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2010-32812

  • Federal Register, Volume 75 Issue 249 (Wednesday, December 29, 2010)[Federal Register Volume 75, Number 249 (Wednesday, December 29, 2010)]

    [Notices]

    [Pages 81977-81979]

    From the Federal Register Online via the Government Printing Office [www.gpo.gov]

    [FR Doc No: 2010-32812]

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    COMMODITY FUTURES TRADING COMMISSION

    Order Exempting the Trading and Clearing of Certain Products

    Related to the CBOE Gold ETF Volatility Index and Similar Products

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Final Order.

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    SUMMARY: On November 10, 2010, the Commodity Futures Trading Commission

    (``CFTC'' or the ``Commission'') published for public comment in the

    Federal Register a proposal to exempt the trading and clearing of

    certain options (``Options'') on the CBOE Gold ETF Volatility Index

    (``GVZ Index''), which would be traded on the Chicago Board Options

    Exchange (``CBOE''), a national securities exchange, and cleared

    through the Options Clearing Corporation (``OCC'') in its capacity as a

    registered securities clearing agency, from the provisions of the

    Commodity Exchange Act (``CEA'') and the regulations thereunder, to the

    extent necessary to permit such Options to be so traded and cleared.

    The Commission also requested comment regarding whether it should

    provide a categorical exemption that would permit the trading and

    clearing of options on indexes that measure the volatility of shares of

    gold exchange-traded funds (``ETFs'') generally, regardless of issuer,

    including options on any index that measures the magnitude of changes

    in, and is composed of the price(s) of shares of one or more gold ETFs

    and the price(s) of any other instrument(s), which other instruments

    are securities as defined in the Securities Exchange Act of 1934 (``the

    '34 Act''). The Commission has determined to issue this Order

    essentially as proposed. Authority for these exemptions is found in

    Sec. 4(c) of the CEA.

    DATES: Effective Date: December 23, 2010.

    FOR FURTHER INFORMATION CONTACT: Robert B. Wasserman, Associate

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

    Intermediary Oversight, Commodity Futures Trading Commission, Three

    Lafayette Centre, 1151 21st Street, NW., Washington, DC 20581, or Anne

    C. Polaski, Special Counsel, 312-596-0575, apolaski@cftc.gov, Division

    of Clearing and Intermediary Oversight, Commodity Futures Trading

    Commission, 525 W. Monroe Street, Suite 1100, Chicago, Illinois 60661.

    SUPPLEMENTARY INFORMATION:

    I. Introduction

    The OCC is both a Derivatives Clearing Organization (``DCO'')

    registered pursuant to Sec. 5b of the CEA,\1\ and a securities

    clearing agency registered pursuant to Sec. 17A of the '34 Act.\2\

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    \1\ 7 U.S.C. 7a-1.

    \2\ 15 U.S.C. 78q-l.

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    OCC has filed with the CFTC, pursuant to Sec. 5c(c) of the CEA and

    Sec. Sec. 39.4(a) and 40.5 of the Commission's regulations

    thereunder,\3\ a request for approval of a rule that would enable OCC

    to clear and settle options on the GVZ Index traded on the CBOE, a

    national securities exchange, in its capacity as a registered

    securities clearing agency (and not in its capacity as a DCO).\4\

    Section 5c(c)(3) of the CEA provides that the CFTC must approve such a

    rule submitted for approval unless it finds that the rule would violate

    the CEA.

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    \3\ 7 U.S.C. 7a-2(c), 17 CFR 39.4(a), 40.5.

    \4\ See Securities Exchange Act Release No. 62094 (May 13,

    2010), 75 FR 28085 (May 19, 2010) (File No. SR-OCC-2010-07 filed

    with both the CFTC and the Securities and Exchange Commission

    (``SEC'')) and the SEC's approval in Securities Exchange Act Release

    No. 62290 (June 14, 2010), 75 FR 35861 (June 23, 2010). See also

    Securities Exchange Act Release No. 62139 (May 19, 2010), 75 FR

    29597 (May 26, 2010) (SEC approval of the CBOE's listing and trading

    of Options on the GVZ Index).

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    The GVZ Index is an index that measures the implied volatility of

    options on shares of the SPDR[reg] Gold Trust (``SPDR[reg] Gold Trust

    Shares''), an ETF designed to reflect the performance of the price of

    gold bullion.\5\

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    \5\ See Securities Exchange Act Release No. 50603 (Oct. 28,

    2004), 69 FR 64614 (Nov. 5, 2004) (original Approval Order for

    listing and trading shares of the streetTRACKs[reg] Gold Trust

    (renamed the SPDR[reg] Gold Trust on May 20, 2008) on the New York

    Stock Exchange, Inc.).

