E6-15231. Government Securities Act Regulations: Applicability to Over-the-Counter Derivatives Dealers

AGENCY:

Office of the Under Secretary for Domestic Finance, Treasury.

ACTION:

Final rule.

SUMMARY:

The Department of the Treasury (“Treasury” or “We”) is issuing this final rule to amend the regulations issued under the Government Securities Act of 1986 (“GSA”), as amended. This technical amendment makes no substantive changes, but adds language to state explicitly that we deem over-the-counter (“OTC”) derivatives dealers that are also government securities dealers to be in compliance with the GSA regulations if they comply with the applicable Securities and Exchange Commission (“SEC”) OTC derivatives dealer rules and other SEC rules applicable to them.

DATES:

Effective Date: September 15, 2006.

ADDRESSES:

You may download this final rule from the Bureau of the Public Debt's Web site at http://www.treasurydirect.gov or from the Electronic Code of Federal Regulations (e-CFR) Web site at http://www.gpoaccess.gov/​ecfr. It is also available for public inspection and copying at the Treasury Department Library, Room 1428, Main Treasury Building, 1500 Pennsylvania Avenue, NW., Washington, DC 20220. To visit the library, call [phone] for an appointment.

FOR FURTHER INFORMATION CONTACT:

Lori Santamorena (Executive Director) or Chuck Andreatta (Associate Director), Bureau of the Public Debt, Government Securities Regulations Staff, [phone] or e-mail us at [e-mail].

SUPPLEMENTARY INFORMATION:

Background

In 1998, the SEC adopted various rules and rule amendments (the “OTCDD Rules” ^[1] ) under the Securities Exchange Act of 1934 (“the Exchange Act”) that define and regulate “OTC derivatives dealers (OTCDDs),” a category of registered broker-dealers that engage in certain over-the-counter derivatives activities, but not the full range of securities activities traditionally associated with full-purpose broker-dealers.^[2] The OTCDD Rules created a flexible regulatory framework under which U.S. securities firms could establish separately capitalized OTCDDs within the United States that will engage in dealer activities in both securities and non-securities OTC-derivative instruments and be able to “compete more effectively with banks and foreign dealers in global OTC derivatives markets, while also maintaining standards necessary to ensure investor protection.” ^[3]

Certain securities derivatives transactions in which an OTCDD may engage include options on particular government securities. Such unlisted options constitute “government securities” for purposes of Section 15C of the Exchange Act.^[4] If OTCDDs act as “dealers” in OTC derivative instruments that are “government securities,” they are also subject to regulation as “government securities dealers” under Section 15C of the Exchange Act and the GSA regulations.^[5]

The GSA required the Secretary of the Treasury to adopt rules with respect to transactions in government securities effected by government securities brokers and dealers in the areas of financial responsibility, protection of investor securities and funds, recordkeeping, reporting and audit. The regulatory framework established by the GSA required the Secretary in promulgating these rules to “consider the sufficiency and appropriateness of then existing law and rules applicable” to government securities brokers and dealers.^[6] In issuing the final GSA rules in 1987, Treasury considered already existing regulation with a view toward preventing overly burdensome and duplicative regulation.^[7] Treasury's GSA rules therefore generally provide that compliance by registered brokers and dealers with certain applicable SEC rules constitutes compliance with the GSA rules.

Moreover, Treasury has concluded and wishes to affirm that the SEC rules issued in 1998 for registered brokers and dealers that are OTCDDs are sufficient and appropriate for government securities brokers and dealers. Thus, for OTCDDs that write options on government securities, compliance with SEC rules constitutes compliance with the GSA rules. This is the result under the current GSA rules. However, in response to recent questions we have received, and recognizing that the current GSA rules require the reader to refer to other, separate SEC rules, we are amending the GSA rules to be more transparent and explicitly cover OTCDDs. These amendments make no substantive change, but merely add specific references to OTCDDs as a category of registered broker or dealer so that it will be clearer that OTCDDs are treated the same way as other registered brokers and dealers under the GSA rules. These changes appear in one general provision and four specific provisions of the GSA rules addressing financial responsibility, customer protection, recordkeeping, and reporting, respectively.

We have consulted with the staff of the SEC in developing this amendment.

