for other persons. Solely with respect to Cleared
CDS, those members generally will be exempt from those provisions of
the Exchange Act and the underlying rules and regulations that do not
apply to security-based swap agreements. As with the exemption
discussed above that is applicable to CME and certain eligible contract
participants, and for the same reasons, this exemption for CME clearing
members that receive or hold funds and securities does not extend to
Exchange Act provisions that explicitly apply in connection with
security-based swap agreements,\39\ or to related enforcement authority
provisions.\40\ As with the exemption discussed above, we also are not
exempting those members from Sections 5, 6, 12(a) and (g), 13, 14,
15(b)(4), 15(b)(6), 15(d), 16, and 17A of the Exchange Act.\41\
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\39\ See note 23, supra.
\40\ See note 28, supra.
\41\ See notes 29 through 31, supra, and accompanying text. Nor
are we exempting those members from provisions related to government
securities, as discussed above. See note 32, supra.
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This temporary exemption is subject to the member complying with
conditions that are important for protecting customer funds and
securities. Any CME clearing member relying on this temporary exemption
must be in material compliance with the rules of CME,\42\ and 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.\43\ In addition, the customers for whom the clearing member
receives or holds such funds or securities may not be natural persons,
and the clearing member must make certain risk disclosures to those
customers.\44\
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\42\ These include Rules 971 and 973 relating to Segregation and
Secured Requirements and Customer Accounts with the Clearing House.
\43\ The term ``customer,'' solely for purposes of Part III.(d)
and (e), infra, and corresponding references in this Order, means a
``customer'' as defined under CFTC Regulation 1.3(k). 17 CFR 1.3(k).
\44\ The clearing member must disclose that it is not regulated
by the Commission, that U.S. broker-dealer segregation requirements
and protections under the Securities Investor Protection Act will
not apply to any funds or securities held by the clearing member to
collateralize Cleared CDS, and that the applicable insolvency law
may affect such customers' ability to recover funds and securities,
or the speed of any such recovery, in an insolvency proceeding.
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As discussed above, this temporary exemption is further conditioned
on funds or securities received or held by the clearing member for the
purpose of purchasing, selling, clearing, settling, or holding cleared
CDS positions for those customers being held: (i) In an account
established in accordance with Section 4d of the CEA and CFTC Rules
1.20 through 1.30 and 1.32 thereunder, or (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,\45\ established for an FCM
to hold its customers' positions in cleared OTC derivatives (and funds
and securities posted to margin, guarantee, or secure such positions);
or (iii) if neither of those other accounts is available, those funds
and securities must be held in an account established in accordance
with CFTC Rule 30.7.\46\
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\45\ 17 CFR 190.01 et seq.
\46\ In that situation, the clearing member must disclose to
Cleared CDS customers that uncertainty exists as to whether they
would receive priority in bankruptcy (vis-[agrave]-vis other
customers) with respect to any funds or securities held by the
clearing member to collateralize Cleared CDS positions.
The conditions in this Order require that any FCM that holds
Cleared CDS customer funds and securities in a 30.7 account must
segregate all such customer funds and securities in a 30.7 account.
It is our understanding that this is consistent with CME Rule 8F03.
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To facilitate compliance with these segregation conditions, the
clearing member--regardless of the type of account discussed above that
it uses--also must annually provide CME with a self-assessment that it
is in compliance with the requirements, along with a report by the
clearing member's independent third-party auditor that attests to that
assessment.\47\ Finally, a CME clearing member that receives or holds
funds or securities of customers for the purpose of purchasing,
selling,
[[Page 17188]]
clearing, settling, or holding Cleared CDS positions shall segregate
such funds and securities of customers from the CME clearing member's
own assets (i.e., the member may not permit the customers to ``opt
out'' of applicable segregation requirements for such funds and
securities even if regulations or laws would permit the customer to
``opt out'').
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\47\ 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.
This condition requiring the clearing member to convey a third-
party audit report to CME as a repository for regulators does not
impose upon CME any independent duty to audit or otherwise review
that information. This condition also does not impose on CME any
independent fiduciary or other obligation to any customer of a
clearing member.
