[Federal Register Volume 74, Number 144 (Wednesday, July 29, 2009)]
[Notices]
[Pages 37748-37758]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-17990]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60372; File No. S7-16-09]


Order Granting Temporary Exemptions Under the Securities Exchange 
Act of 1934 in Connection With Request on Behalf of Ice Clear Europe 
Limited Related to Central Clearing of Credit Default Swaps, and 
Request for Comments

July 23, 2009.

I. Introduction

    In response to the recent turmoil in the financial markets, the 
Securities and Exchange Commission (``Commission'') has taken multiple 
actions to protect investors and ensure the integrity of the nation's 
securities markets, including actions\1\ designed to address concerns 
related to the market in credit default swaps (``CDS'').\2\ The over-
the-counter

[[Page 37749]]

(``OTC'') market for CDS has been a source of concern to us and other 
financial regulators, and we have recognized that facilitating the 
establishment of central counterparties (``CCPs'') for CDS can play an 
important role in reducing the counterparty risks inherent in the CDS 
market, and thereby can help mitigate potential systemic impacts.\3\ 
Thus, taking action to help foster the prompt development of CCPs, 
including granting conditional exemptions from certain provisions of 
the Federal securities laws, is in the public interest.
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    \1\ See generally Securities Exchange Act Release No. 59578 
(Mar. 13, 2009), 74 FR 11781 (Mar. 19, 2009) (temporary exemption in 
connection with CDS clearing by Chicago Mercantile Exchange Inc.), 
Securities Exchange Act Release No. 59527 (Mar. 6, 2009), 74 FR 
10791 (Mar. 12, 2009) (temporary exemption in connection with CDS 
clearing by ICE US Trust LLC), Securities Exchange Act Release No. 
59164 (Dec. 24, 2008), 74 FR 139 (Jan. 2, 2009) (temporary exemption 
in connection with CDS clearing by LIFFE A&M and LCH.Clearnet Ltd.) 
and other Commission actions discussed therein.
    \2\ A CDS is a bilateral contract between two parties, known as 
counterparties. The value of this financial contract is based on 
underlying obligations of a single entity or on a particular 
security or other debt obligation, or an index of several such 
entities, securities, or obligations. The obligation of a seller 
under a CDS to make payments under a CDS contract is triggered by a 
default or other credit event as to such entity or entities or such 
security or securities. Investors may use CDS for a variety of 
reasons, including to offset or insure against risk in their fixed-
income portfolios, to take positions in bonds or in segments of the 
debt market as represented by an index, or to capitalize on the 
volatility in credit spreads during times of economic uncertainty. 
In recent years, CDS market volumes have rapidly increased. See 
Semiannual OTC derivatives statistics at end-December 2008, Bank for 
International Settlement (``BIS''), available at http://www.bis.org/statistics/otcder/dt1920a.pdf.
    This growth has coincided with a significant rise in the types 
and number of entities participating in the CDS market. CDS were 
initially created to meet the demand of banking institutions looking 
to hedge and diversify the credit risk attendant with their lending 
activities. However, financial institutions such as insurance 
companies, pension funds, securities firms, and hedge funds have 
entered the CDS market.
    \3\ See generally actions referenced in note 1, supra.
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    The Commission's authority over this OTC market for CDS is limited. 
Specifically, Section 3A of the Securities Exchange Act of 1934 
(``Exchange Act'') limits the Commission's authority over swap 
agreements, as defined in Section 206A of the Gramm-Leach-Bliley 
Act.\4\ For those CDS that are swap agreements, the exclusion from the 
definition of security in Section 3A of the Exchange Act, and related 
provisions, will continue to apply. The Commission's action today does 
not affect these CDS, and this Order does not apply to them. For those 
CDS that are not swap agreements (``non-excluded CDS''), the 
Commission's action today provides conditional exemptions from certain 
requirements of the Exchange Act.
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    \4\ 15 U.S.C. 78c-1. Section 3A excludes both a non-security-
based and a security-based swap agreement from the definition of 
``security'' under Section 3(a)(10) of the Exchange Act, 15 U.S.C. 
78c(a)(10). Section 206A of the Gramm-Leach-Bliley Act defines a 
``swap agreement'' as ``any agreement, contract, or transaction 
between eligible contract participants (as defined in section 1a(12) 
of the Commodity Exchange Act * * * ) * * * the material terms of 
which (other than price and quantity) are subject to individual 
negotiation.'' 15 U.S.C. 78c note.
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    The Commission believes that using well-regulated CCPs to clear 
transactions in CDS would provide a number of benefits, by helping to 
promote efficiency and reduce risk in the CDS market and among its 
participants, requiring maintenance of records of CDS transactions that 
would aid the Commission's efforts to prevent and detect fraud and 
other abusive market practices, addressing concerns about counterparty 
risk--through the novation process--by substituting the 
creditworthiness and liquidity of the CCP for the creditworthiness and 
liquidity of the counterparties to a CDS,\5\ contributing generally to 
the goal of market stability, and reducing CDS risks through 
multilateral netting of trades.\6\
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    \5\ ``Novation'' is a ``process through which the original 
obligation between a buyer and seller is discharged through the 
substitution of the CCP as seller to buyer and buyer to seller, 
creating two new contracts.'' Committee on Payment and Settlement 
Systems, Technical Committee of the International Organization of 
Securities Commissioners, Recommendations for Central Counterparties 
(Nov. 2004) at 66. Through novation, the CCP assumes counterparty 
risk.
    \6\ See generally actions referenced in note 1, supra.
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    In this context, ICE Clear Europe Limited (``ICE Clear Europe'') 
has requested that the Commission grant exemptions from certain 
requirements under the Exchange Act with respect to its proposed 
activities in clearing and settling certain CDS, as well as the 
proposed activities of certain other persons, as described below.\7\
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    \7\ See Letter from Abigail Arms, Shearman & Sterling LLP, to 
Elizabeth M. Murphy, Secretary, Commission, July 23, 2009.
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    Based on the facts presented and the representations made in the 
request on behalf of ICE Clear Europe,\8\ and for the reasons discussed 
in this Order, the Commission temporarily is exempting, subject to 
certain conditions, ICE Clear Europe from the requirement to register 
as a clearing agency under Section 17A of the Exchange Act solely to 
perform the functions of a clearing agency for certain non-excluded CDS 
transactions. The Commission also temporarily is exempting eligible 
contract participants and others from certain Exchange Act requirements 
with respect to non-excluded CDS cleared by ICE Clear Europe. In 
addition, the Commission temporarily is exempting ICE Clear Europe and 
certain members of ICE Clear Europe from the registration requirements 
of Sections 5 and 6 of the Exchange Act solely in connection with the 
calculation of mark-to-market prices for non-excluded CDS cleared by 
ICE Clear Europe. The Commission's exemptions are temporary and will 
expire on April 23, 2010.\9\
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    \8\ See id. The exemptions we are granting today are based on 
representations made in the request on behalf of ICE Clear Europe. 
We recognize, however, that there could be legal uncertainty in the 
event that one or more of the underlying representations were to 
become inaccurate. Accordingly, if any of these exemptions were to 
become unavailable by reason of an underlying representation no 
longer being materially accurate, the legal status of existing open 
positions in non-excluded CDS associated with persons subject to 
those unavailable exemptions would remain unchanged, but no new 
positions could be established pursuant to the exemptions until all 
of the underlying representations were again accurate.
    \9\ To facilitate the operation of one or more CCPs for the CDS 
market, the Commission has also approved interim final temporary 
rules providing exemptions under the Securities Act of 1933 and the 
Exchange Act for non-excluded CDS. See Securities Act Release No. 
8999 (Jan. 14, 2009), 74 FR 3967 (Jan. 22, 2009).
     Further, the Commission has provided temporary exemptions in 
connection with Sections 5 and 6 of the Exchange Act for 
transactions in non-excluded CDS. See Securities Exchange Act 
Release No. 59165 (Dec. 24, 2008), 74 FR 133 (Jan. 2, 2009).
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II. Discussion

