[Federal Register Volume 74, Number 46 (Wednesday, March 11, 2009)]
[Notices]
[Pages 10647-10652]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-5242]


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DEPARTMENT OF THE TREASURY


Order Granting Temporary Exemptions From Certain Provisions of 
the Government Securities Act and Treasury's Government Securities Act 
Regulations in Connection With a Request on Behalf of ICE US Trust LLC 
Related to Central Clearing of Credit Default Swaps, and Request for 
Comments

AGENCY: Department of the Treasury, Office of the Assistant Secretary 
for Financial Markets.

ACTION: Notice of temporary exemptions.

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SUMMARY: The Department of the Treasury (Treasury) is granting 
temporary exemptions from certain provisions of the Government 
Securities Act of 1986 (GSA) and Treasury's GSA regulations in 
connection with a request on behalf of ICE US Trust LLC related to the 
central clearing of credit default swaps that reference government 
securities. These temporary exemptions are consistent with temporary 
exemptions the Securities and Exchange Commission recently granted to 
ICE US Trust LLC related to the central clearing of credit default 
swaps. Treasury is also soliciting public comment on this Order.

DATES: Effective: March 6, 2009.

FOR FURTHER INFORMATION CONTACT: Lori Santamorena, Executive Director; 
Lee Grandy, Associate Director; or Kevin Hawkins, Government Securities 
Specialist; Bureau of the Public Debt, Department of the Treasury, at 
202-504-3632.

SUPPLEMENTARY INFORMATION: The following is Treasury's exemptive order:

I. Introduction

    Treasury and other financial regulators have raised concerns 
related to the over-the-counter (``OTC'') market in credit default 
swaps (``CDS''). These concerns relate to the potential systemic risk 
to the financial system posed by such CDS markets. The President's 
Working Group on Financial Markets (``PWG'') noted in November 2008 
that its:

Top near-term OTC derivatives priority is to oversee the successful 
implementation of central counterparty services for credit default 
swaps. A well-regulated and prudently managed CDS central 
counterparty can provide immediate benefits to the market by 
reducing the systemic risk associated with counterparty credit 
exposures. It also can help facilitate greater market transparency 
and be a catalyst for a more competitive trading environment that 
includes exchange trading of CDS.\1\
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    \1\ See ``PWG Announces Initiatives to Strengthen OTC 
Derivatives Oversight and Infrastructure.'' U.S. Department of the 
Treasury press release issued November 14, 2008. Available at: 
http://www.treasury.gov/press/releases/hp1272.htm. The Secretary of 
the Treasury serves as chairman of the group, which includes the 
chairmen of the Federal Reserve Board, the Securities and Exchange 
Commission, and the Commodity Futures Trading Commission, and which 
worked with the Office of the Comptroller of the Currency and the 
Federal Reserve Bank of New York on these initiatives.

In this context, the Securities and Exchange Commission (``SEC'') 
recently issued to ICE US Trust LLC (``ICE Trust''), certain 
participants in ICE Trust, and others, exemptions from certain 
provisions of the Securities Exchange Act of 1934 (``Exchange 
Act'').\2\ The SEC's exemptions did not cover the Exchange Act 
provisions applicable to government securities.
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    \2\ Securities Exchange Act Release No. 34-59527 (March 6, 
2009). Order Granting Temporary Exemptions Under the Securities 
Exchange Act of 1934 in Connection with Request on Behalf of ICE US 
Trust LLC Related to Central Clearing of Credit Default Swaps, and 
Request for Comments. See http://www.sec.gov. The SEC's order 
relates only to and is necessary only for CDS that are not swap 
agreements under Section 206A of the Gramm-Leach-Bliley Act.
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    IntercontinentalExchange, Inc. (``ICE'') and The Clearing 
Corporation (``TCC'') requested that Treasury grant, pursuant to its 
authority under Section 15C of the Exchange Act, an exemption for ICE 
Trust, participants in ICE Trust and their affiliates,\3\ and 
interdealer brokers (``IDBs'') from the provisions of Section 15C(a), 
(b), and (d) (other than subsection (d)(3)) and the Treasury rules 
thereunder applicable to government securities brokers and government 
securities dealers,\4\ to the extent they ``would otherwise be 
applicable to the activities of any of the foregoing in connection with 
the offer, execution, termination, clearance, settlement, performance 
and related activities involving'' CDS entered into by participants in 
ICE Trust with other such participants and submitted to ICE Trust for 
clearance and settlement.\5\
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    \3\ The ICE Trust request defines affiliate to mean an entity 
that directly, or indirectly through one or more intermediaries, 
controls or is controlled by, or under common control with, an ICE 
Trust Participant.
    \4\ 17 CFR Chapter IV parts 400-405, and 449 were issued under 
Section 15C(a), (b), and (d). See Part II Section 15C of this Order, 
infra.
    \5\ See Letter from Johnathan Short, IntercontinentalExchange 
Inc. and Kevin McClear, The Clearing Corporation, to the 
Commissioner of the Public Debt, Van Zeck, February 26, 2009, 
available at http://www.treasurydirect.gov/instit/statreg/gsareg/gsareg.htm.
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    Based on the facts presented and the representations made in the 
request on behalf of ICE Trust (``the request''),\6\ and for legal 
certainty and other reasons discussed in this Order, the Secretary of 
the Treasury (``Secretary'') is granting two temporary exemptions. 
First, the Secretary is granting a temporary exemption to ICE Trust, 
certain participants in ICE Trust (``ICE Trust Participants''),\7\ and 
certain eligible contract participants (``ECPs''),\8\ as defined in the 
Commodity Exchange Act (``CEA''), from the registration requirements 
under Section 15C and certain regulations applicable to registered or 
noticed government securities brokers or government securities 
dealers.\9\ The temporary exemption applies to these entities' 
transactions in ``Cleared CDS'' as defined in this Order,\10\ which 
generally are CDS submitted to ICE Trust where the CDS reference a 
government security. In general, this exemption does not apply to any 
ICE Trust Participant that is registered or noticed as a government 
securities broker or a government securities dealer pursuant

