Order (1) Pursuant to Section 4(c) of the Commodity Exchange Act, Permitting the Chicago Mercantile Exchange to Clear Certain Over-the-Counter Agricultural Swaps and (2) Pursuant to Section 4d of the Commodity Exchange Act, Permitting Customer Positions in Such Cleared-Only Contracts and Associated Funds To Be Commingled With Other Positions and Funds Held in Customer Segregated Accounts, 12316-12320 [E9-6369]
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the commercial fishery could include
deducting all or some of the prior year
commercial overage (in weight) from the
subsequent year’s commercial catch
limit.
Proactive AMs for the commercial
fishery could include adjustable trip
limits, as a method to prevent ACLs
from being exceeded. When a given
percent of the commercial catch limit
(in weight) is reached, trips limits in the
fishery for that species could be
decreased until the total commercial
catch limit is reached. The fixed
percentage at which trip limits would
drop would vary depending on which
species the limit applies to, and the trip
limits themselves would be speciesspecific. Other proactive AMs could
include inseason closures when quotas
are projected to be attained. Many
Council-managed species already have
in place such measures; however, the
Council may consider additional
approaches or modification of existing
reporting requirements in support of
improving inseason fishery
management.
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Other Considerations
The Council could consider
establishing a periodic formal review by
the SSC, which would provide the
opportunity to revise ABC control rules
every few years after a control rule has
been implemented. For example, a 5year time period could be used. The
Council may also identify a broader
approach to inclusion of species in its
FMPs that may or may not require
conservation or management, but that
may be relevant in trying to further
ecosystem management in the fishery.
While not required, the Council could
identify and include non-target stocks
and/or ecosystem components in its
FMPs. The Council may also consider
ecosystem issues in the development of
the catch limit framework for any of the
stocks in the fisheries. Any allocation
issues relating to the development of
ABC, ACL, or AMs could also be
considered by the Council.
The Council may deviate from these
examples and develop additional
approaches, consistent with their
description in the Magnuson-Stevens
Act, NS1, and the NS 1 Guidelines. The
above issues under consideration are
described in greater detail in the
scoping document itself; copies may be
obtained from the Council (see
ADDRESSES) or via the Internet at https://
www.mafmc.org.mid-atlantic/
comments/comments.htm.
Authority: 16 U.S.C. 1801 et seq.
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Dated: March 19, 2009
Emily H. Menashes,
Acting Director, Office of Sustainable
Fisheries, National Marine Fisheries Service.
[FR Doc. E9–6468 Filed 3–23–09; 8:45 am]
BILLING CODE 3510–22–S
COMMODITY FUTURES TRADING
COMMISSION
Order (1) Pursuant to Section 4(c) of
the Commodity Exchange Act,
Permitting the Chicago Mercantile
Exchange to Clear Certain Over-theCounter Agricultural Swaps and (2)
Pursuant to Section 4d of the
Commodity Exchange Act, Permitting
Customer Positions in Such ClearedOnly Contracts and Associated Funds
To Be Commingled With Other
Positions and Funds Held in Customer
Segregated Accounts
AGENCY: Commodity Futures Trading
Commission.
ACTION: Order.
SUMMARY: By petition dated April 21,
2008 (Petition), the Chicago Mercantile
Exchange Inc. (CME), a registered
derivatives clearing organization (DCO),
and the Board of Trade of the City of
Chicago, Inc. (CBOT), a designated
contract market, requested permission
to clear certain over-the counter (OTC)
swap agreements (swaps) in corn,
wheat, and soybeans. Authority for
granting this request is found in Section
4(c) of the Commodity Exchange Act
(Act).1 The Petition also requested
permission pursuant to Section 4d of
the Act 2 to allow CME and futures
commission merchants (FCMs) clearing
through CME to commingle positions in
those cleared-only OTC swaps (clearedonly contracts) and funds associated
with those positions with positions and
funds otherwise required to be held in
a customer segregated account. The
Commodity Futures Trading
Commission (Commission) has
reviewed public comments and the
entire record in this matter and it has
determined to issue an order granting
the requested permission, subject to
certain terms and conditions.
DATES: Effective Date: March 18, 2009.
FOR FURTHER INFORMATION CONTACT:
Phyllis P. Dietz, Associate Director,
202–418–5449, pdietz@cftc.gov,
Division of Clearing and Intermediary
Oversight, Commodity Futures Trading
Commission, Three Lafayette Centre,
1155 21st Street, NW., Washington, DC
20581.
17
27
PO 00000
U.S.C. 6(c).
U.S.C. 6d.
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SUPPLEMENTARY INFORMATION:
I. The CME/CBOT Petition
CME, the DCO that provides clearing
services for CBOT, and CBOT jointly
submitted a Petition requesting that the
Commission issue an exemptive order
under Section 4(c) of the Act.3 The
order would grant CME approval to
clear OTC corn basis swaps and corn,
wheat, and soybean calendar swaps, and
it would permit CBOT to list those
products for ‘‘clearing-only.’’ 4 The
contract size for the basis and calendar
swaps would be the same as that for
corn, wheat, and soybean futures—5,000
bushels. Each of the proposed clearedonly contracts would be cash settled, in
contrast to the corresponding futures
contracts which are physically settled.
Part 35 of the Commission’s
regulations 5 exempts, subject to
conditions, swap agreements and
eligible persons entering into such
agreements from most provisions of the
Act.6 The term ‘‘swap agreement’’ is
defined to include, among other types of
agreements, a ‘‘basis swap’’ and a
‘‘commodity swap.’’ 7 Part 35 was
promulgated pursuant to authority
conferred upon the Commission in
Section 4(c) of the Act to exempt certain
transactions in order to explicitly permit
certain off-exchange derivatives
transactions and thus promote
innovation and competition.8 A number
of exemptions and exclusions for offexchange derivatives transactions were
subsequently added to the Act by the
Commodity Futures Modernization Act
of 2000,9 but none apply to agricultural
contracts.10
Part 35 requires, among other things,
that a swap agreement not be part of a
fungible class of agreements that are
3 A copy of the petition is available on the
Commission’s Web site at https://www.cftc.gov/.
4 The suite of OTC agricultural swap products
that CBOT proposes to list for clearing-only is
comprised of corn basis swap contracts for the
following regions: Northeastern Iowa, Northwestern
Iowa, Southern Iowa, Eastern Nebraska, Eastern
South Dakota, and Southern Minnesota; and corn,
wheat, and soybean calendar swaps.
5 17 CFR Part 35 (Commission regulations are
hereinafter cited as ‘‘Reg. l’’).
