[Federal Register Volume 74, Number 13 (Thursday, January 22, 2009)]
[Rules and Regulations]
[Pages 3967-3975]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-1123]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR PARTS 230, 240 and 260

[Release Nos. 33-8999; 34-59246; 39-2549; File No. S7-02-09]
RIN 3235-AK26


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

AGENCY: Securities and Exchange Commission.

ACTION: Interim final temporary rules; request for comments.

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SUMMARY: We are adopting interim final temporary rules providing 
exemptions under the Securities Act of 1933, the Securities Exchange 
Act of 1934, and the Trust Indenture Act of 1939 for certain credit 
default swaps to facilitate the operation of one or more central 
counterparties for those credit default swaps. The interim final 
temporary rules define such credit default swaps as ``eligible credit 
default swaps'' and exempt them from all provisions of the Securities 
Act, other than the Section 17(a) anti-fraud provisions, as well as 
from Exchange Act registration requirements and from the provisions of 
the Trust Indenture Act, provided certain conditions are met. Our 
interim final temporary rules also define as a ``qualified purchaser,'' 
for purposes of the ``covered securities'' provisions of Section 18 of 
the Securities Act, any ``eligible contract participant,'' as defined 
in Section 1a(12) of the Commodity Exchange Act (``CEA''), other than a 
person who is an eligible contract participant under Section 1a(12)(C) 
of the CEA, to whom a sale of a eligible credit default swap is made in 
reliance on the interim final temporary Securities Act exemption.

DATES: Effective Date: The interim final temporary rules are effective 
January 22, 2009 until September 25, 2009.
    Comment Date: Comments on the interim final temporary rules should 
be received on or before March 23, 2009.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

    <bullet> Use the Commission's Internet comment form (http://www.sec.gov/rules/interim-final-temp.shtml);
    <bullet> Send an e-mail to <a href="/cdn-cgi/l/email-protection#5123243d347c323e3c3c343f2522112234327f363e27"><span class="__cf_email__" data-cfemail="dfadaab3baf2bcb0b2b2bab1abac9facbabcf1b8b0a9">[email protected]</span></a>. Please include 
File Number S7-02-09 on the subject line; or
    <bullet> Use the Federal Rulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

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

All submissions should refer to File Number S7-02-09. 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. The Commission will post all comments on the Commission's 
Internet Web site (http://www.sec.gov/rules/interim-final-temp.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.

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

SUPPLEMENTARY INFORMATION: We are adopting interim final temporary Rule 
239T and a temporary amendment to Rule 146 under the Securities Act of 
1933 (``Securities Act'').\1\ We are also adopting interim final 
temporary Rule 12a-10T and Rule 12h-1(h)T under the Securities Exchange 
Act of 1934 (``Exchange Act'') \2\ and interim final temporary Rule 4d-
11T under the Trust Indenture Act of 1939 (``Trust Indenture Act'').\3\
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    \1\ 15 U.S.C. 77a et seq.
    \2\ 15 U.S.C. 78a et seq.
    \3\ 15 U.S.C. 77aaa et seq.
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I. Background

    In response to the recent turmoil in the financial markets, we have 
taken multiple actions to protect investors and ensure the integrity of 
the nation's securities markets.\4\ Today we are 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.\5\ Recent credit market events have 
demonstrated the seriousness of these risks in a CDS market operating 
without meaningful regulation, transparency,\6\ or

[[Page 3968]]

central counterparties (``CCPs'').\7\ These events have emphasized the 
need for CCPs as mechanisms to help control such risks.\8\ 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 \9\ and, in furtherance of this recommendation, the 
Commission, the FRB and the Commodity Futures Trading Commission 
(``CFTC'') signed a Memorandum of Understanding \10\ 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. The interim final temporary 
rules we are adopting are intended to facilitate the ability of one or 
more CCPs for CDS to operate by providing exemptions from certain 
regulatory provisions that might otherwise prevent them from engaging 
in such activities.
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    \4\ A 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 close-out, 
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 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).
    \5\ 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.
    \6\ See 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 
(``Public reporting of prices, trading volumes and aggregate open 
interest should be required to increase market transparency for 
participants and the public.'').
    \7\ See 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).
    \8\ See id.
    \9\ See 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.1
    \10\ See 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 
(``MOU'').
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    A CDS is a bilateral contract between two parties, known as 
counterparties. The value of this financial contract is based on 
underlying obligations (``reference obligations'') of a single entity 
(a ``reference entity'') or on a particular security or other debt 
obligation (``reference security''), or an index of several such 
entities, securities, or obligations. The obligation of a seller 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 synthetic positions in bonds or in segments of the debt market as 
represented by an index, or to capitalize on the volatility in credit 
spreads during times of economic uncertainty. In recent years, CDS 
market volumes have rapidly increased.\11\ This growth has coincided 
with a significant rise in the types and number of entities 
participating in the CDS market.\12\
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    \11\ See Semiannual OTC derivatives statistics at end-December 
2007, Bank for International Settlements (``BIS''), available at 
http://www.bis.org/statistics/otcder/dt1920a.pdf.
    \12\ CDS 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.
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    The operation of a well-regulated CCP can significantly reduce 
counterparty risks by preventing the failure of a single market 
participant from having a disproportionate effect on the overall 
market. A CCP would novate bilateral trades, which would result in the 
CCP entering into separate contractual arrangements with both 
counterparties--becoming buyer to one and seller to the other.\13\ 
Today, CDS agreements generally are negotiated and entered into 
bilaterally, but both parties may agree that one party may novate the 
agreement and substitute another party to take responsibility for 
performance, by acting as the counterparty, under the agreement. In a 
CCP arrangement, both parties entering a CDS would novate their trades 
to the CCP, and the CCP would stand in as the counterparty to all 
parties of the CDS it clears. Through this novation process, the 
counterparty risk of a CDS would be effectively concentrated in the 
CCP.
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    \13\ ``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.
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    In companion actions to these interim final temporary rules, we are 
temporarily exempting, subject to conditions, a clearing agency acting 
as a CCP from the requirement to register as a clearing agency under 
Section 17A of the Exchange Act \14\ solely to perform the functions of 
a clearing agency for certain CDS transactions, and also certain 
eligible contract participants \15\ and others from certain Exchange 
Act requirements with respect to certain CDS.\16\ We also are 
temporarily exempting any exchange that effects transactions in certain 
CDS from the requirements under Sections 5 and 6 of the Exchange Act 
\17\ to register as a national securities exchange, and any broker or 
dealer that effects transactions on an exchange in certain CDS from the 
requirements of Section 5 of the Exchange Act.
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    \14\ 15 U.S.C. 78q-1.
    \15\ See 7 U.S.C. 1a(12).
    \16\ See Securities Exchange Act Release Nos. 59164 and 59165 
(December 24, 2008).
    \17\ 15 U.S.C. 78e and 78f.
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    In connection with these actions to facilitate the operation of 
these CCPs for the CDS market, we believe that it is appropriate and 
necessary to provide temporary exemptions from certain provisions of 
the Securities Act, the Exchange Act and the Trust Indenture Act, 
subject to certain conditions described in the companion exemptive 
orders and in the exemptions themselves. We believe that these interim 
final temporary rules, and the exemptive orders we are providing under 
the Exchange Act, will facilitate the operation of one or more CCPs 
that will clear and settle CDS transactions while enabling us to 
provide oversight to the CDS market.
    We believe that the operation of one or more CCPs in accordance 
with our exemptions likely would improve the efficiency and 
effectiveness of the CDS market, provide for increased transparency of 
exposures to particular reference entities or reference securities, and 
increase available information about reference entities or reference 
securities. The conditions in the companion exemptive orders will 
enable us to oversee the development of CDS CCPs and exchanges as they 
evolve, and to take such additional action as we may deem necessary to 
promote the public interest and the protection of investors. Moreover, 
the limited duration of the exemptions and the interim final temporary 
rules provided today will enable one or more CCPs and CDS exchanges to 
become operational while we gain useful experience with the CDS market 
and evaluate the public input, including comments, we receive on the 
temporary rules and exemptions.

