Request To Amend an Existing Order Under Section 4(c) of the Commodity Exchange Act Permitting Eligible Swap Participants To Submit for Clearing, and ICE Clear U.S., Inc. and Futures Commission Merchants To Clear, Certain-Over-The-Counter Agricultural Swaps, 34434-34438 [2010-14682]
Download as PDF
34434
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(8) ECPs vs. QIBs: CEA Section
2(a)(1)(F)(ii), cited in the preceding
paragraph, provides in full as follows:
Nothing in this Act is intended to prohibit
any eligible contract participant located in
the United States from purchasing or carrying
securities futures products traded on or
subject to the rules of a foreign board of
trade, exchange, or market to the same extent
such person may be authorized to purchase
or carry other securities traded on a foreign
board of trade, exchange, or market so long
as any underlying security for such security
futures products is traded principally on, by,
or through any exchange or market located
outside the United States.31
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As discussed above, the SEC Order
generally limits the category of U.S.
persons that may trade foreign security
futures to QIBs (who own and invest
$100 million or more). This is a
narrower class of investors than ECPs.
The group of persons that satisfy the
ECP definition but may not be QIBs
includes registered investment
companies, commodity pools, pension
plans, corporations and high net worth
individuals. These persons may have a
real need for risk management based
upon exposures in foreign financial
markets or to economic conditions in
other countries, or they may want to
gain exposure to those markets as part
of the asset allocation in their
investment portfolio.
If the relief requested in HEF’s
Petition is granted, an ECP that is a QIB
and trades a foreign futures contract on
a foreign security index that moves from
broad to narrow-based can continue to
trade that contract as a foreign security
future, provided the contract otherwise
meets the requirements of the SEC
Order. An ECP that is not a QIB,
however, would have to exit its position
in the foreign futures contract within
the applicable grace period or be in
violation of the Exchange Act. Given
this difference in legal status, should an
order issued by the Commission
granting the relief requested in HEF’s
Petition be limited to QIBs?
U.S. underlying narrow-based security indexes,
paragraph (1)(a)(ii) of the SEC Order permits debt
securities issued or guaranteed by a foreign
government as defined in Rule 405 of the Securities
Act, 17 CFR 230.405, that are eligible to be
registered with the SEC under Schedule B of the
Securities Act, 15 U.S.C. 77aa. Further, paragraph
(1)(a)(ii) requires that at the time of the transaction,
at least 90% of the index, both in terms of the
number of underlying securities and their weight,
must meet these eligibility requirements. No more
than 10% of the securities in the index, both in
terms of their number and their weight, at the time
of the transaction, that do not meet the
requirements, must be from issuers that are required
to file reports with the SEC pursuant to Section 13
or Section 15(d) of the Exchange Act, 15 U.S.C. 78m
and 78o.
31 7 U.S.C. 2(a)(1)(F)(ii).
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With respect to access to foreign
security futures by U.S. persons, are the
conditions contained in the SEC Order
consistent with Section 2(a)(1)(F)(ii) of
the CEA? Should ECPs that are not QIBs
be permitted to trade foreign security
futures? What conditions, if any, should
be imposed on such trading by ECPs
that are QIBs, and ECPs that are not
QIBs? How should an order permitting
ECPs to trade foreign security futures
take into account, as mandated by
Section 2(a)(1)(E) of the CEA, ‘‘the
nature and size of the markets that the
securities underlying the security
futures product reflects?’’
(9) Nature of Foreign Security
Indexes: Lying at the core of the
complex interplay between HEF’s
Petition on the one hand, and the CEA
and the federal securities laws on the
other hand, is the application of the
statutory definition of a ‘‘narrow-based
security index’’ to foreign security
indexes. To the extent that a foreign
security index falls squarely on the
broad-based side of the line, distinctions
between ECPs that are QIBs and those
that are not, and the prospect of an ECP
that is relying on the relief requested by
HEF violating the securities laws, may
be of less concern.
Congress has recognized that ‘‘[t]he
detailed statutory test of a narrow-based
security index was tailored to fit the
U.S. equity markets, which are by far
the largest, deepest and most liquid
securities markets in the world.’’ 32 In
the CFMA in 2000, Congress directed
that the CFTC and the SEC, within one
year, jointly adopt rules or regulations
that set forth requirements for broadbased foreign security indexes traded on
a foreign board of trade.33 And shortly
thereafter, the CFTC and SEC promised
to consider amending the rules
regarding security index futures trading
on or subject to the rules of a foreign
board of trade.34
Should the CFTC and the SEC
establish criteria to exclude appropriate
foreign security indexes from the
definition of a ‘‘narrow-based security
index?’’ If so, on what basis? How
should it be determined whether a
foreign security index is appropriately
treated as a broad-based security index
so that foreign futures on such an index
32 H.R. Rep. No. 110–627 at 983 (2009)
(Conference Report on the CFTC Reauthorization
Act of 2008, Title XIII of the 2008 ‘‘Farm Bill,’’
Public Law No. 110–246, 122 Stat. 1651 (June 18,
2008)).
33 See 7 U.S.C. 1a(25)(B)(iv) and 1a(25)(C); 15
U.S.C. 3(a)(55)(C)(iv) and 3(a)(55)(D).
34 See Method for Determining Market
Capitalization and Dollar Value of Average Daily
Trading Volume; Application of the Definition of
Narrow-Based Security Index, 66 FR 44490, 44501–
44502 (August 23, 2001).
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would trade subject to the exclusive
jurisdiction of the CFTC, or as a narrowbased security index so that foreign
futures on such an index would trade as
foreign security futures? The
Commission encourages commenters to
submit any quantitative data and
analysis to support any proposed
distinctions between broad and narrowbased foreign security indexes.
(10) CEA Section 4(c) Requirements:
• Is the exemption requested in HEF’s
Petition consistent with the
requirements for relief set forth in
Section 4(c) of the CEA?
• Would granting the exemption
requested in HEF’s Petition be
consistent with the public interest and
purposes of the CEA?
• Would granting the relief requested
in HEF’s Petition have any material
adverse effects upon derivatives clearing
organizations, exchanges, or other
Commission registrants from a
competitive or other perspective?
(11) Other Issues: The Commission
welcomes comment on any other issues
relevant to HEF’s Petition for an
exemption.
*
*
*
*
*
Issued in Washington, DC, on June 11,
2010 by the Commission.
Sauntia S. Warfield,
Assistant Secretary of the Commission.