[[Page 10648]]

to Section 15C(a)(1) of the Exchange Act.
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    \6\ The temporary exemptions contained in this Order are based 
on the facts and circumstances presented in the request. These 
temporary exemptions could become unavailable if the facts or 
circumstances change such that the representations in the request 
are no longer materially accurate. The status of Cleared CDS 
submitted to ICE Trust prior to such change would be unaffected.
    \7\ For purposes of this Order, ICE Trust Participant means any 
participant in ICE Trust that submits CDS that reference a 
government security to ICE Trust for clearance and settlement 
exclusively (i) for its own account or (ii) for the account of an 
affiliate that controls, is controlled by, or is under common 
control with the participant in ICE Trust.
    \8\ ECPs are defined in Section 1a(12) of the Commodity Exchange 
Act (``CEA''), 7 U.S.C. 1 et seq. The use of the term ECPs in this 
Order refers to the definition of ECPs as in effect on the date of 
this Order, and excludes persons that are ECPs under Section 
1a(12)(C). Treasury's exemption provided in this Order to ECPs 
includes IDBs that are ECPs.
    \9\ As used in this Order, registered or noticed government 
securities brokers or government securities dealers encompass all 
brokers, dealers, and entities required to register or file notice 
pursuant to Section 15C(a)(1) of the Exchange Act. See note 18, 
infra.
    \10\ 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 ICE Trust, that is offered only 
to, purchased only by, and sold only to ECPs (as defined in Section 
1a(12) of the CEA as in effect on the date of this Order (other than 
a person that is an ECP under paragraph (C) of that section)), and 
that references a government security.
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    Second, with respect to registered or noticed government securities 
brokers and government securities dealers that are not financial 
institutions,\11\ the Secretary is granting a temporary exemption from 
certain Treasury regulatory requirements consistent with the SEC's 
treatment of registered brokers and dealers in its exemptive order. 
This temporary exemption similarly applies to these entities' 
transactions in Cleared CDS.
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    \11\ A financial institution is defined in 15 U.S.C. 78c(a)(46).
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II. Section 15C

