50862 Federal Register / Vol. 74, No. 189 / Thursday, October 1, 2009 / Notices 

13 15 U.S.C. 78s(b)(2). 

14 17 CFR 240.19d–1(c)(2). 

15 17 CFR 200.30–3(a)(12); 17 CFR 200.30– 

3(a)(44). 

1A CDS is a bilateral contract between two 

parties, known as counterparties. The value of this 

financial contract is based on underlying 

obligations (‘‘reference obligations’’) of a single 

entity (a ‘‘reference entity’’) or on a particular 

security or other debt obligation (‘‘reference 

security’’), or an index of several such entities, 

securities, or obligations. The obligation of a seller 

under a CDS 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 capitalize on the 

volatility in credit spreads during times of 

economic uncertainty. The over-the-counter 

(‘‘OTC’’) market for CDS poses systemic risk to the 

financial system as well as operational risks, risks 

relating to manipulation and fraud, and regulatory 

arbitrage risks. 

2Securities Exchange Act Release No. 59165 

(December 24, 2008), 74 FR 133 (January 2, 2009). 

3Section 3A of the Exchange Act limits the 

Commission’s authority over swap agreements, as 

defined in Section 206A of the Gramm-Leach-Bliley 

Act. 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. 

4 15 U.S.C. 78e and 78f. 

5A national securities exchange that effects 

transactions in 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 this 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) of the 

Exchange Act, 15 U.S.C. 78c(a)(2). 

6 15 U.S.C. 78mm. 

7Section 3(a)(1) of the Exchange Act, 15 U.S.C. 

78c(a)(1), defines ‘‘exchange.’’ Rule 3b–16 under the 

Exchange Act, 17 CFR 240.3b–16, defines certain 

terms used in the statutory definition of exchange. 

See Securities Exchange Act Release No. 40760 

(December 8, 1998), 63 FR 70844 (December 22, 

1998) (‘‘Regulation ATS Adopting Release’’) 

(adopting Rule 3b–16 in addition to Regulation 

ATS). 

8 15 U.S.C. 78f. Section 6 of the Exchange Act also 

sets forth various requirements to which a national 

securities exchange is subject. 

9 15 U.S.C. 78mm(a)(1). 

10See Regulation ATS, 17 CFR 242.300 et seq. In 

1998, the Commission exercised its exemptive 

authority under Section 36 of the Exchange Act and 

its general authority under Section 11A of the 

Exchange Act, 15 U.S.C. 78k–1, to establish a 

regulatory framework for ‘‘alternative trading 

systems,’’ which perform many of the same 

functions as exchanges. Under this framework, an 

entity that, like an exchange, matches the orders in 

securities of multiple buyers and sellers according 

to established, non-discretionary methods is exempt 

from the definition of ‘‘exchange’’ if it instead 

registers as a broker-dealer and complies with 

Regulation ATS. Regulation ATS is designed, 

among other things, ‘‘to adopt a regulatory 

framework that addresses [the Commission’s] 

concerns without jeopardizing the commercial 

viability of these markets.’’ Regulation ATS 

Adopting Release, supra note 7, 63 FR at 70846. 

action under NYSE Arca Rules 10.4– 

10.11. 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act 13 and Rule 

19d–1(c)(2) under the Act,14 that the 

proposed rule change (SR–NYSEArca– 

2009–70) be, and it hereby is, approved 

and declared effective. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.15

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E9–23625 Filed 9–30–09; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–60718; File No. S7–35–08] 

Order Pursuant to Section 36 of the 

Securities Exchange Act of 1934 

Extending Temporary Exemptions 

from Sections 5 and 6 of the Exchange 

Act for Broker-Dealers and Exchanges 

Effecting Transactions in Credit 

Default Swaps 

September 25, 2009. 

