[Federal Register Volume 74, Number 179 (Thursday, September 17, 2009)]
[Rules and Regulations]
[Pages 47719-47725]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-22389]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR parts 230, 240 and 260

[Release Nos. 33-9063; 34-60663; 39-2467; File No. S7-02-09]
RIN 3235-AK26


Extension of Temporary Exemptions for Eligible Credit Default 
Swaps To Facilitate Operation of Central Counterparties To Clear and 
Settle Credit Default Swaps

AGENCY: Securities and Exchange Commission.

ACTION: Interim final temporary rules; extension.

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SUMMARY: We are adopting amendments to the expiration dates in our 
interim final temporary rules that provide exemptions under the 
Securities Act of 1933, the Securities Exchange Act of 1934, and the 
Trust Indenture Act of 1939 for certain credit default swaps in order 
to facilitate the operation of one or more central counterparties for 
those credit default swaps. Under the amendments, the expiration dates 
of the interim final temporary rules will be extended to November 30, 
2010.

DATES: Effective Date: This rule is effective September 17, 2009, and 
the expiration dates for the interim final temporary rules and 
amendments published January 22, 2009 (74 FR 3967) is extended from 
September 25, 2009 to November 30, 2010.

FOR FURTHER INFORMATION CONTACT: Amy M. Starr, Senior Special Counsel, 
or Sebastian Gomez Abero, Attorney, Office of Chief Counsel, Division 
of Corporation Finance, at (202) 551-3500, U.S. Securities and Exchange 
Commission, 100 F Street, NE., Washington, DC 20549-3628.

SUPPLEMENTARY INFORMATION: We are adopting amendments to the following 
rules: interim final temporary Rule 239T and Rule 146 under the 
Securities Act of 1933 (``Securities Act''),\1\ interim final temporary 
Rule 12a-0T and Rule 12h-1(h)T under the Securities Exchange Act of 
1934 (``Exchange Act''),\2\ and interim final temporary Rule 4d-11T 
under the Trust Indenture Act of 1939 (``Trust Indenture Act'').\3\
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    \1\ 15 U.S.C. 77a et seq.
    \2\ 15 U.S.C. 78a et seq.
    \3\ 15 U.S.C. 77aaa et seq.
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I. Background

    In January 2009, we adopted interim final temporary Rule 239T and a 
temporary amendment to Rule 146 under the Securities Act, interim final

[[Page 47720]]

