[Federal Register: March 19, 2009 (Volume 74, Number 52)]
[Notices]
[Page 11781-11792]
[DOCID:fr19mr09-121]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59578; File No. S7-06-09]

Order Granting Temporary Exemptions Under the Securities Exchange
Act of 1934 in Connection with Request of Chicago Mercantile Exchange
Inc. and Citadel Investment Group, L.L.C. Related to Central Clearing
of Credit Default Swaps, and Request for Comments

March 13, 2009.

I. Introduction

    In response to the recent turmoil in the financial markets, the
Securities and Exchange Commission (``Commission'') has taken multiple
actions to protect investors and ensure the integrity of the nation's
securities markets.\1\ Today the

Commission is taking further action designed to address concerns
related to the market in credit default swaps (``CDS''). The over-the-
counter (``OTC'') market for CDS has been a source of concerns to us
and other financial regulators. These concerns include the systemic
risk posed by CDS, highlighted by the possible inability of parties to
meet their obligations as counterparties and the potential resulting
adverse effects on other markets and the financial system.\2\ Recent
credit market events have demonstrated the seriousness of these risks
in a CDS market operating without meaningful regulation,
transparency,\3\ or central counterparties (``CCPs'').\4\ These events
have emphasized the need for CCPs as mechanisms to help control such
risks.\5\ A CCP for CDS could be an important step in reducing the
counterparty risks inherent in the CDS market, and thereby help
mitigate potential systemic impacts. In November 2008, the President's
Working Group on Financial Markets stated that the implementation of a
CCP for CDS was a top priority \6\ and, in furtherance of this
recommendation, the Commission, the FRB and the Commodity Futures
Trading Commission (``CFTC'') signed a Memorandum of Understanding \7\
that establishes a framework for consultation and information sharing
on issues related to CCPs for CDS. Given the continued uncertainty in
this market, taking action to help foster the prompt development of
CCPs, including granting conditional exemptions from certain provisions
of the Federal securities laws, is in the public interest.
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    \1\ A nonexclusive list of the Commission's actions to stabilize
financial markets during this credit crisis include: Adopting a
package of measures to strengthen investor protections against naked
short selling, including rules requiring a hard T+3 close-out,
eliminating the options market maker exception of Regulation SHO,
and expressly targeting fraud in short selling transactions (See
Securities Exchange Act Release No. 58572 (September 17, 2008), 73
FR 54875 (September 23, 2008)); issuing an emergency order to
enhance protections against naked short selling in the securities of
primary dealers, Federal National Mortgage Association (``Fannie
Mae''), and Federal Home Loan Mortgage Corporation (``Freddie Mac'')
(See Securities Exchange Act Release No. 58166 (July 15, 2008), 73
FR 42379 (July 21, 2008)); taking temporary emergency action to ban
short selling in financial securities (See Securities Exchange Act
Release No. 58592 (September 18, 2008), 73 FR 55169 (September 24,
2008)); approving emergency rulemaking to ensure disclosure of short
positions by hedge funds and other institutional money managers (See
Securities Exchange Act Release No. 58591A (September 21, 2008), 73
FR 55557 (September 25, 2008)); proposing rules to strengthen the
regulation of credit rating agencies and making the limits and
purposes of credit ratings clearer to investors (See Securities
Exchange Act Release No. 57967 (June 16, 2008), 73 FR 36212 (June
25, 2008); entering into a Memorandum of Understanding with the
Board of Governors of the Federal Reserve System (``FRB'') to make
sure key Federal financial regulators share information and
coordinate regulatory activities in important areas of common
interest (See Memorandum of Understanding Between the U.S.
Securities and Exchange Commission and the Board of Governors of the
Federal Reserve System Regarding Coordination and Information
Sharing in Areas of Common Regulatory and Supervisory Interest (July
7, 2008), http://www.sec.gov/news/press/2008/2008-134_mou.pdf).
    \2\ In addition to the potential systemic risks that CDS pose to
financial stability, we are concerned about other potential risks in
this market, including operational risks, risks relating to
manipulation and fraud, and regulatory arbitrage risks.
    \3\ See Policy Objectives for the OTC Derivatives Market, The
President's Working Group on Financial Markets, November 14, 2008,
available at http://www.ustreas.gov/press/releases/reports/
policyobjectives.pdf (``Public reporting of prices, trading volumes
and aggregate open interest should be required to increase market
transparency for participants and the public.'').
    \4\ See The Role of Credit Derivatives in the U.S. Economy
Before the H. Agric. Comm., 110th Cong. (2008) (Statement of Erik
Sirri, Director of the Division of Trading and Markets, Commission).
    \5\ See id.
    \6\ See Policy Objectives for the OTC Derivatives Market, The
President's Working Group on Financial Markets (November 14, 2008),
http://www.ustreas.gov/press/releases/reports/policyobjectives.pdf.
See also Policy Statement on Financial Market Developments, The
President's Working Group on Financial Markets (March 13, 2008),
http://www.treas.gov/press/releases/reports/
pwgpolicystatemktturmoil_03122008.pdf; Progress Update on March
Policy Statement on Financial Market Developments, The President's
Working Group on Financial Markets (October 2008), http://
www.treas.gov/press/releases/reports/q4progress%20update.pdf.
    \7\ See Memorandum of Understanding Between the Board of
Governors of the Federal Reserve System, the U.S. Commodity Futures
Trading Commission and the U.S. Securities and Exchange Commission
Regarding Central Counterparties for Credit Default Swaps (November
14, 2008), http://www.treas.gov/press/releases/reports/finalmou.pdf.
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    A CDS is a bilateral contract between two parties, known as
counterparties. The value of this financial contract is based on
underlying obligations of a single entity or on a particular security
or other debt obligation, or an index of several such entities,
securities, or obligations. The obligation of a seller under a CDS to
make payments under a CDS contract is triggered by a default or other
credit event as to such entity or entities or such security or
securities. Investors may use CDS for a variety of reasons, including
to offset or insure against risk in their fixed-income portfolios, to
take positions in bonds or in segments of the debt market as
represented by an index, or to capitalize on the volatility in credit
spreads during times of economic uncertainty. In recent years, CDS
market volumes have rapidly increased.\8\ This growth has coincided
with a significant rise in the types and number of entities
participating in the CDS market.\9\
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    \8\ See Semiannual OTC derivatives statistics at end-December
2007, Bank for International Settlements (``BIS''), available at
http:/www.bis.org/statistics/otcder/dt1920a.pdf.
    \9\ CDS were initially created to meet the demand of banking
institutions looking to hedge and diversify the credit risk
attendant with their lending activities. However, financial
institutions such as insurance companies, pension funds, securities
firms, and hedge funds have entered the CDS market.
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    The Commission's authority over this OTC market for CDS is limited.
Specifically, Section 3A of the Securities Exchange Act of 1934
(``Exchange Act'') limits the Commission's authority over swap
agreements, as defined in Section 206A of the Gramm-Leach-Bliley
Act.\10\ For those CDS that are swap agreements, the exclusion from the
definition of security in Section 3A of the Exchange Act, and related
provisions, will continue to apply. The Commission's action today does
not affect these CDS, and this Order does not apply to them. For those
CDS that are not swap agreements (``non-excluded CDS''), the
Commission's action today provides conditional exemptions from certain
requirements of the Exchange Act.
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    \10\ 15 U.S.C. 78c-1. Section 3A excludes both a non-security-
based and a security-based swap agreement from the definition of
``security'' under Section 3(a)(10) of the Exchange Act, 15 U.S.C.
78c(a)(10). Section 206A of the Gramm-Leach-Bliley Act defines a
``swap agreement'' as ``any agreement, contract, or transaction
between eligible contract participants (as defined in section 1a(12)
of the Commodity Exchange Act * * *) * * * the material terms of
which (other than price and quantity) are subject to individual
negotiation.'' 15 U.S.C. 78c note.
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    The Commission believes that using well-regulated CCPs to clear
transactions in CDS would help promote efficiency and reduce risk in
the CDS market and among its participants. These benefits could be
particularly significant in times of market stress, as CCPs would
mitigate the potential for a market participant's failure to
destabilize other market participants, and reduce the effects of
misinformation and rumors. CCP-maintained records of CDS transactions
would also aid the Commission's efforts to prevent and detect fraud and
other abusive market practices.
    A well-regulated CCP also would address concerns about counterparty
risk by substituting the creditworthiness and liquidity of the CCP for
the creditworthiness and liquidity of the counterparties to a CDS. In
the absence of a CCP, participants in the OTC CDS market must carefully
manage their counterparty risks because the default by a counterparty
can render worthless, and payment delay can reduce the usefulness of,
the credit protection that has been bought by a CDS purchaser. CDS
participants currently attempt to manage counterparty risk by carefully
selecting and monitoring their counterparties, entering into legal
agreements that permit them to net gains and losses across contracts
with a defaulting counterparty, and often requiring counterparty
exposures to be collateralized.\11\ A CCP could allow participants to
avoid these risks specific to individual counterparties because a CCP
``novates'' bilateral trades by entering into separate contractual
arrangements with both counterparties--becoming buyer to one

