FR Doc E8-30057[Federal Register: December 18, 2008 (Volume 73, Number 244)]
[Notices]
[Page 77015-77020]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18de08-51]
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COMMODITY FUTURES TRADING COMMISSION
Order: (1) Pursuant to Section 4(c) of the Commodity Exchange Act
(a) Permitting Eligible Swap Participants To Submit for Clearing and
ICE Clear U.S., Inc. and Futures Commission Merchants To Clear Certain
Over-The-Counter Agricultural Swaps and (b) Determining Certain Floor
Brokers and Traders To Be Eligible Swap Participants; and (2) Pursuant
to Section 4d of the Commodity Exchange Act, Permitting Certain
Customer Positions in the Foregoing Swaps and Associated Property To Be
Commingled With Other Property Held in Segregated Accounts
AGENCY: Commodity Futures Trading Commission.
ACTION: Order.
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SUMMARY: On December 7, 2007, the Commodity Futures Trading Commission
(``CFTC'' or ``Commission'') published for public comment requests (a)
to permit ICE Clear U.S., Inc. (``ICE Clear'') to clear certain over-
the-counter (``OTC'') swap contracts and (b) to determine that certain
ICE Futures U.S., Inc. (``ICE Futures'') floor brokers and traders are
Eligible Swap Participants (``ESPs'') for the purpose of trading those
OTC swaps (``Notice.'').\1\ On January 7, 2008, the comment period was
extended to February 6, 2008.\2\ ICE Clear also filed a request for an
order pursuant to Section 4d of the Commodity Exchange Act (``CEA'' or
``Act'') to allow ICE Clear and Futures Commission Merchants (``FCMs'')
clearing through ICE Clear to commingle positions in those cleared OTC
swap contracts and property supporting those positions with property
and positions otherwise required to be held in customer segregated
accounts. That request was published on the CFTC's Web site for public
comment during the same timeframe with the same comment deadline. The
Commission has reviewed the comments made in response to the requests
for comment and the entire record in this matter and has determined to
issue an order granting the requests.
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\1\ 72 FR 68862 (December 7, 2007).
\2\ 73 FR 1205 (January 7, 2008).
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DATES: Effective Date: December 12, 2008.
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, Senior 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 4(c) Petition
ICE Clear, the clearing organization for ICE Futures, sought to
offer ESPs who enter into certain bilateral swap transactions involving
coffee, sugar, or cocoa the opportunity to submit them to ICE Clear for
clearing. ICE Clear 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,\3\ that these swap agreements are
commonly entered
[[Page 77016]]
into by participants exchanging fixed for floating reference prices,
and that participants in these markets include trade houses, commodity
lenders, producers, end users, and large speculators.
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\3\ 17 CFR Part 35.
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Part 35 of the Commission's regulations exempts, subject to
conditions, swap agreements and eligible persons entering into these
agreements from most provisions of the CEA.\4\ The term ``swap
agreement'' is defined to include, among other types of agreements, ``a
* * * commodity swap,'' \5\ which latter term includes swaps on
agricultural products.\6\ 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 explicitly permit certain off-exchange
derivative transactions, and thus to promote innovation and
competition.\7\ In the Commodity Futures Modernization Act of 2000,\8\
Congress enacted a number of exemptions and exclusions from the CEA for
contracts traded outside of Designated Contract Markets (``DCMs''), but
none apply to agricultural contracts.\9\
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\4\ Jurisdiction is retained for, inter alia, provisions of the
CEA proscribing fraud and manipulation. See Commission Reg. Sec.
35.2, 17 CFR 35.2 (Commission regulations are hereinafter cited as
``Reg. Sec. ----'').
\5\ Reg. Sec. 35.1(b)(1)(i).
\6\ ``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 (January 22, 1993). Section 4(c) of the CEA
was added by section 502(a) of the Futures Trading Practices Act of
1992, Pub. L. 102-546, 106 Stat. 3590.
\8\ Pub. L. 06-554, 114 Stat. 2763 (2000).
