Document ID: SEC-2011-1039-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Financial Industry Regulatory Authority, Inc.
Posted Date: 2011-07-20T04:00Z

[Federal Register Volume 76, Number 139 (Wednesday, July 20, 2011)]
[Notices]
[Pages 43360-43363]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-18221]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64892; File No. SR-FINRA-2011-034]

Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing and Order Granting Accelerated 
Approval of Proposed Rule Change To Amend FINRA Rule 4240 (Margin 
Requirements for Credit Default Swaps)

 July 14, 2011.
    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 July 11, 2011, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I and 
II, below, which Items have been prepared by FINRA. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons and is approving the proposed rule change on an 
accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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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 January 17, 2012 the implementation 
of FINRA Rule 4240 (Margin Requirements for Credit Default Swaps) on an 
interim pilot program basis and to make other revisions to update the 
rule. FINRA Rule 4240, as approved by the SEC on May 22, 2009, and as 
extended by FINRA on November 22, 2010, will expire on July 16, 2011. 
The rule implements an interim pilot program with respect to margin 
requirements for certain transactions in credit default swaps.
    The text of the proposed rule change is set forth below. Proposed 
new language is italicized; 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'')] a clearing agency or derivatives 
clearing organization that provides central counterparty clearing 
services using a margin methodology approved by FINRA as announced in a 
Regulatory Notice (``approved margin methodology''). The Interim Pilot 
Program shall automatically expire on [July 16, 2011] January 17, 2012. 
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,] include any product that is commonly known to the trade 
as a credit default swap and is a swap or security-based swap as 
defined pursuant to Section

[[Page 43361]]

1a(47) of the Commodity Exchange Act and Section 3(a)(68) of the 
Exchange Act, respectively, or the joint rules and guidance of the CFTC 
and the SEC and their staff. [and t]The term ``transaction'' shall 
include any ongoing CDS position.
    (b) Central Counterparty Clearing Arrangements.
    Any member, prior to establishing any clearing arrangement with 
respect to CDS transactions that makes use of any central counterparty 
clearing services provided by any clearing agency or derivatives 
clearing organization [, pursuant to Securities Act Rule 239T(a)(1),] 
must notify FINRA in advance in writing, in such manner as may be 
specified by FINRA in a Regulatory Notice.
    (c) Margin Requirements.
    (1) CDS Cleared [on the Chicago Mercantile Exchange] Through a 
Clearing Agency or Derivatives Clearing Organization Using an Approved 
Margin Methodology.
    Members shall require as a minimum for computing customer or 
broker-dealer margin, with respect to any customer or broker-dealer 
transaction in CDS with a member in which the member executes a 
matching transaction that makes use of the central counterparty 
clearing facilities of [the CME (``CME matching customer-side 
transaction'')] a clearing agency or derivatives clearing organization 
using an approved margin methodology pursuant to this Rule, the 
applicable margin pursuant to [CME rules (sometimes referred to in such 
rules as a ``performance bond'')] the rules of such clearing agency or 
derivatives clearing organization regardless of the type of account in 
which the transaction in CDS is booked. Members shall, based on the 
risk monitoring procedures and guidelines set forth in paragraph (d) of 
this Rule, determine whether the applicable [CME] clearing agency or 
derivatives clearing organization requirements are adequate with 
respect to their customer and broker-dealer accounts and the positions 
in those accounts and, where appropriate, increase such margin in 
excess of such minimum margin. For this purpose, members are permitted 
to use the margin requirements set forth in Supplementary Material .01 
of this Rule.
    The aggregate amount of margin the member collects from customers 
and broker-dealers for transactions in CDS must equal or exceed the 
aggregate amount of margin the member is required to post at [CME] the 
clearing agency or derivatives clearing organization with respect to 
those customer and broker-dealer transactions.
    [CME matching customer-side t]Transactions that are cleared through 
a clearing agency or derivatives clearing organization using an 
approved margin methodology pursuant to this Rule are not subject to 
the provisions of paragraph (c)(2) of this Rule.
    (2) CDS That Are Cleared on Central Counterparty Clearing 
Facilities That Do Not Use an Approved Margin Methodology [Other Than 
the CME] or That Settle Over-the-Counter (``OTC'').
    Members shall require, with respect to any transaction in CDS that 
makes use of central counterparty clearing facilities [other than the 
CME] that do not use an approved margin methodology pursuant to this 
Rule or that settle OTC, the applicable minimum margin as set forth in 
Supplementary Material .01 of this Rule regardless of the type of 
account in which the transaction in CDS is booked. However, members 
shall, based on the risk monitoring procedures and guidelines set forth 
in paragraph (d) of this Rule, determine whether such margin is 
adequate with respect to their customer and broker-dealer accounts and, 
where appropriate, increase such requirements.
    (d) 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,\3\ which 
implements an interim pilot program (the ``Interim Pilot Program'') 
with respect to margin requirements for certain transactions in credit 
default swaps (``CDS''). On November 22, 2010, FINRA extended the 
implementation of Rule 4240 to July 16, 2011.\4\
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    \3\ 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'').
    \4\ See Securities Exchange Act Release No. 63391 (November 30, 
2010), 75 FR 75718 (December 6, 2010) (Notice of Filing and 
Immediate Effectiveness of Proposed Rule Change; File No. SR-FINRA-
2010-063).
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    As explained in the Approval Order,\5\ FINRA Rule 4240, coterminous 
with certain Commission actions,\6\ is intended to address concerns 
arising from systemic risk posed by CDS, including, among other things, 
risks to the financial system arising from the lack of a central 
clearing counterparty to clear and settle CDS. On July 21, 2010, 
President Obama signed into law the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (the ``Dodd-Frank Act''),\7\ Title VII of which 
established a comprehensive new regulatory framework for swaps and 
security-based swaps, including certain CDS. The new legislation was 
intended among other things to enhance the authority of regulators to 
implement new rules designed to reduce risk, increase transparency, and 
promote market integrity with respect to such products.
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    \5\ See 74 FR 25588 through 25589.
    \6\ 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), 74 FR 47719 
(September 17, 2009) (Extension of Temporary Exemptions for Eligible 
Credit Default Swaps To Facilitate Operation of Central 
Counterparties To Clear and Settle Credit Default Swaps); Securities 
Act Release No. 9158 (November 19, 2010), 75 FR 72660 (November 26, 
2010) (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\ Public Law 111-203, 124 Stat. 1376 (2010).
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    FINRA believes it is appropriate to extend the Interim Pilot 
Program for a limited period, to January 17, 2012, pending the final 
implementation of new Commodity Futures Trading Commission (``CFTC'') 
and SEC rules pursuant to Title VII of the Dodd-Frank Act that would 
provide greater regulatory clarity as to margin requirements for the 
products addressed by FINRA Rule 4240.

