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
[[Page 79833]]
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