[Federal Register: December 10, 2009 (Volume 74, Number 236)]
[Notices]
[Page 65554-65568]
[DOCID:fr10de09-88]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-61119; File No. S7-05-09]

Order Extending and Modifying Temporary Exemptions Under the
Securities Exchange Act of 1934 in Connection With Request From ICE
Trust U.S. LLC Related to Central Clearing of Credit Default Swaps, and
Request for Comments

December 4, 2009.

I. Introduction

    Over the past year, the Securities and Exchange Commission
(``Commission'') has taken multiple actions to protect investors and
ensure the integrity of the nation's securities markets, including
actions \1\ designed to address concerns related to the market in
credit default swaps (``CDS'').\2\ The over-the-counter (``OTC'')
market for CDS has been a source of particular concern to us and other
financial regulators, and we have recognized that facilitating the
establishment of central counterparties (``CCPs'') for CDS can play an
important role in reducing the counterparty risks inherent in the CDS
market, and thus can help mitigate potential systemic impacts. We have
therefore found that taking action to help foster the prompt
development of CCPs, including granting temporary conditional
exemptions from certain provisions of the federal securities laws, is
in the public interest.\3\
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    \1\ See generally Securities Exchange Act Release No. 60372
(Jul. 23, 2009), 74 FR 37748 (Jul. 29, 2009) (temporary exemptions
in connection with CDS clearing by ICE Clear Europe Limited),
Securities Exchange Act Release No. 60373 (Jul. 23, 2009), 74 FR
37740 (Jul. 29, 2009) (temporary exemptions in connection with CDS
clearing by Eurex Clearing AG), Securities Exchange Act Release No.
59578 (Mar. 13, 2009), 74 FR 11781 (Mar. 19, 2009) (temporary
exemptions in connection with CDS clearing by Chicago Mercantile
Exchange Inc.), Securities Exchange Act Release No. 59527 (Mar. 6,
2009), 74 FR 10791 (Mar. 12, 2009) (temporary exemptions in
connection with CDS clearing by ICE US Trust LLC (now ``ICE Trust
U.S. LLC'')) (hereinafter, the ``March ICE Trust Order''),
Securities Exchange Act Release No. 59164 (Dec. 24, 2008), 74 FR 139
(Jan. 2, 2009) (temporary exemptions in connection with CDS clearing
by LIFFE A&M and LCH.Clearnet Ltd.) and other Commission actions
discussed therein.
    In addition, we have issued interim final temporary rules that
provide exemptions under the Securities Act of 1933 and the
Securities Exchange Act of 1934 for CDS to facilitate the operation
of one or more central counterparties for the CDS market. See
Securities Act Release No. 8999 (Jan. 14, 2009), 74 FR 3967 (Jan.
22, 2009) (initial approval); Securities Act Release No. 9063 (Sep.
14, 2009), 74 FR 47719 (Sep. 17, 2009) (extension until Nov. 30,
2010).
    Further, the Commission has provided temporary exemptions in
connection with Sections 5 and 6 of the Securities Exchange Act of
1934 for transactions in CDS. See Securities Exchange Act Release
No. 59165 (Dec. 24, 2008), 74 FR 133 (Jan. 2, 2009) (initial
exemption); Securities Exchange Act Release No. 60718 (Sep. 25,
2009), 74 FR 50862 (Oct. 1, 2009) (extension until Mar. 24, 2010).
    \2\ A CDS is a bilateral contract between two parties, known as
counterparties. The value of this financial contract is based on
underlying obligations of a single entity (``reference entity'') or
on a particular security or other debt obligation, or an index of
several such entities, securities, or obligations. The obligation of
a seller to make payments under a CDS contract is triggered by a
default or other credit event as to such entity or entities or such
security or securities. Investors may use CDS for a variety of
reasons, including to offset or insure against risk in their fixed-
income portfolios, to take positions in bonds or in segments of the
debt market as represented by an index, or to take positions on the
volatility in credit spreads during times of economic uncertainty.
    Growth in the CDS market has coincided with a significant rise
in the types and number of entities participating in the CDS market.
CDS were initially created to meet the demand of banking
institutions looking to hedge and diversify the credit risk
attendant to their lending activities. However, financial
institutions such as insurance companies, pension funds, securities
firms, and hedge funds have entered the CDS market.
    \3\ See generally actions referenced in note 1, supra.
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    The Commission's authority over the 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.\4\ 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
temporary conditional exemptions from certain requirements of the
Exchange Act.
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    \4\ 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 provides a number of benefits, by helping to
promote efficiency and reduce risk in the CDS market and among its
participants, contributing generally to the goal of market stability,
and by requiring maintenance of records of CDS transactions that would
aid the Commission's efforts to prevent and detect fraud and other
abusive market practices.\5\
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    \5\ See generally actions referenced in note 1, supra.
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    Earlier this year, the Commission granted temporary conditional
exemptions to ICE Trust U.S. LLC (``ICE Trust'') and certain related
parties to permit ICE Trust to clear and settle CDS transactions.\6\
Those exemptions are scheduled to expire on December 7, 2009. ICE Trust
has requested that the Commission extend the exemptions, and expand
them to address activities in connection with ICE Trust clearing CDS
transactions of its members' customers (in addition to clearing CDS
transactions of members and their affiliates, as permitted by the
current exemption).\7\
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    \6\ For purposes of this Order, ``Cleared CDS'' means a credit
default swap that is submitted (or offered, purchased, or sold on
terms providing for submission) to ICE Trust, that is offered only
to, purchased only by, and sold only to 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: (i) The reference entity, the issuer of the
reference security, or the reference security is one of the
following: (A) An entity reporting under the Exchange Act, providing
Securities Act Rule 144A(d)(4) information, or about which financial
information is otherwise publicly available; (B) a foreign private
issuer whose securities are listed outside the United States and
that has its principal trading market outside the United States; (C)
a foreign sovereign debt security; (D) an asset-backed security, as
defined in Regulation AB, issued in a registered transaction with
publicly available distribution reports; or (E) an asset-backed
security issued or guaranteed by the Federal National Mortgage
Association (``Fannie Mae''), the Federal Home Loan Mortgage
Corporation (``Freddie Mac'') or the Government National Mortgage
Association (``Ginnie Mae''); or (ii) 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
(i). 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 4, supra.
    \7\ See Letter from Kevin McClear, ICE Trust, to Elizabeth
Murphy, Secretary, Commission, Dec. 4, 2009 (``December 2009
request'').
     Market participants have committed to achieve customer access
to CDS clearing by December 15, 2009. See Letter from dealers and
buy-side institutions to Federal Reserve Bank of New York (Jun. 2,
2009) (http://www.newyorkfed.org/newsevents/news/markets/2009/
060209letter.pdf) (``It is our goal to achieve buy-side access to
CDS clearing (through either direct CCP membership or customer
clearing) with customer initial margin segregation and portability
of customer transactions no later than December 15, 2009.'').
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    Based on the facts presented and the representations made on behalf
of ICE Trust,\8\ and for the reasons discussed in this Order, and
subject to certain conditions, the Commission is extending the
exemption granted in the March ICE Trust Order, and is expanding it to
accommodate customer clearing. Specifically, the Commission is
extending the temporary ICE Trust conditional exemption from clearing
agency registration 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 is extending the temporary exemption
of eligible contract participants and others from certain Exchange Act
requirements with respect to non-excluded CDS cleared by ICE Trust. In
addition, this order conditionally exempts on a temporary basis ICE
Trust clearing members from broker-dealer registration requirements and
related requirements in connection with using ICE Trust to clear CDS
transactions of their customers. The Commission further is extending
the temporary exemption of ICE Trust and certain of its clearing
members from the registration requirements of Sections 5 and 6 of the
Exchange Act solely in connection with the calculation of mark-to-
market prices for non-excluded CDS cleared by ICE Trust. These
exemptions are temporary and will expire on March 7, 2010.
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    \8\ See December 2009 request. The exemptions we are granting
today are based on all of the representations made in the December
2009 request on behalf of ICE Trust, which incorporate
representations made on behalf of ICE Trust as part of the request
that preceded our earlier relief in connection with CDS clearing by
ICE Trust. 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 that
previously had been cleared pursuant to the exemptions would remain
unchanged, but no new positions could be established pursuant to the
exemptions until all of the underlying representations were again
accurate.
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II. Discussion