II. Discussion of the Interim Final Temporary Rules and Amendments

    We are adopting interim final temporary rules and amendments to

[[Page 3969]]

existing rules (collectively, ``interim final temporary rules'') to 
provide certain conditional exemptions under the Securities Act, the 
Exchange Act and the Trust Indenture Act.

A. Scope of the Interim Final Temporary Rules

    Our authority over the OTC market for CDS is limited. Specifically, 
Section 2A of the Securities Act and Section 3A of the Exchange Act 
limit our authority over ``swap agreements'' as defined in Section 206A 
of the Gramm-Leach-Bliley Act.\18\ For those CDS that are swap 
agreements, the exclusion from the definition of security in Section 2A 
of the Securities Act and Section 3A of the Exchange Act and related 
provisions will continue to apply. Our action today does not affect 
these CDS, and these interim final temporary rules do not apply to 
them. For those CDS that are not swap agreements (``non-excluded 
CDS''), our action today provides certain conditional exemptions from 
the provisions of the Securities Act, the Exchange Act, and the Trust 
Indenture Act and is designed to encourage the development and 
operation of one or more CDS CCPs and CDS exchanges.\19\
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    \18\ 15 U.S.C. 77b(b)-1 and 15 U.S.C. 78c-1. Section 2A of the 
Securities Act and Section 3A of the Exchange Act excludes both a 
non-security-based and a security-based ``swap agreement'' from the 
definition of ``security'' under Section 2(a)(1) of the Securities 
Act, 15 U.S.C. 77b(a)(1) and 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.
    \19\ Section 28 of the Securities Act authorizes us to exempt 
any person, security or transaction from any provision of the 
Securities Act by rule or regulation to the extent that the 
exemption is necessary or appropriate in the public interest and 
consistent with the protection of investors. 15 U.S.C. 77z-3. 
Similarly, Section 36 of the Exchange Act gives us the authority to 
exempt any person, security or transaction from any Exchange Act 
provision by rule, regulation or order, to the extent that the 
exemption is necessary or appropriate in the public interest and 
consistent with the protection of investors. 15 U.S.C. 78mm. 
Finally, Section 304(d) of the Trust Indenture Act authorizes us to 
exempt conditionally or unconditionally any person, security or 
transaction from any Trust Indenture Act provision by rules or 
regulation to the extent that the exemption is necessary or 
appropriate in the public interest and consistent with the 
protection of investors and the purposes fairly intended by the 
Trust Indenture Act. 15 U.S.C. 77ddd(d).
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B. Securities Act Rule 239T

