Federal Register / Vol. 74, No. 52 / Thursday, March 19, 2009 / Notices 11781 

1A nonexclusive list of the Commission’s actions 

to stabilize financial markets during this credit 

crisis include: Adopting a package of measures to 

strengthen investor protections against naked short 

selling, including rules requiring a hard T+3 closeout, eliminating the options market maker 

exception of Regulation SHO, and expressly 

targeting fraud in short selling transactions (See 

Securities Exchange Act Release No. 58572 

(September 17, 2008), 73 FR 54875 (September 23, 

2008)); issuing an emergency order to enhance 

protections against naked short selling in the 

securities of primary dealers, Federal National 

Mortgage Association (‘‘Fannie Mae’’), and Federal 

Home Loan Mortgage Corporation (‘‘Freddie Mac’’) 

(See Securities Exchange Act Release No. 58166 

(July 15, 2008), 73 FR 42379 (July 21, 2008)); taking 

temporary emergency action to ban short selling in 

financial securities (See Securities Exchange Act 

Release No. 58592 (September 18, 2008), 73 FR 

55169 (September 24, 2008)); approving emergency 

rulemaking to ensure disclosure of short positions 

by hedge funds and other institutional money 

managers (See Securities Exchange Act Release No. 

58591A (September 21, 2008), 73 FR 55557 

(September 25, 2008)); proposing rules to 

strengthen the regulation of credit rating agencies 

and making the limits and purposes of credit ratings 

clearer to investors (See Securities Exchange Act 

Release No. 57967 (June 16, 2008), 73 FR 36212 

(June 25, 2008); entering into a Memorandum of 

Continued 

credit amount vest with him or her 

immediately. 

15. The bonus credit recapture 

provisions are necessary for the Life 

Company to offer the bonus credits and 

avoid anti-selection against it. It would 

be unfair to the Life Company to permit 

an owner to keep his or her bonus 

credits upon his or her exercise of the 

Contract’s ‘‘free look’’ provision. 

Because no CDSC applies to the exercise 

of the ‘‘free look’’ provision, the owner 

could obtain a quick profit in the 

amount of the bonus credit at the Life 

Company’s expense by exercising that 

right. Likewise, because no additional 

CDSC applies upon death of an owner 

(or annuitant) or where the CDSC is 

waived upon a surrender or withdrawal 

due to the owner’s receipt of qualified 

extended medical care or the owner is 

diagnosed with a qualifying terminal 

illness, a death or this type of surrender 

or withdrawal shortly after the award of 

bonus credits would afford an owner or 

a beneficiary a similar profit at the Life 

Company’s expense. 

16. In the event of such profits to an 

owner or beneficiary, the Life Company 

could not recover the cost of granting 

the bonus credits. This is because the 

Life Company intends to recoup the 

costs of providing the bonus credits 

through the charges under the Contract, 

particularly the daily mortality and 

expense risk charge and the daily 

administrative charge. If the profits 

described above are permitted, an owner 

could take advantage of them, reducing 

the base from which the daily charges 

are deducted and greatly increasing the 

amount of bonus credits that the Life 

Company must provide. Therefore, the 

recapture provisions are a price of 

offering the bonus credits. The Life 

Company simply cannot offer the 

proposed bonus credits without the 

ability to recapture those credits in the 

limited circumstances described herein. 

17. Applicants state that the 

Commission’s authority under Section 

6(c) of the Act to grant exemptions from 

various provisions of the Act and rules 

thereunder is broad enough to permit 

orders of exemption that cover classes of 

unidentified persons. Applicants 

request an order of the Commission that 

would exempt them, the Life Company’s 

successors in interest, Future Accounts 

and Future Underwriters from the 

provisions of Sections 2(a)(32) and 

27(i)(2)(A) of the Act and Rule 22c–1 

thereunder with respect to the 

Contracts. The exemption of these 

classes of persons is appropriate in the 

public interest and consistent with the 

protection of investors and the purposes 

fairly intended by the policy and 

provisions of the Act because all of the 

potential members of the class could 

obtain the foregoing exemptions for 

themselves on the same basis as the 

Applicants, but only at a cost to each of 

them that is not justified by any public 

policy purpose. As discussed below, the 

requested exemptions would only 

extend to persons that in all material 

respects are the same as the Applicants. 

The Commission has previously granted 

exemptions to classes of similarly 

situated persons in various contexts and 

in a wide variety of circumstances, 

including class exemptions for 

recapturing bonus credits under variable 

annuity contracts. 

18. Applicants represent that any 

contracts in the future will be 

substantially similar in all material 

respects to the Contracts, but 

particularly with respect to the bonus 

credits and recapture of bonus credits, 

and that each factual statement and 

representation about the bonus credit 

provisions will be equally true of any 

Contracts in the future. Applicants also 

represent that each material 

representation made by them about the 

Account and DSL will be equally true of 

Future Accounts and Future 

Underwriters, to the extent that such 

representations relate to the issues 

discussed in the application. In 

particular, each Future Underwriter will 

be registered as a broker-dealer under 

the Securities Exchange Act of 1934 and 

be a FINRA member. 

19. For the reasons above, Applicants 

submit that the bonus credit provisions 

involve none of the abuses to which 

provision of the Act and rules 

thereunder are directed. The owner will 

always retain the investment experience 

attributable to the bonus credit and will 

retain the principal amount in all cases 

except under the circumstances 

described herein. Further, the Life 

Company should be able to recapture 

such bonus credits to limit potential 

losses associated with such bonus 

credits. 

Conclusion 

Applicants submit that the 

exemptions requested are necessary or 

appropriate in the public interest, 

consistent with the protection of 

investors and the purposes fairly 

intended by the policy and provisions of 

the Act, and consistent with and 

supported by Commission precedent. 

Applicants also submit, based on the 

analysis listed above, that the provisions 

for recapture of any bonus credit under 

the Contracts does not violate Section 

2(a)(32) and 27(i)(2)(A) of the Act and 

Rule 22c–1 thereunder. The Applicants 

hereby request that the Commission 

issue an order pursuant to Section 6(c) 

of the Act to exempt the Applicants 

with respect to (1) the Contracts, (2) 

Future Accounts that support the 

Contracts, and (3) Future Underwriters 

from the provisions of Sections 2(a)(32) 

and 27(i)(2)(A) of the Act and Rule 22c– 

1 thereunder, to the extent necessary to 

permit the recapture of the bonus 

credits (previously applied to premium 

payments) in the circumstances 

described above. 

For the Commission, by the Division of 

Investment Management, pursuant to 

delegated authority. 

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E9–5980 Filed 3–18–09; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–59578; File No. S7–06–09] 

Order Granting Temporary Exemptions 

Under the Securities Exchange Act of 

1934 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 

March 13, 2009. 

I. Introduction 

In response to the recent turmoil in 

the financial markets, the Securities and 

Exchange Commission (‘‘Commission’’) 

has taken multiple actions to protect 

investors and ensure the integrity of the 

nation’s securities markets.1 Today the 


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Understanding with the Board of Governors of the 

Federal Reserve System (‘‘FRB’’) to make sure key 

Federal financial regulators share information and 

coordinate regulatory activities in important areas 

of common interest (See Memorandum of 

Understanding Between the U.S. Securities and 

Exchange Commission and the Board of Governors 

of the Federal Reserve System Regarding 

Coordination and Information Sharing in Areas of 

Common Regulatory and Supervisory Interest (July 

7, 2008), http://www.sec.gov/news/press/2008/ 

2008–134_mou.pdf). 

2 In addition to the potential systemic risks that 

CDS pose to financial stability, we are concerned 

about other potential risks in this market, including 

operational risks, risks relating to manipulation and 

fraud, and regulatory arbitrage risks. 

3See Policy Objectives for the OTC Derivatives 

Market, The President’s Working Group on 

Financial Markets, November 14, 2008, available at 

http://www.ustreas.gov/press/releases/reports/ 

policyobjectives.pdf (‘‘Public reporting of prices, 

trading volumes and aggregate open interest should 

be required to increase market transparency for 

participants and the public.’’). 

4See The Role of Credit Derivatives in the U.S. 

Economy Before the H. Agric. Comm., 110th Cong. 

(2008) (Statement of Erik Sirri, Director of the 

Division of Trading and Markets, Commission). 

5See id. 

6See Policy Objectives for the OTC Derivatives 

Market, The President’s Working Group on 

Financial Markets (November 14, 2008), http:// 

www.ustreas.gov/press/releases/reports/ 

policyobjectives.pdf. See also Policy Statement on 

Financial Market Developments, The President’s 

Working Group on Financial Markets (March 13, 

2008), http://www.treas.gov/press/releases/reports/ 

pwgpolicystatemktturmoil_03122008.pdf; Progress 

Update on March Policy Statement on Financial 

Market Developments, The President’s Working 

Group on Financial Markets (October 2008), 

http://www.treas.gov/press/releases/reports/ 

q4progress%20update.pdf. 

7See Memorandum of Understanding Between 

the Board of Governors of the Federal Reserve 

System, the U.S. Commodity Futures Trading 

Commission and the U.S. Securities and Exchange 

Commission Regarding Central Counterparties for 

Credit Default Swaps (November 14, 2008), http:// 

www.treas.gov/press/releases/reports/finalmou.pdf. 

8See Semiannual OTC derivatives statistics at 

end-December 2007, Bank for International 

Settlements (‘‘BIS’’), available at http:/www.bis.org/ 

statistics/otcder/dt1920a.pdf. 

9CDS were initially created to meet the demand 

of banking institutions looking to hedge and 

diversify the credit risk attendant with their lending 

activities. However, financial institutions such as 

insurance companies, pension funds, securities 

firms, and hedge funds have entered the CDS 

market. 

10 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. 

11See generally R. Bliss and C. Papathanassiou, 

‘‘Derivatives clearing, central counterparties and 

novation: The economic implications’’ (March 8, 

2006), at 6. See also ‘‘New Developments in 

Clearing and Settlement Arrangements for OTC 

Derivatives,’’ Committee on Payment and 

Settlement Systems, BIS, at 25 (March 2007), 

available at http://www.bis.org/pub/cpss77.pdf; 

‘‘Reducing Risks and Improving Oversight in the 

OTC Credit Derivatives Market,’’ Before the Sen. 

Subcomm. On Secs., Ins. and Investments, 110th 

Cong. (2008) (Statement of Patrick Parkinson, 

Deputy Director, Division of Research and 

Statistics, FRB). 

