Document ID: SEC-2009-0334-0001
Agency: sec
Document Type: Notice
Title: Order Granting Temporary Exemptions: Central Clearing of Credit Default Swaps
Posted Date: 2009-03-12T04:00Z

[Federal Register: March 12, 2009 (Volume 74, Number 47)]
[Notices]               
[Page 10791-10800]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12mr09-115]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59527; File No. S7-05-09]

 
Order Granting Temporary Exemptions Under the Securities Exchange 
Act of 1934 in Connection With Request on Behalf of ICE U.S. Trust LLC 
Related to Central Clearing of Credit Default Swaps, and Request for 
Comments

March 6, 2009.

I. Introduction

    In response to the recent turmoil in the financial markets, the 
Securities and Exchange Commission (``Commission'') has taken multiple 
actions to protect investors and ensure the integrity of the nation's 
securities markets.\1\ Today the Commission is taking further action 
designed to address concerns related to the market in credit default 
swaps (``CDS''). The over-the-counter (``OTC'') market for CDS has been 
a source of concerns to us and other financial regulators. These 
concerns include the systemic risk posed by CDS, highlighted by the 
possible inability of parties to meet their obligations as 
counterparties and the potential resulting adverse effects on other 
markets and the financial system.\2\ Recent credit market events have 
demonstrated the seriousness of these risks in a CDS market operating 
without meaningful regulation, transparency,\3\ or central 
counterparties (``CCPs'').\4\ These events have emphasized the need for 
CCPs as mechanisms to help control such risks.\5\ A CCP for CDS could 
be an important step in reducing the counterparty risks inherent in the 
CDS market, and thereby help mitigate potential systemic impacts. In 
November 2008, the President's Working Group on Financial Markets 
stated that the implementation of a CCP for CDS was a top priority \6\ 
and, in furtherance of this recommendation, the Commission, the FRB and 
the Commodity Futures Trading Commission (``CFTC'') signed a Memorandum 
of Understanding \7\ that establishes a framework for consultation and 
information sharing on issues related to CCPs for CDS. Given the 
continued uncertainty in this market, taking action to help foster the 
prompt development of CCPs, including granting conditional exemptions 
from certain provisions of the Federal securities laws, is in the 
public interest.
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    \1\ A nonexclusive list of the Commission's actions to stabilize 
financial markets during this credit crisis include: adopting a 
package of measures to strengthen investor protections against naked 
short selling, including rules requiring a hard T+3 close-out, 
eliminating the options market maker exception of Regulation SHO, 
and expressly targeting fraud in short selling transactions (See 
Securities Exchange Act Release No. 58572 (September 17, 2008), 73 
FR 54875 (September 23, 2008)); issuing an emergency order to 
enhance protections against naked short selling in the securities of 
primary dealers, Federal National Mortgage Association (``Fannie 
Mae''), and Federal Home Loan Mortgage Corporation (``Freddie Mac'') 
(See Securities Exchange Act Release No. 58166 (July 15, 2008), 73 
FR 42379 (July 21, 2008)); taking temporary emergency action to ban 
short selling in financial securities (See Securities Exchange Act 
Release No. 58592 (September 18, 2008), 73 FR 55169 (September 24, 
2008)); approving emergency rulemaking to ensure disclosure of short 
positions by hedge funds and other institutional money managers (See 
Securities Exchange Act Release No. 58591A (September 21, 2008), 73 
FR 55557 (September 25, 2008)); proposing rules to strengthen the 
regulation of credit rating agencies and making the limits and 
purposes of credit ratings clearer to investors (See Securities 
Exchange Act Release No. 57967 (June 16, 2008), 73 FR 36212 (June 
25, 2008); entering into a Memorandum of Understanding with the 
Board of Governors of the Federal Reserve System (``FRB'') to make 
sure key Federal financial regulators share information and 
coordinate regulatory activities in important areas of common 
interest (See Memorandum of Understanding Between the U.S. 
Securities and Exchange Commission and the Board of Governors of the 
Federal Reserve System Regarding Coordination and Information 
Sharing in Areas of Common Regulatory and Supervisory Interest (July 
7, 2008), http://www.sec.gov/news/press/2008/2008-134_mou.pdf).
    \2\ In addition to the potential systemic risks that CDS pose to 
financial stability, we are concerned about other potential risks in 
this market, including operational risks, risks relating to 
manipulation and fraud, and regulatory arbitrage risks.
    \3\ See 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.'').
    \4\ See The Role of Credit Derivatives in the U.S. Economy 
Before the H. Agric. Comm., 110th Cong. (2008) (Statement of Erik 
Sirri, Director of the Division of Trading and Markets, Commission).
    \5\ See id.
    \6\ See Policy Objectives for the OTC Derivatives Market, The 
President's Working Group on Financial Markets (November 14, 2008), 
http://www.ustreas.gov/press/releases/reports/policyobjectives.pdf. 
See also Policy Statement on Financial Market Developments, The 
President's Working Group on Financial Markets (March 13, 2008), 
http://www.treas.gov/press/releases/reports/
pwgpolicystatemktturmoil_03122008.pdf; Progress Update on March 
Policy Statement on Financial Market Developments, The President's 
Working Group on Financial Markets (October 2008), http://
www.treas.gov/press/releases/reports/q4progress%20update.pdf.
    \7\ See Memorandum of Understanding Between the Board of 
Governors of the Federal Reserve System, the U.S. Commodity Futures 
Trading Commission and the U.S. Securities and Exchange Commission 
Regarding Central Counterparties for Credit Default Swaps (November 
14, 2008), http://www.treas.gov/press/releases/reports/finalmou.pdf.
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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 under a CDS to 
make payments under a CDS contract is triggered by a default or other 
credit event as to such entity or entities or such security or 
securities. Investors may use CDS for a variety of reasons, including 
to offset or insure against risk in their fixed-income portfolios, to 
take positions in bonds or in segments of the debt market as 
represented by an index, or to capitalize on the volatility in credit 
spreads during times of economic uncertainty. In recent years, CDS 
market volumes have rapidly increased.\8\ This growth has coincided 
with a significant rise in the types and number of entities 
participating in the CDS market.\9\
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    \8\ See Semiannual OTC derivatives statistics at end-December 
2007, Bank for International Settlements (``BIS''), available at 
http://www.bis.org/statistics/otcder/dt1920a.pdf.
    \9\ CDS were initially created to meet the demand of banking 
institutions looking to hedge and diversify the credit risk 
attendant with their lending activities. However, financial 
institutions such as insurance companies, pension funds, securities 
firms, and hedge funds have entered the CDS market.
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    The Commission's authority over this OTC market for CDS is limited. 
Specifically, Section 3A of the Securities Exchange Act of 1934 
(``Exchange Act'') limits the Commission's authority over swap 
agreements, as defined in Section 206A of the Gramm-Leach-Bliley 
Act.\10\ For

[[Page 10792]]

