Document ID: SEC-2009-1322-0001
Agency: sec
Document Type: Rule
Title: Extension of Temporary Exemptions for Eligible Credit Default Swaps To Facilitate Operation of Central Counterparties To Clear and Settle Credit Default Swaps
Posted Date: 2009-09-17T04:00Z

[Federal Register: September 17, 2009 (Volume 74, Number 179)]
[Rules and Regulations]
[Page 47719-47725]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17se09-3]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR parts 230, 240 and 260

[Release Nos. 33-9063; 34-60663; 39-2467; File No. S7-02-09]
RIN 3235-AK26

Extension of 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; extension.

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SUMMARY: We are adopting amendments to the expiration dates in our
interim final temporary rules that provide 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 in order
to facilitate the operation of one or more central counterparties for
those credit default swaps. Under the amendments, the expiration dates
of the interim final temporary rules will be extended to November 30,
2010.

DATES: Effective Date: This rule is effective September 17, 2009, and
the expiration dates for the interim final temporary rules and
amendments published January 22, 2009 (74 FR 3967) is extended from
September 25, 2009 to November 30, 2010.

FOR FURTHER INFORMATION CONTACT: Amy M. Starr, Senior Special Counsel,
or Sebastian Gomez Abero, Attorney, 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 amendments to the following
rules: interim final temporary Rule 239T and Rule 146 under the
Securities Act of 1933 (``Securities Act''),\1\ interim final temporary
Rule 12a-0T 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 January 2009, we adopted interim final temporary Rule 239T and a
temporary amendment to Rule 146 under the Securities Act, interim final

[[Page 47720]]

