Order Granting Conditional Exemptions Under the SecuritiesExchange Act of 1934 in Connection With Portfolio Margining of Swaps andSecurity-Based Swaps

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Federal Register / Vol. 77, No. 244 / Wednesday, December 19, 2012 / Notices
2-year period ending on the last day of
such 12-week rolling period; then:
(i) At the earlier of the next regularly
scheduled meeting or within four
months of the last day of such 12-week
rolling period, the Board, including a
majority of the Independent Directors:
(1) Will request and evaluate, and the
Fund will furnish, such information as
may be reasonably necessary to make an
informed determination of whether the
Plan should be continued or continued
after amendment;
(2) will determine whether
continuation, or continuation after
amendment, of the Plan is consistent
with the Fund’s investment objective(s)
and policies and in the best interests of
the Fund and its shareholders, after
considering the information in
condition 5(b)(i)(1) above; including,
without limitation:
(A) Whether the Plan is
accomplishing its purpose(s);
(B) the reasonably foreseeable
material effects of the Plan on the
Fund’s long-term total return in relation
to the market price and NAV of the
Fund’s common shares; and
(C) the Fund’s current distribution
rate, as described in condition 5(b)
above, compared with the Fund’s
average annual taxable income or total
return over the 2-year period, as
described in condition 5(b), or such
longer period as the Board deems
appropriate; and
(3) based upon that determination,
will approve or disapprove the
continuation, or continuation after
amendment, of the Plan; and
(ii) The Board will record the
information considered by it including
its consideration of the factors listed in
condition 5(b)(i)(2) above and the basis
for its approval or disapproval of the
continuation, or continuation after
amendment, of the Plan in its meeting
minutes, which must be made and
preserved for a period of not less than
six years from the date of such meeting,
the first two years in an easily accessible
place.
6. Public Offerings. The Fund will not
make a public offering of the Fund’s
common shares other than:
(a) A rights offering below NAV to
holders of the Fund’s common shares;
(b) an offering in connection with a
dividend reinvestment plan, merger,
consolidation, acquisition, spin off or
reorganization of the Fund; or
(c) an offering other than an offering
described in conditions 6(a) and 6(b)
above, provided that, with respect to
such other offering:
(i) The Fund’s annualized distribution
rate for the six months ending on the
last day of the month ended

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immediately prior to the most recent
distribution record date, expressed as a
percentage of NAV as of such date, is no
more than 1 percentage point greater
than the Fund’s average annual total
return for the 5-year period ending on
such date; and
(ii) the transmittal letter
accompanying any registration
statement filed with the Commission in
connection with such offering discloses
that the Fund has received an order
under section 19(b) to permit it to make
periodic distributions of long-term
capital gains with respect to its common
shares as frequently as twelve times
each year, and as frequently as
distributions are specified by or
determined in accordance with the
terms of any outstanding preferred
shares that such Fund may issue.
7. Amendments to Rule 19b–1. The
requested order will expire on the
effective date of any amendment to rule
19b–1 that provides relief permitting
certain closed-end investment
companies to make periodic
distributions of long-term capital gains
with respect to their outstanding
common shares as frequently as twelve
times each year.
For the Commission, by the Division of
Investment Management, under delegated
authority.
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–30548 Filed 12–18–12; 8:45 am]
BILLING CODE 8011–01–P

SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–68433; File No. S7–13–12]

Order Granting Conditional
Exemptions Under the Securities
Exchange Act of 1934 in Connection
With Portfolio Margining of Swaps and
Security-Based Swaps
December 14, 2012.

Securities and Exchange
Commission.
ACTION: Exemptive order; request for
comment.
AGENCY:

The Securities and Exchange
Commission (‘‘SEC’’ or ‘‘Commission’’)
is issuing an order granting conditional
exemptive relief from compliance with
certain provisions of the Securities
Exchange Act of 1934 (‘‘Exchange Act’’)
in connection with a program to
commingle and portfolio margin
customer positions in cleared credit
default swaps (‘‘CDS’’), which include
both swaps and security-based swaps, in
a segregated account established and

SUMMARY:

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maintained in accordance with Section
4d(f) of the Commodity Exchange Act
(‘‘CEA’’).
Effective Date: This exemptive
order is effective on December 19, 2012.
Comments Due Date: Comments must be
received on or before February 19, 2013.

DATES:

Comments may be
submitted, identified by File Number
S7–13–12, by any of the following
methods:

ADDRESSES:

Electronic Comments
• Use the Commission’s Internet
comment form (http://www.sec.gov/
rules/other.shtml); or
• Send an email to [email protected]. Please include File
Number S7–13–12 on the subject line;
or
• Use the Federal Rulemaking Portal
(http://www.regulations.gov). Follow the
instructions for submitting comments.
Paper Comments
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090. All submissions should
refer to File Number S7–13–12. This file
number should be included on the
subject line if email is used. To help us
process and review your comments
more efficiently, please use only one
method. The Commission will post all
comments on the Commission’s Internet
Web site (http://www.sec/gov/rules/
other.shtml). Comments are also
available for Web site viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE.,
Washington, DC 20549, on official
business days between the hours of
10:00 a.m. and 3:00 p.m. All comments
received will be posted without charge;
the Commission does not edit personal
identifying information from
submissions. You should only submit
information that you wish to make
publicly available.
FOR FURTHER INFORMATION CONTACT:

Emily Westerberg Russell, Senior
Special Counsel, Catherine Moore,
Senior Special Counsel, and Natasha Vij
Greiner, Special Counsel, at 202–551–
5550, Division of Trading and Markets,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–7010.
I. Introduction
On July 21, 2010, President Barack
Obama signed the Dodd-Frank Act into

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Federal Register / Vol. 77, No. 244 / Wednesday, December 19, 2012 / Notices

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law.1 Title VII of the Dodd-Frank Act
(‘‘Title VII’’) establishes a regulatory
regime applicable to the over-thecounter (‘‘OTC’’) derivatives markets.
Title VII provides the Commission and
the Commodity Futures Trading
Commission (‘‘CFTC’’) with tools to
oversee these markets.2 Under the
comprehensive framework established
in Title VII, the SEC is given regulatory
authority over security-based swaps,
and the CFTC is given regulatory
authority over swaps.3 The Dodd-Frank
Act amended the Exchange Act to
require, among other things, that
transactions in security-based swaps be
cleared through a clearing agency that is
registered with the Commission or that
is exempt from registration, if the
security-based swaps are of a type that
the Commission determines must be
cleared, unless an exception or
exemption from mandatory clearing
applies.4 The Dodd-Frank Act similarly
amended the CEA.5 In addition, the
Dodd-Frank Act provided the SEC and
CFTC with explicit authority to
facilitate portfolio margining by
allowing cash and securities to be held
in a futures account, and futures and
options on futures and related collateral
to be held in a securities account,
subject to certain conditions.6
On December 16, 2011, the
Commission approved a request by a
clearing agency for portfolio margining
of clearing members’ proprietary
security-based swaps and swap
1 The Dodd-Frank Wall Street Reform and
Consumer Protection Act, Public Law 111–203,124
Stat. 1376 (2010).
2 Generally, Subtitle A of Title VII creates and
relates to the regulatory regime for swaps, while
Subtitle B of Title VII creates and relates to the
regulatory regime for security-based swaps.
3 See Section 3(a)(68) of the Exchange Act, 15
U.S.C. 78c(a)(68) (as added by Section 761(a)(6) of
the Dodd-Frank Act) and Section 1a(47) of the CEA,
7 U.S.C. 1a(47) (as added by Section 721(a) of the
Dodd-Frank Act) for the definitions of securitybased swap and swap, respectively. See also
Further Definition of ‘‘Swap,’’ ‘‘Security-Based
Swap,’’ and ‘‘Security-Based Swap Agreement’’;
Mixed Swaps; Security-Based Swap Agreement
Recordkeeping, Exchange Act Release No. 67453
(Jul. 18, 2012), 77 FR 48207 (Aug. 13, 2012) (Joint
Final Rule with the CFTC) (‘‘Product Definitions
Adopting Release’’), further defining the terms swap
and security-based swap.
4 See Section 763(a) of the Dodd-Frank Act
(adding new Section 3C(a)(1) to the Exchange Act).
15 U.S.C. 78c–2.
5 See Section 723(a)(3) of the Dodd-Frank Act
(adding new Section 2(h)(1)(A) to the CEA).
6 See Section 713 of the Dodd-Frank Act. Under
Section 713 of the Dodd-Frank Act, duallyregistered broker-dealers and futures commission
merchants may portfolio margin pursuant to an
approved portfolio margin program, subject to
certain requirements, including regulatory action by
the SEC and CFTC (pursuant to an exemption, or
by rule or regulation). See Exchange Act Section
15(c)(3)C and CEA Section 4d(h). See also infra note
23.

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positions consisting of single-name CDS
and CDS indices, respectively.7 Under
such a portfolio margining arrangement,
clearing members are able to maintain
reduced levels of margin that are
commensurate with the risks of the
portfolio based on correlations in a
member’s cleared CDS positions
consisting of both swaps and securitybased swaps.
Market participants have also sought
the use of similar portfolio margining
arrangements in the context of customer
positions in CDS. On November 7, 2011,
ICE Clear Credit, LLC (‘‘ICE Clear
Credit’’) filed with the Commission a
petition for rulemaking, regulation or
order to provide exemptive relief from
certain Exchange Act provisions to
allow portfolio margining treatment for
customer-related positions in
anticipation of ICE Clear Credit offering
clearing of security-based swaps for
customer-related transactions.8 ICE
Clear Credit requested exemptive relief
from the application of certain
provisions of the Exchange Act to allow
ICE Clear Credit, and any ICE Clear
Credit member that is a duallyregistered broker-dealer and futures
commission merchant (‘‘BD/FCM’’), to,
among other things: (1) Hold customer
assets used to margin, secure, or
guarantee customer positions consisting
of cleared CDS, which include both
swaps and security-based swaps, in a
commingled customer omnibus account
subject to Section 4d(f) of the CEA; and
(2) calculate margin for this commingled
customer account on a portfolio margin
basis.9 ICE Clear Europe Limited (‘‘ICE
Clear Europe’’) also requested
substantially similar relief for itself and
its members.10
The Commission has received four
comment letters, one of which was
provided by ICE Clear Credit. All of
these letters supported ICE Clear
Credit’s request for relief.11 Commenters
7 See Order Approving Proposed Rule Change to
Adopt ICC’s Enhanced Margin Methodology,
Exchange Act Release No. 66001 (Dec. 16, 2011).
8 ICE Clear Credit formally petitioned the
Commission to grant exemptive relief from the
application of Section 15(c)(3), Rule 15c3–3 and
related rules under the Exchange Act. See Letter
from Michael M. Phillip, Partner, Winston & Strawn
LLP (Nov. 7, 2011) (the petition and comments
received on the petition are on file at the
Commission’s Web site at http://www.sec.gov/rules/
petitions.shtml).
9 Id.
10 See Letter from Paul Swann, President and
Chief Operating Office, ICE Clear Europe Limited
(May 31, 2012) (on file as a comment to the ICE
Clear Credit petition at http://www.sec.gov/
comments/4-641/4641-5.pdf).
11 See letter from Managed Funds Association
dated June 13, 2012 (‘‘MFA Letter’’); letter from
Investment Company Institute (‘‘ICI Letter’’) dated
April 9, 2012; letter from ICE Clear Credit LLC
dated December 22, 2011 (‘‘ICE Letter’’); and letter

