[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]
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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.
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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\
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\1\ 7 U.S.C. 1 et seq.
\2\ 7 U.S.C. 6(c).
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DATES: Comments must be received on or before 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\
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\3\ 15 U.S.C. 78q-l.
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OCC has filed with the CFTC, pursuant to Section 5c(c) of the CEA
and Commission Regulations 39.4(a) and 40.5 thereunder,\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.
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\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.
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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.
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\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.
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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.'' \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.
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\8\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179, 3213
(``4(c) Conf. Report'').
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In proposing this exemption, the CFTC need not--and does not--find
that 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\
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\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\
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\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.
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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.'' \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.
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\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.'')
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Section 4(c)(3) includes within the term ``appropriate persons'' a
number of specified categories of persons, and also in subparagraph (K)
thereof ``such other persons that the Commission determines to be
appropriate in light of * * * the applicability of appropriate
regulatory protections.'' 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.
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\12\ 44 U.S.C. 3507(d).
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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.
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\13\ 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 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