    Title I of the Government Securities Act of 1986 \12\ (``GSA'') 
amended the Exchange Act by adding Section 15C, authorizing the 
Secretary to promulgate regulations with respect to transactions in 
government securities \13\ effected by government securities brokers 
\14\ and government securities dealers \15\ concerning financial 
responsibility, protection of customer securities and balances, and 
recordkeeping and reporting.
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    \12\ Public Law 99-571, 100 Stat. 3208 (1986).
    \13\ The term government securities, as defined at 15 U.S.C. 
78c(a)(42), means: (A) Securities which are direct obligations of, 
or obligations guaranteed as to principal or interest by, the United 
States; (B) securities which are issued or guaranteed by the 
Tennessee Valley Authority or by corporations in which the United 
States has a direct or indirect interest and which are designated by 
the Secretary of the Treasury for exemption as necessary or 
appropriate in the public interest or for the protection of 
investors; (C) securities issued or guaranteed as to principal or 
interest by any corporation the securities of which are designated, 
by statute specifically naming such corporation, to constitute 
exempt securities within the meaning of the laws administered by the 
SEC; and (D) generally ``any put, call, straddle, option, or 
privilege'' on a government security other than one that is traded 
on a national securities exchange or for which quotations are 
disseminated through an automated quotation system operated by a 
registered securities association. Certain Canadian government 
obligations are also included for certain purposes.
    \14\ A government securities broker generally is ``any person 
regularly engaged in the business of effecting transactions in 
government securities for the account of others'' with certain 
exclusions. 15 U.S.C. 78c(a)(43).
    \15\ A government securities dealer generally is ``any person 
engaged in the business of buying and selling government securities 
for his own account, through a broker or otherwise,'' with certain 
exclusions. 15 U.S.C. 78c(a)(44).
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    Under Title I of the GSA, all government securities brokers and 
government securities dealers are required to comply with the 
requirements in Treasury's GSA regulations that are set out at 17 CFR 
parts 400-449.\16\ Treasury's GSA regulations, for the most part, 
incorporate with some modifications SEC rules for non-financial 
institution government securities brokers and government securities 
dealers and the appropriate regulatory agency \17\ rules for financial 
institutions that are required to file notice as government securities 
brokers and government securities dealers.\18\
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    \16\ 17 CFR part 400 Rules of general application; 17 CFR part 
401 Exemptions; 17 CFR part 402 Financial responsibility; 17 CFR 
part 403 Protection of customer securities and balances; 17 CFR part 
404 Recordkeeping and preservation of records; 17 CFR part 405 
Reports and audit; 17 CFR part 420 Large position reporting; and 17 
CFR part 449 Forms, Section 15C of the Securities Exchange Act of 
1934. The GSA regulations also include requirements for custodial 
holdings by depository institutions at 17 CFR part 450, which were 
issued under Title II of the GSA.
    \17\ The definition of appropriate regulatory agency with 
respect to a government securities broker or a government securities 
dealer is set out at 15 U.S.C. 78c(a)(34)(G). The definition 
includes the Board of Governors of the Federal Reserve System, the 
Comptroller of the Currency, the Federal Deposit Insurance 
Corporation, the Director of Thrift Supervision, and in limited 
circumstances the SEC.
    \18\ The GSA regulations apply to all classes of government 
securities brokers and government securities dealers required to 
register or file notice pursuant to Section 15C(a)(1) of the 
Exchange Act. This encompasses registered brokers and dealers 
(including OTC derivatives dealers), registered government 
securities brokers and registered government securities dealers 
(those specialized government securities brokers and government 
securities dealers that conduct a business in only government or 
other exempted securities (other than municipal securities)), and 
financial institutions that are required to file notice as 
government securities brokers and government securities dealers. See 
17 CFR 400.1 and definitions at 17 CFR 400.3. The GSA regulations 
also address futures commission merchants that are government 
securities brokers or government securities dealers, but these 
entities are not covered in this Order. (The definitions of 
``government securities broker'' and ``government securities 
dealer'' in 15 U.S.C. 78c(a)(43) and 78c(a)(44) exclude certain 
persons registered with the Commodity Futures Trading Commission 
(``CFTC''), but only if such persons effect transactions in 
government securities that the SEC, in consultation with the CFTC, 
has determined to be incidental to such persons' futures-related 
business.)
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    Section 15C(a)(5) of the Exchange Act provides that the Secretary:

By rule or order, upon the Secretary's own motion or upon 
application, may conditionally or unconditionally exempt any 
government securities broker or government securities dealer, or 
class of government securities brokers or government securities 
dealers, from any provision of subsection (a), (b), or (d) of this 
section, other than subsection (d)(3), or the rules thereunder, if 
the Secretary finds that such exemption is consistent with the 
public interest, the protection of investors, and the purposes of 
[the Exchange Act].