[FR Doc. 2010–14680 Filed 6–16–10; 8:45 am]
BILLING CODE P
COMMODITY FUTURES TRADING
COMMISSION
Request To Amend an Existing Order
Under Section 4(c) of the Commodity
Exchange Act Permitting Eligible Swap
Participants To Submit for Clearing,
and ICE Clear U.S., Inc. and Futures
Commission Merchants To Clear,
Certain-Over-The-Counter Agricultural
Swaps
AGENCY: Commodity Futures Trading
Commission.
ACTION: Notice of Request for Comment
on an Amendment to an Exemption
Order.
SUMMARY: The Commodity Futures
Trading Commission (‘‘CFTC’’ or
‘‘Commission’’) is requesting comment
on whether to amend an existing order
to extend the exemption granted to ICE
Clear U.S., Inc. (‘‘ICE Clear’’) under
Section 4(c) of the Commodity Exchange
Act (‘‘Act’’) 1 to certain over-the-counter
(‘‘OTC’’) agricultural swaps for which
there is no corresponding futures
contract listed for trading on ICE
17
U.S.C. 6(c).
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Futures U.S., Inc. (‘‘ICE Futures’’) at the
time of acceptance for clearing.
Authority for extending this relief is
found in Section 4(c) of the Act.
DATES: Comments must be received on
or before August 2, 2010.
ADDRESSES: Comments may be
submitted by any of the following
methods:
• Federal eRulemaking Portal: https://
www.regulations.gov/https://
frwebgate.access.gpo/cgi-bin/leaving.
Follow the instructions for submitting
comments.
• E-mail: iceclearotc4c@cftc.gov.
Include ‘‘ICE Clear Section 4(c)
Amended Exemption Request’’ in the
subject line of the message.
• Fax: 202–418–5521.
• Mail: Send to David A. Stawick,
Secretary, Commodity Futures Trading
Commission, Three Lafayette Centre,
1155 21st Street, NW., Washington, DC
20581.
• Courier: Same as mail above.
All comments received will be posted
without change to https://
www.CFTC.gov/.
FOR FURTHER INFORMATION CONTACT:
Robert B. Wasserman, Associate
Director, 202–418–5092,
rwasserman@cftc.gov, or Alicia L.
Lewis, Attorney-Advisor, 202–418–
5862, alewis@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. Background
In September 2007, ICE Clear, a
registered derivatives clearing
organization (‘‘DCO’’) and the clearing
organization for ICE Futures, submitted
applications to the Commission
requesting an order (1) pursuant to
Section 4(c) of the Act, (a) to permit the
clearing of coffee, sugar, and cocoa OTC
swap contracts and (b) to determine that
certain ICE Futures floor brokers and
traders are eligible swap participants
(‘‘ESPs’’) for the purpose of trading these
OTC swaps; and (2) pursuant to Section
4d of the Act, to permit certain customer
positions in these cleared OTC swap
contracts and the property
collateralizing these positions to be
commingled with property and
positions otherwise required to be held
in customer segregated accounts. Part 35
of the Commission’s regulations 2 allows
the trading but not the clearing of such
contracts.3 On December 12, 2008, the
2 17
CFR Part 35.
35 of the Commission’s regulations, 17
CFRPart 35, promulgated pursuant to the authority
3 Part
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Commission approved the applications
and issued an order pursuant to
Sections 4(c) and 4d of the Act (the
‘‘Previous Order’’).4 ICE Clear represents
that it commenced clearing the
permitted swaps on February 13, 2009.
The clearing process for these swaps
involves the replacement of each OTC
swap with a ‘‘cleared-only’’ contract, the
essential terms of which match the
terms, including the expiration date, of
a corresponding underlying exchangelisted futures contract in coffee, sugar,
or cocoa traded on ICE Futures. The
clearinghouse is interposed as the
central counterparty. The cleared-only
contracts are financially settled while
the underlying futures contracts are
settled with physical delivery.
In granting the relief requested, the
Commission imposed certain terms and
conditions in the Previous Order to
address its regulatory concerns and
mitigate the risks associated with the
clearing of OTC agricultural swaps.
With respect to Section 4d of the Act,
the Commission evaluated whether ICE
Clear’s proposal would provide
appropriate protection for customer
funds since futures customers would be
exposed to a different source of risk if
funds supporting contracts executed in
the OTC market were commingled with
customer funds supporting futures
transactions in customer segregated
accounts. In analyzing this issue, the
Commission considered (1) the ability of
a futures commission merchant (‘‘FCM’’)
or DCO to offset these contracts in the
OTC markets in the event of a default
on such contracts by a customer or an
FCM, respectively, since a cleared-only
contract could be offset only by another
of Section 4(c) of the Act, exempts swap agreements
and eligible persons entering into these agreements
from most provisions of the Act. The term ‘‘swap
agreement’’ is defined to include, among other types
of agreements, ‘‘a * * * commodity swap,’’ which
latter term includes swaps on agricultural products.
While the Commodity Futures Modernization Act
of 2000 amends the Act to exempt the trading of
many OTC transactions from many provisions of
the Act, these exemptions explicitly do not apply
to OTC transactions in agricultural commodities.
Accordingly, swaps involving agricultural
commodities continue to rely upon the exemptions
of Part 35. Part 35 requires, among other things, that
a swap agreement not be part of a fungible class of
agreements that are standardized as to their material
economic terms 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. Thus, absent
an additional exemption pursuant to Section 4(c) of
the Act, ICE Clear could not engage in the clearing
of OTC swap contracts in cocoa, sugar and coffee,
since such contracts would not fulfill all of the
conditions for exemption in Part 35. For further
discussion of the Part 35 analysis, see 72 FR 68862,
68863 (Dec. 6, 2007).
As discussed further below, the Commission is
requesting comment on the impact of pending
financial services reform legislation on Part 35.
4 73 FR 77015 (Dec. 18, 2008).
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34435
cleared-only contract and (2) the
availability of the exchange-traded
markets for coffee, sugar and cocoa for
hedging purposes, as well as the
correspondence between the terms of a
cleared-only contract and a
corresponding exchange-traded contract
for these products. Based on ICE Clear’s
proposal, the Commission found that
these cleared-only contracts correspond
to transactions in a potentially liquid
OTC market and, importantly, that they
were economically equivalent to, and
thus could be effectively hedged with an
exchange-listed futures contract.5
Accordingly, in order to ensure an
effective means of risk management for
these cleared-only contracts, the
Commission included Condition 3(B) in
the Previous Order, which required that
the cleared-only contracts be closely
related to underlying futures contracts
traded on ICE Futures. Specifically,
Condition 3(B) provides that:
‘‘[t]he economic terms and the daily
settlement prices of each contract, agreement
or transaction subject to this order must be
analogous to the economic terms, and equal
to the daily settlement prices, respectively, of
a corresponding futures contract listed for
trading on ICE Futures.’’