temporary Rules 12a-10T and 12h-1(h)T under the Exchange Act, and
interim final temporary Rule 4d-11T under the Trust Indenture Act
(collectively, the ``Interim Final Temporary Rules'').\4\ We adopted
these rules in connection with temporary exemptive orders we issued to
a clearing agency acting as a central counterparty (``CCP''), which
exempted the CCP from the requirement to register as a clearing agency
under Section 17A of the Exchange Act \5\ solely to perform the
functions of a clearing agency for certain credit default swap
(``CDS'') transactions. The exemptive orders also exempted certain
eligible contract participants \6\ and others from certain Exchange Act
requirements with respect to certain CDS.\7\ Also at that time, we
temporarily exempted any exchange that effects transactions in certain
CDS from the requirements under Sections 5 and 6 of the Exchange Act
\8\ 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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    \4\ See Exchange Act Release No. 59246 (Jan. 14, 2009).
    \5\ 15 U.S.C. 78q-1.
    \6\ See 7 U.S.C. 1a(12).
    \7\ See Exchange Act Release Nos. 59164 and 59165 (Dec. 24,
2008).
    \8\ 15 U.S.C. 78e and 78f.
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    The Interim Final Temporary Rules, and the temporary exemptive
orders we provided under the Exchange Act, were intended to facilitate
the operation of one or more CCPs that clear and settle CDS
transactions while enabling us to provide oversight to the CDS
market.\9\ Since the adoption of the interim final rules, only one CCP,
ICE U.S. Trust LLC (``ICE Trust''), has been actively engaged as a CCP
in clearing CDS transactions in the U.S. in accordance with our
exemptions.\10\ As of August 28, 2009, ICE Trust had cleared more than
22,800 CDS transactions with a notional value of $1.9 trillion.\11\ We
believe that the clearing of CDS transactions by ICE Trust has
contributed and we anticipate will continue to contribute to increased
transparency \12\ and the reduction of systemic risk in the CDS
market.\13\
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    \9\ For a discussion of concerns related to the market in CDS,
and the development of the exemptive orders and interim temporary
rules, see Exchange Act Release No. 59246 (Jan. 14, 2009).
    \10\ See Exchange Act Release No. 59527 (Mar. 6, 2009), 74 FR
10791 (Mar. 12, 2009) (temporary exemption for ICE U.S. Trust LLC).
    \11\ See Historical Daily Volume Report--ICE Trust U.S.,
available at https://www.theice.com/marketdata/reports/
ReportCenter.shtml?reportId=26.
    \12\ See Testimony of Mark Lenczowski, Managing Director and
Assistant General Counsel at JPMorgan Chase & Co., to the Senate
Agriculture Committee (June 4, 2009) (In his testimony, Mr.
Lenczowski indicated, in the context of CDS clearing by ICE Trust,
that ``[c]learing is a highly transparent process. * * *'').
    \13\ As of June 30, 2009, ICE Trust had reduced the notional
amount of CDS open interest, or net exposure, from over $1.3
trillion to $168.5 billion by clearing trades and netting positions.
See, Quarterly Report on Form 10-Q for the quarter ended June 30,
2009 (filed on August 5, 2009). ICE Trust also has a guarantee fund
that provides additional protection in the event of a clearing
participant default. See Exchange Act Release No. 59527, supra Note
10.
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    We also granted exemptive orders to four other CCPs to clear CDS,
two of which were approved in July 2009.\14\ The Chicago Mercantile
Exchange, to whom we granted an exemptive order in March 2009, has
indicated that it continues to work with buy and sell participants in
the CDS market to promote its CCP.\15\ ICE Clear Europe Limited (``ICE
Europe'') and Eurex Clearing AG (``Eurex'') have begun clearing CDS
transactions in Europe.\16\
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    \14\ See Exchange Act Release No. 60373 (July 23, 2009)
(temporary exemption for Eurex Clearing AG); Exchange Act Release
No. 60372 (July 23, 2009) (temporary exemption for ICE Clear Europe
Limited); Exchange Act Release No. 59578 (Mar. 13, 2009) (temporary
exemption for Chicago Mercantile Exchange Inc.); and Exchange Act
Release No. 59164 (Dec. 24, 2008) (temporary exemption for LIFFE A&M
and LCH.Clearnet Ltd.). LIFFE A&M and LCH.Clearnet Ltd., to whom we
granted exemptive orders in December 2008, indicated that they will
suspend their plans to clear CDS. See, Alastair Marsh, NYSE Liffe
and LCH.Clearnet close CDS clearing service (Aug. 12, 2009),
available at http://www.risk.net/public/showPage.html?page=867491.
    \15\ See Christine Birkner, CDS Clearing Battle (Buy Side vs.
Sell Side), Futures (July 1, 2009) (``A spokesperson for CME Group
says, `We continue to work with buy and sell participants to
demonstrate the value of our offering.' '').
    \16\ See Press Release, IntercontinentalExchange, ICE Clear
Europe Clears Euro 51 Billion in Third Week of European CDS
Processing; Announces New CDS Clearing Member (Aug. 17, 2009),
available at http://ir.theice.com/
releasedetail.cfm?ReleaseID=403509. See also, Press Release, Eurex
Clearing AG, Eurex Credit Clear Clears First Single Name CDS
Worldwide (Aug. 28, 2009), available at http://
www.eurexclearing.com/about/press/press_647_en.html.
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    Since the adoption of the Interim Final Temporary Rules, a number
of legislative initiatives relating to the regulation of derivatives,
including CDS, have been introduced by members of Congress and
recommended by the United States Department of the Treasury
(``Treasury'').\17\ Congress has not yet taken definitive action with
respect to any of the legislative initiatives or the Treasury
proposals. Separately, in July 2009, the Committee on Payment and
Settlement Systems (``CPSS'') and the Technical Committee of the
International Organization of Securities Commissions (``IOSCO'')
established a working group to review the application of the CPSS-IOSCO
Recommendations for Central Counterparties (``Recommendations'') with
respect to OTC derivatives.\18\ The Recommendations set out standards
for risk management of CCPs. The working group plans to identify key
issues that can arise when a CCP provides central clearing services for
OTC derivatives transactions.\19\
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    \17\ See, e.g., Derivatives Trading Integrity Act of 2009 (S.
272) (introduced by Senator Tom Harkin in January 2009); The
Derivatives Markets Transparency and Accountability Act (H.R. 977)
(introduced by Representative Collin Peterson in February 2009);
Authorizing the Regulation of Swaps Act (S. 961) (introduced by
Senator Carl Levin and Senator Susan Collins in May 2009);
Treasury's framework for regulatory reform (released in June 2009);
Derivative Trading Accountability and Disclosure Act (H.R. 3300)
(introduced by Representative Michael McMahon in July 2009);
Description of Principles for OTC Derivatives Legislation (announced
by Representative Barney Frank and Representative Collin Peterson in
July 2009); Senator Charles Schumer's announcement that he is
drafting a bill establishing central trade repositories for OTC
derivatives markets (August 2009); and Over-the-Counter Derivatives
Markets Act of 2009 (prepared by Treasury and sent to Congress in
August 2009).
    \18\ See Press Release, Bank for International Settlements,
CPSS-IOSCO working group on the review of the ``Recommendations for
Central Counterparties'' (July 20, 2009), available at http: //
www.bis.org/press/p090720.htm.
    \19\ ``Where necessary, the working group will propose guidance
on how CCPs for OTC derivatives may meet the standards set out by
the recommendations and will identify any areas in which the
recommendations might be strengthened or expanded to better address
risks associated with the central clearing of OTC derivatives.
Participants in the working group include representatives of the
central banks that are members of the CPSS, representatives of the
securities regulators that are members of the IOSCO Technical
Committee, and representatives of the International Monetary Fund
and the World Bank.'' Id.
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    At the time of adoption of the Interim Final Temporary Rules, we
requested comment on various aspects of the rule provisions. We
received a total of 15 letters, only two of which commented
specifically on the interim temporary final rules. Those two letters
generally supported allowing CCPs to clear and settle CDS transactions
in accordance with the terms of the Interim Final Temporary Rules; but
neither of the commenters specifically addressed the duration of the
Interim Final Temporary Rules and temporary amendments.\20\ The other
commenters raised issues not directly related to this rulemaking.\21\
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    \20\ See letters from the Yale Law School Capital Markets and
Financial Instruments Clinic (March 23, 2009) and from IDX Capital
(March 23, 2009).
    \21\ The public comments we received are available for
inspection in the Commission's Public Reference Room at 100 F St.,
NE., Washington, DC 20549 in File No. S7-02-09. They are also
available online at http://www.sec.gov/comments/s7-02-09/
s70209.shtml.