    As noted above, the SEC recently issued an order granting 
temporary, conditional exemptions under the Exchange Act to ICE Trust 
in connection with the clearing and settling of certain CDS, as well as 
to certain other persons for proposed related activities.\19\ The SEC 
noted in its order that the temporary exemptions extended neither to 
the Exchange Act provisions applicable to government securities as set 
forth in Section 15C and its underlying rules and regulations, nor to 
the related definitions of ``government securities,'' ``government 
securities broker,'' and ``government securities dealer.'' The SEC 
further noted that it does not have authority under Section 36 of the 
Exchange Act to issue exemptions in connection with these 
provisions.\20\
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    \19\ See note 2, supra. The SEC's exemptive order applies only 
to CDS that are not swap agreements and thus not excluded from the 
definition of ``security'' by Section 3A of the Exchange Act.
    \20\ 15 U.S.C. 78mm(b).
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    The request on behalf of ICE Trust states that some CDS include 
reference obligations or deliverable obligations that may be government 
securities as defined in Section 3(a)(42) of the Exchange Act.\21\ In 
providing temporary exemptions from certain provisions of Section 15C 
of the Exchange Act, Treasury is not making a determination, for 
purposes of this Order, whether particular CDS are ``government 
securities.''
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    \21\ See note 13, supra.
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III. CDS

    A CDS is a bilateral contract between two parties, known as 
counterparties. The value of this 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 under a CDS contract to make 
payments is triggered by a default or other credit event involving such 
entity or entities or such security or securities. Investors may 
purchase CDS for a variety of reasons, including to offset or insure 
against risk in their portfolios, to take synthetic positions in bonds 
or in segments of the debt market, or to capitalize on credit spreads. 
In recent years, CDS market volumes have rapidly increased and this 
growth has coincided with a significant rise in the types and number of 
entities participating in the CDS market.
    Under a typical CDS contract, the seller of the contract agrees, in 
exchange for receiving fixed periodic payments from the purchaser, to 
assume the credit risk of the underlying obligation(s) and to 
compensate the purchaser in the event of a default, bankruptcy, or 
other credit event. A bilateral CDS contract therefore entails 
counterparty risk between the purchaser and the seller. Currently, CDS 
participants bilaterally manage counterparty risk by monitoring their 
counterparties, entering into legal agreements that permit them to net

[[Page 10649]]

gains and losses across contracts, and requiring counterparty exposures 
to be collateralized. A central counterparty (``CCP'') could allow 
participants to avoid risks specific to an individual counterparty 
because a CCP ``novates'' bilateral trades by entering into separate 
contractual arrangements with each counterparty--becoming buyer to each 
seller and seller to each buyer.\22\ Novation is one of the means by 
which a CCP can assume counterparty risk.
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    \22\ Novation generally is a process through which the original 
obligation between a buyer and seller is discharged through the 
substitution of the CCP as seller to buyer and buyer to seller, 
creating two new contracts.
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    For this reason, a CCP for CDS could contribute generally to the 
goal of mitigating potential systemic risk. As part of its risk 
management program, a CCP could subject novated contracts to initial 
and variation margin requirements and establish clearing and guarantee 
funds. The CCP also could implement a loss-sharing arrangement among 
its participants to respond to a potential participant insolvency or 
default.
    Recent credit market events have demonstrated the need for 
mechanisms to help manage potential counterparty risks posed by CDS. A 
prudently-managed CCP could help promote efficiency and reduce the 
potential systemic risk associated with counterparty credit exposures. 
These benefits could be particularly significant in times of market 
stress, as CCPs could enhance transparency and mitigate the potential 
for a market participant's difficulties to destabilize other market 
participants.

