[Federal Register: November 12, 2008 (Volume 73, Number 219)]
[Notices]               
[Page 66847-66849]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12no08-45]                         

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COMMODITY FUTURES TRADING COMMISSION

 
Proposal To Exempt, Pursuant to the Authority in Section 4(c) of 
the Commodity Exchange Act, the Trading and Clearing of Certain 
Products Related to iShares[reg] COMEX Gold Trust Shares and 
iShares[reg] Silver 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 
certain contracts called ``options'' and other contracts called 
``security futures'' on each of iShares[reg] COMEX Gold Trust Shares 
(``Gold Products'') and iShares[reg] Silver Trust Shares (``Silver 
Products'') (collectively, ``Gold and Silver Products''), 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 
associations (as to security futures), and in either case cleared 
through the Options Clearing Corporation (``OCC'') in its capacity as a 
registered securities clearing agency, 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 November 19, 2008.

ADDRESSES: Comments may be submitted by any of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-mail: secretary@cftc.gov. Include ``Options and Security 
Futures on Gold and Silver Products'' 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: Robert B. Wasserman, Associate 
Director, 202-418-5092, rwasserman@cftc.gov, 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,\3\ and a securities 
clearing agency registered pursuant to Section 17A of the Securities 
Exchange Act of 1934 (``the '34 Act'').\4\
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    \3\ 7 U.S.C. 7a-1.
    \4\ 15 U.S.C. 78q-1.
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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,\5\ 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 \6\ registered with the SEC as 
limited purpose national securities associations pursuant to Section 
15A(k) of the '34 Act \7\ (``DCMs'') as security futures subject to the 
CEA and CFTC regulations thereunder governing security futures, in 
either case in OCC's capacity as a registered securities clearing 
agency (and not in its capacity as a DCO).\8\ 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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    \5\ 7 U.S.C. 7a-2(c), 17 CFR 39.4(a), 40.5.
    \6\ See Section 5 of the CEA, 7 U.S.C. 7.
    \7\ 15 U.S.C. 78o-3(k).
    \8\ 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 letter dated October 16, 2008, OCC consented 
to an extension of the review period until November 20, 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.\9\ 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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    \9\ 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.'' \10\ 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

[[Page 66848]]

either case to be cleared by OCC in its capacity as a securities 
clearing agency, as discussed above, may 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). The CFTC is requesting 
comment on whether it should exempt Options and Security Futures on 
Gold and Silver Products, as described above, that are traded on a 
national securities exchange or a DCM, respectively, and cleared 
through OCC in its capacity as a registered securities clearing agency, 
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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    \10\ 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 Options on the Gold and Silver Products are (or are not) options 
subject to the CEA, or find that Security Futures on the Gold and 
Silver Products are (or are not) security futures as defined in Section 
1a(31) of the CEA.\11\ During the legislative process leading to the 
enactment of Section 4(c) of the CEA, the House-Senate Conference 
Committee noted that:
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    \11\ 7 U.S.C. 1a(31).

    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.\12\
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    \12\ 4(c) Conf. Report at 3214-3215.
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    The Options and Security Futures on Gold and Silver Products 
described above are ``novel instruments.'' 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.\13\
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    \13\ 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.'' \14\ 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 and clearing the Options and Security 
Futures on Gold and Silver Products--whether the mode applicable to 
options on securities or commodities, or to security futures or 
futures--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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    \14\ 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.'' 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. The CFTC is requesting 
comment as to whether all persons trading Options and Security Futures 
on Gold and Silver Products on national securities exchanges and DCMs, 
respectively, and clearing such products 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'') \15\ 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 information from any 
entities that would be subject to the proposed order.
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    \15\ 44 U.S.C. 3507(d).
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B. Cost-Benefit Analysis

    Section 15(a) of the CEA,\16\ as amended by Section 119 of the 
Commodity Futures Modernization Act of 2000, 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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    \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;

[[Page 66849]]

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, 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 proposed 
exemption may 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 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 November 5, 2008 by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. E8-26815 Filed 11-10-08; 8:45 am]

BILLING CODE 6351-01-P