e8-31110

FR Doc E8-31110[Federal Register: December 30, 2008 (Volume 73, Number 250)]

[Notices]

[Page 79830-79833]

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

[DOCID:fr30de08-50]

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COMMODITY FUTURES TRADING COMMISSION

Order Exempting the Trading and Clearing of Certain Products

Related to iShares[supreg] COMEX Gold Trust Shares and iShares[supreg]

Silver Trust Shares

AGENCY: Commodity Futures Trading Commission.

ACTION: Final order.

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SUMMARY: On November 12, 2008, the Commodity Futures Trading Commission

(``CFTC'' or the ``Commission'') published for public comment in the

Federal Register \1\ a proposal to exempt the trading and clearing of

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

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

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

Products'') (collectively, ``Gold and Silver Products'') from the

provisions of the Commodity Exchange Act (``CEA'') \2\ and the

regulations thereunder to the extent necessary to permit them to be

traded and cleared as described below. The contracts are 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 exchanges (as to

security futures), and in both cases to be cleared through the Options

Clearing Corporation (``OCC'') in its capacity as a registered

securities clearing agency. Authority for this exemption is found in

Section 4(c) of the CEA.\3\

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\1\ 73 FR 66847 (November 12, 2008).

\2\ 7 U.S.C. 1 et seq.

\3\ 7 U.S.C. 6(c).

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DATES: Effective Date: December 3, 2008

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,\4\ and a securities

clearing agency registered pursuant to Section 17A of the Securities

Exchange Act of 1934 (``the '34 Act'').\5\

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\4\ 7 U.S.C. 7a-1

\5\ 15 U.S.C. 78q-l.

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OCC filed with the CFTC, pursuant to Section 5c(c) of the CEA and

Commission Regulations 39.4(a) and 40.5 thereunder,\6\ 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 \7\ registered with the SEC as

limited purpose national securities exchanges pursuant to Section 6(g)

of the '34 Act \8\ (``DCMs'') as security futures subject to the CEA

and CFTC regulations thereunder governing security futures, in both

cases in OCC's capacity as a registered securities clearing agency (and

not in its capacity as a DCO).\9\ 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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\6\ 7 U.S.C. 7a-2(c), 17 CFR 39.4(a), 40.5.

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

\8\ 15 U.S.C. 78f(g).

\9\ 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 letters dated October 16, 2008 and November

19, 2008, OCC consented to extensions of the review period, ultimately

until December 3, 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.\10\ The Commission

[[Page 79831]]

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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\10\ 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.'' \11\ 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 both cases be

cleared by OCC in its capacity as a securities clearing agency, as

discussed above, appears likely to 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).

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\11\ HOUSE CONF. REPORT NO. 102-978, 1992 U.S.C.C.A.N. 3179,

3213 (``4(c) Conf. Report'').

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The Options and Security Futures on Gold and Silver Products

described above are novel instruments. Given, among other things, their

potential usefulness to the market the Commission believes that this is

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.\12\

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\12\ 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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In the November 12, 2008 Federal Register release, the CFTC

requested comment as to whether this exemption from the requirements of

the CEA and regulations thereunder should be granted in the context of

these transactions. No comments were received.

III. Findings and Conclusions

After considering the complete record in this matter, the

Commission has determined that the requirements of Section 4(c) have

been met. First, the exemption is consistent with the public interest

and with the purposes of the CEA, including ``promot[ing] responsible

innovation and fair competition among boards of trade, other markets

and market participants.'' \13\ It appears 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 to be determined by

competitive market forces.

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\13\ CEA Sec. 3(b), 7 U.S.C. 5(b). See also CEA Sec. 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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Second, Options and Security Futures on Gold and Silver Products

will be entered into solely between appropriate persons. 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. Given that the Options and Security

Futures on Gold and Silver Products will be traded on national

securities exchanges (as to Options) and DCMs (as to Security Futures),

the regulatory protections available under securities laws and the

applicable regulations governing security futures, and the goal of

promoting fair competition, the Options and Security Futures on Gold

and Silver Products will be traded by appropriate persons.

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. There is no reason to believe that

granting an exemption here would interfere with the Commission's or a

DCM's ability to oversee the trading of similar products or otherwise

carry out its duties.

Therefore, upon due consideration, pursuant to its authority under

Section 4(c) of the CEA, the Commission hereby issues this Order and

exempts the trading of Options on Gold and Silver Products on national

securities exchanges and the trading of Security Futures on Gold and

Silver Products on DCMs registered with the SEC as limited purpose

national securities exchanges, and the clearing of both the Options and

Security Futures through the OCC in its capacity as a registered

securities clearing agency, from the provisions of the CEA and the

regulations thereunder, to the extent necessary to permit the Options

and Security Futures to be so traded and cleared.

This Order is subject to termination or revision, on a prospective

basis, if the Commission determines upon further information that this

exemption is not consistent with the public interest. If the Commission

believes such exemption becomes detrimental to the public interest, the

Commission may revoke this Order on its own motion.