    We are adopting interim final temporary Securities Act Rule 239T to 
exempt certain CDS (``eligible CDS'') \20\ that are being or will be 
issued or cleared by a CCP satisfying the conditions set forth in the 
companion exemptions, or registered as a clearing agency under Section 
17A of the Exchange Act (``Registered or Exempt CCP''), to eligible 
contract participants from all provisions of the Securities Act, except 
the anti-fraud provisions of Section 17(a) of the Securities Act.\21\ 
Securities Act Rule 239T will permit the offer and sale of such 
eligible CDS that are or will be issued or cleared by a Registered or 
Exempt CCP without requiring compliance with Section 5 of the 
Securities Act, and communications used in connection with such offers 
and sales will not be subject to Section 12(a)(2) liability under the 
Securities Act.
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    \20\ As we discuss below, we have included a definition of 
``eligible credit default swap'' in interim final temporary 
Securities Act Rule 239T.
    \21\ 15 U.S.C. Sec.  77q. This exemption is consistent with the 
Securities Act exemptions for standardized options and security 
futures products. See Section 3(a)(14) [15 U.S.C. Sec.  77c(a)(14)] 
and Securities Act Rule 238 [17 CFR 230.238].
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    Absent this exemption, the Securities Act may require registration 
of the offer and sale of eligible CDS that are or will be issued or 
cleared by a Registered or Exempt CCP. We believe that the interim 
final temporary rules exempting offers and sales of such eligible CDS 
by a Registered or Exempt CCP will facilitate the use by eligible 
contract participants of CCPs for eligible CDS. Indeed, without also 
exempting the offers and sales of the eligible CDS by a Registered or 
Exempt CCP from the registration requirements of the Securities Act and 
the Exchange Act and the provisions of the Trust Indenture Act, we 
believe that the CCPs would not be able to operate in the manner 
contemplated by the Exchange Act exemptive orders. In addition, the 
Securities Act, Exchange Act and Trust Indenture Act exemptions should 
encourage market participants to clear their CDS through the CCPs.
    Under Securities Act Rule 239T, an eligible CDS would be exempt 
from the registration requirements of the Securities Act if it is or 
will be issued or cleared by a Registered or Exempt CCP, and if the 
eligible CDS is offered and sold only to an ``eligible contract 
participant'' (as defined in Section 1a(12) of the CEA as in effect on 
the date of adoption of this rule, other than a person who is an 
eligible contract participant under Section 1a(12)(C) of the CEA).\22\ 
We have included a definition of eligible CDS solely for purposes of 
the interim final temporary rules. Under this definition, an eligible 
CDS is a bilateral executory derivative contract not subject to 
individual negotiation (1) in which a buyer makes payments to the 
seller and, in return, receives a payout if there is a default or other 
credit event involving the reference obligation(s) or reference 
entity(ies) within a certain time, and (2) the agreement for which 
includes the:
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    \22\ See 7 U.S.C. 1(a)(12). The exemption would be limited to 
those persons defined as eligible contract participants in the 
statute and would not extend to those persons that are included in 
the definition through regulatory action by the CFTC. See 7 U.S.C. 
1(a)(12)(C).
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    <bullet> Specification of the reference obligation or obligor; or, 
in the case of a reference group or index thereof, all of the reference 
obligations or obligors comprising any such group or index);
    <bullet> Term of the agreement;
    <bullet> Notional amount upon which payment obligations are 
calculated;
    <bullet> Credit-related events that trigger a settlement 
obligation; and
    <bullet> Obligations to be delivered if there is a credit-related 
event or, if it is a cash settlement, the obligations whose value is to 
be used to determine the amount of settlement obligation under the 
eligible credit default swap.
    Securities Act Rule 239T will permit the offer and sale of eligible 
CDS that are or will be issued or cleared by a Registered or Exempt CCP 
without requiring compliance with Section 5 of the Securities Act, 
while assuring the availability of information to buyers and sellers of 
CDS, due to certain information conditions in the companion exemptive 
orders,\23\ and preserving anti-fraud liability under Section 17(a) of 
the Securities Act, which currently applies to security-based swap 
agreements. Securities Act Rule 239T also provides an exemption from 
the liability provisions of Securities Act Section 12. Thus, oral or 
written communications used in connection with the offer and sale of 
eligible CDS that are or will be issued or cleared by a Registered or 
Exempt CCP in reliance on the rule will not be

[[Page 3970]]

subject to liability under Securities Act Section 12(a)(2).
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    \23\ We note that among the conditions of the exemptions, or 
representations in the exemptive requests on which we are relying, 
from clearing registration are that: (1) Information is available 
about the terms of the CDS, the creditworthiness of the CCP or any 
guarantor, and the clearing and settlement process for the CDS; and 
(2) the reference entity, the issuer of the reference security, or 
the reference security is one of the following: an entity reporting 
under the Exchange Act, providing Securities Act Rule 144A(d)(4) 
information, or about which financial information is otherwise 
publicly available; a foreign private issuer that has securities 
listed outside the United States and has its principal trading 
market outside the United States; a foreign sovereign debt security; 
an asset-backed security, as defined in Regulation AB [17 CFR 
229.1100], issued in a registered transaction with publicly 
available distribution reports; an asset-backed security issued or 
guaranteed by Fannie Mae, Freddie Mac or the Government National 
Mortgage Association (``Ginnie Mae''); or indexes in which 80 
percent or more of the index's weight is comprised of these 
reference entities or reference securities.
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    The Securities Act exemption in the interim final temporary rule is 
limited to offers and sales to eligible contract participants (as 
defined in Section 1a(12) of the CEA as in effect on the date of 
adoption of the rule, other than a person that is an eligible contract 
participant under Section 1a(12)(C) of the CEA). Under Securities Act 
Section 2A, a security-based swap agreement that is entered into 
between eligible contract participants is not permitted to be 
registered under the Securities Act, but the provisions of Securities 
Act Section 17(a) continue to apply to such transactions. The operation 
of one or more CCPs pursuant to the actions we are taking today will 
allow such security-based swap agreements to continue to be entered 
into between eligible contract participants and then be novated to the 
CCP. The Securities Act exemption is intended to limit investor 
involvement in eligible CDS that are issued or cleared by a Registered 
or Exempt CCP to eligible contract participants, who are those persons 
Congress determined were qualified to engage in activities in the 
generally unregulated (other than with respect to the antifraud 
provisions of the Securities Act and the Exchange Act) \24\ OTC CDS 
market.
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    \24\ See Title III of the Commodity Futures Modernization Act of 
2000 (Pub. L. 106-554) and the definition of eligible contract 
participant in Title I of the Commodity Futures Modernization Act of 
2000 [7 U.S.C. 1a(12)]. The term ``eligible contract participant'' 
generally includes various regulated financial institutions, 
business enterprises that meet certain tests relating to total 
assets or net worth, certain pension funds, state and local 
governments, and certain wealthy individuals.
    In addition, the provisions of Section 16 of the Exchange Act 
apply to security-based swap agreements. See 15 U.S.C. 78p(g). The 
exemptions are available only with regard to non-excluded CDS 
satisfying the exemption's conditions and not other types of 
derivative contracts.
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    The Securities Act interim final temporary rule also provides that 
any offer or sale of an eligible CDS that is or will be issued or 
cleared by a Registered or Exempt CCP by or on behalf of the issuer of 
a security, an affiliate of such issuer, or an underwriter, if such 
security is delivered in settlement or whose value is used to determine 
the amount of the settlement obligation, will constitute a ``contract 
for sale of,'' ``sale of,'' ``offer for sale,'' or ``offer to sell'' 
such security under Section 2(a)(3) of the Securities Act. This 
provision is intended to ensure that an eligible CDS that is or will be 
issued or cleared by a Registered or Exempt CCP cannot be used by an 
issuer, affiliate of an issuer or underwriter to circumvent the 
registration requirements of Section 5 with respect to an issuer's 
security for such eligible CDS.\25\ As a result, a transaction by such 
persons in an eligible CDS that is or will be issued or cleared by a 
Registered or Exempt CCP having such securities of the issuer also is a 
transaction in the issuer's securities that must be registered under 
the Securities Act, unless an exemption from registration is available.
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    \25\ This provision is similar to the condition in the 
Securities Act exemption in Rule 238 for standardized options [17 
CFR 230.238] and in Securities Act Section 2(a)(3) [15 U.S.C. 
77b(a)(3)] relating to security futures products.
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    Further, we are adopting on an interim final temporary basis an 
amendment to Securities Act Rule 146. Under the temporary amendment to 
Securities Act Rule 146, eligible contract participants that are sold 
eligible CDS in reliance on interim final temporary Securities Act Rule 
239T will be defined as ``qualified purchasers'' under Section 18(b)(3) 
of the Securities Act and thereby such eligible CDS that are or will be 
issued or cleared by a Registered or Exempt CCP will be considered 
``covered securities'' under Section 18 of the Securities Act and 
exempt from state blue sky laws.\26\ We are adopting this amendment 
because we believe that eligible contract participants are the kinds of 
sophisticated investors who do not require the protections of 
registration under state securities laws. In this regard, as we discuss 
above, Congress determined that eligible contract participants were the 
types of persons that were able to engage in activities in the OTC CDS 
market unregulated by the Commission and preempted the application of 
certain state laws to transactions in OTC security-based swap 
agreements, including CDS.\27\ We believe that defining such eligible 
contract participants as ``qualified purchasers'' for purposes of 
engaging in transactions in eligible CDS in reliance on temporary 
Securities Act Rule 239T would be consistent with such Congressional 
intent.
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    \26\ State securities regulation of covered securities generally 
is limited under Section 18(b). Under Section 18(b)(3), covered 
securities are securities offered and sold to qualified purchasers, 
as defined by the Commission.
    \27\ See 7 U.S.C. 16(e)(2).
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C. Exchange Act Rule 12a-10T and Rule 12h-1(h)T

