25586 Federal Register / Vol. 74, No. 101 / Thursday, May 28, 2009 / Notices 

14 15 U.S.C. 78s(b)(3)(A). 

15 17 CFR 240.19b–4(f)(6). 

16 17 CFR 240.19b–4(f)(6)(iii). In addition, Rule 

19b–4(f)(6)(iii) requires that a self-regulatory 

organization submit to the Commission written 

notice of its intent to file the proposed rule change, 

along with a brief description and text of the 

proposed rule change, at least five business days 

prior to the date of filing of the proposed rule 

change, or such shorter time as designated by the 

Commission. FINRA has satisfied this notice 

requirement. 

17 Id. 

18See supra note 5 and 11. 

19For the purposes only of waiving the 30-day 

operative delay, the Commission has considered the 

proposed rule’s impact on efficiency, competition, 

and capital formation. See 15 U.S.C. 78c(f). 20 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

Commission may designate, it has 

become effective pursuant to Section 

19(b)(3)(A) of the Act 14 and Rule 19b– 

4(f)(6) thereunder.15

A proposed rule change filed under 

19b–4(f)(6) normally may not become 

operative prior to 30 days after the date 

of filing.16 However, Rule 19b– 

4(f)(6)(iii) 17 permits the Commission to 

designate a shorter time if such action 

is consistent with the protection of 

investors and the public interest. FINRA 

has requested that the Commission 

waive the 30-day operative delay. The 

Commission notes that FINRA’s 

proposal is substantially similar to the 

rules of the Options Exchanges and does 

not raise any new substantive issues.18

The Commission believes that waiving 

the 30-day operative delay is consistent 

with the protection of investors and the 

public interest because such waiver will 

allow FINRA to harmonize its rules with 

the rules of the Options Exchanges 

without undue delay. The Commission 

hereby grants FINRA’s request and 

designates the proposal operative upon 

filing.19

At any time within 60 days of the 

filing of such proposed rule change the 

Commission may summarily abrogate 

such rule change if it appears to the 

Commission that such action is 

necessary or appropriate in the public 

interest, for the protection of investors 

or otherwise in furtherance of the 

purposes of the Act. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views and 

arguments concerning the foregoing, 

including whether the proposal is 

consistent with the Act. Comments may 

be submitted by any of the following 

methods: 

Electronic Comments 

• Use the Commission’s Internet 

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

rules/sro.shtml); or 

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

No. SR–FINRA–2009–032 on the subject 

line. 

Paper Comments 

• 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 No. 

SR–FINRA–2009–032. This file number 

should be included on the subject line 

if e-mail is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

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

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule changes between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for 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. 

Copies of such filing also will be 

available for inspection and copying at 

the principal office of FINRA. All 

comments received will be posted 

without change; the Commission does 

not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. All 

submissions should refer to File No. 

SR–FINRA–2009–032 and should be 

submitted on or before June 18, 2009. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.20

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E9–12311 Filed 5–27–09; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–59955; File No. SR–FINRA– 

2009–012] 

Self-Regulatory Organizations; 

Financial Industry Regulatory 

Authority, Inc.; Notice of Filing and 

Order Granting Accelerated Approval 

of Proposed Rule Change, as Modified 

by Amendment No. 1, To Implement an 

Interim Pilot Program With Respect to 

Margin Requirements for Certain 

Transactions in Credit Default Swaps 

May 22, 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 11, 

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 and 

II below, which Items substantially have 

been prepared by FINRA. On May 19, 

2009, FINRA submitted Amendment 

No. 1 to the proposed rule change. The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change from interested persons and is 

simultaneously approving the proposed 

rule change as amended on an 

accelerated basis to establish an interim 

pilot program. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

FINRA is proposing to adopt FINRA 

Rule 4240 (Margin Requirements for 

Credit Default Swaps). The proposed 

rule would implement an interim pilot 

program (the ‘‘Interim Pilot Program’’) 

with respect to margin requirements for 

transactions in credit default swaps 

(‘‘CDS’’) executed by a member 

(regardless of the type of account in 

which the transaction is booked), 

including those in which the offsetting 

matching hedging transactions 

(‘‘matching transactions’’) are effected 

by the member in CDS contracts that are 

cleared through the central counterparty 

clearing services of the Chicago 

Mercantile Exchange (the ‘‘CME’’). The 

proposed rule would expire on 

September 25, 2009. 

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. 

Federal Register / Vol. 74, No. 101 / Thursday, May 28, 2009 / Notices 25587 

In addition, the text of the proposed rule 

change is set forth below. New language 

is in italics. 

* * * * * 

4000. FINANCIAL AND 

OPERATIONAL RULES 

* * * * * 

4200. MARGIN 

* * * * * 

4240. Margin Requirements for Credit 

Default Swaps 

(a) Effective Period of Interim Pilot 

Program 

This Rule establishes an interim pilot 

program (‘‘Interim Pilot Program’’) with 

respect to margin requirements for any 

transactions in credit default swaps 

executed by a member (regardless of the 

type of account in which the transaction 

is booked), including those in which the 

offsetting matching hedging 

transactions (‘‘matching transactions’’) 

are effected by the member in contracts 

that are cleared through the central 

counterparty clearing services of the 

Chicago Mercantile Exchange (‘‘CME’’). 

The Interim Pilot Program shall 

automatically expire on September 25, 

2009. For purposes of this Rule, the term 

‘‘credit default swap’’ (‘‘CDS’’) shall 

mean any ‘‘eligible credit default swap’’ 

as defined in Securities Act Rule 

239T(d), as well as any other CDS that 

would otherwise meet such definition 

but for being subject to individual 

negotiation, and the term ‘‘transaction’’ 

shall include any ongoing CDS position. 

(b) Central Counterparty Clearing 

Arrangements 

Any member, prior to establishing any 

clearing arrangement with respect to 

CDS transactions that makes use of any 

central counterparty clearing services 

provided by any clearing agency, 

pursuant to Securities Act Rule 

239T(a)(1), must notify FINRA in 

advance in writing, in such manner as 

may be specified by FINRA in a 

Regulatory Notice. 