A. Description of ICE Clear Europe's Proposal

    The exemptive request on behalf of ICE Clear Europe describes how 
its proposed arrangement for central clearing of CDS would operate and 
makes representations about the safeguards associated with those 
arrangements, as described below:
1. ICE Clear Europe Organization
    ICE Clear Europe is indirectly a wholly-owned subsidiary of the 
IntercontinenalExchange, Inc. (``ICE'').\10\ ICE Clear Europe was 
incorporated in England and Wales on April 19, 2007 as a private 
limited company under the Companies Act 1985 (as amended, now largely 
superseded by the Companies Act 2006). ICE Clear Europe is subject to 
direct supervision by the United Kingdom's Financial Services Authority 
(``FSA'') as a Recognised Clearing House (``RCH'').
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    \10\ ICE Clear Europe is owned by IntercontinentalExchange 
Holdings, which itself is over 99% owned by ICE Netherlands C.V. ICE 
Netherlands C.V. is owned by ICE Markets, Inc. and by 
IntercontinentalExchange International Inc., both of which are 
wholly owned by ICE.
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2. ICE Clear Europe Central Counterparty Services for CDS
    ICE Clear Europe will act as a central counterparty for ICE Clear 
Europe Clearing Members\11\ by assuming, through novation, the 
obligations of all eligible CDS transactions accepted by it for 
clearing and collecting margin and other credit support from ICE Clear 
Europe Clearing Members to collateralize their obligations to ICE Clear 
Europe. ICE Clear Europe's trade submission process is designed to 
ensure that it maintains a matched book of offsetting CDS contracts.
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    \11\ See note 33, infra.
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    ICE Clear Europe will leverage the Deriv/SERV infrastructure in 
operating its CDS clearing service. Initially, all trades submitted by 
ICE Clear Europe Clearing Members for clearing through

[[Page 37750]]

ICE Clear Europe will be recorded in the Deriv/SERV Trade Information 
Warehouse (``TIW'').\12\ ICE Clear Europe will, initially on a weekly 
basis, obtain from DTCC matched trades that have been recorded in the 
Deriv/SERV TIW as having been submitted for clearing through ICE Clear 
Europe. Eventually, ICE Clear Europe intends to obtain matched trades 
from DTCC on a real-time basis.
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    \12\ Major market participants frequently use the Deriv/SERV 
comparison and confirmation service of The Depository Trust & 
Clearing Corporation (``DTCC'') when documenting their CDS 
transactions. This service creates electronic records of transaction 
terms and counterparties. As part of this service, market 
participants separately submit the terms of a CDS transaction to 
Deriv/SERV in electronic form. Paired submissions are compared to 
verify that their terms match in all required respects. If a match 
is confirmed, the parties receive an electronic confirmation of the 
submitted transaction. All submitted transactions are recorded in 
the Deriv/SERV Trade Information Warehouse, which serves as the 
primary registry for submitted transactions.
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    Members may use the facilities of an inter-dealer broker to execute 
CDS transactions, for example, to access liquidity more rapidly or to 
maintain pre-execution anonymity and submit such transactions for 
clearance and settlement to ICE Clear Europe. The inter-dealer brokers 
do not assume market positions in connection with their intermediation 
of CDS transactions.
    Once a matched CDS contract has been forwarded to, or obtained by, 
ICE Clear Europe, and has been accepted for clearing by it, ICE Clear 
Europe will clear the CDS contract by becoming the central counterparty 
to each party to the trade. Deriv/SERV's current infrastructure will 
help to ensure that ICE Clear Europe maintains a matched book of 
offsetting CDS contracts. Maintaining a matched offsetting book is 
essential to managing the credit risk associated with CDS submitted to 
ICE Clear Europe for clearing.
    Under ICE Clear Europe's draft CDS rules and CDS procedures (``ICE 
Clear Europe Rules''), each bilateral CDS contract between two ICE 
Clear Europe Clearing Members that is submitted to and accepted by ICE 
Clear Europe for clearing will be ``novated.'' As part of this process, 
each bilateral CDS contract submitted to ICE Clear Europe will be 
replaced by two superseding CDS contracts between each of the original 
parties to the submitted transaction and ICE Clear Europe on standard 
terms mandated by ICE Clear Europe. Under these new contracts, ICE 
Clear Europe will act as the protection buyer to the original 
protection seller and protection seller to the original protection 
buyer. As central counterparty to each novated CDS contract, ICE Clear 
Europe will be able to net offsetting positions on a multilateral 
basis, even though ICE Clear Europe will have different counterparties 
with respect to the novated CDS contracts that are being netted.
    As part of the novation process, the terms and conditions governing 
the CDS bilaterally negotiated by the submitting counterparties will be 
superseded by the relevant provisions of the ICE Clear Europe Rules, 
the ISDA 2002 Master Agreement, and the Schedule to the ISDA 2002 
Master Agreement that is entered into by ICE Clear Europe and each ICE 
Clear Europe Clearing Member. Multilateral netting will significantly 
reduce the outstanding notional amount of each ICE Clear Europe 
Clearing Member's portfolio. When ICE Clear Europe acts as the central 
counterparty to all cleared CDS of an ICE Clear Europe Clearing Member, 
that member's positions will be netted down to a single exposure to ICE 
Clear Europe.
3. ICE Clear Europe Risk Management
    ICE Clear Europe will mitigate counterparty risk through a six-
tiered waterfall consisting of: (i) Membership criteria; (ii) initial 
margin; (iii) mark-to-market margin; (iv) intraday risk monitoring; (v) 
guaranty fund; and (vi) a one-time power of assessment. ICE Clear 
Europe's risk management infrastructure and related risk metrics are 
structured specifically for the CDS products that ICE Clear Europe 
clears. Each ICE Clear Europe Clearing Member's credit support 
obligations will be governed by a uniform credit support framework and 
applicable ICE Clear Europe Rules.
    ICE Clear Europe will maintain strict, objectively determined, 
risk-based margin and guaranty fund requirements,\13\ which will be 
consistent with clearing industry practice and international standards 
established for central counterparties as articulated in the Committee 
on Payment and Settlement Systems/International Organization of 
Securities Commissions (``CPSS-IOSCO'') Recommendations for Central 
Counterparties (``RCCP'').\14\ These requirements will also be subject 
to ongoing regulation and oversight by the FSA. The amount of margin 
and guaranty fund required of each ICE Clear Europe Clearing Member 
will be continuously monitored and periodically adjusted as required to 
reflect the size and profile of, and risk associated with, the ICE 
Clear Europe Clearing Member's cleared CDS transactions (and related 
market factors).
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    \13\ ICE Clear Europe takes collateral, including margin and 
guaranty fund contributions and non-cash collateral, by way of a 
``title transfer financial collateral arrangement'' for purposes of 
the Directive 2002/47/EC on Financial Collateral Arrangements 
(``Financial Collateral Regulations''). This is different from 
applicable U.S. law, which mandates that a clearinghouse receive 
pledged collateral. This collateral structure results in ICE Clear 
Europe having an unencumbered property right in all collateral 
provided to it, subject only to an obligation to return excess 
collateral or such collateral as remains unexpended following a 
closeout on a default. The Financial Collateral Regulations also 
provide for the effectiveness of financial collateral arrangements 
and close-out netting provisions under English law notwithstanding 
an insolvency of the counterparty.
    \14\ The RCCP was drafted by a joint task force (``Task Force'') 
composed of representative members of IOSCO and CPSS and published 
in November 2004. The Task Force consisted of securities regulators 
and central bankers from 19 countries and the European Union. The 
U.S. representatives on the Task Force included staff from the 
Commission, the Federal Reserve Board of Governors, and the 
Commodity Futures Trading Commission.
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    Each ICE Clear Europe Clearing Member's margin requirement will 
consist of two components: (i) Initial margin, reflecting a risk-based 
calculation of potential loss on outstanding CDS positions in the event 
of a significant adverse market movement; and (ii) mark-to-market 
margin, based upon an end-of-day mark-to-market of outstanding 
positions. At any time when a requirement for initial margin falls due 
and insufficient permitted cover is held, the ICE Clear Europe Clearing 
Member must initially transfer cash. Thereafter, an ICE Clear Europe 
Clearing Member may substitute such cash margin with other permitted 
cover by delivery of the replacement permitted cover to ICE Clear 
Europe.\15\ Mark-to-market margin payments, however, may be made by ICE 
Clear Europe or an ICE Clear Europe Clearing Member only in cash. ICE 
Clear Europe Clearing Members will be required to cover any end-of-day 
margin deficit with Euros (or such other currency as may be permitted 
under the proposed CDS finance procedures) by the following morning, 
and ICE Clear Europe will have the discretion to require and collect 
additional margin, both at the end of the day and intraday, as it deems 
necessary.\16\
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    \15\ The full list of permitted cover is set out in ICE Clear 
Europe circulars. The most recent circular in this respect is 
available at: https://www.theice.com/publicdocs/clear_europe/circulars/C09015_att.pdf.
    \16\ An ICE Clear Europe Clearing Member would be permitted to 
withdraw mark-to-market margin amounts credited to its account to 
the extent not required to satisfy its initial margin requirement.
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    ICE Clear Europe will also maintain a guaranty fund in respect of 
ICE Clear Europe Clearing Members (the ``CDS Guaranty Fund'') to cover 
losses arising