    We also are adopting two interim final temporary rules relating to 
Exchange Act registration of eligible CDS that are or have been issued 
or cleared by a Registered or Exempt CCP. We are adopting interim final 
temporary Exchange Act Rule 12a-10T to exempt eligible CDS that are or 
have been issued or cleared by a Registered or Exempt CCP from the 
provisions of Section 12(a) of the Exchange Act under certain 
conditions.\28\ We also are adopting an interim final temporary 
amendment to Exchange Act Rule 12h-1 to exempt eligible CDS that are or 
have been issued or cleared by a Registered or Exempt CCP from the 
provisions of Section 12(g) of the Exchange Act under certain 
conditions.\29\ This exemption is the same as that available to 
standardized options issued by a registered options clearing agency and 
security futures products issued by a registered clearing agency, and 
this temporary rule should facilitate the operation of the CCPs.
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    \28\ 15 U.S.C. 78l(a).
    \29\ 15 U.S.C. 78l(g).
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D. Trust Indenture Act Rule 4d-11T

    We are adopting a new interim final temporary rule under Section 
304(d) of the Trust Indenture Act that would exempt any eligible CDS, 
as defined in Securities Act Rule 239T and offered and sold in reliance 
on Securities Act Rule 239T, from having to comply with the provisions 
of the Trust Indenture Act.\30\ We believe an exemption from the Trust 
Indenture Act is appropriate in this situation.
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    \30\ The Trust Indenture Act applies to debt securities sold 
through the use of the mails or interstate commerce. Section 304 of 
the Trust Indenture Act exempts from the Act a number of securities 
and transactions. Section 304(a) of the Trust Indenture Act exempts 
securities that are exempt under Securities Act Section 3(a) but 
does not exempt from the Trust Indenture Act securities that are 
exempt by Commission rule. Accordingly, while Securities Act Rule 
239T would exempt the offer and sale of eligible CDS satisfying 
certain conditions from all the provisions of the Securities Act 
(other than Section 17(a)), the Trust Indenture Act would continue 
to apply.
---------------------------------------------------------------------------

    The Trust Indenture Act is aimed at addressing problems that 
unregulated debt offerings posed for investors and the public,\31\ and 
provides a mechanism for debtholders to protect and enforce their 
rights with respect to the debt. We do not believe that the protections 
contained in the Trust Indenture Act are needed at this time to protect 
eligible contract participants to whom a sale of an eligible CDS is 
made in reliance on interim final temporary Securities Act Rule 239T. 
The identified problems that the Trust Indenture Act is intended to 
address do not occur in the offer and sale of eligible CDS.\32\ For 
example, eligible CDS are contracts between two parties and, as a 
result, do not raise the same problem regarding the ability of parties 
to enforce their rights under the instruments as would, for example, a

[[Page 3971]]

debt offering to the public. Moreover, through novation, the CCP 
becomes the counterparty to the buyer and the seller, and each would 
look directly to the CCP to satisfy the obligations under the eligible 
CDS. As a consequence, enforcement of contractual rights and 
obligations under the eligible CDS would occur directly between such 
parties, and the Trust Indenture Act provisions would not provide any 
additional meaningful substantive or procedural protections.
---------------------------------------------------------------------------

    \31\ See 15 U.S.C.77bbb(a).
    \32\ 15 U.S.C. 77bbb(a).
---------------------------------------------------------------------------

    Accordingly, due to the nature of eligible CDS as bilateral 
contracts that will have been issued or cleared by Registered or Exempt 
CCPs, we do not believe the protections contained in the Trust 
Indenture Act are currently needed with respect to these instruments. 
Therefore, we believe the exemption is necessary or appropriate in the 
public interest, consistent with the protection of investors and the 
purposes fairly intended by the Trust Indenture Act.