and seller to the other.\12\ Through novation, it is the CCP that
assumes counterparty risks.
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    \11\ See generally R. Bliss and C. Papathanassiou, ``Derivatives
clearing, central counterparties and novation: The economic
implications'' (March 8, 2006), at 6. See also ``New Developments in
Clearing and Settlement Arrangements for OTC Derivatives,''
Committee on Payment and Settlement Systems, BIS, at 25 (March
2007), available at http://www.bis.org/pub/cpss77.pdf; ``Reducing
Risks and Improving Oversight in the OTC Credit Derivatives
Market,'' Before the Sen. Subcomm. On Secs., Ins. and Investments,
110th Cong. (2008) (Statement of Patrick Parkinson, Deputy Director,
Division of Research and Statistics, FRB).
    \12\ ``Novation'' is a ``process through which the original
obligation between a buyer and seller is discharged through the
substitution of the CCP as seller to buyer and buyer to seller,
creating two new contracts.'' Committee on Payment and Settlement
Systems, Technical Committee of the International Organization of
Securities Commissioners, Recommendations for Central Counterparties
(November 2004) at 66.
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    For this reason, a CCP for CDS would contribute generally to the
goal of market stability. As part of its risk management, a CCP may
subject novated contracts to initial and variation margin requirements
and establish a clearing fund. The CCP also may implement a loss-
sharing arrangement among its participants to respond to a participant
insolvency or default.
    A CCP would also reduce CDS risks through multilateral netting of
trades.\13\ Trades cleared through a CCP would permit market
participants to accept the best bid or offer from a dealer in the OTC
market with very brief exposure to the creditworthiness of the dealer.
In addition, by allowing netting of positions in similar instruments,
and netting of gains and losses across different instruments, a CCP
would reduce redundant notional exposures and promote the more
efficient use of resources for monitoring and managing CDS positions.
Through uniform margining and other risk controls, including controls
on market-wide concentrations that cannot be implemented effectively
when counterparty risk management is decentralized, a CCP can help
prevent a single market participant's failure from destabilizing other
market participants and, ultimately, the broader financial system.
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    \13\ See ``New Developments in Clearing and Settlement
Arrangements for OTC Derivatives,'' supra note 11, at 25.
Multilateral netting of trades would permit multiple counterparties
to offset their open transaction exposure through the CCP, spreading
credit risk across all participants in the clearing system and more
effectively diffusing the risk of a counterparty's default than
could be accomplished by bilateral netting alone.
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    In this context, The Chicago Mercantile Exchange Inc. (``CME'') and
Citadel Investment Group, L.L.C. (``Citadel'') have requested that the
Commission grant exemptions from certain requirements under the
Exchange Act with respect to their proposed activities in clearing and
settling certain CDS, as well as the proposed activities of certain
other persons, as described below.\14\
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    \14\ See Letter from Adam Cooper, Citadel Investment Group,
L.L.C. and Ann K. Shuman, Chicago Mercantile Exchange, Inc., to
Elizabeth M. Murphy, Secretary, Commission, March 12 , 2008.
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    Based on the facts that CME and Citadel have presented and the
representations they have made,\15\ and for the reasons discussed in
this Order, the Commission temporarily is exempting, subject to certain
conditions, CME from the requirement to register as a clearing agency
under Section 17A of the Exchange Act solely to perform the functions
of a clearing agency for certain non-excluded CDS transactions. The
Commission also temporarily is exempting eligible contract participants
and others from certain Exchange Act requirements with respect to non-
excluded CDS cleared by CME. The Commission's exemptions are temporary
and will expire on December 14, 2009. To facilitate the operation of
one or more CCPs for the CDS market, the Commission has also approved
interim final temporary rules providing exemptions under the Securities
Act of 1933 and the Exchange Act for non-excluded CDS.\16\ Finally, the
Commission has provided temporary exemptions in connection with
Sections 5 and 6 of the Exchange Act for transactions in non-excluded
CDS.\17\
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    \15\ See id. The exemptions we are granting today are based on
representations made by CME and Citadel. We recognize, however, that
there could be legal uncertainty in the event that one or more of
the underlying representations were to become inaccurate.
Accordingly, if any of these exemptions were to become unavailable
by reason of an underlying representation no longer being materially
accurate, the legal status of existing open positions in non-
excluded CDS associated with persons subject to those unavailable
exemptions would remain unchanged, but no new positions could be
established pursuant to the exemptions until all of the underlying
representations were again accurate.
    \16\ See Securities Act Release No. 8999 (January 14, 2009).
    \17\ See Securities Exchange Act Release No. 59165 (December 24,
2008).
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II. Discussion

A. Description of CME and Citadel's Proposal

    The exemptive request by CME and Citadel describes how their
proposed arrangements for central clearing of CDS would operate, and
makes representations about the safeguards associated with those
arrangements, as described below:
1. CME Organization
    CME Group Inc. (``CME Group''), a Delaware stock corporation, is
the holding company for CME, as well as Board of Trade of the City of
Chicago, Inc., New York Mercantile Exchange, Inc., Commodity Exchange,
Inc. and their subsidiaries.
    CME is a designated contract market (``DCM''), regulated by the
CFTC, for the trading of futures and options on futures contracts. In
addition, CME Group operates its own clearing house, which is a
division of CME. The CME clearing house is a derivates clearing
organization (``DCO'') regulated by the CFTC. The clearing house
clears, settles and guarantees the performance of all transactions
matched through the execution facilities and on third party exchanges
for which CME Group provides clearing services. The clearing house
operates with the oversight of the Clearing House Risk Committee
(``CHRC''). The CHRC is made up of a group of clearing member
representatives who represent the interests of the clearing house as
well as clearing members of CME Group.
    CME is required to comply with the eighteen CFTC Core Principles
applicable to registered DCMs and the fourteen CFTC Core Principles
applicable to DCOs.\18\ The CFTC conducts regular audits or risk
reviews of CME with respect to these Core Principles. CME is registered
and in good standing with the CFTC. In addition, CME is notice
registered with the Commission as a special purpose national securities
exchange for the purpose of trading securities futures products. In the
U.K., CME is a Recognised Overseas Investment Exchange and a Recognised
Overseas Clearing House, subject to regulation by the U.K. Financial
Services Authority.
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    \18\ The DCM and DCO Core Principles are set forth in 7 U.S.C.
7(b), 7a-1(c)(2)(A).
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2. CME Central Counterparty Services for CDS
    CME as part of its clearing services would be interposed as central
counterparty for transactions in Cleared CDS (as defined below).\19\
CME would provide clearing and settlement services for transactions in
Cleared CDS submitted to or executed on the CMDX platform.\20\ CME
would also accept for clearing directly from participants trades in
Cleared CDS that are not executed on or processed through CMDX.
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    \19\ See note 29, infra.
    \20\ Citadel and CME have entered into a joint venture (to be
named ``CMDX'') to provide a trading and clearing solution for CDS.
CMDX trading, booking and migration services would be available only
to persons that satisfy the definition of an ``eligible contract
participant'' in Section 1a(12) of the Commodity Exchange Act
(``CEA'') (other than paragraph (C) thereof). In addition, each
participant on the CMDX platform must be a clearing member of CME or
have a clearing relationship with a CME clearing member that agrees
to assume responsibility for the participant's CDS contracts cleared
by CME. Initially, CMDX would offer CDS that mirror as closely as
possible the terms of existing OTC CDS. The coupons and maturities
would be standardized to the extent necessary to permit centralized
clearing.