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    [[Page 81978]]

    The Commission has proposed to permit OCC to clear and settle

    options on indexes that measure the volatility of shares of gold ETFs

    generally, regardless of issuer, that are traded on national securities

    exchanges, in OCC's capacity as a registered securities clearing agency

    (and not in its capacity as a DCO). Such options could include options

    on any index that measures the magnitude of changes in, and is composed

    of the price(s) of shares of one or more gold ETFs and the price(s) of

    any other instrument(s), which other instruments are securities as

    defined in the '34 Act.

    II. 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.\6\ 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.

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    \6\ 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.

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    Section 4(c) does not require the Commission to determine the

    jurisdictional status of the Options on the GVZ Index or other options

    on indexes that measure the volatility of shares of gold ETFs. In

    enacting Sec. 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 and competitive manner.'' \7\

    The Commission believes that permitting Options on the GVZ Index and

    other options on indexes that measure the volatility of shares of gold

    ETFs to be traded on a national securities exchange, and to be cleared

    by OCC in its capacity as a securities clearing agency, as discussed

    above, may foster both financial innovation and competition.

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    \7\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179, 3213

    (``4(c) Conf. Report'').

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    The Options on the GVZ Index and other options on indexes that

    measure the volatility of shares of gold ETFs, described above, are

    novel instruments. Given, among other things, the fact that the

    Commission has provided exemptions for options on shares of gold ETFs

    on prior occasions,\8\ the Commission believes that this is an

    appropriate case for issuing an exemption without issuing a finding as

    to the nature of these particular instruments.

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    \8\ See Order Exempting the Trading and Clearing of Certain

    Products Related to SPDR[reg] Gold Trust Shares, 73 FR 31981 (June

    5, 2008), Order Exempting the Trading and Clearing of Certain

    Products Related to iShares[reg] COMEX Gold Trust Shares and

    iShares[reg] Silver Trust Shares, 73 FR 79830 (Dec. 30, 2008), and

    Order Exempting the Trading and Clearing of Certain Products Related

    to ETFS Physical Swiss Gold Shares and ETFS Physical Silver Shares,

    75 FR 37406 (June 29, 2010) (collectively, the ``Previous Orders'').

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    Section 4(c)(2) of the CEA 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 Commission-

    regulated markets to discharge their regulatory or self-regulatory

    responsibilities under the CEA.\9\

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    \9\ 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.

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    In the November 10, 2010 Federal Register release,\10\ the CFTC

    requested comment as to whether this exemption from the requirements of

    the CEA and regulations thereunder should be granted in the context of

    these transactions. Seven comments were received, including comments

    from OCC and CBOE, which supported the exemption \11\ and five from

    private citizens.\12\

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    \10\ 75 FR 69058 (Nov. 10, 2010).

    \11\ OCC and CBOE express the belief that the exemption, while

    somewhat helpful, does not go far enough, because, in the opinion of

    each of them, all options on ETFs are securities.

    \12\ None of the comments from private citizens discussed the

    GVZ index, gold ETFs, the volatility of shares of gold ETFs, or

    otherwise addressed the merits of this exemption. Each of the seven

    comments is available on the Commission's Web site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=896.

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    III. Findings and Conclusions

    After considering the complete record in this matter, the

    Commission has determined that the requirements of Sec. 4(c) have been

    met. First, the exemption is consistent with the public interest and

    with the purposes of the CEA, including ``promot[ing] responsible

    innovation and fair competition among boards of trade, other markets

    and market participants.'' \13\ It appears consistent with these and

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

    mode of trading and clearing Options on the GVZ Index, as well as other

    options on indexes that measure the volatility of shares of gold ETFs,

    whether the mode applicable to options on securities indexes or on

    commodities indexes, to be determined by competitive market forces.

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    \13\ 7 U.S.C. 5(b). See also 7 U.S.C. 6(c)(1) (purpose of

    exemptions is ``to promote responsible economic or financial

    innovation and fair competition.'').

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    Second, Options on the GVZ Index and other options on indexes that

    measure the volatility of shares of gold ETFs will be entered into

    solely between appropriate persons. Section 4(c)(3) of the CEA includes

    within the term ``appropriate persons'' a number of specified

    categories of persons, and also in subparagraph (K) thereof ``such

    other persons that the Commission determines to be appropriate in light

    of * * * the applicability of appropriate regulatory protections.''

    \14\ National securities exchanges and OCC, as well as their members

    who will intermediate Options on the GVZ Index and other

    [[Page 81979]]

    options on indexes that measure the volatility of shares of gold ETFs

    are subject to extensive and detailed regulation by the SEC under the

    `34 Act. Given such regulatory protections, the Commission has

    determined that all persons trading Options on the GVZ Index and other

    options on indexes that measure the volatility of shares of gold ETFs

    on a national securities exchange, and clearing such products through

    OCC in its capacity as a securities clearing agency, are appropriate

    persons.

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    \14\ 7 U.S.C. 6(c)(3).

