[Federal Register Volume 73, Number 79 (Wednesday, April 23, 2008)]
[Notices]
[Pages 21917-21919]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-8942]


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COMMODITY FUTURES TRADING COMMISSION


Proposal To Exempt the Trading and Clearing of Certain Products 
Related to streetTRACKS[supreg] Gold Trust Shares

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed order and request for comment.

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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or the 
``Commission'') is proposing to exempt the trading and clearing of 
products called options on streetTRACKS[supreg] Gold Trust Shares (``ST 
Gold Options''), proposed to be traded on a national securities 
exchange, and cleared through the Options Clearing Corporation 
(``OCC''), from the provisions of the Commodity Exchange Act (``CEA'') 
\1\ and the regulations thereunder to the extent necessary to permit 
them to be so traded and cleared. Authority for this exemption is found 
in Section 4(c) of the CEA.\2\
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    \1\ 7 U.S.C. 1 et seq.
    \2\ 7 U.S.C. 6(c).

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DATES: Comments must be received on or before April 30, 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 ``OCC ST Gold Options 
4(c)'' 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: Robert B. Wasserman, Associate 
Director, 202-418-5092, [email protected], Division of Clearing and 
Intermediary Oversight, Commodity Futures Trading Commission, Three 
Lafayette Centre, 1151 21st Street, NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION: 

I. Introduction

    The OCC is both a Derivatives Clearing Organization (``DCO'') 
registered pursuant to Section 5b of the CEA, 7 U.S.C. 7a-1, and a 
securities clearing agency registered pursuant to Section 17A of the 
Securities Exchange Act of 1934 (``the '34 Act'').\3\
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    \3\ 15 U.S.C. 78q-l.
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    OCC has filed with the CFTC, pursuant to Section 5c(c) of the CEA 
and Commission Regulations 39.4(a) and 40.5 thereunder,\4\ requests for 
approval of rules and rule amendments that would enable OCC to clear 
and settle ST Gold Options \5\ traded on a national securities exchange 
in its capacity as a registered securities clearing agency (and not in 
its capacity as a DCO).\6\ Section 5c(c)(3) provides that the CFTC must 
approve any such rules and rule amendments submitted for approval 
unless it finds that the rules or rule amendments would violate the 
CEA.
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    \4\ 7 U.S.C. 7a-2(c), 17 CFR 39.4(a), 40.5.
    \5\ streetTRACKS[supreg] Gold Trust Shares, which underly ST 
Gold Options, are described in greater detail in the ``Proposed 
Exemptive Order for ST Gold Futures Contracts,'' 73 FR 13,867 (March 
14, 2008). The length of the comment period for this proposal is 
informed by the fact that the ST Gold Futures Contracts proposal is 
outstanding, and the goal of addressing both proposals 
simultaneously.
    \6\ See SR-OCC-2008-04 and Amendment No. 1 thereto. OCC has also 
filed these proposed rule changes with the SEC.
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    The request for approval concerning the ST Gold Options was filed 
effective February 4, 2008, and Amendment No. 1 thereto was filed 
effective March 7, 2008.

II. Section 4(c) of the Commodity Exchange Act

    Section 4(c)(1) of the CEA empowers the CFTC to ``promote 
responsible economic or financial innovation and fair competition'' by 
exempting any transaction or class of transactions from any of the 
provisions of the CEA (subject to exceptions not relevant here) where 
the Commission determines that the exemption would be consistent with 
the public interest.\7\ The Commission

[[Page 21918]]

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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    \7\ Section 4(c)(1) of the CEA, 7 U.S.C. 6(c)(1), provides in 
full that:
    In order to promote responsible economic or financial innovation 
and fair competition, the Commission by rule, regulation, or order, 
after notice and opportunity for hearing, may (on its own initiative 
or on application of any person, including any board of trade 
designated or registered as a contract market or derivatives 
transaction execution facility for transactions for future delivery 
in any commodity under section 7 of this title) exempt any 
agreement, contract, or transaction (or class thereof) that is 
otherwise subject to subsection (a) of this section (including any 
person or class of persons offering, entering into, rendering advice 
or rendering other services with respect to, the agreement, 
contract, or transaction), either unconditionally or on stated terms 
or conditions or for stated periods and either retroactively or 
prospectively, or both, from any of the requirements of subsection 
(a) of this section, or from any other provision of this chapter 
(except subparagraphs (c)(ii) and (D) of section 2(a)(1) of this 
title, except that the Commission and the Securities and Exchange 
Commission may by rule, regulation, or order jointly exclude any 
agreement, contract, or transaction from section 2(a)(1)(D) of this 
title), if the Commission determines that the exemption would be 
consistent with the public interest.
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    In enacting Section 4(c), Congress noted that the goal of the 
provision ``is to give the Commission a means of providing certainty 
and stability to existing and emerging markets so that financial 
innovation and market development can proceed in an effective and 
competitive manner.'' \8\ Permitting ST Gold Options to trade on 
national securities exchanges and be cleared on OCC as discussed above 
may foster both financial innovation and competition. In accordance 
with the Memorandum of Understanding entered into between the CFTC and 
the Securities and Exchange Commission (``SEC'') on March 11, 2008, and 
in particular the addendum thereto concerning Principles Governing the 
Review of Novel Derivative Products, the Commission believes that novel 
derivative products that implicate areas of overlapping regulatory 
concern should be permitted to trade in either or both a CFTC- or SEC-
regulated environment, in a manner consistent with laws and regulations 
(including the appropriate use of all available exemptive and 
interpretive authority). The CFTC is requesting comment on whether it 
should exempt ST Gold Options, as described above, that are traded on a 
national securities exchange and cleared through OCC, from the CEA and 
the Commission's regulations thereunder, to the extent necessary to 
permit them to be so traded and cleared.
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    \8\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179, 3213 
(``4(c) Conf. Report'').
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    In proposing this exemption, the CFTC need not--and does not--find 
that ST Gold Options are (or are not) subject to the CEA. During the 
legislative process leading to the enactment of Section 4(c) of the 
CEA, the House-Senate Conference Committee noted that:

    The Conferees do not intend that the exercise of exemptive 
authority by the Commission would require any determination 
beforehand that the agreement, instrument, or transaction for which 
an exemption is sought is subject to the Act. Rather, this 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.\9\
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    \9\ 4(c) Conf. Report at 3214-3215.