A. Description of ICE Trust's Activities to Date and Proposed Customer
Clearing Activities

    ICE Trust's request for an extension of its current temporary
exemptions and for an expansion of those exemptions to accommodate
clearing of customer CDS transactions describes how ICE Trust has
cleared CDS to date and how the proposed arrangements for central
clearing of customer CDS transactions would operate.\9\ The request
also makes representations about the safeguards associated with those
arrangements, as described below.\10\
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    \9\ See December 2009 request, supra note 7. The description in
this Order of ICE Trust's proposed activities also is based on the
provisions of ICE Trust's rules.
    \10\ ICE Trust has represented that there have been no material
changes to the representations made in the letter that preceded the
relief we initially granted to it, apart from the proposal to clear
customer CDS transactions, and ICE Trust has incorporated the
representations made in its earlier letter into the current request
for relief.
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1. ICE Trust CDS Clearing Activity to Date
    ICE Trust has cleared the proprietary index CDS transactions of its
clearing members since March 9, 2009, through acceptance and novation
of those transactions.\11\ As of October 30, 2009, ICE Trust had
cleared approximately $2.64 trillion notional amount of CDS contracts
based on indices of securities. ICE Trust intends in the near future to
also clear single-name CDS contracts based on individual reference
entities or securities.
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    \11\ ICE Trust novates those cleared proprietary CDS
transactions by becoming the seller of credit protection to the
clearing member that is the buyer under the CDS, and the buyer of
credit protection from the clearing member that is the seller under
the CDS. ICE Trust collects initial and mark-to-market margin to
secure each clearing member's obligations to ICE Trust under the
cleared transactions, and ICE Trust has established a guaranty fund
to provide additional financial protection in the case of clearing
member default.
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    In clearing CDS transactions, ICE Trust has made use of procedures,
described in the initial request for relief, whereby it has
periodically required participants to execute certain CDS trades at the
applicable end-of-day settlement price to enhance the reliability of
end-of-day settlement

prices submitted as part of the daily mark-to-market process.\12\ ICE
Trust represents that it wishes to continue periodically requiring
clearing members to execute certain CDS trades in this manner, and has
requested the extension of the applicable relief.
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    \12\ In particular, as part of this mark-to-market process, ICE
Trust periodically requires clearing members to execute certain CDS
trades at the price where the prices submitted by clearing members
cross. ICE Trust requires these trades on 30 random days during any
year and at the end of each quarter.
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2. Proposed Activity Clearing CDS Transactions of Members' Clients
    ICE Trust has proposed a ``Non-Member Framework'' for clearing the
CDS transactions of its members' clients. Under this framework, client
positions could be submitted to ICE Trust for clearing in one of two
ways. First, under the ``bilateral model,'' clients could execute a CDS
transaction directly with a clearing member (acting in a principal
capacity), followed by the clearing member submitting a trade to ICE
Trust with terms corresponding to the client-member trade; if the
latter trade is accepted by ICE Trust,\13\ two positions would be
created within ICE Trust--a Client Position of the clearing member that
mirrors the transaction between the client and the clearing member, and
an offsetting House Position of the clearing member.\14\
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    \13\ ICE Trust will accept all CDS that meet the standards set
forth in its rules, unless it determines not to accept the
transaction for risk management reasons.
    \14\ ``Client Positions'' are cleared CDS transactions between
ICE Trust and the clearing member that are offset or mirrored on a
back-to-back basis by CDS transactions between the clearing member
and the client. ``House Positions'' are all other cleared CDS
transactions of a member, or affiliate, and ICE Trust.
     ICE Trust would not have market exposure in connection with
that transaction because it would have two offsetting positions with
the clearing member.
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    Alternatively, under the ``prime broker'' or ``designated clearing
member'' (or ``DCM'') model, a client could agree to a CDS transaction
with an ICE Trust clearing member (``executing dealer'') other than the
member that clears the client's transactions. Then, pursuant to a give-
up or similar agreement, the clearing member (as prime broker) and the
executing dealer would enter into a trade that is submitted to ICE
Trust for clearing, and the clearing member and the client would
simultaneously enter into a trade.\15\ The net result would be that the
client's clearing member and the client would be counterparties to one
transaction, the clearing member would have a Client Position with ICE
Trust, and the executing dealer would have a House Position with ICE
Trust.\16\
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    \15\ ICE Trust expects that, initially, client transactions
likely will be submitted for clearing using the DCM model. These
transactions will be subject to DCM Standard Terms, published by ICE
Trust, that will provide procedures and timing requirements for
submitting transactions to clearing. ICE Trust expects that the
bilateral model will be used initially for back-loading of existing
transactions into central clearing.
    \16\ As with the bilateral model, ICE Trust would not have
market exposure in connection with the cleared transaction. In this
situation the clearing member's Client Position with ICE Trust would
offset the executing dealer's House Position with ICE Trust.
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    ICE Trust has no rule requiring an executing dealer to be a
clearing member. ICE Trust Clearing Rule 314, moreover, requires that
ICE Trust ensure that there shall be open access to its clearing system
for all execution venues and trade processing platforms.\17\
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    \17\ ICE Trust Clearing Rule 314. Based on market feedback, ICE
Trust anticipates that, initially, executing dealers will be
Clearing Members. ICE Trust does not prohibit an executing dealer
that is not a Clearing Member from having a trade submitted for
clearance at ICE Trust through the Clearing Member. However,
currently none of the ``authorized trade processing platforms''
permit, as an operational matter, such an arrangement. ICE Trust
Clearing Rules, however, do provide for open access to its clearing
system for all execution venues and trade processing platforms.
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    ICE Trust expects that transactions under the DCM model will be
submitted to ICE Trust through one or more ``authorized trade
processing platforms'' that will facilitate the affirmation of the
trade terms by the client, executing dealer and DCM, as well as the
electronic submission of the affirmed trade to ICE Trust for
clearing.\18\ ICE Trust also expects that the platform would submit, to
the relevant parties, notice of ICE Trust's acceptance or rejection of
the trade. Authorized trade processing platforms may provide additional
back-office or similar services to clearing members or clients. ICE
Trust expects to enter into arrangements to accept transactions from
multiple authorized trade processing platforms.\19\
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    \18\ Under this approach, for example, when a client and
executing dealer agree to the terms of a transaction (including that
the transaction should be submitted to ICE Trust for clearing), the
executing dealer will submit the trade terms to the authorized trade
processing platform, which will forward those terms to the client
for affirmation. Once the client has affirmed the trade, the
platform will forward those terms to the DCM designated by the
client for affirmation. Once all three parties have affirmed the
transaction, it will be submitted to ICE Trust for clearing. ICE
Trust will determine whether to accept or reject the submitted trade
in accordance with its risk management policies and procedures.
    \19\ ICE Trust states that it has committed to ensure that there
will be open access to ICE Trust's clearing system for platforms
that meet ICE Trust's qualifications and criteria to provide the
necessary services.
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    Under the framework for clearing client transactions, ICE Trust
would have no direct relationship with, or liability to, clients. To
facilitate the transfer or liquidation of client-member transactions in
the event of clearing member default, however, clearing members would
pledge to ICE Trust the clearing members' rights under the client-
member transactions and their rights to related margin, to secure the
clearing members' obligations to ICE Trust under the related client
positions, and the clearing member's obligations to other clients under
other client-member transactions.
    The cleared CDS transaction between the clearing member and its
client will be documented pursuant to a negotiated International Swaps
and Derivatives Association (``ISDA'') master agreement between those
parties, supplemented by a standard annex approved by ICE Trust. This
standard annex would treat these cleared client-member CDS transactions
differently from other derivatives transactions between those parties:
it would make the cleared CDS transactions subject to separate ICE
Trust margin requirements, it would incorporate a standard definition
of clearing member default (based on a determination by ICE Trust), and
it would specify procedures for remedies in the case of clearing member
default. As discussed below, under the standard annex the client could
also agree that certain default portability rules would apply.\20\
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    \20\ See part II.A.4.c, infra.
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3. Framework for Collection and Protection of Client Margin
    ICE Trust states that the Non-Member Framework is intended to
protect clients from default by their clearing members, particularly
with regard to their initial margin. Also, the Non-Member Framework,
and central clearing of CDS generally, is intended to enhance the
financial stability of CDS markets as a whole.\21\
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    \21\ ICE Trust states that it will implement a program to
monitor for its clearing members' compliance with this segregation
framework.
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a. Margin Requirements for Clearing Members and Clients
    ICE Trust rules will require clearing members to collect initial
and variation margin from clients for CDS transactions cleared by ICE
Trust, in an amount at least equal to the amount of margin ICE Trust
would require on a gross basis for the related Client Positions.
Clearing members would be able to collect additional margin from
customers beyond what ICE Trust rules require.\22\
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    \22\ As discussed below, this Order sets forth conditions
intended to protect all of the margin that clearing members collect
from their clients, including this type of ``additional'' margin.

