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staff in advance, that draws from criteria outlined in Division of Trading and Markets staff letters (which would be withdrawn in light of the proposed order).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.