(c) Margin Requirements 

(1) CDS Cleared on the Chicago 

Mercantile Exchange 

Members shall require as a minimum 

for computing customer or broker-dealer 

margin, with respect to any customer or 

broker-dealer transaction in CDS with a 

member in which the member executes 

a matching transaction that makes use 

of the central counterparty clearing 

facilities of the CME (‘‘CME matching 

customer-side transaction’’), the 

applicable margin pursuant to CME 

rules (sometimes referred to in such 

rules as a ‘‘performance bond’’) 

regardless of the type of account in 

which the transaction in CDS is booked. 

Members shall, based on the risk 

monitoring procedures and guidelines 

set forth in paragraph (d) of this Rule, 

determine whether the applicable CME 

requirements are adequate with respect 

to their customer and broker-dealer 

accounts and the positions in those 

accounts and, where appropriate, 

increase such margin in excess of such 

minimum margin. For this purpose, 

members are permitted to use the 

margin requirements set forth in 

Supplementary Material .01 of this Rule. 

The aggregate amount of margin the 

member collects from customers and 

broker-dealers for transactions in CDS 

must equal or exceed the aggregate 

amount of margin the member is 

required to post at CME with respect to 

those customer and broker-dealer 

transactions. 

CME matching customer-side 

transactions are not subject to the 

provisions of paragraph (c)(2) of this 

Rule. 

(2) CDS That Are Cleared on Central 

Counterparty Clearing Facilities Other 

Than the CME or That Settle Over-theCounter (‘‘OTC’’) 

Members shall require, with respect to 

any transaction in CDS that makes use 

of central counterparty clearing 

facilities other than the CME or that 

settle OTC, the applicable minimum 

margin as set forth in Supplementary 

Material .01 of this Rule regardless of 

the type of account in which the 

transaction in CDS is booked. However, 

members shall, based on the risk 

monitoring procedures and guidelines 

set forth in paragraph (d) of this Rule, 

determine whether such margin is 

adequate with respect to their customer 

and broker-dealer accounts and, where 

appropriate, increase such 

requirements. 

(d) Risk Monitoring Procedures and 

Guidelines 

Members shall monitor the risk of any 

customer or broker-dealer accounts with 

exposure to CDS and shall maintain a 

comprehensive written risk analysis 

methodology for assessing the potential 

risk to the member’s capital over a 

specified range of possible market 

movements over a specified time period. 

For purposes of this Rule, members 

must employ the risk monitoring 

procedures and guidelines set forth in 

paragraphs (d)(1) through (8) of this 

Rule. The member must review, in 

accordance with the member’s written 

procedures, at reasonable periodic 

intervals, the member’s credit extension 

activities for consistency with the risk 

monitoring procedures and guidelines 

set forth in this Rule, and must 

determine whether the data necessary to 

apply the risk monitoring procedures 

and guidelines is accessible on a timely 

basis and information systems are 

available to adequately capture, 

monitor, analyze and report relevant 

data, including: 

(1) obtaining and reviewing the 

required account documentation and 

financial information necessary for 

assessing the amount of credit to be 

extended to customers and brokerdealers; 

(2) assessing the determination, 

review and approval of credit limits to 

each customer and broker-dealer, and 

across all customers and broker-dealers, 

engaging in CDS transactions; 

(3) monitoring credit risk exposure to 

the member from CDS, including the 

type, scope and frequency of reporting 

to senior management; 

(4) the use of stress testing of accounts 

containing CDS contracts in order to 

monitor market risk exposure from 

individual accounts and in the 

aggregate; 

(5) managing the impact of credit 

extended related to CDS contracts on 

the member’s overall risk exposure; 

(6) determining the need to collect 

additional margin from a particular 

customer or broker-dealer, including 

whether that determination was based 

upon the creditworthiness of the 

customer or broker-dealer and/or the 

risk of the specific contracts; 

(7) monitoring the credit exposure 

resulting from concentrated positions 

within both individual accounts and 

across all accounts containing CDS 

contracts; and 

(8) maintaining sufficient margin in 

each customer and broker-dealer 

account to protect against the default of 

the largest individual exposure in the 

account as measured by computing the 

largest maximum possible loss. 

(e) Concentrations 

Where the maximum current and 

potential exposure with respect to the 

largest single name CDS across all 

accounts exceeds the member’s 

tentative net capital, the member must 

take a capital charge equal to the 

aggregate margin requirement for such 

accounts on the positions in such single 

name CDS in accordance with the tables 

set forth in Supplementary Material .01 

of this Rule. This capital charge may be 

reduced by the amount of excess margin 

held in all customer and broker-dealer 

accounts. 

25588 Federal Register / Vol. 74, No. 101 / Thursday, May 28, 2009 / Notices 

3See Securities Exchange Act Release No. 59578 

(Mar. 13, 2009), 74 FR 11781 (Mar. 19, 2009). 

4See Securities Exchange Act Release No. 59164 

(Dec. 24, 2008), 74 FR 139 (Jan. 2, 2009). 

5See Securities Exchange Act Release No. 59527 

(Mar. 6, 2009), 74 FR 10791 (Mar. 12, 2009). 

6See Securities Act Release No. 8999 (Jan. 14, 

2009), 74 FR 3967 (Jan. 22, 2009) (Temporary 

Exemptions for Eligible Credit Default Swaps To 

Facilitate Operation of Central Counterparties To 

Clear and Settle Credit Default Swaps). Generally, 

as noted by the Commission, a CDS is a bilateral 

contract between two parties, known as 

counterparties. The value of this contract is based 

on underlying obligations of a single entity or on 

* * * Supplementary Material: 

.01 Margin Requirements for CDS. 

The following customer and brokerdealer margin requirements shall apply, 

as appropriate, pursuant to paragraph 

(c) of this Rule. 

(a) Customer and Broker-Dealer 

Accounts That Are Short a CDS 

The following table shall be used to 

determine the margin that a member 

must collect from a customer or brokerdealer that is short a single name debt 

security CDS contract (sold protection). 