6 Jurisdiction is retained for, among other things,
provisions of the Act proscribing fraud and
manipulation. See Reg. 35.2.
7 Reg. 35.1(b)(1)(i). ‘‘Commodity’’ is defined in
Section 1a(4) of the Act 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.’’
8 See 58 FR 5587 (Jan. 22, 1993). Section 4(c) of
the Act was added by Section 502(a) of the Futures
Trading Practices Act of 1992, Public Law 102–546,
106 Stat. 3590 (1992).
9 Public Law 106–554, 114 Stat. 2763 (2000).
10 See, e.g., Sections 2(d), (g) and (h) of the Act,
7 U.S.C. 2(d), (g), and (h).
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standardized as to their material
economic terms,11 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.12 Under the arrangement
proposed by CME and CBOT, a clearedonly contract could be offset by another
cleared-only contract with equivalent
terms. In addition, due to the
introduction of a clearing guarantee, the
creditworthiness of the counterparty
would no longer be a consideration.
Accordingly, the OTC swaps CME
would clear would not satisfy all of the
conditions of Part 35.13
Part 35 permits ‘‘any person [to] apply
to the Commission for exemption from
any of the provisions of the Act * * *
for other arrangements or facilities.’’ 14
CME and CBOT have petitioned the
Commission for an order under Section
4(c) of the Act that would exempt
certain cleared-only contracts involving
corn, wheat, or soybeans to the same
extent as contracts that are exempt
pursuant to Part 35 of the Commission’s
regulations.
In addition, CME and CBOT also
requested an order under Section 4d of
the Act so that CME and clearing
members of CBOT could hold positions
in the cleared-only contracts and
associated funds in the customer
segregated account along with positions
in exchange-traded futures and
customer funds, resulting in improved
collateral management and other
benefits.
II. Sections 4(c) and 4d of the Act
A. Permitting the OTC Swaps To Be
Cleared
In enacting Section 4(c) of the Act,
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
Section 4(c)(1) of the Act 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 Act (subject
to exceptions not relevant here) where
11 Reg.
35.2(b).
35.2(c).
13 The contracts that CBOT proposes to list for
clearing-only would, however, meet the
requirements of Reg. 35.2(a) and (d) in that they
would be entered into solely between eligible swap
participants and executed OTC, respectively.
14 Reg. 35.2(d).
15 House Conf. Report No. 102–978, 1992
U.S.C.C.A.N. 3179, 3213.
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12 Reg.
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the Commission determines that the
exemption would be consistent with the
public interest.16 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.
Section 4(c)(2) of the Act provides
that the Commission may grant
exemptions from Section 4(a) of the Act
only when the Commission 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 Act;
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
Act.17
16 Section 4(c)(1) of the Act, 7 U.S.C. 6(c)(1),
provides in full as follows:
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.
17 Section 4(c)(2) of the Act, 7 U.S.C. 6(c)(2),
provides in full as follows:
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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12317
The Commission requested comment
on whether it should grant an
exemption from the requirements of the
Act, thereby permitting corn basis
swaps and corn, wheat, and soybean
calendar swaps to be cleared through
CME. It also requested comment on
whether such an exemption would
affect its ability to discharge its
regulatory responsibilities under the Act
or with the self-regulatory duties of any
contract market.
B. Permitting Funds To Be Commingled
Section 4d(a)(2) of the Act prohibits
commingling positions executed on a
contract market and customer funds
associated with such positions together
with any funds not required to be so
segregated.18 Section 4d(a)(2) provides
that the Commission may grant
exceptions to this prohibition by order.
In this case, the corn basis swaps and
corn, wheat, and soybean calendar
swaps are not executed on a contract
market and, thus, holding positions in
those contracts and associated funds in
an account together with positions and
customer funds required to be
segregated would, absent a Commission
order, violate Section 4d. Having
analyzed the risks and benefits
associated with commingling such
positions and funds in a customer
segregated account, the Commission has
determined that the benefits of the
proposal outweigh the risks and that the
proposal, along with conditions set forth
by the Commission, will provide for a
sufficient level of safeguards to address
the risks adequately.
III. Comment Letters
The Commission published a request
for comments regarding the 4(c)
exemption in the Federal Register on
July 7, 2008.19 At the same time, it
posted the Petition on the Commission’s
Web site, providing the opportunity for
the public to comment on any aspect of
the Petition, including the request for an
order under Section 4d of the Act. As
a result of the non-transmission of a
comment letter submitted through the
Federal eRulemaking Portal, the
Commission reopened the comment
period on December 31, 2008,
18 Under Reg. 1.3(gg), the term ‘‘customer funds’’
is defined to include all money, securities, and
property received by an FCM or by a DCO from, for,
or on behalf of, customers or option customers to
margin, guarantee or secure exchange-traded futures
contracts or options on futures, and all money
accruing to such customers as the result of such
contracts. The term ‘‘funds’’ is similarly used herein
to refer to cash as well as securities and other
property associated with futures contracts or
cleared-only contracts.
19 See 73 FR 38403 (July 7, 2008) (45-day
comment period closing August 21, 2008).
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specifically to afford the commenter
whose submission was not received, the
opportunity to resubmit the comment.20
In addition, any other member of the
public was permitted to comment
during the reopened comment period.
The Commission received seven
comment letters, one of which was
submitted during the reopened
comment period. Five letters expressly
supported the issuance of an exemptive
order to permit clearing of the OTC
swaps, citing such benefits as increased
transparency and liquidity in the OTC
markets, enhanced risk management for
market participants, and greater
regulatory surveillance including large
trader reporting. Of those letters, two
specifically commented on the 4d order
request. Both of those letters supported
the issuance of an order to permit the
commingling of positions in clearedonly contracts and associated funds
with positions and customer funds
otherwise required to be held in a
customer segregated account. One letter
focused on the bankruptcy treatment of
cleared-only contract positions and
associated funds when they are held in
a customer segregated account.21 One
commenter opposed the issuance of an
exemption permitting clearing of OTC
swaps based on concerns about the
impact of OTC clearing on the use of
exchange-traded futures contracts for
hedging purposes.
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IV. Findings and Conclusions
After considering the complete record
in this matter, including the comments
received, the Commission finds that the
requirements of Section 4(c) of the Act
have been met with respect to the
request for an order permitting the
clearing of certain corn basis swaps and
corn, wheat, and soybean calendar
swaps.