On December 24, 2008, in connection 

with its efforts to facilitate the 

establishment of one or more central 

counterparties for clearing credit default 

swap (‘‘CDS’’) transactions,1 the 

Securities and Exchange Commission 

(‘‘Commission’’) granted temporary, 

conditional exemptions from the 

registration requirements under 

Sections 5 and 6 of the Securities 

Exchange Act of 1934 (‘‘Exchange Act’’) 

to certain exchanges and broker-dealers 

(‘‘December Order’’).2 Subject to 

conditions specified in the December 

Order, any exchange that effects or 

reports transactions in CDS that are not 

swap agreements (‘‘non-excluded 

CDS’’) 3 and is not otherwise subject to 

the requirements under Sections 5 and 

6 of the Exchange Act,4 and the rules 

and regulations thereunder, is exempt 

from the requirement to register as a 

national securities exchange.5 In 

addition, any broker or dealer that 

effects or reports transactions in nonexcluded CDS on such an exchange is 

exempt from the prohibition on trading 

activity in Section 5 of the Exchange 

Act. The December Order expires on 

September 25, 2009. Pursuant to its 

authority under Section 36 of the 

Exchange Act,6 for the reasons 

described herein, the Commission is 

today extending the exemption granted 

in the December Order until March 24, 

2010. 

Section 5 of the Exchange Act states 

that ‘‘[i]t 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 * * * .’’ Section 6 of the 

Exchange Act sets forth a procedure 

whereby an exchange 7 may register as 

a national securities exchange.8

Section 36 of the Exchange Act 

provides that the Commission, ‘‘by rule, 

regulation, or order, may 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 of 

any rule or regulation thereunder, to the 

extent that such exemption is necessary 

or appropriate in the public interest, 

and is consistent with the protection of 

investors.’’ 9 To facilitate the 

establishment of one or more exchanges 

for non-excluded CDS, the Commission 

in the December Order exercised its 

authority under Section 36 to 

temporarily exempt any exchange, 

broker, or dealer that effects transactions 

in non-excluded CDS from the 

prohibition in Section 5 of the Exchange 

Act and (in the case of exchanges) the 

requirements in Section 6 of the 

Exchange Act and the rules and 

regulations thereunder. 

The exemptions were conditioned on 

an exchange providing notice to the 

Commission of its reliance on the 

December Order, and certain other 

requirements that generally mirror those 

applicable to alternative trading systems 

under Regulation ATS.10 As we noted at 

the time, the temporary exemptions 

from Sections 5 and 6 of the Exchange 

Act in the December Order were 

designed to allow brokers, dealers, and 

exchanges to effect transactions in nonexcluded CDS on exchanges, while 

providing an opportunity for the 

Commission to gain experience with the 


PWALKER on DSK8KYBLC1PROD with NOTICES
Federal Register / Vol. 74, No. 189 / Thursday, October 1, 2009 / Notices 50863 

11The Financial Industry Regulatory Authority 

(‘‘FINRA’’) is a national securities association 

registered with the Commission under Section 15A 

of the Exchange Act, 15 U.S.C. 78o–3, and thus is 

a self-regulatory organization (‘‘SRO’’), as defined in 

Section 3(a)(26) of the Exchange Act, 15 U.S.C. 

78c(a)(26). As an SRO, FINRA has authority to 

regulate and supervise its members for compliance 

with FINRA rules and the federal securities laws 

generally. 

12See December Order, supra note 2, 74 FR at 

136; Regulation ATS, 17 CFR 242.300 et seq. 

Generally, these requirements are designed to allow 

the Commission to monitor market developments, 

to ascertain how new entrants are affecting the 

national market system, and to promote compliance 

with the federal securities laws generally. 

13See 17 CFR 242.301(b)(8), 242.302, and 

242.303. 

14See 17 CFR 242.301(b)(9). 

15See 17 CFR 242.301(b)(10). 

16See 17 CFR 242.301(b)(7). 

17These prohibitions are based on the 

Commission’s belief that an organization, 

association, or group of persons that could exercise 

self-regulatory authority over its subscribers should 

be registered as an SRO and subject to the full 

responsibilities and supervision that registration 

entails. The Comission continues to believe that 

rules governing exchange subscriber conduct may 

be imposed and enforced only by SROs because of 

the potential that they may be applied for anticompetitive purposes. However, like any alternative 

trading system, a CDS exchange could apply credit 

standards to its subscribers or require subscribers to 

provide financial information relevant to their 

activity on the system. See Regulation ATS 

Adopting Release, supra note 7, 63 FR at 70859. 

