[Federal Register Volume 76, Number 130 (Thursday, July 7, 2011)]
[Notices]
[Pages 39927-39940]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-17040]



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SECURITIES AND EXCHANGE COMMISSION



[Release No. 34-64795; File No. S7-27-11]




Order Granting Temporary Exemptions Under the Securities Exchange 

Act of 1934 in Connection With the Pending Revision of the Definition 

of ``Security'' To Encompass Security-Based Swaps, and Request for 

Comment



AGENCY: Securities and Exchange Commission.



ACTION: Exemptive order; request for comment.



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[[Page 39928]]



SUMMARY: The Securities and Exchange Commission (``Commission'' or 

``SEC'') is issuing an order granting temporary exemptive relief from 

compliance with certain provisions of the Securities Exchange Act of 

1934 (``Exchange Act'') in connection with the pending revision of the 

Exchange Act definition of ``security'' to encompass security-based 

swaps and is requesting comments on the temporary relief granted.



DATES: This exemptive order is effective July 1, 2011. Comments must be 

received on or before July 15, 2011.



ADDRESSES: Comments may be submitted, identified by File Number S7-27-

11, 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 S7-27-11 on the subject line; or

     Use the Federal Rulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.



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 

S7-27-11. 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. The Commission will post all 

comments on the Commission's Internet Web site (http://www.sec/gov/rules/other.shtml). Comments are also available for Web site viewing 

and printing in the Commission's Public Reference Room, 100 F Street, 

NE., Washington, DC 20549, on official business days between the hours 

of 10 a.m. and 3 p.m. All comments received will be posted without 

charge; the Commission does not edit personal identifying information 

from submissions. You should only submit information that you wish to 

make publicly available.



FOR FURTHER INFORMATION CONTACT: In general, Joshua Kans, Senior 

Special Counsel, at (202) 551-5550; or Leah Drennan, Attorney-Adviser, 

at (202) 551-5507; in connection with the section 5 and 6 relief, 

Constance Kiggins, Special Counsel, at (202) 551-5701; Division of 

Trading and Markets, Securities and Exchange Commission, 100 F Street, 

NE., Washington, DC 20549-7010.



I. Introduction and Background



    On July 21, 2010, President Barack Obama signed the Dodd-Frank Wall 

Street Reform and Consumer Protection Act (``Dodd-Frank Act'') into 

law.\1\ Title VII of the Dodd-Frank Act (``Title VII'') establishes a 

regulatory regime applicable to the over-the-counter (``OTC'') 

derivatives markets by providing the Commission and the Commodity 

Futures Trading Commission (``CFTC'') with the authority to oversee 

these heretofore largely unregulated markets.\2\ The Dodd-Frank Act 

provides that the CFTC will regulate ``swaps,'' the SEC will regulate 

``security-based swaps,'' and the CFTC and the SEC jointly will 

regulate ``mixed swaps.'' \3\

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    \1\ The Dodd-Frank Wall Street Reform and Consumer Protection 

Act, Public Law 111-203, 124 Stat. 1376 (2010).

    \2\ See generally Securities Exchange Act Release No. 64678 

(June 15, 2011) (``Effective Date Release'').

    \3\ Section 712(d) of the Dodd-Frank Act provides that the 

Commission and the CFTC, in consultation with the Board of Governors 

of the Federal Reserve System (``Federal Reserve''), shall further 

define the terms ``swap,'' ``security-based swap,'' ``swap dealer,'' 

``security-based swap dealer,'' ``major swap participant,'' ``major 

security-based swap participant,'' ``eligible contract 

participant,'' and ``security-based swap agreement.'' The Commission 

and the CFTC jointly have proposed to further define these terms. 

See Further Definition of ``Swap,'' ``Security-Based Swap,'' and 

``Security-Based Swap Agreement''; Mixed Swaps; Security-Based Swap 

Agreement Recordkeeping, Securities Act Release No. 9204, Securities 

Exchange Act Release No. 64372 (Apr. 29, 2011), 76 FR 29818 (May 23, 

2011); Further Definition of ``Swap Dealer,'' ``Security-Based Swap 

Dealer,'' ``Major Swap Participant,'' ``Major Security-Based Swap 

Participant'' and ``Eligible Contract Participant,'' Securities 

Exchange Act Release No. 63452 (Dec. 7, 2010), 75 FR 80174 (Dec. 21, 

2010).

    Moreover, section 712(a)(8) of the Dodd-Frank Act provides that 

the Commission and the CFTC, after consultation with the Federal 

Reserve, shall jointly promulgate such regulations regarding mixed 

swaps as may be necessary to carry out the purposes of Title VII. 

The Commission and the CFTC have jointly proposed such regulations. 

See 76 FR 29818.

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    Title VII amends the Securities Exchange Act of 1934 \4\ 

(``Exchange Act'') to substantially expand the regulation of the 

security-based swap markets, establishing a new regulatory framework 

within which such markets can continue to evolve in a more transparent, 

efficient, fair, accessible, and competitive manner. Among other 

aspects, Title VII amends the Exchange Act to add new provisions 

concerning security-based swaps, including those related to: clearing; 

execution facilities; segregation requirements; antifraud prohibitions; 

position limits; transaction reporting; registration and regulation of 

security-based swap dealers and major security-based swap participants; 

and registration of clearing agencies that clear security-based 

swaps.\5\

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    \4\ 15 U.S.C. 78a et seq.

    \5\ See generally Effective Date Release, note 2, supra.

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    The Title VII amendments generally are effective on July 16, 2011 

(360 days after the enactment of the Dodd-Frank Act, referred to herein 

as the ``Effective Date''), unless a provision requires a 

rulemaking.\6\ The Commission recently issued a release to provide 

guidance in connection with the effectiveness of Exchange Act 

provisions related to security-based swaps added by subtitle B of Title 

VII (which generally creates, and relates to, the regulatory regime for 

security-based swaps), and to provide temporary exemptions and other 

relief in connection with certain of those provisions.\7\ Moreover, the 

Commission has proposed conditional exemptions under the Securities Act 

of 1933 \8\ (``Securities Act''), Exchange Act and the Trust Indenture 

Act of 1939 \9\ (``Trust Indenture Act'') for security-based swaps 

issued by certain clearing agencies.\10\ Also, the Commission intends 

to provide temporary conditional exemptive relief for entities that 

provide certain clearing services for security-based swaps. In 

addition, the Commission will take other actions to address certain 

security-based swaps, such as providing guidance regarding--and where 

appropriate, temporary relief from--the various pre-Dodd Frank Act 

provisions that would otherwise apply to security-based swaps on the 

Effective Date, as well as extending existing temporary rules under the 

Securities Act, the Exchange Act, and the Trust Indenture Act for 

certain security-based swaps.\11\

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    \6\ If a Title VII provision requires a rulemaking, the 

provision will go into effect not less than 60 days after the 

publication of the related final rule or on the Effective Date, 

whichever is later. See Sections 754 and 774 of the Dodd-Frank Act.

    \7\ Effective Date Release, note 2, supra.

    \8\ 15 U.S.C. 77a et seq.

    \9\ 15 U.S.C. 77aaa et seq.

    \10\ See Exemptions for Security-Based Swaps Issued by Certain 

Clearing Agencies, Securities Act Release No. 9222, Securities 

Exchange Act Release No. 64639, Trust Indenture Act Release No. 2474 

(June 9, 2011). These proposed exemptions will not be in place as of 

the Effective Date.

    \11\ See SEC Announces Steps to Address One-Year Effective Date 

of Title VII of Dodd-Frank Act, available at http://www.sec.gov/news/press/2011/2011-125.htm (June 10, 2011).

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    This Order primarily addresses a change that the Title VII 

amendments will make to an already existing definition in the Exchange 

Act.\12\



[[Page 39929]]



Specifically, as of the Effective Date, the Exchange Act definition of 

``security'' will expressly encompass security-based swaps.\ 13\ In 

making this change, Congress intended for security-based swaps to be 

treated as securities under the Exchange Act and the underlying rules 

and regulations. Nonetheless, this expansion of the scope of the 

regulatory provisions of the Exchange Act raises certain complex issues 

of interpretation. Absent additional time to analyze those issues, and 

to consider whether to provide interpretive or operational guidance, 

these changes may lead to unnecessary market uncertainty.\14\

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    \12\ We also are providing guidance in connection with part I of 

subtitle A of Title VII, which includes certain provisions that 

relate to security-based swaps or to the Commission specifically. 

See part III, infra. The Exemptive Date Release addressed subtitle B 

of Title VII, while part II of subtitle A generally creates, and 

relates to, the regulatory regime for swaps. See sections 721 

through 754 of the Dodd-Frank Act.

    \13\ See Exchange Act section 3(a)(10), 15 U.S.C. 78c(a)(10), as 

revised by section 761 of the Dodd-Frank Act.

    \14\ The Commission has received a request for relief by a 

number of industry participants in connection with the revised scope 

of the Exchange Act (as well as in connection with the new Exchange 

Act provisions we have addressed in the Effective Date Release). See 

letter to the Commission from the American Bankers Association, 

Financial Services Roundtable, Futures Industry Association, 

Institute of International Bankers, International Swaps and 

Derivatives Association, Investment Company Institute, Securities 

Industry and Financial Markets Association and U.S. Chamber of 

Commerce, dated June 10, 2011 (``Trade Association Letter'').

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    As is discussed in more detail below, we are addressing those 

issues in part through a temporary exemption from the application of 

the Exchange Act to security-based swaps, subject to certain exceptions 

to this exemption by which specific Exchange Act provisions nonetheless 

will apply to security-based swaps. Separate exemptions within this 

Order will address registered broker-dealers and exchange registration 

requirements. The overall approach is directed toward maintaining the 

status quo during the implementation process for the Dodd-Frank Act, by 

preserving the application of particular Exchange Act requirements that 

already are applicable in connection with instruments that will be 

``security-based swaps'' following the Effective Date, but deferring 

the applicability of additional Exchange Act requirements in connection 

with those instruments explicitly being defined as ``securities'' as of 

the Effective Date.

    The revision of the Exchange Act's ``security'' definition raises, 

among other things, issues related to the Exchange Act definition of 

``broker,'' \15\ particularly with regard to which activities (such as 

facilitating the central clearing of security-based swaps for 

customers) may lead to the requirement to register as a broker. The 

revision of the ``security'' definition also raises interpretive issues 

in the context of the Exchange Act definition of ``dealer'' in that, 

following the Effective Date, the definition of ``dealer'' under the 

Exchange Act will exclude security-based swap dealing activities only 

to the extent that these activities are with counterparties that 

constitute ``eligible contract participants.'' \16\ In other words, 

while an entity's security-based swap activities involving eligible 

contract participants cannot cause the entity to be a ``dealer'' 

(though the entity may otherwise be a ``security-based swap dealer''), 

an entity's activities involving security-based swaps with 

counterparties that are not eligible contract participants could, 

depending on the facts and circumstances, still cause the entity to 

fall within the ``dealer'' definition. Separately, the Dodd-Frank Act 

has revised the definition of ``eligible contract participant,'' \17\ 

and some market participants have raised concerns as to the proper 

interpretation of the revised ``eligible contract participant'' 

definition, and hence the proper interpretation of the new exclusion 

from the ``dealer'' definition.\18\

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    \15\ In relevant part, a ``broker'' is defined as a person ``in 

the business of effecting transactions in securities for the account 

of others.'' See Exchange Act section 3(a)(4), 15 U.S.C. 78c(a)(4). 