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from an ICE Clear Clearing Member's default on cleared CDS transactions 
that exceed the amount of margin held by ICE Clear Europe from the 
defaulting ICE Clear Europe Clearing Member. Each ICE Clear Europe 
Clearing Member will be required to contribute a minimum of 15 million 
Euros to the CDS Guaranty Fund initially when it becomes a Clearing 
Member and additional amounts based on its actual and anticipated CDS 
position exposures plus such other amount as ICE Clear Europe at its 
discretion determines is necessary based on projected clearing 
activity. The adequacy of the total amount of the CDS Guaranty Fund 
will be monitored daily, and if ICE Clear Europe determines the total 
amount in the CDS Guaranty Fund is to change, ICE Clear Europe Clearing 
Members will be given notice and will be required to deposit their new 
contribution prior to the opening of business on the next business day. 
As a result, the CDS Guaranty Fund will grow in proportion to the 
position risk associated with the aggregate volume of CDS cleared by 
ICE Clear Europe.
    ICE Clear Europe will also establish rules that ``mutualize'' the 
risk of an ICE Clear Europe Clearing Member default across all such 
clearing members.\17\ In the event of an ICE Clear Europe Clearing 
Member's default, ICE Clear Europe may look to the margin posted by 
such ICE Clear Europe Clearing Members, such an ICE Clear Europe 
Clearing Member's CDS Guaranty Fund contributions and, if applicable, 
any recovery from a parent guarantor. In addition, at its discretion, 
ICE Clear Europe will be authorized to use, to the extent needed, other 
ICE Clear Europe Clearing Members' CDS Guaranty Fund contributions to 
satisfy any obligations of the defaulting ICE Clear Europe Clearing 
Member.
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    \17\ In the event of a default of an ICE Clear Europe Clearing 
Member, only the CDS Guaranty Fund will be available to cover losses 
from the default. In the event of a default of an energy-only 
clearing member, only the Energy Guaranty Fund will be available to 
cover losses from the default. In the event of a default of an ICE 
Clear Europe Clearing Member that is active in both CDS and energy 
contracts, the Clearing Member's margin and guaranty fund are 
available to cover any loss, but the CDS Guaranty Fund deposits of 
the non-defaulting ICE Clear Europe Clearing Members can only be 
applied against losses in CDS contracts, and the Energy Guaranty 
Fund deposits of the non-defaulting Energy Clearing Members can only 
be applied against losses in energy contracts.
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    In the event that the total CDS Guaranty Fund is exhausted, 
remaining ICE Clear Europe Clearing Members will be obligated to 
contribute additional amounts to the CDS Guaranty Fund based on a one-
time limited power of assessment. The amount of the assessment will be 
up to, but will not exceed,\18\ each ICE Clear Europe Clearing Member's 
CDS Guaranty Fund obligation immediately prior to the default.
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    \18\ An ICE Clear Europe Clearing Member can limit the amount of 
its assessment to an amount equal to such clearing member's guaranty 
fund contribution immediately prior to the relevant default only by 
contributing such amount and terminating its membership from ICE 
Clear Europe, with the withdrawal effective three months after 
notice.
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4. Member Default
    Following a default by an ICE Clear Europe Clearing Member, ICE 
Clear Europe has a number of tools available to it under the ICE Clear 
Europe Rules to ensure an orderly liquidation and unwinding of the open 
positions of such defaulting ICE Clear Europe Clearing Member. In the 
first instance, upon determining that a default has occurred, ICE Clear 
Europe will have the ability to immediately enter into replacement CDS 
transactions with other ICE Clear Europe Clearing Members that are 
designed to mitigate, to the greatest extent possible, the market risk 
of the defaulting clearing member's open positions. ICE Clear Europe 
can also seek to sell or transfer positions to other ICE Clear Europe 
clearing members. For open positions in which there is no liquid 
trading market, ICE Clear Europe may enter into covering CDS 
transactions for which there is a liquid market and that are most 
closely correlated with such illiquid open positions.
    After entering into covering transactions in the open market, if 
any, ICE Clear Europe will seek to close out any remaining open 
positions of the defaulting ICE Clear Europe Clearing Member by using 
one or more auctions or other commercially reasonable unwind processes. 
ICE Clear Europe may close out its position through auctions, open 
market processes, or by allocating replacement transactions to non-
defaulting ICE Clear Europe Clearing Members at the floor price 
established by ICE Clear Europe.

B. Temporary Conditional Exemptions From Clearing Agency and Exchange 
Registration Requirements

1. Exemption From Section 17A of the Exchange Act
    Section 17A of the Exchange Act sets forth the framework for the 
regulation and operation of the U.S. clearance and settlement system, 
including CCPs. Specifically, Section 17A directs the Commission to use 
its authority to promote enumerated Congressional objectives and to 
facilitate the development of a national clearance and settlement 
system for securities transactions. Absent an exemption, a CCP that 
novates trades of non-excluded CDS that are securities and generates 
money and settlement obligations for participants is required to 
register with the Commission as a clearing agency.
    Section 36 of the Exchange Act authorizes the Commission to 
conditionally or unconditionally exempt any person, security, or 
transaction, or any class or classes of persons, securities, or 
transactions, from any provision or provisions of the Exchange Act or 
any rule or regulation thereunder, by rule, regulation, or order, to 
the extent that such exemption is necessary or appropriate in the 
public interest, and is consistent with the protection of 
investors.\19\
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    \19\ 15 U.S.C. 78mm.
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    Accordingly, pursuant to Section 36 of the Exchange Act, the 
Commission finds that it is necessary or appropriate in the public 
interest and is consistent with the protection of investors to exercise 
its authority to grant an exemption until April 23, 2010 to ICE Clear 
Europe from Section 17A of the Exchange Act, solely to perform the 
functions of a clearing agency for Cleared CDS,\20\ subject to the 
conditions discussed below.
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    \20\ For purposes of this exemption, and the other exemptions 
addressed in this Order, ``Cleared CDS'' means a credit default swap 
that is submitted (or offered, purchased, or sold on terms providing 
for submission) to ICE Clear Europe, that is offered only to, 
purchased only by, and sold only to eligible contract participants 
(as defined in Section 1a(12) of the Commodity Exchange Act as in 
effect on the date of this Order (other than a person that is an 
eligible contract participant under paragraph (C) of that section)), 
and in which: (i) The reference entity, the issuer of the reference 
security, or the reference security is one of the following: (A) An 
entity reporting under the Exchange Act, providing Securities Act 
Rule 144A(d)(4) information, or about which financial information is 
otherwise publicly available; (B) a foreign private issuer whose 
securities are listed outside the United States and that has its 
principal trading market outside the United States; (C) a foreign 
sovereign debt security; (D) an asset-backed security, as defined in 
Regulation AB, issued in a registered transaction with publicly 
available distribution reports; or (E) an asset-backed security 
issued or guaranteed by the Federal National Mortgage Association 
(``Fannie Mae''), the Federal Home Loan Mortgage Corporation 
(``Freddie Mac''), or the Government National Mortgage Association 
(``Ginnie Mae''); or (ii) the reference index is an index in which 
80 percent or more of the index's weighting is comprised of the 
entities or securities described in subparagraph (i). As discussed 
above, the Commission's action today does not affect CDS that are 
swap agreements under Section 206A of the Gramm-Leach-Bliley Act. 
See note 4, supra. The Commission's action today also does not 
affect activities in CDS that are outside the jurisdiction of the 
United States.
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    Our action today balances the aim of facilitating the prompt 
establishment of ICE Clear Europe as a CCP for non-

