[Federal Register Volume 77, Number 244 (Wednesday, December 19, 2012)]
[Notices]
[Pages 75211-75223]
[FR Doc No: 2012-30553]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68433; File No. S7-13-12]

Order Granting Conditional Exemptions Under the Securities
Exchange Act of 1934 in Connection With Portfolio Margining of Swaps
and Security-Based Swaps

December 14, 2012.
AGENCY: Securities and Exchange Commission.

ACTION: Exemptive order; request for comment.

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SUMMARY: The Securities and Exchange Commission (``SEC'' or
``Commission'') is issuing an order granting conditional exemptive
relief from compliance with certain provisions of the Securities
Exchange Act of 1934 (``Exchange Act'') in connection with a program to
commingle and portfolio margin customer positions in cleared credit
default swaps (``CDS''), which include both swaps and security-based
swaps, in a segregated account established and maintained in accordance
with Section 4d(f) of the Commodity Exchange Act (``CEA'').

DATES: Effective Date: This exemptive order is effective on December
19, 2012. Comments Due Date: Comments must be received on or before
February 19, 2013.

ADDRESSES: Comments may be submitted, identified by File Number S7-13-
12, 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 email to<EMAIL_ADDRESS>Please include
File Number S7-13-12 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
S7-13-12. This file number should be included on the subject line if
email 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 10:00 a.m. and 3:00 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: Emily Westerberg Russell, Senior
Special Counsel, Catherine Moore, Senior Special Counsel, and Natasha
Vij Greiner, Special Counsel, at<PHONE_NUMBER>, Division of Trading and
Markets, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-7010.

I. Introduction

    On July 21, 2010, President Barack Obama signed the 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. Title VII provides the Commission and the
Commodity Futures Trading Commission (``CFTC'') with tools to oversee
these markets.\2\ Under the comprehensive framework established in
Title VII, the SEC is given regulatory authority over security-based
swaps, and the CFTC is given regulatory authority over swaps.\3\ The
Dodd-Frank Act amended the Exchange Act to require, among other things,
that transactions in security-based swaps be cleared through a clearing
agency that is registered with the Commission or that is exempt from
registration, if the security-based swaps are of a type that the
Commission determines must be cleared, unless an exception or exemption
from mandatory clearing applies.\4\ The Dodd-Frank Act similarly
amended the CEA.\5\ In addition, the Dodd-Frank Act provided the SEC
and CFTC with explicit authority to facilitate portfolio margining by
allowing cash and securities to be held in a futures account, and
futures and options on futures and related collateral to be held in a
securities account, subject to certain conditions.\6\
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    \1\ The Dodd-Frank Wall Street Reform and Consumer Protection
Act, Public Law 111-203,124 Stat. 1376 (2010).
    \2\ Generally, Subtitle A of Title VII creates and relates to
the regulatory regime for swaps, while Subtitle B of Title VII
creates and relates to the regulatory regime for security-based
swaps.
    \3\ See Section 3(a)(68) of the Exchange Act, 15 U.S.C.
78c(a)(68) (as added by Section 761(a)(6) of the Dodd-Frank Act) and
Section 1a(47) of the CEA, 7 U.S.C. 1a(47) (as added by Section
721(a) of the Dodd-Frank Act) for the definitions of security-based
swap and swap, respectively. See also Further Definition of
``Swap,'' ``Security-Based Swap,'' and ``Security-Based Swap
Agreement''; Mixed Swaps; Security-Based Swap Agreement
Recordkeeping, Exchange Act Release No. 67453 (Jul. 18, 2012), 77 FR
48207 (Aug. 13, 2012) (Joint Final Rule with the CFTC) (``Product
Definitions Adopting Release''), further defining the terms swap and
security-based swap.
    \4\ See Section 763(a) of the Dodd-Frank Act (adding new Section
3C(a)(1) to the Exchange Act). 15 U.S.C. 78c-2.
    \5\ See Section 723(a)(3) of the Dodd-Frank Act (adding new
Section 2(h)(1)(A) to the CEA).
    \6\ See Section 713 of the Dodd-Frank Act. Under Section 713 of
the Dodd-Frank Act, dually-registered broker-dealers and futures
commission merchants may portfolio margin pursuant to an approved
portfolio margin program, subject to certain requirements, including
regulatory action by the SEC and CFTC (pursuant to an exemption, or
by rule or regulation). See Exchange Act Section 15(c)(3)C and CEA
Section 4d(h). See also infra note 23.
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    On December 16, 2011, the Commission approved a request by a
clearing agency for portfolio margining of clearing members'
proprietary security-based swaps and swap positions consisting of
single-name CDS and CDS indices, respectively.\7\ Under such a
portfolio margining arrangement, clearing members are able to maintain
reduced levels of margin that are commensurate with the risks of the
portfolio based on correlations in a member's cleared CDS positions
consisting of both swaps and security-based swaps.
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    \7\ See Order Approving Proposed Rule Change to Adopt ICC's
Enhanced Margin Methodology, Exchange Act Release No. 66001 (Dec.
16, 2011).
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    Market participants have also sought the use of similar portfolio
margining arrangements in the context of customer positions in CDS. On
November 7, 2011, ICE Clear Credit, LLC (``ICE Clear Credit'') filed
with the Commission a petition for rulemaking, regulation or order to
provide exemptive relief from certain Exchange Act provisions to allow
portfolio margining treatment for customer-related positions in
anticipation of ICE Clear Credit offering clearing of security-based
swaps for customer-related transactions.\8\ ICE Clear Credit requested
exemptive relief from the application of certain provisions of the
Exchange Act to allow ICE Clear Credit, and any ICE Clear Credit member
that is a dually-registered broker-dealer and futures commission
merchant (``BD/FCM''), to, among other things: (1) Hold customer assets
used to margin, secure, or guarantee customer positions consisting of
cleared CDS, which include both swaps and security-based swaps, in a
commingled customer omnibus account subject to Section 4d(f) of the
CEA; and (2) calculate margin for this commingled customer account on a
portfolio margin basis.\9\ ICE Clear Europe Limited (``ICE Clear
Europe'') also requested substantially similar relief for itself and
its members.\10\
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    \8\ ICE Clear Credit formally petitioned the Commission to grant
exemptive relief from the application of Section 15(c)(3), Rule
15c3-3 and related rules under the Exchange Act. See Letter from
Michael M. Phillip, Partner, Winston & Strawn LLP (Nov. 7, 2011)
(the petition and comments received on the petition are on file at
the Commission's Web site at http://www.sec.gov/rules/petitions.shtml).
    \9\ Id.
    \10\ See Letter from Paul Swann, President and Chief Operating
Office, ICE Clear Europe Limited (May 31, 2012) (on file as a
comment to the ICE Clear Credit petition at http://www.sec.gov/comments/4-641/4641-5.pdf).
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    The Commission has received four comment letters, one of which was
provided by ICE Clear Credit. All of these letters supported ICE Clear
Credit's request for relief.\11\ Commenters generally argued that
portfolio margining of customer positions in CDS removes economic
barriers to customer clearing and would encourage greater clearing,
thereby reducing systemic risk.\12\ One commenter stated that a
portfolio margining program for customer accounts could also improve
competitiveness between market participants who are not clearing
members and those that are clearing members who are already permitted
to portfolio margin in their proprietary accounts.\13\ Certain
commenters addressed additional issues associated with the approval of
ICE Clear Credit's request for relief, including concerns relating to a
potential requirement to provide customers the ability to choose an
account type and a request for certainty about the applicable
bankruptcy regime, which are more specifically addressed, where
appropriate, below.\14\ Additionally, one commenter argued that the
Commission should provide equivalent relief to all clearing agencies
seeking exemptive relief, stating that different approaches could lead
to inefficiencies in the market because market participants may choose
to clear at a particular clearinghouse based on the applicable
regulatory standards rather than market efficiencies.\15\
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    \11\ See letter from Managed Funds Association dated June 13,
2012 (``MFA Letter''); letter from Investment Company Institute
(``ICI Letter'') dated April 9, 2012; letter from ICE Clear Credit
LLC dated December 22, 2011 (``ICE Letter''); and letter from
Association of Institutional Investors dated December 22, 2011.
    \12\ Id.
    \13\ See, e.g., MFA Letter.
    \14\ See ICE Letter, MFA Letter, and ICI Letter.
    \15\ See ICI Letter.
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II. Discussion

    Portfolio margining of index CDS (subject to CFTC regulations) \16\
and single-name CDS (subject to SEC regulations) can offer many
benefits to investors and the markets, including promoting greater
efficiencies in clearing with respect to off-setting positions and
thereby aligning costs more closely with overall risks presented by an
investor's portfolio. Further, portfolio margining may help to
alleviate excessive margin calls, improve cash flows and liquidity, and
reduce volatility.
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    \16\ Index CDS that are currently cleared are generally swaps
subject to CFTC regulation. The definition of ``narrow-based
security index'' is used to help in distinguishing between certain
swaps, such as index CDS, and security-based swaps. See Product
Definitions Adopting Release.
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    At the same time, facilitating portfolio margining for customer-
owned swaps requires careful consideration to ensure that customer
protection concerns are appropriately addressed, as well as to promote
appropriate risk management and disclosure. The Commission is

mindful of the need to address these issues.
    Accordingly, after careful consideration of the requests before the
Commission, comments received, and the relevant statutory provisions,
the Commission is acting to provide conditional exemptive relief to
facilitate portfolio margining treatment for customer-related positions
in CDS that are cleared pursuant to the terms of this Order.

A. Relevant Provisions

    Section 3E of the Exchange Act, as established pursuant to Section
763 of the Dodd-Frank Act, sets forth the framework for the segregation
of assets held as collateral in security-based swap transactions.
