Font Size: AAA // Print // Bookmark

e7-23635

  • [Federal Register: December 6, 2007 (Volume 72, Number 234)]

    [Notices]

    [Page 68862-68865]

    From the Federal Register Online via GPO Access [wais.access.gpo.gov]

    [DOCID:fr06de07-28]

    =============================================================

    -------------------------------------------------------------

    COMMODITY FUTURES TRADING COMMISSION

    Notice of Request for Comment on Exemption Requests

    AGENCY: Commodity Futures Trading Commission.

    Requests to extend, pursuant to the exemptive authority in section

    4(c) of the Commodity Exchange Act, the exemption granted under Part 35

    of the Commission's regulations to certain over-the-counter swaps that

    do not otherwise meet certain of the requirements imposed by Commission

    Regulation 35.2 and to determine that, subject to certain conditions,

    floor brokers and floor traders are eligible swap participants.

    SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or

    ``Commission'') is requesting comment on whether to extend the

    exemption granted under Part 35 of the Commission's regulations to

    certain over-the-counter (``OTC'') swaps that do not meet certain of

    the requirements otherwise imposed by Commission Regulation 35.2. This

    exemption has been requested by ICE Clear U.S., Inc. (``ICE Clear''), a

    registered derivatives clearing organization. The Commission is also

    requesting comment on whether ICE Futures U.S., Inc. (``ICE Futures

    U.S.'') floor traders and floor brokers who are registered with the

    Commission, when trading for their own accounts, may be determined to

    be eligible swap participants and permitted to enter into certain

    specified OTC swap transactions. This exemption has been requested by

    ICE Futures U.S., a designated contract market. Authority for extending

    this relief is found in Section 4(c) of the Commodity Exchange Act

    (``CEA'' or ``Act'').\1\

    -----------------------------------------------------------------

    \1\ 7 U.S.C. Sec. 6(c).

    -----------------------------------------------------------------

    DATES: Comments must be received on or before January 7, 2008.

    ADDRESSES: Comments may be submitted by any of the following methods:

    Federal eRulemaking Portal: http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.regulations.gov/

    http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://frwebgate.access.gpo/cgi-bin/leaving. Follow the instructions

    for submitting comments.

    E-mail: secretary@cftc.gov. Include ``ICE Clear Section

    4(c) Request'' in the subject line of the message.

    Fax: 202-418-5521.

    Mail: Send to David A. Stawick, Secretary, Commodity

    Futures Trading Commission, Three Lafayette Centre, 1155 21st Street,

    NW., Washington, DC 20581.

    Courier: Same as mail above.

    All comments received will be posted without change to http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.cftc.gov/

    .

    FOR FURTHER INFORMATION CONTACT: Lois J. Gregory, Special Counsel, 816-

    960-7719, lgregory@cftc.gov, or Robert B. Wasserman, Associate

    Director, 202-418-5092, rwasserman@cftc.gov, Division of Clearing and

    Intermediary Oversight; or Duane C. Andresen, Special Counsel, 202-418-

    5492, dandresen@cftc.gov, Division of Market Oversight, Commodity

    Futures Trading Commission, Three Lafayette Centre, 1151 21st Street,

    NW., Washington, DC 20581.

    SUPPLEMENTARY INFORMATION:

    I. The ICE Clear Petition

    ICE Clear, the clearing organization for ICE Futures U.S., seeks to

    offer eligible swap participants who enter into certain bilateral swap

    transactions involving coffee, sugar, or cocoa the opportunity to

    submit them to ICE Clear for clearing. ICE Clear has represented that

    swap transactions in various agricultural products, including coffee,

    sugar, and cocoa, currently trade in OTC markets exempt from provisions

    of the CEA pursuant to Part 35 of the Commission's regulations. These

    are commonly swap agreements entered into by participants exchanging

    fixed for floating reference prices. Participants in these markets

    include trade houses, commodity lenders, producers, end users, and

    large speculators.