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excluded CDS transactions--which should help reduce systemic risks--
with ensuring that important elements of Commission oversight are 
applied to the non-excluded CDS market. In doing so, we are mindful 
that applying the full scope of the Exchange Act to transactions 
involving non-excluded CDS could deter the prompt establishment of ICE 
Clear Europe as a CCP to settle those transactions.
    While we are acting so that the prompt establishment of ICE Clear 
Europe as a CCP for non-excluded CDS will not be delayed by the need to 
apply the full scope of Exchange Act Section 17A's requirements that 
govern clearing agencies, the relief we are providing is temporary and 
conditional. The limited duration of the exemptions will permit the 
Commission to continue to gain more direct experience with the non-
excluded CDS market after ICE Clear Europe becomes operational, giving 
the Commission the ability to oversee the development of the centrally 
cleared non-excluded CDS market as it evolves. During the exemptive 
period, the Commission will closely monitor the impact of the CCPs on 
the CDS market. In particular, the Commission will seek to assure 
itself that the CCPs do not act in an anticompetitive manner or 
indirectly facilitate anticompetitive behavior with respect to fees 
charged to members, the dissemination of market data and the access to 
clearing services by independent CDS exchanges or CDS trading 
platforms. The Commission will take that experience into account in 
future actions.
    Moreover, this temporary exemption in part is based on ICE Clear 
Europe's representation that it meets the standards set forth in the 
CPSS-IOSCO RCCP report. The RCCP establishes a framework that requires 
a CCP to have: (i) The ability to facilitate the prompt and accurate 
clearance and settlement of CDS transactions and to safeguard its 
users' assets; and (ii) sound risk management, including the ability to 
appropriately determine and collect clearing fund and monitor its 
users' trading. This framework is generally consistent with the 
requirements of Section 17A of the Exchange Act.
    In addition, this Order is designed to assure that--as represented 
in the request on behalf of ICE Clear Europe--information will be 
available to market participants about the terms of the CDS cleared by 
ICE Clear Europe, the creditworthiness of ICE Clear Europe or any 
guarantor, and the clearing and settlement process for the CDS. 
Moreover, to be within the definition of Cleared CDS for purposes of 
this exemption (as well as the other exemptions granted through this 
Order), a CDS may only involve a reference entity, a reference 
security, an issuer of a reference security, or a reference index that 
satisfies certain conditions relating to the availability of 
information about such persons or securities. For non-excluded CDS that 
are index-based, the definition provides that at least 80 percent of 
the weighting of the index must be comprised of reference entities, 
issuers of a reference security, or reference securities that satisfy 
the information conditions. The definition does not prescribe the type 
of financial information that must be available or the location of the 
particular information, recognizing that eligible contract participants 
have access to information about reference entities and reference 
securities through multiple sources. The Commission believes, however, 
that it is important in the CDS market, as in the market for securities 
generally, that parties to transactions should have access to financial 
information that would allow them to appropriately evaluate the risks 
relating to a particular investment and make more informed investment 
decisions.\21\ Such information availability also will assist ICE Clear 
Europe and the buyers and sellers in valuing their Cleared CDS and 
their counterparty exposures. As a result of the Commission's actions 
today, the Commission believes that information should be available for 
market participants to be able to make informed investment decisions, 
and value and evaluate their Cleared CDS and their counterparty 
exposures.
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    \21\ The Commission notes the recommendations of the President's 
Working Group on Financial Markets regarding the informational needs 
and due diligence responsibilities of investors. See Policy 
Statement on Financial Market Developments, The President's Working 
Group on Financial Markets, Mar. 13, 2008, available at: http://www.ustreas.gov/press/releases/reports/pwgpolicystatemktturmoil_03122008.pdf.
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    This temporary exemption is subject to a number of conditions that 
are designed to enable Commission staff to monitor ICE Clear Europe's 
clearance and settlement of CDS transactions and help reduce risk in 
the CDS market. These conditions require that ICE Clear Europe: (i) 
Make available on its Web site its annual audited financial statements; 
(ii) preserve records of all activities related to the conduct of its 
Cleared CDS clearance and settlement services for at least five years 
(in an easily accessible place for the first two years); (iii) supply 
information relating to its Cleared CDS clearance and settlement 
services as may be reasonably requested by the Commission and provide 
access to the Commission to conduct on-site inspections of facilities, 
records, and personnel related to its Cleared CDS clearance and 
settlement services, subject to cooperation with the FSA and upon terms 
and conditions agreed between the FSA and the Commission; (iv) notify 
the Commission about material disciplinary actions taken against any of 
its members using its Cleared CDS clearance and settlement services, 
and about the involuntary termination of the membership of an entity 
that is using ICE Clear Europe's Cleared CDS clearance and settlement 
services; (v) notify the Commission not less than one day prior to 
implementation or effectiveness of changes to rules, procedures, and 
any other material events affecting its Cleared CDS clearance and 
settlement services, or, in exigent circumstances, as promptly as 
reasonably practicable under the circumstances; (vi) provide the 
Commission with reports prepared by independent audit personnel that 
are generated in accordance with risk assessment of the areas set forth 
in the Commission's Automation Review Policy Statements \22\ and its 
annual audited financial statements prepared by independent audit 
personnel; and (vii) provide notice to the Commission regarding the 
suspension of services or inability to operate facilities in connection 
with Cleared CDS clearance and settlement services at the same time it 
provides notice to the FSA.
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    \22\ See Automated Systems of Self-Regulatory Organizations, 
Securities Exchange Act Release No. 27445 (Nov. 16, 1989), 54 FR 
48703 (Nov. 24, 1989), and Automated Systems of Self-Regulatory 
Organizations, Securities Exchange Act Release No. 29185 (May 9, 
1991), 56 FR 22490 (May 15, 1991).
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    In addition, this relief is conditioned on ICE Clear Europe, 
directly or indirectly, making available to the public on terms that 
are fair and reasonable and not unreasonably discriminatory: (i) All 
end-of-day settlement prices and any other prices with respect to 
Cleared CDS that ICE Clear Europe may establish to calculate mark-to-
market margin requirements for ICE Clear Europe Clearing Members; and 
(ii) any other pricing or valuation information with respect to Cleared 
CDS as is published or distributed by ICE Clear Europe. The Commission 
believes this is an appropriate condition for ICE Clear Europe's 
exemption from registration as a clearing agency. In Section 11A of the 
Exchange Act, Congress found that ``[i]t is in the public interest and 
appropriate for the protection of investors and the maintenance of fair 
and orderly markets to assure * * * the availability to brokers, 
dealers, and investors of

[[Page 37753]]