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    Specifically, CME would accept for clearing (i) trades that are
matched on the CMDX platform, (ii) pre-existing non-standard trades
that are submitted to clearing through the CMDX migration facility, and
(iii) new bilaterally-executed trades in standardized products that are
submitted to CME for clearing directly by the participants (using CME's
Clearing 360\TM\ API or similar facility that CME makes available).\21\
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    \21\ Non-standard trades that are migrated to CME would
ultimately be converted to a standard, centrally cleared contract.
Migration may only occur if both counterparties to a trade agree to
the process and both are clearing members or have the appropriate
relationship with a clearing member. CMDX would also supply
participants a data file of the original bilateral positions that
were accepted into clearing via the migration process, so that
participants may send appropriate exit records to the DTCC Trade
Information Warehouse.
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    The trades submitted to or executed on the CMDX platform would be
processed straight-through to CME for clearing and settlement. CME
clearing and settlement of Cleared CDS would operate using the
established systems, procedures and financial safeguards package that
stand behind trading in CME's primary futures market, and such
activities would be subject to CFTC oversight of risk management and
collateralization procedures. CME Rulebook Chapter 8-F sets forth the
rules governing clearing and settlement of all products, instruments,
and contracts in OTC derivatives, including but not limited to CDS
contracts, swaps and forward rate agreements that the CME clearinghouse
has designated as eligible for clearing.
3. CME Risk Management
    CME clearing members that are broker-dealers or futures commission
merchants maintain capital and liquidity in accordance with relevant
SEC and CFTC rules and regulations. In addition, CME has requirements
for minimum capital contribution, contribution to the guaranty fund
based on risk factors, maintenance margin, and mark to market with
immediate payment of losses applicable to clearing member firms.
    CME has adopted a risk-based capital requirement. Capital
requirements are monitored by CME's Audit Department and vary to
reflect the risk of each clearing member's positions as well as CME's
assessment of each clearing member's internal controls, risk management
policies and back office operations.
    Clearing members also would have tools to manage appropriate
requirements with respect to their customers. CME Rule 982 requires
clearing members to establish written risk management policies and
procedures, including monitoring the risks assumed by specific
customers. To facilitate such controls with respect to CDS
transactions, CME's clearing systems include functionality that permits
clearing members to register customer accounts and specify customer
credit limits.
    CME would extend its current monitoring procedures to Cleared CDS
cleared by CME. CME would monitor for and investigate unusual trading
patterns or volumes. Customer account reporting would allow CME to view
the positions held by individual accounts. The positions of each
account would be analyzed throughout the day to monitor any accounts
that may have significant losses due to market moves. In addition,
significant changes in positions from day to day would be analyzed and
reported to CME clearing house senior management.
    CME would include stress testing of the different CDS clearing
house margin factors to capture moves beyond the one-day 99% standard
on the macro and sector moves and the five-day 99% standard for the
idiosyncratic shocks. This would be considered in designing the
financial safeguards package, adding concentration types of margining
and routine stress testing. Also, the CDS clearing house margin factor
parameters would be reviewed daily as a back-testing procedure to
ensure the parameters are providing the desired coverage. CME would
also review on a daily basis the margin collected by CME on CDS
portfolios and compare those amounts to next-day market moves so that
actual portfolio effects can be determined and gauged against the
margin coverage. In addition, CME would evaluate the concentration of
CDS positions beyond the margin factors and compare them against
overall open interest and liquidity in the CDS market.
    CME will extend its scenario based stress testing techniques for
concentration margining to Cleared CDS. The concentration stress test
results will be evaluated relative to excess adjusted net capital for
each segregated pool. If the hypothetical losses exceed the excess
adjusted net capital for a clearing member's segregated pool, then an
additional margin charge will be applied to the clearing member's
position. The additional margin charge is calculated based on the
magnitude of the hypothetical losses in excess of the clearing member's
excess adjusted net capital.
    CME determines the acceptability of different collateral types and
determines appropriate haircuts.\22\ Collateral requirements for
Cleared CDS would endeavor to reflect the specific risks of Cleared
CDS, including jump-to-default and the consequences of a liquidity
event caused by the defaults.
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    \22\ A list of acceptable collateral and applicable haircuts is
available at www.cme.com.
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4. Member Default
    If a clearing member is troubled (i.e., it fails to meet minimum
financial requirements or its financial or operational condition may
jeopardize the integrity of the CME, or negatively impact the financial
markets), the CME may take action pursuant to Rules 974 (Failure To
Meet Minimum Financial Requirements) or 975 (Emergency Financial
Conditions). In the event of a default by a clearing member of CME, the
process would be governed by applicable CME Rules.\23\
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    \23\ See, e.g., CME Rulebook Chapter 8-F (Over-the-Counter
Derivative Clearing), including but not limited to Rules 8F06
(Clearing Member Default), 8F07 (Security Deposit) and 8F13
(Insolvency and Liquidation). Chapter 8-F further incorporates the
general CME Rules relating to defaults, including but not limited to
Rules 913 (Withdrawal From Clearing Membership), 974 (Failure To
Meet Minimum Financial Requirements), 975 (Emergency Financial
Conditions), 976 (Suspension of Clearing Members), 978 (Open Trades
of Suspended Clearing Members), and 979 (Suspended or Expelled
Clearing Members).
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    In the event of a member default, CME may access its financial
safeguard package as necessary. CME's financial safeguards package is a
combination of each clearing member's collateral on deposit to support
its positions, the collateral of its customers to support their
positions, CME surplus funds, security deposits and assessment
powers.\24\
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    \24\ CME indicates that excluding collateral supporting open
positions, which total approximately $116 billion, the total
financial safeguards package is nearly $7 billion, comprised of: (1)
CME surplus funds of $57 million; (2) clearing member security
deposits of approximately $1.751 billion; and (3) assessment powers
of approximately $4.816 billion (as of December 31, 2008). Clearing
members that clear Cleared CDS would be subject to an additional $5
million security deposit requirement. Furthermore, the calculation
of that portion of a clearing member's security deposit that is
related to the risk of its CDS position would be scaled upward by a
factor of three.
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5. Customer Rules and Other Requirements
    Prior to issuance of an order from the CFTC under Section 4d of the
CEA (``4d order''), all Cleared CDS submitted to CME for clearing for
the account of a clearing member's customer must be assigned and held
in an account subject to CFTC Regulation 30.7.\25\ Regulation

30.7 requires that customer positions and property be separately held
and accounted for from the positions and property of the futures
commission merchant, and that customer property be deposited under an
account name that clearly identifies it as customer property. CME Rule
8F03 reiterates that ``[a]ll collateral deposited as performance bond
to support positions in such Regulation Sec.  30.7 account and all
positions, collateral or cash in such account shall be segregated from
the Clearing Member's proprietary account.''
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    \25\ 17 CFR 30.7.
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    Upon the issuance of a 4d order from the CFTC, the segregation and
protection of customer funds and property would be controlled by
Section 4d of the CEA \26\ and the regulations pertinent thereto; all
funds and property received from customers of futures commission
merchants in connection with purchasing, selling or holding CDS
positions would be subject to the requirements of CFTC Regulation 1.20,
et seq. promulgated under Section 4d. This regulation would apply to
the purchasing, selling, and holding of CDS positions. This regulation
would require that customer positions and property be separately
accounted for and segregated from the positions and property of the
futures commission merchant. Customer property will be deposited under
an account name that clearly identifies it as such and shows it is
appropriately segregated as required by the CEA and Regulation 1.20, et
seq.
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    \26\ 7 U.S.C. 6d.
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    In addition, customer margin requirements for a broker-dealer are
generally set by the broker-dealer's self-regulatory organizations
(e.g., the Financial Industry Regulatory Authority, commonly referred
to as ``FINRA''). One purpose for customer margin requirements is to
assure that broker-dealers collect sufficient margin from customers to
protect the broker-dealer against the event that an adverse price move
causes a customer default, leaving the broker-dealer with the
responsibility for the transaction. FINRA intends to amend its customer
margin rule to include margin requirements for Cleared CDS.\27\
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    \27\ See SR-FINRA-2009-012, available at http://www.finra.org/
Industry/Regulation/RuleFilings/2009/P118121.
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B. Temporary Conditional Exemption From Clearing Agency Registration
Requirement

    Section 17A of the Exchange Act sets forth the framework for the
regulation and operation of the U.S. clearance and settlement system,
including CCPs. Specifically, Section 17A directs the Commission to use
its authority to promote enumerated Congressional objectives and to
facilitate the development of a national clearance and settlement
system for securities transactions. Absent an exemption, a CCP that
novates trades of non-excluded CDS that are securities and generates
money and settlement obligations for participants is required to
register with the Commission as a clearing agency.
    Section 36 of the Exchange Act authorizes the Commission to
conditionally or unconditionally exempt any person, security, or
transaction, or any class or classes of persons, securities, or
transactions, from any provision or provisions of the Exchange Act or
any rule or regulation thereunder, by rule, regulation, or order, to
the extent that such exemption is necessary or appropriate in the
public interest, and is consistent with the protection of
investors.\28\
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    \28\ 15 U.S.C. 78mm.
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    Accordingly, pursuant to Section 36 of the Exchange Act, the
Commission finds that it is necessary or appropriate in the public
interest and is consistent with the protection of investors to exercise
its authority to grant an exemption until December 14, 2009 to CME from
Section 17A of the Exchange Act, solely to perform the functions of a
clearing agency for Cleared CDS,\29\ subject to the conditions
discussed below.
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    \29\ For purposes of this exemption, and the other exemptions
addressed in this Order, ``Cleared CDS'' means a credit default swap
that is submitted (or offered, purchased, or sold on terms providing
for submission) to CME, that is offered only to, purchased only by,
and sold only to eligible contract participants (as defined in
Section 1a(12) of the Commodity Exchange Act as in effect on the
date of this Order (other than a person that is an eligible contract
participant under paragraph (C) of that section)), and in which: (1)
The reference entity, the issuer of the reference security, or the
reference security is one of the following: (i) An entity reporting
under the Exchange Act, providing Securities Act Rule 144A(d)(4)
information, or about which financial information is otherwise
publicly available; (ii) a foreign private issuer whose securities
are listed outside the United States and that has its principal
trading market outside the United States; (iii) a foreign sovereign
debt security; (iv) an asset-backed security, as defined in
Regulation AB, issued in a registered transaction with publicly
available distribution reports; or (v) an asset-backed security
issued or guaranteed by the Fannie Mae, the Freddie Mac, or the
Government National Mortgage Association (``Ginnie Mae''); or (2)
the reference index is an index in which 80 percent or more of the
index's weighting is comprised of the entities or securities
described in subparagraph (1). As discussed above, the Commission's
action today does not affect CDS that are swap agreements under
Section 206A of the Gramm-Leach-Bliley Act. See text at note 10,
supra.
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    Our action today balances the aim of facilitating the prompt
establishment of CME as a CCP for non-excluded CDS transactions--which
should help reduce systemic risks during a period of extreme turmoil in
the U.S. and global financial markets--with ensuring that important
elements of Commission oversight are applied to the non-excluded CDS
market. In doing so, we are mindful that applying the full scope of the
Exchange Act to transactions involving non-excluded CDS could deter the
prompt establishment of CME as a CCP to settle those transactions.
    While we are acting so that the prompt establishment of CME as a
CCP for non-excluded CDS will not be delayed by the need to apply the
full scope of Exchange Act Section 17A's requirements that govern
clearing agencies, the relief we are providing is temporary and
conditional. The limited duration of the exemptions will permit the
Commission to gain more direct experience with the non-excluded CDS
market after CME becomes operational, giving the Commission the ability
to oversee the development of the centrally cleared non-excluded CDS
market as it evolves. During the exemptive period, the Commission will
closely monitor the impact of the CCPs on the CDS market. In
particular, the Commission will seek to assure itself that the CCPs do
not act in anticompetitive manner or indirectly facilitate
anticompetitive behavior with respect to fees charged to members, the
dissemination of market data and the access to clearing services by
independent CDS exchanges or CDS trading platforms. The Commission will
take that experience into account in future actions.
    Moreover, this temporary exemption in part is based on CME's
representation that it meets the standards set forth in the Committee
on Payment and Settlement Systems (``CPSS'') and International
Organization of Securities Commissions (``IOSCO'') report entitled:
Recommendation for Central Counterparties (``RCCP'').\30\ The RCCP
establishes a framework that requires a CCP to have: (i) The ability to
facilitate the prompt and accurate clearance and settlement of CDS
transactions and to safeguard its users' assets; and (ii) sound risk
management, including the ability to appropriately determine and
collect clearing fund and monitor its users' trading. This framework is
generally