Commission is taking further action 

designed to address concerns related to 

the market in credit default swaps 

(‘‘CDS’’). The over-the-counter (‘‘OTC’’) 

market for CDS has been a source of 

concerns to us and other financial 

regulators. These concerns include the 

systemic risk posed by CDS, highlighted 

by the possible inability of parties to 

meet their obligations as counterparties 

and the potential resulting adverse 

effects on other markets and the 

financial system.2 Recent credit market 

events have demonstrated the 

seriousness of these risks in a CDS 

market operating without meaningful 

regulation, transparency,3 or central 

counterparties (‘‘CCPs’’).4 These events 

have emphasized the need for CCPs as 

mechanisms to help control such risks.5

A CCP for CDS could be an important 

step in reducing the counterparty risks 

inherent in the CDS market, and thereby 

help mitigate potential systemic 

impacts. In November 2008, the 

President’s Working Group on Financial 

Markets stated that the implementation 

of a CCP for CDS was a top priority 6

and, in furtherance of this 

recommendation, the Commission, the 

FRB and the Commodity Futures 

Trading Commission (‘‘CFTC’’) signed a 

Memorandum of Understanding 7 that 

establishes a framework for consultation 

and information sharing on issues 

related to CCPs for CDS. Given the 

continued uncertainty in this market, 

taking action to help foster the prompt 

development of CCPs, including 

granting conditional exemptions from 

certain provisions of the Federal 

securities laws, is in the public interest. 

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 

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. In recent 

years, CDS market volumes have rapidly 

increased.8 This growth has coincided 

with a significant rise in the types and 

number of entities participating in the 

CDS market.9

The Commission’s authority over this 

OTC market for CDS is limited. 

Specifically, Section 3A of the 

Securities Exchange Act of 1934 

(‘‘Exchange Act’’) limits the 

Commission’s authority over swap 

agreements, as defined in Section 206A 

of the Gramm-Leach-Bliley Act.10 For 

those CDS that are swap agreements, the 

exclusion from the definition of security 

in Section 3A of the Exchange Act, and 

related provisions, will continue to 

apply. The Commission’s action today 

does not affect these CDS, and this 

Order does not apply to them. For those 

CDS that are not swap agreements 

(‘‘non-excluded CDS’’), the 

Commission’s action today provides 

conditional exemptions from certain 

requirements of the Exchange Act. 

The Commission believes that using 

well-regulated CCPs to clear 

transactions in CDS would help 

promote efficiency and reduce risk in 

the CDS market and among its 

participants. These benefits could be 

particularly significant in times of 

market stress, as CCPs would mitigate 

the potential for a market participant’s 

failure to destabilize other market 

participants, and reduce the effects of 

misinformation and rumors. CCPmaintained records of CDS transactions 

would also aid the Commission’s efforts 

to prevent and detect fraud and other 

abusive market practices. 

A well-regulated CCP also would 

address concerns about counterparty 

risk by substituting the creditworthiness 

and liquidity of the CCP for the 

creditworthiness and liquidity of the 

counterparties to a CDS. In the absence 

of a CCP, participants in the OTC CDS 

market must carefully manage their 

counterparty risks because the default 

by a counterparty can render worthless, 

and payment delay can reduce the 

usefulness of, the credit protection that 

has been bought by a CDS purchaser. 

CDS participants currently attempt to 

manage counterparty risk by carefully 

selecting and monitoring their 

counterparties, entering into legal 

agreements that permit them to net 

gains and losses across contracts with a 

defaulting counterparty, and often 

requiring counterparty exposures to be 

collateralized.11 A CCP could allow 

participants to avoid these risks specific 

to individual counterparties because a 

CCP ‘‘novates’’ bilateral trades by 

entering into separate contractual 

arrangements with both 

counterparties—becoming buyer to one 


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12 ‘‘Novation’’ 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.’’ Committee on Payment and Settlement 

Systems, Technical Committee of the International 

Organization of Securities Commissioners, 

Recommendations for Central Counterparties 

(November 2004) at 66. 

13See ‘‘New Developments in Clearing and 

Settlement Arrangements for OTC Derivatives,’’ 

supra note 11, at 25. Multilateral netting of trades 

would permit multiple counterparties to offset their 

open transaction exposure through the CCP, 

spreading credit risk across all participants in the 

clearing system and more effectively diffusing the 

risk of a counterparty’s default than could be 

accomplished by bilateral netting alone. 

14See Letter from Adam Cooper, Citadel 

Investment Group, L.L.C. and Ann K. Shuman, 

Chicago Mercantile Exchange, Inc., to Elizabeth M. 

Murphy, Secretary, Commission, March 12 , 2008. 

15See id. The exemptions we are granting today 

are based on representations made by CME and 

Citadel. We recognize, however, that there could be 

legal uncertainty in the event that one or more of 

the underlying representations were to become 

inaccurate. Accordingly, if any of these exemptions 

were to become unavailable by reason of an 

underlying representation no longer being 

materially accurate, the legal status of existing open 

positions in non-excluded CDS associated with 

persons subject to those unavailable exemptions 

would remain unchanged, but no new positions 

could be established pursuant to the exemptions 

until all of the underlying representations were 

again accurate. 

16See Securities Act Release No. 8999 (January 

14, 2009). 

17See Securities Exchange Act Release No. 59165 

(December 24, 2008). 

18The DCM and DCO Core Principles are set forth 

in 7 U.S.C. 7(b), 7a–1(c)(2)(A). 

19See note 29, infra. 

20Citadel and CME have entered into a joint 

venture (to be named ‘‘CMDX’’) to provide a trading 

and clearing solution for CDS. CMDX trading, 

booking and migration services would be available 

only to persons that satisfy the definition of an 

‘‘eligible contract participant’’ in Section 1a(12) of 

the Commodity Exchange Act (‘‘CEA’’) (other than 

paragraph (C) thereof). In addition, each participant 

on the CMDX platform must be a clearing member 

of CME or have a clearing relationship with a CME 

clearing member that agrees to assume 

responsibility for the participant’s CDS contracts 

cleared by CME. Initially, CMDX would offer CDS 

that mirror as closely as possible the terms of 

existing OTC CDS. The coupons and maturities 

would be standardized to the extent necessary to 

permit centralized clearing. 

and seller to the other.12 Through 

novation, it is the CCP that assumes 

counterparty risks. 

For this reason, a CCP for CDS would 

contribute generally to the goal of 

market stability. As part of its risk 

management, a CCP may subject 

novated contracts to initial and 

variation margin requirements and 

establish a clearing fund. The CCP also 

may implement a loss-sharing 

arrangement among its participants to 

respond to a participant insolvency or 

default. 

A CCP would also reduce CDS risks 

through multilateral netting of trades.13

Trades cleared through a CCP would 

permit market participants to accept the 

best bid or offer from a dealer in the 

OTC market with very brief exposure to 

the creditworthiness of the dealer. In 

addition, by allowing netting of 

positions in similar instruments, and 

netting of gains and losses across 

different instruments, a CCP would 

reduce redundant notional exposures 

and promote the more efficient use of 

resources for monitoring and managing 

CDS positions. Through uniform 

margining and other risk controls, 

including controls on market-wide 

concentrations that cannot be 

implemented effectively when 

counterparty risk management is 

decentralized, a CCP can help prevent a 

single market participant’s failure from 

destabilizing other market participants 

and, ultimately, the broader financial 

system. 

In this context, The Chicago 

Mercantile Exchange Inc. (‘‘CME’’) and 

Citadel Investment Group, L.L.C. 

(‘‘Citadel’’) have requested that the 

Commission grant exemptions from 

certain requirements under the 

Exchange Act with respect to their 

proposed activities in clearing and 

settling certain CDS, as well as the 

proposed activities of certain other 

persons, as described below.14

Based on the facts that CME and 

Citadel have presented and the 

representations they have made,15 and 

for the reasons discussed in this Order, 

the Commission temporarily is 

exempting, subject to certain conditions, 

CME from the requirement to register as 

a clearing agency under Section 17A of 

the Exchange Act solely to perform the 

functions of a clearing agency for certain 

non-excluded CDS transactions. The 

Commission also temporarily is 

exempting eligible contract participants 

and others from certain Exchange Act 

requirements with respect to nonexcluded CDS cleared by CME. The 

Commission’s exemptions are 

temporary and will expire on December 

14, 2009. To facilitate the operation of 

one or more CCPs for the CDS market, 

the Commission has also approved 

interim final temporary rules providing 

exemptions under the Securities Act of 

1933 and the Exchange Act for nonexcluded CDS.16 Finally, the 

Commission has provided temporary 

exemptions in connection with Sections 

5 and 6 of the Exchange Act for 

transactions in non-excluded CDS.17

II. Discussion 

A. Description of CME and Citadel’s 

Proposal 

The exemptive request by CME and 

Citadel describes how their proposed 

arrangements for central clearing of CDS 

would operate, and makes 

representations about the safeguards 

associated with those arrangements, as 

described below: 

1. CME Organization 

CME Group Inc. (‘‘CME Group’’), a 

Delaware stock corporation, is the 

holding company for CME, as well as 

Board of Trade of the City of Chicago, 

Inc., New York Mercantile Exchange, 

Inc., Commodity Exchange, Inc. and 

their subsidiaries. 

CME is a designated contract market 

(‘‘DCM’’), regulated by the CFTC, for the 

trading of futures and options on futures 

contracts. In addition, CME Group 

operates its own clearing house, which 

is a division of CME. The CME clearing 

house is a derivates clearing 

organization (‘‘DCO’’) regulated by the 

CFTC. The clearing house clears, settles 

and guarantees the performance of all 

transactions matched through the 

execution facilities and on third party 

exchanges for which CME Group 

provides clearing services. The clearing 

house operates with the oversight of the 

Clearing House Risk Committee 

(‘‘CHRC’’). The CHRC is made up of a 

group of clearing member 

representatives who represent the 

interests of the clearing house as well as 

clearing members of CME Group. 

CME is required to comply with the 

eighteen CFTC Core Principles 

applicable to registered DCMs and the 

fourteen CFTC Core Principles 

applicable to DCOs.18 The CFTC 

conducts regular audits or risk reviews 

of CME with respect to these Core 

Principles. CME is registered and in 

good standing with the CFTC. In 

addition, CME is notice registered with 

the Commission as a special purpose 

national securities exchange for the 

purpose of trading securities futures 

products. In the U.K., CME is a 

Recognised Overseas Investment 

Exchange and a Recognised Overseas 

Clearing House, subject to regulation by 

the U.K. Financial Services Authority. 

