[Federal Register Volume 73, Number 51 (Friday, March 14, 2008)]
[Notices]
[Pages 13867-13870]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-5203]


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COMMODITY FUTURES TRADING COMMISSION

RIN 3038-AC52


Proposed Exemptive Order for ST Gold Futures Contracts

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed order and request for comment.

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SUMMARY: The Commodity Futures Trading Commission (Commission) is 
proposing to exempt certain transactions in physically delivered 
futures contracts based on streetTRACKS[reg] Gold Trust Shares (ST gold 
futures contracts) \1\ from those provisions of the Commodity Exchange 
Act (CEA or Act),\2\ and the Commission's regulations thereunder, that 
are inconsistent with the trading and clearing of ST gold futures 
contracts as security futures. The proposed exemption would be 
conditioned on the compliance of transactions in ST gold futures 
contracts with the requirements established for security futures. The 
authority for the issuance of this exemption is found in Section 4(c) 
of the Act.\3\
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    \1\ streetTRACKS[reg] is a registered service mark of State 
Street Corporation, an affiliate of State Street Global Markets, 
LLC, the marketing agent for the streetTRACKS[reg] Gold Trust.
    \2\ 7 U.S.C. 1 et seq.
    \3\ 7 U.S.C. 6(c).

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DATES: Comments must be received on or before March 31, 2008.

ADDRESSES: Comments should be sent to the Commodity Futures Trading 
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, 
DC 20581, attention: Office of the Secretariat. Comments may be sent by 
facsimile to 202.418.5521, or by e-mail to [email protected]. 
Reference should be made to the ``Proposed Exemptive Order for ST Gold 
Futures Contracts.'' Comments may also be submitted through the Federal 
eRulemaking Portal at http://www.regulations.gov. All comments received 
will be posted without change to http://www.CFTC.gov.

FOR FURTHER INFORMATION CONTACT: Bruce Fekrat, Special Counsel, Office 
of the Director (telephone 202.418.5578, e-mail [email protected]), 
Division of Market Oversight, Commodity Futures Trading Commission, 
Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Introduction

    In correspondence dated October 26, 2007, OneChicago, LLC 
(OneChicago or the Exchange),\4\ a contract market designated with the 
Commission pursuant to Sections 5 and 6(a) of the Act, proposed and 
requested Commission approval to list for trading ST gold futures 
contracts as security futures.\5\ OneChicago is notice-registered with 
the Securities and Exchange Commission (SEC) as a national securities 
exchange under Section 6(g) of the Securities Exchange Act of 1934 ('34 
Act) for the purpose of listing and trading security futures products. 
The approval request was filed pursuant to Section 5c(c)(2) of the Act 
and Commission Regulations 40.5 and 41.23.\6\ OneChicago submitted its 
request for approval under the 45-day fast-track review period 
established by Commission Regulation 40.5. The fast-track review period 
for the Exchange's submission was scheduled to expire on December 10, 
2007. The review period was extended by the Director of the

[[Page 13868]]

Division of Market Oversight, pursuant to Regulations 40.5(c) and 
40.7(a)(1), by another 45 days beyond December 10, 2007 to January 24, 
2008 on the grounds that the ST gold futures contracts raised novel and 
complex issues that required additional time for review.\7\ By letter 
dated January 23, 2008, the Exchange, upon the request of the 
Commission's staff, voluntarily extended the review period to March 17, 
2008.\8\ On February 26, 2008, the Exchange gave a further voluntary 
extension of the review period until April 30, 2008.
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    \4\ OneChicago is jointly owned by the CME Group, Inc., IB 
Exchange Corp., and the Chicago Board Options Exchange.
    \5\ In accordance with Section 2(a)(9)(B)(i) of the Act, 
Commission staff forwarded the new contract filing to the Securities 
and Exchange Commission, the U.S. Department of Treasury and the 
Board of Governors of the Federal Reserve System on October 29, 
2007. No comments were received in response to this correspondence. 
On January 4, 2008, the Exchange filed a rule amendment concerning 
minimum price fluctuations to supplement its initial submission.
    \6\ 7 U.S.C. 7a-2(c)(2), 17 CFR 40.5, 41.23.
    \7\ Commission Regulations 40.5(c) and 40.7(a)(1) allow the 
Commission, and certain staff acting pursuant to delegated 
authority, to extend the 45-day fast-track review period by an 
additional 45 days if the product raises novel or complex issues 
requiring additional time for review. 17 CFR 40.5(c), 40.7(a)(1).
    \8\ Section 5c(c) of the Act requires the Commission to approve 
any designated contract market instrument submitted for approval 
within 90 days after the submission of the request unless (1) it 
finds that the trading or clearing of the instrument would violate 
the Act (or the Commission's regulations), or (2) the person 
submitting the request for approval agrees to extend the period of 
review beyond the 90-day time limitation.
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II. Description of the Underlying Commodity