The Dodd-Frank Act did not modify this definition. As a result, 

absent an exemption or other relief, a person who meets this 

definition in connection with security-based swaps activities would 

be a broker and would be subject to the registration and other 

regulatory requirements applicable to brokers, absent an exception 

or exemption.

    \16\ As of the July 16 effectiveness of the Dodd-Frank Act 

amendments, the definition of ``dealer'' in Exchange Act Section 

3(a)(5), 15 U.S.C. 78c(a)(5), will incorporate, in relevant part, 

``any person engaged in the business of buying and selling 

securities (not including security-based swaps, other than security-

based swaps with or for persons that are not eligible contract 

participants), for such person's own account.''

     At that time, the term ``eligible contract participant'' will 

be incorporated into Exchange Act section 3(a)(65), 15 U.S.C. 

78c(a)(65), and will refer to the definition of that term in section 

1a of the Commodity Exchange Act, 7 U.S.C. 1a.

    \17\ Most significantly, the Dodd-Frank Act revised paragraph 

(A)(xi) of the ``eligible contract participant'' definition in the 

Commodity Exchange Act (which the Exchange Act cross-references). 

Prior to its amendment, one portion of that definition encompassed 

individuals with ``total assets'' in excess of $10 million (or $5 

million in the case of certain risk management agreements). As 

revised, that portion of the ``eligible contract participant'' 

definition instead will apply to individuals with those same amounts 

``invested on a discretionary basis.'' See Commodity Exchange Act 

section 1a(18)(A)(xi), 7 U.S.C. 1a(18)(A)(xi) (as amended and 

redesignated by section 721(a)(9) of the Dodd-Frank Act).

    \18\ See Trade Association Letter, note 14, supra (particularly 

citing issues as to the interpretation of the term ``discretionary 

basis'' in the definition of ``eligible contract participant'').

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    The expansion of the ``security'' definition, and hence the 

expansion of the scope of the regulatory provisions of the Exchange Act 

to security-based swaps, further raises other complex questions of 

interpretation that could warrant additional guidance by the 

Commission. These include questions as to how particular Exchange Act 

requirements may apply to security-based swap activities of registered 

broker-dealers.\19\ We believe that it is appropriate to provide market 

participants with additional time to consider the potential impact on 

their businesses and the interpretive questions raised, and to provide 

the Commission with any related requests for guidance or relief, along 

with the underlying analysis.\20\ Also, as is discussed below, 

application of the exchange registration requirements of sections 5 and 

6 \21\ of the Exchange Act to security-based swap activities will not 

be practical until certain rulemaking has been completed.\22\

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    \19\ See id. (citing, among other aspects, issues related to the 

application of certain margin and customer protection rules to 

security-based swap activities of registered broker-dealers).

    \20\ In granting this relief, the Commission notes in particular 

that the signatories to the Trade Association Letter, note 14, 

supra, have represented that within three months of the Effective 

Date they will provide the Commission with a request for permanent 

exemption from the application of securities laws that they believe 

are particularly inapposite in connection with security-based swap 

activities. The signatories to that letter also anticipated that 

Commission guidance would be necessary with respect to some of the 

issues that would arise from the change to the scope of the Exchange 

Act.

    The Commission expects that any industry request for guidance or 

relief will also address implementation issues related to the 

applicable requirements. The Commission invites all interested 

persons to submit views about whether specific relief would be 

necessary or appropriate in the public interest, and consistent with 

the protection of investors.

    \21\ 15 U.S.C. 78e, 78f.

    \22\ See parts II.C and II.D, infra.

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    In furtherance of the Dodd-Frank Act's stated objective of 

promoting financial stability in the U.S. financial system, the 

Commission intends to move forward deliberately in implementing the 

requirements of the Dodd-Frank Act, while minimizing unnecessary 

disruption and costs to the markets. Those include the disruptions and 

costs that may be expected to result if, as of the Effective Date, 

existing Exchange Act provisions were in general deemed to apply to 

security-based swap activities without additional time to consider the 

potential impact of the revision to the ``security'' definition.

    Accordingly, for the reasons discussed in this Order, the 

Commission is granting temporary exemptive relief that is necessary or 

appropriate in the public interest, and consistent with the protection 

of investors, from compliance



[[Page 39930]]



with certain provisions of the Exchange Act that otherwise would apply 

to security-based swap activities as of the Effective Date. Generally, 

section 36 of the Exchange Act authorizes the Commission to 

conditionally or unconditionally exempt, by rule, regulation, or order, 

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, to the extent 

such exemption is necessary or appropriate in the public interest, and 

is consistent with the protection of investors.\23\

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    \23\ 15 U.S.C. 78mm. The Commission's exemptive authority under 

Exchange Act section 36 is not available for certain specified 

provisions of the Exchange Act added by Title VII that relate to 

security-based swaps, see section 36(c) of the Exchange Act, 15 

U.S.C. 78mm(c). That limitation does not apply to the provisions for 

which the Commission is granting relief.

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    The temporary exemptive relief we are granting today in part 

combines an exemption from the application of the Exchange Act in 

connection with security-based swaps with specific exceptions from that 

exemption. As a result of these exceptions, certain provisions of the 

Exchange Act and underlying rules and regulations will apply to 

security-based swap activities.

    For example, the instruments that (after the Effective Date) will 

constitute security-based swaps already are generally subject to 

certain antifraud and anti-manipulation provisions under the Exchange 

Act. This is because those instruments generally constitute ``security-

based swap agreements'' under current law,\24\ and the Exchange Act 

already provides that those security-based swap agreements are subject 

to certain specific antifraud and anti-manipulation provisions 

(including Exchange Act section 10(b)).\25\ Accordingly, under the 

exemption, instruments that (before the Effective Date) were security-

based swap agreements and (after the Effective Date) constitute 

security-based swaps will continue to be subject to the application of 

those Exchange Act antifraud and anti-manipulation provisions, as well 

as Securities Act antifraud provisions,\26\ following the Effective 

Date. As discussed below, the exemption also is subject to certain 

other exceptions which will provide for the application of particular 

Exchange Act provisions to security-based swap activities (e.g., 

``broker'' and ``dealer'' registration provisions in certain 

circumstances, as well as Commission authority to act against broker-

dealers and associated persons).\27\

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    \24\ Under the existing (pre-Dodd-Frank) framework, a 

``security-based swap agreement'' is defined 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. See section 206B of the Gramm-Leach-Bliley 

Act. Under existing law, moreover, the term ``swap agreement'' 

subsumes certain types of agreements for which certain ``material 

terms'' are ``subject to individual negotiation.'' See section 206A 

of the Gramm-Leach-Bliley Act. Thus, instruments that will be 

``security-based swaps'' following the Effective Date in general 

currently are ``security-based swap agreements'' for purposes of the 

Exchange Act.

    \25\ Currently (prior to amendment by the Dodd-Frank Act), the 

Exchange Act provides that instruments that meet the definition of 

``security-based swap agreement'' are subject to the following 

antifraud and anti-manipulation provisions: (a) Paragraphs (2) 

through (5) of Exchange Act section 9(a), 15 U.S.C. 78i(a), 

prohibiting the manipulation of security prices; (b) Exchange Act 

section 10(b), 15 U.S.C. 78j(b), (c) Exchange Act section 15(c)(1), 

15 U.S.C. 78o(c)(1), which prohibits brokers and dealers from using 

manipulative or deceptive devices; (d) Exchange Act section 20(d), 

15 U.S.C. 78t(d), providing for antifraud liability in connection 

with certain derivative transactions; and (e) Exchange Act 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. 

In addition, Exchange Act sections 16(a) and (b), 15 U.S.C. 78p(a) 

and (b) specifically apply to security-based swap agreements under 

current law.

    Underlying rules prohibiting fraud, manipulation and insider 

trading (such as Exchange Act rule 10b-5, 17 CFR 240.10b-5, which 

prohibits the employment of manipulative or deceptive devices), also 

apply to security-based swap agreements. However, as currently 

(prior to amendment by the Dodd-Frank Act) provided by Exchange Act 

section 3A, 15 U.S.C. 78c-1, as well as provided by Exchange Act 

section 10(b), prophylactic reporting or recordkeeping requirements 

(such as Exchange Act rule 10b-10, 17 CFR 10b-10, regarding 

confirmation of transactions) do not apply to security-based swap 

agreements.

     As of the Effective Date, Exchange Act antifraud and insider 

trading provisions still will apply to ``security-based swap 

agreements.'' The definition of ``security-based swap agreement,'' 

as revised by the Dodd-Frank Act, however, will no longer encompass 

those instruments that satisfy the ``security-based swap'' 

definition.

    \26\ The antifraud provisions of Securities Act section 17(a), 

15 U.S.C. 77q(a), also apply to ``security-based swap agreements'' 

under current law.

    \27\ Also, as addressed below, the exemption does not address 

certain other Exchange Act provisions.

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    In addition, we are providing targeted exemptive relief in 

connection with the application of Exchange Act requirements to 

registered broker-dealers,\28\ as well as in connection with the 

exchange registration requirements of Exchange Act sections 5 and 

6.\29\ To promote legal certainty, moreover, we are providing temporary 

relief from the rescission provisions of Exchange Act section 29(b) 

\30\ in connection with these exemptions.\31\ Finally, we are providing 

additional guidance in connection with provisions of part I of subtitle 

A of Title VII.\32\ The following tables summarize the scope--and 

limitations--of the relief we are granting (apart from the Exchange Act 

section 29(b) relief and the guidance related to part I of subtitle A 

of Title VII):

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    \28\ See part II.B, infra.

    \29\ See parts II.C and II.D, infra.

    \30\ 15 U.S.C. 78cc(b).

    \31\ See part II.E, infra.

    \32\ See part III, infra.



 Part II.A--Exchange Act Provisions That Will Apply to Persons Engaging

     in Security-Based Swap Activities Notwithstanding the Temporary

                             Exemption \33\

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       Nature of provisions                 Exchange Act sections

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Antifraud and anti-manipulation...  Paragraphs (2) through (5) of

                                     section 9(a), and sections 10(b),

                                     15(c)(1), 20(d) and 21A(a)(1).\34\

Dealer registration requirements..  15(a)(1), but only in connection

                                     with security-based swaps with

                                     counterparties that are not

                                     eligible contract participants.\35\

Broker registration requirements..  15(a)(1), but only with regard to

                                     members of central counterparties

                                     holding customer funds and

                                     securities in connection with

                                     security-based swaps.