First, permitting the clearing of these
transactions is consistent with the
public interest and with the purposes of
the Act. The purposes of the Act include
‘‘promot[ing] responsible innovation
and fair competition among boards of
trade, other markets, and market
participants.’’ 22 The purpose of an
exemption is ‘‘to promote economic or
financial innovation and fair
competition.’’ 23 Permitting the clearing
of corn basis swaps and corn, wheat,
and soybean calendar swaps by CME
would appear to foster both financial
20 See 73 FR 80367 (Dec. 31, 2008) (reopening the
comment period for 21 days).
21 This bankruptcy matter was subsequently
addressed in an Interpretative Statement issued by
the Commission on September 26, 2008. See 73 FR
65514 (Nov. 4, 2008).
22 Section 3(b) of the Act, 7 U.S.C. 5(b).
23 Section 4(c)(1) of the Act, 7 U.S.C. 6(c)(1).
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innovation and competition. It could
benefit the marketplace by providing
eligible swap participants the ability to
bring together flexible negotiation with
central counterparty guarantees and
capital efficiencies. Clearing also may
increase the liquidity of the OTC
markets and thereby foster competition
in those markets.
Second, the OTC swaps would be
entered into solely between appropriate
persons. Those would be limited to
persons qualifying as eligible swap
participants under Part 35.24
Third, the exemption would not have
a material adverse effect on the ability
of the Commission or any designated
contract market to carry out its
regulatory or self-regulatory
responsibilities under the Act. Clearing
of OTC swaps will actually enhance the
Commission’s ability to carry out its
regulatory responsibilities by, for
example, facilitating the collection of
large trader reports for cleared-only
contracts. CME will use the same
systems, procedures, personnel, and
processes to clear the OTC swaps as it
currently employs with respect to all of
the other transactions it clears on behalf
of CBOT.
The commenter who opposed
granting the exemption raised a
question as to how clearing OTC swaps
would impact trading in the
corresponding futures contracts,
expressing the view that the ability to
clear OTC contracts would serve as a
disincentive to enter into exchangetraded futures contracts, thereby
drawing business away from those
markets to OTC markets. Given the lack
of empirical data relating to the trading
behavior of futures market participants
when clearing becomes available for
OTC products, the basis for the
commenter’s concerns cannot be readily
substantiated or refuted. As a result, the
Commission is unable to conclude that
providing eligible swap participants
with the opportunity to clear OTC
swaps would undermine the purpose or
usefulness of trading in the futures
markets. Moreover, because eligible
swap participants already engage in
OTC transactions, permitting clearing
would provide a means for achieving
benefits that serve the public interest.
The Commission has concluded that
permitting the clearing of OTC corn
basis swaps and corn, wheat, and
soybean calendar swaps, subject to the
terms and conditions of the order,
furthers the goals of market
transparency and liquidity, and
financial risk management. It also
24 See Reg. 35.1(b)(2) (defining the term ‘‘eligible
swap participant’’).
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enhances the Commission’s ability to
obtain market information and conduct
oversight once OTC transactions are
cleared by a registered DCO.
With respect to the petitioners’
request for an order pursuant to Section
4d permitting CME and FCMs clearing
through CME to commingle cleared-only
contract positions and associated funds
with positions and customer funds
required to be held in a customer
segregated account, the Commission has
considered whether the additional risk
to customers presented by such
commingling can be adequately
addressed and mitigated. Additional
risk is presented to customers as a result
of the risk of default involving the
commingled cleared-only contracts.
The carrying FCM should have
adequate means to address a default by
a customer holding cleared-only
contracts. In the event of a customer
default on a position in a cleared-only
corn basis swap, the clearing firm could
offset its risk by entering into an
opposite position in the OTC corn basis
swap market through a broker or dealer.
Alternatively, the clearing firm could
offset its risk by entering into an
opposite transaction in the cash corn
basis market, which is very liquid due
to participation by country elevators,
terminal elevators, ethanol processors,
and livestock feeders. In the event of a
customer default on a position in the
corn, wheat, or soybean cleared-only
calendar swaps contracts, the clearing
firm could offset its risk by liquidating
the customer position through a broker
or dealer in the calendar swap market or
by taking an economically equivalent
position in the corresponding futures
contract.
The order requires that CME review
the clearing members’ risk management
capabilities to verify that all members
clearing OTC swaps maintain sufficient
operational capability to manage a
default in a cleared-only contract. In the
event of a clearing firm default, CME
would have available the same means
for managing the default as the clearing
firm would have in the first instance.
The order also requires that CBOT (1)
maintain a coordinated market
surveillance program that encompasses
the cleared-only contracts and the
corresponding futures contracts, and (2)
adopt speculative position limits for
each of the cleared-only contracts, that
are the same as the limits applicable to
the corresponding futures contracts.
These measures should mitigate market
risk.
Accordingly, the Commission has
determined that CME will be able to
employ reasonable safeguards to protect
customer funds, and that it will be able
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to measure, monitor, manage, and
account for risks associated with
transactions and open interest in the
cleared-only contracts as it does for
other contracts it clears. The
Commission believes that CME has
sufficiently demonstrated that it will
continue to comply with the DCO core
principles set forth in Section 5b of the
Act in connection with holding
customer positions in cleared-only corn
basis swaps and corn, wheat, and
soybean calendar swaps and associated
funds with positions and customer
funds required to be held in a customer
segregated account pursuant to Section
4d of the Act.
V. Related Matters
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A. Paperwork Reduction Act
The Paperwork Reduction Act of 1995
(PRA) 25 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 Commission’s order will not require
a new collection of information from
any entities that would be subject to the
order.
B. Cost-Benefit Analysis
Section 15(a) of the Act,26 requires the
Commission to consider the costs and
benefits of its action before issuing an
order under the Act. 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.
Section 15(a) of the Act 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
Act.
The Commission has considered the
costs and benefits of this order in light
25 44
26 7
U.S.C. 3507(d).
U.S.C. 19(a).
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of the specific provisions of Section
15(a) of the Act, as follows:
1. Protection of Market Participants
and the Public. The cleared-only
contracts will be entered into only by
persons who are ‘‘appropriate persons’’
as set forth in Section 4(c) of the Act.
Only eligible swap participants will
enter into the corn basis swaps and
corn, wheat, and soybean calendar
swaps that will be cleared pursuant to
the Commission’s order. Allowing the
commingling of positions in clearedonly contracts and associated funds
with positions and customer funds
required to be segregated under Section
4d of the Act will benefit market
participants by facilitating clearing and
the reduction of credit risk for contracts
that meet market participants’ specific
risk management requirements.
