Yesterday, the Securities and Exchange Commission (SEC) adopted interim final temporary rules granting exemptions under various securities law requirements for credit default swaps (CDS) to facilitate the operation of one or more central counterparties (CCPs) for those CDS. These rules follow up on measures already taken recently by the SEC with respect to the CDS market, including last month’s issuance of exemptions from various securities laws allowing LCH.Clearnet Ltd to operate as a CCP for CDS and broker-dealers to effect CDS transactions which clear through a CCP. The SEC’s intent in issuing these temporary rules and granting the exemptions, which are all effective until September 25, 2009, has been to balance the goal of promptly establishing an operational CCP or CDS exchange against the need to gain “useful experience” with the CDS market before finalizing the regulatory approach.
The interim final temporary rules only apply to those CDS which are not included in the Securities Exchange Act’s definition of “swap agreements.” The SEC has adopted interim final temporary Rule 239T and a temporary amendment to Rule 146 under the Securities Act. Rule 239T exempts certain CDS not subject to individual negotiation (“eligible CDS”) from all provisions of the Securities Act, except the anti-fraud provisions, if the eligible CDS is or will be (1) issued or cleared by a registered or exempt CCP, and (2) offered and sold only to certain types of “eligible contract participants.” As such, the offer and sale of eligible CDS issued or cleared by a registered or exempt CCP will not be required to be registered under the Securities Act. However, issuers of securities may not use the interim rule to circumvent the Securities Act registration and disclosure requirements by instead having CDS issued or cleared by a registered or exempt CCP on behalf of the issuer, its affiliate, or an underwriter, which CDS are settled by delivery on the basis of the value of the issuer’s securities. Additionally, under the temporary amendment to Securities Act Rule 146, eligible CDS sold to certain eligible contract participants in reliance on Rule 239T will be exempt from state blue sky laws.
Secondly, the SEC has adopted interim final temporary Rule 12a-10T and an amendment to Rule 12h-1 under the Exchange Act, exempting eligible CDS issued or cleared by a registered or exempt CCP from the registration provisions of Sections 12(a) and 12(g) of the Exchange Act, respectively, under certain conditions.
Finally, the SEC has adopted Rule 4d-11T under the Trust Indenture Act, exempting any eligible CDS offered and sold in reliance on Rule 239T from having to comply with the provisions of the Trust Indenture Act. In adopting this temporary rule, the SEC noted that “the identified problems that the Trust Indenture Act is intended to address do not occur in the offer and sale of eligible CDS.”
The SEC has requested public comment on all aspects of these interim final temporary rules.