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e9-27287

  • FR Doc E9-27287[Federal Register: November 13, 2009 (Volume 74, Number 218)]

    [Notices]

    [Page 58608-58610]

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

    [DOCID:fr13no09-36]

    [[Page 58608]]

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    COMMODITY FUTURES TRADING COMMISSION

    Request for Comment on a Petition To Exempt Certain Over-the-

    Counter Agricultural Swaps From Certain of the Requirements Imposed by

    Commission Regulation 35.2, Pursuant to Section 4(c) of the Commodity

    Exchange Act

    AGENCY: Commodity Futures Trading Commission.

    ACTION: Notice of request for comment.

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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 Kansas City Board of Trade (KCBT), a

    designated contract market, and the Kansas City Board of Trade Clearing

    Corporation (KCBTCC), a registered derivatives clearing organization

    (DCO), have petitioned for an exemption permitting them to list for

    clearing and to clear, respectively, wheat calendar swaps. Authority

    for granting such an exemption is found in Section 4(c) of the

    Commodity Exchange Act (CEA).

    DATES: Comments must be received on or before December 14, 2009.

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

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

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

    for submitting comments.

    E-mail: secretary@cftc.gov. Include ``KCBT/KCBTCC 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://

    www.CFTC.gov/.

    FOR FURTHER INFORMATION CONTACT: Phyllis P. Dietz, Associate Director,

    202-418-5449, pdietz@cftc.gov, or Eileen A. Donovan, Special Counsel,

    202-418-5096, edonovan@cftc.gov, Division of Clearing and Intermediary

    Oversight, Commodity Futures Trading Commission, Three Lafayette

    Centre, 1155 21st Street, NW., Washington, DC 20581.

    SUPPLEMENTARY INFORMATION:

    I. The KCBT/KCBTCC Petition

    KCBT and KCBTCC (Petitioners) jointly submitted a request to the

    Commission for an exemptive order under Section 4(c) of the CEA.\1\ The

    order would permit KCBT to list certain wheat calendar swaps for

    ``clearing only'' and permit KCBTCC to clear those wheat calendar swaps

    (cleared-only contracts).\2\ The contract size (5,000 bushels),

    position limits (5,000 contracts for any single month and 6,500

    contracts for all months combined), and minimum price fluctuations

    ($.0025) of the cleared-only contracts would be the same as those of

    the KCBT wheat futures contract. However, the cleared-only contracts

    would be cash-settled, in contrast to KCBT's wheat futures contract,

    which is physically-settled, and would be listed for any of the 12

    calendar months, as compared to the wheat futures contract which is

    listed only for March, May, July, September, and December.

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    \1\ A copy of the petition is available on the Commission's Web

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

    \2\ The Petitioners also requested that the Commission issue an

    order under Section 4d of the CEA that would permit KCBTCC and

    futures commission merchants (FCMs) to commingle customer funds used

    to margin, secure, or guarantee the cleared-only contracts with

    other funds held in segregated accounts. Although the CEA does not

    require the Commission to provide public ``notice and opportunity

    for hearing'' in connection with the issuance of a 4d order (as is

    required for an order requested under Section 4(c)), public comments

    regarding the Petitioners' request for a 4d order are being accepted

    on the Commission's Web site.

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    The OTC wheat calendar swaps would be negotiated between eligible

    swap participants in the OTC market and then cleared by clearing

    members acting on behalf of their own customers or the customers of

    non-clearing member FCMs or non-member FCMs. Previous requests to clear

    OTC agricultural swaps were limited to clearing member FCMs acting on

    behalf of their own customers.\3\

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    \3\ See 74 FR 12316 (Mar. 24, 2009) (order permitting clearing

    of corn, wheat, and soybean swaps by the Chicago Mercantile

    Exchange); 73 FR 77015 (Dec. 18, 2008) (order permitting clearing of

    coffee, sugar, and cocoa swaps by ICE Clear U.S.).

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    In support of their request, Petitioners represent that daily large

    trader reporting information allows KCBT to monitor for position

    concentration among non-clearing member and non-member FCMs, and the

    risk management and financial surveillance procedures of the non-

    clearing member and non-member FCMs' designated self-regulatory

    organizations (DSROs) are similar or identical to those employed by

    KCBT. The Commission requests comment on the impact of permitting the

    OTC wheat calendar swaps to be cleared by clearing FCMs on behalf of

    the customers of non-clearing member FCMs or non-member FCMs, and

    whether there are any conditions that should be placed upon DSROs or

    FCMs to facilitate risk management in connection with such transactions

    in the cleared-only contracts.

    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 ``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\ Public Law 106-554, 114 Stat. 2763 (2000).

    \9\ See, e.g., Sections 2(d), (g), and (h) of the CEA, 7 U.S.C.

    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 Petitioners, a

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

    Thus, clearing of the OTC wheat calendar swaps 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 swaps KCBTCC 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 KCBT proposes to list for clearing-

    only would, however, meet the requirements of paragraphs (a) and (d)

    of Reg. 35.2 in that they would be entered into solely between

    eligible swap participants and executed OTC.

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    [[Page 58609]]

    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\ Petitioners have requested

    that the Commission grant an order under Section 4(c) of the CEA that

    would exempt cleared-only contracts 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\ The Petitioners represent that permitting

    the clearing of the OTC wheat calendar swaps by KCBTCC may benefit the

    marketplace by providing market participants the ability to combine

    flexible negotiation with central counterparty guarantees and capital

    efficiencies. In addition, Petitioners represent that they expect the

    cleared-only contracts to provide a risk management tool with unique

    attributes, i.e., contract months and settlement features, to address

    price risk and to complement KCBT's wheat futures and options

    contracts.

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

    3213.

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    Section 4(c)(2) provides that the Commission may grant 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\ Thus,

    the Commission is requesting comment on whether it should exempt the

    OTC wheat calendar swaps that are proposed to be cleared by KCBTCC and

    listed by KCBT, as described above, to the same extent as other

    contracts that are exempt pursuant to Part 35 of the Commission's

    regulations.

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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 this exemption would 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 Petitioners' exemption request.

    IV. Related Matters

    A. Paperwork Reduction Act

    The Paperwork Reduction Act (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. An exemptive order issued by the Commission would not be

    associated with a collection of information. Accordingly, the PRA does

    not apply.

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    \18\ 44 U.S.C. 3501 et seq.

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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

    [[Page 58610]]

    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 exemption request will only be entered into

    by persons who are ``appropriate persons'' as set forth in Section 4(c)

    of the CEA.

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

    exemption granted under Part 35 to the OTC wheat calendar swaps to

    allow them to be cleared may promote liquidity and transparency in the

    markets for OTC wheat derivatives as well as wheat futures. Extending

    the exemption also may promote financial integrity by providing the

    benefits of clearing to the OTC wheat market.

    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. KCBTCC'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 an agricultural derivatives product

    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 provisions of Section 15.

    Issued in Washington, DC, on November 6, 2009 by the Commission.

    David A. Stawick,

    Secretary of the Commission.

    [FR Doc. E9-27287 Filed 11-12-09; 8:45 am]

    Last Updated: November 13, 2009



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