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    Clearing members will be permitted to calculate the initial margin
collected from individual clients on a net basis, across all of the CDS
transactions of that customer that are cleared through ICE Trust.
Clearing members, however, would not be permitted to net across
multiple clients cleared through ICE Trust. This required ``ICE Gross
Margin'' that a clearing member collects from a client must be pledged
by the client in favor of the clearing member, and must not be subject
to liens or other encumbrances in favor of third parties.
    Under ICE Trust rules, clearing members must post the ICE Gross
Margin they collect from clients to ICE Trust, as custodian, promptly
upon receipt, and it is expected that clearing members would transfer
this margin on the business day of receipt.\23\ Prior to posting, the
clearing member must maintain that ICE Gross Margin in a segregated
client omnibus account or in an individual segregated client account,
on its own books or on the books of a custodian, pursuant to which the
clearing member would receive the margin in an agency or custodial
capacity.
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    \23\ ICE Trust states, however, that this may not be feasible
when the clearing member receives the client margin toward the end
of the business day.
    Clearing members and clients may agree that the clearing member
will post with ICE Trust a different type of collateral than what
the client posts with ICE Trust, and that the collateral posted with
ICE Trust will become the client's property. Thus, for example, a
client and clearing member may agree that cash collateral that the
client posts to the clearing member may be invested in U.S. Treasury
securities, and posted to ICE Trust as such.
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    ICE Trust will determine a net initial margin requirement for each
clearing member with regard to the cleared CDS positions of all of the
member's clients. Clearing members could use collateral posted by
clients to satisfy this ``ICE Net Margin'' obligation.\24\
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    \24\ Clearing members also may initially satisfy this obligation
with their proprietary assets, pending receipt of required margin
from their clients.
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b. Treatment of Client Margin Required Pursuant to ICE Trust Rules
    Clearing members must post all the margin they collect from
customers pursuant to ICE Trust requirements--both the ICE Net Margin
and the remainder of the margin that clearing members collect from
their clients pursuant to ICE Trust rules--to the Custodial Client
Omnibus Margin Account \25\ that would be maintained at ICE Trust or a
subcustodian.
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    \25\ The ``Custodial Client Omnibus Margin Account'' is one or
more accounts maintained by or on behalf of ICE Trust ``with respect
to a Participant for the purposes of holding on an omnibus basis
margin of Non-Participant Parties posted to that Participant in
respect of their respective Minimum ICE Trust Required Initial
Margin and Participant Excess Margin requirements, as applicable.''
ICE Trust rules state that ICE Trust may establish a separate
account or subaccount with respect to a portion of the Custodial
Client Omnibus Margin Account corresponding to the Net Client
Omnibus Margin Amount.
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    The Custodial Client Omnibus Margin Account will be held for the
benefit of all clients of the relevant clearing member (or for the
clearing member as agent or custodian on behalf of such clients), and
will be segregated from other assets of the clearing member (including
assets in its proprietary ``House Account''). The Custodial Client
Omnibus Margin Account will consist of a cash collateral subaccount for
cash margin and a custody subaccount for securities collateral. ICE
Trust will maintain title to cash in the cash collateral subaccount
(ICE Trust, however, will be obligated to return the cash as required
for the benefit of the relevant client or of the clearing member as the
client's agency or custodian), and ICE Trust will hold assets in the
custody subaccount as custodian (subject to a security interest in
favor of the clearing member or ICE Trust as applicable). Assets in the
Custodial Client Omnibus Margin Account may be invested in a range of
investments as permitted by ICE Trust's Custodial Asset Policies,\26\
and the clearing member and its client may agree how the return on
those investments may be distributed between them. ICE Trust rules will
require clearing members to maintain records of the identity of the
clients, the margin they post, the transfer of those assets to the
Custodial Client Omnibus Margin Account and the use of that margin.
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    \26\ ICE Trust states that these generally include assets of the
type allowed under CFTC Rule 1.25. However, a narrower range of
assets is acceptable margin for satisfying the net margin
requirement. This includes only cash in specified currencies and G-7
government debt for initial margin, and only cash for mark-to-market
margin.
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c. Treatment of additional margin that clearing members collect from
clients beyond ICE Trust requirements
    Clearing members may collect margin from clients, in connection
with Cleared CDS transactions, in excess of the margin that ICE Trust
rules require they collect. ICE Trust permits this ``additional''
margin to be posted to the Custodial Client Omnibus Margin Account, but
does not require that it be posted to that account. Under the
conditions of this Order's temporary exemption from certain broker-
dealer related requirements of the Exchange Act, however, such
``additional'' margin must be posted either to the Custodial Client
Omnibus Margin Account, or else to a third-party custodian that is
unaffiliated with the clearing member.\27\ The temporary exemption from
those broker-dealer related requirements is unavailable to any clearing
member that fails to segregate customer collateral in that manner.
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    \27\ See Part II.E, infra.
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d. Treatment of Variation Margin
    ICE Trust states that the amount of variation margin that must be
provided to a client, or by a client, will be determined daily for that
client's portfolio based on ICE Trust's end-of-day settlement price
determinations. ICE Trust further states that in the event that ICE
Trust owes variation margin to a clearing member in respect of client
positions that have moved in the client's favor, the standard annex
would provide that the clearing member has a corresponding obligation
to provide variation margin in favor of clients.\28\
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    \28\ Over the duration of this temporary exemption, the staff
intends to evaluate the protections afforded to clients' mark-to-
market profits associated with Cleared CDS positions, and to
consider the potential benefits of requiring clearing members to
segregate clients' variation margin in connection with Cleared CDS
positions.
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4. Default and Portability Rules
a. Termination Amounts
    In the event a client-member transaction is terminated due to
clearing member default, termination amounts owed by a client on CDS
transactions cleared by ICE Trust would not be netted against
termination amounts owed with respect to the client's other trades with
that clearing member. This is intended to facilitate portability of
positions.
    Moreover, in the event of member default, ICE Trust would undertake
a close-out process that separately would calculate net termination
with respect to the closeout of the clearing member's House Positions
and its Client Positions. ICE Trust would not undertake this process,
however, in the event that the defaulting clearing member's receiver
(such as the Federal Deposit Insurance Corporation or similar
authority) transfers the relevant positions to another non-defaulting
entity in accordance with applicable law.
    The rules generally would not permit netting between a clearing
member's Client Positions and House Positions; however, ICE Trust would
offset any amount that the clearing member owes to ICE Trust in respect
of Client Positions against any amount that ICE Trust owes to the
clearing member in respect of House Positions.
    If a clearing member default is due to a default resulting from a
client's position, ICE Trust may use the margin

posted to the clearing member's Custodial Client Omnibus Margin Account
up to the amount of the ICE Net Margin requirement.\29\ ICE Trust will
not be able to access the remainder of the assets of a non-defaulting
client in the account in amounts above the net margin requirement.\30\
The Commission notes that, as a result of these rules, clients of a
clearing member are subject to the risk of loss resulting from the
default of another client of that clearing member, up to the amount of
the clearing member's net margin requirement.
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    \29\ ICE Trust cannot use a client's positions in this account
if the clearing member's default was the result of its proprietary
activities, rather than the result of a default resulting from a
client's position.
    In the event of a clearing member's default resulting from a
Client Position, net losses to ICE Trust would be paid from the
following sources in order: (i) Any margin of the defaulting client
held in the Custodial Client Omnibus Margin Account, to the extent
of that client's obligations to the clearing member; (ii) amounts
received from clients under their client-member transactions; (iii)
the defaulting clearing member's house margin; (iv) the defaulting
clearing member's contribution to the guaranty fund; (v) the
defaulting clearing member's Custodial Client Omnibus Margin Account
up to the amount of the net margin requirement; and (vi) other
guaranty fund contributions. ICE Trust would not need to apply these
assets to the extent it can close out or replace the defaulting
clearing member's transactions without loss to ICE Trust.
    \30\ ICE Trust, however, could apply all of the margin that a
defaulting client has posted into the account.
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b. Pre-Default Portability
    ICE Trust rules require clearing members to agree to the transfer
of client-member transactions and related positions upon client
request, provided that the client obtains a new clearing member willing
to accept the positions. In connection with that transfer, ICE Trust
would move related margin between the Custodial Client Omnibus Margin
Accounts of the two clearing members.
c. Post-Default Portability
    If a client agrees to the application of the default rules set
forth in the standard annex, it would consent that, in the event of the
clearing member's default, ICE Trust may transfer client-member
transactions to a new clearing member, or otherwise establish
replacement transactions.\31\ The client also would agree not to
exercise its rights to terminate during the transfer period.\32\
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    \31\ Under the standard annex, only the client--and not the
clearing member--can elect as to whether the default portability
rules will apply to the cleared transaction.
    If the client does not agree to the use of the default
portability rules, then the customer could apply the liquidation
procedures discussed below in part II.A.4.d upon the clearing
member's default.
    \32\ The transfer period will be limited to three business days
or fewer.
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    If the clearing member is in default, ICE Trust rules would permit
ICE Trust to transfer, or arrange for the transfer of, the defaulting
clearing member's client positions and related transactions and margin
to a new clearing member. Alternatively, ICE Trust could terminate the
existing transactions and establish new positions with the new clearing
member. ICE Trust may attempt to transfer some or all of the client-
member transactions. Also, ICE Trust may (but would not be obligated
to) take into account client prearrangements for the use of one or more
``backup'' clearing members to which their transactions would be
transferred in the event their primary clearing member defaults.
d. Liquidation Procedures
    If ICE Trust is unable to transfer or terminate and replace client-
member transactions during the transfer period, the client may
terminate the client-member transactions as provided by the terms of
the agreement.\33\ ICE Trust then would determine the close-out price
for the client positions and the client-member transaction.
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    \33\ The client alternatively may opt out of the liquidation
procedures, in which case the client-member transactions also will
be terminated.
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    If a client owes the clearing member with respect to the cleared
CDS transactions, the client's margin in the Custodial Client Omnibus
Margin Account will be applied to satisfy that obligation, and
thereafter would be available to pay amounts owed to ICE Trust in
connection with the related client positions and other clients in
respect of their client-member transactions. Conversely, clients owed
by the clearing member on a net basis will have a claim for that
amount, together with their pro rata share of margin being used to
satisfy the ICE Net Margin Requirement.\34\
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    \34\ Clients will have available, in respect of their Net
Termination Claims, an amount equal to the sum of: (i) The remaining
amount of the ICE Net Margin Requirement after application by ICE
Trust together with any net amounts paid by ICE Trust in respect of
the termination of Client Positions, plus (ii) any termination
amounts paid by Clients that is not applied by ICE Trust, plus (iii)
the amount of any client's excess margin applied to its obligations.
If these proceeds are insufficient to pay all Net Termination
Claims, clients will share in the proceeds pro rata, based on their
respective claims.
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    Clients will be separately entitled to the return of their
remaining excess margin in the Custodial Client Omnibus Margin Account,
except to the extent the margin is applied to satisfy the client's
obligation to the clearing member.\35\ Clients will share in the assets
in the Custodial Client Omnibus Margin Account in proportion of their
claims, but will not be entitled to the return of specific assets in
that account.
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    \35\ The Standard Annex provides that if the clearing member is
in default and the Client owes a net termination payable, amounts
the client owes to the clearing member cannot be netted with amounts
the clearing member owes to the Client in respect of any non-cleared
Client position. Funds that the client owes to the clearing member
in respect of this net termination payable secure the clearing
member's obligations in favor of ICE Trust and as such will be paid
directly to ICE Trust. Conversely, where the client has a net
termination claim against the clearing member, the client may net
the amount owed to the client against amounts owed by the client in
respect of a non-cleared position.
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5. Other Clearing Member Requirements Related to Customer Clearing
    ICE Trust states that before offering the Non-Member Framework, it
will adopt a requirement that clearing members subject to the framework
are regulated by: (i) A signatory to the International Organization of
Securities Commissions (``IOSCO'') Multilateral Memorandum of
Understanding Concerning Consultation and Cooperation and the Exchange
of Information, or (ii) a signatory to a bilateral arrangement with the
Commission for enforcement cooperation.