temporary Rules 12a-10T and 12h-1(h)T under the Exchange Act, and 
interim final temporary Rule 4d-11T under the Trust Indenture Act 
(collectively, the ``Interim Final Temporary Rules'').\4\ We adopted 
these rules in connection with temporary exemptive orders we issued to 
a clearing agency acting as a central counterparty (``CCP''), which 
exempted the CCP from the requirement to register as a clearing agency 
under Section 17A of the Exchange Act \5\ solely to perform the 
functions of a clearing agency for certain credit default swap 
(``CDS'') transactions. The exemptive orders also exempted certain 
eligible contract participants \6\ and others from certain Exchange Act 
requirements with respect to certain CDS.\7\ Also at that time, we 
temporarily exempted any exchange that effects transactions in certain 
CDS from the requirements under Sections 5 and 6 of the Exchange Act 
\8\ to register as a national securities exchange, and any broker or 
dealer that effects transactions on an exchange in certain CDS from the 
requirements of Section 5 of the Exchange Act.
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    \4\ See Exchange Act Release No. 59246 (Jan. 14, 2009).
    \5\ 15 U.S.C. 78q-1.
    \6\ See 7 U.S.C. 1a(12).
    \7\ See Exchange Act Release Nos. 59164 and 59165 (Dec. 24, 
2008).
    \8\ 15 U.S.C. 78e and 78f.
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    The Interim Final Temporary Rules, and the temporary exemptive 
orders we provided under the Exchange Act, were intended to facilitate 
the operation of one or more CCPs that clear and settle CDS 
transactions while enabling us to provide oversight to the CDS 
market.\9\ Since the adoption of the interim final rules, only one CCP, 
ICE U.S. Trust LLC (``ICE Trust''), has been actively engaged as a CCP 
in clearing CDS transactions in the U.S. in accordance with our 
exemptions.\10\ As of August 28, 2009, ICE Trust had cleared more than 
22,800 CDS transactions with a notional value of $1.9 trillion.\11\ We 
believe that the clearing of CDS transactions by ICE Trust has 
contributed and we anticipate will continue to contribute to increased 
transparency \12\ and the reduction of systemic risk in the CDS 
market.\13\
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    \9\ For a discussion of concerns related to the market in CDS, 
and the development of the exemptive orders and interim temporary 
rules, see Exchange Act Release No. 59246 (Jan. 14, 2009).
    \10\ See Exchange Act Release No. 59527 (Mar. 6, 2009), 74 FR 
10791 (Mar. 12, 2009) (temporary exemption for ICE U.S. Trust LLC).
    \11\ See Historical Daily Volume Report--ICE Trust U.S., 
available at https://www.theice.com/marketdata/reports/ReportCenter.shtml?reportId=26.
    \12\ See Testimony of Mark Lenczowski, Managing Director and 
Assistant General Counsel at JPMorgan Chase & Co., to the Senate 
Agriculture Committee (June 4, 2009) (In his testimony, Mr. 
Lenczowski indicated, in the context of CDS clearing by ICE Trust, 
that ``[c]learing is a highly transparent process. * * *'').
    \13\ As of June 30, 2009, ICE Trust had reduced the notional 
amount of CDS open interest, or net exposure, from over $1.3 
trillion to $168.5 billion by clearing trades and netting positions. 
See, Quarterly Report on Form 10-Q for the quarter ended June 30, 
2009 (filed on August 5, 2009). ICE Trust also has a guarantee fund 
that provides additional protection in the event of a clearing 
participant default. See Exchange Act Release No. 59527, supra Note 
10.
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    We also granted exemptive orders to four other CCPs to clear CDS, 
two of which were approved in July 2009.\14\ The Chicago Mercantile 
Exchange, to whom we granted an exemptive order in March 2009, has 
indicated that it continues to work with buy and sell participants in 
the CDS market to promote its CCP.\15\ ICE Clear Europe Limited (``ICE 
Europe'') and Eurex Clearing AG (``Eurex'') have begun clearing CDS 
transactions in Europe.\16\
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    \14\ See Exchange Act Release No. 60373 (July 23, 2009) 
(temporary exemption for Eurex Clearing AG); Exchange Act Release 
No. 60372 (July 23, 2009) (temporary exemption for ICE Clear Europe 
Limited); Exchange Act Release No. 59578 (Mar. 13, 2009) (temporary 
exemption for Chicago Mercantile Exchange Inc.); and Exchange Act 
Release No. 59164 (Dec. 24, 2008) (temporary exemption for LIFFE A&M 
and LCH.Clearnet Ltd.). LIFFE A&M and LCH.Clearnet Ltd., to whom we 
granted exemptive orders in December 2008, indicated that they will 
suspend their plans to clear CDS. See, Alastair Marsh, NYSE Liffe 
and LCH.Clearnet close CDS clearing service (Aug. 12, 2009), 
available at http://www.risk.net/public/showPage.html?page=867491.
    \15\ See Christine Birkner, CDS Clearing Battle (Buy Side vs. 
Sell Side), Futures (July 1, 2009) (``A spokesperson for CME Group 
says, `We continue to work with buy and sell participants to 
demonstrate the value of our offering.' '').
    \16\ See Press Release, IntercontinentalExchange, ICE Clear 
Europe Clears Euro 51 Billion in Third Week of European CDS 
Processing; Announces New CDS Clearing Member (Aug. 17, 2009), 
available at http://ir.theice.com/releasedetail.cfm?ReleaseID=403509. See also, Press Release, Eurex 
Clearing AG, Eurex Credit Clear Clears First Single Name CDS 
Worldwide (Aug. 28, 2009), available at http://www.eurexclearing.com/about/press/press_647_en.html.
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    Since the adoption of the Interim Final Temporary Rules, a number 
of legislative initiatives relating to the regulation of derivatives, 
including CDS, have been introduced by members of Congress and 
recommended by the United States Department of the Treasury 
(``Treasury'').\17\ Congress has not yet taken definitive action with 
respect to any of the legislative initiatives or the Treasury 
proposals. Separately, in July 2009, the Committee on Payment and 
Settlement Systems (``CPSS'') and the Technical Committee of the 
International Organization of Securities Commissions (``IOSCO'') 
established a working group to review the application of the CPSS-IOSCO 
Recommendations for Central Counterparties (``Recommendations'') with 
respect to OTC derivatives.\18\ The Recommendations set out standards 
for risk management of CCPs. The working group plans to identify key 
issues that can arise when a CCP provides central clearing services for 
OTC derivatives transactions.\19\
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    \17\ See, e.g., Derivatives Trading Integrity Act of 2009 (S. 
272) (introduced by Senator Tom Harkin in January 2009); The 
Derivatives Markets Transparency and Accountability Act (H.R. 977) 
(introduced by Representative Collin Peterson in February 2009); 
Authorizing the Regulation of Swaps Act (S. 961) (introduced by 
Senator Carl Levin and Senator Susan Collins in May 2009); 
Treasury's framework for regulatory reform (released in June 2009); 
Derivative Trading Accountability and Disclosure Act (H.R. 3300) 
(introduced by Representative Michael McMahon in July 2009); 
Description of Principles for OTC Derivatives Legislation (announced 
by Representative Barney Frank and Representative Collin Peterson in 
July 2009); Senator Charles Schumer's announcement that he is 
drafting a bill establishing central trade repositories for OTC 
derivatives markets (August 2009); and Over-the-Counter Derivatives 
Markets Act of 2009 (prepared by Treasury and sent to Congress in 
August 2009).
    \18\ See Press Release, Bank for International Settlements, 
CPSS-IOSCO working group on the review of the ``Recommendations for 
Central Counterparties'' (July 20, 2009), available at http://www.bis.org/press/p090720.htm.
    \19\ ``Where necessary, the working group will propose guidance 
on how CCPs for OTC derivatives may meet the standards set out by 
the recommendations and will identify any areas in which the 
recommendations might be strengthened or expanded to better address 
risks associated with the central clearing of OTC derivatives. 
Participants in the working group include representatives of the 
central banks that are members of the CPSS, representatives of the 
securities regulators that are members of the IOSCO Technical 
Committee, and representatives of the International Monetary Fund 
and the World Bank.'' Id.
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    At the time of adoption of the Interim Final Temporary Rules, we 
requested comment on various aspects of the rule provisions. We 
received a total of 15 letters, only two of which commented 
specifically on the interim temporary final rules. Those two letters 
generally supported allowing CCPs to clear and settle CDS transactions 
in accordance with the terms of the Interim Final Temporary Rules; but 
neither of the commenters specifically addressed the duration of the 
Interim Final Temporary Rules and temporary amendments.\20\ The other 
commenters raised issues not directly related to this rulemaking.\21\
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    \20\ See letters from the Yale Law School Capital Markets and 
Financial Instruments Clinic (March 23, 2009) and from IDX Capital 
(March 23, 2009).
    \21\ The public comments we received are available for 
inspection in the Commission's Public Reference Room at 100 F St., 
NE., Washington, DC 20549 in File No. S7-02-09. They are also 
available online at http://www.sec.gov/comments/s7-02-09/s70209.shtml.