those CDS that are swap agreements, the exclusion from the definition 
of security in Section 3A of the Exchange Act, and related provisions, 
will continue to apply. The Commission's action today does not affect 
these CDS, and this Order does not apply to them. For those CDS that 
are not swap agreements (``non-excluded CDS''), the Commission's action 
today provides conditional exemptions from certain requirements of the 
Exchange Act.
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    \10\ 15 U.S.C. 78c-1. Section 3A excludes both a non-security-
based and a security-based swap agreement from the definition of 
``security'' under Section 3(a)(10) of the Exchange Act, 15 U.S.C. 
78c(a)(10). Section 206A of the Gramm-Leach-Bliley Act defines a 
``swap agreement'' as ``any agreement, contract, or transaction 
between eligible contract participants (as defined in section 1a(12) 
of the Commodity Exchange Act * * *) * * * the material terms of 
which (other than price and quantity) are subject to individual 
negotiation.'' 15 U.S.C. 78c note.
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    The Commission believes that using well-regulated CCPs to clear 
transactions in CDS would help promote efficiency and reduce risk in 
the CDS market and among its participants. These benefits could be 
particularly significant in times of market stress, as CCPs would 
mitigate the potential for a market participant's failure to 
destabilize other market participants, and reduce the effects of 
misinformation and rumors. CCP-maintained records of CDS transactions 
would also aid the Commission's efforts to prevent and detect fraud and 
other abusive market practices.
    A well-regulated CCP also would address concerns about counterparty 
risk by substituting the creditworthiness and liquidity of the CCP for 
the creditworthiness and liquidity of the counterparties to a CDS. In 
the absence of a CCP, participants in the OTC CDS market must carefully 
manage their counterparty risks because the default by a counterparty 
can render worthless, and payment delay can reduce the usefulness of, 
the credit protection that has been bought by a CDS purchaser. CDS 
participants currently attempt to manage counterparty risk by carefully 
selecting and monitoring their counterparties, entering into legal 
agreements that permit them to net gains and losses across contracts 
with a defaulting counterparty, and often requiring counterparty 
exposures to be collateralized.\11\ A CCP could allow participants to 
avoid these risks specific to individual counterparties because a CCP 
``novates'' bilateral trades by entering into separate contractual 
arrangements with both counterparties--becoming buyer to one and seller 
to the other.\12\ Through novation, it is the CCP that assumes 
counterparty risks.
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    \11\ See generally R. Bliss and C. Papathanassiou, ``Derivatives 
clearing, central counterparties and novation: The economic 
implications'' (March 8, 2006), at 6. See also ``New Developments in 
Clearing and Settlement Arrangements for OTC Derivatives,'' 
Committee on Payment and Settlement Systems, BIS, at 25 (March 
2007), available at http://www.bis.org/pub/cpss77.pdf; ``Reducing 
Risks and Improving Oversight in the OTC Credit Derivatives 
Market,'' Before the Sen. Subcomm. On Secs., Ins. and Investments, 
110th Cong. (2008) (Statement of Patrick Parkinson, Deputy Director, 
Division of Research and Statistics, FRB).
    \12\ ``Novation'' is a ``process through which the original 
obligation between a buyer and seller is discharged through the 
substitution of the CCP as seller to buyer and buyer to seller, 
creating two new contracts.'' Committee on Payment and Settlement 
Systems, Technical Committee of the International Organization of 
Securities Commissioners, Recommendations for Central Counterparties 
(November 2004) at 66.
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    For this reason, a CCP for CDS would contribute generally to the 
goal of market stability. As part of its risk management, a CCP may 
subject novated contracts to initial and variation margin requirements 
and establish a clearing fund. The CCP also may implement a loss-
sharing arrangement among its participants to respond to a participant 
insolvency or default.
    A CCP would also reduce CDS risks through multilateral netting of 
trades.\13\ Trades cleared through a CCP would permit market 
participants to accept the best bid or offer from a dealer in the OTC 
market with very brief exposure to the creditworthiness of the dealer. 
In addition, by allowing netting of positions in similar instruments, 
and netting of gains and losses across different instruments, a CCP 
would reduce redundant notional exposures and promote the more 
efficient use of resources for monitoring and managing CDS positions. 
Through uniform margining and other risk controls, including controls 
on market-wide concentrations that cannot be implemented effectively 
when counterparty risk management is decentralized, a CCP can help 
prevent a single market participant's failure from destabilizing other 
market participants and, ultimately, the broader financial system.
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    \13\ See ``New Developments in Clearing and Settlement 
Arrangements for OTC Derivatives,'' supra note 11, at 25. 
Multilateral netting of trades would permit multiple counterparties 
to offset their open transaction exposure through the CCP, spreading 
credit risk across all participants in the clearing system and more 
effectively diffusing the risk of a counterparty's default than 
could be accomplished by bilateral netting alone.
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    In this context, IntercontinentalExchange, Inc. (``ICE'') and The 
Clearing Corporation (``TCC''), on behalf of ICE U.S. Trust LLC (``ICE 
Trust''), have requested that the Commission grant exemptions from 
certain requirements under the Exchange Act with respect to the 
proposed activities of ICE Trust in clearing and settling certain CDS, 
as well as the proposed activities of certain other persons, as 
described below.\14\
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    \14\ See Letter from Johnathan Short, InterContinental Exchange, 
Inc. and Kevin McClear, The Clearing Corporation, to Elizabeth 
Murphy, Secretary, Commission, February 26, 2009.
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    Based on the facts presented and the representations made in the 
request on behalf of ICE Trust,\15\ and for the reasons discussed in 
this Order, the Commission temporarily is exempting, subject to certain 
conditions, ICE Trust from the requirement to register as a clearing 
agency under Section 17A of the Exchange Act solely to perform the 
functions of a clearing agency for certain non-excluded CDS 
transactions. The Commission also temporarily is exempting eligible 
contract participants and others from certain Exchange Act requirements 
with respect to non-excluded CDS cleared by ICE Trust. In addition, the 
Commission temporarily is exempting ICE Trust and certain participants 
of ICE Trust from the registration requirements of Sections 5 and 6 of 
the Exchange Act solely in connection with the calculation of mark-to-
market prices for non-excluded CDS cleared by ICE Trust. The 
Commission's exemptions are temporary and will expire on December 7, 
2009. To facilitate the operation of one or more CCPs for the CDS 
market, the Commission has also approved interim final temporary rules 
providing exemptions under the Securities Act of 1933 and the Exchange 
Act for non-excluded CDS.\16\ Finally, the Commission has provided 
temporary exemptions in connection with Sections 5 and 6 of the 
Exchange Act for transactions in non-excluded CDS.\17\
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    \15\ See id. The exemptions we are granting today are based on 
representations made in the request on behalf of ICE Trust. We 
recognize, however, that there could be legal uncertainty in the 
event that one or more of the underlying representations were to 
become inaccurate. Accordingly, if any of these exemptions were to 
become unavailable by reason of an underlying representation no 
longer being materially accurate, the legal status of existing open 
positions in non-excluded CDS associated with persons subject to 
those unavailable exemptions would remain unchanged, but no new 
positions could be established pursuant to the exemptions until all 
of the underlying representations were again accurate.
    \16\ See Securities Act Release No. 33-8999 (January 14, 2009).
    \17\ See Securities Exchange Act Release No. 59165 (December 24, 
2008).
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II. Discussion

A. Description of ICE Trust's Proposal

    The exemptive request on behalf of ICE Trust describes how the 
proposed arrangements for central clearing of CDS by ICE Trust would 
operate, and makes representations about the safeguards associated with 
those arrangements, as described below:

[[Page 10793]]

