[Federal Register Volume 75, Number 18 (Thursday, January 28, 2010)]
[Notices]
[Pages 4626-4630]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-1664]


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DEPARTMENT OF THE TREASURY


Order Granting a Temporary Exemption From Certain Government 
Securities Act Provisions and Regulations in Connection With a Request 
From ICE Trust U.S. LLC Related to Central Clearing of Credit Default 
Swaps, and Request for Comments

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

ACTION: Notice of temporary exemption.

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SUMMARY: The Department of the Treasury (Treasury) is issuing a 
temporary exemption from certain Government Securities Act of 1986 
provisions and regulations in connection with a request from ICE Trust 
U.S. LLC to accommodate customer clearing of credit default swaps that 
reference government securities. Treasury is also soliciting public 
comment on this order.

DATES: Effective Date: January 28, 2010.

FOR FURTHER INFORMATION CONTACT: Lori Santamorena, Lee Grandy, or Kevin 
Hawkins, Bureau of the Public Debt, Department of the Treasury, at 202-
504-3632.

SUPPLEMENTARY INFORMATION: The following is Treasury's order providing 
a temporary exemption:

I. Introduction

    Treasury regulates transactions in government securities \1\ by 
government securities brokers \2\ and government securities dealers \3\ 
under Section 15C of the Securities Exchange Act of 1934 (Exchange 
Act), as amended by the Government Securities Act of 1986 (GSA). These 
regulations impose obligations concerning financial responsibility, 
protection of customer securities and balances, and recordkeeping and 
reporting.
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    \1\ The term government securities is defined at 15 U.S.C. 
78c(a)(42).
    \2\ A government securities broker generally is ``any person 
regularly engaged in the business of effecting transactions in 
government securities for the account of others,'' with certain 
exclusions. 15 U.S.C. 78c(a)(43).
    \3\ A government securities dealer generally is ``any person 
engaged in the business of buying and selling government securities 
for his own account, through a broker or otherwise,'' with certain 
exclusions. 15 U.S.C. 78c(a)(44).
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    On March 6, 2009, Treasury granted temporary exemptions \4\ from 
certain GSA provisions and regulations to ICE Trust U.S. LLC, formerly 
ICE US Trust LLC (ICE Trust), certain ICE Trust participants, and 
certain eligible contract participants (ECPs)\5\ (the March 6, 2009 
order). On December 7, 2009, Treasury extended the expiration date of 
these exemptions until March 7, 2010 (the December 7, 2009 order),\6\ 
in response to a request from ICE Trust (the request).\7\
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    \4\ 74 FR 10647, March 11, 2009 Order Granting Temporary 
Exemptions from Certain Provisions of the Government Securities Act 
and Treasury's Government Securities Act Regulations in Connection 
with a Request on Behalf of ICE US Trust LLC Related to Central 
Clearing of Credit Default Swaps, and Request for Comments, 
available at: http://www.treasurydirect.gov/instit/statreg/gsareg/gsareq_treasexemptiveorder309.pdf.
    \5\ ECPs are defined in Section 1a(12) of the Commodity Exchange 
Act, 7 U.S.C. 1 et seq. The use of the term ECPs in this order 
refers to the definition of ECPs as in effect on the date of this 
order, and excludes persons that are ECPs under Section 1a(12)(C). 
The temporary exemption provided to ECPs in this order also applies 
to interdealer brokers that are ECPs.
    \6\ 74 FR 64127, December 7, 2009 Order Extending Temporary 
Exemptions from Certain Government Securities Act Provisions and 
Regulations in Connection with a Request from ICE Trust U.S. LLC 
Related to Central Clearing of Credit Default Swaps, available at: 
http://www.treasurydirect.gov/instit/statreg/gsareg/FR_Treasury_Order_ICE_Extension_(12-7-09).pdf.
    \7\ Letter from Kevin McClear, General Counsel, ICE Trust to the 
Commissioner of the Public Debt, Van Zeck, December 3, 2009, 
available at http://www.treasurydirect.gov/instit/statreg/gsareg/gsareg.htm.
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    ICE Trust also requested that Treasury grant supplemental exemptive 
relief to permit the clearance of credit default swaps (CDS)\8\ 
transactions on behalf of customers of ICE Trust clearing members. ICE 
Trust requested an exemption for clearing members, including certain 
entities affiliated with ICE Trust clearing members,\9\ from provisions 
of the Exchange Act governing government securities transactions, to 
the extent such provisions would otherwise apply to such clearing 
members in regard to cleared CDS.\10\
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    \8\ 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 (``reference 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 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 take positions on the 
volatility in credit spreads during times of economic uncertainty.
    \9\ ICE Trust stated that, for purposes of its request, an 
affiliate means an entity that directly, or indirectly through one 
or more intermediaries, controls or is controlled by, or that is 
under common control with, a clearing member.
    \10\ For purposes of this order, cleared CDS means a credit 
default swap that is submitted (or offered, purchased, or sold on 
terms providing for submission) to ICE Trust, that is offered only 
to, purchased only by, and sold only to ECPs (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 ECP under paragraph (C) 
of that section)), and that references a government security.

