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e8-30057

  • FR Doc E8-30057[Federal Register: December 18, 2008 (Volume 73, Number 244)]

    [Notices]

    [Page 77015-77020]

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

    [DOCID:fr18de08-51]

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    COMMODITY FUTURES TRADING COMMISSION

    Order: (1) Pursuant to Section 4(c) of the Commodity Exchange Act

    (a) Permitting Eligible Swap Participants To Submit for Clearing and

    ICE Clear U.S., Inc. and Futures Commission Merchants To Clear Certain

    Over-The-Counter Agricultural Swaps and (b) Determining Certain Floor

    Brokers and Traders To Be Eligible Swap Participants; and (2) Pursuant

    to Section 4d of the Commodity Exchange Act, Permitting Certain

    Customer Positions in the Foregoing Swaps and Associated Property To Be

    Commingled With Other Property Held in Segregated Accounts

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Order.

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    SUMMARY: On December 7, 2007, the Commodity Futures Trading Commission

    (``CFTC'' or ``Commission'') published for public comment requests (a)

    to permit ICE Clear U.S., Inc. (``ICE Clear'') to clear certain over-

    the-counter (``OTC'') swap contracts and (b) to determine that certain

    ICE Futures U.S., Inc. (``ICE Futures'') floor brokers and traders are

    Eligible Swap Participants (``ESPs'') for the purpose of trading those

    OTC swaps (``Notice.'').\1\ On January 7, 2008, the comment period was

    extended to February 6, 2008.\2\ ICE Clear also filed a request for an

    order pursuant to Section 4d of the Commodity Exchange Act (``CEA'' or

    ``Act'') to allow ICE Clear and Futures Commission Merchants (``FCMs'')

    clearing through ICE Clear to commingle positions in those cleared OTC

    swap contracts and property supporting those positions with property

    and positions otherwise required to be held in customer segregated

    accounts. That request was published on the CFTC's Web site for public

    comment during the same timeframe with the same comment deadline. The

    Commission has reviewed the comments made in response to the requests

    for comment and the entire record in this matter and has determined to

    issue an order granting the requests.

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    \1\ 72 FR 68862 (December 7, 2007).

    \2\ 73 FR 1205 (January 7, 2008).

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    DATES: Effective Date: December 12, 2008.

    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, Senior 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 4(c) Petition

    ICE Clear, the clearing organization for ICE Futures, sought to

    offer ESPs who enter into certain bilateral swap transactions involving

    coffee, sugar, or cocoa the opportunity to submit them to ICE Clear for

    clearing. ICE Clear 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,\3\ that these swap agreements are

    commonly entered

    [[Page 77016]]

    into by participants exchanging fixed for floating reference prices,

    and that participants in these markets include trade houses, commodity

    lenders, producers, end users, and large speculators.

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    \3\ 17 CFR Part 35.

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    Part 35 of the Commission's regulations exempts, subject to

    conditions, swap agreements and eligible persons entering into these

    agreements from most provisions of the CEA.\4\ The term ``swap

    agreement'' is defined to include, among other types of agreements, ``a

    * * * commodity swap,'' \5\ which latter term includes swaps on

    agricultural products.\6\ 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 explicitly permit certain off-exchange

    derivative transactions, and thus to promote innovation and

    competition.\7\ In the Commodity Futures Modernization Act of 2000,\8\

    Congress enacted a number of exemptions and exclusions from the CEA for

    contracts traded outside of Designated Contract Markets (``DCMs''), but

    none apply to agricultural contracts.\9\

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    \4\ Jurisdiction is retained for, inter alia, provisions of the

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

    35.2, 17 CFR 35.2 (Commission regulations are hereinafter cited as

    ``Reg. Sec. ----'').

    \5\ Reg. Sec. 35.1(b)(1)(i).

    \6\ ``Commodity'' is defined in Section 1a(4) of the CEA 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.''

    \7\ See 58 FR 5587 (January 22, 1993). Section 4(c) of the CEA

    was added by section 502(a) of the Futures Trading Practices Act of

    1992, Pub. L. 102-546, 106 Stat. 3590.

    \8\ Pub. L. 06-554, 114 Stat. 2763 (2000).

