CDS Counterparty Exemption Extended for 6 Months; Regulation ATS to Apply
The SEC has extended until March 24, 2010 the temporary exemption from registration for central counterparties that clear credit default swap transactions. After March 24, the SEC says that it is unlikely to further extend the temporary exemption. Thereafter, central counterparties will either have to register as an exchange or comply with Regulation ATS. Notably, to comply under Regulation ATS, a central counterparty would have to register as a broker-dealer and submit to FINRA membership and oversight. The SEC provided the temporary exemption to facilitate the creation of central CDS counterparties and study the market. The extension is intended to give players time to register and upgrade their operations.
OUR TAKE: We believe most central counterparties will register under Regulation ATS rather than become exchanges. As a result, the SEC has essentially punted regulatory oversight of CDS transactions to FINRA.