The fulfillment of this condition
would enable an FCM carrying the
positions of a defaulting customer or
ICE Clear carrying the positions of a
defaulting member, to economically
hedge those positions in the ICE Futures
market by entering into an equal but
opposite position in the corresponding
listed futures contract. Thus, the
Commission considered economic
hedging in the exchange-listed market
and actual offset based on the OTC
market as feasible risk management
measures for FCMs carrying clearedonly positions, as well as for ICE Clear
itself.
II. The Current ICE Clear Petition
ICE Clear seeks to modify Condition
3(B) of the Previous Order to allow it to
clear OTC swaps in coffee, sugar and
cocoa that have economic terms
analogous to the terms of corresponding
futures contracts listed for trading on
ICE Futures with the exception of their
expiration dates. Such expiration dates
would be permitted to be beyond that of
the corresponding futures contracts.
These OTC swap contracts are referred
to herein as ‘‘Long-Dated Swaps’’. The
clearing of Long-Dated Swaps will
require ICE Clear to establish
independent settlement prices for such
swaps until there is a corresponding
futures contract, with the same
expiration date, listed for trading on ICE
5 See
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73 FR at 77018.
17JNN1
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Futures. In order to establish such
prices, ICE Clear represents that it has
developed specific pricing models for
Long-Dated Swaps and will use those
models along with the best available
market data to determine settlement
prices.6 In addition, ICE Clear
represents that only ESPs would be
permitted to trade these swaps.
ICE Clear has not requested an order
pursuant to Section 4d of the Act
permitting customer positions in these
Long-Dated Swap contracts and the
property collateralizing those positions
to be commingled with property and
positions otherwise required to be held
in customer segregated accounts.
Accordingly, positions in such
contracts, and property collateralizing
such positions, would not be
commingled with positions and related
collateral segregated pursuant to Section
4d of the Act.7 Long-Dated Swaps, and
property collateralizing such swaps,
would be treated as other cleared-only
contracts by ICE Clear and its clearing
members that are registered as FCMs.
Eventually, however, the expiration
date of a Long-Dated Swap will, after
the passage of time, correspond to that
of a futures contract listed for trading by
ICE Futures (at that point, the LongDated Swap would become an ‘‘Aged
Long-Dated Swap’’). An Aged LongDated Swap would be economically
equivalent to an OTC swap that was first
accepted for clearing after the listing of
a corresponding futures contract. As a
result, an Aged Long-Dated Swap would
also satisfy all the requirements
specified in the Previous Order, and
therefore, could be carried in the
customer segregated account pursuant
to the provisions of that order. ICE Clear
would not establish an independent
settlement price for an Aged Long-Dated
Swap, but instead would use the
settlement price of the corresponding
listed futures contract.
6 ICE Clear proposes to use a process similar to
the industry-standard pricing procedures for
options pricing models used to value longer dated
options positions in less liquid contract months.
Moreover, ICE Clear represents that the market data
used will include: (i) Cleared-swaps data submitted
to the clearinghouse; (ii) year-on-year spread values
for the underlying traded futures contract for
actively traded months; (iii) OTC transaction data
solicited from third-party brokers such as the major
inter-dealer brokers; (iv) indicative quotes provided
by third-party brokers; and (v) historical data.
7 Pursuant to recent amendments to Part 190 of
the Commission’s Regulations, 17 CFR Part 190,
positions in these contracts, and related collateral,
could be included as Cleared OTC Derivatives, if
ICE Clear’s rules or bylaws were to require them to
be segregated. The amendments were published at
75 FR 17297 (Apr. 6, 2010).
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III. Section 4(c) of the Commodity
Exchange Act
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.8 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. 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.’’ 9 Permitting the inclusion of
Long-Dated Swaps in the class of OTC
agricultural swap transactions that can
be cleared by ICE Clear may foster both
financial innovation and competition. It
may benefit the marketplace by
providing ESPs with the ability to bring
together flexible negotiation with
central counterparty guarantees, as well
as capital and operational efficiencies.
ESPs also may precisely hedge their
cash positions with offsetting swap
positions that match closely in terms of
expiration date. The Commission is
requesting comment on whether it
should extend the permission to clear
granted previously to include those OTC
swap contracts for which the expiration
8 Section 4(c)(1) of the Act, 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.
9 House Conf. Report No. 102–978, 1992
U.S.C.C.A.N. 3179, 3213.
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date is beyond that of any
corresponding futures contract listed for
trading on ICE Futures at the time of
acceptance for clearing.
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 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 duties under the Act.10
Section 4(c)(3) includes within the term
‘‘appropriate persons’’ a number of
specified categories of persons deemed
appropriate under the Act for entering
into transactions exempt by the
Commission under Section 4(c). This
includes persons the Commission
determines to be appropriate in light of
their financial or other qualifications, or
the applicability of appropriate
regulatory protections. ESPs, as defined
in Part 35 of the Commission’s
regulations,11 and ICE Futures floor
members deemed ESPs by the
Commission in the Order, will be
eligible to submit Long-Dated Swap
transactions to ICE Clear for clearing.
The proposed Order requires ICE Clear,
FCMs and ESPs acting pursuant to the
Order to provide the market and largetrader information described in Parts 16,
17 and 18 of the Commission’s
regulations, in the manner described in
10 Section 4(c)(2) of the Act, 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.
11 This definition includes many of the classes of
persons explicitly referred to in Act Section 4(c)(3)
(e.g., a bank or trust company) as well as some
classes of persons who are included under the
category of Section 4(c)(3)(K) (‘‘[s]uch other persons
that the Commission determines to be appropriate
in light of their financial or other qualifications, or
the applicability of appropriate regulatory
protections’’).
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Parts 15, 16, 17 and 18 of the
Commission’s regulations, with respect
to all Cleared-Only Contracts, including
Long-Dated Swaps. In light of the above,
the Commission is requesting comment
as to whether the extension of this
exemption will affect the ability of the
Commission or any contract market or
derivatives clearing organization to
discharge its regulatory or selfregulatory duties under the Act.
With respect to protecting the public
interest, the Commission notes that
Congress has begun to take steps to
promote transparency in swap contracts.
The financial services reform bills
passed by the House of
Representatives 12 and Senate 13 each
requires swaps 14 to be cleared, subject
to certain exemptions, and further
requires, with respect to swaps that are
subject to the clearing requirement, that
such swaps be executed on a board of
trade designated as a contract market
under Section 5 of the Act (‘‘DCM’’) or
on a swap execution facility (‘‘SEF’’)
registered or exempt under Section 5h
of the Act (where such a trading
environment is available).15 Although
these bills have not completed the
legislative process, the Commission
recognizes that future legislative
enactments may require the execution of
cleared swaps on a DCM or SEF.
