Source: https://www.federalregister.gov/documents/2012/04/05/2012-8141/exemptions-for-security-based-swaps-issued-by-certain-clearing-agencies
Timestamp: 2017-10-20 14:22:59
Document Index: 539450967

Matched Legal Cases: ['§\u2009763', '§\u2009763', '§\u2009763', '§\u2009761', '§\u2009763', '§\u2009768', '§\u2009761', '§\u2009763', '§\u2009761', '§\u2009763', '§\u2009768', '§\u2009763', '§\u2009763', '§\u2009768', '§\u2009763']

A Rule by the Securities and Exchange Commission on 04/05/2012
20536-20549 (14 pages)
https://www.federalregister.gov/d/2012-8141 https://www.federalregister.gov/d/2012-8141
We are adopting Rule 239 under the Securities Act of 1933 (“Securities Act”).[1] We are also adopting Rule 12a-10 and an amendment to Rule 12h-1 under the Securities Exchange Act of 1934 (“Exchange Act”) [2] and Rule 4d-11 under the Trust Indenture Act of 1939 (“Trust Indenture Act”).[3]
On July 21, 2010, the President signed the Dodd-Frank Act into law.[4] Title VII of the Dodd-Frank Act (“Title VII”) provides the Securities and Exchange Commission (“SEC” or the “Commission”) and the Commodity Futures Trading Commission (“CFTC”) with the authority to regulate over-the-counter (“OTC”) derivatives in light of the recent financial crisis.
Title VII provides that the CFTC will regulate “swaps,” the SEC will regulate “security-based swaps,” and the CFTC and SEC will jointly regulate “mixed swaps.” [5] Title VII amends the Exchange Act to require, among other things, the following: (1) Transactions in security-based swaps must be submitted for clearing to a clearing agency if such security-based swap is one that the Commission has determined is required to be cleared, unless an exception from mandatory clearing applies; [6] (2) transactions in security-based swaps must be reported to a registered security-based swap data repository (“SDR”) or the Commission; [7] and (3) if a security-based swap is subject to mandatory clearing, transactions in security-based swaps must be executed on an exchange or a registered or exempt security-based swap execution facility (“security-based SEF”), unless no exchange or security-based SEF makes such security-based swap available for trading or the security-based swap transaction is subject to the clearing exception in Exchange Act Section 3C(g).[8]
Title VII seeks to ensure that, wherever possible and appropriate, security-based swaps are cleared.[9] Paragraph (a)(1) of new Exchange Act Section 3C establishes a mandatory clearing requirement for certain security-based swaps.[10] Exchange Act Section 3C(b) sets forth a process by which we would determine whether a security-based swap or any group, category, type or class of security-based swap that a clearing agency plans to accept for clearing is required to be cleared.[11] If we make a determination that a security-based swap is required to be cleared, then parties may not engage in such a security-based swap without submitting it for clearing, unless an exception applies.[12] If we make a determination that a security-based swap is not required to be cleared, such security-based swap may still be cleared on a non-mandatory basis by the clearing agency if it has rules that permit it to clear such security-based swap.[13] Further, pending the adoption of rules implementing the mandatory clearing requirement, a clearing agency may clear security-based swaps that the clearing agency's rules permit it to clear.[14]
Clearing agencies are broadly defined under the Exchange Act and may undertake a variety of functions.[15] One such function is to act as a central counterparty (“CCP”).[16] For example, when a security-based swap between two counterparties that are members of a CCP is executed and submitted for clearing, the original contract is extinguished and is replaced by two new contracts where the CCP is the buyer to the seller and the seller to the buyer. This process is known as “novation.” [17] At that point, the original counterparties are no longer counterparties to each other. As a result, the creditworthiness and liquidity of the CCP is substituted for the creditworthiness and liquidity of the original counterparties.[18]
Under the rules we proposed regarding mandatory clearing, to meet the clearing requirement in Exchange Act Section 3C, the parties would be required to submit security-based swaps required to be cleared to a clearing agency that functions as a CCP for central clearing.[19] Those proposed rules also would establish procedures for a clearing agency to submit to us for a review each security-based swap, or group, category, type or class of security-based swap that the clearing agency plans to accept for clearing. We would review the submission and make a determination about whether the security-based swap, or group, category, type or class of security-based swap, is required to be cleared.[20] Under the statute and the proposed rules, the submission would be publicly available and a public comment period would be provided with respect to whether the clearing requirement will apply.[21]
If we determine that a security-based swap, or group, category, type, or class of security-based swap, is required to be cleared, counterparties would be required to submit such security-based swaps negotiated and entered into bilaterally to the clearing agency for novation.[22] If we determine that a security-based swap, or group, category, type, or class of security-based swap, is not required to be cleared, such security-based swap, or group, category, type, or class of security-based swap, may still be cleared on a voluntary basis by a clearing agency that functions as a CCP if the clearing agency has rules that permit it to clear such security-based swap.[23] For security-based swaps submitted for novation, the CCP will be the issuer of new security-based swaps.
