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2010-24586

  • FR Doc 2010-24586[Federal Register: September 30, 2010 (Volume 75, Number 189)]

    [Notices]

    [Page 60411-60415]

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

    [DOCID:fr30se10-37]

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    COMMODITY FUTURES TRADING COMMISSION

    Request for Comment on Options for a Proposed Exemptive Order

    Relating to the Trading and Clearing of Precious Metal Commodity-Based

    ETFs; Concept Release

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Notice of options for a proposed exemptive order and request

    for comment; concept release.

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    SUMMARY: Recently, the Commodity Futures Trading Commission

    (``Commission,'' or ``CFTC'') has been confronted with the question of

    how to treat certain transactions on fractional undivided interests, or

    shares, in single commodity investment products referred to as exchange

    traded funds (``ETF'' or ``ETFs''),\1\ primarily in the metals complex.

    The ETFs have in all relevant instances been structured as trusts

    (singularly, ``ETF Trust'' or ``Trust''),\2\ the assets of which

    consist of holdings of one specific physical commodity.\3\ The explicit

    and sole investment objective of each of these ETF Trusts is to track

    as nearly as possible the spot price of the underlying physical

    commodity less the expenses of trust operations. The listing of these

    ETF shares provides shareholders with efficient exposure to commodity

    market price movements.\4\ These Precious Metal Commodity-Based ETFs

    have primarily focused on holding either gold or silver, with a recent

    expansion into palladium and platinum. The Commission has issued Orders

    pursuant to Section 4(c) of the Commodity Exchange Act (the ``Act'')

    permitting the trading and clearing of certain transactions on these

    Trusts as, respectively, options on securities and security futures.\5\

    The Previous Orders have provided exemptions from certain provisions of

    the Act, or the Commission's regulations thereunder, which might have

    been transgressed by trading or clearing, among other things, options

    and futures on Commodity-Based ETFs. The exemption mechanism has

    enabled the Commission to reserve judgment as to the jurisdictional

    classification (i.e. commodity or security) of Commodity-Based ETFs and

    options and futures on Commodity-Based ETFs while at the same time

    providing a mechanism to ensure both that the Commission's regulatory

    [[Page 60412]]

    oversight needs are satisfied (whether through regulation by the

    Securities and Exchange Commission (``SEC'') or by attaching conditions

    to the exemption orders) and that novel products may be introduced

    without undue delay for market participant and investor use.

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    \1\ This Release is limited to those ``Commodity ETFs'' that are

    structured as grantor trusts with an investment objective of

    achieving the price performance of the underlying commodity or

    commodities held by such trust, less expenses. Further, for purposes

    of this Release, the term or label ``ETF'' is loosely applied to

    precious metal commodity-based ETFs (as used interchangeably herein,

    ``Precious Metal Commodity-Based ETFs'' or ``Commodity-Based

    ETFs''), see section 3(a)(1) of the Investment Company Act of 1940

    (the ``1940 Act'') and Securities and Exchange Commission (``SEC''),

    Exchange-Traded Funds, Investment Company Act Release No. 28192

    (March 11, 2008), 73 FR 14618, 14623 (March 18, 2008). As used

    herein, ``Precious Metal'' indicates either gold, silver, palladium,

    or platinum.

    Additionally, when we refer to an ``ETF'' in this Concept

    Release, we are not (unless the context otherwise requires)

    referring to an entity that meets the definition of an ``investment

    company'' and is registered under the 1940 Act. This Release also

    does not address those ``ETF Commodity Pools'' that attempt to track

    a benchmark index or commodity by engaging in the purchase of

    commodity futures and/or options contracts. These ETF Commodity

    Pools are subject to regulation by the Commission as a commodity

    pool operator (``CPO'') and/or commodity trading adviser (``CTA'')

    and may not implicate regulatory issues raised in this Release.

