e7-23635

[Federal Register: December 6, 2007 (Volume 72, Number 234)]

[Notices]

[Page 68862-68865]

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

[DOCID:fr06de07-28]

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COMMODITY FUTURES TRADING COMMISSION

Notice of Request for Comment on Exemption Requests

AGENCY: Commodity Futures Trading Commission.

Requests to extend, pursuant to the exemptive authority in section

4(c) of the Commodity Exchange Act, the exemption granted under Part 35

of the Commission's regulations to certain over-the-counter swaps that

do not otherwise meet certain of the requirements imposed by Commission

Regulation 35.2 and to determine that, subject to certain conditions,

floor brokers and floor traders are eligible swap participants.

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

``Commission'') is requesting comment on whether to extend the

exemption granted under Part 35 of the Commission's regulations to

certain over-the-counter (``OTC'') swaps that do not meet certain of

the requirements otherwise imposed by Commission Regulation 35.2. This

exemption has been requested by ICE Clear U.S., Inc. (``ICE Clear''), a

registered derivatives clearing organization. The Commission is also

requesting comment on whether ICE Futures U.S., Inc. (``ICE Futures

U.S.'') floor traders and floor brokers who are registered with the

Commission, when trading for their own accounts, may be determined to

be eligible swap participants and permitted to enter into certain

specified OTC swap transactions. This exemption has been requested by

ICE Futures U.S., a designated contract market. Authority for extending

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

(``CEA'' or ``Act'').\1\

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

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DATES: Comments must be received on or before January 7, 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.gov/cgi-bin/leaving.cgi?from=leavingFR.html&log=linklog&to=http://frwebgate.access.gpo/cgi-bin/leaving. Follow the instructions

for submitting comments.

E-mail: [email protected] Include ``ICE Clear Section

4(c) Request'' 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: Lois J. Gregory, Special Counsel, 816-

960-7719, [email protected], or Robert B. Wasserman, Associate

Director, 202-418-5092, [email protected], Division of Clearing and

Intermediary Oversight; or Duane C. Andresen, Special Counsel, 202-418-

5492, [email protected], Division of Market Oversight, Commodity

Futures Trading Commission, Three Lafayette Centre, 1151 21st Street,

NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. The ICE Clear Petition

ICE Clear, the clearing organization for ICE Futures U.S., seeks to

offer eligible swap participants who enter into certain bilateral swap

transactions involving coffee, sugar, or cocoa the opportunity to

submit them to ICE Clear for clearing. ICE Clear has represented that

swap transactions in various agricultural products, including coffee,

sugar, and cocoa, currently trade in OTC markets exempt from provisions

of the CEA pursuant to Part 35 of the Commission's regulations. These

are commonly swap agreements entered into by participants exchanging

fixed for floating reference prices. Participants in these markets

include trade houses, commodity lenders, producers, end users, and

large speculators.

Part 35 of the Commission's regulations \2\ exempts swap agreements

and eligible persons entering into these agreements from most

provisions of the Act.\3\ The term ``swap agreement'' is defined to

include, among other types of agreements, ``a * * * commodity swap,''

\4\ which latter term includes swaps on agricultural products.\5\ Part

35 was promulgated pursuant to authority provided to the Commission in

Section 4(c) of the Act to exempt certain transactions in order to

promote innovation and competition.\6\ Various exemptions and

exclusions were subsequently added to the Act by the Commodity Futures

Modernization Act

[[Page 68863]]

of 2000 (``CFMA''),\7\ but none apply to agricultural contracts.\8\

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\2\ 17 CFR Part 35.

\3\ Jurisdiction is retained for, inter alia, provisions of the

CEA proscribing fraud and manipulation. See Commission Reg. Sec.

35.2, 17 CFR Sec. 35.2 (Commission regulations are hereinafter

cited as ``Reg. Sec. --'').

\4\ Reg. Sec. 35.1(b)(1)(i).

\5\ ``Commodity'' is defined in Section 1a(4) of the Act 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.''

\6\ See 58 F.R. 5587 (January 22, 1993).

\7\ Pub. L. 106-554, 114 Stat. 2763 (2000).

\8\ See, e.g., CEA Sec. Sec. 2(d), (g) and (h).

