Order Exempting the Trading and Clearing of Certain Products Related to iShares® COMEX Gold Trust Shares and iShares® Silver Trust Shares, 79830-79833 [E8-31110]
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Federal Register / Vol. 73, No. 250 / Tuesday, December 30, 2008 / Notices
The PTs
will meet to discuss the following
agenda items.
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January 15, 2009, 1 p.m. to 4 p.m. (HST)
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Although non-emergency issues not
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Dated: December 23, 2008.
Tracey L. Thompson,
Acting Director, Office of Sustainable
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[FR Doc. E8–30989 Filed 12–29–08; 8:45 am]
BILLING CODE 3510–22–S
COMMODITY FUTURES TRADING
COMMISSION
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Order Exempting the Trading and
Clearing of Certain Products Related to
iShares® COMEX Gold Trust Shares
and iShares® Silver Trust Shares
AGENCY: Commodity Futures Trading
Commission.
ACTION: Final order.
SUMMARY: On November 12, 2008, the
Commodity Futures Trading
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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®
COMEX Gold Trust Shares (‘‘Gold
Products’’) and iShares® 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
DATES: Effective Date: December 3, 2008
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,4 and a securities clearing agency
registered pursuant to Section 17A of
the Securities Exchange Act of 1934
(‘‘the ′34 Act’’).5
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
1 73
FR 66847 (November 12, 2008).
U.S.C. 1 et seq.
3 7 U.S.C. 6(c).
4 7 U.S.C. 7a–1
5 15 U.S.C. 78q–l.
6 7 U.S.C. 7a–2(c), 17 CFR 39.4(a), 40.5.
27
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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.
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
7 See
Section 5 of the CEA, 7 U.S.C. 7.
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’’).
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
8 15
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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.
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).
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
(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.
11 HOUSE CONF. REPORT NO. 102–978, 1992
U.S.C.C.A.N. 3179, 3213 (‘‘4(c) Conf. Report’’).
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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
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.
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
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.
13 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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79831
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
14 44
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U.S.C. 3507(d).
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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.
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.
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
15 7
16 7
U.S.C. 19(a).
U.S.C. 19(a).
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affected since the Options and Security
Futures on Gold and Silver Products
will be cleared by OCC, a DCO and SECregistered clearing agency, and
intermediated by SEC-registered brokerdealers.
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® Silver Trust Shares and
iShares® 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
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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® Silver Trust Shares and
iShares® 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
DEPARTMENT OF DEFENSE
submitted on December 17, 2008, to the
House Committee on Oversight and
Government Reform, the Senate
Committee on Governmental Affairs,
and the Office of Management and
Budget (OMB) pursuant to paragraph 4c
of Appendix I to OMB Circular No. A–
130, ‘Federal Agency Responsibilities
for Maintaining Records About
Individuals’, dated February 8, 1996
(February 20, 1996, 61 FR 6427).
of availability for work; information on
veteran’s preference, Federal
employment history, and preferences
with regard to being contacted by
intelligence agencies; degree
information; foreign language
information; job history; overseas
experience; other information e.g.,
special recognitions or memberships;
special skills and qualifications;
fieldwork or volunteer experience.
Dated: December 18, 2008.
Morgan E. Frazier,
Alternate OSD Federal Register Liaison
Officer, Department of Defense.
AUTHORITY FOR MAINTENANCE OF THE SYSTEM:
DHRA 06
SYSTEM NAME:
National Security Education Program
Records.
SYSTEM LOCATION:
National Security Education Program,
1101 Wilson Blvd., Suite 1210,
Arlington, VA 22209–2248.
Institute of International Education,
1400 K Street, 6th floor, Washington, DC
20005.
Trident Systems, Inc., 10201 Fairfax
Blvd., Suite 300, Fairfax, VA 22030.
Office of the Secretary
CATEGORIES OF INDIVIDUALS COVERED BY THE
SYSTEM:
[Docket ID DOD–2008–OS–0163]
Individuals who apply for the
following scholarships or fellowships:
David L. Boren Scholarships, English for
Heritage Language Speakers
Scholarships, David L. Boren
Fellowships, and Flagship Fellowships.
Privacy Act of 1974; System of
Records
Office of the Secretary, DoD.
Notice to Add a System of
Records.
AGENCY:
ACTION:
CATEGORIES OF RECORDS IN THE SYSTEM:
The Office of the Secretary of
Defense proposes to add a system of
records to its inventory of record
systems subject to the Privacy Act of
1974 (5 U.S.C. 552a), as amended.
DATES: This proposed action would be
effective without further notice on
January 29, 2009 unless comments are
received which result in a contrary
determination.
SUMMARY:
Send comments to Chief,
OSD/JS Privacy Office, Freedom of
Information Directorate, Washington
Headquarters Services, 1155 Defense
Pentagon, Washington, DC 20301–1155.
FOR FURTHER INFORMATION CONTACT: Ms.
Cindy Allard at (703) 588–6830.
SUPPLEMENTARY INFORMATION: The Office
of the Secretary of Defense notices for
systems of records subject to the Privacy
Act of 1974 (5 U.S.C. 552a), as amended,
have been published in the Federal
Register and are available from the
address above.
The proposed system report, as
required by 5 U.S.C. 552a(r) of the
Privacy Act of 1974, as amended, was
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ADDRESSES:
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Information collected on the online
application and an award recipient
includes not limited to: Title; full name;
current address, city, state, and zip
code; permanent address, city, state;
Social Security Number (SSN); current
telephone number and permanent
telephone number; e-mail address;
voting district; date of birth; country or
state of birth; naturalization
information; educational information;
region, country, and language to be
studied under award; other languages
spoken; proficiency in language studied
at time of award; overseas experience;
relevant activities; honors and awards;
government agencies of interest;
proposed study abroad program
information and budget; other
scholarship funding information;
gender; ethnicity; employer name and
employer address; supervisor name,
title, and telephone number; position
title; employment dates and hours;
language used in position; security
clearance held for position; award type;
date of award completion; graduation
date; length of service requirement; date
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50 U.S.C. 1901 et. seq., as amended;
Pub. L. 102–183, David L. Boren
National Security Education Act of
1991; DoDD 1025.6, National Security
Education Program; and E.O. 9397
(SSN).
PURPOSE(S):
To provide Americans with the
resources and encouragement needed to
acquire skills and experiences in areas
of the world critical to the future
security of nations in exchange for a
commitment to seek work in the federal
government. This will enable the
National Security Education Program to
select qualified applicants to be
awarded National Security Education
Program scholarships and fellowships.
ROUTINE USES OF RECORDS MAINTAINED IN THE
SYSTEM, INCLUDING CATEGORIES OF USERS AND
THE PURPOSES OF SUCH USES:
In addition to those disclosures
generally permitted under 5 U.S.C.
552a(b) of the Privacy Act, these records
or information contained therein may
specifically be disclosed outside the
DoD as a routine use pursuant to 5
U.S.C. 552a(b)(3) as follows:
To authorized federal hiring officials
to facilitate the recruiting of National
Security Education Program award
recipients into federal service for the
purpose of fulfilling National Security
Education Program’s mission.
To the Boren Forum, the non-profit
National Security Education Program
alumni organization to confirm the
name, award year and type of award of
National Security Education Program
award recipients.
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E:\FR\FM\30DEN1.SGM
30DEN1
]]>Agencies
[Federal Register Volume 73, Number 250 (Tuesday, December 30, 2008)]
[Notices]
[Pages 79830-79833]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-31110]
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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, 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,\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