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generally argued that portfolio
margining of customer positions in CDS
removes economic barriers to customer
clearing and would encourage greater
clearing, thereby reducing systemic
risk.12 One commenter stated that a
portfolio margining program for
customer accounts could also improve
competitiveness between market
participants who are not clearing
members and those that are clearing
members who are already permitted to
portfolio margin in their proprietary
accounts.13 Certain commenters
addressed additional issues associated
with the approval of ICE Clear Credit’s
request for relief, including concerns
relating to a potential requirement to
provide customers the ability to choose
an account type and a request for
certainty about the applicable
bankruptcy regime, which are more
specifically addressed, where
appropriate, below.14 Additionally, one
commenter argued that the Commission
should provide equivalent relief to all
clearing agencies seeking exemptive
relief, stating that different approaches
could lead to inefficiencies in the
market because market participants may
choose to clear at a particular
clearinghouse based on the applicable
regulatory standards rather than market
efficiencies.15
II. Discussion
Portfolio margining of index CDS
(subject to CFTC regulations) 16 and
single-name CDS (subject to SEC
regulations) can offer many benefits to
investors and the markets, including
promoting greater efficiencies in
clearing with respect to off-setting
positions and thereby aligning costs
more closely with overall risks
presented by an investor’s portfolio.
Further, portfolio margining may help to
alleviate excessive margin calls,
improve cash flows and liquidity, and
reduce volatility.
At the same time, facilitating portfolio
margining for customer-owned swaps
requires careful consideration to ensure
that customer protection concerns are
appropriately addressed, as well as to
promote appropriate risk management
and disclosure. The Commission is
from Association of Institutional Investors dated
December 22, 2011.
12 Id.
13 See, e.g., MFA Letter.
14 See ICE Letter, MFA Letter, and ICI Letter.
15 See ICI Letter.
16 Index CDS that are currently cleared are
generally swaps subject to CFTC regulation. The
definition of ‘‘narrow-based security index’’ is used
to help in distinguishing between certain swaps,
such as index CDS, and security-based swaps. See
Product Definitions Adopting Release.

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Federal Register / Vol. 77, No. 244 / Wednesday, December 19, 2012 / Notices
mindful of the need to address these
issues.
Accordingly, after careful
consideration of the requests before the
Commission, comments received, and
the relevant statutory provisions, the
Commission is acting to provide
conditional exemptive relief to facilitate
portfolio margining treatment for
customer-related positions in CDS that
are cleared pursuant to the terms of this
Order.

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A. Relevant Provisions
Section 3E of the Exchange Act, as
established pursuant to Section 763 of
the Dodd-Frank Act, sets forth the
framework for the segregation of assets
held as collateral in security-based swap
transactions. Section 3E(b)(1) of the
Exchange Act provides that a broker,
dealer, or security-based swap dealer
shall treat and deal with all money,
securities, and property of any securitybased swap customer received to
margin, guarantee, or secure a cleared
security-based swap transaction as
belonging to the customer.17 Section
3E(b)(2) of the Exchange Act provides
that the money, securities, and property
shall be separately accounted for and
shall not be commingled with the funds
of the broker, dealer, or security-based
swap dealer or used to margin, secure,
or guarantee any trades or contracts of
any security-based swap customer or
person other than the person for whom
the money, securities, or property are
held.18 Section 3E(c)(1) of the Exchange
Act provides that, notwithstanding
Section 3E(b) of the Exchange Act,
money, securities, and property of
cleared security-based swap customers
of a broker, dealer, or security-based
swap dealer may, for convenience, be
commingled and deposited in the same
one or more accounts with any bank,
trust company, or clearing agency.19
Section 3E(c)(2) of the Exchange Act
further provides that the Commission
may, notwithstanding Section 3E(b) of
the Exchange Act, by rule, regulation, or
order prescribe terms and conditions
under which any money, securities, or
property of a customer with respect to
cleared security-based swaps may be
commingled and deposited with any
other money, securities, or property
received by the broker, dealer, or
security-based swap dealer and required
17 See Section 3E(b)(1) of the Exchange Act (15
U.S.C. 78c–5(b)(1)) (as added by Section 763(d) of
the Dodd-Frank Act).
18 See Section 3E(b)(2) of the Exchange Act (15
U.S.C. 78c–5(b)(2)) (as added by Section 763(d) of
the Dodd-Frank Act).
19 See Section 3E(c)(1) of the Exchange Act (15
U.S.C. 78c–5(c)(1)) (as added by Section 763(d) of
the Dodd-Frank Act).

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by the Commission to be separately
accounted for and treated and dealt with
as belonging to the security-based swap
customer of the broker, dealer, or
security-based swap dealer.20 Section
3E(d) of the Exchange Act restricts the
ability to invest such money, securities,
and property of the security-based swap
customer,21 and Section 3E(e) of the
Exchange Act places certain
prohibitions on the disposition and use
of customer money, securities, and
property of a security-based swap
customer by any person, including any
clearing agency and any depository
institution that has received any money,
securities, or property for deposit in a
separate account or accounts, as
provided in Section 3E(b) of the
Exchange Act.22 Finally, Section 3E(g)
of the Exchange Act provides that an
account holding a security-based swap,
other than a portfolio margining account
referred to in Section 15(c)(3)(C) of the
Exchange Act, shall be considered to be
a securities account, as defined in 11
U.S.C. 741.23
Section 15(c)(3) of the Exchange Act
and Rule 15c3–3 24 also provide for the
protection of customer securities and
funds. Specifically, under Section
15(c)(3) of the Exchange Act, the SEC
may prescribe rules and regulations ‘‘to
provide safeguards with respect to the
financial responsibility and related
practices of brokers and dealers,
including, but not limited to, the
acceptance of custody and use of
customers’ securities and the carrying
and use of customers’ deposits or credit
balances.’’ 25 Under Exchange Act Rule
15c3–3, a broker-dealer must, in
essence, segregate customer funds and
fully paid and excess margin securities
held by the firm for the accounts of
customers. The intent of the rule is,
among other things, to ‘‘facilitate the
liquidations of insolvent broker-dealers
and to protect customer assets in the
event of a SIPC liquidation through a
clear delineation in Exchange Act Rule
15c3–3 of specifically identifiable
property of customers.’’ 26 Absent an
20 See Section 3E(c)(2) of the Exchange Act (15
U.S.C. 78c–5(c)(2) (as added by Section 763(d) of
the Dodd-Frank Act).
21 15 U.S.C. 78c–5(d) (as added by Section 763(c)
of the Dodd-Frank Act).
22 15 U.S.C. 78c–5(e) (as added by Section 763(c)
of the Dodd-Frank Act).
23 Solely for purposes of Section 3E(g) of the
Exchange Act, the Commission interprets ‘‘a
portfolio margining account referred to in section
15(c)(3)(C)’’ to include a portfolio margining
account that is maintained in accordance with the
terms of this Order.
24 17 CFR 240.15c3–3.
25 15 U.S.C. 78o(c)(3).
26 See Broker-Dealers; Maintenance of Certain
Basic Reserves, Exchange Act Release No. 9856
(Nov. 10 1972), 37 FR 25224 (Nov. 29, 1972).

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exemption, a broker-dealer would be
required to comply with applicable
provisions of Section 15(c)(3) of the
Exchange Act and Rule 15c3–3
thereunder as they relate to all
securities, including security-based
swaps.27
Section 724 of the Dodd-Frank Act
added provisions to Section 4d of CEA
that perform functions similar to those
in Section 3E of the Exchange Act in
creating a segregation framework for
swap customers.28 Accordingly, in order
to permit collateral related to cleared
security-based swaps to be commingled
with that related to cleared swaps for
purposes of portfolio margining and to
operate under the segregation
framework for swaps, a broker-dealer
would need relief from the applicable
provisions of Section 3E and Section
15(c)(3) of the Exchange Act as well as
Rule 15c3–3 thereunder. Similarly, a
clearing agency would need relief from
applicable provisions of Section 3E of
the Exchange Act.29
27 In addition to the Exchange Act provisions
specific to security-based swaps, there are Exchange
Act provisions applicable to ‘‘securities’’, which
would apply to security-based swaps. Section 761
of the Dodd-Frank Act amended the definition of
‘‘security’’ under the Exchange Act to include
security-based swaps. See Exchange Act Section
3(a)(10), 15 U.S.C. 78c(a)(10) (as revised by Section
761 of the Dodd-Frank Act). The Commission
approved an order granting temporary relief and
providing interpretive guidance to make it clear that
a substantial number of the requirements of the
Exchange Act would not apply to security-based
swaps when the revised definition of ‘‘security’’
went into effect on July 16, 2011. Order Granting
Temporary Exemptions under the Securities
Exchange Act of 1934 in Connection with the
Pending Revision of the Definition of ‘‘Security’’ to
Encompass Security-Based Swaps, and Request for
Comment, Exchange Act Release No. 64795 (July 1,
2011) (‘‘Exchange Act Exemptive Order’’). While
the Exchange Act Exemptive Order provided
registered broker-dealers a limited exemption from
Section 15(c)(3) of the Exchange Act and rules
thereunder in connection with security basedswaps (to the extent that these provisions do not
apply to security-based swap activities or positions
as of July 15, 2011), the exemption from Exchange
Act Rule 15c3–3 is not available for the brokerdealer’s activities and positions related to cleared
security-based swaps, to the extent that the brokerdealer is a member of a clearing agency that
functions as a central counterparty for securitybased swaps, and holds customer funds or
securities in connection with cleared security-based
swaps, because at the time the exemption was
granted no clearing agencies were clearing securitybased swaps. Id. Accordingly, relief separate from
Section 15(c)(3) of the Exchange Act and Rule
15c3–3, and certain other Exchange Act provisions
applicable to ‘‘securities’’ discussed herein, is
necessary to permit the commingling and portfolio
margining of customer positions in cleared CDS.
28 See 7 U.S.C. 6d(f) (as added by Section 724 of
the Dodd-Frank Act).
29 The CFTC would also need to provide relief to
allow security-based swaps to be commingled with
swaps in an account maintained in accordance with
Section 4d(f) of the CEA. The Commission notes
that the CFTC has also received similar requests for
relief. See Letter from Michael M. Phillip, Partner,