The margin is to be collected based 

upon the basis point spread over LIBOR 

of the CDS contract as well as the 

maturity of that contract as a percentage 

of the notional amount, shall be as 

follows: 

Basis point spread 

Length of time to maturity of CDS contract 

(in percent) 

1 year 3 years 5 years 7 years & 

longer 

0–100 ............................................................................................................................... 1 2 4 7 

100–300 ........................................................................................................................... 2 5 7 10 

300–500 ........................................................................................................................... 5 10 15 20 

500–700 ........................................................................................................................... 10 15 20 25 

700 and above ................................................................................................................. 15 20 25 30 

For those CDS contracts where the 

underlying obligation is a debt index, 

rather than a single name bond, the 

margin requirement as a percentage of 

the notional amount shall be as follows: 

Index 

Length of time to maturity of CDS contract 

(in percent) 

1 year 3 years 5 years 7 years 10 years 

CDX.IG ..................................................................................................... 1 1 2 4 5 

CDX.HY ................................................................................................... 3 5 10 12 15 

CDX.HVOL ............................................................................................... 2 3 4 5 7 

(b) Accounts That Are Long a CDS 

For customer or broker-dealer 

accounts that are long the CDS contracts 

(purchased protection), the margin to be 

collected shall be 50% of the above 

amounts. 

(c) Accounts That Maintain Both Long 

and Short CDS 

In instances where the customer or 

broker-dealer maintains both long and 

short CDS, the member may elect to 

collect 50% of the above margin 

requirements on the greater of the long 

or short position within the same 

Bloomberg CDS sector, provided those 

long and short positions are in the same 

spread and maturity bucket. 

If a customer or broker-dealer is long 

the bond and long a CDS contract on the 

same underlying obligor, margin needs 

to be collected only on the long bond 

position, provided that bond can be 

delivered against the long CDS contract, 

as prescribed pursuant to applicable 

FINRA margin rules. 

In instances where the customer or 

broker-dealer is short the bond and 

short the CDS on the same underlying 

obligor, margin need only be collected 

on the short bond, as prescribed 

pursuant to applicable FINRA margin 

rules. 

* * * * * 

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 

FINRA is proposing to adopt FINRA 

Rule 4240 (Margin Requirements for 

Credit Default Swaps). The proposed 

rule would implement an Interim Pilot 

Program with respect to margin 

requirements for transactions in CDS 

executed by a member (regardless of the 

type of account in which the transaction 

is booked), including those in which 

matching transactions are effected by 

the member in CDS contracts that are 

cleared through the central counterparty 

clearing services of the CME. The 

proposed rule would expire on 

September 25, 2009. 

(A). Background 

On March 13, 2009, the Commission 

issued an Order granting temporary 

exemptions under the Exchange Act in 

response to a request by CME and 

Citadel Investment Group, LLC with 

respect to their proposal for CME to 

provide clearance and settlement 

services as a central counterparty for 

certain transactions in CDS.3 The 

Commission issued similar Orders to 

LCH.Clearnet Ltd 4 and ICE U.S. Trust 

LLC.5 The Commission also recently 

enacted interim final temporary rules 

providing enumerated exemptions 

under the federal securities laws for 

certain CDS to facilitate the operation of 

one or more central clearing 

counterparties in such CDS.6 Finally, 

Federal Register / Vol. 74, No. 101 / Thursday, May 28, 2009 / Notices 25589 

a particular security or other debt obligation, 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. 

7See Securities Exchange Act Release No. 59165 

(Dec. 24, 2008), 74 FR 133 (Jan. 2, 2009). 

8See supra, notes 3, 4, 5, 6, and 7. 

9The methodology CME proposed was amended 

based on FINRA’s analysis. FINRA’s proposed rule 

sets forth additional requirements. See Proposed 

FINRA Rule 4240(c)(1). 

10See Proposed FINRA Rule 4240(c)(2). 

11Based on communications on or about April 22, 

2009 between Bonnie Gauch of the Commission’s 

Division of Trading and Markets and Grace Vogel 

of FINRA. 

12NASD Rule 0120(g) states that the term 

‘‘customer’’ shall not include a broker or dealer. For 

purposes of the proposed rule, the terms ‘‘customer 

or broker-dealer’’ and ‘‘customer and broker-dealer’’ 

are intended to include any party with which a 

member executes a CDS transaction. 

13Under Proposed FINRA Rule 4240(c)(1), such 

transactions are defined as ‘‘CME matching 

customer-side transactions.’’ See Section (B)(3) 

under this Item. Under Proposed FINRA Rule 

4240(c)(1), the term ‘‘CME matching customer-side 

transaction’’ would include any party, including a 

broker-dealer. 

14 17 CFR 230.239T(d). 

15FINRA notes that Rule 239T(d) excludes 

contracts that are ‘‘subject to individual 

negotiation.’’ The proposed FINRA rule would 

reach CDS contracts, subject to the other criteria set 

forth in Rule 239T(d), without regard to whether 

they are individually negotiated. 

16 17 CFR 230.239T(a)(1). 

17See Proposed FINRA Rule 4240(d). 

the Commission has provided 

temporary exemptions in connection 

with Sections 5 and 6 of the Exchange 

Act for transactions in non-excluded 

CDS 7 (these Commission actions are 

hereinafter referred to collectively as the 

‘‘Commission’s CDS Relief’’). The 

Commission noted that these measures 

were intended to address concerns 

arising from systemic risk posed by 

CDS, including, among others, risks to 

the financial system arising from the 

lack of a central clearing counterparty to 

clear and settle CDS.8

Historically, in the absence of a 

central clearing counterparty, CDS 

transactions entered into by U.S. 

investment banks have not been booked 

in the member, but rather in the 

affiliated entities. In light of the rapid 

growth of the CDS market, and the 

potential inability of parties to meet 

their obligations as counterparties, the 

lack of a central clearing counterparty 

poses risks not only to the two parties 

to a CDS transaction, but also to the 

financial system overall because of the 

resulting chain of significant economic 

loss when one or more parties default 

on their obligations under a CDS 

transaction. 

As discussed above, the Commission 

has issued exemptive Orders to allow 

three entities to act as CDS central 

clearing counterparties. Of these, the 

CME has requested that FINRA adopt 

customer margin rules for CDS and 

suggested a specific customer margin 

methodology that could be employed.9

FINRA performed an analysis of the 

margin methodology suggested by CME, 

as well as the alternative methodology 

for CDS 10 prior to proposing Rule 4240. 