B. Extended Temporary Conditional Exemption From Clearing Agency
Registration Requirement

    On March 6, 2009, in connection with its efforts to facilitate the
establishment of one or more central counterparties (``CCP'') for
Cleared CDS, the Commission issued the March ICE Trust Order,
conditionally exempting ICE Trust from clearing agency registration
under Section 17A of the Exchange Act on a temporary basis. Subject to
the conditions in that order, ICE Trust is permitted to act as a CCP
for Cleared CDS by novating trades of non-excluded CDS that are
securities and generating money and settlement obligations for
participants without having to register with the Commission as a
clearing agency. The March ICE Trust Order expires on December 7, 2009.
Pursuant to its authority under Section 36 of the Exchange Act,\36\ for
the reasons described herein, the Commission is

extending the exemption granted in that Order until March 7, 2010.
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    \36\ 15 U.S.C. 78mm. 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.
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    In the March ICE Trust order, the Commission recognized the need to
ensure the prompt establishment of ICE Trust as a CCP for CDS
transactions. The Commission also recognized the need to ensure that
important elements of Section 17A of the Exchange Act, which sets forth
the framework for the regulation and operation of the U.S. clearance
and settlement system for securities, apply to the non-excluded CDS
market. Accordingly, the temporary exemption in the March ICE Trust
Order was subject to a number of conditions designed to enable
Commission staff to monitor ICE Trust's clearance and settlement of CDS
transactions.\37\ Moreover, the temporary exemption in that order in
part was based on ICE Trust's representation that it met the standards
set forth in the Committee on Payment and Settlement Systems (``CPSS'')
and IOSCO report entitled: Recommendation for Central Counterparties
(``RCCP'').\38\ 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 funds and monitor its users' trading.
This framework is generally consistent with the requirements of Section
17A of the Exchange Act.
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    \37\ See Securities Exchange Act Release No. 59527 (Mar. 6,
2009), 74 FR 10791 (Mar. 12, 2009).
    \38\ 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 Federal Reserve Board, and the Commodity Futures
Trading Commission.
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    The Commission believes that continuing to facilitate the central
clearing of CDS transactions--including customer CDS transactions--
through a temporary conditional exemption from Section 17A would
provide important risk management and systemic benefits by avoiding an
interruption in those CCP clearance and settlement services. Any
interruption in CCP clearance and settlement services for CDS
transactions would eliminate in the future the benefits ICE Trust
provides to the non-excluded CDS market during the exemptive period.
Accordingly, and consistent with our findings in the March ICE Trust
Order, we find pursuant to Section 36 of the Exchange Act that it is
necessary and appropriate in the public interest and is consistent with
the protection of investors for the Commission to extend, until March
7, 2010, the relief provided from the clearing agency registration
requirements of Section 17A by the March ICE Trust Order.
    Our action today balances the aim of facilitating ICE Trust's
continued service as a CCP for non-excluded CDS transactions with
ensuring that important elements of Commission oversight are applied to
the non-excluded CDS market. The continued use of temporary exemptions
will permit the Commission to continue to develop direct experience
with the non-excluded CDS market. During the extended exemptive period,
the Commission will continue to monitor closely the impact of the CCPs
on the CDS market. In particular, the Commission will seek to assure
itself that ICE Trust does not act in an 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.
    This temporary extension of the March ICE Trust Order also is
designed to assure that--as represented in the request on behalf of ICE
Trust--information will continue to be available to market participants
about the terms of the CDS cleared by ICE Trust, the creditworthiness
of ICE Trust or any guarantor, and the clearance and settlement process
for the CDS.\39\ The Commission believes continued operation of ICE
Trust consistent with the conditions of this Order will facilitate the
availability to market participants of information that should enable
them to make better informed investment decisions and better value and
evaluate their Cleared CDS and counterparty exposures relative to a
market for CDS that is not centrally cleared.
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    \39\ The Commission believes 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 evaluate appropriately the risks relating to a
particular investment and make more informed investment decisions.
See generally 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.
---------------------------------------------------------------------------

    This temporary extension of the March ICE Trust Order is subject to
a number of conditions that are designed to enable Commission staff to
continue to monitor ICE Trust's clearance and settlement of CDS
transactions and help reduce risk in the CDS market. These conditions
require that ICE Trust: (i) Make available on its Web site its annual
audited financial statements; (ii) preserve records related to the
conduct of its Cleared CDS clearance and settlement services for at
least five years (in an easily accessible place for the first two
years); (iii) provide information relating to its Cleared CDS clearance
and settlement services to the Commission and provide access to the
Commission to conduct on-site inspections of facilities, records and
personnel related to its Cleared CDS clearance and settlement services;
(iv) notify the Commission about material disciplinary actions taken
against any of its members utilizing its Cleared CDS clearance and
settlement services, and about the involuntary termination of the
membership of an entity that is utilizing ICE Trust's Cleared CDS
clearance and settlement services; (v) provide the Commission with
changes to rules, procedures, 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 \40\ and its
annual audited financial statements prepared by independent audit
personnel; and (vii) report all significant systems outages to the
Commission.
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    \40\ 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 temporary extension of the March ICE Trust Order
is conditioned on ICE Trust, 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 ICE Trust may
establish to calculate mark-to-market margin requirements for ICE Trust
clearing members; and (ii) any other pricing or valuation information
with respect to Cleared CDS as is published or distributed by ICE
Trust. The Commission believes this is an appropriate condition for ICE
Trust's temporary continued exemption from registration as a clearing
agency.
    As a CCP, ICE Trust collects and processes information about CDS
transactions, prices, and positions from all of its participants. With
this information, a CCP calculates and disseminates 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. Extended Temporary Conditional Exemption From Exchange Registration
Requirements

    When we initially provided exemptions in connection with CDS
clearing by ICE Trust, we granted a temporary conditional exemption to
ICE Trust from the requirements of Sections 5 and 6 of the Exchange
Act, and the rules and regulations thereunder, in connection with ICE
Trust's calculation of mark-to-market prices for open positions in
Cleared CDS. We also temporarily exempted ICE Trust participants from
the prohibitions of Section 5 to the extent that they use ICE Trust to
effect or report any transaction in Cleared CDS in connection with ICE
Trust's calculation of mark-to-market prices for open positions in
Cleared CDS. Section 5 of the Exchange Act contains certain
restrictions relating to the registration of national securities
exchanges,\41\ while Section 6 provides the procedures for registering
as a national securities exchange.\42\
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    \41\ In particular, Section 5 states:
    It shall be unlawful for any broker, dealer, or exchange,
directly or indirectly, to make use of the mails or any means or
instrumentality of interstate commerce for the purpose of using any
facility of an exchange * * * to effect any transaction in a
security, or to report any such transactions, unless such exchange
(1) is registered as a national securities exchange under section 6
of [the Exchange Act], or (2) is exempted from such registration * *
* by reason of the limited volume of transactions effected on such
exchange * * *.
    15 U.S.C. 78e.
    \42\ 15 U.S.C. 78f. Section 6 of the Exchange Act also sets
forth various requirements to which a national securities exchange
is subject.
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    We granted these temporary exemptions to facilitate the
establishment of ICE Trust's end-of-day settlement price process. ICE
Trust had represented that in connection with its clearing and risk
management process it would calculate an end-of-day settlement price
for each Cleared CDS in which an ICE Trust participant has a cleared
position, based on prices submitted by the participants. ICE Trust
stated that as part of this mark-to-market process, it periodically
would require participants to execute certain CDS trades at the
applicable end-of-day settlement price, to help ensure that the prices
that the participants submit reflect their assessment of the value of
each open position in Cleared CDS, thereby reducing risk by helping ICE
Trust to impose appropriate margin requirements.
    As part of its current request, ICE Trust has stated that since it
has commenced clearing operations for Cleared CDS, it has periodically
required ICE Trust clearing members to execute certain CDS trades at
the applicable end-of-day settlement price. ICE Trust further
represents that it wishes to continue periodically requiring clearing
members to execute certain CDS trades in this manner.
    As discussed above, we have found in general that it is necessary
or appropriate in the public interest, and is consistent with the
protection of investors, to facilitate continued CDS clearing by ICE
Trust. Consistent with that finding--and in reliance on ICE Trust's
representation that the end-of-day settlement pricing process,
including the periodically required trading, is integral to its risk
management--we further find that it is necessary or appropriate in the
public interest, and is consistent with the protection of investors
that we exercise our authority under Section 36 of the Exchange Act to
extend, until March 7, 2010, ICE Trust's temporary exemption from
Sections 5 and 6 of the Exchange Act in connection with its calculation
of mark-to-market prices for open positions in Cleared CDS, and ICE
Trust clearing members' temporary exemption from Section 5 with respect
to such trading activity.\43\
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    \43\ We are making a technical modification to this exemption so
it refers to ICE Trust's clearing members rather than ``ICE Trust
Participants.'' The latter defined term was used in our earlier
Order consistent with the scope of that Order, and the term no
longer is necessary given the expansion of our exemptive relief to
accommodate customer clearing by ICE Trust. See note 46, infra.
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    The temporary exemption for ICE Trust will continue to be subject
to three conditions. First, ICE Trust must report the following
information with respect to its calculation of mark-to-market prices
for Cleared CDS to the Commission within 30 days of the end of each
quarter, and preserve such reports during the life of the enterprise
and of any successor enterprise:
     The total dollar volume of transactions executed during
the quarter, broken down by reference entity, security, or index; and
     The total unit volume and/or notional amount executed
during the quarter, broken down by reference entity, security, or
index.
    Reporting of this information will assist the Commission in
carrying out its responsibility to supervise and regulate the
securities markets.
    Second, ICE Trust must establish and maintain adequate safeguards
and procedures to protect participants' confidential trading
information. Such safeguards and procedures shall include: (a) Limiting
access to the confidential trading information of participants to those
employees of ICE Trust who are operating the system or responsible for
its compliance with this exemption or any other applicable rules; and
(b) establishing and maintaining standards controlling employees of ICE
Trust trading for their own accounts. ICE Trust must establish and
maintain adequate oversight procedures to ensure that the safeguards
and procedures established pursuant to this condition are followed.
This condition is designed to prevent any misuse of ICE Trust clearing
member trading information that may be available to ICE Trust in
connection with the daily marking-to-market process of open positions
in Cleared CDS. This should strengthen confidence in ICE Trust as a CCP
for CDS, thus promoting participation in central clearing of CDS.
    Third, ICE Trust must comply with the conditions to the temporary
exemption from Section 17A of the Exchange Act in this Order, given
that this exemption is granted in the context of our goal of continuing
to facilitate ICE Trust's ability to act as a CCP for non-excluded CDS,
and given ICE Trust's representation that the end-of-day settlement
pricing process, including the periodically required trading, is
integral to its risk management.