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Moreover, Exchange Act Rules 8c–1
and 15c2–1 (‘‘hypothecation rules’’)
prohibit, among other things, a brokerdealer from commingling customer
securities (the term ‘‘customer’’ for this
purpose generally includes affiliates of
the broker-dealer) with its own
proprietary securities under a lien for a
loan made to such broker-dealer.30
However, pursuant to the CFTC Part 22
Rules, the money, securities, and
property of an affiliate (as defined in
association with the definition of
‘‘Cleared Swaps Proprietary Account’’
pursuant to CFTC Rule 22.1) 31 of an
intermediary (i.e., BD/FCM) must be
held in a Cleared Swaps Proprietary
Account in accordance with the CFTC
regime in order to permit such affiliates
to use portfolio margining for CDS.32
Absent an exemption, affiliates of a
broker-dealer that are not excluded from
the definition of customer in the
hypothecation rules are customers
whose securities positions cannot be
commingled with the broker-dealer’s
proprietary securities and therefore
could not be held in a Cleared Swap
Proprietary Account, as required by the
CFTC’s Part 22 Rules.33
Winston & Strawn LLP (Oct. 4, 2011) (the petition
and comments received on the petition are on file
at the CFTC’s Web site at http://sirt.cftc.gov/sirt/sirt.
aspx?Topic=CommissionOrdersandOtherActions
AD&Key=22685).
30 17 CFR 240.8c–1 and 17 CFR 240.15c2–1. The
term ‘‘‘customer’’ is defined in paragraph (b)(1) of
the hypothecation rules and excludes any general
or special partner or any director or officer of such
broker-dealer, or any participant, as such, in any
joint, group or syndicate account with such brokerdealer or with any partner, officer, or director
thereof.
31 Cleared Swaps Proprietary Account means an
account for cleared swaps and associated collateral
that is carried on the books and records of a FCM
for persons with certain relationships with that
FCM, including applicable affiliates. In association
with the definition of a Cleared Swaps Proprietary
Account, an ‘‘affiliate’’ is defined to include a
person, directly or indirectly, controls such
individual, partnership, corporation or association
or, directly or indirectly, is controlled by or is
under common control with, such individual,
partnership, corporation or association. See CFTC
Rule 22.1, 17 CFR 22.1.
32 Under CFTC Rule 22.1, a firm that is an affiliate
of a FCM would not be a cleared swaps customer,
which is defined as any person entering into a
cleared swap, excluding any owner or holder of a
Cleared Swaps Proprietary Account with respect to
the cleared swaps in such account and a clearing
member of a DCO with respect to cleared swaps
cleared on that DCO. See CFTC Rule 22.1, 17 CFR
22.1. Thus, such an affiliate would not be a
customer for purposes of a customer portfolio
margining program with respect to swaps and
security-based swaps.
33 The Exchange Act Exemptive Order provided
registered broker-dealers a temporary exemption
from these rules, which expires on February 11,
2013. While the Commission will consider the
appropriate treatment of security-based swaps
under the provisions of the Exchange Act not
amended by the Dodd-Frank Act before expiration
of the exemptions set forth in the Exchange Act

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B. Exemptive Relief
Given the above requirements for the
segregation of assets held as collateral
under the Exchange Act, absent relief by
the Commission, participants would not
be able to operate in accordance with
both the Exchange Act and the CEA and
establish a program to commingle and
portfolio margin cleared customer
positions in CDS, which include both
swaps and security-based swaps. The
Commission has received requests to
provide certain exemptive relief 34 to
facilitate the establishment of a program
providing for portfolio margining of
cleared customer positions in CDS.
Such a program has the potential to
reduce clearing costs through the
integration of clearing functions and the
potential reduction of margin
requirements by taking into account
offsetting positions. As discussed above,
Section 3E(c)(2) of the Exchange Act
provides that, notwithstanding Section
3E(b) of the Exchange Act, in
accordance with any terms and
conditions the Commission may
prescribe by rule, regulation, or order,
any money, securities, or property of the
security-based swaps customer of a
broker, dealer, or security-based swap
dealer described in Section 3E(b) of the
Exchange Act may be commingled and
deposited as provided in Section 3E of
the Exchange Act with any other money,
securities, or property received by the
broker, dealer, or security-based swap
dealer and required by the Commission
to be separately accounted for and
treated and dealt with as belonging to
the security-based swaps customer of
the broker, dealer, or security-based
swap dealer.
In addition, 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 certain provisions of
the Exchange Act or certain rules or
regulations 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.35
After careful consideration, the
Commission believes that providing
certain conditional exemptive relief to
facilitate portfolio margining, as
Exemptive Order, including Exchange Act Rules
8c–1 and 15c2–1, the Commission believes that it
is appropriate to provide relief from these rules in
the context of this order. See Product Definitions
Adopting Release.
34 See supra notes 8 and 10.
35 15 U.S.C. 78mm(a)(1).

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outlined below, is necessary or
appropriate in the public interest, and is
consistent with the protection of
investors, because it would promote a
more accurate measure of the risk of the
total position of the customer based on
off-setting positions. Portfolio margining
would also increase efficiency and
reduce costs by closely aligning the
costs of maintaining a portfolio of
cleared CDS to the risks presented by
such a portfolio. Moreover, the
conditions to the exemption will
provide restrictions designed to protect
money, securities, and property of a
security-based swap customer, to
address certain differences in the
statutory requirements of the Exchange
Act and CEA, and to promote
appropriate risk management and
disclosure.
Specifically, consistent with the
discussion on the need for relief to
facilitate portfolio margining outlined
above under the heading ‘‘Relevant
Provisions,’’ pursuant to Section
3E(c)(2) and 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 the following
conditional exemptions: 36
(1) An exemption from Sections 3E(b),
(d), and (e) of the Exchange Act and any
rules thereunder for a clearing agency
registered pursuant to Section 17A of
the Exchange Act and registered as a
derivatives clearing organization
pursuant to Section 5b of the CEA
(‘‘clearing agency/DCO’’),37 solely to
perform the functions of a clearing
agency for CDS under a program to
commingle and portfolio margin CDS
for customer positions; and
(2) An exemption from Sections 3E(b),
(d), and (e) of the Exchange Act and
Section 15(c)(3) of the Exchange Act and
Rule 15c3–3 thereunder,38 and from any
36 The following conditional exemptions do not
in any way limit the Commission’s authority to
oversee or regulate security-based swaps under the
Exchange Act with respect to provisions that are not
subject to the exemptions, including, among others,
the antifraud and anti-manipulation provisions and
the Commission’s examination authority
provisions.
37 An entity that clears both security-based swaps
and swaps is required to be dually registered as a
clearing agency/DCO. See Section 17A(g) of the
Exchange Act, (requiring that clearing agencies that
clear security-based swaps be registered with the
Commission) and Section (h) of the CEA (requiring
that DCOs that clear swaps be registered with the
CFTC).
38 ICE Clear Credit and ICE Clear Europe also
requested exemptive relief from Rules 15c3–1, 17a–
3, 17a–4, 17a–5 and 17a–11(c)(2) of the Exchange
Act for their members engaged in the portfolio
margining program. However, compliance with
these rules depends upon the application of
Exchange Act Rule 15c3–3 to CDS covered by the

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requirement to treat an affiliate (as
defined in association with the
definition of ‘‘Cleared Swaps
Proprietary Account’’ pursuant to CFTC
Rule 22.1) as a customer for purposes of
Exchange Act Rules 8c–1 and 15c2–1,
for BD/FCMs that elect to offer a
program to commingle and portfolio
margin customer positions in CDS in
customer accounts maintained in
accordance with Section 4d(f) of the
CEA and the rules thereunder.
As discussed in more detail below,
this relief is subject to certain
conditions that are designed to help
ensure the protection of money,
securities, and property received from a
security-based swap customer, as well
as to address certain differences in the
statutory requirements of the Exchange
Act and CEA and promote appropriate
risk management and disclosure. In
particular, the conditions seek to
preserve customers’ ability to select
between the segregation requirements
and customer protections afforded a
securities account subject to the
Exchange Act and the requirements and
protections afforded a swap account
subject to the CEA, help ensure that BD/
FCMs collect sufficient margin from
customers to address the risk presented
by this business, and help ensure that
customers receive relevant disclosures
about the legal framework that will
apply to their CDS transactions.

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C. Conditional Exemptions for Clearing
Agencies/DCOs From Sections 3E(b), (d)
and (e) of the Exchange Act
As summarized above, pursuant to
Section 3E(c)(2) and Section 36 of the
Exchange Act from Sections 3E(b), (d),
and (e) of the Exchange Act and any
rules thereunder, the Commission is
issuing an exemption to a clearing
agency/DCO. This exemption is
available to a clearing agency/DCO
solely to perform the functions of a
clearing agency for CDS under a
program to commingle and portfolio
margin cleared CDS for customer
positions. This exemption is subject to
five conditions that are designed to help
safeguard customer money, securities,
and property and promote the ability of
customers to select an appropriate
framework for the segregation of assets.
The first two conditions are intended
to provide for portfolio margining
within a securities account as an
portfolio margining program contemplated under
this Order. Therefore, because the Commission is
already providing conditional exemptive relief from
Section 15(c)(3) of the Exchange Act and Rule
15c3–3 thereunder, the Commission does not need
to provide separate exemptive relief from these
provisions with respect to the portfolio margining
program contemplated under this Order.

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alternative for customers that may
desire to conduct portfolio margining
under a securities account structure as
opposed to in a swaps account, once the
Commission adopts final rules setting
forth margin and segregation
requirements applicable to securitybased swaps consistent with Section 3E
of the Exchange Act (‘‘final margin and
segregation rules for security-based
swaps’’).39
Specifically, the first condition
requires that the clearing agency/DCO,
by the later of (i) six months after the
adoption date of the final margin and
segregation rules for security-based
swaps or (ii) the compliance date of
such rules, take all necessary action
within its control to obtain any relief
needed to permit its BD/FCM clearing
members to maintain customer money,
securities, and property received by the
BD/FCM to margin, guarantee, or secure
customer positions in CDS in a
segregated account established and
maintained in accordance with Section
3E of the Exchange Act and any rules
thereunder for the purpose of clearing
(as a clearing member of the clearing
agency/DCO) such customer positions
under a program to commingle and
portfolio margin CDS. Under this
condition, a clearing agency/DCO would
be required to have taken steps, by the
later of six months after the adoption
date of final rules or the compliance
date of such rules, that are within its
control to obtain relief from all
appropriate regulatory agencies,
including submitting any applicable
request for relief and working diligently
to address any questions or issues raised
by regulators.40
The second condition requires that
the clearing agency/DCO, by the later of
(i) six months after the adoption date of
final margin and segregation rules for
security-based swaps or (ii) the
39 The Commission has proposed margin, and
segregation requirements for security-based swap
dealers and major security-based swap participants.
See Capital, Margin, and Segregation Requirements
for Security-Based Swap Dealers and Major
Security-Based Swap Participants and Capital
Requirements for Broker-Dealers (‘‘Capital, Margin,
and Segregation Requirements Adopting Release’’),
Exchange Act Release No. 68071 (Oct. 18, 2012), 77
FR 70213 (Nov. 23, 2012), at http://www.gpo.gov/
fdsys/pkg/FR–2012–11–23/pdf/2012–26164.pdf.
Once adopted, the Commission’s rules would help
establish a more permanent framework for the
availability of a securities account as an alternative
for customer accounts holding both security-based
swaps and swaps. As a result, the Commission may
provide further guidance on the application of the
exemptive relief provided in this Order after the
final rules related to margin and the segregation
requirements of security-based swaps are adopted
by the Commission.
40 The Commission anticipates that the CFTC will
consider appropriate regulatory action to facilitate
portfolio margining.