    \2\ See e.g. NYSEArca Rule 8.201 (Commodity-Based Trust Shares);

    NYSEAmex Rule 1200A (Commodity-Based Trust Shares); NYSE Rule 1300

    (streetTracks Gold Shares); and BATS Exchange Rule 14.4.

    \3\ See, however, Securities Exchange Act Release Nos. 62402

    (June 29, 2010), 75 FR 39292 (July 8, 2010) (notice of filing of a

    proposal to list and trade shares of the ETFS Precious Metals Basket

    Trust consisting of gold, silver, palladium, and platinum) and 62620

    (July 30, 2010) (notice of a proposal to list and trade shares of

    ETFS White Metals Basket Trust consisting of silver, palladium, and

    platinum).

    \4\ For a previous Commission discussion of the structural and

    arbitrage mechanisms underlying a physical gold ETF, see Description

    of the Underlying Commodity in CFTC, Proposed Exemptive Order for ST

    Gold Futures Contracts, 73 FR 13867, at 13868 (March 14, 2008).

    \5\ See CFTC, Order Exempting the Trading and Clearing of

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

    (June 5, 2008), CFTC, Order Exempting the Trading and Clearing of

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

    iShares[reg] Silver Trust Shares, 73 FR 79830 (December 30, 2008),

    and CFTC, Order Exempting the Trading and Clearing of Certain

    Products Related to ETFS Physical Swiss Gold Shares and ETFS

    Physical Silver Shares, 75 FR 37406 (June 29, 2010) (collectively,

    the ``Previous Orders'').

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    More recently, the Options Clearing Corporation (the ``OCC'') has

    sought approval of rules permitting similar treatment of options and

    futures on certain ETFs based on palladium and platinum.

    The Commission is issuing this Release to solicit comments on: (i)

    Options for a proposed exemptive order in connection with the OCC's

    request for approval of a rule change; and (ii) the Commission's

    treatment of Precious Metal Commodity-Based ETFs generally, including

    whether the Commission should exempt the trading and clearing of

    certain options and futures transactions on gold and silver, and/or

    palladium and platinum, Commodity-Based ETFs on a categorical basis.

    DATES: Comments must be received on or before November 1, 2010. All

    comments must be in English, or if not in English, accompanied by an

    English translation.

    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: CommodityETFs@cftc.gov. Include ``Commodity Based

    ETFs'' 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: Ryne Miller, Attorney Advisor, 202-

    418-5921, rmiller@cftc.gov, or David Van Wagner, Chief Counsel, 202-

    418-5481, dvanwagner@cftc.gov, Division of Market Oversight, Commodity

    Futures Trading Commission, Three Lafayette Centre, 1151 21st Street,

    NW., Washington, DC 20581.

    SUPPLEMENTARY INFORMATION:

    Part I--Proposed Exemptive Order

    A. Background

    The first Commodity-Based ETF in the U.S. was listed and traded on

    the New York Stock Exchange (``NYSE'') in November 2004.\6\ Since that

    time, Commodity-Based ETFs have generally focused on the precious

    metals of gold and silver,\7\ with palladium and platinum \8\ having

    been the subject of a Commodity-Based ETF only recently.

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    \6\ See NYSE Information Memo Number 04-59 (November 18, 2004)

    (trading of streetTRACKS Gold Shares: Rules 1300 and 1301) and

    Securities Exchange Act Release No. 50603 (October 28, 2004), 69 FR

    64614 (November 5, 2004) (approval of the listing and trading of

    streetTRACKS Gold Shares).

    \7\ See, e.g., Securities Exchange Act Release Nos. 51058

    (January 19, 2005), 70 FR 3749 (January 26, 2005) (approval of the

    iShares COMEX Gold Trust (IAU)); 53521 (March 20, 2006), 71 FR 14967

    (March 24, 2006) (approval of the iShares Silver Trust (SLV)); 59781

    (April 17, 2009), 74 FR 18771 (April 24, 2009) (approval of the ETFS

    Silver Trust); and 59895 (May 8, 2009), 74 FR 22993 (May 15, 2009)

    (approval of the ETFS Gold Trust).