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[[Page 47721]]

    The Interim Final Temporary Rules expire on September 25, 2009. We
have determined that it is necessary and appropriate to extend the
expiration date of the Interim Final Temporary Rules to November 30,
2010.\22\
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    \22\ See Section III, infra, for a discussion of why the
extension of time is necessary.
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II. Discussion of the Final Temporary Rules

    We are adopting amendments to the Interim Final Temporary Rules to
extend the expiration date of each of the rules to November 30, 2010.
We are not making any other changes to the Interim Final Temporary
Rules.

A. Securities Act Rule 239T and Rule 146

    Securities Act Rule 239T exempts from all provisions of the
Securities Act, except the anti-fraud provisions of Section 17(a),
certain CDS (``eligible CDS'') \23\ that are offered and sold only to
``eligible contract participants,'' \24\ and that are being or will be
issued or cleared by a CCP satisfying the conditions set forth in the
CCP exemptions, or registered as a clearing agency under Section 17A of
the Exchange Act (``Registered or Exempt CCP''). Hence, under
Securities Act Rule 239T, the offer and sale of eligible CDS are exempt
from the registration requirements of the Securities Act if the
eligible CDS is or will be issued or cleared by a Registered or Exempt
CCP, and offered and sold only to an eligible contract participant.
Communications used in connection with such offers and sales are not
subject to Section 12(a)(2) liability under the Securities Act.
Securities Act Rule 239T assures the availability of information to
buyers and sellers of CDS due to certain information conditions in the
CCP exemptive orders.\25\
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    \23\ See 17 CFR 230.239T(d).
    \24\ For purposes of Securities Act Rule 239T, ``eligible
contract participant'' has the same meaning as in Section 1a(12) of
the Commodity Exchange Act (the ``CEA''), as in effect on the date
of adoption of Rule 239T, except that the term does not include a
person who is an ``eligible contract participant'' pursuant to
Section 1a(12)(C) of the CEA. 17 CFR 230.239T(a)(2).
    \25\ 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; or indexes in which 80 percent or more of the
index's weight is comprised of these reference entities or reference
securities. See, e.g., Exchange Act Release No. 59527, supra Note
10.
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    As we noted in January 2009, 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. 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 are
intended to encourage market participants to clear their CDS through
the CCPs.
    Securities Act Rule 239T 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.\26\ 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.\27\ 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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    \26\ 17 CRF 230.239T(c).
    \27\ 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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    We also adopted on an interim final temporary basis an amendment to
Securities Act Rule 146. Under the temporary amendment to Rule 146,
eligible contract participants that are sold eligible CDS in reliance
on interim final temporary Securities Act Rule 239T are 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 are considered ``covered securities'' under
Section 18 of the Securities Act and exempt from state blue sky
laws.\28\
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    \28\ 17 CFR 230.146(c)T. 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.
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B. Exchange Act Rule 12a-10T and Rule 12h-1(h)T

