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«SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 240 and 249 [Release No. 34-67286; File No. S7-44-10] RIN 3235-AK87 Process for Submissions for ...»

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 249

[Release No. 34-67286; File No. S7-44-10]

RIN 3235-AK87

Process for Submissions for Review of Security-Based Swaps for Mandatory Clearing and

Notice Filing Requirements for Clearing Agencies; Technical Amendments to Rule 19b-4

and Form 19b-4 Applicable to All Self-Regulatory Organizations

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

SUMMARY: In accordance with Section 763(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”), the Securities and Exchange Commission (“Commission”) is adopting rules under the Securities Exchange Act of 1934 (“Exchange Act”) to specify the process for a registered clearing agency’s submission for review of any securitybased swap, or any group, category, type or class of security-based swaps, that the clearing agency plans to accept for clearing, the manner of notice the clearing agency must provide to its members of such submission and the procedure by which the Commission may stay the requirement that a security-based swap is subject to mandatory clearing while the clearing of the security-based swap is reviewed. The Commission also is adopting a rule to specify that when a security-based swap is required to be cleared, the submission of the security-based swap for clearing must be for central clearing to a clearing agency that functions as a central counterparty.

In addition, the Commission is adopting rules to define and describe when notices of proposed changes to rules, procedures or operations are required to be filed by designated financial market utilities in accordance with Section 806(e) of Title VIII of the Dodd-Frank Act and to set forth the process for filing such notices with the Commission. Finally, the Commission is adopting rules to make conforming changes as required by the amendments to Section 19(b) of the Exchange Act contained in Section 916 of the Dodd-Frank Act.

DATES: Effective Dates: [INSERT DATE 30 DAYS AFTER PUBLICATION IN THE FEDERAL REGISTER] for §§240.19b-4(n), 19b­ 4(o), 3Ca-1, 3Ca-2 and the amendments to §§240.19b-4(a), (b), (i), (j), (k), (l) and (m).

December 10, 2012 for all amendments to Form 19b-4.

Compliance Dates: [INSERT DATE 30 DAYS AFTER PUBLICATION IN THE FEDERAL REGISTER] for §§240.19b-4(n), 3Ca-1, 3Ca-2 and the amendments to §§240.19b-4(a), (b), (i), (j), (k), (l) and (m).

December 10, 2012 for all amendments to Form 19b-4.

The compliance date for §240.19b-4(o) is discussed in th

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FOR FURTHER INFORMATION CONTACT: Catherine Moore, Senior Special Counsel, Kenneth Riitho, Special Counsel or Andrew Bernstein, Special Counsel, at (202) 551-5710;

Division of Trading and Markets, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION:

TABLE OF CONTENTS

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2. Current Clearing Practices in the Security-Based Swap Market 3. Views on Clearing Requirements for Security-Based Swaps 4. Overview of Statutory Requirements B. Analysis of Final Procedural Rules 1. Analysis of Final Rules Related to Security-Based Swap Submissions 2. Analysis of Final Rules Related to the Process for Staying a Clearing Requirement While the Clearing of the Security-Based Swap is Reviewed 3. Analysis of Final Rule Related to Preventing Evasion of the Clearing Requirement 4. Analysis of Final Rules Related to Advance Notices

V. REGULATORY FLEXIBILITY CERTIFICATION

A. Self-Regulatory Organizations B. Security-Based Swap Counterparties C. Certification

VI. STATUTORY AUTHORITY

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On July 21, 2010, the President signed the Dodd-Frank Act into law.1 The Dodd-Frank Act was enacted, among other reasons, to promote the financial stability of the United States by improving accountability and transparency in the financial system.2 Title VII and Title VIII of the Dodd-Frank Act, among other things, impose new requirements with respect to clearance and settlement systems.

Title VII of the Dodd-Frank Act (“Title VII”) provides the Commission and the Commodity Futures Trading Commission (“CFTC”) with authority to regulate certain over-the­ counter (“OTC”) derivatives in response to the recent financial crisis.3 The Dodd-Frank Act is 1 The Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. No. 111-203, H.R. 4173).