[[Page 39931]]



 

Authority to take actions against   15(b)(4), 15(b)(6).

 broker-dealers and associated

 persons.

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\33\ The general temporary exemption provided in this Order does not

  address the following additional provisions: securities registration,

  reporting, proxy, short-swing profits and related requirements

  (Exchange Act sections 12, 13, 14, 15(d) and 16); clearing agency

  registration requirements (Exchange Act section 17A); and certain

  provisions added by subtitle B of Title VII. We separately have

  addressed or are addressing certain of those other requirements in the

  context of security-based swaps. In addition, this exemption does not

  address certain provisions related to government securities (Exchange

  Act sections 3(a)(42)-(45) and 15C). Exchange registration provisions

  are the subject of separate exemptions in this Order. In particular,

  persons other than clearing agencies acting as central counterparties

  will be exempt from the exchange registration requirements of Exchange

  Act sections 5 and 6 solely in connection with security-based swap

  activities, while broker-dealers effecting or reporting security-based

  swap transactions on those exempt exchanges will be exempt from

  Exchange Act section 5. In addition, three existing central

  counterparties that clear CDS will be exempt from Exchange Act

  sections 5 and 6 (in connection with their ``forced trade''

  procedures) subject to certain conditions, and members that use those

  central counterparties' clearance and risk management process to

  effect or report Cleared CDS transactions will be exempt from section

  5 unconditionally.

\34\ Underlying rules prohibiting fraud, manipulation or insider

  trading, such as Exchange Act rule 10b-5, also remain applicable (but

  not prophylactic reporting or recordkeeping requirements, such as

  Exchange Act rule 10b-10). This is consistent with the current

  application of antifraud and anti-manipulation provisions to security-

  based swap agreements, as provided by Exchange Act sections 3A and

  10(b) (which generally prohibit the application of ``reporting or

  recordkeeping requirements, procedures, or standards as prophylactic

  measures against fraud, manipulation, or insider trading'' with

  respect to any security-based swap agreement''). 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 also remain applicable.

\35\ This will be based on whether a person is an ``eligible contract

  participant'' as set forth in the definition of that term in effect on

  July 20, 2010 (prior to the Dodd-Frank Act).





    Part II.B--Additional Exchange Act Provisions That Will Apply to

   Security-Based Swap Activities and Positions of Registered Broker-

           Dealers Notwithstanding the Temporary Exemption 36

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       Nature of provisions             Exchange Act section or rule

------------------------------------------------------------------------

Extension of credit...............  Section 7(c)

Extension of credit...............  Regulation T (12 CFR 220.1 et seq.).

Rulemaking authority over broker-   Section 15(c)(3).

 dealers.

Net capital.......................  Rule 15c3-1.

Reserves and custody of securities  Rule 15c3-3.

Books and records.................  Sections 17(a)-(b).

Records and reports...............  Rules 17a-3, 17a-4, 17a-5, 17a-8.

Quarterly security counts.........  Rule 17a-13.

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\36\ In general, these provisions will apply to security-based swap

  activities or positions of registered broker-dealers only to the

  extent that they are applicable to those activities and positions as

  of July 15, 2011. Exchange Act rule 15c3-3, however, also will fully

  apply to the activities and positions of a registered broker-dealer

  related to cleared security-based swaps, to the extent that the

  registered broker-dealer is a member of a clearing agency that

  functions as a central counterparty for security-based swaps, and

  holds customer funds or securities in connection with cleared security-

  based swaps.



II. Temporary Exemption in Connection With Certain Exchange Act 

Requirements



    The Commission is issuing temporary exemptions to address the 

issues and concerns arising from the revision of the Exchange Act 

``security'' definition and the application of the Exchange Act to 

security-based swaps. These include a temporary exemption for certain 

persons, along with a temporary exemption specific to broker-dealers; 

both of those exemptions will remain in effect until the compliance 

date for final rules that we may adopt further defining the terms 

``security-based swap'' and ``eligible contract participant.'' \37\ 

These also include temporary exemptions related to Exchange Act 

sections 5 and 6, and related to Exchange Act section 29(b), which, as 

addressed below, will have other durations.

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    \37\ See SEC and CFTC joint proposing releases defining those 

terms, note 3, supra.

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A. Temporary Exemption From Certain Exchange Act Requirements in 

Connection With Security-Based Swaps



    As the first part of the relief provided by this Order, the 

Commission is temporarily exempting certain persons from the 

application of certain Exchange Act provisions in connection with 

security-based swaps. As discussed below, this exemption will be 

subject to certain key exceptions by which particular statutory 

provisions (or underlying rules or regulations) or particular 

activities will not be exempted.

    The temporary exemption will be available to any person that meets 

the definition of ``eligible contract participant'' that was in effect 

as of July 20, 2010 (the day prior to the enactment of the Dodd-Frank 

Act), other than a registered broker-dealer \38\ or, except in limited 

circumstances, a self-regulatory organization.\39\ The availability of 

this



[[Page 39932]]



temporary exemption will be limited to persons that meet the ``eligible 

contract participant'' definition in order to provide relief to persons 

currently participating in the security-based swap markets.\40\

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    \38\ A separate temporary exemption addresses the security-based 

swap activities of registered broker-dealers. See part II.B, infra.

    \39\ Registered securities associations can take advantage of 

this exemption in certain limited circumstances. In particular, the 

exemption will be available to any registered securities association 

solely with respect to its obligations under Exchange Act section 

19(g)(1)(B), 15 U.S.C. 78s(g)(1)(B), to enforce compliance in 

connection with security-based swaps with provisions of its rules 

(and with provisions of the rules of the Municipal Securities 

Rulemaking Board) that do not apply to positions or activities 

involving security-based swaps as of July 15, 2011. Section 

19(g)(1)(B) in relevant part requires national securities 

associations to enforce compliance with their own rules. As 

discussed below, see part II.B, infra, under the Commission's 

exemption registered broker-dealers will be required to comply with 

certain Exchange Act requirements in connection with security-based 

swaps, but not to the extent that those provisions or rules do not 

apply to the broker's or dealer's security-based swap positions or 

activities as of July 15, 2011. The application of this exemption to 

national securities associations is consistent with that approach.

     Also, we expect the Financial Industry Regulatory Authority 

(``FINRA''), a national securities association that is a self-

regulatory organization for registered broker-dealers, to file a 

proposed rule change related to the application of FINRA's rules to 

security-based swaps.

    \40\ The exemption relies on the pre-Dodd-Frank Act definition 

of ``eligible contract participant'' due to outstanding issues 

discussed above, see note 17, supra, and accompanying text, 

regarding the meaning of ``eligible contract participant'' under the 

Dodd-Frank Act.

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    Subject to exclusions discussed below, persons covered by the 

temporary exemption will be exempt from the provisions of the Exchange 

Act, and the applicable rules and regulations thereunder, solely in 

connection with their activities involving security-based swaps. The 

temporary exemption's scope is to be construed narrowly, and does not 

apply to a person's activities involving securities other than 

security-based swaps, even if those other securities-related activities 

also involve security-based swaps.\41\

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    \41\ In other words, for example, if a person were to enter into 

an arrangement involving the purchase of a debt security in 

conjunction with the purchase of credit protection in the form of a 

credit default swap referencing that debt security, the person's 

credit default swap transaction would be subject the temporary 

exemption, but the person's purchase of the debt security would not.

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    As noted above, however, this temporary exemption does not extend 

to certain Exchange Act provisions and underlying rules and 

regulations.

    First, for the reasons discussed above, the temporary exemption 

applicable to security-based swaps does not extend to the antifraud and 

anti-manipulation provisions of the Exchange Act, and underlying rules 

or regulations, that already apply to ``security-based swap 

agreements'' under current law. Thus, even with the temporary 

exemption, paragraphs (2) through (5) of section 9(a), section 10(b), 

section 15(c)(1), section 20(d) and section 21A(a)(1) of the Exchange 

Act \42\ will apply to security-based swaps. Underlying rules 

prohibiting fraud, manipulation or insider trading, such as Exchange 

Act rule 10b-5 (but not prophylactic reporting or recordkeeping 

requirements such as the confirmation requirements of Exchange Act rule 

10b-10) also will apply to security-based swaps. Consistent with the 

Commission's current authority, moreover, the temporary exemption will 

not affect the Commission's investigative, enforcement, and procedural 

authority related to those provisions and rules.\43\

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    \42\ See note 25, supra.

    \43\ Thus, for example, the Commission retains the ability to 

investigate potential violations and bring enforcement actions in 

the federal courts as well as in administrative proceedings, and to 

seek the full panoply of remedies available in such cases.

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    The temporary exemption also does not extend to Exchange Act 

provisions related to security-based swaps that were added or amended 

by Subtitle B of Title VII of the Dodd-Frank Act. The Commission 

separately has addressed those new provisions and amendments \44\ 

(apart from the change to the ``security'' definition that underpins 

the exemptions that are the subject of this Order).

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    \44\ See Effective Date Release, note 2, supra.

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    In addition, even under the temporary exemption, the Exchange Act 

``broker'' registration requirements will apply to broker activities 

involving security-based swaps by persons that are members of a 

clearing agency that functions as a central counterparty \45\ (``CCP'') 

for security-based swaps, and that hold customer funds and securities 

in connection with security-based swaps. Based on the Commission's 

experience in granting, and representations made by recipients of, 

previous exemptive orders for CCPs, the Commission understands that 

there currently are no CCPs offering customer clearing of security-

based swaps.\46\ Apart from that limitation, and for the reasons 

discussed above, the exemption from registration requirements will 

extend to broker activity involving security-based swaps.\47\

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    \45\ For these purposes, a ``central counterparty'' means a 

clearing agency that interposes itself between the counterparties to 

security-based swap transactions, acting functionally as the buyer 

to every seller and the seller to every buyer.

    \46\ The Commission has granted temporary conditional exemptions 

to facilitate CDS clearing in connection with requests on behalf of 

ICE Clear Europe Limited; Eurex Clearing AG; Chicago Mercantile 

Exchange Inc.; ICE Trust US LLC; and LIFFE A&M and LCH.Clearnet Ltd. 

See notes 71 and 76, infra.

     To the extent that CCPs plan to offer customer clearing of 

security-based swaps during the duration of this exemption, the 

Commission will consider requests for relief from broker-related 

requirements by such CCPs on behalf of their participants, based on 

the applicable facts and circumstances.