information with respect to quotations for and transactions in 
securities.'' \23\ The President's Working Group on Financial Markets 
has stated that increased transparency is a policy objective for the 
over-the-counter derivatives market,\24\ which includes the market for 
CDS. The condition is designed to further this policy objective of both 
Congress and the President's Working Group by requiring ICE Clear 
Europe to make useful pricing data available to the public on terms 
that are fair and reasonable and not unreasonably discriminatory. 
Congress adopted these standards for the distribution of data in 
Section 11A. The Commission long has applied the standards in the 
specific context of securities market data,\25\ and it anticipates that 
ICE Clear Europe will distribute its data on terms that generally are 
consistent with the application of these standards to securities market 
data. For example, data distributors generally are required to treat 
subscribers equally and not grant special access, fees, or other 
privileges to favored customers of the distributor. Similarly, 
distributors must make their data feeds reasonably available to data 
vendors for those subscribers who wish to receive their data indirectly 
through a vendor rather than directly from the distributor. In 
addition, a distributor's attempt to tie data products that must be 
made available to the public with other products or services of the 
distributor would be inconsistent with the statutory requirements.\26\ 
The Commission carefully evaluates any type of discrimination with 
respect to subscribers and vendors to assess whether there is a 
reasonable basis for the discrimination given, among other things, the 
Exchange Act objective of promoting price transparency.\27\ Moreover, 
preventing unreasonable discrimination is a practical means to promote 
fair and reasonable terms for data distribution because distributors 
are more likely to act appropriately when the terms applicable to the 
broader public also must apply to any favored classes of customers.\28\
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    \23\ 15 U.S.C. 78k-1(a)(1)(C)(iii). See also 15 U.S.C. 78k-
1(a)(1)(D).
    \24\ See President's Working Group on Financial Markets, Policy 
Objectives for the OTC Derivatives Market (Nov. 14, 2008), available 
at http://www.ustreas.gov/press/releases/reports/policyobjectives.pdf (``Public reporting of prices, trading volumes 
and aggregate open interest should be required to increase market 
transparency for participants and the public.''). See also 
Department of the Treasury, Financial Regulatory Reform: A New 
Foundation, available at http://www.financialstability.gov/docs/regs/FinalReport_web.pdf, at p.48 (``[m]arket efficiency and price 
transparency should be improved in derivatives markets * * * by 
requiring development of a system for timely reporting of trades and 
prompt dissemination of prices and other trade information.'').
    \25\ See Securities Exchange Act Release No. 42209 (Dec. 9, 
1999), 64 FR 70613, 70621-70623 (Dec. 17, 1999) (``Market 
Information Concept Release'') (discussion of legal standards 
applicable to market data distribution since Section 11A was adopted 
in 1975).
    \26\ See Securities Exchange Act Release No. 59039 (Dec. 2, 
2008), 73 FR 74770, 74793 (Dec. 9, 2008) (``NYSE ArcaBook Order'') 
(``[S]ection 6 and Exchange Act Rule 603(a) require NYSE Arca to 
distribute the ArcaBook data on terms that are not tied to other 
products in a way that is unfairly discriminatory or 
anticompetitive.'').
    \27\ See Market Information Concept Release, 64 FR at 70630 
(``The most important objectives for the Commission to consider in 
evaluating fees are to assure (1) the wide availability of market 
information, (2) the neutrality of fees among markets, vendors, 
broker-dealers, and users, (3) the quality of market information--
its integrity, reliability, and accuracy, and (4) fair competition 
and equal regulation among markets and broker-dealers.'').
    \28\ See NYSE ArcaBook Order, 73 FR at 74794 (``[T]he proposed 
fees for ArcaBook data will apply equally to all professional 
subscribers and all non-professional subscribers * * * The fees 
therefore do not unreasonably discriminate among types of 
subscribers, such as by favoring participants in the NYSE Arca 
market or penalizing participants in other markets.'').
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    As a CCP, ICE Clear Europe will collect and process information 
about CDS transactions, prices, and positions from all of its 
participants. With this information, a CCP will, among other things, 
calculate and disseminate current values for open positions for the 
purpose of setting appropriate margin levels. The availability of such 
information can improve fairness, efficiency, and competitiveness of 
the market--all of which enhance investor protection and facilitate 
capital formation. Moreover, with pricing and valuation information 
relating to Cleared CDS, market participants would be able to derive 
information about underlying securities and indexes. This may improve 
the efficiency and effectiveness of the securities markets by allowing 
investors to better understand credit conditions generally.
2. Exemption From Sections 5 and 6 of the Exchange Act
    ICE Clear Europe represents that, in connection with its clearing 
and risk management process, it will calculate an end-of-day settlement 
price for each Cleared CDS in which an ICE Clear Europe Clearing Member 
has a cleared position, based on prices submitted by ICE Clear Europe 
Clearing Members. As part of this mark-to-market process, ICE Clear 
Europe will periodically require ICE Clear Europe Clearing Members to 
execute certain CDS trades at the applicable end-of-day settlement 
price. Requiring ICE Clear Europe Clearing Members to trade CDS 
periodically in this manner is designed to help ensure that such 
submitted prices reflect each ICE Clear Europe Clearing Member's best 
assessment of the value of each of its open positions in Cleared CDS on 
a daily basis, thereby reducing risk by allowing ICE Clear Europe to 
impose appropriate margin requirements.
    Section 5 of the Exchange Act states that ``[i]t shall be unlawful 
for any broker, dealer, or exchange, directly or indirectly, to make 
use of the mails or any means or instrumentality of interstate commerce 
for the purpose of using any facility of an exchange * * * to effect 
any transaction in a security, or to report any such transactions, 
unless such exchange (1) is registered as a national securities 
exchange under section 6 of [the Exchange Act], or (2) is exempted from 
such registration * * * by reason of the limited volume of transactions 
effected on such exchange * * *.'' \29\ Section 6 of the Exchange Act 
sets forth a procedure whereby an exchange \30\ may register as a 
national securities exchange.\31\ To facilitate the establishment of 
ICE Clear Europe's end-of-day settlement price process, including the 
periodically required trading described above, the Commission is 
exercising its authority under Section 36 of the Exchange Act to 
temporarily exempt ICE Clear Europe and ICE Clear Europe Clearing 
Members from Sections 5 and 6 of the Exchange Act and the rules and 
regulations thereunder in connection with ICE Clear Europe's 
calculation of mark-to-market prices for open positions in Cleared CDS. 
This temporary exemption is subject to the following conditions:
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    \29\ 15 U.S.C. 78e.
    \30\ Section 3(a)(1) of the Exchange Act, 15 U.S.C. 78c(a)(1), 
defines ``exchange.'' Rule 3b-16 under the Exchange Act, 17 CFR 
240.3b-16, defines certain terms used in the statutory definition of 
exchange. See Securities Exchange Act Release No. 40760 (Dec. 8, 
1998), 63 FR 70844 (Dec. 22, 1998) (adopting Rule 3b-16 in addition 
to Regulation ATS).
    \31\ 15 U.S.C. 78f. Section 6 of the Exchange Act also sets 
forth various requirements to which a national securities exchange 
is subject.
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    First, ICE Clear Europe must report the following information with 
respect to the calculation of mark-to-market prices for Cleared CDS to 
the Commission within 30 days of the end of each quarter, and preserve 
such reports during the life of the enterprise and of any successor 
enterprise:
     The total dollar volume of transactions executed during 
the quarter, broken down by reference entity, security, or index; and
     The total unit volume and/or notional amount executed 
during the

[[Page 37754]]

quarter, broken down by reference entity, security, or index.

Reporting of this information will assist the Commission in carrying 
out its responsibility to supervise and regulate the securities 
markets.
    Second, ICE Clear Europe must establish adequate safeguards and 
procedures to protect members' confidential trading information. Such 
safeguards and procedures shall include: (i) Limiting access to the 
confidential trading information of members to those employees of ICE 
Clear Europe who are operating the system or responsible for its 
compliance with this exemption or any other applicable rules; and (ii) 
implementing standards controlling employees of ICE Clear Europe 
trading for their own accounts. ICE Clear Europe must adopt and 
implement adequate oversight procedures to ensure that the safeguards 
and procedures established pursuant to this condition are followed. 
This condition is designed to prevent any misuse of ICE Clear Europe 
Clearing Members' trading information that may be available to ICE 
Clear Europe in connection with the daily marking-to-market process of 
open positions in Cleared CDS. This should strengthen confidence in ICE 
Clear Europe as a CCP for CDS, promoting participation.
    Third, ICE Clear Europe must comply with the conditions to the 
temporary exemption from registration as a clearing agency granted in 
this Order. As set forth above, this Order is designed to facilitate 
the prompt establishment of ICE Clear Europe as a CCP for non-excluded 
CDS. ICE Clear Europe has represented that, to enhance the reliability 
of end-of-day settlement prices submitted as part of the daily mark-to-
market process, it must require periodic trading of Cleared CDS 
positions by ICE Clear Europe Clearing Members whose submitted end-of-
day prices lock or cross. The Commission's temporary exemption from 
Sections 5 and 6 of the Exchange Act is based on ICE Clear Europe's 
representation that the end-of-day settlement pricing process, 
including the periodically required trading, is integral to its risk 
management. Accordingly, as a condition to ICE Clear Europe's temporary 
exemption from Sections 5 and 6 of the Exchange Act, ICE Clear Europe 
must comply with the conditions to the temporary exemption from Section 
17A of the Exchange Act in this Order.
    The Commission is also temporarily exempting each ICE Clear Europe 
Clearing Member from the prohibition in Section 5 of the Exchange Act 
to the extent that such ICE Clear Europe Clearing Member uses any 
facility of ICE Clear Europe to effect any transaction in Cleared CDS, 
or to report any such transaction, in connection with ICE Clear 
Europe's calculation of mark-to-market prices for open positions in 
Cleared CDS. Absent an exemption, Section 5 would prohibit any ICE 
Clear Europe Clearing Member that is a broker or dealer from effecting 
transactions in Cleared CDS on ICE Clear Europe, which will rely on 
this Order for an exemption from exchange registration. The Commission 
believes that temporarily exempting ICE Clear Europe Clearing Members 
from the restriction in Section 5 is necessary and appropriate in the 
public interest and is consistent with the protection of investors 
because it will facilitate their use of ICE Clear Europe's CCP for 
Cleared CDS, which for the reasons noted in this Order the Commission 
believes to be beneficial. Without also temporarily exempting ICE Clear 
Europe Clearing Members from this Section 5 requirement, the 
Commission's temporary exemption of ICE Clear Europe from Sections 5 
and 6 of the Exchange Act would be ineffective, because ICE Clear 
Europe Clearing Members that are brokers or dealers would not be 
permitted to effect transactions on ICE Clear Europe in connection with 
the end-of-day settlement price process.

