Document ID: SEC-2009-1747-0001
Agency: sec
Document Type: Notice
Title: Order Extending and Modifying Temporary Exemptions Under the Securities Exchange Act of 1934 in Connection With Request From ICE Trust U.S.
Posted Date: 2009-12-10T05:00Z

[Federal Register: December 10, 2009 (Volume 74, Number 236)]
[Notices]               
[Page 65554-65568]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10de09-88]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61119; File No. S7-05-09]

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

December 4, 2009.

I. Introduction

    Over the past year, the Securities and Exchange Commission 
(``Commission'') has taken multiple actions to protect investors and 
ensure the integrity of the nation's securities markets, including 
actions \1\ designed to address concerns related to the market in 
credit default swaps (``CDS'').\2\ The over-the-counter (``OTC'') 
market for CDS has been a source of particular concern to us and other 
financial regulators, and we have recognized that facilitating the 
establishment of central counterparties (``CCPs'') for CDS can play an 
important role in reducing the counterparty risks inherent in the CDS 
market, and thus can help mitigate potential systemic impacts. We have 
therefore found that taking action to help foster the prompt 
development of CCPs, including granting temporary conditional 
exemptions from certain provisions of the federal securities laws, is 
in the public interest.\3\
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    \1\ See generally Securities Exchange Act Release No. 60372 
(Jul. 23, 2009), 74 FR 37748 (Jul. 29, 2009) (temporary exemptions 
in connection with CDS clearing by ICE Clear Europe Limited), 
Securities Exchange Act Release No. 60373 (Jul. 23, 2009), 74 FR 
37740 (Jul. 29, 2009) (temporary exemptions in connection with CDS 
clearing by Eurex Clearing AG), Securities Exchange Act Release No. 
59578 (Mar. 13, 2009), 74 FR 11781 (Mar. 19, 2009) (temporary 
exemptions in connection with CDS clearing by Chicago Mercantile 
Exchange Inc.), Securities Exchange Act Release No. 59527 (Mar. 6, 
2009), 74 FR 10791 (Mar. 12, 2009) (temporary exemptions in 
connection with CDS clearing by ICE US Trust LLC (now ``ICE Trust 
U.S. LLC'')) (hereinafter, the ``March ICE Trust Order''), 
Securities Exchange Act Release No. 59164 (Dec. 24, 2008), 74 FR 139 
(Jan. 2, 2009) (temporary exemptions in connection with CDS clearing 
by LIFFE A&M and LCH.Clearnet Ltd.) and other Commission actions 
discussed therein.
    In addition, we have issued interim final temporary rules that 
provide exemptions under the Securities Act of 1933 and the 
Securities Exchange Act of 1934 for CDS to facilitate the operation 
of one or more central counterparties for the CDS market. See 
Securities Act Release No. 8999 (Jan. 14, 2009), 74 FR 3967 (Jan. 
22, 2009) (initial approval); Securities Act Release No. 9063 (Sep. 
14, 2009), 74 FR 47719 (Sep. 17, 2009) (extension until Nov. 30, 
2010).
    Further, the Commission has provided temporary exemptions in 
connection with Sections 5 and 6 of the Securities Exchange Act of 
1934 for transactions in CDS. See Securities Exchange Act Release 
No. 59165 (Dec. 24, 2008), 74 FR 133 (Jan. 2, 2009) (initial 
exemption); Securities Exchange Act Release No. 60718 (Sep. 25, 
2009), 74 FR 50862 (Oct. 1, 2009) (extension until Mar. 24, 2010).
    \2\ 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 (``reference entity'') or 
on a particular security or other debt obligation, or an index of 
several such entities, securities, or obligations. The obligation of 
a seller to make 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 take positions on the 
volatility in credit spreads during times of economic uncertainty.
    Growth in the CDS market has coincided with a significant rise 
in the types and number of entities participating in the CDS market. 
CDS were initially created to meet the demand of banking 
institutions looking to hedge and diversify the credit risk 
attendant to their lending activities. However, financial 
institutions such as insurance companies, pension funds, securities 
firms, and hedge funds have entered the CDS market.
    \3\ See generally actions referenced in note 1, supra.
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    The Commission's authority over the 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

[[Page 65555]]

of the Gramm-Leach-Bliley Act.\4\ For 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 
temporary conditional exemptions from certain requirements of the 
Exchange Act.
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    \4\ 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 provides a number of benefits, by helping to 
promote efficiency and reduce risk in the CDS market and among its 
participants, contributing generally to the goal of market stability, 
and by requiring maintenance of records of CDS transactions that would 
aid the Commission's efforts to prevent and detect fraud and other 
abusive market practices.\5\
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    \5\ See generally actions referenced in note 1, supra.
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    Earlier this year, the Commission granted temporary conditional 
exemptions to ICE Trust U.S. LLC (``ICE Trust'') and certain related 
parties to permit ICE Trust to clear and settle CDS transactions.\6\ 
Those exemptions are scheduled to expire on December 7, 2009. ICE Trust 
has requested that the Commission extend the exemptions, and expand 
them to address activities in connection with ICE Trust clearing CDS 
transactions of its members' customers (in addition to clearing CDS 
transactions of members and their affiliates, as permitted by the 
current exemption).\7\
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    \6\ For purposes of 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 Federal National Mortgage 
Association (``Fannie Mae''), the Federal Home Loan Mortgage 
Corporation (``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 4, supra.
    \7\ See Letter from Kevin McClear, ICE Trust, to Elizabeth 
Murphy, Secretary, Commission, Dec. 4, 2009 (``December 2009 
request'').
     Market participants have committed to achieve customer access 
to CDS clearing by December 15, 2009. See Letter from dealers and 
buy-side institutions to Federal Reserve Bank of New York (Jun. 2, 
2009) (http://www.newyorkfed.org/newsevents/news/markets/2009/
060209letter.pdf) (``It is our goal to achieve buy-side access to 
CDS clearing (through either direct CCP membership or customer 
clearing) with customer initial margin segregation and portability 
of customer transactions no later than December 15, 2009.'').
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    Based on the facts presented and the representations made on behalf 
of ICE Trust,\8\ and for the reasons discussed in this Order, and 
subject to certain conditions, the Commission is extending the 
exemption granted in the March ICE Trust Order, and is expanding it to 
accommodate customer clearing. Specifically, the Commission is 
extending the temporary ICE Trust conditional exemption from clearing 
agency registration 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 is extending the temporary exemption 
of eligible contract participants and others from certain Exchange Act 
requirements with respect to non-excluded CDS cleared by ICE Trust. In 
addition, this order conditionally exempts on a temporary basis ICE 
Trust clearing members from broker-dealer registration requirements and 
related requirements in connection with using ICE Trust to clear CDS 
transactions of their customers. The Commission further is extending 
the temporary exemption of ICE Trust and certain of its clearing 
members 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. These 
exemptions are temporary and will expire on March 7, 2010.
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    \8\ See December 2009 request. The exemptions we are granting 
today are based on all of the representations made in the December 
2009 request on behalf of ICE Trust, which incorporate 
representations made on behalf of ICE Trust as part of the request 
that preceded our earlier relief in connection with CDS clearing by 
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 that 
previously had been cleared pursuant to the exemptions would remain 
unchanged, but no new positions could be established pursuant to the 
exemptions until all of the underlying representations were again 
accurate.
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II. Discussion

A. Description of ICE Trust's Activities to Date and Proposed Customer 
Clearing Activities

    ICE Trust's request for an extension of its current temporary 
exemptions and for an expansion of those exemptions to accommodate 
clearing of customer CDS transactions describes how ICE Trust has 
cleared CDS to date and how the proposed arrangements for central 
clearing of customer CDS transactions would operate.\9\ The request 
also makes representations about the safeguards associated with those 
arrangements, as described below.\10\
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    \9\ See December 2009 request, supra note 7. The description in 
this Order of ICE Trust's proposed activities also is based on the 
provisions of ICE Trust's rules.
    \10\ ICE Trust has represented that there have been no material 
changes to the representations made in the letter that preceded the 
relief we initially granted to it, apart from the proposal to clear 
customer CDS transactions, and ICE Trust has incorporated the 
representations made in its earlier letter into the current request 
for relief.
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1. ICE Trust CDS Clearing Activity to Date
    ICE Trust has cleared the proprietary index CDS transactions of its 
clearing members since March 9, 2009, through acceptance and novation 
of those transactions.\11\ As of October 30, 2009, ICE Trust had 
cleared approximately $2.64 trillion notional amount of CDS contracts 
based on indices of securities. ICE Trust intends in the near future to 
also clear single-name CDS contracts based on individual reference 
entities or securities.
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    \11\ ICE Trust novates those cleared proprietary CDS 
transactions by becoming the seller of credit protection to the 
clearing member that is the buyer under the CDS, and the buyer of 
credit protection from the clearing member that is the seller under 
the CDS. ICE Trust collects initial and mark-to-market margin to 
secure each clearing member's obligations to ICE Trust under the 
cleared transactions, and ICE Trust has established a guaranty fund 
to provide additional financial protection in the case of clearing 
member default.
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    In clearing CDS transactions, ICE Trust has made use of procedures, 
described in the initial request for relief, whereby it has 
periodically required participants to execute certain CDS trades at the 
applicable end-of-day settlement price to enhance the reliability of 
end-of-day settlement