Because the definition of “security” in the Securities Act was amended in Title VII to include security-based swaps,[24] the novation of a security-based swap by a clearing agency functioning as a central counterparty involves an offer and sale by the clearing agency of a security (the security-based swap) under the Securities Act. The Securities Act requires that any offer and sale of a security must either be registered under the Securities Act or made pursuant to an exemption from registration.[25] Certain provisions of the Exchange Act relating to the registration of classes of securities and the indenture qualification provisions of the Trust Indenture Act also potentially will apply to security-based swaps. The provisions of Section 12 of the Exchange Act could, without an exemption, require that security-based swaps be registered before a transaction could be effected on a national securities exchange.[26] In addition, registration of a class of security-based swaps under Section 12(g) of the Exchange Act will be required if the security-based swap is considered an equity security and there are more than 500 record holders of a particular class of security-based swaps at the end of a fiscal year. Further, without an exemption, the Trust Indenture Act requires qualification of an indenture for security-based swaps considered to be debt.[27]
The provisions of Title VII do not contain an exemption from Securities Act or Exchange Act registration, or from Trust Indenture Act qualification, for security-based swaps. However, we believe that compliance by the clearing agency with the registration and qualification provisions of these Acts likely will be impracticable and frustrate the purposes of Title VII. We have taken action in the past to facilitate clearing of certain credit default swaps by clearing agencies functioning as CCPs. For example, prior to enactment of the Dodd-Frank Act, we permitted five clearing agencies to clear certain credit default swaps (“eligible CDS”) on a temporary conditional basis.[28] To facilitate the operation of clearing agencies as CCPs for eligible CDS, we also adopted temporary exemptions from certain provisions of the Securities Act, the Exchange Act and the Trust Indenture Act, subject to certain conditions.[29] In the adopting release, we noted that we believed that the existence of CCPs for CDS would be important in helping to reduce counterparty risks inherent in the CDS market.[30] In addition to those actions with respect to eligible CDS, as discussed further below, we adopted exemptions under the Securities Act and the Exchange Act for certain standardized options.[31]
On June 9, 2011, we proposed exemptions from the registration requirements of the Securities Act and the Exchange Act, and from the qualification requirements of the Trust Indenture Act, for security-based swaps issued by certain clearing agencies satisfying certain conditions to facilitate the intent of Dodd-Frank Act with respect to mandatory clearing of security-based swaps.[32] The proposed rules would exempt certain transactions by clearing agencies in these security-based swaps from all provisions of the Securities Act, other than the Section 17(a) anti-fraud provisions, as well as exempt these security-based swaps from the Exchange Act registration requirements and from the provisions of the Trust Indenture Act, provided certain conditions are met.[33]
The Proposing Release requested comment on a variety of significant aspects of the proposed exemptions. We received seven comment letters in connection with the Proposing Release, of which six commented on the proposed exemptions.[34] Most commentators supported the proposed exemptions and did not suggest any changes to the exemptions as they applied to security-based swaps issued by a registered or exempt clearing agency in its function as a CCP.[35] As discussed below, a few commentators suggested additional exemptions for security-based swaps. We have reviewed and considered all of the comments that we received relating to the proposed exemptions.
Commentators generally supported proposed Securities Act Rule 239.[36] We received only one specific comment on the proposed rule.[37] This commentator suggested that the Commission provide an exemption under the Securities Act similar to the proposed rule for transactions in uncleared security-based swaps entered into between eligible contract participants and effected through any trading platform.[38] This commentator did not provide any explanation as to why such exemption was needed, including how security-based swap trading platforms operate, that would enable us to evaluate whether another exemption under the Securities Act is necessary or appropriate.
We requested comment in the Proposing Release and in the Interim SBS Exemptions Release as to whether security-based swaps are or will be transacted in a manner that would not permit the parties to rely on existing exemptions under the Securities Act.[39] We also requested comment in these releases on whether the Commission should consider additional exemptions under the Securities Act for security-based swaps traded on a national securities exchange or security-based SEF with eligible contract participants.[40] This commentator's suggestion related to exemptions affecting transactions that do not involve registered or exempt clearing agencies and appears responsive to the request for whether additional exemptions should be considered. Thus, we believe that this commentator's suggestion relating to uncleared security-based swaps is more appropriate to be considered in connection with the Interim SBS Exemptions Release and, therefore, we are not adopting rules at this time providing exemptions that would apply to uncleared security-based swaps, including those that may be effected on or through trading platforms.[41]
We are adopting Securities Act Rule 239 without any changes from the proposal. The final rule exempts the offer and sale of security-based swaps that are or will be issued to eligible contract participants by, and in a transaction involving, a clearing agency that is registered under Section 17A of the Exchange Act [42] or exempt from such registration [43] by rule, regulation or order of the Commission (“registered or exempt clearing agency”) in its function as a CCP, from all provisions of the Securities Act, except the anti-fraud provisions of Section 17(a), subject to the conditions described below.[44] Thus, Securities Act Rule 239 as adopted permits the offer and sale of security-based swaps to eligible contract participants that are or will be issued by, and in a transaction involving, a registered or exempt clearing agency in its function as a CCP without requiring compliance with Section 5 of the Securities Act.[45]
The security-based swap is or will be issued by a clearing agency that is registered with us under Section 17A of the Exchange Act or exempt from such registration by rule, regulation or order of the Commission;
The security-based swap is sold only to an eligible contract participant (as defined in Section 1a(18) of the Commodity Exchange Act) in a transaction involving the registered or exempt clearing agency in its function as a CCP with respect to the security-based swap; [46] and
Consistent with the proposal, the Securities Act exemption applies only to offers and sales of security-based swaps that are or will be issued by, and in a transaction involving, a clearing agency in its function as a CCP that is either registered with us or exempt from such registration by rule, regulation or order of the Commission. Registered clearing agencies are regulated by us under the Exchange Act and must comply with the standards in the Exchange Act, including the requirements of Section 17A.[47] The activities of such clearing agencies relating to the clearing or submission for clearing of security-based swaps are subject to regulation under the Exchange Act and applicable rules thereunder.[48] The Securities Act exemption also is available for security-based swaps that are issued by a clearing agency that we have exempted from registration with us by rule, regulation, or order, subject to such terms and conditions contained in any exemption.[49] We believe it is appropriate to make the Securities Act exemption available to security-based swaps issued by exempt clearing agencies because in granting an exemption the Commission could impose appropriate conditions to the availability of the exemption that would provide protection to investors.
The Securities Act exemption applies to the extent the clearing agency will issue or is issuing the security-based swap in its function as a CCP and applies to transactions involving such clearing agency.[50] We note that a clearing agency's role as a CCP and an issuer of security-based swaps is similar to a clearing agency's role with respect to standardized options.[51] We believe that a clearing agency's role as a CCP for security-based swaps, similar to a clearing agency's role with respect to standardized options, is fundamentally different from a conventional issuer that registers transactions in its securities under the Securities Act.[52] For example, the purchaser of a security-based swap does not, except in the most formal sense, make an investment decision regarding the clearing agency.[53] Rather, the security-based swap investment decision is based on the referenced security, loan, narrow-based security index, or issuer. In this circumstance, coupled with the other conditions to the Securities Act exemption, we do not believe that Securities Act registration of the offer and sale of security-based swaps by a clearing agency in its function as a CCP to eligible contract participants is necessary.