    Part 35 of the Commission's regulations \2\ exempts swap agreements

    and eligible persons entering into these agreements from most

    provisions of the Act.\3\ The term ``swap agreement'' is defined to

    include, among other types of agreements, ``a * * * commodity swap,''

    \4\ which latter term includes swaps on agricultural products.\5\ Part

    35 was promulgated pursuant to authority provided to the Commission in

    Section 4(c) of the Act to exempt certain transactions in order to

    promote innovation and competition.\6\ Various exemptions and

    exclusions were subsequently added to the Act by the Commodity Futures

    Modernization Act

    [[Page 68863]]

    of 2000 (``CFMA''),\7\ but none apply to agricultural contracts.\8\

    ---------------------------------------------------------------------------

    \2\ 17 CFR Part 35.

    \3\ Jurisdiction is retained for, inter alia, provisions of the

    CEA proscribing fraud and manipulation. See Commission Reg. Sec.

    35.2, 17 CFR Sec. 35.2 (Commission regulations are hereinafter

    cited as ``Reg. Sec. --'').

    \4\ Reg. Sec. 35.1(b)(1)(i).

    \5\ ``Commodity'' is defined in Section 1a(4) of the Act to

    include a variety of specified agricultural products, ``and all

    other goods and articles, except onions * * * and all services,

    rights and interests in which contracts for future delivery are

    presently or in the future dealt in.''

    \6\ See 58 F.R. 5587 (January 22, 1993).

    \7\ Pub. L. 106-554, 114 Stat. 2763 (2000).

    \8\ See, e.g., CEA Sec. Sec. 2(d), (g) and (h).

    ---------------------------------------------------------------------------

    Part 35 requires, inter alia, that a swap agreement not be part of

    a fungible class of agreements that are standardized as to their

    material economic terms \9\ and that the creditworthiness of any party

    having an interest under the agreement be a material consideration in

    entering into or negotiating the terms of the agreement.\10\ Under the

    arrangement that ICE Clear seeks to establish, OTC contracts would be

    submitted for clearing, a process that would extinguish the original

    OTC contract and replace it with an equivalent number of cash-settled

    ``cleared-only'' futures contracts, with the clearinghouse interposed

    as central counterparty.\11\ A cleared-only contract could be offset by

    another cleared-only contract. Thus, clearing of these OTC contracts

    would result in contracts that are fungible with other cleared-only

    contracts with approximately equivalent terms. In addition, the

    creditworthiness of the counterparty would not be a consideration.

    Accordingly, the OTC contracts ICE Clear would clear in the fashion

    proposed would not fulfill all of the conditions of Part 35.

    ---------------------------------------------------------------------------

    \9\ Reg. Sec. 35.2(b).

    \10\ Reg.Sec. 35.2(c).

    \11\ The OTC transaction would be required to involve the

    coffee, sugar, or cocoa underlying the corresponding cleared-only

    contract. The unit size, quality, and other specifications for the

    OTC coffee, sugar, or cocoa transaction would be approximately

    equivalent to the unit size, quality, and other specifications of

    the corresponding physical delivery futures contract listed on ICE

    Futures.

    ---------------------------------------------------------------------------

    However, Part 35 further invites ``any person [to] apply to the

    Commission for exemption from any of the provisions of the Act * * *

    for other arrangements or facilities.'' ICE Clear has petitioned the

    Commission for an order under Section 4(c) of the Act that would permit

    cleared OTC swaps involving coffee, sugar, and cocoa to be exempt on

    the same basis as other swaps are exempt under Part 35.

    II. The ICE Futures U.S. Petition

    ICE Futures U.S. seeks to permit floor traders and floor brokers

    (collectively, floor members) who are registered with the Commission,

    when trading for their own accounts, to enter into the OTC swap

    transactions discussed above. Part 35, however, defines the term

    eligible swap participant (``ESP'') to include floor members only as

    follows: (1) Floor members generally who are other than natural persons

    or proprietorships; (2) floor members who are natural persons, provided

    they have total assets exceeding at least $10,000,000; or (3) floor

    members who are proprietorships, provided they have total assets

    exceeding at least $10,000,000, or have the obligations under the swap

    agreement guaranteed or otherwise supported by certain other ESPs, or

    have a net worth of $1,000,000 and enter into the swap agreement in

    connection with the conduct of their business or to manage the risk of

    an asset or liability owned or incurred in the conduct of their

    business or reasonably likely to be owned or incurred in the conduct of

    their business.\12\ ICE Futures U.S. has petitioned the Commission for

    an order under Section 4(c) of the Act that would permit all ICE

    Futures U.S. floor members who are registered with the Commission, when

    trading for their own accounts, to be ESPs for the purpose of entering

    into bilateral swap transactions involving agricultural commodities as

    described above.