[[Page 65556]]

prices submitted as part of the daily mark-to-market process.\12\ ICE 
Trust represents that it wishes to continue periodically requiring 
clearing members to execute certain CDS trades in this manner, and has 
requested the extension of the applicable relief.
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    \12\ In particular, as part of this mark-to-market process, ICE 
Trust periodically requires clearing members to execute certain CDS 
trades at the price where the prices submitted by clearing members 
cross. ICE Trust requires these trades on 30 random days during any 
year and at the end of each quarter.
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2. Proposed Activity Clearing CDS Transactions of Members' Clients
    ICE Trust has proposed a ``Non-Member Framework'' for clearing the 
CDS transactions of its members' clients. Under this framework, client 
positions could be submitted to ICE Trust for clearing in one of two 
ways. First, under the ``bilateral model,'' clients could execute a CDS 
transaction directly with a clearing member (acting in a principal 
capacity), followed by the clearing member submitting a trade to ICE 
Trust with terms corresponding to the client-member trade; if the 
latter trade is accepted by ICE Trust,\13\ two positions would be 
created within ICE Trust--a Client Position of the clearing member that 
mirrors the transaction between the client and the clearing member, and 
an offsetting House Position of the clearing member.\14\
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    \13\ ICE Trust will accept all CDS that meet the standards set 
forth in its rules, unless it determines not to accept the 
transaction for risk management reasons.
    \14\ ``Client Positions'' are cleared CDS transactions between 
ICE Trust and the clearing member that are offset or mirrored on a 
back-to-back basis by CDS transactions between the clearing member 
and the client. ``House Positions'' are all other cleared CDS 
transactions of a member, or affiliate, and ICE Trust.
     ICE Trust would not have market exposure in connection with 
that transaction because it would have two offsetting positions with 
the clearing member.
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    Alternatively, under the ``prime broker'' or ``designated clearing 
member'' (or ``DCM'') model, a client could agree to a CDS transaction 
with an ICE Trust clearing member (``executing dealer'') other than the 
member that clears the client's transactions. Then, pursuant to a give-
up or similar agreement, the clearing member (as prime broker) and the 
executing dealer would enter into a trade that is submitted to ICE 
Trust for clearing, and the clearing member and the client would 
simultaneously enter into a trade.\15\ The net result would be that the 
client's clearing member and the client would be counterparties to one 
transaction, the clearing member would have a Client Position with ICE 
Trust, and the executing dealer would have a House Position with ICE 
Trust.\16\
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    \15\ ICE Trust expects that, initially, client transactions 
likely will be submitted for clearing using the DCM model. These 
transactions will be subject to DCM Standard Terms, published by ICE 
Trust, that will provide procedures and timing requirements for 
submitting transactions to clearing. ICE Trust expects that the 
bilateral model will be used initially for back-loading of existing 
transactions into central clearing.
    \16\ As with the bilateral model, ICE Trust would not have 
market exposure in connection with the cleared transaction. In this 
situation the clearing member's Client Position with ICE Trust would 
offset the executing dealer's House Position with ICE Trust.
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    ICE Trust has no rule requiring an executing dealer to be a 
clearing member. ICE Trust Clearing Rule 314, moreover, requires that 
ICE Trust ensure that there shall be open access to its clearing system 
for all execution venues and trade processing platforms.\17\
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    \17\ ICE Trust Clearing Rule 314. Based on market feedback, ICE 
Trust anticipates that, initially, executing dealers will be 
Clearing Members. ICE Trust does not prohibit an executing dealer 
that is not a Clearing Member from having a trade submitted for 
clearance at ICE Trust through the Clearing Member. However, 
currently none of the ``authorized trade processing platforms'' 
permit, as an operational matter, such an arrangement. ICE Trust 
Clearing Rules, however, do provide for open access to its clearing 
system for all execution venues and trade processing platforms.
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    ICE Trust expects that transactions under the DCM model will be 
submitted to ICE Trust through one or more ``authorized trade 
processing platforms'' that will facilitate the affirmation of the 
trade terms by the client, executing dealer and DCM, as well as the 
electronic submission of the affirmed trade to ICE Trust for 
clearing.\18\ ICE Trust also expects that the platform would submit, to 
the relevant parties, notice of ICE Trust's acceptance or rejection of 
the trade. Authorized trade processing platforms may provide additional 
back-office or similar services to clearing members or clients. ICE 
Trust expects to enter into arrangements to accept transactions from 
multiple authorized trade processing platforms.\19\
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    \18\ Under this approach, for example, when a client and 
executing dealer agree to the terms of a transaction (including that 
the transaction should be submitted to ICE Trust for clearing), the 
executing dealer will submit the trade terms to the authorized trade 
processing platform, which will forward those terms to the client 
for affirmation. Once the client has affirmed the trade, the 
platform will forward those terms to the DCM designated by the 
client for affirmation. Once all three parties have affirmed the 
transaction, it will be submitted to ICE Trust for clearing. ICE 
Trust will determine whether to accept or reject the submitted trade 
in accordance with its risk management policies and procedures.
    \19\ ICE Trust states that it has committed to ensure that there 
will be open access to ICE Trust's clearing system for platforms 
that meet ICE Trust's qualifications and criteria to provide the 
necessary services.
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    Under the framework for clearing client transactions, ICE Trust 
would have no direct relationship with, or liability to, clients. To 
facilitate the transfer or liquidation of client-member transactions in 
the event of clearing member default, however, clearing members would 
pledge to ICE Trust the clearing members' rights under the client-
member transactions and their rights to related margin, to secure the 
clearing members' obligations to ICE Trust under the related client 
positions, and the clearing member's obligations to other clients under 
other client-member transactions.
    The cleared CDS transaction between the clearing member and its 
client will be documented pursuant to a negotiated International Swaps 
and Derivatives Association (``ISDA'') master agreement between those 
parties, supplemented by a standard annex approved by ICE Trust. This 
standard annex would treat these cleared client-member CDS transactions 
differently from other derivatives transactions between those parties: 
it would make the cleared CDS transactions subject to separate ICE 
Trust margin requirements, it would incorporate a standard definition 
of clearing member default (based on a determination by ICE Trust), and 
it would specify procedures for remedies in the case of clearing member 
default. As discussed below, under the standard annex the client could 
also agree that certain default portability rules would apply.\20\
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    \20\ See part II.A.4.c, infra.
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3. Framework for Collection and Protection of Client Margin
    ICE Trust states that the Non-Member Framework is intended to 
protect clients from default by their clearing members, particularly 
with regard to their initial margin. Also, the Non-Member Framework, 
and central clearing of CDS generally, is intended to enhance the 
financial stability of CDS markets as a whole.\21\
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    \21\ ICE Trust states that it will implement a program to 
monitor for its clearing members' compliance with this segregation 
framework.
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a. Margin Requirements for Clearing Members and Clients
    ICE Trust rules will require clearing members to collect initial 
and variation margin from clients for CDS transactions cleared by ICE 
Trust, in an amount at least equal to the amount of margin ICE Trust 
would require on a gross basis for the related Client Positions. 
Clearing members would be able to collect additional margin from 
customers beyond what ICE Trust rules require.\22\
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    \22\ As discussed below, this Order sets forth conditions 
intended to protect all of the margin that clearing members collect 
from their clients, including this type of ``additional'' margin.

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[[Page 65557]]