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[[Page 4627]]

    Based on the facts presented and the representations made in the 
request,\11\ Treasury is granting this temporary exemption to 
accommodate customer clearing. We are granting this exemption for ICE 
Trust clearing members and certain ECPs from government securities 
broker and government securities dealer registration requirements and 
related requirements in connection with using ICE Trust to clear CDS 
transactions of their customers. The exemption is subject to certain 
conditions and will expire on March 7, 2010, unless Treasury renews, 
revokes, or modifies it.
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    \11\ See note 7, supra. The temporary exemption Treasury is 
granting in this order is based on representations made in the 
request from ICE Trust, which incorporate representations made by 
ICE Trust in its request upon which the March 6, 2009 order was 
based. Treasury recognizes, however, that there could be legal 
uncertainty in the event that one or more of the underlying 
representations were to become inaccurate. Accordingly, if this 
temporary exemption becomes unavailable by reason of an underlying 
representation no longer being materially accurate, the legal status 
of existing open positions in cleared CDS associated with persons 
subject to the unavailable exemption will remain unchanged, but no 
new positions can be established pursuant to the temporary exemption 
until all of the underlying representations are again accurate.
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    In providing this temporary exemption from certain provisions of 
Section 15C of the Exchange Act, Treasury is not determining whether 
particular CDS are ``government securities'' under 15 U.S.C. 
78c(a)(42).

