[Federal Register Volume 71, Number 179 (Friday, September 15, 2006)]
[Rules and Regulations]
[Pages 54409-54411]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-15231]


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DEPARTMENT OF THE TREASURY

17 CFR Parts 400, 401 402, 403, 404 and 405

[Docket No. BPD GSRS 06-01]
RIN 1505-AB70


Government Securities Act Regulations: Applicability to Over-the-
Counter Derivatives Dealers

AGENCY: Office of the Under Secretary for Domestic Finance, Treasury.

ACTION: Final rule.

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SUMMARY: The Department of the Treasury (``Treasury'' or ``We'') is 
issuing this final rule to amend the regulations issued under the 
Government Securities Act of 1986 (``GSA''), as amended. This technical 
amendment makes no substantive changes, but adds language to state 
explicitly that we deem over-the-counter (``OTC'') derivatives dealers 
that are also government securities dealers to be in compliance with 
the GSA regulations if they comply with the applicable Securities and 
Exchange Commission (``SEC'') OTC derivatives dealer rules and other 
SEC rules applicable to them.

DATES: Effective Date: September 15, 2006.

ADDRESSES: You may download this final rule from the Bureau of the 
Public Debt's Web site at http://www.treasurydirect.gov or from the 
Electronic Code of Federal Regulations (e-CFR) Web site at http://www.gpoaccess.gov/ecfr. It is also available for public inspection and 
copying at the Treasury Department Library, Room 1428, Main Treasury 
Building, 1500 Pennsylvania Avenue, NW., Washington, DC 20220. To visit 
the library, call (202) 622-0990 for an appointment.

FOR FURTHER INFORMATION CONTACT: Lori Santamorena (Executive Director) 
or Chuck Andreatta (Associate Director), Bureau of the Public Debt, 
Government Securities Regulations Staff, (202) 504-3632 or e-mail us at 
[email protected].

SUPPLEMENTARY INFORMATION:

Background

    In 1998, the SEC adopted various rules and rule amendments (the 
``OTCDD Rules'' \1\) under the Securities Exchange Act of 1934 (``the 
Exchange Act'') that define and regulate ``OTC derivatives dealers 
(OTCDDs),'' a

[[Page 54410]]

category of registered broker-dealers that engage in certain over-the-
counter derivatives activities, but not the full range of securities 
activities traditionally associated with full-purpose broker-
dealers.\2\ The OTCDD Rules created a flexible regulatory framework 
under which U.S. securities firms could establish separately 
capitalized OTCDDs within the United States that will engage in dealer 
activities in both securities and non-securities OTC-derivative 
instruments and be able to ``compete more effectively with banks and 
foreign dealers in global OTC derivatives markets, while also 
maintaining standards necessary to ensure investor protection.'' \3\
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    \1\ The OTCDD Rules are commonly referred to as the ``Broker-
Dealer Lite'' rules.
    \2\ Exchange Act Release No. 40594 (October 23, 1998), 63 FR 
59362 (November 3, 1998).
    \3\ Id. at 59364.
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    Certain securities derivatives transactions in which an OTCDD may 
engage include options on particular government securities. Such 
unlisted options constitute ``government securities'' for purposes of 
Section 15C of the Exchange Act.\4\ If OTCDDs act as ``dealers'' in OTC 
derivative instruments that are ``government securities,'' they are 
also subject to regulation as ``government securities dealers'' under 
Section 15C of the Exchange Act and the GSA regulations.\5\
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    \4\ For purposes of section 78o-5, a ``government security'' 
includes an option on a government security other than an option (i) 
that is traded on one or more national securities exchanges; or (ii) 
for which quotations are disseminated through an automated quotation 
system operated by a registered securities association. 15 U.S.C. 
78c(42)(D).
    \5\ 63 FR 59362. Under 15 U.S.C. 78o-5(a)(1)(B)(1), a broker or 
dealer effecting, inducing, or attempting to induce the purchase or 
sale of a government security must file with the appropriate 
regulatory agency written notice that it is a government securities 
broker or dealer. Thus, an OTC derivatives dealer that engages in 
government securities transactions must also file notice of such 
activities with the SEC on Form BD.
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    The GSA required the Secretary of the Treasury to adopt rules with 
respect to transactions in government securities effected by government 
securities brokers and dealers in the areas of financial 
responsibility, protection of investor securities and funds, 
recordkeeping, reporting and audit. The regulatory framework 
established by the GSA required the Secretary in promulgating these 
rules to ``consider the sufficiency and appropriateness of then 
existing law and rules applicable'' to government securities brokers 
and dealers.\6\ In issuing the final GSA rules in 1987, Treasury 
considered already existing regulation with a view toward preventing 
overly burdensome and duplicative regulation.\7\ Treasury's GSA rules 
therefore generally provide that compliance by registered brokers and 
dealers with certain applicable SEC rules constitutes compliance with 
the GSA rules.
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    \6\ 15 U.S.C. 78o-5(b)(5)(C).
    \7\ 52 FR 27910 (July 24, 1987).
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    Moreover, Treasury has concluded and wishes to affirm that the SEC 
rules issued in 1998 for registered brokers and dealers that are OTCDDs 
are sufficient and appropriate for government securities brokers and 
dealers. Thus, for OTCDDs that write options on government securities, 
compliance with SEC rules constitutes compliance with the GSA rules. 
This is the result under the current GSA rules. However, in response to 
recent questions we have received, and recognizing that the current GSA 
rules require the reader to refer to other, separate SEC rules, we are 
amending the GSA rules to be more transparent and explicitly cover 
OTCDDs. These amendments make no substantive change, but merely add 
specific references to OTCDDs as a category of registered broker or 
dealer so that it will be clearer that OTCDDs are treated the same way 
as other registered brokers and dealers under the GSA rules. These 
changes appear in one general provision and four specific provisions of 
the GSA rules addressing financial responsibility, customer protection, 
recordkeeping, and reporting, respectively.
    We have consulted with the staff of the SEC in developing this 
amendment.