consistent with the requirements of Section 17A of the Exchange Act.
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    \30\ The RCCP was drafted by a joint task force (``Task Force'')
composed of representative members of IOSCO and CPSS and published
in November 2004. The Task Force consisted of securities regulators
and central bankers from 19 countries and the European Union. The
U.S. representatives on the Task Force included staff from the
Commission, the FRB, and the CFTC.
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    In addition, this Order is designed to assure that--as CME and
Citadel have represented--information will be available to market
participants about the terms of the CDS cleared by CME, the
creditworthiness of CME or any guarantor, and the clearing and
settlement process for the CDS. Moreover, to be within the definition
of Cleared CDS for purposes of this exemption (as well as the other
exemptions granted through this Order), a CDS may only involve a
reference entity, a reference security, an issuer of a reference
security, or a reference index that satisfies certain conditions
relating to the availability of information about such persons or
securities. For non-excluded CDS that are index-based, the definition
provides that at least 80 percent of the weighting of the index must be
comprised of reference entities, issuers of a reference security, or
reference securities that satisfy the information conditions. The
definition does not prescribe the type of financial information that
must be available nor the location of the particular information,
recognizing that eligible contract participants have access to
information about reference entities and reference securities through
multiple sources. The Commission believes, however, that it is
important in the CDS market, as in the market for securities generally,
that parties to transactions should have access to financial
information that would allow them to appropriately evaluate the risks
relating to a particular investment and make more informed investment
decisions.\31\ Such information availability also will assist CME and
the buyers and sellers in valuing their Cleared CDS and their
counterparty exposures. As a result of the Commission's actions today,
the Commission believes that information should be available for market
participants to be able to make informed investment decisions, and
value and evaluate their Cleared CDS and their counterparty exposures.
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    \31\ The Commission notes the recommendations of the President's
Working Group on Financial Markets regarding the informational needs
and due diligence responsibilities of investors. See Policy
Statement on Financial Market Developments, The President's Working
Group on Financial Markets, March 13, 2008, available at http://
www.treas.gov/press/releases/reports/pwgpolicystatemktturmoil_
03122008.pdf.
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    This temporary exemption is subject to a number of conditions that
are designed to enable Commission staff to monitor CME's clearance and
settlement of CDS transactions and help reduce risk in the CDS market.
These conditions require that CME: (i) Make available on its Web site
its annual audited financial statements; (ii) preserve records of all
activities related to the business of CME as a CCP for Cleared CDS for
at least five years (in an easily accessible place for the first two
years); (iii) supply information relating to its Cleared CDS clearance
and settlement services \32\ to the Commission and provide access to
the Commission to conduct on-site inspections of facilities and records
related to its Cleared CDS clearance and settlement services and will
provide the Commission access to its personnel to answer reasonable
questions during any such inspections; \33\ (iv) notify the Commission
about material disciplinary actions taken against CME clearing members
with respect to Cleared CDS clearance and settlement services, and
about the involuntary termination of the membership of an entity using
those services; (v) notify the Commission of all changes to rules as
defined under the CFTC rules, fees, and any other material events
affecting its Cleared CDS clearance and settlement services; (vi)
provide the Commission with reports prepared by independent audit
personnel that are generated in accordance with risk assessment of the
areas set forth in the Commission's Automation Review Policy Statements
\34\ and its annual audited financial statements prepared by
independent audit personnel; (vii) report all significant systems
outages to the Commission; and (viii) not materially change its
methodology for determining Cleared CDS margin levels without prior
written approval from the Commission, and from FINRA with respect to
customer margin requirements that would apply to broker-dealers.
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    \32\ Clearance and settlement services would include services in
association with CME's CMDX migration facility, as well as
activities associated with margin services.
    \33\ The Commission will conduct routine examinations no more
often than annually, although it may inspect more frequently for
cause. Moreover, the Commission will limit the scope of such
inspections to confirming compliance with the requirements set forth
in this Order, including compliance with the securities laws
applicable to CME's Cleared CDS business and operations. The
Commission will make reasonable efforts to coordinate any
inspections with the CFTC or other regulatory bodies with
jurisdiction in order to conduct joint inspections where possible.
    \34\ See Automated Systems of Self-Regulatory Organization,
Exchange Act Release No. 27445 (November 16, 1989), File No. S7-29-
89, and Automated Systems of Self-Regulatory Organization (II),
Exchange Act Release No. 29185 (May 9, 1991), File No. S7-12-91.
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    In addition, this relief is conditioned on CME, directly or
indirectly, making available to the public on terms that are fair and
reasonable and not unreasonably discriminatory: (i) All end-of-day
settlement prices and any other prices with respect to Cleared CDS that
CME may establish to calculate mark-to-market margin requirements for
CME participants; and (ii) any other pricing or valuation information
with respect to Cleared CDS as is published or distributed by CME. The
Commission believes this is an appropriate condition for CME's
exemption from registration as a clearing agency. In Section 11A of the
Exchange Act, Congress found that ``[i]t is in the public interest and
appropriate for the protection of investors and the maintenance of fair
and orderly markets to assure * * * the availability to brokers,
dealers, and investors of information with respect to quotations for
and transactions in securities.'' \35\ The President's Working Group on
Financial Markets has stated that increased transparency is a policy
objective for the over-the-counter derivatives market,\36\ which
includes the market for CDS. The condition is designed to further this
policy objective of both Congress and the President's Working Group by
requiring CME to make useful pricing data available to the public on
terms that are fair and reasonable and not unreasonably discriminatory.
Congress adopted these standards for the distribution of data in
Section 11A. The Commission long has applied the standards in the
specific context of securities market data, and it anticipates that CME
will distribute its data on terms that generally are consistent with
the application of these standards to securities market data. For
example, data distributors generally are required to treat subscribers
equally and not grant special access, fees, or other privileges to
favored customers of the distributor. Similarly, distributors must make
their data feeds reasonably available to data vendors for those
subscribers who wish to receive their data indirectly through a vendor
rather than directly from the distributor. In addition, a distributor's
attempt to tie data products that must be made available to the public
with other products or services of the distributor would be
inconsistent with the statutory requirements. The Commission carefully
evaluates any type of

discrimination with respect to subscribers and vendors to assess
whether there is a reasonable basis for the discrimination given, among
other things, the Exchange Act objective of promoting price
transparency. Moreover, preventing unreasonable discrimination is a
practical means to promote fair and reasonable terms for data
distribution because distributors are more likely to act appropriately
when the terms applicable to the broader public also must apply to any
favored classes of customers.
---------------------------------------------------------------------------

    \35\ 15 U.S.C. 78k-1(a)(1)(C)(iii). See also 15 U.S.C. 78k-
1(a)(1)(D).
    \36\ See President's Working Group on Financial Markets, Policy
Objectives for the OTC Derivatives Market (November 14, 2008),
available at http://www.ustreas.gov/press/releases/reports/
policyobjectives.pdf (``Public reporting of prices, trading volumes
and aggregate open interest should be required to increase market
transparency for participants and the public.'').
---------------------------------------------------------------------------

    As a CCP, CME will collect and process information about CDS
transactions and positions from all of its participants. With this
information, a CCP will, among other things, calculate and disseminate
current values for open positions for the purpose of setting
appropriate margin levels. The availability of such information can
improve fairness, efficiency, and competitiveness of the market--all of
which enhance investor protection and facilitate capital formation.
Moreover, with pricing and valuation information relating to Cleared
CDS, market participants would be able to derive information about
underlying securities and indexes. This may improve the efficiency and
effectiveness of the securities markets by allowing investors to better
understand credit conditions generally.

