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2010-14682

  • FR Doc 2010-14682[Federal Register: June 17, 2010 (Volume 75, Number 116)]

    [Notices]

    [Page 34434-34438]

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

    [DOCID:fr17jn10-54]

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    COMMODITY FUTURES TRADING COMMISSION

    Request To Amend an Existing Order Under Section 4(c) of the

    Commodity Exchange Act 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

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Notice of Request for Comment on an Amendment to an Exemption

    Order.

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

    ``Commission'') is requesting comment on whether to amend an existing

    order to extend the exemption granted to ICE Clear U.S., Inc. (``ICE

    Clear'') under Section 4(c) of the Commodity Exchange Act (``Act'') \1\

    to certain over-the-counter (``OTC'') agricultural swaps for which

    there is no corresponding futures contract listed for trading on ICE

    [[Page 34435]]

    Futures U.S., Inc. (``ICE Futures'') at the time of acceptance for

    clearing. Authority for extending this relief is found in Section 4(c)

    of the Act.

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

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    DATES: Comments must be received on or before August 2, 2010.

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

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

    http://frwebgate.access.gpo/cgi-bin/leaving. Follow the instructions

    for submitting comments.

    E-mail: iceclearotc4c@cftc.gov. Include ``ICE Clear

    Section 4(c) Amended Exemption Request'' in the subject line of the

    message.

    Fax: 202-418-5521.

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

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

    NW., Washington, DC 20581.

    Courier: Same as mail above.

    All comments received will be posted without change to http://

    www.CFTC.gov/.

    FOR FURTHER INFORMATION CONTACT: Robert B. Wasserman, Associate

    Director, 202-418-5092, rwasserman@cftc.gov, or Alicia L. Lewis,

    Attorney-Advisor, 202-418-5862, alewis@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. Background

    In September 2007, ICE Clear, a registered derivatives clearing

    organization (``DCO'') and the clearing organization for ICE Futures,

    submitted applications to the Commission requesting an order (1)

    pursuant to Section 4(c) of the Act, (a) to permit the clearing of

    coffee, sugar, and cocoa OTC swap contracts and (b) to determine that

    certain ICE Futures floor brokers and traders are eligible swap

    participants (``ESPs'') for the purpose of trading these OTC swaps; and

    (2) pursuant to Section 4d of the Act, to permit certain customer

    positions in these cleared OTC swap contracts and the property

    collateralizing these positions to be commingled with property and

    positions otherwise required to be held in customer segregated

    accounts. Part 35 of the Commission's regulations \2\ allows the

    trading but not the clearing of such contracts.\3\ On December 12,

    2008, the Commission approved the applications and issued an order

    pursuant to Sections 4(c) and 4d of the Act (the ``Previous

    Order'').\4\ ICE Clear represents that it commenced clearing the

    permitted swaps on February 13, 2009.

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    \2\ 17 CFR Part 35.

    \3\ Part 35 of the Commission's regulations, 17 CFRPart 35,

    promulgated pursuant to the authority of Section 4(c) of the Act,

    exempts swap agreements and eligible persons entering into these

    agreements from most provisions of the Act. The term ``swap

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

    ``a * * * commodity swap,'' which latter term includes swaps on

    agricultural products. While the Commodity Futures Modernization Act

    of 2000 amends the Act to exempt the trading of many OTC

    transactions from many provisions of the Act, these exemptions

    explicitly do not apply to OTC transactions in agricultural

    commodities. Accordingly, swaps involving agricultural commodities

    continue to rely upon the exemptions of Part 35. Part 35 requires,

    among other things, that a swap agreement not be part of a fungible

    class of agreements that are standardized as to their material

    economic terms 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. Thus, absent an

    additional exemption pursuant to Section 4(c) of the Act, ICE Clear

    could not engage in the clearing of OTC swap contracts in cocoa,

    sugar and coffee, since such contracts would not fulfill all of the

    conditions for exemption in Part 35. For further discussion of the

    Part 35 analysis, see 72 FR 68862, 68863 (Dec. 6, 2007).

    As discussed further below, the Commission is requesting comment

    on the impact of pending financial services reform legislation on

    Part 35.