FINRA believes it is appropriate to 

adopt the proposed customer margin 

rule for CDS transactions during a 

limited pilot period for the reasons 

described below; however, FINRA 

represents that it will consider 

proposals it receives from other CDS 

central clearing counterparties to amend 

its customer margin rules for CDS and, 

if appropriate, will propose changes to 

its customer margin rules for CDS.11

Accordingly, FINRA proposes to 

adopt Proposed FINRA Rule 4240, 

which would impose margin rules for 

certain CDS transactions. The Interim 

Pilot Program is intended to be 

coterminous with the Commission’s 

CDS Relief and would expire on 

September 25, 2009. 

FINRA requests comment on the 

proposed rule during the period of the 

Interim Pilot Program. Among other 

matters that commenters may wish to 

address, FINRA is particularly 

interested in the following questions: 

1. Since historically CDS transactions 

have not been undertaken in brokerdealers and therefore have not exposed 

broker-dealers to the risks of such 

transactions, is the advent of brokerdealer participation in these 

transactions, which entails greater 

individual risks to broker-dealers but 

which fosters less systemic risk because 

of the existence of a central clearing 

party for the matching transaction, a 

correct balancing of risks as a matter of 

public policy? 

2. Do commenters believe that 

different or amended margin provisions 

would be superior to those set forth in 

the proposed rule? 

(B). Proposal 

(1) Scope of the Proposed Rule 

Proposed FINRA Rule 4240(a) 

provides that the Interim Pilot Program 

would apply to margin requirements for 

any transactions in CDS executed by a 

member (regardless of the type of 

account in which the transaction is 

booked), including those in which the 

matching transactions are effected by 

the member in contracts that are cleared 

through the central clearing 

counterparty clearing services of the 

CME. FINRA notes that matching 

transactions that are cleared through the 

CME as the central clearing 

counterparty would be subject to margin 

requirements pursuant to CME rules 

(sometimes referred to in such rules as 

‘‘performance bond’’). Accordingly, 

with respect to these matching 

transactions, the proposed rule is 

intended to apply to the side of the CDS 

transaction—executed between a 

member and a customer or other brokerdealer 12—that is not cleared through the 

CME.13

Proposed FINRA Rule 4240(a) would 

define the term ‘‘CDS’’ for purposes of 

the rule. Specifically, CDS would 

include any ‘‘eligible credit default 

swap’’ as defined in Securities Act Rule 

239T(d),14 as well as any other CDS that 

would otherwise meet such definition 

but for being subject to individual 

negotiation.15 In addition, the proposed 

rule provides that, for purposes of the 

rule, the term ‘‘transaction’’ includes 

any ongoing CDS position. 

Proposed FINRA Rule 4240(a) 

provides that the Interim Pilot Program 

would automatically expire on 

September 25, 2009. 

(2) Central Counterparty Clearing 

Arrangements 

Proposed FINRA Rule 4240(b) would 

provide that any member, prior to 

establishing any clearing arrangement 

with respect to CDS transactions that 

makes use of any central counterparty 

clearing services provided by any 

clearing agency, pursuant to Securities 

Act Rule 239T(a)(1),16 must notify 

FINRA in advance in writing, in such 

manner as may be specified by FINRA 

in a Regulatory Notice. 

(3) Margin Requirements: CDS Cleared 

on the CME 

Proposed FINRA Rule 4240(c)(1) 

provides that a member, as a minimum 

for computing customer or broker-dealer 

margin, with respect to any customer or 

broker-dealer transaction in CDS with a 

member in which the member executes 

a CME matching customer-side 

transaction, must require the applicable 

margin pursuant to CME rules 

regardless of the type of account in 

which the transaction in CDS is booked. 

The proposed rule would require that 

members must, based on the risk 

monitoring procedures and guidelines 

set forth in paragraph (d) of the 

proposed rule,17 determine whether the 

applicable CME requirements are 

adequate with respect to their customer 

and broker-dealer accounts and the 

positions in those accounts and, where 

appropriate, increase such margin in 

excess of the minimum margin. For this 

purpose, the proposed rule would 

25590 Federal Register / Vol. 74, No. 101 / Thursday, May 28, 2009 / Notices 

18See Proposed FINRA Rule 4240.01. 

19See Letter from Adam Cooper, Senior Managing 

Director and General Counsel, Citadel Investment 

Group, L.L.C., and Ann K. Shulman, Managing 

Director and Deputy General Counsel, Chicago 

Merchantile Exchange Inc., to Elizabeth M. Murphy, 

Secretary, Securities and Exchange Commission, 

dated March 12, 2009 (available at http:// 

www.sec.gov/rules/exorders/2009/cme-citadelexreq.pdf). Letter from Lisa A. Dunsky, Director & 

Associate General Counsel, CME Group, to David 

Stawick, Secretary, Commodity Futures Trading 

Commission, dated December 19, 2008, (available 

at: http://www.cftc.gov). 

20See Proposed FINRA Rule 4240.01. 

21See Proposed FINRA Rule 4240(d)(1) through 

(8). 

22See Proposed FINRA Rule 4240.01. 

23As originally proposed, the rule change would 

have stated, ‘‘If a customer or broker-dealer is long 

the bond and long a CDS contract on the same 

underlying obligor, margin needs to be collected 

only on the long bond position, provided that bond 

can be delivered against the short CDS contract, as 

prescribed pursuant to applicable FINRA margin 

rules.’’ Amendment No. 1 corrected this sentence 

by changing the word ‘‘short’’ directly preceding 

the second ‘‘CDS’’ to ‘‘long.’’ 

24As originally proposed, the rule change would 

have stated, ‘‘In instances where the customer or 

broker-dealer is short the bond and short the CDS, 

margin need only be collected on the short bond, 

as prescribed pursuant to applicable FINRA margin 

rules.’’ Amendment No. 1 clarified this sentence by 

adding the phrase ‘‘on the same underlying obligor’’ 

directly following the word ‘‘CDS.’’ 