2. CME Central Counterparty Services 

for CDS 

CME as part of its clearing services 

would be interposed as central 

counterparty for transactions in Cleared 

CDS (as defined below).19 CME would 

provide clearing and settlement services 

for transactions in Cleared CDS 

submitted to or executed on the CMDX 

platform.20 CME would also accept for 

clearing directly from participants 

trades in Cleared CDS that are not 

executed on or processed through 

CMDX. 


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21Non-standard trades that are migrated to CME 

would ultimately be converted to a standard, 

centrally cleared contract. Migration may only 

occur if both counterparties to a trade agree to the 

process and both are clearing members or have the 

appropriate relationship with a clearing member. 

CMDX would also supply participants a data file of 

the original bilateral positions that were accepted 

into clearing via the migration process, so that 

participants may send appropriate exit records to 

the DTCC Trade Information Warehouse. 

22A list of acceptable collateral and applicable 

haircuts is available at www.cme.com. 

23See, e.g., CME Rulebook Chapter 8–F (Over-theCounter Derivative Clearing), including but not 

limited to Rules 8F06 (Clearing Member Default), 

8F07 (Security Deposit) and 8F13 (Insolvency and 

Liquidation). Chapter 8-F further incorporates the 

general CME Rules relating to defaults, including 

but not limited to Rules 913 (Withdrawal From 

Clearing Membership), 974 (Failure To Meet 

Minimum Financial Requirements), 975 

(Emergency Financial Conditions), 976 (Suspension 

of Clearing Members), 978 (Open Trades of 

Suspended Clearing Members), and 979 (Suspended 

or Expelled Clearing Members). 

24CME indicates that excluding collateral 

supporting open positions, which total 

approximately $116 billion, the total financial 

safeguards package is nearly $7 billion, comprised 

of: (1) CME surplus funds of $57 million; (2) 

clearing member security deposits of approximately 

$1.751 billion; and (3) assessment powers of 

approximately $4.816 billion (as of December 31, 

2008). Clearing members that clear Cleared CDS 

would be subject to an additional $5 million 

security deposit requirement. Furthermore, the 

calculation of that portion of a clearing member’s 

security deposit that is related to the risk of its CDS 

position would be scaled upward by a factor of 

three. 

25 17 CFR 30.7. 

Specifically, CME would accept for 

clearing (i) trades that are matched on 

the CMDX platform, (ii) pre-existing 

non-standard trades that are submitted 

to clearing through the CMDX migration 

facility, and (iii) new bilaterallyexecuted trades in standardized 

products that are submitted to CME for 

clearing directly by the participants 

(using CME’s Clearing 360TM API or 

similar facility that CME makes 

available).21

The trades submitted to or executed 

on the CMDX platform would be 

processed straight-through to CME for 

clearing and settlement. CME clearing 

and settlement of Cleared CDS would 

operate using the established systems, 

procedures and financial safeguards 

package that stand behind trading in 

CME’s primary futures market, and such 

activities would be subject to CFTC 

oversight of risk management and 

collateralization procedures. CME 

Rulebook Chapter 8–F sets forth the 

rules governing clearing and settlement 

of all products, instruments, and 

contracts in OTC derivatives, including 

but not limited to CDS contracts, swaps 

and forward rate agreements that the 

CME clearinghouse has designated as 

eligible for clearing. 

3. CME Risk Management 

CME clearing members that are 

broker-dealers or futures commission 

merchants maintain capital and 

liquidity in accordance with relevant 

SEC and CFTC rules and regulations. In 

addition, CME has requirements for 

minimum capital contribution, 

contribution to the guaranty fund based 

on risk factors, maintenance margin, 

and mark to market with immediate 

payment of losses applicable to clearing 

member firms. 

CME has adopted a risk-based capital 

requirement. Capital requirements are 

monitored by CME’s Audit Department 

and vary to reflect the risk of each 

clearing member’s positions as well as 

CME’s assessment of each clearing 

member’s internal controls, risk 

management policies and back office 

operations. 

Clearing members also would have 

tools to manage appropriate 

requirements with respect to their 

customers. CME Rule 982 requires 

clearing members to establish written 

risk management policies and 

procedures, including monitoring the 

risks assumed by specific customers. To 

facilitate such controls with respect to 

CDS transactions, CME’s clearing 

systems include functionality that 

permits clearing members to register 

customer accounts and specify customer 

credit limits. 

CME would extend its current 

monitoring procedures to Cleared CDS 

cleared by CME. CME would monitor 

for and investigate unusual trading 

patterns or volumes. Customer account 

reporting would allow CME to view the 

positions held by individual accounts. 

The positions of each account would be 

analyzed throughout the day to monitor 

any accounts that may have significant 

losses due to market moves. In addition, 

significant changes in positions from 

day to day would be analyzed and 

reported to CME clearing house senior 

management. 

CME would include stress testing of 

the different CDS clearing house margin 

factors to capture moves beyond the 

one-day 99% standard on the macro and 

sector moves and the five-day 99% 

standard for the idiosyncratic shocks. 

This would be considered in designing 

the financial safeguards package, adding 

concentration types of margining and 

routine stress testing. Also, the CDS 

clearing house margin factor parameters 

would be reviewed daily as a backtesting procedure to ensure the 

parameters are providing the desired 

coverage. CME would also review on a 

daily basis the margin collected by CME 

on CDS portfolios and compare those 

amounts to next-day market moves so 

that actual portfolio effects can be 

determined and gauged against the 

margin coverage. In addition, CME 

would evaluate the concentration of 

CDS positions beyond the margin 

factors and compare them against 

overall open interest and liquidity in the 

CDS market. 

CME will extend its scenario based 

stress testing techniques for 

concentration margining to Cleared 

CDS. The concentration stress test 

results will be evaluated relative to 

excess adjusted net capital for each 

segregated pool. If the hypothetical 

losses exceed the excess adjusted net 

capital for a clearing member’s 

segregated pool, then an additional 

margin charge will be applied to the 

clearing member’s position. The 

additional margin charge is calculated 

based on the magnitude of the 

hypothetical losses in excess of the 

clearing member’s excess adjusted net 

capital. 

CME determines the acceptability of 

different collateral types and determines 

appropriate haircuts.22 Collateral 

requirements for Cleared CDS would 

endeavor to reflect the specific risks of 

Cleared CDS, including jump-to-default 

and the consequences of a liquidity 

event caused by the defaults. 

4. Member Default 

If a clearing member is troubled (i.e., 

it fails to meet minimum financial 

requirements or its financial or 

operational condition may jeopardize 

the integrity of the CME, or negatively 

impact the financial markets), the CME 

may take action pursuant to Rules 974 

(Failure To Meet Minimum Financial 

Requirements) or 975 (Emergency 

Financial Conditions). In the event of a 

default by a clearing member of CME, 

the process would be governed by 

applicable CME Rules.23

In the event of a member default, CME 

may access its financial safeguard 

package as necessary. CME’s financial 

safeguards package is a combination of 

each clearing member’s collateral on 

deposit to support its positions, the 

collateral of its customers to support 

their positions, CME surplus funds, 

security deposits and assessment 

powers.24

5. Customer Rules and Other 

Requirements 

Prior to issuance of an order from the 

CFTC under Section 4d of the CEA (‘‘4d 

order’’), all Cleared CDS submitted to 

CME for clearing for the account of a 

clearing member’s customer must be 

assigned and held in an account subject 

to CFTC Regulation 30.7.25 Regulation 


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26 7 U.S.C. 6d. 

27See SR–FINRA–2009–012, available at http:// 

www.finra.org/Industry/Regulation/RuleFilings/ 

2009/P118121. 

28 15 U.S.C. 78mm. 

29For purposes of this exemption, and the other 

exemptions addressed in this Order, ‘‘Cleared CDS’’ 

means a credit default swap that is submitted (or 

offered, purchased, or sold on terms providing for 

submission) to CME, that is offered only to, 

purchased only by, and sold only to eligible 

contract participants (as defined in Section 1a(12) 

of the Commodity Exchange Act as in effect on the 

date of this Order (other than a person that is an 

eligible contract participant under paragraph (C) of 

that section)), and in which: (1) The reference 

entity, the issuer of the reference security, or the 

reference security is one of the following: (i) An 

entity reporting under the Exchange Act, providing 

Securities Act Rule 144A(d)(4) information, or 

about which financial information is otherwise 

publicly available; (ii) a foreign private issuer 

whose securities are listed outside the United States 

and that has its principal trading market outside the 

United States; (iii) a foreign sovereign debt security; 

(iv) an asset-backed security, as defined in 

Regulation AB, issued in a registered transaction 

with publicly available distribution reports; or (v) 

an asset-backed security issued or guaranteed by the 

Fannie Mae, the Freddie Mac, or the Government 

National Mortgage Association (‘‘Ginnie Mae’’); or 

(2) the reference index is an index in which 80 

percent or more of the index’s weighting is 

comprised of the entities or securities described in 

subparagraph (1). As discussed above, the 

Commission’s action today does not affect CDS that 

are swap agreements under Section 206A of the 

Gramm-Leach-Bliley Act. See text at note 10, supra. 

30The RCCP was drafted by a joint task force 

(‘‘Task Force’’) composed of representative 

members of IOSCO and CPSS and published in 

November 2004. The Task Force consisted of 

securities regulators and central bankers from 19 

countries and the European Union. The U.S. 

representatives on the Task Force included staff 

from the Commission, the FRB, and the CFTC. 

30.7 requires that customer positions 

and property be separately held and 

accounted for from the positions and 

property of the futures commission 

merchant, and that customer property 

be deposited under an account name 

that clearly identifies it as customer 

property. CME Rule 8F03 reiterates that 

‘‘[a]ll collateral deposited as 

performance bond to support positions 

in such Regulation § 30.7 account and 

all positions, collateral or cash in such 

account shall be segregated from the 

Clearing Member’s proprietary 

account.’’ 

Upon the issuance of a 4d order from 

the CFTC, the segregation and 

protection of customer funds and 

property would be controlled by Section 

4d of the CEA 26 and the regulations 

pertinent thereto; all funds and property 

received from customers of futures 

commission merchants in connection 

with purchasing, selling or holding CDS 

positions would be subject to the 

requirements of CFTC Regulation 1.20, 

et seq. promulgated under Section 4d. 

This regulation would apply to the 

purchasing, selling, and holding of CDS 

positions. This regulation would require 

that customer positions and property be 

separately accounted for and segregated 

from the positions and property of the 

futures commission merchant. Customer 

property will be deposited under an 

account name that clearly identifies it as 

such and shows it is appropriately 

segregated as required by the CEA and 

Regulation 1.20, et seq. 