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[[Page 47721]]

    The Interim Final Temporary Rules expire on September 25, 2009. We 
have determined that it is necessary and appropriate to extend the 
expiration date of the Interim Final Temporary Rules to November 30, 
2010.\22\
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    \22\ See Section III, infra, for a discussion of why the 
extension of time is necessary.
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II. Discussion of the Final Temporary Rules

    We are adopting amendments to the Interim Final Temporary Rules to 
extend the expiration date of each of the rules to November 30, 2010. 
We are not making any other changes to the Interim Final Temporary 
Rules.

A. Securities Act Rule 239T and Rule 146

    Securities Act Rule 239T exempts from all provisions of the 
Securities Act, except the anti-fraud provisions of Section 17(a), 
certain CDS (``eligible CDS'') \23\ that are offered and sold only to 
``eligible contract participants,'' \24\ and that are being or will be 
issued or cleared by a CCP satisfying the conditions set forth in the 
CCP exemptions, or registered as a clearing agency under Section 17A of 
the Exchange Act (``Registered or Exempt CCP''). Hence, under 
Securities Act Rule 239T, the offer and sale of eligible CDS are exempt 
from the registration requirements of the Securities Act if the 
eligible CDS is or will be issued or cleared by a Registered or Exempt 
CCP, and offered and sold only to an eligible contract participant. 
Communications used in connection with such offers and sales are not 
subject to Section 12(a)(2) liability under the Securities Act. 
Securities Act Rule 239T assures the availability of information to 
buyers and sellers of CDS due to certain information conditions in the 
CCP exemptive orders.\25\
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    \23\ See 17 CFR 230.239T(d).
    \24\ For purposes of Securities Act Rule 239T, ``eligible 
contract participant'' has the same meaning as in Section 1a(12) of 
the Commodity Exchange Act (the ``CEA''), as in effect on the date 
of adoption of Rule 239T, except that the term does not include a 
person who is an ``eligible contract participant'' pursuant to 
Section 1a(12)(C) of the CEA. 17 CFR 230.239T(a)(2).
    \25\ We note that among the conditions of the exemptions, or 
representations in the exemptive requests on which we are relying, 
from clearing registration are that: (1) Information is available 
about the terms of the CDS, the creditworthiness of the CCP or any 
guarantor, and the clearing and settlement process for the CDS; and 
(2) the reference entity, the issuer of the reference security, or 
the reference security is one of the following: an entity reporting 
under the Exchange Act, providing Securities Act Rule 144A(d)(4) 
information, or about which financial information is otherwise 
publicly available; a foreign private issuer that has securities 
listed outside the United States and has its principal trading 
market outside the United States; a foreign sovereign debt security; 
an asset-backed security, as defined in Regulation AB [17 CFR 
229.1100], issued in a registered transaction with publicly 
available distribution reports; an asset-backed security issued or 
guaranteed by Fannie Mae, Freddie Mac or the Government National 
Mortgage Association; or indexes in which 80 percent or more of the 
index's weight is comprised of these reference entities or reference 
securities. See, e.g., Exchange Act Release No. 59527, supra Note 
10.
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    As we noted in January 2009, absent this exemption, the Securities 
Act may require registration of the offer and sale of eligible CDS that 
are or will be issued or cleared by a Registered or Exempt CCP. Without 
also exempting the offers and sales of the eligible CDS by a Registered 
or Exempt CCP from the registration requirements of the Securities Act 
and the Exchange Act and the provisions of the Trust Indenture Act, we 
believe that the CCPs would not be able to operate in the manner 
contemplated by the Exchange Act exemptive orders. In addition, the 
Securities Act, Exchange Act and Trust Indenture Act exemptions are 
intended to encourage market participants to clear their CDS through 
the CCPs.
    Securities Act Rule 239T also provides that any offer or sale of an 
eligible CDS that is or will be issued or cleared by a Registered or 
Exempt CCP by or on behalf of the issuer of a security, an affiliate of 
such issuer, or an underwriter, if such security is delivered in 
settlement or whose value is used to determine the amount of the 
settlement obligation, will constitute a ``contract for sale of,'' 
``sale of,'' ``offer for sale,'' or ``offer to sell'' such security 
under Section 2(a)(3) of the Securities Act.\26\ This provision is 
intended to ensure that an eligible CDS that is or will be issued or 
cleared by a Registered or Exempt CCP cannot be used by an issuer, 
affiliate of an issuer or underwriter to circumvent the registration 
requirements of Section 5 with respect to an issuer's security for such 
eligible CDS.\27\ As a result, a transaction by such persons in an 
eligible CDS that is or will be issued or cleared by a Registered or 
Exempt CCP having such securities of the issuer also is a transaction 
in the issuer's securities that must be registered under the Securities 
Act, unless an exemption from registration is available.
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    \26\ 17 CRF 230.239T(c).
    \27\ This provision is similar to the condition in the 
Securities Act exemption in Rule 238 for standardized options [17 
CFR 230.238] and in Securities Act Section 2(a)(3) [15 U.S.C. 
77b(a)(3)] relating to security futures products.
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    We also adopted on an interim final temporary basis an amendment to 
Securities Act Rule 146. Under the temporary amendment to Rule 146, 
eligible contract participants that are sold eligible CDS in reliance 
on interim final temporary Securities Act Rule 239T are defined as 
``qualified purchasers'' under Section 18(b)(3) of the Securities Act 
and thereby such eligible CDS that are or will be issued or cleared by 
a Registered or Exempt CCP are considered ``covered securities'' under 
Section 18 of the Securities Act and exempt from state blue sky 
laws.\28\
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    \28\ 17 CFR 230.146(c)T. State securities regulation of covered 
securities generally is limited under Section 18(b). Under Section 
18(b)(3), covered securities are securities offered and sold to 
qualified purchasers, as defined by the Commission.
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B. Exchange Act Rule 12a-10T and Rule 12h-1(h)T