    ST gold futures contracts would overlie 100 Shares of the 
streetTRACKS[reg] Gold Trust (Trust).\9\ The Trust was formed under New 
York law pursuant to a trust indenture on November 12, 2004. World Gold 
Trust Services, LLC, a wholly owned limited liability company of the 
World Gold Council,\10\ is the sponsor of the Trust. In addition, The 
Bank of New York is the trustee of the Trust, HSBC Bank USA, N.A. is 
the custodian of the Trust, and State Street Global Markets, LLC is the 
marketing agent for the Trust.\11\ The Trust presently does not engage 
in the business of investing or trading securities or commodity futures 
or options contracts. As a result, the Trust is not registered as an 
investment company under the Investment Company Act of 1940 and it is 
not managed by a commodity pool operator registered under the CEA.
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    \9\ By its terms, an ST gold futures contract would expire on 
the third Friday of each contract month. The contract would not be 
subject to speculative position limits prior to the last five days 
of trading. During the last five trading days, however, speculative 
positions would be limited to 13,500 contracts, net long or short. 
Positions in ST gold futures contracts would become reportable to 
OneChicago when equal to or above 200 contracts. Positions in ST 
gold futures contracts would become reportable to the Commission 
when equal to or above 1,000 contracts.
    \10\ The World Gold Council (founded in 1987) is a not-for-
profit association registered under the laws of Switzerland. The 
Council is funded by gold mining companies and is tasked, in part, 
with increasing the demand for gold through marketing initiatives 
and lowering regulatory barriers to the widespread ownership of gold 
products. About the World Gold Council, available at http://www.gold.org/discover/about_us/index.html.
    \11\ Prospectus for the Trust's offering of Shares (July 24, 
2007), available at http://www.streettracksgoldshares.com/pdf/streetTRACKS.pdf (provides a detailed description of the Trust and 
its operations).
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    The Trust, from time to time, creates, issues, and redeems Shares 
which represent fractional undivided beneficial interests in the assets 
of the Trust. The sole assets of the Trust consist of gold bullion and 
limited amounts of cash. Accordingly, the value of each Share will 
fluctuate with the value of the Trust's holdings,\12\ which in turn is 
dependent on the spot price of gold.\13\ That value may be found by 
dividing the aggregate value of the gold and cash held by the Trust 
less applicable fees and expenses by the quantity of Shares outstanding 
at any specific moment in time.\14\ The Trust is not actively managed 
and does not engage in any investment activities that are designed to 
avoid losses or profit from changes in the price of gold. Rather, the 
investment purpose of the Trust is to issue Shares that will track the 
spot price of gold and thereby give shareholders the opportunity to 
gain exposure to the commodity's price volatility.
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    \12\ The Net Asset Value (NAV) of the Trust is the aggregate 
value of the Trust's assets less its liabilities which include (1) 
fees paid to the Sponsor, (2) fees paid to the Trustee, (3) fees 
paid to the Custodian, (4) fees paid to the Marketing Agent, and (5) 
certain administrative expenses assessed as fees.
    \13\ In determining the NAV of the Trust, the Trustee values the 
gold held by the Trust on the basis of the price of an ounce of gold 
as set by the afternoon session of the London Bullion Market 
Association's twice-daily fix of the price of gold. The gold fix is 