IV. Related Matters

A. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (``PRA'') \14\ imposes certain

requirements on federal agencies (including the Commission) in

connection with their conducting or

[[Page 79832]]

sponsoring any collection of information as defined by the PRA. The

exemptive order will not require a new collection of information from

any entities that would be subject to the proposed order.

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\14\ 44 U.S.C. 3507(d).

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B. Cost-Benefit Analysis

Section 15(a) of the CEA,\15\ as amended by Section 119 of the

Commodity Futures Modernization Act of 2000,\16\ 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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\15\ 7 U.S.C. 19(a).

\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; 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 the 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 exemptive

order appears likely to 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 exemptive order

appears likely to encourage development of derivative products through

market competition without unnecessary regulatory burden.

The Commission requested comment on its application of these

factors in the proposing release. No comments were received.

After considering these factors, the Commission has determined to

issue this order.

* * * * *

Issued in Washington, DC, on December 3, 2008 by the Commission.

David A. Stawick,

Secretary of the Commission.

Commissioner Michael V. Dunn

Signing Statement

CFTC Recommendations in Connection With iShares[supreg] Silver Trust

Shares and iShares[supreg] COMEX Gold Trust Shares

According to the CFTC/SEC Memorandum of Understanding (MOU), each

of our agencies ``recognizes that enhanced coordination and cooperation

concerning issues of common regulatory interest is necessary in order

to foster market innovation and fair competition and to promote

efficiency in regulatory oversight.'' The CFTC/SEC MOU further states

that ``the agencies can facilitate the introduction of novel derivative

products to market users and investors.'' While the CFTC and SEC may be

adhering to the words of their MOU, I am not certain that we are

following the spirit of this document. I fear that it is no easier

today for novel products to get to market than it was pre-MOU. I also

fear that if this lack of cooperation and coordination continues, given

today's financial environment, both agencies will be doing a disservice

to the markets we regulate and the investors we seek to protect. I

believe that in order to foster true cooperation between the CFTC and

SEC, we must hold joint public meetings so that each agency's Chairmen

and Commissioners set a tone of cooperation for their staffs, and can

be held accountable to those they serve if their coordination and

cooperation does not foster the market innovation or efficiency the

public demands.

Pending before the Commission are requests by the Options Clearing

Corporation (``OCC'') for approval of OCC rules allowing them to clear

iShares[supreg] Silver Trust Shares and iShares[supreg] Comex Gold

Trust Shares, and an order pursuant to Section 4(c) of the Commodity

Exchange Act (CEA) exempting the trading and clearing of the iShares

Option and Futures Contracts as options on securities and security

futures.

The propriety of treating the iShares Option and Futures Contracts

as options on securities and security futures depends on the status of

the underlying iShares contracts as securities. While I have questions

about the status of the underlying iShares contracts as securities, see

SEC v. W.J. Howey Co., 328 U.S. 293 (1946), I believe innovative

products, in a regulated environment, should be brought to market in a

timely fashion. If, absent the 4(c) exemptive order, the OCC rules are

permitted to be deemed approved, an inference might be drawn concerning

the status of the iShares Option and Futures Contracts as securities.

Accordingly, I am voting to approve the 4(c) exemptive order and, based

on the Commission's approval of that order, to approve the OCC rules.

While I vote to approve the exemptive order and OCC rules, it is my

hope that in the future, greater cooperation between our agencies will

facilitate the introduction of similar innovative products regardless

of who develops them.

Dissenting in Part and Concurring in Part to Exemptive Order Exempting

the Trading and Clearing of Certain Products Related to iShares COMEX

Gold Trust Shares and iShares Silver Trust Shares and Approval of

Request for Approval of Rules

As I have noted previously in a similar context, I applaud efforts

to enhance cooperation and coordination in approving innovative and

novel products, and it is my hope and expectation that such efforts

will improve in the near future. I dissent, however, from the

Commission's issuance of the above-referenced order, because--as I have

stated before--I believe the Commission's issuance of such an order

should be predicated upon assurance that the SEC will similarly

exercise its broad statutory exemptive authorities under the securities

laws to permit futures exchanges to trade products that are

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economically equivalent to those that are or may be approved for

trading on national securities exchanges, and to allow derivatives

clearing organizations to clear such products. My objective here is not

to impair or impede the trading of such cross-jurisdictional products;

rather, my concern is solely to ensure that futures markets are not in

any way competitively disadvantaged. I dissent once again, as I have in

the past, because I do not believe that we have up to this point

reached the level of coordination and cooperation between our agencies

that provides the assurance of such reciprocity. I look forward to

working with colleagues at the SEC on such collaborative efforts

promptly to achieve these goals. Given the issuance of the order,

however, I concur in the approval of the request for approval of rules.

Bart Chilton,

Commissioner, Commodity Futures Trading Commission.

[FR Doc. E8-31110 Filed 12-29-08; 8:45 am]

BILLING CODE 6351-01-P

Last Updated: December 30, 2008