    Clearing members will be permitted to calculate the initial margin 
collected from individual clients on a net basis, across all of the CDS 
transactions of that customer that are cleared through ICE Trust. 
Clearing members, however, would not be permitted to net across 
multiple clients cleared through ICE Trust. This required ``ICE Gross 
Margin'' that a clearing member collects from a client must be pledged 
by the client in favor of the clearing member, and must not be subject 
to liens or other encumbrances in favor of third parties.
    Under ICE Trust rules, clearing members must post the ICE Gross 
Margin they collect from clients to ICE Trust, as custodian, promptly 
upon receipt, and it is expected that clearing members would transfer 
this margin on the business day of receipt.\23\ Prior to posting, the 
clearing member must maintain that ICE Gross Margin in a segregated 
client omnibus account or in an individual segregated client account, 
on its own books or on the books of a custodian, pursuant to which the 
clearing member would receive the margin in an agency or custodial 
capacity.
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    \23\ ICE Trust states, however, that this may not be feasible 
when the clearing member receives the client margin toward the end 
of the business day.
    Clearing members and clients may agree that the clearing member 
will post with ICE Trust a different type of collateral than what 
the client posts with ICE Trust, and that the collateral posted with 
ICE Trust will become the client's property. Thus, for example, a 
client and clearing member may agree that cash collateral that the 
client posts to the clearing member may be invested in U.S. Treasury 
securities, and posted to ICE Trust as such.
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    ICE Trust will determine a net initial margin requirement for each 
clearing member with regard to the cleared CDS positions of all of the 
member's clients. Clearing members could use collateral posted by 
clients to satisfy this ``ICE Net Margin'' obligation.\24\
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    \24\ Clearing members also may initially satisfy this obligation 
with their proprietary assets, pending receipt of required margin 
from their clients.
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b. Treatment of Client Margin Required Pursuant to ICE Trust Rules
    Clearing members must post all the margin they collect from 
customers pursuant to ICE Trust requirements--both the ICE Net Margin 
and the remainder of the margin that clearing members collect from 
their clients pursuant to ICE Trust rules--to the Custodial Client 
Omnibus Margin Account \25\ that would be maintained at ICE Trust or a 
subcustodian.
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    \25\ The ``Custodial Client Omnibus Margin Account'' is one or 
more accounts maintained by or on behalf of ICE Trust ``with respect 
to a Participant for the purposes of holding on an omnibus basis 
margin of Non-Participant Parties posted to that Participant in 
respect of their respective Minimum ICE Trust Required Initial 
Margin and Participant Excess Margin requirements, as applicable.'' 
ICE Trust rules state that ICE Trust may establish a separate 
account or subaccount with respect to a portion of the Custodial 
Client Omnibus Margin Account corresponding to the Net Client 
Omnibus Margin Amount.
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    The Custodial Client Omnibus Margin Account will be held for the 
benefit of all clients of the relevant clearing member (or for the 
clearing member as agent or custodian on behalf of such clients), and 
will be segregated from other assets of the clearing member (including 
assets in its proprietary ``House Account''). The Custodial Client 
Omnibus Margin Account will consist of a cash collateral subaccount for 
cash margin and a custody subaccount for securities collateral. ICE 
Trust will maintain title to cash in the cash collateral subaccount 
(ICE Trust, however, will be obligated to return the cash as required 
for the benefit of the relevant client or of the clearing member as the 
client's agency or custodian), and ICE Trust will hold assets in the 
custody subaccount as custodian (subject to a security interest in 
favor of the clearing member or ICE Trust as applicable). Assets in the 
Custodial Client Omnibus Margin Account may be invested in a range of 
investments as permitted by ICE Trust's Custodial Asset Policies,\26\ 
and the clearing member and its client may agree how the return on 
those investments may be distributed between them. ICE Trust rules will 
require clearing members to maintain records of the identity of the 
clients, the margin they post, the transfer of those assets to the 
Custodial Client Omnibus Margin Account and the use of that margin.
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    \26\ ICE Trust states that these generally include assets of the 
type allowed under CFTC Rule 1.25. However, a narrower range of 
assets is acceptable margin for satisfying the net margin 
requirement. This includes only cash in specified currencies and G-7 
government debt for initial margin, and only cash for mark-to-market 
margin.
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c. Treatment of additional margin that clearing members collect from 
clients beyond ICE Trust requirements
    Clearing members may collect margin from clients, in connection 
with Cleared CDS transactions, in excess of the margin that ICE Trust 
rules require they collect. ICE Trust permits this ``additional'' 
margin to be posted to the Custodial Client Omnibus Margin Account, but 
does not require that it be posted to that account. Under the 
conditions of this Order's temporary exemption from certain broker-
dealer related requirements of the Exchange Act, however, such 
``additional'' margin must be posted either to the Custodial Client 
Omnibus Margin Account, or else to a third-party custodian that is 
unaffiliated with the clearing member.\27\ The temporary exemption from 
those broker-dealer related requirements is unavailable to any clearing 
member that fails to segregate customer collateral in that manner.
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    \27\ See Part II.E, infra.
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d. Treatment of Variation Margin
    ICE Trust states that the amount of variation margin that must be 
provided to a client, or by a client, will be determined daily for that 
client's portfolio based on ICE Trust's end-of-day settlement price 
determinations. ICE Trust further states that in the event that ICE 
Trust owes variation margin to a clearing member in respect of client 
positions that have moved in the client's favor, the standard annex 
would provide that the clearing member has a corresponding obligation 
to provide variation margin in favor of clients.\28\
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    \28\ Over the duration of this temporary exemption, the staff 
intends to evaluate the protections afforded to clients' mark-to-
market profits associated with Cleared CDS positions, and to 
consider the potential benefits of requiring clearing members to 
segregate clients' variation margin in connection with Cleared CDS 
positions.
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4. Default and Portability Rules
a. Termination Amounts
    In the event a client-member transaction is terminated due to 
clearing member default, termination amounts owed by a client on CDS 
transactions cleared by ICE Trust would not be netted against 
termination amounts owed with respect to the client's other trades with 
that clearing member. This is intended to facilitate portability of 
positions.
    Moreover, in the event of member default, ICE Trust would undertake 
a close-out process that separately would calculate net termination 
with respect to the closeout of the clearing member's House Positions 
and its Client Positions. ICE Trust would not undertake this process, 
however, in the event that the defaulting clearing member's receiver 
(such as the Federal Deposit Insurance Corporation or similar 
authority) transfers the relevant positions to another non-defaulting 
entity in accordance with applicable law.
    The rules generally would not permit netting between a clearing 
member's Client Positions and House Positions; however, ICE Trust would 
offset any amount that the clearing member owes to ICE Trust in respect 
of Client Positions against any amount that ICE Trust owes to the 
clearing member in respect of House Positions.
    If a clearing member default is due to a default resulting from a 
client's position, ICE Trust may use the margin

[[Page 65558]]

posted to the clearing member's Custodial Client Omnibus Margin Account 
up to the amount of the ICE Net Margin requirement.\29\ ICE Trust will 
not be able to access the remainder of the assets of a non-defaulting 
client in the account in amounts above the net margin requirement.\30\ 
The Commission notes that, as a result of these rules, clients of a 
clearing member are subject to the risk of loss resulting from the 
default of another client of that clearing member, up to the amount of 
the clearing member's net margin requirement.
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    \29\ ICE Trust cannot use a client's positions in this account 
if the clearing member's default was the result of its proprietary 
activities, rather than the result of a default resulting from a 
client's position.
    In the event of a clearing member's default resulting from a 
Client Position, net losses to ICE Trust would be paid from the 
following sources in order: (i) Any margin of the defaulting client 
held in the Custodial Client Omnibus Margin Account, to the extent 
of that client's obligations to the clearing member; (ii) amounts 
received from clients under their client-member transactions; (iii) 
the defaulting clearing member's house margin; (iv) the defaulting 
clearing member's contribution to the guaranty fund; (v) the 
defaulting clearing member's Custodial Client Omnibus Margin Account 
up to the amount of the net margin requirement; and (vi) other 
guaranty fund contributions. ICE Trust would not need to apply these 
assets to the extent it can close out or replace the defaulting 
clearing member's transactions without loss to ICE Trust.
    \30\ ICE Trust, however, could apply all of the margin that a 
defaulting client has posted into the account.
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b. Pre-Default Portability
    ICE Trust rules require clearing members to agree to the transfer 
of client-member transactions and related positions upon client 
request, provided that the client obtains a new clearing member willing 
to accept the positions. In connection with that transfer, ICE Trust 
would move related margin between the Custodial Client Omnibus Margin 
Accounts of the two clearing members.
c. Post-Default Portability
    If a client agrees to the application of the default rules set 
forth in the standard annex, it would consent that, in the event of the 
clearing member's default, ICE Trust may transfer client-member 
transactions to a new clearing member, or otherwise establish 
replacement transactions.\31\ The client also would agree not to 
exercise its rights to terminate during the transfer period.\32\
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    \31\ Under the standard annex, only the client--and not the 
clearing member--can elect as to whether the default portability 
rules will apply to the cleared transaction.
    If the client does not agree to the use of the default 
portability rules, then the customer could apply the liquidation 
procedures discussed below in part II.A.4.d upon the clearing 
member's default.
    \32\ The transfer period will be limited to three business days 
or fewer.
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    If the clearing member is in default, ICE Trust rules would permit 
ICE Trust to transfer, or arrange for the transfer of, the defaulting 
clearing member's client positions and related transactions and margin 
to a new clearing member. Alternatively, ICE Trust could terminate the 
existing transactions and establish new positions with the new clearing 
member. ICE Trust may attempt to transfer some or all of the client-
member transactions. Also, ICE Trust may (but would not be obligated 
to) take into account client prearrangements for the use of one or more 
``backup'' clearing members to which their transactions would be 
transferred in the event their primary clearing member defaults.
d. Liquidation Procedures
    If ICE Trust is unable to transfer or terminate and replace client-
member transactions during the transfer period, the client may 
terminate the client-member transactions as provided by the terms of 
the agreement.\33\ ICE Trust then would determine the close-out price 
for the client positions and the client-member transaction.
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    \33\ The client alternatively may opt out of the liquidation 
procedures, in which case the client-member transactions also will 
be terminated.
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    If a client owes the clearing member with respect to the cleared 
CDS transactions, the client's margin in the Custodial Client Omnibus 
Margin Account will be applied to satisfy that obligation, and 
thereafter would be available to pay amounts owed to ICE Trust in 
connection with the related client positions and other clients in 
respect of their client-member transactions. Conversely, clients owed 
by the clearing member on a net basis will have a claim for that 
amount, together with their pro rata share of margin being used to 
satisfy the ICE Net Margin Requirement.\34\
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    \34\ Clients will have available, in respect of their Net 
Termination Claims, an amount equal to the sum of: (i) The remaining 
amount of the ICE Net Margin Requirement after application by ICE 
Trust together with any net amounts paid by ICE Trust in respect of 
the termination of Client Positions, plus (ii) any termination 
amounts paid by Clients that is not applied by ICE Trust, plus (iii) 
the amount of any client's excess margin applied to its obligations. 
If these proceeds are insufficient to pay all Net Termination 
Claims, clients will share in the proceeds pro rata, based on their 
respective claims.
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    Clients will be separately entitled to the return of their 
remaining excess margin in the Custodial Client Omnibus Margin Account, 
except to the extent the margin is applied to satisfy the client's 
obligation to the clearing member.\35\ Clients will share in the assets 
in the Custodial Client Omnibus Margin Account in proportion of their 
claims, but will not be entitled to the return of specific assets in 
that account.
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    \35\ The Standard Annex provides that if the clearing member is 
in default and the Client owes a net termination payable, amounts 
the client owes to the clearing member cannot be netted with amounts 
the clearing member owes to the Client in respect of any non-cleared 
Client position. Funds that the client owes to the clearing member 
in respect of this net termination payable secure the clearing 
member's obligations in favor of ICE Trust and as such will be paid 
directly to ICE Trust. Conversely, where the client has a net 
termination claim against the clearing member, the client may net 
the amount owed to the client against amounts owed by the client in 
respect of a non-cleared position.
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5. Other Clearing Member Requirements Related to Customer Clearing
    ICE Trust states that before offering the Non-Member Framework, it 
will adopt a requirement that clearing members subject to the framework 
are regulated by: (i) A signatory to the International Organization of 
Securities Commissions (``IOSCO'') Multilateral Memorandum of 
Understanding Concerning Consultation and Cooperation and the Exchange 
of Information, or (ii) a signatory to a bilateral arrangement with the 
Commission for enforcement cooperation.

