FR Doc E9-27287[Federal Register: November 13, 2009 (Volume 74, Number 218)]
[Notices]
[Page 58608-58610]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13no09-36]
[[Page 58608]]
=======================================================================
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
Request for Comment on a Petition To Exempt Certain Over-the-
Counter Agricultural Swaps From Certain of the Requirements Imposed by
Commission Regulation 35.2, Pursuant to Section 4(c) of the Commodity
Exchange Act
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of request for comment.
-----------------------------------------------------------------------
SUMMARY: The Commodity Futures Trading Commission (Commission) is
requesting comment on whether to exempt certain over-the-counter (OTC)
swaps from certain of the requirements otherwise imposed by Commission
Regulation 35.2. Specifically, the Kansas City Board of Trade (KCBT), a
designated contract market, and the Kansas City Board of Trade Clearing
Corporation (KCBTCC), a registered derivatives clearing organization
(DCO), have petitioned for an exemption permitting them to list for
clearing and to clear, respectively, wheat calendar swaps. Authority
for granting such an exemption is found in Section 4(c) of the
Commodity Exchange Act (CEA).
DATES: Comments must be received on or before December 14, 2009.
ADDRESSES: Comments may be submitted by any of the following methods:
Federal eRulemaking Portal: http://www.regulations.gov/
http://frwebgate.access.gpo/cgi-bin/leaving. Follow the instructions
for submitting comments.
E-mail: [email protected]. Include ``KCBT/KCBTCC Section
4(c) Petition'' 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://
www.CFTC.gov/.
FOR FURTHER INFORMATION CONTACT: Phyllis P. Dietz, Associate Director,
202-418-5449, [email protected], or Eileen A. Donovan, Special Counsel,
202-418-5096, [email protected], Division of Clearing and Intermediary
Oversight, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street, NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. The KCBT/KCBTCC Petition
KCBT and KCBTCC (Petitioners) jointly submitted a request to the
Commission for an exemptive order under Section 4(c) of the CEA.\1\ The
order would permit KCBT to list certain wheat calendar swaps for
``clearing only'' and permit KCBTCC to clear those wheat calendar swaps
(cleared-only contracts).\2\ The contract size (5,000 bushels),
position limits (5,000 contracts for any single month and 6,500
contracts for all months combined), and minimum price fluctuations
($.0025) of the cleared-only contracts would be the same as those of
the KCBT wheat futures contract. However, the cleared-only contracts
would be cash-settled, in contrast to KCBT's wheat futures contract,
which is physically-settled, and would be listed for any of the 12
calendar months, as compared to the wheat futures contract which is
listed only for March, May, July, September, and December.
---------------------------------------------------------------------------
\1\ A copy of the petition is available on the Commission's Web
site at http://www.cftc.gov.
\2\ The Petitioners also requested that the Commission issue an
order under Section 4d of the CEA that would permit KCBTCC and
futures commission merchants (FCMs) to commingle customer funds used
to margin, secure, or guarantee the cleared-only contracts with
other funds held in segregated accounts. Although the CEA does not
require the Commission to provide public ``notice and opportunity
for hearing'' in connection with the issuance of a 4d order (as is
required for an order requested under Section 4(c)), public comments
regarding the Petitioners' request for a 4d order are being accepted
on the Commission's Web site.
---------------------------------------------------------------------------
The OTC wheat calendar swaps would be negotiated between eligible
swap participants in the OTC market and then cleared by clearing
members acting on behalf of their own customers or the customers of
non-clearing member FCMs or non-member FCMs. Previous requests to clear
OTC agricultural swaps were limited to clearing member FCMs acting on
behalf of their own customers.\3\
---------------------------------------------------------------------------
\3\ See 74 FR 12316 (Mar. 24, 2009) (order permitting clearing
of corn, wheat, and soybean swaps by the Chicago Mercantile
Exchange); 73 FR 77015 (Dec. 18, 2008) (order permitting clearing of
coffee, sugar, and cocoa swaps by ICE Clear U.S.).
---------------------------------------------------------------------------
In support of their request, Petitioners represent that daily large
trader reporting information allows KCBT to monitor for position
concentration among non-clearing member and non-member FCMs, and the
risk management and financial surveillance procedures of the non-
clearing member and non-member FCMs' designated self-regulatory
organizations (DSROs) are similar or identical to those employed by
KCBT. The Commission requests comment on the impact of permitting the
OTC wheat calendar swaps to be cleared by clearing FCMs on behalf of
the customers of non-clearing member FCMs or non-member FCMs, and
whether there are any conditions that should be placed upon DSROs or
FCMs to facilitate risk management in connection with such transactions
in the cleared-only contracts.
Part 35 of the Commission's regulations \4\ exempts swap agreements
and eligible persons entering into such agreements from most provisions
of the CEA.\5\ The term ``swap agreement'' is defined to include, among
other types of agreements, a ``commodity swap.'' \6\ Part 35 was
promulgated pursuant to authority conferred upon the Commission in
Section 4(c) of the CEA to exempt certain transactions in order to
promote innovation and competition.\7\ Various exemptions and
exclusions were subsequently added to the CEA by the Commodity Futures
Modernization Act of 2000 (CFMA),\8\ but none apply to agricultural
contracts.\9\
---------------------------------------------------------------------------
\4\ 17 CFR Part 35 (Commission regulations are hereinafter cited
as ``Reg. ------'').
