Document ID: SEC-2009-1389-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2009-10-01T04:00Z

[Federal Register: October 1, 2009 (Volume 74, Number 189)]
[Notices]               
[Page 50856-50858]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01oc09-129]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60722; File No. SR-FINRA-2009-063]

 
Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of 
Proposed Rule Change To Extend to November 30, 2010, the Implementation 
of FINRA Rule 4240 (Margin Requirements for Credit Default Swaps)

September 25, 2009.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on September 21, 2009, Financial Industry Regulatory 
Authority, Inc. (``FINRA'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change as 
described in Items I and II below, which Items have been prepared by 
FINRA. FINRA has designated the proposed rule change as constituting a 
``non-controversial'' rule change under paragraph (f)(6) of Rule 19b-4 
under the Act,\3\ which renders the proposal effective upon receipt of 
this filing by the Commission. The Commission is

[[Page 50857]]

publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to extend to November 30, 2010, the 
implementation of FINRA Rule 4240 (Margin Requirements for Credit 
Default Swaps) on an interim pilot program basis, and to make minor 
technical changes. FINRA Rule 4240, as approved by the SEC on May 22, 
2009, will expire on September 25, 2009. The rule implements an interim 
pilot program with respect to margin requirements for 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 are effected by the member 
in credit default swap contracts that are cleared through the central 
counterparty clearing services of the Chicago Mercantile Exchange.
    The text of the proposed rule change is available on FINRA's Web 
site at http://www.finra.org, at the principal office of FINRA and at 
the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    On May 22, 2009, the Commission approved FINRA Rule 4240,\4\ which 
implements 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 are effected by the member in 
credit default swap contracts that are cleared through the central 
counterparty clearing services of the Chicago Mercantile Exchange 
(``CME''). As originally approved by the Commission, the rule will 
expire on September 25, 2009.
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    \4\ See Securities Exchange Act Release No. 59955 (May 22, 
2009), 74 FR 25586 (May 28, 2009) (Notice of Approval of Proposed 
Rule Change; File No. SR-FINRA-2009-012) (``Approval Order'').
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    As explained in the Approval Order, FINRA Rule 4240 is intended to 
be coterminous with certain Commission actions 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.\5\ Recently, the 
Commission has determined to extend the period for which certain of 
these actions are in effect.\6\ FINRA believes it is appropriate to 
extend the implementation of the Interim Pilot Program accordingly, to 
November 30, 2010. In addition, FINRA is proposing a minor technical 
correction to FINRA Rule 4240.01(a).\7\
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    \5\ See 74 FR 25588 through 25589. In early 2009 the Commission 
enacted interim final temporary rules (the ``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. See Securities 
Act Release No. 8999 (January 14, 2009), 74 FR 3967 (January 22, 
2009) (Temporary Exemptions for Eligible Credit Default Swaps to 
Facilitate Operation of Central Counterparties to Clear and Settle 
Credit Default Swaps). See also Securities Exchange Act Release No. 
59578 (March 13, 2009), 74 FR 11781 (March 19, 2009) (Order Granting 
Temporary Exemptions in Connection with Request of Chicago 
Mercantile Exchange Inc. and Citadel Investment Group, LLC Related 
to Central Clearing of Credit Default Swaps); Securities Exchange 
Act Release No. 59165 (December 24, 2008), 74 FR 133 (January 2, 
2009) (Order Granting Temporary Exemptions for Broker-Dealers and 
Exchanges Effecting Transactions in Credit Default Swaps).
    \6\ See Securities Act Release No. 9063 (September 14, 2009) 
(Extension of Temporary Exemptions for Eligible Credit Default 
Swaps).
    \7\ See Exhibit 5.
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    FINRA has filed the proposed rule change for immediate 
effectiveness and has requested that the SEC waive the requirement that 
the proposed rule change not become operative for 30 days after the 
date of the filing, such that FINRA can implement the proposed rule 
change immediately. The proposed rule change will expire on November 
30, 2010.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\8\ 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 will 
further the purposes of the Act because, consistent with the goals set 
forth by the Commission when it adopted the interim final temporary 
rules 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.
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    \8\ 15 U.S.C. 78o-3(b)(6).
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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