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F. Extended Temporary Conditional General Exemption for Certain
Registered Broker-Dealers Including Certain Broker-Dealer-FCMs
The March 2009 and December 2009 CME exemptive orders granted
temporary limited exemptions from Exchange Act requirements to
registered broker-dealers in connection with their activities involving
Cleared CDS. In crafting these temporary exemptions, we balanced the
need to avoid creating disincentives to the prompt use of CCPs against
the critical role that certain broker-dealers play in promoting market
integrity and protecting customers (including broker-dealer customers
that are not involved with CDS transactions).
In light of the risk management and systemic benefits in continuing
to facilitate CDS clearing by CME through targeted conditional
exemptions to registered broker-dealers, the Commission finds pursuant
to Section 36 of the Exchange Act that it is necessary or appropriate
in the public interest and is consistent with the protection of
investors to exercise its authority to extend this temporary
conditional registered broker-dealer exemption from certain Exchange
Act requirements until November 30, 2010.\48\
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\48\ The temporary exemptions addressed above--with regard to
CME, certain clearing members, and certain eligible contract
participants--are not available to persons that are registered as
broker-dealers with the Commission (other than those that are notice
registered pursuant to Exchange Act Section 15(b)(11)). Exchange Act
Section 15(b)(11) provides for notice registration of certain
persons that effect transactions in security futures products. 15
U.S.C. 78o(b)(11).
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As before, consistent with the temporary exemptions discussed
above, and solely with respect to Cleared CDS, we are temporarily
exempting registered broker-dealers (including registered broker-
dealers that are also FCMs (``BD-FCMs'')) from provisions of the
Exchange Act and the rules and regulations thereunder that do not apply
to security-based swap agreements, subject to certain conditions. As
discussed above, we are not excluding registered broker-dealers,
including BD-FCMs, from Exchange Act provisions that explicitly apply
in connection with security-based swap agreements or from related
enforcement authority provisions.\49\ As above, and for similar
reasons, we are not exempting registered broker-dealers, including BD-
FCMs, from: Sections 5, 6, 12, 13, 14, 15(b)(4), 15(b)(6), 15(d), 16
and 17A of the Exchange Act.\50\
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\49\ See notes 23 and 28, 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.
\50\ See notes 29 through 31, supra, and accompanying text. We
also are not exempting those members from provisions related to
government securities, as discussed above. See note 32, supra.
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Further, we are not exempting registered broker-dealers from the
following additional provisions under the Exchange Act: (1) Section
7(c),\51\ regarding the unlawful extension of credit by broker-dealers;
(2) Section 15(c)(3),\52\ regarding the use of unlawful or manipulative
devices by broker-dealers; (3) Section 17(a),\53\ regarding broker-
dealer obligations to make, keep, and furnish information; (4) Section
17(b),\54\ regarding broker-dealer records subject to examination; (5)
Regulation T,\55\ a Federal Reserve Board regulation regarding
extension of credit by broker-dealers; (6) Exchange Act Rule 15c3-
1,\56\ regarding broker-dealer net capital; (7) Exchange Act Rule 15c3-
3,\57\ regarding broker-dealer reserves and custody of securities; (8)
Exchange Act Rules 17a-3 through 17a-5,\58\ 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,\59\ regarding quarterly
security counts to be made by certain exchange members and broker-
dealers.\60\ 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.\61\
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\51\ 15 U.S.C. 78g(c).
\52\ 15 U.S.C. 78o(c)(3).
\53\ 15 U.S.C. 78q(a).
\54\ 15 U.S.C. 78q(b).
\55\ 12 CFR 220.1 et seq.
\56\ 17 CFR 240.15c3-1.
\57\ 17 CFR 240.15c3-3.
\58\ 17 CFR 240.17a-3 through 240.17a-5.
\59\ 17 CFR 240.17a-13.
\60\ 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.
\61\ Indeed, Congress directed the Commission to promulgate
broker-dealer financial responsibility rules, including rules
relating to custody, the use of customer securities, the use of
customers' deposits or credit balances, and the establishment of
minimum financial requirements. See Exchange Act Section 15(c)(3).