Section 3E(b)(1) of the Exchange Act provides that a broker, dealer, or
security-based swap dealer shall treat and deal with all money,
securities, and property of any security-based swap customer received
to margin, guarantee, or secure a cleared security-based swap
transaction as belonging to the customer.\17\ Section 3E(b)(2) of the
Exchange Act provides that the money, securities, and property shall be
separately accounted for and shall not be commingled with the funds of
the broker, dealer, or security-based swap dealer or used to margin,
secure, or guarantee any trades or contracts of any security-based swap
customer or person other than the person for whom the money,
securities, or property are held.\18\ Section 3E(c)(1) of the Exchange
Act provides that, notwithstanding Section 3E(b) of the Exchange Act,
money, securities, and property of cleared security-based swap
customers of a broker, dealer, or security-based swap dealer may, for
convenience, be commingled and deposited in the same one or more
accounts with any bank, trust company, or clearing agency.\19\ Section
3E(c)(2) of the Exchange Act further provides that the Commission may,
notwithstanding Section 3E(b) of the Exchange Act, by rule, regulation,
or order prescribe terms and conditions under which any money,
securities, or property of a customer with respect to cleared security-
based swaps may be commingled and deposited with any other money,
securities, or property received by the broker, dealer, or security-
based swap dealer and required by the Commission to be separately
accounted for and treated and dealt with as belonging to the security-
based swap customer of the broker, dealer, or security-based swap
dealer.\20\ Section 3E(d) of the Exchange Act restricts the ability to
invest such money, securities, and property of the security-based swap
customer,\21\ and Section 3E(e) of the Exchange Act places certain
prohibitions on the disposition and use of customer money, securities,
and property of a security-based swap customer by any person, including
any clearing agency and any depository institution that has received
any money, securities, or property for deposit in a separate account or
accounts, as provided in Section 3E(b) of the Exchange Act.\22\
Finally, Section 3E(g) of the Exchange Act provides that an account
holding a security-based swap, other than a portfolio margining account
referred to in Section 15(c)(3)(C) of the Exchange Act, shall be
considered to be a securities account, as defined in 11 U.S.C. 741.\23\
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    \17\ See Section 3E(b)(1) of the Exchange Act (15 U.S.C. 78c-
5(b)(1)) (as added by Section 763(d) of the Dodd-Frank Act).
    \18\ See Section 3E(b)(2) of the Exchange Act (15 U.S.C. 78c-
5(b)(2)) (as added by Section 763(d) of the Dodd-Frank Act).
    \19\ See Section 3E(c)(1) of the Exchange Act (15 U.S.C. 78c-
5(c)(1)) (as added by Section 763(d) of the Dodd-Frank Act).
    \20\ See Section 3E(c)(2) of the Exchange Act (15 U.S.C. 78c-
5(c)(2) (as added by Section 763(d) of the Dodd-Frank Act).
    \21\ 15 U.S.C. 78c-5(d) (as added by Section 763(c) of the Dodd-
Frank Act).
    \22\ 15 U.S.C. 78c-5(e) (as added by Section 763(c) of the Dodd-
Frank Act).
    \23\ Solely for purposes of Section 3E(g) of the Exchange Act,
the Commission interprets ``a portfolio margining account referred
to in section 15(c)(3)(C)'' to include a portfolio margining account
that is maintained in accordance with the terms of this Order.
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    Section 15(c)(3) of the Exchange Act and Rule 15c3-3 \24\ also
provide for the protection of customer securities and funds.
Specifically, under Section 15(c)(3) of the Exchange Act, the SEC may
prescribe rules and regulations ``to provide safeguards with respect to
the financial responsibility and related practices of brokers and
dealers, including, but not limited to, the acceptance of custody and
use of customers' securities and the carrying and use of customers'
deposits or credit balances.'' \25\ Under Exchange Act Rule 15c3-3, a
broker-dealer must, in essence, segregate customer funds and fully paid
and excess margin securities held by the firm for the accounts of
customers. The intent of the rule is, among other things, to
``facilitate the liquidations of insolvent broker-dealers and to
protect customer assets in the event of a SIPC liquidation through a
clear delineation in Exchange Act Rule 15c3-3 of specifically
identifiable property of customers.'' \26\ Absent an exemption, a
broker-dealer would be required to comply with applicable provisions of
Section 15(c)(3) of the Exchange Act and Rule 15c3-3 thereunder as they
relate to all securities, including security-based swaps.\27\
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    \24\ 17 CFR 240.15c3-3.
    \25\ 15 U.S.C. 78o(c)(3).
    \26\ See Broker-Dealers; Maintenance of Certain Basic Reserves,
Exchange Act Release No. 9856 (Nov. 10 1972), 37 FR 25224 (Nov. 29,
1972).
    \27\ In addition to the Exchange Act provisions specific to
security-based swaps, there are Exchange Act provisions applicable
to ``securities'', which would apply to security-based swaps.
Section 761 of the Dodd-Frank Act amended the definition of
``security'' under the Exchange Act to include security-based swaps.
See Exchange Act Section 3(a)(10), 15 U.S.C. 78c(a)(10) (as revised
by Section 761 of the Dodd-Frank Act). The Commission approved an
order granting temporary relief and providing interpretive guidance
to make it clear that a substantial number of the requirements of
the Exchange Act would not apply to security-based swaps when the
revised definition of ``security'' went into effect on July 16,
2011. 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, Exchange Act Release No. 64795 (July 1, 2011)
(``Exchange Act Exemptive Order''). While the Exchange Act Exemptive
Order provided registered broker-dealers a limited exemption from
Section 15(c)(3) of the Exchange Act and rules thereunder in
connection with security based-swaps (to the extent that these
provisions do not apply to security-based swap activities or
positions as of July 15, 2011), the exemption from Exchange Act Rule
15c3-3 is not available for the broker-dealer's activities and
positions related to cleared security-based swaps, to the extent
that the 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, because at the time the exemption was granted
no clearing agencies were clearing security-based swaps. Id.
Accordingly, relief separate from Section 15(c)(3) of the Exchange
Act and Rule 15c3-3, and certain other Exchange Act provisions
applicable to ``securities'' discussed herein, is necessary to
permit the commingling and portfolio margining of customer positions
in cleared CDS.
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    Section 724 of the Dodd-Frank Act added provisions to Section 4d of
CEA that perform functions similar to those in Section 3E of the
Exchange Act in creating a segregation framework for swap
customers.\28\ Accordingly, in order to permit collateral related to
cleared security-based swaps to be commingled with that related to
cleared swaps for purposes of portfolio margining and to operate under
the segregation framework for swaps, a broker-dealer would need relief
from the applicable provisions of Section 3E and Section 15(c)(3) of
the Exchange Act as well as Rule 15c3-3 thereunder. Similarly, a
clearing agency would need relief from applicable provisions of Section
3E of the Exchange Act.\29\
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    \28\ See 7 U.S.C. 6d(f) (as added by Section 724 of the Dodd-
Frank Act).
    \29\ The CFTC would also need to provide relief to allow
security-based swaps to be commingled with swaps in an account
maintained in accordance with Section 4d(f) of the CEA. The
Commission notes that the CFTC has also received similar requests
for relief. See Letter from Michael M. Phillip, Partner, Winston &
Strawn LLP (Oct. 4, 2011) (the petition and comments received on the
petition are on file at the CFTC's Web site at http://sirt.cftc.gov/sirt/sirt.aspx?Topic=CommissionOrdersandOtherActionsAD&Key=22685).

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    Moreover, Exchange Act Rules 8c-1 and 15c2-1 (``hypothecation
rules'') prohibit, among other things, a broker-dealer from commingling
customer securities (the term ``customer'' for this purpose generally
includes affiliates of the broker-dealer) with its own proprietary
securities under a lien for a loan made to such broker-dealer.\30\
However, pursuant to the CFTC Part 22 Rules, the money, securities, and
property of an affiliate (as defined in association with the definition
of ``Cleared Swaps Proprietary Account'' pursuant to CFTC Rule 22.1)
\31\ of an intermediary (i.e., BD/FCM) must be held in a Cleared Swaps
Proprietary Account in accordance with the CFTC regime in order to
permit such affiliates to use portfolio margining for CDS.\32\ Absent
an exemption, affiliates of a broker-dealer that are not excluded from
the definition of customer in the hypothecation rules are customers
whose securities positions cannot be commingled with the broker-
dealer's proprietary securities and therefore could not be held in a
Cleared Swap Proprietary Account, as required by the CFTC's Part 22
Rules.\33\
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    \30\ 17 CFR 240.8c-1 and 17 CFR 240.15c2-1. The term
```customer'' is defined in paragraph (b)(1) of the hypothecation
rules and excludes any general or special partner or any director or
officer of such broker-dealer, or any participant, as such, in any
joint, group or syndicate account with such broker-dealer or with
any partner, officer, or director thereof.
    \31\ Cleared Swaps Proprietary Account means an account for
cleared swaps and associated collateral that is carried on the books
and records of a FCM for persons with certain relationships with
that FCM, including applicable affiliates. In association with the
definition of a Cleared Swaps Proprietary Account, an ``affiliate''
is defined to include a person, directly or indirectly, controls
such individual, partnership, corporation or association or,
directly or indirectly, is controlled by or is under common control
with, such individual, partnership, corporation or association. See
CFTC Rule 22.1, 17 CFR 22.1.
    \32\ Under CFTC Rule 22.1, a firm that is an affiliate of a FCM
would not be a cleared swaps customer, which is defined as any
person entering into a cleared swap, excluding any owner or holder
of a Cleared Swaps Proprietary Account with respect to the cleared
swaps in such account and a clearing member of a DCO with respect to
cleared swaps cleared on that DCO. See CFTC Rule 22.1, 17 CFR 22.1.
Thus, such an affiliate would not be a customer for purposes of a
customer portfolio margining program with respect to swaps and
security-based swaps.
    \33\ The Exchange Act Exemptive Order provided registered
broker-dealers a temporary exemption from these rules, which expires
on February 11, 2013. While the Commission will consider the
appropriate treatment of security-based swaps under the provisions
of the Exchange Act not amended by the Dodd-Frank Act before
expiration of the exemptions set forth in the Exchange Act Exemptive
Order, including Exchange Act Rules 8c-1 and 15c2-1, the Commission
believes that it is appropriate to provide relief from these rules
in the context of this order. See Product Definitions Adopting
Release.