    \47\ In light of the exemption from broker registration 

requirements and from the dealer registration requirements addressed 

below (but subject to the exemption's limitations associated with 

those requirements), non-U.S. persons that act as brokers or dealers 

solely in connection with security-based swaps involving U.S. 

counterparties need not rely on the exemptions from broker-dealer 

registration requirements that are set forth in Exchange Act rule 

15a-6, 17 CFR 240.15a-6. Thus, non-U.S. persons will not have to 

comply with the requirements and conditions of rule 15a-6, 

including, for example, the requirement to use a registered U.S. 

broker-dealer to effect a transaction in a security-based swap, as 

provided in paragraph (a)(3) of the rule.

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    Moreover, even under the temporary exemption, the Exchange Act 

``dealer'' registration requirements will apply to security-based swap 

dealing activities unless those activities involve counterparties that 

meet the definition of ``eligible contract participant'' that was in 

effect as of July 20, 2010 (the day prior to the enactment of the Dodd-

Frank Act). Accordingly, conducting security-based swap activities with 

counterparties that do not meet that July 20, 2010 definition of 

``eligible contract participant'' could, depending on the facts and 

circumstances, still cause an entity to be a ``dealer'' under the 

Exchange Act. In light of market participants' concerns regarding 

interpretive issues resulting from the statutory changes to the 

``eligible contract participant'' definition, the exemption is intended 

to appropriately implement the legislative goal of applying the 

``dealer'' definition to security-based swap activities involving 

counterparties that are not eligible contract participants, while 

maintaining the status quo with respect to activities involving 

``eligible contract participants'' as that term was defined on July 20, 

2010.\48\

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    \48\ In a similar way, the Commission has targeted the exemptive 

relief it previously granted in connection with section 6(l) of the 

Exchange Act, 15 U.S.C. 78f(l), which was added by the Dodd-Frank 

Act. This relief will permit persons that currently participate in 

the security-based swap markets, but that potentially may not be 

considered eligible contract participants under the definition as 

amended by Title VII of the Dodd-Frank Act, to continue to do so 

until the term ``eligible contract participant'' is further defined 

in final rulemaking. See Effective Date Release, note 2, supra.

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    This temporary exemption further does not excuse compliance with 

certain additional provisions under the Exchange Act. The exemption 

does not apply to the exchange registration requirements of Exchange 

Act sections 5 and 6, as those provisions instead are being addressed 

by a separate conditional exemption described below.\49\ This exemption 

further does not extend to: the requirements of Exchange Act sections 

12, 13, 14, 15(d), and 16 \50\; the Commission's administrative 

proceeding authority under Exchange Act sections 15(b)(4) and (b)(6) 

\51\; or to certain provisions



[[Page 39933]]



related to government securities.\52\ The temporary exemption further 

does not extend to the clearing agency registration requirement of 

Exchange Act section 17A,\53\ as the Commission separately intends to 

provide targeted exemptive relief in connection with that requirement.

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    \49\ See parts II.C and II.D, infra.

    \50\ 15 U.S.C. 78l, 78m, 78n, 78o(d), 78p. These provisions 

address, among other things, securities registration, reporting by 

issuers and other persons, proxies and short-swing profits.

    \51\ 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 brokers and dealers and associated persons in certain 

situations. Accordingly, while this exemption extends to certain 

persons that may otherwise act as brokers or dealers in the market 

for security-based swaps, such brokers or dealers may still be 

subject to actions under sections 15(b)(4) and (b)(6) of the 

Exchange Act.

    In addition, such brokers or dealers 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. 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.

    \52\ The 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. The exemption also does not 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).

    \53\ 15 U.S.C. 78q-1.

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B. Temporary Exemption From Certain Exchange Act Requirements in 

Connection With Security-Based Swap Activities by Registered Broker-

Dealers



    In addition to the temporary exemption addressed above, the 

Commission separately is providing exemptive relief to registered 

broker-dealers in connection with the revised ``security'' definition 

and the application of existing Exchange Act provisions to security-

based swaps. In granting this relief, we have sought to recognize 

concerns raised by market participants--e.g., the application of 

current broker-dealer margin rules to security-based swap activities--

while also being mindful that certain regulations applicable to broker-

dealers play a critical role in promoting market integrity and 

protecting customers (including broker-dealer customers that are not 

involved in security-based swap transactions).

    This temporary exemption will be available to any registered 

broker-dealer solely with respect to its activities and positions 

involving security-based swaps. In general--and subject to the 

additional provisions addressed below--this temporary exemption has the 

same scope as the temporary exemption addressed above, and is subject 

to the same exclusions. Thus, for example, security-based swap activity 

by registered broker-dealers will be subject to the same Exchange Act 

antifraud and anti-manipulation provisions as will be effective under 

the temporary exemption addressed above.

    Moreover, we are limiting the scope of the exemption for registered 

broker-dealers in connection with certain Exchange Act provisions and 

rules that apply specifically to registered broker-dealers. In 

particular (and subject to additional limitations in connection with 

Exchange Act rule 15c3-3 as addressed below), registered broker-dealers 

will solely be exempt from those provisions and rules to the extent 

that those provisions or rules do not apply to the broker's or dealer's 

security-based swap positions or activities as of July 15, 2011--the 

day before the effectiveness of the change to the ``security'' 

definition. In other words, during the exemptive period the application 

of current law will remain unchanged, and those particular Exchange Act 

requirements will continue to apply to registered broker-dealers' 

security-based swap activities and positions to the same extent they 

apply currently. This approach is intended to help avoid undue market 

disruptions resulting from the change to the ``security'' definition, 

while at the same time preserving the current application of those 

particular provisions or rules to security-based swap activity by 

registered broker-dealers.

    Thus, under this approach of preserving the status quo, no 

exemption will be provided in connection with the following 

requirements under the Exchange Act to the extent that those 

requirements currently apply to registered broker-dealer activities or 

positions involving instruments that will be security-based swaps (but 

registered broker-dealers will be exempted in connection with those 

requirements to the extent that the requirements do not already apply 

to activities or positions involving those instruments): \54\

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    \54\ Solely for purposes of this temporary 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 in 

connection with security-based swaps.

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     Section 7(c),\55\ regarding the extension of credit by 

broker-dealers; and Regulation T,\56\ a Federal Reserve Board 

regulation regarding broker-dealer extension of credit.

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    \55\ 15 U.S.C. 78g(c).

    \56\ 12 CFR 220.1 et seq.

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     Section 15(c)(3),\57\ which provides the Commission with 

rulemaking authority in connection with broker-dealer financial 

responsibility; Exchange Act rule 15c3-1,\58\ regarding broker-dealer 

net capital; and Exchange Act rule 15c3-3,\59\ regarding broker-dealer 

reserves and custody of securities. In the case of Exchange Act rule 

15c3-3, moreover, the exemption will not be applicable to the 

activities and positions of a registered broker-dealer related to 

cleared security-based swaps, to the extent that the registered broker-

dealer is a member of a clearing agency that functions as a central 

counterparty for security-based swaps, and holds customer funds or 

securities in connection with cleared security-based swaps.\60\

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    \57\ 15 U.S.C. 78o(c)(3).

    \58\ 17 CFR 240.15c3-1.

    \59\ 17 CFR 240.15c3-3.

    \60\ This is consistent with the exclusion from the temporary 

exemption addressed above with regard to the broker registration 

requirement. See note 45, supra, and accompanying text.

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     Section 17(a),\61\ regarding broker-dealer obligations to 

make, keep and furnish information; section 17(b),\62\ regarding 

broker-dealer records subject to examination; Exchange Act rules 17a-3 

through 17a-5,\63\ regarding records to be made and preserved by 

broker-dealers and reports to be made by broker-dealers; Exchange Act 

rule 17a-8,\64\ regarding broker-dealer recordkeeping and reporting 

under the Bank Secrecy Act; and Exchange Act rule 17a-13,\65\ regarding 

quarterly security counts to be made by certain exchange members and 

broker-dealers.

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    \61\ 15 U.S.C. 78q(a).

    \62\ 15 U.S.C. 78q(b).

    \63\ 17 CFR 240.17a-3 through 17a-5

    \64\ 17 CFR 240.17a-8.

    \65\ 17 CFR 240.17a-13.

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C. Temporary Exemptions From Sections 5 and 6 of the Exchange Act for 

Brokers, Dealers and Exchanges



    Section 5 of the Exchange Act states that ``[i]t shall be unlawful 

for any broker, dealer, or exchange,\66\ 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



[[Page 39934]]



of transactions effected on such exchange * * * .'' Section 6 of the 

Exchange Act sets forth a procedure whereby an exchange may register as 

a national securities exchange.\67\

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    \66\ Section 3(a)(1) of the Exchange Act, 15 U.S.C. 78c(a)(1), 

defines ``exchange'' to mean ``any organization, association, or 

group of persons, whether incorporated or unincorporated, which 

constitutes, maintains, or provides a market place or facilities for 

bringing together purchasers and sellers of securities or for 

otherwise performing with respect to securities the functions 

commonly performed by a stock exchange as that term is generally 

understood, and includes the market place and the market facilities 

maintained by such an 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) (``Regulation ATS 

Adopting Release'') (adopting Rule 3b-16 in addition to Regulation 

ATS).

    \67\ See generally Exchange Act section 6(a) and the rules 

thereunder. Section 6 of the Exchange Act also sets forth various 

requirements to which a national securities exchange is subject. 

See, e.g., Exchange Act section 6(b).

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    Certain persons, particularly those that would meet the statutory 

definition of security-based swap execution facility (``SB SEF''),\68\ 

may today engage in activities that would subject them to the 

restrictions and requirements of sections 5 and 6 of the Exchange Act 

as of the Effective Date, once security-based swaps are included within 

the definition of ``security.'' The Commission has proposed, but not 

acted on, registration requirements for SB SEFs. Therefore, the 

Commission is using its authority under section 36 of the Exchange Act 

to provide a temporary exemption from the requirement to register as a 

national securities exchange in sections 5 and 6 of the Exchange Act to 

any person, other than a clearing agency acting as a central 

counterparty in security-based swaps,\69\ that, solely due to its 

activities relating to security-based swaps, would fall within the 

definition of exchange and thus be required to register as an exchange. 

Persons who can take advantage of this exemption include those entities 

that would meet the statutory SB SEF definition,\70\ but that otherwise 

would not be subject to the requirements under sections 5 and 6 of the 

Exchange Act.

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    \68\ See Exchange Act section 3(a)(77), 15 U.S.C. 78c(a)(77).

    \69\ The status of central counterparties in security-based 

swaps is addressed in part II.D, infra.