Special Analysis

Because this rule makes no substantive change to the existing rules, and imposes no additional requirements on OTCDDs that are government securities brokers or dealers, we find under 5 U.S.C. 553(b)(B) and (d)(3) that there is good cause that notice and public procedures are unnecessary, and that the rule can be issued in direct final form and made effective immediately. The final rule is not a “significant regulatory action” for the purposes of Executive Order 12866.

Because no notice of proposed rulemaking is required, the provisions of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.) do not apply.

List of Subjects

17 CFR Part 400

• Administrative practice and procedure
• Banks
• Banking
• Brokers
• Government securities
• Reporting and recordkeeping requirements

17 CFR Part 401

• Banks
• Banking
• Brokers
• Government securities

17 CFR Part 402

• Brokers
• Government securities

17 CFR Part 403

• Banks
• Banking
• Brokers
• Government securities

17 CFR Part 404

• Banks
• Banking
• Brokers
• Government securities
• Reporting and recordkeeping requirements

17 CFR Part 405

• Brokers
• Government securities
• Reporting and recordkeeping requirements

For the reasons set forth in the preamble, the Department of the Treasury amends 17 CFR parts 400, 401, 402, 403, 404, and 405 as follows:

PART 400—RULES OF GENERAL APPLICATION

1. The authority citation for part 400 continues to read as follows:

Authority: 15 U.S.C. 78o-5.

2. Section 400.1 is amended by revising paragraph (a) to read as follows:

§ 400.1

Scope of regulations.

(a) Title I of the Government Securities Act of 1986 (Pub. L. 99-571, 100 Stat. 3208) amends the Securities Exchange Act of 1934 (48 Stat. 881-905; 15 U.S.C. chapter 2B) (“Act”) by adding section 15C, authorizing the Secretary of the Treasury to promulgate regulations concerning the financial responsibility, protection of customer securities and balances, recordkeeping and reporting of brokers and dealers in government securities. Those regulations constitute subchapter A of this chapter. Unless otherwise explicitly provided, all regulations in this subchapter apply to all government securities brokers or dealers, including registered brokers or dealers and financial institutions. Registered brokers or dealers include OTC derivatives dealers.

* * * * *

§ 400.2

[Amended]

3. Amend § 400.2 as follows:

A. In paragraph (c)(3)(vi), remove the reference “Room 553, 999 E Street NW.,” and add in its place “9th Floor, 799 9th Street NW.,”.

B. In paragraph (c)(7)(i), remove the reference “Room 5030,” and add it is place “Room 1318,”.

4. Section 400.3 is amended by removing the alphabetical paragraph designations and adding a new definition in alphabetical order for “OTC derivatives dealer” to read as follows:

§ 400.3

Definitions.

* * * * *

OTC derivatives dealer has the same meaning set out in 17 CFR 240.3b-12.

* * * * *

PART 401—EXEMPTIONS

5. The authority citation for part 401 continues to read as follows:

Authority: Sec. 101, Pub. L. 99-571, 100 Stat. 3209 (15 U.S.C. 78o-5(a)(4)).

§ 401.3

[Amended]

6. In paragraphs (a)(2)(ii)(B) and (a)(2)(ii)(C), remove the reference “§ 400.3(c)” and add in its place “§ 400.3”.

§ 401.9

[Amended]

7. Amend § 401.9 as follows:

A. In paragraph (b), remove the reference “§ 400.3(m)” and add in its place “§ 400.3”.

B. In paragraph (i), remove the reference “§§ 400.3 (k) and (l)” and add in its place “§ 400.3”.

C. In paragraph (n), remove the reference “§ 400.3(o)” and add in its place “§ 400.3”.

D. In paragraph (o), remove the reference “§ 400.3(j)” and add in its place “§ 400.3”.

E. In paragraph (p), remove the reference “§ 400.3(b)” and add in its place “§ 400.3”.

PART 402—FINANCIAL RESPONSIBILITY

8. The authority citation for part 402 continues to read as follows:

Authority: 15 U.S.C. 78o-5(b)(1)(A), (b)(4).

9. Section 402.1 is amended by revising paragraph (b) to read as follows:

§ 402.1

Application of part to registered brokers and dealers and financial institutions; special rules for futures commission merchants and government securities interdealer brokers; effective date.