    In January 2009, we also adopted two Interim Final Temporary Rules 
relating to Exchange Act registration of eligible CDS that are or have 
been issued or cleared by a Registered or Exempt CCP. Exchange Act Rule 
12a-10T exempts eligible CDS that are or have been issued or cleared by 
a Registered or Exempt CCP from the provisions of Section 12(a) of the 
Exchange Act under certain conditions.\29\ Exchange Act Rule 12h-1(h)T 
exempts eligible CDS that are or have been issued or cleared by a 
Registered or Exempt CCP from the provisions of Section 12(g) of the 
Exchange Act under certain conditions.\30\
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    \29\ 15 U.S.C. 78l(a).
    \30\ 17 CFR 240.12h-1(h)T; 15 U.S.C. 78l(g).
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C. Trust Indenture Act Rule 4d-11T

    We also adopted a rule under Section 304(d) of the Trust Indenture 
Act that exempts any eligible CDS, as defined in Securities Act Rule 
239T and offered and sold in reliance on Securities Act Rule 239T, from 
having to comply with the provisions of the Trust Indenture Act.\31\
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    \31\ Rule 4d-11T. The Trust Indenture Act applies to debt 
securities sold through the use of the mails or interstate commerce. 
Section 304 of the Trust Indenture Act exempts from the Act a number 
of securities and transactions. Section 304(a) of the Trust 
Indenture Act exempts securities that are exempt under Securities 
Act Section 3(a), but does not exempt from the Trust Indenture Act 
securities that are exempt by Commission rule. Accordingly, while 
Securities Act Rule 239T exempts the offer and sale of eligible CDS 
satisfying certain conditions from all the provisions of the 
Securities Act (other than Section 17(a)), the Trust Indenture Act 
would continue to apply.
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III. Amendment of Expiration Date of Interim Final Temporary Rules

    In January 2009, we adopted the interim final rules on a temporary 
basis until September 25, 2009 because we anticipated that this date 
would provide us with adequate time to evaluate the availability of the 
exemptions applicable to CDS CCPs and non-excluded CDS, and whether any 
conditions or provisions of such

[[Page 47722]]