Accordingly, the Commission seeks
comment, both as to the current
proposed exemption, as well as more
generally with respect to Part 35 of the
Commission’s regulations, on the issues
raised by the pending legislation
regarding trading requirements for swap
contracts, including agricultural swap
contracts.
IV. Amended Order
The Previous Order is proposed to be
revised to read as follows:
ORDER
(1) The Commission, pursuant to its
authority under Section 4(c) of the
Commodity Exchange Act (‘‘Act’’) and
subject to the conditions below, hereby:
(a) Permits eligible swap participants
(‘‘ESPs’’) to submit for clearing, and futures
commission merchants (‘‘FCMs’’) and ICE
Clear to clear, OTC agricultural swap
12 H.R.
4173, 111th Cong. (2009).
4173 EAS, 111th Cong. (2010).
14 We note that both bills include agricultural
swap contracts in their definition of swaps. See
H.R. 4173 § 3103(a) (at 575–77); H.R. 4173 EAS
§ 721(a) (at 535–38).
15 H.R. 4173 EAS § 723(a) (at 570); H.R. 4173
§ 3103(a) (at 605). Each of the financial services
reform bills also provides that agricultural swaps
may not be traded except pursuant to CFTC
enabling regulations. See H.R. 4173 § 3103(a) (at
605) and § 3109 (at 646); H.R. 4173 EAS § 723(c)(3)
(at 577–78).
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contracts in coffee, sugar, and cocoa
(‘‘Cleared-Only Contracts’’); and
(b) Permits all ICE Futures floor members
that are registered with the Commission,
when trading for their own accounts, to be
deemed ESPs for the purpose of entering into
bilateral swap transactions involving coffee,
sugar, or cocoa to be cleared on ICE Clear.
(2) The term ‘‘Long-Dated Swap Contract’’
shall be defined as a Cleared-Only Contract
with terms analogous to those of a
corresponding futures contract listed for
trading on ICE Futures, except that the
expiration date of the swap contract is later
than that of any such futures contract. If the
expiration date of a Long-Dated Swap
Contract, after the passage of time, is on or
before that of a futures contract listed for
trading by ICE Futures, such OTC swap
contract will become an ‘‘Aged Long-Dated
Swap Contract’’.
(3) The Commission, pursuant to its
authority under Section 4d of the Act and
subject to the conditions below, hereby
permits ICE Clear and its clearing members
that are registered FCMs, acting pursuant to
this order, to hold money, securities, and
other property, used to margin, guarantee, or
secure Cleared-Only Contracts (with the
exception of Long-Dated Swap Contracts) and
belonging to customers that are ESPs
(including customers that are deemed ESPs
in accordance with this order), 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 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 ICE Clear clearing member,
consistent with Section 4d of the Act and the
regulations thereunder. This permission shall
also apply to an Aged Long-Dated Swap
Contract.
(4) The 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
Cleared-Only Contracts as defined herein.
(b) The economic terms and the daily
settlement prices of each contract, agreement,
or transaction subject to this order, except for
a Long-Dated Swap Contract, shall be
analogous to the economic terms, and equal
to the daily settlement prices, respectively, of
a corresponding futures contract listed for
trading on ICE Futures.
(c) ICE Clear shall establish a settlement
price for each Long-Dated Swap Contract for
each trading day until such time as the
contract’s expiration date corresponds to that
of a futures contract listed for trading on ICE
Futures. ICE Clear shall make records
reflecting the basis for setting each such price
and shall maintain such records pursuant to
Core Principle K.
PO 00000
Frm 00020
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34437
(d) All contracts subject to this order shall
be submitted for clearing by an ICE Futures
clearing member to ICE Clear pursuant to ICE
Clear rules.
(e) Each ICE Futures floor member, acting
as an ESP pursuant to this order, shall be the
subject of a financial guarantee from a
member of ICE Clear covering the trading of
the OTC swap contracts subject to this order.
The clearing member shall be registered with
the Commission as an FCM and shall clear
for the floor member the contracts,
agreement, or transactions covered by the
financial guarantee.
(f) An ICE Futures floor member shall be
prohibited from entering into a transaction in
a Cleared-Only Contract with another ICE
Futures floor member as the counterparty.
(g) ICE Clear and its clearing members shall
mark to market each Cleared-Only Contract
on a daily basis in accordance with ICE Clear
rules.
(h) ICE Clear shall apply its margining
system and calculate performance bond rates
for each Cleared-Only Contract in accordance
with its normal and customary practices.
(i) ICE Futures shall maintain appropriate
compliance systems to monitor the
transactions of its floor members in the OTC
swap transactions permitted pursuant to this
order.
(j) ICE Clear shall apply appropriate risk
management procedures with respect to
transactions and open interest in all ClearedOnly Contracts. ICE Clear shall conduct
financial surveillance and oversight of its
members clearing Cleared-Only Contracts,
and shall conduct oversight sufficient to
assure ICE Clear that each such member has
the appropriate operational capabilities
necessary to manage defaults in such
contracts. ICE Clear and its clearing
members, acting pursuant to this order, shall
take all other steps necessary and appropriate
to manage risk related to clearing ClearedOnly Contracts.
(k) ICE Clear shall make available open
interest and settlement price information for
the Cleared-Only Contracts on a daily basis
in the same manner as for futures contracts
listed for trading on ICE Futures.
(l) ICE Futures shall establish and maintain
a coordinated market surveillance program
that encompasses the Cleared-Only Contracts
and the corresponding futures contracts
listed by ICE Futures on its designated
contract market. ICE Futures shall adopt
position accountability levels for each
cleared-only contract that are appropriate in
light of the position accountability levels
applicable to the corresponding futures
contracts listed for trading on ICE Futures.
(m) Cleared-only contracts shall not be
treated as fungible with any contract listed
for trading on ICE Futures.
(n) 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 ClearedOnly Contracts. Such information and
records shall be produced for inspection in
accordance with the requirements of
Commission Regulation 1.31.
(o) ICE Futures shall provide to the
Commission the types of information
E:\FR\FM\17JNN1.SGM
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34438
Federal Register / Vol. 75, No. 116 / Thursday, June 17, 2010 / Notices
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.