IV. ICE Trust

    As noted above, ICE and TCC, on behalf of ICE Trust, have requested 
that the Secretary grant exemptions from certain requirements under the 
Exchange Act with respect to the proposed activities of ICE Trust in 
clearing and settling certain CDS, as well as the proposed activities 
of certain other persons.\23\
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    \23\ See note 5, supra.
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    Based on the request, we understand the facts to be as follows. ICE 
and TCC are each corporations organized under the laws of the State of 
Delaware. The request states that ICE is in the process of acquiring 
TCC. ICE Trust is organized as a New York State chartered limited 
liability trust company, and will become a member of the Federal 
Reserve System.\24\ ICE Trust is subject to direct supervision and 
examination by the New York State Banking Department, and due to its 
expected membership in the Federal Reserve System, will be subject to 
direct supervision and examination by the Board of Governors of the 
Federal Reserve System, specifically by the Federal Reserve Bank of New 
York.
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    \24\ The Federal Reserve Board announced on March 4, 2009, its 
approval of the application by ICE US Trust LLC to become a member 
of the Federal Reserve System. See Federal Reserve Board press 
release, available at http://www.federalreserve.gov/newsevents/press/orders/20090304a.htm.
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    We further understand that CDS transactions entered into by ICE 
Trust Participants with other ICE Trust Participants will be submitted 
to ICE Trust for clearance and settlement. The request represents that 
initially, ICE Trust's business will be limited to the provision of 
clearing services for a limited range of CDS in the OTC market. During 
this initial phase, ICE Trust's CDS clearing services will be limited 
to transactions for the proprietary accounts of ICE Trust Participants 
(in each case, acting as principal for its own account or the account 
of an affiliate). ICE Trust will act as a CCP for ICE Trust 
Participants by assuming, through novation, the obligations of all 
eligible CDS transactions accepted by it for clearing and by collecting 
margin and other credit support from ICE Trust Participants to 
collateralize their obligations to ICE Trust.
    The request states that ICE Trust anticipates that it will 
eventually expand the range of CDS contracts eligible for clearing to 
include single name CDS (which could include issuers of government 
securities). The request explains that participation in ICE Trust will 
be open to all qualified applicants, each of whom will clear 
transactions solely as principal for its own account and not on behalf 
of other persons. In order to qualify as an ICE Trust Participant, an 
applicant will be required to satisfy ICE Trust's participant criteria 
at the time that the applicant applies to ICE Trust and on an ongoing 
basis thereafter.\25\ Among these criteria is a requirement that each 
ICE Trust Participant is subject to regulation for capital adequacy by 
a federal or foreign financial regulator or is an affiliate of an 
entity that is subject to regulation by such a financial regulator (and 
as a result the ICE Trust Participant would be subject to consolidated 
holding company group supervision).
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    \25\ The request states that the participant criteria are 
specified in the ICE Trust Rules.
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    Although CDS are currently bilaterally negotiated and executed, 
major market participants frequently use the Deriv/SERV service of The 
Depository Trust & Clearing Corporation comparison and confirmation 
service when documenting their CDS transactions. ICE Trust will 
leverage the Deriv/SERV infrastructure in operating its CDS clearing 
service.
    ICE Trust will collect and process information about CDS 
transactions and positions from all of its participants. With this 
information, ICE Trust plans to, among other things, calculate and 
disseminate current values for open positions for the purpose of 
setting appropriate margin levels, or have an agent perform these 
functions on its behalf. ICE Trust believes that the availability of 
such information could improve the fairness, efficiency, and 
competitiveness of the market. Moreover, with pricing and valuation 
information relating to CDS transactions, ICE Trust represents that 
market participants would be able to derive information about 
underlying securities and indexes. ICE Trust believes this could 
improve the efficiency and effectiveness of the securities markets by 
allowing investors to better understand credit conditions generally.
    ICE Trust maintains that in addition to reducing the outstanding 
notional amount of ICE Trust-cleared CDS, it will further mitigate 
counterparty risk to ICE Trust, ICE Trust Participants, and the CDS 
market generally through its margin, guaranty fund, and credit support 
framework.
    As the counterparty to each of the ICE Trust Participants, ICE 
Trust will have exposure to default risk by ICE Trust Participants. To 
address this counterparty credit risk, ICE Trust states that it will 
require the ICE Trust Participants to provide credit support for their 
obligations under cleared CDS transactions and has established rules 
that ``mutualize'' the risk of an ICE Trust Participant default across 
all ICE Trust Participants. ICE Trust's risk management infrastructure 
and related risk metrics have been structured specifically for the CDS 
products that ICE Trust clears. Each ICE Trust Participant's credit 
support obligations will be governed by a uniform credit support 
framework and applicable ICE Trust Rules.
    The request also states that ICE Trust Participants may use the 
facilities of an IDB to execute CDS, for example, to access liquidity 
more rapidly or to maintain pre-execution anonymity, and submit such 
transactions for clearance and settlement to ICE Trust. Further, these 
IDBs may be unregistered with the SEC, may be registered as broker-
dealers or government securities brokers or government securities 
dealers, or may be registered as broker-dealers and

[[Page 10650]]

