Document ID: SEC-2010-1836-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2010-12-06T05:00Z

[Federal Register Volume 75, Number 233 (Monday, December 6, 2010)]
[Notices]
[Pages 75718-75719]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-30429]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63391; File No. SR-FINRA-2010-063]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Immediate Effectiveness of 
Proposed Rule Change To Extend to July 16, 2011, the Pilot Period for 
FINRA Rule 4240 (Margin Requirements for Credit Default Swaps)

November 30, 2010.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on November 22, 2010, 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 substantially 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 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 July 16, 2011, FINRA Rule 4240 
(Margin Requirements for Credit Default Swaps) on an interim pilot 
program basis. FINRA Rule 4240, as approved by the SEC on May 22, 2009, 
will expire on November 30, 2010. 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 below. Proposed new 
language is underlined; proposed deletions are in brackets:
* * * * *

4000. FINANCIAL AND OPERATIONAL RULES

* * * * *

4200. MARGIN

* * * * *

4240. Margin Requirements for Credit Default Swaps

    (a) Effective Period of Interim Pilot Program.
    This Rule establishes an interim pilot program (``Interim Pilot 
Program'') with respect to margin requirements for any transactions 
in credit default swaps executed by a member (regardless of the type 
of account in which the transaction is booked), including those in 
which the offsetting matching hedging transactions (``matching 
transactions'') are effected by the member in contracts that are 
cleared through the central counterparty clearing services of the 
Chicago Mercantile Exchange (``CME''). The Interim Pilot Program 
shall automatically expire on [November 30, 2010] July 16, 2011. For 
purposes of this Rule, the term ``credit default swap'' (``CDS'') 
shall mean any ``eligible credit default swap'' as defined in 
Securities Act Rule 239T(d), as well as any other CDS that would 
otherwise meet such definition but for being subject to individual 
negotiation, and the term ``transaction'' shall include any ongoing 
CDS position.
    (b) through (e) No Change.
    * * * Supplementary Material:
    .01 No Change.
* * * * *

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''). On September 21, 2009, FINRA extended the implementation of 
Rule 4240 to November 30, 2010.\5\
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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'').
    \5\ See Securities Exchange Act Release No. 60722 (September 25, 
2009), 74 FR 50856 (October 1, 2010) (Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change; File No. SR-FINRA-2009-063).
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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.\6\ Recently, the 
Commission has determined to extend the period for which certain of 
these actions are in effect.\7\ FINRA believes it

[[Page 75719]]

is appropriate to extend the implementation of the Interim Pilot 
Program accordingly, to July 16, 2011.\8\
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    \6\ 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); Securities Act Release No. 9063 (September 
14, 2009) (Extension of 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, 
L.L.C. 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).
    \7\ See Securities Act Release No. 9158 (November 19, 2010), 75 
FR 72260 (November 26, 2009) (Extension of Temporary Exemptions for 
Eligible Credit Default Swaps To Facilitate Operation of Central 
Counterparties To Clear and Settle Credit Default Swaps).
    \8\ 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 July 16, 
2011. FINRA is proposing to implement the proposed rule change 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,\9\ 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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    \9\ 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

    Written comments were neither solicited nor received.

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 \10\ and Rule 19b 
4(f)(6) thereunder.\11\
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6).
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    FINRA requests that the Commission waive the five-day pre-filing 
notice requirement specified in Rule 19b-4(f)(6)(iii) under the 
Act.\12\ FINRA proposes to make the proposed rule change operative on 
November 30, 2010.
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    \12\ 17 CFR 240.19b-4(f)(6)(iii). In addition, Rule 19b-
4(f)(6)(iii) requires a self-regulatory organization to submit to 
the Commission written notice of its intent to file the proposed 
rule change, along with a brief description and text of the proposed 
rule change, at least five business days prior to the date of filing 
of the proposed rule change, or such shorter time as designated by 
the Commission. The Commission has waived the five-day pre-filing 
period in this case.
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    FINRA has requested that the Commission waive the 30-day operative 
delay, so that the proposed rule change may become operative upon 
filing. The Commission hereby grants FINRA's request and believes that 
waiving the 30-day operative delay is consistent with the protection of 
investors and the public interest.\13\ This will allow the existing 
pilot program to continue without interruption and extend the benefits 
of a pilot program that the Commission approved and previously 
extended. For these reasons, the Commission designates the proposed 
rule change as effective and operative on November 30, 2010.
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    \13\ 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. 15 U.S.C. 78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend 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-2010-063 on the subject line.

Paper Comments

     Send paper comments in triplicate Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-FINRA-2010-063. 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 Web site 
viewing and printing 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-2010-063 
and should be submitted on or before December 27, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-30429 Filed 12-3-10; 8:45 am]
BILLING CODE 8011-01-P