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e8-31110

  • FR Doc E8-31110[Federal Register: December 30, 2008 (Volume 73, Number 250)]

    [Notices]

    [Page 79830-79833]

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

    [DOCID:fr30de08-50]

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    COMMODITY FUTURES TRADING COMMISSION

    Order Exempting the Trading and Clearing of Certain Products

    Related to iShares[supreg] COMEX Gold Trust Shares and iShares[supreg]

    Silver Trust Shares

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Final order.

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    SUMMARY: On November 12, 2008, the Commodity Futures Trading Commission

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

    Federal Register \1\ a proposal to exempt the trading and clearing of

    certain contracts called ``options'' and other contracts called

    ``security futures'' on each of iShares[supreg] COMEX Gold Trust Shares

    (``Gold Products'') and iShares[supreg] Silver Trust Shares (``Silver

    Products'') (collectively, ``Gold and Silver Products'') from the

    provisions of the Commodity Exchange Act (``CEA'') \2\ and the

    regulations thereunder to the extent necessary to permit them to be

    traded and cleared as described below. The contracts are proposed to be

    traded on national securities exchanges (as to options) and designated

    contract markets registered with the Securities and Exchange Commission

    (``SEC'') as limited purpose national securities exchanges (as to

    security futures), and in both cases to be cleared through the Options

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

    securities clearing agency. Authority for this exemption is found in

    Section 4(c) of the CEA.\3\

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    \1\ 73 FR 66847 (November 12, 2008).

    \2\ 7 U.S.C. 1 et seq.

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

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    DATES: Effective Date: December 3, 2008

    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.

    SUPPLEMENTARY INFORMATION:

    I. Introduction

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

    registered pursuant to Section 5b of the CEA,\4\ and a securities

    clearing agency registered pursuant to Section 17A of the Securities

    Exchange Act of 1934 (``the '34 Act'').\5\

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    \4\ 7 U.S.C. 7a-1

    \5\ 15 U.S.C. 78q-l.

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    OCC filed with the CFTC, pursuant to Section 5c(c) of the CEA and

    Commission Regulations 39.4(a) and 40.5 thereunder,\6\ requests for

    approval of rules and rule amendments that would enable OCC (1) to

    clear and settle contracts called ``options'' (``Options'') on Gold and

    Silver Products traded on national securities exchanges, in its

    capacity as a registered securities clearing agency (and not in its

    capacity as a DCO) and (2) to clear and settle contracts called

    ``security futures'' (``Security Futures'') on Gold and Silver Products

    traded on designated contract markets \7\ registered with the SEC as

    limited purpose national securities exchanges pursuant to Section 6(g)

    of the '34 Act \8\ (``DCMs'') as security futures subject to the CEA

    and CFTC regulations thereunder governing security futures, in both

    cases in OCC's capacity as a registered securities clearing agency (and

    not in its capacity as a DCO).\9\ Section 5c(c)(3) provides that the

    CFTC must approve such rules and rule amendments submitted for approval

    unless it finds that the rules or rule amendments would violate the

    CEA.

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    \6\ 7 U.S.C. 7a-2(c), 17 CFR 39.4(a), 40.5.

    \7\ See Section 5 of the CEA, 7 U.S.C. 7.

    \8\ 15 U.S.C. 78f(g).

    \9\ See SR-OCC-2008-13 and SR-OCC-2008-14. OCC has also filed

    these proposed rule changes with the Securities and Exchange

    Commission (``SEC'').

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    The request for approval concerning the Options and Security

    Futures on Gold and Silver Products was filed effective July 23, 2008.

    By letter dated August 20, 2008, the Director of the Division of

    Clearing and Intermediary Oversight, pursuant to delegated authority,

    extended the review period of the request until October 21, 2008 due to

    the novel and complex issues raised by the products that are the

    subject of the request. By letters dated October 16, 2008 and November

    19, 2008, OCC consented to extensions of the review period, ultimately

    until December 3, 2008.