Customers holding positions in clearedonly contracts also would benefit from
having those positions and associated
funds held in a customer segregated
account in the event of the insolvency
of an FCM. Futures customers will be
protected from risks associated with the
commingling of funds by a number of
existing risk management and other
safeguards, including CME’s financial
surveillance of clearing members and its
financial resources package, as
supplemented by conditions imposed
by the order.
2. Efficiency and Competition.
Allowing the OTC swaps to be cleared
appears likely to promote liquidity and
transparency in the markets for OTC
derivatives as well as futures on those
commodities. The commingling of
positions in the cleared-only contracts
and associated funds with positions and
customer funds required to be held in a
customer segregated account should
result in improved, more efficient,
collateral management and lower
administrative costs given that riskreducing positions will be held together
in the same account rendering a more
precise estimation of the risk posed by
the account. The availability of clearedonly contracts also provides another risk
management tool that could compete
with other OTC products.
3. Financial Integrity of Futures
Markets and Price Discovery. Price
discovery is likely to be enhanced by
bringing greater transparency to the
OTC market for the subject
commodities. The Section 4(c)
exemption also may promote financial
integrity by providing the benefits of
clearing to the OTC markets. As
discussed above, the Commission
believes that the risks associated with
the commingling of funds in the
customer segregated account can be
appropriately mitigated.
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12319
4. Sound Risk Management Practices.
Clearing of the OTC swaps is likely to
improve risk management by the
participant counterparties. CME’s risk
management practices in clearing these
transactions are subject to the
Commission’s supervision and
oversight.
5. Other Public Interest
Considerations. The action taken by the
Commission under Sections 4(c) and 4d
of the Act is likely to encourage market
competition in agricultural derivatives
products. It will also further the
Commission’s overall goals in
supporting greater market transparency,
credit risk management, and regulatory
oversight by encouraging the clearing of
OTC products.
The Commission requested comment
on its application of these factors in the
proposing release. No comments were
received.
VI. Order
After considering the above factors
and the comment letters received in
response to its request for comments,
the Commission has determined to issue
the following:
Order
(1) The Commission, pursuant to its
authority under Section 4(c) of the Act
and subject to the conditions below,
hereby permits eligible swap
participants to submit for clearing, and
FCMs and CME to clear, the following
OTC agricultural swap contracts
(eligible products):
(a) Corn basis swap contracts for the
following regions:
(i) Northeastern Iowa;
(ii) Northwestern Iowa;
(iii) Southern Iowa;
(iv) Eastern Nebraska;
(v) Eastern South Dakota; and
(vi) Southern Minnesota.
(b) Corn calendar swap contracts.
(c) Wheat calendar swap contracts.
(d) Soybean calendar swap contracts.
(2) The Commission, pursuant to its
authority under Section 4d of the Act
and subject to the conditions below,
hereby permits CME and clearing
members of CBOT that are registered
FCMs, acting pursuant to this order, to
hold money, securities, and other
property, used to margin, guarantee, or
secure cleared-only transactions in
eligible products (cleared-only
contracts), and belonging to customers
that are eligible swap participants, with
other customer funds used to margin,
guarantee, or secure trades or positions
in commodity futures or commodity
option contracts executed on or subject
to the rules of a contract market
designated pursuant to Section 5 of the
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Federal Register / Vol. 74, No. 55 / Tuesday, March 24, 2009 / Notices
Act, in a customer segregated account or
accounts maintained in accordance with
Section 4d of the Act (including any
orders issued pursuant to Section
4d(a)(2) of the Act) and the
Commission’s regulations thereunder,
and all such customer funds shall be
accounted for and treated and dealt with
as belonging to the customers of the
CBOT clearing member, consistent with
Section 4d of the Act and the
regulations thereunder.
(3) This order is subject to the
following conditions:
(a) The contracts, agreements, or
transactions subject to this order shall
be executed pursuant to the
requirements of Part 35 of the
Commission’s regulations, as modified
herein, and shall be limited to the
eligible products enumerated in this
order.
(b) All eligible products shall be
submitted for clearing by a CBOT
clearing member to CME pursuant to
CBOT and CME rules.
(c) Each cleared-only contract shall be
marked to market on a daily basis, and
final settlement prices shall be
established in accordance with CBOT
rules.
(d) CME shall apply its margining
system and calculate performance bond
rates for each cleared-only contract in
accordance with its normal and
customary practices.
(e) CME shall apply appropriate risk
management procedures with respect to
transactions and open interest in the
cleared-only contracts. CME shall
conduct financial surveillance and
oversight of CBOT members clearing the
eligible products, and it shall conduct
oversight sufficient to assure CME that
each such member has the appropriate
operational capabilities necessary to
manage defaults in such contracts. CME
and clearing members of CBOT, acting
pursuant to this order, shall take all
other steps necessary and appropriate to
manage risk related to clearing eligible
products.
(f) CBOT shall make available open
interest and settlement price
information for the cleared-only
contracts on a daily basis in the same
manner as for contracts listed on CBOT.
(g) CBOT shall establish and maintain
a coordinated market surveillance
program that encompasses the clearedonly contracts and the corresponding
futures contracts listed by CBOT on its
designated contract market.
(h) CBOT shall adopt speculative
position limits for each of the clearedonly contracts that are the same as the
limits applicable to the corresponding
futures contracts pursuant to
Commission Regulation 150.2.
VerDate Nov<24>2008
01:06 Mar 24, 2009
Jkt 217001
(i) The cleared-only contracts shall
not be treated as fungible with any
contract listed for trading on CBOT.
(j) Each FCM acting pursuant to this
order shall keep the types of
information and records that are
described in Section 4g of the Act and
Commission regulations thereunder,
including but not limited to
Commission Regulation 1.35, with
respect to all cleared-only contracts.
Such information and records shall be
produced for inspection in accordance
with the requirements of Commission
Regulation 1.31.
(k) CBOT shall provide to the
Commission the types of information
described in Part 16 of the
Commission’s regulations in the manner
described in Parts 15 and 16 of the
Commission’s regulations with respect
to all cleared-only contracts.
(l) CBOT shall apply large trader
reporting requirements to cleared-only
contracts in accordance with its rules,
and each FCM acting pursuant to this
order shall provide to the Commission
the types of information described in
Part 17 of the Commission’s regulations
in the manner described in Parts 15 and
17 of the Commission’s regulations with
respect to all cleared-only contracts in
which it participates.
(m) CME and CBOT shall at all times
fulfill all representations made in their
requests for Commission action under
Sections 4(c) and 4d of the Act and all
supporting materials thereto.