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    Third, the grant of this exemption would not have a material

    adverse effect on the ability of the Commission or any Commission-

    regulated market to carry out their regulatory responsibilities under

    the CEA.\15\

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    \15\ As noted in the proposing release, 75 FR at 69059, on

    September 24, 2010, the Commission has also issued a Request for

    Comment on Options for a Proposed Exemptive Order Relating to the

    Trading and Clearing of Precious Metal Commodity-Based ETFs and a

    Concept Release, 75 FR 60411 (September 30, 2010) (``Precious Metal

    ETF Release''). In the Precious Metal ETF Release, the Commission

    requested comment, in part, regarding whether it should issue a

    categorical Section 4(c) exemption to permit options and futures on

    shares of all or some precious metal commodity-based ETFs to be

    traded and cleared as options on securities and security futures,

    respectively. The comment period for the Precious Metal ETF Release

    expired on November 1, 2010; eight comments were received.

    The Commission will use its authority under Section 4(c) of the

    CEA to exempt options on indexes that measure the volatility of

    shares of gold ETFs at this time while it continues to consider the

    appropriateness of a categorical exemption with respect to options

    and futures on shares of precious metal commodity-based ETFs. The

    Commission concludes that options on an index that measures

    commodity price volatility based on shares of such an ETF do not

    raise the same regulatory concerns that may be associated with

    options and futures on shares of an ETF that is based on the

    underlying commodity. In this regard, trading in options and futures

    on shares of a gold ETF could have a potential impact on the

    deliverable supply by removing physical gold from physical marketing

    channels, and thus may impact the gold futures price. An index based

    on volatility measures does not raise these concerns in that such an

    index does not involve ownership of the commodity, either directly

    or indirectly, by traders in options on such an index, and thus

    options on such index would not have a direct impact on deliverable

    supplies or the pricing of gold in the cash market.

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    Therefore, upon due consideration, pursuant to its authority under

    Sec. 4(c) of the CEA, the Commission hereby issues this Order and

    exempts the trading of the following products on national securities

    exchanges, and the clearing of all such products through the Options

    Clearing Corporation (``OCC'') in its capacity as a registered

    securities clearing agency, from the provisions of the CEA and the

    regulations thereunder, to the extent necessary to permit such products

    to be so traded and cleared:

    (a) Options on the GVZ Index;

    (b) Options on any index that measures the volatility (historical

    or expected) of the price(s) of shares of one or more gold ETFs; and

    (c) Options on any index that measures the volatility (historical

    or expected) of price(s) of shares of one or more gold ETFs and the

    price(s) of any other instrument(s), which other instruments are

    securities as defined in Sec. 3(a)(10) of the '34 Act.\16\

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    \16\ 15 U.S.C. 78c(a)(10).

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    This Order is subject to termination or revision, on a prospective

    basis, if the Commission determines upon further information that this

    exemption is not consistent with the public interest. If the Commission

    believes such exemption becomes detrimental to the public interest, the

    Commission may revoke this Order on its own motion.

    IV. Related Matters

    A. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \17\ imposes certain

    requirements on Federal agencies in connection with their conducting or

    sponsoring any collection of information as defined by the PRA. The

    proposed exemptive order would not, if approved, require a new

    collection of information from any entities that would be subject to

    the proposed order.

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    \17\ 44 U.S.C. 3507(d).

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    B. Cost-Benefit Analysis

    Section 15(a) of the CEA \18\ requires the Commission to consider

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

    CEA. By its terms, Sec. 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, it requires that the

    Commission ``consider'' the costs and benefits of its action.

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    \18\ 7 U.S.C. 19(a).

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

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

    public concern: (1) Protection of market participants and the public;

    (2) efficiency, competitiveness, and financial integrity of futures

    markets; (3) price discovery; (4) sound risk management practices; and

    (5) other public interest considerations. The Commission may 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 is 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 has considered the costs and benefits of the order

    in light of the specific provisions of Sec. 15(a) of the CEA. The

    Commission has determined that the costs of this order are not

    significant. Although the order exempts the subject options from

    regulation under the CEA, market participants and the public will

    nonetheless be protected because the national securities exchanges on

    which they trade, and the intermediaries through which they will be

    traded will be subject to comprehensive regulation by the SEC. The

    Commission has determined that the benefits of the order are

    substantial. The order will promote efficiency in the markets, as it

    will provide certainty that the subject options will not be subject to

    duplicative regulation.

    The Commission requested comment on its application of these

    factors in the proposing release. No such comments were received.

    After considering the costs and benefits, the Commission has

    determined to issue this order.

    Issued in Washington, DC, on December 23, 2010 by the

    Commission.

    David A. Stawick,

    Secretary of the Commission.

    [FR Doc. 2010-32812 Filed 12-28-10; 8:45 am]

    BILLING CODE P

    Last Updated: December 30, 2010



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