18See December Order, supra note 2, 74 FR at 

138–39. 19 15 U.S.C. 78mm. 

CDS marketplace and consider public 

input regarding appropriate regulation 

and oversight. 

During the ensuing period, the 

Commission has reviewed the CDS 

marketplace and been in contact with 

various market participants. Our effort 

has been to understand the operation of 

the CDS marketplace, evaluate the 

application of the exemptions in the 

December Order, and consider whether 

the conditions we imposed should be 

modified. In particular, consistent with 

our December Order, we have 

considered whether Regulation ATS, 

with or without modifications, should 

apply to systems that match orders in 

non-excluded CDS of multiple buyers 

and sellers. 

Based on its review of the CDS 

marketplace, the Commission 

preliminarily believes that an exchange 

effecting transactions in non-excluded 

CDS should register under Sections 5 

and 6 of the Exchange Act or structure 

itself as an alternative trading system 

and comply with the requirements of 

Regulation ATS. Among other things, 

Regulation ATS requires that the 

operator of an alternative trading system 

be registered as a broker-dealer. The 

Commission preliminarily believes that 

broker-dealer registration for exchanges 

that trade non-excluded CDS, as for 

other alternative trading systems, 

provides important regulatory benefits, 

is in the public interest, and is 

consistent with the protection of 

investors. In particular, regulated 

broker-dealers that operate alternative 

trading systems are also required to be 

FINRA members.11 Membership in 

FINRA would allow FINRA to integrate 

trading of CDS on alternative trading 

systems into its surveillance of trading 

in economically similar investments, 

such as debt securities. 

As noted, the conditions set out in the 

December Order under which CDS 

exchanges must operate are otherwise 

substantially similar to the requirements 

established under Regulation ATS.12 ’’ 

Like the December Order, Regulation 

ATS would require a CDS exchange to 

keep records about its operations, its 

subscribers, and their orders; 13 provide 

the Commission with trading 

information on a quarterly basis; 14

establish procedures to ensure the 

confidential treatment of trading 

information; 15 permit the Commission 

to examine its premises, systems, and 

records; and cooperate with the 

examination of its subscribers.16 In 

addition, the CDS exchange could not: 

(a) Set rules governing the conduct of 

subscribers other than the conduct of 

such subscribers trading on such 

exchange; or (b) discipline subscribers 

under the Exchange Act other than by 

exclusion from trading.17 Thus, with 

regard to these requirements, 

compliance with Regulation ATS 

should not create any significant 

additional regulatory burden for a CDS 

exchange now relying on the December 

Order. 

The Commission is sensitive not to 

disrupt existing CDS markets 

unnecessarily or impose unreasonable 

burdens on market participants 

providing or using CDS exchanges. We 

recognize that restructuring current 

business activity and registration as a 

national securities exchange or 

alternative trading system may 

reasonably be expected to take some 

time. Accordingly, the Commission has 

determined to extend the December 

Order through March 24, 2010 to permit 

exchanges facilitating transactions in 

non-excluded CDS sufficient time to 

register pursuant to Sections 5 and 6 of 

the Exchange Act, or comply with the 

requirements of Regulation ATS, which 

include registration as a broker-dealer. 

The conditions specified in the 

December Order will continue to 

apply.18

Likewise, the Commission is 

extending the exemption it granted in 

the December Order to brokers and 

dealers effecting transactions in nonexcluded CDS on an exchange that is 

not a national securities exchange 

because of that exchange’s reliance on 

the December Order. Absent an 

exemption, Section 5 of the Exchange 

Act would prohibit brokers and dealers 

from effecting transactions in nonexcluded CDS on such an exchange. As 

we found in the December Order, the 

temporary exemption for brokers and 

dealers is necessary and appropriate in 

the public interest and is consistent 

with the protection of investors because 

it will facilitate brokers’ and dealers’ use 

of CDS exchanges, which, for reasons 

noted in the December Order, the 

Commission believes would be 

beneficial. This exemption also provides 

legal certainty to broker-dealers 

effecting transactions in CDS. Without 

also exempting brokers and dealers from 

this Section 5 requirement, the 

Commission’s temporary exemption of 

CDS exchanges would be ineffective, 

because brokers and dealers would not 

be permitted to effect transactions on 

those exchanges. 