In the Mandatory Clearing Release, we proposed rules to implement the provisions of the Dodd-Frank Act regarding mandatory and voluntary clearing of security-based swaps, or groups, categories, or types or classes of security-based swaps.[54] Those proposed rules would establish procedures for a clearing agency to submit for a review the security-based swap, or group, category, type or class of security-based swap, that the clearing agency plans to accept for clearing. As proposed, we would review the submission and make a determination of whether the security-based swap, or group, category, type or class of security-based swap, is required to be cleared.[55]
The Dodd-Frank Act also provides that if a security-based swap is subject to the mandatory clearing requirement, it must be traded on an exchange or a registered or exempt security-based SEF, unless no security-based SEF makes such security-based swap available to trade.[56] Thus, it is possible that a security-based swap could be subject to mandatory clearing without being traded on an exchange or security-based SEF. The Securities Act exemption is available for security-based swaps that are subject to the mandatory clearing requirement or are permitted to be cleared pursuant to the clearing agency's rules,[57] regardless of whether such security-based swaps also are traded on a national securities exchange or through a security-based SEF.[58] We believe that if the conditions to the Securities Act exemption are satisfied, then the protections provided for in the analogous exemptions for standardized options and security futures arising from the requirement for exchange trading, such as compliance with the statutory listing standards, are not needed here.[59] Unlike security future products that may be purchased by any person, under the Dodd-Frank Act security-based swaps may only be offered and sold to eligible contract participants either pursuant to an exemption from the registration requirements of the Securities Act and in transactions not effected on a national securities exchange or in registered offerings effected on a national securities exchange. No offers or sales of security-based swaps may be made to non-eligible contract participants unless there is an effective registration statement under the Securities Act covering transactions in such security-based swap [60] and any security-based swap transaction with a non-eligible contract participant must be effected on a national securities exchange.[61] As a result, security-based swaps issued by a registered or exempt clearing agency in its function as a CCP may only be offered and sold to eligible contract participants, unless there is an effective registration statement and the transaction is effected on a national securities exchange. Thus, because only eligible contract participants may enter into the security-based swaps not traded on a national securities exchange, we do not believe it is necessary to condition the Securities Act exemption on whether the security-based swap is traded on a national securities exchange. In addition, including such a provision could frustrate the goals of the Dodd-Frank Act because the Dodd-Frank Act did not restrict transactions with eligible contract participants to transactions on national securities exchanges. Consequently, the Securities Act exemption does not include such a requirement.
Under the Dodd-Frank Act, only an eligible contract participant may enter into security-based swaps other than on a national securities exchange.[62] In addition, security-based swaps that are not registered pursuant to the Securities Act can only be sold to eligible contract participants.[63] New Securities Act Section 5(d) specifically provides that it is unlawful to offer to buy, purchase, or sell a security-based swap to any person that is not an eligible contract participant, unless the transaction is registered under the Securities Act.[64] Given that Congress determined it is appropriate to limit the availability of registration exemptions under the Securities Act to eligible contract participants, consistent with the proposal, we believe it is appropriate to limit the Securities Act exemption to security-based swaps entered into with eligible contract participants.
The purpose of the requirement relating to the availability of information is to inform investors about whether there is publicly available information about the issuer of the referenced security or the referenced issuer.[65] We are not conditioning the Securities Act exemption on whether the issuer is subject to Exchange Act reporting or whether there is publicly available financial information about such issuer. As noted above, the Securities Act exemption for offers and sales of security-based swaps issued by, and in a transaction involving, a registered or exempt clearing agency in its function as a CCP is limited to security-based swaps entered into with an eligible contract participant. The Dodd-Frank Act did not restrict eligible contract participants' ability to enter into security-based swaps based on whether or not there is publicly-available information about the issuer of the referenced security or loan or the referenced issuer.[66] As a result, and in light of the nature of the other regulatory safeguards,[67] we are not conditioning the Securities Act exemption on the actual availability or delivery of such information.
Under the Securities Act exemption, the required information could be provided in the agreement covering the security-based swap the registered or exempt clearing agency provides or makes available to the counterparty or on a publicly available Web site maintained by the clearing agency. We understand that master agreements and related schedules for security-based swaps generally contain detailed information about the terms of the security-based swaps.[68] In addition, each registered clearing agency is required to post and maintain a current and complete version of its rules on its Web site. Thus, we believe that parties engaging in security-based swaps transactions would be familiar with looking to the agreements or a clearing agency's Web site to obtain information. Given that clearing agencies generally provide information in agreements and maintain publicly available Web sites, we believe that providing the information we are requiring to be disclosed in the agreement for the security-based swap or on the clearing agency's publicly available Web site would not pose significant burdens for clearing agencies.