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B. Exemptive Relief

    Given the above requirements for the segregation of assets held as
collateral under the Exchange Act, absent relief by the Commission,
participants would not be able to operate in accordance with both the
Exchange Act and the CEA and establish a program to commingle and
portfolio margin cleared customer positions in CDS, which include both
swaps and security-based swaps. The Commission has received requests to
provide certain exemptive relief \34\ to facilitate the establishment
of a program providing for portfolio margining of cleared customer
positions in CDS. Such a program has the potential to reduce clearing
costs through the integration of clearing functions and the potential
reduction of margin requirements by taking into account offsetting
positions. As discussed above, Section 3E(c)(2) of the Exchange Act
provides that, notwithstanding Section 3E(b) of the Exchange Act, in
accordance with any terms and conditions the Commission may prescribe
by rule, regulation, or order, any money, securities, or property of
the security-based swaps customer of a broker, dealer, or security-
based swap dealer described in Section 3E(b) of the Exchange Act may be
commingled and deposited as provided in Section 3E of the Exchange Act
with any other money, securities, or property received by the broker,
dealer, or security-based swap dealer and required by the Commission to
be separately accounted for and treated and dealt with as belonging to
the security-based swaps customer of the broker, dealer, or security-
based swap dealer.
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    \34\ See supra notes 8 and 10.
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    In addition, Section 36 of the Exchange Act authorizes the
Commission to conditionally or unconditionally exempt any person,
security, or transaction, or any class or classes of persons,
securities, or transactions, from certain provisions of the Exchange
Act or certain rules or regulations thereunder, by rule, regulation, or
order, to the extent that such exemption is necessary or appropriate in
the public interest, and is consistent with the protection of
investors.\35\
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    \35\ 15 U.S.C. 78mm(a)(1).
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    After careful consideration, the Commission believes that providing
certain conditional exemptive relief to facilitate portfolio margining,
as outlined below, is necessary or appropriate in the public interest,
and is consistent with the protection of investors, because it would
promote a more accurate measure of the risk of the total position of
the customer based on off-setting positions. Portfolio margining would
also increase efficiency and reduce costs by closely aligning the costs
of maintaining a portfolio of cleared CDS to the risks presented by
such a portfolio. Moreover, the conditions to the exemption will
provide restrictions designed to protect money, securities, and
property of a security-based swap customer, to address certain
differences in the statutory requirements of the Exchange Act and CEA,
and to promote appropriate risk management and disclosure.
    Specifically, consistent with the discussion on the need for relief
to facilitate portfolio margining outlined above under the heading
``Relevant Provisions,'' pursuant to Section 3E(c)(2) and Section 36 of
the Exchange Act, the Commission finds that it is necessary or
appropriate in the public interest and is consistent with the
protection of investors to exercise its authority to grant the
following conditional exemptions: \36\
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    \36\ The following conditional exemptions do not in any way
limit the Commission's authority to oversee or regulate security-
based swaps under the Exchange Act with respect to provisions that
are not subject to the exemptions, including, among others, the
antifraud and anti-manipulation provisions and the Commission's
examination authority provisions.
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    (1) An exemption from Sections 3E(b), (d), and (e) of the Exchange
Act and any rules thereunder for a clearing agency registered pursuant
to Section 17A of the Exchange Act and registered as a derivatives
clearing organization pursuant to Section 5b of the CEA (``clearing
agency/DCO''),\37\ solely to perform the functions of a clearing agency
for CDS under a program to commingle and portfolio margin CDS for
customer positions; and
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    \37\ An entity that clears both security-based swaps and swaps
is required to be dually registered as a clearing agency/DCO. See
Section 17A(g) of the Exchange Act, (requiring that clearing
agencies that clear security-based swaps be registered with the
Commission) and Section (h) of the CEA (requiring that DCOs that
clear swaps be registered with the CFTC).
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    (2) An exemption from Sections 3E(b), (d), and (e) of the Exchange
Act and Section 15(c)(3) of the Exchange Act and Rule 15c3-3
thereunder,\38\ and from any

requirement to treat an affiliate (as defined in association with the
definition of ``Cleared Swaps Proprietary Account'' pursuant to CFTC
Rule 22.1) as a customer for purposes of Exchange Act Rules 8c-1 and
15c2-1, for BD/FCMs that elect to offer a program to commingle and
portfolio margin customer positions in CDS in customer accounts
maintained in accordance with Section 4d(f) of the CEA and the rules
thereunder.
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    \38\ ICE Clear Credit and ICE Clear Europe also requested
exemptive relief from Rules 15c3-1, 17a-3, 17a-4, 17a-5 and 17a-
11(c)(2) of the Exchange Act for their members engaged in the
portfolio margining program. However, compliance with these rules
depends upon the application of Exchange Act Rule 15c3-3 to CDS
covered by the portfolio margining program contemplated under this
Order. Therefore, because the Commission is already providing
conditional exemptive relief from Section 15(c)(3) of the Exchange
Act and Rule 15c3-3 thereunder, the Commission does not need to
provide separate exemptive relief from these provisions with respect
to the portfolio margining program contemplated under this Order.
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    As discussed in more detail below, this relief is subject to
certain conditions that are designed to help ensure the protection of
money, securities, and property received from a security-based swap
customer, as well as to address certain differences in the statutory
requirements of the Exchange Act and CEA and promote appropriate risk
management and disclosure. In particular, the conditions seek to
preserve customers' ability to select between the segregation
requirements and customer protections afforded a securities account
subject to the Exchange Act and the requirements and protections
afforded a swap account subject to the CEA, help ensure that BD/FCMs
collect sufficient margin from customers to address the risk presented
by this business, and help ensure that customers receive relevant
disclosures about the legal framework that will apply to their CDS
transactions.

C. Conditional Exemptions for Clearing Agencies/DCOs From Sections
3E(b), (d) and (e) of the Exchange Act

    As summarized above, pursuant to Section 3E(c)(2) and Section 36 of
the Exchange Act from Sections 3E(b), (d), and (e) of the Exchange Act
and any rules thereunder, the Commission is issuing an exemption to a
clearing agency/DCO. This exemption is available to a clearing agency/
DCO solely to perform the functions of a clearing agency for CDS under
a program to commingle and portfolio margin cleared CDS for customer
positions. This exemption is subject to five conditions that are
designed to help safeguard customer money, securities, and property and
promote the ability of customers to select an appropriate framework for
the segregation of assets.
    The first two conditions are intended to provide for portfolio
margining within a securities account as an alternative for customers
that may desire to conduct portfolio margining under a securities
account structure as opposed to in a swaps account, once the Commission
adopts final rules setting forth margin and segregation requirements
applicable to security-based swaps consistent with Section 3E of the
Exchange Act (``final margin and segregation rules for security-based
swaps'').\39\
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    \39\ The Commission has proposed margin, and segregation
requirements for security-based swap dealers and major security-
based swap participants. See Capital, Margin, and Segregation
Requirements for Security-Based Swap Dealers and Major Security-
Based Swap Participants and Capital Requirements for Broker-Dealers
(``Capital, Margin, and Segregation Requirements Adopting
Release''), Exchange Act Release No. 68071 (Oct. 18, 2012), 77 FR
70213 (Nov. 23, 2012), at http://www.gpo.gov/fdsys/pkg/FR-2012-11-23/pdf/2012-26164.pdf. Once adopted, the Commission's rules would
help establish a more permanent framework for the availability of a
securities account as an alternative for customer accounts holding
both security-based swaps and swaps. As a result, the Commission may
provide further guidance on the application of the exemptive relief
provided in this Order after the final rules related to margin and
the segregation requirements of security-based swaps are adopted by
the Commission.
---------------------------------------------------------------------------

    Specifically, the first condition requires that the clearing
agency/DCO, by the later of (i) six months after the adoption date of
the final margin and segregation rules for security-based swaps or (ii)
the compliance date of such rules, take all necessary action within its
control to obtain any relief needed to permit its BD/FCM clearing
members to maintain customer money, securities, and property received
by the BD/FCM to margin, guarantee, or secure customer positions in CDS
in a segregated account established and maintained in accordance with
Section 3E of the Exchange Act and any rules thereunder for the purpose
of clearing (as a clearing member of the clearing agency/DCO) such
customer positions under a program to commingle and portfolio margin
CDS. Under this condition, a clearing agency/DCO would be required to
have taken steps, by the later of six months after the adoption date of
final rules or the compliance date of such rules, that are within its
control to obtain relief from all appropriate regulatory agencies,
including submitting any applicable request for relief and working
diligently to address any questions or issues raised by regulators.\40\
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    \40\ The Commission anticipates that the CFTC will consider
appropriate regulatory action to facilitate portfolio margining.
---------------------------------------------------------------------------

    The second condition requires that the clearing agency/DCO, by the
later of (i) six months after the adoption date of final margin and
segregation rules for security-based swaps or (ii) the compliance date
of such rules, take all necessary action within its control to
establish rules and operational practices to permit a BD/FCM (at the
BD/FCM's election) to maintain customer money, securities, and property
received by the BD/FCM to margin, guarantee, or secure customer
positions in cleared CDS, which include both swaps and security-based
swaps, in a segregated account established and maintained in accordance
with Section 3E of the Exchange Act and any rules thereunder for the
purpose of clearing (as a clearing member of the clearing agency/DCO)
such customer positions under a program to commingle and portfolio
margin CDS. Until the clearing agency/DCO has developed such rules and
operational practices, the clearing agency/DCO must have in place rules
requiring BD/FCM clearing members to maintain customer money,
securities, and property received to margin, guarantee, or secure
customer positions consisting of cleared CDS, which include both swaps
and security-based swaps, in a segregated account established and
maintained in accordance with Section 4d(f) of the CEA and rules
thereunder for the purpose of clearing (as a clearing member of the
clearing agency/DCO) such customer positions under a program to
commingle and portfolio margin CDS. This condition would ensure that
all customer assets are segregated and subject to appropriate
regulatory oversight.
    Some commenters raised certain issues associated with a requirement
that market participants be provided a choice in account structure.
Specifically, ICE Clear Credit stated that offering customers a choice
would require changes at ICE Clear Credit and each of its participant
BD/FCMs and result in needless additional costs.\41\ ICE Clear Credit
stated that few, if any, customers would choose an account established
in accordance with Section 3E of the Exchange Act instead of an account
established in accordance with Section 4d(f) of the CEA.\42\ Another
commenter also stated that granting the petition now would not prohibit
customers from later choosing a different portfolio margining option
under a Section 3E account structure, if made available.\43\
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    \41\ See ICE Letter.
    \42\ Id.
    \43\ See MFA Letter.