D. Modified and Extended Temporary Conditional General Exemption for
ICE Trust and Certain Eligible Contract Participants

    As we recognized when we initially provided temporary exemptions in
connection with CDS clearing by ICE Trust, 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. We also recognized that it is important that
the antifraud provisions of the Exchange Act apply to transactions in
non-excluded CDS, particularly given that OTC transactions subject to
individual negotiation that qualify as security-based swap

agreements already are subject to those provisions.\44\
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    \44\ 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.
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    As a result, we concluded 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. Consistent with that conclusion, we
temporarily exempted ICE Trust, and certain members and eligible
contract participants from a number of Exchange Act requirements, while
excluding certain enforcement-related and other provisions from the
scope of the exemption.
    We believe that continuing to facilitate the central clearing of
CDS transactions by ICE Trust through this type of temporary exemption
will provide important risk management benefits and systemic benefits.
We also believe that facilitating the central clearing of customer CDS
transactions, subject to the conditions in this Order, will provide an
opportunity for the customers of ICE Trust clearing members to control
counterparty risk.
    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 March 7, 2010 from certain
requirements under the Exchange Act. To account for the additional
relief we are granting in connection with customer CDS clearing by ICE
Trust, we are modifying the parameters of the relief we previously
granted.
    As revised, this temporary exemption applies to ICE Trust and to
any eligible contract participants \45\--including any ICE Trust
clearing member \46\--other than: Eligible contract participants that
are self-regulatory organizations; or eligible contract participants
that are registered brokers or dealers.\47\
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    \45\ 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.
    \46\ The prior exemption specifically applied to any ``ICE Trust
Participant,'' which was defined to exclude those members that
submitted customer CDS trades for clearing. In light of our
expansion of the ICE Trust relief to accommodate customer clearing,
we no longer are limiting the exemption in that way, and are not
using the ``ICE Trust Participant'' definition.
    \47\ A separate temporary exemption addresses the Cleared CDS
activities of registered broker-dealers. See Part II.F, 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.
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    As before, under this temporary exemption, and solely with respect
to Cleared CDS, those persons generally are exempt from the provisions
of the Exchange Act and the rules and regulations thereunder that do
not apply to security-based swap agreements. Thus, those persons would
still be subject to those Exchange Act requirements that explicitly are
applicable in connection with security-based swap agreements.\48\ 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.\49\ 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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    \48\ See note 44, supra.
    \49\ Thus, for example, the Commission retains the ability to
investigate potential violations and bring enforcement actions in
the federal courts as well as in administrative proceedings, and to
seek the full panoply of remedies available in such cases.
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    In light of the temporary conditional exemption--discussed below--
that we are granting from certain Exchange Act requirements related to
broker-dealers, we are modifying this temporary exemption by excluding
from its scope the broker-dealer registration requirements of Section
15(a)(1),\50\ and the other requirements of the Exchange Act, including
paragraphs (4) and (6) of Section 15(b),\51\ and the rules and
regulations thereunder that apply to a broker or dealer that is not
registered with the Commission.
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    \50\ 15 U.S.C. 78o(a)(1).
    \51\ Exchange Act Sections 15(b)(4) and 15(b)(6), 15 U.S.C.
78o(b)(4) and (b)(6), grant the Commission authority to take action
against broker-dealers and associated persons in certain situations.
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    Consistent with our earlier exemptions, and for the same reasons,
this temporary exemption also does not extend to: the exchange
registration requirements of Exchange Act Sections 5 and 6; \52\ the
clearing agency registration requirements of Exchange Act Section 17A;
the requirements of Exchange Act Sections 12, 13, 14, 15(d), and 16;
\53\ or certain provisions related to government securities.\54\
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    \52\ These are subject to a separate temporary class exemption.
See note 1, 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).
    This Order also includes a separate temporary exemption from
Sections 5 and 6 in connection with the mark-to-market process of
ICE Trust, discussed above, at note 41 and accompanying text.
    \53\ 15 U.S.C. 78l, 78m, 78n, 78o(d), 78p. Eligible contract
participants and other persons instead should refer to the interim
final temporary rules issued by the Commission. See note 1, supra.
    \54\ 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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    To take advantage of this temporary exemption from Exchange Act
requirements, moreover, ICE Trust clearing members must be in material
compliance with ICE Trust rules. Also, to help promote compliance with
the exemption--discussed below--that we are granting from certain
Exchange Act requirements specifically related to broker-dealers, this
more general Exchange Act exemption is conditioned on any ICE Trust
clearing member that participates in the clearing of Cleared CDS
transactions on behalf of other persons annually providing a
certification to ICE Trust that attests to whether the clearing member
is relying on the temporary exemption from broker-dealer related
requirements described below.\55\
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    \55\ This condition requiring clearing members to convey
information to ICE Trust as a repository for regulators, and other
conditions of this Order that require clearing members or others to
convey information (e.g., an audit report related to the clearing
member's compliance with exemptive conditions) to ICE Trust, does
not impose upon ICE Trust any independent duty to audit or otherwise
review that information. These conditions also do not impose on ICE
Trust any independent fiduciary or other obligation to any customer
of a clearing member.

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E. Conditional Temporary Exemption from Broker-Dealer Related
Requirements for Certain Clearing Members of ICE Trust and Others

    The March ICE Trust Order did not address clearing of customer
transactions by ICE Trust, and that order thus did not provide ICE
Trust clearing members that hold customer collateral in connection with
cleared CDS transactions with an exemption from broker-dealer
requirements under the Exchange Act. Absent an exception or exemption,
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.\56\ Moreover, certain other
requirements of the Exchange Act could apply to such persons, as
broker-dealers, regardless of whether they are registered with the
Commission.
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    \56\ Section 15(a)(1) 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 excludes
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
securities intermediaries that receive or hold funds and securities on
behalf of others to comply with standards that safeguard the interests
of their customers. For example, a registered broker-dealer is required
to segregate assets held on behalf of customers from proprietary assets
because segregation will assist customers in recovering assets in the
event the broker-dealer fails. To the extent that funds and securities
are not segregated, they could be used by an intermediary to fund its
own business and could be attached to satisfy debts of the intermediary
if it were to fail.\57\ Moreover, the maintenance of adequate capital
and liquidity protects customers, CCPs and other market participants.
Adequate books and records (including both transactional and position
records) are necessary to facilitate day to day operations as well as
to help resolve situations in which an intermediary fails and either a
regulatory authority or receiver 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.
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    \57\ In the context of the December 15 commitment for customer
CDS clearing, an ISDA buy-side/sell-side committee issued a report
extensively analyzing the legal issues associated with segregating
the collateral that customers post with members. See Distilled
Report (Jul. 13, 2009) (http: //www.newyorkfed.org/markets/
Distilled_Report.pdf); Full Report (Jun. 30, 2009) (http://
www.newyorkfed.org/markets/Full_Report.pdf); see also Press
Release, ``New York Fed Welcomes CDS Central Counterparty Legal
Analysis'' (Jul. 13, 2009) (http://www.newyorkfed.org/newsevents/
news/markets/2009/an090713.html) (```Segregation and portability are
key elements in building robust central counterparties. We requested
the analysis because market participants were not making enough
progress to analyze and address these buy-side issues. This is a
good first step and, as we move the OTC derivatives market to
central clearing, we will work to strengthen the regulatory and
legal environment for buy-side clearing,' said William C. Dudley,
president of the New York Fed.'').
---------------------------------------------------------------------------

    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 customer CDS transactions, which would cause
customers to lose the counterparty risk benefits of central clearing,
and would lessen the systemic risk reduction benefits associated with
central clearing.
    Those factors argue in favor of flexibility in applying the
requirements of the Exchange Act to these intermediaries, conditioned
on requiring the intermediaries to take reasonable steps to help
increase the likelihood that their customers would be protected in the
event the intermediary became insolvent, even if those safeguards are
as not as strong as those required of registered broker-dealers. This
requires us to balance the goals of promoting the central clearing of
customer CDS transactions against the goal of protecting customers, and
to be mindful that these conditions cannot provide legal certainty that
customer collateral in fact would be protected in the event an ICE
Trust clearing member were to become insolvent.
    In granting the temporary exemption, we also are relying on ICE
Trust's representation that before offering the Non-Member Framework,
it will adopt a requirement that non-U.S. clearing members subject to
the framework are regulated by: (i) A signatory to the IOSCO
Multilateral Memorandum of Understanding Concerning Consultation and
Cooperation and the Exchange of Information, or (ii) a signatory to a
bilateral arrangement with the Commission for enforcement
cooperation.\58\
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    \58\ Non-U.S. clearing members that do not meet these criteria
would not be eligible to rely on this exemption.
---------------------------------------------------------------------------