Commentators generally supported the proposed rule and amendment.[69] We received only two specific comments on the proposed rule and amendment.[70] One commentator suggested that the Commission provide exemptions under the Exchange Act similar to the proposed rule and amendment for transactions in uncleared security-based swaps entered into between eligible contract participants and effected through any trading platform.[71] This commentator did not provide any explanation as to why such exemptions were needed, including how security-based swap trading platforms operate, that would enable us to evaluate whether other exemptions under the Exchange Act are necessary or appropriate. Another commentator suggested that the Commission provide an exemption under Section 12(g) of the Exchange Act similar to the proposed amendment for uncleared security-based swaps transactions entered into solely between eligible contract participants.[72]
We requested comment in the Proposing Release and in the Interim SBS Exemptions Release as to whether security-based swaps are or will be transacted in a manner that would not permit the parties to rely on existing exemptions under the Exchange Act.[73] We also requested comment in these releases on whether the Commission should consider additional exemptions under the Exchange Act for security-based swaps traded on a national securities exchange or security-based SEF with eligible contract participants.[74] These commentators' suggestions related to exemptions affecting transactions that do not involve registered or exempt clearing agencies and appear responsive to the request for whether additional exemptions should be considered. Thus, we believe that these commentators' suggestions relating to uncleared security-based swaps are more appropriate to be considered in connection with the Interim SBS Exemptions Release and, therefore, we are not adopting rules at this time providing exemptions that would apply to uncleared security-based swaps, including those that may be effected on or through trading platforms.[75]
Section 12(a) of the Exchange Act makes it unlawful for any broker or dealer to effect a transaction in a non-exempt security on a national securities exchange unless the security has been registered under Section 12(b) of the Exchange Act for trading on that exchange. Section 12(g)(1) of the Exchange Act, as modified by rule, requires any issuer with more than $10,000,000 in total assets and a class of equity securities held by 500 or more persons to register such security with us.[76]
We are adopting new Rule 12a-10 under the Exchange Act without any changes from the proposal to exempt security-based swaps that are or have been issued by a registered or exempt clearing agency in reliance on Securities Act Rule 239 from Section 12(a) of the Exchange Act under certain conditions.[77] Exchange Act Rule 12a-10 as adopted provides that Exchange Act Section 12(a) does not apply to any security-based swap that:
We also are adopting an amendment to Exchange Act Rule 12h-1 without any changes from the proposal to exempt security-based swaps that are or have been issued by a registered or exempt clearing agency from the provisions of Section 12(g) of the Exchange Act under certain conditions.[78] Exchange Act Rule 12h-1(h) as adopted exempts from Section 12(g) of the Exchange Act security-based swaps that are issued by a registered or exempt clearing agency in its function as a CCP, whether or not such security-based swap is traded on a national securities exchange registered pursuant to Section 6(a) of the Exchange Act or a registered or exempt security-based SEF.[79] In addition, the security-based swaps being issued by the registered or exempt clearing agency in its function as a CCP must be required to be cleared, or be permitted to be cleared pursuant to the clearing agency's rules, and may only be sold to eligible contract participants.
As we noted in the discussion of Securities Act Rule 239, we believe the interest of investors in the security-based swap is primarily with respect to the referenced security or loan, referenced issuer or referenced narrow-based security index, and not with respect to the registered or exempt clearing agency functioning as the CCP.[80] Therefore, we believe that requiring registration of security-based swaps under the Exchange Act would not provide additional useful information or meaningful protection to investors with respect to the security-based swap. In addition, the other consequences of Exchange Act registration, such as requirements for ongoing periodic reporting and application of the proxy rules to the clearing agency, would not be meaningful in the context of security-based swaps. At the same time, requiring such registration likely would impose burdens on clearing agencies issuing security-based swaps.[81] Therefore, based on the discussion above, we believe that exempting the registered or exempt clearing agency from the requirements of the Exchange Act arising from Section 12(a) or 12(g) is necessary or appropriate in the public interest and is not inconsistent with the public interest or the protection of investors.
In addition, we note that similar Exchange Act exemptions exist for standardized options issued by a registered options clearing agency and security futures products issued by a registered or exempt clearing agency.[82] We believe that it is appropriate to establish comparable regulatory treatment for security-based swaps issued by a registered or exempt clearing agency with respect to the applicability of Section 12 of the Exchange Act to security-based swaps issued by a registered or exempt clearing agency. Moreover, we believe it is important to further the goal of facilitating clearing of security-based swaps while maintaining appropriate investor protection.
Consistent with the proposal, security-based swaps that will not be cleared by a registered or exempt clearing agency in its function as a CCP but are listed for trading on a national securities exchange or registered or exempt security-based SEF will not be able to rely on these exemptions from registration under Section 12(b) or Section 12(g) of the Exchange Act.[83]
Commentators generally supported the proposed rule.[84] We received only two specific comments on the proposed rule.[85] Consistent with the comments noted above, these commentators suggested that the Commission provide an exemption under the Trust Indenture Act similar to the proposed rule for certain uncleared security-based swap transactions involving eligible contract participants.[86] As noted above, these commentators' suggestions related to exemptions affecting transactions that do not involve registered or exempt clearing agencies and appear responsive to the request for whether additional exemptions should be considered. Thus, we believe that these commentators' suggestions relating to uncleared security-based swaps are more appropriate to be considered in connection with the Interim SBS Exemptions Release and, therefore, we are not adopting rules at this time providing exemptions that would apply to uncleared security-based swaps, including those that may be effected on or through trading platforms.[87]
We are adopting Rule 4d-11 under Section 304(d) of the Trust Indenture Act without any changes from the proposal. Final Rule 4d-11 exempts any security-based swap offered and sold in reliance on Securities Act Rule 239 from having to comply with the provisions of the Trust Indenture Act.[88] We adopted a similar exemption on a temporary basis for eligible CDS.[89]
The Trust Indenture Act is aimed at addressing problems that unregulated debt offerings pose for investors and the public,[90] and provides a mechanism for debtholders to protect and enforce their rights with respect to the debt. We do not believe that the protections contained in the Trust Indenture Act are needed to protect eligible contract participants to whom a sale of a security-based swap is made in reliance on Securities Act Rule 239. The identified problems that the Trust Indenture Act is intended to address generally do not occur in the offer and sale of security-based swaps.[91] For example, security-based swaps are contracts between two parties and, as a result, do not raise the same problem regarding the ability of parties to enforce their rights under the instruments as would, for example, a debt offering to the public. Moreover, through novation, the clearing agency functionally becomes the counterparty to the buyer and the seller, and, in the case where buyer and seller are both members of the CCP, each would look directly to the clearing agency to satisfy the obligations under the security-based swap. As a consequence, enforcement of contractual rights and obligations under the security-based swap would occur directly between such parties, and the Trust Indenture Act provisions would not provide any additional meaningful substantive or procedural protections.