In addition, customer margin 

requirements for a broker-dealer are 

generally set by the broker-dealer’s selfregulatory organizations (e.g., the 

Financial Industry Regulatory 

Authority, commonly referred to as 

‘‘FINRA’’). One purpose for customer 

margin requirements is to assure that 

broker-dealers collect sufficient margin 

from customers to protect the brokerdealer against the event that an adverse 

price move causes a customer default, 

leaving the broker-dealer with the 

responsibility for the transaction. 

FINRA intends to amend its customer 

margin rule to include margin 

requirements for Cleared CDS.27

B. Temporary Conditional Exemption 

From Clearing Agency Registration 

Requirement 

Section 17A of the Exchange Act sets 

forth the framework for the regulation 

and operation of the U.S. clearance and 

settlement system, including CCPs. 

Specifically, Section 17A directs the 

Commission to use its authority to 

promote enumerated Congressional 

objectives and to facilitate the 

development of a national clearance and 

settlement system for securities 

transactions. Absent an exemption, a 

CCP that novates trades of non-excluded 

CDS that are securities and generates 

money and settlement obligations for 

participants is required to register with 

the Commission as a clearing agency. 

Section 36 of the Exchange Act 

authorizes the Commission to 

conditionally or unconditionally 

exempt any person, security, or 

transaction, or any class or classes of 

persons, securities, or transactions, from 

any provision or provisions of the 

Exchange Act or any rule or regulation 

thereunder, by rule, regulation, or order, 

to the extent that such exemption is 

necessary or appropriate in the public 

interest, and is consistent with the 

protection of investors.28

Accordingly, pursuant to Section 36 

of the Exchange Act, the Commission 

finds that it is necessary or appropriate 

in the public interest and is consistent 

with the protection of investors to 

exercise its authority to grant an 

exemption until December 14, 2009 to 

CME from Section 17A of the Exchange 

Act, solely to perform the functions of 

a clearing agency for Cleared CDS,29

subject to the conditions discussed 

below. 

Our action today balances the aim of 

facilitating the prompt establishment of 

CME as a CCP for non-excluded CDS 

transactions—which should help reduce 

systemic risks during a period of 

extreme turmoil in the U.S. and global 

financial markets—with ensuring that 

important elements of Commission 

oversight are applied to the nonexcluded CDS market. In doing so, we 

are mindful that applying the full scope 

of the Exchange Act to transactions 

involving non-excluded CDS could 

deter the prompt establishment of CME 

as a CCP to settle those transactions. 

While we are acting so that the 

prompt establishment of CME as a CCP 

for non-excluded CDS will not be 

delayed by the need to apply the full 

scope of Exchange Act Section 17A’s 

requirements that govern clearing 

agencies, the relief we are providing is 

temporary and conditional. The limited 

duration of the exemptions will permit 

the Commission to gain more direct 

experience with the non-excluded CDS 

market after CME becomes operational, 

giving the Commission the ability to 

oversee the development of the centrally 

cleared non-excluded CDS market as it 

evolves. During the exemptive period, 

the Commission will closely monitor 

the impact of the CCPs on the CDS 

market. In particular, the Commission 

will seek to assure itself that the CCPs 

do not act in anticompetitive manner or 

indirectly facilitate anticompetitive 

behavior with respect to fees charged to 

members, the dissemination of market 

data and the access to clearing services 

by independent CDS exchanges or CDS 

trading platforms. The Commission will 

take that experience into account in 

future actions. 

Moreover, this temporary exemption 

in part is based on CME’s representation 

that it meets the standards set forth in 

the Committee on Payment and 

Settlement Systems (‘‘CPSS’’) and 

International Organization of Securities 

Commissions (‘‘IOSCO’’) report entitled: 

Recommendation for Central 

Counterparties (‘‘RCCP’’).30 The RCCP 

establishes a framework that requires a 

CCP to have: (i) The ability to facilitate 

the prompt and accurate clearance and 

settlement of CDS transactions and to 

safeguard its users’ assets; and (ii) sound 

risk management, including the ability 

to appropriately determine and collect 

clearing fund and monitor its users’ 

trading. This framework is generally 


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31The Commission notes the recommendations of 

the President’s Working Group on Financial 

Markets regarding the informational needs and due 

diligence responsibilities of investors. See Policy 

Statement on Financial Market Developments, The 

President’s Working Group on Financial Markets, 

March 13, 2008, available at http://www.treas.gov/ 

press/releases/reports/ 

pwgpolicystatemktturmoil_03122008.pdf. 

32Clearance and settlement services would 

include services in association with CME’s CMDX 

migration facility, as well as activities associated 

with margin services. 

33The Commission will conduct routine 

examinations no more often than annually, 

although it may inspect more frequently for cause. 

Moreover, the Commission will limit the scope of 

such inspections to confirming compliance with the 

requirements set forth in this Order, including 

compliance with the securities laws applicable to 

CME’s Cleared CDS business and operations. The 

Commission will make reasonable efforts to 

coordinate any inspections with the CFTC or other 

regulatory bodies with jurisdiction in order to 

conduct joint inspections where possible. 

34See Automated Systems of Self-Regulatory 

Organization, Exchange Act Release No. 27445 

(November 16, 1989), File No. S7–29–89, and 

Automated Systems of Self-Regulatory Organization 

(II), Exchange Act Release No. 29185 (May 9, 1991), 

File No. S7–12–91. 

35 15 U.S.C. 78k–1(a)(1)(C)(iii). See also 15 U.S.C. 

78k–1(a)(1)(D). 

36See President’s Working Group on Financial 

Markets, Policy Objectives for the OTC Derivatives 

Market (November 14, 2008), available at http:// 

www.ustreas.gov/press/releases/reports/ 

policyobjectives.pdf (‘‘Public reporting of prices, 

trading volumes and aggregate open interest should 

be required to increase market transparency for 

participants and the public.’’). 

consistent with the requirements of 

Section 17A of the Exchange Act. 

In addition, this Order is designed to 

assure that—as CME and Citadel have 

represented—information will be 

available to market participants about 

the terms of the CDS cleared by CME, 

the creditworthiness of CME or any 

guarantor, and the clearing and 

settlement process for the CDS. 

Moreover, to be within the definition of 

Cleared CDS for purposes of this 

exemption (as well as the other 

exemptions granted through this Order), 

a CDS may only involve a reference 

entity, a reference security, an issuer of 

a reference security, or a reference index 

that satisfies certain conditions relating 

to the availability of information about 

such persons or securities. For nonexcluded CDS that are index-based, the 

definition provides that at least 80 

percent of the weighting of the index 

must be comprised of reference entities, 

issuers of a reference security, or 

reference securities that satisfy the 

information conditions. The definition 

does not prescribe the type of financial 

information that must be available nor 

the location of the particular 

information, recognizing that eligible 

contract participants have access to 

information about reference entities and 

reference securities through multiple 

sources. The Commission believes, 

however, that it is important in the CDS 

market, as in the market for securities 

generally, that parties to transactions 

should have access to financial 

information that would allow them to 

appropriately evaluate the risks relating 

to a particular investment and make 

more informed investment decisions.31

Such information availability also will 

assist CME and the buyers and sellers in 

valuing their Cleared CDS and their 

counterparty exposures. As a result of 

the Commission’s actions today, the 

Commission believes that information 

should be available for market 

participants to be able to make informed 

investment decisions, and value and 

evaluate their Cleared CDS and their 

counterparty exposures. 

This temporary exemption is subject 

to a number of conditions that are 

designed to enable Commission staff to 

monitor CME’s clearance and settlement 

of CDS transactions and help reduce 

risk in the CDS market. These 

conditions require that CME: (i) Make 

available on its Web site its annual 

audited financial statements; (ii) 

preserve records of all activities related 

to the business of CME as a CCP for 

Cleared CDS for at least five years (in an 

easily accessible place for the first two 

years); (iii) supply information relating 

to its Cleared CDS clearance and 

settlement services 32 to the Commission 

and provide access to the Commission 

to conduct on-site inspections of 

facilities and records related to its 

Cleared CDS clearance and settlement 

services and will provide the 

Commission access to its personnel to 

answer reasonable questions during any 

such inspections; 33 (iv) notify the 

Commission about material disciplinary 

actions taken against CME clearing 

members with respect to Cleared CDS 

clearance and settlement services, and 

about the involuntary termination of the 

membership of an entity using those 

services; (v) notify the Commission of 

all changes to rules as defined under the 

CFTC rules, fees, and any other material 

events affecting its Cleared CDS 

clearance and settlement services; (vi) 

provide the Commission with reports 

prepared by independent audit 

personnel that are generated in 

accordance with risk assessment of the 

areas set forth in the Commission’s 

Automation Review Policy 

Statements 34 and its annual audited 

financial statements prepared by 

independent audit personnel; (vii) 

report all significant systems outages to 

the Commission; and (viii) not 

materially change its methodology for 

determining Cleared CDS margin levels 

without prior written approval from the 

Commission, and from FINRA with 

respect to customer margin 

requirements that would apply to 

broker-dealers. 

In addition, this relief is conditioned 

on CME, directly or indirectly, making 

available to the public on terms that are 

fair and reasonable and not 

unreasonably discriminatory: (i) All 

end-of-day settlement prices and any 

other prices with respect to Cleared CDS 

that CME may establish to calculate 

mark-to-market margin requirements for 

CME participants; and (ii) any other 

pricing or valuation information with 

respect to Cleared CDS as is published 

or distributed by CME. The Commission 

believes this is an appropriate condition 

for CME’s exemption from registration 

as a clearing agency. In Section 11A of 

the Exchange Act, Congress found that 

‘‘[i]t is in the public interest and 

appropriate for the protection of 

investors and the maintenance of fair 

and orderly markets to assure * * * the 

availability to brokers, dealers, and 

investors of information with respect to 

quotations for and transactions in 

securities.’’ 35 The President’s Working 

Group on Financial Markets has stated 

that increased transparency is a policy 

objective for the over-the-counter 

derivatives market,36 which includes 

the market for CDS. The condition is 

designed to further this policy objective 

of both Congress and the President’s 

Working Group by requiring CME to 

make useful pricing data available to the 

public on terms that are fair and 

reasonable and not unreasonably 

discriminatory. Congress adopted these 

standards for the distribution of data in 

Section 11A. The Commission long has 

applied the standards in the specific 

context of securities market data, and it 

anticipates that CME will distribute its 

data on terms that generally are 

consistent with the application of these 

standards to securities market data. For 

example, data distributors generally are 

required to treat subscribers equally and 

not grant special access, fees, or other 

privileges to favored customers of the 

distributor. Similarly, distributors must 

make their data feeds reasonably 

available to data vendors for those 

subscribers who wish to receive their 

data indirectly through a vendor rather 

than directly from the distributor. In 

addition, a distributor’s attempt to tie 

data products that must be made 

available to the public with other 

products or services of the distributor 

would be inconsistent with the statutory 

requirements. The Commission 

carefully evaluates any type of 


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37While Section 3A of the Exchange Act excludes 

‘‘swap agreements’’ from the definition of 

‘‘security,’’ certain antifraud and insider trading 

provisions under the Exchange Act explicitly apply 

to security-based swap agreements. See (a) 

paragraphs (2) through (5) of Section 9(a), 15 U.S.C. 