    ---------------------------------------------------------------------------

    \12\ Reg. Sec. 35.1(b)(2)(x).

    ---------------------------------------------------------------------------

    ICE Futures U.S. represents that all floor members entering into

    the swap transactions would be sophisticated and knowledgeable in the

    relevant products and markets and would be fully capable of evaluating

    the transactions. Further, because the transaction results in a

    cleared-only futures contract, floor members would not be subject to

    counterparty credit risk and would rely on the credit of ICE CLEAR and

    their clearing futures commission merchants (``FCMs'').

    The Commission anticipates that any Section 4(c) order issued in

    response to this request would be subject to the following conditions:

    (1) The contracts, agreement or transactions would have to be

    executed pursuant to the requirements of Part 35, as modified herein.

    (2) The ICE Futures U.S. floor member would have to obtain a

    financial guarantee for the OTC swap transactions from an ICE Futures

    U.S. clearing member that:

    (i) Is registered with the Commission as an FCM; and

    (ii) Clears the OTC swap transactions thus guaranteed.

    (3) Permissible OTC swap transactions would be limited to

    ``cleared-only'' contracts in the following eligible products: cocoa,

    coffee and sugar.

    (4) Permissible OTC swap transactions would have to be submitted

    for clearance by an ICE Futures U.S. clearing member to ICE Clear

    pursuant to ICE Clear Rules.

    (5) An ICE Futures U.S. floor member could not enter into OTC swap

    transactions with another ICE Futures U.S. floor member as the

    counterparty for ICE Clear ``cleared-only'' contracts.

    (6) ICE Futures U.S. would maintain appropriate compliance systems

    in place to monitor the OTC swap transactions of its floor members.\13\

    ---------------------------------------------------------------------------

    \13\ These conditions are substantially similar to the

    conditions included in two previously issued Commission orders that

    permit floor members to be eligible contract participants (``ECPs'')

    pursuant to Section 1a(12)(C) of the Act, 7 U.S.C. 1a(12)(C). On

    March 14, 2006, the Commission issued an order that permitted

    Chicago Mercantile Exchange floor members to be ECPs with respect to

    OTC transactions in excluded commodities entered into pursuant to

    Section 2(d)(1) of the Act. On August 3, 2006, the Commission issued

    an order that permitted New York Mercantile Exchange floor members

    to be ECPs with respect to OTC transactions in exempt commodities

    entered into pursuant to Section 2(h)(1) of the Act.

    ---------------------------------------------------------------------------

    III. Section 4(c) of the Commodity Exchange Act

    Section 4(c)(1) of the CEA empowers the CFTC to ``promote

    responsible economic or financial innovation and fair competition'' by

    exempting any transaction or class of transactions from any of the

    provisions of the CEA (subject to exceptions not relevant here) where

    the Commission determines that the exemption would be consistent with

    the public interest.\14\ The Commission may grant such an exemption by

    rule, regulation, or order, after notice and opportunity for hearing,

    and may do so on application of any person or on its own initiative.

    ---------------------------------------------------------------------------

    \14\ Section 4(c)(1) of the CEA, 7 U.S.C. 6(c)(1), provides in

    full that:

    In order to promote responsible economic or financial innovation

    and fair competition, the Commission by rule, regulation, or order,

    after notice and opportunity for hearing, may (on its own initiative

    or on application of any person, including any board of trade

    designated or registered as a contract market or derivatives

    transaction execution facility for transactions for future delivery

    in any commodity under section 7 of this title) exempt any

    agreement, contract, or transaction (or class thereof) that is

    otherwise subject to subsection (a) of this section (including any

    person or class of persons offering, entering into, rendering advice

    or rendering other services with respect to, the agreement,

    contract, or transaction), either unconditionally or on stated terms

    or conditions or for stated periods and either retroactively or

    prospectively, or both, from any of the requirements of subsection

    (a) of this section, or from any other provision of this chapter

    (except subparagraphs (c)(ii) and (D) of section 2(a)(1) of this

    title, except that the Commission and the Securities and Exchange

    Commission may by rule, regulation, or order jointly exclude any

    agreement, contract, or transaction from section 2(a)(1)(D) of this

    title), if the Commission determines that the exemption would be

    consistent with the public interest.