(p) ICE Clear shall apply large trader
reporting requirements to all Cleared-Only
Contracts in accordance with its rules, and
each FCM and ESP acting pursuant to this
order shall provide to the Commission the
types of information described in Parts 17
and 18 of the Commission’s regulations in
the manner described in Parts 15, 17, and 18
of the Commission’s regulations with respect
to all Cleared-Only Contracts in which it
participates.
(q) ICE Clear and ICE Futures 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.
V. Request for Comment
The Commission requests comment
on all aspects of the issues presented by
this amended exemption request.
VI. Related Matters
mstockstill on DSKH9S0YB1PROD with NOTICES
A. Paperwork Reduction Act
The Paperwork Reduction Act of 1995
(‘‘PRA’’) 16 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 amended exemption would not, if
approved, require a new collection of
information from any entities that
would be subject to the exemption.
B. Cost-Benefit Analysis
Section 15(a) of the Act,17 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 is considering the
costs and benefits of an amended
exemption 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 contracts that are
the subject of the amended exemption
request will only be entered into by
persons who are ‘‘appropriate persons’’
as set forth in Section 4(c) of the Act.
2. Efficiency, competition, and
financial integrity. Extending the
exemption granted under Part 35 to
allow the clearing of Long-Dated Swap
Contracts may promote liquidity and
transparency in the markets for OTC
derivatives in coffee, sugar, and cocoa,
as well as for futures on those
commodities. Extending the exemption
also may promote financial integrity by
increasing the benefits of clearing in
these OTC markets.
3. Price discovery. Price discovery
may be enhanced through market
competition.
4. Sound risk management practices.
Clearing of Long-Dated Swap Contracts
may foster risk management by the
participant counterparties. ICE Clear’s
risk management practices in clearing
these transactions would be subject to
the Commission’s supervision and
oversight.
5. Other public interest
considerations. The requested amended
exemption may encourage market
competition in agricultural derivative
products without unnecessary
regulatory burden. As noted above,
however, there are pending financial
services reform bills that would affect
the trading and clearing requirements
for agricultural swap contracts.
After considering these factors, the
Commission has determined to seek
comment on the request for an amended
exemption order as discussed above.
The Commission also invites public
comment on its application of the costbenefit provision.
*
*
*
*
*
Issued in Washington, DC, on June 14,
2010 by the Commission.
Sauntia S. Warfield,
Assistant Secretary of the Commission.
16 44
[FR Doc. 2010–14682 Filed 6–16–10; 8:45 am]
17 7
BILLING CODE P
U.S.C. 3507(d).
U.S.C. 19(a).
VerDate Mar<15>2010
16:13 Jun 16, 2010
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CONSUMER PRODUCT SAFETY
COMMISSION
Sunshine Act Meetings
TIME AND DATE: Wednesday, June 23,
2010; 10 a.m.–12 Noon.
PLACE: Hearing Room 420, Bethesda
Towers, 4330 East West Highway,
Bethesda, Maryland.
STATUS: Closed to the Public.
MATTERS TO BE CONSIDERED:
Compliance Status Report
The Commission staff will brief the
Commission on the status of compliance
matters.
For a recorded message containing the
latest agenda information, call (301)
504–7948.
CONTACT PERSON FOR MORE INFORMATION:
Todd A. Stevenson, Office of the
Secretary, U.S. Consumer Product
Safety Commission, 4330 East West
Highway, Bethesda, MD 20814, (301)
504–7923.
Dated: June 14, 2010.
Todd A. Stevenson,
Secretary.
[FR Doc. 2010–14816 Filed 6–15–10; 4:15 pm]
BILLING CODE 6355–01–P
DEPARTMENT OF DEFENSE
Office of the Secretary
Defense Science Board Task Force on
Trends and Implications of Climate
Change for National and International
Security
Department of Defense (DoD).
Notice of advisory committee
meetings.
AGENCY:
ACTION:
SUMMARY: The Defense Science Board
Task Force on Trends and Implications
of Climate Change for National and
International Security will meet in
closed session on July 14–15 and on
July 29–30, 2010, in Arlington, VA.
DATES: The meetings will be held on
July 14–15 and on July 29–30, 2010.
ADDRESSES: Both meetings will be held
at Strategic Analysis, Inc., 4075 Wilson
Boulevard, Suite 350, Arlington, VA.
FOR FURTHER INFORMATION CONTACT: Maj.
Michael Warner, USAF Military
Assistant, Defense Science Board, 3140
Defense Pentagon, Room 3B888A,
Washington, DC 20301–3140, via e-mail
at michael.warner@osd.mil, or via
phone at (703) 571–0081.
SUPPLEMENTARY INFORMATION: The
mission of the Defense Science Board is
to advise the Secretary of Defense and
E:\FR\FM\17JNN1.SGM
17JNN1
Agencies
[Federal Register Volume 75, Number 116 (Thursday, June 17, 2010)]
[Notices]
[Pages 34434-34438]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-14682]
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
Request To Amend an Existing Order Under Section 4(c) of the
Commodity Exchange Act Permitting Eligible Swap Participants To Submit
for Clearing, and ICE Clear U.S., Inc. and Futures Commission Merchants
To Clear, Certain-Over-The-Counter Agricultural Swaps
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of Request for Comment on an Amendment to an Exemption
Order.
-----------------------------------------------------------------------
SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or
``Commission'') is requesting comment on whether to amend an existing
order to extend the exemption granted to ICE Clear U.S., Inc. (``ICE
Clear'') under Section 4(c) of the Commodity Exchange Act (``Act'') \1\
to certain over-the-counter (``OTC'') agricultural swaps for which
there is no corresponding futures contract listed for trading on ICE
[[Page 34435]]
Futures U.S., Inc. (``ICE Futures'') at the time of acceptance for
clearing. Authority for extending this relief is found in Section 4(c)
of the Act.
---------------------------------------------------------------------------
\1\ 7 U.S.C. 6(c).
---------------------------------------------------------------------------
DATES: Comments must be received on or before August 2, 2010.
ADDRESSES: Comments may be submitted by any of the following methods:
Federal eRulemaking Portal: https://www.regulations.gov/https://frwebgate.access.gpo/cgi-bin/leaving. Follow the instructions
for submitting comments.
E-mail: iceclearotc4c@cftc.gov. Include ``ICE Clear
Section 4(c) Amended Exemption Request'' in the subject line of the
message.
Fax: 202-418-5521.
Mail: Send to David A. Stawick, Secretary, Commodity
Futures Trading Commission, Three Lafayette Centre, 1155 21st Street,
NW., Washington, DC 20581.
Courier: Same as mail above.
All comments received will be posted without change to https://www.CFTC.gov/.