    The Commission, in approving the Interim Pilot Program on an 
accelerated basis, solicited comment on the original proposed rule 
change that established the program.\9\ That comment period ended on 
June 18, 2009. The Commission received one comment.\10\ The commenter 
raised concerns regarding Federal agency action with respect to 
regulation of CDS. FINRA declines to respond to those comments as 
beyond the scope of the proposed rule change.
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    \9\ See Approval Order, supra note 4.
    \10\ Letter from Gary De Waal, Senior Managing Director and 
Group General Counsel, Newedge USA, LLC, to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, dated June 18, 2009, 
available at: http://www.sec.gov/rules/sro/finra.shtml.
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    In addition, FINRA received one letter in response to the 
Regulatory Notice \11\ announcing the Commission's approval of the 
original rule change establishing the Interim Pilot Program.\12\ SIFMA 
suggested that, while the adoption of a margin rule for CDS addresses 
an important regulatory issue, there are certain other obstacles to 
broker-dealers engaging in transactions in CDS, among other derivative 
instruments. While FINRA views this comment as generally beyond the 
scope of the proposed rule change, FINRA welcomes further substantive 
dialogue on this issue. SIFMA also sought clarification as to

[[Page 50858]]

why FINRA Rule 4240 addresses in particular CDS transactions that are 
cleared using the central counterparty clearing facilities of the CME. 
In response, FINRA notes that, as explained in the Approval Order, the 
CME requested that FINRA adopt customer margin rules for CDS and 
suggested a specific customer margin methodology that could be 
employed.\13\ FINRA performed an analysis of the margin methodology 
suggested by CME, as well as the alternative methodology set forth in 
Rule 4240(c)(2), prior to proposing Rule 4240. The Approval Order 
further noted that FINRA will consider proposals it receives from CDS 
central clearing counterparties in addition to the CME to amend the 
customer margin rules for CDS and, if appropriate, will propose changes 
to such rules.
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    \11\ See Regulatory Notice 09-30 (June 2009) (Credit Default 
Swaps).
    \12\ Letter from Daniel McIsaac, Chair, Capital Steering 
Committee, Securities Industry and Financial Markets Association, to 
Marcia E. Asquith, Office of the Corporate Secretary, FINRA, dated 
August 3, 2009 (``SIFMA''), available at: http://www.sifma.org/
comments/index.aspx.
    \13\ See 74 FR 25589.
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    SIFMA suggested certain changes to the margin requirements set 
forth in FINRA Rule 4240. FINRA believes these suggestions are 
premature and that additional time is needed to make a meaningful 
determination about whether Rule 4240 should be made permanent and 
whether certain provisions should be modified and, if so, to what 
extent. Consequently, at this time, FINRA is only seeking to extend the 
Interim Pilot Program and make minor technical changes. Lastly, SIFMA 
requested clarification as to certain net capital requirements and 
implementation issues, as well as documentation issues discussed in 
Regulatory Notice 09-30. FINRA notes that it will provide further 
guidance working with the SEC regarding implementation of Rule 4240, as 
appropriate.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \14\ and Rule 19b-
(f)(6) thereunder.\15\
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    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file 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 requirement.
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    Normally, a proposed rule change filed under 19b-4(f)(6) may not 
become operative prior to 30 days after the date of filing. However, 
Rule 19b-4(f)(6)(iii) permits the Commission to designate a shorter 
time if such action is consistent with the protection of investors and 
the public interest. FINRA requested that the Commission waive the 30-
day operative delay, so that the proposed rule change may become 
operative upon filing. The Commission believes that the earlier 
operative date is consistent with the protection of investors and the 
public interest because the proposed rule change permits the Exchange 
to implement without further delay the extension of its pilot 
program.\16\ This will prevent FINRA Rule 4240 from lapsing. 
Additionally, the Commission extended the temporary exemptions for 
eligible credit default swaps and therefore agrees with FINRA that it 
is appropriate to extend the implementation of the Interim Pilot 
Program to November 30, 2010.\17\
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    \16\ For 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.
    \17\ See supra note 6 and accompanying text.
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    At any time within 60 days of the filing of the 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 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 rule-comments@sec.gov. Please include 
File Number SR-FINRA-2009-063 on the subject line.

Paper Comments

     Send paper comments in triplicate to Florence E. Harmon, 
Deputy Secretary, Securities and Exchange Commission, 100 F Street, 
NE., Washington, DC 20549-1090.
    All submissions should refer to File Number SR-FINRA-2009-063. 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 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-2009-063 and should be 
submitted on or before October 22, 2009.
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    \18\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-23699 Filed 9-30-09; 8:45 am]

BILLING CODE 8011-01-P