    \8\ See Securities Exchange Act Release No. 61220 (December 22,

    2009), 74 FR 68895 (December 29, 2009) (approval of ETFS Palladium)

    and 60970 (November 9, 2009), 74 FR 59319 (November 17, 2009)

    (approval of ETFS Platinum).

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    The structure and trading of Commodity-Based ETFs is virtually

    identical to traditional ETFs listed and traded on national securities

    exchanges. Shares of ETFs are bought and sold throughout the trading

    day on national securities exchanges. Unlike traditional mutual funds,

    ETFs do not sell or redeem their individual shares at net asset value

    (``NAV'').\9\ Instead, large institutional investors known as

    Authorized Participants (``APs'') buy shares of the ETF directly from

    the Trust in creation unit sizes (``Creation Units''), varying from

    25,000 to 200,000 shares, generally in exchange for an in-kind deposit

    of securities.\10\ Conversely, APs may sell or redeem shares of an ETF

    only in Creation Unit size and generally in exchange for portfolio

    securities (``Redemption Baskets''). In limited cases, such as an ETF

    investing in illiquid securities or derivatives, APs may deposit cash

    instead of securities in exchange for shares of an ETF. For Commodity-

    Based ETFs, Creation Units and Redemption Baskets require the delivery

    of the relevant physical commodity plus any cash based on the ETF's

    NAV. ETF shares are traded on national securities exchanges at market

    prices that may, and do, differ from NAV.

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    \9\ NAV is the amount by which the value of an entity's assets

    exceeds the value of its liabilities. NAV is typically calculated on

    a per-share basis by dividing the total value of all assets in a

    portfolio, less any liabilities, by the number of shares

    outstanding.

    \10\ See NYSE Explanation of ETFs, available at http://

    www.nyse.com/pdfs/ETFs7109.pdf, and SEC statement regarding ETFs,

    available at http://www.sec.gov/answers/etf.htm. See also Kathleen

    Moriarty, Exchange-Traded Funds: Legal and Structural Issues

    Worldwide, 29 Int'l Bus. L. 346 (2001); Stuart M. Strauss, Exchange-

    Traded Funds--the Wave of the Future? 7 Investment Lawyer 1 (2000);

    and Stuart Strauss & Scott M. Zoltowski, Exchange Traded Funds, in

    A.L.I.-A.B.A., Investment Mgmt Reg. 67 (Aug. 2006).

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    APs, who are typically exchange market makers or specialists, use

    their ability to exchange Creation Units with their underlying assets

    to provide liquidity for the ETF shares and help ensure that their

    intraday market price approximates the NAV of the ETF. Other investors

    trade ETF shares on national securities exchanges in the secondary

    market. The ability to purchase and redeem Creation Units and

    Redemption Baskets gives ETFs an inherent arbitrage mechanism intended

    to minimize the potential deviation between the market price and NAV of

    ETF shares.\11\ Existing ETFs (including Commodity-Based ETFs) have

    daily transparent portfolios, so that APs and investors know exactly

    what portfolio assets they must assemble if they wish to purchase a

    Creation Unit. The national securities exchanges that trade ETF shares

    disseminate an updated indicative NAV throughout the trading day,

    typically at 15-second intervals.

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    \11\ See Grimm, A Process of Natural Correction: Arbitrage and

    the Regulation of Exchange-Traded Funds Under the Investment Company

    Act, 1 U. Pa. J. Bus & Emp. Law 95 (2008). See also Securities

    Exchange Act Release No. 31591 (), 57 FR 60253 (December 18, 1992)

    (File No. SR-AMEX-92-18) (order approving proposed rule change by

    the Amex relating to Portfolio Depository Receipts), n. 25.