Section 5 of the Exchange Act 

recognizes that there are situations 

where brokers and dealers should be 

permitted to trade on an exchange that 

is not registered as a national securities 

exchange. Section 5 provides in relevant 

part that brokers and dealers may effect 

transactions on an exchange that the 

Commission, by reason of the limited 

volume of transactions effected on such 

exchange, has exempted from 

registration under Section 6. Brokers 

and dealers are also permitted to effect 

transactions on alternative trading 

systems, which are exempted from the 

definition of ‘‘exchange’’ and thus do 

not fall within the restriction of Section 

5. Therefore, the Commission finds that 

it is consistent with the public interest 

and the protection of investors to extend 

the December Order, which granted a 

temporary exemption from Section 5 of 

the Exchange Act to any broker or dealer 

that effects transactions in non-excluded 

CDS, or reports such transactions, on an 

exchange that is exempted pursuant to 

the December Order. 

Finally, the Commission notes that, 

absent comments that articulate a 

substantial need for further relief, the 

Commission is unlikely to further 

extend the December Order beyond 

March 24, 2010. 

Accordingly, 

It is ordered, pursuant to Section 36 

of the Exchange Act,19 that any 

exchange that effects transactions in 

non-excluded CDS and is not otherwise 

subject to the requirements under 


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50864 Federal Register / Vol. 74, No. 189 / Thursday, October 1, 2009 / Notices 

20 15 U.S.C. 78e and 78f. 21 15 U.S.C. 78mm. 

Sections 5 and 6 of the Exchange Act,20

and the rules and regulations 

thereunder, will continue to be exempt 

from the requirement to register as a 

national securities exchange under 

Section 6 of the Exchange Act, and from 

the prohibition in Section 5 of the 

Exchange Act against effecting 

transactions as an exchange unless it is 

registered as a national securities 

exchange or exempt from registration 

due to the limited volume of its 

transactions through March 24, 2010, 

subject to the following conditions: 

(1) The exchange must not: (a) Set 

rules governing the conduct of 

subscribers other than the conduct of 

such subscribers trading on such 

exchange; or (b) discipline subscribers 

other than by exclusion from trading; 

(2) The exchange must make and keep 

for a period of not less than three years, 

the first two years in an easily accessible 

place, the following records: 

• A record of subscribers in the 

exchange (identifying any affiliations 

between the exchange and subscribers 

in the exchange, including common 

directors, officers, or owners); 

• Daily summaries of trading, 

including (a) information identifying 

CDS in which transactions are effected; 

and (b) transaction volume, expressed in 

terms of number of trades and total U.S. 

dollar notional value; and 

• Time-sequenced records of order 

information, including: (a) Identity of 

the party entering an order; (b) 

identification of non-excluded CDS 

contract (including the reference entity, 

security, or index, and notional value); 

(c) date and time that order was 

received; (d) price (whether expressed 

as credit spread, rate, strike, or coupon); 

(e) whether the order is to buy or sell 

and any order conditions; (f) any 

subsequent modification or cancellation 

of the order; (g) date and time the order 

was executed, the size (e.g., notional 

value amount) executed, and the price; 

and (h) identity of the parties to the 

transaction; 

(3) The exchange must preserve the 

following records: 