25The current FINRA rulebook consists of: (1) 

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

incorporated from NYSE (‘‘Incorporated NYSE 

Rules’’). 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. 

26For more information about the rulebook 

consolidation process, see FINRA Information 

Notice, March 12, 2008 (Rulebook Consolidation 

Process). 

permit members to use the margin 

requirements set forth in the proposed 

rule’s Supplementary Material.18

It is FINRA’s understanding that, after 

calculating margin on an accountspecific basis, CME performs stress tests 

to assess concentration risk across a 

member’s customer and house 

portfolios.19 Further, CME may require 

that a member post additional margin 

based on the results of those 

concentration risk stress tests. 

Accordingly, Proposed FINRA Rule 

4240(c)(1) would require that the 

aggregate amount of margin the member 

collects from customers and brokerdealers for transactions in CDS must 

equal or exceed the aggregate amount of 

margin the member is required to post 

at CME with respect to those customer 

and broker-dealer transactions. 

CME matching customer-side 

transactions, being subject to the margin 

guidelines set forth in Proposed FINRA 

Rule 4240(c)(1), are not subject to the 

margin guidelines as set forth in 

paragraph (c)(2) of the proposed rule. 

However, members are encouraged to 

apply higher margin requirements 

where appropriate. 

(4) Margin Requirements: CDS That Are 

Cleared on Central Counterparty 

Clearing Facilities Other Than the CME 

or That Settle Over-the-Counter (‘‘OTC’’) 

Proposed FINRA Rule 4240(c)(2) 

would provide that a member, with 

respect to any transaction in CDS that 

makes use of central counterparty 

clearing facilities other than the CME or 

that settle OTC, must require the 

applicable minimum margin as set forth 

in the proposed rule’s Supplementary 

Material regardless of the type of 

account in which the transaction in CDS 

is booked.20 However, the proposed rule 

provides that a member must, based on 

the risk monitoring procedures and 

guidelines set forth in paragraph (d) of 

the proposed rule, determine whether 

such margin is adequate with respect to 

their customer and broker-dealer 

accounts and, where appropriate, 

increase the requirements. 

(5) Risk Monitoring Procedures and 

Guidelines 

Proposed FINRA Rule 4240(d) 

provides that members must monitor 

the risk of any customer or broker-dealer 

accounts with exposure to CDS and 

must maintain a comprehensive written 

risk analysis methodology for assessing 

the potential risk to the member’s 

capital over a specified range of possible 

market movements over a specified time 

period. The proposed rule would 

require that members must employ the 

risk monitoring procedures and 

guidelines set forth in Proposed FINRA 

Rule 4240(d)(1) through (8).21 Further, 

the rule would require the member to 

review, in accordance with the 

member’s written procedures, at 

reasonable periodic intervals, the 

member’s credit extension activities for 

consistency with the risk monitoring 

procedures and guidelines set forth in 

the rule, and to determine whether the 

data necessary to apply the risk 

monitoring procedures and guidelines is 

accessible on a timely basis and 

information systems are available to 

adequately capture, monitor, analyze 

and report relevant data (i.e., the data 

relevant for purposes of the risk 

monitoring procedures and guidelines 

set forth in Proposed FINRA Rule 

4240(d)(1) through (8)). 

(6) Concentrations 

Proposed FINRA Rule 4240(e) would 

require that, where the maximum 

current and potential exposure with 

respect to the largest single name CDS 

across all accounts exceeds the 

member’s tentative net capital, the 

member must take a capital charge equal 

to the aggregate margin requirement for 

such accounts on the positions in such 

single name CDS in accordance with the 

tables set forth in the proposed rule’s 

Supplementary Material.22 This 

additional requirement for concentrated 

positions reflects FINRA’s concern for 

the possibility of a sudden default in the 

largest single name CDS across all 

accounts in respect of which a member 

has current or potential exposure. 

However, the proposed rule would 

allow a member to reduce this capital 

charge by the amount of the excess 

margin held in all customer and brokerdealer accounts. 

(7) Proposed FINRA Rule 4240.01 

Proposed FINRA Rule 4240.01, a 

Supplementary Material, sets forth the 

customer and broker-dealer margin 

requirements that would apply with 

respect to CDS, as appropriate, pursuant 

to paragraph (c) of the proposed rule. 

The proposed rule addresses customer 

and broker-dealer accounts that are 

short a CDS, accounts that are long a 

CDS and accounts that maintain both 

long and short CDS. Paragraph (c) of the 

Supplementary Material provides, with 

respect to accounts that maintain both 

long and short CDS, that if a customer 

or broker-dealer is long the bond and 

long a CDS contract on the same 

underlying obligor, margin would need 

to be collected only on the long bond 

position, provided that bond can be 

delivered against the long CDS contract, 

as prescribed pursuant to applicable 

FINRA margin rules.23 In instances 

where the customer or broker-dealer is 

short the bond and short the CDS on the 

same underlying obligor, margin need 

only be collected on the short bond, 

again as prescribed pursuant to 

applicable FINRA margin rules.24

FINRA notes that, for purposes of the 

proposed rule, the term ‘‘applicable 

FINRA margin rules’’ refers to 

requirements pursuant to NASD Rule 

2520 or Incorporated NYSE Rule 431, as 

applicable to the member.25 FINRA 

plans to address NASD Rule 2520 and 

Incorporated NYSE Rule 431 later as 

part of FINRA’s rulebook consolidation 

process, and, accordingly, will amend 

Proposed FINRA Rule 4240.01(c) as 

appropriate to refer to the new, 

consolidated FINRA margin rule.26

FINRA will announce the effective 

date of the proposed rule change in a 

Regulatory Notice to be published no 

later than 60 days following 

Commission approval, but FINRA does 

Federal Register / Vol. 74, No. 101 / Thursday, May 28, 2009 / Notices 25591 

27 15 U.S.C. 78o–3(b)(6). 

28 15 U.S.C. 78s(b)(2). 

29 15 U.S.C. 78o–3(b)(6). 

30See Securities Exchange Act Releases Nos. 