The exemptions we are adopting in this release are not available for security-based swaps that are not cleared (“uncleared security-based swaps”), including, for example, uncleared security-based swaps entered into on organized markets, such as a security-based SEF or a national securities exchange. It is our understanding that transactions involving uncleared security-based swaps entered into between eligible contract participants may occur today on organized platforms that would likely register as security-based SEFs, and we understand that this activity will likely continue after the full implementation of Title VII.[92] As noted above, security-based swaps are included in the definition of security under the Securities Act and the Exchange Act and are subject to the full panoply of the federal securities laws, including the registration requirements of Section 5 of the Securities Act and Section 12 of the Exchange Act. Because the exemptions we are adopting in this release are not available with respect to uncleared security-based swaps, counterparties that are eligible contract participants and engaging in an uncleared security-based swap would have to either rely on other available exemptions from the registration requirements of the Securities Act, the Exchange Act, and, if applicable, the Trust Indenture Act, or consider whether to register such transaction and/or class of security.[93]
Further, as noted above, security-based swap transactions involving persons that are not eligible contract participants, whether the transaction is cleared or not cleared, must be registered under the Securities Act and effected on a national securities exchange.[94] One commentator suggested that the Commission adopt a simplified disclosure and registration scheme for those security-based swaps transactions that may involve persons who are not eligible contract participants.[95] As the commentator's suggestions are outside the scope of the proposed rules, we are not considering the suggestions as part of this rulemaking. In the future, we may evaluate the need for a simplified disclosure and registration scheme for security-based swaps that may be offered and sold to persons who are not eligible contract participants.
The final rules will become effective on April 16, 2012. The Administrative Procedure Act generally requires that an agency publish an adopted rule in the Federal Register 30 days before it becomes effective.[96] This requirement, however, does not apply if a substantive rule grants or recognizes an exemption or relieves a restriction or if the Commission finds good cause not to delay the effective date.[97] The Commission finds that the final rules meet both criteria.
Although the final rules condition the exemptions on the registered or exempt clearing agency disclosing certain information with respect to the security-based swaps it clears, we believe that providing this information will not pose significant transition burdens for the three clearing agencies that have been actively engaged as CCPs in clearing eligible CDS in reliance on the temporary exemptions for eligible CDS, which expire on April 16, 2012.[98] As noted above, these three clearing agencies are deemed registered as clearing agencies for purposes of clearing security-based swaps and are able to engage as CCPs in clearing eligible CDS, in part, pursuant to the temporary exemptive order relating to Sections 5 and 6 of the Exchange Act.[99] The temporary exemptive order contains the conditions relating to, among other things, available information about the eligible CDS and the underlying reference entity of such eligible CDS. Since these clearing agencies have been required to comply with these conditions, they should have the information readily available regarding the eligible CDS that they would need to comply with the conditions of the final rules we are adopting in this release. The final rules provide that these clearing agencies either make the information publicly available on the clearing agency's Web site or in an agreement the clearing agency provides or makes available to its counterparty to the security-based swap transaction. As discussed below, we estimate that each clearing agency will spend approximately 2 hours in order to comply with this information disclosure requirement.[100]
The final rules are intended to further the goal of central clearing of security-based swaps by providing exemptions for the issuance of security-based swaps by a registered or exempt clearing agency in its function as a CCP from certain regulatory provisions that might otherwise impair their ability to engage in such clearing activities. Without an exemption, (1) a security-based swap transaction involving a registered or exempt clearing agency functioning as a CCP would have to be registered under the Securities Act; (2) the security-based swaps that are or have been issued in a transaction involving a registered or exempt clearing agency functioning as a CCP would have to be registered as a class of securities under the Exchange Act; and (3) the provisions of the Trust Indenture Act would apply. We believe that requiring compliance with these provisions likely would unnecessarily impede central clearing of security-based swaps and that the exemptions are necessary to facilitate the intent of the Dodd-Frank Act with respect to mandatory clearing of security-based swaps. Absent these exemptions, we believe that registered or exempt clearing agencies would incur additional costs due to compliance with the registration requirements of the Securities Act and the Exchange Act solely because of their clearing functions.[101]
The exemptions would treat security-based swaps issued or cleared by a registered or exempt clearing agency in its function as a CCP in the same manner as similar types of securities, such as security futures products and standardized options.[102] The exemptions are similar to the temporary exemptions for eligible CDS. A registered or exempt clearing agency issuing security-based swaps in its function as a CCP would benefit from the exemptions because it would not have to file registration statements covering the offer and sale of the security-based swaps. If a registered or exempt clearing agency is not required to register the offer and sale of security-based swaps, it would not have to incur the costs of such registration, including legal and accounting costs. Some of these costs, such as the costs of obtaining audited financial statements, may still be incurred by the clearing agency as a result of other regulatory requirements for clearing agencies.
The final rules we are adopting exempt offers and sales of security-based swaps that are or will be issued to eligible contract participants by, and in a transaction involving, a registered or exempt clearing agency in its function as a CCP from all provisions of the Securities Act, other than the Section 17(a) antifraud provision, as well as from the registration requirements under Section 12 of the Exchange Act and the provisions of the Trust Indenture Act.[103] Because these exemptions are available to any registered or exempt clearing agency offering and selling security-based swaps to an eligible contract participant, in its function as a CCP, we do not believe that the exemptions impose a burden on competition. In contrast, we believe the exemptions as adopted will facilitate moving security-based swaps into centralized clearing, furthering the goal of the Dodd-Frank Act to reduce systemic risk while improving market access to hedging instruments that can contribute to lower costs of raising capital. In addition, we believe the exemptions will promote efficiency by treating security-based swaps issued by clearing agencies in a manner similar to standardized options and security futures issued by clearing agencies. Harmonizing the regulatory treatment of these securities under the Securities Act, Exchange Act, and the Trust Indenture Act should reduce the potential for regulatory arbitrage between such products.