B. Extended Temporary Conditional Exemption From Clearing Agency 
Registration Requirement

    On March 6, 2009, in connection with its efforts to facilitate the 
establishment of one or more central counterparties (``CCP'') for 
Cleared CDS, the Commission issued the March ICE Trust Order, 
conditionally exempting ICE Trust from clearing agency registration 
under Section 17A of the Exchange Act on a temporary basis. Subject to 
the conditions in that order, ICE Trust is permitted to act as a CCP 
for Cleared CDS by novating trades of non-excluded CDS that are 
securities and generating money and settlement obligations for 
participants without having to register with the Commission as a 
clearing agency. The March ICE Trust Order expires on December 7, 2009. 
Pursuant to its authority under Section 36 of the Exchange Act,\36\ for 
the reasons described herein, the Commission is

[[Page 65559]]

extending the exemption granted in that Order until March 7, 2010.
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    \36\ 15 U.S.C. 78mm. 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.
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    In the March ICE Trust order, the Commission recognized the need to 
ensure the prompt establishment of ICE Trust as a CCP for CDS 
transactions. The Commission also recognized the need to ensure that 
important elements of Section 17A of the Exchange Act, which sets forth 
the framework for the regulation and operation of the U.S. clearance 
and settlement system for securities, apply to the non-excluded CDS 
market. Accordingly, the temporary exemption in the March ICE Trust 
Order was subject to a number of conditions designed to enable 
Commission staff to monitor ICE Trust's clearance and settlement of CDS 
transactions.\37\ Moreover, the temporary exemption in that order in 
part was based on ICE Trust's representation that it met the standards 
set forth in the Committee on Payment and Settlement Systems (``CPSS'') 
and IOSCO report entitled: Recommendation for Central Counterparties 
(``RCCP'').\38\ 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 funds and monitor its users' trading. 
This framework is generally consistent with the requirements of Section 
17A of the Exchange Act.
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    \37\ See Securities Exchange Act Release No. 59527 (Mar. 6, 
2009), 74 FR 10791 (Mar. 12, 2009).
    \38\ 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 Federal Reserve Board, and the Commodity Futures 
Trading Commission.
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    The Commission believes that continuing to facilitate the central 
clearing of CDS transactions--including customer CDS transactions--
through a temporary conditional exemption from Section 17A would 
provide important risk management and systemic benefits by avoiding an 
interruption in those CCP clearance and settlement services. Any 
interruption in CCP clearance and settlement services for CDS 
transactions would eliminate in the future the benefits ICE Trust 
provides to the non-excluded CDS market during the exemptive period. 
Accordingly, and consistent with our findings in the March ICE Trust 
Order, we find pursuant to Section 36 of the Exchange Act that it is 
necessary and appropriate in the public interest and is consistent with 
the protection of investors for the Commission to extend, until March 
7, 2010, the relief provided from the clearing agency registration 
requirements of Section 17A by the March ICE Trust Order.
    Our action today balances the aim of facilitating ICE Trust's 
continued service as a CCP for non-excluded CDS transactions with 
ensuring that important elements of Commission oversight are applied to 
the non-excluded CDS market. The continued use of temporary exemptions 
will permit the Commission to continue to develop direct experience 
with the non-excluded CDS market. During the extended exemptive period, 
the Commission will continue to monitor closely the impact of the CCPs 
on the CDS market. In particular, the Commission will seek to assure 
itself that ICE Trust does not act in an 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.
    This temporary extension of the March ICE Trust Order also is 
designed to assure that--as represented in the request on behalf of ICE 
Trust--information will continue to 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 clearance and settlement process 
for the CDS.\39\ The Commission believes continued operation of ICE 
Trust consistent with the conditions of this Order will facilitate the 
availability to market participants of information that should enable 
them to make better informed investment decisions and better value and 
evaluate their Cleared CDS and counterparty exposures relative to a 
market for CDS that is not centrally cleared.
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    \39\ The Commission believes 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 evaluate appropriately the risks relating to a 
particular investment and make more informed investment decisions. 
See generally 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 extension of the March ICE Trust Order is subject to 
a number of conditions that are designed to enable Commission staff to 
continue 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 \40\ 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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    \40\ 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. S7-12-91.
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    In addition, this temporary extension of the March ICE Trust Order 
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 
clearing members; 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 temporary continued exemption from registration as a clearing 
agency.
    As a CCP, ICE Trust collects and processes information about CDS 
transactions, prices, and positions from all of its participants. With 
this information, a CCP calculates and disseminates current values for 
open positions for the purpose of setting

[[Page 65560]]

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.

C. Extended Temporary Conditional Exemption From Exchange Registration 
Requirements

    When we initially provided exemptions in connection with CDS 
clearing by ICE Trust, we granted a temporary conditional exemption to 
ICE Trust from the requirements of 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. We also temporarily exempted ICE Trust participants from 
the prohibitions of Section 5 to the extent that they use ICE Trust to 
effect or report any transaction in Cleared CDS in connection with ICE 
Trust's calculation of mark-to-market prices for open positions in 
Cleared CDS. Section 5 of the Exchange Act contains certain 
restrictions relating to the registration of national securities 
exchanges,\41\ while Section 6 provides the procedures for registering 
as a national securities exchange.\42\
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    \41\ In particular, Section 5 states:
    It 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 * * *.
    15 U.S.C. 78e.
    \42\ 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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    We granted these temporary exemptions to facilitate the 
establishment of ICE Trust's end-of-day settlement price process. ICE 
Trust had represented that in connection with its clearing and risk 
management process it would 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 the participants. ICE Trust 
stated that as part of this mark-to-market process, it periodically 
would require participants to execute certain CDS trades at the 
applicable end-of-day settlement price, to help ensure that the prices 
that the participants submit reflect their assessment of the value of 
each open position in Cleared CDS, thereby reducing risk by helping ICE 
Trust to impose appropriate margin requirements.
    As part of its current request, ICE Trust has stated that since it 
has commenced clearing operations for Cleared CDS, it has periodically 
required ICE Trust clearing members to execute certain CDS trades at 
the applicable end-of-day settlement price. ICE Trust further 
represents that it wishes to continue periodically requiring clearing 
members to execute certain CDS trades in this manner.
    As discussed above, we have found in general that it is necessary 
or appropriate in the public interest, and is consistent with the 
protection of investors, to facilitate continued CDS clearing by ICE 
Trust. Consistent with that finding--and in reliance on ICE Trust's 
representation that the end-of-day settlement pricing process, 
including the periodically required trading, is integral to its risk 
management--we further find that it is necessary or appropriate in the 
public interest, and is consistent with the protection of investors 
that we exercise our authority under Section 36 of the Exchange Act to 
extend, until March 7, 2010, ICE Trust's temporary exemption from 
Sections 5 and 6 of the Exchange Act in connection with its calculation 
of mark-to-market prices for open positions in Cleared CDS, and ICE 
Trust clearing members' temporary exemption from Section 5 with respect 
to such trading activity.\43\
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    \43\ We are making a technical modification to this exemption so 
it refers to ICE Trust's clearing members rather than ``ICE Trust 
Participants.'' The latter defined term was used in our earlier 
Order consistent with the scope of that Order, and the term no 
longer is necessary given the expansion of our exemptive relief to 
accommodate customer clearing by ICE Trust. See note 46, infra.
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    The temporary exemption for ICE Trust will continue to be subject 
to three conditions. First, ICE Trust must report the following 
information with respect to its 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 and maintain 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) establishing and maintaining standards controlling employees of ICE 
Trust trading for their own accounts. ICE Trust must establish and 
maintain 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 clearing 
member 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, thus promoting participation in central clearing of CDS.
    Third, ICE Trust must comply with the conditions to the temporary 
exemption from Section 17A of the Exchange Act in this Order, given 
that this exemption is granted in the context of our goal of continuing 
to facilitate ICE Trust's ability to act as a CCP for non-excluded CDS, 
and given ICE Trust's representation that the end-of-day settlement 
pricing process, including the periodically required trading, is 
integral to its risk management.