78i(a), prohibiting the manipulation of security 

prices; (b) Section 10(b), 15 U.S.C. 78j(b), and 

underlying rules prohibiting fraud, manipulation or 

insider trading (but not prophylactic reporting or 

recordkeeping requirements); (c) Section 15(c)(1), 

15 U.S.C. 78o(c)(1), which prohibits brokers and 

dealers from using manipulative or deceptive 

devices; (d) Sections 16(a) and (b), 15 U.S.C. 78p(a) 

and (b), which address disclosure by directors, 

officers and principal stockholders, and short-swing 

trading by those persons, and rules with respect to 

reporting requirements under Section 16(a); (e) 

Section 20(d), 15 U.S.C. 78t(d), providing for 

antifraud liability in connection with certain 

derivative transactions; and (f) Section 21A(a)(1), 15 

U.S.C. 78u–1(a)(1), related to the Commission’s 

authority to impose civil penalties for insider 

trading violations. 

‘‘Security-based swap agreement’’ is defined in 

Section 206B of the Gramm-Leach-Bliley Act as a 

swap agreement in which a material term is based 

on the price, yield, value, or volatility of any 

security or any group or index of securities, or any 

interest therein. 38This exemption in general applies to eligible 

contract participants, as defined in Section 1a(12) 

of the Commodity Exchange Act as in effect on the 

date of this Order, other than persons that are 

eligible contract participants under paragraph (C) of 

that section. 39Solely for purposes of this requirement, an 

eligible contract participant would not be viewed as 

receiving or holding funds or securities for purpose 

of purchasing, selling, clearing, settling, or holding 

Cleared CDS positions for other persons, if the other 

persons involved in the transaction would not be 

considered ‘‘customers’’ of the eligible contract 

participant in a parallel manner when certain 

persons would not be considered ‘‘customers’’ of a 

broker-dealer under Exchange Act Rule 15c3– 

3(a)(1). For these purposes, and for the purpose of 

the definition of ‘‘Cleared CDS,’’ the terms 

‘‘purchasing’’ and ‘‘selling’’ mean the execution, 

termination (prior to its scheduled maturity date), 

assignment, exchange, or similar transfer or 

conveyance of, or extinguishing the rights or 

obligations under, a Cleared CDS, as the context 

may require. This is consistent with the meaning of 

the terms ‘‘purchase’’ or ‘‘sale’’ under the Exchange 

Act in the context of security-based swap 

agreements. See Exchange Act Section 3A(b)(4). 

A separate temporary conditional exemption 

addresses members of CME that hold funds or 

securities for the purpose of purchasing, selling, 

clearing, settling, or holding Cleared CDS positions 

for other persons. See Part II.D, infra. 

40A separate temporary exemption addresses the 

Cleared CDS activities of registered-broker-dealers. 

See Part II.E, infra. Solely for purposes of this 

Order, a registered broker-dealer, or a broker or 

dealer registered under Section 15(b) of the 

Exchange Act, does not refer to someone that would 

otherwise be required to register as a broker or 

dealer solely as a result of activities in Cleared CDS 

in compliance with this Order. 

41See note 37, supra. 

42Thus, for example, the Commission retains the 

ability to investigate potential violations and bring 

enforcement actions in the Federal courts and 

administrative proceedings, and to seek the full 

panoply of remedies available in such cases. 

43See note 17, supra. A national securities 

exchange that effects transactions in Cleared CDS 

would continue to be required to comply with all 

requirements under the Exchange Act applicable to 

such transactions. A national securities exchange 

could form subsidiaries or affiliates that operate 

exchanges exempt under that order. Any subsidiary 

or affiliate of a registered exchange could not 

integrate, or otherwise link, the exempt CDS 

exchange with the registered exchange including 

the premises or property of such exchange for 

effecting or reporting a transaction without being 

considered a ‘‘facility of the exchange.’’ See Section 

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

44 15 U.S.C. 78l, 78m, 78n, 78o(d), 78p. 

discrimination with respect to 

subscribers and vendors to assess 

whether there is a reasonable basis for 

the discrimination given, among other 

things, the Exchange Act objective of 

promoting price transparency. 

Moreover, preventing unreasonable 

discrimination is a practical means to 

promote fair and reasonable terms for 

data distribution because distributors 

are more likely to act appropriately 

when the terms applicable to the 

broader public also must apply to any 

favored classes of customers. 

As a CCP, CME will collect and 

process information about CDS 

transactions and positions from all of its 

participants. With this information, a 

CCP will, among other things, calculate 

and disseminate current values for open 

positions for the purpose of setting 

appropriate margin levels. The 

availability of such information can 

improve fairness, efficiency, and 

competitiveness of the market—all of 

which enhance investor protection and 

facilitate capital formation. Moreover, 

with pricing and valuation information 

relating to Cleared CDS, market 

participants would be able to derive 

information about underlying securities 

and indexes. This may improve the 

efficiency and effectiveness of the 

securities markets by allowing investors 

to better understand credit conditions 

generally. 

C. Temporary General Exemption for 

CME and Certain Eligible Contract 

Participants 

Applying the full panoply of 

Exchange Act requirements to 

participants in transactions in nonexcluded CDS likely would deter some 

participants from using CCPs to clear 

CDS transactions. At the same time, it 

is important that the antifraud 

provisions of the Exchange Act apply to 

transactions in non-excluded CDS; 

indeed, OTC transactions subject to 

individual negotiation that qualify as 

security-based swap agreements already 

are subject to these antifraud 

provisions.37

We thus believe that it is appropriate 

in the public interest and consistent 

with the protection of investors 

temporarily to apply substantially the 

same framework to transactions by 

market participants in non-excluded 

CDS that applies to transactions in 

security-based swap agreements. 

Applying substantially the same set of 

requirements to participants in 

transactions in non-excluded CDS as 

apply to participants in OTC CDS 

transactions will avoid deterring market 

participants from promptly using CCPs, 

which would detract from the potential 

benefits of central clearing. 

Accordingly, pursuant to Section 36 

of the Exchange Act, the Commission 

finds that it is necessary or appropriate 

in the public interest and is consistent 

with the protection of investors to 

exercise its authority to grant an 

exemption until December 14, 2009 

from certain requirements under the 

Exchange Act. This temporary 

exemption applies to CME and to 

certain eligible contract participants 38

other than: Eligible contract participants 

that receive or hold funds or securities 

for the purpose of purchasing, selling, 

clearing, settling, or holding Cleared 

CDS positions for other persons; 39

eligible contract participants that are 

self-regulatory organizations; or eligible 

contract participants that are registered 

brokers or dealers).40

Under this temporary exemption, and 

solely with respect to Cleared CDS, 

these persons generally are exempt from 

provisions of the Exchange Act and the 

rules and regulations thereunder that do 

not apply to security-based swap 

agreements. Those persons thus would 

still be subject to those Exchange Act 

requirements that explicitly are 

applicable in connection with securitybased swap agreements.41 In addition, 

all provisions of the Exchange Act 

related to the Commission’s 

enforcement authority in connection 

with violations or potential violations of 

such provisions would remain 

applicable.42 In this way, the temporary 

exemption would apply the same 

Exchange Act requirements in 

connection with non-excluded CDS as 

apply in connection with OTC credit 

default swaps. 

This temporary exemption, however, 

does not extend to Sections 5 and 6 of 

the Exchange Act. The Commission 

separately issued a conditional 

exemption from these provisions to all 

broker-dealers and exchanges.43 This 

temporary exemption also does not 

extend to Section 17A of the Exchange 

Act; instead, CME is exempt from 

registration as a clearing agency under 

the conditions discussed above. In 

addition, this exemption does not apply 

to Exchange Act Sections 12, 13, 14, 

15(d), and 16; 44 eligible contract 

participants and other persons instead 

should refer to the interim final 

temporary rules issued by the 


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11788 Federal Register / Vol. 74, No. 52 / Thursday, March 19, 2009 / Notices 

45Exchange Act Sections 15(b)(4) and 15(b)(6), 15 

U.S.C. 78o(b)(4) and (b)(6), grant the Commission 

authority to take action against broker-dealers and 

associated persons in certain situations. 

Accordingly, while this exemption generally 

extends to persons that act as inter-dealer brokers 

in the market for Cleared CDS and do not hold 

funds or securities for others, such inter-dealer 

brokers may be subject to actions under Sections 

15(b)(4) and (b)(6) of the Exchange Act. 

In addition, such inter-dealer brokers may be 

subject to actions under Exchange Act Section 

15(c)(1), 15 U.S.C. 78o(c)(1), which prohibits 

brokers and dealers from using manipulative or 

deceptive devices. As noted above, Section 15(c)(1) 

explicitly applies to security-based swap 

agreements. Sections 15(b)(4), 15(b)(6) and 15(c)(1), 

of course, would not apply to persons subject to this 

exemption who do not act as broker-dealers or 

associated persons of broker-dealers. 

46This exemption specifically does not extend to 

the Exchange Act provisions applicable to 

government securities, as set forth in Section 15C, 

15 U.S.C. 78o–5, and its underlying rules and 

regulations; nor does the exemption extend to 

related definitions found at paragraphs (42) through 

(45) of Section 3(a), 15 U.S.C. 78c(a). The 

Commission does not have authority under Section 

36 to issue exemptions in connection with those 

provisions. See Exchange Act Section 36(b), 15 

U.S.C. 78mm(b). 

47 15 U.S.C. 78o(a)(1). This section generally 

provides that, absent an exception or exemption, a 

broker or dealer that uses the mails or any means 

of interstate commerce to effect transactions in, or 

to induce or attempt to induce the purchase or sale 

of, any security must register with the Commission. 

