[Federal Register Volume 77, Number 49 (Tuesday, March 13, 2012)]
[Notices]
[Pages 14850-14852]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-5985]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66527; File No. SR-FINRA-2012-015]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Order Granting Accelerated 
Approval of Proposed Rule Change To Amend FINRA Rule 4240 (Margin 
Requirements for Credit Default Swaps)

March 7, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on February 23, 2012, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I and 
II, below, which Items have been substantially prepared by FINRA. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons. For the reasons discussed 
below, the Commission is granting accelerated approval of the proposed 
rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend FINRA Rule 4240 (Margin Requirements 
for Credit Default Swaps) to limit the application of the rule at this 
time to certain transactions in credit default swaps that are security-
based swaps and to make other revisions to update the rule. FINRA Rule 
4240 implements an interim pilot program with respect to margin 
requirements for certain transactions in credit default swaps.
    The text of the proposed rule change is available on FINRA's Web 
site at http://www.finra.org, at the principal office of FINRA and at 
the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    On May 22, 2009, the Commission approved FINRA Rule 4240,\3\ which 
implements an interim pilot program (``Interim Pilot Program'') with 
respect to margin requirements for certain transactions in credit 
default swaps (``CDS''). FINRA has filed a proposed

[[Page 14851]]

rule change to extend the implementation of Rule 4240 to July 17, 
2012.\4\
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    \3\ See Securities Exchange Act Release No. 59955 (May 22, 
2009), 74 FR 25586 (May 28, 2009) (Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change, as Modified 
by Amendment No. 1 [File No. SR-FINRA-2009-012]) (``Approval 
Order'').
    \4\ See SR-FINRA-2012-014.
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    As explained in the Approval Order,\5\ FINRA Rule 4240, coterminous 
with certain Commission actions,\6\ is intended to address concerns 
arising from counterparty credit risk posed by CDS, including, among 
other things, risks to the financial system arising from credit risk 
resulting from bilateral CDS transactions and from a concentration of 
credit risk to a central counterparty that clears and settles CDS. On 
July 21, 2010, President Obama signed into law the Dodd-Frank Wall 
Street Reform and Consumer Protection Act (``Dodd-Frank Act''),\7\ 
Title VII of which established a comprehensive new regulatory framework 
for swaps and security-based swaps,\8\ including certain CDS. The new 
legislation was intended among other things to enhance the authority of 
regulators to implement new rules designed to reduce risk, increase 
transparency, and promote market integrity with respect to such 
products.
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    \5\ See 74 FR 25588 through 25589.
    \6\ In early 2009, the Commission enacted interim final 
temporary rules providing enumerated exemptions under the federal 
securities laws for certain CDS to facilitate the operation of one 
or more central clearing counterparties in such CDS. See Securities 
Act Release No. 8999 (January 14, 2009), 74 FR 3967 (January 22, 
2009) (Temporary Exemptions for Eligible Credit Default Swaps To 
Facilitate Operation of Central Counterparties To Clear and Settle 
Credit Default Swaps); Securities Act Release No. 9063 (September 
14, 2009), 74 FR 47719 (September 17, 2009) (Extension of Temporary 
Exemptions for Eligible Credit Default Swaps to Facilitate Operation 
of Central Counterparties to Clear and Settle Credit Default Swaps); 
Securities Act Release No. 9158 (November 19, 2010), 75 FR 72660 
(November 26, 2010) (Extension of Temporary Exemptions for Eligible 
Credit Default Swaps to Facilitate Operation of Central 
Counterparties to Clear and Settle Credit Default Swaps). See also 
Securities Exchange Act Release No. 59578 (March 13, 2009), 74 FR 
11781 (March 19, 2009) (Order Granting Temporary Exemptions in 
Connection with Request of Chicago Mercantile Exchange Inc. and 
Citadel Investment Group, L.L.C. Related to Central Clearing of 
Credit Default Swaps, and Request for Comments); Securities Exchange 
Act Release No. 59165 (December 24, 2008), 74 FR 133 (January 2, 
2009) (Order Pursuant to Section 36 of the Securities Exchange Act 
of 1934 Granting Temporary Exemptions from Sections 5 and 6 of the 
Exchange Act for Broker-Dealers and Exchanges Effecting Transactions 
in Credit Default Swaps).
    \7\ Public Law 111-203, 124 Stat. 1376 (2010).
    \8\ The terms ``swap'' and ``security-based swap'' are defined 
in Sections 721 and 761 of the Dodd-Frank Act. The Commission and 
the CFTC jointly have proposed to further define these terms. See 
Securities Exchange Act Release No. 64372 (Apr. 29, 2011), 76 FR 
29818 (May 23, 2011) (Further Definition of ``Swap,'' ``Security-
Based Swap,'' and ``Security-Based Swap Agreement''; Mixed Swaps; 
Security-Based Swap Agreement Recordkeeping); Securities Exchange 
