[Federal Register Volume 72, Number 234 (Thursday, December 6, 2007)]
[Notices]
[Pages 68862-68865]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-23635]


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COMMODITY FUTURES TRADING COMMISSION


Notice of Request for Comment on Exemption Requests

AGENCY: Commodity Futures Trading Commission.

    Requests to extend, pursuant to the exemptive authority in section 
4(c) of the Commodity Exchange Act, the exemption granted under Part 35 
of the Commission's regulations to certain over-the-counter swaps that 
do not otherwise meet certain of the requirements imposed by Commission 
Regulation 35.2 and to determine that, subject to certain conditions, 
floor brokers and floor traders are eligible swap participants.
SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or 
``Commission'') is requesting comment on whether to extend the 
exemption granted under Part 35 of the Commission's regulations to 
certain over-the-counter (``OTC'') swaps that do not meet certain of 
the requirements otherwise imposed by Commission Regulation 35.2. This 
exemption has been requested by ICE Clear U.S., Inc. (``ICE Clear''), a 
registered derivatives clearing organization. The Commission is also 
requesting comment on whether ICE Futures U.S., Inc. (``ICE Futures 
U.S.'') floor traders and floor brokers who are registered with the 
Commission, when trading for their own accounts, may be determined to 
be eligible swap participants and permitted to enter into certain 
specified OTC swap transactions. This exemption has been requested by 
ICE Futures U.S., a designated contract market. Authority for extending 
this relief is found in Section 4(c) of the Commodity Exchange Act 
(``CEA'' or ``Act'').\1\
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    \1\ 7 U.S.C. Sec.  6(c).

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DATES: Comments must be received on or before January 7, 2008.

ADDRESSES: Comments may be submitted by any of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov/http://frwebgate.access.gpo/cgi-bin/leaving. Follow the instructions 
for submitting comments.
     E-mail: [email protected]. Include ``ICE Clear Section 
4(c) 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 http://www.CFTC.gov/.

FOR FURTHER INFORMATION CONTACT: Lois J. Gregory, Special Counsel, 816-
960-7719, [email protected], or Robert B. Wasserman, Associate 
Director, 202-418-5092, [email protected], Division of Clearing and 
Intermediary Oversight; or Duane C. Andresen, Special Counsel, 202-418-
5492, [email protected], Division of Market Oversight, Commodity 
Futures Trading Commission, Three Lafayette Centre, 1151 21st Street, 
NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION: 

I. The ICE Clear Petition

    ICE Clear, the clearing organization for ICE Futures U.S., seeks to 
offer eligible swap participants who enter into certain bilateral swap 
transactions involving coffee, sugar, or cocoa the opportunity to 
submit them to ICE Clear for clearing. ICE Clear has represented that 
swap transactions in various agricultural products, including coffee, 
sugar, and cocoa, currently trade in OTC markets exempt from provisions 
of the CEA pursuant to Part 35 of the Commission's regulations. These 
are commonly swap agreements entered into by participants exchanging 
fixed for floating reference prices. Participants in these markets 
include trade houses, commodity lenders, producers, end users, and 
large speculators.
    Part 35 of the Commission's regulations \2\ exempts swap agreements 
and eligible persons entering into these agreements from most 
provisions of the Act.\3\ The term ``swap agreement'' is defined to 
include, among other types of agreements, ``a * * * commodity swap,'' 
\4\ which latter term includes swaps on agricultural products.\5\ Part 
35 was promulgated pursuant to authority provided to the Commission in 
Section 4(c) of the Act to exempt certain transactions in order to 
promote innovation and competition.\6\ Various exemptions and 
exclusions were subsequently added to the Act by the Commodity Futures 
Modernization Act

[[Page 68863]]