Section 3(a)(4) of the Exchange Act generally 

defines a ‘‘broker’’ as ‘‘any person engaged in the 

business of effecting transactions in securities for 

the account of others,’’ but provides 11 exceptions 

for certain bank securities activities. 15 U.S.C. 

78c(a)(4). Section 3(a)(5) of the Exchange Act 

generally defines a ‘‘dealer’’ as ‘‘any person engaged 

in the business of buying and selling securities for 

his own account,’’ but includes exceptions for 

certain bank activities. 15 U.S.C. 78c(a)(5). 

Exchange Act Section 3(a)(6) defines a ‘‘bank’’ as a 

bank or savings association that is directly 

supervised and examined by State or Federal 

banking authorities (with certain additional 

requirements for banks and savings associations 

that are not chartered by a Federal authority or a 

member of the Federal Reserve System). 15 U.S.C. 

78c(a)(6). 

48See note 37, supra. 

49See note 42, supra. 

50Nor are we exempting those members from 

provisions related to government securities, as 

discussed above. 

Commission. Finally, this temporary 

exemption does not extend to the 

Commission’s administrative 

proceeding authority under Sections 

15(b)(4) and (b)(6),45 or to certain 

provisions related to government 

securities.46

D. Conditional Temporary General 

Exemption for Certain Clearing 

Members of CME 

Absent an exception, persons that 

effect transactions in non-excluded CDS 

that are securities may be required to 

register as broker-dealers pursuant to 

Section 15(a)(1) of the Exchange Act.47

Moreover, certain reporting and other 

requirements of the Exchange Act could 

apply to such persons, as broker-dealers, 

regardless of whether they are registered 

with the Commission. 

It is consistent with our investor 

protection mandate to require that 

intermediaries in securities transactions 

that receive or hold funds and securities 

on behalf of others comply with 

standards that safeguard the interests of 

their customers. For example, registered 

broker-dealers are required to segregate 

assets held on behalf of customers from 

proprietary assets, because segregation 

will assist customers in recovering 

assets in the event the intermediary 

fails. To the extent that funds and 

securities are not segregated, they could 

be used by a participant to fund its own 

business and could be attached to 

satisfy debts of the participant were the 

participant to fail. Moreover, the 

maintenance of adequate capital and 

liquidity protects customers, CCPs and 

other market participants. Adequate 

books and records (including both 

transactional and position records) are 

necessary to facilitate day to day 

operations as well as to help resolve 

situations in which a participant fails 

and either a regulatory authority or 

receiver is forced to liquidate the firm. 

Appropriate records also are necessary 

to allow examiners to review for 

improper activities, such as insider 

trading or fraud. 

At the same time, requiring 

intermediaries that receive or hold 

funds and securities on behalf of 

customers in connection with 

transactions in non-excluded CDS to 

register as broker-dealers may deter the 

use of CCPs in CDS transactions, to the 

detriment of the markets and market 

participants generally. Also, as noted 

above with regard to other eligible 

contract participants to non-excluded 

CDS transactions, immediately applying 

the panoply of Exchange Act 

requirements to centrally cleared 

transactions may deter the use of CCPs 

for CDS transactions. 

Those factors argue in favor of 

flexibility in applying the requirements 

of the Exchange Act to these 

intermediaries. Along with those 

factors, in granting an exemption here 

we are particularly relying on the 

representation of CME that CME’s rules 

alone or in combination with laws and 

regulations applicable to CME and its 

clearing members require that any CME 

clearing member that purchases, sells, 

or holds CDS positions for other 

persons, solely as they relate to CDS: (1) 

Must be registered with the CFTC as a 

futures commission merchant; (2) 

effectively segregates funds and 

securities of other persons (except 

positions held in proprietary accounts 

of the clearing member, which may 

include, for example, positions of 

employees or affiliates of the clearing 

member) that it holds in its custody or 

control for the purpose of purchasing, 

selling, or holding CDS positions; (3) 

maintains adequate capital and 

liquidity; and (4) maintains sufficient 

books and records to establish (a) that 

the CME clearing member is 

maintaining adequate capital and 

liquidity, and (b) separate ownership of 

the funds, securities, and positions it 

may hold for the purpose of purchasing, 

selling, or holding CDS positions for 

other persons and those it holds for its 

proprietary accounts. 

Accordingly, pursuant to Section 36 

of the Exchange Act, the Commission 

finds that it is necessary or appropriate 

in the public interest and is consistent 

with the protection of investors to 

exercise its authority to grant a 

conditional exemption until December 

14, 2009 from certain Exchange Act 

requirements. In general, we are 

providing a temporary exemption, 

subject to the conditions discussed 

below, to any CME clearing member 

registered as a futures commission 

merchant pursuant to Section 4f(a)(1) of 

the Commodity Exchange Act (‘‘FCM’’) 

(but that is not registered as a brokerdealer under Section 15(b) of the 

Exchange Act (other than paragraph (11) 

thereof)) that receives or holds funds or 

securities for the purpose of purchasing, 

selling, clearing, settling or holding 

Cleared CDS positions for other persons. 

Solely with respect to Cleared CDS, 

those members generally will be exempt 

from those provisions of the Exchange 

Act and the underlying rules and 

regulations that do not apply to 

security-based swap agreements. 

As with the exemption discussed 

above that is applicable to CME and 

certain eligible contract participants, 

and for the same reasons, this 

exemption for CME clearing members 

that receive or hold funds and securities 

does not extend to Exchange Act 

provisions that explicitly apply in 

connection with security-based swap 

agreements,48 or to related enforcement 

authority provisions.49 As with the 

exemption discussed above, we also are 

not exempting those members from 

Sections 5, 6, 12(a) and (g), 13, 14, 

15(b)(4), 15(b)(6), 15(d), 16 and 17A of 

the Exchange Act.50

This temporary exemption is subject 

to the member complying with 

conditions that are important for 

protecting customer funds and 

securities. Particularly, the member 

must be in material compliance with the 

rules of CME, and applicable laws and 


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51The term ‘‘customer,’’ solely for purposes of 

Part III(c) and (d), infra, and corresponding 

references in this Order, means a ‘‘customer’’ as 

defined under CFTC Regulation 1.3(k). 17 CFR 

1.3(k). 

52A member would not be ‘‘in material 

compliance’’ if it failed in any way to segregate 

customer funds and securities consistent with these 

rules, laws and regulations. In that circumstance, 

the member could not rely on this exemption. 

53Exchange Act Section 15(b)(11) provides for 

notice registration of certain persons that effect 

transactions in security futures products. 15 U.S.C. 

78o(b)(11). 

54See notes 37 and 42, supra. As noted above, 

broker-dealers also would be subject to Section 

15(c)(1) of the Exchange Act, which prohibits 

brokers and dealers from using manipulative or 

deceptive devices, because that provision explicitly 

applies in connection with security-based swap 

agreements. In addition, to the extent the Exchange 

Act and any rule or regulation thereunder imposes 

any other requirement on a broker-dealer with 

respect to security-based swap agreements (e.g., 

requirements under Rule 17h-1T to maintain and 

preserve written policies, procedures, or systems 

concerning the broker or dealer’s trading positions 

and risks, such as policies relating to restrictions or 

limitations on trading financial instruments or 

products), these requirements would continue to 

apply to broker-dealers’ activities with respect to 

Cleared CDS. 

55We also are not exempting those members from 

provisions related to government securities, as 

discussed above. 

56 15 U.S.C. 78g(c). 

57 15 U.S.C. 78o(c)(3). 

58 15 U.S.C. 78q(a). 

59 15 U.S.C. 78q(b). 

60 12 CFR 220.1 et seq. 

61Solely for purposes of this exemption, in 

addition to the general requirements under the 

referenced Exchange Act sections, registered brokerdealers shall only be subject to the enumerated 

rules under the referenced Exchange Act sections. 

Broker-dealers will, however, continue to be subject 

to applicable rules of self-regulatory organizations 

of which they are a member, including applicable 

margin rules. 

62 Indeed, Congress directed the Commission to 

promulgate broker-dealer financial responsibility 

rules, including rules regarding custody, the use of 

customer securities and the use of customers’ 

deposits or credit balances, and regarding 

establishment of minimum financial requirements. 

63See note 52, supra. 

regulations, relating to capital, liquidity, 

and segregation of customers’ 51 funds 

and securities (and related books and 

records provisions) with respect to nonexcluded CDS.52 Also, to the extent that 

the member receives or holds funds or 

securities of U.S. eligible contract 

participants for the purpose of 

purchasing, selling, clearing, settling or 

holding non-excluded CDS positions for 

those persons, this exemption is 

predicated on the member satisfying the 

following condition: The member must 

segregate such funds and securities of 

U.S. customers from the member’s own 

assets (i.e., the member may not permit 

U.S. customers to ‘‘opt out’’ of 

applicable segregation requirements for 

such funds and securities even if 

regulations or laws would permit the 

person to ‘‘opt out’’). 

E. Temporary General Exemption for 

Certain Registered Broker-Dealers 

Including Certain Broker-Dealer-FCMs 

The temporary exemptions addressed 

above—with regard (i) to CME and 

certain eligible contract participants and 

(ii) to certain CME clearing members 

that receive or hold funds and securities 

of others—are not available to persons 

that are registered as broker-dealers with 

the Commission (other than those that 

are notice registered pursuant to Section 

15(b)(11)).53 The Exchange Act and its 

underlying rules and regulations require 

broker-dealers to comply with a number 

of obligations that are important to 

protecting investors and promoting 

market integrity. We are mindful of the 

need to avoid creating disincentives to 

the prompt use of CCPs, and we 

recognize that the factors discussed 

above suggest that the full panoply of 

Exchange Act requirements should not 

immediately be applied to registered 

broker-dealers that engage in 

transactions involving Cleared CDS. At 

the same time, we also are sensitive to 

the critical importance of certain brokerdealer requirements to promoting 

market integrity and protecting 

customers (including those brokerdealer customers that are not involved 

with CDS transactions). 