C. Temporary General Exemption for CME and Certain Eligible Contract
Participants

    Applying the full panoply of Exchange Act requirements to
participants in transactions in non-excluded CDS likely would deter
some participants from using CCPs to clear CDS transactions. At the
same time, it is important that the antifraud provisions of the
Exchange Act apply to transactions in non-excluded CDS; indeed, OTC
transactions subject to individual negotiation that qualify as
security-based swap agreements already are subject to these antifraud
provisions.\37\
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    \37\ While Section 3A of the Exchange Act excludes ``swap
agreements'' from the definition of ``security,'' certain antifraud
and insider trading provisions under the Exchange Act explicitly
apply to security-based swap agreements. See (a) paragraphs (2)
through (5) of Section 9(a), 15 U.S.C. 78i(a), prohibiting the
manipulation of security prices; (b) Section 10(b), 15 U.S.C.
78j(b), and underlying rules prohibiting fraud, manipulation or
insider trading (but not prophylactic reporting or recordkeeping
requirements); (c) Section 15(c)(1), 15 U.S.C. 78o(c)(1), which
prohibits brokers and dealers from using manipulative or deceptive
devices; (d) Sections 16(a) and (b), 15 U.S.C. 78p(a) and (b), which
address disclosure by directors, officers and principal
stockholders, and short-swing trading by those persons, and rules
with respect to reporting requirements under Section 16(a); (e)
Section 20(d), 15 U.S.C. 78t(d), providing for antifraud liability
in connection with certain derivative transactions; and (f) Section
21A(a)(1), 15 U.S.C. 78u-1(a)(1), related to the Commission's
authority to impose civil penalties for insider trading violations.
    ``Security-based swap agreement'' is defined in Section 206B of
the Gramm-Leach-Bliley Act as a swap agreement in which a material
term is based on the price, yield, value, or volatility of any
security or any group or index of securities, or any interest
therein.
---------------------------------------------------------------------------

    We thus believe that it is appropriate in the public interest and
consistent with the protection of investors temporarily to apply
substantially the same framework to transactions by market participants
in non-excluded CDS that applies to transactions in security-based swap
agreements. Applying substantially the same set of requirements to
participants in transactions in non-excluded CDS as apply to
participants in OTC CDS transactions will avoid deterring market
participants from promptly using CCPs, which would detract from the
potential benefits of central clearing.
    Accordingly, pursuant to Section 36 of the Exchange Act, the
Commission finds that it is necessary or appropriate in the public
interest and is consistent with the protection of investors to exercise
its authority to grant an exemption until December 14, 2009 from
certain requirements under the Exchange Act. This temporary exemption
applies to CME and to certain eligible contract participants \38\ other
than: Eligible contract participants that receive or hold funds or
securities for the purpose of purchasing, selling, clearing, settling,
or holding Cleared CDS positions for other persons; \39\ eligible
contract participants that are self-regulatory organizations; or
eligible contract participants that are registered brokers or
dealers).\40\
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    \38\ This exemption in general applies to eligible contract
participants, as defined in Section 1a(12) of the Commodity Exchange
Act as in effect on the date of this Order, other than persons that
are eligible contract participants under paragraph (C) of that
section.
    \39\ Solely for purposes of this requirement, an eligible
contract participant would not be viewed as receiving or holding
funds or securities for purpose of purchasing, selling, clearing,
settling, or holding Cleared CDS positions for other persons, if the
other persons involved in the transaction would not be considered
``customers'' of the eligible contract participant in a parallel
manner when certain persons would not be considered ``customers'' of
a broker-dealer under Exchange Act Rule 15c3-3(a)(1). For these
purposes, and for the purpose of the definition of ``Cleared CDS,''
the terms ``purchasing'' and ``selling'' mean the execution,
termination (prior to its scheduled maturity date), assignment,
exchange, or similar transfer or conveyance of, or extinguishing the
rights or obligations under, a Cleared CDS, as the context may
require. This is consistent with the meaning of the terms
``purchase'' or ``sale'' under the Exchange Act in the context of
security-based swap agreements. See Exchange Act Section 3A(b)(4).
    A separate temporary conditional exemption addresses members of
CME that hold funds or securities for the purpose of purchasing,
selling, clearing, settling, or holding Cleared CDS positions for
other persons. See Part II.D, infra.
    \40\ A separate temporary exemption addresses the Cleared CDS
activities of registered-broker-dealers. See Part II.E, infra.
Solely for purposes of this Order, a registered broker-dealer, or a
broker or dealer registered under Section 15(b) of the Exchange Act,
does not refer to someone that would otherwise be required to
register as a broker or dealer solely as a result of activities in
Cleared CDS in compliance with this Order.
---------------------------------------------------------------------------

    Under this temporary exemption, and solely with respect to Cleared
CDS, these persons generally are exempt from provisions of the Exchange
Act and the rules and regulations thereunder that do not apply to
security-based swap agreements. Those persons thus would still be
subject to those Exchange Act requirements that explicitly are
applicable in connection with security-based swap agreements.\41\ In
addition, all provisions of the Exchange Act related to the
Commission's enforcement authority in connection with violations or
potential violations of such provisions would remain applicable.\42\ In
this way, the temporary exemption would apply the same Exchange Act
requirements in connection with non-excluded CDS as apply in connection
with OTC credit default swaps.
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    \41\ See note 37, supra.
    \42\ Thus, for example, the Commission retains the ability to
investigate potential violations and bring enforcement actions in
the Federal courts and administrative proceedings, and to seek the
full panoply of remedies available in such cases.
---------------------------------------------------------------------------

    This temporary exemption, however, does not extend to Sections 5
and 6 of the Exchange Act. The Commission separately issued a
conditional exemption from these provisions to all broker-dealers and
exchanges.\43\ This temporary exemption also does not extend to Section
17A of the Exchange Act; instead, CME is exempt from registration as a
clearing agency under the conditions discussed above. In addition, this
exemption does not apply to Exchange Act Sections 12, 13, 14, 15(d),
and 16; \44\ eligible contract participants and other persons instead
should refer to the interim final temporary rules issued by the

Commission. Finally, this temporary exemption does not extend to the
Commission's administrative proceeding authority under Sections
15(b)(4) and (b)(6),\45\ or to certain provisions related to government
securities.\46\
---------------------------------------------------------------------------

    \43\ See note 17, supra. A national securities exchange that
effects transactions in Cleared CDS would continue to be required to
comply with all requirements under the Exchange Act applicable to
such transactions. A national securities exchange could form
subsidiaries or affiliates that operate exchanges exempt under that
order. Any subsidiary or affiliate of a registered exchange could
not integrate, or otherwise link, the exempt CDS exchange with the
registered exchange including the premises or property of such
exchange for effecting or reporting a transaction without being
considered a ``facility of the exchange.'' See Section 3(a)(2), 15
U.S.C. 78c(a)(2).
    \44\ 15 U.S.C. 78l, 78m, 78n, 78o(d), 78p.
    \45\ Exchange Act Sections 15(b)(4) and 15(b)(6), 15 U.S.C.
78o(b)(4) and (b)(6), grant the Commission authority to take action
against broker-dealers and associated persons in certain situations.
Accordingly, while this exemption generally extends to persons that
act as inter-dealer brokers in the market for Cleared CDS and do not
hold funds or securities for others, such inter-dealer brokers may
be subject to actions under Sections 15(b)(4) and (b)(6) of the
Exchange Act.
    In addition, such inter-dealer brokers may be subject to actions
under Exchange Act Section 15(c)(1), 15 U.S.C. 78o(c)(1), which
prohibits brokers and dealers from using manipulative or deceptive
devices. As noted above, Section 15(c)(1) explicitly applies to
security-based swap agreements. Sections 15(b)(4), 15(b)(6) and
15(c)(1), of course, would not apply to persons subject to this
exemption who do not act as broker-dealers or associated persons of
broker-dealers.
    \46\ This exemption specifically does not extend to the Exchange
Act provisions applicable to government securities, as set forth in
Section 15C, 15 U.S.C. 78o-5, and its underlying rules and
regulations; nor does the exemption extend to related definitions
found at paragraphs (42) through (45) of Section 3(a), 15 U.S.C.
78c(a). The Commission does not have authority under Section 36 to
issue exemptions in connection with those provisions. See Exchange
Act Section 36(b), 15 U.S.C. 78mm(b).
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D. Conditional Temporary General Exemption for Certain Clearing Members
of CME

    Absent an exception, persons that effect transactions in non-
excluded CDS that are securities may be required to register as broker-
dealers pursuant to Section 15(a)(1) of the Exchange Act.\47\ Moreover,
certain reporting and other requirements of the Exchange Act could
apply to such persons, as broker-dealers, regardless of whether they
are registered with the Commission.
---------------------------------------------------------------------------