\9\ See, e.g., CEA section 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,\10\ that the agreement be solely between
ESPs,\11\ 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.\12\ 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''
contracts, with the clearinghouse interposed as central
counterparty.\13\ A cleared-only contract could be offset by another
cleared-only contract. Thus, clearing of these OTC contracts would
result in contracts that were fungible with other cleared-only
contracts with approximately equivalent terms. In addition, due to the
clearing guarantee, the creditworthiness of the counterparty would no
longer be a consideration. Accordingly, the OTC contracts ICE Clear
clears in this fashion would not fulfill all of the conditions of Part
35.
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\10\ Reg. Sec. 35.2(b).
\11\ Reg. Sec. 35.2(a).
\12\ Reg. Sec. 35.2(c).
\13\ 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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ICE Clear also requested an order under CEA Section 4d so that ICE
Clear and its clearing members can hold the cleared-only contracts and
property supporting them in the customer segregated account along with
exchange-listed futures contracts and associated property, resulting in
improved collateral management and other benefits.
II. The ICE Futures Petition
ICE Futures, a U.S. DCM, sought 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
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.\14\ Therefore, ICE Futures petitioned the Commission for an
order pursuant to Section 4(c) of the CEA that would permit all ICE
Futures 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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\14\ Reg. Sec. 35.1(b)(2)(x).
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ICE Futures represented 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 FCMs.
The Commission stated that it anticipated that any Section 4(c)
order issued in response to ICE Futures' request would be subject to
the following conditions:
(1) The contracts, agreements, or transactions would have to be
executed pursuant to the requirements of Part 35, as modified by the
order.
(2) The ICE Futures floor member would have to obtain a financial
guarantee for the OTC swap transactions from an ICE Futures 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 eligible products identified in the order.
(4) Permissible OTC swap transactions would have to be submitted
for clearance by an ICE Futures clearing member to ICE Clear pursuant
to ICE Clear rules.
(5) An ICE Futures floor member could not enter into OTC swap
transactions with another ICE Futures floor member as the counterparty
for ICE Clear cleared-only contracts.
(6) ICE Futures would maintain appropriate compliance systems in
place to monitor the OTC swap transactions of its floor members.\15\
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\15\ The Commission noted that 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 (``CME'')
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 a second order (the
first was issued February 4, 2003) that permitted New York
Mercantile Exchange (``NYMEX'') 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. Sections 4(c) and 4d of the CEA
A. Permitting the OTC Contracts To Be Cleared
Section 4(c)(1) of the CEA empowers the CFTC to ``promote
responsible
[[Page 77017]]
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.\16\ 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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\16\ 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.'' \17\ The Commission requested comment on whether
it should permit the OTC transactions in coffee, sugar, and cocoa to be
cleared through ICE Clear as described above. The Commission also
requested comment on whether it should determine ICE Futures 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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\17\ 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
from Section 4(a) of the CEA only when the Commission 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.\18\
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\18\ 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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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''). ICE Futures has
requested that the Commission expand this list of appropriate persons
to include ICE Futures floor members. The Commission requested comment
on this determination. The Commission also requested 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
(``DCO'').
B. Segregation of Customer Funds
CEA Section 4d(a)(2) prohibits commingling customer positions
executed on a contract market and property supporting such positions
together with any property not required to be so segregated. Section
4d(a)(2) provides that the Commission may grant exceptions to this
prohibition by order. In this case, the OTC coffee, sugar, and cocoa
contracts are not executed on a contract market and thus holding them
together with customer property and positions required to be segregated
would, absent a Commission order, violate Section 4d. As discussed
further below, the Commission has analyzed the risks and benefits
associated with commingling the cleared-only positions and associated
customer funds with positions and customer funds otherwise required to
be segregated, and has determined that the benefits of the proposal
outweigh the risks and that the proposal, along with conditions set
forth by the Commission, will provide for a sufficient level of
safeguards to address the risks adequately.