FOR FURTHER INFORMATION CONTACT: Robert B. Wasserman, Associate
Director, 202-418-5092, rwasserman@cftc.gov, or Alicia L. Lewis,
Attorney-Advisor, 202-418-5862, alewis@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. Background
In September 2007, ICE Clear, a registered derivatives clearing
organization (``DCO'') and the clearing organization for ICE Futures,
submitted applications to the Commission requesting an order (1)
pursuant to Section 4(c) of the Act, (a) to permit the clearing of
coffee, sugar, and cocoa OTC swap contracts and (b) to determine that
certain ICE Futures floor brokers and traders are eligible swap
participants (``ESPs'') for the purpose of trading these OTC swaps; and
(2) pursuant to Section 4d of the Act, to permit certain customer
positions in these cleared OTC swap contracts and the property
collateralizing these positions to be commingled with property and
positions otherwise required to be held in customer segregated
accounts. Part 35 of the Commission's regulations \2\ allows the
trading but not the clearing of such contracts.\3\ On December 12,
2008, the Commission approved the applications and issued an order
pursuant to Sections 4(c) and 4d of the Act (the ``Previous
Order'').\4\ ICE Clear represents that it commenced clearing the
permitted swaps on February 13, 2009.
---------------------------------------------------------------------------
\2\ 17 CFR Part 35.
\3\ Part 35 of the Commission's regulations, 17 CFRPart 35,
promulgated pursuant to the authority of Section 4(c) of the Act,
exempts swap agreements and eligible persons entering into these
agreements from most provisions of the Act. The term ``swap
agreement'' is defined to include, among other types of agreements,
``a * * * commodity swap,'' which latter term includes swaps on
agricultural products. While the Commodity Futures Modernization Act
of 2000 amends the Act to exempt the trading of many OTC
transactions from many provisions of the Act, these exemptions
explicitly do not apply to OTC transactions in agricultural
commodities. Accordingly, swaps involving agricultural commodities
continue to rely upon the exemptions of Part 35. Part 35 requires,
among other things, that a swap agreement not be part of a fungible
class of agreements that are standardized as to their material
economic terms 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. Thus, absent an
additional exemption pursuant to Section 4(c) of the Act, ICE Clear
could not engage in the clearing of OTC swap contracts in cocoa,
sugar and coffee, since such contracts would not fulfill all of the
conditions for exemption in Part 35. For further discussion of the
Part 35 analysis, see 72 FR 68862, 68863 (Dec. 6, 2007).
As discussed further below, the Commission is requesting comment
on the impact of pending financial services reform legislation on
Part 35.
\4\ 73 FR 77015 (Dec. 18, 2008).
---------------------------------------------------------------------------
The clearing process for these swaps involves the replacement of
each OTC swap with a ``cleared-only'' contract, the essential terms of
which match the terms, including the expiration date, of a
corresponding underlying exchange-listed futures contract in coffee,
sugar, or cocoa traded on ICE Futures. The clearinghouse is interposed
as the central counterparty. The cleared-only contracts are financially
settled while the underlying futures contracts are settled with
physical delivery.
In granting the relief requested, the Commission imposed certain
terms and conditions in the Previous Order to address its regulatory
concerns and mitigate the risks associated with the clearing of OTC
agricultural swaps. With respect to Section 4d of the Act, the
Commission evaluated whether ICE Clear's proposal would provide
appropriate protection for customer funds since futures customers would
be exposed to a different source of risk if funds supporting contracts
executed in the OTC market were commingled with customer funds
supporting futures transactions in customer segregated accounts. In
analyzing this issue, the Commission considered (1) the ability of a
futures commission merchant (``FCM'') or DCO to offset these contracts
in the OTC markets in the event of a default on such contracts by a
customer or an FCM, respectively, since a cleared-only contract could
be offset only by another cleared-only contract and (2) the
availability of the exchange-traded markets for coffee, sugar and cocoa
for hedging purposes, as well as the correspondence between the terms
of a cleared-only contract and a corresponding exchange-traded contract
for these products. Based on ICE Clear's proposal, the Commission found
that these cleared-only contracts correspond to transactions in a
potentially liquid OTC market and, importantly, that they were
economically equivalent to, and thus could be effectively hedged with
an exchange-listed futures contract.\5\
---------------------------------------------------------------------------
\5\ See 73 FR at 77018.
---------------------------------------------------------------------------
Accordingly, in order to ensure an effective means of risk
management for these cleared-only contracts, the Commission included
Condition 3(B) in the Previous Order, which required that the cleared-
only contracts be closely related to underlying futures contracts
traded on ICE Futures. Specifically, Condition 3(B) provides that:
``[t]he economic terms and the daily settlement prices of each
contract, agreement or transaction subject to this order must be
analogous to the economic terms, and equal to the daily settlement
prices, respectively, of a corresponding futures contract listed for
trading on ICE Futures.''
The fulfillment of this condition would enable an FCM carrying the
positions of a defaulting customer or ICE Clear carrying the positions
of a defaulting member, to economically hedge those positions in the
ICE Futures market by entering into an equal but opposite position in
the corresponding listed futures contract. Thus, the Commission
considered economic hedging in the exchange-listed market and actual
offset based on the OTC market as feasible risk management measures for
FCMs carrying cleared-only positions, as well as for ICE Clear itself.
II. The Current ICE Clear Petition
ICE Clear seeks to modify Condition 3(B) of the Previous Order to
allow it to clear OTC swaps in coffee, sugar and cocoa that have
economic terms analogous to the terms of corresponding futures
contracts listed for trading on ICE Futures with the exception of their
expiration dates. Such expiration dates would be permitted to be beyond
that of the corresponding futures contracts. These OTC swap contracts
are referred to herein as ``Long-Dated Swaps''. The clearing of Long-
Dated Swaps will require ICE Clear to establish independent settlement
prices for such swaps until there is a corresponding futures contract,
with the same expiration date, listed for trading on ICE
[[Page 34436]]
Futures. In order to establish such prices, ICE Clear represents that
it has developed specific pricing models for Long-Dated Swaps and will
use those models along with the best available market data to determine
settlement prices.\6\ In addition, ICE Clear represents that only ESPs
would be permitted to trade these swaps.
---------------------------------------------------------------------------
\6\ ICE Clear proposes to use a process similar to the industry-
standard pricing procedures for options pricing models used to value
longer dated options positions in less liquid contract months.
Moreover, ICE Clear represents that the market data used will
include: (i) Cleared-swaps data submitted to the clearinghouse; (ii)
year-on-year spread values for the underlying traded futures
contract for actively traded months; (iii) OTC transaction data
solicited from third-party brokers such as the major inter-dealer
brokers; (iv) indicative quotes provided by third-party brokers; and
(v) historical data.