This calls for balancing the 

facilitation of the development and 

prompt implementation of CCPs with 

the preservation of certain key investor 

protections. Pursuant to Section 36 of 

the Exchange Act, the Commission finds 

that it is necessary or appropriate in the 

public interest and is consistent with 

the protection of investors to exercise its 

authority to grant an exemption until 

December 14, 2009 from certain 

Exchange Act requirements. Consistent 

with the temporary exemptions 

discussed above, and solely with respect 

to Cleared CDS, we are exempting 

registered broker-dealers (including 

registered broker-dealers that are also 

FCMs (‘‘BD–FCMs’’)) in general from 

provisions of the Exchange Act and its 

underlying rules and regulations that do 

not apply to security-based swap 

agreements. As above, we are not 

excluding registered broker-dealers, 

including BD–FCMs, from Exchange Act 

provisions that explicitly apply in 

connection with security-based swap 

agreements or from related enforcement 

authority provisions.54 As above, and 

for similar reasons, we are not 

exempting registered broker-dealers, 

including BD–FCMs, from: Sections 5, 

6, 12(a) and (g), 13, 14, 15(b)(4), 15(b)(6), 

15(d), 16 and 17A of the Exchange 

Act.55

Further we are not exempting 

registered broker-dealers from the 

following additional provisions under 

the Exchange Act: (1) Section 7(c),56

which addresses the unlawful extension 

of credit by broker-dealers; (2) Section 

15(c)(3),57 which addresses the use of 

unlawful or manipulative devices by 

broker-dealers; (3) Section 17(a),58

regarding broker-dealer obligations to 

make, keep and furnish information; (4) 

Section 17(b),59 regarding broker-dealer 

records subject to examination; (5) 

Regulation T,60 a Federal Reserve Board 

regulation regarding extension of credit 

by broker-dealers; (6) Exchange Act Rule 

15c3–1, regarding broker-dealer net 

capital; (7) Exchange Act Rule 15c3–3, 

regarding broker-dealer reserves and 

custody of securities; (8) Exchange Act 

Rules 17a–3 through 17a–5, regarding 

records to be made and preserved by 

broker-dealers and reports to be made 

by broker-dealers; and (9) Exchange Act 

Rule 17a–13, regarding quarterly 

security counts to be made by certain 

exchange members and brokerdealers.61 Registered broker-dealers 

should comply with these provisions in 

connection with their activities 

involving non-excluded CDS because 

these provisions are especially 

important to helping protect customer 

funds and securities, ensure proper 

credit practices and safeguard against 

fraud and abuse.62

However, CME clearing members that 

are BD–FCMs that holds customer funds 

and securities for the purpose of 

purchasing, selling, clearing, settling or 

holding CDS positions cleared by CME 

in a futures account (as that term is 

defined in Rule 15c3–3(a)(15) [17 CFR 

240.15c3–3(a)(15)]) also shall be exempt 

from Exchange Act Rule 15c3–3, subject 

to the following conditions: (1) The 

CME clearing member shall be in 

material compliance with the rules of 

CME, and applicable laws and 

regulations, relating to capital, liquidity, 

and segregation of customers’ funds and 

securities (and related books and 

records provisions) with respect to 

Cleared CDS; 63 (2) the CME clearing 

member shall segregate such funds and 

securities of U.S. customers from the 

CME clearing member’s own assets (i.e., 

the member may not permit U.S. 

customers to ‘‘opt out’’ of applicable 

segregation requirements for such funds 

and securities even if regulations or 

laws would permit the customer to ‘‘opt 

out’’); and (3) the CME clearing member 

shall comply with the margin rules for 

Cleared CDS of the self-regulatory 


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64See 17 CFR 240.17d–1 for a description of a 

designated examining authority. 

organization that is its designated 

examining authority 64 (e.g., FINRA). 

F. Solicitation of Comments 

The Commission intends to monitor 

closely the development of the CDS 

market and intends to determine to 

what extent, if any, additional 

regulatory action may be necessary. For 

example, as circumstances warrant, 

certain conditions could be added, 

altered, or eliminated. Moreover, 

because these exemptions are 

temporary, the Commission will in the 

future consider whether they should be 

extended or allowed to expire. The 

Commission believes it would be 

prudent to solicit public comment on its 

action today, and on what action it 

should take with respect to the CDS 

market in the future. The Commission is 

soliciting public comment on all aspects 

of these exemptions, including: 

1. Whether the length of this 

temporary exemption (until December 

14, 2009) is appropriate. If not, what 

should the appropriate duration be? 

2. Whether the conditions to these 

exemptions are appropriate. Why or 

why not? Should other conditions 

apply? Are any of the present conditions 

to the exemptions provided in this 

Order unnecessary? If so, please specify 

and explain why such conditions are 

not needed. 

3. Whether CME ultimately should be 

required to register as a clearing agency 

under the Exchange Act. Why or why 

not? 

4. Whether CME members that receive 

or hold funds or securities for the 

purpose of purchasing, selling, clearing, 

settling or holding non-excluded CDS 

positions for other persons ultimately 

should be required to register as brokerdealers? Why or why not? 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/other.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number S7–06–09 on the subject line; 

or 

• Use the Federal eRulemaking Portal 

(http://www.regulations.gov/). Follow 

the instructions for submitting 

comments. 

Paper Comments 

• Send paper comments in triplicate 

to Secretary, Securities and Exchange 

Commission, 100 F Street, NE., 

Washington, DC 20549–1090. 

All submissions should refer to File 

Number S7–06–09. This file number 

should be included on the subject line 

if e-mail is used. To help us process and 

review your comments more efficiently, 

please use only one method. We will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/ 

rules/other.shtml). Comments are also 

available for public inspection and 

copying in the Commission’s Public 

Reference Room, 100 F Street, NE., 

Washington, DC 20549, on official 

business days between the hours of 10 

a.m. and 3 p.m. All comments received 

will be posted without change; we do 

not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. 

III. Conclusion 

It is hereby ordered, pursuant to 

Section 36(a) of the Exchange Act, that, 

until December 14, 2009: 

(a) Exemption from Section 17A of the 

Exchange Act. 

The Chicago Mercantile Exchange Inc. 

(‘‘CME’’) shall be exempt from Section 

17A of the Exchange Act solely to 

perform the functions of a clearing 

agency for Cleared CDS (as defined in 

paragraph (e) of this Order), subject to 

the following conditions: 

(1) CME shall make available on its 

Web site its annual audited financial 

statements. 

(2) CME shall keep and preserve 

records of all activities related to the 

business of CME as a central 

counterparty for Cleared CDS. These 

records shall be kept for at least five 

years and for the first two years shall be 

held in an easily accessible place. 

(3) CME shall supply such 

information and periodic reports 

relating to its Cleared CDS clearance 

and settlement services as may be 

reasonably requested by the 

Commission. CME shall also provide 

access to the Commission to conduct 

on-site inspections of all facilities 

(including automated systems and 

systems environment), and records 

related to its Cleared CDS clearance and 

settlement services. CME will provide 

the Commission with access to its 

personnel to answer reasonable 

questions during any such inspections 

related to its Cleared CDS clearance and 

settlement services. 

(4) CME shall notify the Commission, 

on a monthly basis, of any material 

disciplinary actions taken against any 

CME clearing members utilizing its 

Cleared CDS clearance and settlement 

services, including the denial of 

services, fines, or penalties. CME shall 

notify the Commission promptly when 

CME involuntarily terminates the 

membership of an entity that is utilizing 

CME’s Cleared CDS clearance and 

settlement services. Both notifications 

shall describe the facts and 

circumstances that led to CME’s 

disciplinary action. 

(5) CME shall notify the Commission 

of all changes to rules as defined under 

the CFTC rules, fees, and any other 

material events affecting its Cleared CDS 

clearance and settlement services, 

including material changes to risk 

management models. In addition, CME 

will post any rule or fee changes on the 

CME Web site. CME shall provide the 

Commission with notice of all changes 

to its rules not less than one day prior 

to effectiveness or implementation of 

such rule changes or, in exigent 

circumstances, as promptly as 

reasonably practicable under the 

circumstances. Such notifications will 

not be deemed rule filings that require 

Commission approval. 

(6) CME shall provide the 

Commission with annual reports and 

any associated field work concerning its 

Cleared CDS clearance and settlement 

services prepared by independent audit 

personnel that are generated in 

accordance with risk assessment of the 

areas set forth in the Commission’s 

Automation Review Policy Statements. 

CME shall provide the Commission 

(beginning in its first year of operation) 

with its annual audited financial 

statements prepared by independent 

audit personnel for CME. 

(7) CME shall report to the 

Commission all significant outages of 

clearing systems having a material 

impact on its Cleared CDS clearance and 

settlement services. If it appears that the 

outage may extend for 30 minutes or 

longer, CME shall report the systems 

outage immediately. If it appears that 

the outage will be resolved in less than 

30 minutes, CME shall report the 

systems outage within a reasonable time 

after the outage has been resolved. 

(8) CME, directly or indirectly, shall 

make available to the public on terms 

that are fair and reasonable and not 

unreasonably discriminatory: (i) All 

end-of-day settlement prices and any 

other prices with respect to Cleared CDS 

that CME may establish to calculate 

mark-to-market margin requirements for 

CME clearing members; and (ii) any 

other pricing or valuation information 

with respect to Cleared CDS as is 

published or distributed by CME. 

(9) CME shall not materially change 

its methodology for determining Cleared 

CDS margin levels without prior written 

approval from the Commission, and 

from FINRA with respect to customer 

margin requirements that would apply 


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to broker-dealers. (b) Exemption for 

CME and certain eligible contract 

participants. 

(1) Persons eligible. The exemption in 

paragraph (b)(2) is available to: 

(i) CME; and 

(ii) Any eligible contract participant 

(as defined in Section 1a(12) of the 

Commodity Exchange Act as in effect on 

the date of this Order (other than a 

person that is an eligible contract 

participant under paragraph (C) of that 

section)), other than: (A) An eligible 

contract participant that receives or 

holds funds or securities for the purpose 

of purchasing, selling, clearing, settling, 

or holding Cleared CDS positions for 

other persons; (B) an eligible contract 

participant that is a self-regulatory 

organization, as that term is defined in 

Section 3(a)(26) of the Exchange Act; or 

(C) a broker or dealer registered under 

Section 15(b) of the Exchange Act (other 

than paragraph (11) thereof). 

(2) Scope of exemption. 

(i) In general. Such persons generally 

shall, solely with respect to Cleared 

CDS, be exempt from the provisions of 

the Exchange Act and the rules and 

regulations thereunder that do not apply 

in connection with security-based swap 

agreements. Accordingly, under this 

exemption, those persons would remain 

subject to those Exchange Act 

requirements that explicitly are 

applicable in connection with securitybased swap agreements (i.e., paragraphs 

(2) through (5) of Section 9(a), Section 

10(b), Section 15(c)(1), paragraphs (a) 

and (b) of Section 16, Section 20(d) and 

Section 21A(a)(1) and the rules 

thereunder that explicitly are applicable 

to security-based swap agreements). All 

provisions of the Exchange Act related 

to the Commission’s enforcement 

authority in connection with violations 

or potential violations of such 

provisions also remain applicable. 