This order is based upon the
representations made and supporting
material provided to the Commission by
CME and CBOT in connection with
their requests. Any material change or
omission in the facts and circumstances
pursuant to which this order is granted
might require the Commission to
reconsider its finding that the actions
taken herein are appropriate. Further, in
its discretion, the Commission may
condition, suspend, terminate, or
otherwise modify this order, as
appropriate, on its own motion.
Issued in Washington, DC, on March 18,
2009 by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. E9–6369 Filed 3–23–09; 8:45 am]
BILLING CODE 6351–01–P
PO 00000
DEPARTMENT OF DEFENSE
Office of the Secretary
[Docket ID: DOD–2009–OS–0046]
Privacy Act of 1974; Systems of
Records
AGENCY: Defense Finance and
Accounting Service, DoD.
ACTION: Notice to add a new System of
Records.
SUMMARY: The Defense Finance and
Accounting Service (DFAS) proposes to
add a new system of records notice to
its inventory of record systems subject
to the Privacy Act of 1974, (5 U.S.C.
552a), as amended.
DATES: This Action will be effective
without further notice on April 23, 2009
unless comments are received that
would result in a contrary
determination.
ADDRESSES: Send comments to the
FOIA/PA Program Manager, Corporate
Communications and Legislative
Liaison, Defense Finance and
Accounting Service, 8899 E. 56th Street,
Indianapolis, IN 46249–0150.
FOR FURTHER INFORMATION CONTACT: Ms.
Linda Krabbenhoft at (720) 242–6631.
SUPPLEMENTARY INFORMATION: The
Defense Finance and Accounting
Service 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
submitted on March 16, 2009, to the
House Committee on 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
December 12, 2000, 65 FR 239.
Dated: March 18, 2009.
Morgan E. Frazier,
Alternate OSD Federal Register Liaison
Officer, Department of Defense.
T5040
SYSTEM NAME:
Call Recording Application Records.
SYSTEM LOCATION:
Defense Finance and Accounting
Service, Cleveland, Anthony J.
Celebrezze Federal Building (Room
1669), 1240 E. 9th Street, Cleveland, OH
44199–2055.
Frm 00018
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]]>Agencies
[Federal Register Volume 74, Number 55 (Tuesday, March 24, 2009)]
[Notices]
[Pages 12316-12320]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-6369]
=======================================================================
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
Order (1) Pursuant to Section 4(c) of the Commodity Exchange Act,
Permitting the Chicago Mercantile Exchange to Clear Certain Over-the-
Counter Agricultural Swaps and (2) Pursuant to Section 4d of the
Commodity Exchange Act, Permitting Customer Positions in Such Cleared-
Only Contracts and Associated Funds To Be Commingled With Other
Positions and Funds Held in Customer Segregated Accounts
AGENCY: Commodity Futures Trading Commission.
ACTION: Order.
-----------------------------------------------------------------------
SUMMARY: By petition dated April 21, 2008 (Petition), the Chicago
Mercantile Exchange Inc. (CME), a registered derivatives clearing
organization (DCO), and the Board of Trade of the City of Chicago, Inc.
(CBOT), a designated contract market, requested permission to clear
certain over-the counter (OTC) swap agreements (swaps) in corn, wheat,
and soybeans. Authority for granting this request is found in Section
4(c) of the Commodity Exchange Act (Act).\1\ The Petition also
requested permission pursuant to Section 4d of the Act \2\ to allow CME
and futures commission merchants (FCMs) clearing through CME to
commingle positions in those cleared-only OTC swaps (cleared-only
contracts) and funds associated with those positions with positions and
funds otherwise required to be held in a customer segregated account.
The Commodity Futures Trading Commission (Commission) has reviewed
public comments and the entire record in this matter and it has
determined to issue an order granting the requested permission, subject
to certain terms and conditions.
---------------------------------------------------------------------------
\1\ 7 U.S.C. 6(c).
\2\ 7 U.S.C. 6d.
---------------------------------------------------------------------------
DATES: Effective Date: March 18, 2009.
FOR FURTHER INFORMATION CONTACT: Phyllis P. Dietz, Associate Director,
202-418-5449, pdietz@cftc.gov, Division of Clearing and Intermediary
Oversight, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street, NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. The CME/CBOT Petition
CME, the DCO that provides clearing services for CBOT, and CBOT
jointly submitted a Petition requesting that the Commission issue an
exemptive order under Section 4(c) of the Act.\3\ The order would grant
CME approval to clear OTC corn basis swaps and corn, wheat, and soybean
calendar swaps, and it would permit CBOT to list those products for
``clearing-only.'' \4\ The contract size for the basis and calendar
swaps would be the same as that for corn, wheat, and soybean futures--
5,000 bushels. Each of the proposed cleared-only contracts would be
cash settled, in contrast to the corresponding futures contracts which
are physically settled.
---------------------------------------------------------------------------
\3\ A copy of the petition is available on the Commission's Web
site at https://www.cftc.gov/.
\4\ The suite of OTC agricultural swap products that CBOT
proposes to list for clearing-only is comprised of corn basis swap
contracts for the following regions: Northeastern Iowa, Northwestern
Iowa, Southern Iowa, Eastern Nebraska, Eastern South Dakota, and
Southern Minnesota; and corn, wheat, and soybean calendar swaps.
---------------------------------------------------------------------------
Part 35 of the Commission's regulations \5\ exempts, subject to
conditions, swap agreements and eligible persons entering into such
agreements from most provisions of the Act.\6\ The term ``swap
agreement'' is defined to include, among other types of agreements, a
``basis swap'' and a ``commodity swap.'' \7\ Part 35 was promulgated
pursuant to authority conferred upon the Commission in Section 4(c) of
the Act to exempt certain transactions in order to explicitly permit
certain off-exchange derivatives transactions and thus promote
innovation and competition.\8\ A number of exemptions and exclusions
for off-exchange derivatives transactions were subsequently added to
the Act by the Commodity Futures Modernization Act of 2000,\9\ but none
apply to agricultural contracts.\10\
---------------------------------------------------------------------------
\5\ 17 CFR Part 35 (Commission regulations are hereinafter cited
as ``Reg. --'').
\6\ Jurisdiction is retained for, among other things, provisions
of the Act proscribing fraud and manipulation. See Reg. 35.2.
\7\ Reg. 35.1(b)(1)(i). ``Commodity'' is defined in Section
1a(4) of the Act 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.''