* * * * *

(b) Registered brokers or dealers. This part does not apply to a registered broker or dealer (including an OTC derivatives dealer) that is subject to § 240.15c3-1 of this title (SEC Rule 15c3-1).

* * * * *

§ 402.2a

[Amended]

10. In paragraph (c), under the heading for Schedule B, in paragraph (1) under the “Columns 3 and 4” paragraph, remove the reference “ 17 CFR 400.3(m)” and add in its place “17 CFR 400.3”.

PART 403—PROTECTION OF CUSTOMER SECURITIES AND BALANCES

11. The authority citation for part 403 continues to read as follows:

Authority: Sec. 101, Pub. L. 99-571, 100 Stat. 3209; sec. 4(b), Pub. L. 101-432, 104 Stat. 963; sec. 102, sec. 106, Pub. L. 103-202, 107 Stat. 2344 (15 U.S.C. 78o-5(a)(5), (b)(1)(A), (b)(4).

12. Section 403.1 is revised to read as follows:

§ 403.1

Application of part to registered brokers and dealers.

With respect to their activities in government securities, compliance by registered brokers or dealers with § 240.8c-1 of this title (SEC Rule 8c-1), as modified by § 403.2 (a), (b) and (c), with § 240.15c2-1 of this title (SEC Rule 15c2-1), with § 240.15c3-2 of this title (SEC Rule 15c3-2), as modified by § 403.3, and with § 240.15c3-3 of this title (SEC Rule 15c3-3), as modified by § 403.4 (a) through (d), (f)(2) through (3), (g) through (j), and (m), including provisions in those rules relating to OTC derivatives dealers, constitutes compliance with this part.

PART 404-RECORDKEEPING AND PRESERVATION OF RECORDS

13. The authority citation for part 404 continues to read as follows:

Authority: 15 U.S.C. 78o-5 (b)(1)(B), (b)(1)(C), (b)(2), (b)(4).

14. Section 404.1 is revised to read as follows:

§ 404.1

Application of part to registered brokers and dealers.

Compliance by a registered broker or dealer with § 240.17a-3 of this title (pertaining to records to be made), § 240.17a-4 of this title (pertaining to preservation of records), § 240.17a-13 of this title (pertaining to quarterly securities counts) and § 240.17a-7 of this title (pertaining to records of non-resident brokers or dealers), including provisions in those rules relating to OTC derivatives dealers, constitutes compliance with this part.

§ 404.4

[Amended]

15. In paragraph (a)(3)(i)(B), remove the reference “§ 400.3(c)” and add in its place “§ 400.3”.

PART 405-REPORTS AND AUDITS

16. The authority citation for part 405 continues to read as follows:

Authority: 15 U.S.C. 78o-5 (b)(1)(B), (b)(1)(C), (b)(2), (b)(4).

17. Section 405.1 is amended by revising paragraph (a) to read as follows:

§ 405.1

Application of part to registered brokers and dealers and to financial institutions; transition rule.

(a) Compliance by registered brokers or dealers with §§ 240.17a-5, 240.17a-8, and 240.17a-11 of this title (Commission Rules 17a-5, 17a-8 and 17a-11), including provisions of those rules relating to OTC derivatives dealers, constitutes compliance with this part.

* * * * *

Dated: September 8, 2006.

Randal K. Quarles,

Under Secretary, Domestic Finance.

Footnotes

1.  The OTCDD Rules are commonly referred to as the “Broker-Dealer Lite” rules.

2.  Exchange Act Release No. 40594 (October 23, 1998), 63 FR 59362 (November 3, 1998).

3.  Id. at 59364.

4.  For purposes of section 78o-5, a “government security” includes an option on a government security other than an option (i) that is traded on one or more national securities exchanges; or (ii) for which quotations are disseminated through an automated quotation system operated by a registered securities association. 15 U.S.C. 78c(42)(D).

5.  63 FR 59362. Under 15 U.S.C. 78o-5(a)(1)(B)(1), a broker or dealer effecting, inducing, or attempting to induce the purchase or sale of a government security must file with the appropriate regulatory agency written notice that it is a government securities broker or dealer. Thus, an OTC derivatives dealer that engages in government securities transactions must also file notice of such activities with the SEC on Form BD.

6.  15 U.S.C. 78o-5(b)(5)(C).

7.  52 FR 27910 (July 24, 1987).