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e8-15274

  • [Federal Register: July 7, 2008 (Volume 73, Number 130)]

    [Notices]

    [Page 38403-38405]

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

    [DOCID:fr07jy08-48]

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    COMMODITY FUTURES TRADING COMMISSION

    Request To Exempt Certain Over-the-Counter Swaps From Certain of

    the Requirements Imposed by Commission Regulation 35.2, Pursuant to the

    Authority in Section 4(C) of the Commodity Exchange Act

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Notice of request for comment on exemption request.

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    SUMMARY: The Commodity Futures Trading Commission (``Commission'') is

    requesting comment on whether to exempt certain over-the-counter

    (``OTC'') swaps from certain of the requirements otherwise imposed by

    Commission Regulation 35.2. Specifically, the petitioners request

    authority to clear certain agricultural

    [[Page 38404]]

    swaps. This exemption has been requested by the Chicago Mercantile

    Exchange Inc. (``CME''), a registered derivatives clearing organization

    (``DCO''), and the Board of Trade of the City of Chicago, Inc.

    (``CBOT''), a designated contract market. Authority for extending this

    relief is found in Section 4(c) of the Commodity Exchange Act

    (``CEA'').\1\

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

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    DATES: Comments must be received on or before August 21, 2008.

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

    Federal eRulemaking Portal: http://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.regulations.gov/http://frwebgate.access.gpo/cgi-bin/leaving http://www.regulations.gov/

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

    for submitting comments.

    E-mail: secretary@cftc.gov. Include ``CME/CBOT Section

    4(c) Petition'' 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://frwebgate.access.gpo.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://www.cftc.gov/ http://

    www.CFTC.gov/.

    FOR FURTHER INFORMATION CONTACT: Sarah E. Josephson, Special Counsel,

    202-418-5684, sjosephson@cftc.gov, or Phyllis P. Dietz, Associate

    Director, 202-418-5449, pdietz@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. The CME/CBOT Petition

    CME, the DCO that provides clearing services for the CBOT, and the

    CBOT jointly submitted a request to the Commission for an exemptive

    order under Section 4(c) of the CEA.\2\ The order would grant CME

    approval to clear OTC corn basis swaps and corn, wheat, and soybean

    calendar swaps,\3\ and it would permit the CBOT to list those products

    for ``clearing-only.'' The contract size for the basis and calendar

    swap products will be the same as that for corn, wheat, and soybean

    futures--5,000 bushels. However, each of the proposed cleared-only OTC

    products will be cash-settled, in contrast to the CBOT's corn, wheat,

    and soybean futures contracts, which are physically-settled.

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    \2\ A copy of the petition is available on the Commission's Web

    site at http://www.cftc.gov/.

    \3\ The suite of OTC agricultural swap products that the CBOT

    proposes to list for clearing-only is comprised of corn basis swap

    contracts for the following regions: Northeastern Iowa, Northwestern

    Iowa, Southern Iowa, Eastern Nebraska, Eastern South Dakota, and

    Southern Minnesota; and corn, wheat, and soybean calendar swaps.

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    Part 35 of the Commission's regulations \4\ exempts swap agreements

    and eligible persons entering into such agreements from most provisions

    of the CEA.\5\ The term ``swap agreement'' is defined to include, among

    other types of agreements, a ``basis swap'' or a ``commodity swap.''

    \6\ Part 35 was promulgated pursuant to authority conferred upon the

    Commission in Section 4(c) of the CEA to exempt certain transactions in

    order to promote innovation and competition.\7\ Various exemptions and

    exclusions were subsequently added to the CEA by the Commodity Futures

    Modernization Act of 2000 (``CFMA''),\8\ but none apply to agricultural

    contracts.\9\

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    \4\ 17 CFR Part 35 (Commission regulations are hereinafter cited

    as ``Reg. ----'').

    \5\ Jurisdiction is retained for, among other things, provisions

    of the CEA proscribing fraud and manipulation. See Reg. 35.2.

    \6\ Reg. 35.1(b)(1)(i). ``Commodity'' is defined in Section

    1a(4) of the CEA to include a variety of specified agricultural

    products, ``and all other goods and articles, except onions * * *

    and all services, rights, and interests in which contracts for

    future delivery are presently or in the future dealt in.''

    \7\ See 58 FR 5587 (Jan. 22, 1993).

    \8\ Pub. L. 106-554, 114 Stat. 2763 (2000).

    \9\ See, e.g., CEA 2(d), (g) and (h).

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    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 \10\ 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.\11\ Under the arrangement proposed by CME and the CBOT, a

    cleared-only OTC contract could be offset by another cleared-only OTC

    contract. Thus, clearing of these OTC contracts would result in

    contracts that are fungible with other cleared-only contracts with

    equivalent terms. In addition, the creditworthiness of the counterparty

    would not be a consideration. Accordingly, the OTC contracts CME would

    clear would not satisfy all of the conditions of Part 35.\12\

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    \10\ Reg. 35.2(b).

    \11\ Reg. 35.2(c).

    \12\ The contracts that the CBOT proposes to list for clearing-

    only would, however, meet the requirements of Reg. 35.2(a) and (d)

    in that they would be entered into solely between eligible swap

    participants and executed OTC.

