e8-26815

FR Doc E8-26815[Federal Register: November 12, 2008 (Volume 73, Number 219)]

[Notices]

[Page 66847-66849]

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

[DOCID:fr12no08-45]

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COMMODITY FUTURES TRADING COMMISSION

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 iShares[reg] COMEX Gold Trust Shares and

iShares[reg] Silver 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

certain contracts called ``options'' and other contracts called

``security futures'' on each of iShares[reg] COMEX Gold Trust Shares

(``Gold Products'') and iShares[reg] Silver Trust Shares (``Silver

Products'') (collectively, ``Gold and Silver Products''), proposed to

be traded on national securities exchanges (as to options) and

designated contract markets registered with the Securities and Exchange

Commission (``SEC'') as limited purpose national securities

associations (as to security futures), and in either case 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 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 November 19, 2008.

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: [email protected] Include ``Options and Security

Futures on Gold and Silver 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 received will be posted without change to http://

www.CFTC.gov/.

FOR FURTHER INFORMATION CONTACT: Robert B. Wasserman, Associate

Director, 202-418-5092, [email protected], 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,\3\ and a securities

clearing agency registered pursuant to Section 17A of the Securities

Exchange Act of 1934 (``the '34 Act'').\4\

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\3\ 7 U.S.C. 7a-1.

\4\ 15 U.S.C. 78q-1.

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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,\5\ requests for

approval of rules and rule amendments that would enable OCC (1) to

clear and settle contracts called ``options'' (``Options'') on Gold and

Silver Products traded on national securities exchanges, in its

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

capacity as a DCO) and (2) to clear and settle contracts called

``security futures'' (``Security Futures'') on Gold and Silver Products

traded on designated contract markets \6\ registered with the SEC as

limited purpose national securities associations pursuant to Section

15A(k) of the '34 Act \7\ (``DCMs'') as security futures subject to the

CEA and CFTC regulations thereunder governing security futures, in

either case in OCC's capacity as a registered securities clearing

agency (and not in its capacity as a DCO).\8\ Section 5c(c)(3) provides

that the CFTC must approve 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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\5\ 7 U.S.C. 7a-2(c), 17 CFR 39.4(a), 40.5.

\6\ See Section 5 of the CEA, 7 U.S.C. 7.

\7\ 15 U.S.C. 78o-3(k).

\8\ See SR-OCC-2008-13 and SR-OCC-2008-14. OCC has also filed

these proposed rule changes with the Securities and Exchange

Commission (``SEC'').

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The request for approval concerning the Options and Security

Futures on Gold and Silver Products was filed effective July 23, 2008.

By letter dated August 20, 2008, the Director of the Division of

Clearing and Intermediary Oversight, pursuant to delegated authority,

extended the review period of the request until October 21, 2008 due to

the novel and complex issues raised by the products that are the

subject of the request. By letter dated October 16, 2008, OCC consented

to an extension of the review period until November 20, 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.\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 and Security Futures on

Gold and Silver Products to trade on national securities exchanges (as

to Options) and DCMs (as to Security Futures) and in

[[Page 66848]]

either case to be cleared by OCC in its capacity as a securities

clearing agency, as discussed above, may foster both financial

innovation and competition. In accordance with the Memorandum of

Understanding entered into between the CFTC and the 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 Options and Security Futures on

Gold and Silver Products, as described above, that are traded on a

national securities exchange or a DCM, respectively, and cleared

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

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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\10\ 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 Options on the Gold and Silver Products are (or are not) options

subject to the CEA, or find that Security Futures on the Gold and

Silver Products are (or are not) security futures as defined in Section

1a(31) of the CEA.\11\ During the legislative process leading to the

enactment of Section 4(c) of the CEA, the House-Senate Conference

Committee noted that:

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\11\ 7 U.S.C. 1a(31).

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.\12\

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\12\ 4(c) Conf. Report at 3214-3215.

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The Options and Security Futures on Gold and Silver Products

described above are ``novel instruments.'' 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.\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, 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 and clearing the Options and Security

Futures on Gold and Silver Products--whether the mode applicable to

options on securities or commodities, or to security futures or

futures--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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\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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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.'' National securities exchanges and OCC, as

well as their members who will intermediate Options on Gold and Silver

Products, are subject to extensive and detailed regulation by the SEC

under the '34 Act. Similarly, DCMs and OCC, as well as their members

who will intermediate Security Futures on Gold and Silver Products, are

subject to regulation by the SEC and CFTC. The CFTC is requesting

comment as to whether all persons trading Options and Security Futures

on Gold and Silver Products on national securities exchanges and DCMs,

respectively, and clearing such products 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'') \15\ 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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\15\ 44 U.S.C. 3507(d).

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B. Cost-Benefit Analysis

Section 15(a) of the CEA,\16\ 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 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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\16\ 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;

[[Page 66849]]

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, DCMs, OCC and their members who would

intermediate the above-described Options and Security Futures on Gold

and Silver Products 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 Options and Security Futures on Gold and

Silver Products through modes other than those normally applicable to

designated contract markets or derivatives transaction execution

facilities. Financial integrity will not be affected since the Options

and Security Futures on Gold and Silver Products 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 Options and Security

Futures on Gold and Silver Products 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 November 5, 2008 by the Commission.

David A. Stawick,

Secretary of the Commission.

[FR Doc. E8-26815 Filed 11-10-08; 8:45 am]

BILLING CODE 6351-01-P

Last Updated: November 12, 2008