E. Request for Comment

    We request and encourage any interested person to submit comments 
regarding the interim final temporary rules. In particular, we solicit 
comment on the following questions:
    <bullet> We are interested in understanding what type of non-
excluded CDS would not be eligible for these exemptions. Are there 
credit swaps that would not be encompassed within the scope of the 
exemptions and that should be covered?
    <bullet> What are the amounts and types of CDS that may not satisfy 
the conditions for the exemptions?
    <bullet> Is the definition of eligible CDS appropriate and does it 
include the types of CDS that should be within the exemptions or should 
there be another definition? Does the definition of eligible CDS 
include all the appropriate or relevant material terms of a CDS? Should 
we require more specificity as to the terms, including final settlement 
valuations?
    <bullet> Each of the temporary exemptions contains particular 
conditions. Should the Securities Act exemption in temporary Securities 
Act Rule 239T be conditioned on the eligible CDS being issued or 
cleared by a Registered or Exempt CCP? If not, why not?
    <bullet> Should there be information conditions in the Securities 
Act exemptions themselves regarding the reference entities or reference 
securities similar to the information requirements in the CCP exemptive 
orders? If so, what type of information conditions should be included 
and why? Is additional or different information from that contained in 
the CCP exemption orders appropriate?
    <bullet> Are the Securities Act, Exchange Act and Trust Indenture 
Act exemptions appropriate? If not, why not? Given the voluntary nature 
of using a CCP, should we take a different approach?
    <bullet> The Securities Act exemption also provides that eligible 
CDS that are or will be issued or cleared by a Registered or Exempt CCP 
and are entered into with an issuer of a security, or an underwriter or 
affiliate of such issuer, if such security is delivered in settlement 
or whose value is used to determine the amount of the settlement 
obligation, will be considered an offer and sale of such security at 
that time. Are there circumstances in which the application of the 
Securities Act to such security of the issuer should not apply at the 
time of the offer and sale of eligible CDS that are or will be issued 
or cleared by a Registered or Exempt CCP? Are there securities or 
obligations used in CDS transactions that are not debt obligations? If 
yes, please explain.
    <bullet> The Securities Act exemption is limited to offers and 
sales to eligible contract participants. Should the exemption be 
limited in this manner? If not, why not? Are there persons who invest 
in CDS now in the OTC market that would not be able to take advantage 
of the exemptions? If yes, please explain the categories of persons and 
why the exemptions should include such persons.
    <bullet> The definition of ``qualified purchaser'' for purposes of 
the interim final temporary amendment to Securities Act Rule 146 
applies only to eligible contract participants that have been sold 
eligible CDS in reliance on the new interim final temporary exemption 
in Securities Act Rule 239T. Is this an appropriate definition and 
should eligible contract participants that are sold eligible CDS 
pursuant to Securities Act Rule 239T be considered ``qualified 
purchasers'' for purposes of Section 18 of the Securities Act?
    <bullet> Should the Securities Act exemption be limited to an 
exemption from Section 5 and Section 12 of the Securities Act? Please 
explain your reasoning in detail.
    <bullet> Should we exempt eligible CDS that have been issued or 
cleared by a Registered or Exempt CCP from the registration 
requirements of the Exchange Act? If not, why?
    <bullet> The conditions of the temporary Exchange Act and Trust 
Indenture Act exemptions are the same as the conditions to the 
temporary Securities Act exemption. Is this appropriate or should there 
be different conditions relating to the Exchange Act and Trust 
Indenture Act exemptions? If yes, please explain.
    <bullet> The interim final temporary rules include an exemption 
from the application of the Trust Indenture Act for eligible CDS that 
are offered and sold in reliance on interim final Securities Act Rule 
239T. Is this exemption appropriate or are there contractual 
protections in the Trust Indenture Act that should be included as 
mandatory provisions of an eligible CDS contract that is or will be 
issued or cleared by a Registered or Exempt CCP? If yes, please explain 
in detail.

III. Transition and Expiration Date of Interim Final Temporary Rules

    We are adopting the interim final rules on a temporary basis until 
September 25, 2009. We anticipate that this term of this exemption will 
provide us with adequate time to evaluate the availability of the 
exemptions applicable to CDS CCPs and non-excluded CDS, and whether any 
conditions or provisions of such exemptions should be modified.
    Adoption of the interim final temporary rules, which will be 
effective on [effective date] and will continue in effect until 
September 25, 2009, will facilitate the development of one or more CCPs 
as well as our review of the CDS market. We have included several 
requests for comment in this release. We will consider the public 
comments we receive in determining whether we should revise the interim 
final temporary rules in any respect, as well as whether we should 
consider extending the exemptions. The rules will expire and cease to 
be effective on September 25, 2009 unless we act to extend the 
effective date or revise the interim final temporary rules.

IV. Other Matters

    The Administrative Procedure Act generally requires an agency to 
publish notice of a proposed rulemaking in the Federal Register.\33\ 
This requirement does not apply, however, if the agency ``for good 
cause finds * * * that notice and public procedure are impracticable, 
unnecessary, or contrary to the public interest.'' \34\ Further, the 
Administrative Procedure Act also generally requires that an agency 
publish an adopted rule in the Federal Register 30 days before it 
becomes effective.\35\ This requirement does not apply, however, if the 
agency finds good cause for making the rule effective sooner.\36\ We, 
for good cause,

[[Page 3972]]

find that notice and solicitation of comment before adopting the new 
rules is impracticable, unnecessary, or contrary to the public 
interest.
---------------------------------------------------------------------------

    \33\ See 5 U.S.C. 553(b).
    \34\ Id.
    \35\ See 5 U.S.C. 553(d).
    \36\ Id.
---------------------------------------------------------------------------

    For the reasons we discussed throughout this release, we believe 
that we have good cause to act immediately to adopt these rules on an 
interim final temporary basis. The 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.\37\ Recent credit market events have demonstrated the 
seriousness of these risks in a CDS market operating without meaningful 
regulation, transparency,\38\ or CCPs.\39\ These events have emphasized 
the need for CCPs as mechanisms to help control such risks.\40\ 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 \41\ and, in furtherance of this recommendation, the 
Commission, the FRB and the CFTC signed a Memorandum of Understanding 
\42\ 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, thus is in the 
public interest. The interim final temporary rules we are adopting are 
intended to facilitate the ability of one or more CCPs for CDS to 
operate by providing exemptions from certain regulatory provisions that 
might otherwise prevent them from engaging in such activities. Absent 
an exemption, the offer and sale of eligible CDS that are or will be 
issued or cleared by a Registered or Exempt CCP may have to be 
registered under the Securities Act, the eligible CDS that have been so 
issued or cleared may have to be registered as a class under the 
Exchange Act and the provisions of the Trust Indenture Act may need to 
be complied with. We believe that the interim final temporary rules 
exempting the registration of eligible CDS that are or will be issued 
or cleared by a Registered or Exempt CCP under certain conditions will 
facilitate the use by eligible contract participants of CDS CCPs. 
Without also exempting the offers and sales of the eligible CDS from 
the registration requirements of the Securities Act and the Exchange 
Act and the provisions of the Trust Indenture Act, we believe that the 
CCPs would not be able to operate in the manner contemplated by the 
exemptive orders. We emphasize that we are requesting comments on the 
interim final temporary rules and will carefully consider any comments 
that we receive and respond to them in a subsequent release. Moreover, 
these interim final temporary rules will expire on September 25, 2009. 
Setting a termination date for the interim final temporary rules will 
necessitate further Commission action no later than the end of that 
period if we determine to continue the same, or similar, requirements 
contained in the interim final temporary rules. We find that there is 
good cause to have the rules effective as interim final temporary rules 
on January 22, 2009 and that notice and public procedure in advance of 
effectiveness of the interim final temporary rules is impracticable, 
unnecessary and contrary to the public interest.\43\
---------------------------------------------------------------------------