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    Although similar in practice to traditional ETFs that invest in

    securities, by law, Commodity-Based ETFs are not subject to specific

    SEC regulation under the 1940 Act. Instead, Commodity-Based ETFs are

    subject to SEC disclosure review by the SEC's Division of Corporation

    Finance as well as exchange regulation.

    Based on the belief that options and security futures trading

    benefits the liquidity and relative success of the underlying ETF, the

    national securities exchanges and ETF sponsors have sought to be able

    to trade options and futures on Commodity-Based ETFs. In 2008, the

    Commission and the SEC provided regulatory approvals and exemptions so

    that options on shares of the streetTracks Gold Trust (predecessor to

    the SPDR Gold Trust) (symbol: GLD) would be able to be listed and

    traded on the various options exchanges.\12\ Since 2008, the Commission

    has permitted options and futures on several other gold and silver

    Commodity-Based ETFs.\13\

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    \12\ See Securities Exchange Act Release No. 57894 (May 30,

    2008), 73 FR 32061 (June 5, 2008) (approval of SPDR Gold Trust

    options), and CFTC, Order Exempting the Trading and Clearing of

    Certain Products Related to SPDR Gold Trust Shares, 73 FR 31981

    (June 5, 2008), and Exemptive Order for SPDR Gold Futures Contracts,

    73 FR 31979 (June 5, 2008).

    \13\ See footnote 5, supra.

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    [[Page 60413]]

    From a procedural standpoint, the issue of the regulation of

    Commodity-Based ETFs comes before the CFTC through filings by a

    contract market or a clearing organization in its capacity as a CFTC

    registrant, requesting Commission approval of certain proposed rule

    change(s) which would permit it to treat options and futures

    transactions on such ETFs as options on securities and security

    futures, respectively. In order to approve such rule changes, the

    Commission has issued exemptive orders for the options or futures in

    question pursuant to its exemptive authority under Section 4(c)(1) of

    the Commodity Exchange Act (``Act''), 7 U.S.C. 6(c).\14\ As noted

    above, the Commission has issued three such exemptive ETF orders, all

    of which have been confined to options and futures on shares of

    specific physical gold and silver ETFs.\15\

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    \14\ Section 4(c)(1) of the Act 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.

    \15\ See footnote 5, supra.

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    Notably, in issuing the Previous Orders providing Section 4(c)

    exemptions for options and futures on gold and silver ETF shares, the

    Commission did not make any finding that the options were either

    options on securities or options subject to the Act, nor did it make

    any finding that the futures were, or were not, security futures.\16\

    Rather, the exemptions permitted the trading and clearing of options

    and/or futures on the Commodity-Based ETFs as, respectively, options on

    securities and security futures. In doing so, the Commission reserved

    making any affirmative determination as to whether shares of Commodity-

    Based ETFs are more properly characterized as either commodities or

    securities. That is, the exemptions have enabled the Commission to

    reserve judgment as to the appropriate jurisdictional classification of

    Commodity-Based ETFs and options and futures on Commodity-Based ETFs.

    The Commission's approach is consistent with the framework envisioned

    by Congress. In the future, and upon the Dodd-Frank Wall Street Reform

    and Consumer Protection Act's (``Dodd-Frank Act'') \17\ effective date,

    certain provisions in the Dodd-Frank Act will provide the Commission

    and the SEC with a legal and procedural framework to use exemptive

    authority to tailor joint regulatory solutions for novel products that

    raise jurisdictional questions--such as those raised by Commodity-Based

    ETFs and options and futures on Commodity-Based ETFs.\18\

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    \16\ Under Section 4(c), the Commission is not required to make

    an express finding of jurisdiction over a product as a condition

    precedent to issuing a Section 4(c) exemption. The 4(c) Conference

    Report states: ``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.'' See House Conf. Report No. 102-978, 1992 U.S.C.C.A.N.

    3179, 3214-3215 (``4(c) Conf. Report'').

    \17\ Dodd-Frank Wall Street Reform and Consumer Protection Act,

    Public Law 111-203, 124 Stat. 1376 (2010).