exemptions should be modified. At the time we adopted the Interim Final 
Temporary Rules, we indicated that we could act to extend the 
expiration date of such rules.\32\
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    \32\ See Section III of Exchange Act Release No. 59246 (Jan. 14, 
2009).
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    We have now determined that it is necessary to extend the 
expiration date of the Interim Final Temporary Rules for the following 
reasons. First, we adopted the interim final rules to foster the 
development of CCPs by providing exemptions from certain regulatory 
provisions that might otherwise prevent them from engaging in such 
activities in the manner contemplated by the exemptive orders. To date, 
there has been only one CCP (ICE Trust) that has begun to clear and 
settle CDS transactions in the U.S. and two CCPs (ICE Europe and Eurex) 
that have begun to clear and settle CDS transactions in Europe. 
Extending the expiration date of our Interim Final Temporary Rules 
would not only allow ICE Trust, ICE Europe and Eurex to continue to 
clear and settle CDS transactions, it would also enable other CCPs to 
start clearing and settling CDS transactions in the manner contemplated 
by the exemptive orders. Competition among CCPs clearing CDS 
transactions could give participants more choice for their trading 
needs and may reduce clearing fees.\33\ In addition, the extension 
would give us more time to evaluate the rule and assess its effect on 
the CDS market and the market participants. As reflected in the CPSS-
IOSCO Recommendations, our fellow regulators around the world are also 
thinking about how to address the risks associated with the central 
clearing of OTC derivatives, and this remains an open and current topic 
of discussion for all securities regulators. Finally, Treasury has 
delivered financial regulatory reform proposals to Congress, and 
several bills to regulate derivatives and the derivatives markets have 
been introduced in Congress.
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    \33\ See Harrington and Leising, supra note 15 (quoting Theo 
Lubke, an official with the Federal Reserve Bank of New York 
responsible for the central bank's efforts to curb risk in the CDS 
market, as stating that ``A competitive [CCP clearing] environment, 
at least in the short run, is beneficial. We don't want the first 
mover to be the winner just because they're the first mover. We 
would like to see real choice in the market for a period of time to 
determine which is the better mousetrap.''). See also, Financial 
Services: Cost of Trading Going Down, Survey Finds, Europolitics 
(July 17, 2009) (citing European Commissioner Charlie McCreevy, ``I 
particularly welcome the [European Commission] study's findings 
concerning the decreases in costs for trading and clearing and to 
some extent also for settlement services since 2006. This confirms 
the positive impact on competition of the Markets in Financial 
Instruments Directive and the code of conduct on clearing and 
settlement.'').
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    Absent an exemption, the offer and sale of eligible CDS that are or 
will be issued or cleared by a Registered or Exempt CCP may have to be 
registered under the Securities Act, the eligible CDS that have been so 
issued or cleared may have to be registered as a class under the 
Exchange Act, and the provisions of the Trust Indenture Act may need to 
be complied with. We believe that the Interim Final Temporary Rules 
have facilitated and anticipate that they will continue to facilitate 
the use by eligible contract participants of CDS CCPs. Absent an 
extension of the expiration date of the interim final rules, we believe 
that the CCPs would not be able to operate in the manner contemplated 
by the exemptive orders. We note that the expiration dates of certain 
of these exemptive orders currently extend until April 23, 2010. We 
are, therefore, adopting amendments to each of the interim final rules 
to extend the expiration date of the rules to November 30, 2010. 
Extending the expiration dates for this length of time will allow us to 
continue to monitor the development and operation of CCPs in the CDS 
market under the current, evolving regulatory and legislative 
environment.

IV. Certain Administrative Law Matters

    Section 553(b) of the Administrative Procedure Act (``APA'') \34\ 
generally requires an agency to publish notice of a proposed rule 
making in the Federal Register. This requirement does not apply, 
however, if the agency ``for good cause finds (and incorporates the 
finding and a brief statement of reasons therefor in the rules issued) 
that notice and public procedure thereon are impracticable, 
unnecessary, or contrary to the public interest.'' \35\ The Commission 
finds good cause to act immediately to extend the expiration date of 
the Interim Final Temporary Rules. When we adopted the rules in January 
of this year, we sought sufficient time to evaluate the appropriateness 
of the exemptions and the role of CCPs in the CDS market. Since that 
time, we have granted orders to four additional CDS CCPs exempting them 
from the requirement to register as a clearing agency under Section 17A 
of the Exchange Act. Two of these orders were granted as recently as 
July 2009, and one CCP has started to clear CDS transactions in the 
U.S. and two have begun clearing CDS in Europe. In addition, there have 
been a number of recent and still developing legislative and regulatory 
initiatives relating to the regulation of derivatives, including CDS. 
Finally, we note that commenters had an opportunity to comment on the 
length of the temporary rules in January of this year and that this 
extension is of a limited duration. Therefore, we believe there is good 
cause to extend the exemption until November 30, 2010 and find that 
notice and solicitation of comment on the extension to be 
impracticable, unnecessary, or contrary to the public interest.\36\
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    \34\ 5 U.S.C. 553(b).
    \35\ 5 U.S.C. 553(b)(B).
    \36\ This finding also satisfies the requirements of 5 U.S.C. 
808(2), allowing the rule amendment to become effective 
notwithstanding the requirement of 5 U.S.C. 801 (if a Federal agency 
finds that notice and public comment are ``impractical, unnecessary 
or contrary to the public interest,'' a rule ``shall take effect at 
such time as the Federal agency promulgating the rule determines'').
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    The APA also generally requires that an agency publish an adopted 
rule in the Federal Register 30 days before it becomes effective.\37\ 
However, this requirement does not apply if the agency finds good cause 
not to delay the effective date.\38\ For similar reasons to those 
explained above, the Commission finds good cause not to delay the 
effective date.
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    \37\ 5 U.S.C. 553(d).
    \38\ 5 U.S.C. 553(d)(3).
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V. Paperwork Reduction Act