59164, p. 1 (Dec. 24, 2008), 74 FR 139 (Jan. 2, 2009), 

59165, p. 1 (Dec. 24, 2008), 74 FR 133 (Jan. 2, 2009), 

59527, p. 1 (Mar. 6, 2009), 74 FR 10791 (Mar. 12, 

2009), 59578, p. 1 (Mar 13, 2009), 74 FR 11781, at 

11782 (Mar. 19, 2009), and Securities Act Release 

No. 8999, p. 4 (Jan. 14, 2009), 74 FR 3967 (Jan. 22, 

2009). 31 Id. 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. 32See 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.’’). 

33See 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). 

34See id. 

35See Securities Exchange Act Release Nos. 

59164 (Dec. 24, 2008), 74 FR 139 (Jan. 2, 2009), 

59527 (Mar. 6, 2009), 74 FR 10791 (Mar. 12, 2009), 

and 59578 (Mar. 13, 2009), 74 FR 11781 (Mar. 19, 

2009). 

36See Securities Exchange Act Releases Nos. 

59164, p. 4 (Dec. 24, 2008), 74 FR 139, at 140 (Jan. 

2, 2009), 59527, p. 4 (Mar. 6, 2009), 74 FR 10791, 

at 10792 (Mar. 12, 2009), and 59578, p. 4 (Mar. 13, 

2009), 74 FR 11781, at 11782 (Mar. 19, 2009). 

37 Id. 

38 Id. 

39 Id. 

40 Id. 

41See generally R. Bliss and C. Papathanassiou, 

‘‘Derivatives clearing, central counterparties and 

novation: The economic implications,’’ http:// 

www.ecb.int/events/pdf/conferences/ccp/ 

BlissPapathanassiou_final.pdf (Mar. 8, 2006), at 6. 

Continued 

intend to issue such Regulatory Notice 

as soon as practicable in the event of 

SEC approval of the proposed rule 

change given the limited time period of 

the proposed Interim Pilot Program. 

2. Statutory Basis 

FINRA believes that the proposed rule 

change is consistent with the provisions 

of Section 15A(b)(6) of the Act,27 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 would further the 

purposes of the Act because, consistent 

with goals set forth by the Commission 

when it provided the Commission’s CDS 

Relief with respect to the operation of 

central counterparties to clear and settle 

CDS, the margin requirements set forth 

by the proposed rule change will help 

to stabilize the financial markets. 

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. Commission’s Findings and Order 

Granting Accelerated Approval of a 

Proposed Rule Change 

Pursuant to Section 19(b)(2) of the 

Act,28 the Commission may not approve 

any proposed rule change, or 

amendment thereto, prior to the 30th 

day after the date of publication of 

notice of the filing thereof, unless the 

Commission finds good cause for so 

doing and publishes its reasons for so 

finding. FINRA also has requested that 

the Commission find good cause for 

approving the proposed rule change 

prior to the 30th day after publication in 

the Federal Register. For the 

Commission to approve rule changes 

proposed by a registered securities 

association (e.g., FINRA) the proposed 

rule changes must be consistent with 

the requirements of the Exchange Act, 

including Section 15A(b)(6) of the Act,29

and the rules and regulations 

thereunder. Section 15A(b)(6) requires 

that the rules of a registered securities 

association be, ‘‘designed to prevent 

fraudulent and manipulative acts and 

practices, to promote just and equitable 

principles of trade, to foster cooperation 

and coordination with persons engaged 

in regulating, clearing, settling, 

processing information with respect to, 

and facilitating transactions in 

securities, to remove impediments to 

and perfect the mechanism of a free and 

open market and a national market 

system, and, in general, to protect 

investors and the public interest; and 

are not designed to permit unfair 

discrimination between customers, 

issuers, brokers, or dealers, to fix 

minimum profits, to impose any 

schedule or fix rates of commissions, 

allowances, discounts, or other fees to 

be charged by its members, or to 

regulate by virtue of any authority 

conferred by [Section 15A] matters not 

related to the purposes of [Section 15A] 

or the administration of the 

association.’’ 

The over-the-counter (‘‘OTC’’) market 

for CDS has been a source of concerns 

to the Commission and other financial 

regulators.30 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.31 Recent credit market 

events have demonstrated the 

seriousness of these risks in a CDS 

market operating without meaningful 

regulation, transparency,32 or central 

clearing counterparties.33 These events 

have emphasized the need for central 

clearing counterparties as mechanisms 

to help control such risks.34

Establishment of central clearing 

counterparties for CDS is expected to 

reduce the counterparty risks inherent 

in the CDS market, and thereby help 

mitigate potential systemic impacts. As 

we have stated previously,35 given the 

continued uncertainty in this market, 

taking action to help foster the prompt 

development of central clearing 

counterparties is in the public interest. 

The Commission believes that using 

well-regulated central clearing 

counterparties to clear transactions in 

CDS helps promote efficiency and 

reduce risk in the CDS market and 

among its participants.36 These benefits 

can be particularly significant in times 

of market stress, as central clearing 

counterparties can mitigate the potential 

for a market participant’s failure to 

destabilize other market participants, 

and reduce the effects of misinformation 

and rumors.37 Central clearing 

counterparty-maintained records of CDS 

transactions may also aid the 

Commission’s efforts to prevent and 

detect fraud and other abusive market 

practices.38

Well-regulated central clearing 

counterparties also are expected to 

address concerns about counterparty 

risk by substituting the creditworthiness 

and liquidity of the central clearing 

counterparties for the creditworthiness 

and liquidity of the counterparties to a 

CDS.39 In the absence of central clearing 

counterparties, participants in the OTC 

CDS market must carefully manage their 

counterparty risks because a 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.40

Firms that trade CDS OTC 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.41 Central clearing 

25592 Federal Register / Vol. 74, No. 101 / Thursday, May 28, 2009 / Notices 

See also ‘‘New Developments in Clearing and 

Settlement Arrangements for OTC Derivatives,’’ 

Committee on Payment and Settlement Systems, 

BIS, at 25 (Mar. 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). 

42See Securities Exchange Act Releases Nos. 

59164, p. 4 (Dec. 24, 2008), 74 FR 139, at 140 (Jan. 