C. Temporary General Exemption for ICE Clear Europe, ICE Clear Europe 
Clearing Members, and Certain Eligible Contract Participants

    Applying the full panoply of Exchange Act requirements to 
participants in transactions in non-excluded CDS likely would deter 
some participants from using CCPs to clear CDS transactions. At the 
same time, it is important that the antifraud provisions of the 
Exchange Act apply to transactions in non-excluded CDS; indeed, OTC 
transactions subject to individual negotiation that qualify as 
security-based swap agreements already are subject to these antifraud 
provisions.\32\
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    \32\ While Section 3A of the Exchange Act excludes ``swap 
agreements'' from the definition of ``security,'' certain antifraud 
and insider trading provisions under the Exchange Act explicitly 
apply to security-based swap agreements. See (a) paragraphs (2) 
through (5) of Section 9(a), 15 U.S.C. 78i(a), prohibiting the 
manipulation of security prices; (b) Section 10(b), 15 U.S.C. 
78j(b), and underlying rules prohibiting fraud, manipulation or 
insider trading (but not prophylactic reporting or recordkeeping 
requirements); (c) Section 15(c)(1), 15 U.S.C. 78o(c)(1), which 
prohibits brokers and dealers from using manipulative or deceptive 
devices; (d) Sections 16(a) and (b), 15 U.S.C. 78p(a) and (b), which 
address disclosure by directors, officers and principal 
stockholders, and short-swing trading by those persons, and rules 
with respect to reporting requirements under Section 16(a); (e) 
Section 20(d), 15 U.S.C. 78t(d), providing for antifraud liability 
in connection with certain derivative transactions; and (f) Section 
21A(a)(1), 15 U.S.C. 78u-1(a)(1), related to the Commission's 
authority to impose civil penalties for insider trading violations.
    ``Security-based swap agreement'' is defined in Section 206B of 
the Gramm-Leach-Bliley Act as a swap agreement in which a material 
term is based on the price, yield, value, or volatility of any 
security or any group or index of securities, or any interest 
therein.
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    We thus believe that it is appropriate in the public interest and 
consistent with the protection of investors temporarily to apply 
substantially the same framework to transactions by market participants 
in non-excluded CDS that applies to transactions in security-based swap 
agreements. Applying substantially the same set of requirements to 
participants in transactions in non-excluded CDS as apply to 
participants in OTC CDS transactions will avoid deterring market 
participants from promptly using CCPs, which would detract from the 
potential benefits of central clearing.
    Accordingly, pursuant to Section 36 of the Exchange Act, the 
Commission finds that it is necessary or appropriate in the public 
interest and is consistent with the protection of investors to exercise 
its authority to grant an exemption until April 23, 2010 from certain 
requirements under the Exchange Act. This temporary exemption applies 
to ICE Clear Europe, any ICE Clear Europe Clearing Member \33\ which is 
not a broker or dealer registered under Section 15(b) of the Exchange 
Act (other than paragraph (11) thereof), and any eligible contract 
participants \34\ other than: Eligible contract participants that 
receive or hold funds or securities for the purpose of purchasing, 
selling, clearing, settling or holding Cleared CDS positions for other 
persons; \35\ eligible contract

[[Page 37755]]

participants that are self-regulatory organizations; or eligible 
contract participants that are registered brokers or dealers.\36\
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    \33\ For purposes of this Order, an ``ICE Clear Europe Clearing 
Member'' means any clearing member of ICE Clear Europe that submits 
Cleared CDS to ICE Clear Europe for clearance and settlement 
exclusively (i) for its own account or (ii) for the account of an 
affiliate that controls, is controlled by, or is under common 
control with the clearing member of ICE Clear Europe. In general, 
this exemption does not apply to any ICE Clear Europe Clearing 
Member that is registered with the Commission as a broker-dealer. A 
separate temporary exemption addresses the Cleared CDS activities of 
registered broker-dealers. See Part II.D., infra.
    \34\ This exemption in general applies to eligible contract 
participants, as defined in Section 1a(12) of the Commodity Exchange 
Act as in effect on the date of this Order, other than persons that 
are eligible contract participants under paragraph (C) of that 
section.
    \35\ Solely for purposes of this requirement, an eligible 
contract participant would not be viewed as receiving or holding 
funds or securities for purpose of purchasing, selling, clearing, 
settling, or holding Cleared CDS positions for other persons, if the 
other persons involved in the transaction would not be considered 
``customers'' of the eligible contract participant under the 
analysis used for determining whether certain persons would be 
considered ``customers'' of a broker-dealer under Exchange Act Rule 
15c3-3(a)(1). For these purposes, and for the purpose of the 
definition of ``Cleared CDS,'' the terms ``purchasing'' and 
``selling'' mean the execution, termination (prior to its scheduled 
maturity date), assignment, exchange, or similar transfer or 
conveyance of, or extinguishing the rights or obligations under, a 
Cleared CDS, as the context may require. This is consistent with the 
meaning of the terms ``purchase'' or ``sale'' under the Exchange Act 
in the context of security-based swap agreements. See Exchange Act 
Section 3A(b)(4).
    \36\ A separate temporary exemption addresses the Cleared CDS 
activities of registered broker-dealers. See Part II.D., infra. 
Solely for purposes of this Order, a registered broker-dealer, or a 
broker or dealer registered under Section 15(b) of the Exchange Act, 
does not refer to someone that would otherwise be required to 
register as a broker or dealer solely as a result of activities in 
Cleared CDS in compliance with this Order.
---------------------------------------------------------------------------

    Under this temporary exemption, and solely with respect to Cleared 
CDS, these persons generally are exempt from the provisions of the 
Exchange Act and the rules and regulations thereunder that do not apply 
to security-based swap agreements. Those persons thus would still be 
subject to those Exchange Act requirements that explicitly are 
applicable in connection with security-based swap agreements.\37\ In 
addition, all provisions of the Exchange Act related to the 
Commission's enforcement authority in connection with violations or 
potential violations of such provisions would remain applicable.\38\ In 
this way, the temporary exemption would apply the same Exchange Act 
requirements in connection with non-excluded CDS as apply in connection 
with OTC credit default swaps.
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    \37\ See note 32, supra.
    \38\ Thus, for example, the Commission retains the ability to 
investigate potential violations and bring enforcement actions in 
the Federal courts and administrative proceedings, and to seek the 
full panoply of remedies available in such cases.
---------------------------------------------------------------------------

    This temporary exemption, however, does not extend to Sections 5 
and 6 of the Exchange Act.\39\ The Commission separately issued a 
conditional exemption from these provisions to all broker-dealers and 
exchanges.\40\ This temporary exemption also does not extend to Section 
17A of the Exchange Act; instead, ICE Clear Europe is exempt from 
registration as a clearing agency under the conditions discussed above. 
In addition, this temporary exemption does not apply to Exchange Act 
Sections 12, 13, 14, 15(d), and 16; \41\ eligible contract participants 
and other persons instead should refer to the interim final temporary 
rules issued by the Commission. Finally, this temporary exemption does 
not extend to the Commission's administrative proceeding authority 
under Sections 15(b)(4) and (b)(6),\42\ or to certain provisions 
related to government securities.\43\
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    \39\ This Order includes a separate temporary exemption 
regarding the mark-to-market process of ICE Clear Europe, discussed 
above.
    \40\ See note 9, supra. A national securities exchange that 
effects transactions in Cleared CDS would continue to be required to 
comply with all requirements under the Exchange Act applicable to 
such transactions. A national securities exchange could form 
subsidiaries or affiliates that operate exchanges exempt under that 
order. Any subsidiary or affiliate of a registered exchange could 
not integrate, or otherwise link, the exempt CDS exchange with the 
registered exchange including the premises or property of such 
exchange for effecting or reporting a transaction without being 
considered a ``facility of the exchange.'' See Section 3(a)(2), 15 
U.S.C. 78c(a)(2).
    \41\ 15 U.S.C. 78l, 78m, 78n, 78o(d), 78p.
    \42\ Exchange Act Sections 15(b)(4) and 15(b)(6), 15 U.S.C. 
78o(b)(4) and (b)(6), grant the Commission authority to take action 
against broker-dealers and associated persons in certain situations. 
Accordingly, while this exemption generally extends to persons that 
act as inter-dealer brokers in the market for Cleared CDS and do not 
hold funds or securities for others, such inter-dealer brokers may 
be subject to actions under Sections 15(b)(4) and (b)(6) of the 
Exchange Act.
    In addition, such inter-dealer brokers may be subject to actions 
under Exchange Act Section 15(c)(1), 15 U.S.C. 78o(c)(1), which 
prohibits brokers and dealers from using manipulative or deceptive 
devices. As noted above, Section 15(c)(1) explicitly applies to 
security-based swap agreements. Sections 15(b)(4), 15(b)(6) and 
15(c)(1), of course, would not apply to persons subject to this 
exemption who do not act as broker-dealers or associated persons of 
broker-dealers.
    \43\ This exemption specifically does not extend to the Exchange 
Act provisions applicable to government securities, as set forth in 
Section 15C, 15 U.S.C. 78o-5, and its underlying rules and 
regulations; nor does the exemption extend to related definitions 
found at paragraphs (42) through (45) of Section 3(a), 15 U.S.C. 
78c(a). The Commission does not have authority under Section 36 to 
issue exemptions in connection with those provisions. See Exchange 
Act Section 36(b), 15 U.S.C. 78mm(b).
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D. Temporary General Exemption for Certain Registered Broker-Dealers