    \4\ 73 FR 77015 (Dec. 18, 2008).

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    The clearing process for these swaps involves the replacement of

    each OTC swap with a ``cleared-only'' contract, the essential terms of

    which match the terms, including the expiration date, of a

    corresponding underlying exchange-listed futures contract in coffee,

    sugar, or cocoa traded on ICE Futures. The clearinghouse is interposed

    as the central counterparty. The cleared-only contracts are financially

    settled while the underlying futures contracts are settled with

    physical delivery.

    In granting the relief requested, the Commission imposed certain

    terms and conditions in the Previous Order to address its regulatory

    concerns and mitigate the risks associated with the clearing of OTC

    agricultural swaps. With respect to Section 4d of the Act, the

    Commission evaluated whether ICE Clear's proposal would provide

    appropriate protection for customer funds since futures customers would

    be exposed to a different source of risk if funds supporting contracts

    executed in the OTC market were commingled with customer funds

    supporting futures transactions in customer segregated accounts. In

    analyzing this issue, the Commission considered (1) the ability of a

    futures commission merchant (``FCM'') or DCO to offset these contracts

    in the OTC markets in the event of a default on such contracts by a

    customer or an FCM, respectively, since a cleared-only contract could

    be offset only by another cleared-only contract and (2) the

    availability of the exchange-traded markets for coffee, sugar and cocoa

    for hedging purposes, as well as the correspondence between the terms

    of a cleared-only contract and a corresponding exchange-traded contract

    for these products. Based on ICE Clear's proposal, the Commission found

    that these cleared-only contracts correspond to transactions in a

    potentially liquid OTC market and, importantly, that they were

    economically equivalent to, and thus could be effectively hedged with

    an exchange-listed futures contract.\5\

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    \5\ See 73 FR at 77018.

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    Accordingly, in order to ensure an effective means of risk

    management for these cleared-only contracts, the Commission included

    Condition 3(B) in the Previous Order, which required that the cleared-

    only contracts be closely related to underlying futures contracts

    traded on ICE Futures. Specifically, Condition 3(B) provides that:

    ``[t]he 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.''

    The fulfillment of this condition would enable an FCM carrying the

    positions of a defaulting customer or ICE Clear carrying the positions

    of a defaulting member, to economically hedge those positions in the

    ICE Futures market by entering into an equal but opposite position in

    the corresponding listed futures contract. Thus, the Commission

    considered economic hedging in the exchange-listed market and actual

    offset based on the OTC market as feasible risk management measures for

    FCMs carrying cleared-only positions, as well as for ICE Clear itself.

    II. The Current ICE Clear Petition

    ICE Clear seeks to modify Condition 3(B) of the Previous Order to

    allow it to clear OTC swaps in coffee, sugar and cocoa that have

    economic terms analogous to the terms of corresponding futures

    contracts listed for trading on ICE Futures with the exception of their

    expiration dates. Such expiration dates would be permitted to be beyond

    that of the corresponding futures contracts. These OTC swap contracts

    are referred to herein as ``Long-Dated Swaps''. The clearing of Long-

    Dated Swaps will require ICE Clear to establish independent settlement

    prices for such swaps until there is a corresponding futures contract,

    with the same expiration date, listed for trading on ICE

    [[Page 34436]]

    Futures. In order to establish such prices, ICE Clear represents that

    it has developed specific pricing models for Long-Dated Swaps and will

    use those models along with the best available market data to determine

    settlement prices.\6\ In addition, ICE Clear represents that only ESPs

    would be permitted to trade these swaps.

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    \6\ ICE Clear proposes to use a process similar to the industry-

    standard pricing procedures for options pricing models used to value

    longer dated options positions in less liquid contract months.

    Moreover, ICE Clear represents that the market data used will

    include: (i) Cleared-swaps data submitted to the clearinghouse; (ii)

    year-on-year spread values for the underlying traded futures

    contract for actively traded months; (iii) OTC transaction data

    solicited from third-party brokers such as the major inter-dealer

    brokers; (iv) indicative quotes provided by third-party brokers; and

    (v) historical data.