2, 2009), 59527, p. 4 (Mar. 6, 2009), 74 FR 10791, 

at 10792 (Mar. 12, 2009), and 59578, p. 4 (Mar. 13, 

2009), 74 FR 11781, at 11782 (Mar. 19, 2009). 

‘‘Novation’’ is a ‘‘process through which the 

original obligation between a buyer and seller is 

discharged through the substitution of the central 

clearing counterparty 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. 

43See Securities Exchange Act Releases Nos. 

59164, p. 5 (Dec. 24, 2008), 74 FR 139, at 140 (Jan. 

2, 2009), 59527, p. 5 (Mar. 6, 2009), 74 FR 10791, 

at 10792 (Mar. 12, 2009), and 59578, p. 5 (Mar. 13, 

2009), 74 FR 11781, at 11782 (Mar. 19, 2009). 

44 Id. 

45 Id. 

46See Securities Exchange Act Releases Nos. 

59164, p. 5 (Dec. 24, 2008), 74 FR 139, at 140 (Jan. 

2, 2009), 59527, p. 5 (Mar. 6, 2009), 74 FR 10791, 

at 10792 (Mar. 12, 2009), and 59578, p. 5 (Mar. 13, 

2009), 74 FR 11781, at 11782 (Mar. 19, 2009). See 

also, ‘‘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 central 

clearing counterparty, 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. 

47 Id. 

48 Id. 

49 Id. 

50 In approving this proposed rule change, the 

Commission has considered its impact on 

efficiency, competition, and capital formation. See 

15 U.S.C. 78c(f). 

51 15 U.S.C. 78o–3(b)(6). 

52 Id. 

53 Id. 

counterparties are expected to allow 

participants to avoid the risks specific to 

individual counterparties because 

central clearing counterparties generally 

‘‘novate’’ bilateral trades by entering 

into separate contractual arrangements 

with both counterparties—becoming 

buyer to one and seller to the other.42

Through novation, it is the central 

clearing counterparty that assumes the 

counterparty risks. For this reason, 

central clearing counterparties for CDS 

are expected to contribute generally to 

the goal of market stability.43 As part of 

its risk management, a central clearing 

counterparty may subject novated 

contracts to initial and variation margin 

requirements and establish a clearing 

fund.44 A central clearing counterparty 

also may implement a loss-sharing 

arrangement among its participants to 

respond to a participant insolvency or 

default.45

Central clearing counterparties also 

are expected to reduce CDS risks 

through multilateral netting of trades.46

Trades cleared through a central 

clearing counterparty would limit a 

participant’s exposure to an OTC market 

dealer, permitting the participant to 

accept the best bid or offer in the OTC 

market regardless of the 

creditworthiness of the dealer.47 In 

addition, by allowing netting of 

positions in similar instruments, and 

netting of gains and losses across 

different instruments, central clearing 

counterparties are expected to reduce 

redundant notional exposures and 

promote the more efficient use of 

resources for monitoring and managing 

CDS positions.48 Through risk controls, 

including controls on market-wide 

concentrations that cannot be 

implemented effectively when 

counterparty risk management is 

decentralized, central clearing 

counterparties are expected to help 

prevent a single market participant’s 

failure from destabilizing other market 

participants and, ultimately, the broader 

financial system.49

After careful consideration, the 

Commission finds that FINRA’s 

proposed rule change to establish a pilot 

program implementing minimum 

customer margin requirements for 

transactions in CDS is consistent with 

the requirements of the Exchange Act,50

including Section 15A(b)(6) of the Act.51

In particular, the Commission finds that 

FINRA’s proposed rule is consistent 

with Section 15A(b)(6) of the Act 52 in 

that it is designed to perfect the 

mechanism of a free and open market 

and to protect investors and the public 

interest. The Commission notes that the 

proposed rule is intended to promote 

greater accuracy and efficiency with 

respect to Exchange margin 

requirements. The proposed rule is 

intended to align a customer’s total 

margin requirement for CDS positions 

with the actual risk associated with 

those positions taken as a whole. 

FINRA’s proposed rule also is consistent 

with 15A(b)(6) of the Act 53 because it is 

designed to limit the amount of leverage 

a customer can obtain though CDS 

positions and decreases the risk that a 

broker-dealer will fail because its 

customers are unable to fulfill their 

obligations to the firm. 

The Commission also finds that 

accelerated approval is appropriate. 

More specifically, accelerated approval 

will allow the pilot program, which will 

expire on September 25, 2009, to be in 

effect for a sufficient period of time to 

permit FINRA to properly evaluate the 

performance of the margin rule so that 

it can propose suitable permanent 

margin rules for CDS. Further, 

accelerated approval is appropriate 

because it will enable the CME to 

immediately begin clearing customer, in 

addition to proprietary, CDS positions, 

and therefore, enable market 

participants to receive more quickly the 

benefits described above, such as 

increased market stability, arising from 

the existence of a well-regulated central 

clearing counterparty. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views and 

arguments concerning the foregoing, 

including whether the proposed rule 

change is consistent with the Act. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

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

rules/sro.shtml); or 

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

Number SR–FINRA–2009–012 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Elizabeth M. Murphy, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090. 

All submissions should refer to File 

Number SR–FINRA–2009–012. This file 

number should be included on the 

subject line if e-mail is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

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

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for 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. 

Copies of such filing also will be 

available for inspection and copying at 

the principal office of FINRA. All 

comments received will be posted 

Federal Register / Vol. 74, No. 101 / Thursday, May 28, 2009 / Notices 25593 

54 15 U.S.C. 78s(b)(2). 

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

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 59679 

(April 1, 2009), 74 FR 15795 (‘‘Notice’’). 

4A ‘‘distributor’’ will be defined as any firm that 

receives an ISE data feed directly from ISE or 

indirectly through a ‘‘redistributor’’ and then 

distributes it either internally or externally. ISE 

proposes that all distributors execute an ISE 

distributor agreement. ‘‘Redistributors’’ will include 

market data vendors and connectivity providers 

such as extranets and private network providers. 

5A ‘‘controlled device’’ is defined as any device 

that a distributor of the ISE Depth of Market permits 

to access the information in the Depth of Market 

offering. 

