Swaps Regulation - Exemptions for Security-Based Swaps Issued by Certain Clearing Agencies

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Gavel.png FINAL RULE: SEC Final Rule: Exemptions for Security-Based Swaps Issued by Certain Clearing Agencies Approved on April 5, 2012
Dodd-Frank Timeline, Exemptions for Security-Based Swaps Issued by Certain Clearing Agencies, SEC
Proposal Date Final Rule Issue Effective Date
June 15, 2011 April 5, 2012 April 16, 2012

Among the provisions of Title VII of the Dodd-Frank Act is the requirement that a swap made available to trade must be executed on a designated contract market or a swap execution facility. The Act also establishes a mandatory clearing requirement for certain swaps and security-based swaps.

On April 5, 2012, SEC adopted exemptions under the Securities Act of 1933, the Securities Exchange Act of 1934, and the Trust Indenture Act of 1939 for security-based swaps issued by clearing agencies satisfying certain conditions. The final rules exempt transactions by clearing agencies from all provisions of the Securities Act except the anti-fraud provisions.

The final rule adopts the proposed rulemaking from June 2011 without modification.

Background: Proposed Rule on Clearing Agency Exemption, June 2011[edit]

The Dodd-Frank Act requires, among other things, that the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC), create and implement rules regarding mandatory clearing of swaps transactions. On June 15, 2011, the SEC proposed rules specifically concerning exemptions for security-based swaps issued by certain clearing agencies, specifically:

  • exemptions under the Securities Act of 1933;
  • exemptions under the Securities Act of 1934;
  • exemptions under the Trust Indenture Act of 1939;
  • exemptions for security-based swap transactions by clearing agencies under all provisions of the Securities Act, other than the anti-fraud provisions; and
  • exemptions for security-based swap transactions by clearing agencies from registration requirements under the Exchange Act and the Trust Indenture Act, assuming that the agency in question meets certain qualification conditions.

The rationale behind the exemption is to encourage the use of central counterparty ("CCP") clearing for swap transactions. The clearing of a bilaterally-negotiated swap transaction involves the extinguishment of the original contract and creation of two new contract, each with the CCP taking the other side of the transaction (a process known as "novation". Not granting the exemption to clearing organizations could have impeded the clearing process and could have been detrimental to the intentions of the Dodd-Frank Act.

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Related Documents: Final Rule as it Appeared in the Federal Register[edit]


References[edit]

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