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    ICE Clear has not requested an order pursuant to Section 4d of the

    Act permitting customer positions in these Long-Dated Swap contracts

    and the property collateralizing those positions to be commingled with

    property and positions otherwise required to be held in customer

    segregated accounts. Accordingly, positions in such contracts, and

    property collateralizing such positions, would not be commingled with

    positions and related collateral segregated pursuant to Section 4d of

    the Act.\7\ Long-Dated Swaps, and property collateralizing such swaps,

    would be treated as other cleared-only contracts by ICE Clear and its

    clearing members that are registered as FCMs.

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    \7\ Pursuant to recent amendments to Part 190 of the

    Commission's Regulations, 17 CFR Part 190, positions in these

    contracts, and related collateral, could be included as Cleared OTC

    Derivatives, if ICE Clear's rules or bylaws were to require them to

    be segregated. The amendments were published at 75 FR 17297 (Apr. 6,

    2010).

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    Eventually, however, the expiration date of a Long-Dated Swap will,

    after the passage of time, correspond to that of a futures contract

    listed for trading by ICE Futures (at that point, the Long-Dated Swap

    would become an ``Aged Long-Dated Swap''). An Aged Long-Dated Swap

    would be economically equivalent to an OTC swap that was first accepted

    for clearing after the listing of a corresponding futures contract. As

    a result, an Aged Long-Dated Swap would also satisfy all the

    requirements specified in the Previous Order, and therefore, could be

    carried in the customer segregated account pursuant to the provisions

    of that order. ICE Clear would not establish an independent settlement

    price for an Aged Long-Dated Swap, but instead would use the settlement

    price of the corresponding listed futures contract.

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

    Section 4(c)(1) of the Act empowers the Commission 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 Act (subject to exceptions not relevant here) where

    the Commission determines that the exemption would be consistent with

    the public interest.\8\ 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. In

    enacting Section 4(c) of the Act, 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.'' \9\ Permitting the inclusion of Long-Dated Swaps

    in the class of OTC agricultural swap transactions that can be cleared

    by ICE Clear may foster both financial innovation and competition. It

    may benefit the marketplace by providing ESPs with the ability to bring

    together flexible negotiation with central counterparty guarantees, as

    well as capital and operational efficiencies. ESPs also may precisely

    hedge their cash positions with offsetting swap positions that match

    closely in terms of expiration date. The Commission is requesting

    comment on whether it should extend the permission to clear granted

    previously to include those OTC swap contracts for which the expiration

    date is beyond that of any corresponding futures contract listed for

    trading on ICE Futures at the time of acceptance for clearing.

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    \8\ Section 4(c)(1) of the Act, 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.

    \9\ 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

    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 Act; 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 duties under the Act.\10\ 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,\11\ and ICE Futures floor members deemed ESPs by the

    Commission in the Order, will be eligible to submit Long-Dated Swap

    transactions to ICE Clear for clearing. The proposed Order requires ICE

    Clear, FCMs and ESPs acting pursuant to the Order to provide the market

    and large-trader information described in Parts 16, 17 and 18 of the

    Commission's regulations, in the manner described in

    [[Page 34437]]

    Parts 15, 16, 17 and 18 of the Commission's regulations, with respect

    to all Cleared-Only Contracts, including Long-Dated Swaps. In light of

    the above, the Commission is requesting comment as to whether the

    extension of this exemption will affect the ability of the Commission

    or any contract market or derivatives clearing organization to

    discharge its regulatory or self-regulatory duties under the Act.

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    \10\ Section 4(c)(2) of the Act, 7 U.S.C. Sec. 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.

    \11\ This definition includes many of the classes of persons

    explicitly referred to in Act 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'').

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    With respect to protecting the public interest, the Commission

    notes that Congress has begun to take steps to promote transparency in

    swap contracts. The financial services reform bills passed by the House

    of Representatives \12\ and Senate \13\ each requires swaps \14\ to be

    cleared, subject to certain exemptions, and further requires, with

    respect to swaps that are subject to the clearing requirement, that

    such swaps be executed on a board of trade designated as a contract

    market under Section 5 of the Act (``DCM'') or on a swap execution

    facility (``SEF'') registered or exempt under Section 5h of the Act

    (where such a trading environment is available).\15\ Although these

    bills have not completed the legislative process, the Commission

    recognizes that future legislative enactments may require the execution

    of cleared swaps on a DCM or SEF. Accordingly, the Commission seeks

    comment, both as to the current proposed exemption, as well as more

    generally with respect to Part 35 of the Commission's regulations, on

    the issues raised by the pending legislation regarding trading

    requirements for swap contracts, including agricultural swap contracts.