    \47\ 15 U.S.C. 78o(a)(1). This section generally provides that,
absent an exception or exemption, a broker or dealer that uses the
mails or any means of interstate commerce to effect transactions in,
or to induce or attempt to induce the purchase or sale of, any
security must register with the Commission.
    Section 3(a)(4) of the Exchange Act generally defines a
``broker'' as ``any person engaged in the business of effecting
transactions in securities for the account of others,'' but provides
11 exceptions for certain bank securities activities. 15 U.S.C.
78c(a)(4). Section 3(a)(5) of the Exchange Act generally defines a
``dealer'' as ``any person engaged in the business of buying and
selling securities for his own account,'' but includes exceptions
for certain bank activities. 15 U.S.C. 78c(a)(5). Exchange Act
Section 3(a)(6) defines a ``bank'' as a bank or savings association
that is directly supervised and examined by State or Federal banking
authorities (with certain additional requirements for banks and
savings associations that are not chartered by a Federal authority
or a member of the Federal Reserve System). 15 U.S.C. 78c(a)(6).
---------------------------------------------------------------------------

    It is consistent with our investor protection mandate to require
that intermediaries in securities transactions that receive or hold
funds and securities on behalf of others comply with standards that
safeguard the interests of their customers. For example, registered
broker-dealers are required to segregate assets held on behalf of
customers from proprietary assets, because segregation will assist
customers in recovering assets in the event the intermediary fails. To
the extent that funds and securities are not segregated, they could be
used by a participant to fund its own business and could be attached to
satisfy debts of the participant were the participant to fail.
Moreover, the maintenance of adequate capital and liquidity protects
customers, CCPs and other market participants. Adequate books and
records (including both transactional and position records) are
necessary to facilitate day to day operations as well as to help
resolve situations in which a participant fails and either a regulatory
authority or receiver is forced to liquidate the firm. Appropriate
records also are necessary to allow examiners to review for improper
activities, such as insider trading or fraud.
    At the same time, requiring intermediaries that receive or hold
funds and securities on behalf of customers in connection with
transactions in non-excluded CDS to register as broker-dealers may
deter the use of CCPs in CDS transactions, to the detriment of the
markets and market participants generally. Also, as noted above with
regard to other eligible contract participants to non-excluded CDS
transactions, immediately applying the panoply of Exchange Act
requirements to centrally cleared transactions may deter the use of
CCPs for CDS transactions.
    Those factors argue in favor of flexibility in applying the
requirements of the Exchange Act to these intermediaries. Along with
those factors, in granting an exemption here we are particularly
relying on the representation of CME that CME's rules alone or in
combination with laws and regulations applicable to CME and its
clearing members require that any CME clearing member that purchases,
sells, or holds CDS positions for other persons, solely as they relate
to CDS: (1) Must be registered with the CFTC as a futures commission
merchant; (2) effectively segregates funds and securities of other
persons (except positions held in proprietary accounts of the clearing
member, which may include, for example, positions of employees or
affiliates of the clearing member) that it holds in its custody or
control for the purpose of purchasing, selling, or holding CDS
positions; (3) maintains adequate capital and liquidity; and (4)
maintains sufficient books and records to establish (a) that the CME
clearing member is maintaining adequate capital and liquidity, and (b)
separate ownership of the funds, securities, and positions it may hold
for the purpose of purchasing, selling, or holding CDS positions for
other persons and those it holds for its proprietary accounts.
    Accordingly, pursuant to Section 36 of the Exchange Act, the
Commission finds that it is necessary or appropriate in the public
interest and is consistent with the protection of investors to exercise
its authority to grant a conditional exemption until December 14, 2009
from certain Exchange Act requirements. In general, we are providing a
temporary exemption, subject to the conditions discussed below, to any
CME clearing member registered as a futures commission merchant
pursuant to Section 4f(a)(1) of the Commodity Exchange Act (``FCM'')
(but that is not registered as a broker-dealer under Section 15(b) of
the Exchange Act (other than paragraph (11) thereof)) that receives or
holds funds or securities for the purpose of purchasing, selling,
clearing, settling or holding Cleared CDS positions for other persons.
Solely with respect to Cleared CDS, those members generally will be
exempt from those provisions of the Exchange Act and the underlying
rules and regulations that do not apply to security-based swap
agreements.
    As with the exemption discussed above that is applicable to CME and
certain eligible contract participants, and for the same reasons, this
exemption for CME clearing members that receive or hold funds and
securities does not extend to Exchange Act provisions that explicitly
apply in connection with security-based swap agreements,\48\ or to
related enforcement authority provisions.\49\ As with the exemption
discussed above, we also are not exempting those members from Sections
5, 6, 12(a) and (g), 13, 14, 15(b)(4), 15(b)(6), 15(d), 16 and 17A of
the Exchange Act.\50\
---------------------------------------------------------------------------

    \48\ See note 37, supra.
    \49\ See note 42, supra.
    \50\ Nor are we exempting those members from provisions related
to government securities, as discussed above.
---------------------------------------------------------------------------

    This temporary exemption is subject to the member complying with
conditions that are important for protecting customer funds and
securities. Particularly, the member must be in material compliance
with the rules of CME, and applicable laws and

regulations, relating to capital, liquidity, and segregation of
customers' \51\ funds and securities (and related books and records
provisions) with respect to non-excluded CDS.\52\ Also, to the extent
that the member receives or holds funds or securities of U.S. eligible
contract participants for the purpose of purchasing, selling, clearing,
settling or holding non-excluded CDS positions for those persons, this
exemption is predicated on the member satisfying the following
condition: The member must segregate such funds and securities of U.S.
customers from the member's own assets (i.e., the member may not permit
U.S. customers to ``opt out'' of applicable segregation requirements
for such funds and securities even if regulations or laws would permit
the person to ``opt out'').
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    \51\ The term ``customer,'' solely for purposes of Part III(c)
and (d), infra, and corresponding references in this Order, means a
``customer'' as defined under CFTC Regulation 1.3(k). 17 CFR 1.3(k).
    \52\ A member would not be ``in material compliance'' if it
failed in any way to segregate customer funds and securities
consistent with these rules, laws and regulations. In that
circumstance, the member could not rely on this exemption.
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E. Temporary General Exemption for Certain Registered Broker-Dealers
Including Certain Broker-Dealer-FCMs

    The temporary exemptions addressed above--with regard (i) to CME
and certain eligible contract participants and (ii) to certain CME
clearing members that receive or hold funds and securities of others--
are not available to persons that are registered as broker-dealers with
the Commission (other than those that are notice registered pursuant to
Section 15(b)(11)).\53\ The Exchange Act and its underlying rules and
regulations require broker-dealers to comply with a number of
obligations that are important to protecting investors and promoting
market integrity. We are mindful of the need to avoid creating
disincentives to the prompt use of CCPs, and we recognize that the
factors discussed above suggest that the full panoply of Exchange Act
requirements should not immediately be applied to registered broker-
dealers that engage in transactions involving Cleared CDS. At the same
time, we also are sensitive to the critical importance of certain
broker-dealer requirements to promoting market integrity and protecting
customers (including those broker-dealer customers that are not
involved with CDS transactions).
---------------------------------------------------------------------------

    \53\ Exchange Act Section 15(b)(11) provides for notice
registration of certain persons that effect transactions in security
futures products. 15 U.S.C. 78o(b)(11).
---------------------------------------------------------------------------

    This calls for balancing the facilitation of the development and
prompt implementation of CCPs with the preservation of certain key
investor protections. Pursuant to Section 36 of the Exchange Act, the
Commission finds that it is necessary or appropriate in the public
interest and is consistent with the protection of investors to exercise
its authority to grant an exemption until December 14, 2009 from
certain Exchange Act requirements. Consistent with the temporary
exemptions discussed above, and solely with respect to Cleared CDS, we
are exempting registered broker-dealers (including registered broker-
dealers that are also FCMs (``BD-FCMs'')) in general from provisions of
the Exchange Act and its underlying rules and regulations that do not
apply to security-based swap agreements. As above, we are not excluding
registered broker-dealers, including BD-FCMs, from Exchange Act
provisions that explicitly apply in connection with security-based swap
agreements or from related enforcement authority provisions.\54\ As
above, and for similar reasons, we are not exempting registered broker-
dealers, including BD-FCMs, from: Sections 5, 6, 12(a) and (g), 13, 14,
15(b)(4), 15(b)(6), 15(d), 16 and 17A of the Exchange Act.\55\
---------------------------------------------------------------------------

    \54\ See notes 37 and 42, supra. As noted above, broker-dealers
also would be subject to Section 15(c)(1) of the Exchange Act, which
prohibits brokers and dealers from using manipulative or deceptive
devices, because that provision explicitly applies in connection
with security-based swap agreements. In addition, to the extent the
Exchange Act and any rule or regulation thereunder imposes any other
requirement on a broker-dealer with respect to security-based swap
agreements (e.g., requirements under Rule 17h-1T to maintain and
preserve written policies, procedures, or systems concerning the
broker or dealer's trading positions and risks, such as policies
relating to restrictions or limitations on trading financial
instruments or products), these requirements would continue to apply
to broker-dealers' activities with respect to Cleared CDS.
    \55\ We also are not exempting those members from provisions
related to government securities, as discussed above.
---------------------------------------------------------------------------