D. Modified and Extended Temporary Conditional General Exemption for 
ICE Trust and Certain Eligible Contract Participants

    As we recognized when we initially provided temporary exemptions in 
connection with CDS clearing by ICE Trust, 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. We also recognized that it is important that 
the antifraud provisions of the Exchange Act apply to transactions in 
non-excluded CDS, particularly given that OTC transactions subject to 
individual negotiation that qualify as security-based swap

[[Page 65561]]

agreements already are subject to those provisions.\44\
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    \44\ 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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    As a result, we concluded 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. Consistent with that conclusion, we 
temporarily exempted ICE Trust, and certain members and eligible 
contract participants from a number of Exchange Act requirements, while 
excluding certain enforcement-related and other provisions from the 
scope of the exemption.
    We believe that continuing to facilitate the central clearing of 
CDS transactions by ICE Trust through this type of temporary exemption 
will provide important risk management benefits and systemic benefits. 
We also believe that facilitating the central clearing of customer CDS 
transactions, subject to the conditions in this Order, will provide an 
opportunity for the customers of ICE Trust clearing members to control 
counterparty risk.
    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 March 7, 2010 from certain 
requirements under the Exchange Act. To account for the additional 
relief we are granting in connection with customer CDS clearing by ICE 
Trust, we are modifying the parameters of the relief we previously 
granted.
    As revised, this temporary exemption applies to ICE Trust and to 
any eligible contract participants \45\--including any ICE Trust 
clearing member \46\--other than: Eligible contract participants that 
are self-regulatory organizations; or eligible contract participants 
that are registered brokers or dealers.\47\
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    \45\ 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.
    \46\ The prior exemption specifically applied to any ``ICE Trust 
Participant,'' which was defined to exclude those members that 
submitted customer CDS trades for clearing. In light of our 
expansion of the ICE Trust relief to accommodate customer clearing, 
we no longer are limiting the exemption in that way, and are not 
using the ``ICE Trust Participant'' definition.
    \47\ A separate temporary exemption addresses the Cleared CDS 
activities of registered broker-dealers. See Part II.F, 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.
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    As before, under this temporary exemption, and solely with respect 
to Cleared CDS, those persons generally are exempt from the provisions 
of the Exchange Act and the rules and regulations thereunder that do 
not apply to security-based swap agreements. Thus, those persons would 
still be subject to those Exchange Act requirements that explicitly are 
applicable in connection with security-based swap agreements.\48\ 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.\49\ 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.
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    \48\ See note 44, supra.
    \49\ Thus, for example, the Commission retains the ability to 
investigate potential violations and bring enforcement actions in 
the federal courts as well as in administrative proceedings, and to 
seek the full panoply of remedies available in such cases.
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    In light of the temporary conditional exemption--discussed below--
that we are granting from certain Exchange Act requirements related to 
broker-dealers, we are modifying this temporary exemption by excluding 
from its scope the broker-dealer registration requirements of Section 
15(a)(1),\50\ and the other requirements of the Exchange Act, including 
paragraphs (4) and (6) of Section 15(b),\51\ and the rules and 
regulations thereunder that apply to a broker or dealer that is not 
registered with the Commission.
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    \50\ 15 U.S.C. 78o(a)(1).
    \51\ 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.
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    Consistent with our earlier exemptions, and for the same reasons, 
this temporary exemption also does not extend to: the exchange 
registration requirements of Exchange Act Sections 5 and 6; \52\ the 
clearing agency registration requirements of Exchange Act Section 17A; 
the requirements of Exchange Act Sections 12, 13, 14, 15(d), and 16; 
\53\ or certain provisions related to government securities.\54\
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    \52\ These are subject to a separate temporary class exemption. 
See note 1, 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).
    This Order also includes a separate temporary exemption from 
Sections 5 and 6 in connection with the mark-to-market process of 
ICE Trust, discussed above, at note 41 and accompanying text.
    \53\ 15 U.S.C. 78l, 78m, 78n, 78o(d), 78p. Eligible contract 
participants and other persons instead should refer to the interim 
final temporary rules issued by the Commission. See note 1, supra.
    \54\ 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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    To take advantage of this temporary exemption from Exchange Act 
requirements, moreover, ICE Trust clearing members must be in material 
compliance with ICE Trust rules. Also, to help promote compliance with 
the exemption--discussed below--that we are granting from certain 
Exchange Act requirements specifically related to broker-dealers, this 
more general Exchange Act exemption is conditioned on any ICE Trust 
clearing member that participates in the clearing of Cleared CDS 
transactions on behalf of other persons annually providing a 
certification to ICE Trust that attests to whether the clearing member 
is relying on the temporary exemption from broker-dealer related 
requirements described below.\55\
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    \55\ This condition requiring clearing members to convey 
information to ICE Trust as a repository for regulators, and other 
conditions of this Order that require clearing members or others to 
convey information (e.g., an audit report related to the clearing 
member's compliance with exemptive conditions) to ICE Trust, does 
not impose upon ICE Trust any independent duty to audit or otherwise 
review that information. These conditions also do not impose on ICE 
Trust any independent fiduciary or other obligation to any customer 
of a clearing member.

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[[Page 65562]]

E. Conditional Temporary Exemption from Broker-Dealer Related 
Requirements for Certain Clearing Members of ICE Trust and Others

    The March ICE Trust Order did not address clearing of customer 
transactions by ICE Trust, and that order thus did not provide ICE 
Trust clearing members that hold customer collateral in connection with 
cleared CDS transactions with an exemption from broker-dealer 
requirements under the Exchange Act. Absent an exception or exemption, 
persons that effect transactions in non-excluded CDS that are 
securities may be required to register as broker-dealers pursuant to 
Section 15(a)(1) of the Exchange Act.\56\ Moreover, certain other 
requirements of the Exchange Act could apply to such persons, as 
broker-dealers, regardless of whether they are registered with the 
Commission.
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    \56\ Section 15(a)(1) generally provides that, absent an 
exception or exemption, a broker or dealer that uses the mails or 
any means of interstate commerce to effect transactions in, or to 
induce or attempt to induce the purchase or sale of, any security 
must register with the Commission.
    Section 3(a)(4) of the Exchange Act generally defines a 
``broker'' as ``any person engaged in the business of effecting 
transactions in securities for the account of others,'' but excludes 
certain bank securities activities. 15 U.S.C. 78c(a)(4). Section 
3(a)(5) of the Exchange Act generally defines a ``dealer'' as ``any 
person engaged in the business of buying and selling securities for 
his own account,'' but includes exceptions for certain bank 
activities. 15 U.S.C. 78c(a)(5). Exchange Act Section 3(a)(6) 
defines a ``bank'' as a bank or savings association that is directly 
supervised and examined by state or federal banking authorities 
(with certain additional requirements for banks and savings 
associations that are not chartered by a federal authority or a 
member of the Federal Reserve System). 15 U.S.C. 78c(a)(6).
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    It is consistent with our investor protection mandate to require 
securities intermediaries that receive or hold funds and securities on 
behalf of others to comply with standards that safeguard the interests 
of their customers. For example, a registered broker-dealer is required 
to segregate assets held on behalf of customers from proprietary assets 
because segregation will assist customers in recovering assets in the 
event the broker-dealer fails. To the extent that funds and securities 
are not segregated, they could be used by an intermediary to fund its 
own business and could be attached to satisfy debts of the intermediary 
if it were to fail.\57\ Moreover, the maintenance of adequate capital 
and liquidity protects customers, CCPs and other market participants. 
Adequate books and records (including both transactional and position 
records) are necessary to facilitate day to day operations as well as 
to help resolve situations in which an intermediary fails and either a 
regulatory authority or receiver is forced to liquidate the firm. 
Appropriate records also are necessary to allow examiners to review for 
improper activities, such as insider trading or fraud.
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    \57\ In the context of the December 15 commitment for customer 
CDS clearing, an ISDA buy-side/sell-side committee issued a report 
extensively analyzing the legal issues associated with segregating 
the collateral that customers post with members. See Distilled 
Report (Jul. 13, 2009) (http: //www.newyorkfed.org/markets/
Distilled_Report.pdf); Full Report (Jun. 30, 2009) (http://
www.newyorkfed.org/markets/Full_Report.pdf); see also Press 
Release, ``New York Fed Welcomes CDS Central Counterparty Legal 
Analysis'' (Jul. 13, 2009) (http://www.newyorkfed.org/newsevents/
news/markets/2009/an090713.html) (```Segregation and portability are 
key elements in building robust central counterparties. We requested 
the analysis because market participants were not making enough 
progress to analyze and address these buy-side issues. This is a 
good first step and, as we move the OTC derivatives market to 
central clearing, we will work to strengthen the regulatory and 
legal environment for buy-side clearing,' said William C. Dudley, 
president of the New York Fed.'').
---------------------------------------------------------------------------

