 [Federal Register Volume 76, Number 130 (Thursday, July 7, 2011)] [Notices] [Pages 39927-39940] [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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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_ADDRESS>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<PHONE_NUMBER>; or Leah Drennan, Attorney-Adviser,

at<PHONE_NUMBER>; in connection with the section 5 and 6 relief,

Constance Kiggins, Special Counsel, at<PHONE_NUMBER>; 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\

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

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.

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

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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

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

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.

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

     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

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.

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    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

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\

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    \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

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.

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    \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.

                         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.

\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

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    \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

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

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