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    The Commission appreciates the benefits of providing relief to
facilitate portfolio margining now while maintaining discretion for
customers to later choose a different portfolio

margining option under a Section 3E account structure when it becomes
available. The Commission believes that it is important to ultimately
provide market participants with the ability to select an account
structure to manage their individual risks by taking into account the
different regulatory provisions that may apply to different accounts
types and that any costs incurred in providing such an option would be
based on existing obligations that clearing agencies and markets
participants have under Section 3E of the Exchange Act in connection
with the clearing of security-based swaps in accordance with Section 3E
of the Exchange Act. Accordingly, the Commission is imposing these two
conditions in order to facilitate the ability of customers to choose an
alternative account option in the future, once the Commission adopts
final margin and segregation rules for security-based swaps.\44\
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    \44\ The choice of the type of portfolio margining account
structure (i.e., security account or swap account) would be made by
each intermediary (i.e., BD/FCM) for the benefit of its customers,
while the clearing agency would be expected to maintain the capacity
to allow the intermediary, acting as a clearing member, to select
either option. This optionality also will further efforts to achieve
more fully the benefits of risk-based portfolio margining, by giving
to customers the choice of portfolio margining in a single futures
or securities account at a dually-registered BD/FCM. See A Joint
Report of the SEC and the CFTC on Harmonization of Regulation (Oct.
19, 2009) ``Joint Report''.
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    The third condition requires the clearing agency/DCO to have
obtained any other relief needed to permit a BD/FCM that is a clearing
member (at the BD/FCM's election) to maintain customer money,
securities, and property received by the BD/FCM to margin, guarantee,
or secure customer positions in cleared CDS, which include both swaps
and security-based swaps, in a segregated account established and
maintained in accordance with Section 4d(f) of the CEA and rules
thereunder for the purpose of clearing (as a clearing member of the
clearing agency/DCO) such customer positions under a program to
commingle and portfolio margin CDS. The conditional exemptions from the
requirements under the Exchange Act are based in part on the
applicability of the regulatory regime under the CEA. This condition is
designed to help ensure the exemption from the Exchange Act regulatory
framework would apply only in circumstances where the regulatory regime
under the CEA is applicable.
    The fourth condition requires the clearing agency/DCO to have
appropriate rules and operational practices to permit a BD/FCM that is
a clearing member (at the BD/FCM's election) to maintain customer
money, securities, and property received by the BD/FCM to margin,
guarantee, or secure customer positions in cleared CDS, which include
both swaps and security-based swaps, in a segregated account
established and maintained in accordance with Section 4d(f) of the CEA
and rules thereunder for the purpose of clearing (as a clearing member
of the clearing agency/DCO) such customer positions under a program to
commingle and portfolio margin CDS. Similar to the prior condition,
this condition is designed to help ensure the exemption from the
Exchange Act regulatory framework would apply only in circumstances
where the regulatory regime under the CEA is applicable.
    The fifth condition requires the clearing agency/DCO to have rules
mandating that each customer of the BD/FCM participating in a program
to commingle and portfolio margin CDS shall be an ``eligible contract
participant'' as defined in Section 1a(18) of the CEA. Persons that are
not eligible contract participants may lack the expertise or resources
to effectively determine the risks associated with engaging in these
types of transactions.\45\ Accordingly, the Commission believes it is
appropriate to provide conditions that would limit the applicability of
the exemptions to customers that are eligible contract participants.
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    \45\ The Dodd-Frank Act limits the swaps and security-based swap
transactions that may be entered into by parties that are not
eligible contract participants. For example, under the Dodd-Frank
Act, only an eligible contract participant may enter into security-
based swaps that are not on a national securities exchange. See
Exchange Act Section 6(l), 15 U.S.C. 78f(l) (added by Section 763(e)
of the Dodd-Frank Act). In addition, security-based swaps that are
not registered pursuant to the Securities Act of 1933 (``Securities
Act'') can only be sold to eligible contract participants. See
Securities Act Section 5(d), 15 U.S.C. 77e(d) (added by Section
768(b) of the Dodd-Frank Act). Securities Act Section 5(d)
specifically provides that it is unlawful to offer to buy, purchase,
or sell a security-based swap to any person that is not an eligible
contract participant, unless the transaction is registered under the
Securities Act. Id. Given that Congress determined it is appropriate
to include these limitations in the Dodd-Frank Act with respect to
eligible contract participants, we believe it is appropriate to
limit the exemptions in this Order to CDS entered into with eligible
contract participants.
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D. Conditional Exemption for BD/FCMs That Elect To Offer a Program To
Commingle and Portfolio Margin Customer Positions in CDS in Customer
Accounts Maintained in Accordance With Section 4d(f) of the CEA and
Rules Thereunder

    As summarized above, the Commission is issuing an exemption to BD/
FCMs from Exchange Act Sections 3E(b), (d), and (e), and Section
15(c)(3) and Rule 15c3-3 thereunder, as well as an exemption from any
requirement to treat an affiliate (as defined in association with the
definition of ``Cleared Swaps Proprietary Account'' pursuant to CFTC
Rule 22.1) \46\ as a customer for purposes of Exchange Act Rules 8c-1
and 15c2-1, provided that the BD/FCM complies with the conditions to
the exemption discussed below. This exemption is available to BD/FCMs
solely to perform the functions of a BD/FCM for CDS with respect to any
customer money, securities, and property received by the BD/FCM to
margin, guarantee, or secure cleared customer positions in security-
based swaps included in a segregated account established and maintained
in accordance with Section 4d(f) of the CEA and the rules thereunder
under a program to commingle and portfolio margin customer positions in
cleared CDS.
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    \46\ 17 CFR 22.1. The definition of ``Cleared Swaps Proprietary
Account'' was recently adopted by the CFTC and is substantially
similar to the definition of ``Proprietary Account'' for futures
contracts in regulation 1.3. See Protection of Cleared Swaps
Customer Contracts and Collateral; Conforming Amendments to the
Commodity Broker Bankruptcy Provisions, 77 FR 6336 (Feb. 7, 2012).
---------------------------------------------------------------------------

    The exemption is subject to six conditions that are designed to
permit such BD/FCMs to participate in a program to commingle and
portfolio margin customer positions in cleared CDS while helping to
ensure the protection of customer securities and funds. The first two
conditions of this exemption relate to the segregation of customer
positions in CDS and impose separate requirements for customers that
are not affiliates of the BD/FCM and customers that are affiliates of
the BD/FCM.\47\ The remaining conditions apply generally to all BD/FCMs
participating in the program--regardless of whether they deal with
customers that are affiliates of the BD/FCM--and relate to the risk
management and other safeguards the BD/FCM must have in place in order
to rely on the exemption. Among other things, these conditions

establish minimum margin levels and disclosure requirements.
---------------------------------------------------------------------------

    \47\ ``Customer'' for purposes of this exemption has the same
meaning as in Exchange Act Rules 15c2-1 and 8c2-1.
---------------------------------------------------------------------------

    The first condition consists of two requirements and applies with
respect to transactions involving customers that are not affiliates
\48\ of the BD/FCM.
---------------------------------------------------------------------------

    \48\ See supra notes 31 and 32 and accompanying text.
---------------------------------------------------------------------------

    First, the BD/FCM must maintain customer money, securities, and
property received to margin, guarantee or secure customer positions
consisting of cleared CDS, which include both swaps and security-based
swaps, in a segregated account established and maintained in accordance
with Section 4d(f) of the CEA and rules thereunder for the purpose of
clearing (as a clearing member or through a clearing member of a
clearing agency/DCO operating pursuant to the exemption in this Order)
such customer positions under a program to commingle and portfolio
margin CDS. This condition is designed to help ensure that the
exemption under this Order would apply only in circumstances where
customer money, securities, and property are maintained in a segregated
account pursuant to the regulatory regime under the CEA.
    Second, the BD/FCM must enter into a non-conforming subordination
agreement \49\ with each customer that is not an affiliate regarding
all customer money, securities, or property held in a segregated
account established and maintained in accordance with Section 4d(f) of
the CEA and rules thereunder under a program to commingle and portfolio
margin CDS. The non-conforming subordination agreement must contain:
(i) A specific acknowledgment by the customer that such money,
securities or property will not receive customer treatment under the
Exchange Act or Securities Investor Protection Act of 1970 (``SIPA'')
or be treated as customer property as defined in 11 U.S.C. 741 in a
liquidation of the BD/FCM, and that such money, securities or property
will be subject to any applicable protections under Subchapter IV of
Chapter 7 of Title 11 of the United States Code and rules and
regulations thereunder; and (ii) an affirmation by the customer that
all of its claims with respect to such money, securities, or property
against the BD/FCM will be subordinated to the claims of other
securities customers and security-based swaps customers not operating
under a program to commingle and portfolio margin CDS pursuant to this
Order. The Commission believes that this condition, along with the
disclosure conditions discussed below, should help to ensure that
customers clearly understand that any customer protection treatment
otherwise available with respect to securities transactions under the
Exchange Act, SIPA or the stockbroker liquidation provisions will not
be available for CDS held in an account maintained in accordance with
Section 4d(f) of the CEA.
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    \49\ The term ``non-conforming subordination agreement'' is used
broadly to refer to a subordination agreement between a broker-
dealer and its client where the client agrees to subordinate its
claims to the claims of all customers and other creditors of the
broker-dealer. Non-conforming subordination agreements have
previously been used in limited circumstances to permit broker-
dealer affiliates to be treated as non-customers for purposes of
Exchange Act Rule 15c3-3 to allow the positions of the affiliate to
be commingled with the positions of the clearing member. See, e.g.,
Letter from Michael A. Macchiaroli, Associate Director, Division of
Market Regulation, to William H. Navin, EVP and General Counsel, The
Options Clearing Corporation (June 15, 2000). See also Statement of
the SEC Division of Trading and Markets Regarding the Protection of
Customer Assets, Sept. 20, 2008 (available at http://www.sec.gov/news/press/2008/2008-216.htm).