1. ICE Trust Organization
    ICE Trust is organized as a New York State chartered limited 
liability trust company and has received approval of its application to 
become a member of the Federal Reserve System. ICE Trust is subject to 
direct supervision and examination by the New York State Banking 
Department (``NYSBD''), and, in association with the approval of its 
application to become a member of the Federal Reserve System, will be 
subject to direct supervision and examination by the FRB, specifically 
the Federal Reserve Bank of New York.
2. ICE Trust Central Counterparty Services for CDS
    Initially, ICE Trust's business will be limited to the provision of 
clearing services for the OTC CDS market. ICE Trust will act as a 
central counterparty for ICE Trust Participants (as defined below) \18\ 
by assuming, through novation, the obligations of all eligible CDS 
transactions accepted by it for clearing and collecting margin and 
other credit support from ICE Trust Participants to collateralize their 
obligations to ICE Trust. ICE Trust's trade submission process is 
designed to ensure that it maintains a matched book of offsetting CDS 
contracts.
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    \18\ See note 35, infra.
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    Although CDS are currently bilaterally negotiated and executed, 
major market participants frequently use the Deriv/SERV service of The 
Depository Trust & Clearing Corporation (``DTCC'') comparison and 
confirmation service when documenting their CDS transactions. This 
service creates electronic records of transaction terms and 
counterparties. As part of this service, market participants separately 
submit the terms of a CDS transaction to Deriv/SERV in electronic form. 
Paired submissions are compared to verify that their terms match in all 
required respects. If a match is confirmed, the parties receive an 
electronic confirmation of the submitted transaction. All submitted 
transactions are recorded in the Deriv/SERV Trade Information 
Warehouse, which serves as the primary registry for submitted 
transactions.
    ICE Trust will leverage the Deriv/SERV infrastructure in operating 
its CDS clearing service. Initially, all trades submitted by 
Participants for clearing through ICE Trust will be recorded in the 
Deriv/SERV Trade Information Warehouse. ICE Trust will, initially on a 
weekly basis, obtain from DTCC matched trades that have been recorded 
in the Deriv/SERV Trade Information Warehouse as having been submitted 
for clearing through ICE Trust. Within two months of launch, ICE Trust 
intends to obtain matched trades from DTCC on a daily basis.
    Participants may use the facilities of an inter-dealer broker to 
execute CDS transactions, for example, to access liquidity more rapidly 
or to maintain pre-execution anonymity and submit such transactions for 
clearance and settlement to ICE Trust. The inter-dealer brokers do not 
assume market positions in connection with their intermediation of CDS 
transactions.
    Once a matched CDS contract has been forwarded to, or obtained by, 
ICE Trust, and has been accepted for clearing by it, ICE Trust will 
clear the CDS contract by becoming the central counterparty to each 
party to the trade through novation. Deriv/SERV's current 
infrastructure will help to ensure that ICE Trust maintains a matched 
book of offsetting CDS contracts. Maintaining a matched offsetting book 
is essential to managing the credit risk associated with CDS submitted 
to ICE Trust for clearing.
    Under the ICE Trust's current draft rules (``ICE Trust Rules''), 
each bilateral CDS contract between two ICE Trust Participants that is 
submitted, and accepted by ICE Trust, for clearing will be ``novated.'' 
As part of this process, each bilateral CDS contract submitted to ICE 
Trust will be replaced by two superseding CDS contracts between each of 
the original parties to the submitted transaction and ICE Trust. Under 
these new contracts, ICE Trust will act as the counterparty to each of 
the original parties. As central counterparty to each novated CDS 
contract, ICE Trust will be able to net offsetting positions on a 
multilateral basis, even though ICE Trust will have different 
counterparties with respect to the novated CDS contracts that are being 
netted.
    As part of the novation process, the terms and conditions governing 
the CDS bilaterally negotiated by the submitting counterparties will be 
superseded by the relevant provisions of the ICE Trust Rules applicable 
to the relevant CDS transaction. Multilateral netting will 
significantly reduce the outstanding notional amount of each ICE Trust 
Participant's CDS portfolio. When ICE Trust acts as the central 
counterparty to all cleared CDS of an ICE Trust Participant, that 
participant's positions will be netted down to a single exposure to ICE 
Trust.
3. ICE Trust Risk Management
    ICE Trust will mitigate counterparty risk through its margin, 
guaranty fund, and credit support framework, as set forth in the ICE 
Trust Rules. ICE Trust's risk management infrastructure and related 
risk metrics will be structured specifically for the CDS products that 
ICE Trust clears. Each ICE Trust Participant's credit support 
obligations will be governed by a uniform credit support framework and 
applicable ICE Trust Rules.
    ICE Trust represents that it will maintain strict, objectively 
determined, risk-based margin and guaranty fund requirements, which 
will be subject to extensive and ongoing regulation and oversight by 
the FRB and the NYSBD. These requirements will also be consistent with 
clearing industry practice, Basel II capital adequacy standards, and 
international standards established for central counterparties as 
articulated in the Bank for International Settlements / International 
Organization of Securities Commissions (``IOSCO'') CCP Recommendations. 
The amount of margin and guaranty fund required of each ICE Trust 
Participant will be continuously adjusted to reflect the size and 
profile of, and risk associated with, the ICE Trust Participant's 
cleared CDS transactions (and related market factors).
    Pursuant to ICE Trust Rules, each ICE Trust Participant's margin 
requirement will consist of two components: (1) Initial margin, 
reflecting a risk-based calculation of potential loss on outstanding 
CDS positions in the event of a significant adverse market movement, 
and (2) mark-to-market margin, based upon an end-of-day mark-to-market 
of outstanding positions. Acceptable margin will initially include only 
cash in specified currencies and G-7 government debt for initial margin 
and only cash for mark-to-market margin. ICE Trust Participants will be 
required to cover any end-of-day margin deficit with U.S. dollars by 
the following morning, and ICE Trust will have the discretion to 
require and collect additional margin, both at the end of the day and 
intraday, as it deems necessary.\19\
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    \19\ An ICE Trust Participant would be permitted to withdraw 
mark-to-market margin amounts credited to its account to the extent 
not required to satisfy its initial margin requirement.
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    ICE Trust will also maintain a guaranty fund (the ``Guaranty 
Fund'') to cover losses arising from an ICE Trust Participant's default 
on cleared CDS transactions that exceed the amount of margin held by 
ICE Trust from the defaulting ICE Trust Participant. Each ICE Trust 
Participant will be required to contribute a minimum of $20 million to 
the Guaranty Fund initially when it becomes an ICE Trust Participant 
and

[[Page 10794]]

on an ongoing basis, additional amounts based on its actual and 
anticipated CDS position exposures. The adequacy of the Guaranty Fund 
will be monitored daily and the need for additional contributions will 
be determined on at least a monthly basis, based on the size of ICE 
Trust Participant exposures within the ICE Trust clearing system. As a 
result, the Guaranty Fund will grow in proportion to the position risk 
associated with the aggregate volume of CDS cleared by ICE Trust.
    ICE Trust will also establish rules that ``mutualize'' the risk of 
an ICE Trust Participant default across all ICE Trust Participants. In 
the event of an ICE Trust Participant's default, ICE Trust may look to 
the margin posted by such participant, such participant's Guaranty Fund 
contributions and, if applicable, any recovery from a parent guarantor. 
In addition, at its discretion, ICE Trust will be authorized to use, to 
the extent needed, other ICE Trust Participants' Guaranty Fund 
contributions to satisfy any obligations of the defaulting ICE Trust 
Participant; provided that, any recovery from the defaulting ICE Trust 
Participant, its parent guarantor, if any, or the sale of the 
defaulting ICE Trust Participant's positions in ICE Trust will first be 
used to refund any amounts utilized by ICE Trust from contributions of 
non-defaulting ICE Trust Participants to the Guaranty Fund.
4. Member Default
    Following a default by an ICE Trust Participant, ICE Trust has a 
number of tools available to it under the ICE Trust Rules to ensure an 
orderly liquidation and unwinding of the open positions of such 
defaulting ICE Trust Participant. In the first instance, upon 
determining that a default has occurred, ICE Trust will have the 
ability to immediately enter into replacement CDS transactions with 
other ICE Trust Participants that are designed to mitigate, to the 
greatest extent possible, the market risk of the defaulting ICE Trust 
Participant's open positions. For open positions in which there is no 
liquid trading market, ICE Trust may enter into covering CDS 
transactions for which there is a liquid market and that are most 
closely correlated with such illiquid open positions.
    After entering into covering transactions in the open market, if 
any, ICE Trust will seek to close out any remaining open positions of 
the defaulting ICE Trust Participant (including any initial covering 
transactions) by using one or more auctions or other commercially 
reasonable unwind processes. The ICE Trust Rules will prohibit ICE 
Trust from entering into any replacement transaction if the price of 
such transaction would be below the least favorable price that would be 
reasonable to accept for such replacement transaction. To the extent 
ICE Trust is not able to enter into the necessary replacement 
transactions through auctions or open market processes, ICE Trust will 
be entitled to allocate such replacement transactions to the remaining 
ICE Trust Participants at the floor price established by ICE Trust.