    In January 2009, we also adopted 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. Exchange Act Rule
12a-10T exempts 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.\29\ Exchange Act Rule 12h-1(h)T
exempts 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.\30\
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    \29\ 15 U.S.C. 78l(a).
    \30\ 17 CFR 240.12h-1(h)T; 15 U.S.C. 78l(g).
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C. Trust Indenture Act Rule 4d-11T

    We also adopted a rule under Section 304(d) of the Trust Indenture
Act that exempts 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.\31\
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    \31\ Rule 4d-11T. 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 exempts 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.
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III. Amendment of Expiration Date of Interim Final Temporary Rules

    In January 2009, we adopted the interim final rules on a temporary
basis until September 25, 2009 because we anticipated that this date
would 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

[[Page 47722]]

exemptions should be modified. At the time we adopted the Interim Final
Temporary Rules, we indicated that we could act to extend the
expiration date of such rules.\32\
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    \32\ See Section III of Exchange Act Release No. 59246 (Jan. 14,
2009).
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    We have now determined that it is necessary to extend the
expiration date of the Interim Final Temporary Rules for the following
reasons. First, we adopted the interim final rules to foster the
development of CCPs by providing exemptions from certain regulatory
provisions that might otherwise prevent them from engaging in such
activities in the manner contemplated by the exemptive orders. To date,
there has been only one CCP (ICE Trust) that has begun to clear and
settle CDS transactions in the U.S. and two CCPs (ICE Europe and Eurex)
that have begun to clear and settle CDS transactions in Europe.
Extending the expiration date of our Interim Final Temporary Rules
would not only allow ICE Trust, ICE Europe and Eurex to continue to
clear and settle CDS transactions, it would also enable other CCPs to
start clearing and settling CDS transactions in the manner contemplated
by the exemptive orders. Competition among CCPs clearing CDS
transactions could give participants more choice for their trading
needs and may reduce clearing fees.\33\ In addition, the extension
would give us more time to evaluate the rule and assess its effect on
the CDS market and the market participants. As reflected in the CPSS-
IOSCO Recommendations, our fellow regulators around the world are also
thinking about how to address the risks associated with the central
clearing of OTC derivatives, and this remains an open and current topic
of discussion for all securities regulators. Finally, Treasury has
delivered financial regulatory reform proposals to Congress, and
several bills to regulate derivatives and the derivatives markets have
been introduced in Congress.
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    \33\ See Harrington and Leising, supra note 15 (quoting Theo
Lubke, an official with the Federal Reserve Bank of New York
responsible for the central bank's efforts to curb risk in the CDS
market, as stating that ``A competitive [CCP clearing] environment,
at least in the short run, is beneficial. We don't want the first
mover to be the winner just because they're the first mover. We
would like to see real choice in the market for a period of time to
determine which is the better mousetrap.''). See also, Financial
Services: Cost of Trading Going Down, Survey Finds, Europolitics
(July 17, 2009) (citing European Commissioner Charlie McCreevy, ``I
particularly welcome the [European Commission] study's findings
concerning the decreases in costs for trading and clearing and to
some extent also for settlement services since 2006. This confirms
the positive impact on competition of the Markets in Financial
Instruments Directive and the code of conduct on clearing and
settlement.'').
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    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
have facilitated and anticipate that they will continue to facilitate
the use by eligible contract participants of CDS CCPs. Absent an
extension of the expiration date of the interim final rules, we believe
that the CCPs would not be able to operate in the manner contemplated
by the exemptive orders. We note that the expiration dates of certain
of these exemptive orders currently extend until April 23, 2010. We
are, therefore, adopting amendments to each of the interim final rules
to extend the expiration date of the rules to November 30, 2010.
Extending the expiration dates for this length of time will allow us to
continue to monitor the development and operation of CCPs in the CDS
market under the current, evolving regulatory and legislative
environment.