    ---------------------------------------------------------------------------

    In enacting Section 4(c), Congress noted that the goal of the

    provision ``is to give the Commission a means of providing certainty

    and stability to existing and emerging markets so that financial

    innovation and market development can proceed in an effective

    [[Page 68864]]

    and competitive manner.''\15\ Permitting the clearing of OTC coffee,

    sugar, and cocoa transactions by ICE Clear, as well as permitting ICE

    Futures U.S. floor members to trade such products, as discussed above,

    may foster both financial innovation and competition. It may benefit

    the marketplace by providing ESPs the ability to bring together

    flexible negotiation with central counterparty guarantees and capital

    efficiencies. The CFTC is requesting comment on whether it should

    exempt the OTC transactions in coffee, sugar, and cocoa that are

    proposed to be cleared through ICE Clear as described above, in the

    same fashion as are other contracts that are exempt pursuant to Part 35

    of the Commission's regulations. The CFTC is also requesting comment on

    whether it should determine ICE Futures U.S. floor members, subject to

    certain conditions, to be ESPs for the purpose of entering into the OTC

    transactions in coffee, sugar and cocoa.

    ---------------------------------------------------------------------------

    \15\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179,

    3213.

    ---------------------------------------------------------------------------

    Section 4(c)(2) provides that the Commission may grant exemptions

    only when it determines that the requirements for which an exemption is

    being provided should not be applied to the agreements, contracts, or

    transactions at issue, and the exemption is consistent with the public

    interest and the purposes of the CEA; that the agreements, contracts or

    transactions will be entered into solely between appropriate persons;

    and that the exemption will not have a material adverse effect on the

    ability of the Commission or any contract market or derivatives

    transaction execution facility to discharge its regulatory or self-

    regulatory responsibilities under the CEA.\16\

    ---------------------------------------------------------------------------

    \16\ Section 4(c)(2) of the CEA, 7 U.S.C. 6(c)(2), provides in

    full that:

    The Commission shall not grant any exemption under paragraph (1)

    from any of the requirements of subsection (a) of this section

    unless the Commission determines that--

    (A) the requirement should not be applied to the agreement,

    contract, or transaction for which the exemption is sought and that

    the exemption would be consistent with the public interest and the

    purposes of this Act; and

    (B) the agreement, contract, or transaction--

    (i) will be entered into solely between appropriate persons; and

    (ii) will not have a material adverse effect on the ability of

    the Commission or any contract market or derivatives transaction

    execution facility to discharge its regulatory or self-regulatory

    duties under this Act.

    ---------------------------------------------------------------------------

    The purposes of the CEA include ``promot[ing] responsible

    innovation and fair competition among boards of trade, other markets,

    and market participants.'' \17\ It may be consistent with these and the

    other purposes of the CEA, and with the public interest, for the OTC

    contracts described herein and submitted for clearing as described

    herein to be exempt as are other contracts under Part 35 of the

    Commission's regulations. However, the exception of agricultural

    commodities from the exemptions and exclusions provided under the CFMA

    for OTC transactions may be relevant to the analysis. Accordingly, the

    CFTC is requesting comment as to whether an exemption from the

    requirements of the CEA should be granted in the context of these

    transactions and these potential participants.

    ---------------------------------------------------------------------------

    \17\ CEA Sec. section 3(b), 7 U.S.C. 5(b). See also CEA Sec.

    section 4(c)(1), 7 U.S.C. Sec. 6(c)(1) (purpose of exemptions is

    ``to promote responsible economic or financial innovation and fair

    competition'').

    ---------------------------------------------------------------------------

    Section 4(c)(3) includes within the term ``appropriate persons'' a

    number of specified categories of persons deemed appropriate under the

    Act for entering into transactions exempt by the Commission under

    Section 4(c). This includes persons the Commission determines to be

    appropriate in light of their financial or other qualifications, or the

    applicability of appropriate regulatory protections. ESPs, as defined

    in Part 35 of the Commission's regulations, will be eligible to submit

    for clearing to ICE Clear the OTC transactions described above. That

    definition includes many of the classes of persons explicitly referred

    to in CEA Section 4(c)(3) (e.g., a bank or trust company) as well as

    some classes of persons who are included under the category of Section

    4(c)(3)(K) (``[s]uch other persons that the Commission determines to be

    appropriate in light of their financial or other qualifications, or the

    applicability of appropriate regulatory protections''). The Commission

    is proposing to include as appropriate persons for this extended relief

    under Part 35 all of the persons who meet the definition of ESP in

    Commission Regulation Sec. 35.1(b)(2). For the purposes of the

    extended relief requested by ICE Futures U.S., the Commission is also

    proposing to expand upon this list of appropriate persons to include,

    as discussed above, ICE Futures U.S. floor members. The Commission

    seeks comment on this determination.