IV. Comment Letters
The Commission received eleven letters in response to its request
for comment. An initial comment letter from the CME Group Inc. (``CME
Group'') requested an extension of the comment period and listed
various concerns CME Group suggested might have to be addressed in
order for the Commission to act on ICE Clear's request for an extension
of the swaps exemption of Part 35. However, a subsequent comment letter
from CME Group took the position that the Commission should permit the
clearing of OTC agricultural swap contracts but pursuant to appropriate
conditions to protect the market and market participants in a manner
that would establish a level playing field for all DCOs.
Brief comments from two individuals expressed concerns related to
their belief that the OTC transactions would be undertaken primarily by
large traders, such as hedge funds, to the detriment of smaller traders
who use the markets for hedging. Neither of these comments provided any
evidence that would support the conclusion that smaller traders would
be adversely affected by the requested relief. One of the comments did
note that there was no mention of the application of speculative
limits. As discussed further below, the order will require ICE Futures
to apply position accountability levels to the cleared-only contracts
that are appropriate in light of the position accountability levels
applicable to the underlying futures contracts.
The remaining seven comment letters are from two futures exchanges
and five commodity trading firms, all of which
[[Page 77018]]
support ICE Clear's and ICE Futures' requests for exemption.
With respect to the ICE Futures request that floor members be
deemed ESPs, NYMEX commented regarding the Commission's assertion that
the proposed conditions pertaining to the determination were
substantially similar to the conditions included in two previously
issued Commission orders that permit floor members to be ECPs pursuant
to Section 1a(12)(C) of the CEA.\19\ Specifically, NYMEX stated that
the Commission previously has required that the clearing member
providing a financial guarantee to a floor member deemed to be an ECP
must maintain capitalization of a certain size to be able to issue such
a guarantee, that the financial requirement was not included in the
list of conditions to be applied to ICE Futures clearing members
guaranteeing floor members deemed to be ESPs, and that the Notice did
not provide any policy rationale for imposing different financial
standards for clearing member guarantors.
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\19\ See supra note 15.
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On February 4, 2003, the Commission issued to NYMEX the first order
determining that floor members could be ECPs. Due to the order's novel
nature and the concern that a trader entering into OTC transactions
could create financial difficulty for the guarantor FCM, the clearing
entity, or other clearing firms, the order required clearing members
that guaranteed and cleared OTC transactions to meet specified minimum
capital requirements, and for NYMEX to submit a report to the
Commission not later than 30 days after the order was in effect for 18
months.\20\
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\20\ The order required that, as part of the report, NYMEX
review its experiences and the experiences of its floor members and
clearing members under the order during those 18 months.
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CME subsequently petitioned the Commission for an order that would
permit CME floor members to be deemed ECPs. After reviewing the impact
of the NYMEX order upon NYMEX and its floor members, and noting the
lack of problems associated with it, the Commission issued an order to
CME that did not include a special guarantor capitalization
requirement.\21\ Immediately thereafter, Commission staff advised NYMEX
that it could petition for a new or amended order that would not
include a special guarantor capitalization requirement, but NYMEX to
date has not so petitioned.
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\21\ The floor member must have a guarantee from, and the trades
must be cleared by, a CME clearing member FCM. That FCM must have
adjusted net capital that equals or exceeds the greater of
$2,500,000, CFTC requirements as computed pursuant to Reg. Sec.
1.17, or Securities and Exchange Commission requirements.
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V. Findings and Conclusions
After considering the complete record in this matter, including the
comments received, the Commission finds that the requirements of CEA
Section 4(c) have been met with respect to the requests for an order
permitting the clearing of certain OTC transactions and determining
that certain floor brokers and floor traders qualify as ESPs.
First, permitting the clearing of these transactions is consistent
with the public interest and with the purposes of the CEA. The purposes
of the CEA include ``promot[ing] responsible innovation and fair
competition among boards of trade, other markets, and market
participants.'' \22\ The purpose of exemptions is ``to promote economic
or financial innovation and fair competition.'' \23\ Permitting the
clearing of OTC coffee, sugar, and cocoa transactions by ICE Clear, as
well as permitting ICE Futures floor members to trade such products,
would appear to foster both financial innovation and competition. It
could benefit the marketplace by providing ESPs the ability to bring
together flexible negotiation with central counterparty guarantees and
capital efficiencies. Clearing also may increase the transparency of
the OTC market.