---------------------------------------------------------------------------

    One commenter similarly requested clarity about how CDS commingled
in a Section 4d(f) account would be treated in the event of the
bankruptcy of a BD/FCM.\50\ The commenter requested that the Commission
and the CFTC clarify and confirm in any approval of ICE Clear Credit's
request for relief that commingled accounts held in accordance with the
segregation requirements of Section 4d(f) of the CEA would be a cleared
swaps customer account for customers trading swaps and would be treated
as such under the Bankruptcy Code (rather than a securities account
subject to SIPA).\51\ The Commission believes it is critical for the
protection of customer's assets to clarify at the outset the rights of
customers, generally, in the event of a bankruptcy of the BD/FCM, and
believes that the subordination agreement condition discussed herein,
in conjunction with disclosure condition described below, should help
provide customers with clarity that the segregation requirements of the
Exchange Act and any protections of SIPA and the stockbroker
liquidation provisions will not apply to customer positions in CDS that
are security-based swaps and are held in a Section 4d(f) account.\52\
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    \50\ See ICI Letter.
    \51\ Id.
    \52\ In response to statements in the ICE Letter regarding what
occurs when there is a shortfall in customer property in a broker-
dealer bankruptcy or SIPA liquidation versus an FCM bankruptcy, the
Commission notes that SIPA provide protections to customers that
give them priority over general creditors. See Joint Report, supra,
note 44, at 39-40. First, in the case of a shortfall in customer
property held by a broker-dealer, SIPA and the stockbroker
liquidation provisions of the Bankruptcy Code provide that customer
property may be supplemented with other property in certain
circumstances. See 15 U.S.C. 78lll(4)(E); 15 U.S.C. 78fff-2(c)(3);
11 U.S.C. 741(4)(A)(iv); and 11 U.S.C. 749. In a SIPA liquidation,
to the extent customer property and SIPC advances (up to $500,000
per customer, including a maximum of $250,000 for cash claims) are
not sufficient to pay or otherwise satisfy in full the net equity
claims of customers, such customers are entitled, to the extent only
of their respective unsatisfied net equities, to participate in the
general estate as unsecured creditors.
    In response to statements in the ICE Letter that the SIPA
insolvency rules do not appear to provide assurances for a prompt
liquidation, the Commission notes that SIPA and Commission
regulations contemplate expeditious transfer of customer accounts
through self-liquidation or a proceeding under SIPA. In general, if
the books and records of the broker-dealer are in order and customer
accounts are properly margined, customer accounts may be transferred
to another broker-dealer in a process known as a bulk transfer. See
Joint Report, supra, note 44, at 40.
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    The second condition applies with respect to transactions involving
customers that are affiliates of the BD/FCM and consists of three
requirements.
    First, the BD/FCM must maintain affiliate money, securities, and
property received to margin, guarantee, or secure positions consisting
of cleared CDS, which include both swaps and security-based swaps, in a
Cleared Swaps Proprietary Account for the purpose of clearing (as a
clearing member of a clearing agency/DCO operating pursuant to the
exemption in this Order) such positions under a program to commingle
and portfolio margin CDS. The purpose of this requirement is to ensure
that a program to commingle and portfolio margin CDS will conform to
the regulatory regime of the CFTC, under which certain affiliates are
not treated as customers.\53\ Specifically, the money, securities, and
property of a customer that is an affiliate of the BD/FCM must be held
in a Cleared Swaps Proprietary Account in accordance with the CFTC
regime.\54\
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    \53\ Under CFTC regulations, an account in which Cleared Swaps
and associated collateral of applicable affiliates of an FCM are
held is classified as a proprietary account. See 17 CFR 22.1. As
previously noted, the Commission believes the relief being provided
with respect to affiliates of a BD/FCM is appropriate because absent
an exemption, affiliates of a BD/FCM that are not otherwise excluded
from the definition of customer in the hypothecation rules (i.e.,
Exchange Act Rules 8c-1 and 15c2-1) are customers whose securities
positions cannot be commingled with the broker-dealer's own
proprietary securities positions and therefore could not be held in
Cleared Swap Proprietary Account as required under the CFTC regime.
    \54\ The Commission has previously granted similar relief to
non-broker-dealer affiliates of members of a registered clearing
agency. See Letter from Michael A. Macchiaroli, Associate Director,
Division of Market Regulation, to William H. Navin, EVP and General
Counsel, The Options Clearing Corporation (June 15, 2000). The no-
action relief included terms that required each non-broker-dealer
member affiliate whose securities positions would be hypothecated to
consent to being treated as a non-customer and to execute a non-
conforming subordination agreement meeting certain criteria
accompanied by an opinion of counsel regarding the legal authority
of the member affiliate to so subordinate its claims. In connection
with the no action relief, the Commission approved a proposed rule
change filed by OCC to allow an affiliate of an OCC clearing member
to designate itself as a non-customer under the Commission's
hypothecation rules and OCC's By-Laws and Rules in order for the
affiliate's transactions and positions to be commingled in its
clearing member's firm and/or proprietary cross-margin account. See
Self-Regulatory Organizations; The Options Clearing Corporation;
Order Granting Approval of Proposed Rule Change Relating to Clearing
Member Affiliates, Exchange Act Release No. 43668 (Dec. 4, 2000), 65
FR 77413 (Dec. 11, 2000).

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    Second, the BD/FCM must enter into a non-conforming subordination
agreement \55\ with each affiliate regarding all customer money,
securities, or property held in a segregated account established and
maintained in accordance with Section 4d(f) of the CEA and rules
thereunder under a program to commingle and portfolio margin CDS. The
non-conforming subordination agreement must contain: (i) A specific
acknowledgment by the affiliate that such money, securities or property
will not receive customer treatment under the Exchange Act or SIPA or
be treated as customer property as defined in 11 U.S.C. 741 in a
liquidation of the BD/FCM, and that such money, securities or property
will be held in a proprietary account in accordance with the CFTC
requirements and will be subject to any applicable protections under
Subchapter IV of Chapter 7 of Title 11 of the United States Code and
rules and regulations thereunder; and (ii) an affirmation by the
affiliate that all of its claims with respect to such money,
securities, or property against the BD/FCM will be subordinated to the
claims of other securities customers and security-based swap customers
not operating under a program to commingle and portfolio margin CDS
pursuant to this Order. The Commission believes that this requirement
should help to ensure that affiliates clearly understand that any
customer protection treatment otherwise available with respect to
securities transactions under the Exchange Act, SIPA or the stockbroker
liquidation provisions will not be available and the account would be
treated as a proprietary account (and not a customer account) under the
CEA.
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    \55\ Under Exchange Act Rule 15c3-1, a broker-dealer can exclude
from its liabilities a subordinated loan that has been approved by
its designated examining authority (``DEA'') for purposes
determining its net capital. See 17 CFR 240.15c3-1(c)(2)(ii) and
15c3-1d. A non-conforming subordinated loan is one that the DEA has
not approved and, therefore, cannot be used to exclude the liability
arising from the loan agreement. See Letter from Michael A.
Macchiaroli, Associate Director, Division of Market Regulation, to
William H. Navin, EVP and General Counsel, The Options Clearing
Corporation (June 15, 2000).
---------------------------------------------------------------------------

    Third, the BD/FCM must obtain from the affiliate an opinion of
counsel that the affiliate is legally authorized to subordinate all of
its claims against the BD/FCM to those of other customers. The
Commission believes that this condition is appropriate to help ensure
that affiliates of the BD/FCM do not place in a proprietary account any
assets that the affiliate is not legally authorized to subordinate.
    The remaining conditions are applicable generally to all BD/FCMs
operating pursuant to the exemption in this Order, regardless of
whether they deal with customers that are affiliates of the BD/FCM.
    The third condition to this exemption states that the BD/FCM must
set minimum margin levels, with respect to any customer transaction in
a program to commingle and portfolio margin CDS, at least equal to the
amount determined using a margin methodology established and maintained
by the BD/FCM that has been approved in writing by the Commission or
the Commission staff. In conducting this review function, the
Commission intends that the Commission staff will consult with the CFTC
staff and take into consideration the margin methodology used by the
clearing agency/DCO in setting customer margin levels under the CFTC
risk management regulations.\56\ This condition is designed to help
assure that consistent customer margin requirements apply to the BD/
FCM, regardless of the type of account in which a security (including
security-based swap) is held, and that the BD/FCM is requiring minimum
margin that adequately measures the risk in the customer's CDS
portfolio in a manner consistent with its appropriate internal risk
management procedures.\57\ This approach will promote the establishment
of consistent margin levels for securities across account types, which
in turn will mitigate the risk that clearing agency/DCOs will compete
by implementing lower margin levels and help ensure that margin levels
are set at sufficiently prudent levels to reduce systemic risk.
Finally, the Commission intends that the Commission staff will work
with the CFTC staff to see that trading under the program will
facilitate both capital efficiency and prudent risk management.
---------------------------------------------------------------------------

    \56\ See 17 CFR 39.13 (CFTC risk management regulations
applicable to DCOs). In appropriate circumstances, the Commission or
the Commission staff may provide temporary approval of a BD/FCM's
margin methodology while the methodology is still being evaluated
prior to granting final approval.
    \57\ Nothing in this Order will preclude an FCM from setting a
higher margin level for some or all of its customers. See 17 CFR
39.13(g)(8).
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    A BD/FCM seeking approval for a margin methodology would be
expected to submit sufficient information for the Commission or
Commission staff \58\ to be able to make a determination regarding the
performance of the firm's margin methodology.\59\ In reviewing this
information, the Commission or the Commission staff will be guided by
the standards prescribed in Appendix E of Exchange Act Rule 15c3-1, to
the extent relevant to the portfolio margining of cleared CDS that are
swaps and security-based swaps.\60\ In reviewing the BD/FCM's submitted
margin methodology, we expect that the Commission or Commission staff
would consider, among other things, whether the type and amount of
securities permitted to be held for margin purposes are restricted to
those which would facilitate the portfolio margining program and
whether the BD/FCM's VaR model meets the standards set forth in
Appendix E to Exchange Act Rule 15c3-1, as applicable.\61\ In cases
where a BD/FCM proposes to use a standardized, rather than model-based,
methodology, the Commission or Commission staff would consider whether
the methodology could be expected to be at least as conservative in
setting margin amounts as a model meeting the requirements just
described.
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    \58\ The Commission expects and intends that the Financial
Industry Regulatory Authority (``FINRA'') will be actively involved
in reviewing risk management systems and procedures, including
margin methodologies, used by BD/FCMs seeking to participate in the
program. FINRA has a defined and vital interest in seeing that its
members use portfolio margining arrangements involving securities,
including security-based swaps, in a manner that is prudent and
fully accounts for all the risks that they incur in connection with
such arrangements.