II. Discussion

A. ICE Trust's Activities and Proposed Customer Clearing Activities

    The request describes how ICE Trust currently clears CDS and how 
the proposed arrangements for central clearing of customers' CDS 
transactions would operate, including the safeguards associated with 
customer clearing, as summarized below.\12\
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    \12\ ICE Trust represents that there have been no material 
changes to the representations made in the letter requesting the 
relief we provided in the March 6, 2009 order, apart from the 
proposal to clear customer CDS transactions, and ICE Trust has 
incorporated those representations into the request. See the request 
for a detailed description of ICE Trust's proposed customer CDS 
clearing activities.
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1. ICE Trust's CDS Clearing Activity
    According to the request, as of October 30, 2009, ICE Trust has 
cleared approximately $2.64 trillion notional amount of the proprietary 
CDS transactions of its clearing members, based on indices of 
securities. ICE Trust also intends to clear single-name CDS contracts 
based on individual reference entities or securities.
2. Proposed Activity Clearing CDS Transactions of Members' Clients
    ICE Trust has proposed a ``Non-Member Framework'' for clearing the 
CDS transactions of its clearing members' clients, under which its 
clearing members would submit client positions to ICE Trust in one of 
two ways. Both ways will result in ICE Trust having no market exposure 
in connection with the cleared CDS transaction. Under the ``bilateral 
model,'' clients execute a CDS transaction directly with a clearing 
member (acting in a principal capacity), followed by the clearing 
member submitting a trade to ICE Trust with corresponding terms. ICE 
Trust will create two positions: A Client Position of the clearing 
member that mirrors the transaction between the client and the clearing 
member, and an offsetting House Position of the clearing member.
    Under the ``prime broker'' or ``designated clearing member'' model, 
a client agrees to a CDS transaction with a clearing member (executing 
dealer) other than the member that clears the client's transactions. 
The clearing member, as prime broker, and the executing dealer would 
enter into a trade and submit it to ICE Trust for clearing, and the 
clearing member and the client would simultaneously enter into an 
offsetting trade. The net result would be that the client's clearing 
member and the client would be counterparties to one transaction, the 
clearing member would have a Client Position with ICE Trust that 
mirrors its transaction with the client, and the executing dealer would 
have a House Position with ICE Trust.
    Under the Non-Member Framework, ICE Trust would have no direct 
relationship with or liability to clients. To facilitate the transfer 
or liquidation of clearing member-client transactions if a clearing 
member defaults, ICE Trust will require clearing members to pledge to 
ICE Trust their rights under the clearing member-client transactions 
and their rights to related margin. This pledge would secure the 
clearing members' obligations to ICE Trust under the related client 
positions, and their obligations to other clients under other clearing 
member-client transactions. The request states that a negotiated 
International Swaps and Derivatives Association (ISDA) master agreement 
between the clearing member and its client, supplemented by a Standard 
Annex approved by ICE Trust,\13\ will document the CDS transaction 
between those parties.
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    \13\ The Standard Annex would treat these clearing member-client 
CDS transactions differently from other derivatives transactions 
between those parties. It would make the CDS transactions submitted 
to ICE Trust for clearing subject to separate ICE Trust margin 
requirements; incorporate a standard definition of clearing member 
default (based on a determination by ICE Trust); and specify 
procedures for remedies in the case of a clearing member default. 
The client also could agree that certain default portability rules 
would apply.
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3. Margin Requirements for Clearing Members and Clients
    ICE Trust states that the Non-Member Framework is intended to 
protect clients from default by their clearing members, particularly 
with regard to their initial margin, and that central clearing of CDS 
generally is intended to enhance the financial stability of CDS markets 
as a whole.
    ICE Trust rules establish a framework for the collection and 
protection of client margin and will require clearing members to 
collect sufficient amounts of initial and variation margin from clients 
for CDS transactions that ICE Trust clears.\14\ Clearing members will 
be able to collect additional margin from customers beyond what ICE 
Trust rules require.
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    \14\ ICE Trust rules permit clearing members to calculate the 
initial margin collected from individual clients on a net basis, 
across all of the CDS transactions of that customer that are cleared 
through ICE Trust. The rules will not permit clearing members to net 
across multiple clients cleared through ICE Trust. ICE Gross Margin 
collected by a clearing member from a client must be pledged by the 
client to the clearing member, and must not be subject to liens or 
other encumbrances in favor of third parties.
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    Under ICE Trust rules, promptly upon receipt clearing members must 
post ICE Gross Margin (the gross initial margin collected from clients) 
to ICE Trust as custodian. Prior to posting, the clearing member must 
segregate that ICE Gross Margin.
    ICE Trust will determine the ICE Net Margin requirement for each 
clearing member with regard to the cleared CDS positions of all of the 
member's clients. Clearing members could use collateral posted by 
clients to satisfy this obligation. ICE Trust rules require that 
clearing members post both the ICE Net Margin, and the remainder of the 
margin that clearing members collect from their clients pursuant to ICE 
Trust rules, to the Custodial Client Omnibus Margin Account that would 
be maintained at ICE Trust or a subcustodian.\15\
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    \15\ This order contains several conditions related to this 
account.
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    ICE Trust or the subcustodian will hold the Custodial Client 
Omnibus Margin Account for the benefit of all clients of the relevant 
clearing member (or for the clearing member as agent or custodian on 
behalf of such clients), and segregate it from other assets of the

[[Page 4628]]

