[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