    At the same time, requiring intermediaries that receive or hold 
funds and securities on behalf of customers in connection with 
transactions in non-excluded CDS to register as broker-dealers may 
deter the use of CCPs in customer CDS transactions, which would cause 
customers to lose the counterparty risk benefits of central clearing, 
and would lessen the systemic risk reduction benefits associated with 
central clearing.
    Those factors argue in favor of flexibility in applying the 
requirements of the Exchange Act to these intermediaries, conditioned 
on requiring the intermediaries to take reasonable steps to help 
increase the likelihood that their customers would be protected in the 
event the intermediary became insolvent, even if those safeguards are 
as not as strong as those required of registered broker-dealers. This 
requires us to balance the goals of promoting the central clearing of 
customer CDS transactions against the goal of protecting customers, and 
to be mindful that these conditions cannot provide legal certainty that 
customer collateral in fact would be protected in the event an ICE 
Trust clearing member were to become insolvent.
    In granting the temporary exemption, we also are relying on ICE 
Trust's representation that before offering the Non-Member Framework, 
it will adopt a requirement that non-U.S. clearing members subject to 
the framework are regulated by: (i) A signatory to the IOSCO 
Multilateral Memorandum of Understanding Concerning Consultation and 
Cooperation and the Exchange of Information, or (ii) a signatory to a 
bilateral arrangement with the Commission for enforcement 
cooperation.\58\
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    \58\ Non-U.S. clearing members that do not meet these criteria 
would not be eligible to rely on this exemption.
---------------------------------------------------------------------------

    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 a conditional exemption until March 7, 2010, 
with respect to certain Exchange Act requirements related to broker-
dealers. This exemption is available to ICE Trust clearing members 
other than registered broker-dealers. This exemption also is available 
to any eligible contract participant, other than a registered broker-
dealer, that does not receive or hold funds or securities for the 
purpose of purchasing, selling, clearing, settling, or holding Cleared 
CDS positions for other persons.\59\ Solely with respect to Cleared 
CDS, those persons temporarily will be exempt from the broker-dealer 
registration requirements of Section 15(a)(1), and the other 
requirements of the Exchange Act (other than paragraphs (4) and (6) of 
Section 15(b)) \60\ and the

[[Page 65563]]

rules and regulations thereunder that apply to a broker or dealer that 
is not registered with the Commission.
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    \59\ In some circumstances, an eligible contract participant 
that does not hold customer funds or securities nonetheless may act 
as a dealer in securities transactions, or as a broker (such as an 
inter-dealer broker).
     Solely for purposes of this requirement, an eligible contract 
participant would not be viewed as receiving or holding funds or 
securities for purpose of purchasing, selling, clearing, settling, 
or holding Cleared CDS positions for other persons, if the other 
persons involved in the transaction would not be considered 
``customers'' of the eligible contract participant under the 
analysis used for determining whether certain persons would be 
considered ``customers'' of a broker-dealer under Exchange Act Rule 
15c3-3(a)(1). 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).
    \60\ As noted above, see note 51, supra, Exchange Act Sections 
15(b)(4) and 15(b)(6) grant the Commission authority to take action 
against broker-dealers and associated persons in certain situations. 
Accordingly, while this exemption from broker-dealer requirements 
generally extends to persons that act as broker-dealers in the 
market for Cleared CDS (potentially including inter-dealer brokers 
that do not hold funds or securities for others), such persons may 
be subject to actions under Sections 15(b)(4) and (b)(6) of the 
Exchange Act.
    In addition, such persons 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.
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    For all ICE Trust clearing members--regardless of whether they 
receive or hold customer collateral in connection with Cleared CDS--
this temporary exemption is conditioned on the clearing member being in 
material compliance with ICE Trust's rules, as well as on the clearing 
member being in compliance with applicable laws and regulations 
relating to capital, liquidity, and segregation of customers' funds and 
securities (and related books and records provisions) with respect to 
Cleared CDS.
    For ICE Trust clearing members that receive or hold funds or 
securities of U.S. persons (or who receive or hold funds or securities 
of any person in the case of a U.S. clearing member)--other than for an 
affiliate that controls, is controlled by, or is under common control 
with the clearing member--in connection with Cleared CDS, this 
temporary exemption further is conditioned on the customer not being a 
natural person, and on the clearing member providing certain risk 
disclosures to the customer.\61\
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    \61\ The clearing member must disclose that it is not regulated 
by the Commission and that U.S. broker-dealer segregation 
requirements and protections under the Securities Investor 
Protection Act will not apply, that the insolvency law of the 
applicable jurisdiction may affect the customer's ability to recover 
funds and securities or the speed of any such recovery, and (if 
applicable) that non-U.S. members may be subject to an insolvency 
regime that is materially different from that applicable to U.S. 
persons.
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    Also, those clearing members that receive or hold such customer 
funds or securities must transfer those funds and securities, as 
promptly as practicable after receipt, to either the Custodial Client 
Omnibus Margin Account at ICE Trust \62\ or an account held by a third-
party custodian, as described below.
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    \62\ Cash collateral transferred to ICE Trust may be invested in 
``Eligible Custodial Assets,'' as defined in ICE Trust's ``Custodial 
Asset Policies.'' See note 26 supra and accompanying text. Also, 
collateral transferred to ICE Trust may be held at a subcustodian.
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    Collateral that is held at a third-party custodian, moreover, must 
either be held: (1) In the name of the customer, subject to an 
agreement in which the customer, the clearing member and the custodian 
are parties, acknowledging that the assets held therein are customer 
assets used to collateralize obligations of the customer to the 
clearing member, and that the assets held in the account may not 
otherwise be pledged or rehypothecated by the clearing member or the 
custodian; or (2) in an omnibus account for which the clearing member 
maintains daily records as to the amount owing to each customer, and 
which is subject to an agreement between the clearing member and the 
custodian specifying: (i) That all account assets are held for the 
exclusive benefit of the clearing member's customers and are being kept 
separate from any other accounts that the clearing member maintains 
with the custodian; (ii) that the account assets may not be used as 
security for a loan to the clearing member by the custodian, and shall 
be subject to no right, charge, security interest, lien, or claim of 
any kind in favor of the custodian or any person claiming through the 
custodian; and (iii) that the assets may not otherwise be pledged or 
rehypothecated by the clearing member or the custodian.\63\ Under 
either approach, the third-party custodian cannot be affiliated with 
the clearing member.\64\ Moreover, if the third-party custodian is a 
U.S. entity, it must be a bank (as that term is defined in Section 
3(a)(6) of the Exchange Act), have total regulatory capital of at least 
$1 billion,\65\ and have been approved to engage in a trust business by 
an appropriate regulatory agency. A custodian that is not a U.S. entity 
must have regulatory capital of at least $1 billion,\66\ and must 
provide the clearing member, the customer and ICE Trust with a legal 
opinion providing that the account assets are subject to regulatory 
requirements in the custodian's home jurisdiction designed to protect, 
and provide for the prompt return of, custodial assets in the event of 
the custodian's insolvency, and that the assets held in that account 
reasonably could be expected to be legally separate from the clearing 
member's assets in the event of the clearing member's insolvency. Also, 
cash collateral posted with the third-party custodian may be invested 
in other assets, consistent with the investment policies that govern 
collateral held at ICE Trust.\67\ Finally, a clearing member that uses 
a third-party custodian to hold customer collateral must notify ICE 
Trust of that use.
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    \63\ We do not contemplate that either of these approaches 
involving the use of a third-party custodian would interfere with 
the ability of a clearing member and its customer to agree as to how 
any return or losses earned on those assets would be distributed 
between the clearing member and its customer.
    Also, the restriction in both approaches on the clearing 
member's and the custodian's ability to rehypothecate these customer 
funds and securities does not preclude that collateral from being 
transferred to ICE Trust as necessary to satisfy variation margin 
requirements in connection with the customer's CDS position.
    \64\ For purposes of the Order, an ``affiliated person'' of a 
clearing member mean any person who directly or indirectly controls 
a clearing member or any person who is directly or indirectly 
controlled by or under common control with a clearing member; 
ownership of 10 percent or more of an entity's common stock will be 
deemed prima facie control of that entity. This standard is 
analogous to the standard used to identify affiliated persons of 
broker-dealers under Exchange Act Rule 15c3-3(a)(13), 17 CFR 
240.15c3-3(a)(13).
    \65\ In particular, custodians that are U.S. entities must have 
total capital, as calculated to meet the applicable requirements 
imposed by the entity's appropriate regulatory agency, of at least 
$1 billion. The term ``appropriate regulatory agency'' is defined in 
Section 3(a)(34) of the Exchange Act, 15 U.S.C. 78c(a)(34)).
    \66\ Custodians that are non-U.S. entities, particularly must 
have total capital, as calculated to meet the applicable 
requirements imposed by the foreign financial regulatory authority 
of at least $1 billion. The term ``foreign financial regulatory 
authority'' is defined in Section 3(a)(52) of the Exchange Act, 15 
U.S.C. 78c(a)(52)).
    \67\ See note 26, supra.
---------------------------------------------------------------------------