\5\ Jurisdiction is retained for, among other things, provisions
of the CEA proscribing fraud and manipulation. See Reg. 35.2.
\6\ Reg. 35.1(b)(1)(i). ``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 (Jan. 22, 1993).
\8\ Public Law 106-554, 114 Stat. 2763 (2000).
\9\ See, e.g., Sections 2(d), (g), and (h) of the CEA, 7 U.S.C.
2(d), (g), and (h).
---------------------------------------------------------------------------
Part 35 requires, among other things, that a swap agreement not be
part of a fungible class of agreements that are standardized as to
their material economic terms \10\ 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.\11\ Under the arrangement proposed by Petitioners, a
cleared-only contract could be offset by another cleared-only contract.
Thus, clearing of the OTC wheat calendar swaps would result in
contracts that are fungible with other cleared-only contracts with
equivalent terms. In addition, the creditworthiness of the counterparty
would not be a consideration. Accordingly, the OTC swaps KCBTCC would
clear would not satisfy all of the conditions of Part 35.\12\
---------------------------------------------------------------------------
\10\ Reg. 35.2(b).
\11\ Reg. 35.2(c).
\12\ The contracts that the KCBT proposes to list for clearing-
only would, however, meet the requirements of paragraphs (a) and (d)
of Reg. 35.2 in that they would be entered into solely between
eligible swap participants and executed OTC.
---------------------------------------------------------------------------
[[Page 58609]]
However, Part 35 further permits ``any person [to] apply to the
Commission for exemption from any of the provisions of the Act * * *
for other arrangements or facilities.'' \13\ Petitioners have requested
that the Commission grant an order under Section 4(c) of the CEA that
would exempt cleared-only contracts to the same extent as contracts
that are exempt pursuant to Part 35 of the Commission's regulations.
---------------------------------------------------------------------------
\13\ Reg. 35.2(d).
---------------------------------------------------------------------------
II. Section 4(c) of the Commodity Exchange Act
Section 4(c)(1) of the CEA empowers the Commission 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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.'' \15\ The Petitioners represent that permitting
the clearing of the OTC wheat calendar swaps by KCBTCC may benefit the
marketplace by providing market participants the ability to combine
flexible negotiation with central counterparty guarantees and capital
efficiencies. In addition, Petitioners represent that they expect the
cleared-only contracts to provide a risk management tool with unique
attributes, i.e., contract months and settlement features, to address
price risk and to complement KCBT's wheat futures and options
contracts.
---------------------------------------------------------------------------
\15\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179,
3213.
---------------------------------------------------------------------------
Section 4(c)(2) provides that the Commission may grant an exemption
only when it determines that the requirements for which the 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\ Thus,
the Commission is requesting comment on whether it should exempt the
OTC wheat calendar swaps that are proposed to be cleared by KCBTCC and
listed by KCBT, as described above, to the same extent as other
contracts that are exempt pursuant to Part 35 of the Commission's
regulations.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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
cleared-only contracts 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 Commission is requesting comment as
to whether an exemption from the requirements of the CEA should be
granted in the context of these transactions.
---------------------------------------------------------------------------
\17\ Section 3(b) of the CEA, 7 U.S.C. 5(b). See also Section
4(c)(1) of the CEA, 7 U.S.C. 6(c)(1) (purpose of exemptions is ``to
promote responsible economic or financial innovation and fair
competition'').
---------------------------------------------------------------------------
In light of the above, the Commission also is requesting comment as
to whether this exemption would affect its ability to discharge its
regulatory responsibilities under the CEA, or with the self-regulatory
duties of any designated contract market.
III. Request for Comment
The Commission requests comment on all aspects of the issues
presented by Petitioners' exemption request.
IV. Related Matters
A. Paperwork Reduction Act
The Paperwork Reduction Act (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. An exemptive order issued by the Commission would not be
associated with a collection of information. Accordingly, the PRA does
not apply.
---------------------------------------------------------------------------
\18\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\19\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------
Section 15(a) of the CEA further specifies that costs and benefits
shall be evaluated in light of five broad areas of market and public
concern: Protection of market participants and the public; efficiency,
competitiveness, and financial integrity of futures markets; price
discovery; sound risk management practices; and other public interest
considerations. Accordingly, the Commission could in its discretion
give greater weight to any one of the five enumerated areas and could
in its discretion determine that, notwithstanding its costs, a
particular order was necessary or appropriate to protect the public
interest or to effectuate any of the provisions or to
[[Page 58610]]
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 exemption request will only be entered into
by persons who are ``appropriate persons'' as set forth in Section 4(c)
of the CEA.
2. Efficiency, competition, and financial integrity. Extending the
exemption granted under Part 35 to the OTC wheat calendar swaps to
allow them to be cleared may promote liquidity and transparency in the
markets for OTC wheat derivatives as well as wheat futures. Extending
the exemption also may promote financial integrity by providing the
benefits of clearing to the OTC wheat 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. KCBTCC'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 an agricultural derivatives product
without unnecessary regulatory burden.
After considering these factors, the Commission has determined to
seek comment on the exemption request as discussed above. The
Commission also invites public comment on its application of the cost-
benefit provisions of Section 15.
Issued in Washington, DC, on November 6, 2009 by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. E9-27287 Filed 11-12-09; 8:45 am]
Last Updated: November 13, 2009