[Federal Register Volume 59, Number 249 (Thursday, December 29, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-32094]


[[Page Unknown]]

[Federal Register: December 29, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35135]

 

Order Exempting Certain Brokers and Dealers From Broker-Dealer 
Registration

December 22, 1994.
AGENCY: Securities and Exchange Commission.

ACTION: Exemptive Order.

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SUMMARY: The Securities and Exchange Commission is issuing an order 
exempting persons acting as brokers or dealers with respect to certain 
categories of over-the-counter derivative instruments, to the extent 
that such instruments are securities, from the broker-dealer 
registration requirement under Section 15(a) of the Securities Exchange 
Act of 1934. The exemption set forth in the order is retroactive to 
June 6, 1934, the date of the enactment of the Securities Exchange Act 
of 1934, and will expire September 30, 1995.

EFFECTIVE DATE: December 22, 1994.

FOR FURTHER INFORMATION CONTACT:
Catherine McGuire, Chief Counsel, Patrice Gliniecki, Senior Counsel, or 
Glenn Jessee, Senior Counsel, (202) 942-0073, Office of Chief Counsel, 
Division of Market Regulation, Mail Stop 7-10, Securities and Exchange 
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION: 

I. Background

    It is widely recognized that derivative instruments are important 
financial management tools that, in many respects, reflect the unique 
strength and innovation of the American capital markets. These 
derivative instruments encompass a wide array of financial contracts, 
including swaps, futures, options, and forwards, that derive their 
value from the performance of other assets, such as equities, equity 
indexes, U.S. Treasury securities or other debt obligations, foreign 
currencies, and commodities.
    The complexity and rapid proliferation of these instruments has 
raised some questions regarding the proper statutory and regulatory 
designation of certain OTC contracts. Such concerns are compounded by 
the trend among dealers to conduct a range of OTC derivatives 
activities in unregistered entities, either here or abroad, or in 
separately-capitalized derivative product companies.
    In order to provide certainty to participants in the OTC 
derivatives market with respect to their registration obligations under 
the Exchange Act, the Commission is exercising its authority under 
Section 15(a)(2) of the Securities Exchange Act of 1934 (``Exchange 
Act'') to exempt persons acting as brokers or dealers regarding certain 
categories of OTC derivative instruments, to the extent such 
instruments are securities, from the broker-dealer registration 
requirement under Section 15(a).\1\
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    \1\This order is being issued concurrent with the issuance of an 
order instituting proceedings pursuant to Section 8A of the 
Securities Act of 1933 and Sections 15(b) and 21C of the Securities 
Exchange Act of 1934, and findings and order imposing remedial 
sanctions in the Matter of BT Securities Corporation.
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II. Discussion

A. Scope of Order

    This order exempts persons acting as brokers or dealers with regard 
to transactions in certain classes of OTC options, to the extent such 
options are securities, from the broker-dealer registration requirement 
under Section 15(a) of the Exchange Act. This exemption only applies to 
transactions involving individually negotiated, cash-settled OTC 
options on debt securities or groups or indexes of such securities that 
(1) are documented as swap agreements, and (2) satisfy the terms of the 
exemption from regulation under the Commodity Exchange Act adopted by 
the Commodity Futures Trading Commission, which is set forth at 17 
C.F.R. Part 35. Individually negotiated, cash-settled OTC options on 
debt securities that may satisfy the criteria described above could 
include (1) options on prices of debt securities; (2) options on yields 
of debt securities; (3) options on the difference, or spread, between 
the yields of two or more debt securities, the spread between the 
prices (or other value) of two or more debt securities, or the spread 
between yields and prices involving two or more debt securities; and 
(4) options on the spread between the price (or other value) or yield 
on one or more debt securities and the price (or other value) or yield 
of any other asset or index (other than an equity security or a group 
or index of equity securities.
    In addition, to the extent any person satisfies the conditions of 
the exemptive order, the Division of Market Regulation has indicated 
that it would not recommend enforcement action if such persons do not 
comply with the various statutory and regulatory requirements otherwise 
imposed on a ``broker'' or ``dealer'' as defined in Sections 3(a)(4) 
and 3(a)(5) of the Exchange Act.\2\ Such persons, however, remain 
subject to the antifraud provisions under the federal securities laws 
including, but not limited to, the provisions of Section 17(a) of the 
Securities Act of 1933, Sections 10(b) and 15(c) of the Exchange Act, 
and Rules 10b-5 and 15c1-2 thereunder.
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    \2\In addition, the Commission staff will respond promptly to 
no-action, exemptive, or other requests submitted by brokers or 
dealers that require relief from specific provisions of the federal 
securities laws.
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B. Public Interest

    The Commission finds that granting this exemptive order is 
consistent with the public interest and the protection of investors. 
When used properly, OTC derivative instruments provide significant 
benefits to corporations, financial institutions, and institutional 
investors in managing the risks of their business exposures or 
financial assets. Derivatives also permit investors to lower their 
funding costs and, in many instances, can be a cheaper and more liquid 
way of attaining desired exposure than a position in the cash market. 
This exemption is intended to reduce or eliminate any legal risk 
arising from conducting certain OTC derivatives transactions in 
unregistered broker-dealers, and thus to reduce any financial risk 
within the securities markets. Legal certainty contributes to the 
preservation of the financial integrity and stability of OTC 
derivatives markets.

C. Effective Date; Future Regulatory Action

    The exemption set forth in the order is retroactive and effective 
as of June 6, 1934, the date of the enactment of the Exchange Act, and 
will expire September 30, 1995. Prior to that time, the Commission will 
consider whether to modify, condition, extend, or withdraw the 
exemption in whole or in part. Furthermore, this exemption is subject 
to modification or revocation at any time the Commission determines 
that such modification or revocation is consistent with the public 
interest or the protection of investors.\3\
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    \3\The Commission is issuing the temporary exemption set forth 
in this order to avoid any short-term dislocation of existing OTC 
derivatives markets. This order is not intended to permit registered 
broker-dealers conducting transactions in cash-settled OTC options 
on debt securities to move their activities involving such 
transactions to unregistered affiliates. Indeed, were such conduct 
to occur, the Commission would move quickly to revise or withdraw 
this order to constrain such conduct prior to September 30, 1995. In 
this regard, it is the Commission's intent to monitor developments 
in the OTC derivatives market during the period in which this order 
is effective and to take prompt action to protect investors and 
maintain fair and orderly markets.
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    It is therefore ordered, pursuant to Section 15(a)(2) of the 
Exchange Act, that to the extent brokers or dealers engage in 
transactions involving individually negotiated, cash-settled OTC 
options on debt securities or groups or indexes of such securities that 
(1) are documented as swap agreements, and (2) satisfy the terms of the 
exemption from regulation under the Commodity Exchange Act adopted by 
the Commodity Futures Trading Commission, which is set forth at 17 
C.F.R. Part 35, to the extent such instruments are securities, such 
brokers and dealers are exempt from the registration requirements of 
Section 15(a)(1) of the Exchange Act.

    By the Commission.
Jonathan G. Katz,
Secretary.
[FR Doc. 94-32094 Filed 12-28-94; 8:45 am]
BILLING CODE 8010-01-M