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CME clearing members that are BD-FCMs and that receive or hold
customer funds or securities for the purpose of purchasing, selling,
clearing, settling, or holding CDS positions cleared by CME in a
futures account (as that term is defined in Rule 15c3-3(a)(15) \62\)
also shall be exempt from Exchange Act Rule 15c3-3, subject to
conditions that are similar to those--discussed above--that are
applicable to CME that are not broker-dealers and that hold customer
funds and securities in connection with Cleared CDS transactions. Thus,
such BD-FCMs must be in material compliance with CME rules, as well as
and applicable laws and regulations relating to capital, liquidity, and
segregation of customers' funds and securities (and related books and
records provisions) with respect to Cleared CDS. A BD-FCM may not
receive or hold funds or securities relating to Cleared CDS
transactions and positions for customers who are natural persons. In
addition, the BD-FCM must make certain risk disclosures to each such
customer.\63\ Further, the BD-FCM must hold the customer funds or
securities in the same type of account (e.g., in a 4d account) as is
required for other clearing members that hold customer funds and
securities in connection with Cleared CDS transactions.\64\ The BD-FCM
also must
[[Page 17189]]
segregate the funds and securities of customers from the CME clearing
member's own assets (i.e., the member may not permit the customers to
``opt out'' of applicable segregation requirements for such funds and
securities even if regulations or laws would permit the customer to
``opt out''). In addition, the BD-FCM also must annually provide CME
with a self-assessment that it is in compliance with the requirements,
along with a report by the clearing member's independent third-party
auditor that attests to that assessment.\65\
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\62\ 17 CFR 240.15c3-3(a)(15).
\63\ The BD-FCM must disclose that U.S. broker-dealer
segregation requirements and protections under the Securities
Investor Protection Act will not apply to any funds or securities
held by the clearing member to collateralize Cleared CDS positions,
and that the applicable insolvency law may affect such customers'
ability to recover funds and securities, or the speed of any such
recovery, in an insolvency proceeding.
This BD-FCM condition differs from the analogous disclosure
condition related to other CME clearing members that hold customer
funds and securities, in that the other condition also requires
disclosure that the clearing member is not regulated by the
Commission.
\64\ As with the exemption applicable to those other CME
clearing members, in the absence of a 4d order from the CFTC, the
BD-FCM may hold the funds and securities in an account that is part
of a separate account class, specified by CFTC Bankruptcy Rules,
established for an FCM to hold its customers' positions in cleared
OTC derivatives (and funds and securities posted to margin,
guarantee, or secure such positions). See Part II.E, supra.
If that alternative also is not available, the BD-FCM must hold
the funds and securities in an account established in accordance
with CFTC Rule 30.7. In that situation, the clearing member must
disclose to Cleared CDS customers that uncertainty exists as to
whether they would receive priority in bankruptcy (vis-[agrave]-vis
other customers) with respect to any funds or securities held by the
clearing member to collateralize Cleared CDS positions.
As above, the conditions in this Order require that BD-FCM (as
well as any other FCM) that holds Cleared CDS customer funds and
securities in a 30.7 account must segregate all such customer funds
and securities in a 30.7 account.
\65\ The report must be dated the same date as the clearing
member's annual audit report (but may be separate from it), and must
be produced in accordance with the standards that the auditor
follows in auditing the clearing member's financial statements. See
text accompanying note 57, supra.
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Finally--and in addition to the conditions that are applicable to
CME that are not broker-dealers and that hold customer funds and
securities in connection with Cleared CDS transactions--the CME
clearing member must comply with the margin rules for Cleared CDS of
the self-regulatory organization that is its designated examining
authority \66\ (e.g., FINRA).
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\66\ See 17 CFR 240.17d-1 for a description of a designated
examining authority.
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G. Solicitation of Comments
When we granted the March 2009 and December 2009 orders extending
the exemptions granted in connection with CDS clearing by CME, we
requested comment on all aspects of the exemptions. We received no
comments in response to these requests.
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. We particularly request
comment on the adequacy of the proposed conditions for the protection
of customer assets, including whether it is appropriate to permit such
assets to be protected in an account that is subject to the framework
provided by CFTC Rule 30.7, and, if so, whether the conditions
associated with the use of that account are adequate.