B. Temporary Conditional Exemptions From Clearing Agency and Exchange 
Registration Requirements

1. Exemption From Section 17A of the Exchange Act
    Section 17A of the Exchange Act sets forth the framework for the 
regulation and operation of the U.S. clearance and settlement system, 
including CCPs. Specifically, Section 17A directs the Commission to use 
its authority to promote enumerated Congressional objectives and to 
facilitate the development of a national clearance and settlement 
system for securities transactions. Absent an exemption, a CCP that 
novates trades of non-excluded CDS that are securities and generates 
money and settlement obligations for participants is required to 
register with the Commission as a clearing agency.
    Section 36 of the Exchange Act authorizes the Commission to 
conditionally or unconditionally exempt any person, security, or 
transaction, or any class or classes of persons, securities, or 
transactions, from any provision or provisions of the Exchange Act or 
any rule or regulation thereunder, by rule, regulation, or order, to 
the extent that such exemption is necessary or appropriate in the 
public interest, and is consistent with the protection of 
investors.\20\
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    \20\ 15 U.S.C. 78mm.
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    Accordingly, pursuant to Section 36 of the Exchange Act, the 
Commission finds that it is necessary or appropriate in the public 
interest and is consistent with the protection of investors to exercise 
its authority to grant an exemption until December 7, 2009 to ICE Trust 
from Section 17A of the Exchange Act, solely to perform the functions 
of a clearing agency for Cleared CDS,\21\ subject to the conditions 
discussed below.
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    \21\ For purposes of this exemption, and the other exemptions 
addressed in this Order, ``Cleared CDS'' means a credit default swap 
that is submitted (or offered, purchased, or sold on terms providing 
for submission) to ICE Trust, that is offered only to, purchased 
only by, and sold only to eligible contract participants (as defined 
in Section 1a(12) of the Commodity Exchange Act as in effect on the 
date of this Order (other than a person that is an eligible contract 
participant under paragraph (C) of that section)), and in which: (i) 
The reference entity, the issuer of the reference security, or the 
reference security is one of the following: (A) An entity reporting 
under the Exchange Act, providing Securities Act Rule 144A(d)(4) 
information, or about which financial information is otherwise 
publicly available; (B) a foreign private issuer whose securities 
are listed outside the United States and that has its principal 
trading market outside the United States; (C) a foreign sovereign 
debt security; (D) an asset-backed security, as defined in 
Regulation AB, issued in a registered transaction with publicly 
available distribution reports; or (E) an asset-backed security 
issued or guaranteed by the Fannie Mae, Freddie Mac or the 
Government National Mortgage Association (``Ginnie Mae''); or (ii) 
the reference index is an index in which 80 percent or more of the 
index's weighting is comprised of the entities or securities 
described in subparagraph (i). As discussed above, the Commission's 
action today does not affect CDS that are swap agreements under 
Section 206A of the Gramm-Leach-Bliley Act. See text at note 10, 
supra.
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    Our action today balances the aim of facilitating the prompt 
establishment of ICE Trust as a CCP for non-excluded CDS transactions--
which should help reduce systemic risks during a period of extreme 
turmoil in the U.S. and global financial markets--with ensuring that 
important elements of Commission oversight are applied to the non-
excluded CDS market. In doing so, we are mindful that applying the full 
scope of the Exchange Act to transactions involving non-excluded CDS 
could deter the prompt establishment of ICE Trust as a CCP to settle 
those transactions.
    While we are acting so that the prompt establishment of ICE Trust 
as a CCP for non-excluded CDS will not be delayed by the need to apply 
the full scope of Exchange Act Section 17A's requirements that govern 
clearing agencies, the relief we are providing is temporary and 
conditional. The limited duration of the exemptions will permit the 
Commission to gain more direct experience with the non-excluded CDS 
market after ICE Trust becomes operational, giving the Commission the 
ability to oversee the development of the centrally cleared non-
excluded CDS market as it evolves. During the exemptive period, the 
Commission will closely monitor the impact of the CCPs on the CDS 
market. In particular, the Commission will seek to assure itself that 
the CCPs do not act in anticompetitive manner or indirectly facilitate 
anticompetitive behavior with respect to fees charged to members, the 
dissemination of market data and the access to clearing services by 
independent CDS exchanges or CDS trading platforms. The Commission will 
take that experience into account in future actions.
    Moreover, this temporary exemption in part is based on ICE Trust's

[[Page 10795]]

representation that it meets the standards set forth in the Committee 
on Payment and Settlement Systems (``CPSS'') and IOSCO report entitled: 
Recommendation for Central Counterparties (``RCCP'').\22\ The RCCP 
establishes a framework that requires a CCP to have: (i) The ability to 
facilitate the prompt and accurate clearance and settlement of CDS 
transactions and to safeguard its users' assets; and (ii) sound risk 
management, including the ability to appropriately determine and 
collect clearing fund and monitor its users' trading. This framework is 
generally consistent with the requirements of Section 17A of the 
Exchange Act.
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    \22\ The RCCP was drafted by a joint task force (``Task Force'') 
composed of representative members of IOSCO and CPSS and published 
in November 2004. The Task Force consisted of securities regulators 
and central bankers from 19 countries and the European Union. The 
U.S. representatives on the Task Force included staff from the 
Commission, the FRB, and the CFTC.
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    In addition, this Order is designed to assure that--as represented 
in the request on behalf of ICE Trust--information will be available to 
market participants about the terms of the CDS cleared by ICE Trust, 
the creditworthiness of ICE Trust or any guarantor, and the clearing 
and settlement process for the CDS. Moreover, to be within the 
definition of Cleared CDS for purposes of this exemption (as well as 
the other exemptions granted through this Order), a CDS may only 
involve a reference entity, a reference security, an issuer of a 
reference security, or a reference index that satisfies certain 
conditions relating to the availability of information about such 
persons or securities. For non-excluded CDS that are index-based, the 
definition provides that at least 80 percent of the weighting of the 
index must be comprised of reference entities, issuers of a reference 
security, or reference securities that satisfy the information 
conditions. The definition does not prescribe the type of financial 
information that must be available nor the location of the particular 
information, recognizing that eligible contract participants have 
access to information about reference entities and reference securities 
through multiple sources. The Commission believes, however, that it is 
important in the CDS market, as in the market for securities generally, 
that parties to transactions should have access to financial 
information that would allow them to appropriately evaluate the risks 
relating to a particular investment and make more informed investment 
decisions.\23\ Such information availability also will assist ICE Trust 
and the buyers and sellers in valuing their Cleared CDS and their 
counterparty exposures. As a result of the Commission's actions today, 
the Commission believes that information should be available for market 
participants to be able to make informed investment decisions, and 
value and evaluate their Cleared CDS and their counterparty exposures.
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    \23\ The Commission notes the recommendations of the President's 
Working Group on Financial Markets regarding the informational needs 
and due diligence responsibilities of investors. See Policy 
Statement on Financial Market Developments, The President's Working 
Group on Financial Markets, March 13, 2008, available at: http://
www.treas.gov/press/releases/reports/pwgpolicystatemktturmoil_
03122008.pdf.
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    This temporary exemption is subject to a number of conditions that 
are designed to enable Commission staff to monitor ICE Trust's 
clearance and settlement of CDS transactions and help reduce risk in 
the CDS market. These conditions require that ICE Trust: (i) Make 
available on its Web site its annual audited financial statements; (ii) 
preserve records related to the conduct of its Cleared CDS clearance 
and settlement services for at least five years (in an easily 
accessible place for the first two years); (iii) provide information 
relating to its Cleared CDS clearance and settlement services to the 
Commission and provide access to the Commission to conduct on-site 
inspections of facilities, records and personnel related to its Cleared 
CDS clearance and settlement services; (iv) notify the Commission about 
material disciplinary actions taken against any of its members 
utilizing its Cleared CDS clearance and settlement services, and about 
the involuntary termination of the membership of an entity that is 
utilizing ICE Trust's Cleared CDS clearance and settlement services; 
(v) provide the Commission with changes to rules, procedures, and any 
other material events affecting its Cleared CDS clearance and 
settlement services; (vi) provide the Commission with reports prepared 
by independent audit personnel that are generated in accordance with 
risk assessment of the areas set forth in the Commission's Automation 
Review Policy Statements \24\ and its annual audited financial 
statements prepared by independent audit personnel; and (vii) report 
all significant systems outages to the Commission.
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    \24\ See Automated Systems of Self-Regulatory Organization, 
Exchange Act Release No. 27445 (November 16, 1989), File No. S7-29-
89, and Automated Systems of Self-Regulatory Organization (II), 
Exchange Act Release No. 29185 (May 9, 1991), File No. S7-12-19.
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    In addition, this relief is conditioned on ICE Trust, directly or 
indirectly, making available to the public on terms that are fair and 
reasonable and not unreasonably discriminatory: (i) All end-of-day 
settlement prices and any other prices with respect to Cleared CDS that 
ICE Trust may establish to calculate mark-to-market margin requirements 
for ICE Trust Participants; and (ii) any other pricing or valuation 
information with respect to Cleared CDS as is published or distributed 
by ICE Trust. The Commission believes this is an appropriate condition 
for ICE Trust's exemption from registration as a clearing agency. In 
Section 11A of the Exchange Act, Congress found that ``[i]t is in the 
public interest and appropriate for the protection of investors and the 
maintenance of fair and orderly markets to assure * * * the 
availability to brokers, dealers, and investors of information with 
respect to quotations for and transactions in securities.'' \25\ The 
President's Working Group on Financial Markets has stated that 
increased transparency is a policy objective for the over-the-counter 
derivatives market,\26\ which includes the market for CDS. The 
condition is designed to further this policy objective of both Congress 
and the President's Working Group by requiring ICE Trust to make useful 
pricing data available to the public on terms that are fair and 
reasonable and not unreasonably discriminatory. Congress adopted these 
standards for the distribution of data in Section 11A. The Commission 
long has applied the standards in the specific context of securities 
market data,\27\ and it anticipates that ICE Trust will distribute its 
data on terms that generally are consistent with the application of 
these standards to securities market data. For example, data 
distributors generally are required to treat subscribers equally and 
not grant special access, fees, or other privileges to favored 
customers of the distributor. Similarly, distributors must make their 
data feeds reasonably available to data vendors for those subscribers 
who wish to receive their data indirectly through a vendor rather