of 2000 (``CFMA''),\7\ but none apply to agricultural contracts.\8\
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    \2\ 17 CFR Part 35.
    \3\ Jurisdiction is retained for, inter alia, provisions of the 
CEA proscribing fraud and manipulation. See Commission Reg. Sec.  
35.2, 17 CFR Sec.  35.2 (Commission regulations are hereinafter 
cited as ``Reg. Sec.  --'').
    \4\ Reg. Sec.  35.1(b)(1)(i).
    \5\ ``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.''
    \6\ See 58 F.R. 5587 (January 22, 1993).
    \7\ Pub. L. 106-554, 114 Stat. 2763 (2000).
    \8\ See, e.g., CEA Sec. Sec.  2(d), (g) and (h).
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    Part 35 requires, inter alia, that a swap agreement not be part of 
a fungible class of agreements that are standardized as to their 
material economic terms \9\ 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.\10\ Under the 
arrangement that ICE Clear seeks to establish, OTC contracts would be 
submitted for clearing, a process that would extinguish the original 
OTC contract and replace it with an equivalent number of cash-settled 
``cleared-only'' futures contracts, with the clearinghouse interposed 
as central counterparty.\11\ A cleared-only contract could be offset by 
another cleared-only contract. Thus, clearing of these OTC contracts 
would result in contracts that are fungible with other cleared-only 
contracts with approximately equivalent terms. In addition, the 
creditworthiness of the counterparty would not be a consideration. 
Accordingly, the OTC contracts ICE Clear would clear in the fashion 
proposed would not fulfill all of the conditions of Part 35.
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    \9\ Reg. Sec.  35.2(b).
    \10\ Reg.Sec.  35.2(c).
    \11\ The OTC transaction would be required to involve the 
coffee, sugar, or cocoa underlying the corresponding cleared-only 
contract. The unit size, quality, and other specifications for the 
OTC coffee, sugar, or cocoa transaction would be approximately 
equivalent to the unit size, quality, and other specifications of 
the corresponding physical delivery futures contract listed on ICE 
Futures.
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    However, Part 35 further invites ``any person [to] apply to the 
Commission for exemption from any of the provisions of the Act * * * 
for other arrangements or facilities.'' ICE Clear has petitioned the 
Commission for an order under Section 4(c) of the Act that would permit 
cleared OTC swaps involving coffee, sugar, and cocoa to be exempt on 
the same basis as other swaps are exempt under Part 35.

II. The ICE Futures U.S. Petition

    ICE Futures U.S. seeks to permit floor traders and floor brokers 
(collectively, floor members) who are registered with the Commission, 
when trading for their own accounts, to enter into the OTC swap 
transactions discussed above. Part 35, however, defines the term 
eligible swap participant (``ESP'') to include floor members only as 
follows: (1) Floor members generally who are other than natural persons 
or proprietorships; (2) floor members who are natural persons, provided 
they have total assets exceeding at least $10,000,000; or (3) floor 
members who are proprietorships, provided they have total assets 
exceeding at least $10,000,000, or have the obligations under the swap 
agreement guaranteed or otherwise supported by certain other ESPs, or 
have a net worth of $1,000,000 and enter into the swap agreement in 
connection with the conduct of their business or to manage the risk of 
an asset or liability owned or incurred in the conduct of their 
business or reasonably likely to be owned or incurred in the conduct of 
their business.\12\ ICE Futures U.S. has petitioned the Commission for 
an order under Section 4(c) of the Act that would permit all ICE 
Futures U.S. floor members who are registered with the Commission, when 
trading for their own accounts, to be ESPs for the purpose of entering 
into bilateral swap transactions involving agricultural commodities as 
described above.
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    \12\ Reg. Sec.  35.1(b)(2)(x).
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    ICE Futures U.S. represents that all floor members entering into 
the swap transactions would be sophisticated and knowledgeable in the 
relevant products and markets and would be fully capable of evaluating 
the transactions. Further, because the transaction results in a 
cleared-only futures contract, floor members would not be subject to 
counterparty credit risk and would rely on the credit of ICE CLEAR and 
their clearing futures commission merchants (``FCMs'').
    The Commission anticipates that any Section 4(c) order issued in 
response to this request would be subject to the following conditions:
    (1) The contracts, agreement or transactions would have to be 
executed pursuant to the requirements of Part 35, as modified herein.
    (2) The ICE Futures U.S. floor member would have to obtain a 
financial guarantee for the OTC swap transactions from an ICE Futures 
U.S. clearing member that:
    (i) Is registered with the Commission as an FCM; and
    (ii) Clears the OTC swap transactions thus guaranteed.
    (3) Permissible OTC swap transactions would be limited to 
``cleared-only'' contracts in the following eligible products: cocoa, 
coffee and sugar.
    (4) Permissible OTC swap transactions would have to be submitted 
for clearance by an ICE Futures U.S. clearing member to ICE Clear 
pursuant to ICE Clear Rules.
    (5) An ICE Futures U.S. floor member could not enter into OTC swap 
transactions with another ICE Futures U.S. floor member as the 
counterparty for ICE Clear ``cleared-only'' contracts.
    (6) ICE Futures U.S. would maintain appropriate compliance systems 
in place to monitor the OTC swap transactions of its floor members.\13\
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    \13\ These conditions are substantially similar to the 
conditions included in two previously issued Commission orders that 
permit floor members to be eligible contract participants (``ECPs'') 
pursuant to Section 1a(12)(C) of the Act, 7 U.S.C. 1a(12)(C). On 
March 14, 2006, the Commission issued an order that permitted 
Chicago Mercantile Exchange floor members to be ECPs with respect to 
OTC transactions in excluded commodities entered into pursuant to 
Section 2(d)(1) of the Act. On August 3, 2006, the Commission issued 
an order that permitted New York Mercantile Exchange floor members 
to be ECPs with respect to OTC transactions in exempt commodities 
entered into pursuant to Section 2(h)(1) of the Act.
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III. Section 4(c) of the Commodity Exchange Act

