Monday, July 04, 2011

SEC Extends Temporary Rules Exempting Credit Default Swaps Cleared by Central Counterparties until April 16, 2012

In order to allow central counterparties to clear eligible credit default swaps while the Commission completes the regulatory implementation of the derivatives provisions of Dodd-Frank, the SEC extended the expiration dates of Temporary Rules to April 16, 2012 or until the Commission adopts permanent exemptions for security-based swaps issued by certain clearing agencies. In January 2009, the SEC adopted the Temporary Rules, which exempt eligible credit default swaps issued or cleared by a central counterparty and offered and sold only to eligible contract participants from all provisions of the Securities Act, other than the anti-fraud provision, as well as from the registration requirements of the Exchange Act and from the provisions of the Trust Indenture Act.. In September 2009, the rules were extended until November 30, 2010. These are interim final temporary Rule 239T and a temporary amendment to Rule 146 under the Securities Act, interim final temporary Rules 12a-10T and 12h-1(h)T under the Exchange Act, and interim final temporary Rule 4d-11T under the Trust Indenture Act.

The Dodd-Frank Act was enacted on July 21, 2010, requiring that transactions in security-based swaps be cleared through a clearing agency that is either registered with the Commission or exempt from registration. Dodd-Frank directs the SEC to regulate clearing agencies for, and the clearing of, security-based swaps, which include credit default swaps. Extending the expiration dates in the Temporary Rules will continue to facilitate the operation of the central counterparties in clearing eligible credit default swaps as the SEC considers rules implementing the clearing provisions of Title VII, including any applicable permanent exemptions. In light of Dodd-Frank, the expiration dates were further extended until July 16, 2011.

Pursuant to Dodd-Frank the SEC has proposed exemptions under the Securities Act, the Exchange Act, and the Trust Indenture Act for security-based swaps issued by certain clearing agencies satisfying certain conditions. The Temporary Rules are an interim measure pending final action on the proposed permanent exemptions.

The implementation of Title VII is a substantial undertaking, said the SEC, and the Commission is working toward fulfilling its requirements in a thorough and deliberative manner that includes significant public input and coordination with other regulators. The SEC does not expect to complete the rulemaking the agency was directed to carry out under Title VII before July 16, 2011, the current termination date for the Temporary Rules. Due to the uncertainty of the timing regarding the adoption of final rules implementing the clearing provisions of Title VII, including any applicable permanent exemptions, the SEC believed that it was important that central counterparties continue to be able to clear eligible credit default swaps without concern that the Temporary Rules are unavailable. As such, the SEC determined that it is necessary and appropriate to extend the expiration dates in the Temporary Rules.

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