[[Page 10796]]

than directly from the distributor. In addition, a distributor's 
attempt to tie data products that must be made available to the public 
with other products or services of the distributor would be 
inconsistent with the statutory requirements.\28\ The Commission 
carefully evaluates any type of discrimination with respect to 
subscribers and vendors to assess whether there is a reasonable basis 
for the discrimination given, among other things, the Exchange Act 
objective of promoting price transparency.\29\ Moreover, preventing 
unreasonable discrimination is a practical means to promote fair and 
reasonable terms for data distribution because distributors are more 
likely to act appropriately when the terms applicable to the broader 
public also must apply to any favored classes of customers.\30\
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    \25\ 15 U.S.C. 78k-1(a)(1)(C)(iii). See also 15 U.S.C. 78k-
1(a)(1)(D).
    \26\ See President's Working Group on Financial Markets, Policy 
Objectives for the OTC Derivatives Market (November 14, 2008), 
available at http://www.ustreas.gov/press/releases/reports/
policyobjectives.pdf (``Public reporting of prices, trading volumes 
and aggregate open interest should be required to increase market 
transparency for participants and the public.'').
    \27\ See Exchange Act Release No. 42209 (December 9, 1999), 64 
FR 70613, 70621-70623 (December 17, 1999) (``Market Information 
Concept Release'') (discussion of legal standards applicable to 
market data distribution since Section 11A was adopted in 1975).
    \28\ See Exchange Act Release No. 59039 (December 2, 2008), 73 
FR 74770, 74793 (December 9, 2008) (``NYSE ArcaBook Order'') 
(``[S]ection 6 and Exchange Act Rule 603(a) require NYSE Arca to 
distribute the ArcaBook data on terms that are not tied to other 
products in a way that is unfairly discriminatory or 
anticompetitive.'').
    \29\ See Market Information Concept Release, 64 FR at 70630 
(``The most important objectives for the Commission to consider in 
evaluating fees are to assure (1) the wide availability of market 
information, (2) the neutrality of fees among markets, vendors, 
broker-dealers, and users, (3) the quality of market information--
its integrity, reliability, and accuracy, and (4) fair competition 
and equal regulation among markets and broker-dealers.'').
    \30\ See NYSE ArcaBook Order, 73 FR at 74794 (``[T]he proposed 
fees for ArcaBook data will apply equally to all professional 
subscribers and all non-professional subscribers * * * The fees 
therefore do not unreasonably discriminate among types of 
subscribers, such as by favoring participants in the NYSE Arca 
market or penalizing participants in other markets.'').
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    As a CCP, ICE Trust will collect and process information about CDS 
transactions, prices, and positions from all of its participants. With 
this information, a CCP will, among other things, calculate and 
disseminate current values for open positions for the purpose of 
setting appropriate margin levels. The availability of such information 
can improve fairness, efficiency, and competitiveness of the market--
all of which enhance investor protection and facilitate capital 
formation. Moreover, with pricing and valuation information relating to 
Cleared CDS, market participants would be able to derive information 
about underlying securities and indexes. This may improve the 
efficiency and effectiveness of the securities markets by allowing 
investors to better understand credit conditions generally.
2. Exemption From Sections 5 and 6 of the Exchange Act
    ICE Trust represents that, in connection with its clearing and risk 
management process, it will calculate an end-of-day settlement price 
for each Cleared CDS in which an ICE Trust Participant has a cleared 
position, based on prices submitted by ICE Trust Participants. As part 
of this mark-to-market process, ICE Trust will periodically require ICE 
Trust Participants to execute certain CDS trades at the applicable end-
of-day settlement price. Requiring ICE Trust Participants to trade CDS 
periodically in this manner is designed to help ensure that such 
submitted prices reflect each ICE Trust Participant's best assessment 
of the value of each of its open positions in Cleared CDS on a daily 
basis, thereby reducing risk by allowing ICE Trust to impose 
appropriate margin requirements.
    Section 5 of the Exchange Act states that ``[i]t shall be unlawful 
for any broker, dealer, or exchange, directly or indirectly, to make 
use of the mails or any means or instrumentality of interstate commerce 
for the purpose of using any facility of an exchange * * * to effect 
any transaction in a security, or to report any such transactions, 
unless such exchange (1) is registered as a national securities 
exchange under section 6 of [the Exchange Act], or (2) is exempted from 
such registration * * * by reason of the limited volume of transactions 
effected on such exchange. * * *'' \31\ Section 6 of the Exchange Act 
sets forth a procedure whereby an exchange \32\ may register as a 
national securities exchange.\33\ To facilitate the establishment of 
ICE Trust's end-of-day settlement price process, including the 
periodically required trading described above, the Commission is 
exercising its authority under Section 36 of the Exchange Act to 
temporarily exempt ICE Trust and ICE Trust Participants from Sections 5 
and 6 of the Exchange Act and the rules and regulations thereunder in 
connection with ICE Trust's calculation of mark-to-market prices for 
open positions in Cleared CDS. This temporary exemption is subject to 
the following conditions:
---------------------------------------------------------------------------

    \31\ 15 U.S.C. 78e.
    \32\ Section 3(a)(1) of the Exchange Act, 15 U.S.C. 78c(a)(1), 
defines ``exchange.'' Rule 3b-16 under the Exchange Act, 17 CFR 
240.3b-16, defines certain terms used in the statutory definition of 
exchange. See Exchange Act Release No. 40760 (December 8, 1998), 63 
FR 70844 (December 22, 1998) (adopting Rule 3b-16 in addition to 
Regulation ATS).
    \33\ 15 U.S.C. 78f. Section 6 of the Exchange Act also sets 
forth various requirements to which a national securities exchange 
is subject.
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    First, ICE Trust must report the following information with respect 
to the calculation of mark-to-market prices for Cleared CDS to the 
Commission within 30 days of the end of each quarter, and preserve such 
reports during the life of the enterprise and of any successor 
enterprise:
     The total dollar volume of transactions executed during 
the quarter, broken down by reference entity, security, or index; and
     The total unit volume and/or notional amount executed 
during the quarter, broken down by reference entity, security, or 
index.

Reporting of this information will assist the Commission in carrying 
out its responsibility to supervise and regulate the securities 
markets.
    Second, ICE Trust must establish adequate safeguards and procedures 
to protect participants' confidential trading information. Such 
safeguards and procedures shall include: (a) Limiting access to the 
confidential trading information of participants to those employees of 
ICE Trust who are operating the system or responsible for its 
compliance with this exemption or any other applicable rules; and (b) 
implementing standards controlling employees of ICE Trust trading for 
their own accounts. ICE Trust must adopt and implement adequate 
oversight procedures to ensure that the safeguards and procedures 
established pursuant to this condition are followed. This condition is 
designed to prevent any misuse of ICE Trust Participant trading 
information that may be available to ICE Trust in connection with the 
daily marking-to-market process of open positions in Cleared CDS. This 
should strengthen confidence in ICE Trust as a CCP for CDS, promoting 
participation.
    Third, ICE Trust must comply with the conditions to the temporary 
exemption from registration as a clearing agency granted in this Order. 
As set forth above, this Order is designed to facilitate the prompt 
establishment of ICE Trust as a CCP for non-excluded CDS. ICE Trust has 
represented that, to enhance the reliability of end-of-day settlement 
prices submitted as part of the daily mark-to-market process, it must 
require periodic trading of Cleared CDS positions by ICE Participants 
whose submitted end-of-day prices lock or cross. The Commission's 
temporary exemption from Sections 5 and 6 of the Exchange Act is based 
on ICE Trust's representation that the end-of-day settlement pricing 
process, including the periodically required trading is integral to its 
risk management.

[[Page 10797]]

Accordingly, as a condition to ICE Trust's temporary exemption from 
Sections 5 and 6 of the Exchange Act, ICE trust must comply with the 
conditions to the temporary exemption from Section 17A of the Exchange 
Act in this Order.
    The Commission is also exempting each ICE Trust Participant from 
the prohibition in Section 5 of the Exchange Act to the extent that 
such ICE Trust Participant uses any facility of ICE Trust to effect any 
transaction in Cleared CDS, or to report any such transaction, in 
connection with ICE Trust's calculation of mark-to-market prices for 
open positions in Cleared CDS. Absent an exemption, Section 5 would 
prohibit any ICE Trust Participant that is a broker or dealer from 
effecting transactions in Cleared CDS on ICE Trust, which will rely on 
this order for an exemption from exchange registration. The Commission 
believes that exempting ICE Trust Participants from the restriction in 
Section 5 is necessary and appropriate in the public interest and is 
consistent with the protection of investors because it will facilitate 
their use of ICE Trust's CCP for Cleared CDS, which for the reasons 
noted in this Order the Commission believes to be beneficial. Without 
also exempting ICE Trust Participants from this Section 5 requirement, 
the Commission's temporary exemption of ICE Trust from Sections 5 and 6 
of the Exchange Act would be ineffective, because ICE Trust 
Participants that are brokers or dealers would not be permitted to 
effect transactions on ICE Trust in connection with the end-of-day 
settlement price process.