Act Release No. 63452 (Dec. 7, 2010), 75 FR 80174 (Dec. 21, 2010) 
(Further Definition of ``Swap Dealer,'' ``Security-Based Swap 
Dealer,'' ``Major Swap Participant,'' ``Major Security-Based Swap 
Participant'' and ``Eligible Contract Participant'').
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    As noted earlier, FINRA has filed a proposed rule change to extend 
the implementation of FINRA Rule 4240 to July 17, 2012.\9\ In this 
filing, FINRA is proposing to make certain revisions to FINRA Rule 4240 
in light of the continuing development of the CDS business within the 
framework of the Dodd-Frank Act.
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    \9\ See supra note 4.
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    Specifically, FINRA is limiting the application of FINRA Rule 4240 
at this time to CDS that are security-based swaps under Section 
3(a)(68) of the Act,\10\ pending further development of federal 
regulations governing margin for swaps and security-based swaps and 
further consideration of potential portfolio margin methodologies for 
cleared CDS that include both swaps and security-based swaps. Based on 
these factors, FINRA may propose to extend FINRA Rule 4240 to encompass 
CDS that are swaps under Section 1a(47) of the Commodity Exchange Act 
\11\ at a later date.
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    \10\ 15 U.S.C. 78c(a)(68).
    \11\ 7 U.S.C. 1a(47).
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    Accordingly, FINRA is revising the definition of ``CDS'' set forth 
in paragraph (a) of FINRA Rule 4240 to provide that, for purposes of 
the rule, the term CDS includes any product that is commonly known to 
the trade as a credit default swap and is a security-based swap as 
defined pursuant to Section 3(a)(68) of the Act or the rules and 
guidance of the SEC and its staff.\12\ Consistent with this change, 
FINRA is eliminating the grid set forth under paragraph (a) of FINRA 
Rule 4240.01 as to CDS contracts where the underlying obligation is a 
debt index rather than a single name bond, because such grid is for 
broad-based indexes. As revised, the rule provides that with respect to 
CDS contracts where the underlying obligation is a narrow-based debt 
index, rather than a single name bond, the margin requirement shall be 
based upon a margin methodology using the member's internal models the 
use of which has been approved by FINRA. In addition, FINRA is revising 
paragraphs (a), (b) and (c)(1) of the rule to remove references to 
derivatives clearing organizations.
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    \12\ See Exhibit 5 attached to SR-FINRA-2012-015. See also supra 
note 8.
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    Further, in the interest of regulatory clarity and efficiency, and 
based upon FINRA's experience in the administration of the rule, FINRA 
has revised the grid set forth under FINRA Rule 4240.01(a) as to CDS 
contracts where the underlying obligation is a single name debt 
security. Specifically, the revised grid sets forth more calibrated 
ranges with respect to the length of time to maturity of the relevant 
CDS contract and percentages with respect to the required margin.
    FINRA has made minor edits to paragraph (e) of the rule to align 
the terms ``current exposure'' and ``maximum potential exposure'' with 
the definitions set forth in Act Rule 15c3-1e(c)(4) and to make other 
minor clarifications. In addition, in the interest of clarification, 
FINRA has replaced references to use of an ``approved margin 
methodology'' in paragraphs (a), (c)(1) and (c)(2) of the rule with 
``using'' or ``use'' a ``margin methodology the use of which has been 
approved by FINRA as announced in a Regulatory Notice.''
    Lastly, FINRA has made clarifying edits to paragraph (c) of 
Supplementary Material .01 to provide that in instances where the 
customer or broker-dealer maintains both long and short CDS, the member 
may elect to collect 50% of the relevant margin requirements on the 
lesser of the long or short position within the same Bloomberg CDS 
sector (or, if the long and short positions are equal, the long 
position), provided those long and short positions are in the same 
spread and maturity bucket, plus the relevant margin requirements on 
the excess long or short position, if any.
    The proposed rule change will become effective upon approval by the 
SEC. FINRA has requested the Commission to find good cause pursuant to 
Section 19(b)(2) of the Act \13\ for approving the proposed rule change 
prior to the 30th day after its publication in the Federal Register.
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    \13\ 15 U.S.C. 78s(b)(2).
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2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\14\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. FINRA believes that the proposed rule change will 
further the purposes of the Act because, consistent with the goals set 
forth by the Commission when it adopted the interim final temporary 
rules with respect to the operation of central counterparties to clear 
and settle CDS, and pending the final implementation of new CFTC and 
SEC rules pursuant to Title VII of the Dodd-Frank Act, the margin 
requirements set forth by the

