SEC Extends Temporary Exemptions Granted to Facilitate Central Clearing and Settlement of CDS


On September 14, 2009, the Securities and Exchange Commission (“SEC”) issued a release (the “Extension Release”) which extended the expiration dates of five interim final temporary rules (the “Interim Rules”) it had adopted in January 2009 under the Securities Act of 1933, as amended (the “Securities Act”), the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Trust Indenture Act of 1939, as amended, relating to credit default swaps (“CDS”).  The Interim Rules were adopted in connection with temporary exemptive orders issued by the SEC to foster the development and facilitate the operation of central clearing counterparties (“CCPs”) for eligible types of CDS.  Among other things, the Interim Rules temporarily (i) exempt from all provisions of the Securities Act (except the anti-fraud provisions) eligible CDS transactions that are offered and sold only to “eligible contract participants” (as defined in Section 1a(12) of the Commodities Exchange Act of 2000, as amended) and that are cleared by either a CCP satisfying specified conditions for exemption set forth in its exemptive order or a clearing agency registered under Section 17A of the Exchange Act; (ii) exempt any exchange that effects transactions in eligible CDS from the requirements of Sections 5 and 6 of the Exchange Act to register as a “national securities exchange” and (iii) exempt any broker or dealer that effects transactions on an exchange in eligible CDS from the requirements of Section 5 of the Exchange Act.

In the Extension Release, the SEC noted that, since the adoption of its Interim Rules, it had granted temporary exemptive orders to five CCPs to clear CDS.  Of those five, only one CCP had become actively engaged as a CCP clearing CDS transactions in the United States; the other CCPs had either suspended their efforts, had begun clearing CDS in Europe or continued to work with participants to become operational.  The SEC explained that the purpose of extending the Interim Rules was to allow the CCP that has begun operations to continue to clear and settle CDS transactions[1] and to enable other CCPs to begin operating in a manner contemplated by the exemptive orders, hence increasing competition among CCPs and reducing clearing fees.  The SEC also noted that the operation of CCPs, as facilitated by the existence of the Interim Rules, would enable it to provide oversight to the relevant CDS market through, among other things, the on-site inspection of facilities, records and personnel.

The Extension Release extended the expiration date of the Interim Rules from September 25, 2009 to November 30, 2010, during which period the SEC will continue monitoring the development and operation of CCPs in the CDS market, particularly in light of the evolving regulatory and legislative environment.

[1] The SEC pointed out that it believed that the operation of this CCP, ICE U.S. Trust LLC (“ICE Trust”), alone had contributed to increased transparency and the reduction of systemic risk in the CDS market.  According to its filing for the quarter ending on June 30, 2009, ICE Trust reported that it had processed more than 22,800 CDS transactions, hence reducing the net exposure on these trades from over $1.3 trillion to $168.5 billion by clearing the trades and netting positions.