[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
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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