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e8-26815

  • FR Doc E8-26815[Federal Register: November 12, 2008 (Volume 73, Number 219)]

    [Notices]

    [Page 66847-66849]

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

    [DOCID:fr12no08-45]

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    COMMODITY FUTURES TRADING COMMISSION

    Proposal To Exempt, Pursuant to the Authority in Section 4(c) of

    the Commodity Exchange Act, the Trading and Clearing of Certain

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

    iShares[reg] Silver Trust Shares

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Notice of proposed order and request for comment.

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

    ``Commission'') is proposing to exempt the trading and clearing of

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

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

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

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

    associations (as to security futures), and in either case 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'') \1\ and the regulations thereunder, to

    the extent necessary to permit them to be so traded and cleared.

    Authority for this exemption is found in Section 4(c) of the CEA.\2\

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

    \2\ 7 U.S.C. 6(c).

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    DATES: Comments must be received on or before November 19, 2008.

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

    Federal eRulemaking Portal: http://www.regulations.gov.

    Follow the instructions for submitting comments.

    E-mail: secretary@cftc.gov. Include ``Options and Security

    Futures on Gold and Silver Products'' 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://

    www.CFTC.gov/.

    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,\3\ and a securities

    clearing agency registered pursuant to Section 17A of the Securities

    Exchange Act of 1934 (``the '34 Act'').\4\

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    \3\ 7 U.S.C. 7a-1.

    \4\ 15 U.S.C. 78q-1.

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

    and Commission Regulations 39.4(a) and 40.5 thereunder,\5\ 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 \6\ registered with the SEC as

    limited purpose national securities associations pursuant to Section

    15A(k) of the '34 Act \7\ (``DCMs'') as security futures subject to the

    CEA and CFTC regulations thereunder governing security futures, in

    either case in OCC's capacity as a registered securities clearing

    agency (and not in its capacity as a DCO).\8\ 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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    \5\ 7 U.S.C. 7a-2(c), 17 CFR 39.4(a), 40.5.

    \6\ See Section 5 of the CEA, 7 U.S.C. 7.

    \7\ 15 U.S.C. 78o-3(k).

    \8\ 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 letter dated October 16, 2008, OCC consented

    to an extension of the review period until November 20, 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.\9\ 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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    \9\ 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.'' \10\ 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

    [[Page 66848]]

    either case to be cleared by OCC in its capacity as a securities

    clearing agency, as discussed above, may 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). The CFTC is requesting

    comment on whether it should exempt Options and Security Futures on

    Gold and Silver Products, as described above, that are traded on a

    national securities exchange or a DCM, respectively, and cleared

    through OCC in its capacity as a registered securities clearing agency,

    from the CEA and the Commission's regulations thereunder, to the extent

    necessary to permit them to be so traded and cleared.

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    \10\ HOUSE CONF. REPORT NO. 102-978, 1992 U.S.C.C.A.N. 3179,

    3213 (``4(c) Conf. Report'').

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    In proposing this exemption, the CFTC need not--and does not--find

    that Options on the Gold and Silver Products are (or are not) options

    subject to the CEA, or find that Security Futures on the Gold and

    Silver Products are (or are not) security futures as defined in Section

    1a(31) of the CEA.\11\ During the legislative process leading to the

    enactment of Section 4(c) of the CEA, the House-Senate Conference

    Committee noted that:

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    \11\ 7 U.S.C. 1a(31).

    The Conferees do not intend that the exercise of exemptive

    authority by the Commission would require any determination

    beforehand that the agreement, instrument, or transaction for which

    an exemption is sought is subject to the Act. Rather, this provision

    provides flexibility for the Commission to provide legal certainty

    to novel instruments where the determination as to jurisdiction is

    not straightforward. Rather than making a finding as to whether a

    product is or is not a futures contract, the Commission in

    appropriate cases may proceed directly to issuing an exemption.\12\

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    \12\ 4(c) Conf. Report at 3214-3215.

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    The Options and Security Futures on Gold and Silver Products

    described above are ``novel instruments.'' Given their potential

    usefulness to the market, however, the Commission believes that this

    may be 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.\13\

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    \13\ 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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    The purposes of the CEA include ``promot[ing] responsible

    innovation and fair competition among boards of trade, other markets

    and market participants.'' \14\ It may be 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--whether the mode applicable to

    options on securities or commodities, or to security futures or

    futures--to be determined by competitive market forces. Accordingly,

    the CFTC is requesting comment as to whether this exemption from the

    requirements of the CEA and regulations thereunder should be granted in

    the context of these transactions.

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    \14\ CEA 3(b), 7 U.S.C. 5(b). See also CEA 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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    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. The CFTC is requesting

    comment as to whether all persons trading Options and Security Futures

    on Gold and Silver Products on national securities exchanges and DCMs,

    respectively, and clearing such products on OCC, are appropriate

    persons.

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

    to whether this exemption will interfere with its ability to discharge

    its regulatory responsibilities under the CEA or with the self-

    regulatory duties of any contract market or derivatives transaction

    execution facility.

    III. Request for Comment

    The Commission requests comment on all aspects of the issues

    presented by this proposed order.

    IV. Related Matters

    A. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \15\ 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 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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    \15\ 44 U.S.C. 3507(d).

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    B. Cost-Benefit Analysis

    Section 15(a) of the CEA,\16\ as amended by Section 119 of the

    Commodity Futures Modernization Act of 2000, 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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    \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;

    [[Page 66849]]

    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 this

    proposed 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 proposed

    exemption may 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 proposed exemption may

    encourage development of derivative products through market competition

    without unnecessary regulatory burden.

    After considering these factors, the Commission has determined to

    seek comment on the proposed order as discussed above. The Commission

    invites public comment on its application of the cost-benefit

    provision.

    Issued in Washington, DC, on November 5, 2008 by the Commission.

    David A. Stawick,

    Secretary of the Commission.

    [FR Doc. E8-26815 Filed 11-10-08; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: November 12, 2008



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