    \9\ See, e.g., CEA section 2(d), (g), and (h).

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    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,\10\ that the agreement be solely between

    ESPs,\11\ 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.\12\ 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''

    contracts, with the clearinghouse interposed as central

    counterparty.\13\ A cleared-only contract could be offset by another

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

    result in contracts that were fungible with other cleared-only

    contracts with approximately equivalent terms. In addition, due to the

    clearing guarantee, the creditworthiness of the counterparty would no

    longer be a consideration. Accordingly, the OTC contracts ICE Clear

    clears in this fashion would not fulfill all of the conditions of Part

    35.

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

    \11\ Reg. Sec. 35.2(a).

    \12\ Reg. Sec. 35.2(c).

    \13\ 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.

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    ICE Clear also requested an order under CEA Section 4d so that ICE

    Clear and its clearing members can hold the cleared-only contracts and

    property supporting them in the customer segregated account along with

    exchange-listed futures contracts and associated property, resulting in

    improved collateral management and other benefits.

    II. The ICE Futures Petition

    ICE Futures, a U.S. DCM, sought 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

    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.\14\ Therefore, ICE Futures petitioned the Commission for an

    order pursuant to Section 4(c) of the CEA that would permit all ICE

    Futures 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.

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    \14\ Reg. Sec. 35.1(b)(2)(x).

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    ICE Futures represented 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 FCMs.

    The Commission stated that it anticipated that any Section 4(c)

    order issued in response to ICE Futures' request would be subject to

    the following conditions:

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

    executed pursuant to the requirements of Part 35, as modified by the

    order.

    (2) The ICE Futures floor member would have to obtain a financial

    guarantee for the OTC swap transactions from an ICE Futures 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 eligible products identified in the order.

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

    for clearance by an ICE Futures clearing member to ICE Clear pursuant

    to ICE Clear rules.

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

    transactions with another ICE Futures floor member as the counterparty

    for ICE Clear cleared-only contracts.

    (6) ICE Futures would maintain appropriate compliance systems in

    place to monitor the OTC swap transactions of its floor members.\15\

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    \15\ The Commission noted that 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 (``CME'')

    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 a second order (the

    first was issued February 4, 2003) that permitted New York

    Mercantile Exchange (``NYMEX'') floor members to be ECPs with

    respect to OTC transactions in exempt commodities entered into

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

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    III. Sections 4(c) and 4d of the CEA

    A. Permitting the OTC Contracts To Be Cleared

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

    responsible

    [[Page 77017]]

    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.\16\ 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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    \16\ 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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    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 and

    competitive manner.'' \17\ The Commission requested comment on whether

    it should permit the OTC transactions in coffee, sugar, and cocoa to be

    cleared through ICE Clear as described above. The Commission also

    requested comment on whether it should determine ICE Futures floor

    members, subject to certain conditions, to be ESPs for the purpose of

    entering into the OTC transactions in coffee, sugar, and cocoa.

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    \17\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179,

    3213.

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

    from Section 4(a) of the CEA only when the Commission 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.\18\

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    \18\ 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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    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''). ICE Futures has

    requested that the Commission expand this list of appropriate persons

    to include ICE Futures floor members. The Commission requested comment

    on this determination. The Commission also requested 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

    (``DCO'').

    B. Segregation of Customer Funds

    CEA Section 4d(a)(2) prohibits commingling customer positions

    executed on a contract market and property supporting such positions

    together with any property not required to be so segregated. Section

    4d(a)(2) provides that the Commission may grant exceptions to this

    prohibition by order. In this case, the OTC coffee, sugar, and cocoa

    contracts are not executed on a contract market and thus holding them

    together with customer property and positions required to be segregated

    would, absent a Commission order, violate Section 4d. As discussed

    further below, the Commission has analyzed the risks and benefits

    associated with commingling the cleared-only positions and associated

    customer funds with positions and customer funds otherwise required to

    be segregated, and has determined that the benefits of the proposal

    outweigh the risks and that the proposal, along with conditions set

    forth by the Commission, will provide for a sufficient level of

    safeguards to address the risks adequately.