    Further we are not exempting registered broker-dealers from the
following additional provisions under the Exchange Act: (1) Section
7(c),\56\ which addresses the unlawful extension of credit by broker-
dealers; (2) Section 15(c)(3),\57\ which addresses the use of unlawful
or manipulative devices by broker-dealers; (3) Section 17(a),\58\
regarding broker-dealer obligations to make, keep and furnish
information; (4) Section 17(b),\59\ regarding broker-dealer records
subject to examination; (5) Regulation T,\60\ a Federal Reserve Board
regulation regarding extension of credit by broker-dealers; (6)
Exchange Act Rule 15c3-1, regarding broker-dealer net capital; (7)
Exchange Act Rule 15c3-3, regarding broker-dealer reserves and custody
of securities; (8) Exchange Act Rules 17a-3 through 17a-5, regarding
records to be made and preserved by broker-dealers and reports to be
made by broker-dealers; and (9) Exchange Act Rule 17a-13, regarding
quarterly security counts to be made by certain exchange members and
broker-dealers.\61\ Registered broker-dealers should comply with these
provisions in connection with their activities involving non-excluded
CDS because these provisions are especially important to helping
protect customer funds and securities, ensure proper credit practices
and safeguard against fraud and abuse.\62\
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    \56\ 15 U.S.C. 78g(c).
    \57\ 15 U.S.C. 78o(c)(3).
    \58\ 15 U.S.C. 78q(a).
    \59\ 15 U.S.C. 78q(b).
    \60\ 12 CFR 220.1 et seq.
    \61\ Solely for purposes of this exemption, in addition to the
general requirements under the referenced Exchange Act sections,
registered broker-dealers shall only be subject to the enumerated
rules under the referenced Exchange Act sections. Broker-dealers
will, however, continue to be subject to applicable rules of self-
regulatory organizations of which they are a member, including
applicable margin rules.
    \62\ Indeed, Congress directed the Commission to promulgate
broker-dealer financial responsibility rules, including rules
regarding custody, the use of customer securities and the use of
customers' deposits or credit balances, and regarding establishment
of minimum financial requirements.
---------------------------------------------------------------------------

    However, CME clearing members that are BD-FCMs that holds customer
funds and securities for the purpose of purchasing, selling, clearing,
settling or holding CDS positions cleared by CME in a futures account
(as that term is defined in Rule 15c3-3(a)(15) [17 CFR 240.15c3-
3(a)(15)]) also shall be exempt from Exchange Act Rule 15c3-3, subject
to the following conditions: (1) The CME clearing member shall be in
material compliance with the rules of CME, and applicable laws and
regulations, relating to capital, liquidity, and segregation of
customers' funds and securities (and related books and records
provisions) with respect to Cleared CDS; \63\ (2) the CME clearing
member shall segregate such funds and securities of U.S. customers from
the CME clearing member's own assets (i.e., the member may not permit
U.S. customers to ``opt out'' of applicable segregation requirements
for such funds and securities even if regulations or laws would permit
the customer to ``opt out''); and (3) the CME clearing member shall
comply with the margin rules for Cleared CDS of the self-regulatory

organization that is its designated examining authority \64\ (e.g.,
FINRA).
---------------------------------------------------------------------------

    \63\ See note 52, supra.
    \64\ See 17 CFR 240.17d-1 for a description of a designated
examining authority.
---------------------------------------------------------------------------

F. Solicitation of Comments

    The Commission intends to monitor closely the development of the
CDS market and intends to determine to what extent, if any, additional
regulatory action may be necessary. For example, as circumstances
warrant, certain conditions could be added, altered, or eliminated.
Moreover, because these exemptions are temporary, the Commission will
in the future consider whether they should be extended or allowed to
expire. The Commission believes it would be prudent to solicit public
comment on its action today, and on what action it should take with
respect to the CDS market in the future. The Commission is soliciting
public comment on all aspects of these exemptions, including:
    1. Whether the length of this temporary exemption (until December
14, 2009) is appropriate. If not, what should the appropriate duration
be?
    2. Whether the conditions to these exemptions are appropriate. Why
or why not? Should other conditions apply? Are any of the present
conditions to the exemptions provided in this Order unnecessary? If so,
please specify and explain why such conditions are not needed.
    3. Whether CME ultimately should be required to register as a
clearing agency under the Exchange Act. Why or why not?
    4. Whether CME members that receive or hold funds or securities for
the purpose of purchasing, selling, clearing, settling or holding non-
excluded CDS positions for other persons ultimately should be required
to register as broker-dealers? Why or why not?
Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/other.shtml); or
     Send an e-mail to<EMAIL_ADDRESS>Please include
File Number S7-06-09 on the subject line; or
     Use the Federal eRulemaking Portal (http://
www.regulations.gov/). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number S7-06-09. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. We will post all comments on the Commission's Internet Web site
(http://www.sec.gov/rules/other.shtml). Comments are also available for
public inspection and copying in the Commission's Public Reference
Room, 100 F Street, NE., Washington, DC 20549, on official business
days between the hours of 10 a.m. and 3 p.m. All comments received will
be posted without change; we do not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly.

III. Conclusion

    It is hereby ordered, pursuant to Section 36(a) of the Exchange
Act, that, until December 14, 2009:
    (a) Exemption from Section 17A of the Exchange Act.
    The Chicago Mercantile Exchange Inc. (``CME'') shall be exempt from
Section 17A of the Exchange Act solely to perform the functions of a
clearing agency for Cleared CDS (as defined in paragraph (e) of this
Order), subject to the following conditions:
    (1) CME shall make available on its Web site its annual audited
financial statements.
    (2) CME shall keep and preserve records of all activities related
to the business of CME as a central counterparty for Cleared CDS. These
records shall be kept for at least five years and for the first two
years shall be held in an easily accessible place.
    (3) CME shall supply such information and periodic reports relating
to its Cleared CDS clearance and settlement services as may be
reasonably requested by the Commission. CME shall also provide access
to the Commission to conduct on-site inspections of all facilities
(including automated systems and systems environment), and records
related to its Cleared CDS clearance and settlement services. CME will
provide the Commission with access to its personnel to answer
reasonable questions during any such inspections related to its Cleared
CDS clearance and settlement services.
    (4) CME shall notify the Commission, on a monthly basis, of any
material disciplinary actions taken against any CME clearing members
utilizing its Cleared CDS clearance and settlement services, including
the denial of services, fines, or penalties. CME shall notify the
Commission promptly when CME involuntarily terminates the membership of
an entity that is utilizing CME's Cleared CDS clearance and settlement
services. Both notifications shall describe the facts and circumstances
that led to CME's disciplinary action.
    (5) CME shall notify the Commission of all changes to rules as
defined under the CFTC rules, fees, and any other material events
affecting its Cleared CDS clearance and settlement services, including
material changes to risk management models. In addition, CME will post
any rule or fee changes on the CME Web site. CME shall provide the
Commission with notice of all changes to its rules not less than one
day prior to effectiveness or implementation of such rule changes or,
in exigent circumstances, as promptly as reasonably practicable under
the circumstances. Such notifications will not be deemed rule filings
that require Commission approval.
    (6) CME shall provide the Commission with annual reports and any
associated field work concerning its Cleared CDS clearance and
settlement services prepared by independent audit personnel that are
generated in accordance with risk assessment of the areas set forth in
the Commission's Automation Review Policy Statements. CME shall provide
the Commission (beginning in its first year of operation) with its
annual audited financial statements prepared by independent audit
personnel for CME.
    (7) CME shall report to the Commission all significant outages of
clearing systems having a material impact on its Cleared CDS clearance
and settlement services. If it appears that the outage may extend for
30 minutes or longer, CME shall report the systems outage immediately.
If it appears that the outage will be resolved in less than 30 minutes,
CME shall report the systems outage within a reasonable time after the
outage has been resolved.
    (8) CME, directly or indirectly, shall make available to the public
on terms that are fair and reasonable and not unreasonably
discriminatory: (i) All end-of-day settlement prices and any other
prices with respect to Cleared CDS that CME may establish to calculate
mark-to-market margin requirements for CME clearing members; and (ii)
any other pricing or valuation information with respect to Cleared CDS
as is published or distributed by CME.
    (9) CME shall not materially change its methodology for determining
Cleared CDS margin levels without prior written approval from the
Commission, and from FINRA with respect to customer margin requirements
that would apply

