[Federal Register Volume 60, Number 188 (Thursday, September 28, 1995)]
[Notices]
[Pages 50223-50224]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-24097]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36270]


Order Extending Exemption for Certain Brokers and Dealers From 
Broker-Dealer Registration

September 22, 1995.
AGENCY: Securities and Exchange Commission.

ACTION: Extension of exemption.

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SUMMARY: The Securities and Exchange Commission is extending the 
exemption for 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. As extended, the exemption is retroactive to June 6, 1934, 
the date of the enactment of the Securities Exchange Act of 1934, and 
will expire September 30, 1996.

EFFECTIVE DATE: September 22, 1995.

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 5-10, Securities and Exchange 
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION: 

I. Background

    On December 22, 1994, the Securities and Exchange Commission 
(``Commission'') issued an order under Section 15(a)(2) of the 
Securities Exchange Act of 1934 (``Exchange Act'') exempting persons 
acting as brokers or dealers with regard to certain categories of over-
the-counter (``OTC'') derivative instruments, to the extent such 
instruments are securities, from the broker-dealer registration 
requirement under Section 15(a) (``Exemptive Order'').\1\ In issuing 
the Exemptive Order, the Commission recognized the importance of 
derivative instruments as financial management tools, and sought to 
provide assurance to market participants in light of questions 
regarding the proper statutory and regulatory designation of certain 
OTC contracts. Such concerns, it was noted, 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.

    \1\ Exchange Act Release No. 35135 (Dec. 22, 1994), 59 FR 67358 
(Dec. 29, 1994). The Exemptive Order was issued concurrently 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 
Exchange Act, and findings and other imposing remedial sanctions in 
the Matter of BT Securities Corporation. Exchange Act Release No. 
35136 (Dec. 22, 1994).
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    Market participants have indicated to the Commission staff that the 
exemption set forth in the Exemptive Order has proved useful in 
addressing concerns regarding the status of various OTC derivative 
instruments.\2\ Therefore, in order to continue 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 Exchange Act to 
extend the exemption covering 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).

    \2\ See Letter from Zachary Snow, Chairman, OTC Derivative 
Products Committee, Securities Industry Association (``SIA''), to 
Brandon Becker, Director, Division of Market Regulation, dated July 
31, 1995; Letter from Brandon Becker, Director, Division of Market 
Regulation, to Zachary Snow, Chairman, SIA OTC Derivative Products 
Committee, dated June 28, 1995.
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II. Discussion

A. Scope of Order

    This order extends the exemption for persons acting as brokers or 
dealers with regard to transactions in certain classes of OTC options, 
to the extend 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-settlement 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 (``CFTC''), which is set forth at 17 CFR Part 35 (``Part 35 
Rules'').\3\ In addition, to the extent any person satisfies the 
conditions of the exemption, 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.\4\ 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.

    \3\ Individually negotiated, cash-settled OTC options on debt 
securities that may satisfy these criteria 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 a equity security 
or a group or index of equity securities).
    \4\ 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. Clarification

    The Commission notes that questions have arisen regarding the 
specific application of the requirements set forth above. For example, 
certain persons seeking to avail themselves of the exemption have asked 
whether transactions within the scope of the exemption must be 
documented using master agreements formulated by the International 
Swaps and Derivatives Association (``ISDA''). Some market participants 
prefer to use their own documentation for these transactions rather 
than standardized agreements. Also, certain OTC derivatives 
transactions based on foreign debt securities or documented using non-
U.S. master agreements developed specifically for foreign domestic 
markets. Accordingly, the requirement 

[[Page 50224]]
that transactions under the exemption be documented as swaps may be 
satisfied by the use of ISDA master agreements, individually tailored 
agreements negotiated between specific counterparties that contain 
terms that are substantially equivalent to those terms contained in the 
ISDA master agreements, or non-U.S. master agreements developed 
specifically for documenting transactions effected in foreign domestic 
markets. Conventional option agreements or conventional forward 
agreements that are documented using ISDA master agreements or other 
forms of agreement are not included within the scope of this exemption.
    Questions also have arisen regarding the requirement that swap 
agreements covered by this exemption satisfy the terms of the exemption 
in the Part 35 Rules. Specifically, questions have arisen whether swap 
agreements covered by this exemption also must be exempt under the Part 
35 Rules. The Commission's intention in requiring that transactions 
eligible for the exemption satisfy the Part 35 Rules was to ensure that 
the exemption be available only to swap agreements that meet the terms 
and conditions set forth in the Part 35 Rules, specifically in Part 
35.2 (17 CFR 35.2). Therefore, it is not necessary that swap agreements 
subject to the exemption also be exempt under the Part 35 Rules; 
rather, such swap agreements must satisfy the specified criteria set 
forth in the Part 35 Rules.

C. Public Interest

    The Commission finds that extending the exemption 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 cast 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.

D. Effective Date; Future Regulatory Action

    The exemption being extended by this order is retroactive and 
effective as of June 6, 1934, the date of the enactment of the Exchange 
Act, and will expire September 30, 1996. The Commission staff will 
continue its review of the OTC derivatives activities of U.S. broker-
dealers and their affiliates, and prior to September 30, 1996, 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.\5\

    \5\ The extension of the exemption is intended to avoid any 
dislocation of existing OTC derivatives markets and to allow those 
broker-dealers who have not already done so time to move existing 
business covered by this exemption into entities that do not rely on 
this exemption. The extension of the exemption 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. The 
extension of the exemption also is not designed to facilitate the 
creation of new types of options on debt securities to be written, 
purchased, or sold by an unregistered broker-dealer, if such 
instruments are of the type that are written, purchased, or sold by 
registered broker-dealers or are similar to conventional option 
contracts. 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, 1996. In this regard. it is the 
Commission's intent to continue monitoring developments in the OTC 
derivatives market during the period in which the exemption 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 CFR 
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.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-24097 Filed 9-27-95; 8:45 am]
BILLING CODE 8010-01-M