    \18\ See e.g. Sec. Sec. 717 and 718 of the Dodd-Frank Act,

    which cover ``New Product Approval CFTC--SEC Process'' and

    ``Determining Status of Novel Derivative Products'', respectively.

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    B. Pending OCC Submission--Transactions on Palladium and Platinum ETFs

    By a submission dated March 1, 2010, the OCC has submitted for

    Commission approval, pursuant to Section 5c(c)(2) of the Act and

    Commission Regulations 39.4(a) and 40.5, a proposed amendment to an

    interpretation of Article I, Section 1.F.(8) of their By-Laws.\19\ The

    interpretation, as amended, would state that the OCC will clear and

    treat as options on securities any options on ETFS Palladium Shares

    (``Palladium Products'') \20\ or ETFS Platinum Shares (``Platinum

    Products''),\21\ and will clear and treat as security futures any

    futures contracts on the Palladium and Platinum Products. Section

    5c(c)(3) of the Act provides that the Commission must approve any such

    rules or rule amendments, which includes a proposed amendment of an

    interpretation, submitted for approval unless it finds that the rules

    or rule amendments would violate the Act. The Commission initially

    extended the review period of the OCC's submission by forty-five days,

    pursuant to Commission Regulation 40.5(c)(1), to June 1, 2010. By

    letter dated June 1, 2010 and pursuant to Commission Regulation

    40.5(c)(2), the OCC consented to a further extension of the review

    period to September 30, 2010. While the OCC's pending rule submission

    deals with options and futures on two specific palladium and platinum

    Commodity-Based ETFs (the Palladium and Platinum Products), the

    Commission is also requesting comment on options for a proposed

    exemption that would permit the trading and clearing, as options on

    securities and security futures, of options and futures on gold and

    silver, and/or palladium and platinum Commodity-Based ETFs on a

    categorical basis, i.e., regardless of issuer.

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    \19\ The complete submission is made available on the

    Commission's Web site at: http://www.cftc.gov/stellent/groups/

    public/@rulesandproducts/documents/ifdocs/rul030110occ001.pdf.

    \20\ Shares of the Palladium Products are traded on NYSE Arca

    under the symbol ``PALL''.

    \21\ Shares of the Platinum Products are traded on NYSE Arca

    under the symbol ``PPLT''.

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    C. Regulatory Implications of Precious Metal Commodity-Based ETFs

    The Commission is issuing this Release because, among other things,

    the Commission believes that options and futures on Commodity-Based

    ETFs may raise certain regulatory issues due to their economic

    similarity to options on commodities and futures on commodities traded

    on designated contract markets. The Commission's concerns include the

    potential that futures contracts based on the commodities underlying

    the ETFs could be affected by withdrawal of the deliverable supply for

    futures contracts, and also, that the Commission would lack the

    jurisdictional capability to surveil persons with positions in the

    Commodity-Based ETFs.\22\

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    \22\ These concerns arise from the Commission's statutory

    mandate under Section 6(c) of the Act, which charges the Commission

    with manipulation authority regarding price of ``any commodity, in

    interstate commerce, or for future delivery [* * *].'' See Section

    6(c) of the Act.

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    The concerns are heightened by the reality that options and futures

    on Commodity-Based ETFs allow market participants to take positions in

    instruments that appear economically similar to Commission-regulated

    products, including products that would otherwise fall under, for

    example, the Commission's market and trade practice surveillance and

    large trader reporting

    [[Page 60414]]

    system.\23\ By taking positions in options and futures on Commodity-

    Based ETFs traded on national securities exchanges, which can achieve

    the same investment objectives and are functionally the same as

    Commission-regulated products, market participants potentially avoid

    incurring any obligation to comply with the Commission's rules and

    regulations (although the market participants do remain subject to the

    existing regulatory regime applicable to the securities markets).