[[Page 14852]]

proposed rule change will help to stabilize the financial markets.
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    \14\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

    <bullet> Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#8af8ffe6efa7e9e5e7e7efe4fef9caf9efe9a4ede5fc"><span class="__cf_email__" data-cfemail="493b3c252c642a2624242c273d3a093a2c2a672e263f">[email protected]</span></a>. Please include 
File Number SR-FINRA-2012-015 on the subject line.

Paper Comments

    <bullet> Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2012-015. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be 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. Copies of such filing also will be available for 
inspection and copying at the principal office of FINRA. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-FINRA-2012-015 and should be 
submitted on or before April 3, 2012.

IV. Commission's Findings and Order Granting Accelerated Approval of a 
Proposed Rule Change

    FINRA has requested that the Commission find good cause pursuant to 
Section 19(b)(2) of the Act for approving the proposed rule change 
prior to the 30th day after publication in the Federal Register.\15\ 
After careful consideration, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
association.\16\
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    \15\ 15 U.S.C. 78s(b)(2).
    \16\ In approving this rule change, the Commission notes that it 
has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
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    In particular, the Commission finds that the proposed rule change 
is consistent with Section 15A(b)(6) of the Act, which requires, among 
other things, that FINRA rules be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest.\17\ Specifically, as noted above, FINRA is limiting 
the application of FINRA Rule 4240 at this time to CDS that are 
security-based swaps under Section 3(a)(68) of the Act,\18\ pending 
further development of federal regulations governing margin for swaps 
and security-based swaps and further consideration of potential 
portfolio margin methodologies for cleared CDS that include both swaps 
and security-based swaps. This is consistent with the goals of Title 
VII of the Dodd-Frank Act.\19\ In addition, the Commission believes 
that the proposed alternative tables that may be used by market 
participants to compute the required margin will provide market 
participants with some flexibility in computing margin, while still 
permitting the continued use of the existing margin tables in FINRA 
Rule 4240 Supplementary Material .01.
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    \17\ 15 U.S.C. 78o-3(b)(6).
    \18\ 15 U.S.C. 78c(a)(68).
    \19\ Public Law 111-203, 124 Stat. 1376 (2010).
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    The accelerated approval will, consistent with the goals set forth 
by the Commission when it adopted the interim final temporary rules 
with respect to the operation of central counterparties to clear and 
settle CDS, and pending the final implementation of new CFTC and SEC 
rules pursuant to Title VII of the Dodd-Frank Act, help to stabilize 
the financial markets by setting forth margin requirements for certain 
transactions in CDS. Therefore, the Commission finds good cause, 
pursuant to Section 19(b)(2) of the Act, for approving the proposed 
rule change prior to the 30th day after the date of publication of note 
in the Federal Register.\20\
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    \20\ 15 U.S.C. 78(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\21\ that the proposed rule change (SR-FINRA-2012-015) be, and 
hereby is, approved on an accelerated basis.
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    \21\ 15 U.S.C. 78(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-5985 Filed 3-12-12; 8:45 am]
BILLING CODE 8011-01-P


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