clearing member (including assets in its proprietary House Account). 
ICE Trust rules require clearing members to maintain records that 
include the clients' identities, the margin they post, the transfer of 
those assets to the Custodial Client Omnibus Margin Account, and the 
use of that margin.
4. Default and Portability Rules
    ICE Trust rules also require clearing members to agree to the 
transfer of clearing member-client transactions and related positions 
upon a client's request, provided that the client obtains a new 
clearing member willing to accept the positions. In connection with 
that transfer, ICE Trust would move related margin between the 
Custodial Client Omnibus Margin Accounts of the two clearing members.
    In the event of a client or clearing member default, ICE Trust's 
rules provide for an orderly transfer, termination, or liquidation of 
clearing member-client transactions. Upon a clearing member default, if 
ICE Trust terminates a clearing member-client transaction, ICE Trust 
will not net termination amounts owed by a client against termination 
amounts owed with respect to the client's other trades with that 
clearing member. This is intended to facilitate portability of 
positions. ICE Trust also would undertake a close-out process, 
including calculating separate net termination amounts with respect to 
the closeout of the clearing member's House Positions and its Client 
Positions,\16\ which would not permit netting between those positions. 
To protect the clearing system, however, ICE Trust would offset any 
amount that the clearing member owes to ICE Trust with respect to 
Client Positions against any amount that ICE Trust owes to the clearing 
member with respect to House Positions.
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    \16\ ICE Trust would not undertake this process, however, if the 
defaulting clearing member's receiver (such as the Federal Deposit 
Insurance Corporation or similar authority) transfers the relevant 
positions to another non-defaulting entity in accordance with 
applicable law.
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    The default rules in the Standard Annex provide that, if a clearing 
member defaults, ICE Trust may transfer clearing member-client 
transactions to a new clearing member, or otherwise establish 
replacement transactions. If ICE Trust is unable to transfer, or 
terminate and replace the transactions, the client may terminate them.
    ICE Trust states that if a clearing member default is due to a 
client's default, ICE Trust may use the margin posted to the clearing 
member's Custodial Client Omnibus Margin Account up to the amount of 
the ICE Net Margin requirement, but will not be able to access the 
remainder of a non-defaulting client's assets. As a result, the clients 
of a clearing member are subject to the risk of loss resulting from the 
default of another client of that clearing member, up to the amount of 
the clearing member's net margin requirement.
    If a client owes amounts to the clearing member with respect to the 
cleared CDS transactions, ICE Trust will apply the client's margin in 
the Custodial Client Omnibus Margin Account to satisfy that obligation, 
and the client's margin thereafter would be available to pay amounts 
that client owed to ICE Trust and to other clients with respect to 
their clearing member-client transactions. Conversely, clients owed by 
the clearing member on a net basis will have a claim for that amount, 
together with their pro rata share of margin being used to satisfy the 
ICE Net Margin requirement.
    Clients will be entitled to the return of their remaining excess 
margin in the Custodial Client Omnibus Margin Account, except to the 
extent that ICE Trust applies the margin to satisfy the client's 
obligation to the clearing member. Clients will share in the assets in 
the Custodial Client Omnibus Margin Account in proportion to their 
claims, but will not be entitled to the return of specific assets in 
that account.

B. Conditional Temporary Exemption for Certain Clearing Members and 
Certain ECPs

    In the March 6, 2009 order, Treasury concluded that the central 
counterparty (CCP) clearing facility for CDS proposed by ICE Trust may 
increase transparency, enhance counterparty risk management, and 
contribute generally to the goal of mitigating systemic risk. Treasury 
further recognized the possibility that applying the full range of GSA 
requirements to certain CDS market participants that are not registered 
or noticed government securities brokers or government securities 
dealers could deter some of them from using ICE Trust to clear CDS 
transactions where the CDS references a government security, and 
thereby reduce the potential systemic risk mitigation and other 
benefits of central clearing. Consistent with these findings, as well 
as with the public interest and the protection of investors, Treasury 
temporarily exempted ICE Trust, certain clearing members, and certain 
ECPs from some of the GSA provisions. For similar reasons, Treasury 
extended these temporary exemptions in the December 7, 2009 order.
    Treasury believes that facilitating the central clearing of CDS 
transactions with an appropriate, temporary exemption will increase 
transparency, enhance counterparty risk management, and contribute 
generally to the goal of mitigating systemic risk. Treasury also 
believes that facilitating the central clearing of customer CDS 
transactions will help the customers of clearing members manage 
counterparty risk.
    Treasury is mindful that such an exemption must require securities 
intermediaries that receive or hold funds and securities on behalf of 
others to comply with standards that safeguard the interests of their 
customers. For example, a registered or noticed government securities 
broker or government securities dealer must segregate assets held on 
behalf of customers from proprietary assets because segregation will 
assist customers in recovering assets in the event the government 
securities broker or government securities dealer fails. To the extent 
that funds and securities are not segregated, they could be used by an 
intermediary to fund its own business and satisfy its debts if it were 
to fail. Moreover, the maintenance of adequate capital and liquidity 
protects customers, CCPs, and other market participants. Adequate books 
and records (including both transactional and position records) are 
necessary to facilitate day-to-day operations as well as to help 
resolve situations in which an intermediary fails and either a 
regulatory authority or receiver must liquidate the firm. Appropriate 
records also are necessary to allow examiners to review for improper 
activities.
    At the same time, requiring such intermediaries to register as 
government securities brokers or government securities dealers may 
deter the use of CCPs for customer CDS transactions, which could lessen 
the counterparty risk and systemic risk reduction benefits associated 
with central clearing.
    Those factors weigh in favor of not applying the requirements of 
the GSA to these intermediaries, conditioned on them taking reasonable 
steps to increase the likelihood that their customers would be 
protected if the intermediary became insolvent. This requires balancing 
the promotion of central clearing of customer CDS transactions and 
customer protection. While the conditions imposed in this order serve 
to minimize the risk to customers, these conditions cannot provide 
legal certainty that customer collateral would be protected if an ICE 
Trust clearing member were to become insolvent.
    Treasury recognizes that requiring clearing members that receive or 
hold