\8\ See 58 FR 5587 (Jan. 22, 1993). Section 4(c) of the Act was
added by Section 502(a) of the Futures Trading Practices Act of
1992, Public Law 102-546, 106 Stat. 3590 (1992).
\9\ Public Law 106-554, 114 Stat. 2763 (2000).
\10\ See, e.g., Sections 2(d), (g) and (h) of the Act, 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
[[Page 12317]]
standardized as to their material economic terms,\11\ 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.\12\ Under the arrangement proposed by CME and CBOT, a
cleared-only contract could be offset by another cleared-only contract
with equivalent terms. In addition, due to the introduction of a
clearing guarantee, the creditworthiness of the counterparty would no
longer be a consideration. Accordingly, the OTC swaps CME would clear
would not satisfy all of the conditions of Part 35.\13\
---------------------------------------------------------------------------
\11\ Reg. 35.2(b).
\12\ Reg. 35.2(c).
\13\ The contracts that CBOT proposes to list for clearing-only
would, however, meet the requirements of Reg. 35.2(a) and (d) in
that they would be entered into solely between eligible swap
participants and executed OTC, respectively.
---------------------------------------------------------------------------
Part 35 permits ``any person [to] apply to the Commission for
exemption from any of the provisions of the Act * * * for other
arrangements or facilities.'' \14\ CME and CBOT have petitioned the
Commission for an order under Section 4(c) of the Act that would exempt
certain cleared-only contracts involving corn, wheat, or soybeans to
the same extent as contracts that are exempt pursuant to Part 35 of the
Commission's regulations.
---------------------------------------------------------------------------
\14\ Reg. 35.2(d).
---------------------------------------------------------------------------
In addition, CME and CBOT also requested an order under Section 4d
of the Act so that CME and clearing members of CBOT could hold
positions in the cleared-only contracts and associated funds in the
customer segregated account along with positions in exchange-traded
futures and customer funds, resulting in improved collateral management
and other benefits.
II. Sections 4(c) and 4d of the Act
A. Permitting the OTC Swaps To Be Cleared
In enacting Section 4(c) of the Act, 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\ Section 4(c)(1) of the Act 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 Act (subject to
exceptions not relevant here) where the Commission determines that the
exemption would be consistent with the public interest.\16\ 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.
---------------------------------------------------------------------------
\15\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179,
3213.
\16\ Section 4(c)(1) of the Act, 7 U.S.C. 6(c)(1), provides in
full as follows:
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.
---------------------------------------------------------------------------
Section 4(c)(2) of the Act provides that the Commission may grant
exemptions from Section 4(a) of the Act only when the Commission
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 Act; 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 Act.\17\
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\17\ Section 4(c)(2) of the Act, 7 U.S.C. 6(c)(2), provides in
full as follows:
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 Commission requested comment on whether it should grant an
exemption from the requirements of the Act, thereby permitting corn
basis swaps and corn, wheat, and soybean calendar swaps to be cleared
through CME. It also requested comment on whether such an exemption
would affect its ability to discharge its regulatory responsibilities
under the Act or with the self-regulatory duties of any contract
market.
B. Permitting Funds To Be Commingled
Section 4d(a)(2) of the Act prohibits commingling positions
executed on a contract market and customer funds associated with such
positions together with any funds not required to be so segregated.\18\
Section 4d(a)(2) provides that the Commission may grant exceptions to
this prohibition by order.
---------------------------------------------------------------------------
\18\ Under Reg. 1.3(gg), the term ``customer funds'' is defined
to include all money, securities, and property received by an FCM or
by a DCO from, for, or on behalf of, customers or option customers
to margin, guarantee or secure exchange-traded futures contracts or
options on futures, and all money accruing to such customers as the
result of such contracts. The term ``funds'' is similarly used
herein to refer to cash as well as securities and other property
associated with futures contracts or cleared-only contracts.
---------------------------------------------------------------------------
In this case, the corn basis swaps and corn, wheat, and soybean
calendar swaps are not executed on a contract market and, thus, holding
positions in those contracts and associated funds in an account
together with positions and customer funds required to be segregated
would, absent a Commission order, violate Section 4d. Having analyzed
the risks and benefits associated with commingling such positions and
funds in a customer segregated account, the Commission has determined
that the benefits of the proposal outweigh the risks and that the
proposal, along with conditions set forth by the Commission, will
provide for a sufficient level of safeguards to address the risks
adequately.
III. Comment Letters
The Commission published a request for comments regarding the 4(c)
exemption in the Federal Register on July 7, 2008.\19\ At the same
time, it posted the Petition on the Commission's Web site, providing
the opportunity for the public to comment on any aspect of the
Petition, including the request for an order under Section 4d of the
Act. As a result of the non-transmission of a comment letter submitted
through the Federal eRulemaking Portal, the Commission reopened the
comment period on December 31, 2008,
[[Page 12318]]
specifically to afford the commenter whose submission was not received,
the opportunity to resubmit the comment.\20\ In addition, any other
member of the public was permitted to comment during the reopened
comment period.
---------------------------------------------------------------------------
\19\ See 73 FR 38403 (July 7, 2008) (45-day comment period
closing August 21, 2008).
\20\ See 73 FR 80367 (Dec. 31, 2008) (reopening the comment
period for 21 days).
---------------------------------------------------------------------------
The Commission received seven comment letters, one of which was
submitted during the reopened comment period. Five letters expressly
supported the issuance of an exemptive order to permit clearing of the
OTC swaps, citing such benefits as increased transparency and liquidity
in the OTC markets, enhanced risk management for market participants,
and greater regulatory surveillance including large trader reporting.
Of those letters, two specifically commented on the 4d order request.
Both of those letters supported the issuance of an order to permit the
commingling of positions in cleared-only contracts and associated funds
with positions and customer funds otherwise required to be held in a
customer segregated account. One letter focused on the bankruptcy
treatment of cleared-only contract positions and associated funds when
they are held in a customer segregated account.\21\ One commenter
opposed the issuance of an exemption permitting clearing of OTC swaps
based on concerns about the impact of OTC clearing on the use of
exchange-traded futures contracts for hedging purposes.
---------------------------------------------------------------------------
\21\ This bankruptcy matter was subsequently addressed in an
Interpretative Statement issued by the Commission on September 26,
2008. See 73 FR 65514 (Nov. 4, 2008).
---------------------------------------------------------------------------
IV. Findings and Conclusions
After considering the complete record in this matter, including the
comments received, the Commission finds that the requirements of
Section 4(c) of the Act have been met with respect to the request for
an order permitting the clearing of certain corn basis swaps and corn,
wheat, and soybean calendar swaps.
