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U.S. Securities and Exchange Commission

SEC Approves Exemptions to Allow Central Counterparty for Credit Default Swaps


Washington, D.C., Dec. 23, 2008 — The Securities and Exchange Commission today approved temporary exemptions allowing LCH.Clearnet Ltd. to operate as a central counterparty for credit default swaps. Today's action is an important step in stabilizing financial markets by reducing counterparty risk and helping to promote efficiency in the credit default swap market.

"Today's announcement is an important step in our efforts to add transparency and structure to the opaque and unregulated multi-trillion dollar credit default swaps market," said SEC Chairman Christopher Cox. "These conditional exemptions will allow a central counterparty to be quickly up and running, while protecting investors through regulatory oversight. Although more needs to be done in this area legislatively, these actions will shine much-needed light on credit default swaps trading."

The Commission developed these temporary exemptions in close consultation with the Board of Governors of the Federal Reserve System (FRB), the Federal Reserve Bank of New York, the Commodity Futures Trading Commission (CFTC), and the U.K. Financial Services Authority.

The President's Working Group on Financial Markets has stated that the implementation of central counterparty services for credit default swaps was a top priority. In furtherance of this goal, the Commission, the FRB and the CFTC signed a Memorandum of Understanding in November 2008 that establishes a framework for consultation and information sharing on issues related to central counterparties for credit default swaps.

The temporary exemptions will facilitate central counterparties such as LCH.Clearnet and certain of their participants to implement centralized clearing quickly, while providing the Commission time to review their operations and evaluate whether registrations or permanent exemptions should be granted in the future. The conditions that apply to the exemptions are designed to provide that key investor protections and important elements of Commission oversight apply, while taking into account that applying all the particulars of the securities laws could have the unintended consequence of deterring the prompt establishment and use of a central counterparty.

Well-regulated central counterparties should help promote stability in financial markets by reducing the counterparty risks posed by the default or financial distress of a major market participant. This, in turn, should reduce the potential for disruption in financial markets attributable to credit default swaps. They should also promote operational efficiencies and transparency, which are lacking currently in the over-the-counter market for credit default swaps.

Erik R. Sirri, Director of the SEC's Division of Trading and Markets, said, "These temporary and conditional exemptions are the best way to facilitate the prompt establishment of a central counterparty for CDS transactions. Their limited duration will allow the Commission and its staff to gain more direct experience with the development of the centrally cleared CDS market, while the conditions to the exemptions will give the Commission the ability to oversee the CDS market after the central counterparty becomes operational."

To assist in its consideration of any further action that may be needed in this area, the Commission is soliciting public comment on all aspects of these exemptions.

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Modified: 12/24/2008