    IV. Comment Letters

    The Commission received eleven letters in response to its request

    for comment. An initial comment letter from the CME Group Inc. (``CME

    Group'') requested an extension of the comment period and listed

    various concerns CME Group suggested might have to be addressed in

    order for the Commission to act on ICE Clear's request for an extension

    of the swaps exemption of Part 35. However, a subsequent comment letter

    from CME Group took the position that the Commission should permit the

    clearing of OTC agricultural swap contracts but pursuant to appropriate

    conditions to protect the market and market participants in a manner

    that would establish a level playing field for all DCOs.

    Brief comments from two individuals expressed concerns related to

    their belief that the OTC transactions would be undertaken primarily by

    large traders, such as hedge funds, to the detriment of smaller traders

    who use the markets for hedging. Neither of these comments provided any

    evidence that would support the conclusion that smaller traders would

    be adversely affected by the requested relief. One of the comments did

    note that there was no mention of the application of speculative

    limits. As discussed further below, the order will require ICE Futures

    to apply position accountability levels to the cleared-only contracts

    that are appropriate in light of the position accountability levels

    applicable to the underlying futures contracts.

    The remaining seven comment letters are from two futures exchanges

    and five commodity trading firms, all of which

    [[Page 77018]]

    support ICE Clear's and ICE Futures' requests for exemption.

    With respect to the ICE Futures request that floor members be

    deemed ESPs, NYMEX commented regarding the Commission's assertion that

    the proposed conditions pertaining to the determination were

    substantially similar to the conditions included in two previously

    issued Commission orders that permit floor members to be ECPs pursuant

    to Section 1a(12)(C) of the CEA.\19\ Specifically, NYMEX stated that

    the Commission previously has required that the clearing member

    providing a financial guarantee to a floor member deemed to be an ECP

    must maintain capitalization of a certain size to be able to issue such

    a guarantee, that the financial requirement was not included in the

    list of conditions to be applied to ICE Futures clearing members

    guaranteeing floor members deemed to be ESPs, and that the Notice did

    not provide any policy rationale for imposing different financial

    standards for clearing member guarantors.

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    \19\ See supra note 15.

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    On February 4, 2003, the Commission issued to NYMEX the first order

    determining that floor members could be ECPs. Due to the order's novel

    nature and the concern that a trader entering into OTC transactions

    could create financial difficulty for the guarantor FCM, the clearing

    entity, or other clearing firms, the order required clearing members

    that guaranteed and cleared OTC transactions to meet specified minimum

    capital requirements, and for NYMEX to submit a report to the

    Commission not later than 30 days after the order was in effect for 18

    months.\20\

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    \20\ The order required that, as part of the report, NYMEX

    review its experiences and the experiences of its floor members and

    clearing members under the order during those 18 months.

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    CME subsequently petitioned the Commission for an order that would

    permit CME floor members to be deemed ECPs. After reviewing the impact

    of the NYMEX order upon NYMEX and its floor members, and noting the

    lack of problems associated with it, the Commission issued an order to

    CME that did not include a special guarantor capitalization

    requirement.\21\ Immediately thereafter, Commission staff advised NYMEX

    that it could petition for a new or amended order that would not

    include a special guarantor capitalization requirement, but NYMEX to

    date has not so petitioned.

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    \21\ The floor member must have a guarantee from, and the trades

    must be cleared by, a CME clearing member FCM. That FCM must have

    adjusted net capital that equals or exceeds the greater of

    $2,500,000, CFTC requirements as computed pursuant to Reg. Sec.

    1.17, or Securities and Exchange Commission requirements.

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    V. Findings and Conclusions

    After considering the complete record in this matter, including the

    comments received, the Commission finds that the requirements of CEA

    Section 4(c) have been met with respect to the requests for an order

    permitting the clearing of certain OTC transactions and determining

    that certain floor brokers and floor traders qualify as ESPs.

    First, permitting the clearing of these transactions is consistent

    with the public interest and with the purposes of the CEA. The purposes

    of the CEA include ``promot[ing] responsible innovation and fair

    competition among boards of trade, other markets, and market

    participants.'' \22\ The purpose of exemptions is ``to promote economic

    or financial innovation and fair competition.'' \23\ Permitting the

    clearing of OTC coffee, sugar, and cocoa transactions by ICE Clear, as

    well as permitting ICE Futures floor members to trade such products,

    would appear to foster both financial innovation and competition. It

    could benefit the marketplace by providing ESPs the ability to bring

    together flexible negotiation with central counterparty guarantees and

    capital efficiencies. Clearing also may increase the transparency of

    the OTC market.