    To the extent there is any delay in the clearing member 
transferring such funds and securities to ICE Trust or a third-party 
custodian,\68\ the clearing member must effectively segregate the 
collateral in a way that, pursuant to applicable law, could reasonably 
be expected to effectively protect the collateral from the clearing 
member's creditors. The clearing member may not permit customers to 
``opt out'' of such segregation even if applicable regulations or laws 
otherwise would permit such ``opt out.''
---------------------------------------------------------------------------

    \68\ This provision is intended to address short-term technology 
or operational issues. ICE Trust rules require collateral to be 
transferred promptly on receipt, with the expectation that margin 
would be transferred on the same business day.
---------------------------------------------------------------------------

    To facilitate compliance with the segregation practices that are 
required as a condition to this temporary exemption, the clearing 
member also must annually provide ICE Trust with a self-assessment that 
it is in compliance with the requirements, along with a report by the 
clearing member's independent third-party auditor that attests to that 
assessment. The report must be dated the same date as the clearing 
member's annual audit report (but may be separate from it), and must be 
produced in accordance with the standards that the auditor follows in 
auditing the clearing member's financial statements.
    Finally, to support these segregation practices and enhance the 
ability to detect and deter circumstances in which clearing members 
fail to segregate customer collateral consistent with the exemption, 
this temporary exemption is conditioned on the clearing member

[[Page 65564]]

agreeing to provide the Commission with access to information related 
to Cleared CDS transactions.\69\ In particular, the clearing member 
would provide the Commission (upon request and subject to agreements 
reached between the Commission or the U.S. Government and an 
appropriate foreign securities authority \70\) with information or 
documents within the clearing member's possession, custody, or control, 
as well as testimony of clearing member personnel and assistance in 
taking the evidence of other persons, that relates to Cleared CDS 
transactions. If, after the clearing member has exercised its best 
efforts to provide this information (including requesting the 
appropriate governmental body and, if legally necessary, its 
customers), the clearing member nonetheless is prohibited from 
providing the information by applicable foreign law or regulations, 
this temporary exemption shall not longer be available to the clearing 
member.\71\
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    \69\ This requirement for clearing members to make information 
available to the Commission is consistent with a requirement in 
Exchange Act Rule 15a-6, which exempts certain foreign broker-
dealers from registering with the Commission. See Exchange Act Rule 
15a-6(a)(3)(i)(B).
    \70\ The term ``foreign securities authority'' is defined in 
Section 3(a)(50) of the Exchange Act, 15 U.S.C. 78c(a)(50).
    \71\ Consistent with the discussion above as to the loss of an 
exemption due to an underlying representation no longer being 
accurate, see note 8, supra, if a clearing member were to lose the 
benefit of this exemption due to the failure to provide information 
to the Commission as the result of a prohibition by an applicable 
foreign law or regulation, the legal status of existing open 
positions in non-excluded CDS associated with those clearing members 
and its customers would remain unchanged, but the clearing member 
could not establish new CDS positions pursuant to the exemption.
---------------------------------------------------------------------------

    We recognize that requiring clearing members that receive or hold 
customer collateral to satisfy these conditions will not guarantee that 
a customer would receive the return of its collateral in the event of a 
clearing member's insolvency, particularly in light of the fact-
specific nature of the insolvency process and the multiplicity of 
insolvency regimes that may apply to ICE Trust's members clearing for 
U.S. customers. We believe, however, that these are reasonable steps 
for increasing the likelihood that customers would be able to access 
collateral in such an insolvency event. We also recognize that these 
customers generally may be expected to be sophisticated market 
participants that should be able to weigh the risks associated with 
entering into arrangements with intermediaries that are not registered 
broker-dealers, particularly in light of the disclosure required as a 
condition to this temporary exemption.

F. Extended Temporary General Exemption for Certain Registered Broker-
Dealers

    When we initially provided exemptions in connection with CDS 
clearing by ICE Trust, we granted limited exemptions from Exchange Act 
requirements to registered broker-dealers in connection with their 
activities involving Cleared CDS. In crafting these temporary 
exemptions, we balanced the need to avoid creating disincentives to the 
prompt use of CCPs against the critical role that certain broker-
dealers play in promoting market integrity and protecting customers 
(including broker-dealer customers that are not involved with CDS 
transactions).
    In light of the risk management and systemic benefits in continuing 
to facilitate CDS clearing by ICE Trust through targeted exemptions to 
registered broker-dealers, the Commission finds pursuant to Section 36 
of the Exchange Act that it is necessary or appropriate in the public 
interest and is consistent with the protection of investors to exercise 
its authority to extend this temporary registered broker-dealer 
exemption from certain Exchange Act requirements until March 7, 
2010.\72\
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    \72\ The temporary exemptions addressed above--with regard to 
ICE Trust, certain clearing members 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 Exchange Act Section 15(b)(11)). 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).
---------------------------------------------------------------------------

    Consistent with the temporary exemptions discussed above, and 
solely with respect to Cleared CDS, we are temporarily exempting 
registered broker-dealers from provisions of the Exchange Act and the 
rules and regulations thereunder that do not apply to security-based 
swap agreements. As discussed 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.\73\ 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.\74\
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    \73\ See notes 44 and 49, 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.
    \74\ We also are not exempting those members from provisions 
related to government securities, as discussed above.
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    Further we are not exempting registered broker-dealers from the 
following additional provisions under the Exchange Act: (1) Section 
7(c),\75\ regarding the unlawful extension of credit by broker-dealers; 
(2) Section 15(c)(3),\76\ regarding the use of unlawful or manipulative 
devices by broker-dealers; (3) Section 17(a),\77\ regarding broker-
dealer obligations to make, keep and furnish information; (4) Section 
17(b),\78\ regarding broker-dealer records subject to examination; (5) 
Regulation T,\79\ 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.\80\ 
Registered broker-dealers must 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.\81\
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    \75\ 15 U.S.C. 78g(c).
    \76\ 15 U.S.C. 78o(c)(3).
    \77\ 15 U.S.C. 78q(a).
    \78\ 15 U.S.C. 78q(b).
    \79\ 12 CFR 220.1 et seq.
    \80\ Solely for purposes of this temporary 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.
    \81\ Indeed, Congress directed the Commission to promulgate 
broker-dealer financial responsibility rules, including rules 
relating to custody, the use of customer securities, the use of 
customers' deposits or credit balances, and the establishment of 
minimum financial requirements.
---------------------------------------------------------------------------

G. Solicitation of Comments

    When we granted our initial exemptions relief in connection with 
CDS clearing by ICE Trust, we solicited comment on all aspects of the 
exemptions, and specifically requested

[[Page 65565]]

comment as to the duration of the temporary exemptions, the 
appropriateness of the exemptive conditions, and whether ICE Trust 
should be required to register as a clearing agency under the Exchange 
Act. We received no comments in response to this request.
    In connection with this Order extending the exemptions granted in 
connection with CDS clearing by ICE Trust, and expanding that relief to 
accommodate central clearing of customer CDS transactions, we reiterate 
our request for comments on all aspects of the exemptions. We 
particularly request comments as to the relief we are granting in 
connection with customer clearing, including whether ICE Trust members 
that clear customer CDS transactions should be required to register as 
broker-dealers, whether the conditions that we have placed on the 
relief adequately protect customer funds and securities from the threat 
posed by clearing member insolvency, whether additional conditions or 
requirements are appropriate to promote compliance with the 
requirements of the exemptions, and what, if any, additional conditions 
would be appropriate. We also particularly request comment on whether 
additional conditions, such as a segregation requirement, are necessary 
to protect customers' mark-to-market profits associated with Cleared 
CDS transactions that are held at clearing members; in that regard, 
commenters particularly are invited to discuss whether, in practice, 
there are impediments to customers receiving such mark-to-market 
profits from their clearing members promptly after they are earned.
    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 March 7, 2010:
    (a) Exemption from Section 17A of the Exchange Act.
    ICE Trust U.S. 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 (f)(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 ICE Trust's disciplinary 
action.
    (5) ICE Trust shall 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 (beginning in 
its first year of operation) with 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 clearing 
members; 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

[[Page 65566]]