    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 March 7, 2010,
with respect to certain Exchange Act requirements related to broker-
dealers. This exemption is available to ICE Trust clearing members
other than registered broker-dealers. This exemption also is available
to any eligible contract participant, other than a registered broker-
dealer, that does not receive or hold funds or securities for the
purpose of purchasing, selling, clearing, settling, or holding Cleared
CDS positions for other persons.\59\ Solely with respect to Cleared
CDS, those persons temporarily will be exempt from the broker-dealer
registration requirements of Section 15(a)(1), and the other
requirements of the Exchange Act (other than paragraphs (4) and (6) of
Section 15(b)) \60\ and the

rules and regulations thereunder that apply to a broker or dealer that
is not registered with the Commission.
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    \59\ In some circumstances, an eligible contract participant
that does not hold customer funds or securities nonetheless may act
as a dealer in securities transactions, or as a broker (such as an
inter-dealer broker).
     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 under the
analysis used for determining whether certain persons would 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).
    \60\ As noted above, see note 51, supra, Exchange Act Sections
15(b)(4) and 15(b)(6) grant the Commission authority to take action
against broker-dealers and associated persons in certain situations.
Accordingly, while this exemption from broker-dealer requirements
generally extends to persons that act as broker-dealers in the
market for Cleared CDS (potentially including inter-dealer brokers
that do not hold funds or securities for others), such persons may
be subject to actions under Sections 15(b)(4) and (b)(6) of the
Exchange Act.
    In addition, such persons 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.
---------------------------------------------------------------------------

    For all ICE Trust clearing members--regardless of whether they
receive or hold customer collateral in connection with Cleared CDS--
this temporary exemption is conditioned on the clearing member being in
material compliance with ICE Trust's rules, as well as on the clearing
member being in compliance with 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.
    For ICE Trust clearing members that receive or hold funds or
securities of U.S. persons (or who receive or hold funds or securities
of any person in the case of a U.S. clearing member)--other than for an
affiliate that controls, is controlled by, or is under common control
with the clearing member--in connection with Cleared CDS, this
temporary exemption further is conditioned on the customer not being a
natural person, and on the clearing member providing certain risk
disclosures to the customer.\61\
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    \61\ The clearing member must disclose that it is not regulated
by the Commission and that U.S. broker-dealer segregation
requirements and protections under the Securities Investor
Protection Act will not apply, that the insolvency law of the
applicable jurisdiction may affect the customer's ability to recover
funds and securities or the speed of any such recovery, and (if
applicable) that non-U.S. members may be subject to an insolvency
regime that is materially different from that applicable to U.S.
persons.
---------------------------------------------------------------------------

    Also, those clearing members that receive or hold such customer
funds or securities must transfer those funds and securities, as
promptly as practicable after receipt, to either the Custodial Client
Omnibus Margin Account at ICE Trust \62\ or an account held by a third-
party custodian, as described below.
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    \62\ Cash collateral transferred to ICE Trust may be invested in
``Eligible Custodial Assets,'' as defined in ICE Trust's ``Custodial
Asset Policies.'' See note 26 supra and accompanying text. Also,
collateral transferred to ICE Trust may be held at a subcustodian.
---------------------------------------------------------------------------

    Collateral that is held at a third-party custodian, moreover, must
either be held: (1) In the name of the customer, subject to an
agreement in which the customer, the clearing member and the custodian
are parties, acknowledging that the assets held therein are customer
assets used to collateralize obligations of the customer to the
clearing member, and that the assets held in the account may not
otherwise be pledged or rehypothecated by the clearing member or the
custodian; or (2) in an omnibus account for which the clearing member
maintains daily records as to the amount owing to each customer, and
which is subject to an agreement between the clearing member and the
custodian specifying: (i) That all account assets are held for the
exclusive benefit of the clearing member's customers and are being kept
separate from any other accounts that the clearing member maintains
with the custodian; (ii) that the account assets may not be used as
security for a loan to the clearing member by the custodian, and shall
be subject to no right, charge, security interest, lien, or claim of
any kind in favor of the custodian or any person claiming through the
custodian; and (iii) that the assets may not otherwise be pledged or
rehypothecated by the clearing member or the custodian.\63\ Under
either approach, the third-party custodian cannot be affiliated with
the clearing member.\64\ Moreover, if the third-party custodian is a
U.S. entity, it must be a bank (as that term is defined in Section
3(a)(6) of the Exchange Act), have total regulatory capital of at least
$1 billion,\65\ and have been approved to engage in a trust business by
an appropriate regulatory agency. A custodian that is not a U.S. entity
must have regulatory capital of at least $1 billion,\66\ and must
provide the clearing member, the customer and ICE Trust with a legal
opinion providing that the account assets are subject to regulatory
requirements in the custodian's home jurisdiction designed to protect,
and provide for the prompt return of, custodial assets in the event of
the custodian's insolvency, and that the assets held in that account
reasonably could be expected to be legally separate from the clearing
member's assets in the event of the clearing member's insolvency. Also,
cash collateral posted with the third-party custodian may be invested
in other assets, consistent with the investment policies that govern
collateral held at ICE Trust.\67\ Finally, a clearing member that uses
a third-party custodian to hold customer collateral must notify ICE
Trust of that use.
---------------------------------------------------------------------------

    \63\ We do not contemplate that either of these approaches
involving the use of a third-party custodian would interfere with
the ability of a clearing member and its customer to agree as to how
any return or losses earned on those assets would be distributed
between the clearing member and its customer.
    Also, the restriction in both approaches on the clearing
member's and the custodian's ability to rehypothecate these customer
funds and securities does not preclude that collateral from being
transferred to ICE Trust as necessary to satisfy variation margin
requirements in connection with the customer's CDS position.
    \64\ For purposes of the Order, an ``affiliated person'' of a
clearing member mean any person who directly or indirectly controls
a clearing member or any person who is directly or indirectly
controlled by or under common control with a clearing member;
ownership of 10 percent or more of an entity's common stock will be
deemed prima facie control of that entity. This standard is
analogous to the standard used to identify affiliated persons of
broker-dealers under Exchange Act Rule 15c3-3(a)(13), 17 CFR
240.15c3-3(a)(13).
    \65\ In particular, custodians that are U.S. entities must have
total capital, as calculated to meet the applicable requirements
imposed by the entity's appropriate regulatory agency, of at least
$1 billion. The term ``appropriate regulatory agency'' is defined in
Section 3(a)(34) of the Exchange Act, 15 U.S.C. 78c(a)(34)).
    \66\ Custodians that are non-U.S. entities, particularly must
have total capital, as calculated to meet the applicable
requirements imposed by the foreign financial regulatory authority
of at least $1 billion. The term ``foreign financial regulatory
authority'' is defined in Section 3(a)(52) of the Exchange Act, 15
U.S.C. 78c(a)(52)).
    \67\ See note 26, supra.
---------------------------------------------------------------------------

    To the extent there is any delay in the clearing member
transferring such funds and securities to ICE Trust or a third-party
custodian,\68\ the clearing member must effectively segregate the
collateral in a way that, pursuant to applicable law, could reasonably
be expected to effectively protect the collateral from the clearing
member's creditors. The clearing member may not permit customers to
``opt out'' of such segregation even if applicable regulations or laws
otherwise would permit such ``opt out.''
---------------------------------------------------------------------------

    \68\ This provision is intended to address short-term technology
or operational issues. ICE Trust rules require collateral to be
transferred promptly on receipt, with the expectation that margin
would be transferred on the same business day.
---------------------------------------------------------------------------

    To facilitate compliance with the segregation practices that are
required as a condition to this temporary exemption, the clearing
member also must annually provide ICE Trust with a self-assessment that
it is in compliance with the requirements, along with a report by the
clearing member's independent third-party auditor that attests to that
assessment. The report must be dated the same date as the clearing
member's annual audit report (but may be separate from it), and must be
produced in accordance with the standards that the auditor follows in
auditing the clearing member's financial statements.
    Finally, to support these segregation practices and enhance the
ability to detect and deter circumstances in which clearing members
fail to segregate customer collateral consistent with the exemption,
this temporary exemption is conditioned on the clearing member

agreeing to provide the Commission with access to information related
to Cleared CDS transactions.\69\ In particular, the clearing member
would provide the Commission (upon request and subject to agreements
reached between the Commission or the U.S. Government and an
appropriate foreign securities authority \70\) with information or
documents within the clearing member's possession, custody, or control,
as well as testimony of clearing member personnel and assistance in
taking the evidence of other persons, that relates to Cleared CDS
transactions. If, after the clearing member has exercised its best
efforts to provide this information (including requesting the
appropriate governmental body and, if legally necessary, its
customers), the clearing member nonetheless is prohibited from
providing the information by applicable foreign law or regulations,
this temporary exemption shall not longer be available to the clearing
member.\71\
---------------------------------------------------------------------------

    \69\ This requirement for clearing members to make information
available to the Commission is consistent with a requirement in
Exchange Act Rule 15a-6, which exempts certain foreign broker-
dealers from registering with the Commission. See Exchange Act Rule
15a-6(a)(3)(i)(B).
    \70\ The term ``foreign securities authority'' is defined in
Section 3(a)(50) of the Exchange Act, 15 U.S.C. 78c(a)(50).
    \71\ Consistent with the discussion above as to the loss of an
exemption due to an underlying representation no longer being
accurate, see note 8, supra, if a clearing member were to lose the
benefit of this exemption due to the failure to provide information
to the Commission as the result of a prohibition by an applicable
foreign law or regulation, the legal status of existing open
positions in non-excluded CDS associated with those clearing members
and its customers would remain unchanged, but the clearing member
could not establish new CDS positions pursuant to the exemption.
---------------------------------------------------------------------------

    We recognize that requiring clearing members that receive or hold
customer collateral to satisfy these conditions will not guarantee that
a customer would receive the return of its collateral in the event of a
clearing member's insolvency, particularly in light of the fact-
specific nature of the insolvency process and the multiplicity of
insolvency regimes that may apply to ICE Trust's members clearing for
U.S. customers. We believe, however, that these are reasonable steps
for increasing the likelihood that customers would be able to access
collateral in such an insolvency event. We also recognize that these
customers generally may be expected to be sophisticated market
participants that should be able to weigh the risks associated with
entering into arrangements with intermediaries that are not registered
broker-dealers, particularly in light of the disclosure required as a
condition to this temporary exemption.