2 See Pub. L. No. 111-203, Preamble.

3 See, e.g., Report of the Senate Committee on Banking, Housing, and Urban Affairs regarding The Restoring American Financial Stability Act of 2010, S. Rep. No. 111-176 at 29 (2010) (stating that “[m]any factors led to the unraveling of this country’s financial sector and the government intervention to correct it, but a major contributor to the financial crisis was the unregulated [OTC] derivatives market.”)

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OTC derivatives market, which has grown exponentially in recent years. Title VII provides that the CFTC will regulate “swaps,” the Commission will regulate “security-based swaps,” and the CFTC and the Commission will jointly regulate “mixed swaps.”4 Title VII was designed to provide greater certainty that, wherever possible and appropriate, swap and security-based swap contracts formerly traded exclusively in the OTC market are centrally cleared.5 The swaps and security-based swaps markets traditionally have been characterized by privately negotiated transactions entered into by two counterparties, in 4 Section 712(d) of the Dodd-Frank Act provides that the Commission and the CFTC, in consultation with the Board of Governors of the Federal Reserve System (“Board”), shall further define the terms “swap,” “security-based swap,” “swap dealer,” “security-based swap dealer,” “major swap participant,” “major security-based swap participant,” “eligible contract participant,” and “security-based swap agreement.” The Commission and the CFTC jointly have proposed to further define the terms “swap,” “security-based swap,” and “security-based swap agreement.” See Further Definition of “Swap,” “Security-Based Swap,” and “Security-Based Swap Agreement”; Mixed Swaps;





Security-Based Swap Agreement Recordkeeping, Securities Act Release No. 9204, Securities Exchange Act Release No. 64372 (Apr. 29, 2011), 76 FR 29818 (May 23, 2011), corrected in Securities Act Release No. 9204A, Securities Exchange Act Release No. 64372A (June 1, 2011), 76 FR 32880 (June 7, 2011) (“Product Definition Proposing Release”). Further, the Commission and CFTC jointly have adopted rules to further define the terms “swap dealer,” “security-based swap dealer,” “major swap participant,” “major security-based swap participant,” and eligible contract participant,” See Further Definition of “Swap Dealer,” “Security-Based Swap Dealer,” “Major Swap Participant,” “Major Security-Based Swap Participant” and “Eligible Contract Participant”, Securities Exchange Act Release No. 66868 (Apr. 27, 2012), 77 FR 30596 (May 23, 2012).

Moreover, section 712(a)(8) of the Dodd-Frank Act provides that the Commission and the CFTC, after consultation with the Board, shall jointly promulgate such regulations regarding “mixed swaps” as may be necessary to carry out the purposes of Title VII. The Commission and the CFTC have jointly proposed such regulations. See Product Definition Proposing Release.

5 See, e.g., Report of the Senate Committee on Banking, Housing, and Urban Affairs regarding The Restoring American Financial Stability Act of 2010, S. Rep. No. 111-176 at 34 (stating that “[s]ome parts of the OTC market may not be suitable for clearing and exchange trading due to individual business needs of certain users. Those users should retain the ability to engage in customized, uncleared contracts while bringing in as much of the OTC market under the centrally cleared and exchange-traded framework as possible.”).

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based swaps was at the heart of Congressional reform of the derivatives markets in Title VII.7 Clearing agencies are broadly defined under the Exchange Act and undertake a variety of functions.8 One such function is to act as a central counterparty (“CCP”), which is an entity that interposes itself between the counterparties to a trade.9 For example, when a security-based swap contract between two counterparties that are members of a CCP is executed and submitted for clearing, it is typically replaced by two new contracts – separate contracts between the CCP and each of the two original counterparties. At that point, the original counterparties are no longer counterparties to each other. Instead, each acquires the CCP as its counterparty, and the 6 See, e.g., Financial Stability Board, Implementing OTC Derivatives Market Reforms (Oct.