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    However, Part 35 further permits ``any person [to] apply to the

    Commission for exemption from any of the provisions of the Act * * *

    for other arrangements or facilities.'' \13\ CME and the CBOT have

    petitioned the Commission for an order under Section 4(c) of the CEA

    that would exempt cleared-only OTC swaps involving corn, wheat, or

    soybeans to the same extent as contracts that are exempt pursuant to

    Part 35 of the Commission's regulations.

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    \13\ Reg. 35.2(d).

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

    Section 4(c)(1) of the CEA 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 CEA (subject to exceptions not relevant here) where

    the Commission determines that the exemption would be consistent with

    the public interest.\14\ 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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    \14\ 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.'' \15\ Permitting the clearing of OTC corn, wheat,

    and soybean swaps by CME may foster both financial innovation and

    competition. It may benefit the marketplace by providing market

    participants the ability to combine flexible negotiation with central

    counterparty guarantees and capital efficiencies. In addition, the

    [[Page 38405]]

    CBOT has represented that it expects that the proposed cleared-only OTC

    corn basis and calendar swaps will be a complement to the CBOT's corn

    futures and will enable corn suppliers and users, including

    participants in the ethanol industry, to manage volatile basis risk

    while realizing the benefits of centralized clearing. Similarly, the

    CBOT has stated that it expects that its proposed cleared-only OTC

    wheat and soybean calendar swaps will complement wheat and soybean

    futures, respectively, and will result in similar benefits.

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    \15\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179,

    3213.

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    The Commission is requesting comment on whether it should exempt

    the OTC corn basis swaps and corn, wheat, and soybean calendar swaps

    that are proposed to be cleared by CME and listed by the CBOT, as

    described above, to the same extent as are other contracts that are

    exempt pursuant to Part 35 of the Commission's regulations.

    Section 4(c)(2) provides that the Commission may grant an exemption

    only when it determines that the requirements for which the exemption

    is being provided should not be applied to the agreements, contracts,

    or transactions at issue, and the exemption is consistent with the

    public interest and the purposes of the CEA; that the agreements,

    contracts, or transactions will be entered into solely between

    appropriate persons; and that the exemption will not have a material

    adverse effect on the ability of the Commission or any contract market

    or derivatives transaction execution facility to discharge its

    regulatory or self-regulatory responsibilities under the CEA.\16\

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    \16\ 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.'' \17\ It may be consistent with these and the

    other purposes of the CEA, and with the public interest, for the

    cleared-only contracts described herein to be exempt as are other

    contracts under Part 35 of the Commission's regulations. However, the

    exception of agricultural commodities from the exemptions and

    exclusions provided under the CFMA for OTC transactions may be relevant

    to the analysis. Accordingly, the Commission is requesting comment as

    to whether an exemption from the requirements of the CEA should be

    granted in the context of these transactions.

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    \17\ Section 3(b) of the CEA, 7 U.S.C. 5(b). See also Section

    4(c)(1) of the CEA, 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 light of the above, the Commission also is requesting comment as

    to whether these exemptions will affect its ability to discharge its

    regulatory responsibilities under the CEA, or with the self-regulatory

    duties of any designated contract market.

    III. Request for Comment

    The Commission requests comment on all aspects of the issues

    presented by this exemption request.

    IV. Related Matters

    A. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \18\ 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 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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    \18\ 44 U.S.C. 3507(d).

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    B. Cost-Benefit Analysis

    Section 15(a) of the CEA,\19\ 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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    \19\ 7 U.S.C. 19(a).

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    Section 15(a) of the CEA further specifies that costs and benefits

    shall be evaluated in light of five broad areas of market and public

    concern: Protection of market participants and the public; efficiency,

    competitiveness, and financial integrity of futures markets; price

    discovery; sound risk management practices; and other public interest

    considerations. Accordingly, the Commission could in its discretion

    give greater weight to any one of the five enumerated areas and could

    in its discretion determine that, notwithstanding its costs, a

    particular order was necessary or appropriate to protect the public

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

    the purposes of the CEA.

    The Commission is considering the costs and benefits of an

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

    the CEA, as follows:

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

    that are the subject of the exemptive 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 these OTC swap agreements to allow

    them to be cleared may promote liquidity and transparency in the

    markets for OTC derivatives on corn, wheat, and soybeans, as well as

    futures on those commodities. Extending the exemption also may promote

    financial integrity by providing the benefits of clearing to these OTC

    markets.

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

    competition.

    4. Sound risk management practices. Clearing of OTC transactions

    may foster risk management by the participant counterparties. CME'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 exemption

    may encourage market competition in agricultural derivatives products

    without unnecessary regulatory burden.

    After considering these factors, the Commission has determined to

    seek comment on the exemption request as discussed above. The

    Commission also invites public comment on its application of the cost-

    benefit provision.

    Issued in Washington, DC, on June 30, 2008 by the Commission.

    David A. Stawick,

    Secretary of the Commission.

    [FR Doc. E8-15274 Filed 7-3-08; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: May 8, 2012



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