performed by five members of the association. HSBC Bank USA, NA, the 
Custodian of the Trust, is one of five gold fixing members.
    \14\ By way of a simplified example, assume that the Trust holds 
10,000 ounces of gold, the spot price of gold is $900 per ounce, and 
that there are 50,000 Shares outstanding. Assume further that the 
Trust has accrued fees and expenses of $50,000. Under this example, 
the value of the Trust's holdings of gold would be $8,950,000, and 
the value of each Share would be 1/50,000 of $8,950,000, or $179.
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    The Trust, on an ongoing basis, will only issue Shares to, and only 
redeem Shares from, Authorized Participants in baskets of 100,000 
Shares (ST Share Baskets). An Authorized Participant must (1) be a 
participant in the Depository Trust Company that is a registered 
broker-dealer or other securities market participant (such as a bank or 
other financial institution) that is not required to register as a 
broker-dealer to engage in securities transactions, (2) have entered 
into an agreement with the Trust and the Sponsor of the Trust, and (3) 
have established an unallocated gold account (paper transfer account) 
with the Custodian. Upon the payment of a transaction fee, Authorized 
Participants may purchase ST Share Baskets by depositing gold (and cash 
if necessary) in an amount equal to the NAV of an ST Share Basket per 
purchased basket. Likewise, Authorized Participants may redeem ST Share 
Baskets in exchange for an amount of gold (and cash if necessary) that 
corresponds to the NAV of an ST Share Basket per redeemed basket. All 
transfers of gold are accomplished through paper transfers, as opposed 
to physical transfers of gold, and are cleared through the clearing 
members of the London Bullion Market Association. Such members utilize 
mutually maintained unallocated gold accounts for the settlement of 
proprietary over-the-counter trades as well as for the settlement of 
client transfers.
    Upon purchasing ST Share Baskets, Authorized Participants may 
divide the baskets into individual Shares for resale. Trust Shares are 
registered as securities under the Securities Act of 1933 ('33 Act) and 
listed on the NYSE Arca Exchange under the ticker symbol GLD.\15\ The 
continuous Share creation, sale, resale, and redemption process, 
coupled with a highly liquid market, creates an arbitrage mechanism 
that functions to keep the Shares trading at or near the NAV of the 
Trust's gold holdings.\16\ Authorized Participants act as arbitrageurs 
by taking advantage of significant premiums or discounts in the trading 
price of outstanding Shares relative to the spot price of gold. If 
individual exchange-traded Shares trade at a price that is below the 
spot market price of gold, Authorized Participants will purchase and 
aggregate Shares into ST Share Baskets and redeem the Baskets with the 
Trust for an amount of gold with an aggregate value that is greater 
than the aggregate trading value of the individual Shares that comprise 
the redeemed ST Share Baskets. Similarly, if ST Shares are trading at a 
price that is above the spot market price of gold, Authorized 
Participants will deposit gold with the Trust in exchange for ST Share 
Baskets that can then be divided into individual Shares for resale to 
retail investors at a premium.
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    \15\ NYSE Arca is the electronic equities trading facility of 
NYSE Arca Equities, Inc., a wholly-owned subsidiary of NYSE 
Euronext.
    \16\ See Elisabeth Hehn, Exchange Traded Funds: Structure, 
Regulation and Application of a New Fund Class (January 16, 2006).
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III. Section 4(c) of the Commodity Exchange Act