    \59\ If a BD/FCM's margin methodology is approved for purposes
of this exemption, the performance of the methodology would be
subject to ongoing regulatory supervision, and the BD/FCM would be
expected to submit for approval any material changes to its margin
methodology.
    \60\ See generally 17 CFR 240.15c3-1e(a). Information submitted
as part of such application shall be accorded confidential
treatment, subject to provisions of applicable law.
    \61\ The amount and type of securities held for margin purposes
should be commensurate with the risk and activity contained in the
portfolio margining program and must not be designed to evade the
requirements generally applicable to securities pursuant to Exchange
Act Rule 15c3-3.
---------------------------------------------------------------------------

    By conducting this review, the Commission will be approving margin
methodologies for customer positions in securities as well as non-
securities held in a portfolio margin account. Due to the nature of
portfolio margining, in which

the margin methodology is applied to all positions in an account as a
single portfolio, security-based swaps cannot be singled out for margin
treatment that differs from the treatment applied to swaps. This order
by its terms does not apply to, and the Commission is not seeking to
establish margin requirements with respect to, accounts that hold no
positions in security-based swaps.
    The fourth condition requires that the BD/FCM be in compliance with
applicable laws and regulations relating to risk management, capital,
and liquidity, and be in compliance with applicable clearing agency/DCO
rules and CFTC requirements (including segregation and related books
and records provisions) for accounts established and maintained in
accordance with Section 4d(f) of the CEA and rules thereunder and
subject to a program to commingle and portfolio margin CDS. The purpose
of this condition is to help assure that the exemption under this Order
is available only where the applicable regulatory requirements are
appropriately followed.
    The fifth condition requires that each customer of the BD/FCM
participating in a program to commingle and portfolio margin CDS be an
``eligible contract participant'' as defined in Section 1a(18) of the
CEA. Similar to the condition under the exemption for clearing
agencies/DCOs, the Commission believes that it is appropriate to limit
the availability of this exemption to eligible contract participants,
as persons that are not eligible contract participants may lack the
expertise or resources to effectively determine the risks associated
with engaging in these types of transactions.
    The sixth and final condition requires that, before receiving any
money, securities, or property of a customer to margin, guarantee, or
secure positions consisting of cleared CDS, which include both swaps
and security-based swaps, under a program to commingle and portfolio
margin CDS, the BD/FCM must furnish to the customer a disclosure
document containing (i) a statement indicating that the customer's
money, securities, and property will be held in an account maintained
in accordance with the segregation requirements of Section 4d(f) of the
CEA and that the customer has elected to seek protections under
Subchapter IV of Chapter 7 of Title 11 of the United States Code and
the rules and regulations thereunder with respect to such money,
securities, and property, and (ii) a statement that the broker-dealer
segregation requirements of Section 15(c)(3) and Section 3E of the
Exchange Act and the rules thereunder, and any customer protections
under SIPA and the stockbroker liquidation provisions, will not apply
to such customer money, securities, and property. The disclosure
document may be provided to a customer at or prior to the time that the
customer opens an account to commingle and portfolio margin CDS
positions in accordance with Section 4d(f) of the CEA, but must be
provided prior to the BD/FCM receiving any money, securities or
property to margin, guarantee or secure positions consisting of cleared
CDS, which include both swaps and security-based swaps, under a program
to commingle and portfolio margin CDS. The Commission believes that
this condition will help to provide market participants that elect to
participate in a portfolio margining arrangement, as contemplated under
this Order, with important disclosures regarding the legal framework
that will govern their transactions. As noted above, the Commission
views the disclosure requirements as essential to highlight to
customers who elect to commingle and portfolio margin their positions
in CDS in accounts maintained in accordance with Section 4d(f) of the
CEA that the account will be governed by the segregation requirements
under the CFTC's regulatory regime and that any protections under the
SIPA will not be available to the account in the event of
insolvency.\62\
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    \62\ See supra note 52 and associated text.
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III. Solicitation of Comments

    The Commission requests comment on this exemption for clearing
agencies/DCOs and BD/FCMs. The Commission is soliciting public comment
on all aspects of this exemption, including whether other conditions
should apply. If so, what conditions and why?

IV. Conclusion

    It is hereby ordered, pursuant to Section 3E(c)(2) and Section
36(a) of the Exchange Act, the following exemptions from Exchange Act
requirements will apply:
    (a) Exemption for dually registered clearing agencies/derivatives
clearing organizations. A clearing agency registered pursuant to
Section 17A of the Exchange Act and registered as a derivatives
clearing organization pursuant to Section 5b of the CEA (a ``clearing
agency/DCO'') shall be exempt from Sections 3E(b), (d), and (e) of the
Exchange Act and any rules thereunder, solely to perform the functions
of a clearing agency for CDS under a program to commingle and portfolio
margin cleared CDS for customer positions, subject to the following
conditions:
    (1) The clearing agency/DCO, by the later of (i) six months after
the adoption date of final rules setting forth margin and segregation
requirements applicable to security-based swaps consistent with Section
3E of the Exchange Act or (ii) the compliance date of such rules, takes
all necessary action within its control to obtain any relief needed to
permit its clearing members that are registered under Section 15(b) of
the Exchange Act (other than paragraph (11) thereof) and also
registered as a futures commission merchant pursuant to Section
4f(a)(1) of the CEA (a ``BD/FCM'') (at the BD/FCM's election), to
maintain customer money, securities, and property received by the BD/
FCM to margin, guarantee, or secure customer positions in cleared CDS,
which include both swaps (as defined in Section 1(a)(47) of the CEA and
the rules thereunder) and security-based swaps (as defined in Section
3(g)(68) of the Exchange Act and the rules thereunder), in a segregated
account established and maintained in accordance with Section 3E of the
Exchange Act and any rules thereunder for the purpose of clearing (as a
clearing member of the clearing agency/DCO) such customer positions
under a program to commingle and portfolio margin CDS.
    (2) The clearing agency/DCO, by the later of (i) six months after
the adoption date of final rules setting forth margin and segregation
requirements applicable to security-based swaps consistent with Section
3E of the Exchange Act or (ii) the compliance date of such rules, takes
all necessary action within its control to establish rules and
operational practices to permit a BD/FCM (at the BD/FCM's election) to
maintain customer money, securities, and property received by the BD/
FCM to margin, guarantee, or secure customer positions in cleared CDS,
which include both swaps and security-based swaps, in a segregated
account established and maintained in accordance with Section 3E of the
Exchange Act and any rules thereunder for the purpose of clearing (as a
clearing member of the clearing agency/DCO) such customer positions
under a program to commingle and portfolio margin CDS. Until such rules
and operational practices have been developed, pursuant to the clearing
agency/DCO's rules, clearing members that are BD/FCMs must maintain
customer money, securities, and property received to margin, guarantee,
or secure customer positions consisting of cleared CDS, which include
both

swaps and security-based swaps, in a segregated account established and
maintained in accordance with Section 4d(f) of the CEA and rules
thereunder for the purpose of clearing (as a clearing member of the
clearing agency/DCO) such customer positions under a program to
commingle and portfolio margin CDS.
    (3) The clearing agency/DCO has obtained any other relief needed to
permit a BD/FCM that is a clearing member (at the BD/FCM's election) to
maintain customer money, securities, and property received by the BD/
FCM to margin, guarantee, or secure customer positions in cleared CDS,
which include both swaps and security-based swaps, in a segregated
account established and maintained in accordance with Section 4d(f) of
the CEA and rules thereunder for the purpose of clearing (as a clearing
member of the clearing agency/DCO) such customer positions under a
program to commingle and portfolio margin CDS.
    (4) The clearing agency/DCO has appropriate rules and operational
practices to permit a BD/FCM that is a clearing member (at the BD/FCM's
election) to maintain customer money, securities, and property received
by the BD/FCM to margin, guarantee, or secure customer positions in
cleared CDS, which include both swaps and security-based swaps, in a
segregated account established and maintained in accordance with
Section 4d(f) of the CEA and rules thereunder for the purpose of
clearing (as a clearing member of the clearing agency/DCO) such
customer positions under a program to commingle and portfolio margin
CDS.
    (5) The rules of the clearing agency/DCO require that each customer
of the BD/FCM participating in a program to commingle and portfolio
margin CDS shall be an ``eligible contract participant'' as defined in
Section 1a(18) of the CEA.
    (b) Exemption for certain BD/FCMs that elect to offer a program to
commingle and portfolio margin customer positions in CDS in customer
accounts maintained in accordance with Section 4d(f) of the CEA and
rules thereunder.

Solely to perform the functions of a BD/FCM for cleared CDS, with
respect to any customer money, securities, and property received by the
BD/FCM to margin, guarantee, or secure customer positions in security-
based-swaps included in a segregated account established and maintained
in accordance with Section 4d(f) of the CEA and rules thereunder under
a program to commingle and portfolio margin customer positions in CDS,
a BD/FCM shall be exempt from Exchange Act Sections 3E(b), (d), and
(e), and Section 15(c)(3) and Rule 15c3-3 thereunder and any
requirement to treat an affiliate (as defined in association with the
definition of ``Cleared Swaps Proprietary Account'' pursuant to CFTC
Rule 22.1) as a customer for purposes of Exchange Act Rules 8c-1 and
15c2-1, subject to the following conditions:

    (1) With respect to customers that are not affiliates of the BD/
FCM,
    (i) the BD/FCM shall maintain customer money, securities, and
property received to margin, guarantee or secure customer positions
consisting of cleared CDS, which include both swaps and security-based
swaps, in a segregated account established and maintained in accordance
with Section 4d(f) of the CEA and rules thereunder for the purpose of
clearing (as a clearing member or through a clearing member of a
clearing agency/DCO operating pursuant to the exemption in paragraph
(a) above) such customer positions under a program to commingle and
portfolio margin CDS; and
    (ii) the BD/FCM shall enter into a non-conforming subordination
agreement with each customer. The agreement must contain a specific
acknowledgment by the customer that such money, securities or property
will not receive customer treatment under the Exchange Act or SIPA or
be treated as customer property as defined in 11 U.S.C. 741 in a
liquidation of the BD/FCM and that such money, securities or property
will be subject to any applicable protections under Subchapter IV of
Chapter 7 of Title 11 of the United States Code and rules and
regulations thereunder; as well as an affirmation by the customer that
all of its claims with respect to such money, securities, or property
against the BD/FCM will be subordinated to the claims of other
securities customers and security-based swap customers not operating
under a program to commingle and portfolio margin CDS pursuant to this
Order.