C. Temporary General Exemption for ICE Trust, Certain ICE Trust 
Participants, and Certain Eligible Contract Participants

    Applying the full panoply of Exchange Act requirements to 
participants in transactions in non-excluded CDS likely would deter 
some participants from using CCPs to clear CDS transactions. At the 
same time, it is important that the antifraud provisions of the 
Exchange Act apply to transactions in non-excluded CDS; indeed, OTC 
transactions subject to individual negotiation that qualify as 
security-based swap agreements already are subject to these antifraud 
provisions.\34\
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    \34\ While Section 3A of the Exchange Act excludes ``swap 
agreements'' from the definition of ``security,'' certain antifraud 
and insider trading provisions under the Exchange Act explicitly 
apply to security-based swap agreements. See (a) paragraphs (2) 
through (5) of Section 9(a), 15 U.S.C. 78i(a), prohibiting the 
manipulation of security prices; (b) Section 10(b), 15 U.S.C. 
78j(b), and underlying rules prohibiting fraud, manipulation or 
insider trading (but not prophylactic reporting or recordkeeping 
requirements); (c) Section 15(c)(1), 15 U.S.C. 78o(c)(1), which 
prohibits brokers and dealers from using manipulative or deceptive 
devices; (d) Sections 16(a) and (b), 15 U.S.C. 78p(a) and (b), which 
address disclosure by directors, officers and principal 
stockholders, and short-swing trading by those persons, and rules 
with respect to reporting requirements under Section 16(a); (e) 
Section 20(d), 15 U.S.C. 78t(d), providing for antifraud liability 
in connection with certain derivative transactions; and (f) Section 
21A(a)(1), 15 U.S.C. 78u-1(a)(1), related to the Commission's 
authority to impose civil penalties for insider trading violations.
    ``Security-based swap agreement'' is defined in Section 206B of 
the Gramm-Leach-Bliley Act as a swap agreement in which a material 
term is based on the price, yield, value, or volatility of any 
security or any group or index of securities, or any interest 
therein.
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    We thus believe that it is appropriate in the public interest and 
consistent with the protection of investors temporarily to apply 
substantially the same framework to transactions by market participants 
in non-excluded CDS that applies to transactions in security-based swap 
agreements. Applying substantially the same set of requirements to 
participants in transactions in non-excluded CDS as apply to 
participants in OTC CDS transactions will avoid deterring market 
participants from promptly using CCPs, which would detract from the 
potential benefits of central clearing.
    Accordingly, pursuant to Section 36 of the Exchange Act, the 
Commission finds that it is necessary or appropriate in the public 
interest and is consistent with the protection of investors to exercise 
its authority to grant an exemption until December 7, 2009 from certain 
requirements under the Exchange Act. This temporary exemption applies 
to ICE Trust, any ICE Trust Participant \35\ which is not a broker or 
dealer registered under Section 15(b) of the Exchange Act (other than 
paragraph (11) thereof), and any eligible contract participants \36\ 
other than: Eligible contract participants that receive or hold funds 
or securities for the purpose of purchasing, selling, clearing, 
settling or holding Cleared CDS positions for other persons; \37\ 
eligible contract participants that are self-regulatory organizations; 
or eligible contract participants that are registered brokers or 
dealers.\38\
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    \35\ For purposes of this Order, an ``ICE Trust Participant'' 
means any participant in ICE Trust that submits Cleared CDS to ICE 
Trust for clearance and settlement exclusively (i) for its own 
account or (ii) for the account of an affiliate that controls, is 
controlled by, or is under common control with the participant in 
ICE Trust. In general, this exemption does not apply to any ICE 
Trust Participant that is registered with the Commission as a 
broker-dealer. A separate temporary exemption addresses the Cleared 
CDS activities of registered broker-dealers. See Part II.D., infra.
    \36\ This exemption in general applies to eligible contract 
participants, as defined in Section 1a(12) of the Commodity Exchange 
Act as in effect on the date of this Order, other than persons that 
are eligible contract participants under paragraph (C) of that 
section.
    \37\ For these purposes, and for the purpose of the definition 
of ``Cleared CDS,'' the terms ``purchasing'' and ``selling'' mean 
the execution, termination (prior to its scheduled maturity date), 
assignment, exchange, or similar transfer or conveyance of, or 
extinguishing the rights or obligations under, a Cleared CDS, as the 
context may require. This is consistent with the meaning of the 
terms ``purchase'' or ``sale'' under the Exchange Act in the context 
of security-based swap agreements. See Exchange Act Section 
3A(b)(4).
    \38\ A separate temporary exemption addresses the Cleared CDS 
activities of registered broker-dealers. See Part II.D., infra.. 
Solely for purposes of this Order, a registered broker-dealer, or a 
broker or dealer registered under Section 15(b) of the Exchange Act, 
does not refer to someone that would otherwise be required to 
register as a broker or dealer solely as a result of activities in 
Cleared CDS in compliance with this Order.
---------------------------------------------------------------------------

    Under this temporary exemption, and solely with respect to Cleared 
CDS, these persons generally are exempt from provisions of the Exchange 
Act and the rules and regulations thereunder that do not apply to 
security-based swap agreements. Those persons thus would still be 
subject to those Exchange Act requirements that explicitly are 
applicable in connection with security-based swap agreements.\39\ In 
addition, all provisions of the Exchange Act related to the 
Commission's enforcement authority in connection with violations or 
potential violations of such provisions would remain applicable.\40\ In 
this way, the temporary exemption would apply the same Exchange Act 
requirements in connection with non-excluded CDS as apply in connection 
with OTC credit default swaps.
---------------------------------------------------------------------------

    \39\ See note 34, supra.
    \40\ Thus, for example, the Commission retains the ability to 
investigate potential violations and bring enforcement actions in 
the Federal courts and administrative proceedings, and to seek the 
full panoply of remedies available in such cases.
---------------------------------------------------------------------------

    This temporary exemption, however, does not extend to Sections 5 
and 6 of the Exchange Act.\41\ The Commission separately issued a 
conditional exemption from these provisions to all broker-dealers and 
exchanges.\42\ This

[[Page 10798]]

temporary exemption also does not extend to Section 17A of the Exchange 
Act; instead, ICE Trust is exempt from registration as a clearing 
agency under the conditions discussed above. In addition, this 
exemption does not apply to Exchange Act Sections 12, 13, 14, 15(d), 
and 16; \43\ eligible contract participants and other persons instead 
should refer to the interim final temporary rules issued by the 
Commission. Finally, this temporary exemption does not extend to the 
Commission's administrative proceeding authority under Sections 
15(b)(4) and (b)(6),\44\ or to certain provisions related to government 
securities.\45\
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    \41\ This Order includes a separate temporary exemption 
regarding the mark-to-market process of ICE Trust, discussed above.
    \42\ See note 17, supra. A national securities exchange that 
effects transactions in Cleared CDS would continue to be required to 
comply with all requirements under the Exchange Act applicable to 
such transactions. A national securities exchange could form 
subsidiaries or affiliates that operate exchanges exempt under that 
order. Any subsidiary or affiliate of a registered exchange could 
not integrate, or otherwise link, the exempt CDS exchange with the 
registered exchange including the premises or property of such 
exchange for effecting or reporting a transaction without being 
considered a ``facility of the exchange.'' See Section 3(a)(2), 15 
U.S.C. 78c(a)(2).
    \43\ 15 U.S.C. 78l, 78m, 78n, 78o(d), 78p.
    \44\ Exchange Act Sections 15(b)(4) and 15(b)(6), 15 U.S.C. 
78o(b)(4) and (b)(6), grant the Commission authority to take action 
against broker-dealers and associated persons in certain situations. 
Accordingly, while this exemption generally extends to persons that 
act as inter-dealer brokers in the market for Cleared CDS and do not 
hold funds or securities for others, such inter-dealer brokers may 
be subject to actions under Sections 15(b)(4) and (b)(6) of the 
Exchange Act.
    In addition, such inter-dealer brokers may be subject to actions 
under Exchange Act Section 15(c)(1), 15 U.S.C. 78o(c)(1), which 
prohibits brokers and dealers from using manipulative or deceptive 
devices. As noted above, Section 15(c)(1) explicitly applies to 
security-based swap agreements. Sections 15(b)(4), 15(b)(6) and 
15(c)(1), of course, would not apply to persons subject to this 
exemption who do not act as broker-dealers or associated persons of 
broker-dealers.
    \45\ This exemption specifically does not extend to the Exchange 
Act provisions applicable to government securities, as set forth in 
Section 15C, 15 U.S.C. 78o-5, and its underlying rules and 
regulations; nor does the exemption extend to related definitions 
found at paragraphs (42) through (45) of Section 3(a), 15 U.S.C. 
78c(a). The Commission does not have authority under Section 36 to 
issue exemptions in connection with those provisions. See Exchange 
Act Section 36(b), 15 U.S.C. 78mm(b).
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D. Temporary General Exemption for Certain Registered Broker-Dealers