    \70\ While the Exchange Act currently does not prohibit 

registered alternative trading systems from trading security-based 

swaps, after the Effective Date any alternative trading system that 

meets the definition of SB SEF would no longer be permitted to do so 

absent an exemption or registration as a national securities 

exchange or SB SEF. See section 763 of the Dodd-Frank Act, adding 

Exchange Act section 3D(a)(1), 15 U.S.C. 78c-4(a)(1) (``[n]o person 

may operate a facility for the trading or processing of security-

based swaps, unless the facility is registered as a security-based 

swap execution facility or as a national securities exchange under 

this section'') and Securities Exchange Act Release No. 34-63825 

(Feb. 2, 2011), 76 FR 10948 (Feb. 28, 2011) (``SB SEF Proposing 

Release'') at note 10 (``The Commission views [Section 3D(a)(1) of 

the Exchange Act] as applying only to facilities that meet the 

definition of ``security-based swap execution facility'' in Section 

3(a)(77) of the Exchange Act). The Commission has granted temporary 

relief from the requirements of section 3D(a)(1) of the Exchange Act 

to allow alternative trading systems and other entities trading 

security-based swaps to continue to trade security-based swaps until 

the exemption expires. See Effective Date Release, note 2, supra. 

Following the expiration of the temporary exemption, any entity 

trading security-based swaps that meets the definition of SB SEF 

would be required to register as a national securities exchange or a 

SB SEF.

---------------------------------------------------------------------------



    This temporary exemption will remain in effect until the earliest 

compliance date set forth in any of the final rules regarding the 

registration of SB SEFs. It specifically will permit security-based 

swaps to continue to be traded on or through entities (other than 

central counterparties) following the Effective Date, until the 

registration requirements and other provisions applicable to SB SEFs 

have been implemented. As noted above, this temporary exemption is 

available to persons (other than central counterparties) that meet the 

definition of exchange solely because of their activities relating to 

transactions in security-based swaps. Thus, to the extent that a person 

otherwise satisfies the definition of ``exchange'' in section 3(a)(1) 

of the Exchange Act and the criteria of rule 3b-16 under the Exchange 

Act, it must register with the Commission as a national securities 

exchange under section 6 of the Exchange Act and the rules and 

regulations thereunder or comply with the terms of another exemption.

    In addition, absent an exemption, section 5 of the Exchange Act 

would prohibit brokers and dealers from effecting transactions in 

security-based swaps on an exchange that is not a national securities 

exchange, even if that exchange was operating in reliance on the 

exemption addressed above. The Commission therefore is using its 

authority under section 36 of the Exchange Act to provide a temporary 

exemption to brokers and dealers that effect transactions in security-

based swaps on an exchange that is operating without registering as a 

national securities exchange in reliance on that exemption. Temporarily 

exempting brokers and dealers that effect transactions in security-

based swaps on such an exchange from this restriction in section 5 will 

facilitate brokers' and dealers' continued use of such facilities 

without the disruptions and costs that might be expected to result from 

the application of those provisions prior to the earliest compliance 

date of final rules regarding the registration of SB SEFs. Without also 

exempting brokers and dealers from this section 5 requirement, the 

Commission's temporary exemption of persons that meet the definition of 

exchange with respect to the trading of security-based swaps would be 

ineffective, because brokers and dealers would not be permitted to 

effect transactions on those exchanges. A broker or dealer is exempt 

from the prohibition in section 5 pursuant to this temporary exemption 

solely to the extent that it effects transactions in security-based 

swaps on an exchange operating in reliance on the exemption addressed 

above, or reports security-based swap transactions on such an exempted 

exchange.



D. Exemption From Sections 5 and 6 for Certain CCPs



    The Commission is also exercising its authority under section 36 of 

the Exchange Act to extend specific existing exemptions from the 

exchange registration requirements of sections 5 and 6 of the Exchange 

Act provided to three central counterparties--ICE Trust U.S. LLC (``ICE 

Trust''), Chicago Mercantile Exchange Inc. (``CME''), and ICE Clear 

Europe, Limited (``ICE Clear Europe'') (collectively, ``CDS CCPs'') 

\71\--that clear ``Cleared CDS.'' \72\ These exemptions will remain in 

effect until the earliest compliance date set forth in any of the final 

rules regarding the registration of SB SEFs.

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    \71\ See generally Securities Exchange Act Release Nos. 60372 

(July 23, 2009), 74 FR 37748 (July 29, 2009); 61973 (April 23, 

2010), 75 FR 22656 (April 29, 2010); and 63389 (November 29, 2010), 

75 FR 75520 (December 3, 2010) (temporary exemptions in connection 

with CDS clearing by ICE Clear Europe); 59578 (March 13, 2009), 74 

FR 11781 (March 19, 2009); 61164 (December 14, 2009), 74 FR 67258 

(December 18, 2009); 61803 (March 30, 2010), 75 FR 17181 (April 5, 

2010); and 63388 (November 29, 2010), 75 FR 75522 (December 3, 2010) 

(temporary exemptions in connection with CDS clearing by CME); 59527 

(March 6, 2009), 74 FR 10791 (March 12, 2009); 61119 (December 4, 

2009), 74 FR 65554 (December 10, 2009); 61662 (March 5, 2010), 75 FR 

11589 (March 11, 2010), 63387 (November 29, 2010), 75 FR 75502 

(December 3, 2010) (temporary exemptions in connection with CDS 

clearing by ICE Trust) (collectively, ``Temporary Cleared CDS 

Exemptions'').

    \72\ ``Cleared CDS'' means a credit default swaps that is a 

security-based swap that is submitted (or offered, purchased, or 

sold on terms providing for submission) to a CDS CCP, and that is 

offered only to, purchased only by, and sold only to persons that 

meet the pre Dodd-Frank definition of eligible contract participant. 

In addition, to be a Cleared CDS, either: (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) (17 CFR 

230.144A(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, 

the Federal Home Loan Mortgage Corporation, or the Government 

National Mortgage Association; or (ii) the reference index is an 

index in which 80% or more of the index's weighting is comprised of 

the entities or securities described in subparagraph (i).

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    As described in the Temporary Cleared CDS Exemptions,\73\ as part 

of the clearing and risk management



[[Page 39935]]



processes, each CDS CCP calculates, based on prices or quotations 

submitted by its participants, an end-of-day settlement price for each 

contract in which any of its participants has a cleared position.\74\ 

As part of this process, each CDS CCP has periodically used a ``forced 

trade'' mechanism to require clearing members at randomly selected 

times to execute certain CDS trades.\75\ This mechanism, which is 

designed to promote the integrity of the price-submission process, 

involves bringing together buyers and sellers of CDS. Therefore, absent 

an exemption, this activity would cause each CDS CCP to meet the 

definition of ``exchange'' under the Exchange Act, thereby triggering 

the applicability of sections 5 and 6. Accordingly, the Commission, in 

connection with previous exemptions from clearing agency registration 

under section 17A of the Exchange Act, also provided each CDS CCP a 

temporary conditional exemption from the exchange registration 

requirements of Sections 5 and 6 of the Exchange Act. Following the 

Effective Date, the CDS CCPs will not require further exemptions from 

section 17A.\76\

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    \73\ See, e.g., 74 FR at 37748 (ICE Clear Europe); 74 FR at 

65560 (ICE Trust); 74 FR at 67262 (CME).

    \74\ As part of the clearing process, eligible trades are 

submitted to the CDS CCP for novation, which results in the 

bilateral contract being extinguished and replaced by two new 

contracts where the CDS CCP is the buyer to the seller and the 

seller to the buyer. ``Novation'' is a process through with the 

original obligation between a buyer and seller is discharged through 

the substitute of the CCP as functionally the seller to buyer and 

buyer to seller, creating new substitute contracts. See, e.g., 

Committee on Payment and Settlement Systems, Technical Committee of 

the International Organization of Securities Commissioners, 

Recommendations for Central Counterparties (Nov. 2004) at 66.

    \75\ See Letter from Russell D. Sacks, on behalf of ICE Clear 

Europe, to Elizabeth Murphy, Secretary, Commission, Nov. 29, 2010; 

Letter from Ann K. Shuman, Managing Director and Deputy General 

Counsel, CME, to Elizabeth Murphy, Secretary, Commission, Nov. 29, 

2010; See Letter from Kevin McClear, ICE Trust, to Elizabeth Murphy, 

Secretary, Commission, Nov. 29, 2010.

    \76\ Title VII of the Dodd-Frank Act provides that a depository 

institution or derivatives clearing organization registered with the 

Commodity Futures Trading Commission under the Commodity Exchange 

Act that is required to be registered as a clearing agency is deemed 

to be registered as a clearing agency solely for the purpose of 

clearing security-based swaps to the extent that, before July 21, 

2010: (A) the depository institution cleared swaps as a multilateral 

clearing organization, or (B) the derivative clearing organization 

cleared swaps pursuant to an exemption from registration as a 

clearing agency. See section 763(b) of the Dodd-Frank Act (adding 

new Section 17A(l) to the Exchange Act, 15 U.S.C. 78q-1(1)) 

(``Deemed Registered Provision''). The Deemed Registered Provision, 

along with other general provisions of Title VII of the Dodd-Frank 

Act, becomes effective on July 16, 2011. See Effective Date Release, 

note 2, supra.

    CME, ICE Clear Europe, and ICE Trust satisfy the requirements of 

the Deemed Registered Provision and thus will no longer need 

temporary exemptions from registration as a clearing agency under 

Section 17A of the Exchange Act. However, because the Deemed 

Registered Provision does not apply with respect to sections 5 and 6 

of the Exchange Act, the CDS CCPs would, absent an exemption, have 

to either register as national securities exchanges or discontinue 

use of their forced trading mechanisms.

    A fourth CCP, Eurex Clearing AG (``Eurex''), also received from 

the Commission temporary exemptions from sections 5, 6, and 17A of 

the Exchange Act in relation to its CDS clearing activities. See, 

e.g., Exchange Act Release No. 63390 (November 29, 2010). Unlike the 

CDS CCPs, Eurex will not be deemed registered with the Commission 

because it is neither a depository institution nor a derivatives 

clearing organization registered with the Commodity Futures Trading 

Commission under the Commodity Exchange Act. Eurex will not be 

registered with the Commission as a clearing agency for security-

based swaps as of July 16, 2011. Thus, the Commission is not 

granting Eurex an exemption from sections 5 and 6 of the Exchange 

Act with respect to any activities relating to security-based swaps. 

In addition, the Commission previously extended a temporary 

exemption from section 17A (but not sections 5 and 6) in connection 

with CDS clearing by LIFFE A&M and LCH.Clearnet Ltd., but that 

exemption has since expired. See Securities Exchange Act Release No. 

59164 (Dec. 24, 2008), 74 FR 139 (Jan. 2, 2009).

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    As part of these Temporary Cleared CDS Exemptions, the Commission 

also temporarily exempted each CDS CCP's participants that were brokers 

or dealers from the prohibitions of Section 5, to the extent that they 

use a CDS CCP to effect or report any transaction in Cleared CDS in 

connection with the CDS CCP's calculation of settlement prices for open 

positions in Cleared CDS. The definition of ``Cleared CDS'' used here 

is consistent with the Temporary Cleared CDS Exemptions.\77\

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    \77\ See, e.g., Securities Exchange Act Release No. 63387 (Nov. 

