/Vol. 77, No. 213/Friday, November 2, 2012/Rules and Regulations
LCH.Clearnet Ltd.) (collectively, ‘‘CDS ClearingExemption Orders’’). LIFFE A&M and LCH.ClearnetLtd. allowed their order to lapse without seekingrenewal.
15 U.S.C. 78q–1(b).
Public Law111–203 §763(b) (adding subparagraph (g) toSection 17 of the Exchange Act).
17 CFR 240.17Ab2–1.
Specifically, Sections 17A(b)(3)(A)–(I) identifydeterminations that the Commission must makeabout the rules and structure of a clearing agencyprior to granting registration.
15 U.S.C. 78q–1(b)(3)(A)–(I). The staff of the Commission providedguidance on meeting the requirements of Section17A in its Announcement of Standards for theRegistration of Clearing Agencies.
Exchange ActRelease No. 16900 (June 17, 1980), 45 FR 41920(June 23, 1980).
15 U.S.C. 78q–1(d).
15 U.S.C. 78u.
See id.; see also
15 U.S.C. 78s(h).
The Dodd-Frank Wall Street Reform andConsumer Protection Act, Public Law 111–203, 124Stat. 1376 (2010).
Section 712(d) of the Dodd-Frank Act providesthat the Commission and the CFTC, in consultationwith the Board of Governors of the Federal ReserveSystem, shall further define the terms ‘‘swap,’’‘‘security-based swap,’’ ‘‘swap dealer,’’ ‘‘security- based swap dealer,’’ ‘‘major swap participant,’’‘‘major security-based swap participant,’’ ‘‘eligiblecontract participant’’ and ‘‘security-based swapagreement.’’ The Commission and the CFTC jointlyadopted rules to further define the terms ‘‘swapdealer,’’ ‘‘security-based swap dealer,’’ ‘‘major swapparticipant,’’ ‘‘major security-based swapparticipant’’ and eligible contract participant.’’
Further Definition of ‘‘Swap Dealer,’’ ‘‘Security-Based Swap Dealer,’’ ‘‘Major Swap Participant,’’ ‘‘Major Security-Based Swap Participant’’ and ‘‘Eligible Contract Participant’’,
Securities ExchangeAct Release No. 34–66868 (Apr. 27, 2012).
Report of the Senate Committee,
note 11, at 34 (stating that ‘‘[s]ome parts of the OTCmarket may not be suitable for clearing andexchange trading due to individual business needsof certain users. Those users should retain theability to engage in customized, uncleared contractswhile bringing in as much of the OTC market underthe centrally cleared and exchange-tradedframework as possible.’’).
Financial Stability Board,
Implementing OTC Derivatives Market Reforms
(Oct. 25, 2010),
As previously noted, the Dodd-Frank Act seeksto ensure that, wherever possible and appropriate,derivatives contracts formerly traded exclusively inthe OTC market be cleared.
Section 3(a)(23)(A) of the Exchange Act definesthe term ‘‘clearing agency’’ to mean any person whoacts as an intermediary in making payments ordeliveries or both in connection with transactionsin securities or who provides facilities for thecomparison of data regarding the terms of settlement of securities transactions to reduce thenumber of settlements of securities transactions orthe allocation of securities settlementresponsibilities. Such term also means any person,such as a securities depository, who (i) acts as acustodian of securities in connection with a systemfor the central handling of securities whereby allsecurities of a particular class or series of any issuerdeposited within the system are treated as fungibleand may be transferred, loaned or pledged by bookkeeping entry without physical delivery of securities certificates, or (ii) otherwise permits orfacilitates the settlement of securities transactionsor the hypothecation or lending of securitieswithout physical delivery of securities certificates.15 U.S.C. 78c(a)(23)(A).
An entity that acts as a CCP forsecurities transactions is a clearing agency asdefined in the Exchange Act and is required toregister with the Commission.