• For a period of not less than three 

years, the first two years in an easily 

accessible place, all notices provided by 

such exchange to subscribers generally, 

whether written or communicated 

through automated means, including, 

but not limited to, notices addressing 

hours of system operations, system 

malfunctions, changes to system 

procedures, maintenance of hardware 

and software, instructions pertaining to 

access to the market and denials of, or 

limitations on, access to the exchange; 

and 

• During the life of the enterprise and 

of any successor enterprise, the 

exchange’s organizational documents 

and copies of reports filed with the 

Commission pursuant to this 

exemption; 

(4) An exchange must, within five 

days of commencing operation, submit 

a notice to the Commission that 

includes the following information: 

• Full legal name of the exchange; 

• A description of the exchange’s 

ownership structure; 

• Contact person and contact 

information; 

• A general description of what CDS 

contracts trade on the exchange; and 

• A description of how the exchange 

operates; 

(5) An exchange must report the 

following information to the 

Commission within 30 days of the end 

of each quarter: 

• The total dollar volume of 

transactions executed during the 

quarter, broken down by reference 

entity, security, or index; 

• The total unit volume and/or 

notional amount executed during the 

quarter, broken down by reference 

entity, security, or index; and 

• A list of all subscribers that effected 

transactions on the exchange during the 

quarter; 

(6) The exchange must establish 

adequate safeguards and procedures to 

protect subscribers’ confidential trading 

information. Such safeguards and 

procedures shall include: (a) Limiting 

access to the confidential trading 

information of subscribers to those 

employees of the exchange who are 

operating the system or responsible for 

its compliance with this exemption or 

any other applicable rules; and (b) 

implementing standards controlling 

employees of the exchange trading for 

their own accounts. The exchange must 

adopt and implement adequate 

oversight procedures to ensure that the 

safeguards and procedures established 

pursuant to this condition are followed; 

and 

(7) The exchange must provide access 

to the Commission to conduct on-site 

inspections of its facilities (including 

automated systems and systems 

environment), records, and personnel 

related to exchange activities. The 

exchange must cooperate with the 

Commission in connection with the 

investigation of any exchange 

subscribers. 

It is further ordered, pursuant to 

Section 36 of the Exchange Act,21 that 

until March 24, 2010, a broker or dealer 

that effects transactions in non-excluded 

CDS, or reports such transactions, on an 

exchange that is exempted pursuant to 

this Order will also continue to be 

exempt from the prohibition on trading 

activity in Section 5 of the Exchange 

Act. 

By the Commission. 

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E9–23622 Filed 9–30–09; 8:45 am] 

BILLING CODE 8011–01–P 

DEPARTMENT OF TRANSPORTATION 

Pipeline and Hazardous Materials 

Safety Administration 

Office of Hazardous Materials Safety; 

Notice of Application for Special 

Permits 

AGENCY: Pipeline and Hazardous 

Materials Safety Administration 

(PHMSA), DOT. 

ACTION: List of applications for special 

permits. 

SUMMARY: In accordance with the 

procedures governing the application 

for, and the processing of, special 

permits from the Department of 

Transportation’s Hazardous Material 

Regulations (49 CFR part 107, subpart 

B), notice is hereby given that the Office 

of Hazardous Materials Safety has 

received the application described 

herein. Each mode of transportation for 

which a particular special permit is 

requested is indicated by a number in 

the ‘‘Nature of Application’’ portion of 

the table below as follows: 1—Motor 

vehicle, 2—Rail freight, 3—Cargo vessel, 

4—Cargo aircraft only, 5—Passengercarrying aircraft. 

DATES: Comments must be received on 

or before November 2, 2009. 

Address Comments To: Record 

Center, Pipeline and Hazardous, 

Materials Safety Administration, U.S. 

Department of Transportation, 

Washington, DC 20590. 

Comments should refer to the 

application number and be submitted in 

triplicate. If confirmation of receipt of 

comments is desired, include a selfaddressed stamped postcard showing 

the special permit number. 

FOR FURTHER INFORMATION CONTACT: 

Copies of the applications are available 

for inspection in the Records Center, 

East Building, PHH–30, 1200 New 

Jersey Avenue, SE., Washington DC or at 

http://regulations.gov. 

This notice of receipt of applications 

for special permit is published in 


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