[[Page 4629]]

customer collateral to satisfy these conditions will not guarantee the 
return of a customer's assets if a clearing member becomes insolvent, 
particularly in light of the fact-specific nature of the insolvency 
process and the diversity of insolvency regimes that may apply to ICE 
Trust members clearing for U.S. customers. Treasury believes, however, 
that the customer segregation requirements we impose in this order as 
conditions on the temporary exemption are reasonable steps to increase 
the likelihood that customers could access their assets in such an 
insolvency event. Treasury also recognizes that these customers 
generally will be sophisticated market participants who can weigh the 
risks associated with entering into arrangements with intermediaries 
that are not registered or noticed government securities brokers or 
government securities dealers, particularly in light of the disclosures 
required as a condition of this temporary exemption.
    For these reasons, the Secretary finds that it is consistent with 
the public interest, the protection of investors, and the purposes of 
the Exchange Act to grant the conditional, temporary exemption set 
forth below. This exemption will expire on March 7, 2010, unless 
Treasury renews, revokes, or modifies it. This exemption is consistent 
with a recent modification and extension of temporary exemptions the 
Securities and Exchange Commission (SEC) granted related to a request 
from ICE Trust concerning central clearing of CDS.\17\
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    \17\ Securities Exchange Act Release No. 34-61119 (December 4, 
2009). Order Extending and Modifying Temporary Exemptions Under the 
Securities Exchange Act of 1934 in Connection with Request from ICE 
Trust U.S. LLC Related to Central Clearing of Credit Default Swaps, 
and Request for Comments. See http://www.sec.gov. The SEC's order 
relates only to and is necessary only for CDS that are not swap 
agreements under Section 206A of the Gramm-Leach-Bliley Act.
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C. Consultations and Considerations

    In ordering this exemption, Treasury has consulted with and 
considered the views of the staffs of the SEC, the Commodity Futures 
Trading Commission (CFTC), and the financial institution appropriate 
regulatory agencies.\18\
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    \18\ The definition of appropriate regulatory agency with 
respect to a government securities broker or a government securities 
dealer is set out at 15 U.S.C. 78c(a)(34)(G). The definition 
includes the Board of Governors of the Federal Reserve System, the 
Comptroller of the Currency, the Federal Deposit Insurance 
Corporation, the Director of Thrift Supervision, and in limited 
circumstances the SEC.
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    Treasury finds that the circumstances upon which it issued and 
extended the March 6, 2009 order, including mitigation of potential 
systemic risk, still exist and therefore Treasury believes that 
granting this temporary exemption to accommodate customer clearing is 
warranted and appropriate.
    Treasury bases this order on the facts and circumstances presented 
and representations made by ICE Trust in the request. ICE Trust has 
indicated that there have been no material changes to any of the facts 
or circumstances set forth in its request in support of the March 6, 
2009 order, and the request for extension and modification of that 
order, that would cause such representations to no longer be materially 
accurate.