operating subject to Regulation ATS. The request indicates that these 
IDBs, although they are compensated for matching and effecting CDS 
transactions, do not handle the funds or property of their CDS 
participants, and similarly do not assume market positions in 
connection with their intermediation of CDS transactions.
    The request states that a CDS that does not qualify as a security-
based swap agreement may potentially be subject to characterization as 
a security, and similarly, that a CDS that has one or more reference or 
deliverable obligations that are government securities and that does 
not qualify as a security-based swap agreement may potentially be 
subject to characterization as a government security.
    The request also asserts that the framework for the regulation of 
securities broker-dealers has been effective for traditional securities 
activities, but it has not provided a commercially practical framework 
for the conduct of broad categories of OTC derivatives activities. The 
request states that little would be gained by subjecting ICE Trust 
Participants to regulation as government securities brokers or 
government securities dealers with respect to any cleared CDS that 
reference government securities, given that ICE Trust Participants will 
be sophisticated derivatives market participants, will be acting solely 
for their own accounts (or the account of their affiliates) and will be 
limited to firms who are subject to regulation or consolidated 
supervision by a financial regulator.
    ICE Trust further states that requiring government securities 
broker and government securities dealer regulation and imposing the 
Exchange Act Section 15C government securities regime on any cleared 
CDS that reference government securities would create a significant and 
burdensome dislocation of this part of the CDS market and would present 
a significant obstacle to the adoption of clearing for this and related 
segments of the CDS market. The request states that the imposition of 
such additional regulation and regulatory constraints would be 
unwarranted, would not constitute an efficient allocation of regulatory 
resources, and would not serve the public interest. ICE Trust believes 
that, equally important, ``given the size and significance of the CDS 
market, proceeding in the face of any material legal uncertainty as to 
the regulatory status of a significant portion of CDS cleared through 
ICE Trust would be unacceptable both to market participants and the 
official sector.'' The request states that either outcome would produce 
undesirable consequences and jeopardize the important benefits that the 
introduction of central clearing for CDS can provide.
    The request asks for exemptive relief for the avoidance of legal 
uncertainty, on terms and conditions that would, in effect, permit ICE 
Trust, ICE Trust Participants and their affiliates, and IDBs to 
continue to conduct business in cleared CDS that reference government 
securities on the basis that such transactions would be treated as 
security-based swap agreements under the Exchange Act.\26\
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    \26\ The approach of the SEC exemptive order was to apply 
substantially the same framework to CDS transactions that applies to 
transactions in security-based swap agreements. See note 2, supra. 
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. 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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V. Temporary Exemption for ICE Trust, ICE Trust Participants and 
Certain ECPs

    Treasury believes that the application of the GSA requirements to 
certain participants in CDS transactions that are not currently 
registered or noticed government securities brokers or government 
securities dealers could deter some market participants from using ICE 
Trust to clear CDS transactions where the CDS references a government 
security and thus reduce the CCP benefit of mitigating potential 
systemic risk. Moreover, based on the representations made in the 
request for exemptive relief, Treasury has concluded that the CCP 
facility for CDS proposed by ICE Trust could increase transparency, 
enhance counterparty risk management, and contribute generally to the 
goal of mitigating systemic risk.
    Accordingly, pursuant to Section 15C(a)(5) of the Exchange Act, the 
Secretary finds that it is consistent with the public interest, the 
protection of investors, and the purposes of the Exchange Act to grant 
a temporary exemption until December 6, 2009 from the provisions of 
Section 15C(a), (b), and (d) (other than subsection (d)(3)) of the 
Exchange Act, and the rules thereunder. This temporary exemption 
applies to: (1) ICE Trust, (2) ICE Trust Participants that are not 
government securities brokers or government securities dealers 
registered or noticed under Section 15C(a)(1) of the Exchange Act, and 
(3) any ECPs \27\ other than: (a) ECPs that are registered or noticed 
government securities brokers or government securities dealers; (b) 
ECPs that receive or hold funds or securities for the purpose of 
purchasing, selling,\28\ clearing, settling, or holding CDS positions 
for other persons; and (c) ECPs that are ECPs under Section 1a(12)(C) 
of the CEA. This temporary exemption applies to these entities' 
transactions in Cleared CDS.\29\
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    \27\ Treasury is providing relief to ECPs, including IDBs that 
are ECPs, consistent with the SEC's order and the treatment of 
security-based swap agreements under the Exchange Act. A swap 
agreement is defined under Section 206A of the Gramm-Leach-Bliley 
Act, in part, as any agreement, contract, or transaction between 
eligible contract participants (as defined in Section 1a(12) of the 
Commodity Exchange Act * * * other than a person that is an eligible 
contract participant under Section 1a(12)(C) 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.
    \28\ For the purposes of this Order, 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 transaction, 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).
    \29\ See note 10, supra.
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VI. Temporary Exemption for Registered or Noticed Government Securities 
Brokers and Government Securities Dealers That Are Not Financial 
Institutions

    The GSA and its underlying rules and regulations require government 
securities brokers and government securities dealers to comply with a 
number of obligations that are important to protecting investors and 
promoting market integrity. Treasury believes it is important to 
promote the integrity, liquidity, and efficiency of financial markets 
while at the same time ensuring that risk is mitigated and customers 
are protected. Treasury also wants to avoid creating obstacles to the 
use of CCPs for CDS, and recognizes that the factors discussed above 
suggest that the full range of GSA requirements generally should not be 
applied immediately to government securities brokers and government 
securities dealers that engage in transactions involving CDS that 
reference a government security.
    The request suggested that to the extent that the SEC's CDS 
exemptions exclude particular Exchange Act provisions or specify 
certain conditions to the exemptive relief, the Treasury relief should 
be issued subject to the same conditions and to compliance with the 
same excluded provisions, to the