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 [email protected]. Please include
File Number S7-06-09 on the subject line; or
Use the Federal eRulemaking Portal (http://www.regulations.gov/). Follow the instructions for submitting comments.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.
All submissions should refer to File Number S7-06-09. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. We will post all comments on the Commission's Internet Web site
(http://www.sec.gov/rules/other.shtml). Comments are also available for
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.
The Chicago Mercantile Exchange Inc. (``CME'') shall be exempt from
Section 17A of the Exchange Act solely to perform the functions of a
clearing agency for Cleared CDS (as defined in paragraph (f) of this
Order), subject to the following conditions:
(1) CME shall make available on its Web site its annual audited
financial statements.
(2) CME shall keep and preserve records of all activities related
to the business of CME as a central counterparty for Cleared CDS. These
records shall be kept for at least five years and for the first two
years shall be held in an easily accessible place.
(3) CME shall supply such information and periodic reports relating
to its Cleared CDS clearance and settlement services as may be
reasonably requested by the Commission. CME shall also provide access
to the Commission to conduct on-site inspections of all facilities
(including automated systems and systems environment), and records
related to its Cleared CDS clearance and settlement services. CME will
provide the Commission with access to its personnel to answer
reasonable questions during any such inspections related to its Cleared
CDS clearance and settlement services.
(4) CME shall notify the Commission, on a monthly basis, of any
material disciplinary actions taken against any CME clearing members
utilizing its Cleared CDS clearance and settlement services, including
the denial of services, fines, or penalties. CME shall notify the
Commission promptly when CME involuntarily terminates the membership of
an entity that is utilizing CME's Cleared CDS clearance and settlement
services. Both notifications shall describe the facts and circumstances
that led to CME's disciplinary action.
(5) CME shall notify the Commission of all changes to rules as
defined under the CFTC rules, fees, and any other material events
affecting its Cleared CDS clearance and settlement services, including
material changes to risk management models. In addition, CME will post
any rule or fee changes on the CME Web site. CME shall provide the
Commission with notice of all changes to its rules not less than one
day prior to effectiveness or implementation of such rule changes or,
in exigent circumstances, as promptly as reasonably practicable under
the circumstances. Such notifications will not be deemed rule filings
that require Commission approval.
(6) CME shall provide the Commission with annual reports and any
associated field work concerning its Cleared CDS clearance and
settlement services prepared by independent audit personnel that are
generated in accordance with risk assessment of the areas set forth in
the Commission's Automation Review Policy Statements. CME shall provide
the Commission (beginning in its first year of operation) with its
annual audited financial statements prepared by independent audit
personnel for CME.
(7) CME shall report to the Commission all significant outages of
clearing systems having a material impact on its Cleared CDS clearance
and settlement services. If it appears that the outage may extend for
30 minutes or longer, CME shall report the systems outage immediately.
If it appears that the outage will be resolved in less than
[[Page 17190]]
30 minutes, CME shall report the systems outage within a reasonable
time after the outage has been resolved.
(8) CME, directly or indirectly, shall make available to the public
on terms that are fair and reasonable and not unreasonably
discriminatory: (i) All end-of-day settlement prices and any other
prices with respect to Cleared CDS that CME may establish to calculate
settlement variation or margin requirements for CME clearing members;
and (ii) any other pricing or valuation information with respect to
Cleared CDS as is published or distributed by CME.
(9) CME shall not materially change its methodology for determining
Cleared CDS margin levels without prior written approval from the
Commission staff, and from FINRA with respect to customer margin
requirements that would apply to broker-dealers.
(b) Exemption from Sections 5 and 6 of the Exchange Act.