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    \12\ H.R. 4173, 111th Cong. (2009).

    \13\ H.R. 4173 EAS, 111th Cong. (2010).

    \14\ We note that both bills include agricultural swap contracts

    in their definition of swaps. See H.R. 4173 Sec. 3103(a) (at 575-

    77); H.R. 4173 EAS Sec. 721(a) (at 535-38).

    \15\ H.R. 4173 EAS Sec. 723(a) (at 570); H.R. 4173 Sec.

    3103(a) (at 605). Each of the financial services reform bills also

    provides that agricultural swaps may not be traded except pursuant

    to CFTC enabling regulations. See H.R. 4173 Sec. 3103(a) (at 605)

    and Sec. 3109 (at 646); H.R. 4173 EAS Sec. 723(c)(3) (at 577-78).

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    IV. Amended Order

    The Previous Order is proposed to be revised to read as follows:

    ORDER

    (1) The Commission, pursuant to its authority under Section 4(c) of

    the Commodity Exchange Act (``Act'') and subject to the conditions

    below, hereby:

    (a) Permits eligible swap participants (``ESPs'') to submit for

    clearing, and futures commission merchants (``FCMs'') and ICE Clear

    to clear, OTC agricultural swap contracts in coffee, sugar, and

    cocoa (``Cleared-Only Contracts''); 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 to be cleared on ICE

    Clear.

    (2) The term ``Long-Dated Swap Contract'' shall be defined as a

    Cleared-Only Contract with terms analogous to those of a

    corresponding futures contract listed for trading on ICE Futures,

    except that the expiration date of the swap contract is later than

    that of any such futures contract. If the expiration date of a Long-

    Dated Swap Contract, after the passage of time, is on or before that

    of a futures contract listed for trading by ICE Futures, such OTC

    swap contract will become an ``Aged Long-Dated Swap Contract''.

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

    of the Act and subject to the conditions below, hereby permits ICE

    Clear and its clearing members that are registered FCMs, acting

    pursuant to this order, to hold money, securities, and other

    property, used to margin, guarantee, or secure Cleared-Only

    Contracts (with the exception of Long-Dated Swap Contracts) 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 customer segregated account or accounts

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

    orders issued pursuant to Section 4d(a)(2) of the Act) 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, consistent with

    Section 4d of the Act and the regulations thereunder. This

    permission shall also apply to an Aged Long-Dated Swap Contract.

    (4) The Order is subject to the following conditions:

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

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

    the Commission's regulations, as modified herein, and shall be

    limited to Cleared-Only Contracts as defined herein.

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

    contract, agreement, or transaction subject to this order, except

    for a Long-Dated Swap Contract, shall 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) ICE Clear shall establish a settlement price for each Long-

    Dated Swap Contract for each trading day until such time as the

    contract's expiration date corresponds to that of a futures contract

    listed for trading on ICE Futures. ICE Clear shall make records

    reflecting the basis for setting each such price and shall maintain

    such records pursuant to Core Principle K.

    (d) All contracts subject to this order shall be submitted for

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

    ICE Clear rules.

    (e) Each ICE Futures floor member, acting as an ESP pursuant to

    this order, shall be the subject of a financial guarantee from a

    member of ICE Clear covering the trading of the OTC swap contracts

    subject to this order. The clearing member shall be registered with

    the Commission as an FCM and shall clear for the floor member the

    contracts, agreement, or transactions covered by the financial

    guarantee.

    (f) An ICE Futures floor member shall be prohibited from

    entering into a transaction in a Cleared-Only Contract with another

    ICE Futures floor member as the counterparty.

    (g) ICE Clear and its clearing members shall mark to market each

    Cleared-Only Contract on a daily basis in accordance with ICE Clear

    rules.

    (h) ICE Clear shall apply its margining system and calculate

    performance bond rates for each Cleared-Only Contract in accordance

    with its normal and customary practices.