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    \22\ CEA section 3(b), 7 U.S.C. 5(b).

    \23\ CEA section 4(c)(1), 7 U.S.C. 6(c)(1).

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    Second, the bilateral transactions in the OTC agricultural swaps

    would be entered into solely between appropriate persons. These would

    be limited to those persons qualifying as ESPs under Part 35 and those

    floor brokers and traders deemed ESPs herein by the Commission. ICE

    Futures floor brokers or traders that entered into the swap would be

    registered with the Commission and would have the requisite skills,

    experience, and market expertise to trade for their own accounts. Each

    such floor member would be financially backed by the ICE Clear clearing

    member that submits the swap for clearing, and all of its activity in

    the OTC agricultural swaps, limited only to coffee, sugar, or cocoa,

    will be closely monitored by ICE Futures.

    Third, the exemption would not have a material adverse effect on

    the ability of the Commission or any DCM to carry out its regulatory

    responsibilities under the CEA. ICE Clear will use the same systems,

    procedures, people, and processes to clear the bilateral agricultural

    swap contracts in coffee, sugar, and cocoa as it currently employs with

    respect to all of the other transactions it clears.

    With respect to ICE Clear's request for an order pursuant to

    Section 4d permitting ICE Clear and FCMs clearing through ICE Clear to

    commingle funds supporting positions in the cleared-only contracts

    resulting from these agricultural swaps with customer funds required to

    be segregated under CEA Section 4d, the Commission has considered

    whether the additional risk to customers presented by such commingling

    can be adequately addressed and mitigated. Additional risk is presented

    to customers as a result of the risk of default involving the

    commingled cleared-only contracts. However, the carrying FCM should

    have adequate means to address a default by a customer trading these

    contracts. Since each cleared-only contract will have identical

    economic terms as its underlying corresponding contract listed on ICE

    Futures and will settle on both a daily and final basis to that

    corresponding listed contract, the carrying FCM (or, if necessary, ICE

    Clear) economically could hedge any contracts that are the subject of a

    default by entering into the offsetting underlying exchange-listed

    contract. Therefore, the additional risk would be mitigated. The order

    requires that ICE Clear review its members' risk management

    capabilities to verify that all members participating in the program

    maintain sufficient operational capability to engage in such offsetting

    transactions. The order also requires that ICE Futures (1) maintain a

    coordinated market surveillance program that encompasses the cleared-

    only contracts and the underlying futures contracts, and (2) adopt

    position accountability levels for each of the cleared-only contracts

    subject to the order that are appropriate in light of the position

    accountability levels applicable to the underlying futures contracts.

    These measures should mitigate market risk.

    Accordingly, the Commission has determined that ICE Clear will be

    able to employ reasonable safeguards to protect customer funds, and

    that it will be able to measure, monitor, manage, and account for risks

    associated with transactions and open interest in the bilateral swap

    contracts as it does for other contracts it clears. The Commission

    believes that ICE Clear has demonstrated sufficiently that it will

    continue to comply with all of the core principles in CEA Section 5b of

    the Act in connection with holding customer positions in OTC

    agricultural swaps with property held in segregated accounts pursuant

    to CEA Section 4d.

    [[Page 77019]]

    VI. Related Matters

    A. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \24\ 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 will not require a new

    collection of information from any entities that would be subject to

    the exemption.

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    \24\ 44 U.S.C. 3507(d).

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    B. Cost-Benefit Analysis

    Section 15(a) of the CEA,\25\ 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.

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    \25\ 7 U.S.C. 19(a).

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    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 has considered the costs and benefits of this

    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 requests will only be entered

    into by persons who are ``appropriate persons'' as set forth in Section

    4(c) of the Act. Only ESPs and those floor brokers and traders deemed

    ESPs pursuant to ICE Futures' request herein will enter into

    transactions in the OTC agricultural swaps that are the subject of ICE

    Clear's request. Allowing the commingling of funds supporting positions

    in the resulting cleared-only contracts with customer funds required to

    be segregated under CEA Section 4d will benefit ESP market participants

    by facilitating clearing and the reduction of credit risk for contracts

    that meet market participants' specific risk-management requirements.