Special Analysis

    Because this rule makes no substantive change to the existing 
rules, and imposes no additional requirements on OTCDDs that are 
government securities brokers or dealers, we find under 5 U.S.C. 
553(b)(B) and (d)(3) that there is good cause that notice and public 
procedures are unnecessary, and that the rule can be issued in direct 
final form and made effective immediately. The final rule is not a 
``significant regulatory action'' for the purposes of Executive Order 
12866.
    Because no notice of proposed rulemaking is required, the 
provisions of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.) do 
not apply.

List of Subjects

17 CFR Part 400

    Administrative practice and procedure, Banks, Banking, Brokers, 
Government securities, Reporting and recordkeeping requirements.

17 CFR Part 401

    Banks, Banking, Brokers, Government securities.

17 CFR Part 402

    Brokers, Government securities.

17 CFR Part 403

    Banks, Banking, Brokers, Government securities.

17 CFR Part 404

    Banks, Banking, Brokers, Government securities, Reporting and 
recordkeeping requirements.

17 CFR Part 405

    Brokers, Government securities, Reporting and recordkeeping 
requirements.

0
For the reasons set forth in the preamble, the Department of the 
Treasury amends 17 CFR parts 400, 401, 402, 403, 404, and 405 as 
follows:

PART 400--RULES OF GENERAL APPLICATION

0
1. The authority citation for part 400 continues to read as follows:

    Authority: 15 U.S.C. 78o-5.


0
2. Section 400.1 is amended by revising paragraph (a) to read as 
follows:


Sec.  400.1  Scope of regulations.

    (a) Title I of the Government Securities Act of 1986 (Pub. L. 99-
571, 100 Stat. 3208) amends the Securities Exchange Act of 1934 (48 
Stat. 881-905; 15 U.S.C. chapter 2B) (``Act'') by adding section 15C, 
authorizing the Secretary of the Treasury to promulgate regulations 
concerning the financial responsibility, protection of customer 
securities and balances, recordkeeping and reporting of brokers and 
dealers in government securities. Those regulations constitute 
subchapter A of this chapter. Unless otherwise explicitly provided, all 
regulations in this subchapter apply to all government securities 
brokers or dealers, including registered brokers or dealers and 
financial institutions. Registered brokers or dealers include OTC 
derivatives dealers.
* * * * *


Sec.  400.2  [Amended]

0
3. Amend Sec.  400.2 as follows:
0
A. In paragraph (c)(3)(vi), remove the reference ``Room 553, 999 E 
Street NW.,'' and add in its place ``9th Floor, 799 9th Street NW.,''.
0
B. In paragraph (c)(7)(i), remove the reference ``Room 5030,'' and add 
it is place ``Room 1318,''.

0
4. Section 400.3 is amended by removing the alphabetical paragraph

[[Page 54411]]

designations and adding a new definition in alphabetical order for 
``OTC derivatives dealer'' to read as follows:


Sec.  400.3  Definitions.

* * * * *
    OTC derivatives dealer has the same meaning set out in 17 CFR 
240.3b-12.
* * * * *

PART 401--EXEMPTIONS

0
5. The authority citation for part 401 continues to read as follows:

     Authority: Sec. 101, Pub. L. 99-571, 100 Stat. 3209 (15 U.S.C. 
78o-5(a)(4)).


Sec.  401.3  [Amended]

0
6. In paragraphs (a)(2)(ii)(B) and (a)(2)(ii)(C), remove the reference 
``Sec.  400.3(c)'' and add in its place ``Sec.  400.3''.


