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  • [Federal Register: April 23, 2008 (Volume 73, Number 79)]

    [Notices]

    [Page 21917-21919]

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

    [DOCID:fr23ap08-51]

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    COMMODITY FUTURES TRADING COMMISSION

    Proposal To Exempt the Trading and Clearing of Certain Products Related to streetTRACKS[supreg] Gold Trust Shares

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Notice of proposed order and request for comment.

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

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

    products called options on streetTRACKS[supreg] Gold Trust Shares (``ST

    Gold Options''), proposed to be traded on a national securities

    exchange, and cleared through the Options Clearing Corporation

    (``OCC''), from the provisions of the Commodity Exchange Act (``CEA'')

    \1\ and the regulations thereunder to the extent necessary to permit

    them to be so traded and cleared. Authority for this exemption is found

    in Section 4(c) of the CEA.\2\

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

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

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    DATES: Comments must be received on or before April 30, 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. Follow the instructions

    for submitting comments.

    E-mail: secretary@cftc.gov. Include ``OCC ST Gold Options

    4(c)'' 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/.

    FOR FURTHER INFORMATION CONTACT: Robert B. Wasserman, Associate

    Director, 202-418-5092, rwasserman@cftc.gov, Division of Clearing and

    Intermediary Oversight, Commodity Futures Trading Commission, Three

    Lafayette Centre, 1151 21st Street, NW., Washington, DC 20581.

    SUPPLEMENTARY INFORMATION:

    I. Introduction

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

    registered pursuant to Section 5b of the CEA, 7 U.S.C. 7a-1, and a

    securities clearing agency registered pursuant to Section 17A of the

    Securities Exchange Act of 1934 (``the '34 Act'').\3\

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    \3\ 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,\4\ requests for

    approval of rules and rule amendments that would enable OCC to clear

    and settle ST Gold Options \5\ traded on a national securities exchange

    in its capacity as a registered securities clearing agency (and not in

    its capacity as a DCO).\6\ Section 5c(c)(3) provides that the CFTC must

    approve any such rules and rule amendments submitted for approval

    unless it finds that the rules or rule amendments would violate the

    CEA.

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    \4\ 7 U.S.C. 7a-2(c), 17 CFR 39.4(a), 40.5.

    \5\ streetTRACKS[supreg] Gold Trust Shares, which underly ST

    Gold Options, are described in greater detail in the ``Proposed

    Exemptive Order for ST Gold Futures Contracts,'' 73 FR 13,867 (March

    14, 2008). The length of the comment period for this proposal is

    informed by the fact that the ST Gold Futures Contracts proposal is

    outstanding, and the goal of addressing both proposals

    simultaneously.

    \6\ See SR-OCC-2008-04 and Amendment No. 1 thereto. OCC has also

    filed these proposed rule changes with the SEC.

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    The request for approval concerning the ST Gold Options was filed

    effective February 4, 2008, and Amendment No. 1 thereto was filed

    effective March 7, 2008.

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

    Section 4(c)(1) of the CEA empowers the CFTC to ``promote

    responsible economic or financial innovation and fair competition'' by

    exempting any transaction or class of transactions from any of the

    provisions of the CEA (subject to exceptions not relevant here) where

    the Commission determines that the exemption would be consistent with

    the public interest.\7\ The Commission

    [[Page 21918]]

    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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    \7\ 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.'' \8\ Permitting ST Gold Options to trade on

    national securities exchanges and be cleared on OCC as discussed above

    may foster both financial innovation and competition. In accordance

    with the Memorandum of Understanding entered into between the CFTC and

    the Securities and Exchange Commission (``SEC'') on March 11, 2008, and

    in particular the addendum thereto concerning Principles Governing the

    Review of Novel Derivative Products, the Commission believes that novel

    derivative products that implicate areas of overlapping regulatory

    concern should be permitted to trade in either or both a CFTC- or SEC-

    regulated environment, in a manner consistent with laws and regulations

    (including the appropriate use of all available exemptive and

    interpretive authority). The CFTC is requesting comment on whether it

    should exempt ST Gold Options, as described above, that are traded on a

    national securities exchange and cleared through OCC, from the CEA and

    the Commission's regulations thereunder, to the extent necessary to

    permit them to be so traded and cleared.

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    \8\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179, 3213

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

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

    that ST Gold Options are (or are not) 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 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.\9\

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    \9\ 4(c) Conf. Report at 3214-3215.

    ST Gold Options are ``novel instruments'' and the ``determination as to

    [their] jurisdiction is not straightforward.'' Given their potential

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

    may be an appropriate case for issuing an exemption without making a

    finding as to the nature of these particular instruments.