    Section 4(c)(1) of the CEA empowers the CFTC to ``promote 
responsible economic or financial innovation and fair competition'' by 
exempting any transaction or class of transactions from any of the 
provisions of the CEA (subject to exceptions not relevant here) where 
the Commission determines that the exemption would be consistent with 
the public interest.\14\ The Commission may grant such an exemption by 
rule, regulation, or order, after notice and opportunity for hearing, 
and may do so on application of any person or on its own initiative.
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    \14\ Section 4(c)(1) of the CEA, 7 U.S.C. 6(c)(1), provides in 
full that:
    In order to promote responsible economic or financial innovation 
and fair competition, the Commission by rule, regulation, or order, 
after notice and opportunity for hearing, may (on its own initiative 
or on application of any person, including any board of trade 
designated or registered as a contract market or derivatives 
transaction execution facility for transactions for future delivery 
in any commodity under section 7 of this title) exempt any 
agreement, contract, or transaction (or class thereof) that is 
otherwise subject to subsection (a) of this section (including any 
person or class of persons offering, entering into, rendering advice 
or rendering other services with respect to, the agreement, 
contract, or transaction), either unconditionally or on stated terms 
or conditions or for stated periods and either retroactively or 
prospectively, or both, from any of the requirements of subsection 
(a) of this section, or from any other provision of this chapter 
(except subparagraphs (c)(ii) and (D) of section 2(a)(1) of this 
title, except that the Commission and the Securities and Exchange 
Commission may by rule, regulation, or order jointly exclude any 
agreement, contract, or transaction from section 2(a)(1)(D) of this 
title), if the Commission determines that the exemption would be 
consistent with the public interest.
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    In enacting Section 4(c), Congress noted that the goal of the 
provision ``is to give the Commission a means of providing certainty 
and stability to existing and emerging markets so that financial 
innovation and market development can proceed in an effective

[[Page 68864]]