    ESP customers holding positions in cleared-only contracts also would

    benefit from having their property held in segregated accounts in the

    event of the insolvency of an FCM. In addition, the order is premised

    on ICE Clear maintaining a number of existing risk management and other

    safeguards.

    2. Efficiency and competition. Allowing these swap agreements to be

    cleared appears likely to promote liquidity and transparency in the

    markets for OTC derivatives on coffee, sugar, and cocoa, as well as on

    futures on those commodities. Determining ICE Futures floor members to

    be ESPs will likely increase the flow of trading information between

    markets, increase the pool of potential counterparties for participants

    trading OTC, and provide additional trading expertise to the market.

    The commingling of funds supporting cleared-only positions with

    customer funds supporting exchange-traded positions should result in

    improved, more efficient, collateral management and lower

    administrative costs since risk-offsetting positions will be held

    together in the same account rendering a more precise estimation of the

    risk posed by the account. These types of efficiencies also generally

    support competition.

    3. Financial integrity of futures markets and price discovery.

    Price discovery is likely to be enhanced through market competition.

    The extended exemption also may promote financial integrity by

    providing the benefits of clearing to these OTC markets. As discussed

    above, the risks associated with commingling funds supporting cleared-

    only positions with customer funds supporting exchange-traded positions

    are appropriately mitigated.

    4. Sound risk management practices. Clearing of OTC transactions is

    likely to foster risk management by the participant counterparties. ICE

    Clear's risk management practices in clearing these transactions are

    subject to the Commission's supervision and oversight.

    5. Other public interest considerations. The granted exemptions are

    likely to encourage market competition in agricultural derivatives

    products without unnecessary regulatory burden.

    The Commission requested comment on its application of these

    factors in the proposing release. No comments were received.

    VII. Order

    After considering the above factors and the comment letters

    received in response to its request for comments on its application of

    these factors in the proposing release, the Commission has determined

    to issue the following:

    Order

    (1) The Commission, pursuant to its authority under CEA Section

    4(c) and subject to the conditions below, hereby:

    (A) Permits ESPs to submit for clearing, and FCMs and ICE Clear to

    clear, OTC agricultural swap contracts in coffee, sugar, or cocoa; and

    (B) Permits all ICE Futures floor members that are registered with

    the Commission, when trading for their own accounts, to be deemed ESPs

    for the purpose of entering into bilateral swap transactions involving

    coffee, sugar, or cocoa agricultural commodities to be cleared on ICE

    Clear.

    (2) The Commission, pursuant to its authority under CEA Section 4d

    and subject to the conditions below, hereby permits ICE Clear and its

    clearing members that are registered FCMs and acting pursuant to this

    order to hold money, securities, and other property, used to margin,

    guarantee, or secure transactions in OTC agricultural swap contracts

    involving coffee, sugar, or cocoa and belonging to customers that are

    ESPs (including customers that are deemed ESPs in accordance with this

    order) with other customer funds used to margin, guarantee, or secure

    trades or positions in commodity futures or commodity option contracts

    executed on or subject to the rules of a contract market designated

    pursuant to Section 5 of the Act in a segregated account or accounts

    maintained in accordance with Section 4d of the CEA (including any

    orders issued pursuant to Section 4d(a)(2) of the CEA) and the

    Commission's regulations thereunder, and all such customer funds shall

    be accounted for and treated and dealt with as belonging to the

    customers of the ICE Clear clearing member consistently with CEA

    Section 4d and the regulations thereunder.