to broker-dealers. (b) Exemption for CME and certain eligible contract
participants.
    (1) Persons eligible. The exemption in paragraph (b)(2) is
available to:
    (i) CME; and
    (ii) Any eligible contract participant (as defined in Section
1a(12) of the Commodity Exchange Act as in effect on the date of this
Order (other than a person that is an eligible contract participant
under paragraph (C) of that section)), other than: (A) An eligible
contract participant that receives or holds funds or securities for the
purpose of purchasing, selling, clearing, settling, or holding Cleared
CDS positions for other persons; (B) an eligible contract participant
that is a self-regulatory organization, as that term is defined in
Section 3(a)(26) of the Exchange Act; or (C) a broker or dealer
registered under Section 15(b) of the Exchange Act (other than
paragraph (11) thereof).
    (2) Scope of exemption.
    (i) In general. Such persons generally shall, solely with respect
to Cleared CDS, be exempt from the provisions of the Exchange Act and
the rules and regulations thereunder that do not apply in connection
with security-based swap agreements. Accordingly, under this exemption,
those persons would remain subject to those Exchange Act requirements
that explicitly are applicable in connection with security-based swap
agreements (i.e., paragraphs (2) through (5) of Section 9(a), Section
10(b), Section 15(c)(1), paragraphs (a) and (b) of Section 16, Section
20(d) and Section 21A(a)(1) and the rules thereunder that explicitly
are applicable to security-based swap agreements). All provisions of
the Exchange Act related to the Commission's enforcement authority in
connection with violations or potential violations of such provisions
also remain applicable.
    (ii) Exclusions from exemption. The exemption in paragraph
(b)(2)(i), however, does not extend to the following provisions under
the Exchange Act:
    (A) Paragraphs (42), (43), (44), and (45) of Section 3(a);
    (B) Section 5;
    (C) Section 6;
    (D) Section 12 and the rules and regulations thereunder;
    (E) Section 13 and the rules and regulations thereunder;
    (F) Section 14 and the rules and regulations thereunder;
    (G) Paragraphs (4) and (6) of Section 15(b);
    (H) Section 15(d) and the rules and regulations thereunder;
    (I) Section 15C and the rules and regulations thereunder;
    (J) Section 16 and the rules and regulations thereunder; and
    (K) Section 17A (other than as provided in paragraph (a)).
    (c) Exemption for certain CME clearing members.
    Any CME clearing member registered as a futures commission merchant
pursuant to Section 4f(a)(1) of the Commodity Exchange Act (but that is
not registered as a broker or dealer under Section 15(b) of the
Exchange Act (other than paragraph (11) thereof)) that receives or
holds funds or securities for the purpose of purchasing, selling,
clearing, settling or holding Cleared CDS for other persons shall be
exempt from the provisions of the Exchange Act and the rules and
regulations thereunder specified in paragraph (b)(2), solely with
respect to Cleared CDS, subject to the following conditions:
    (1) The CME clearing member shall be in material compliance with
the rules of CME, and applicable laws and regulations, relating to
capital, liquidity, and segregation of customers' funds and securities
(and related books and records provisions) with respect to Cleared CDS;
and
    (2) To the extent that the CME clearing member receives or holds
funds or securities of U.S. customers for the purpose of purchasing,
selling, clearing, settling, or holding Cleared CDS positions, the CME
clearing member shall segregate such funds and securities of U.S.
customers from the CME clearing member's own assets (i.e., the member
may not permit U.S. customers to ``opt out'' of applicable segregation
requirements for such funds and securities even if regulations or laws
would permit the customer to ``opt out'').
    (d) Exemption for certain registered broker-dealers.
    A broker or dealer registered under Section 15(b) of the Exchange
Act (other than paragraph (11) thereof) shall be exempt from the
provisions of the Exchange Act and the rules and regulations thereunder
specified in paragraph (b)(2), solely with respect to Cleared CDS,
except:
    (1) Section 7(c);
    (2) Section 15(c)(3);
    (3) Section 17(a);
    (4) Section 17(b);
    (5) Regulation T, 12 CFR 200.1 et seq.;
    (6) Rule 15c3-1;
    (7) Rule 15c3-3;
    (8) Rule 17a-3;
    (9) Rule 17a-4;
    (10) Rule 17a-5; and
    (11) Rule 17a-13;

provided, that a CME clearing member that is a broker or dealer
registered under Section 15(b) of the Exchange Act (other than
paragraph (11) thereof) and that is also registered as a futures
commission merchant pursuant to Section 4f(a)(1) of the Commodity
Exchange Act and that holds customer funds and securities for the
purpose of purchasing, selling, clearing, settling or holding Cleared
CDS in a futures account (as that term is defined in Rule 15c3-3(a)(15)
[17 CFR 240.15c3-3(a)(15)]) also shall be exempt from Exchange Act Rule
15c3-3, subject to the following conditions:
    (1) The CME clearing member shall be in material compliance with
the rules of CME, and applicable laws and regulations, relating to
capital, liquidity, and segregation of customers' funds and securities
(and related books and records provisions) with respect to Cleared CDS;
    (2) The CME clearing member shall segregate such funds and
securities of U.S. customers from the CME clearing member's own assets
(i.e., the member may not permit U.S. customers to ``opt out'' of
applicable segregation requirements for such funds and securities even
if regulations or laws would permit the customer to ``opt out''); and
    (3) The CME clearing member shall collect from each customer the
amount of margin that is not less than the amount required for Cleared
CDS under the margin rule of the self-regulatory organization that is
its designated examining authority.
    (e) For purposes of this Order, ``Cleared CDS'' shall mean a credit
default swap that is submitted (or offered, purchased or sold on terms
providing for submission) to CME, that is offered only to, purchased
only by, and sold only to eligible contract participants (as defined in
Section 1a(12) of the Commodity Exchange Act as in effect on the date
of this Order (other than a person that is an eligible contract
participant under paragraph (C) of that section)), and in which:
    (1) The reference entity, the issuer of the reference security, or
the reference security is one of the following:
    (i) An entity reporting under the Exchange Act, providing
Securities Act Rule 144A(d)(4) information, or about which financial
information is otherwise publicly available;
    (ii) a foreign private issuer whose securities are listed outside
the United States and that has its principal trading market outside the
United States;
    (iii) a foreign sovereign debt security;
    (iv) an asset-backed security, as defined in Regulation AB, issued
in a registered transaction with publicly available distribution
reports; or

    (v) an asset-backed security issued or guaranteed by Fannie Mae,
Freddie Mac or Ginnie Mae; or
    (2) the reference index is an index in which 80 percent or more of
the index's weighting is comprised of the entities or securities
described in subparagraph (1).

    By the Commission.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-5927 Filed 3-18-09; 8:45 am]


[Federal Register: September 19, 2008 (Volume 73, Number 183)]
[Notices]
[Page 54393-54394]
[DOCID:fr19se08-44]

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

[Project Nos. 2085-014, 67-113, 2175-014, 120-020 California]

Southern California Edison; Notice of Availability of the Draft
Environmental Impact Statement for the Big Creek Projects

September 12, 2008.
    In accordance with the National Environmental Policy Act of 1969
and the Federal Energy Regulatory Commission's (Commission)
regulations, 18 CFR part 380 (Order No. 486, 52 F.R. 47897), the Office
of Energy Projects has reviewed the applications for relicensing four
Southern California Edison (SCE) projects, which are part of the Big
Creek System: Mammoth Pool Project (FERC No. 2085); Big Creek Nos. 2A,
8 and Eastwood (FERC No. 67); Big Creek Nos. 1 and 2 (FERC No. 2175);
and Big Creek No. 3 (FERC No. 120), located in Fresno and Madera
Counties, California, and has prepared a Draft Environmental Impact
Statement (draft EIS) for the projects.
    SCE's existing 865-megawatt Big Creek System includes the
integrated operation of nine major powerhouses, six major reservoirs,
numerous small diversions, various conveyance facilities, and
electrical transmission lines, authorized under seven Commission
licenses. The four projects evaluated in the draft EIS occupy about
6,870 acres of federal land administered by the U.S. Department of
Agriculture, Forest Service, in the Sierra National Forest.
    In the draft EIS, staff evaluates the applicant's proposal and
alternatives for relicensing the projects. The draft EIS documents the
views of governmental agencies, non-governmental organizations,
affected Indian tribes, the public, the license applicant, and
Commission staff.
    Comments should be filed with: Kimberly D. Bose, Secretary, Federal
Energy Regulatory Commission, 888 First Street, NE., Washington, DC
20426. All comments must be filed within 45 days of the notice in the
Federal Register, and should reference the project the comments refer
to: Project No. 2085-014 (Mammoth Pool Project); Project No. 67-113
(Big Creek Nos. 2A, 8 and Eastwood; Project No. 2175-014 (Big Creek
Nos. 1 and 2); or (Project No. 120-020). Comments may be filed
electronically via the Internet in lieu of paper. The Commission
strongly encourages electronic filings. See 18 CFR 385.2001(a)(1)(iii)
and instructions on the Commission's Web site at http://www.ferc.gov
under the eLibrary link.
    Anyone may intervene in this proceeding based on this draft EIS (18
CFR 380.10). You may also file your request to intervene
electronically. You do not need intervenor status to have the
Commission consider your comments.
    Copies of the draft EIS are available for review in the
Commission's Public Reference Branch, Room 2A, located at 888 First
Street, NE., Washington, DC 20426. The draft EIS also may be viewed on
the Internet at http://www.ferc.gov

under the eLibrary link. Enter the docket number (P-067, P-2175, P-
2085, or P-120) to access the document. For assistance, contact FERC
Online Support at<EMAIL_ADDRESS>or toll-free at 1-866-208-
3676, or for TTY,<PHONE_NUMBER>.
    CD versions of the draft EIS have been mailed to everyone on the
mailing list for the projects. Copies of the CD, as well as a limited
number of paper copies, are available from the Public Reference Room
identified above.
    You may also register online at http://www.ferc.gov/docs-filing/
esubscription.asp to be notified via e-mail of new filings and
issuances related to these or other pending projects. For assistance,
contact FERC Online Support.
    For further information, contact James Fargo at<PHONE_NUMBER> or
at<EMAIL_ADDRESS>
Kimberly D. Bose,
Secretary.
[FR Doc. E8-21872 Filed 9-18-08; 8:45 am]

BILLING CODE 6717-01-P