Sec.  401.9  [Amended]

0
7. Amend Sec.  401.9 as follows:
0
A. In paragraph (b), remove the reference ``Sec.  400.3(m)'' and add in 
its place ``Sec.  400.3''.
0
B. In paragraph (i), remove the reference ``Sec. Sec.  400.3 (k) and 
(l)'' and add in its place ``Sec.  400.3''.
0
C. In paragraph (n), remove the reference ``Sec.  400.3(o)'' and add in 
its place ``Sec.  400.3''.
0
D. In paragraph (o), remove the reference ``Sec.  400.3(j)'' and add in 
its place ``Sec.  400.3''.
0
E. In paragraph (p), remove the reference ``Sec.  400.3(b)'' and add in 
its place ``Sec.  400.3''.

PART 402--FINANCIAL RESPONSIBILITY

0
8. The authority citation for part 402 continues to read as follows:

     Authority: 15 U.S.C. 78o-5(b)(1)(A), (b)(4).


0
9. Section 402.1 is amended by revising paragraph (b) to read as 
follows:


Sec.  402.1  Application of part to registered brokers and dealers and 
financial institutions; special rules for futures commission merchants 
and government securities interdealer brokers; effective date.

* * * * *
    (b) Registered brokers or dealers. This part does not apply to a 
registered broker or dealer (including an OTC derivatives dealer) that 
is subject to Sec.  240.15c3-1 of this title (SEC Rule 15c3-1).
* * * * *


Sec.  402.2a  [Amended]

0
10. In paragraph (c), under the heading for Schedule B, in paragraph 
(1) under the ``Columns 3 and 4'' paragraph, remove the reference ``17 
CFR 400.3(m)'' and add in its place ``17 CFR 400.3''.

PART 403--PROTECTION OF CUSTOMER SECURITIES AND BALANCES

0
11. The authority citation for part 403 continues to read as follows:

    Authority: Sec. 101, Pub. L. 99-571, 100 Stat. 3209; sec. 4(b), 
Pub. L. 101-432, 104 Stat. 963; sec. 102, sec. 106, Pub. L. 103-202, 
107 Stat. 2344 (15 U.S.C. 78o-5(a)(5), (b)(1)(A), (b)(4).


0
12. Section 403.1 is revised to read as follows:


Sec.  403.1  Application of part to registered brokers and dealers.

    With respect to their activities in government securities, 
compliance by registered brokers or dealers with Sec.  240.8c-1 of this 
title (SEC Rule 8c-1), as modified by Sec.  403.2 (a), (b) and (c), 
with Sec.  240.15c2-1 of this title (SEC Rule 15c2-1), with Sec.  
240.15c3-2 of this title (SEC Rule 15c3-2), as modified by Sec.  403.3, 
and with Sec.  240.15c3-3 of this title (SEC Rule 15c3-3), as modified 
by Sec.  403.4 (a) through (d), (f)(2) through (3), (g) through (j), 
and (m), including provisions in those rules relating to OTC 
derivatives dealers, constitutes compliance with this part.

PART 404-RECORDKEEPING AND PRESERVATION OF RECORDS

0
13. The authority citation for part 404 continues to read as follows:

     Authority: 15 U.S.C. 78o-5 (b)(1)(B), (b)(1)(C), (b)(2), 
(b)(4).


0
14. Section 404.1 is revised to read as follows:


Sec.  404.1  Application of part to registered brokers and dealers.

    Compliance by a registered broker or dealer with Sec.  240.17a-3 of 
this title (pertaining to records to be made), Sec.  240.17a-4 of this 
title (pertaining to preservation of records), Sec.  240.17a-13 of this 
title (pertaining to quarterly securities counts) and Sec.  240.17a-7 
of this title (pertaining to records of non-resident brokers or 
dealers), including provisions in those rules relating to OTC 
derivatives dealers, constitutes compliance with this part.


Sec.  404.4  [Amended]

0
15. In paragraph (a)(3)(i)(B), remove the reference ``Sec.  400.3(c)'' 
and add in its place ``Sec.  400.3''.

PART 405-REPORTS AND AUDITS

0
16. The authority citation for part 405 continues to read as follows:

    Authority: 15 U.S.C. 78o-5 (b)(1)(B), (b)(1)(C), (b)(2), (b)(4).


0
17. Section 405.1 is amended by revising paragraph (a) to read as 
follows:


Sec.  405.1  Application of part to registered brokers and dealers and 
to financial institutions; transition rule.

    (a) Compliance by registered brokers or dealers with Sec. Sec.  
240.17a-5, 240.17a-8, and 240.17a-11 of this title (Commission Rules 
17a-5, 17a-8 and 17a-11), including provisions of those rules relating 
to OTC derivatives dealers, constitutes compliance with this part.
* * * * *

    Dated: September 8, 2006.
Randal K. Quarles,
Under Secretary, Domestic Finance.
 [FR Doc. E6-15231 Filed 9-14-06; 8:45 am]
BILLING CODE 4810-39-P