---------------------------------------------------------------------------
ICE Clear has not requested an order pursuant to Section 4d of the
Act permitting customer positions in these Long-Dated Swap contracts
and the property collateralizing those positions to be commingled with
property and positions otherwise required to be held in customer
segregated accounts. Accordingly, positions in such contracts, and
property collateralizing such positions, would not be commingled with
positions and related collateral segregated pursuant to Section 4d of
the Act.\7\ Long-Dated Swaps, and property collateralizing such swaps,
would be treated as other cleared-only contracts by ICE Clear and its
clearing members that are registered as FCMs.
---------------------------------------------------------------------------
\7\ Pursuant to recent amendments to Part 190 of the
Commission's Regulations, 17 CFR Part 190, positions in these
contracts, and related collateral, could be included as Cleared OTC
Derivatives, if ICE Clear's rules or bylaws were to require them to
be segregated. The amendments were published at 75 FR 17297 (Apr. 6,
2010).
---------------------------------------------------------------------------
Eventually, however, the expiration date of a Long-Dated Swap will,
after the passage of time, correspond to that of a futures contract
listed for trading by ICE Futures (at that point, the Long-Dated Swap
would become an ``Aged Long-Dated Swap''). An Aged Long-Dated Swap
would be economically equivalent to an OTC swap that was first accepted
for clearing after the listing of a corresponding futures contract. As
a result, an Aged Long-Dated Swap would also satisfy all the
requirements specified in the Previous Order, and therefore, could be
carried in the customer segregated account pursuant to the provisions
of that order. ICE Clear would not establish an independent settlement
price for an Aged Long-Dated Swap, but instead would use the settlement
price of the corresponding listed futures contract.
III. Section 4(c) of the Commodity Exchange Act
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.\8\ 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. 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.'' \9\ Permitting the inclusion of Long-Dated Swaps
in the class of OTC agricultural swap transactions that can be cleared
by ICE Clear may foster both financial innovation and competition. It
may benefit the marketplace by providing ESPs with the ability to bring
together flexible negotiation with central counterparty guarantees, as
well as capital and operational efficiencies. ESPs also may precisely
hedge their cash positions with offsetting swap positions that match
closely in terms of expiration date. The Commission is requesting
comment on whether it should extend the permission to clear granted
previously to include those OTC swap contracts for which the expiration
date is beyond that of any corresponding futures contract listed for
trading on ICE Futures at the time of acceptance for clearing.
---------------------------------------------------------------------------
\8\ Section 4(c)(1) of the Act, 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.
\9\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179,
3213.
---------------------------------------------------------------------------
Section 4(c)(2) provides that the Commission may grant 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 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 duties under the Act.\10\ Section 4(c)(3) includes within
the term ``appropriate persons'' a number of specified categories of
persons deemed appropriate under the Act for entering into transactions
exempt by the Commission under Section 4(c). This includes persons the
Commission determines to be appropriate in light of their financial or
other qualifications, or the applicability of appropriate regulatory
protections. ESPs, as defined in Part 35 of the Commission's
regulations,\11\ and ICE Futures floor members deemed ESPs by the
Commission in the Order, will be eligible to submit Long-Dated Swap
transactions to ICE Clear for clearing. The proposed Order requires ICE
Clear, FCMs and ESPs acting pursuant to the Order to provide the market
and large-trader information described in Parts 16, 17 and 18 of the
Commission's regulations, in the manner described in
[[Page 34437]]
Parts 15, 16, 17 and 18 of the Commission's regulations, with respect
to all Cleared-Only Contracts, including Long-Dated Swaps. In light of
the above, the Commission is requesting comment as to whether the
extension of this exemption will affect the ability of the Commission
or any contract market or derivatives clearing organization to
discharge its regulatory or self-regulatory duties under the Act.
---------------------------------------------------------------------------
\10\ Section 4(c)(2) of the Act, 7 U.S.C. Sec. 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.
\11\ This definition includes many of the classes of persons
explicitly referred to in Act Section 4(c)(3) (e.g., a bank or trust
company) as well as some classes of persons who are included under
the category of Section 4(c)(3)(K) (``[s]uch other persons that the
Commission determines to be appropriate in light of their financial
or other qualifications, or the applicability of appropriate
regulatory protections'').
---------------------------------------------------------------------------
With respect to protecting the public interest, the Commission
notes that Congress has begun to take steps to promote transparency in
swap contracts. The financial services reform bills passed by the House
of Representatives \12\ and Senate \13\ each requires swaps \14\ to be
cleared, subject to certain exemptions, and further requires, with
respect to swaps that are subject to the clearing requirement, that
such swaps be executed on a board of trade designated as a contract
market under Section 5 of the Act (``DCM'') or on a swap execution
facility (``SEF'') registered or exempt under Section 5h of the Act
(where such a trading environment is available).\15\ Although these
bills have not completed the legislative process, the Commission
recognizes that future legislative enactments may require the execution
of cleared swaps on a DCM or SEF. Accordingly, the Commission seeks
comment, both as to the current proposed exemption, as well as more
generally with respect to Part 35 of the Commission's regulations, on
the issues raised by the pending legislation regarding trading
requirements for swap contracts, including agricultural swap contracts.
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\12\ H.R. 4173, 111th Cong. (2009).
\13\ H.R. 4173 EAS, 111th Cong. (2010).
\14\ We note that both bills include agricultural swap contracts
in their definition of swaps. See H.R. 4173 Sec. 3103(a) (at 575-
77); H.R. 4173 EAS Sec. 721(a) (at 535-38).
\15\ H.R. 4173 EAS Sec. 723(a) (at 570); H.R. 4173 Sec.
3103(a) (at 605). Each of the financial services reform bills also
provides that agricultural swaps may not be traded except pursuant
to CFTC enabling regulations. See H.R. 4173 Sec. 3103(a) (at 605)
and Sec. 3109 (at 646); H.R. 4173 EAS Sec. 723(c)(3) (at 577-78).
---------------------------------------------------------------------------
IV. Amended Order
The Previous Order is proposed to be revised to read as follows:
ORDER
(1) The Commission, pursuant to its authority under Section 4(c) of
the Commodity Exchange Act (``Act'') and subject to the conditions
below, hereby:
(a) Permits eligible swap participants (``ESPs'') to submit for
clearing, and futures commission merchants (``FCMs'') and ICE Clear
to clear, OTC agricultural swap contracts in coffee, sugar, and
cocoa (``Cleared-Only Contracts''); and
(b) Permits all ICE Futures floor members that are registered
with the Commission, when trading for their own accounts, to be
deemed ESPs for the purpose of entering into bilateral swap
transactions involving coffee, sugar, or cocoa to be cleared on ICE
Clear.