    (3) This order is subject to the following conditions:

    (A) The contracts, agreements, or transactions subject to this

    order must be executed pursuant to the requirements of Part 35 of the

    Commission's regulations, as modified herein, and are limited to

    cleared-only contracts in the following agricultural products: coffee,

    sugar, or cocoa;

    [[Page 77020]]

    (B) The economic terms and the daily settlement prices of each

    contract, agreement, or transaction subject to this order must be

    analogous to the economic terms, and equal to the daily settlement

    prices, respectively, of a corresponding futures contract listed for

    trading on ICE Futures;

    (C) All contracts, agreements, or transactions subject to this

    order must be submitted for clearing by an ICE Futures clearing member

    to ICE Clear pursuant to ICE Clear rules;

    (D) Each ICE Futures floor member acting as an ESP pursuant to this

    order must be the subject of a financial guarantee from a member of ICE

    Clear covering the trading of the OTC swap contracts, agreements, or

    transactions subject to this order. The clearing member must be

    registered with the Commission as an FCM and must clear for the floor

    member the contracts, agreement, or transactions covered by the

    financial guarantee;

    (E) An ICE Futures floor member is prohibited from entering into a

    transaction in a cleared-only contract subject to this order with

    another ICE Futures floor member as the counterparty;

    (F) ICE Clear and its clearing members will mark to market each

    cleared-only contract subject to this order on a daily basis in

    accordance with ICE Clear rules;

    (G) ICE Clear will apply its margining system and calculate margin

    rates for each cleared-only contract subject to this order in

    accordance with its normal and customary practices;

    (H) ICE Futures must maintain appropriate compliance systems in

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

    transactions permitted pursuant to this order;

    (I) ICE Clear will apply appropriate risk management procedures

    with respect to transactions and open interest in the cleared-only

    contracts subject to this order. ICE Clear will conduct financial

    surveillance and oversight of its members clearing the cleared-only

    contracts, and will conduct oversight sufficient to assure ICE Clear

    that each such member has the appropriate operational capabilities

    necessary to manage defaults in such contracts. ICE Clear and its

    clearing members acting pursuant to this order will take all other

    steps necessary and appropriate to manage risk related to clearing

    cleared-only contracts;

    (J) ICE Clear will make available open interest and settlement

    price information for the cleared-only contracts in the eligible

    products (coffee, sugar, and cocoa) on a daily basis in the same manner

    as for contracts listed on ICE Futures;

    (K) ICE Futures shall establish and maintain a coordinated market

    surveillance program that encompasses the cleared-only contracts

    subject to this order and the underlying futures contracts listed by

    ICE Futures on its designated contract market. ICE Futures shall adopt

    position accountability levels for each of the cleared-only contracts

    subject to this order that are appropriate in light of the position

    accountability levels applicable to the underlying futures contracts.

    (L) Cleared-only contracts subject to this order shall not be

    treated as fungible with any contract listed for trading on ICE

    Futures.

    (M) Each FCM acting pursuant to this order shall keep the types of

    information and records that are described in CEA Section 4g and

    Commission regulations thereunder, including but not limited to Reg.

    Sec. 1.35, with respect to all cleared-only contracts in eligible

    products subject to this order. Such information and records shall be

    produced for inspection in accordance with the requirements of Reg.

    Sec. 1.31;

    (N) ICE Futures shall provide to the Commission the types of

    information described in Part 16 of the Commission's regulations in the

    manner described in Parts 15 and 16 of the Commission's regulations

    with respect to all cleared-only contracts;

    (O) ICE Clear will apply large trader reporting requirements to

    cleared-only contracts in accordance with its rules, and each FCM

    acting pursuant to this order shall provide to the Commission the types

    of information described in Part 17 of the Commission's regulations in

    the manner described in Parts 15 and 17 of the Commission's regulations

    with respect to all cleared-only contracts in which it participates;

    and

    (P) ICE Clear and ICE Futures shall at all times fulfill all

    representations made in their requests for relief under CEA Sections

    4(c) and 4d and all supporting materials thereto.

    This order is based upon the representations made and supporting

    material provided to the Commission by ICE Clear and ICE Futures in

    their requests. Any material change or omissions in the facts and

    circumstances pursuant to which this order is granted might require the

    Commission to reconsider its finding that the exemptions set forth

    herein are appropriate. Further, in its discretion, the Commission may

    condition, modify, suspend, terminate, or otherwise restrict the

    exemptions granted in this order, as appropriate, on its own motion.

    Issued in Washington, DC, on December 12, 2008 by the

    Commission.

    David A. Stawick,

    Secretary of the Commission.

    [FR Doc. E8-30057 Filed 12-17-08; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: December 18, 2008



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