    \37\ 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.
    \38\ See 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 
(``Public reporting of prices, trading volumes and aggregate open 
interest should be required to increase market transparency for 
participants and the public.'')
    \39\ See 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).
    \40\ See id.
    \41\ See 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.
    \42\ See MOU, supra note 10.
    \43\ This finding also satisfies the requirements of 5 U.S.C. 
808(2), allowing the rule amendment to become effective 
notwithstanding the requirement of 5 U.S.C. 801 (if a federal agency 
finds that notice and public comment are ``impractical, unnecessary 
or contrary to the public interest,'' a rule ``shall take effect at 
such time as the federal agency promulgating the rule determines'').
---------------------------------------------------------------------------

V. Paperwork Reduction Act

    The interim final temporary rules do not impose any new 
``collections of information'' within the meaning of the Paperwork 
Reduction Act of 1995 (``PRA''),\44\ nor do they create any new filing, 
reporting, recordkeeping, or disclosure reporting requirements for a 
CCP that is or will be issuing or clearing eligible CDS. Accordingly, 
we are not submitting the interim final temporary rules to the Office 
of Management and Budget for review in accordance with the PRA.\45\ We 
request comment on whether our conclusion that there are no collections 
of information is correct.
---------------------------------------------------------------------------

    \44\ 44 U.S.C. 3501 et seq.
    \45\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
---------------------------------------------------------------------------

VI. Cost-Benefit Analysis

    We are adopting interim final temporary rules under the Securities 
Act, the Exchange Act and the Trust Indenture Act that would exempt 
eligible CDS that are or will be issued or cleared by a Registered or 
Exempt CCP and offered and sold only to eligible contract participants 
from all provisions of the Securities Act, other than the Section 17(a) 
anti-fraud provision, as well as from the registration requirements 
under Section 12 of the Exchange Act and from the provisions of the 
Trust Indenture Act. These interim final temporary rules are intended 
to facilitate the operation of one or more CCPs to act as a clearing 
agency in the CDS market to reduce some of the risks in the CDS market.
    A CDS is a bilateral contract between two parties, known as 
counterparties. The value of this financial contract is based on 
underlying obligations of a single entity or on a particular security 
or other debt obligation, or an index of several such entities, 
securities, or obligations. The obligation of a seller to make payment 
under a CDS contract is triggered by a default or other credit event as 
to such entity or entities or such security or securities. Investors 
may use CDS for a variety of reasons, including to offset or insure 
against risk in their fixed-income portfolios, to take synthetic 
positions in bonds or in segments of the debt market as represented by 
an index, or to capitalize on the volatility in credit spreads during 
times of economic uncertainty. In recent years, CDS market volumes have 
rapidly increased.\46\ This growth has coincided with a significant 
rise in the types and

[[Page 3973]]

number of entities participating in the CDS market.\47\
---------------------------------------------------------------------------

    \46\ See Semiannual OTC derivatives statistics at end-December 
2007, Bank for International Settlements (``BIS''), available at 
http://www.bis.org/statistics/otcder/dt1920a.pdf.
    \47\ CDSs were initially created to meet the demand of banking 
institutions looking to hedge and diversify the credit risk 
attendant with their lending activities. However, financial 
institutions such as insurance companies, pension funds, securities 
firms and hedge funds have entered the CDS market.
---------------------------------------------------------------------------

    In a CCP arrangement, both parties entering a CDS would novate 
their trades to the CCP, and the CCP would stand in as the counterparty 
to all parties of the CDS it clears. Through this novation process, the 
counterparty risk of a CDS would be effectively concentrated in the 
CCP.

A. Benefits

    We are providing exemptive orders that will facilitate the 
operation of CCPs for the CDS market. In connection with these actions, 
we are adopting exemptions from certain provisions of the Securities 
Act, the Exchange Act and the Trust Indenture Act, subject to certain 
conditions described in the companion exemptive orders and in the 
exemptions themselves. The conditions and representations in the 
companion exemptive orders and exemptions require that information be 
available about the terms of the CDS, the creditworthiness of the CCP 
or any guarantor, and the clearing and settlement process for the CDS. 
Additionally, the conditions require that financial information about 
the reference entity, the issuer of the reference security, or the 
reference security be publicly available. We believe that these interim 
final temporary rules and the exemptions we are providing under the 
Exchange Act, will facilitate the operation of CCPs while enabling us 
to provide oversight to the non-excluded CDS market. We believe that 
the operation of one or more CCPs in accordance with our exemptions 
likely would improve the efficiency and effectiveness of the CDS 
market, provide clearing participants with increased transparency of 
exposures to particular reference entities or reference securities, and 
increase available information about reference entities or reference 
securities.
    Absent an exemption, the offer and sale of eligible CDS that are or 
will be issued or cleared by a Registered or Exempt CCP would have to 
be registered under the Securities Act, the eligible CDS that are or 
have been issued or cleared by a Registered or Exempt CCP would have to 
be registered as a class under the Exchange Act, and the provisions of 
the Trust Indenture Act would apply. We believe that the interim final 
temporary rules exempting the registration of eligible CDS issued or 
cleared by a Registered or Exempt CCP under certain conditions will 
facilitate the use by eligible contract participants of CDS CCPs. 
Without also exempting the offers and sales of eligible CDS issued or 
cleared by a Registered or Exempt CCP from the registration 
requirements of the Securities Act and the Exchange Act and the 
provisions of the Trust Indenture Act, we believe that the CCPs would 
not be able to operate in the manner contemplated by the exemptive 
orders.
    The interim final temporary exemptions also will treat eligible CDS 
issued or cleared by a Registered or Exempt CCP under the Securities 
Act and the Exchange Act in the same manner as certain other types of 
derivative contracts, such as security futures products and 
standardized options.\48\ A Registered or Exempt CCP issuing or 
clearing eligible CDS will benefit from the temporary exemptions 
because it will not have to file registration statements with us 
covering the offer and sale of the eligible CDS. The registration form 
most applicable to a CCP is a Form S-20, which is the form that is used 
by options clearing houses that do not qualify for our exemption in 
Securities Act Rule 238 \49\ from registering the offer and sale of 
standardized options. If a CCP is not required to register the offer 
and sale of eligible CDS (on Form S-20, for example), it would not have 
to incur the costs of such registration, including legal and accounting 
costs. Some of these costs, of course, such as the costs of obtaining 
audited financial statements, may still be incurred as a result of the 
operations of the entity as a CCP and the regulatory oversight of the 
central counterparty operations. In addition, if any of the CCPs are 
entities that are subject to the periodic reporting requirements of the 
Exchange Act, the cost of filing a registration statement covering the 
eligible CDS would be lessened further as the information regarding the 
CCP already would be prepared. The availability of exemptions under the 
Securities Act, the Exchange Act, and the Trust Indenture Act also 
would mean that CCPs would not incur the costs of preparing disclosure 
documents describing eligible CDS and from preparing indentures and 
arranging for the services of a trustee.
---------------------------------------------------------------------------