[[Page 43362]]

    FINRA has revised the definition of ``CDS'' set forth in paragraph 
(a) of the Rule to reflect the effectiveness of the definitions of 
``swap'' and ``security-based swap'' in Section 1a(47) of the Commodity 
Exchange Act \8\ and Section 3(a)(68) of the Act,\9\ respectively, 
pursuant to the Dodd-Frank Act.
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    \8\ 7 U.S.C. 1a(47).
    \9\ 15 U.S.C. 78c(a)(68).
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    FINRA has revised FINRA Rule 4240(a) to clarify that the Interim 
Pilot Program applies with respect to margin requirements for any 
transactions in CDS executed by a member (regardless of the type of 
account in which the transaction is booked), including those in which 
the offsetting matching hedging transactions (``matching 
transactions'') are effected by the member in contracts that are 
cleared through a clearing agency or derivatives clearing organization 
that provides central counterparty clearing services using a margin 
methodology approved by FINRA as announced in a Regulatory Notice 
(``approved margin methodology''). FINRA believes that this serves the 
interest of regulatory efficiency and is consistent with the goals set 
forth in the Approval Order, which noted that FINRA would consider 
margin methodology proposals from central clearing counterparties and 
would amend Rule 4240 as appropriate.\10\
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    \10\ See 74 FR 25589. FINRA has made conforming revisions to 
paragraphs (b), (c)(1) and (c)(2) of the Rule. See Exhibit 5.
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    FINRA has requested the Commission to find good cause pursuant to 
Section 19(b)(2) of the Act \11\ for approving the proposed rule change 
prior to the 30th day after its publication in the Federal Register, 
such that FINRA can prevent FINRA Rule 4240 from lapsing and implement 
the proposed rule change on July 16, 2011. The proposed rule change 
will expire on January 17, 2012.
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    \11\ 15 U.S.C. 78s(b)(2).
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2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\12\ 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, and pending the final implementation of new CFTC and 
SEC rules pursuant to Title VII of the Dodd-Frank Act, the margin 
requirements set forth by the proposed rule change will help to 
stabilize the financial markets.
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    \12\ 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. Commission's Findings and Order Granting Accelerated Approval of a 
Proposed Rule Change

    FINRA has requested that the Commission find good cause pursuant to 
Section 19(b)(2) of the Act for approving the proposed rule change 
prior to the 30th day after publication in the Federal Register.\13\ 
The Commission finds good cause for approving the proposed rule change 
prior to the 30th day after the date of publication of notice of 
filing. The accelerated approval will, 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, and pending the final implementation of new CFTC and 
SEC rules pursuant to Title VII of the Dodd-Frank Act, help to 
stabilize the financial markets by setting forth margin requirements 
for certain transactions in CDS. The Commission believes the proposed 
revisions to paragraph (a) of FINRA Rule 4240 are consistent with the 
goals set forth in the Approval Order, which noted that FINRA would 
consider margin methodology proposals from central clearing 
counterparties and would amend Rule 4240 as appropriate.\14\
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    \13\ 15 U.S.C. 78s(b)(2).
    \14\ See Section II.A.1. of this release.
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    In particular, the Commission finds that the proposed rule change 
is consistent with Section 15A(b)(6) of the Act, which requires, among 
other things, that FINRA rules 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.\15\ This allows the existing pilot program to continue 
without interruption and extend the benefits of a pilot program that 
the Commission has previously approved and extended.
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    \15\ In approving this rule change, the Commission notes that it 
has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
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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-2011-034 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-FINRA-2011-034. 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

[[Page 43363]]

should submit only information that you wish to make available 
publicly.
    All submissions should refer to File Number SR-FINRA-2011-034 and 
should be submitted on or before August 10, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-18221 Filed 7-19-11; 8:45 am]
BILLING CODE 8011-01-P