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2010-28377

  • FR Doc 2010-28377[Federal Register: November 10, 2010 (Volume 75, Number 217)]

    [Notices]

    [Page 69058-69060]

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

    [DOCID:fr10no10-42]

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    COMMODITY FUTURES TRADING COMMISSION

    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 the CBOE Gold ETF

    Volatility Index and Similar Products

    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'' (``Options'') on the CBOE Gold ETF

    Volatility Index (``GVZ Index''), which would be traded on the Chicago

    Board Options Exchange (``CBOE''), a national securities exchange, and

    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 such Options

    on the GVZ Index to be so traded and cleared. Authority for this

    exemption is found in Section 4(c) of the CEA.\2\ The Commission is

    also requesting comment regarding whether the Commission should provide

    a categorical exemption that would permit the trading and clearing of

    options on indexes that measure the volatility of shares of gold

    exchange-traded funds (``ETFs'') generally, regardless of issuer,

    including options on any index that measures the magnitude of changes

    in, and is composed of the price(s) of shares of one or more gold ETFs

    and the price(s) of any other instrument(s), which other instruments

    are securities as defined in the Securities Exchange Act of 1934 (``the

    '34 Act'').\3\

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

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

    \3\ 15 U.S.C. 78a et seq. The Commission has provided exemptions

    for gold and silver ETF products on three prior occasions. See Order

    Exempting the Trading and Clearing of Certain Products Related to

    SPDR[supreg] Gold Trust Shares, 73 FR 31981 (June 5, 2008),

    Exemptive Order for SPDR[supreg] Gold Futures Contracts, 73 FR 31979

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

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

    iShares[supreg] Silver Trust Shares, 73 FR 79830 (December 30,

    2008), and 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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    DATES: Comments must be received on or before December 10, 2010.

    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: goldvolatility4c@cftc.gov. Include ``Options on

    GVZ Index and Similar 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 must be submitted in English, or if not, accompanied

    by an English translation. Comments may be posted as received to http:/

    /www.cftc.gov. You should submit only information that you wish to make

    available publicly. If you wish the Commission to consider information

    that may be exempt from disclosure under the Freedom of Information

    Act, a petition for confidential treatment of the exempt information

    may be submitted according to the established procedures in CFTC

    Regulation 145.9.

    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, or Anne

    C. Polaski, Special Counsel, 312-596-0575, apolaski@cftc.gov, Division

    of Clearing and Intermediary Oversight, Commodity Futures Trading

    Commission, 525 W. Monroe Street, Suite 1100, Chicago, Illinois 60661.

    SUPPLEMENTARY INFORMATION:

    I. Introduction

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

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

    clearing agency registered pursuant to Section 17A of the '34 Act.\5\

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

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

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

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

    for approval of a rule that would enable OCC to clear and settle

    Options on the GVZ Index traded on the CBOE, a national securities

    exchange, in its capacity as a registered securities clearing agency

    (and not in its capacity as a DCO).\7\ Section 5c(c)(3) of the CEA

    provides that the CFTC must approve such a rule submitted for approval

    unless it finds that the rule would violate the CEA.

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

    \7\ See Securities Exchange Act Release No. 62094 (May 13,

    2010), 75 FR 28085 (May 19, 2010) (File No. SR-OCC-2010-07 filed

    with both the CFTC and the Securities and Exchange Commission

    (``SEC'')) and the SEC's approval in Securities Exchange Act Release

    No. 62290 (June 14, 2010), 75 FR 35861 (June 23, 2010). See also

    Securities Exchange Act Release No. 62139 (May 19, 2010), 75 FR

    29597 (May 26, 2010) (SEC approval of the CBOE's listing and trading

    of Options on the GVZ Index).

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    The GVZ Index is an index that measures the implied volatility of

    options on shares of the SPDR[supreg] Gold Trust (``SPDR[supreg] Gold

    Trust Shares''), an ETF designed to reflect the performance of the

    price of gold bullion.\8\

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    \8\ See Securities Exchange Act Release No. 50603 (October 28,

    2004), 69 FR 64614 (November 5, 2004) (original GLD Approval Order

    for listing and trading on the NYSE).

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    [[Page 69059]]

    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 on the GVZ Index to be

    traded on a national securities exchange and to be cleared by OCC in

    its capacity as a securities clearing agency, as discussed above, may

    foster both financial innovation and competition and may be consistent

    with public interest and the CEA. The CFTC is requesting comment on

    whether it should exempt Options on the GVZ Index, as described above,

    that are traded on a national securities exchange, and cleared through

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

    the provisions of the CEA and the Commission's regulations thereunder,

    to the extent necessary to permit such Options to be so traded and

    cleared. The CFTC previously granted exemptions for options on shares

    of gold ETFs on June 5, 2008, December 30, 2008, and June 29, 2010.\11\

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    \10\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179,

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

    \11\ See footnote 3, above.

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

    that Options on the GVZ Index are (or are not) options subject to the

    CEA. During the legislative process leading to the enactment of Section

    4(c) of the CEA, the House-Senate Conference Committee noted that:

    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 [CEA]. 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.