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75215

compliance date of such rules, take all
necessary action within its control to
establish rules and operational practices
to permit a BD/FCM (at the BD/FCM’s
election) to maintain customer money,
securities, and property received by the
BD/FCM to margin, guarantee, or secure
customer positions in cleared CDS,
which include both swaps and securitybased swaps, in a segregated account
established and maintained in
accordance with Section 3E of the
Exchange Act and any rules thereunder
for the purpose of clearing (as a clearing
member of the clearing agency/DCO)
such customer positions under a
program to commingle and portfolio
margin CDS. Until the clearing agency/
DCO has developed such rules and
operational practices, the clearing
agency/DCO must have in place rules
requiring BD/FCM clearing members to
maintain customer money, securities,
and property received to margin,
guarantee, or secure customer positions
consisting of cleared CDS, which
include both swaps and security-based
swaps, in a segregated account
established and maintained in
accordance with Section 4d(f) of the
CEA and rules thereunder for the
purpose of clearing (as a clearing
member of the clearing agency/DCO)
such customer positions under a
program to commingle and portfolio
margin CDS. This condition would
ensure that all customer assets are
segregated and subject to appropriate
regulatory oversight.
Some commenters raised certain
issues associated with a requirement
that market participants be provided a
choice in account structure.
Specifically, ICE Clear Credit stated that
offering customers a choice would
require changes at ICE Clear Credit and
each of its participant BD/FCMs and
result in needless additional costs.41 ICE
Clear Credit stated that few, if any,
customers would choose an account
established in accordance with Section
3E of the Exchange Act instead of an
account established in accordance with
Section 4d(f) of the CEA.42 Another
commenter also stated that granting the
petition now would not prohibit
customers from later choosing a
different portfolio margining option
under a Section 3E account structure, if
made available.43
The Commission appreciates the
benefits of providing relief to facilitate
portfolio margining now while
maintaining discretion for customers to
later choose a different portfolio
41 See

ICE Letter.

42 Id.
43 See

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margining option under a Section 3E
account structure when it becomes
available. The Commission believes that
it is important to ultimately provide
market participants with the ability to
select an account structure to manage
their individual risks by taking into
account the different regulatory
provisions that may apply to different
accounts types and that any costs
incurred in providing such an option
would be based on existing obligations
that clearing agencies and markets
participants have under Section 3E of
the Exchange Act in connection with
the clearing of security-based swaps in
accordance with Section 3E of the
Exchange Act. Accordingly, the
Commission is imposing these two
conditions in order to facilitate the
ability of customers to choose an
alternative account option in the future,
once the Commission adopts final
margin and segregation rules for
security-based swaps.44
The third condition requires the
clearing agency/DCO to have obtained
any other relief needed to permit a BD/
FCM that is a clearing member (at the
BD/FCM’s election) to maintain
customer money, securities, and
property received by the BD/FCM to
margin, guarantee, or secure customer
positions in cleared CDS, which include
both swaps and security-based swaps, in
a segregated account established and
maintained in accordance with Section
4d(f) of the CEA and rules thereunder
for the purpose of clearing (as a clearing
member of the clearing agency/DCO)
such customer positions under a
program to commingle and portfolio
margin CDS. The conditional
exemptions from the requirements
under the Exchange Act are based in
part on the applicability of the
regulatory regime under the CEA. This
condition is designed to help ensure the
exemption from the Exchange Act
regulatory framework would apply only
in circumstances where the regulatory
regime under the CEA is applicable.
The fourth condition requires the
clearing agency/DCO to have
appropriate rules and operational
practices to permit a BD/FCM that is a
44 The choice of the type of portfolio margining
account structure (i.e., security account or swap
account) would be made by each intermediary (i.e.,
BD/FCM) for the benefit of its customers, while the
clearing agency would be expected to maintain the
capacity to allow the intermediary, acting as a
clearing member, to select either option. This
optionality also will further efforts to achieve more
fully the benefits of risk-based portfolio margining,
by giving to customers the choice of portfolio
margining in a single futures or securities account
at a dually-registered BD/FCM. See A Joint Report
of the SEC and the CFTC on Harmonization of
Regulation (Oct. 19, 2009) ‘‘Joint Report’’.

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clearing member (at the BD/FCM’s
election) to maintain customer money,
securities, and property received by the
BD/FCM to margin, guarantee, or secure
customer positions in cleared CDS,
which include both swaps and securitybased swaps, in a segregated account
established and maintained in
accordance with Section 4d(f) of the
CEA and rules thereunder for the
purpose of clearing (as a clearing
member of the clearing agency/DCO)
such customer positions under a
program to commingle and portfolio
margin CDS. Similar to the prior
condition, this condition is designed to
help ensure the exemption from the
Exchange Act regulatory framework
would apply only in circumstances
where the regulatory regime under the
CEA is applicable.
The fifth condition requires the
clearing agency/DCO to have rules
mandating that each customer of the
BD/FCM participating in a program to
commingle and portfolio margin CDS
shall be an ‘‘eligible contract
participant’’ as defined in Section 1a(18)
of the CEA. Persons that are not eligible
contract participants may lack the
expertise or resources to effectively
determine the risks associated with
engaging in these types of
transactions.45 Accordingly, the
Commission believes it is appropriate to
provide conditions that would limit the
applicability of the exemptions to
customers that are eligible contract
participants.

45 The Dodd-Frank Act limits the swaps and
security-based swap transactions that may be
entered into by parties that are not eligible contract
participants. For example, under the Dodd-Frank
Act, only an eligible contract participant may enter
into security-based swaps that are not on a national
securities exchange. See Exchange Act Section 6(l),
15 U.S.C. 78f(l) (added by Section 763(e) of the
Dodd-Frank Act). In addition, security-based swaps
that are not registered pursuant to the Securities Act
of 1933 (‘‘Securities Act’’) can only be sold to
eligible contract participants. See Securities Act
Section 5(d), 15 U.S.C. 77e(d) (added by Section
768(b) of the Dodd-Frank Act). Securities Act
Section 5(d) specifically provides that it is unlawful
to offer to buy, purchase, or sell a security-based
swap to any person that is not an eligible contract
participant, unless the transaction is registered
under the Securities Act. Id. Given that Congress
determined it is appropriate to include these
limitations in the Dodd-Frank Act with respect to
eligible contract participants, we believe it is
appropriate to limit the exemptions in this Order
to CDS entered into with eligible contract
participants.

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D. Conditional Exemption for BD/FCMs
That Elect To Offer a Program To
Commingle and Portfolio Margin
Customer Positions in CDS in Customer
Accounts Maintained in Accordance
With Section 4d(f) of the CEA and Rules
Thereunder
As summarized above, the
Commission is issuing an exemption to
BD/FCMs from Exchange Act Sections
3E(b), (d), and (e), and Section 15(c)(3)
and Rule 15c3–3 thereunder, as well as
an exemption from any requirement to
treat an affiliate (as defined in
association with the definition of
‘‘Cleared Swaps Proprietary Account’’
pursuant to CFTC Rule 22.1) 46 as a
customer for purposes of Exchange Act
Rules 8c–1 and 15c2–1, provided that
the BD/FCM complies with the
conditions to the exemption discussed
below. This exemption is available to
BD/FCMs solely to perform the
functions of a BD/FCM for CDS with
respect to any customer money,
securities, and property received by the
BD/FCM to margin, guarantee, or secure
cleared customer positions in securitybased swaps included in a segregated
account established and maintained in
accordance with Section 4d(f) of the
CEA and the rules thereunder under a
program to commingle and portfolio
margin customer positions in cleared
CDS.
The exemption is subject to six
conditions that are designed to permit
such BD/FCMs to participate in a
program to commingle and portfolio
margin customer positions in cleared
CDS while helping to ensure the
protection of customer securities and
funds. The first two conditions of this
exemption relate to the segregation of
customer positions in CDS and impose
separate requirements for customers that
are not affiliates of the BD/FCM and
customers that are affiliates of the BD/
FCM.47 The remaining conditions apply
generally to all BD/FCMs participating
in the program—regardless of whether
they deal with customers that are
affiliates of the BD/FCM—and relate to
the risk management and other
safeguards the BD/FCM must have in
place in order to rely on the exemption.
Among other things, these conditions
46 17 CFR 22.1. The definition of ‘‘Cleared Swaps
Proprietary Account’’ was recently adopted by the
CFTC and is substantially similar to the definition
of ‘‘Proprietary Account’’ for futures contracts in
regulation 1.3. See Protection of Cleared Swaps
Customer Contracts and Collateral; Conforming
Amendments to the Commodity Broker Bankruptcy
Provisions, 77 FR 6336 (Feb. 7, 2012).
47 ‘‘Customer’’ for purposes of this exemption has
the same meaning as in Exchange Act Rules 15c2–
1 and 8c2–1.

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establish minimum margin levels and
disclosure requirements.
The first condition consists of two
requirements and applies with respect
to transactions involving customers that
are not affiliates 48 of the BD/FCM.
First, the BD/FCM must maintain
customer money, securities, and
property received to margin, guarantee
or secure customer positions consisting
of cleared CDS, which include both
swaps and security-based swaps, in a
segregated account established and
maintained in accordance with Section
4d(f) of the CEA and rules thereunder
for the purpose of clearing (as a clearing
member or through a clearing member
of a clearing agency/DCO operating
pursuant to the exemption in this Order)
such customer positions under a
program to commingle and portfolio
margin CDS. This condition is designed
to help ensure that the exemption under
this Order would apply only in
circumstances where customer money,
securities, and property are maintained
in a segregated account pursuant to the
regulatory regime under the CEA.
Second, the BD/FCM must enter into
a non-conforming subordination
agreement 49 with each customer that is
not an affiliate regarding all customer
money, securities, or property held in a
segregated account established and
maintained in accordance with Section
4d(f) of the CEA and rules thereunder
under a program to commingle and
portfolio margin CDS. The nonconforming subordination agreement
must contain: (i) A specific
acknowledgment by the customer that
such money, securities or property will
not receive customer treatment under
the Exchange Act or Securities Investor
Protection Act of 1970 (‘‘SIPA’’) or be
treated as customer property as defined
in 11 U.S.C. 741 in a liquidation of the
BD/FCM, and that such money,
securities or property will be subject to
any applicable protections under
48 See

supra notes 31 and 32 and accompanying

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text.
49 The term ‘‘non-conforming subordination
agreement’’ is used broadly to refer to a
subordination agreement between a broker-dealer
and its client where the client agrees to subordinate
its claims to the claims of all customers and other
creditors of the broker-dealer. Non-conforming
subordination agreements have previously been
used in limited circumstances to permit brokerdealer affiliates to be treated as non-customers for
purposes of Exchange Act Rule 15c3–3 to allow the
positions of the affiliate to be commingled with the
positions of the clearing member. See, e.g., Letter
from Michael A. Macchiaroli, Associate Director,
Division of Market Regulation, to William H. Navin,
EVP and General Counsel, The Options Clearing
Corporation (June 15, 2000). See also Statement of
the SEC Division of Trading and Markets Regarding
the Protection of Customer Assets, Sept. 20, 2008
(available at http://www.sec.gov/news/press/2008/
2008-216.htm).

