e8-8942

[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]

=============================================================

-------------------------------------------------------------

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.

-------------------------------------------------------------

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\

-----------------------------------------------------------------

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

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

---------------------------------------------------------------------------

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: [email protected] 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, [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, 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\

---------------------------------------------------------------------------

\3\ 15 U.S.C. 78q-l.

---------------------------------------------------------------------------

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.

---------------------------------------------------------------------------

\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.

---------------------------------------------------------------------------

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.

---------------------------------------------------------------------------

\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.

---------------------------------------------------------------------------

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.

---------------------------------------------------------------------------

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

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

---------------------------------------------------------------------------

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\

---------------------------------------------------------------------------

\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\

---------------------------------------------------------------------------

\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.

---------------------------------------------------------------------------

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.

---------------------------------------------------------------------------

\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.'')

---------------------------------------------------------------------------

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.

---------------------------------------------------------------------------

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

---------------------------------------------------------------------------

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.

---------------------------------------------------------------------------

\13\ 7 U.S.C. 19(a).

---------------------------------------------------------------------------

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