Cecchetti, Gyntelberg and Hollanders,
Central Counterparties for Over-the-Counter Derivatives,
Bank for International SettlementQuarterly Review (Sept. 2009),
Bank for InternationalSettlements’ Committee on Payment and SettlementSystems and Technical Committee of theInternational Organization of SecuritiesCommissions,
Guidance on the Application of the2004 CPSS–IOSCO Recommendations for Central
default swaps transactions werecentrally cleared prior to the enactmentof the Dodd-Frank Act.2. Section 17A of the Exchange ActSection 17A of the Exchange Act
require entities toregister with the Commission prior toperforming the functions of a clearingagency. Under the statute, theCommission is not permitted to grantregistration unless it determines that therules and operations of the clearingagency meet the standards set forth inSection 17A.
If the Commissionregisters a clearing agency, theCommission oversees the clearingagency to facilitate compliance with theExchange Act using various tools thatinclude, among other things, the rulefiling process for self-regulatoryorganizations (‘‘SROs’’) and on-siteexaminations by Commission staff.Section 17A(d) also gives theCommission authority to adopt rules forclearing agencies as necessary orappropriate in the public interest, forthe protection of investors, or otherwisein furtherance of the purposes of theExchange Act and prohibits a registeredclearing agency from engaging in anyactivity in contravention of these rulesand regulations.
Pursuant to Section21(a) of the Exchange Act, theCommission can invoke its enforcementpowers to initiate and conductinvestigations to determine violations of the federal securities laws, includingthose specifically applicable to clearingagencies.
In so doing, the Commissionmay institute civil actions seekinginjunctive and other equitable remediesand/or administrative proceedings to,among other things, suspend or revokeregistration, impose limitations upon aclearing agency’s activities, functions, oroperations, or impose other sanctions.
3. The Dodd-Frank ActOn July 21, 2010, President BarackObama signed the Dodd-Frank Act intolaw.
The Dodd-Frank Act was enactedto, among other things, promote thefinancial stability of the United States by improving accountability andtransparency in the financial system.
a. Title VII of the Dodd-Frank ActTitle VII of the Dodd-Frank Act(‘‘Title VII’’) provides the Commissionand the Commodity Futures TradingCommission (‘‘CFTC’’) with enhancedauthority to regulate certain OTCderivatives in response to the recentfinancial crisis.
The Dodd-Frank Act isintended to bolster the existingregulatory structure and provideregulatory tools to oversee the OTCderivatives market, which has grownexponentially in recent years and iscapable of affecting significant sectors of the U.S. economy. Title VII providesthat the CFTC will regulate ‘‘swaps,’’ theCommission will regulate ‘‘security- based swaps,’’ and the CFTC and theCommission will jointly regulate‘‘mixed swaps.’’
Title VII was designed to providegreater certainty that, wherever possibleand appropriate, swap and security- based swap contracts formerly tradedexclusively in the OTC market arecentrally cleared.
The swap andsecurity-based swap marketstraditionally have been characterized byprivately negotiated transactionsentered into by two counterparties, inwhich each assumes the credit risk of the other counterparty.
Clearing of swaps and security-based swaps was atthe heart of Congressional reform of thederivatives markets in Title VII.
Clearing agencies are broadly definedunder the Exchange Act and undertakea variety of functions.
One suchfunction is to act as a CCP, which is anentity that interposes itself between thecounterparties to a trade.
For example,when a security-based swap contract between two counterparties that aremembers of a CCP is executed andsubmitted for clearing, it is typicallyreplaced by two new contracts—separate contracts between the CCP andeach of the two original counterparties.At that point, the original parties to thetransaction are no longer counterpartiesto each other. Instead, each acquires theCCP as its counterparty, and the CCPassumes the counterparty credit risk of each of the original counterparties thatare members of the CCP.
Structuredand operated appropriately, CCPs mayimprove the management of counterparty risk and may provideadditional benefits such as multilateralnetting of trades.
The Dodd-Frank Act
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