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 and maintain adequate safeguards and 
procedures to protect clearing members' confidential trading 
information. Such safeguards and procedures shall include:
    (A) Limiting access to the confidential trading information of 
clearing members 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) establishing and maintaining standards controlling employees of 
ICE Trust trading for their own accounts. ICE Trust must establish and 
maintain 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 set forth in paragraphs 
(a)(1)--(8) of this Order.
    (2) Any ICE Trust clearing member shall be exempt from the 
requirements of Section 5 of the Exchange Act to the extent such ICE 
Trust clearing member 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, ICE Trust clearing members, and 
certain eligible contract participants.
    (1) Persons eligible. The exemption in paragraph (c)(2) is 
available to:
    (i) ICE Trust; and
    (ii) 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)), including any ICE Trust clearing 
member, other than:
    (A) 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
    (B) 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. Subject to the conditions specified in paragraph 
(c)(3) of this subsection, 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 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) The broker-dealer registration requirements of Section 
15(a)(1), and the other requirements of the Exchange Act (including 
paragraphs (4) and (6) of Section 15(b)) and the rules and regulations 
thereunder that apply to a broker or dealer that is not registered with 
the Commission;
    (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)).
    (3) Conditions for ICE Trust clearing members.
    (i) Any ICE Trust clearing member relying on this exemption must be 
in material compliance with the rules of ICE Trust.
    (ii) Any ICE Trust clearing member relying on this exemption that 
participates in the clearing of Cleared CDS transactions on behalf of 
other persons must annually provide a certification to ICE Trust that 
attests to whether the clearing member is relying on the exemption from 
broker-dealer related requirements set forth in paragraph (d) of this 
Order.
    (d) Exemption from broker-dealer related requirements for ICE Trust 
clearing members and certain eligible contract participants.
    (1) Persons eligible. The exemption in paragraph (d)(2) is 
available to:
    (i) Any ICE Trust clearing member (other than one that is 
registered as a broker or dealer under Section 15(b) of the Exchange 
Act (other than paragraph (11) thereof)); and
    (ii) Any eligible contract participant that does not receive or 
hold funds or securities for the purpose of purchasing, selling, 
clearing, settling, or holding Cleared CDS positions for other persons 
(other than one that is registered as a broker or dealer under Section 
15(b) of the Exchange Act (other than paragraph (11) thereof)).
    (2) Scope of exemption. The persons described in paragraph (d)(1) 
shall, solely with respect to Cleared CDS, be exempt from the broker-
dealer registration requirements of Section 15(a)(1) and the other 
requirements of the Exchange Act (other than Sections 15(b)(4) and 
15(b)(6)) and the rules and regulations thereunder that apply to a 
broker or dealer that is not registered with the Commission, subject to 
the conditions set forth in paragraph (d)(3) with respect to ICE Trust 
clearing members.
    (3) Conditions for ICE Trust clearing members.
    (i) General condition for ICE Trust clearing members. An ICE Trust 
clearing member relying on this exemption must be in material 
compliance with the rules of ICE Trust, and also must be in material 
compliance with applicable laws and regulations relating to capital, 
liquidity, and segregation of customers' funds and securities (and 
related books and records provisions) with respect to Cleared CDS.
    (ii) Additional conditions for ICE Trust clearing members that 
receive or hold customer funds or securities. Any ICE Trust clearing 
member that receives or holds funds or securities for the purpose of 
purchasing, selling, clearing, settling, or holding Cleared CDS 
positions for U.S. persons (or for any person if the clearing member is 
a U.S. clearing member)--other than for an affiliate that controls, is 
controlled by, or is under common control with the clearing member--
also shall comply with the following conditions with respect to such 
activities:
    (A) The U.S. person (or any person if the clearing member is a U.S. 
clearing member) for whom the clearing member

[[Page 65567]]

receives or holds such funds or securities shall not be natural 
persons;
    (B) The clearing member shall disclose to such U.S. person (or to 
any such person if the clearing member is a U.S. clearing member) that 
the clearing member is not regulated by the Commission and that U.S. 
broker-dealer segregation requirements and protections under the 
Securities Investor Protection Act will not apply to any funds or 
securities held by the clearing member, that the insolvency law of the 
applicable jurisdiction may affect such persons' ability to recover 
funds and securities, or the speed of any such recovery, in an 
insolvency proceeding, and, if applicable, that non-U.S. clearing 
members may be subject to an insolvency regime that is materially 
different from that applicable to U.S. persons;
    (C) As promptly as practicable after receipt, the clearing member 
shall transfer such funds and securities (other than those promptly 
returned to such other person) to:
    (I) The clearing member's Custodial Client Omnibus Margin Account 
at ICE Trust; or
    (II) an account held by a third-party custodian, subject to the 
following requirements:
    (a) The funds and securities must be held either:
    (1) In the name of a customer, subject to an agreement to which the 
customer, the clearing member and the custodian are parties, 
acknowledging that the assets held therein are customer assets used to 
collateralize obligations of the customer to the clearing member, and 
that the assets held in that account may not otherwise be pledged or 
rehypothecated by the clearing member or the custodian; or
    (2) in an omnibus account for which the clearing member maintains a 
daily record as to the amount held in the account that is owed to each 
customer, and which is subject to an agreement between the clearing 
member and the custodian specifying that:
    (i) all assets in that account are held for the exclusive benefit 
of the clearing member's customers and are being kept separate from any 
other accounts maintained by the clearing member with the custodian;
    (ii) the assets held in that account shall at no time be used 
directly or indirectly as security for a loan to the clearing member by 
the custodian and shall be subject to no right, charge, security 
interest, lien, or claim of any kind in favor of the custodian or any 
person claiming through the custodian; and
    (iii) the assets held in that account may not otherwise be pledged 
or rehypothecated by the clearing member or the custodian;
    (b) The custodian may not be an affiliated person of the clearing 
member (as defined at paragraph (f)(2)); and
    (1) If the custodian is a U.S. entity, it must be a bank (as that 
term is defined in section 3(a)(6) of the Exchange Act), have total 
capital, as calculated to meet the applicable requirements imposed by 
the entity's appropriate regulatory agency (as defined in section 
3(a)(34) of the Exchange Act), of at least $1 billion, and have been 
approved to engage in a trust business by its appropriate regulatory 
agency;
    (2) if the custodian is not a U.S. entity, it must have total 
capital, as calculated to meet the applicable requirements imposed by 
the foreign financial regulatory authority (as defined in section 
3(a)(52) of the Exchange Act) responsible for setting capital 
requirements for the entity, equating to at least $1 billion, and 
provide the clearing member, the customer and ICE Trust with a legal 
opinion providing that the assets held in the account are subject to 
regulatory requirements in the custodian's home jurisdiction designed 
to protect, and provide for the prompt return of, custodial assets in 
the event of the insolvency of the custodian, and that the assets held 
in that account reasonably could be expected to be legally separate 
from the clearing member's assets in the event of the clearing member's 
insolvency;
    (c) such funds may be invested in Eligible Custodial Assets as that 
term is defined in ICE Trust's Custodial Asset Policies; and
    (d) the clearing member must provide notice to ICE Trust that it is 
using the third-party custodian to hold customer collateral.
    (D) To the extent there is any delay in transferring such funds and 
securities to the third-parties identified in paragraph (C), the 
clearing member shall effectively segregate the collateral in a way 
that, pursuant to applicable law, is reasonably expected to effectively 
protect such funds and securities from the clearing member's creditors. 
The clearing member shall not permit such persons to ``opt out'' of 
such segregation even if regulations or laws otherwise would permit 
such ``opt out.''
    (E) The clearing member annually must provide ICE Trust with
    (I) an assessment by the clearing member that it is in compliance 
with all the provisions of paragraphs (d)(3)(ii)(A) through (D) in 
connection with such activities, and
    (II) a report by the clearing member's independent third-party 
auditor that attests to, and reports on, the clearing member's 
assessment described in paragraph (d)(3)(ii)(E)(I) and that is
    (a) dated as of the same date as, but which may be separate and 
distinct from, the clearing member's annual audit report;
    (b) produced in accordance with the auditing standards followed by 
the independent third party auditor in its audit of the clearing 
member's financial statements.
    (F) The clearing member shall provide the Commission (upon request 
or pursuant to agreements reached between the Commission or the U.S. 
Government and any foreign securities authority (as defined in Section 
3(a)(50) of the Exchange Act)) with any information or documents within 
the possession, custody, or control of the clearing member, any 
testimony of personnel of the clearing member, and any assistance in 
taking the evidence of other persons, wherever located, that the 
Commission requests and that relates to Cleared CDS transactions, 
except that if, after the clearing member has exercised its best 
efforts to provide the information, documents, testimony, or 
assistance, including requesting the appropriate governmental body and, 
if legally necessary, its customers (with respect to customer 
information) to permit the clearing member to provide the information, 
documents, testimony, or assistance to the Commission, the clearing 
member is prohibited from providing this information, documents, 
testimony, or assistance by applicable foreign law or regulations, then 
this exemption shall not longer be available to the clearing member.
    (e) 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.
    (f) Definitions.
    (1) For purposes of this Order, the term ``Cleared CDS'' shall mean 
a credit

[[Page 65568]]

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 (1).
    (2) For purposes of this Order, the term ``Affiliated Person of the 
Clearing Member'' shall mean any person who directly or indirectly 
controls a clearing member or any person who is directly or indirectly 
controlled by or under common control with the clearing member. 
Ownership of 10 percent or more of the common stock of the relevant 
entity will be deemed prima facie control of that entity.

    December 4, 2009.

    By the Securities and Exchange Commission.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-29423 Filed 12-9-09; 8:45 am]

BILLING CODE 8011-01-P