(1) CME shall be exempt from the requirements of Sections 5 and 6
of the Exchange Act and the rules and regulations thereunder in
connection with its calculation of settlement prices for Cleared CDS,
subject to the following conditions:
(i) CME shall report the following information with respect to its
determination of daily settlement prices for Cleared CDS to the
Commission within 30 days of the end of each quarter, and preserve such
reports for as long as CME offers CDS clearing services and for a
period of at least five years thereafter:
(A) The total dollar volume of CDS transactions executed during the
quarter pursuant to CME's price quality auction methodology, broken
down by reference entity, security, or index; and
(B) The total unit volume or notional amount executed during the
quarter pursuant to CME's price quality auction methodology, broken
down by reference entity, security, or index;
(ii) CME shall establish and maintain adequate safeguards and
procedures to protect participants' confidential trading information
related to Cleared CDS. Such safeguards and procedures shall include:
(A) Limiting access to the confidential trading information of
participants to those CME employees who have a need to access such
information in connection with the provision of CME CDS clearing
services or who are responsible for compliance with this exemption or
any other applicable rules; and
(B) Implementing policies and procedures for CME employees with
access to such information with respect to trading for their own
accounts. CME shall adopt and implement adequate oversight procedures
to ensure that the policies and procedures established pursuant to this
condition are followed; and
(iii) CME shall satisfy the conditions of the temporary exemption
from Section 17A of the Exchange Act set forth in paragraphs (a)(1)-(9)
of this Order.
(2) Any CME clearing member shall be exempt from the requirements
of Section 5 of the Exchange Act to the extent such CME clearing member
uses any facility of CME to effect any transaction in Cleared CDS, or
to report any such transaction, in connection with CME's clearance and
risk management process for Cleared CDS.
(c) Exemption for CME and certain eligible contract participants.
(1) Persons eligible. The exemption in paragraph (c)(2) is
available to:
(i) CME; and
(ii) Any eligible contract participant (as defined in Section
1a(12) of the Commodity Exchange Act as in effect on the date of this
Order (other than a person that is an eligible contract participant
under paragraph (C) of that section)), other than:
(A) An eligible contract participant that receives or holds funds
or securities for the purpose of purchasing, selling, clearing,
settling, or holding Cleared CDS positions for other persons;
(B) An eligible contract participant that is a self-regulatory
organization, as that term is defined in Section 3(a)(26) of the
Exchange Act; or
(C) A broker or dealer registered under Section 15(b) of the
Exchange Act (other than paragraph (11) thereof).
(2) Scope of exemption.
(i) In general. Subject to the condition specified in paragraph
(c)(3), such persons generally shall, solely with respect to Cleared
CDS, be exempt from the provisions of the Exchange Act and the rules
and regulations thereunder that do not apply in connection with
security-based swap agreements. Accordingly, under this exemption,
those persons would remain subject to those Exchange Act requirements
that explicitly are applicable in connection with security-based swap
agreements (i.e., paragraphs (2) through (5) of Section 9(a), Section
10(b), Section 15(c)(1), subsections (a) and (b) of Section 16, Section
20(d), and Section 21A(a)(1), and the rules thereunder that explicitly
are applicable to security-based swap agreements). All provisions of
the Exchange Act related to the Commission's enforcement authority in
connection with violations or potential violations of such provisions
also remain applicable.
(ii) Exclusions from exemption. The exemption in paragraph
(c)(2)(i), however, does not extend to the following provisions under
the Exchange Act:
(A) Paragraphs (42), (43), (44), and (45) of Section 3(a);
(B) Section 5;
(C) Section 6;
(D) Section 12 and the rules and regulations thereunder;
(E) Section 13 and the rules and regulations thereunder;
(F) Section 14 and the rules and regulations thereunder;
(G) Paragraphs (4) and (6) of Section 15(b);
(H) Section 15(d) and the rules and regulations thereunder;
(I) Section 15C and the rules and regulations thereunder;
(J) Section 16 and the rules and regulations thereunder; and
(K) Section 17A (other than as provided in paragraph (a)).
(3) Condition for CME clearing members. Any CME clearing member
relying on this exemption must be in material compliance with the rules
of CME.
(d) Exemption for certain CME clearing members.