    The Interim Final Temporary Rules do not impose any new 
``collections of information'' within the meaning of the Paperwork 
Reduction Act of 1995 (``PRA''),\39\ nor do they create any new filing, 
reporting, recordkeeping, or disclosure reporting requirements for a 
CCP that is or will be issuing or clearing eligible CDS. Accordingly, 
we did not submit the Interim Final Temporary Rules to the Office of 
Management and Budget for review in accordance with the PRA.\40\ We 
requested comment on whether our conclusion that there are no 
collections of information is correct, and we did not receive any 
comment. The extension of the expiration dates does not change our 
analysis.
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    \39\ 44 U.S.C. 3501 et seq.
    \40\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
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VI. Cost-Benefit Analysis

    In January 2009, we adopted the Interim Final Temporary Rules under 
the Securities Act, the Exchange Act and the Trust Indenture Act that 
exempt eligible CDS that are or will be issued or cleared by a 
Registered or Exempt CCP and offered and sold only to eligible contract 
participants from all provisions of the Securities Act, other than the 
Section 17(a) anti-fraud provision, as well as from the registration 
requirements under Section

[[Page 47723]]

12 of the Exchange Act and from the provisions of the Trust Indenture 
Act. The Interim Final Temporary Rules were intended to facilitate the 
operation of one or more CCPs to act as a clearing agency in the CDS 
market to reduce some of the risks in the CDS market. Today, we are 
adopting amendments to such rules to extend their expiration date to 
November 30, 2010.
    Since the adoption of the Interim Final Temporary Rules, one CCP 
(ICE Trust) has been actively engaged as a CCP in clearing CDS 
transactions in the U.S. in accordance with terms of the exemptive 
orders, and two other CCPs (ICE Europe and Eurex) have begun clearing 
CDS transactions in Europe. In addition, a number of legislative 
initiatives relating to the regulation of derivatives, including CDS, 
have been introduced by members of Congress and recommended by the 
United States Department of the Treasury.\41\ Extending the expiration 
dates of the Interim Final Temporary Rules for this length of time will 
allow us to continue to monitor the development and operation of CCPs 
in the CDS market under the current, evolving regulatory and 
legislative environment.
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    \41\ See Section I, supra, for additional discussion of 
developments in this area since the adoption of the Interim Final 
Temporary Rules.
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    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, 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 payment 
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 synthetic 
positions in bonds or in segments of the debt market as represented by 
an index, or to capitalize on the volatility in credit spreads during 
times of economic uncertainty. In recent years, CDS market volumes have 
rapidly increased.\42\ This growth has coincided with a significant 
rise in the types and number of entities participating in the CDS 
market.\43\
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    \42\ See Semiannual OTC derivatives statistics at end-December 
2008, Bank for International Settlements (``BIS''), available at 
http://www.bis.org/statistics/otcder/dt1920a.pdf.
    \43\ CDSs were initially created to meet the demand of banking 
institutions looking to hedge and diversify the credit risk 
attendant with their lending activities. However, other financial 
institutions such as insurance companies, pension funds, securities 
firms and hedge funds have entered the CDS market.
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    In a CCP arrangement, both parties entering a CDS novate their 
trades to the CCP, and the CCP stands in as the counterparty to all 
parties of the CDS it clears. Through this novation process, the 
counterparty risk of a CDS is effectively concentrated in the CCP.

A. Benefits

    We are extending the termination date of the Interim Final 
Temporary Rules that provide exemptions from certain provisions of the 
Securities Act, the Exchange Act and the Trust Indenture Act, subject 
to certain conditions described in the CCP exemptive orders and in the 
exemptions themselves to further facilitate the operation of CCPs in 
the CDS market. The conditions and representations in the CCP exemptive 
orders and exemptions require that information be available about the 
terms of the CDS, the creditworthiness of the CCP or any guarantor, and 
the clearing and settlement process for the CDS. Additionally, the 
conditions require that financial information about the reference 
entity, the issuer of the reference security, or the reference security 
be publicly available. We believe that the Interim Final Temporary 
Rules and the exemptions under the Exchange Act, have facilitated and 
we anticipate will continue to facilitate the operation of CCPs \44\ 
while enabling us to provide oversight to the non-excluded CDS 
market.\45\ We believe that the operation of at least one CCP over the 
last six months in accordance with our exemptions has increased 
transparency,\46\ increased available information about exposures to 
particular reference entities or reference securities,\47\ and reduced 
risks to participants in the market for CCP-cleared CDS.\48\ Not 
extending the termination date could cause significant disruptions in 
this market. Therefore, we believe this extension provides important 
benefits.
---------------------------------------------------------------------------

    \44\ See Karen Brettell, Banks to submit 95 pct of eligible CDS 
for clearing (Sep. 1, 2009), available at http://www.reuters.com/article/euRegulatoryNews/idUSN0150814420090901?pageNumber=1&virtualBrandChannel=10522.
    \45\ See e.g., Exchange Act Release No. 59527, supra Note 10 
(our exemptions require that the CCPs provide us with, among other 
things, access to conduct on-site inspections of facilities, records 
and personnel).
    \46\ See Testimony of Mark Lenczowski, supra Note 12.
    \47\ See e.g., Exchange Act Release No. 59527, supra Note 26.
    \48\ See IntercontinentalExchange, supra Note 13.
---------------------------------------------------------------------------