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Subchapter IV of Chapter 7 of Title 11
of the United States Code and rules and
regulations thereunder; and (ii) an
affirmation by the customer that all of
its claims with respect to such money,
securities, or property against the BD/
FCM will be subordinated to the claims
of other securities customers and
security-based swaps customers not
operating under a program to
commingle and portfolio margin CDS
pursuant to this Order. The Commission
believes that this condition, along with
the disclosure conditions discussed
below, should help to ensure that
customers clearly understand that any
customer protection treatment otherwise
available with respect to securities
transactions under the Exchange Act,
SIPA or the stockbroker liquidation
provisions will not be available for CDS
held in an account maintained in
accordance with Section 4d(f) of the
CEA.
One commenter similarly requested
clarity about how CDS commingled in a
Section 4d(f) account would be treated
in the event of the bankruptcy of a BD/
FCM.50 The commenter requested that
the Commission and the CFTC clarify
and confirm in any approval of ICE
Clear Credit’s request for relief that
commingled accounts held in
accordance with the segregation
requirements of Section 4d(f) of the CEA
would be a cleared swaps customer
account for customers trading swaps
and would be treated as such under the
Bankruptcy Code (rather than a
securities account subject to SIPA).51
The Commission believes it is critical
for the protection of customer’s assets to
clarify at the outset the rights of
customers, generally, in the event of a
bankruptcy of the BD/FCM, and believes
that the subordination agreement
condition discussed herein, in
conjunction with disclosure condition
described below, should help provide
customers with clarity that the
segregation requirements of the
Exchange Act and any protections of
SIPA and the stockbroker liquidation
provisions will not apply to customer
positions in CDS that are security-based
swaps and are held in a Section 4d(f)
account.52
50 See

ICI Letter.

51 Id.
52 In response to statements in the ICE Letter
regarding what occurs when there is a shortfall in
customer property in a broker-dealer bankruptcy or
SIPA liquidation versus an FCM bankruptcy, the
Commission notes that SIPA provide protections to
customers that give them priority over general
creditors. See Joint Report, supra, note 44, at 39–
40. First, in the case of a shortfall in customer
property held by a broker-dealer, SIPA and the
stockbroker liquidation provisions of the
Bankruptcy Code provide that customer property

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The second condition applies with
respect to transactions involving
customers that are affiliates of the BD/
FCM and consists of three requirements.
First, the BD/FCM must maintain
affiliate money, securities, and property
received to margin, guarantee, or secure
positions consisting of cleared CDS,
which include both swaps and securitybased swaps, in a Cleared Swaps
Proprietary Account for the purpose of
clearing (as a clearing member of a
clearing agency/DCO operating pursuant
to the exemption in this Order) such
positions under a program to commingle
and portfolio margin CDS. The purpose
of this requirement is to ensure that a
program to commingle and portfolio
margin CDS will conform to the
regulatory regime of the CFTC, under
which certain affiliates are not treated as
customers.53 Specifically, the money,
securities, and property of a customer
that is an affiliate of the BD/FCM must
be held in a Cleared Swaps Proprietary
Account in accordance with the CFTC
regime.54
may be supplemented with other property in
certain circumstances. See 15 U.S.C. 78lll(4)(E); 15
U.S.C. 78fff–2(c)(3); 11 U.S.C. 741(4)(A)(iv); and 11
U.S.C. 749. In a SIPA liquidation, to the extent
customer property and SIPC advances (up to
$500,000 per customer, including a maximum of
$250,000 for cash claims) are not sufficient to pay
or otherwise satisfy in full the net equity claims of
customers, such customers are entitled, to the
extent only of their respective unsatisfied net
equities, to participate in the general estate as
unsecured creditors.
In response to statements in the ICE Letter that
the SIPA insolvency rules do not appear to provide
assurances for a prompt liquidation, the
Commission notes that SIPA and Commission
regulations contemplate expeditious transfer of
customer accounts through self-liquidation or a
proceeding under SIPA. In general, if the books and
records of the broker-dealer are in order and
customer accounts are properly margined, customer
accounts may be transferred to another brokerdealer in a process known as a bulk transfer. See
Joint Report, supra, note 44, at 40.
53 Under CFTC regulations, an account in which
Cleared Swaps and associated collateral of
applicable affiliates of an FCM are held is classified
as a proprietary account. See 17 CFR 22.1. As
previously noted, the Commission believes the
relief being provided with respect to affiliates of a
BD/FCM is appropriate because absent an
exemption, affiliates of a BD/FCM that are not
otherwise excluded from the definition of customer
in the hypothecation rules (i.e., Exchange Act Rules
8c–1 and 15c2–1) are customers whose securities
positions cannot be commingled with the brokerdealer’s own proprietary securities positions and
therefore could not be held in Cleared Swap
Proprietary Account as required under the CFTC
regime.
54 The Commission has previously granted
similar relief to non-broker-dealer affiliates of
members of a registered clearing agency. See Letter
from Michael A. Macchiaroli, Associate Director,
Division of Market Regulation, to William H. Navin,
EVP and General Counsel, The Options Clearing
Corporation (June 15, 2000). The no-action relief
included terms that required each non-brokerdealer member affiliate whose securities positions

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Second, the BD/FCM must enter into
a non-conforming subordination
agreement 55 with each affiliate
regarding all customer money,
securities, or property held in a
segregated account established and
maintained in accordance with Section
4d(f) of the CEA and rules thereunder
under a program to commingle and
portfolio margin CDS. The nonconforming subordination agreement
must contain: (i) A specific
acknowledgment by the affiliate that
such money, securities or property will
not receive customer treatment under
the Exchange Act or SIPA or be treated
as customer property as defined in 11
U.S.C. 741 in a liquidation of the BD/
FCM, and that such money, securities or
property will be held in a proprietary
account in accordance with the CFTC
requirements and will be subject to any
applicable protections under
Subchapter IV of Chapter 7 of Title 11
of the United States Code and rules and
regulations thereunder; and (ii) an
affirmation by the affiliate that all of its
claims with respect to such money,
securities, or property against the BD/
FCM will be subordinated to the claims
of other securities customers and
security-based swap customers not
operating under a program to
commingle and portfolio margin CDS
pursuant to this Order. The Commission
believes that this requirement should
help to ensure that affiliates clearly
understand that any customer
protection treatment otherwise available
with respect to securities transactions
under the Exchange Act, SIPA or the
stockbroker liquidation provisions will
would be hypothecated to consent to being treated
as a non-customer and to execute a non-conforming
subordination agreement meeting certain criteria
accompanied by an opinion of counsel regarding
the legal authority of the member affiliate to so
subordinate its claims. In connection with the no
action relief, the Commission approved a proposed
rule change filed by OCC to allow an affiliate of an
OCC clearing member to designate itself as a noncustomer under the Commission’s hypothecation
rules and OCC’s By-Laws and Rules in order for the
affiliate’s transactions and positions to be
commingled in its clearing member’s firm and/or
proprietary cross-margin account. See SelfRegulatory Organizations; The Options Clearing
Corporation; Order Granting Approval of Proposed
Rule Change Relating to Clearing Member Affiliates,
Exchange Act Release No. 43668 (Dec. 4, 2000), 65
FR 77413 (Dec. 11, 2000).
55 Under Exchange Act Rule 15c3–1, a brokerdealer can exclude from its liabilities a
subordinated loan that has been approved by its
designated examining authority (‘‘DEA’’) for
purposes determining its net capital. See 17 CFR
240.15c3–1(c)(2)(ii) and 15c3–1d. A nonconforming subordinated loan is one that the DEA
has not approved and, therefore, cannot be used to
exclude the liability arising from the loan
agreement. See Letter from Michael A. Macchiaroli,
Associate Director, Division of Market Regulation,
to William H. Navin, EVP and General Counsel, The
Options Clearing Corporation (June 15, 2000).

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not be available and the account would
be treated as a proprietary account (and
not a customer account) under the CEA.
Third, the BD/FCM must obtain from
the affiliate an opinion of counsel that
the affiliate is legally authorized to
subordinate all of its claims against the
BD/FCM to those of other customers.
The Commission believes that this
condition is appropriate to help ensure
that affiliates of the BD/FCM do not
place in a proprietary account any assets
that the affiliate is not legally authorized
to subordinate.
The remaining conditions are
applicable generally to all BD/FCMs
operating pursuant to the exemption in
this Order, regardless of whether they
deal with customers that are affiliates of
the BD/FCM.
The third condition to this exemption
states that the BD/FCM must set
minimum margin levels, with respect to
any customer transaction in a program
to commingle and portfolio margin CDS,
at least equal to the amount determined
using a margin methodology established
and maintained by the BD/FCM that has
been approved in writing by the
Commission or the Commission staff. In
conducting this review function, the
Commission intends that the
Commission staff will consult with the
CFTC staff and take into consideration
the margin methodology used by the
clearing agency/DCO in setting
customer margin levels under the CFTC
risk management regulations.56 This
condition is designed to help assure that
consistent customer margin
requirements apply to the BD/FCM,
regardless of the type of account in
which a security (including securitybased swap) is held, and that the BD/
FCM is requiring minimum margin that
adequately measures the risk in the
customer’s CDS portfolio in a manner
consistent with its appropriate internal
risk management procedures.57 This
approach will promote the
establishment of consistent margin
levels for securities across account
types, which in turn will mitigate the
risk that clearing agency/DCOs will
compete by implementing lower margin
levels and help ensure that margin
levels are set at sufficiently prudent
levels to reduce systemic risk. Finally,
the Commission intends that the
56 See 17 CFR 39.13 (CFTC risk management
regulations applicable to DCOs). In appropriate
circumstances, the Commission or the Commission
staff may provide temporary approval of a BD/
FCM’s margin methodology while the methodology
is still being evaluated prior to granting final
approval.
57 Nothing in this Order will preclude an FCM
from setting a higher margin level for some or all
of its customers. See 17 CFR 39.13(g)(8).