    Beyond this concern, the Commission has examined, and continues to

    examine, the palladium and platinum markets relative to the gold and

    silver markets to review empirical findings which may justify a

    different regulatory resolution for the Palladium and Platinum Products

    as compared to the Commission's approach to gold and silver ETF

    products under the Previous Orders (discussed further at section D,

    infra).

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    \23\ The Commission has previously considered whether special

    conditions should be attached to related exemptions granted pursuant

    to Section 4(c) of the Act:

    In order to preserve the integrity of the price discovery and

    risk management functions of Commission regulated markets, it may be

    that national securities exchanges that list the options [on

    precious metal commodity-based ETFs] should comply with market

    reporting requirements and brokers and traders that carry accounts

    or trade in options on gold and silver products should comply with

    large trader reporting requirements.

    See CFTC, Request for Comment on a 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 ETFS Physical

    Swiss Gold Shares and ETFS Physical Silver Shares, 75 FR 19619

    (April 15, 2010) at 19621. In its order exempting the trading and

    clearing of products related to the ETFS Physical Swiss Gold Shares

    and the ETFS Physical Swiss Silver Shares, the Commission did not

    impose market reporting and large trader reporting requirements.

    However, the Commission noted the comments received and future

    consideration with respect to market and large trader reporting for

    certain gold and silver option products. See CFTC, Order Exempting

    the Trading and Clearing of Certain Products Related to ETFS

    Physical Swiss Gold Shares and ETFS Physical Swiss Silver Shares,

    footnote 5, supra.

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    At the same time, the Commission is seeking comment as to whether

    the trading and clearing (as options on securities or security futures)

    of options and futures on all or some Precious Metal Commodity-Based

    ETFs should be categorically exempted from the Act to the extent

    necessary to permit them to be so traded and cleared, whether

    absolutely or subject to conditions. Related to that issue, the

    Commission has been encouraged by market participants to adopt a

    ``generic'' approach for addressing the transactions in question on

    Precious Metal Commodity-Based ETFs as opposed to the existing process

    of performing a case-by-case basis review.\24\ This Release is intended

    to assist in the Commission's consideration relating to a potential

    ``generic'' approach, and the Commission is seeking comments to that

    end.

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    \24\ Specifically, on April 15, 2010, the OCC and the Chicago

    Board Options Exchange (``CBOE'') jointly delivered a letter to the

    Chairmen of both the Commission and the SEC, expressing their

    concern about the delays incurred in the case-by-case review method

    of these products. The letter is referenced in a public presentation

    available on the CBOE's Web site at: http://cboenews.cboe.com/pdfs/

    PressBriefingOIC2010FINAL.pdf, at page 7.

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    D. Empirical Observations: Palladium and Platinum v. Gold and Silver

    There are significant empirical differences across the precious

    metal markets which may support the Commission taking a different

    regulatory approach with respect to options and futures on Commodity-

    Based ETFs holding palladium and platinum than it has previously taken

    with respect to options and futures on Commodity-Based ETFs holding

    gold and silver.

    Global palladium and platinum supplies are considerably smaller in

    volume than supplies of gold and silver, and come predominantly from

    mine production concentrated in a small number of countries, namely,

    South Africa and Russia (``Producer Countries'').\25\ These factors

    make palladium and platinum markets potentially more susceptible to

    tightness during periods of economic growth and subject to potential

    supply shocks from isolated events in either of the Producer Countries.