III. Solicitation of Comments

    When Treasury issued the March 6, 2009 order, we solicited comment 
on all aspects of the temporary exemptions, and specifically requested 
comment as to the duration of the temporary exemptions and the 
appropriateness of the exemptive conditions. We received no comments.
    In connection with this order to accommodate central clearing of 
customer CDS transactions, we request comments on the relief we are 
granting in connection with customer clearing and whether the 
conditions we have placed on the relief adequately protect customer 
funds and securities from the threat posed by clearing member 
insolvency.
    Treasury will continue to monitor ICE Trust's progress and the 
development of CCPs for the CDS market and determine to what extent, if 
any, additional action might be necessary. For example, as 
circumstances warrant, certain conditions could be added, altered, or 
eliminated from this order. Treasury will consider whether the 
temporary exemption should be extended or allowed to expire.
    Treasury also will continue to consult with the staffs of the SEC, 
the CFTC, and the appropriate regulatory agencies for financial 
institutions on this matter.
    You may send comments to: Government Securities Regulations Staff, 
Bureau of the Public Debt, 799 9th Street, NW., Washington, DC 20239-
0001. You may also send comments by e-mail to [email protected]. 
Please provide your full name and mailing address. You may download 
this order, and review the comments we receive, from the Bureau of the 
Public Debt's Web site at http://www.treasurydirect.gov. The order and 
comments also will be 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.

IV. Conclusion

    It is hereby ordered, pursuant to Section 15C(a)(5) of the Exchange 
Act, that, until March 7, 2010:
    Exemption--Conditional Temporary Exemption for Certain ECPs and 
Certain Clearing Members.
    (a) Persons eligible. This exemption is available to certain ECPs 
\19\ and certain clearing members. Excluded from eligibility for the 
exemption are clearing members and ECPs that are registered or noticed 
as government securities brokers or government securities dealers under 
Section 15C(a)(1) of the Exchange Act, ECPs as defined in Section 
1a(12)(C) of the Commodity Exchange Act, and ECPs that are not clearing 
members and that receive or hold funds or securities for the purpose of 
purchasing, selling, clearing, settling, or holding cleared CDS 
positions for other persons.
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    \19\ See note 5, supra.
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    (b) Scope of exemption. Subject to the conditions specified in 
paragraph (c) of this section, certain ECPs and certain clearing 
members, solely with respect to cleared CDS, are exempt from the 
provisions of Section 15C(a), (b), and (d) (other than subsection 
(d)(3)) of the Exchange Act, and the rules thereunder.
    (c) Conditions for all clearing members.
    (1) Each clearing member relying on this exemption must be in 
material compliance with ICE Trust rules.
    (2) Each clearing member relying on this exemption that 
participates in the clearing of cleared CDS transactions on behalf of 
other persons must promptly provide a certification to ICE Trust that 
states that the clearing member is relying on the temporary exemption.
    (d) Additional conditions for certain clearing members. Each 
clearing member that receives or holds funds or securities for the 
purpose of purchasing, selling, clearing, settling, or holding cleared 
CDS positions for U.S. persons (or for any persons if the clearing 
member is a U.S. clearing member)--other than for an affiliate that 
controls, is controlled by, or is under common control with the 
clearing member--also must comply with the following six conditions 
with respect to such activities:
    (1) No natural persons. The U.S. persons (or any persons if the 
clearing member is a U.S. clearing member) for whom the clearing member 
receives or holds such funds or securities may not be natural persons.

[[Page 4630]]