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Commission staff will work with the
CFTC staff to see that trading under the
program will facilitate both capital
efficiency and prudent risk
management.
A BD/FCM seeking approval for a
margin methodology would be expected
to submit sufficient information for the
Commission or Commission staff 58 to
be able to make a determination
regarding the performance of the firm’s
margin methodology.59 In reviewing
this information, the Commission or the
Commission staff will be guided by the
standards prescribed in Appendix E of
Exchange Act Rule 15c3–1, to the extent
relevant to the portfolio margining of
cleared CDS that are swaps and
security-based swaps.60 In reviewing the
BD/FCM’s submitted margin
methodology, we expect that the
Commission or Commission staff would
consider, among other things, whether
the type and amount of securities
permitted to be held for margin
purposes are restricted to those which
would facilitate the portfolio margining
program and whether the BD/FCM’s
VaR model meets the standards set forth
in Appendix E to Exchange Act Rule
15c3–1, as applicable.61 In cases where
a BD/FCM proposes to use a
standardized, rather than model-based,
methodology, the Commission or
Commission staff would consider
whether the methodology could be
expected to be at least as conservative
in setting margin amounts as a model
meeting the requirements just described.
By conducting this review, the
Commission will be approving margin
methodologies for customer positions in
securities as well as non-securities held
in a portfolio margin account. Due to the
nature of portfolio margining, in which
58 The Commission expects and intends that the
Financial Industry Regulatory Authority (‘‘FINRA’’)
will be actively involved in reviewing risk
management systems and procedures, including
margin methodologies, used by BD/FCMs seeking to
participate in the program. FINRA has a defined
and vital interest in seeing that its members use
portfolio margining arrangements involving
securities, including security-based swaps, in a
manner that is prudent and fully accounts for all
the risks that they incur in connection with such
arrangements.
59 If a BD/FCM’s margin methodology is approved
for purposes of this exemption, the performance of
the methodology would be subject to ongoing
regulatory supervision, and the BD/FCM would be
expected to submit for approval any material
changes to its margin methodology.
60 See generally 17 CFR 240.15c3–1e(a).
Information submitted as part of such application
shall be accorded confidential treatment, subject to
provisions of applicable law.
61 The amount and type of securities held for
margin purposes should be commensurate with the
risk and activity contained in the portfolio
margining program and must not be designed to
evade the requirements generally applicable to
securities pursuant to Exchange Act Rule 15c3–3.

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Federal Register / Vol. 77, No. 244 / Wednesday, December 19, 2012 / Notices
the margin methodology is applied to all
positions in an account as a single
portfolio, security-based swaps cannot
be singled out for margin treatment that
differs from the treatment applied to
swaps. This order by its terms does not
apply to, and the Commission is not
seeking to establish margin
requirements with respect to, accounts
that hold no positions in security-based
swaps.
The fourth condition requires that the
BD/FCM be in compliance with
applicable laws and regulations relating
to risk management, capital, and
liquidity, and be in compliance with
applicable clearing agency/DCO rules
and CFTC requirements (including
segregation and related books and
records provisions) for accounts
established and maintained in
accordance with Section 4d(f) of the
CEA and rules thereunder and subject to
a program to commingle and portfolio
margin CDS. The purpose of this
condition is to help assure that the
exemption under this Order is available
only where the applicable regulatory
requirements are appropriately
followed.
The fifth condition requires that each
customer of the BD/FCM participating
in a program to commingle and portfolio
margin CDS be an ‘‘eligible contract
participant’’ as defined in Section 1a(18)
of the CEA. Similar to the condition
under the exemption for clearing
agencies/DCOs, the Commission
believes that it is appropriate to limit
the availability of this exemption to
eligible contract participants, as persons
that are not eligible contract participants
may lack the expertise or resources to
effectively determine the risks
associated with engaging in these types
of transactions.
The sixth and final condition requires
that, before receiving any money,
securities, or property of a customer to
margin, guarantee, or secure positions
consisting of cleared CDS, which
include both swaps and security-based
swaps, under a program to commingle
and portfolio margin CDS, the BD/FCM
must furnish to the customer a
disclosure document containing (i) a
statement indicating that the customer’s
money, securities, and property will be
held in an account maintained in
accordance with the segregation
requirements of Section 4d(f) of the CEA
and that the customer has elected to
seek protections under Subchapter IV of
Chapter 7 of Title 11 of the United
States Code and the rules and
regulations thereunder with respect to
such money, securities, and property,
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Section 15(c)(3) and Section 3E of the
Exchange Act and the rules thereunder,
and any customer protections under
SIPA and the stockbroker liquidation
provisions, will not apply to such
customer money, securities, and
property. The disclosure document may
be provided to a customer at or prior to
the time that the customer opens an
account to commingle and portfolio
margin CDS positions in accordance
with Section 4d(f) of the CEA, but must
be provided prior to the BD/FCM
receiving any money, securities or
property to margin, guarantee or secure
positions consisting of cleared CDS,
which include both swaps and securitybased swaps, under a program to
commingle and portfolio margin CDS.
The Commission believes that this
condition will help to provide market
participants that elect to participate in
a portfolio margining arrangement, as
contemplated under this Order, with
important disclosures regarding the
legal framework that will govern their
transactions. As noted above, the
Commission views the disclosure
requirements as essential to highlight to
customers who elect to commingle and
portfolio margin their positions in CDS
in accounts maintained in accordance
with Section 4d(f) of the CEA that the
account will be governed by the
segregation requirements under the
CFTC’s regulatory regime and that any
protections under the SIPA will not be
available to the account in the event of
insolvency.62
III. Solicitation of Comments
The Commission requests comment
on this exemption for clearing agencies/
DCOs and BD/FCMs. The Commission
is soliciting public comment on all
aspects of this exemption, including
whether other conditions should apply.
If so, what conditions and why?
IV. Conclusion
It is hereby ordered, pursuant to
Section 3E(c)(2) and Section 36(a) of the
Exchange Act, the following exemptions
from Exchange Act requirements will
apply:
(a) Exemption for dually registered
clearing agencies/derivatives clearing
organizations. A clearing agency
registered pursuant to Section 17A of
the Exchange Act and registered as a
derivatives clearing organization
pursuant to Section 5b of the CEA (a
‘‘clearing agency/DCO’’) shall be exempt
from Sections 3E(b), (d), and (e) of the
Exchange Act and any rules thereunder,
solely to perform the functions of a
clearing agency for CDS under a
62 See

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program to commingle and portfolio
margin cleared CDS for customer
positions, subject to the following
conditions:
(1) The clearing agency/DCO, by the
later of (i) six months after the adoption
date of final rules setting forth margin
and segregation requirements applicable
to security-based swaps consistent with
Section 3E of the Exchange Act or (ii)
the compliance date of such rules, takes
all necessary action within its control to
obtain any relief needed to permit its
clearing members that are registered
under Section 15(b) of the Exchange Act
(other than paragraph (11) thereof) and
also registered as a futures commission
merchant pursuant to Section 4f(a)(1) of
the CEA (a ‘‘BD/FCM’’) (at the BD/
FCM’s election), to maintain customer
money, securities, and property
received by the BD/FCM to margin,
guarantee, or secure customer positions
in cleared CDS, which include both
swaps (as defined in Section 1(a)(47) of
the CEA and the rules thereunder) and
security-based swaps (as defined in
Section 3(g)(68) of the Exchange Act and
the rules thereunder), in a segregated
account established and maintained in
accordance with Section 3E of the
Exchange Act and any rules thereunder
for the purpose of clearing (as a clearing
member of the clearing agency/DCO)
such customer positions under a
program to commingle and portfolio
margin CDS.
(2) The clearing agency/DCO, by the
later of (i) six months after the adoption
date of final rules setting forth margin
and segregation requirements applicable
to security-based swaps consistent with
Section 3E of the Exchange Act or (ii)
the compliance date of such rules, takes
all necessary action within its control to
establish rules and operational practices
to permit a BD/FCM (at the BD/FCM’s
election) to maintain customer money,
securities, and property received by the
BD/FCM to margin, guarantee, or secure
customer positions in cleared CDS,
which include both swaps and securitybased swaps, in a segregated account
established and maintained in
accordance with Section 3E of the
Exchange Act and any rules thereunder
for the purpose of clearing (as a clearing
member of the clearing agency/DCO)
such customer positions under a
program to commingle and portfolio
margin CDS. Until such rules and
operational practices have been
developed, pursuant to the clearing
agency/DCO’s rules, clearing members
that are BD/FCMs must maintain
customer money, securities, and
property received to margin, guarantee,
or secure customer positions consisting
of cleared CDS, which include both

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swaps and security-based swaps, in a
segregated account established and
maintained in accordance with Section
4d(f) of the CEA and rules thereunder
for the purpose of clearing (as a clearing
member of the clearing agency/DCO)
such customer positions under a
program to commingle and portfolio
margin CDS.
(3) The clearing agency/DCO has
obtained any other relief needed to
permit a BD/FCM that is a clearing
member (at the BD/FCM’s election) to
maintain customer money, securities,
and property received by the BD/FCM to
margin, guarantee, or secure customer
positions in cleared CDS, which include
both swaps and security-based swaps, in
a segregated account established and
maintained in accordance with Section
4d(f) of the CEA and rules thereunder
for the purpose of clearing (as a clearing
member of the clearing agency/DCO)
such customer positions under a
program to commingle and portfolio
margin CDS.
(4) The clearing agency/DCO has
appropriate rules and operational
practices to permit a BD/FCM that is a
clearing member (at the BD/FCM’s
election) to maintain customer money,
securities, and property received by the
BD/FCM to margin, guarantee, or secure
customer positions in cleared CDS,
which include both swaps and securitybased swaps, in a segregated account
established and maintained in
accordance with Section 4d(f) of the
CEA and rules thereunder for the
purpose of clearing (as a clearing
member of the clearing agency/DCO)
such customer positions under a
program to commingle and portfolio
margin CDS.
(5) The rules of the clearing agency/
DCO require that each customer of the
BD/FCM participating in a program to
commingle and portfolio margin CDS
shall be an ‘‘eligible contract
participant’’ as defined in Section 1a(18)
of the CEA.
(b) Exemption for certain BD/FCMs
that elect to offer a program to
commingle and portfolio margin
customer positions in CDS in customer
accounts maintained in accordance with
Section 4d(f) of the CEA and rules
thereunder.
Solely to perform the functions of a BD/
FCM for cleared CDS, with respect to
any customer money, securities, and
property received by the BD/FCM to
margin, guarantee, or secure customer
positions in security-based-swaps
included in a segregated account
established and maintained in
accordance with Section 4d(f) of the
CEA and rules thereunder under a

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program to commingle and portfolio
margin customer positions in CDS, a
BD/FCM shall be exempt from Exchange
Act Sections 3E(b), (d), and (e), and
Section 15(c)(3) and Rule 15c3–3
thereunder and any requirement to treat
an affiliate (as defined in association
with the definition of ‘‘Cleared Swaps
Proprietary Account’’ pursuant to CFTC
Rule 22.1) as a customer for purposes of
Exchange Act Rules 8c–1 and 15c2–1,
subject to the following conditions:
(1) With respect to customers that are
not affiliates of the BD/FCM,
(i) the BD/FCM shall maintain
customer money, securities, and
property received to margin, guarantee
or secure customer positions consisting
of cleared CDS, which include both
swaps and security-based swaps, in a
segregated account established and
maintained in accordance with Section
4d(f) of the CEA and rules thereunder
for the purpose of clearing (as a clearing
member or through a clearing member
of a clearing agency/DCO operating
pursuant to the exemption in paragraph
(a) above) such customer positions
under a program to commingle and
portfolio margin CDS; and
(ii) the BD/FCM shall enter into a
non-conforming subordination
agreement with each customer. The
agreement must contain a specific
acknowledgment by the customer that
such money, securities or property will
not receive customer treatment under
the Exchange Act or SIPA or be treated
as customer property as defined in 11
U.S.C. 741 in a liquidation of the BD/
FCM and that such money, securities or
property will be subject to any
applicable protections under
Subchapter IV of Chapter 7 of Title 11
of the United States Code and rules and
regulations thereunder; as well as an
affirmation by the customer that all of
its claims with respect to such money,
securities, or property against the BD/
FCM will be subordinated to the claims
of other securities customers and
security-based swap customers not
operating under a program to
commingle and portfolio margin CDS
pursuant to this Order.
(2) With respect to customers that are
affiliates of the BD/FCM,
(i) The BD/FCM maintains money,
securities, and property of affiliates
received to margin, guarantee, or secure
positions consisting of cleared CDS,
which include both swaps and securitybased swaps, in a Cleared Swaps
Proprietary Account for the purpose of
clearing (as a clearing member of a
clearing agency/DCO operating pursuant
to the exemption in paragraph (a) above)
such positions under a program to
commingle and portfolio margin CDS;