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Part 35 requires, inter alia, that a swap agreement not be part of

a fungible class of agreements that are standardized as to their

material economic terms \9\ 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.\10\ Under the

arrangement that ICE Clear seeks to establish, OTC contracts would be

submitted for clearing, a process that would extinguish the original

OTC contract and replace it with an equivalent number of cash-settled

``cleared-only'' futures contracts, with the clearinghouse interposed

as central counterparty.\11\ A cleared-only contract could be offset by

another cleared-only contract. Thus, clearing of these OTC contracts

would result in contracts that are fungible with other cleared-only

contracts with approximately equivalent terms. In addition, the

creditworthiness of the counterparty would not be a consideration.

Accordingly, the OTC contracts ICE Clear would clear in the fashion

proposed would not fulfill all of the conditions of Part 35.

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\9\ Reg. Sec. 35.2(b).

\10\ Reg.Sec. 35.2(c).

\11\ The OTC transaction would be required to involve the

coffee, sugar, or cocoa underlying the corresponding cleared-only

contract. The unit size, quality, and other specifications for the

OTC coffee, sugar, or cocoa transaction would be approximately

equivalent to the unit size, quality, and other specifications of

the corresponding physical delivery futures contract listed on ICE

Futures.

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

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

for other arrangements or facilities.'' ICE Clear has petitioned the

Commission for an order under Section 4(c) of the Act that would permit

cleared OTC swaps involving coffee, sugar, and cocoa to be exempt on

the same basis as other swaps are exempt under Part 35.

II. The ICE Futures U.S. Petition

ICE Futures U.S. seeks to permit floor traders and floor brokers

(collectively, floor members) who are registered with the Commission,

when trading for their own accounts, to enter into the OTC swap

transactions discussed above. Part 35, however, defines the term

eligible swap participant (``ESP'') to include floor members only as

follows: (1) Floor members generally who are other than natural persons

or proprietorships; (2) floor members who are natural persons, provided

they have total assets exceeding at least $10,000,000; or (3) floor

members who are proprietorships, provided they have total assets

exceeding at least $10,000,000, or have the obligations under the swap

agreement guaranteed or otherwise supported by certain other ESPs, or

have a net worth of $1,000,000 and enter into the swap agreement in

connection with the conduct of their business or to manage the risk of

an asset or liability owned or incurred in the conduct of their

business or reasonably likely to be owned or incurred in the conduct of

their business.\12\ ICE Futures U.S. has petitioned the Commission for

an order under Section 4(c) of the Act that would permit all ICE

Futures U.S. floor members who are registered with the Commission, when

trading for their own accounts, to be ESPs for the purpose of entering

into bilateral swap transactions involving agricultural commodities as

described above.

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\12\ Reg. Sec. 35.1(b)(2)(x).

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ICE Futures U.S. represents that all floor members entering into

the swap transactions would be sophisticated and knowledgeable in the

relevant products and markets and would be fully capable of evaluating

the transactions. Further, because the transaction results in a

cleared-only futures contract, floor members would not be subject to

counterparty credit risk and would rely on the credit of ICE CLEAR and

their clearing futures commission merchants (``FCMs'').

The Commission anticipates that any Section 4(c) order issued in

response to this request would be subject to the following conditions:

(1) The contracts, agreement or transactions would have to be

executed pursuant to the requirements of Part 35, as modified herein.

(2) The ICE Futures U.S. floor member would have to obtain a

financial guarantee for the OTC swap transactions from an ICE Futures

U.S. clearing member that:

(i) Is registered with the Commission as an FCM; and

(ii) Clears the OTC swap transactions thus guaranteed.

(3) Permissible OTC swap transactions would be limited to

``cleared-only'' contracts in the following eligible products: cocoa,

coffee and sugar.

(4) Permissible OTC swap transactions would have to be submitted

for clearance by an ICE Futures U.S. clearing member to ICE Clear

pursuant to ICE Clear Rules.

(5) An ICE Futures U.S. floor member could not enter into OTC swap

transactions with another ICE Futures U.S. floor member as the

counterparty for ICE Clear ``cleared-only'' contracts.