6 In differentiating between a ‘‘Non-Professional 

Subscriber’’ and a ‘‘Professional Subscriber,’’ ISE 

will apply the same criteria for qualification as in 

the Consolidated Tape Association Plan (‘‘CTA 

Plan’’) and the Consolidated Quotation Plan (‘‘CQ 

Plan’’). 

7 In approving this proposal, the Commission has 

considered the proposed rule’s impact on 

efficiency, competition, and capital formation. See 

15 U.S.C. 78c(f). 

8 15 U.S.C. 78f(b)(4). 

9 15 U.S.C. 78f(b)(5). 

10U.S.C. 78f(b)(8). 

11See Securities Exchange Act Release No. 59039 

(December 2, 2008), 73 FR 74770 (December 9, 

2008) (SR–NYSEArca–2006–21) (‘‘NYSE Arca 

Order’’). 

12 Id. at 74771. 

13 Id. at 74782. 

14 Id. at 74781. 

without change; the Commission does 

not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. All 

submissions should refer to File 

Number SR–FINRA–2009–012 and 

should be submitted on or before June 

18, 2009. 

V. Conclusion 

For the foregoing reasons, pursuant to 

Section 19(b)(2) of the Act,54 the 

Commission finds good cause to 

approve the proposed rule change on an 

accelerated basis. 

It is hereby ordered, pursuant to 

Section 19(b)(2) of the Act, that the 

proposed rule change (SR–FINRA– 

2009–012) be, and it hereby is, approved 

on an accelerated basis to establish an 

interim pilot program expiring on 

September 25, 2009. 

By the Commission. 

Elizabeth M. Murphy, 

Secretary. 

[FR Doc. E9–12342 Filed 5–27–09; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–59949; File No. SR–ISE– 

2007–97] 

Self-Regulatory Organizations; 

International Securities Exchange, 

LLC; Order Approving Proposed Rule 

Change, as Modified by Amendment 

No. 1, Relating to Market Data Fees 

May 20, 2009. 

I. Introduction 

On October 5, 2007, International 

Securities Exchange, LLC (the 

‘‘Exchange’’ or ‘‘ISE’’) filed with the 

Securities and Exchange Commission 

(‘‘Commission’’), pursuant to Section 

19(b)(1) of the Securities Exchange Act 

of 1934 (‘‘Act’’) 1 and Rule 19b–4 

thereunder,2 a proposed rule change to 

establish fees for a real-time depth of 

market data offering. On March 9, 2009, 

the Exchange filed Amendment No. 1 to 

the proposed rule change. The proposed 

rule change, as modified by Amendment 

No. 1, was published for comment in 

the Federal Register on April 7, 2009.3

The Commission received no comments 

on the proposal. This order approves the 

proposed rule change, as modified by 

Amendment No. 1. 

II. Description of the Proposal 

The Exchange currently produces and 

provides free of charge a data feed that 

contains the aggregate bid and offer size 

available at the first five price levels on 

ISE’s limit order book, the ISE Depth of 

Market Data Feed (‘‘Depth of Market’’). 

The Depth of Market feed includes nonmarketable orders and quotes that are 

displayed, and is distributed in real 

time. 

ISE has proposed to establish fees for 

its Depth of Market product. ISE will 

make this product available to members 

and non-members, and to professional 

and non-professional subscribers. 

Specifically, the Exchange proposes to 

charge distributors of Depth of Market 

$5,000 per month.4 In addition, the 

Exchange proposes to charge each 

distributor a monthly fee per controlled 

device 5 of $50 per controlled device for 

Professionals (for internal use or 

external redistribution through a 

controlled device) and $5 per controlled 

device for Non-Professionals who 

receive the data from a distributor 

through a controlled device.6 ISE 

proposes to cap the monthly maximum 

amount of fees payable by a distributor 

at $7,500 for Professionals where the 

data is for internal use only; $12,500 for 

Professionals where the data is 

redistributed externally; and $10,000 for 

Non-Professionals who receive the data 

from a distributor. The Exchange 

proposes to charge distributors a flat fee 

of $1,000 for the first month after 

connectivity has been established 

between ISE and the distributor. 

Further, the Exchange proposes to waive 

all user fees during this one month 

period. 

III. Discussion 

After careful review, the Commission 

finds that the proposed rule change is 

consistent with the Act and the rules 

and regulations thereunder applicable to 

a national securities exchange.7 In 

particular, the Commission finds that 

the proposed rule change is consistent 

with Section 6(b)(4) of the Act,8 which 

requires that the rules of a national 

securities exchange provide for the 

equitable allocation of reasonable dues, 

fees, and other charges among its 

members and issuers and other parties 

using its facilities, and Section 6(b)(5) of 

the Act,9 which requires, among other 

things, that the rules of an exchange be 

designed to promote just and equitable 

principles of trade, to remove 

impediments to and perfect the 

mechanism of a free and open market 

and a national market system, and, in 

general, to protect investors and the 

public interest, and not be designed to 

permit unfair discrimination between 

customers, issuers, brokers, or dealers. 

The Commission also finds that the 

proposed rule change is consistent with 

Section 6(b)(8) of the Act 10 in that it 

does not impose any burden on 

competition not necessary or 

appropriate in furtherance of the 

purposes of the Act. 

The Commission has reviewed the 

proposal using the approach set forth in 

the NYSE Arca Order for non-core 

market data fees.11 In the NYSE Arca 

Order, the Commission stated that 

‘‘when possible, reliance on competitive 

forces is the most appropriate and 

effective means to assess whether the 

terms for the distribution of non-core 

data are equitable, fair and reasonable, 

and not unreasonably 

discriminatory.’’ 12 It noted that the 

‘‘existence of significant competition 

provides a substantial basis for finding 

that the terms of an exchange’s fee 

proposal are equitable, fair, reasonable, 

and not unreasonably or unfairly 

discriminatory.’’ 13 If an exchange ‘‘was 

subject to significant competitive forces 

in setting the terms of a proposal,’’ the 

Commission will approve a proposal 

unless it determines that ‘‘there is a 

substantial countervailing basis to find 

that the terms nevertheless fail to meet 

an applicable requirement of the 

Exchange Act or the rules 

thereunder.’’ 14