25, 2010), available at:

http://www.financialstabilityboard.org/publications/r_101025.pdf.

7 As previously noted, the Dodd-Frank Act seeks to ensure that, wherever possible and appropriate, derivatives contracts formerly traded exclusively in the OTC market be cleared. See supra note 5; see also Letter from Christopher Dodd, Chairman, Committee on Banking, Housing and Urban Affairs, United States Senate and Blanche Lincoln, Chairman, Committee on Agriculture, Nutrition, and Forestry, United States Senate, to Barney Frank, Chairman, Financial Services Committee, United States House of Representatives and Colin Peterson, Chairman, Committee on Agriculture, United States House of Representatives (June 30, 2010) (on file with the United States Senate).

8 Section 3(a)(23)(A) of the Exchange Act defines the term “clearing agency” to mean any person who acts as an intermediary in making payments or deliveries or both in connection with transactions in securities or who provides facilities for the comparison of data regarding the terms of settlement of securities transactions, to reduce the number of settlements of securities transactions, or the allocation of securities settlement responsibilities. Such term also means any person, such as a securities depository, who acts as a custodian of securities in connection with a system for the central handling of securities whereby all securities of a particular class or series of any issuer deposited within the system are treated as fungible and may be transferred, loaned, or pledged by bookkeeping entry without physical delivery of securities certificates, or otherwise permits or facilitates the settlement of securities transactions or the hypothecation or lending of securities without physical delivery of securities certificates. 15 U.S.C.

78c(a)(23)(A).

9 See id. An entity that acts as a CCP for securities transactions is a clearing agency as defined in the Exchange Act and is required to register with the Commission.

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of the CCP.10 Structured and operated appropriately, CCPs may improve the management of counterparty risk and may provide additional benefits such as multilateral netting of trades.11 One key way in which the Dodd-Frank Act promotes clearing of such contracts is by requiring a process by which the Commission would determine whether a security-based swap is required to be cleared. Section 3C of the Exchange Act, as added by Section 763(a) of the DoddFrank Act (“Exchange Act Section 3C”),12 creates, among other things, a clearing requirement with respect to certain security-based swaps. Specifically, this section provides that “[i]t shall be unlawful for any person to engage in a security-based swap unless that person submits such security-based swap for clearing to a clearing agency that is registered under this Act or a clearing agency that is exempt from registration under this Act if the security-based swap is required to be cleared.”13 Exchange Act Section 3C requires the Commission to adopt rules for a 10 See Cecchetti, Gyntelberg and Hollanders, Central counterparties for over-the-counter

derivatives, BIS Quarterly Review, Sept. 2009, available at:

http://www.bis.org/publ/qtrpdf/r_qt0909f.pdf.

11 See id. at 46 (stating that the structure of a CCP “has three clear benefits. First, it improves the management of counterparty risk. Second, it allows the CCP to perform multilateral netting of exposures as well as payments. Third, it increases transparency by making information on market activity and exposures – both prices and quantities – available to regulators and the public”); see also Bank for International Settlements’ Committee on Payment and Settlement Systems and Technical Committee of the International Organization of Securities Commissions, Guidance on the application of the 2004 CPSS-IOSCO Recommendations for Central Counterparties to OTC derivatives CCPs: Consultative report, (May 2010), available at: http://www.bis.org/publ/cpss89.pdf.

12 15 U.S.C. 78c-3 et seq.

13 See 15 U.S.C. 78c-3(a)(1) (as added by Section 763(a) of the Dodd-Frank Act). The requirement that a security-based swap be cleared will stem from the determination to be made by the Commission. Such determination may be made in connection with the review of a clearing agency’s submission regarding a security-based swap, or any group, category, type or class of security-based swaps, that the clearing agency plans to accept for clearing. See 15 U.S.C. 78c-3(b)(2)(C)(ii) (as added by Section 763(a) of the DoddFrank Act) (“[t]he Commission shall... review each submission made under

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