[[Page 10651]]

extent applicable. The SEC order exempts registered broker-dealers from 
certain provisions and rules under the Exchange Act, but retains 
certain other requirements such as those related to the protection of 
customer funds and securities.\30\
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    \30\ See note 2, supra.
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    Government securities brokers and government securities dealers are 
subject to the requirements in Section 15C and the regulations issued 
thereunder. Treasury was given authority by Congress in 1986 to issue 
rules with respect to transactions in government securities effected by 
government securities brokers and government securities dealers in the 
areas of financial responsibility, acceptance of custody and use of 
customer's securities, the carrying and use of customers' deposits or 
credit balances, and the transfer and control of government securities 
subject to repurchase agreements, records, and reporting. The GSA 
regulations issued by Treasury reflect a deliberate and responsive 
approach to regulating the government securities market, and strike a 
balance between ensuring customer protection and the continued 
liquidity and efficiency of the market. In addition, Congress directed 
the Secretary to: (1) Use existing regulations whenever possible, 
thereby avoiding duplicative requirements; (2) avoid imposing overly 
burdensome rules; and (3) ensure that the rules did not result in 
unequal treatment of market participants.\31\
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    \31\ 15 U.S.C. 78o-5(b)(4) and (5).
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    Many of the Treasury regulations promulgated under the GSA 
incorporated with limited modifications the existing SEC regulations 
(i.e., customer protection, recordkeeping, reports, and audits) that 
applied to registered brokers and dealers before the passage of the 
GSA. Treasury generally has exercised its authority under the Exchange 
Act in a manner that would provide consistency, to the extent possible, 
between the requirements applicable to registered broker-dealers and 
government securities brokers and government securities dealers. 
Therefore, Treasury is providing certain temporary exemptions for 
government securities brokers and government securities dealers that 
are not financial institutions from certain GSA regulations to maintain 
consistency with the requirements applicable to registered broker-
dealers with respect to CDS transactions that are submitted to ICE 
Trust for clearance and settlement.
    Accordingly, pursuant to Section 15C(a)(5) of the Exchange Act, the 
Secretary finds that it is consistent with the public interest, the 
protection of investors, and the purposes of the Exchange Act to grant 
a temporary exemption to registered or noticed government securities 
brokers and government securities dealers that are not financial 
institutions until December 6, 2009 from the regulations in 17 CFR 
parts 402, 403, 404, and 405.\32\ However, this Order does not exempt 
registered or noticed government securities brokers or government 
securities dealers from the following: (1) The capital requirements for 
registered government securities brokers and government securities 
dealers in part 402 of the GSA regulations (which are comparable to SEC 
Rule 15c3-1 on net capital) \33\; (2) the provisions of part 403 of the 
GSA regulations that incorporate and modify SEC Rule 15c3-3 on reserves 
and custody of securities; (3) the provisions of parts 404 and 405 of 
the GSA regulations that incorporate and modify SEC Rules 17a-3 through 
17a-5, 17h-1T and 17h-2T, on records and reports; and (4) the 
provisions of part 404 of the GSA regulations that incorporate and 
modify SEC Rule 17a-13 on quarterly security counts. This temporary 
exemption applies to these entities' transactions in Cleared CDS.\34\
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    \32\ The rules in part 400 are excluded because they are rules 
of general application. The rules in part 401 are excluded because 
they cover existing exemptions. The rules in part 449 are excluded 
because they describe forms that are required by other rules.
    \33\ Part 402 does not apply to registered broker-dealers that 
are subject to Rule 15c3-1.
    \34\ See note 10, supra.
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    With respect to noticed government securities brokers and 
government securities dealers that are financial institutions, the GSA 
regulations generally adopt the appropriate regulatory agency rules for 
financial institutions that are comparable to the SEC rules to which 
the exemption does not extend. The GSA regulations also incorporate 
rules of the appropriate regulatory agencies that are otherwise 
applicable to financial institutions. Treasury is not extending the 
temporary exemption to financial institution government securities 
brokers and government securities dealers. Financial institution 
government securities brokers and government securities dealers should 
continue to comply with existing rules.
    In issuing this Order, Treasury has consulted with and considered 
the views of the staffs of the SEC, the Commodity Futures Trading 
Commission, and the financial institution appropriate regulatory 
agencies.