    In light of the above, the Commission also is requesting comment as

    to whether these exemptions will affect its ability to discharge its

    regulatory responsibilities under the CEA, or with the self-regulatory

    duties of any contract market or derivatives clearing organization.

    IV. Request for Comment

    The Commission requests comment on all aspects of the issues

    presented by these exemption requests.

    V. Related Matters

    A. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \18\ imposes certain

    requirements on federal agencies (including the Commission) in

    connection with their conducting or sponsoring any collection of

    information as defined by the PRA. The exemption would not, if

    approved, require a new collection of information from any entities

    that would be subject to the exemption.

    ---------------------------------------------------------------------------

    \18\ 44 U.S.C. Sec. 3507(d).

    ---------------------------------------------------------------------------

    B. Cost-Benefit Analysis

    Section 15(a) of the CEA,\19\ requires the Commission to consider

    the costs and benefits of its action before issuing an order under the

    CEA. By its terms, Section 15(a) does not require the Commission to

    quantify the costs and benefits of an order or to determine whether the

    benefits of the order outweigh its costs. Rather, Section 15(a) simply

    requires the Commission to ``consider the costs and benefits'' of its

    action.

    ---------------------------------------------------------------------------

    \19\ 7 U.S.C. Sec. 19(a).

    ---------------------------------------------------------------------------

    Section 15(a) of the CEA further specifies that costs and benefits

    shall be evaluated in light of five broad areas of market and public

    concern: protection of market participants and the public; efficiency,

    competitiveness, and financial integrity of futures markets; price

    discovery; sound risk management practices; and other public interest

    considerations. Accordingly, the Commission could in its discretion

    give greater weight to any one of the five enumerated areas and could

    in its discretion determine that, notwithstanding its costs, a

    particular order was necessary or appropriate to protect the public

    interest or to effectuate any of the provisions or to accomplish any of

    the purposes of the CEA.

    The Commission is considering the costs and benefits of an

    exemptive order in light of the specific provisions of Section 15(a) of

    the CEA, as follows:

    1. Protection of market participants and the public. The contracts

    that are the subject of the exemptive request will only be entered into

    by persons who are ``appropriate persons'' as set forth in Section 4(c)

    of the Act.

    2. Efficiency, competition, and financial integrity. Extending the

    exemption granted under Part 35 to

    [[Page 68865]]

    these swap agreements to allow them to be cleared may promote liquidity

    and transparency in the markets for OTC derivatives on coffee, sugar,

    and cocoa, as well as on futures on those commodities. Extending the

    exemption also may promote financial integrity by providing the

    benefits of clearing to these OTC markets. Determining ICE Futures U.S.

    floor members to be ESPs may increase the flow of trading information

    between markets, increase the pool of potential counterparties for

    participants trading OTC, and provide essential trading expertise to

    the market.

    3. Price discovery. Price discovery may be enhanced through market

    competition.

    4. Sound risk management practices. Clearing of OTC transactions

    may foster risk management by the participant counterparties. ICE

    Clear's risk management practices in clearing these transactions would

    be subject to the Commission's supervision and oversight.

    5. Other public interest considerations. The requested exemption

    may encourage market competition in agricultural derivative products

    without unnecessary regulatory burden.

    After considering these factors, the Commission has determined to

    seek comment on the exemption requests as discussed above. The

    Commission also invites public comment on its application of the cost-

    benefit provision.

    * * * * *

    Issued in Washington, DC, on November 30, 2007 by the

    Commission.

    David A. Stawick,

    Secretary of the Commission.

    [FR Doc. E7-23635 Filed 12-5-07; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: December 6, 2007



See Also:

OpenGov Logo

CFTC's Commitment to Open Government

Gavel and Book

Follow the Status of Enforcement Actions