We recognize that a consequence of the exemptions would be the unavailability of certain remedies under the Securities Act and the Exchange Act and certain protections under the Trust Indenture Act. Absent an exemption, a clearing agency may have to file a registration statement covering the offer and sale of the security-based swaps, may have to register the class of eligible security-based swaps that it has issued or cleared under the Exchange Act, and may have to satisfy the applicable provisions of the Trust Indenture Act, which would provide investors with civil remedies in addition to antifraud remedies. A registration statement covering the offer and sale of security-based swaps may provide certain information about the clearing agency, security-based swap contract terms, and the identification of the particular reference securities, issuers, and loans underlying the security-based swap. However, it would not necessarily provide the type of information necessary to assess the risk of the reference issuer, security, narrow-based security index, or loan. Further, while a registration statement would provide information to eligible contract participants, as well as to the market as a whole, registered clearing agencies already are required to make their audited financial statements and other information about themselves publicly available.[104] While an investor would be able to pursue an antifraud action in connection with the purchase and sale of security-based swaps under Exchange Act Section 10(b),[105] it would not be able to pursue civil remedies under Securities Act Sections 11 or 12.[106] We could still pursue an antifraud action in the offer and sale of security-based swaps issued by a clearing agency.[107]
We believe some of the information the clearing agency will make available will be the same information the clearing agency collects and analyzes in making its business decision to plan to accept the security-based swap, or any group, category, type, or class of security-based swaps, for clearing. A clearing agency may incur costs in providing or making available this information in order to rely on the exemption.[108]
Certain provisions of Securities Act Rule 239 would result in “collection of information requirements” within the meaning of the Paperwork Reduction Act of 1995 (“PRA”).[109] We published a notice requesting comment on the collection of information requirements in the Proposing Release for Securities Act Rule 239 and we submitted these requirements to the Office of Management and Budget (“OMB”) for review in accordance with the PRA. We requested comment on the collection of information requirements included in the Proposing Release for Securities Act Rule 239, but we did not receive any comments.
Currently, three clearing agencies clear eligible CDS, which include security-based swaps.[110] The obligation to centrally clear certain security-based swap transactions is a new requirement under Title VII of the Dodd-Frank Act, and clearing agencies that are deemed registered as clearing agencies are eligible to clear security-based swaps. Based on the fact that there are currently three clearing agencies authorized to clear security-based swaps and that there could conceivably be a few more in the foreseeable future,[111] we estimate that three to six clearing agencies may plan to centrally clear security-based swaps and seek to rely on the exemptions we are adopting in this release, and therefore, would be subject to the collection of information.[112] For purposes of the PRA, we estimate six clearing agencies would seek to rely on the exemptions we are adopting in this release. This estimate is consistent with the estimate in the Proposing Release and we received no comments on this estimate.
We believe that a registered or exempt clearing agency issuing security-based swaps in its function as a CCP could incur some costs associated with disclosing, or providing or making available, certain information in accordance with Securities Act Rule 239, either in its agreement regarding the security-based swap or on its publicly available Web site, with respect to the security-based swap. A clearing agency also could incur costs associated with updating the information on its Web site or in its agreements, if necessary. The purpose of the requirement is to inform investors about whether there is publicly available information about the issuer of the referenced security or referenced issuer and we believe that a clearing agency likely already would be collecting and making public the type of information required by the final rule.[113]
We estimate that each registered or exempt clearing agency issuing security-based swaps in its function as a CCP will spend approximately 2 hours each time it provides or updates the information in its agreements relating to security-based swaps or on its Web site.[114] We estimate that each registered or exempt clearing agency will provide or update the information 20 times per year.[115] Therefore, we estimate that the total annual reporting burden for clearing agencies to provide the information in their agreements relating to security-based swaps or on their Web site to comply with Securities Act Rule 239(b)(3) will be 240 hours (20 × 2 hours × 6 respondents). We estimate that 75% of the burden of preparation is carried by the clearing agency internally and that 25% of the burden is carried by outside professionals retained by the clearing agency at an average cost of $400 per hour. These estimates are consistent with the estimates in the Proposing Release and we received no comments on these estimates.
Under Section 605(b) of the Regulatory Flexibility Act,[116] we certified that, when adopted, Rule 239 under the Securities Act, Rule 12a-10 under the Exchange Act, the amendment to Rule 12h-1 under the Exchange Act, and Rule 4d-11 under the Trust Indenture Act would not have a significant economic impact on a substantial number of small entities. This certification, including our basis for the certification, was included in Part VIII of the Proposing Release. We solicited comments on the potential impact of these rules and amendment on small entities, but received none. The final rules are identical to the proposed rules. Accordingly, there have been no changes to the proposal that would alter the basis upon which the certification was made.
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 78j, 78j-1, 78k, 78k-1, 78 l, 78m, 78n, 78n-1, 78o, 78o-4, 78p, 78q, 78s, 78u-5, 78w, 78x, 78 ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 7201 et seq., 18 U.S.C. 1350, 12 U.S.C. 5221(e)(3), and Pub. L. 111-203, 939A, 124 Stat. 1376 (2010), unless otherwise noted.
5. Section 712(d) of the Dodd-Frank Act provides that the Commission and the CFTC, in consultation with the Board of Governors of the Federal Reserve System, shall jointly further define the terms “swap,” “security-based swap,” “swap dealer,” “security-based swap dealer,” “major swap participant,” “major security-based swap participant,” “eligible contract participant,” and “security-based swap agreement.” These terms are defined in Sections 721 and 761 of the Dodd-Frank Act and, with respect to the term “eligible contract participant,” in Section 1a(18) of the Commodity Exchange Act (“CEA”) [7 U.S.C. 1a(18)], as re-designated and amended by Section 721 of the Dodd-Frank Act. In April 2011, the SEC and the CFTC jointly proposed rules and interpretations to further define the terms “swap,” “security-based swap,” and “security-based swap agreement.” See Further Definition of “Swap,” “Security-Based Swap,” and “Security-Based Swap Agreement”; Mixed Swaps; Security-Based Swap Agreement Recordkeeping, Release No. 33-9204 (Apr. 29, 2011), 76 FR 29818 (May 23, 2011), corrected in Release No. 33-9204A (June 1, 2011), 76 FR 32880 (June 7, 2011). In December 2010, the SEC and the CFTC jointly proposed rules and interpretations to further define the terms “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap Participant” and “Eligible Contract Participant.” See Further Definition of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap Participant” and “Eligible Contract Participant”, Release No. 34-63452 (Dec. 7, 2010), 75 FR 80174 (Dec. 21, 2010) (“Intermediaries Definitions Release”).
