The Securities and Exchange Commission today proposed rules that would provide certain clearing agencies with exemptions from the registration requirements of the Securities Act of 1933 and the Securities Exchange Act of 1934 for security-based swaps that they issue.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, which established a comprehensive framework for regulating the over-the-counter swaps markets, envisioned that certain security-based swaps would be cleared through a clearing agency. The proposed exemptions would facilitate the clearing of such security-based swaps.
A clearing agency generally acts as a middleman between the parties to a transaction, and when providing central counterparty services, assumes the risk should there be a default. When structured and operated appropriately, such a clearing agency can provide benefits such as improving the management of counterparty risk and reducing outstanding exposures through multilateral netting of trades.
The proposed rules would exempt transactions by clearing agencies in these security-based swaps from all provisions of the Securities Act, other than the Section 17(a) anti-fraud provisions, as well as exempt these security-based swaps from Exchange Act registration requirements and from the provisions of the Trust Indenture Act, provided certain conditions are met. Public comments on the proposed rules should be received by July 25, 2011.
On several previous occasions, the Commission has acted to facilitate clearing of certain credit default swaps by clearing agencies functioning as central counterparties. Among other things, the Commission previously adopted temporary rules that would exempt credit default swaps from these same registration and qualification requirements. The new proposed rules would create permanent exemptions that would cover these credit default swaps and the security-based swaps brought in through the Dodd-Frank Act and, as a result, supplant the temporary rules.
Because the current termination date for the temporary rules – July 16, 2011 – is expected to pass before the proposed exemptions are adopted, the Commission intends to extend the temporary rules in order to continue facilitating the clearing of certain credit default swaps by clearing agencies functioning as central counterparties.
The extension of these temporary rules is one part of a multi-step Commission effort to clarify the requirements that will apply to security-based swap transactions as of July 16 – the effective date of Title VII of the Dodd-Frank Act – and to provide appropriate temporary relief.