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(ii) The BD/FCM enters into a nonconforming subordination agreement
with each affiliate. The agreement must
contain a specific acknowledgment by
the affiliate that such money, securities
or property will not receive customer
treatment under the Exchange Act or
SIPA or be treated as customer property
as defined in 11 U.S.C. 741 in a
liquidation of the BD/FCM, and that
such money, securities or property will
be held in a proprietary account in
accordance with the CFTC requirements
and will be subject to any applicable
protections under Subchapter IV of
Chapter 7 of Title 11 of the United
States Code and rules and regulations
thereunder; as well as an affirmation by
the affiliate that all of its claims with
respect to such money, securities, or
property against the BD/FCM will be
subordinated to the claims of other
securities customers and security-based
swap customers not operating under a
program to commingle and portfolio
margin CDS pursuant to this Order; and
(iii) The BD/FCM obtains from the
affiliate an opinion of counsel that the
affiliate is legally authorized to
subordinate all of its claims against the
BD/FCM to those of customers.
(3) The BD/FCM requires minimum
margin levels with respect to any
customer transaction in a program to
commingle and portfolio margin CDS at
least equal to the amount determined
using a margin methodology established
and maintained by the BD/FCM that has
been approved by the Commission or
the Commission staff.
(4) The BD/FCM must be in
compliance with applicable laws and
regulations relating to risk management,
capital, and liquidity, and shall be in
compliance with applicable clearing
agency/DCO rules and CFTC
requirements (including segregation and
related books and records provisions)
for accounts established and maintained
in accordance with Section 4d(f) of the
CEA and rules thereunder and subject to
a program to commingle and portfolio
margin CDS.
(5) Each customer of the BD/FCM
participating in a program to commingle
and portfolio margin CDS is an ‘‘eligible
contract participant’’ as defined in
Section 1a(18) of the CEA.
(6) Before receiving any money,
securities, or property of a customer to
margin, guarantee, or secure positions
consisting of cleared CDS, which
include both swaps and security-based
swaps, under a program to commingle
and portfolio margin CDS, the BD/FCM
must furnish to the customer a
disclosure document containing the
following information:

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(i) a statement indicating that the
customer’s money, securities, and
property will be held in an account
maintained in accordance with the
segregation requirements of Section
4d(f) of the CEA and that the customer
has elected to seek protections under
Subchapter IV of Chapter 7 of Title 11
of the United States Code and the rules
and regulations thereunder with respect
to such money, securities, and property;
and
(ii) a statement that the broker-dealer
segregation requirements of Section
15(c)(3) and Section 3E of the Exchange
Act and the rules thereunder, and any
customer protections under SIPA and
the stockbroker liquidation provisions,
will not apply to such customer money,
securities, and property.

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V. Paperwork Reduction Act
Certain provisions of this Order
contain ‘‘collection of information
requirements’’ within the meaning of
the Paperwork Reduction Act of 1995.63
The Commission has submitted this
Order to the Office of Management and
Budget (‘‘OMB’’) for review in
accordance with 44 U.S.C. 3507(d) and
5 CFR 1320.11. An agency may not
conduct or sponsor, and a person is not
required to respond to, a collection of
information unless it displays a
currently valid control number.
A. Collection of Information
The Commission found it necessary or
appropriate in the public interest and
consistent with the protection of
investors to grant the conditional
exemptions discussed in this Order.
Among other things, the Order would
require BD/FCMs that elect to offer a
program to commingle and portfolio
margin customer positions in CDS in
customer accounts maintained in
accordance with Section 4d(f) of the
CEA and rules thereunder, to obtain
certain agreements and opinions from
its customers regarding the applicable
regulatory regime, and to make certain
disclosures to its customers before
receiving any money, securities, or
property of a customer to margin,
guarantee, or secure positions consisting
of cleared CDS, which include both
swaps and security-based swaps, under
a program to commingle and portfolio
margin CDS. The Order would also
require BD/FCMs that elect to offer a
program to commingle and portfolio
margin CDS positions in customer
accounts maintained in accordance with
Section 4d(f) of the CEA and rules
thereunder, to maintain minimum
margin levels using a margin
63 44

U.S.C. 3501 et seq.

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methodology approved by the
Commission or the Commission staff.
B. Proposed Use of Information
The collection of information
requirements are designed, among other
things, to provide appropriate
agreements, disclosures, and opinions to
BD/FCM customers to clarify key
aspects of the regulatory framework that
will govern their participation in a
program to commingle and portfolio
margin CDS positions and to ensure that
appropriate levels of margin are
collected.
C. Respondents
The collections of information as
required by this Order would apply to
those BD/FCMs that are seeking to offer
a program to commingle and portfolio
margin customer positions in CDS in
customer accounts maintained in
accordance with Section 4d(f) of the
CEA. Based on conversations with
industry participants and the
Commission’s market oversight
experience, the Commission estimates
that approximately 57 firms would be
likely to participate in the CDS market
in the future.64 Consequently, the
Commission estimates that
approximately 57 firms may seek to
avail themselves of the conditional
exemptive relief provided in this Order.
D. Total Annual Reporting and
Recordkeeping Burden
Paragraph IV(b)(1)(ii) of this Order
applies with respect to customers that
are not affiliates of the BD/FCM and
requires BD/FCMs that elect to offer a
program to commingle and portfolio
margin customer positions in CDS in
customer accounts maintained in
accordance with Section 4d(f) of the
CEA and rules thereunder to enter into
a non-conforming subordination
agreement with the non-affiliate
64 Based on a review of FOCUS reports filed with
the Commission there are approximately 57 brokerdealers that also completed the Commodity Futures
Account segregation page on the FOCUS report and
therefore would be BD/FCMs. The Commission is
assuming that all 57 BD/FCMs would be likely to
participate in the CDS market. In addition, the
Commission notes it had previously estimated that
approximately 50 entities may fit within the
definition of security-based swap dealer (‘‘SBSD’’)
and up to 5 entities may fit within the definition
of major security-based swap participant
(‘‘MSBSP’’). See Registration of Security-Based
Swap Dealers and Major Security-Based Swap
Participants, Exchange Act Release No. 65543 (Oct.
12, 2011), 76 FR 65784 (Oct. 24, 2011), at 65808.
The Commission believes that the number of BD/
FCMs likely to engage in the CDS business would
be approximately equal to the previously estimated
number of security-based swap dealers and major
security-based swap participants given that CDS
make up a significant portion of the current
security-based swap market.

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customer. The non-conforming
subordination agreement must contain:
(i) A specific acknowledgment by the
customer that such money, securities or
property will not receive customer
treatment under the Exchange Act or
SIPA or be treated as customer property
as defined in 11 U.S.C. 741 in a
liquidation of the BD/FCM and that
such money, securities or property will
be subject to any applicable protections
under Subchapter IV of Chapter 7 of
Title 11 of the United States Code and
rules and regulations thereunder; and
(ii) an affirmation by the customer that
all of its claims with respect to such
money, securities, or property against
the BD/FCM will be subordinated to the
claims of other securities customers and
security-based swap customers not
operating under a program to
commingle and portfolio margin CDS
pursuant to this Order.
The Commission estimates that the
average number of non-affiliate CDS
customers of a BD/FCM to be
approximately 1,000 65 and the average
number of hours to develop a
subordination agreement for each nonaffiliate CDS customer to be
approximately 20 hours. In addition,
based on a consultation with industry
representatives, the Commission
estimates that each non-affiliate
customer will do business with more
than one BD/FCM, averaging out to 2.5
BD/FCMs per customer. Consequently,
the Commission estimates the total onetime burden associated with this
requirement to be 2,850,000 hours.66 In
addition, because the BD/FCM would
enter into these agreements with CDS
customers, the Commission staff
estimates that a BD/FCM would have
outside counsel review a standard nonconforming subordination agreement
and that the review would take
approximately 100 hours at a cost of
65 This estimate is based on a previous estimate
in the Capital Margin and Segregation Release that
each of SBSD and MSBSP has 1,000 counterparties
at any given time. See Capital, Margin, and
Segregation Requirements Adopting Release.
Commission staff believes that the number of
counterparties of a SBSD or MSBSP may likely be
equivalent to the number of customers of a BD/FCM
that may participate in a portfolio margining
program for customer positions in cleared CDS
offered by the BD/FCM. However, as portfolio
margining programs are not yet being offered for
CDS customers, it is difficult to estimate with
precision the number of customers that may
participate in customer clearing of CDS.
Furthermore, the number of customers that seek to
clear CDS through a portfolio margining program
may change after final mandatory clearing
determinations are made with respect to various
product types within CDS.
66 57 BD/FCMs × 1,000 non-affiliate customers
per dealer × 2.5 BD/FCMs used by each customer
× 20 hours for each agreement.

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approximately $400 per hour.67 As a
result, the Commission staff estimates
that each BD/FCM would incur onetime costs of approximately $40,000,
resulting in an industry-wide one-time
cost of approximately $2,280,000.68
Paragraph IV(b)(2)(ii) of this Order
applies with respect to customers that
are affiliates of the BD/FCM and
requires BD/FCMs that elect to offer a
program to commingle and portfolio
margin customer positions in CDS in
customer accounts maintained in
accordance with Section 4d(f) of the
CEA and rules thereunder to enter into
a non-conforming subordination
agreement. The non-conforming
subordination agreement must contain:
(i) A specific acknowledgment by the
affiliate that such money, securities or
property will not receive customer
treatment under the Exchange Act or
SIPA or be treated as customer property
as defined in 11 U.S.C. 741 in a
liquidation of the BD/FCM, and that
such money, securities or property will
be held in a proprietary account in
accordance with the CFTC requirements
and will be subject to any applicable
protections under Subchapter IV of
Chapter 7 of Title 11 of the United
States Code and rules and regulations
thereunder; and (ii) an affirmation by
the affiliate that all of its claims with
respect to such money, securities, or
property against the BD/FCM will be
subordinated to the claims of other
securities customers and security-based
swap customers not operating under a
program to commingle and portfolio
margin CDS pursuant to this Order. The
Commission estimates that the average
number of customers that are affiliates
of the BD/FCM to be approximately
11 69 and the average number of hours
to develop a subordination agreement
for a non-affiliate CDS customer to be
approximately 20 hours based on the
67 See PRA Analysis in Capital, Margin, and
Segregation Requirements Adopting Release
(providing an estimate of $400 an hour to engage
an outside attorney).
68 57 BD/FCMs × 100 hours to review × $400 per
hour.
69 FINRA CRD data indicate that the 17 largest
broker-dealers (i.e., those with total assets of $50
billion or more) reported a total of 188 affiliates that
are themselves registered with the SEC (i.e., they
have their own CRD numbers), representing
approximately 11 affiliates per broker-dealer. The
Commission believes that this would be a useful
approximation of the average number of customers
that are affiliates of the BD/FCM, as many affiliates
of a BD/FCM that would seek to use portfolio
margining are likely to be subject to some form of
a registration requirement with the SEC.
Furthermore, the assumption that all such
registered affiliates would seek to engage in
portfolio margining (when some may not) should
help to offset any discrepancy associated with
customers that are affiliates but would not be
subject to an SEC registration requirement.