6. See Public Law 111-203, § 763(a) (adding Exchange Act Section 3C [15 U.S.C. 78c-3]).
7. See Public Law 111-203, §§ 763(i) and 766(a) (adding Exchange Act Sections 13(m)(1)(G) and 13A(a)(1) [15 U.S.C. 78m(m)(1)(G) and 78m-1(a)(1)], respectively).
8. See Public Law 111-203, § 763(a) (adding Exchange Act Section 3C [15 U.S.C. 78c-3]). See also Public Law 111-203, § 761 (adding Exchange Act Section 3(a)(77) [15 U.S.C. 78c(a)(77)] (defining the term “security-based swap execution facility”)), and Registration and Regulation of Security-Based Swap Execution Facilities, Release No. 34-63825 (Feb. 2, 2011) 76 FR 10948 (Feb. 28, 2011) (“Security-Based SEF Proposing Release”). See footnote 12 below for a discussion of the clearing exception in Exchange Act Section 3C(g) [15 U.S.C. 78c-3(g)].
9. See, e.g., Report of the Senate Committee on Banking, Housing, and Urban Affairs regarding The Restoring American Financial Stability Act of 2010, S. Rep. No. 111-176 at 34 (stating that “[s]ome parts of the OTC market may not be suitable for clearing and exchange trading due to individual business needs of certain users. Those users should retain the ability to engage in customized, uncleared contracts while bringing in as much of the OTC market under the centrally cleared and exchange-traded framework as possible.”).
10. Section 763(a) of the Dodd-Frank Act added Section 3C to the Exchange Act. See 15 U.S.C. 78c-3. See also Process for Submissions for Review of Security-Based Swaps for Mandatory Clearing and Notice Filing Requirements for Clearing Agencies; Technical Amendments to Rule 19b-4 and Form 19b-4 Applicable to All Self-Regulatory Organizations, Release No. 34-63557 (Dec. 15, 2010), 75 FR 82490 (Dec. 30, 2010) (“Mandatory Clearing Proposing Release”).
18. See Cecchetti, Gyntelberg and Hollanders, Central counterparties for over-the-counter derivatives, BIS Quarterly Review, September 2009, available at http://www.bis.org/publ/qtrpdf/r_qt0909f.pdf.
20. See Mandatory Clearing Proposing Release and Public Law 111-203, § 763(a) (adding Exchange Act Section 3C [15 U.S.C. 78c-3]).
24. See Public Law 111-203, § 768(a)(1) (amending Securities Act Section 2(a)(1) [15 U.S.C. 77b(a)(1)]). See also Public Law 111-203, § 761(a)(2) (amending Exchange Act Section 3(a)(10) [15 U.S.C. 78c(a)(10)]).
28. See Order Granting Temporary Exemptions under the Securities Exchange Act of 1934 in Connection with Request on Behalf of ICE Clear Europe Limited Related to Central Clearing of Credit Default Swaps, and Request for Comments, Release No. 34-60372 (Jul. 23, 2009), 74 FR 37748 (Jul. 29, 2009); Order Granting Temporary Exemptions under the Securities Exchange Act of 1934 in Connection with Request on Behalf of Eurex Clearing AG Related to Central Clearing of Credit Default Swaps, and Request for Comments, Release No. 34-60373 (Jul. 23, 2009), 74 FR 37740 (Jul. 29, 2009); Order Granting Temporary Exemptions Under the Securities Exchange Act of 1934 in Connection With Request of Chicago Mercantile Exchange Inc. and Citadel Investment Group, L.L.C. Related to Central Clearing of Credit Default Swaps, and Request for Comments, Release No. 34-59578 (Mar. 13, 2009), 74 FR 11781 (Mar. 19, 2009); Order Granting Temporary Exemptions Under the Securities Exchange Act of 1934 in Connection With Request on Behalf of ICE US Trust LLC Related to Central Clearing of Credit Default Swaps, and Request for Comments, Release No. 34-59527 (Mar. 6, 2009), 74 FR 10791 (Mar. 12, 2009); and Order Granting Temporary Exemptions Under the Securities Exchange Act of 1934 in Connection with Request of LIFFE Administration and Management and LCH.Clearnet Ltd. Related to Central Clearing Of Credit Default Swaps, and Request for Comments, Release No. 34-59164 (Dec. 24, 2008), 74 FR 139 (Jan. 2, 2009). The Commission subsequently extended and, in certain cases, modified certain of these temporary exemptive orders. See Release No. 34-61973 (Apr. 23, 2010), 75 FR 22656 (Apr. 29, 2010) and Release No. 34-63389 (Nov. 29, 2010), 75 FR 75520 (Dec. 3, 2010) (extending the order granted to ICE Clear Europe, Limited); Release No. 34-61975 (Apr. 23, 2010), 75 FR 22641 (Apr. 29, 2010) and Release No. 34-63390 (Nov. 29, 2010), 75 FR 75518 (Dec. 3, 2010) (extending and modifying the order granted to Eurex Clearing AG); Release No. 34-61164 (Dec. 14, 2009), 74 FR 67258 (Dec. 18, 2009), Release No. 34-61803 (Mar. 30, 2010), 75 FR 17181 (Apr. 5, 2010), and Release No. 34-63388 (Nov. 29, 2010), 75 FR 75522 (Dec. 3, 2010) (extending and modifying the order granted to Chicago Mercantile Exchange Inc.); and Release No. 34-61119 (Dec. 4, 2009), 74 FR 65554 (Dec. 10, 2009), Release No. 34-61662 (Mar. 5, 2010), 75 FR 11589 (Mar. 11, 2010), and Release No. 34-63387 (Nov. 29, 2010), 75 FR 75502 (Dec. 3, 2010) (extending and modifying the order granted to ICE US Trust LLC). LIFFE A&M and LCH.Clearnet Ltd. allowed their temporary exemptive orders to lapse without seeking an extension.