F. Extended Temporary General Exemption for Certain Registered Broker-
Dealers

    When we initially provided exemptions in connection with CDS
clearing by ICE Trust, we granted limited exemptions from Exchange Act
requirements to registered broker-dealers in connection with their
activities involving Cleared CDS. In crafting these temporary
exemptions, we balanced the need to avoid creating disincentives to the
prompt use of CCPs against the critical role that certain broker-
dealers play in promoting market integrity and protecting customers
(including broker-dealer customers that are not involved with CDS
transactions).
    In light of the risk management and systemic benefits in continuing
to facilitate CDS clearing by ICE Trust through targeted exemptions to
registered broker-dealers, the Commission finds pursuant to Section 36
of the Exchange Act that it is necessary or appropriate in the public
interest and is consistent with the protection of investors to exercise
its authority to extend this temporary registered broker-dealer
exemption from certain Exchange Act requirements until March 7,
2010.\72\
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    \72\ The temporary exemptions addressed above--with regard to
ICE Trust, certain clearing members and certain eligible contract
participants--are not available to persons that are registered as
broker-dealers with the Commission (other than those that are notice
registered pursuant to Exchange Act Section 15(b)(11)). 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).
---------------------------------------------------------------------------

    Consistent with the temporary exemptions discussed above, and
solely with respect to Cleared CDS, we are temporarily exempting
registered broker-dealers from provisions of the Exchange Act and the
rules and regulations thereunder that do not apply to security-based
swap agreements. As discussed above, we are not excluding registered
broker-dealers from Exchange Act provisions that explicitly apply in
connection with security-based swap agreements or from related
enforcement authority provisions.\73\ As above, and for similar
reasons, we are not exempting registered broker-dealers 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.\74\
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    \73\ See notes 44 and 49, 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.
    \74\ 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),\75\ regarding the unlawful extension of credit by broker-dealers;
(2) Section 15(c)(3),\76\ regarding the use of unlawful or manipulative
devices by broker-dealers; (3) Section 17(a),\77\ regarding broker-
dealer obligations to make, keep and furnish information; (4) Section
17(b),\78\ regarding broker-dealer records subject to examination; (5)
Regulation T,\79\ 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.\80\
Registered broker-dealers must 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.\81\
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    \75\ 15 U.S.C. 78g(c).
    \76\ 15 U.S.C. 78o(c)(3).
    \77\ 15 U.S.C. 78q(a).
    \78\ 15 U.S.C. 78q(b).
    \79\ 12 CFR 220.1 et seq.
    \80\ Solely for purposes of this temporary exemption, in
addition to the general requirements under the referenced Exchange
Act sections, registered broker-dealers shall only be subject to the
enumerated rules under the referenced Exchange Act sections.
    \81\ Indeed, Congress directed the Commission to promulgate
broker-dealer financial responsibility rules, including rules
relating to custody, the use of customer securities, the use of
customers' deposits or credit balances, and the establishment of
minimum financial requirements.
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G. Solicitation of Comments

    When we granted our initial exemptions relief in connection with
CDS clearing by ICE Trust, we solicited comment on all aspects of the
exemptions, and specifically requested

comment as to the duration of the temporary exemptions, the
appropriateness of the exemptive conditions, and whether ICE Trust
should be required to register as a clearing agency under the Exchange
Act. We received no comments in response to this request.
    In connection with this Order extending the exemptions granted in
connection with CDS clearing by ICE Trust, and expanding that relief to
accommodate central clearing of customer CDS transactions, we reiterate
our request for comments on all aspects of the exemptions. We
particularly request comments as to the relief we are granting in
connection with customer clearing, including whether ICE Trust members
that clear customer CDS transactions should be required to register as
broker-dealers, whether the conditions that we have placed on the
relief adequately protect customer funds and securities from the threat
posed by clearing member insolvency, whether additional conditions or
requirements are appropriate to promote compliance with the
requirements of the exemptions, and what, if any, additional conditions
would be appropriate. We also particularly request comment on whether
additional conditions, such as a segregation requirement, are necessary
to protect customers' mark-to-market profits associated with Cleared
CDS transactions that are held at clearing members; in that regard,
commenters particularly are invited to discuss whether, in practice,
there are impediments to customers receiving such mark-to-market
profits from their clearing members promptly after they are earned.
    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 S7-05-09 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 S7-05-09. 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 March 7, 2010:
    (a) Exemption from Section 17A of the Exchange Act.
    ICE Trust U.S. LLC (``ICE Trust'') 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 (f)(1) of this Order),
subject to the following conditions:
    (1) ICE Trust shall make available on its Web site its annual
audited financial statements.
    (2) ICE Trust shall keep and preserve at least one copy of all
documents, including all correspondence, memoranda, papers, books,
notices, accounts, and other such records as shall be made or received
by it relating to its Cleared CDS clearance and settlement services.
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) ICE Trust shall supply information and periodic reports
relating to its Cleared CDS clearance and settlement services as may be
reasonably requested by the Commission, and shall provide access to the
Commission to conduct on-site inspections of all facilities (including
automated systems and systems environment), records, and personnel
related to ICE Trust's Cleared CDS clearance and settlement services.
    (4) ICE Trust shall notify the Commission, on a monthly basis, of
any material disciplinary actions taken against any of its members
utilizing its Cleared CDS clearance and settlement services, including
the denial of services, fines, or penalties. ICE Trust shall notify the
Commission promptly when ICE Trust involuntarily terminates the
membership of an entity that is utilizing ICE Trust's Cleared CDS
clearance and settlement services. Both notifications shall describe
the facts and circumstances that led to ICE Trust's disciplinary
action.
    (5) ICE Trust shall notify the Commission of all changes to rules,
procedures, and any other material events affecting its Cleared CDS
clearance and settlement services, including its fee schedule and
changes to risk management practices, the day before effectiveness or
implementation of such rule changes or, in exigent circumstances, as
promptly as reasonably practicable under the circumstances. All such
rule changes will be posted on ICE Trust's Web site. Such notifications
will not be deemed rule filings that require Commission approval.
    (6) ICE Trust shall 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. ICE Trust shall provide the Commission (beginning in
its first year of operation) with its annual audited financial
statements prepared by independent audit personnel.
    (7) ICE Trust shall report all significant systems outages to the
Commission. If it appears that the outage may extend for 30 minutes or
longer, ICE Trust shall report the systems outage immediately. If it
appears that the outage will be resolved in less than 30 minutes, ICE
Trust shall report the systems outage within a reasonable time after
the outage has been resolved.
    (8) ICE Trust, 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 ICE Trust may establish to
calculate mark-to-market margin requirements for ICE Trust clearing
members; and (ii) any other pricing or valuation information with
respect to Cleared CDS as is published or distributed by ICE Trust.
(b) Exemption from Sections 5 and 6 of the Exchange Act
    (1) ICE Trust shall be exempt from the requirements of Sections 5
and 6 of the Exchange Act and the rules and regulations thereunder in
connection with its calculation of mark-to-market prices for open
positions in Cleared CDS, subject to the following conditions:
    (i) ICE Trust shall report the following information with respect
to the calculation of mark-to-market prices for Cleared CDS to the
Commission within 30 days of the end of each quarter, and