    (2) With respect to customers that are affiliates of the BD/FCM,
    (i) The BD/FCM maintains money, securities, and property of
affiliates received to margin, guarantee, or secure positions
consisting of cleared CDS, which include both swaps and security-based
swaps, in a Cleared Swaps Proprietary Account for the purpose of
clearing (as a clearing member of a clearing agency/DCO operating
pursuant to the exemption in paragraph (a) above) such positions under
a program to commingle and portfolio margin CDS;
    (ii) The BD/FCM enters into a non-conforming subordination
agreement with each affiliate. The agreement must contain a specific
acknowledgment by the affiliate that such money, securities or property
will not receive customer treatment under the Exchange Act or SIPA or
be treated as customer property as defined in 11 U.S.C. 741 in a
liquidation of the BD/FCM, and that such money, securities or property
will be held in a proprietary account in accordance with the CFTC
requirements and will be subject to any applicable protections under
Subchapter IV of Chapter 7 of Title 11 of the United States Code and
rules and regulations thereunder; as well as an affirmation by the
affiliate that all of its claims with respect to such money,
securities, or property against the BD/FCM will be subordinated to the
claims of other securities customers and security-based swap customers
not operating under a program to commingle and portfolio margin CDS
pursuant to this Order; and
    (iii) The BD/FCM obtains from the affiliate an opinion of counsel
that the affiliate is legally authorized to subordinate all of its
claims against the BD/FCM to those of customers.
    (3) The BD/FCM requires minimum margin levels with respect to any
customer transaction in a program to commingle and portfolio margin CDS
at least equal to the amount determined using a margin methodology
established and maintained by the BD/FCM that has been approved by the
Commission or the Commission staff.
    (4) The BD/FCM must be in compliance with applicable laws and
regulations relating to risk management, capital, and liquidity, and
shall be in compliance with applicable clearing agency/DCO rules and
CFTC requirements (including segregation and related books and records
provisions) for accounts established and maintained in accordance with
Section 4d(f) of the CEA and rules thereunder and subject to a program
to commingle and portfolio margin CDS.
    (5) Each customer of the BD/FCM participating in a program to
commingle and portfolio margin CDS is an ``eligible contract
participant'' as defined in Section 1a(18) of the CEA.
    (6) Before receiving any money, securities, or property of a
customer to margin, guarantee, or secure positions consisting of
cleared CDS, which include both swaps and security-based swaps, under a
program to commingle and portfolio margin CDS, the BD/FCM must furnish
to the customer a disclosure document containing the following
information:

    (i) a statement indicating that the customer's money, securities,
and property will be held in an account maintained in accordance with
the segregation requirements of Section 4d(f) of the CEA and that the
customer has elected to seek protections under Subchapter IV of Chapter
7 of Title 11 of the United States Code and the rules and regulations
thereunder with respect to such money, securities, and property; and
    (ii) a statement that the broker-dealer segregation requirements of
Section 15(c)(3) and Section 3E of the Exchange Act and the rules
thereunder, and any customer protections under SIPA and the stockbroker
liquidation provisions, will not apply to such customer money,
securities, and property.

V. Paperwork Reduction Act

    Certain provisions of this Order contain ``collection of
information requirements'' within the meaning of the Paperwork
Reduction Act of 1995.\63\ The Commission has submitted this Order to
the Office of Management and Budget (``OMB'') for review in accordance
with 44 U.S.C. 3507(d) and 5 CFR 1320.11. An agency may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless it displays a currently valid control number.
---------------------------------------------------------------------------

    \63\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

A. Collection of Information

    The Commission found it necessary or appropriate in the public
interest and consistent with the protection of investors to grant the
conditional exemptions discussed in this Order. Among other things, the
Order would require BD/FCMs that elect to offer a program to commingle
and portfolio margin customer positions in CDS in customer accounts
maintained in accordance with Section 4d(f) of the CEA and rules
thereunder, to obtain certain agreements and opinions from its
customers regarding the applicable regulatory regime, and to make
certain disclosures to its customers before receiving any money,
securities, or property of a customer to margin, guarantee, or secure
positions consisting of cleared CDS, which include both swaps and
security-based swaps, under a program to commingle and portfolio margin
CDS. The Order would also require BD/FCMs that elect to offer a program
to commingle and portfolio margin CDS positions in customer accounts
maintained in accordance with Section 4d(f) of the CEA and rules
thereunder, to maintain minimum margin levels using a margin
methodology approved by the Commission or the Commission staff.

B. Proposed Use of Information

    The collection of information requirements are designed, among
other things, to provide appropriate agreements, disclosures, and
opinions to BD/FCM customers to clarify key aspects of the regulatory
framework that will govern their participation in a program to
commingle and portfolio margin CDS positions and to ensure that
appropriate levels of margin are collected.

C. Respondents

    The collections of information as required by this Order would
apply to those BD/FCMs that are seeking to offer a program to commingle
and portfolio margin customer positions in CDS in customer accounts
maintained in accordance with Section 4d(f) of the CEA. Based on
conversations with industry participants and the Commission's market
oversight experience, the Commission estimates that approximately 57
firms would be likely to participate in the CDS market in the
future.\64\ Consequently, the Commission estimates that approximately
57 firms may seek to avail themselves of the conditional exemptive
relief provided in this Order.
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    \64\ Based on a review of FOCUS reports filed with the
Commission there are approximately 57 broker-dealers that also
completed the Commodity Futures Account segregation page on the
FOCUS report and therefore would be BD/FCMs. The Commission is
assuming that all 57 BD/FCMs would be likely to participate in the
CDS market. In addition, the Commission notes it had previously
estimated that approximately 50 entities may fit within the
definition of security-based swap dealer (``SBSD'') and up to 5
entities may fit within the definition of major security-based swap
participant (``MSBSP''). See Registration of Security-Based Swap
Dealers and Major Security-Based Swap Participants, Exchange Act
Release No. 65543 (Oct. 12, 2011), 76 FR 65784 (Oct. 24, 2011), at
65808. The Commission believes that the number of BD/FCMs likely to
engage in the CDS business would be approximately equal to the
previously estimated number of security-based swap dealers and major
security-based swap participants given that CDS make up a
significant portion of the current security-based swap market.
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D. Total Annual Reporting and Recordkeeping Burden

    Paragraph IV(b)(1)(ii) of this Order applies with respect to
customers that are not affiliates of the BD/FCM and requires BD/FCMs
that elect to offer a program to commingle and portfolio margin
customer positions in CDS in customer accounts maintained in accordance
with Section 4d(f) of the CEA and rules thereunder to enter into a non-
conforming subordination agreement with the non-affiliate customer. The
non-conforming subordination agreement must contain: (i) A specific
acknowledgment by the customer that such money, securities or property
will not receive customer treatment under the Exchange Act or SIPA or
be treated as customer property as defined in 11 U.S.C. 741 in a
liquidation of the BD/FCM and that such money, securities or property
will be subject to any applicable protections under Subchapter IV of
Chapter 7 of Title 11 of the United States Code and rules and
regulations thereunder; and (ii) an affirmation by the customer that
all of its claims with respect to such money, securities, or property
against the BD/FCM will be subordinated to the claims of other
securities customers and security-based swap customers not operating
under a program to commingle and portfolio margin CDS pursuant to this
Order.
    The Commission estimates that the average number of non-affiliate
CDS customers of a BD/FCM to be approximately 1,000 \65\ and the
average number of hours to develop a subordination agreement for each
non-affiliate CDS customer to be approximately 20 hours. In addition,
based on a consultation with industry representatives, the Commission
estimates that each non-affiliate customer will do business with more
than one BD/FCM, averaging out to 2.5 BD/FCMs per customer.
Consequently, the Commission estimates the total one-time burden
associated with this requirement to be 2,850,000 hours.\66\ In
addition, because the BD/FCM would enter into these agreements with CDS
customers, the Commission staff estimates that a BD/FCM would have
outside counsel review a standard non-conforming subordination
agreement and that the review would take approximately 100 hours at a
cost of

approximately $400 per hour.\67\ As a result, the Commission staff
estimates that each BD/FCM would incur one-time costs of approximately
$40,000, resulting in an industry-wide one-time cost of approximately
$2,280,000.\68\
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    \65\ This estimate is based on a previous estimate in the
Capital Margin and Segregation Release that each of SBSD and MSBSP
has 1,000 counterparties at any given time. See Capital, Margin, and
Segregation Requirements Adopting Release. Commission staff believes
that the number of counterparties of a SBSD or MSBSP may likely be
equivalent to the number of customers of a BD/FCM that may
participate in a portfolio margining program for customer positions
in cleared CDS offered by the BD/FCM. However, as portfolio
margining programs are not yet being offered for CDS customers, it
is difficult to estimate with precision the number of customers that
may participate in customer clearing of CDS. Furthermore, the number
of customers that seek to clear CDS through a portfolio margining
program may change after final mandatory clearing determinations are
made with respect to various product types within CDS.
    \66\ 57 BD/FCMs x 1,000 non-affiliate customers per dealer x 2.5
BD/FCMs used by each customer x 20 hours for each agreement.
    \67\ See PRA Analysis in Capital, Margin, and Segregation
Requirements Adopting Release (providing an estimate of $400 an hour
to engage an outside attorney).
    \68\ 57 BD/FCMs x 100 hours to review x $400 per hour.