    \48\ See, e.g., Securities Act Section 3(a)(14) [15 U.S.C. 
77c(a)(14)], Securities Act Rule 238 [17 CFR 230.238]; Exchange Act 
Section 12(a) [15 U.S.C. 78l], and Exchange Act Rule 12h-1(d) and 
(e) [17 CFR 240.12h-1(d) and (e)].
    \49\ 17 CFR 230.238.
---------------------------------------------------------------------------

B. Costs

    The interim final temporary rules exempting offers and sales of 
eligible CDS that are or will be issued or cleared by a Registered or 
Exempt CCP should facilitate the use by eligible contract participants 
of CDS CCPs that are the subject of exemptive orders at minimal cost to 
the CCP or investors. Because the interim final temporary rules are 
self-executing, the costs of being able to rely on such exemptions, we 
believe, are minimal.
    Absent an exemption, a CCP may have to file a registration 
statement covering the offer and sale of the eligible CDS, may have to 
satisfy the applicable provisions of the Trust Indenture Act, and may 
have to register the class of eligible CDS that it has issued or 
cleared under the Exchange Act, which would provide investors with 
civil remedies in addition to antifraud remedies. While a CCP 
registration statement covering eligible CDS (or the offer and sale of 
such eligible CDS) may provide certain information about the CCP, CDS 
contract terms, and the identification of reference entities or 
reference securities, it would not necessarily provide the type of 
information necessary to assess the credit risk of the reference entity 
or reference security. Further, while a CCP registration statement 
would provide information to the CDS market participants, as well as to 
the market as a whole, a condition of the clearing agency exemption in 
the exemptive orders is that the CCPs make their audited financial 
statements and other information about themselves publicly available. 
We recognize that a consequence of the exemptions would be the 
unavailability of certain remedies under the Securities Act and the 
Exchange Act and certain protections under the Trust Indenture Act. 
While an investor would be able to pursue an antifraud action in 
connection with the purchase and sale of eligible CDS under Exchange 
Act Section 10(b),\50\ it would not be able to pursue civil remedies 
under Sections 11 or 12 of the Securities Act.\51\ We could still 
pursue an antifraud action in the offer and sale of eligible CDS issued 
or cleared by a CCP.\52\
---------------------------------------------------------------------------

    \50\ 15 U.S.C. 78j(b).
    \51\ 15 U.S.C. 77k and 77l.
    \52\ See 15 U.S.C. 77q and 15 U.S.C. 78j(b).

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[[Page 3974]]

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

    Section 23(a)(2) of the Exchange Act \53\ requires us, when 
adopting rules under the Exchange Act, to consider the impact that any 
new rule would have on competition. Section 23(a)(2) prohibits us from 
adopting any rule that would impose a burden on competition not 
necessary or appropriate in furtherance of the purposes of the Exchange 
Act. In addition, Section 2(b) \54\ of the Securities Act and Section 
3(f) \55\ of the Exchange Act require us, when engaging in rulemaking 
where we are required to consider or determine whether an action is 
necessary or appropriate in the public interest, to also consider 
whether the action will promote efficiency, competition, and capital 
formation.
---------------------------------------------------------------------------

    \53\ 15 U.S.C. 78w(a)(2).
    \54\ 15 U.S.C. 77b(b).
    \55\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    We are adopting interim final temporary rules that would exempt 
eligible CDS issued or cleared by a Registered or Exempt CCP from all 
provisions of the Securities Act, other than the Section 17(a) 
antifraud provision, as well as from the registration requirements 
under Section 12 of the Exchange Act and the provisions of the Trust 
Indenture Act. Because our interim final temporary exemptions will be 
available to any Registered or Exempt CCP offering and selling eligible 
CDS, we do not believe that our actions today will impose a burden on 
competition. We also believe that the ability to settle CDS through 
CCPs will improve the transparency of the CDS market and provide 
greater assurance to participants as to the capacity of the eligible 
CDS counterparty to perform its obligations under the eligible CDS. We 
believe that increased transparency in the CDS market could help to 
decrease further market turmoil and thereby facilitate the capital 
formation process.

VIII. Regulatory Flexibility Act Certification

    The Commission hereby certifies pursuant to 5 U.S.C. 605(b) that 
the interim final temporary rules contained in this release will not 
have a significant economic impact on a substantial number of small 
entities. The interim final temporary rules exempt eligible CDS that 
are or will be issued or cleared by a Registered or Exempt CCP. None of 
the entities that are eligible to meet the requirements of the 
exemption from registration under Section 17A is a small entity. For 
this reason, the interim final temporary rules should not have a 
significant economic impact on a substantial number of small entities.