    Absent an exemption, the offer and sale of eligible CDS that are 
and will be issued or cleared by a Registered or Exempt CCP would have 
to be registered under the Securities Act, the eligible CDS that are or 
have been issued or cleared by a Registered or Exempt CCP would have to 
be registered as a class under the Exchange Act, and the provisions of 
the Trust Indenture Act would apply. We believe that the Interim Final 
Temporary Rules exempting the registration of eligible CDS issued or 
cleared by a Registered or Exempt CCP under certain conditions have 
facilitated and we anticipate will continue to facilitate the use by 
eligible contract participants of CDS CCPs. Without also exempting the 
offers and sales of eligible CDS issued or cleared by a Registered or 
Exempt CCP from the registration requirements of the Securities Act and 
the Exchange Act and the provisions of the Trust Indenture Act, we 
believe that the CCPs would not be able to operate in the manner 
contemplated by the exemptive orders.
    The interim final temporary exemptions treat eligible CDS issued or 
cleared by a Registered or Exempt CCP under the Securities Act and the 
Exchange Act in the same manner as certain other types of derivative 
contracts, such as security futures products and standardized 
options.\49\ A Registered or Exempt CCP issuing or clearing eligible 
CDS benefits from the temporary exemptions because it does not have to 
file registration statements with us covering the offer and sale of the 
eligible CDS. The registration form most applicable to a CCP is a Form 
S-20, which is the form that is used by options clearing houses that do 
not qualify for our exemption in Securities Act Rule 238 \50\ from 
registering the offer and sale of standardized options. If a CCP is not 
required to register the offer and sale of eligible CDS (on Form S-20, 
for example), it would not have to incur the costs of such 
registration, including legal and accounting costs. Some of these 
costs, of course, such as the costs of obtaining audited financial 
statements, may still be incurred as a result of the operations of the 
entity as a CCP and the regulatory oversight of the central 
counterparty operations. In addition, if any of the CCPs are entities 
that are subject to the periodic reporting requirements of the Exchange 
Act, the cost of filing a registration statement covering the eligible 
CDS would be lessened further as the information regarding the CCP 
already would be prepared. The availability of exemptions under the 
Securities Act, the Exchange

[[Page 47724]]

Act, and the Trust Indenture Act also would mean that CCPs would not 
incur the costs of preparing disclosure documents describing eligible 
CDS and from preparing indentures and arranging for the services of a 
trustee.
---------------------------------------------------------------------------

    \49\ See, e.g., Securities Act Section 3(a)(14) [15 U.S.C. 
77c(a)(14)], Securities Act Rule 238 [17 CFR 230.238]; Exchange Act 
Section 12(a) [15 U.S.C. 78l], and Exchange Act Rule 12h-1(d) and 
(e) [17 CFR 240.12h-1(d) and (e)].
    \50\ 17 CFR 230.238.
---------------------------------------------------------------------------

B. Costs

    The Interim Final Temporary Rules exempting offers and sales of 
eligible CDS that are or will be issued or cleared by a Registered or 
Exempt CCP have facilitated and we anticipate will continue to 
facilitate the use by eligible contract participants of CDS CCPs that 
are the subject of exemptive orders at some costs to the CCP or 
investors.
    Absent an exemption, a CCP may have to file a registration 
statement covering the offer and sale of the eligible CDS, may have to 
satisfy the applicable provisions of the Trust Indenture Act, and may 
have to register the class of eligible CDS that it has issued or 
cleared under the Exchange Act, which would provide investors with 
civil remedies in addition to antifraud remedies. While a CCP 
registration statement covering eligible CDS (or the offer and sale of 
such eligible CDS) may provide certain information about the CCP, CDS 
contract terms, and the identification of reference entities or 
reference securities, it would not necessarily provide the type of 
information necessary to assess the credit risk of the reference entity 
or reference security. Further, while a CCP registration statement 
would provide information to the CDS market participants, as well as to 
the market as a whole, a condition of the clearing agency exemption in 
the exemptive orders is that the CCPs make their audited financial 
statements and other information about themselves publicly available.
    We recognize that a consequence of the exemptions has been and will 
continue to be the unavailability of certain remedies under the 
Securities Act and the Exchange Act and certain protections under the 
Trust Indenture Act. While an investor would be able to pursue an 
antifraud action in connection with the purchase and sale of eligible 
CDS under Exchange Act Section 10(b),\51\ it would not be able to 
pursue civil remedies under Sections 11 or 12 of the Securities 
Act.\52\ We could still pursue an antifraud action in the offer and 
sale of eligible CDS issued or cleared by a CCP.\53\ We believe that 
the incremental costs from the extension of the expiration date of the 
Interim Final Temporary Rules will be minimal because the amendments 
are merely an extension of such Interim Final Temporary Rules and such 
extension will not affect the information and remedies available to 
investors as a result of the Interim Final Temporary Rules.
---------------------------------------------------------------------------

    \51\ 15 U.S.C. 78j(b).
    \52\ 15 U.S.C. 77k and 77l.
    \53\ See 15 U.S.C. 77q and 15 U.S.C. 78j(b).
---------------------------------------------------------------------------

VII. Consideration of Impact on the Economy, Burden on Competition and 
Promotion of Efficiency, Competition and Capital Formation