    Palladium and platinum futures markets consequently become more

    susceptible to price volatility that may result from relatively small

    changes in demand. These concerns were observed in January 2010 when

    the Palladium and Platinum Products were initially listed for trading

    on NYSE Arca, resulting in an apparent one-time increase in short-term

    demand for physical palladium and platinum,\26\ and the NYMEX palladium

    and platinum futures markets entered nearby backwardation.\27\ Indeed,

    the Prospectuses for the Palladium and Platinum Products, dated

    December 30, 2009, and filed with the SEC, acknowledge that purchase of

    the shares may affect the prices of palladium and platinum,

    respectively, and may impact the supply of, and demand for, palladium

    and platinum, respectively.\28\

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    \25\ Data from the Johnson Matthey Platinum 2010 publication

    indicates that 76.5% of global platinum supplies came from South

    Africa in 2009, while 51.1% of global palladium supplies came from

    Russia. Global platinum and palladium supplies for 2009 totaled 5.9

    million ounces and 7.1 million ounces respectively (based on Johnson

    Matthey's data), compared to much larger 2009 global supplies of

    gold (116.6 million ounces) and silver (826.1 million ounces), based

    on data from the CPM Group Gold and Silver Yearbooks for 2010.

    \26\ For example, NYMEX settlement data shows that the April

    2010 to July 2010 active spread for platinum futures was in

    backwardation on 18 out of 19 trading days between January 14, 2010,

    and February 10, 2010, ranging from +$0.20 to +$2.00. The March 2010

    to June 2010 active spread for palladium futures was in

    backwardation on 5 of 6 trading days from January 14, 2010 to

    January 22, 2010, ranging from +$0.05 to +$1.00.

    \27\ Nearby backwardation occurs when the price for the nearby

    futures contract is higher than the price for the next nearest

    expiring contract, a generally unusual circumstance in the precious

    metals markets.

    \28\ See http://www.sec.gov/Archives/edgar/data/1459862/

    000093041310000057/c58962_424b3.htm, at page 7; see also http://

    www.sec.gov/Archives/edgar/data/1460235/000093041310000056/c58731_

    424b3.htm, at page 7.

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    In addition to these distinguishing features, industrial demand

    constitutes a greater percentage of the total demand for both palladium

    and platinum \29\ as compared to industrial demand as a percentage of

    total demand for gold and silver,\30\ and palladium and platinum have

    traditionally not been held for investment purposes to nearly the same

    extent as gold and silver.\31\ Accordingly, the Commission requests

    comment on whether these empirical differences suggest the need for a

    different regulatory approach for options and futures on the Palladium

    and Platinum Products, or any palladium or platinum Commodity-Based

    ETF, as compared to options and futures on the gold and silver

    Commodity-Based ETFs covered by the Previous Orders.

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    \29\ The Prospectus for the Palladium Products states that

    ``autocatalysts, automobile components that use palladium, accounted

    for approximately 57% of the global demand in palladium in 2008.''

    See citation in footnote 26, at page 9. The Prospectus for the

    Platinum Products states that autocatalysts accounted for

    approximately 51% of the 2008 global demand for platinum. See

    citation in footnote 26, at page 9.

    \30\ In comparison, the CPM Group Gold and Silver Yearbooks for

    2010 indicate that 12.5% of global gold demand was for industrial

    purposes in 2009 (this includes electronics and dental/medical

    products), while 45.3% of global silver demand was for industrial

    purposes (this includes photography and electronics and batteries).

    Jewelry demand is not included in these figures.

    \31\ The Johnson Matthey Platinum 2010 publication indicates

    that 9.4% of global demand for platinum in 2009 was for investment

    purposes, while 8.0% of global demand for palladium was for

    investment. In contrast, the CPM Group Gold and Silver Yearbooks for

    2010 indicate that net private investment in gold accounted for a

    larger 44.7% share of global gold demand in 2009 (this includes

    official coins, bullion and medallions), with net private investment

    accounting for around 30.0% of global silver demand in 2009 (this

    includes bullion and coins).

    ---------------------------------------------------------------------------

    Part II--Issues for Comment

    The Commission requests comment, taking into account all of the

    issues presented in this Release and

    [[Page 60415]]

    considering the Commission's future treatment of options and futures on

    Precious Metal Commodity-Based ETFs as required pursuant to the Dodd-

    Frank Act, on each of the following options for a proposed exemptive

    order:

    1. Is there any reason the Commission should not provide a

    categorical Section 4(c) exemption for the trading and clearing of the

    transactions in question on gold and/or silver Commodity-Based ETFs?