29, 2010), 75 FR 75502, 75504 n. 18 (Dec. 3, 2010).

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    Consistent with our findings in previous exemptive orders, and with 

the discussion in this Order, and particularly in light of the risk 

management and systemic benefits in continuing to facilitate CDS 

clearing by CDS CCPs during the transition period before full 

implementation of Title VII, the Commission is extending the temporary 

conditional exemptions of the CDS CCPs from the registration 

requirements of sections 5 and 6 of the Exchange Act. The Commission 

also finds that it is necessary or appropriate in the public interest 

and is consistent with the protection of investors to extend the 

temporary exemption of any broker or dealer effecting any transaction 

in a security, or reporting any such transaction, on a CDS CCP with 

respect to section 5 of the Exchange Act. These exemptions are solely 

with respect to the ``forced trade'' mechanism used to calculate 

settlement prices for Cleared CDS. The exemption for CDS CCPs, 

moreover, is subject to the following terms and conditions: \78\

---------------------------------------------------------------------------



    \78\ These terms and conditions are the same as the terms and 

conditions of the existing exemptive relief that is being extended. 

Therefore, the CDS CCPs should already be complying with these 

conditions.

---------------------------------------------------------------------------



    First, each CDS CCP, in order to rely on the exemption, is required 

to report to the Commission the following information with respect to 

its calculation of settlement prices for Cleared CDS within 30 days of 

the end of each quarter, and to 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. Reporting of this information 

will assist the Commission in carrying out its responsibility to 

supervise and regulate the securities markets.

    Second, each CDS CCP, as a condition to relying on the exemption, 

is required to establish and maintain adequate safeguards and 

procedures to protect participants' confidential trading information. 

Such safeguards and procedures include: (a) Limiting access to the 

confidential trading information of participants to those employees of 

the CDS CCP who are operating the systems or are responsible for their 

compliance with this exemption or any other applicable rules; and (b) 

establishing and maintaining standards controlling employees of the CDS 

CCP trading for their own accounts. The CDS CCP is required to 

establish and maintain 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 trading 

information that may be available to a CDS CCP in connection with the 

``forced trade'' mechanism. This should strengthen confidence in CCPs, 

thus promoting participation.

    Third, each CDS CCP, as a condition to relying on the exemption, is 

required to directly or indirectly make available to the public on 

terms that are fair and reasonable and not unreasonably discriminatory: 

(a) All end-of-day settlement prices and any other prices with respect 

to Cleared CDS that it may establish to calculate mark-to-market margin 

requirements for its clearing members; and (b) any other pricing or 

valuation information with respect to Cleared CDS as is published or 

distributed by the CDS CCP. This condition is appropriate to maintain



[[Page 39936]]



transparency by continuing to make this useful pricing data available 

to the public on terms that are fair and reasonable and not 

unreasonably discriminatory.

    Finally, each CDS CCP, as a condition to relying on the exemption, 

is required to implement policies and procedures designed to ensure 

compliance with these terms and conditions, and to conduct periodic 

internal reviews related to its compliance program.



E. Section 29(b) of the Exchange Act



    Section 29(b) of the Exchange Act generally provides that contracts 

made in violation of any provision of the Exchange Act, or the rules 

thereunder, shall be void ``(1) as regards the rights of any person 

who, in violation of any such provision, * * * shall have made or 

engaged in the performance of any such contract, and (2) as regards the 

rights of any person who, not being a party to such contracts, shall 

have acquired any right thereunder with actual knowledge of the facts 

by reason of which the making or performance of such contracts in 

violation of any such provision * * * .'' The Commission does not 

believe that section 29(b) would apply to provisions for which the 

Commission has provided exemptive relief. To make this clear to all 

market participants, however, and to eliminate any possible legal 

uncertainty or market disruption, the Commission is granting temporary 

exemptive relief from section 29(b).

    In particular, the Commission is exercising its authority under 

section 36 of the Exchange Act to temporarily exempt any security-based 

swap contract entered into on or after the Effective Date from being 

void or considered voidable by reason of section 29 of the Exchange Act 

on the basis that any person that is a party to the security-based swap 

contract is alleged to have violated any of the provisions for which 

the Commission has provided exemptive relief herein, until the 

compliance date for final rules that we may adopt further defining the 

terms ``security-based swap'' and ``eligible contract participant.'' 

This temporary exemption will remain in effect until the time the 

underlying exemptive relief expires.\79\

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    \79\ The temporary exemption and the broker-dealer specific 

exemption addressed above will remain in effect until the compliance 

date for final rules that we may adopt further defining the terms 

``security-based swap'' and ``eligible contract participant.'' The 

exemption from the exchange registration requirements of sections 5 

and 6 will remain in effect until the earliest compliance date set 

forth in any of the final rules regarding registration of SB SEFs.

---------------------------------------------------------------------------



    The legal uncertainty that would result if, for the period in which 

these temporary exemptions are effective, contracts entered into after 

the Effective Date could be voided under section 29(b), would undermine 

the purposes of these exemptions and lead to unnecessary disruption and 

wasteful litigation.

    As previously discussed, as of the Effective Date, persons 

effecting transactions in security-based swaps, or engaged in acts, 

practices, and courses of business involving security-based swaps, will 

be subject to the general antifraud and anti-manipulation provisions of 

the federal securities laws that were in place before the enactment of 

the Dodd-Frank Act. Persons would retain all available rights as a 

result of any violation of these general antifraud and anti-

manipulation provisions.



III. Guidance Related to Part I of Subtitle A



    We also are providing guidance regarding the status, as of the 

Effective Date, of certain provisions of part I of subtitle A of Title 

VII (``Part I'') that address security-based swaps. Our recent 

Effective Date Release \80\ separately provided guidance and targeted 

exemptive relief in connection with the status of those Exchange Act 

provisions related to security-based swaps that were added or amended 

by subtitle B of Title VII.

---------------------------------------------------------------------------



    \80\ See note 2, supra.

---------------------------------------------------------------------------



    As discussed in the Effective Date Release, while certain Title VII 

provisions applicable to security-based swaps in general will be 

effective as of the Effective Date, there are a number of reasons why--

as of that date--particular provisions will not be effective or 

compliance with particular provisions will not be required. For 

example, if a provision requires a rulemaking, that provision will not 

go into effect until after the final rulemaking.\81\ If a provision 

expressly or implicitly applies only to ``registered'' persons, then 

persons will not have to comply with the provision until the related 

registration processes for such persons have been established by final 

Commission rules, and such persons have become registered.\82\ Other 

Title VII provisions require or permit compliance by market 

participants as a result of, or in response to, Commission action other 

than rulemaking, and thus do not impose a compliance obligation upon 

market participants in the absence of such Commission action.\83\ Also, 

certain Title VII provisions authorize or direct the Commission or 

another agency to take specified action that may impose compliance 

obligations upon market participants; \84\ thus, while these provisions 

will become effective on the Effective Date, they will not require 

compliance by market participants until the relevant action has been 

undertaken.

---------------------------------------------------------------------------



    \81\ See section 754 of the Dodd-Frank Act. In particular, the 

Dodd-Frank Act provides that if a Part I provision requires a 

rulemaking, the provision will go into effect the later of ``not 

less than'' 60 days after publication of the related final rule or 

July 16.

    \82\ See, e.g., section 716(b)(2) of the Dodd-Frank Act 

(providing that the term ``swaps entity'' means any swap dealer, 

security-based swap dealer, major swap participant, or major 

security-based swap participant that is registered under the 

Commodity Exchange Act or the Exchange Act).

    \83\ See, e.g., section 714 of the Dodd-Frank Act (permitting, 

pursuant to an exemption or rule, a dually registered futures 

commission merchant and broker-dealer to hold futures, and options 

on futures, in a portfolio margining account carried as a securities 

account pursuant to a portfolio margining program approved by the 

CFTC and to hold cash and securities in a portfolio margining 

account carried as a futures account pursuant to a portfolio 

margining program approved by the Commission).

    \84\ See, e.g., section 712(a)(8) of the Dodd-Frank Act 

(requiring the Commission and the CFTC, after consultation with the 

Board of Governors, to prescribe jointly such regulations regarding 

mixed swaps as may be necessary to carry out the purposes of Title 

VII).

---------------------------------------------------------------------------



    The table below lists each provision of Part I, and identifies 

provisions for which compliance will be required on the Effective Date. 

The table also identifies provisions for which compliance is predicated 

on some other action (e.g., registration, adoption of final rules, or 

other action by the Commission or another agency) and thus will not be 

required as of that date. The table further addresses certain 

provisions with which compliance will be required on a date other than 

the Effective Date, as specified by law.

    The Commission does not believe it is necessary to grant, and thus 

is not granting, temporary relief from compliance with those Part I 

provisions for which compliance will be required on the Effective Date, 

for the reasons discussed below.



[[Page 39937]]







                         Table--Part I of Subtitle A of Title VII of the Dodd-Frank Act.

----------------------------------------------------------------------------------------------------------------

                                           Compliance date

                              ---------------------------------------- Authorizes/directs/

                                                   Upon registration,   limits commission

    Dodd-Frank Act section       Upon effective      publication of    and/or CFTC action      Relief granted

                                 date (July 16,      final rules, or           86

                                      2011)         other  action 85

----------------------------------------------------------------------------------------------------------------

711: Definitions.............            [check]                                           No \87\

712(a): Review of regulatory                                                     [check]   N/A \88\

 authority--consultation.

712(b)(1)-(2): Review of                                                         [check]   N/A \89\

 regulatory authority--

 consultation; limitation.

712(b)(3): Review of                     [check]                                           No \90\

 regulatory authority--

 consultation; prohibitions.

712(c): Objection to                                                             [check]   N/A \91\

 Commission regulation.

712(d): Joint rulemaking.....                                                    [check]   N/A \92\

712(e): Global rulemaking                                                        [check]   N/A \93\

 timeframe.

712(f): Rules and                                                                [check]   N/A \94\

 registration before final

 effective dates.

713(a)-(b): Portfolio                                        [check]                       N/A \95\

 margining conforming changes.

713(c): Portfolio margining                                                      [check]   N/A \96\

 conforming changes--duty of

 CFTC.

714: Abusive swaps...........                                                    [check]   N/A \97\

715: Authority to prohibit                                                       [check]   N/A \98\

 participation in swaps

 activities.

716(a)-(j): Prohibition                                      [check]                       N/A\99\

 against federal government

 bailouts of swaps entities.

716(k)-(l): Prohibition                                                          [check]   N/A \100\

 against federal government

 bailouts of swaps entities;

 rules and authority.