Any CME clearing member registered as a futures commission merchant
pursuant to Section 4f(a)(1) of the Commodity Exchange Act (but that is
not registered as a broker or dealer under Section 15(b) of the
Exchange Act (other than paragraph (11) thereof)) that receives or
holds funds or securities for the purpose of purchasing, selling,
clearing, settling, or holding Cleared CDS for other persons shall be
exempt from the provisions of the Exchange Act and the rules and
regulations thereunder specified in paragraph (c)(2), solely with
respect to Cleared CDS, subject to the following conditions:
(1) The clearing member shall be in material compliance with the
rules of CME (including Rules 971 and 973 relating to Segregation and
Secured Requirements and Customer Accounts with the Clearing House),
and also shall be in material compliance with applicable laws and
regulations, relating to capital, liquidity, and segregation of
customers' funds and securities (and related books and records
provisions) with respect to Cleared CDS;
(2) The customers for whom the clearing member receives or holds
such funds or securities shall not be natural persons;
(3) The clearing member shall disclose to such customers that the
clearing member is not regulated by the
[[Page 17191]]
Commission, that U.S. broker-dealer segregation requirements and
protections under the Securities Investor Protection Act will not apply
to any funds or securities held by the clearing member to collateralize
Cleared CDS positions, and that the applicable insolvency law may
affect such customers' ability to recover funds and securities, or the
speed of any such recovery, in an insolvency proceeding;
(4) Customer funds and securities received or held by the clearing
member for the purpose of purchasing, selling, clearing, settling, or
holding Cleared CDS positions for such customers shall be held in one
of the following manners:
(i) In an account established in accordance with section 4d of the
Commodity Exchange Act and CFTC Rules 1.20 through 1.30 and 1.32 [17
CFR 1.20 through 1.30 and 1.32] thereunder;
(ii) In the absence of an Order from the Commodity Futures Trading
Commission (``CFTC'') permitting the use of an account specified in
subparagraph (d)(4)(i) for holding such funds and securities, in an
account that is part of a separate account class, specified by CFTC
Bankruptcy Rules [17 CFR 190.01 et seq.], established for a futures
commission merchant to hold its customers' positions in cleared OTC
derivatives (and funds and securities posted to margin, guarantee, or
secure such positions); or
(iii) If the clearing member is unable to hold such funds and
securities as specified in subparagraph (d)(4)(i) or (ii), the clearing
member shall:
(A) Hold such funds and securities in a separate account that is
established in accordance with CFTC Rule 30.7 [17 CFR 30.7], and
(B) Disclose to such customers that uncertainty exists as to
whether they would receive priority in bankruptcy (vis-[agrave]-vis
other customers) with respect to any funds or securities held by the
clearing member to collateralize Cleared CDS positions.
(5) The clearing member annually shall provide CME with
(i) An assessment by the clearing member that it is in compliance
with all the provisions of subparagraphs (d)(4)(i) through (iii) in
connection with such activities, and
(ii) A report by the clearing member's independent third-party
auditor that attests to, and reports on, the clearing member's
assessment described in subparagraph (d)(5)(i) and that is:
(A) Dated as of the same date as, but which may be separate and
distinct from, the clearing member's annual audit report;
(B) Produced in accordance with the auditing standards followed by
the independent third-party auditor in its audit of the clearing
member's financial statements.
(6) To the extent that the clearing member receives or holds funds
or securities of customers for the purpose of purchasing, selling,
clearing, settling, or holding Cleared CDS positions, the clearing
member shall segregate such funds and securities of customers from the
clearing member's own assets (i.e., the member may not permit such
customers to ``opt out'' of applicable segregation requirements for
such funds and securities even if regulations or laws would permit the
customer to ``opt out'').
(e) Exemption for certain registered broker-dealers.
(1) In general. A broker or dealer registered under Section 15(b)
of the Exchange Act (other than paragraph (11) thereof) shall be exempt
from the provisions of the Exchange Act and the rules and regulations
thereunder specified in paragraph (c)(2), solely with respect to
Cleared CDS, except:
(i) Section 7(c);
(ii) Section 15(c)(3);
(iii) Section 17(a);
(iv) Section 17(b);
(v) Regulation T, 12 CFR 200.1 et seq.;
(vi) Rule 15c3-1;
(vii) Rule 15c3-3;
(viii) Rule 17a-3;
(ix) Rule 17a-4;
(x) Rule 17a-5; and
(xi) Rule 17a-13.