30. Title VII contains provisions that “deem registered” as a clearing agency for the purposes of clearing security-based swaps clearing agencies that met certain conditions. See Public Law 111-203, § 763(b) (adding Exchange Act Section 17A(l) [15 U.S.C. 78q-1(l)]. Three clearing agencies that had temporary exemptive orders permitting them to clear eligible CDS were deemed registered under this provision and currently are performing the functions of a CCP for eligible CDS. These clearing agencies are ICE Clear Credit LLC (f/k/a ICE U.S. Trust LLC), ICE Clear Europe, Ltd., and Chicago Mercantile Exchange Inc. As a result of the deemed registered provision, we had to grant a temporary exemptive order to these clearing agencies only relating to Sections 5 and 6 of the Exchange Act. This temporary exemptive order will expire upon the earliest compliance date set forth in any of the final Title VII rules regarding registration of security-based SEFs. See Order Granting Temporary Exemptions under the Securities Exchange Act of 1934 in Connection with the Pending Revision of the Definition of “Security” to Encompass Security-Based Swaps, and Request for Comment, Release No. 34-64795 (Jul. 1, 2011). The new temporary exemptive order contains conditions similar to those set forth in the temporary exemptive orders in effect prior to the deemed registered provisions pursuant to which certain clearing agencies were permitted to clear eligible CDS. See footnote 28 above.
34. The Commission received the following letters that commented specifically on the proposed exemptions: Letter from Richard M. Whiting, Executive Director and General Counsel, Financial Services Roundtable, Robert Pickel, Chief Executive Officer, International Swaps and Derivatives Association, and Kenneth E. Bentsen, Jr., Executive Vice President, Public Policy and Advocacy, Securities Industry and Financial Markets Association (“FSR/ISDA/SIFMA Letter”); letter from Bruce Bolander, Gibson, Dunn & Crutcher LLP, dated Aug. 22, 2011 (“Gibson Dunn Letter”); letter from Scott Pintoff, General Counsel, GFI Group Inc., dated Jul. 25, 2011 (“GFI Letter”); letter from Lawrence J. Kramer, dated Jun. 22, 2011 (“Kramer Letter”); letter from Thomas A. Prentice, Ph.D., dated Jun. 21, 2011 (“Prentice Letter”); and letter from William Michael Cunningham, Creative Investment Research, Inc., dated Jul. 4, 2011 (“CIR Letter”). The letter from Scott C. Goebel, Senior Vice President, General Counsel, Fidelity Investments, dated Dec. 8, 2011, did not address the proposed exemptions but commented on rules the Commodity Futures Trading Commission proposed relating to collateral posted in connection with cleared derivatives trades.
46. Eligible contract participant is defined in CEA Section 1a(18) (as re-designated and amended by Section 721 of the Dodd-Frank Act). See also Public Law 111-203, § 761(a) (adding Exchange Act Section 3(a)(65) [15 U.S.C. 78c(a)(65)], which refers to the definition of eligible contract participant in the CEA). The definition of eligible contract participant contained the CEA (as amended by the Dodd-Frank Act) includes: Financial institutions; insurance companies; investment companies; commodity pools; business entities, such as corporations, partnerships, and trusts; employee benefit plans; government entities, such as the United States, a State or local municipality, a foreign government, a multinational or supranational government entity, or an instrumentality, agency or department of such entities; market professionals, such as broker dealers, futures commission merchants, floor brokers, and investment advisors; and natural persons with a specified dollar amount invested on a discretionary basis. For certain of the entities and market professionals, the definition also contains certain conditions relating to the amount of assets or amount of monies invested on a discretionary basis. For a complete description of the definition, see CEA Section 1a(18) and Section 721 of the Dodd-Frank Act. Further, the Dodd-Frank Act authorized the CFTC and the SEC to jointly further define the definition of eligible contract participant. See Section 712(d)(1) of the Dodd-Frank Act. In December 2010, the CFTC and the SEC jointly proposed rules to further define the definition of eligible contract participant primarily relating to commodity pools and foreign exchange transactions. See Intermediaries Definitions Release.
56. Exchange Act Section 3C(h) specifies that transactions in security-based swaps that are subject to the clearing requirement of Exchange Act Section 3C(a)(1) must be executed on an exchange or on a security-based SEF registered with us (or a security-based SEF exempt from registration), unless no exchange or security-based SEF makes the security-based swap available to trade or the security-based swap transaction is subject to the clearing exception in Exchange Act Section 3C(g). See Public Law 111-203, § 763 (adding Exchange Act Section 3C(h) [15 U.S.C. 78c-3(h)]). Exchange Act Section 3D(e) allows the Commission to exempt a security-based SEF from registration if the Commission finds that the security-based SEF is subject to comparable comprehensive supervision and regulation on a consolidated basis by the CFTC. See 15 U.S.C. 78c-4(e). The Commission proposed (but has not yet adopted) Regulation SB SEF under the Exchange Act that is designed to create a registration framework for security-based SEFs, establish rules with respect to Title VII's requirement that a security-based SEF must comply with the fourteen enumerated core principles and enforce compliance with those principles, and implement a process for a security-based SEF to submit to the Commission proposed changes to its rules. See footnote 8 above.
60. See Public Law 111-203, § 768(b) (adding Securities Act Section 5(d) [15 U.S.C. 77e(d)]).
61. See Public Law 111-203, § 763(e) (adding Exchange Act Section 6(l) [15 U.S.C. 78f(l)]).
62. See also Public Law 111-203, § 763(e) (adding Exchange Act Section 6(l) [15 U.S.C. 78f(l)]).
63. See Public Law 111-203, § 768(b) (adding Securities Act Section 5(d) [15 U.S.C. 77e(d)]).
81. See Public Law 111-203 § 763(b).