    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.\10\ The Commission

    [[Page 79831]]

    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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    \10\ 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.'' \11\ Permitting Options and Security Futures on

    Gold and Silver Products to trade on national securities exchanges (as

    to Options) and DCMs (as to Security Futures) and in both cases be

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

    discussed above, appears likely to foster both financial innovation and

    competition. In accordance with the Memorandum of Understanding entered

    into between the CFTC and the SEC on March 11, 2008, and in particular

    the addendum thereto concerning Principles Governing the Review of

    Novel Derivative Products, the Commission believes that novel

    derivative products that implicate areas of overlapping regulatory

    concern should be permitted to trade in either or both a CFTC- or SEC-

    regulated environment, in a manner consistent with laws and regulations

    (including the appropriate use of all available exemptive and

    interpretive authority).

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    \11\ 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 and Security Futures on Gold and Silver Products

    described above are novel instruments. Given, among other things, their

    potential usefulness to the market the Commission believes that this is

    an appropriate case for issuing an exemption without making a finding

    as to the nature of these particular instruments.

    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.\12\

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    \12\ 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 12, 2008 Federal Register release, 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. No comments were received.

    III. Findings and Conclusions

    After considering the complete record in this matter, the

    Commission has determined that the requirements of Section 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, with the public interest, with the CFTC-

    SEC Memorandum of Understanding of March 11, 2008, and with the

    addendum thereto, for the mode of trading and clearing the Options and

    Security Futures on Gold and Silver Products to be determined by

    competitive market forces.

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    \13\ CEA Sec. 3(b), 7 U.S.C. 5(b). See also CEA Sec. 4(c)(1),

    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 and Security Futures on Gold and Silver Products

    will be entered into solely between appropriate persons. Section

    4(c)(3) 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.'' National securities exchanges and OCC, as well as their

    members who will intermediate Options on Gold and Silver Products, are

    subject to extensive and detailed regulation by the SEC under the `34

    Act. Similarly, DCMs and OCC, as well as their members who will

    intermediate Security Futures on Gold and Silver Products, are subject

    to regulation by the SEC and CFTC. Given that the Options and Security

    Futures on Gold and Silver Products will be traded on national

    securities exchanges (as to Options) and DCMs (as to Security Futures),

    the regulatory protections available under securities laws and the

    applicable regulations governing security futures, and the goal of

    promoting fair competition, the Options and Security Futures on Gold

    and Silver Products will be traded by appropriate persons.

    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. There is no reason to believe that

    granting an exemption here would interfere with the Commission's or a

    DCM's ability to oversee the trading of similar products or otherwise

    carry out its duties.

    Therefore, upon due consideration, pursuant to its authority under

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

    exempts the trading of Options on Gold and Silver Products on national

    securities exchanges and the trading of Security Futures on Gold and

    Silver Products on DCMs registered with the SEC as limited purpose

    national securities exchanges, and the clearing of both the Options and

    Security Futures through the 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 the Options

    and Security Futures to be so traded and cleared.

    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'') \14\ imposes certain

    requirements on federal agencies (including the Commission) in

    connection with their conducting or

    [[Page 79832]]

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

    exemptive order will not require a new collection of information from

    any entities that would be subject to the proposed order.

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    \14\ 44 U.S.C. 3507(d).

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    B. Cost-Benefit Analysis

    Section 15(a) of the CEA,\15\ as amended by Section 119 of the

    Commodity Futures Modernization Act of 2000,\16\ 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) as amended

    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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    \15\ 7 U.S.C. 19(a).

    \16\ 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 the order

    in light of the specific provisions of Section 15(a) of the CEA, as

    follows:

    1. Protection of market participants and the public. National

    securities exchanges, DCMs, OCC and their members who would

    intermediate the above-described Options and Security Futures on Gold

    and Silver Products are subject to extensive regulatory oversight.

    2. Efficiency, competition, and financial integrity. The exemptive

    order appears likely to enhance market efficiency and competition since

    it could encourage potential trading of Options and Security Futures on

    Gold and Silver Products through modes other than those normally

    applicable to designated contract markets or derivatives transaction

    execution facilities. Financial integrity will not be affected since

    the Options and Security Futures on Gold and Silver Products will be

    cleared by OCC, a DCO and SEC-registered clearing agency, and

    intermediated by SEC-registered broker-dealers.

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

    competition.

    4. Sound risk management practices. The Options and Security

    Futures on Gold and Silver Products will be subject to OCC's current

    risk-management practices including its margining system.

    5. Other public interest considerations. The exemptive order

    appears likely to encourage development of derivative products through

    market competition without unnecessary regulatory burden.

    The Commission requested comment on its application of these

    factors in the proposing release. No comments were received.