    Section 23(a)(2) of the Exchange Act \54\ requires us, when 
adopting rules under the Exchange Act, to consider the impact that any 
new rule would have on competition. Section 23(a)(2) prohibits us from 
adopting any rule that would impose a burden on competition not 
necessary or appropriate in furtherance of the purposes of the Exchange 
Act. In addition, Section 2(b) \55\ of the Securities Act and Section 
3(f) \56\ of the Exchange Act require us, when engaging in rulemaking 
where we are required to consider or determine whether an action is 
necessary or appropriate in the public interest, to also consider 
whether the action will promote efficiency, competition, and capital 
formation.
---------------------------------------------------------------------------

    \54\ 15 U.S.C. 78w(a)(2).
    \55\ 15 U.S.C. 77b(b).
    \56\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    The Interim Final Temporary Rules we are extending today exempt 
eligible CDS issued or cleared by a Registered or Exempt CCP from all 
provisions of the Securities Act, other than the Section 17(a) 
antifraud provision, as well as from the registration requirements 
under Section 12 of the Exchange Act and the provisions of the Trust 
Indenture Act. Because these interim final temporary exemptions are 
available to any Registered or Exempt CCP offering and selling eligible 
CDS, we do not believe that the exemptions impose a burden on 
competition. Although only one CCP is currently clearing and settling 
CDS in the U.S., we believe the extension will increase the opportunity 
for other CCPs to compete in the marketplace. We also believe that the 
ability to settle CDS through CCPs has improved and we anticipate will 
continue to improve the transparency of the CDS market and provide 
greater assurance to participants as to the capacity of the eligible 
CDS counterparty to perform its obligations under the eligible CDS. ICE 
Trust, for example, makes available on its Web site information about 
open interests, or net exposure, volume and pricing of CDS 
transactions. We believe that increased transparency in the CDS market 
could help to decrease further market turmoil and thereby facilitate 
the capital formation process.

VIII. Regulatory Flexibility Act Certification

    The Commission certified pursuant to 5 U.S.C. 605(b) that the 
Interim Final Temporary Rules would not have a significant economic 
impact on a substantial number of small entities. The Interim Final 
Temporary Rules exempt eligible CDS that are or will be issued or 
cleared by a Registered or Exempt CCP. None of the entities that are 
eligible to meet the requirements of the exemption from registration 
under Section 17A is a small entity. We received no comments on the 
certification.

IX. Statutory Authority and Text of the Rules and Amendments

    The amendments described in this release are being adopted under 
the authority set forth in Sections 18, 19 and 28 of the Securities 
Act; Sections 12(h), 23(a) and 36 of the Exchange Act; and Section 
304(d) of the Trust Indenture Act.

List of Subjects in 17 CFR Parts 230, 240 and 260

    Reporting and recordkeeping requirements, Securities.

Text of the Rules and Amendments

0
Accordingly, we are temporarily amending 17 CFR parts 230, 240, and 260 
as follows and the expiration date for the interim final temporary 
rules published January 22, 2009 (74 FR 3967) is extended from 
September 25, 2009, to November 30, 2010.

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

0
1. The authority citation for Part 230 continues to read, in part, as 
follows:


    Authority:  15 U.S.C. 77b, 77c, 77d, 77f, 77g, 77h, 77j, 77r, 
77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78t, 78w, 
78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-30, and 80a-37, 
unless otherwise noted.
* * * * *


Sec. Sec.  230.146 and 230.239   [Amended]

0
2. In Sec.  230.146(c)T, in the last sentence, remove the words 
``September 25, 2009'' and add, in their place, the words ``November 
30, 2010''.

0
3. In Sec.  230.239T(e), remove the words ``September 25, 2009'' and 
add, in their place, the words ``November 30, 2010''.

[[Page 47725]]

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

0
4. The authority citation for Part 240 continues to read, in part, as 
follows:


    Authority:  15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 
78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 
80b-11, and 7201 et seq.; and 18 U.S.C. 1350, unless otherwise 
noted.
* * * * *


Sec. Sec.  240.12a-10T and 240.12h-1   [Amended]

0
5. In Sec.  240.12a-10T(b), remove the words ``September 25, 2009'' and 
add, in their place, the words ``November 30, 2010''.
0
6. In Sec.  240.12h-1(h)T, in the last sentence, remove the words 
``September 25, 2009'' and add, in their place, the words ``November 
30, 2010''.

PART 260--GENERAL RULES AND REGULATIONS, TRUST INDENTURE ACT OF 
1939

0
7. The authority citation for Part 260 continues to read as follows:


    Authority:  15 U.S.C. 77eee, 77ggg, 77nnn, 77sss, 78ll(d), 80b-
3, 80b-4, and 80b-11.


Sec.  260.4d-11T  [Amended]

0
8. Section 260.4d-11T is amended by removing the words ``September 25, 
2009'' and adding, in their place, the words ``November 30, 2010'' in 
the last sentence.

    September 14, 2009.

    By the Commission.

Elizabeth M. Murphy,
Secretary.
[FR Doc. E9-22389 Filed 9-16-09; 8:45 am]
BILLING CODE 8010-01-P