First, permitting the clearing of these transactions is consistent
with the public interest and with the purposes of the Act. The purposes
of the Act include ``promot[ing] responsible innovation and fair
competition among boards of trade, other markets, and market
participants.'' \22\ The purpose of an exemption is ``to promote
economic or financial innovation and fair competition.'' \23\
Permitting the clearing of corn basis swaps and corn, wheat, and
soybean calendar swaps by CME would appear to foster both financial
innovation and competition. It could benefit the marketplace by
providing eligible swap participants the ability to bring together
flexible negotiation with central counterparty guarantees and capital
efficiencies. Clearing also may increase the liquidity of the OTC
markets and thereby foster competition in those markets.
---------------------------------------------------------------------------
\22\ Section 3(b) of the Act, 7 U.S.C. 5(b).
\23\ Section 4(c)(1) of the Act, 7 U.S.C. 6(c)(1).
---------------------------------------------------------------------------
Second, the OTC swaps would be entered into solely between
appropriate persons. Those would be limited to persons qualifying as
eligible swap participants under Part 35.\24\
---------------------------------------------------------------------------
\24\ See Reg. 35.1(b)(2) (defining the term ``eligible swap
participant'').
---------------------------------------------------------------------------
Third, the exemption would not have a material adverse effect on
the ability of the Commission or any designated contract market to
carry out its regulatory or self-regulatory responsibilities under the
Act. Clearing of OTC swaps will actually enhance the Commission's
ability to carry out its regulatory responsibilities by, for example,
facilitating the collection of large trader reports for cleared-only
contracts. CME will use the same systems, procedures, personnel, and
processes to clear the OTC swaps as it currently employs with respect
to all of the other transactions it clears on behalf of CBOT.
The commenter who opposed granting the exemption raised a question
as to how clearing OTC swaps would impact trading in the corresponding
futures contracts, expressing the view that the ability to clear OTC
contracts would serve as a disincentive to enter into exchange-traded
futures contracts, thereby drawing business away from those markets to
OTC markets. Given the lack of empirical data relating to the trading
behavior of futures market participants when clearing becomes available
for OTC products, the basis for the commenter's concerns cannot be
readily substantiated or refuted. As a result, the Commission is unable
to conclude that providing eligible swap participants with the
opportunity to clear OTC swaps would undermine the purpose or
usefulness of trading in the futures markets. Moreover, because
eligible swap participants already engage in OTC transactions,
permitting clearing would provide a means for achieving benefits that
serve the public interest.
The Commission has concluded that permitting the clearing of OTC
corn basis swaps and corn, wheat, and soybean calendar swaps, subject
to the terms and conditions of the order, furthers the goals of market
transparency and liquidity, and financial risk management. It also
enhances the Commission's ability to obtain market information and
conduct oversight once OTC transactions are cleared by a registered
DCO.
With respect to the petitioners' request for an order pursuant to
Section 4d permitting CME and FCMs clearing through CME to commingle
cleared-only contract positions and associated funds with positions and
customer funds required to be held in a customer segregated account,
the Commission has considered whether the additional risk to customers
presented by such commingling can be adequately addressed and
mitigated. Additional risk is presented to customers as a result of the
risk of default involving the commingled cleared-only contracts.
The carrying FCM should have adequate means to address a default by
a customer holding cleared-only contracts. In the event of a customer
default on a position in a cleared-only corn basis swap, the clearing
firm could offset its risk by entering into an opposite position in the
OTC corn basis swap market through a broker or dealer. Alternatively,
the clearing firm could offset its risk by entering into an opposite
transaction in the cash corn basis market, which is very liquid due to
participation by country elevators, terminal elevators, ethanol
processors, and livestock feeders. In the event of a customer default
on a position in the corn, wheat, or soybean cleared-only calendar
swaps contracts, the clearing firm could offset its risk by liquidating
the customer position through a broker or dealer in the calendar swap
market or by taking an economically equivalent position in the
corresponding futures contract.
The order requires that CME review the clearing members' risk
management capabilities to verify that all members clearing OTC swaps
maintain sufficient operational capability to manage a default in a
cleared-only contract. In the event of a clearing firm default, CME
would have available the same means for managing the default as the
clearing firm would have in the first instance.
The order also requires that CBOT (1) maintain a coordinated market
surveillance program that encompasses the cleared-only contracts and
the corresponding futures contracts, and (2) adopt speculative position
limits for each of the cleared-only contracts, that are the same as the
limits applicable to the corresponding futures contracts. These
measures should mitigate market risk.
Accordingly, the Commission has determined that CME will be able to
employ reasonable safeguards to protect customer funds, and that it
will be able
[[Page 12319]]
to measure, monitor, manage, and account for risks associated with
transactions and open interest in the cleared-only contracts as it does
for other contracts it clears. The Commission believes that CME has
sufficiently demonstrated that it will continue to comply with the DCO
core principles set forth in Section 5b of the Act in connection with
holding customer positions in cleared-only corn basis swaps and corn,
wheat, and soybean calendar swaps and associated funds with positions
and customer funds required to be held in a customer segregated account
pursuant to Section 4d of the Act.
V. Related Matters
A. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) \25\ 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 Commission's order will not
require a new collection of information from any entities that would be
subject to the order.
---------------------------------------------------------------------------
\25\ 44 U.S.C. 3507(d).
---------------------------------------------------------------------------
B. Cost-Benefit Analysis
Section 15(a) of the Act,\26\ requires the Commission to consider
the costs and benefits of its action before issuing an order under the
Act. 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.
---------------------------------------------------------------------------
\26\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------
Section 15(a) of the Act 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 Act.
The Commission has considered the costs and benefits of this order
in light of the specific provisions of Section 15(a) of the Act, as
follows:
1. Protection of Market Participants and the Public. The cleared-
only contracts will be entered into only by persons who are
``appropriate persons'' as set forth in Section 4(c) of the Act. Only
eligible swap participants will enter into the corn basis swaps and
corn, wheat, and soybean calendar swaps that will be cleared pursuant
to the Commission's order. Allowing the commingling of positions in
cleared-only contracts and associated funds with positions and customer
funds required to be segregated under Section 4d of the Act will
benefit market participants by facilitating clearing and the reduction
of credit risk for contracts that meet market participants' specific
risk management requirements. Customers holding positions in cleared-
only contracts also would benefit from having those positions and
associated funds held in a customer segregated account in the event of
the insolvency of an FCM. Futures customers will be protected from
risks associated with the commingling of funds by a number of existing
risk management and other safeguards, including CME's financial
surveillance of clearing members and its financial resources package,
as supplemented by conditions imposed by the order.