    The temporary exemptions addressed above--with regard to ICE Clear 
Europe, certain ICE Clear Europe Clearing Members, and certain eligible 
contract participants--are not available to persons that are registered 
as broker-dealers with the Commission (other than those that are notice 
registered pursuant to Section 15(b)(11)).\44\ The Exchange Act and its 
underlying rules and regulations require broker-dealers to comply with 
a number of obligations that are important to protecting investors and 
promoting market integrity. We are mindful of the need to avoid 
creating disincentives to the prompt use of CCPs, and we recognize that 
the factors discussed above suggest that the full panoply of Exchange 
Act requirements should not immediately be applied to registered 
broker-dealers that engage in transactions involving Cleared CDS. At 
the same time, we also are sensitive to the critical importance of 
certain broker-dealer requirements to promoting market integrity and 
protecting customers (including those broker-dealer customers that are 
not involved with CDS transactions).
---------------------------------------------------------------------------

    \44\ Exchange Act Section 15(b)(11) provides for notice 
registration of certain persons that effect transactions in security 
futures products. 15 U.S.C. 78o(b)(11).
---------------------------------------------------------------------------

    This calls for balancing the facilitation of the development and 
prompt implementation of CCPs with the preservation of certain key 
investor protections. Pursuant to Section 36 of the Exchange Act, the 
Commission finds that it is necessary or appropriate in the public 
interest and is consistent with the protection of investors to exercise 
its authority to grant an exemption until April 23, 2010 from certain 
Exchange Act requirements. Consistent with the temporary exemptions 
discussed above, and solely with respect to Cleared CDS, we are 
temporarily exempting registered broker-dealers in general from the 
provisions of the Exchange Act and its underlying rules and regulations 
that do not apply to security-based swap agreements. As above, we are 
not excluding registered broker-dealers from Exchange Act provisions 
that explicitly apply in connection with security-based swap agreements 
or from related enforcement authority provisions.\45\ As above, and for 
similar reasons, we are not exempting registered broker-dealers from: 
Sections 5, 6, 12(a) and (g), 13, 14, 15(b)(4), 15(b)(6), 15(d), 16 and 
17A of the Exchange Act.\46\
---------------------------------------------------------------------------

    \45\ See notes 32 and 38, supra. As noted above, broker-dealers 
also would be subject to Section 15(c)(1) of the Exchange Act, which 
prohibits brokers and dealers from using manipulative or deceptive 
devices, because that provision explicitly applies in connection 
with security-based swap agreements. In addition, to the extent the 
Exchange Act and any rule or regulation thereunder imposes any other 
requirement on a broker-dealer with respect to security-based swap 
agreements (e.g., requirements under Rule 17h-1T to maintain and 
preserve written policies, procedures, or systems concerning the 
broker or dealer's trading positions and risks, such as policies 
relating to restrictions or limitations on trading financial 
instruments or products), these requirements would continue to apply 
to broker-dealers' activities with respect to Cleared CDS.
    \46\ We also are not exempting those members from provisions 
related to government securities, as discussed above.
---------------------------------------------------------------------------

    Further we are not exempting registered broker-dealers from the 
following additional provisions under

[[Page 37756]]

the Exchange Act: (i) Section 7(c),\47\ which addresses the unlawful 
extension of credit by broker-dealers; (ii) Section 15(c)(3),\48\ which 
addresses the use of unlawful or manipulative devices by broker-
dealers; (iii) Section 17(a),\49\ regarding broker-dealer obligations 
to make, keep and furnish information; (iv) Section 17(b),\50\ 
regarding broker-dealer records subject to examination; (v) Regulation 
T,\51\ a Federal Reserve Board regulation regarding extension of credit 
by broker-dealers; (vi) Exchange Act Rule 15c3-1, regarding broker-
dealer net capital; (vii) Exchange Act Rule 15c3-3, regarding broker-
dealer reserves and custody of securities; (viii) Exchange Act Rules 
17a-3 through 17a-5, regarding records to be made and preserved by 
broker-dealers and reports to be made by broker-dealers; and (ix) 
Exchange Act Rule 17a-13, regarding quarterly security counts to be 
made by certain exchange members and broker-dealers.\52\ Registered 
broker-dealers should comply with these provisions in connection with 
their activities involving non-excluded CDS because these provisions 
are especially important to helping protect customer funds and 
securities, ensure proper credit practices and safeguard against fraud 
and abuse.\53\
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    \47\ 15 U.S.C. 78g(c).
    \48\ 15 U.S.C. 78o(c)(3).
    \49\ 15 U.S.C. 78q(a).
    \50\ 15 U.S.C. 78q(b).
    \51\ 12 CFR 220.1 et seq.
    \52\ Solely for purposes of this exemption, in addition to the 
general requirements under the referenced Exchange Act sections, 
registered broker-dealers shall only be subject to the enumerated 
rules under the referenced Exchange Act sections.
    \53\ Indeed, Congress directed the Commission to promulgate 
broker-dealer financial responsibility rules, including rules 
regarding custody, the use of customer securities and the use of 
customers' deposits or credit balances, and regarding establishment 
of minimum financial requirements.
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E. Solicitation of Comments

    The Commission is continuing to monitor closely the development of 
the CDS market and intends to determine to what extent, if any, 
additional regulatory action may be necessary. For example, as 
circumstances warrant, certain conditions could be added, altered, or 
eliminated. Moreover, because these exemptions are temporary, the 
Commission will in the future consider whether they should be extended 
or allowed to expire. The Commission believes it would be prudent to 
solicit public comment on its action today, and on what action it 
should take with respect to the CDS market in the future. The 
Commission is soliciting public comment on all aspects of these 
temporary exemptions, including:
    1. Whether the length of this temporary exemption (until April 23, 
2010) is appropriate. If not, what should the appropriate duration be?
    2. Whether the conditions to these temporary exemptions are 
appropriate. Why or why not? Should other conditions apply? Are any of 
the present conditions to the temporary exemptions provided in this 
Order unnecessary? If so, please specify and explain why such 
conditions are not needed.
    3. Whether ICE Clear Europe ultimately should be required to 
register as a clearing agency under the Exchange Act. Why or why not?
    Comments may be submitted by any of the following methods:
Electronic Comments
     Use the Commission's Internet comment form (http://www.sec.gov/rules/other.shtml ); or
     Send an e-mail to [email protected]. Please include 
File Number S7-16-09 on the subject line.
Paper Comments
     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number S7-16-09. This file number 
should be included on the subject line if e-mail is used. To help us 
process and review your comments more efficiently, please use only one 
method. We will post all comments on the Commission's Internet Web site 
(http://www.sec.gov/rules/exorders.shtml ). Comments are also available 
for public inspection and copying in the Commission's Public Reference 
Room, 100 F Street, NE., Washington, DC 20549, on official business 
days between the hours of 10:00 am and 3:00 pm. All comments received 
will be posted without change; we do not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly.

III. Conclusion

    It is hereby ordered, pursuant to Section 36(a) of the Exchange 
Act, that, until April 23, 2010:

(a) Exemption From Section 17A of the Exchange Act

    ICE Clear Europe Limited (``ICE Clear Europe'') shall be exempt 
from Section 17A of the Exchange Act solely to perform the functions of 
a clearing agency for Cleared CDS (as defined in paragraph (e)(1) of 
this Order), subject to the following conditions:
    (1) ICE Clear Europe shall make available on its Web site its 
annual audited financial statements.
    (2) ICE Clear Europe shall keep and preserve at least one copy of 
all documents, including all correspondence, memoranda, papers, books, 
notices, accounts, and other such records as shall be made or received 
by it relating to its Cleared CDS clearance and settlement services. 
These records shall be kept for at least five years and for the first 
two years shall be held in an easily accessible place.
    (3) ICE Clear Europe shall supply information and periodic reports 
relating to its Cleared CDS clearance and settlement services as may be 
reasonably requested by the Commission and, subject to cooperation with 
the FSA and upon such terms and conditions as may be agreed between the 
FSA and the Commission, shall provide access to the Commission to 
conduct on-site inspections of all facilities (including automated 
systems and systems environment), records, and personnel related to ICE 
Clear Europe's Cleared CDS clearance and settlement services.
    (4) ICE Clear Europe shall notify the Commission, on a monthly 
basis, of any material disciplinary actions taken against any of its 
members using its Cleared CDS clearance and settlement services, 
including the denial of services, fines, or penalties. ICE Clear Europe 
shall notify the Commission promptly when ICE Clear Europe terminates 
on an involuntary basis the membership of an entity that is using ICE 
Clear Europe's Cleared CDS clearance and settlement services. Both 
notifications shall describe the facts and circumstances that led to 
the ICE Clear Europe's disciplinary action.
    (5) ICE Clear Europe shall notify the Commission of all changes to 
its rules, procedures, and any other material events affecting its 
Cleared CDS clearance and settlement services, including its fee 
schedule and changes to risk management practices, not less than one 
day prior to effectiveness or implementation of such changes or, in 
exigent circumstances, as promptly as reasonably practicable under the 
circumstances. If ICE Clear Europe gives notice to, or seeks approval 
from, the FSA regarding any other changes to its rules regarding its 
Cleared CDS clearance and settlement services, ICE Clear Europe will 
also provide notice to the Commission. All such rule changes will be 
posted on ICE Clear Europe's Web site. Such notifications will not be