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\22\ CEA section 3(b), 7 U.S.C. 5(b).
\23\ CEA section 4(c)(1), 7 U.S.C. 6(c)(1).
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Second, the bilateral transactions in the OTC agricultural swaps
would be entered into solely between appropriate persons. These would
be limited to those persons qualifying as ESPs under Part 35 and those
floor brokers and traders deemed ESPs herein by the Commission. ICE
Futures floor brokers or traders that entered into the swap would be
registered with the Commission and would have the requisite skills,
experience, and market expertise to trade for their own accounts. Each
such floor member would be financially backed by the ICE Clear clearing
member that submits the swap for clearing, and all of its activity in
the OTC agricultural swaps, limited only to coffee, sugar, or cocoa,
will be closely monitored by ICE Futures.
Third, the exemption would not have a material adverse effect on
the ability of the Commission or any DCM to carry out its regulatory
responsibilities under the CEA. ICE Clear will use the same systems,
procedures, people, and processes to clear the bilateral agricultural
swap contracts in coffee, sugar, and cocoa as it currently employs with
respect to all of the other transactions it clears.
With respect to ICE Clear's request for an order pursuant to
Section 4d permitting ICE Clear and FCMs clearing through ICE Clear to
commingle funds supporting positions in the cleared-only contracts
resulting from these agricultural swaps with customer funds required to
be segregated under CEA Section 4d, the Commission has considered
whether the additional risk to customers presented by such commingling
can be adequately addressed and mitigated. Additional risk is presented
to customers as a result of the risk of default involving the
commingled cleared-only contracts. However, the carrying FCM should
have adequate means to address a default by a customer trading these
contracts. Since each cleared-only contract will have identical
economic terms as its underlying corresponding contract listed on ICE
Futures and will settle on both a daily and final basis to that
corresponding listed contract, the carrying FCM (or, if necessary, ICE
Clear) economically could hedge any contracts that are the subject of a
default by entering into the offsetting underlying exchange-listed
contract. Therefore, the additional risk would be mitigated. The order
requires that ICE Clear review its members' risk management
capabilities to verify that all members participating in the program
maintain sufficient operational capability to engage in such offsetting
transactions. The order also requires that ICE Futures (1) maintain a
coordinated market surveillance program that encompasses the cleared-
only contracts and the underlying futures contracts, and (2) adopt
position accountability levels for each of the cleared-only contracts
subject to the order that are appropriate in light of the position
accountability levels applicable to the underlying futures contracts.
These measures should mitigate market risk.
Accordingly, the Commission has determined that ICE Clear will be
able to employ reasonable safeguards to protect customer funds, and
that it will be able to measure, monitor, manage, and account for risks
associated with transactions and open interest in the bilateral swap
contracts as it does for other contracts it clears. The Commission
believes that ICE Clear has demonstrated sufficiently that it will
continue to comply with all of the core principles in CEA Section 5b of
the Act in connection with holding customer positions in OTC
agricultural swaps with property held in segregated accounts pursuant
to CEA Section 4d.
[[Page 77019]]
VI. Related Matters
A. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (``PRA'') \24\ 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 will not require a new
collection of information from any entities that would be subject to
the exemption.
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\24\ 44 U.S.C. 3507(d).
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B. Cost-Benefit Analysis
Section 15(a) of the CEA,\25\ 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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\25\ 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 has considered the costs and benefits of this
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 requests will only be entered
into by persons who are ``appropriate persons'' as set forth in Section
4(c) of the Act. Only ESPs and those floor brokers and traders deemed
ESPs pursuant to ICE Futures' request herein will enter into
transactions in the OTC agricultural swaps that are the subject of ICE
Clear's request. Allowing the commingling of funds supporting positions
in the resulting cleared-only contracts with customer funds required to
be segregated under CEA Section 4d will benefit ESP market participants
by facilitating clearing and the reduction of credit risk for contracts
that meet market participants' specific risk-management requirements.