VII. Solicitation of Comments

    Treasury intends to monitor the development of CCPs for the CDS 
market and determine to what extent, if any, additional action might be 
necessary. For example, as circumstances warrant, certain conditions 
could be added, altered, or eliminated from this Order. Treasury will 
in the future consider whether the temporary exemptions should be 
extended or allowed to expire. Treasury believes it is prudent to 
solicit public comment on this Order. Specifically, Treasury is 
soliciting public comment on all aspects of these temporary exemptions, 
including:
    1. The appropriateness of the length of this temporary exemption 
(until December 6, 2009). If not appropriate, what should the 
appropriate duration be?
    2. The appropriateness of the extent of the relief granted or any 
exclusions from the exemptions.
    You may send comments to: Government Securities Regulations Staff, 
Bureau of the Public Debt, 799 9th Street, NW., Washington, DC 20239-
0001. You may also send comments by e-mail to <a href="/cdn-cgi/l/email-protection#187f776e6b7d7b6a7d7f587a687c366c6a7d796b367f776e"><span class="__cf_email__" data-cfemail="7b1c140d081e18091e1c3b190b1f550f091e1a08551c140d">[email protected]</span></a>. 
Please provide your full name and mailing address. You may download 
this temporary exemptive Order, and review the comments we receive, 
from the Bureau of the Public Debt's Web site at http://www.treasurydirect.gov. The Order and comments also will be available 
for public inspection and copying at the Treasury Department Library, 
Room 1428, Main Treasury Building, 1500 Pennsylvania Avenue, NW., 
Washington, DC 20220. To visit the library, call (202) 622-0990 for an 
appointment.
    Treasury will continue to consult with, the staffs of the SEC, the 
Commodity Futures Trading Commission, and the financial institution 
appropriate regulatory agencies on this matter.

VIII. Conclusion

    It is hereby ordered, pursuant to Section 15C(a)(5) of the Exchange 
Act, that, until December 6, 2009:

(a) Temporary Exemption for ICE Trust, ICE Trust Participants, and 
Certain ECPs

    The following persons are exempt from the provisions of Section 
15C(a), (b), and (d) (other than subsection (d)(3)) of the Exchange 
Act, and the rules thereunder: ICE Trust, ICE Trust Participants that 
are not government

[[Page 10652]]

securities brokers or government securities dealers registered or 
noticed under Section 15C(a)(1) of the Exchange Act, and any ECPs \35\ 
other than: (a) ECPs that are registered or noticed government 
securities brokers or government securities dealers; (b) ECPs that 
receive or hold funds or securities for the purpose of purchasing, 
selling, clearing, settling, or holding CDS positions for other 
persons; and (c) ECPs that are ECPs under Section 1a(12)(C) of the CEA. 
This temporary exemption applies to these entities' transactions in 
Cleared CDS.\36\
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    \35\ See note 8, supra.
    \36\ See note 10, supra.
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(b) Temporary Exemption for Registered or Noticed Government Securities 
Brokers and Government Securities Dealers that are not Financial 
Institutions

    Registered or noticed government securities brokers and government 
securities dealers that are not financial institutions are exempt from 
the regulations in 17 CFR parts 402, 403, 404, and 405. However, this 
Order does not exempt registered or noticed government securities 
brokers or government securities dealers that are not financial 
institutions from the following:
    (1) The capital requirements for registered government securities 
brokers and government securities dealers in part 402 of the GSA 
regulations (which are comparable to SEC Rule 15c3-1 on net capital);
    (2) the provisions of part 403 of the GSA regulations that 
incorporate and modify SEC Rule 15c3-3 on reserves and custody of 
securities;
    (3) the provisions of parts 404 and 405 of the GSA regulations that 
incorporate and modify SEC Rules 17a-3 through 17a-5, 17h-1T and 17h-
2T, on records and reports; and
    (4) the provisions of part 404 of the GSA regulations that 
incorporate and modify SEC Rule 17a-13 on quarterly security counts.

This temporary exemption applies to these entities' transactions in 
Cleared CDS.
    The temporary exemptions contained in this Order are based on the 
facts and circumstances presented in the request. These temporary 
exemptions could become unavailable if the facts or circumstances 
change such that the representations in the request are no longer 
materially accurate. The status of Cleared CDS submitted to ICE Trust 
prior to such change would be unaffected.

Karthik Ramanathan,
Acting Assistant Secretary for Financial Markets.
[FR Doc. E9-5242 Filed 3-6-09; 4:15 pm]
BILLING CODE 4810-39-P


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