2. Efficiency and Competition. Allowing the OTC swaps to be cleared
appears likely to promote liquidity and transparency in the markets for
OTC derivatives as well as futures on those commodities. The
commingling of positions in the cleared-only contracts and associated
funds with positions and customer funds required to be held in a
customer segregated account should result in improved, more efficient,
collateral management and lower administrative costs given that risk-
reducing positions will be held together in the same account rendering
a more precise estimation of the risk posed by the account. The
availability of cleared-only contracts also provides another risk
management tool that could compete with other OTC products.
3. Financial Integrity of Futures Markets and Price Discovery.
Price discovery is likely to be enhanced by bringing greater
transparency to the OTC market for the subject commodities. The Section
4(c) exemption also may promote financial integrity by providing the
benefits of clearing to the OTC markets. As discussed above, the
Commission believes that the risks associated with the commingling of
funds in the customer segregated account can be appropriately
mitigated.
4. Sound Risk Management Practices. Clearing of the OTC swaps is
likely to improve risk management by the participant counterparties.
CME's risk management practices in clearing these transactions are
subject to the Commission's supervision and oversight.
5. Other Public Interest Considerations. The action taken by the
Commission under Sections 4(c) and 4d of the Act is likely to encourage
market competition in agricultural derivatives products. It will also
further the Commission's overall goals in supporting greater market
transparency, credit risk management, and regulatory oversight by
encouraging the clearing of OTC products.
The Commission requested comment on its application of these
factors in the proposing release. No comments were received.
VI. Order
After considering the above factors and the comment letters
received in response to its request for comments, the Commission has
determined to issue the following:
Order
(1) The Commission, pursuant to its authority under Section 4(c) of
the Act and subject to the conditions below, hereby permits eligible
swap participants to submit for clearing, and FCMs and CME to clear,
the following OTC agricultural swap contracts (eligible products):
(a) Corn basis swap contracts for the following regions:
(i) Northeastern Iowa;
(ii) Northwestern Iowa;
(iii) Southern Iowa;
(iv) Eastern Nebraska;
(v) Eastern South Dakota; and
(vi) Southern Minnesota.
(b) Corn calendar swap contracts.
(c) Wheat calendar swap contracts.
(d) Soybean calendar swap contracts.
(2) The Commission, pursuant to its authority under Section 4d of
the Act and subject to the conditions below, hereby permits CME and
clearing members of CBOT that are registered FCMs, acting pursuant to
this order, to hold money, securities, and other property, used to
margin, guarantee, or secure cleared-only transactions in eligible
products (cleared-only contracts), and belonging to customers that are
eligible swap participants, with other customer funds used to margin,
guarantee, or secure trades or positions in commodity futures or
commodity option contracts executed on or subject to the rules of a
contract market designated pursuant to Section 5 of the
[[Page 12320]]
Act, in a customer segregated account or accounts maintained in
accordance with Section 4d of the Act (including any orders issued
pursuant to Section 4d(a)(2) of the Act) and the Commission's
regulations thereunder, and all such customer funds shall be accounted
for and treated and dealt with as belonging to the customers of the
CBOT clearing member, consistent with Section 4d of the Act and the
regulations thereunder.
(3) This order is subject to the following conditions:
(a) The contracts, agreements, or transactions subject to this
order shall be executed pursuant to the requirements of Part 35 of the
Commission's regulations, as modified herein, and shall be limited to
the eligible products enumerated in this order.
(b) All eligible products shall be submitted for clearing by a CBOT
clearing member to CME pursuant to CBOT and CME rules.
(c) Each cleared-only contract shall be marked to market on a daily
basis, and final settlement prices shall be established in accordance
with CBOT rules.
(d) CME shall apply its margining system and calculate performance
bond rates for each cleared-only contract in accordance with its normal
and customary practices.
(e) CME shall apply appropriate risk management procedures with
respect to transactions and open interest in the cleared-only
contracts. CME shall conduct financial surveillance and oversight of
CBOT members clearing the eligible products, and it shall conduct
oversight sufficient to assure CME that each such member has the
appropriate operational capabilities necessary to manage defaults in
such contracts. CME and clearing members of CBOT, acting pursuant to
this order, shall take all other steps necessary and appropriate to
manage risk related to clearing eligible products.
(f) CBOT shall make available open interest and settlement price
information for the cleared-only contracts on a daily basis in the same
manner as for contracts listed on CBOT.
(g) CBOT shall establish and maintain a coordinated market
surveillance program that encompasses the cleared-only contracts and
the corresponding futures contracts listed by CBOT on its designated
contract market.
(h) CBOT shall adopt speculative position limits for each of the
cleared-only contracts that are the same as the limits applicable to
the corresponding futures contracts pursuant to Commission Regulation
150.2.
(i) The cleared-only contracts shall not be treated as fungible
with any contract listed for trading on CBOT.
(j) Each FCM acting pursuant to this order shall keep the types of
information and records that are described in Section 4g of the Act and
Commission regulations thereunder, including but not limited to
Commission Regulation 1.35, with respect to all cleared-only contracts.
Such information and records shall be produced for inspection in
accordance with the requirements of Commission Regulation 1.31.
(k) CBOT shall provide to the Commission the types of information
described in Part 16 of the Commission's regulations in the manner
described in Parts 15 and 16 of the Commission's regulations with
respect to all cleared-only contracts.
(l) CBOT shall apply large trader reporting requirements to
cleared-only contracts in accordance with its rules, and each FCM
acting pursuant to this order shall provide to the Commission the types
of information described in Part 17 of the Commission's regulations in
the manner described in Parts 15 and 17 of the Commission's regulations
with respect to all cleared-only contracts in which it participates.
(m) CME and CBOT shall at all times fulfill all representations
made in their requests for Commission action under Sections 4(c) and 4d
of the Act and all supporting materials thereto.
This order is based upon the representations made and supporting
material provided to the Commission by CME and CBOT in connection with
their requests. Any material change or omission in the facts and
circumstances pursuant to which this order is granted might require the
Commission to reconsider its finding that the actions taken herein are
appropriate. Further, in its discretion, the Commission may condition,
suspend, terminate, or otherwise modify this order, as appropriate, on
its own motion.
Issued in Washington, DC, on March 18, 2009 by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. E9-6369 Filed 3-23-09; 8:45 am]
BILLING CODE 6351-01-P