716(m): Prohibition against                                  [check]                       No \101\

 federal government bailouts

 of swaps entities; ban on

 proprietary trading.

717(a)-(b): New product                                                          [check]   N/A \102\

 approval CFTC--SEC process--

 amendments to the Commodity

 Exchange Act.

717(c)-(d), 718: Determining             [check]                                           N/A\103\

 the Status of Novel

 Derivative Products.

719: Studies.................                                                    [check]   N/A \104\

720: Memorandum..............                                                    [check]   N/A \105\

----------------------------------------------------------------------------------------------------------------

\85\ These provisions do not require compliance by market participants on the Effective Date unless the relevant

  Commission action already has been undertaken.

\86\ A number of Title VII provisions expressly (or implicitly) apply only to ``registered'' persons. As

  discussed above, until the related registration processes for such persons have been established by final

  Commission or other rules, and such persons have become registered pursuant to such rules, they will not be

  required to comply with these Title VII provisions. Similarly, if a Title VII provision requires a rulemaking,

  such provision will not necessarily go into effect on the Effective Date, but instead will go into effect

  ``not less than'' 60 days after publication of the related final rule or on July16, 2011, whichever is later.

  See section 754 of the Dodd-Frank Act, 7 U.S.C. 1a note. Provisions for which compliance is not required as of

  the Effective Date for some other reason, such as another effective date specified by law, are also included

  in this column and noted below.

\87\ Section 711 of the Dodd-Frank Act provides that certain definitions in subtitle A of Title VII have the

  meaning given in section 1a of the Commodity Exchange Act, 7 U.S.C. 1a.

\88\ Section 712(a) of the Dodd-Frank Act requires the Commission and the CFTC to consult and coordinate with

  each other before commencing rulemaking or issuing orders in certain Title VII areas and also specifies

  certain requirements and parameters regarding such activity by the Commission and the CFTC.

\89\ Sections 712(b)(1) and (2) of the Dodd-Frank Act relate to the authority of the Commission and the CFTC

  under Title VII.

\90\ Section 712(b)(3) of the Dodd-Frank Act provides that, unless otherwise authorized by Title VII and except

  for enforcement of, and examination for compliance with, its rules on capital adequacy, no futures association

  registered under section 17 of the Commodity Exchange Act, 7 U.S.C. 21, may regulate security-based swaps and

  no national securities associations registered under section 15A of the Exchange Act, 15 U.S.C. 78o-3, may

  regulate swaps. This provision will require compliance as of the Effective Date.

\91\ Section 712(c) of the Dodd-Frank Act outlines a process by which the Commission and the CFTC may request by

  filing a petition in court, under certain circumstances, that a rule published by the other be set aside.

\92\ Section 712(d) of the Dodd-Frank Act requires certain joint rulemaking by the Commission and the CFTC and

  prescribes certain requirements for such joint rulemaking, as well as for interpretations and guidance by the

  Commission and the CFTC. It also requires the CFTC to share information with the Commission about security-

  based swap agreements that are not cleared.

\93\ Section 712(e) of the Dodd-Frank Act requires the Commission and the CFTC, unless otherwise provided in

  Title VII or an amendment thereto, to promulgate rules required under Title VII not later than the Effective

  Date.

\94\ Section 712(f) of the Dodd-Frank Act details actions the Commission and the CFTC are permitted to take to

  prepare for the effective dates of the provisions of the Dodd-Frank Act.

\95\ Sections 713(a) and (b) of the Dodd-Frank Act provide that, pursuant to an exemption or rule, a dually

  registered futures commission merchant and broker-dealer may hold futures, and options on futures, in a

  portfolio margining account carried as a securities account pursuant to a portfolio margining program approved

  by the CFTC and may hold cash and securities in a portfolio margining account carried as a futures account

  pursuant to a portfolio margining program approved by the Commission. Persons cannot comply with this

  provision in the absence of an appropriate exemption or rule.

\96\ Section 713(c) of the Dodd-Frank Act amends the Commodity Exchange Act to require to CFTC to exercise its

  authority to ensure that securities held in a portfolio margining account carried as a futures account are

  customer property and the owners of those accounts are customers for the purposes of the Bankruptcy Code, 11

  U.S.C. 1 et seq.

\97\ Section 714 of the Dodd-Frank Act provides that the Commission, the CFTC, or both may collect information

  as may be necessary concerning the markets for swaps and security-based swaps and issue a report regarding

  abusive swaps and security-based swaps that the Commission or the CFTC determine are detrimental to the

  stability of a financial market or participants in a financial market.

\98\ Section 715 of the Dodd-Frank Act provides that, if the Commission or the CFTC determine that a foreign

  country's swap or security-based swap regulation undermines the stability of the United States financial

  system, either the Commission or the CFTC, in consultation with the Secretary of the Treasury, may prohibit an

  entity domiciled in the foreign country from participating in the United States in swap or security-based swap

  activities.



[[Page 39938]]



 

\99\ Section 716(a) of the Dodd-Frank Act prohibits any ``swaps entity'' from receiving Federal assistance with

  respect to any swap, security-based swap, or other activity of the swaps entity. Section 716(h) of the Dodd-

  Frank Act provides that the prohibition in section 716(a) of the Dodd-Frank Act ``shall be effective 2 years

  following the date on which this Act is effective.'' In addition, the term ``swaps entity'' is defined in

  section 716(b)(2) of the Dodd-Frank Act to mean a swap dealer, security-based swap dealer, major swap

  participant, or major security-based swap participant that is registered under the Commodity Exchange Act or

  the Exchange Act, meaning that the prohibition in section 716(a) of the Dodd-Frank is not applicable unless a

  registration regime exists for such persons under either the Commodity Exchange Act or Exchange Act.

Many of the other provisions of section 716 of the Dodd-Frank Act relate to the prohibition in section 716(a) of

  the Dodd-Frank Act and thus will not require compliance until such prohibition is in effect. See, e.g.,

  section 716(e) of the Dodd-Frank Act (limiting the scope of the prohibition in section 716(a) of the Dodd-

  Frank Act). Other provisions of section 716 of the Dodd-Frank Act relate to the applicability of the term

  ``swaps entity'' and thus will not require compliance until persons can become ``swaps entities,'' which

  requires registration regimes to be in place. See, e.g., sections 716(g) and (l) of the Dodd-Frank Act

  (limiting the applicability of the term ``swaps entity'' and detailing certain liquidation and other

  requirements for certain swaps entities, respectively).

\100\ Section 716(k) of the Dodd-Frank Act states that, ``[i]n prescribing rules, the prudential regulator for a

  swaps entity shall consider'' certain factors. Section 716(l) of the Dodd-Frank Act provides the Financial

  Stability Oversight Council authority to make certain determinations regarding swaps entities.

\101\ Section 716(m) of the Dodd-Frank Act requires insured depository institutions to comply with the

  prohibition on proprietary trading in derivatives in section 619 of the Dodd-Frank Act, which adds new section

  13 to the Bank Holding Company Act of 1956, 12 U.S.C. 1841 et seq. (``BHC Act''). Section 13 of the BHC Act,

  12 U.S.C. 1851, pursuant to section 13(c)(1) thereof, 12 U.S.C. 1851(c)(1), takes effect on the earlier of 12

  months after final rules are issued under section 13(b) of the BHC Act, 12 U.S.C. 1851(b), or 2 years after

  the date of enactment of the Dodd-Frank Act. As a general matter, a banking entity must bring its activities

  and investments into compliance with section 13 of the BHC Act not later than 2 years after that section

  becomes effective. Section 716(m) of the Dodd-Frank Act thus does not impose any compliance obligations until

  insured depository institutions are required to comply with section 13 of the BHC Act.

\102\ Section 717(a) of the Dodd-Frank Act amends section 2(a)(1)(C) of the Commodity Exchange Act, 7 U.S.C.

  2a(1)(C), to provide that the CFTC shall have jurisdiction over certain accounts, agreements, and transactions

  that the Commission has exempted under section 36(a)(1) of the Exchange Act, 15 U.S.C. 78mm(a)(1), with the

  condition that the CFTC exercise concurrent jurisdiction over such accounts, agreements, and transactions.

  Section 717(b) of the Dodd-Frank Act adds new section 3B of the Exchange Act, 15 U.S.C. 78c-2, which provides

  that an agreement, contract, or transaction (or class thereof) that is exempted by the CFTC pursuant to

  section 4(c)(1) of the Commodity Exchange Act, 7 U.S.C. 6(c)(1), with the condition that the Commission

  exercise concurrent jurisdiction over it shall be deemed a security for purposes of the securities laws and

  includes certain details regarding the applicability of the federal securities laws to such deemed securities.

  These provisions relate to the jurisdiction and authority of the Commission and the CFTC and do not themselves

  impose compliance obligations upon market participants. Action by the Commission or the CFTC to which these

  provisions are applicable however, could result in compliance obligations for market participants. For

  example, an agreement, contract, or transaction that is deemed a security as a result of section 717(b) of the

  Dodd-Frank Act would, as a security, be subject to the requirements of the federal securities laws.

\103\ Section 718 of the Dodd-Frank Act creates a process through which a person filing a proposal to list or

  trade a novel derivative product that may have elements of both securities and contracts of sale of a

  commodity for future delivery (or options on such contracts or options on commodities) may concurrently

  provide notice and a copy of such filing to the Commission and the CFTC and details the specific requirements

  of the process and obligations of the Commission and the CFTC pursuant to the process. Market participants are

  not obligated to make submissions pursuant to this provision. Sections 717(c) and (d) of the Dodd-Frank Act

  make related amendments to section 19(b) of the Exchange Act, 15 U.S.C. 78s(b), and section 5c(c)(1) of the

  Commodity Exchange Act, 7 U.S.C. 7a-2(c)(1), respectively.

\104\ Section 719 of the Dodd-Frank Act requires the Commission and the CFTC to undertake a number of studies.

\105\ Section 720 of the Dodd-Frank Act includes two provisions requiring the CTFC and the Federal Energy

  Regulatory Commission to negotiate a memorandum of understanding.



IV. Solicitation of Comments



    The Commission intends to monitor closely the transition of the 

derivatives markets to regulated markets and to determine to what 

extent, if any, additional regulatory action may be necessary. The 

Commission is soliciting public comment on all aspects of these 

exemptions, including:

    1. Does the approach set forth by these exemptions--including the 

approach of continuing to apply certain regulatory requirements that 

already are applicable to instruments that will be security-based swaps 

following the Effective Date, but not adding new regulatory 

requirements in connection with those instruments--appropriately serve 

the goals of providing for the effective implementation of the Dodd-

Frank Act without causing unwarranted market disruption during the 

implementation process? Would alternative approaches be more effective?

    2. Are there other provisions of the Exchange Act as amended by the 

Dodd-Frank Act for which temporary exemptive relief should be granted? 