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Commission’s prior experiences with
the development of subordination
agreements.70 Consequently, the
Commission estimates that the total onetime burden associated with this
requirement to be 12,540 hours.71 As
stated previously, the Commission staff
believes that a BD/FCM would have
outside counsel review a standard nonconforming subordination agreement
and that review would result in a onetime industry cost of $2,280,000.
Because the same requirements and
acknowledgements in the nonconforming subordination agreements
with non-affiliate customers must be
included in the non-conforming
subordination agreements with affiliate
customers (with an additional
acknowledgement by the affiliate that its
money, securities, or property will be
held in a proprietary account in
accordance with CFTC requirements),
we believe that a BD/FCM would not
need to engage an outside counsel to
perform a review of a separate review of
a standard non-conforming
subordination agreement for affiliate
customers.
Paragraph IV(b)(2)(iii) of this Order
applies with respect to customers that
are affiliates of the BD/FCM and
requires BD/FCMs that elect to offer a
program to commingle and portfolio
margin customer positions in CDS in
customer accounts maintained in
accordance with Section 4d(f) of the
CEA and rules thereunder to obtain
from its affiliates an opinion of counsel
that the affiliate is legally authorized to
subordinate all of its claims against the
BD/FCM to those of customers. Again,
the Commission estimates that the
average number of customers that are
affiliates of the BD/FCM to be
approximately 11 and the average
number of hours to develop the required
opinion for an affiliate CDS customer to
be approximately 2 hours.72
Consequently, the Commission
estimates that the total one-time burden
70 The Commission has previously considered the
development of subordination agreements in other
contexts. See Letter from Michael A. Macchiaroli,
Associate Director, Division of Market Regulation,
to William H. Navin, EVP and General Counsel, The
Options Clearing Corporation (June 15, 2000).
71 57 BD/FCMs × 11 affiliate customers × 20
hours.
72 This estimate is based on the Commission’s
currently approved Collection of Information
Supporting Statement for Rule 15c3–1 of the
Exchange Act, which discusses obtaining an
opinion of counsel as required by Appendix C to
Rule 15c3–1 of the Exchange Act (available at
http://www.reginfo.gov/public/do/
PRAViewDocument?ref_nbr=201006-3235-004). The
Commission believes that obtaining an opinion of
counsel as required by this order will require
additional time to adequately research the issue to
provide an opinion of counsel and, therefore, has
provided additional time in its estimation.

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associated with this requirement to be
1,254 hours.73 The Commission staff
also estimates that the BD/FCM will
engage outside counsel to review a
standard opinion of counsel and that the
outside counsel would need
approximately 20 hours at a cost of
approximately $400 per hour. As a
result, the Commission staff estimates
that the BD/FCM would incur a onetime cost of approximately $8,000,
resulting in an industry-wide one-time
cost of approximately $456,000.74
Paragraph IV(b)(5) of this Order
requires that BD/FCMs that elect to offer
a program to commingle and portfolio
margin customer positions in CDS in
customer accounts maintained in
accordance with Section 4d(f) of the
CEA and rules thereunder, to maintain
minimum margin levels with respect to
any customer transaction in a program
to commingle and portfolio margin CDS
at least equal to the amount determined
using a margin methodology established
and maintained by the BD/FCM that has
been approved by the Commission or its
staff. As part of the approval process, a
BD/FCM would be expected to submit
certain information in order to make a
determination regarding the
performance of the margin
methodology. The Commission
anticipates that information would be
substantially similar to information
required in Appendix E to Exchange Act
Rule 15c3–1 to the extent relevant to
portfolio margining CDS that are swaps
and security-based swaps. Based on
similar estimates, the Commission
estimates that each BD/FCM that seeks
approval from the Commission would
spend approximately 1,000 hours to
create and compile the various
documents to provide to Commission
staff and to work with Commission staff
through the approval process.75 This
includes approximately 100 hours for an
in-house attorney to complete a review
of the information and documentation
provided to the Commission staff.
Consequently, the Commission
estimates the total one-time burden
associated with this requirement to be
57,000 hours.76
Paragraph IV(b)(6) of this Order
requires each BD/FCM receiving any
BD/FCMs × 11 affiliate customers × 2 hours.
BD/FCMs × 20 hours for outside counsel to
review × $400 per hour.
75 This estimate is based on the Commission’s
currently approved Collection of Information
Supporting Statement for Rule 15c3–1 of the
Exchange Act, which discusses the reporting
burden for broker-dealers to apply and receive
approval from the Commission to use Appendix E
to Rule 15c3–1 of the Exchange Act (available at
http://www.reginfo.gov/public/do/
PRAViewDocument?ref_nbr=201006-3235-004).
76 1,000 hours × 57 BD/FCMs.
73 57
74 57

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Federal Register / Vol. 77, No. 244 / Wednesday, December 19, 2012 / Notices
money, securities, or property of a
customer to margin, guarantee or secure
positions consisting of cleared CDS,
which include both swaps and securitybased swaps, under a program to
commingle and portfolio margin CDS in
an account maintained in accordance
with Section 4d(f) of the CEA and the
rules thereunder to disclose to its
customers that (i) the customer’s money,
securities, and property will be held in
an account maintained in accordance
with the segregation requirements of
Section 4(d)f of the CEA and that the
customer has elected to seek protections
under Subchapter IV of Chapter 7 of
Title 11 of the United States Code and
the rules and regulations thereunder
with respect to such money, securities,
and property and (ii) that the brokerdealer segregation requirements of
Section 15(c)(3) and Section 3E of the
Exchange Act, and any customer
protections under SIPA and the
stockbroker liquidation provisions, will
not apply to such customer money,
securities, and property. These
disclosures provide customers
important disclosures regarding the
legal framework that will govern their
transactions if a liquidation were to
occur. The Commission believes that the
BD/FCM could use the language in the
Order that describes the disclosure that
must be made as a template to draft the
disclosure statement. Consequently, the
Commission estimates that it would take
a BD/FCM clearing member
approximately 8 hours to draft the
disclosure statement.77 Further, the
Commission believes the BD/FCM will
include this disclosure statement with
other documents or agreements
provided to cleared CDS customers and
as a result the BD/FCM should not be
subject to any additional burden
associated with relaying this
information to the customer. Therefore,
the Commission estimates that aggregate
burden from this requirement will be
456 hours 78 to comply with this
requirement.

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E. Collection of Information Is
Mandatory
The collections of information
contained in the conditions to this
Order are mandatory for any entity
wishing to rely on the conditional
exemptions granted by this Order.
77 This estimate is based on the Commission’s
currently approved Collection of Information
Supporting Statement for Rule 15c3–3 of the
Exchange Act, which discusses the reporting
burden to prepare a disclosure statement pursuant
to Rule 15c3–3 of the Exchange Act (http://
www.reginfo.gov/public/do/
PRAViewDocument?ref_nbr=201103-3235-025).
78 57 BD/FCMs × 8 hours.

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F. Confidentiality
The Commission expects to receive
confidential information in connection
with the proposed collections of
information. To the extent that the
Commission receives confidential
information pursuant to these
collections of information, the
Commission is committed to protecting
the confidentiality of such information,
subject to the provisions of applicable
law.79
G. Request for Comment on Paperwork
Reduction Act
The Commission requests, pursuant to
44 U.S.C. 3506(c)(2)(B), comment on the
collections of information contained in
this Order to:
(i) Evaluate whether the collections of
information are necessary for the proper
performance of the functions of the
Commission, including whether the
information would have practical
utility;
(ii) Evaluate the accuracy of the
Commission’s estimates of the burden of
the collections of information;
(iii) Determine whether there are ways
to enhance the quality, utility, and
clarity of the information to be
collected; and
(iv) evaluate whether there are ways
to minimize the burden of the
collections of information on those
required to respond, including through
the use of automated collection
techniques or other forms of information
technology.
Persons who desire to submit
comments on the collection of
information requirements should direct
their comments to the OMB, Attention:
Desk Officer for the Securities and
Exchange Commission, Office of
Information and Regulatory Affairs,
Washington, DC 20503, and should also
send a copy of their comments to
Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090, and refer to File No. S7–
13–12. OMB is required to make a
decision concerning the collections of
information between 30 and 60 days
after publication of this document in the
79 See, e.g., Exchange Act Section 24, 15 U.S.C.
78x (governing the public availability of
information obtained by the Commission) and 5
U.S.C. 552 et seq. (Freedom of Information Act—
‘‘FOIA’’). FOIA Exemption 4 provides an exemption
for ‘‘trade secrets and commercial or financial
information obtained from a person and privileged
or confidential.’’ 5 U.S.C. 552(b)(4). FOIA
Exemption 8 provides an exemption for matters that
are ‘‘contained in or related to examination,
operating, or condition reports prepared by, on
behalf of, or for the use of an agency responsible
for the regulation or supervision of financial
institutions.’’ 5 U.S.C. 552(b)(8).

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Federal Register; therefore, comments
to OMB are best assured of having full
effect if OMB receives them within 30
days of this publication. The
Commission has submitted the
proposed collections of information to
OMB for approval. Requests for the
materials submitted to OMB by the
Commission with regard to these
collections of information should be in
writing, refer to File No. S7–13–12, and
be submitted to the Securities and
Exchange Commission, Records
Management Office, 100 F Street NE.,
Washington, DC 20549.
By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012–30553 Filed 12–18–12; 8:45 am]
BILLING CODE 8011–01–P

SECURITIES AND EXCHANGE
COMMISSION
[File No. 500–1]

Spencer Pharmaceutical Inc.; Order of
Suspension of Trading
December 17, 2012.

It appears to the Securities and
Exchange Commission that there is a
lack of current and accurate information
concerning the securities of Spencer
Pharmaceutical Inc. (‘‘Spencer’’)
because of questions regarding the
accuracy of publicly disseminated
information, concerning, among other
things: (1) The company’s current
financial condition; and (2) statements
made by Spencer in press releases
concerning, among other things, an
unsolicited buyout offer of Spencer by
a foreign company.
The Commission is of the opinion that
the public interest and the protection of
investors require a suspension of trading
in the securities of the above-listed
company.
Therefore, it is ordered, pursuant to
Section 12(k) of the Securities Exchange
Act of 1934, that trading in the
securities of the above-listed company,
and any equity securities of any entity
purporting to succeed to this issuer, is
suspended for the period from 9:30 a.m.
EST on Monday, December 17, 2012,
through 11:59 p.m. EST on Monday,
December 31, 2012.
By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012–30665 Filed 12–17–12; 11:15 am]
BILLING CODE 8011–01–P

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