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    Paragraph IV(b)(2)(ii) of this Order applies with respect to
customers that are affiliates of the BD/FCM and requires BD/FCMs that
elect to offer a program to commingle and portfolio margin customer
positions in CDS in customer accounts maintained in accordance with
Section 4d(f) of the CEA and rules thereunder to enter into a non-
conforming subordination agreement. The non-conforming subordination
agreement must contain: (i) A specific acknowledgment by the affiliate
that such money, securities or property will not receive customer
treatment under the Exchange Act or SIPA or be treated as customer
property as defined in 11 U.S.C. 741 in a liquidation of the BD/FCM,
and that such money, securities or property will be held in a
proprietary account in accordance with the CFTC requirements and will
be subject to any applicable protections under Subchapter IV of Chapter
7 of Title 11 of the United States Code and rules and regulations
thereunder; and (ii) an affirmation by the affiliate that all of its
claims with respect to such money, securities, or property against the
BD/FCM will be subordinated to the claims of other securities customers
and security-based swap customers not operating under a program to
commingle and portfolio margin CDS pursuant to this Order. The
Commission estimates that the average number of customers that are
affiliates of the BD/FCM to be approximately 11 \69\ and the average
number of hours to develop a subordination agreement for a non-
affiliate CDS customer to be approximately 20 hours based on the
Commission's prior experiences with the development of subordination
agreements.\70\ Consequently, the Commission estimates that the total
one-time burden associated with this requirement to be 12,540
hours.\71\ As stated previously, the Commission staff believes that a
BD/FCM would have outside counsel review a standard non-conforming
subordination agreement and that review would result in a one-time
industry cost of $2,280,000. Because the same requirements and
acknowledgements in the non-conforming subordination agreements with
non-affiliate customers must be included in the non-conforming
subordination agreements with affiliate customers (with an additional
acknowledgement by the affiliate that its money, securities, or
property will be held in a proprietary account in accordance with CFTC
requirements), we believe that a BD/FCM would not need to engage an
outside counsel to perform a review of a separate review of a standard
non-conforming subordination agreement for affiliate customers.
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    \69\ FINRA CRD data indicate that the 17 largest broker-dealers
(i.e., those with total assets of $50 billion or more) reported a
total of 188 affiliates that are themselves registered with the SEC
(i.e., they have their own CRD numbers), representing approximately
11 affiliates per broker-dealer. The Commission believes that this
would be a useful approximation of the average number of customers
that are affiliates of the BD/FCM, as many affiliates of a BD/FCM
that would seek to use portfolio margining are likely to be subject
to some form of a registration requirement with the SEC.
Furthermore, the assumption that all such registered affiliates
would seek to engage in portfolio margining (when some may not)
should help to offset any discrepancy associated with customers that
are affiliates but would not be subject to an SEC registration
requirement.
    \70\ The Commission has previously considered the development of
subordination agreements in other contexts. See Letter from Michael
A. Macchiaroli, Associate Director, Division of Market Regulation,
to William H. Navin, EVP and General Counsel, The Options Clearing
Corporation (June 15, 2000).
    \71\ 57 BD/FCMs x 11 affiliate customers x 20 hours.
---------------------------------------------------------------------------

    Paragraph IV(b)(2)(iii) of this Order applies with respect to
customers that are affiliates of the BD/FCM and requires BD/FCMs that
elect to offer a program to commingle and portfolio margin customer
positions in CDS in customer accounts maintained in accordance with
Section 4d(f) of the CEA and rules thereunder to obtain from its
affiliates an opinion of counsel that the affiliate is legally
authorized to subordinate all of its claims against the BD/FCM to those
of customers. Again, the Commission estimates that the average number
of customers that are affiliates of the BD/FCM to be approximately 11
and the average number of hours to develop the required opinion for an
affiliate CDS customer to be approximately 2 hours.\72\ Consequently,
the Commission estimates that the total one-time burden associated with
this requirement to be 1,254 hours.\73\ The Commission staff also
estimates that the BD/FCM will engage outside counsel to review a
standard opinion of counsel and that the outside counsel would need
approximately 20 hours at a cost of approximately $400 per hour. As a
result, the Commission staff estimates that the BD/FCM would incur a
one-time cost of approximately $8,000, resulting in an industry-wide
one-time cost of approximately $456,000.\74\
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    \72\ This estimate is based on the Commission's currently
approved Collection of Information Supporting Statement for Rule
15c3-1 of the Exchange Act, which discusses obtaining an opinion of
counsel as required by Appendix C to Rule 15c3-1 of the Exchange Act
(available at http://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=201006-3235-004). The Commission believes that obtaining an
opinion of counsel as required by this order will require additional
time to adequately research the issue to provide an opinion of
counsel and, therefore, has provided additional time in its
estimation.
    \73\ 57 BD/FCMs x 11 affiliate customers x 2 hours.
    \74\ 57 BD/FCMs x 20 hours for outside counsel to review x $400
per hour.
---------------------------------------------------------------------------

    Paragraph IV(b)(5) of this Order requires that BD/FCMs that elect
to offer a program to commingle and portfolio margin customer positions
in CDS in customer accounts maintained in accordance with Section 4d(f)
of the CEA and rules thereunder, to maintain minimum margin levels with
respect to any customer transaction in a program to commingle and
portfolio margin CDS at least equal to the amount determined using a
margin methodology established and maintained by the BD/FCM that has
been approved by the Commission or its staff. As part of the approval
process, a BD/FCM would be expected to submit certain information in
order to make a determination regarding the performance of the margin
methodology. The Commission anticipates that information would be
substantially similar to information required in Appendix E to Exchange
Act Rule 15c3-1 to the extent relevant to portfolio margining CDS that
are swaps and security-based swaps. Based on similar estimates, the
Commission estimates that each BD/FCM that seeks approval from the
Commission would spend approximately 1,000 hours to create and compile
the various documents to provide to Commission staff and to work with
Commission staff through the approval process.\75\ This includes
approximately 100 hours for an in-house attorney to complete a review
of the information and documentation provided to the Commission staff.
Consequently, the Commission estimates the total one-time burden
associated with this requirement to be 57,000 hours.\76\
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    \75\ This estimate is based on the Commission's currently
approved Collection of Information Supporting Statement for Rule
15c3-1 of the Exchange Act, which discusses the reporting burden for
broker-dealers to apply and receive approval from the Commission to
use Appendix E to Rule 15c3-1 of the Exchange Act (available at
http://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=201006-3235-004).
    \76\ 1,000 hours x 57 BD/FCMs.
---------------------------------------------------------------------------

    Paragraph IV(b)(6) of this Order requires each BD/FCM receiving any

money, securities, or property of a customer to margin, guarantee or
secure positions consisting of cleared CDS, which include both swaps
and security-based swaps, under a program to commingle and portfolio
margin CDS in an account maintained in accordance with Section 4d(f) of
the CEA and the rules thereunder to disclose to its customers that (i)
the customer's money, securities, and property will be held in an
account maintained in accordance with the segregation requirements of
Section 4(d)f of the CEA and that the customer has elected to seek
protections under Subchapter IV of Chapter 7 of Title 11 of the United
States Code and the rules and regulations thereunder with respect to
such money, securities, and property and (ii) that the broker-dealer
segregation requirements of Section 15(c)(3) and Section 3E of the
Exchange Act, and any customer protections under SIPA and the
stockbroker liquidation provisions, will not apply to such customer
money, securities, and property. These disclosures provide customers
important disclosures regarding the legal framework that will govern
their transactions if a liquidation were to occur. The Commission
believes that the BD/FCM could use the language in the Order that
describes the disclosure that must be made as a template to draft the
disclosure statement. Consequently, the Commission estimates that it
would take a BD/FCM clearing member approximately 8 hours to draft the
disclosure statement.\77\ Further, the Commission believes the BD/FCM
will include this disclosure statement with other documents or
agreements provided to cleared CDS customers and as a result the BD/FCM
should not be subject to any additional burden associated with relaying
this information to the customer. Therefore, the Commission estimates
that aggregate burden from this requirement will be 456 hours \78\ to
comply with this requirement.
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    \77\ This estimate is based on the Commission's currently
approved Collection of Information Supporting Statement for Rule
15c3-3 of the Exchange Act, which discusses the reporting burden to
prepare a disclosure statement pursuant to Rule 15c3-3 of the
Exchange Act (http://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=201103-3235-025).
    \78\ 57 BD/FCMs x 8 hours.
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E. Collection of Information Is Mandatory

    The collections of information contained in the conditions to this
Order are mandatory for any entity wishing to rely on the conditional
exemptions granted by this Order.

F. Confidentiality

    The Commission expects to receive confidential information in
connection with the proposed collections of information. To the extent
that the Commission receives confidential information pursuant to these
collections of information, the Commission is committed to protecting
the confidentiality of such information, subject to the provisions of
applicable law.\79\
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    \79\ See, e.g., Exchange Act Section 24, 15 U.S.C. 78x
(governing the public availability of information obtained by the
Commission) and 5 U.S.C. 552 et seq. (Freedom of Information Act--
``FOIA''). FOIA Exemption 4 provides an exemption for ``trade
secrets and commercial or financial information obtained from a
person and privileged or confidential.'' 5 U.S.C. 552(b)(4). FOIA
Exemption 8 provides an exemption for matters that are ``contained
in or related to examination, operating, or condition reports
prepared by, on behalf of, or for the use of an agency responsible
for the regulation or supervision of financial institutions.'' 5
U.S.C. 552(b)(8).
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G. Request for Comment on Paperwork Reduction Act

    The Commission requests, pursuant to 44 U.S.C. 3506(c)(2)(B),
comment on the collections of information contained in this Order to:
    (i) Evaluate whether the collections of information are necessary
for the proper performance of the functions of the Commission,
including whether the information would have practical utility;
    (ii) Evaluate the accuracy of the Commission's estimates of the
burden of the collections of information;
    (iii) Determine whether there are ways to enhance the quality,
utility, and clarity of the information to be collected; and
    (iv) evaluate whether there are ways to minimize the burden of the
collections of information on those required to respond, including
through the use of automated collection techniques or other forms of
information technology.
    Persons who desire to submit comments on the collection of
information requirements should direct their comments to the OMB,
Attention: Desk Officer for the Securities and Exchange Commission,
Office of Information and Regulatory Affairs, Washington, DC 20503, and
should also send a copy of their comments to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090, and refer to File No. S7-13-12. OMB is
required to make a decision concerning the collections of information
between 30 and 60 days after publication of this document in the
Federal Register; therefore, comments to OMB are best assured of having
full effect if OMB receives them within 30 days of this publication.
The Commission has submitted the proposed collections of information to
OMB for approval. Requests for the materials submitted to OMB by the
Commission with regard to these collections of information should be in
writing, refer to File No. S7-13-12, and be submitted to the Securities
and Exchange Commission, Records Management Office, 100 F Street NE.,
Washington, DC 20549.

    By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-30553 Filed 12-18-12; 8:45 am]
BILLING CODE 8011-01-P