IX. Statutory Authority and Text of the Rules and Amendments

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

List of Subjects

    17 CFR Parts 230, 240 and 260.
    Reporting and recordkeeping requirements, Securities.

Text of the Rules and Amendments

0
For the reasons set out in the preamble, the Commission amends Title 
17, Chapter II, of the Code of Federal Regulations as follows:

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

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

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

0
2. Section 230.146 is amended by adding paragraph (c)T to read as 
follows:


Sec.  230.146  Rules under section 18 of the Act.

* * * * *
    (c)T Temporary definition of eligible contract participant as 
qualified purchaser. For purposes of Section 18(b)(3) of the Act (15 
U.S.C. 77r(b)(3)), the term ``qualified purchaser'' shall mean any 
eligible contract participant (as defined in Section 1a(12) of the 
Commodity Exchange Act (7 U.S.C. 1a(12)) as in effect on the date of 
adoption of this section, other than a person who is an eligible 
contract participant under Section 1(a)(12)(C) of the Commodity 
Exchange Act) that has been sold an eligible credit default swap (as 
defined in Rule 239T of this Act) in reliance on Rule 239T of this Act. 
This temporary rule will expire on September 25, 2009.

0
3. Section 230.239T is added to read as follows:


Sec.  230.239T  Temporary exemption for eligible credit default swaps.

    (a) Except as expressly provided in paragraph (b) and (c) of this 
section, the Act does not apply to any eligible credit default swap 
that is:
    (1) Issued or cleared by a clearing agency registered as a clearing 
agency under Section 17A of the Securities Exchange Act of 1934 (15 
U.S.C. 78q-1) or exempt from registration under Section 17A of the 
Securities Exchange Act of 1934 pursuant to a rule, regulation, or 
order of the Commission; and
    (2) Offered and sold only to an eligible contract participant (as 
defined in Section 1a(12) of the Commodity Exchange Act (7 U.S.C. 
1a(12)) as in effect on the date of adoption of this section, other 
than a person who is an eligible contract participant under Section 
1(a)(12)(C) of the Commodity Exchange Act).
    (b) The exemption provided in paragraph (a) of this section does 
not apply to the provisions of Section 17(a) of the Act (15 U.S.C. 
77q(a)).
    (c) Offers and sales. Any offer or sale of an eligible credit 
default swap pursuant to this section by or on behalf of the issuer of 
an identified security that is to be delivered if there is a credit-
related event or whose value is used to determine the amount of the 
settlement obligation, an affiliate of such issuer, or an underwriter, 
will constitute a ``contract for sale of,'' ``sale of,'' ``offer for 
sale,'' or ``offer to sell'' such identified security under Section 
2(a)(3) of the Act (15 U.S.C. 77b(a)(3)).
    (d) Definition of Eligible Credit Default Swap. For purposes of 
this section, an eligible credit default swap is a bilateral executory 
derivative contract not subject to individual negotiation:
    (1) in which a buyer makes payments to the seller and, in return, 
receives a payout if there is a default or other credit event involving 
identified obligation(s) or identified entity(ies) within a certain 
time; and
    (2) The agreement for which includes the:
    (i) Specification of the identified obligation or obligor; or, in 
the case of an identified group or index thereof, all of the identified 
obligations or obligors comprising any such group or index;
    (ii) Term of the agreement;
    (iii) Notional amount upon which payment obligations are 
calculated;
    (iv) Credit-related events that trigger a settlement obligation; 
and
    (v) Obligations to be delivered if there is a credit-related event 
or, if it is a cash settlement, the obligations whose value is to be 
used to determine the amount of settlement obligation under the 
eligible credit default swap.
    (e) This temporary rule will expire on September 25, 2009.

[[Page 3975]]

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

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

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

0
5. Section 240.12a-10T is added to read as follows:


Sec.  240.12a-10T  Temporary exemption of eligible credit default swaps 
from Section 12(a) of the Act.

    (a) The provisions of Section 12(a) of the Act (15 U.S.C. 78l(a)) 
do not apply in respect of any eligible credit default swap, as defined 
in Rule 239T of the Securities Act of 1933 (17 CFR 230.239T) issued or 
cleared by a clearing agency registered as a clearing agency under 
Section 17A of the Act (15 U.S.C. 78q-1) or exempt from registration 
under Section 17A of the Act pursuant to a rule, regulation, or order 
of the Commission, that will be purchased by or sold to an eligible 
contract participant (as defined in Section 1a(12) of the Commodity 
Exchange Act (7 U.S.C. 1a(12)) as in effect on the date of adoption of 
this section, other than a person who is an eligible contract 
participant under Section 1(a)(12)(C) of the Commodity Exchange Act.
    (b) This temporary rule will expire on September 25, 2009.

0
6. Section 240.12h-1 is amended by adding paragraph (h)T to read as 
follows:


Sec.  240.12h-1  Exemptions from registration under section 12(g) of 
the Act.

* * * * *
    (h)T any eligible credit default swap, as defined in Rule 239T of 
the Securities Act of 1933 (17 CFR 230.239T), issued or cleared by a 
clearing agency registered as a clearing agency under Section 17A of 
the Act (15 U.S.C. 78q-1) or exempt from registration under Section 17A 
of the Act pursuant to a rule, regulation, or order of the Commission 
that will be purchased by or sold to an eligible contract participant 
(as defined in Section 1a(12) of the Commodity Exchange Act (7 U.S.C. 
1a(12)) as in effect on the date of adoption of this section, other 
than a person who is an eligible contract participant under Section 
1(a)(12)(C) of the Commodity Exchange Act. This temporary rule will 
expire on September 25, 2009.

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

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

    Authority: 15 U.S.C. 77eee, 77ggg, 77nnn, 77sss, 78ll(d), 80b-3, 
80b-4, and 80b-11.
0
8. Section 260.4d-11T is added to read as follows:


Sec.  260.4d-11T  Temporary exemption for eligible credit default swaps 
offered and sold in reliance on Securities Act of 1933 Rule 239T (Sec.  
230.239T).

    Any eligible credit default swap (as defined in Rule 239T of this 
chapter, 17 CFR 230.239T), whether or not issued under an indenture, is 
exempt from the Act if offered and sold in reliance on Rule 239T of 
this chapter. This temporary rule will expire on September 25, 2009.

    By the Commission.
    Dated: January 14, 2009.
Elizabeth M. Murphy,
Secretary.
[FR Doc. E9-1123 Filed 1-21-09; 8:45 am]
BILLING CODE 8011-01-P


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