    (i) ICE Futures shall maintain appropriate compliance systems to

    monitor the transactions of its floor members in the OTC swap

    transactions permitted pursuant to this order.

    (j) ICE Clear shall apply appropriate risk management procedures

    with respect to transactions and open interest in all Cleared-Only

    Contracts. ICE Clear shall conduct financial surveillance and

    oversight of its members clearing Cleared-Only Contracts, and shall

    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, shall take all other steps

    necessary and appropriate to manage risk related to clearing

    Cleared-Only Contracts.

    (k) ICE Clear shall make available open interest and settlement

    price information for the Cleared-Only Contracts on a daily basis in

    the same manner as for futures contracts listed for trading on ICE

    Futures.

    (l) ICE Futures shall establish and maintain a coordinated

    market surveillance program that encompasses the Cleared-Only

    Contracts and the corresponding futures contracts listed by ICE

    Futures on its designated contract market. ICE Futures shall adopt

    position accountability levels for each cleared-only contract that

    are appropriate in light of the position accountability levels

    applicable to the corresponding futures contracts listed for trading

    on ICE Futures.

    (m) Cleared-only contracts shall not be treated as fungible with

    any contract listed for trading on ICE Futures.

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

    of information and records that are described in Section 4g of the

    Act and Commission regulations thereunder, including but not limited

    to Commission Regulation 1.35, with respect to all Cleared-Only

    Contracts. Such information and records shall be produced for

    inspection in accordance with the requirements of Commission

    Regulation 1.31.

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

    information

    [[Page 34438]]

    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.

    (p) ICE Clear shall apply large trader reporting requirements to

    all Cleared-Only Contracts in accordance with its rules, and each

    FCM and ESP acting pursuant to this order shall provide to the

    Commission the types of information described in Parts 17 and 18 of

    the Commission's regulations in the manner described in Parts 15,

    17, and 18 of the Commission's regulations with respect to all

    Cleared-Only Contracts in which it participates.

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

    representations made in their requests for Commission action under

    Sections 4(c) and 4d of the Act and all supporting materials

    thereto.

    V. Request for Comment

    The Commission requests comment on all aspects of the issues

    presented by this amended exemption request.

    VI. Related Matters

    A. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \16\ 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 amended exemption would not, if

    approved, require a new collection of information from any entities

    that would be subject to the exemption.

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    \16\ 44 U.S.C. 3507(d).

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    B. Cost-Benefit Analysis

    Section 15(a) of the Act,\17\ requires the Commission to consider

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

    Act. 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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    \17\ 7 U.S.C. 19(a).

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    Section 15(a) of the Act 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 Act.

    The Commission is considering the costs and benefits of an amended

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

    the Act, as follows:

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

    that are the subject of the amended exemption request will only be

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

    Section 4(c) of the Act.

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

    exemption granted under Part 35 to allow the clearing of Long-Dated

    Swap Contracts may promote liquidity and transparency in the markets

    for OTC derivatives in coffee, sugar, and cocoa, as well as for futures

    on those commodities. Extending the exemption also may promote

    financial integrity by increasing the benefits of clearing in these OTC

    markets.

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

    competition.

    4. Sound risk management practices. Clearing of Long-Dated Swap

    Contracts may foster risk management by the participant counterparties.

    ICE Clear's risk management practices in clearing these transactions

    would be subject to the Commission's supervision and oversight.

    5. Other public interest considerations. The requested amended

    exemption may encourage market competition in agricultural derivative

    products without unnecessary regulatory burden. As noted above,

    however, there are pending financial services reform bills that would

    affect the trading and clearing requirements for agricultural swap

    contracts.

    After considering these factors, the Commission has determined to

    seek comment on the request for an amended exemption order as discussed

    above. The Commission also invites public comment on its application of

    the cost-benefit provision.

    * * * * *

    Issued in Washington, DC, on June 14, 2010 by the Commission.

    Sauntia S. Warfield,

    Assistant Secretary of the Commission.

    [FR Doc. 2010-14682 Filed 6-16-10; 8:45 am]

    BILLING CODE P

    Last Updated: June 17, 2010



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