    (2) Disclosures. The clearing member must disclose to such U.S. 
persons (or to any such persons if the clearing member is a U.S. 
clearing member) that: (i) The clearing member is not regulated by 
Treasury or the SEC; (ii) U.S. government securities broker and 
government securities dealer segregation requirements and protections 
under the Securities Investor Protection Act will not apply to any 
funds or securities held by the clearing member; (iii) the insolvency 
law of the applicable jurisdiction may affect such persons' ability to 
recover funds and securities, or the speed of any such recovery, in an 
insolvency proceeding; and (iv) if applicable, that non-U.S. clearing 
members may be subject to an insolvency regime that is materially 
different from that applicable to U.S. persons.
    (3) Prompt transfer of funds and securities. As promptly as 
practicable after receipt, the clearing member must transfer such funds 
and securities (other than those promptly returned to such other 
person) to: (i) The clearing member's Custodial Client Omnibus Margin 
Account at ICE Trust; or (ii) an account held by a third-party 
custodian, subject to the requirements in paragraph (6) of this 
section.
    (4) Segregation until transfer. To the extent there is any delay in 
transferring such funds and securities (collateral) to the third 
parties identified in paragraph (3) of this section, the clearing 
member must segregate the collateral in a way that, pursuant to 
applicable law, is reasonably expected to protect such collateral from 
the clearing member's creditors. The clearing member must not permit 
persons for whom the clearing member receives or holds such funds and 
securities to ``opt out'' of such segregation even if regulations or 
laws otherwise would permit it.
    (5) Cooperation with SEC. The clearing member must provide the SEC, 
upon request, with:
    (i) Information or documents within its possession, custody, or 
control;
    (ii) Testimony of its personnel; and
    (iii) Assistance in taking evidence relating to cleared CDS 
transactions from other persons, wherever located, upon the SEC's 
request or pursuant to agreements between the SEC or the U.S. 
Government and any foreign securities authority (as defined in Section 
3(a)(50) of the Exchange Act). If applicable foreign law or regulation 
prohibits the clearing member from providing this information, 
documents, testimony, or assistance, the clearing member must exercise 
its best efforts to provide it, including requesting the appropriate 
governmental body and, if legally necessary, its customers (with 
respect to customer information) to permit the clearing member to 
provide it to the SEC. If the clearing member is still unable to 
provide it despite the clearing member's best efforts, then this 
exemption shall no longer be available to the clearing member.
    (6) Requirements for third-party custodian account. A clearing 
member that transfers customer assets to an account held by a third-
party custodian under paragraph (3) of this section must notify such 
custodian that the following requirements apply:
    (i) How funds and securities are held. Funds and securities 
maintained by a third-party custodian must be held:
    (A) In the name of a customer, subject to an agreement to which the 
customer, the clearing member, and the custodian are parties, which 
states that the assets held are customer assets used to collateralize 
obligations of the customer to the clearing member, and the clearing 
member or the custodian must not pledge or rehypothecate the assets 
held in that account; or
    (B) In an omnibus account for which the clearing member maintains a 
daily record as to the amount held in the account that is owed to each 
customer, and which is subject to an agreement between the clearing 
member and the custodian, which states that:
    (1) The custodian is holding all assets in that account for the 
exclusive benefit of the clearing member's customers and separate from 
any other accounts maintained by the clearing member with the 
custodian;
    (2) The custodian will not use the account assets as security for a 
loan to the clearing member and account assets must not be subject to 
right, charge, security interest, lien, or claim of any kind in favor 
of the custodian or any person claiming through the custodian; and
    (3) Neither the clearing member nor the custodian will pledge or 
rehypothecate the assets.
    (ii) No affiliation. The third-party custodian must not be an 
affiliated person of the clearing member.
    (iii) Entity and capital requirements.
    (A) If the third-party custodian is a U.S. entity, it must be a 
bank (as that term is defined in section 3(a)(6) of the Exchange Act), 
have total capital, as calculated to meet the applicable requirements 
imposed by the entity's appropriate regulatory agency (as defined in 
section 3(a)(34) of the Exchange Act), of at least $1 billion, and have 
been approved to engage in a trust business by its appropriate 
regulatory agency.
    (B) If the custodian is not a U.S. entity, it must have total 
capital, as calculated to meet the applicable requirements imposed by 
the foreign financial regulatory authority (as defined in section 
3(a)(52) of the Exchange Act) responsible for setting capital 
requirements for the entity, equating to at least $1 billion, and must 
provide the clearing member, the customer, and ICE Trust with a legal 
opinion stating that:
    (1) The account assets are subject to regulatory requirements in 
the custodian's home jurisdiction, designed to protect and provide for 
the prompt return of custodial assets in the event of the custodian's 
insolvency; and
    (2) That the assets held in that account reasonably could be 
expected to be legally separate from the clearing member's assets in 
the event of the clearing member's insolvency.
    (iv) Investment of customer funds. The clearing member may invest 
customer funds in Eligible Custodial Assets as that term is defined in 
ICE Trust's Custodial Asset Policies.
    (v) Notice to ICE Trust. The clearing member must provide notice to 
ICE Trust that it is using the third-party custodian to hold customer 
collateral.
    The temporary exemption contained in this order is based on the 
facts and circumstances presented in the request and is conditioned on 
compliance with the terms of this order. This temporary exemption could 
become unavailable if the facts or circumstances change such that the 
representations in the request are no longer materially accurate or in 
the event of non-compliance. If the SEC were to withdraw or modify the 
terms of its order, Treasury may revoke or modify this order 
accordingly. The status of cleared CDS submitted to ICE Trust prior to 
such change would be unaffected.

Michael S. Barr,
Acting Under Secretary for Domestic Finance.
[FR Doc. 2010-1664 Filed 1-27-10; 8:45 am]
BILLING CODE 4810-39-P