    The temporary exemptions addressed above--with regard to ICE Trust, 
certain ICE Trust Participants, and certain eligible contract 
participants--are not available to persons that are registered as 
broker-dealers with the Commission (other than those that are notice 
registered pursuant to Section 15(b)(11)).\46\ The Exchange Act and its 
underlying rules and regulations require broker-dealers to comply with 
a number of obligations that are important to protecting investors and 
promoting market integrity. We are mindful of the need to avoid 
creating disincentives to the prompt use of CCPs, and we recognize that 
the factors discussed above suggest that the full panoply of Exchange 
Act requirements should not immediately be applied to registered 
broker-dealers that engage in transactions involving Cleared CDS. At 
the same time, we also are sensitive to the critical importance of 
certain broker-dealer requirements to promoting market integrity and 
protecting customers (including those broker-dealer customers that are 
not involved with CDS transactions).
---------------------------------------------------------------------------

    \46\ Exchange Act Section 15(b)(11) provides for notice 
registration of certain persons that effect transactions in security 
futures products. 15 U.S.C. 78o(b)(11).
---------------------------------------------------------------------------

    This calls for balancing the facilitation of the development and 
prompt implementation of CCPs with the preservation of certain key 
investor protections. Pursuant to Section 36 of the Exchange Act, the 
Commission finds that it is necessary or appropriate in the public 
interest and is consistent with the protection of investors to exercise 
its authority to grant an exemption until December 7, 2009 from certain 
Exchange Act requirements. Consistent with the temporary exemptions 
discussed above, and solely with respect to Cleared CDS, we are 
exempting registered broker-dealers in general from provisions of the 
Exchange Act and its underlying rules and regulations that do not apply 
to security-based swap agreements. As above, we are not excluding 
registered broker-dealers from Exchange Act provisions that explicitly 
apply in connection with security-based swap agreements or from related 
enforcement authority provisions.\47\ As above, and for similar 
reasons, we are not exempting registered broker-dealers from: Sections 
5, 6, 12(a) and (g), 13, 14, 15(b)(4), 15(b)(6), 15(d), 16 and 17A of 
the Exchange Act.\48\
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    \47\ See notes 34 and 40, supra. As noted above, broker-dealers 
also would be subject to Section 15(c)(1) of the Exchange Act, which 
prohibits brokers and dealers from using manipulative or deceptive 
devices, because that provision explicitly applies in connection 
with security-based swap agreements. In addition, to the extent the 
Exchange Act and any rule or regulation thereunder imposes any other 
requirement on a broker-dealer with respect to security-based swap 
agreements (e.g., requirements under Rule 17h-1T to maintain and 
preserve written policies, procedures, or systems concerning the 
broker or dealer's trading positions and risks, such as policies 
relating to restrictions or limitations on trading financial 
instruments or products), these requirements would continue to apply 
to broker-dealers' activities with respect to Cleared CDS.
    \48\ We also are not exempting those members from provisions 
related to government securities, as discussed above.
---------------------------------------------------------------------------

    Further we are not exempting registered broker-dealers from the 
following additional provisions under the Exchange Act: (1) Section 
7(c),\49\ which addresses the unlawful extension of credit by broker-
dealers; (2) Section 15(c)(3),\50\ which addresses the use of unlawful 
or manipulative devices by broker-dealers; (3) Section 17(a),\51\ 
regarding broker-dealer obligations to make, keep and furnish 
information; (4) Section 17(b),\52\ regarding broker-dealer records 
subject to examination; (5) Regulation T,\53\ a Federal Reserve Board 
regulation regarding extension of credit by broker-dealers; (6) 
Exchange Act Rule 15c3-1, regarding broker-dealer net capital; (7) 
Exchange Act Rule 15c3-3, regarding broker-dealer reserves and custody 
of securities; (8) Exchange Act Rules 17a-3 through 17a-5, regarding 
records to be made and preserved by broker-dealers and reports to be 
made by broker-dealers; and (9) Exchange Act Rule 17a-13, regarding 
quarterly security counts to be made by certain exchange members and 
broker-dealers.\54\ Registered broker-dealers should comply with these 
provisions in connection with their activities involving non-excluded 
CDS because these provisions are especially important to helping 
protect customer funds and securities, ensure proper credit practices 
and safeguard against fraud and abuse.\55\
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    \49\ 15 U.S.C. 78g(c).
    \50\ 15 U.S.C. 78o(c)(3).
    \51\ 15 U.S.C. 78q(a).
    \52\ 15 U.S.C. 78q(b).
    \53\ 12 CFR 220.1 et seq.
    \54\ Solely for purposes of this exemption, in addition to the 
general requirements under the referenced Exchange Act sections, 
registered broker-dealers shall only be subject to the enumerated 
rules under the referenced Exchange Act sections.
    \55\ Indeed, Congress directed the Commission to promulgate 
broker-dealer financial responsibility rules, including rules 
regarding custody, the use of customer securities and the use of 
customers' deposits or credit balances, and regarding establishment 
of minimum financial requirements.
---------------------------------------------------------------------------

E. Solicitation of Comments

    The Commission intends to monitor closely the development of the 
CDS market and intends to determine to what extent, if any, additional 
regulatory action may be necessary. For example, as circumstances 
warrant, certain conditions could be added, altered, or eliminated. 
Moreover, because these exemptions are temporary, the Commission will 
in the future consider whether they should be extended or allowed to 
expire. The Commission believes it would be prudent to solicit public 
comment on its action today, and on what action it should take with 
respect to the CDS market in the future. The Commission is soliciting 
public comment on all aspects of these exemptions, including:
    1. Whether the length of this temporary exemption (until December 
7, 2009) is appropriate. If not, what should the appropriate duration 
be?

[[Page 10799]]

    2. Whether the conditions to these exemptions are appropriate. Why 
or why not? Should other conditions apply? Are any of the present 
conditions to the exemptions provided in this Order unnecessary? If so, 
please specify and explain why such conditions are not needed.
    3. Whether ICE Trust ultimately should be required to register as a 
clearing agency under the Exchange Act. Why or why not?
Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/other.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number S7-05-09 on the subject line; or
     Use the Federal eRulemaking Portal (http://
www.regulations.gov/). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number S7-05-09. This file number 
should be included on the subject line if e-mail is used. To help us 
process and review your comments more efficiently, please use only one 
method. We will post all comments on the Commission's Internet Web site 
(http://www.sec.gov/rules/other.shtml). Comments are also available for 
public inspection and copying in the Commission's Public Reference 
Room, 100 F Street, NE., Washington, DC 20549, on official business 
days between the hours of 10 a.m. and 3 p.m. All comments received will 
be posted without change; we do not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly.

III. Conclusion

    It is hereby ordered, pursuant to Section 36(a) of the Exchange 
Act, that, until December 7, 2009:

(a) Exemption From Section 17A of the Exchange Act

    ICE US Trust LLC (``ICE Trust'') shall be exempt from Section 17A 
of the Exchange Act solely to perform the functions of a clearing 
agency for Cleared CDS (as defined in paragraph (e)(1) of this Order), 
subject to the following conditions:
    (1) ICE Trust shall make available on its Web site its annual 
audited financial statements.
    (2) ICE Trust shall keep and preserve at least one copy of all 
documents, including all correspondence, memoranda, papers, books, 
notices, accounts, and other such records as shall be made or received 
by it relating to its Cleared CDS clearance and settlement services. 
These records shall be kept for at least five years and for the first 
two years shall be held in an easily accessible place.
    (3) ICE Trust shall supply information and periodic reports 
relating to its Cleared CDS clearance and settlement services as may be 
reasonably requested by the Commission, and shall provide access to the 
Commission to conduct on-site inspections of all facilities (including 
automated systems and systems environment), records, and personnel 
related to ICE Trust's Cleared CDS clearance and settlement services.
    (4) ICE Trust shall notify the Commission, on a monthly basis, of 
any material disciplinary actions taken against any of its members 
utilizing its Cleared CDS clearance and settlement services, including 
the denial of services, fines, or penalties. ICE Trust shall notify the 
Commission promptly when ICE Trust involuntarily terminates the 
membership of an entity that is utilizing ICE Trust's Cleared CDS 
clearance and settlement services. Both notifications shall describe 
the facts and circumstances that led to the ICE Trust's disciplinary 
action.
    (5) ICE Trust notify the Commission of all changes to rules, 
procedures, and any other material events affecting its Cleared CDS 
clearance and settlement services, including its fee schedule and 
changes to risk management practices, the day before effectiveness or 
implementation of such rule changes or, in exigent circumstances, as 
promptly as reasonably practicable under the circumstances. All such 
rule changes will be posted on ICE Trust's Web site. Such notifications 
will not be deemed rule filings that require Commission approval.
    (6) ICE Trust shall provide the Commission with reports prepared by 
independent audit personnel that are generated in accordance with risk 
assessment of the areas set forth in the Commission's Automation Review 
Policy Statements. ICE Trust shall provide the Commission with 
(beginning in its first year of operation) its annual audited financial 
statements prepared by independent audit personnel.
    (7) ICE Trust shall report all significant systems outages to the 
Commission. If it appears that the outage may extend for 30 minutes or 
longer, ICE Trust shall report the systems outage immediately. If it 
appears that the outage will be resolved in less than 30 minutes, ICE 
Trust shall report the systems outage within a reasonable time after 
the outage has been resolved.
    (8) ICE Trust, directly or indirectly, shall make available to the 
public on terms that are fair and reasonable and not unreasonably 
discriminatory: (i) all end-of-day settlement prices and any other 
prices with respect to Cleared CDS that ICE Trust may establish to 
calculate mark-to-market margin requirements for ICE Trust 
Participants; and (ii) any other pricing or valuation information with 
respect to Cleared CDS as is published or distributed by ICE Trust.

(b) Exemption From Sections 5 and 6 of the Exchange Act

    (1) ICE Trust shall be exempt from the requirements of Sections 5 
and 6 of the Exchange Act and the rules and regulations thereunder in 
connection with its calculation of mark-to-market prices for open 
positions in Cleared CDS, subject to the following conditions:
    (i) ICE Trust shall report the following information with respect 
to the calculation of mark-to-market prices for Cleared CDS to the 
Commission within 30 days of the end of each quarter, and preserve such 
reports during the life of the enterprise and of any successor 
enterprise:
    (A) The total dollar volume of transactions executed during the 
quarter, broken down by reference entity, security, or index; and
    (B) The total unit volume and/or notional amount executed during 
the quarter, broken down by reference entity, security, or index;
    (ii) ICE Trust shall establish adequate safeguards and procedures 
to protect participants' confidential trading information. Such 
safeguards and procedures shall include: (A) Limiting access to the 
confidential trading information of participants to those employees of 
ICE Trust who are operating the system or responsible for its 
compliance with this exemption or any other applicable rules; and (B) 
implementing standards controlling employees of ICE Trust trading for 
their own accounts. ICE Trust must adopt and implement adequate 
oversight procedures to ensure that the safeguards and procedures 
established pursuant to this condition are followed; and
    (iii) ICE Trust shall satisfy the conditions of the temporary 
exemption from Section 17A of the Exchange Act

[[Page 10800]]

set forth in paragraphs (a)(1)-(8) of this Order.
    (2) Any ICE Trust Participant shall be exempt from the requirements 
of Section 5 of the Exchange Act to the extent such ICE Trust 
Participant uses any facility of ICE Trust to effect any transaction in 
Cleared CDS, or to report any such transaction, in connection with ICE 
Trust's clearance and risk management process for Cleared CDS.

(c) Exemption for ICE Trust, Certain ICE Trust Participants, and 
Certain Eligible Contract Participants

    (1) Persons eligible. The exemption in paragraph (c)(2) is 
available to:
    (i) ICE Trust;
    (ii) Any ICE Trust Participant (as defined in paragraph (e)(2) of 
this Order), which is not a broker or dealer registered under Section 
15(b) of the Exchange Act (other than paragraph (11) thereof); and
    (iii) Any eligible contract participant (as defined in Section 
1a(12) of the Commodity Exchange Act as in effect on the date of this 
Order (other than a person that is an eligible contract participant 
under paragraph (C) of that section)), other than: (A) an eligible 
contract participant that receives or holds funds or securities for the 
purpose of purchasing, selling, clearing, settling, or holding Cleared 
CDS positions for other persons; (B) an eligible contract participant 
that is a self-regulatory organization, as that term is defined in 
Section 3(a)(26) of the Exchange Act; or (C) a broker or dealer 
registered under Section 15(b) of the Exchange Act (other than 
paragraph (11) thereof).
    (2) Scope of exemption.
    (i) In general. Such persons generally shall, solely with respect 
to Cleared CDS, be exempt from the provisions of the Exchange Act and 
the rules and regulations thereunder that do not apply in connection 
with security-based swap agreements. Accordingly, under this exemption, 
those persons would remain subject to those Exchange Act requirements 
that explicitly are applicable in connection with security-based swap 
agreements (i.e., paragraphs (2) through (5) of Section 9(a), Section 
10(b), Section 15(c)(1), paragraphs (a) and (b) of Section 16, Section 
20(d) and Section 21A(a)(1) and the rules thereunder that explicitly 
are applicable to security-based swap agreements). All provisions of 
the Exchange Act related to the Commission's enforcement authority in 
connection with violations or potential violations of such provisions 
also remain applicable.
    (ii) Exclusions from exemption. The exemption in paragraph 
(c)(2)(i), however, does not extend to the following provisions under 
the Exchange Act:
    (A) Paragraphs (42), (43), (44), and (45) of Section 3(a);
    (B) Section 5;
    (C) Section 6;
    (D) Section 12 and the rules and regulations thereunder;
    (E) Section 13 and the rules and regulations thereunder;
    (F) Section 14 and the rules and regulations thereunder;
    (G) Paragraphs (4) and (6) of Section 15(b);
    (H) Section 15(d) and the rules and regulations thereunder;
    (I) Section 15C and the rules and regulations thereunder;
    (J) Section 16 and the rules and regulations thereunder; and
    (K) Section 17A (other than as provided in paragraph (a)).

(d) Exemption for Certain Registered Broker-Dealers

    A broker or dealer registered under Section 15(b) of the Exchange 
Act (other than paragraph (11) thereof) shall be exempt from the 
provisions of the Exchange Act and the rules and regulations thereunder 
specified in paragraph (c)(2), solely with respect to Cleared CDS, 
except:
    (1) Section 7(c);
    (2) Section 15(c)(3);
    (3) Section 17(a);
    (4) Section 17(b);
    (5) Regulation T, 12 CFR 200.1 et seq.;
    (6) Rule 15c3-1;
    (7) Rule 15c3-3;
    (8) Rule 17a-3;
    (9) Rule 17a-4;
    (10) Rule 17a-5; and
    (11) Rule 17a-13.

(e) Definitions

    For purposes of this Order:
    (1) ``Cleared CDS'' shall mean a credit default swap that is 
submitted (or offered, purchased, or sold on terms providing for 
submission) to ICE Trust, that is offered only to, purchased only by, 
and sold only to eligible contract participants (as defined in Section 
1a(12) of the Commodity Exchange Act as in effect on the date of this 
Order (other than a person that is an eligible contract participant 
under paragraph (C) of that section)), and in which:
    (i) The reference entity, the issuer of the reference security, or 
the reference security is one of the following:
    (A) An entity reporting under the Exchange Act, providing 
Securities Act Rule 144A(d)(4) information, or about which financial 
information is otherwise publicly available;
    (B) a foreign private issuer whose securities are listed outside 
the United States and that has its principal trading market outside the 
United States;
    (C) a foreign sovereign debt security;
    (D) an asset-backed security, as defined in Regulation AB, issued 
in a registered transaction with publicly available distribution 
reports; or
    (E) an asset-backed security issued or guaranteed by Fannie Mae, 
Freddie Mac or Ginnie Mae; or
    (ii) the reference index is an index in which 80 percent or more of 
the index's weighting is comprised of the entities or securities 
described in subparagraph (i).
    (2) ``ICE Trust Participant'' shall mean any participant in ICE 
Trust that submits Cleared CDS to ICE Trust for clearance and 
settlement exclusively (i) for its own account or (ii) for the account 
of an affiliate that controls, is controlled by, or is under common 
control with the participant in ICE Trust.

    By the Commission.
Elizabeth M. Murphy,
Secretary.
 [FR Doc. E9-5299 Filed 3-11-09; 8:45 am]

BILLING CODE 8011-01-P