preserve such reports during the life of the enterprise and of any
successor enterprise:
    (A) The total dollar volume of transactions executed during the
quarter, broken down by reference entity, security, or index; and
    (B) The total unit volume and/or notional amount executed during
the quarter, broken down by reference entity, security, or index;
    (ii) ICE Trust shall establish and maintain adequate safeguards and
procedures to protect clearing members' confidential trading
information. Such safeguards and procedures shall include:
    (A) Limiting access to the confidential trading information of
clearing members to those employees of ICE Trust who are operating the
system or responsible for its compliance with this exemption or any
other applicable rules; and
    (B) establishing and maintaining standards controlling employees of
ICE Trust trading for their own accounts. ICE Trust must establish and
maintain adequate oversight procedures to ensure that the safeguards
and procedures established pursuant to this condition are followed; and
    (iii) ICE Trust shall satisfy the conditions of the temporary
exemption from Section 17A of the Exchange Act set forth in paragraphs
(a)(1)--(8) of this Order.
    (2) Any ICE Trust clearing member shall be exempt from the
requirements of Section 5 of the Exchange Act to the extent such ICE
Trust clearing member uses any facility of ICE Trust to effect any
transaction in Cleared CDS, or to report any such transaction, in
connection with ICE Trust's clearance and risk management process for
Cleared CDS.
    (c) Exemption for ICE Trust, ICE Trust clearing members, and
certain eligible contract participants.
    (1) Persons eligible. The exemption in paragraph (c)(2) is
available to:
    (i) ICE Trust; 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)), including any ICE Trust clearing
member, other than:
    (A) 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
    (B) 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. Subject to the conditions specified in paragraph
(c)(3) of this subsection, 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 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
(c)(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) The broker-dealer registration requirements of Section
15(a)(1), and the other requirements of the Exchange Act (including
paragraphs (4) and (6) of Section 15(b)) and the rules and regulations
thereunder that apply to a broker or dealer that is not registered with
the Commission;
    (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)).
    (3) Conditions for ICE Trust clearing members.
    (i) Any ICE Trust clearing member relying on this exemption must be
in material compliance with the rules of ICE Trust.
    (ii) Any ICE Trust clearing member relying on this exemption that
participates in the clearing of Cleared CDS transactions on behalf of
other persons must annually provide a certification to ICE Trust that
attests to whether the clearing member is relying on the exemption from
broker-dealer related requirements set forth in paragraph (d) of this
Order.
    (d) Exemption from broker-dealer related requirements for ICE Trust
clearing members and certain eligible contract participants.
    (1) Persons eligible. The exemption in paragraph (d)(2) is
available to:
    (i) Any ICE Trust clearing member (other than one that is
registered as a broker or dealer under Section 15(b) of the Exchange
Act (other than paragraph (11) thereof)); and
    (ii) Any eligible contract participant that does not receive or
hold funds or securities for the purpose of purchasing, selling,
clearing, settling, or holding Cleared CDS positions for other persons
(other than one that is registered as a broker or dealer under Section
15(b) of the Exchange Act (other than paragraph (11) thereof)).
    (2) Scope of exemption. The persons described in paragraph (d)(1)
shall, solely with respect to Cleared CDS, be exempt from the broker-
dealer registration requirements of Section 15(a)(1) and the other
requirements of the Exchange Act (other than Sections 15(b)(4) and
15(b)(6)) and the rules and regulations thereunder that apply to a
broker or dealer that is not registered with the Commission, subject to
the conditions set forth in paragraph (d)(3) with respect to ICE Trust
clearing members.
    (3) Conditions for ICE Trust clearing members.
    (i) General condition for ICE Trust clearing members. An ICE Trust
clearing member relying on this exemption must be in material
compliance with the rules of ICE Trust, and also must be in material
compliance with 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.
    (ii) Additional conditions for ICE Trust clearing members that
receive or hold customer funds or securities. Any ICE Trust clearing
member that receives or holds funds or securities for the purpose of
purchasing, selling, clearing, settling, or holding Cleared CDS
positions for U.S. persons (or for any person if the clearing member is
a U.S. clearing member)--other than for an affiliate that controls, is
controlled by, or is under common control with the clearing member--
also shall comply with the following conditions with respect to such
activities:
    (A) The U.S. person (or any person if the clearing member is a U.S.
clearing member) for whom the clearing member

receives or holds such funds or securities shall not be natural
persons;
    (B) The clearing member shall disclose to such U.S. person (or to
any such person if the clearing member is a U.S. clearing member) that
the clearing member is not regulated by the Commission and that U.S.
broker-dealer segregation requirements and protections under the
Securities Investor Protection Act will not apply to any funds or
securities held by the clearing member, that the insolvency law of the
applicable jurisdiction may affect such persons' ability to recover
funds and securities, or the speed of any such recovery, in an
insolvency proceeding, and, if applicable, that non-U.S. clearing
members may be subject to an insolvency regime that is materially
different from that applicable to U.S. persons;
    (C) As promptly as practicable after receipt, the clearing member
shall transfer such funds and securities (other than those promptly
returned to such other person) to:
    (I) The clearing member's Custodial Client Omnibus Margin Account
at ICE Trust; or
    (II) an account held by a third-party custodian, subject to the
following requirements:
    (a) The funds and securities must be held either:
    (1) In the name of a customer, subject to an agreement to which the
customer, the clearing member and the custodian are parties,
acknowledging that the assets held therein are customer assets used to
collateralize obligations of the customer to the clearing member, and
that the assets held in that account may not otherwise be pledged or
rehypothecated by the clearing member or the custodian; or
    (2) in an omnibus account for which the clearing member maintains a
daily record as to the amount held in the account that is owed to each
customer, and which is subject to an agreement between the clearing
member and the custodian specifying that:
    (i) all assets in that account are held for the exclusive benefit
of the clearing member's customers and are being kept separate from any
other accounts maintained by the clearing member with the custodian;
    (ii) the assets held in that account shall at no time be used
directly or indirectly as security for a loan to the clearing member by
the custodian and shall be subject to no right, charge, security
interest, lien, or claim of any kind in favor of the custodian or any
person claiming through the custodian; and
    (iii) the assets held in that account may not otherwise be pledged
or rehypothecated by the clearing member or the custodian;
    (b) The custodian may not be an affiliated person of the clearing
member (as defined at paragraph (f)(2)); and
    (1) If the custodian is a U.S. entity, it must be a bank (as that
term is defined in section 3(a)(6) of the Exchange Act), have total
capital, as calculated to meet the applicable requirements imposed by
the entity's appropriate regulatory agency (as defined in section
3(a)(34) of the Exchange Act), of at least $1 billion, and have been
approved to engage in a trust business by its appropriate regulatory
agency;
    (2) if the custodian is not a U.S. entity, it must have total
capital, as calculated to meet the applicable requirements imposed by
the foreign financial regulatory authority (as defined in section
3(a)(52) of the Exchange Act) responsible for setting capital
requirements for the entity, equating to at least $1 billion, and
provide the clearing member, the customer and ICE Trust with a legal
opinion providing that the assets held in the account are subject to
regulatory requirements in the custodian's home jurisdiction designed
to protect, and provide for the prompt return of, custodial assets in
the event of the insolvency of the custodian, and that the assets held
in that account reasonably could be expected to be legally separate
from the clearing member's assets in the event of the clearing member's
insolvency;
    (c) such funds may be invested in Eligible Custodial Assets as that
term is defined in ICE Trust's Custodial Asset Policies; and
    (d) the clearing member must provide notice to ICE Trust that it is
using the third-party custodian to hold customer collateral.
    (D) To the extent there is any delay in transferring such funds and
securities to the third-parties identified in paragraph (C), the
clearing member shall effectively segregate the collateral in a way
that, pursuant to applicable law, is reasonably expected to effectively
protect such funds and securities from the clearing member's creditors.
The clearing member shall not permit such persons to ``opt out'' of
such segregation even if regulations or laws otherwise would permit
such ``opt out.''
    (E) The clearing member annually must provide ICE Trust with
    (I) an assessment by the clearing member that it is in compliance
with all the provisions of paragraphs (d)(3)(ii)(A) through (D) in
connection with such activities, and
    (II) a report by the clearing member's independent third-party
auditor that attests to, and reports on, the clearing member's
assessment described in paragraph (d)(3)(ii)(E)(I) and that is
    (a) dated as of the same date as, but which may be separate and
distinct from, the clearing member's annual audit report;
    (b) produced in accordance with the auditing standards followed by
the independent third party auditor in its audit of the clearing
member's financial statements.
    (F) The clearing member shall provide the Commission (upon request
or pursuant to agreements reached between the Commission or the U.S.
Government and any foreign securities authority (as defined in Section
3(a)(50) of the Exchange Act)) with any information or documents within
the possession, custody, or control of the clearing member, any
testimony of personnel of the clearing member, and any assistance in
taking the evidence of other persons, wherever located, that the
Commission requests and that relates to Cleared CDS transactions,
except that if, after the clearing member has exercised its best
efforts to provide the information, documents, testimony, or
assistance, including requesting the appropriate governmental body and,
if legally necessary, its customers (with respect to customer
information) to permit the clearing member to provide the information,
documents, testimony, or assistance to the Commission, the clearing
member is prohibited from providing this information, documents,
testimony, or assistance by applicable foreign law or regulations, then
this exemption shall not longer be available to the clearing member.
    (e) 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 (c)(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.
    (f) Definitions.
    (1) For purposes of this Order, the term ``Cleared CDS'' shall mean
a credit

default swap that is submitted (or offered, purchased, or sold on terms
providing for submission) to ICE Trust, that is offered only to,
purchased only by, and sold only to 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:
    (i) The reference entity, the issuer of the reference security, or
the reference security is one of the following:
    (A) an entity reporting under the Exchange Act, providing
Securities Act Rule 144A(d)(4) information, or about which financial
information is otherwise publicly available;
    (B) a foreign private issuer whose securities are listed outside
the United States and that has its principal trading market outside the
United States;
    (C) a foreign sovereign debt security;
    (D) an asset-backed security, as defined in Regulation AB, issued
in a registered transaction with publicly available distribution
reports; or
    (E) an asset-backed security issued or guaranteed by Fannie Mae,
Freddie Mac or Ginnie Mae; or
    (ii) 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).
    (2) For purposes of this Order, the term ``Affiliated Person of the
Clearing Member'' shall mean any person who directly or indirectly
controls a clearing member or any person who is directly or indirectly
controlled by or under common control with the clearing member.
Ownership of 10 percent or more of the common stock of the relevant
entity will be deemed prima facie control of that entity.

    December 4, 2009.

    By the Securities and Exchange Commission.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-29423 Filed 12-9-09; 8:45 am]

BILLING CODE 8011-01-P