IV. Certain Administrative Law Matters

    Section 553(b) of the Administrative Procedure Act (``APA'') \34\
generally requires an agency to publish notice of a proposed rule
making in the Federal Register. This requirement does not apply,
however, if the agency ``for good cause finds (and incorporates the
finding and a brief statement of reasons therefor in the rules issued)
that notice and public procedure thereon are impracticable,
unnecessary, or contrary to the public interest.'' \35\ The Commission
finds good cause to act immediately to extend the expiration date of
the Interim Final Temporary Rules. When we adopted the rules in January
of this year, we sought sufficient time to evaluate the appropriateness
of the exemptions and the role of CCPs in the CDS market. Since that
time, we have granted orders to four additional CDS CCPs exempting them
from the requirement to register as a clearing agency under Section 17A
of the Exchange Act. Two of these orders were granted as recently as
July 2009, and one CCP has started to clear CDS transactions in the
U.S. and two have begun clearing CDS in Europe. In addition, there have
been a number of recent and still developing legislative and regulatory
initiatives relating to the regulation of derivatives, including CDS.
Finally, we note that commenters had an opportunity to comment on the
length of the temporary rules in January of this year and that this
extension is of a limited duration. Therefore, we believe there is good
cause to extend the exemption until November 30, 2010 and find that
notice and solicitation of comment on the extension to be
impracticable, unnecessary, or contrary to the public interest.\36\
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    \34\ 5 U.S.C. 553(b).
    \35\ 5 U.S.C. 553(b)(B).
    \36\ 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'').
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    The APA also generally requires that an agency publish an adopted
rule in the Federal Register 30 days before it becomes effective.\37\
However, this requirement does not apply if the agency finds good cause
not to delay the effective date.\38\ For similar reasons to those
explained above, the Commission finds good cause not to delay the
effective date.
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    \37\ 5 U.S.C. 553(d).
    \38\ 5 U.S.C. 553(d)(3).
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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''),\39\ 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 did not submit the Interim Final Temporary Rules to the Office of
Management and Budget for review in accordance with the PRA.\40\ We
requested comment on whether our conclusion that there are no
collections of information is correct, and we did not receive any
comment. The extension of the expiration dates does not change our
analysis.
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    \39\ 44 U.S.C. 3501 et seq.
    \40\ 44 U.S.C. 3507(d) and 5 CFR 1320.11.
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VI. Cost-Benefit Analysis

    In January 2009, we adopted the Interim Final Temporary Rules under
the Securities Act, the Exchange Act and the Trust Indenture Act that
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

[[Page 47723]]

12 of the Exchange Act and from the provisions of the Trust Indenture
Act. The Interim Final Temporary Rules were 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. Today, we are
adopting amendments to such rules to extend their expiration date to
November 30, 2010.
    Since the adoption of the Interim Final Temporary Rules, one CCP
(ICE Trust) has been actively engaged as a CCP in clearing CDS
transactions in the U.S. in accordance with terms of the exemptive
orders, and two other CCPs (ICE Europe and Eurex) have begun clearing
CDS transactions in Europe. In addition, a number of legislative
initiatives relating to the regulation of derivatives, including CDS,
have been introduced by members of Congress and recommended by the
United States Department of the Treasury.\41\ Extending the expiration
dates of the Interim Final Temporary Rules for this length of time will
allow us to continue to monitor the development and operation of CCPs
in the CDS market under the current, evolving regulatory and
legislative environment.
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    \41\ See Section I, supra, for additional discussion of
developments in this area since the adoption of the Interim Final
Temporary Rules.
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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 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.\42\ This growth has coincided with a significant
rise in the types and number of entities participating in the CDS
market.\43\
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    \42\ See Semiannual OTC derivatives statistics at end-December
2008, Bank for International Settlements (``BIS''), available at
http://www.bis.org/statistics/otcder/dt1920a.pdf.
    \43\ 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, other 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 novate their
trades to the CCP, and the CCP stands in as the counterparty to all
parties of the CDS it clears. Through this novation process, the
counterparty risk of a CDS is effectively concentrated in the CCP.

A. Benefits

    We are extending the termination date of the Interim Final
Temporary Rules that provide exemptions from certain provisions of the
Securities Act, the Exchange Act and the Trust Indenture Act, subject
to certain conditions described in the CCP exemptive orders and in the
exemptions themselves to further facilitate the operation of CCPs in
the CDS market. The conditions and representations in the CCP 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 the Interim Final Temporary
Rules and the exemptions under the Exchange Act, have facilitated and
we anticipate will continue to facilitate the operation of CCPs \44\
while enabling us to provide oversight to the non-excluded CDS
market.\45\ We believe that the operation of at least one CCP over the
last six months in accordance with our exemptions has increased
transparency,\46\ increased available information about exposures to
particular reference entities or reference securities,\47\ and reduced
risks to participants in the market for CCP-cleared CDS.\48\ Not
extending the termination date could cause significant disruptions in
this market. Therefore, we believe this extension provides important
benefits.
---------------------------------------------------------------------------