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

    only when it determines: that the requirements for which an exemption

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

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

    interest and the purposes of the CEA; that the agreements, contracts or

    transactions will be entered into solely between appropriate persons;

    and that the exemption will not have a material adverse effect on the

    ability of the Commission or any contract market or derivatives

    transaction execution facility to discharge its regulatory or self-

    regulatory responsibilities under the CEA.\10\

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    \10\ 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.'' \11\ It may be consistent with these and the

    other purposes of the CEA, with the public interest, with the CFTC-SEC

    Memorandum of Understanding of March 11, 2008, and with the addendum

    thereto, for the mode of trading of these transactions--whether it is

    to be through CFTC-regulated markets and clearing organizations or SEC-

    regulated markets and clearing organizations--to be determined by

    competitive market forces. Accordingly, the CFTC is requesting comment

    as to whether this exemption from the requirements of the CEA and

    Regulations thereunder should be granted in the context of these

    transactions.

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    \11\ CEA 3(b), 7 U.S.C. 5(b). See also CEA 4(c)(1), 7 U.S.C.

    6(c)(1) (purpose of exemptions is ``to promote responsible economic

    or financial innovation and fair competition.'')

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    Section 4(c)(3) includes within the term ``appropriate persons'' a

    number of specified categories of persons, and also in subparagraph (K)

    thereof ``such other persons that the Commission determines to be

    appropriate in light of * * * the applicability of appropriate

    regulatory protections.'' Both national securities exchanges and OCC,

    as well as their members who will intermediate these transactions, are

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

    Act. The CFTC is requesting comment as to whether all persons trading

    ST Gold Options on national securities exchanges, and clearing such

    options on OCC, are appropriate persons.

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

    to whether this exemption will interfere with its ability to discharge

    its regulatory responsibilities under the CEA or with the self-

    regulatory duties of any contract market or derivatives transaction

    execution facility.

    III. Request for Comment

    The Commission requests comment on all aspects of the issues

    presented by this proposed order.

    IV. Related Matters

    A. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \12\ 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

    [[Page 21919]]

    information from any entities that would be subject to the proposed

    order.

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    \12\ 44 U.S.C. 3507(d).

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    B. Cost-Benefit Analysis

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

    Commodity Futures Modernization Act of 2000 (``CFMA''),\13\ requires

    the Commission to consider the costs and benefits of its action before

    issuing an order under the CEA. By its terms, Section 15(a) as amended

    does not require the Commission to quantify the costs and benefits of

    an order or to determine whether the benefits of the order outweigh its

    costs. Rather, Section 15(a) simply requires the Commission to

    ``consider the costs and benefits'' of its action.

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    \13\ 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 this

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

    the CEA, as follows:

    1. Protection of market participants and the public. National

    securities exchanges, OCC and their members who would intermediate ST

    Gold Options are subject to extensive regulatory oversight.

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

    exemption may enhance market efficiency and competition since it could

    encourage potential trading of ST Gold Options on markets other than

    designated contract markets or derivative transaction execution

    facilities. Financial integrity will not be affected since the ST Gold

    Options will be cleared by OCC, a DCO and SEC-registered clearing

    agency, and intermediated by SEC-registered broker-dealers.

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

    competition.

    4. Sound risk management practices. The ST Gold Options will be

    subject to OCC's current risk-management practices including its

    margining system.

    5. Other public interest considerations. The proposed exemption may

    encourage development of derivative products through market competition

    without unnecessary regulatory burden.

    After considering these factors, the Commission has determined to

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

    invites public comment on its application of the cost-benefit

    provision.

    * * * * *

    Issued in Washington, DC, on April 21, 2008 by the Commission.

    David A. Stawick,

    Secretary of the Commission.

    Dissenting Opinion of Commissioner Bartholomew H. Chilton to

    Notice of Proposed Order pursuant to Section 4(c) of the CEA which

    would exempt certain products related to StreetTRACKS Gold Trust

    Shares traded on a national securities exchange and cleared by the

    Options Clearing Corporation from provisions of the CEA.

    I respectfully dissent from the Commission's issuance of the

    above-referenced proposed order. Should the CFTC ultimately approve

    this order, it is my hope and expectation that the SEC similarly

    will fully exercise its broad exemptive authority under the

    securities laws to permit futures exchanges to trade products that

    are economically equivalent to those that are or may be approved for

    trading on national securities exchanges, and to allow designated

    clearing organizations to clear such products, to ensure that the

    futures markets are not competitively disadvantaged with regard to

    such products. I dissent from today's action, because I do not

    believe that the proposed order provides sufficient basis for or

    assurance of such reciprocity in the future.

    Bart Chilton,

    Commissioner, Commodity Futures Trading Commission.

    [FR Doc. E8-8942 Filed 4-22-08; 8:45 am]

    BILLING CODE 6351-01-P

    Last Updated: April 23, 2008



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