(6) ICE Futures U.S. would maintain appropriate compliance systems

in place to monitor the OTC swap transactions of its floor members.\13\

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\13\ These conditions are substantially similar to the

conditions included in two previously issued Commission orders that

permit floor members to be eligible contract participants (``ECPs'')

pursuant to Section 1a(12)(C) of the Act, 7 U.S.C. 1a(12)(C). On

March 14, 2006, the Commission issued an order that permitted

Chicago Mercantile Exchange floor members to be ECPs with respect to

OTC transactions in excluded commodities entered into pursuant to

Section 2(d)(1) of the Act. On August 3, 2006, the Commission issued

an order that permitted New York Mercantile Exchange floor members

to be ECPs with respect to OTC transactions in exempt commodities

entered into pursuant to Section 2(h)(1) of the Act.

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III. 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.\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

[[Page 68864]]

and competitive manner.''\15\ Permitting the clearing of OTC coffee,

sugar, and cocoa transactions by ICE Clear, as well as permitting ICE

Futures U.S. floor members to trade such products, as discussed above,

may foster both financial innovation and competition. It may benefit

the marketplace by providing ESPs the ability to bring together

flexible negotiation with central counterparty guarantees and capital

efficiencies. The CFTC is requesting comment on whether it should

exempt the OTC transactions in coffee, sugar, and cocoa that are

proposed to be cleared through ICE Clear as described above, in the

same fashion as are other contracts that are exempt pursuant to Part 35

of the Commission's regulations. The CFTC is also requesting comment on

whether it should determine ICE Futures U.S. floor members, subject to

certain conditions, to be ESPs for the purpose of entering into the OTC

transactions in coffee, sugar and cocoa.

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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 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.\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 OTC

contracts described herein and submitted for clearing as 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

CFTC is requesting comment as to whether an exemption from the

requirements of the CEA should be granted in the context of these

transactions and these potential participants.

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\17\ CEA Sec. section 3(b), 7 U.S.C. 5(b). See also CEA Sec.

section 4(c)(1), 7 U.S.C. Sec. 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 deemed appropriate under the

Act for entering into transactions exempt by the Commission under

Section 4(c). This includes persons the Commission determines to be

appropriate in light of their financial or other qualifications, or the

applicability of appropriate regulatory protections. ESPs, as defined

in Part 35 of the Commission's regulations, will be eligible to submit

for clearing to ICE Clear the OTC transactions described above. That

definition includes many of the classes of persons explicitly referred

to in CEA Section 4(c)(3) (e.g., a bank or trust company) as well as

some classes of persons who are included under the category of Section

4(c)(3)(K) (``[s]uch other persons that the Commission determines to be

appropriate in light of their financial or other qualifications, or the

applicability of appropriate regulatory protections''). The Commission

is proposing to include as appropriate persons for this extended relief

under Part 35 all of the persons who meet the definition of ESP in

Commission Regulation Sec. 35.1(b)(2). For the purposes of the

extended relief requested by ICE Futures U.S., the Commission is also

proposing to expand upon this list of appropriate persons to include,

as discussed above, ICE Futures U.S. floor members. The Commission

seeks comment on this determination.

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 contract market or derivatives clearing organization.

IV. Request for Comment

The Commission requests comment on all aspects of the issues

presented by these exemption requests.

V. 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. Sec. 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. Sec. 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

[[Page 68865]]

these swap agreements to allow them to be cleared may promote liquidity

and transparency in the markets for OTC derivatives on coffee, sugar,

and cocoa, as well as on futures on those commodities. Extending the

exemption also may promote financial integrity by providing the

benefits of clearing to these OTC markets. Determining ICE Futures U.S.

floor members to be ESPs may increase the flow of trading information

between markets, increase the pool of potential counterparties for

participants trading OTC, and provide essential trading expertise to

the 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. ICE

Clear'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 derivative products

without unnecessary regulatory burden.

After considering these factors, the Commission has determined to

seek comment on the exemption requests as discussed above. The

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

benefit provision.

* * * * *

Issued in Washington, DC, on November 30, 2007 by the

Commission.

David A. Stawick,

Secretary of the Commission.

[FR Doc. E7-23635 Filed 12-5-07; 8:45 am]

BILLING CODE 6351-01-P

Last Updated: December 6, 2007