    \44\ See Karen Brettell, Banks to submit 95 pct of eligible CDS
for clearing (Sep. 1, 2009), available at http://www.reuters.com/
article/euRegulatoryNews/
idUSN0150814420090901?pageNumber=1&virtualBrandChannel=10522.
    \45\ See e.g., Exchange Act Release No. 59527, supra Note 10
(our exemptions require that the CCPs provide us with, among other
things, access to conduct on-site inspections of facilities, records
and personnel).
    \46\ See Testimony of Mark Lenczowski, supra Note 12.
    \47\ See e.g., Exchange Act Release No. 59527, supra Note 26.
    \48\ See IntercontinentalExchange, supra Note 13.
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    Absent an exemption, the offer and sale of eligible CDS that are
and 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 have
facilitated and we anticipate will continue to 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 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.\49\ A Registered or Exempt CCP issuing or clearing eligible
CDS benefits from the temporary exemptions because it does 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 \50\ 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

[[Page 47724]]

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.
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    \49\ 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)].
    \50\ 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 have facilitated and we anticipate will continue to
facilitate the use by eligible contract participants of CDS CCPs that
are the subject of exemptive orders at some costs to the CCP or
investors.
    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 has been and will
continue to 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),\51\ it would not be able to
pursue civil remedies under Sections 11 or 12 of the Securities
Act.\52\ We could still pursue an antifraud action in the offer and
sale of eligible CDS issued or cleared by a CCP.\53\ We believe that
the incremental costs from the extension of the expiration date of the
Interim Final Temporary Rules will be minimal because the amendments
are merely an extension of such Interim Final Temporary Rules and such
extension will not affect the information and remedies available to
investors as a result of the Interim Final Temporary Rules.
---------------------------------------------------------------------------

    \51\ 15 U.S.C. 78j(b).
    \52\ 15 U.S.C. 77k and 77l.
    \53\ See 15 U.S.C. 77q and 15 U.S.C. 78j(b).
---------------------------------------------------------------------------

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 \54\ 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) \55\ of the Securities Act and Section
3(f) \56\ 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.
---------------------------------------------------------------------------

    \54\ 15 U.S.C. 78w(a)(2).
    \55\ 15 U.S.C. 77b(b).
    \56\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    The Interim Final Temporary Rules we are extending today 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 these interim final temporary exemptions are
available to any Registered or Exempt CCP offering and selling eligible
CDS, we do not believe that the exemptions impose a burden on
competition. Although only one CCP is currently clearing and settling
CDS in the U.S., we believe the extension will increase the opportunity
for other CCPs to compete in the marketplace. We also believe that the
ability to settle CDS through CCPs has improved and we anticipate will
continue to 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. ICE
Trust, for example, makes available on its Web site information about
open interests, or net exposure, volume and pricing of CDS
transactions. 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 certified pursuant to 5 U.S.C. 605(b) that the
Interim Final Temporary Rules would 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. We received no comments on the
certification.

IX. Statutory Authority and Text of the Rules and Amendments

    The 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 in 17 CFR Parts 230, 240 and 260

    Reporting and recordkeeping requirements, Securities.

Text of the Rules and Amendments

0
Accordingly, we are temporarily amending 17 CFR parts 230, 240, and 260
as follows and the expiration date for the interim final temporary
rules published January 22, 2009 (74 FR 3967) is extended from
September 25, 2009, to November 30, 2010.

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.
* * * * *

Sec. Sec.  230.146 and 230.239   [Amended]

0
2. In Sec.  230.146(c)T, in the last sentence, remove the words
``September 25, 2009'' and add, in their place, the words ``November
30, 2010''.

0
3. In Sec.  230.239T(e), remove the words ``September 25, 2009'' and
add, in their place, the words ``November 30, 2010''.

[[Page 47725]]

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.
* * * * *

Sec. Sec.  240.12a-10T and 240.12h-1   [Amended]

0
5. In Sec.  240.12a-10T(b), remove the words ``September 25, 2009'' and
add, in their place, the words ``November 30, 2010''.
0
6. In Sec.  240.12h-1(h)T, in the last sentence, remove the words
``September 25, 2009'' and add, in their place, the words ``November
30, 2010''.

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.

Sec.  260.4d-11T  [Amended]

0
8. Section 260.4d-11T is amended by removing the words ``September 25,
2009'' and adding, in their place, the words ``November 30, 2010'' in
the last sentence.

    September 14, 2009.

    By the Commission.

Elizabeth M. Murphy,
Secretary.
[FR Doc. E9-22389 Filed 9-16-09; 8:45 am]

BILLING CODE 8010-01-P