(2) Broker-dealers that also are futures commission merchants. A
CME clearing member that is a broker or dealer registered under Section
15(b) of the Exchange Act (other than paragraph (11) thereof) and that
is also registered as a futures commission merchant pursuant to Section
4f(a)(1) of the Commodity Exchange Act and that receives or holds
customer funds and securities for the purpose of purchasing, selling,
clearing, settling, or holding Cleared CDS in a futures account (as
that term is defined in Rule 15c3-3(a)(15) [17 CFR 240.15c3-3(a)(15)])
also shall be exempt from Exchange Act Rule 15c3-3, subject to the
following conditions:
(i) The clearing member shall comply with the conditions set forth
in paragraphs (d)(1), (2), (4), (5), and (6) above;
(ii) The clearing member shall disclose to Cleared CDS customers
that the U.S. broker-dealer segregation requirements and protections
under the Securities Investor Protection Act will not apply to funds or
securities held by the clearing member to collateralize Cleared CDS
positions, and that the applicable insolvency law may affect such
customers' ability to recover funds and securities, or the speed of any
such recovery, in an insolvency proceeding; and
(iii) The CME clearing member shall collect from each customer the
amount of margin that is not less than the amount required for Cleared
CDS under the margin rule of the self-regulatory organization that is
its designated examining authority.
(f) For purposes of this Order, ``Cleared CDS'' shall mean a credit
default swap that is submitted (or offered, purchased, or sold on terms
providing for submission) to CME, that is offered only to, purchased
only by, and sold only to eligible contract participants (as defined in
Section 1a(12) of the Commodity Exchange Act as in effect on the date
of this Order (other than a person that is an eligible contract
participant under paragraph (C) of that section)), and in which:
(1) The reference entity, the issuer of the reference security, or
the reference security is one of the following:
(i) An entity reporting under the Exchange Act, providing
Securities Act Rule 144A(d)(4) information, or about which financial
information is otherwise publicly available;
(ii) A foreign private issuer whose securities are listed outside
the United States and that has its principal trading market outside the
United States;
(iii) A foreign sovereign debt security;
(iv) An asset-backed security, as defined in Regulation AB, issued
in a registered transaction with publicly available distribution
reports; or
(v) An asset-backed security issued or guaranteed by Fannie Mae,
Freddie Mac, or Ginnie Mae; or
(2) The reference index is an index in which 80 percent or more of
the index's weighting is comprised of the entities or securities
described in subparagraph (f)(1).
IV. Paperwork Reduction Act
Certain provisions of this Order contain ``collection of
information requirements'' within the meaning of the Paperwork
Reduction Act of 1995.\67\ 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.
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\67\ 44 U.S.C. 3501 et seq.
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[[Page 17192]]
A. Collection of Information
As discussed above, the Commission has found it to be necessary or
appropriate in the public interest and consistent with the protection
of investors to grant the temporary conditional exemptions discussed in
this Order until November 30, 2010. Among other things, the Order
requires CME clearing members that receive or hold customers' funds or
securities for the purpose of purchasing, selling, clearing, settling,
or holding Cleared CDS positions to: (a) Make certain disclosures to
those customers; (b) make additional disclosures to those customers if
the clearing member holds such funds and securities in an account
established in accordance with Commodity Futures Trading Commission
Rule 30.7 (which would be permitted only if certain other types of
accounts are not available for holding the collateral); and (c) provide
CME with a self-assessment as to its compliance with certain exemptive
conditions, and obtain a separate report, as part of its annual audit
report, as to its compliance with the conditions of the Order regarding
protection of customer assets.
B. Proposed Use of Information
These collection of information requirements are designed to inform
Cleared CDS customers that their ability to recover assets placed with
the clearing member are dependent on the applicable insolvency regime,
to provide additional information about the potential risks associated
with 30.7 accounts, provide Commission staff with access to information
regarding whether clearing members are complying with the conditions of
this 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 become a clearing member of CME. In
addition, 8 more firms may enter into this business. Consequently, the
Commission estimates that CME, like the other CCPs that clear CDS
transactions, may have up to 20 clearing members.