    2. Are the palladium and platinum markets sufficiently distinct

    from the gold and silver markets to justify a different regulatory

    approach, for the purposes of a Section 4(c) exemption, for options and

    futures on the Palladium and Platinum Products (i.e. the specific ETF

    products identified in the OCC's pending submission) as compared to

    that for options and futures on gold and silver Commodity-Based ETFs.

    3. More generally, should the Commission consider extending such a

    Section 4(c) exemption to options and futures on palladium and platinum

    Commodity-Based ETFs on a categorical basis (i.e. without respect to

    issuer)?

    4. If the Commission continues granting Section 4(c) exemptions,

    whether on an individual or categorical basis, when presented with a

    request to allow options and futures on Commodity-Based ETFs, should

    the Commission include additional conditions and requirements? For

    example, should the Commission consider imposing large trader reporting

    obligations, position limits,\32\ or other analogous requirements when

    exempting options and futures on Precious Metal Commodity-Based ETFs

    from the Commission's jurisdiction?

    ---------------------------------------------------------------------------

    \32\ The Commission understands that certain position and

    exercise limits on Commodity-Based ETF options currently exist in

    the securities options markets. See, e.g., ISE Rules 412 and 414;

    see also NYSE Amex Rules 904 and 905. In addition, certain position

    limits and position accountability rules apply to security futures

    products listed and traded on OneChicago. See OneChicago Rule 414.

    ---------------------------------------------------------------------------

    Related Matters

    A. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \33\ 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. At least some of the options for a

    proposed exemptive order described above, if issued with substantive

    reporting or similar conditions, would require a new collection of

    information from any entities that would be subject to the proposed

    order.

    ---------------------------------------------------------------------------

    \33\ 44 U.S.C. 3507(d).

    ---------------------------------------------------------------------------

    B. Cost-Benefit Analysis

    In considering the options for a Section 4(c) exemption allowing

    the trading and clearing as options on securities any options on gold,

    silver, palladium, and platinum Commodity-Based ETFs, and to clear and

    treat as security futures any futures contracts on gold, silver,

    palladium, and platinum Commodity-Based ETFs, Section 15(a) of the

    Act,\34\ 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 Act.

    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.

    ---------------------------------------------------------------------------

    \34\ 7 U.S.C. 19(a).

    ---------------------------------------------------------------------------

    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 the options

    for a proposed order described above in light of the specific

    provisions of Section 15(a) of the Act, as follows:

    1. Protection of market participants and the public. National

    securities exchanges, OCC, and their members who would intermediate the

    above-described options and security futures on gold, silver,

    palladium, and platinum Commodity-Based ETFs are subject to extensive

    regulatory oversight; however, this regulatory oversight in the

    securities markets does not completely parallel the oversight programs

    seen in CFTC regulated markets.

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

    for a proposed exemption may enhance market efficiency and competition

    since they could encourage potential trading of options and security

    futures on the gold, silver, palladium, and platinum Commodity-Based

    ETFs through modes other than those normally applicable; that is,

    designated contract markets or derivatives transaction execution

    facilities. Financial integrity will not be affected since the options

    and security futures on gold, silver, palladium, and platinum

    Commodity-Based ETFs will be cleared by the 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 the gold, silver, palladium, and platinum Commodity-Based

    ETFs will be subject to OCC's current risk-management practices

    including its margining system.

    5. Other public interest considerations. The options for a 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 matters discussed above. The Commission invites

    public comment on its application of the cost-benefit provision.

    * * * * *

    Issued in Washington, DC, on September 24, 2010 by the

    Commission.

    David A. Stawick,

    Secretary of the Commission.

    [FR Doc. 2010-24586 Filed 9-29-10; 8:45 am]

    BILLING CODE P

    Last Updated: September 30, 2010



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