(2) The term ``Long-Dated Swap Contract'' shall be defined as a
Cleared-Only Contract with terms analogous to those of a
corresponding futures contract listed for trading on ICE Futures,
except that the expiration date of the swap contract is later than
that of any such futures contract. If the expiration date of a Long-
Dated Swap Contract, after the passage of time, is on or before that
of a futures contract listed for trading by ICE Futures, such OTC
swap contract will become an ``Aged Long-Dated Swap Contract''.
(3) The Commission, pursuant to its authority under Section 4d
of the Act and subject to the conditions below, hereby permits ICE
Clear and its clearing members that are registered FCMs, acting
pursuant to this order, to hold money, securities, and other
property, used to margin, guarantee, or secure Cleared-Only
Contracts (with the exception of Long-Dated Swap Contracts) and
belonging to customers that are ESPs (including customers that are
deemed ESPs in accordance with this order), 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 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 ICE Clear clearing member, consistent with
Section 4d of the Act and the regulations thereunder. This
permission shall also apply to an Aged Long-Dated Swap Contract.
(4) The 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 Cleared-Only Contracts as defined herein.
(b) The economic terms and the daily settlement prices of each
contract, agreement, or transaction subject to this order, except
for a Long-Dated Swap Contract, shall be analogous to the economic
terms, and equal to the daily settlement prices, respectively, of a
corresponding futures contract listed for trading on ICE Futures.
(c) ICE Clear shall establish a settlement price for each Long-
Dated Swap Contract for each trading day until such time as the
contract's expiration date corresponds to that of a futures contract
listed for trading on ICE Futures. ICE Clear shall make records
reflecting the basis for setting each such price and shall maintain
such records pursuant to Core Principle K.
(d) All contracts subject to this order shall be submitted for
clearing by an ICE Futures clearing member to ICE Clear pursuant to
ICE Clear rules.
(e) Each ICE Futures floor member, acting as an ESP pursuant to
this order, shall be the subject of a financial guarantee from a
member of ICE Clear covering the trading of the OTC swap contracts
subject to this order. The clearing member shall be registered with
the Commission as an FCM and shall clear for the floor member the
contracts, agreement, or transactions covered by the financial
guarantee.
(f) An ICE Futures floor member shall be prohibited from
entering into a transaction in a Cleared-Only Contract with another
ICE Futures floor member as the counterparty.
(g) ICE Clear and its clearing members shall mark to market each
Cleared-Only Contract on a daily basis in accordance with ICE Clear
rules.
(h) ICE Clear shall apply its margining system and calculate
performance bond rates for each Cleared-Only Contract in accordance
with its normal and customary practices.
(i) ICE Futures shall maintain appropriate compliance systems to
monitor the transactions of its floor members in the OTC swap
transactions permitted pursuant to this order.
(j) ICE Clear shall apply appropriate risk management procedures
with respect to transactions and open interest in all Cleared-Only
Contracts. ICE Clear shall conduct financial surveillance and
oversight of its members clearing Cleared-Only Contracts, and shall
conduct oversight sufficient to assure ICE Clear that each such
member has the appropriate operational capabilities necessary to
manage defaults in such contracts. ICE Clear and its clearing
members, acting pursuant to this order, shall take all other steps
necessary and appropriate to manage risk related to clearing
Cleared-Only Contracts.
(k) ICE Clear shall make available open interest and settlement
price information for the Cleared-Only Contracts on a daily basis in
the same manner as for futures contracts listed for trading on ICE
Futures.
(l) ICE Futures shall establish and maintain a coordinated
market surveillance program that encompasses the Cleared-Only
Contracts and the corresponding futures contracts listed by ICE
Futures on its designated contract market. ICE Futures shall adopt
position accountability levels for each cleared-only contract that
are appropriate in light of the position accountability levels
applicable to the corresponding futures contracts listed for trading
on ICE Futures.
(m) Cleared-only contracts shall not be treated as fungible with
any contract listed for trading on ICE Futures.
(n) 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.
(o) ICE Futures shall provide to the Commission the types of
information
[[Page 34438]]
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.
(p) ICE Clear shall apply large trader reporting requirements to
all Cleared-Only Contracts in accordance with its rules, and each
FCM and ESP acting pursuant to this order shall provide to the
Commission the types of information described in Parts 17 and 18 of
the Commission's regulations in the manner described in Parts 15,
17, and 18 of the Commission's regulations with respect to all
Cleared-Only Contracts in which it participates.
(q) ICE Clear and ICE Futures 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.
V. Request for Comment
The Commission requests comment on all aspects of the issues
presented by this amended exemption request.
VI. Related Matters
A. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (``PRA'') \16\ 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 amended exemption would not, if
approved, require a new collection of information from any entities
that would be subject to the exemption.
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\16\ 44 U.S.C. 3507(d).
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B. Cost-Benefit Analysis
Section 15(a) of the Act,\17\ 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.
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\17\ 7 U.S.C. 19(a).
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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 is considering the costs and benefits of an amended
exemption 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 contracts
that are the subject of the amended exemption request will only be
entered into by persons who are ``appropriate persons'' as set forth in
Section 4(c) of the Act.
2. Efficiency, competition, and financial integrity. Extending the
exemption granted under Part 35 to allow the clearing of Long-Dated
Swap Contracts may promote liquidity and transparency in the markets
for OTC derivatives in coffee, sugar, and cocoa, as well as for futures
on those commodities. Extending the exemption also may promote
financial integrity by increasing the benefits of clearing in these OTC
markets.
3. Price discovery. Price discovery may be enhanced through market
competition.
4. Sound risk management practices. Clearing of Long-Dated Swap
Contracts may foster risk management by the participant counterparties.
ICE Clear's risk management practices in clearing these transactions
would be subject to the Commission's supervision and oversight.
5. Other public interest considerations. The requested amended
exemption may encourage market competition in agricultural derivative
products without unnecessary regulatory burden. As noted above,
however, there are pending financial services reform bills that would
affect the trading and clearing requirements for agricultural swap
contracts.
After considering these factors, the Commission has determined to
seek comment on the request for an amended exemption order as discussed
above. The Commission also invites public comment on its application of
the cost-benefit provision.
* * * * *
Issued in Washington, DC, on June 14, 2010 by the Commission.
Sauntia S. Warfield,
Assistant Secretary of the Commission.
[FR Doc. 2010-14682 Filed 6-16-10; 8:45 am]
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