    The Options on the GVZ Index described above raise questions involving

    their nature and the appropriate resulting jurisdiction over them.

    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) of the CEA 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 Commission-

    regulated markets to discharge their 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 and with the public interest for the mode of

    trading and clearing the Options on the GVZ Index--whether the mode

    applicable to options on securities indexes or commodity indexes--to be

    determined by competitive market forces. Accordingly, the Commission

    proposes to use its authority under Section 4(c) of the CEA to exempt

    the trading of Options on the GVZ Index on a national securities

    exchange, and clearing thereof by a registered securities clearing

    agency, from the provisions of the CEA and the Commission's regulations

    thereunder to the extent necessary to permit such Options to be so

    traded and cleared.

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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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    In addition, the Commission proposes to use its authority under

    Section 4(c) of the CEA to exempt the trading and clearing of options

    on indexes that measure the volatility of shares of gold ETFs

    generally, regardless of issuer. In particular, the Commission proposes

    to exempt the following categories of Options from the provisions of

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

    necessary to permit such Options to be traded on a national securities

    exchange and cleared by OCC, in its capacity as a securities clearing

    agency:

    (a) Options on the GVZ Index;

    (b) Options on any index that measures the volatility (historical

    or expected) of the price(s) of shares of one or more gold ETFs; and

    (c) Options on any index that measures the volatility (historical

    or expected) of price(s) of shares of one or more gold ETFs and the

    price(s) of any other instrument(s), which other instruments are

    securities as defined in Section 3(a)(10) of the '34 Act.

    The CFTC is requesting comment as to whether an exemption from the

    requirements of the CEA and regulations thereunder should be granted in

    the context of these transactions.

    On September 24, 2010, the Commission issued a Request for Comment

    on Options for a Proposed Exemptive Order Relating to the Trading and

    Clearing of Precious Metal

    [[Page 69060]]

    Commodity-Based ETFs and a Concept Release (``Precious Metal ETF

    Release'').\15\ In the Precious Metal ETF Release, the Commission

    requested comment, in part, regarding whether it should issue a

    categorical Section 4(c) exemption to permit options and futures on

    shares of all or some precious metal commodity-based ETFs to be traded

    and cleared as options on securities and security futures,

    respectively. The comment period for the Precious Metal ETF Release

    expires on November 1, 2010.

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    \15\ See 75 FR 60411 (September 30, 2010).

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    The Commission proposes to use its authority under Section 4(c) of

    the CEA to exempt options on indexes that measure the volatility of

    shares of gold ETFs at this time while it continues to seek comments

    and consider the appropriateness of a categorical exemption with

    respect to options and futures on shares of precious metal commodity-

    based ETFs. The Commission believes that options on an index that

    measures commodity price volatility based on shares of such an ETF do

    not raise the same regulatory concerns that may be associated with

    options and futures on shares of an ETF that is based on the underlying

    commodity. In this regard, trading in options and futures on shares of

    a gold ETF could have a potential impact on the deliverable supply by

    removing physical gold from physical marketing channels, while an index

    based on volatility measures does not raise these concerns in that such

    an index does not involve ownership of the commodity, either directly

    or indirectly, by traders in options on such an index.

    Section 4(c)(3) of the CEA 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

    securities clearing agencies, as well as their members who will

    intermediate Options on the GVZ Index and other options on indexes that

    measure the volatility of shares of gold ETFs as described herein, are

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

    Act.

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

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    B. Cost-Benefit Analysis

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

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

    CEA. By its terms, Section 15(a) does not require the Commission to

    quantify the costs and benefits of an order or to determine whether the

    benefits of the order outweigh its costs. Rather, Section 15(a) simply

    requires the Commission to ``consider the costs and benefits'' of its

    action.

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    \17\ 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: (1) Protection of market participants and the public; (2)

    efficiency, competitiveness, and financial integrity of futures

    markets; (3) price discovery; (4) sound risk management practices; and

    (5) other public interest considerations. The Commission may 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 is necessary or appropriate to protect the public

    interest or to effectuate any of the provisions or to accomplish any of

    the purposes of the CEA.

    The Commission has determined that the costs of this proposed order

    are not significant. Although the order would exempt the subject

    options from regulation under the CEA, market participants and the

    public will nonetheless be protected because the options, the markets

    on which they trade, and the intermediaries through which they will be

    traded will be subject to comprehensive regulation by the SEC. The

    Commission has determined that the benefits of the proposed order are

    substantial. The proposed order would promote efficiency in the

    markets, as it would provide certainty that the subject options will

    not be subject to duplicative regulation.

    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

    considerations. Commenters are also are invited to submit any data or

    other information that they may have quantifying or qualifying the

    costs and benefits of the proposal with their comment letters.

    Issued in Washington, DC, on November 4, 2010 by the Commission.

    David A. Stawick,

    Secretary of the Commission.

    [FR Doc. 2010-28377 Filed 11-9-10; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: November 10, 2010



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