and competitive manner.''\15\ Permitting the clearing of OTC coffee, 
sugar, and cocoa transactions by ICE Clear, as well as permitting ICE 
Futures U.S. floor members to trade such products, as discussed above, 
may foster both financial innovation and competition. It may benefit 
the marketplace by providing ESPs the ability to bring together 
flexible negotiation with central counterparty guarantees and capital 
efficiencies. The CFTC is requesting comment on whether it should 
exempt the OTC transactions in coffee, sugar, and cocoa that are 
proposed to be cleared through ICE Clear as described above, in the 
same fashion as are other contracts that are exempt pursuant to Part 35 
of the Commission's regulations. The CFTC is also requesting comment on 
whether it should determine ICE Futures U.S. floor members, subject to 
certain conditions, to be ESPs for the purpose of entering into the OTC 
transactions in coffee, sugar and cocoa.
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    \15\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179, 
3213.
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    Section 4(c)(2) provides that the Commission may grant exemptions 
only when it determines that the requirements for which an exemption is 
being provided should not be applied to the agreements, contracts, or 
transactions at issue, and the exemption is consistent with the public 
interest and the purposes of the CEA; that the agreements, contracts or 
transactions will be entered into solely between appropriate persons; 
and that the exemption will not have a material adverse effect on the 
ability of the Commission or any contract market or derivatives 
transaction execution facility to discharge its regulatory or self-
regulatory responsibilities under the CEA.\16\
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    \16\ Section 4(c)(2) of the CEA, 7 U.S.C. 6(c)(2), provides in 
full that:
    The Commission shall not grant any exemption under paragraph (1) 
from any of the requirements of subsection (a) of this section 
unless the Commission determines that--
    (A) the requirement should not be applied to the agreement, 
contract, or transaction for which the exemption is sought and that 
the exemption would be consistent with the public interest and the 
purposes of this Act; and
    (B) the agreement, contract, or transaction--
    (i) will be entered into solely between appropriate persons; and
    (ii) will not have a material adverse effect on the ability of 
the Commission or any contract market or derivatives transaction 
execution facility to discharge its regulatory or self-regulatory 
duties under this Act.
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    The purposes of the CEA include ``promot[ing] responsible 
innovation and fair competition among boards of trade, other markets, 
and market participants.'' \17\ It may be consistent with these and the 
other purposes of the CEA, and with the public interest, for the OTC 
contracts described herein and submitted for clearing as described 
herein to be exempt as are other contracts under Part 35 of the 
Commission's regulations. However, the exception of agricultural 
commodities from the exemptions and exclusions provided under the CFMA 
for OTC transactions may be relevant to the analysis. Accordingly, the 
CFTC is requesting comment as to whether an exemption from the 
requirements of the CEA should be granted in the context of these 
transactions and these potential participants.
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    \17\ CEA Sec.  section 3(b), 7 U.S.C. 5(b). See also CEA Sec.  
section 4(c)(1), 7 U.S.C. Sec.  6(c)(1) (purpose of exemptions is 
``to promote responsible economic or financial innovation and fair 
competition'').
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    Section 4(c)(3) includes within the term ``appropriate persons'' a 
number of specified categories of persons 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, will be eligible to submit 
for clearing to ICE Clear the OTC transactions described above. That 
definition includes many of the classes of persons explicitly referred 
to in CEA 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''). The Commission 
is proposing to include as appropriate persons for this extended relief 
under Part 35 all of the persons who meet the definition of ESP in 
Commission Regulation Sec.  35.1(b)(2). For the purposes of the 
extended relief requested by ICE Futures U.S., the Commission is also 
proposing to expand upon this list of appropriate persons to include, 
as discussed above, ICE Futures U.S. floor members. The Commission 
seeks comment on this determination.
    In light of the above, the Commission also is requesting comment as 
to whether these exemptions will affect its ability to discharge its 
regulatory responsibilities under the CEA, or with the self-regulatory 
duties of any contract market or derivatives clearing organization.

IV. Request for Comment

    The Commission requests comment on all aspects of the issues 
presented by these exemption requests.

V. Related Matters

A. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \18\ 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 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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    \18\ 44 U.S.C. Sec.  3507(d).
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B. Cost-Benefit Analysis

    Section 15(a) of the CEA,\19\ requires the Commission to consider 
the costs and benefits of its action before issuing an order under the 
CEA. By its terms, Section 15(a) 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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    \19\ 7 U.S.C. Sec.  19(a).
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    Section 15(a) of the CEA further specifies that costs and benefits 
shall be evaluated in light of five broad areas of market and public 
concern: protection of market participants and the public; efficiency, 
competitiveness, and financial integrity of futures markets; price 
discovery; sound risk management practices; and other public interest 
considerations. Accordingly, the Commission could in its discretion 
give greater weight to any one of the five enumerated areas and could 
in its discretion determine that, notwithstanding its costs, a 
particular order was necessary or appropriate to protect the public 
interest or to effectuate any of the provisions or to accomplish any of 
the purposes of the CEA.
    The Commission is considering the costs and benefits of an 
exemptive order in light of the specific provisions of Section 15(a) of 
the CEA, as follows:
    1. Protection of market participants and the public. The contracts 
that are the subject of the exemptive 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

[[Page 68865]]

these swap agreements to allow them to be cleared may promote liquidity 
and transparency in the markets for OTC derivatives on coffee, sugar, 
and cocoa, as well as on futures on those commodities. Extending the 
exemption also may promote financial integrity by providing the 
benefits of clearing to these OTC markets. Determining ICE Futures U.S. 
floor members to be ESPs may increase the flow of trading information 
between markets, increase the pool of potential counterparties for 
participants trading OTC, and provide essential trading expertise to 
the market.
    3. Price discovery. Price discovery may be enhanced through market 
competition.
    4. Sound risk management practices. Clearing of OTC transactions 
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 exemption 
may encourage market competition in agricultural derivative products 
without unnecessary regulatory burden.
    After considering these factors, the Commission has determined to 
seek comment on the exemption requests as discussed above. The 
Commission also invites public comment on its application of the cost-
benefit provision.
* * * * *

    Issued in Washington, DC, on November 30, 2007 by the 
Commission.
David A. Stawick,
Secretary of the Commission.
 [FR Doc. E7-23635 Filed 12-5-07; 8:45 am]
BILLING CODE 6351-01-P