    Section 4(c)(1) of the CEA empowers the Commission to ``promote

[[Page 13869]]

responsible economic or financial innovation and fair competition'' by 
exempting any transaction or class of transactions \17\ from any of the 
provisions of the Act upon determining that the exemption would be 
consistent with the public interest.\18\ Section 4(c)(2) of the Act 
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; that 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 designated contract market or 
derivatives transaction execution facility to discharge its regulatory 
or self-regulatory responsibilities under the CEA.\19\ With respect to 
the term ``appropriate persons,'' Section 4(c)(3) of the Act enumerates 
several categories of appropriate persons and provides in subparagraph 
(K) that the term shall include ``[s]uch other persons that the 
Commission determines to be appropriate in light of * * * the 
applicability of appropriate regulatory protections.''
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    \17\ Covered transactions are subject to certain exceptions not 
relevant to the publication of this proposal.
    \18\ Section 4(c)(1) of the CEA, 7 U.S.C. Sec. 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.
    \19\ Section 4(c)(2) of the CEA, 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.
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    In order for the Commission to approve the Exchange's request to 
list for trading ST gold futures contracts as security futures, it 
would have to find that the interest that would underlie an ST gold 
futures contract is a security. However, if the contracts are 
considered to be futures contracts based on a commodity that is not a 
security, then they would be subject to the exclusive jurisdiction of 
the CFTC under CEA Section Sec.  2(a)(1)(A), and listing the contract 
for trading as a security future as the Exchange proposes would violate 
the CEA.\20\
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    \20\ 7 U.S.C. Sec.  2(a)(1)(A). Security futures are subject to 
joint regulation by the CFTC and the SEC under Section 2(a)(1)(D) of 
the CEA, 7 U.S.C. Sec. 2(a)(1)(D).
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    ST gold futures contracts would be based on an innovative and 
highly successful product that efficiently and transparently creates 
exposure to the spot price of gold by combining attributes of exchange 
traded financial products, cash commodity ownership interests, and 
speculative participation in the price volatility of a commodity. The 
jurisdictional classification of the underlying instrument, whether as 
a security or a commodity that is not a security, is not 
straightforward.
    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.'' \21\ Accordingly, the Commission proposes to 
use its authority under Section 4(c) of the Act to exempt transactions 
in ST gold futures contracts that would be listed for trading on 
OneChicago from those provisions of the Act and the Commission's 
regulations thereunder that, if the underlying were considered to be a 
commodity that is not a security, would be inconsistent with the 
trading and clearing of ST gold futures contracts as security 
futures.\22\ The proposed exemption would require that transactions in 
ST gold futures contracts comply with the requirements established for 
transactions in security futures by the Act and the Commission's 
regulations thereunder.\23\
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    \21\ H.R. Conf. Rep. No. 102-978, 1992 U.S.C.C.A.N. 3179, at 
3213 (H.R. Conf. Rep.).
    \22\ The Commission recently issued a similar order with respect 
to exchange traded credit default products. See Order Exempting the 
Trading and Clearing of Certain Credit Default Products Pursuant to 
the Exemptive Authority in Section 4(c) of the Commodity Exchange 
Act, 72 FR 32079 (June 11, 2007).
    \23\ Transactions in ST gold futures contracts would be subject 
to the provisions of the securities laws, including any applicable 
provision of the '33 and '34 Acts.
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    In proposing to exercise its exemptive authority under Section 4(c) 
of the Act, the Commission is not required to, and does not, find 
either that an ST gold futures contract is based on a security, or that 
it is not based on a security and is thereby subject to exclusive 
regulation under the CEA. In this regard, the House-Senate Conference 
Committee in the legislative process leading to the enactment of CEA 
Section 4(c) noted that:

    [T]his provision provides flexibility for the Commission to 
provide legal certainty to novel instruments where the determination 
as to jurisdiction is not straightforward. Rather than making a 
finding as to whether a product is or is not a futures contract, the 
Commission in appropriate cases may proceed directly to issuing an 
exemption.\24\
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    \24\ H.R. Conf. Rep. at 3214-3215.

    Futures contracts based on the underlying Shares of the Trust are 
``novel instruments'' and, as noted above, the ``determination as to 
[their] jurisdiction is not straightforward.'' Given the potential 
usefulness of ST gold futures contracts to the significant market for 
the Shares that would underlie such contracts, as well as all gold-
linked markets, the Commission believes that this may be an appropriate 
case for issuing an exemption without making a finding as to the 
precise nature of the underlying Shares of the Trust.
    Exempting transactions in ST gold futures contracts from the 
provisions of the Act, and the Commission's regulations thereunder, 
that are inconsistent with the trading and clearing of security 
futures, and thereby permitting the trading of ST gold futures 
contracts as security futures on OneChicago, may foster both financial 
innovation by expeditiously bringing an innovative derivatives product 
to market, and competition by not potentially excluding other similarly 
innovative products from trading on regulated futures markets. In 
addition, ST gold futures contracts, if traded as security futures 
pursuant to an exemption, would be subject to regulation by both the 
SEC and the Commission. The implementation of an exemption, under these 
circumstances, would not erode customer protections

[[Page 13870]]

or impair the ability of the Commission or OneChicago to discharge any 
regulatory or self-regulatory duty under the Act.