D. Total Annual Reporting and Recordkeeping Burden
Paragraph III.(d)(3) of the Order requires that any CME clearing
member holding customer collateral in connection with cleared customer
CDS transactions that seeks to rely on the exemptive relief specified
in paragraph III.(d) of the Order to disclose to those customers that
the clearing member is not regulated by the Commission, that U.S.
broker-dealer segregation requirements and protections under the
Securities Investor Protection Act will not apply to any funds or
securities it holds, and that the applicable insolvency law may affect
the customers' ability to recover funds and securities, or the speed of
any such recovery, in an insolvency proceeding. The Commission believes
that clearing members could use the language in the 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 estimates (based on staff
experience) that 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.\68\
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\68\ 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) x 20 clearing members.
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Paragraph III.(d)(4)(iii)(B) of this Order further provides that if
a CME clearing member holds customer collateral in connection with
cleared CDS transactions in an account established in accordance with
CFTC Rule 30.7, the clearing member must disclose to those customers
that uncertainty exists as to whether they would receive priority in
bankruptcy (vis-[agrave]-vis other customers) with respect to any funds
or securities held by the clearing member to collateralize cleared CDS
positions.\69\ Here too, the Commission believes that clearing members
could use the language in this 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
CME 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 estimates (based on staff experience) that 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.\70\
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\69\ CME clearing members will not be allowed to hold customer
assets relating to cleared CDS in a 30.7 account if certain other
options for segregating cleared CDS customer assets (e.g., an
account established in accordance with Section 4d of the Commodity
Exchange Act) become available.
\70\ 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) x 20 clearing members.
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Paragraph III.(d)(5) of the Order requires CME 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 CME with an assessment that it is in
compliance with all the provisions of paragraphs III.(d)(4)(i) through
(iii) 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,\71\ 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.\72\ Further, the Commission
estimates that it will cost each clearing member approximately $100,000
more each year to have its auditor prepare this special report as part
of its audit of the clearing member.\73\ Consequently, the Commission
estimates that compliance with this requirement will result in an
[[Page 17193]]
aggregate annual burden of 100 hours for all 20 clearing members, and
that the total additional cost of this requirement will be
approximately $2,000,000 each year.\74\
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\71\ The Commission intends for this requirement to be performed
in conjunction with the firm's annual audit report.
\72\ 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).
\73\ 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 firm is already providing to the clearing member.
While this condition would require that the auditor create a
separate report, the auditor already must review custody of customer
assets pursuant to CFTC Rule 17 CFR 1.16(d)(1). Consequently, the
Commission believes the cost of this requirement for FCMs will be
lower than it would be for other types of entities that are not
subject to a specific audit requirement to review custody of
customer assets.
\74\ 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). $2 million =
$100,000 per clearing member x 20 clearing members.
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In sum, the Commission estimates that the total additional burden
associated with all of the conditions contained in the exemptive order
would be approximately 160 hours,\75\ and that the total additional
cost associated with compliance with the exemptive order would be
approximately $2 million.\76\
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\75\ 160 hours = (30 hours to draft the general disclosure and
determine how the disclosure should be integrated into those other
documents or agreements + 30 hours to draft the 30.7-specific
disclosure and determine how the disclosure should be integrated
into those other documents or agreements + 100 hours per 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). This total burden includes one-time
burdens of 60 hours (= 30 hours to draft the general disclosure and
determine how the disclosure should be integrated into those other
documents or agreements + 30 hours to draft the 30.7-specific
disclosure and determine how the disclosure should be integrated
into those other documents or agreements) and annual burdens of 100
hours (100 hours per 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).
\76\ The estimated cost of the additional audit report. See
footnote 74 and accompanying text.
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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 that order.
F. Confidentiality
Certain of the conditions of the this Order that address
collections of information require CME clearing members to make
disclosures to their customers, or to provide other information to CME.
G. Request for Comment on Paperwork Reduction Act Issues
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. S7-06-09. 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. S7-06-09, and be submitted to the Securities
and Exchange Commission, Records Management Office, 100 F Street, NE.,
Washington, DC 20549.
By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-7629 Filed 4-2-10; 8:45 am]
BILLING CODE 8011-01-P