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SEC Updates Cleared CDS Exemptions's picture
Commentary by Nihal Patel

The SEC adopted changes to the exemptions for certain clearing agencies and broker-dealer/futures commission merchants concerning the portfolio margining of swaps and security-based swaps ("SBS") that are cleared credit default swaps ("CDS"). The exemption supersedes and replaces the SEC's December 2012 Order Granting Conditional Exemptions under the Securities Exchange Act of 1934 in Connection with Portfolio Margining of Swaps and Security-Based Swaps (or the "December 2012 Order").

As previously covered, the exemption is applicable to (i) clearing agencies that are dually registered with the SEC and the CFTC as clearing agencies and derivatives clearing organizations ("clearing agencies / DCOs") and (ii) broker-dealers that are dually registered with the SEC and CFTC as broker-dealers and futures commission merchants (each, a "BD/FCM").

The exemption provides relief to these entities from requirements under Section 3E of the Exchange Act, which applies to CDS that are (i) for cleared swaps customers in a segregated account as defined under Section 4d(f) ("Dealing by unregistered futures commission") of the CEA, and (ii) for affiliates in a cleared swaps proprietary account. Additionally, the proposed exemption would allow such entities to calculate on a portfolio basis their margin requirements.

The exemption, among other things, modifies the December 2012 Order by:

  • removing certain conditions regarding exemptions for clearing agencies / DCOs that are now requirements to which regulated entities must adhere on the compliance date (i.e., October 6, 2021) for security-based swap dealers' capital, margin and segregation requirements;

  • clarifying the conditions governing subordination agreements to disclaim that, for the purpose of the exemption, claims of general creditors are not included within the scope of subordination; and

  • replacing the condition requiring approval from the SEC or SEC staff of the margin methodology of a BD/FCM, with the condition that a BD/FCM is required to have an internal risk management program, approved by the SEC or SEC staff in advance, that draws from criteria outlined in Division of Trading and Markets staff letters (which would be withdrawn in light of the proposed order).

The exemptive order went into effect on November 1, 2021.


Though it replaces the 2012 order entirely, there are only a handful of significant developments. (See unofficial comparison here.)

  • The SEC reaffirmed that the program is available only to customers that have both CDS that are "SBS" and CDS that are "swaps" (i.e., the relief cannot be relied upon for clearing single-name SBS CDS only).

  • The SEC made clarifying changes to the subordination requirement, which it said were intended to preserve current protections and "better clarify that a cleared swaps customer is not subordinating claims to general creditors."

  • The SEC adopted specific terms for the standards of the risk management program to satisfy the order, but indicated that firms that have previously received SEC or SEC staff approval need not obtain additional approval.

Firms relying on the relief should review their existing subordination terms. The SEC declined to generally "grandfather" prior arrangements. Any changes that need to align with the amended order must be made in short order - by February 1, 2022.

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