[[Page 37757]]

deemed rule filings that require Commission approval.
    (6) ICE Clear Europe shall provide the Commission with reports 
prepared by independent audit personnel concerning its Cleared CDS 
clearance and settlement services that are generated in accordance with 
risk assessment of the areas set forth in the Commission's Automation 
Review Policy Statements. ICE Clear Europe shall provide the Commission 
with annual audited financial statements for ICE Clear Europe prepared 
by independent audit personnel.
    (7) ICE Clear Europe shall notify the Commission at the same time 
it notifies the FSA in accordance with FSA REC 3.15 and FSA REC 3.16 
regarding the suspension of services or inability to operate its 
facilities in connection with its Cleared CDS clearance and settlement 
services.
    (8) ICE Clear Europe, directly or indirectly, shall make available 
to the public on terms that are fair and reasonable and not 
unreasonably discriminatory: (i) All end-of-day settlement prices and 
any other prices with respect to Cleared CDS that ICE Clear Europe may 
establish to calculate mark-to-market margin requirements for ICE Clear 
Europe Clearing Members; and (ii) any other pricing or valuation 
information with respect to Cleared CDS as is published or distributed 
by ICE Clear Europe.

(b) Exemption From Sections 5 and 6 of the Exchange Act

    (1) ICE Clear Europe shall be exempt from the requirements of 
Sections 5 and 6 of the Exchange Act and the rules and regulations 
thereunder in connection with its calculation of mark-to-market prices 
for open positions in Cleared CDS, subject to the following conditions:
    (i) ICE Clear Europe shall report the following information with 
respect to the calculation of mark-to-market prices for Cleared CDS to 
the Commission within 30 days of the end of each quarter, and preserve 
such reports during the life of the enterprise and of any successor 
enterprise:
    (A) The total dollar volume of transactions executed during the 
quarter, broken down by reference entity, security, or index; and
    (B) The total unit volume and/or notional amount executed during 
the quarter, broken down by reference entity, security, or index;
    (ii) ICE Clear Europe shall establish adequate safeguards and 
procedures to protect members' confidential trading information. Such 
safeguards and procedures shall include: (A) Limiting access to the 
confidential trading information of members to those employees of ICE 
Clear Europe who are operating the system or responsible for its 
compliance with this exemption or any other applicable rules; and (B) 
implementing standards controlling employees of ICE Clear Europe 
trading for their own accounts. ICE Clear Europe must adopt and 
implement adequate oversight procedures to ensure that the safeguards 
and procedures established pursuant to this condition are followed; and
    (iii) ICE Clear Europe shall satisfy the conditions of the 
temporary exemption from Section 17A of the Exchange Act set forth in 
paragraphs (a)(1)-(8) of this Order.
    (2) Any ICE Clear Europe Clearing Member shall be exempt from the 
requirements of Section 5 of the Exchange Act to the extent such ICE 
Clear Europe Clearing Member uses any facility of ICE Clear Europe to 
effect any transaction in Cleared CDS, or to report any such 
transaction, in connection with ICE Clear Europe's clearance and risk 
management process for Cleared CDS.
    (c) Exemption for ICE Clear Europe, ICE Clear Europe Clearing 
Members, and certain eligible contract participants.
    (1) Persons eligible. The exemption in paragraph (c)(2) is 
available to:
    (i) ICE Clear Europe;
    (ii) Any ICE Clear Europe Clearing Member (as defined in paragraph 
(e)(2) of this Order), which is not a broker or dealer registered under 
Section 15(b) of the Exchange Act (other than paragraph (11) thereof); 
and
    (iii) Any eligible contract participant (as defined in Section 
1a(12) of the Commodity Exchange Act as in effect on the date of this 
Order (other than a person that is an eligible contract participant 
under paragraph (C) of that section)), other than: (A) An eligible 
contract participant that receives or holds funds or securities for the 
purpose of purchasing, selling, clearing, settling, or holding Cleared 
CDS positions for other persons; (B) an eligible contract participant 
that is a self-regulatory organization, as that term is defined in 
Section 3(a)(26) of the Exchange Act; or (C) a broker or dealer 
registered under Section 15(b) of the Exchange Act (other than 
paragraph (11) thereof).
    (2) Scope of exemption.
    (i) In general. Such persons generally shall, solely with respect 
to Cleared CDS, be exempt from the provisions of the Exchange Act and 
the rules and regulations thereunder that do not apply in connection 
with security-based swap agreements. Accordingly, under this exemption, 
those persons would remain subject to those Exchange Act requirements 
that explicitly are applicable in connection with security-based swap 
agreements (i.e., paragraphs (2) through (5) of Section 9(a), Section 
10(b), Section 15(c)(1), paragraphs (a) and (b) of Section 16, Section 
20(d) and Section 21A(a)(1) and the rules thereunder that explicitly 
are applicable to security-based swap agreements). All provisions of 
the Exchange Act related to the Commission's enforcement authority in 
connection with violations or potential violations of such provisions 
also remain applicable.
    (ii) Exclusions from exemption. The exemption in paragraph 
(c)(2)(i), however, does not extend to the following provisions under 
the Exchange Act:
    (A) Paragraphs (42), (43), (44), and (45) of Section 3(a);
    (B) Section 5;
    (C) Section 6;
    (D) Section 12 and the rules and regulations thereunder;
    (E) Section 13 and the rules and regulations thereunder;
    (F) Section 14 and the rules and regulations thereunder;
    (G) Paragraphs (4) and (6) of Section 15(b);
    (H) Section 15(d) and the rules and regulations thereunder;
    (I) Section 15C and the rules and regulations thereunder;
    (J) Section 16 and the rules and regulations thereunder; and
    (K) Section 17A (other than as provided in paragraph (a)).
    (d) Exemption for certain registered broker-dealers.
    A broker or dealer registered under Section 15(b) of the Exchange 
Act (other than paragraph (11) thereof) shall be exempt from the 
provisions of the Exchange Act and the rules and regulations thereunder 
specified in paragraph (c)(2), solely with respect to Cleared CDS, 
except:
    (1) Section 7(c);
    (2) Section 15(c)(3);
    (3) Section 17(a);
    (4) Section 17(b);
    (5) Regulation T, 12 CFR 200.1 et seq.;
    (6) Rule 15c3-1;
    (7) Rule 15c3-3;
    (8) Rule 17a-3;
    (9) Rule 17a-4;
    (10) Rule 17a-5; and
    (11) Rule 17a-13.
    (e) Definitions.
    For purposes of this Order:
    (1) ``Cleared CDS'' shall mean a credit default swap that is 
submitted (or offered, purchased, or sold on terms providing for 
submission) to ICE Clear Europe, that is offered only to,

[[Page 37758]]

purchased only by, and sold only to eligible contract participants (as 
defined in Section 1a(12) of the Commodity Exchange Act as in effect on 
the date of this Order (other than a person that is an eligible 
contract participant under paragraph (C) of that section)), and in 
which:
    (i) The reference entity, the issuer of the reference security, or 
the reference security is one of the following:
    (A) An entity reporting under the Exchange Act, providing 
Securities Act Rule 144A(d)(4) information, or about which financial 
information is otherwise publicly available;
    (B) A foreign private issuer whose securities are listed outside 
the United States and that has its principal trading market outside the 
United States;
    (C) A foreign sovereign debt security;
    (D) An asset-backed security, as defined in Regulation AB, issued 
in a registered transaction with publicly available distribution 
reports; or
    (E) An asset-backed security issued or guaranteed by Fannie Mae, 
Freddie Mac or Ginnie Mae; or
    (ii) The reference index is an index in which 80 percent or more of 
the index's weighting is comprised of the entities or securities 
described in subparagraph (i).
    (2) ``ICE Clear Europe Clearing Member'' shall mean any clearing 
member of ICE Clear Europe that submits Cleared CDS to ICE Clear Europe 
for clearance and settlement exclusively (i) for its own account or 
(ii) for the account of an affiliate that controls, is controlled by, 
or is under common control with the clearing member of ICE Clear 
Europe.

    By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. E9-17990 Filed 7-28-09; 8:45 am]
BILLING CODE 8010-01-P