Alternatively, are there particular provisions, for which relief has 

been granted here, that do not warrant an exemption? Please provide 

section references and provide a detailed explanation of why granting 

such an exemption, or terminating an existing exemption, would be 

necessary or appropriate in the public interest, and consistent with 

the protection of investors.

    3. What should be the appropriate duration of the temporary 

exemptions granted in this Order?

    4. Should any additional conditions be placed on any of these 

exemptions, or should any conditions that have been placed on any of 

these exemptions be removed or modified? If so, which exemptions? 

Please explain and provide specific examples.



V. Conclusion



    For the reasons discussed above, the Commission finds that the 

temporary exemptions provided in this Order are necessary or 

appropriate in the public interest, and are consistent with the 

protection of investors, to avoid unnecessary disruption and 

uncertainty among participants in activities involving security-based 

swaps, and to provide for the orderly implementation of the 

requirements of the Dodd-Frank Act. Accordingly,

    It Is Hereby Ordered, pursuant to section 36 of the Exchange Act, 

that, until the compliance date for final rules that we may adopt 

further defining the terms ``security-based swap'' and ``eligible 

contract participant,'' the following exemptions from Exchange Act 

requirements will apply:

    (a) Temporary exemption in connection with security-based swap 

activity:

    (1) Persons eligible. The exemption in paragraph (a)(2) of this 

exemption is available to any person that meets the definition of 

eligible contract participant as set forth in section 1a(12) of the 

Commodity Exchange Act (as in effect on July 20, 2010), other than:

    (i) A broker or dealer registered under section 15(b) of the 

Exchange Act (other than paragraph (11) thereof); \106\ or

---------------------------------------------------------------------------



    \106\ Registered broker-dealers are addressed in paragraph (b) 

of this exemption.

---------------------------------------------------------------------------



    (ii) A self-regulatory organization, as defined in section 3(a)(26) 

of the Exchange Act; provided, however, that this temporary exemption 

shall be available to a registered securities association solely with 

respect to its obligations under section 19(g)(1)(B) of the Exchange 

Act to enforce compliance with provisions of its rules (and



[[Page 39939]]



provisions of the rules of the Municipal Securities Rulemaking Board) 

that do not apply to positions or activities involving security-based 

swaps as of July 15, 2011.

    (2) General scope of exemption. Subject to the exclusions in 

paragraph (a)(3) of this exemption, such person shall be exempt from 

the provisions of the Exchange Act, and the rules and regulations 

thereunder, solely in connection with the person's activities involving 

security-based swaps.

    (3) Exclusions from exemption. The exemption in paragraph (a)(2) of 

this exemption does not extend to the following provisions under the 

Exchange Act, and the applicable rules or regulations thereunder:

    (i) Antifraud and anti-manipulation provisions. The antifraud and 

anti-manipulation provisions of sections 9(a)(2)-(5), 10(b), 15(c)(1), 

20(d) and 21A(a)(1) of the Exchange Act, as well as underlying rules 

prohibiting fraud, manipulation or insider trading (but not 

prophylactic reporting or recordkeeping requirements), and any 

provision of the Exchange Act related to the Commission's enforcement 

authority in connection with violations or potential violations of such 

provisions.

    (ii) Provisions added or amended by subtitle B of Title VII of the 

Dodd-Frank Act. All Exchange Act provisions related to security-based 

swaps added or amended by subtitle B of Title VII of the Dodd-Frank 

Act, including the amended definition of ``security'' in section 

3(a)(10) of the Exchange Act.

    (iii) Provisions applicable to certain securities brokers. The 

broker registration requirements of section 15(a)(1) of the Exchange 

Act, and the other requirements of the Exchange Act and the rules and 

regulations thereunder that apply to a broker that is not registered 

with the Commission; provided, however, that this exclusion shall apply 

only to broker activities by persons that are members of a clearing 

agency that functions as a central counterparty for security-based 

swaps and that hold customer funds or securities in connection with 

security-based swaps. Otherwise, paragraph (a)(2) of this exemption 

will be available in connection with broker activities involving 

security-based swaps by persons other than registered broker-dealers or 

self-regulatory organizations. For these purposes, the term ``central 

counterparty'' means a clearing agency that interposes itself between 

the counterparties to security-based swap transactions, acting 

functionally as the buyer to every seller and the seller to every 

buyer.

    (iv) Provisions applicable to certain securities dealers. The 

dealer registration requirements of section 15(a)(1) of the Exchange 

Act, and the other requirements of the Exchange Act and the rules and 

regulations thereunder that apply to a dealer that is not registered 

with the Commission; provided, however, that this exclusion shall not 

apply, and paragraph (a)(2) of this exemption will be available, in 

connection with dealing activities involving security-based swaps with 

counterparties that meet the definition of eligible contract 

participant as set forth in section 1a(12) of the Commodity Exchange 

Act (as in effect on July 20, 2010).

    (v) Additional provisions. The following additional provisions 

under the Exchange Act, or the rules and regulations thereunder:

    (A) Paragraphs (42), (43), (44), and (45) of Section 3(a);

    (B) Section 5;

    (C) Section 6; \107\

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    \107\ Exchange Act sections 5 and 6 are addressed in a separate 

exemption in this Order.

---------------------------------------------------------------------------



    (D) Section 12;

    (E) Section 13;

    (F) Section 14;

    (G) Paragraphs (4) and (6) of Section 15(b);

    (H) Section 15(d);

    (I) Section 15C;

    (J) Section 16; and

    (K) Section 17A.

    (b) Temporary exemption specific to security-based swap activities 

by registered brokers and dealers.

    (1) In general. Subject to paragraph (b)(2) of this exemption, 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 (a)(2) (subject to the exclusions in paragraph (a)(3) of 

this exemption) solely with respect to security-based swaps.

    (2) Limited exemption in connection with certain provisions and 

rules. A registered broker or dealer shall be exempt from the following 

provisions and rules in connection with security-based swaps solely to 

the extent that those provisions or rules do not apply to the broker's 

or dealer's security-based swap positions or activities as of July 15, 

2011; provided, however, that the exemption from rule 15c3-3 under the 

Exchange Act shall not be available for activities and positions of the 

registered broker or dealer related to cleared security-based swaps, to 

the extent that the registered broker or dealer is a member of a 

clearing agency that functions as a central counterparty for security-

based swaps, and holds customer funds or securities in connection with 

cleared security-based swaps: \108\

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    \108\ Solely for purposes of this temporary 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 in 

connection with security-based swaps.

---------------------------------------------------------------------------



    (i) Section 7(c);

    (ii) Section 15(c)(3);

    (iii) Section 17(a);

    (iv) Section 17(b);

    (v) Regulation T, 12 CFR 220.1 et seq.;

    (vi) Rule 240.15c3-1;

    (vii) Rule 240.15c3-3;

    (viii) Rule 240.17a-3;

    (ix) Rule 240.17a-4;

    (x) Rule 240.17a-5;

    (xi) Rule 240.17a-8; and

    (xii) Rule 240.17a-13.

    It Is Hereby Further Ordered, pursuant to section 36 of the 

Exchange Act, that, until the earliest compliance date set forth in any 

of the final rules regarding registration of security-based swap 

execution facilities, the following exceptions from Exchange Act 

requirements will apply:

    (a) Temporary exemption from sections 5 and 6 of the Exchange Act.

    (1) Any person other than a clearing agency acting as a central 

counterparty in security-based swaps shall be exempt from the 

requirements to register as a national securities exchange under 

sections 5 and 6 of the Exchange Act and the rules and regulations 

thereunder solely in connection with the person's activities involving 

security-based swaps.

    (2) A broker or dealer shall be exempt from section 5 of the 

Exchange Act solely in connection with the broker's or dealer's 

activities involving security-based swaps that it effects or reports on 

an exchange that is exempted from registration pursuant to paragraph 

(a)(1) of this exemption.

    (3) Each CDS CCP shall be exempt from the requirements of sections 

5 and 6 of the Exchange Act and the rules and regulations thereunder 

solely in connection with its calculation of mark-to-market prices for 

open positions in Cleared CDS, subject to the following conditions:

    (i) Each CDS CCP 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



[[Page 39940]]



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) The CDS CCP shall establish and maintain 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 the CDS CCP who are operating the system 

or responsible for its compliance with this exemption or any other 

applicable rules; and

    (B) Establishing and maintaining standards controlling employees of 

the CDS CCP trading for their own accounts. The CDS CCP must establish 

and maintain adequate oversight procedures to ensure that the 

safeguards and procedures established pursuant to this condition are 

followed; and

    (iii) Each CDS CCP shall directly or indirectly make available to 

the public on terms that are fair and reasonable and not unreasonably 

discriminatory:

    (A) All end-of-day settlement prices and any other prices with 

respect to Cleared CDS that it may establish to calculate mark-to-

market margin requirements for its clearing members; and

    (B) Any other pricing or valuation information with respect to 

Cleared CDS as is published or distributed by the CDS CCP.

    (4) Any member of an CDS CCP shall be exempt from the requirements 

of section 5 of the Exchange Act solely to the extent such member uses 

any facility of the CDS CCP to effect any transaction in Cleared CDS, 

or to report any such transaction, in connection with the CDS CCP's 

clearance and risk management process for Cleared CDS.

    (b) Definitions.

    (1) For purposes of this exemption, the term ``central 

counterparty'' means a clearing agency that interposes itself between 

the counterparties to security-based swap transactions, acting 

functionally as the buyer to every seller and the seller to every 

buyer.

    (2) For purposes of this exemption, the term ``CDS CCP'' shall mean 

ICE Trust U.S. LLC, Chicago Mercantile Exchange Inc., and ICE Clear 

Europe, Limited.

    (3) For purposes of this exemption, the term ``Cleared CDS'' shall 

mean a credit default swap that is a security-based swap that is 

submitted (or offered, purchased, or sold on terms providing for 

submission) to a CDS CCP, that is offered only to, purchased only by, 

and sold only to persons that meet the definition of eligible contract 

participant as set forth in section 1a(12) of the Commodity Exchange 

Act (as in effect on July 20, 2010), 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, the Federal Home Loan Mortgage 

Corporation, or the Government National Mortgage Association; or

    (ii) The reference index is an index in which 80% or more of the 

index's weighting is comprised of the entities or securities described 

in subparagraph (i).

    It Is Hereby Further Ordered, pursuant to section 36 of the 

Exchange Act, that no contract entered into on or after July 16, 2011 

shall be void or considered voidable by reason of section 29(b) of the 

Exchange Act because any person that is a party to the contract 

violated a provision of the Exchange Act for which the Commission has 

provided exemptive relief herein, until such time as the underlying 

exemptive relief expires.



    By the Commission.



     Dated: July 1, 2011.

Elizabeth M. Murphy,

Secretary.

[FR Doc. 2011-17040 Filed 7-6-11; 8:45 am]

BILLING CODE 8011-01-P