ESP customers holding positions in cleared-only contracts also would
benefit from having their property held in segregated accounts in the
event of the insolvency of an FCM. In addition, the order is premised
on ICE Clear maintaining a number of existing risk management and other
safeguards.
2. Efficiency and competition. Allowing these swap agreements to be
cleared appears likely to promote liquidity and transparency in the
markets for OTC derivatives on coffee, sugar, and cocoa, as well as on
futures on those commodities. Determining ICE Futures floor members to
be ESPs will likely increase the flow of trading information between
markets, increase the pool of potential counterparties for participants
trading OTC, and provide additional trading expertise to the market.
The commingling of funds supporting cleared-only positions with
customer funds supporting exchange-traded positions should result in
improved, more efficient, collateral management and lower
administrative costs since risk-offsetting positions will be held
together in the same account rendering a more precise estimation of the
risk posed by the account. These types of efficiencies also generally
support competition.
3. Financial integrity of futures markets and price discovery.
Price discovery is likely to be enhanced through market competition.
The extended exemption also may promote financial integrity by
providing the benefits of clearing to these OTC markets. As discussed
above, the risks associated with commingling funds supporting cleared-
only positions with customer funds supporting exchange-traded positions
are appropriately mitigated.
4. Sound risk management practices. Clearing of OTC transactions is
likely to foster risk management by the participant counterparties. ICE
Clear's risk management practices in clearing these transactions are
subject to the Commission's supervision and oversight.
5. Other public interest considerations. The granted exemptions are
likely to encourage market competition in agricultural derivatives
products without unnecessary regulatory burden.
The Commission requested comment on its application of these
factors in the proposing release. No comments were received.
VII. Order
After considering the above factors and the comment letters
received in response to its request for comments on its application of
these factors in the proposing release, the Commission has determined
to issue the following:
Order
(1) The Commission, pursuant to its authority under CEA Section
4(c) and subject to the conditions below, hereby:
(A) Permits ESPs to submit for clearing, and FCMs and ICE Clear to
clear, OTC agricultural swap contracts in coffee, sugar, or cocoa; and
(B) Permits all ICE Futures floor members that are registered with
the Commission, when trading for their own accounts, to be deemed ESPs
for the purpose of entering into bilateral swap transactions involving
coffee, sugar, or cocoa agricultural commodities to be cleared on ICE
Clear.
(2) The Commission, pursuant to its authority under CEA Section 4d
and subject to the conditions below, hereby permits ICE Clear and its
clearing members that are registered FCMs and acting pursuant to this
order to hold money, securities, and other property, used to margin,
guarantee, or secure transactions in OTC agricultural swap contracts
involving coffee, sugar, or cocoa and belonging to customers that are
ESPs (including customers that are deemed ESPs in accordance with this
order) with other customer funds used to margin, guarantee, or secure
trades or positions in commodity futures or commodity option contracts
executed on or subject to the rules of a contract market designated
pursuant to Section 5 of the Act in a segregated account or accounts
maintained in accordance with Section 4d of the CEA (including any
orders issued pursuant to Section 4d(a)(2) of the CEA) and the
Commission's regulations thereunder, and all such customer funds shall
be accounted for and treated and dealt with as belonging to the
customers of the ICE Clear clearing member consistently with CEA
Section 4d and the regulations thereunder.