IV. Request for Comment

    The purposes of the CEA include ``promot[ing] responsible 
innovation and fair competition among boards of trade, other markets 
and market participants.'' \25\ Based on the foregoing, it may be 
consistent with these and the other purposes of the CEA, and with the 
public interest, for ST gold futures contracts to trade on OneChicago 
as security futures. The Commission urges interested persons to provide 
comments that will assist the Commission in conducting its analysis of 
the issues relevant to this proposal. This release is not intended in 
any way to alter the current status of any transaction that is subject 
to one or more provisions of the '33 or '34 Acts or the CEA, including 
any regulations adopted thereunder.
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    \25\ CEA section 3(b), 7 U.S.C. 5(b). See also CEA section 
4(c)(1), 7 U.S.C. 6(c)(1) (purpose of exemption is ``to promote 
responsible economic or financial innovation and fair 
competition.'')
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V. Related Matters

A. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) \26\ imposes certain 
requirements on federal agencies (including the Commission) in 
connection with their conducting or sponsoring any collection of 
information as defined by the PRA. The proposed exemptive order would 
not, if issued, require a new collection of information from any entity 
that would be subject to the proposed order.
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    \26\ 44 U.S.C. 3507(d).
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B. Cost-Benefit Analysis

    Section 15(a) of the CEA, as amended by Section 119 of the 
Commodity Futures Modernization Act of 2000,\27\ requires the 
Commission to consider the costs and benefits of its action before 
issuing an order under the CEA. Section 15(a) of the Act further 
specifies that costs and benefits shall be evaluated in light of the 
following 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. 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. 
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 specifically invites public comment on its 
analysis of the costs and benefits associated with the proposed 
issuance of an exemptive order under Section 4(c) of the Act.
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    \27\ 7 U.S.C. 19(a).
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    The primary cost that could be associated with the proposed 
exemptive order is the burden that may arise from subjecting 
transactions in ST gold futures contracts, and thereby the market 
participants transacting in such contracts, to the dual regulation of 
security futures by the Commission and the SEC. Potential costs arising 
from dual regulation, however, are outweighed by the legal certainty 
and additional benefits that could arise from the issuance of the 
proposed exemptive order. For example, permitting the trading of ST 
gold futures contracts on OneChicago, through the issuance of the 
proposed exemptive order, could facilitate price discovery for gold and 
gold-linked interests given that a liquid market in ST gold futures 
contracts would serve as an additional source for discerning the 
appropriate market value of gold. As discussed previously, the issuance 
of the proposed exemptive order may also foster competition by bringing 
a new derivatives product to market expeditiously without negatively 
impacting potential innovations in other markets for other commodities.
    In addition, the issuance of the proposed exemptive order would not 
result in any costs in terms of reduced protections for Commission-
regulated markets or market participants. Transactions in ST gold 
futures contracts, pursuant to the proposed exemption, would be 
executed on OneChicago as security futures and would be subject to 
extensive and detailed regulation by the SEC and the Commission. 
Consequently, only intermediaries registered or notice-registered with 
the Commission and the SEC would be able to solicit, accept orders for, 
or deal in any transactions in connection with ST gold futures 
contracts. The implementation of an exemption, under these 
circumstances, would not negatively impact any applicable regulatory 
measure designed to protect market participants or the public interest. 
With respect to financial integrity, The Options Clearing Corporation, 
as both a derivatives clearing organization registered as such with the 
Commission and a clearing agency registered as such with the SEC, would 
carry out the clearing and settlement of OneChicago's ST gold futures 
contracts, including directing appropriate arrangements for the payment 
and physical delivery of the Shares that would underlie the ST gold 
futures contracts.
    After considering the factors presented in this release, the 
Commission has determined to seek comment on the proposed order as 
discussed above.

    Issued in Washington, DC, on March 10, 2008 by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. E8-5203 Filed 3-13-08; 8:45 am]
BILLING CODE 6351-01-P