(ii) Exclusions from exemption. The 

exemption in paragraph (b)(2)(i), 

however, does not extend to the 

following provisions under the 

Exchange Act: 

(A) Paragraphs (42), (43), (44), and 

(45) of Section 3(a); 

(B) Section 5; 

(C) Section 6; 

(D) Section 12 and the rules and 

regulations thereunder; 

(E) Section 13 and the rules and 

regulations thereunder; 

(F) Section 14 and the rules and 

regulations thereunder; 

(G) Paragraphs (4) and (6) of Section 

15(b); 

(H) Section 15(d) and the rules and 

regulations thereunder; 

(I) Section 15C and the rules and 

regulations thereunder; 

(J) Section 16 and the rules and 

regulations thereunder; and 

(K) Section 17A (other than as 

provided in paragraph (a)). 

(c) Exemption for certain CME 

clearing members. 

Any CME clearing member registered 

as a futures commission merchant 

pursuant to Section 4f(a)(1) of the 

Commodity Exchange Act (but that is 

not registered as a broker or dealer 

under Section 15(b) of the Exchange Act 

(other than paragraph (11) thereof)) that 

receives or holds funds or securities for 

the purpose of purchasing, selling, 

clearing, settling or holding Cleared 

CDS for other persons shall be exempt 

from the provisions of the Exchange Act 

and the rules and regulations 

thereunder specified in paragraph (b)(2), 

solely with respect to Cleared CDS, 

subject to the following conditions: 

(1) The CME clearing member shall be 

in material compliance with the rules of 

CME, and applicable laws and 

regulations, relating to capital, liquidity, 

and segregation of customers’ funds and 

securities (and related books and 

records provisions) with respect to 

Cleared CDS; and 

(2) To the extent that the CME 

clearing member receives or holds funds 

or securities of U.S. customers for the 

purpose of purchasing, selling, clearing, 

settling, or holding Cleared CDS 

positions, the CME clearing member 

shall segregate such funds and securities 

of U.S. customers from the CME clearing 

member’s own assets (i.e., the member 

may not permit U.S. customers to ‘‘opt 

out’’ of applicable segregation 

requirements for such funds and 

securities even if regulations or laws 

would permit the customer to ‘‘opt 

out’’). 

(d) Exemption for certain registered 

broker-dealers. 

A broker or dealer registered under 

Section 15(b) of the Exchange Act (other 

than paragraph (11) thereof) shall be 

exempt from the provisions of the 

Exchange Act and the rules and 

regulations thereunder specified in 

paragraph (b)(2), solely with respect to 

Cleared CDS, except: 

(1) Section 7(c); 

(2) Section 15(c)(3); 

(3) Section 17(a); 

(4) Section 17(b); 

(5) Regulation T, 12 CFR 200.1 et seq.; 

(6) Rule 15c3–1; 

(7) Rule 15c3–3; 

(8) Rule 17a–3; 

(9) Rule 17a–4; 

(10) Rule 17a–5; and 

(11) Rule 17a–13; 

provided, that a CME clearing member 

that is a broker or dealer registered 

under Section 15(b) of the Exchange Act 

(other than paragraph (11) thereof) and 

that is also registered as a futures 

commission merchant pursuant to 

Section 4f(a)(1) of the Commodity 

Exchange Act and that holds customer 

funds and securities for the purpose of 

purchasing, selling, clearing, settling or 

holding Cleared CDS in a futures 

account (as that term is defined in Rule 

15c3–3(a)(15) [17 CFR 240.15c3– 

3(a)(15)]) also shall be exempt from 

Exchange Act Rule 15c3–3, subject to 

the following conditions: 

(1) The CME clearing member shall be 

in material compliance with the rules of 

CME, and applicable laws and 

regulations, relating to capital, liquidity, 

and segregation of customers’ funds and 

securities (and related books and 

records provisions) with respect to 

Cleared CDS; 

(2) The CME clearing member shall 

segregate such funds and securities of 

U.S. customers from the CME clearing 

member’s own assets (i.e., the member 

may not permit U.S. customers to ‘‘opt 

out’’ of applicable segregation 

requirements for such funds and 

securities even if regulations or laws 

would permit the customer to ‘‘opt 

out’’); and 

(3) The CME clearing member shall 

collect from each customer the amount 

of margin that is not less than the 

amount required for Cleared CDS under 

the margin rule of the self-regulatory 

organization that is its designated 

examining authority. 

(e) For purposes of this Order, 

‘‘Cleared CDS’’ shall mean a credit 

default swap that is submitted (or 

offered, purchased or sold on terms 

providing for submission) to CME, that 

is offered only to, purchased only by, 

and sold only to eligible contract 

participants (as defined in Section 

1a(12) of the Commodity Exchange Act 

as in effect on the date of this Order 

(other than a person that is an eligible 

contract participant under paragraph (C) 

of that section)), and in which: 

(1) The reference entity, the issuer of 

the reference security, or the reference 

security is one of the following: 

(i) An entity reporting under the 

Exchange Act, providing Securities Act 

Rule 144A(d)(4) information, or about 

which financial information is 

otherwise publicly available; 

(ii) a foreign private issuer whose 

securities are listed outside the United 

States and that has its principal trading 

market outside the United States; 

(iii) a foreign sovereign debt security; 

(iv) an asset-backed security, as 

defined in Regulation AB, issued in a 

registered transaction with publicly 

available distribution reports; or 


sroberts on PROD1PC70 with NOTICES
11792 Federal Register / Vol. 74, No. 52 / Thursday, March 19, 2009 / Notices 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3The current FINRA rulebook consists of (1) 

FINRA Rules; (2) NASD Rules; and (3) rules 

incorporated from NYSE (‘‘Incorporated NYSE 

Rules’’) (together, the NASD Rules and Incorporated 

NYSE Rules are referred to as the ‘‘Transitional 

Rulebook’’). While the NASD Rules generally apply 

to all FINRA members, the Incorporated NYSE 

Rules apply only to those members of FINRA that 

are also members of the NYSE (‘‘Dual Members’’). 

The FINRA Rules apply to all FINRA members, 

unless such rules have a more limited application 

by their terms. For more information about the 

rulebook consolidation process, see FINRA 

Information Notice, March 12, 2008 (Rulebook 

Consolidation Process). 4 15 U.S.C. 78o–3(b)(6). 

(v) an asset-backed security issued or 

guaranteed by Fannie Mae, Freddie Mac 

or Ginnie Mae; or 

(2) the reference index is an index in 

which 80 percent or more of the index’s 

weighting is comprised of the entities or 

securities described in subparagraph (1). 

By the Commission. 

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E9–5927 Filed 3–18–09; 8:45 am] 

BILLING CODE 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–59563; File No. SR–FINRA– 

2009–009] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Notice of Filing of 

Proposed Rule Change To Adopt 

FINRA Rule 1122 (Filing of Misleading 

Information as to Membership or 

Registration) in the Consolidated 

FINRA Rulebook 

March 12, 2009. 

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 March 3, 

2009, Financial Industry Regulatory 

Authority, Inc. (‘‘FINRA’’) (f/k/a 

National Association of Securities 

Dealers, Inc. (‘‘NASD’’)) filed with the 

Securities and Exchange Commission 

(‘‘SEC’’ or ‘‘Commission’’) the proposed 

rule change as described in Items I, II, 

and III below, which Items have been 

prepared by FINRA. The Commission is 

publishing this notice to solicit 

comments on the proposed rule change 

from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

FINRA is proposing to adopt NASD 

Interpretative Material 1000–1 (‘‘IM– 

1000–1’’) (Filing of Misleading 

Information as to Membership or 

Registration) as a FINRA rule in the 

consolidated FINRA rulebook with 

minor changes. The proposed rule 

change would renumber NASD IM– 

1000–1 as FINRA Rule 1122 in the 

consolidated FINRA rulebook. 

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 

As part of the process of developing 

a new consolidated rulebook 

(‘‘Consolidated FINRA Rulebook’’),3

FINRA is proposing to adopt NASD 

Interpretative Material 1000–1 (‘‘IM– 

1000–1’’) (Filing of Misleading 

Information as to Membership or 

Registration) as a FINRA rule in the 

consolidated FINRA rulebook with 

minor changes discussed below. 

NASD IM–1000–1 provides that the 

filing of membership or registration 

information as a Registered 

Representative with FINRA which is 

incomplete or inaccurate so as to be 

misleading, or which could in any way 

tend to mislead, or the failure to correct 

such filing after notice thereof, may be 

deemed conduct inconsistent with just 

and equitable principles of trade and 

may be subject to disciplinary action. 

FINRA proposes to adopt NASD IM– 

1000–1 as FINRA Rule 1122 as it 

believes that this rule continues to be an 

important tool in ensuring that members 

and persons associated with members 

provide complete and accurate 

membership and registration 

information. FINRA proposes to clarify 

its applicability to members and persons 

associated with members by specifying 

that ‘‘no member or person associated 

with a member’’ shall file incomplete or 

misleading membership or registration 

information. FINRA also proposes to 

eliminate the reference to the filing of 

registration information ‘‘as a Registered 

Representative’’ to clarify that the rule 

applies to the filing of registration 

information regarding any category of 

registration. In addition, FINRA 

proposes to delete the reference that the 

prohibited conduct may be deemed 

inconsistent with just and equitable 

principles of trade and subject to 

disciplinary action as unnecessary and 

to better reflect the proposed adoption 

of the NASD IM as a stand-alone FINRA 

rule. 

FINRA will announce the 

implementation date of the proposed 

rule change in a Regulatory Notice to be 

published no later than 90 days 

following Commission approval. 

2. Statutory Basis 

FINRA believes that the proposed rule 

change is consistent with the provisions 

of Section 15A(b)(6) of the Act,4 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 helps to ensure 

the accuracy and completeness of 

membership and registration 

information filed with FINRA. 

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. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

Within 35 days of the date of 

publication of this notice in the Federal 

Register or within such longer period (i) 

as the Commission may designate up to 

90 days of such date if it finds such 

longer period to be appropriate and 

publishes its reasons for so finding or 

(ii) as to which the self-regulatory 

organization consents, the Commission 

will: 

(A) By order approve such proposed 

rule change, or 


sroberts on PROD1PC70 with NOTICES