    After considering these factors, the Commission has determined to

    issue this order.

    * * * * *

    Issued in Washington, DC, on December 3, 2008 by the Commission.

    David A. Stawick,

    Secretary of the Commission.

    Commissioner Michael V. Dunn

    Signing Statement

    CFTC Recommendations in Connection With iShares[supreg] Silver Trust

    Shares and iShares[supreg] COMEX Gold Trust Shares

    According to the CFTC/SEC Memorandum of Understanding (MOU), each

    of our agencies ``recognizes that enhanced coordination and cooperation

    concerning issues of common regulatory interest is necessary in order

    to foster market innovation and fair competition and to promote

    efficiency in regulatory oversight.'' The CFTC/SEC MOU further states

    that ``the agencies can facilitate the introduction of novel derivative

    products to market users and investors.'' While the CFTC and SEC may be

    adhering to the words of their MOU, I am not certain that we are

    following the spirit of this document. I fear that it is no easier

    today for novel products to get to market than it was pre-MOU. I also

    fear that if this lack of cooperation and coordination continues, given

    today's financial environment, both agencies will be doing a disservice

    to the markets we regulate and the investors we seek to protect. I

    believe that in order to foster true cooperation between the CFTC and

    SEC, we must hold joint public meetings so that each agency's Chairmen

    and Commissioners set a tone of cooperation for their staffs, and can

    be held accountable to those they serve if their coordination and

    cooperation does not foster the market innovation or efficiency the

    public demands.

    Pending before the Commission are requests by the Options Clearing

    Corporation (``OCC'') for approval of OCC rules allowing them to clear

    iShares[supreg] Silver Trust Shares and iShares[supreg] Comex Gold

    Trust Shares, and an order pursuant to Section 4(c) of the Commodity

    Exchange Act (CEA) exempting the trading and clearing of the iShares

    Option and Futures Contracts as options on securities and security

    futures.

    The propriety of treating the iShares Option and Futures Contracts

    as options on securities and security futures depends on the status of

    the underlying iShares contracts as securities. While I have questions

    about the status of the underlying iShares contracts as securities, see

    SEC v. W.J. Howey Co., 328 U.S. 293 (1946), I believe innovative

    products, in a regulated environment, should be brought to market in a

    timely fashion. If, absent the 4(c) exemptive order, the OCC rules are

    permitted to be deemed approved, an inference might be drawn concerning

    the status of the iShares Option and Futures Contracts as securities.

    Accordingly, I am voting to approve the 4(c) exemptive order and, based

    on the Commission's approval of that order, to approve the OCC rules.

    While I vote to approve the exemptive order and OCC rules, it is my

    hope that in the future, greater cooperation between our agencies will

    facilitate the introduction of similar innovative products regardless

    of who develops them.

    Dissenting in Part and Concurring in Part to Exemptive Order Exempting

    the Trading and Clearing of Certain Products Related to iShares COMEX

    Gold Trust Shares and iShares Silver Trust Shares and Approval of

    Request for Approval of Rules

    As I have noted previously in a similar context, I applaud efforts

    to enhance cooperation and coordination in approving innovative and

    novel products, and it is my hope and expectation that such efforts

    will improve in the near future. I dissent, however, from the

    Commission's issuance of the above-referenced order, because--as I have

    stated before--I believe the Commission's issuance of such an order

    should be predicated upon assurance that the SEC will similarly

    exercise its broad statutory exemptive authorities under the securities

    laws to permit futures exchanges to trade products that are

    [[Page 79833]]

    economically equivalent to those that are or may be approved for

    trading on national securities exchanges, and to allow derivatives

    clearing organizations to clear such products. My objective here is not

    to impair or impede the trading of such cross-jurisdictional products;

    rather, my concern is solely to ensure that futures markets are not in

    any way competitively disadvantaged. I dissent once again, as I have in

    the past, because I do not believe that we have up to this point

    reached the level of coordination and cooperation between our agencies

    that provides the assurance of such reciprocity. I look forward to

    working with colleagues at the SEC on such collaborative efforts

    promptly to achieve these goals. Given the issuance of the order,

    however, I concur in the approval of the request for approval of rules.

    Bart Chilton,

    Commissioner, Commodity Futures Trading Commission.

    [FR Doc. E8-31110 Filed 12-29-08; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: December 30, 2008



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