(3) This order is subject to the following conditions:
(A) The contracts, agreements, or transactions subject to this
order must be executed pursuant to the requirements of Part 35 of the
Commission's regulations, as modified herein, and are limited to
cleared-only contracts in the following agricultural products: coffee,
sugar, or cocoa;
[[Page 77020]]
(B) The economic terms and the daily settlement prices of each
contract, agreement, or transaction subject to this order must be
analogous to the economic terms, and equal to the daily settlement
prices, respectively, of a corresponding futures contract listed for
trading on ICE Futures;
(C) All contracts, agreements, or transactions subject to this
order must be submitted for clearing by an ICE Futures clearing member
to ICE Clear pursuant to ICE Clear rules;
(D) Each ICE Futures floor member acting as an ESP pursuant to this
order must be the subject of a financial guarantee from a member of ICE
Clear covering the trading of the OTC swap contracts, agreements, or
transactions subject to this order. The clearing member must be
registered with the Commission as an FCM and must clear for the floor
member the contracts, agreement, or transactions covered by the
financial guarantee;
(E) An ICE Futures floor member is prohibited from entering into a
transaction in a cleared-only contract subject to this order with
another ICE Futures floor member as the counterparty;
(F) ICE Clear and its clearing members will mark to market each
cleared-only contract subject to this order on a daily basis in
accordance with ICE Clear rules;
(G) ICE Clear will apply its margining system and calculate margin
rates for each cleared-only contract subject to this order in
accordance with its normal and customary practices;
(H) ICE Futures must maintain appropriate compliance systems in
place to monitor the transactions of its floor members in the OTC swap
transactions permitted pursuant to this order;
(I) ICE Clear will apply appropriate risk management procedures
with respect to transactions and open interest in the cleared-only
contracts subject to this order. ICE Clear will conduct financial
surveillance and oversight of its members clearing the cleared-only
contracts, and will conduct oversight sufficient to assure ICE Clear
that each such member has the appropriate operational capabilities
necessary to manage defaults in such contracts. ICE Clear and its
clearing members acting pursuant to this order will take all other
steps necessary and appropriate to manage risk related to clearing
cleared-only contracts;
(J) ICE Clear will make available open interest and settlement
price information for the cleared-only contracts in the eligible
products (coffee, sugar, and cocoa) on a daily basis in the same manner
as for contracts listed on ICE Futures;
(K) ICE Futures shall establish and maintain a coordinated market
surveillance program that encompasses the cleared-only contracts
subject to this order and the underlying futures contracts listed by
ICE Futures on its designated contract market. ICE Futures shall adopt
position accountability levels for each of the cleared-only contracts
subject to this order that are appropriate in light of the position
accountability levels applicable to the underlying futures contracts.
(L) Cleared-only contracts subject to this order shall not be
treated as fungible with any contract listed for trading on ICE
Futures.
(M) Each FCM acting pursuant to this order shall keep the types of
information and records that are described in CEA Section 4g and
Commission regulations thereunder, including but not limited to Reg.
Sec. 1.35, with respect to all cleared-only contracts in eligible
products subject to this order. Such information and records shall be
produced for inspection in accordance with the requirements of Reg.
Sec. 1.31;
(N) ICE Futures shall provide to the Commission the types of
information described in Part 16 of the Commission's regulations in the
manner described in Parts 15 and 16 of the Commission's regulations
with respect to all cleared-only contracts;
(O) ICE Clear will apply large trader reporting requirements to
cleared-only contracts in accordance with its rules, and each FCM
acting pursuant to this order shall provide to the Commission the types
of information described in Part 17 of the Commission's regulations in
the manner described in Parts 15 and 17 of the Commission's regulations
with respect to all cleared-only contracts in which it participates;
and
(P) ICE Clear and ICE Futures shall at all times fulfill all
representations made in their requests for relief under CEA Sections
4(c) and 4d and all supporting materials thereto.
This order is based upon the representations made and supporting
material provided to the Commission by ICE Clear and ICE Futures in
their requests. Any material change or omissions in the facts and
circumstances pursuant to which this order is granted might require the
Commission to reconsider its finding that the exemptions set forth
herein are appropriate. Further, in its discretion, the Commission may
condition, modify, suspend, terminate, or otherwise restrict the
exemptions granted in this order, as appropriate, on its own motion.
Issued in Washington, DC, on December 12, 2008 by the
Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. E8-30057 Filed 12-17-08; 8:45 am]
BILLING CODE 6351-01-P
Last Updated: December 18, 2008