ST Gold Options are ``novel instruments'' and the ``determination as to 
[their] jurisdiction is not straightforward.'' Given their potential 
usefulness to the market, however, the Commission believes that this 
may be an appropriate case for issuing an exemption without making a 
finding as to the nature of these particular instruments.
    Section 4(c)(2) provides that the Commission may grant exemptions 
only when it determines: that the requirements for which an exemption 
is being provided should not be applied to the agreements, contracts or 
transactions at issue, and the exemption is consistent with the public 
interest and the purposes of the CEA; that the agreements, contracts or 
transactions will be entered into solely between appropriate persons; 
and that the exemption will not have a material adverse effect on the 
ability of the Commission or any contract market or derivatives 
transaction execution facility to discharge its regulatory or self-
regulatory responsibilities under the CEA.\10\
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    \10\ 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.'' \11\ It may be consistent with these and the 
other purposes of the CEA, with the public interest, with the CFTC-SEC 
Memorandum of Understanding of March 11, 2008, and with the addendum 
thereto, for the mode of trading of these transactions--whether it is 
to be through CFTC-regulated markets and clearing organizations or SEC-
regulated markets and clearing organizations--to be determined by 
competitive market forces. Accordingly, the CFTC is requesting comment 
as to whether this exemption from the requirements of the CEA and 
Regulations thereunder should be granted in the context of these 
transactions.
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    \11\ CEA 3(b), 7 U.S.C. 5(b). See also CEA 4(c)(1), 7 U.S.C. 
6(c)(1) (purpose of exemptions is ``to promote responsible economic 
or financial innovation and fair competition.'')
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    Section 4(c)(3) includes within the term ``appropriate persons'' a 
number of specified categories of persons, and also in subparagraph (K) 
thereof ``such other persons that the Commission determines to be 
appropriate in light of * * * the applicability of appropriate 
regulatory protections.'' Both national securities exchanges and OCC, 
as well as their members who will intermediate these transactions, are 
subject to extensive and detailed regulation by the SEC under the `34 
Act. The CFTC is requesting comment as to whether all persons trading 
ST Gold Options on national securities exchanges, and clearing such 
options on OCC, are appropriate persons.
    In light of the above, the Commission also is requesting comment as 
to whether this exemption will interfere with its ability to discharge 
its regulatory responsibilities under the CEA or with the self-
regulatory duties of any contract market or derivatives transaction 
execution facility.

III. Request for Comment

    The Commission requests comment on all aspects of the issues 
presented by this proposed order.

IV. Related Matters

A. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \12\ 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 approved, require a new collection of

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information from any entities that would be subject to the proposed 
order.
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    \12\ 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 (``CFMA''),\13\ requires 
the Commission to consider the costs and benefits of its action before 
issuing an order under the CEA. By its terms, Section 15(a) as amended 
does not require the Commission to quantify the costs and benefits of 
an order or to determine whether the benefits of the order outweigh its 
costs. Rather, Section 15(a) simply requires the Commission to 
``consider the costs and benefits'' of its action.
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    \13\ 7 U.S.C. 19(a).
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    Section 15(a) of the CEA further specifies that costs and benefits 
shall be evaluated in light of five broad areas of market and public 
concern: Protection of market participants and the public; efficiency, 
competitiveness, and financial integrity of futures markets; price 
discovery; sound risk management practices; and other public interest 
considerations. Accordingly, the Commission could in its discretion 
give greater weight to any one of the five enumerated areas and could 
in its discretion determine that, notwithstanding its costs, a 
particular order was necessary or appropriate to protect the public 
interest or to effectuate any of the provisions or to accomplish any of 
the purposes of the CEA.
    The Commission is considering the costs and benefits of this 
proposed order in light of the specific provisions of Section 15(a) of 
the CEA, as follows:
    1. Protection of market participants and the public. National 
securities exchanges, OCC and their members who would intermediate ST 
Gold Options are subject to extensive regulatory oversight.
    2. Efficiency, competition, and financial integrity. The proposed 
exemption may enhance market efficiency and competition since it could 
encourage potential trading of ST Gold Options on markets other than 
designated contract markets or derivative transaction execution 
facilities. Financial integrity will not be affected since the ST Gold 
Options will be cleared by OCC, a DCO and SEC-registered clearing 
agency, and intermediated by SEC-registered broker-dealers.
    3. Price discovery. Price discovery may be enhanced through market 
competition.
    4. Sound risk management practices. The ST Gold Options will be 
subject to OCC's current risk-management practices including its 
margining system.
    5. Other public interest considerations. The proposed exemption may 
encourage development of derivative products through market competition 
without unnecessary regulatory burden.
    After considering these factors, the Commission has determined to 
seek comment on the proposed order as discussed above. The Commission 
invites public comment on its application of the cost-benefit 
provision.
* * * * *

    Issued in Washington, DC, on April 21, 2008 by the Commission.
David A. Stawick,
Secretary of the Commission.
    Dissenting Opinion of Commissioner Bartholomew H. Chilton to 
Notice of Proposed Order pursuant to Section 4(c) of the CEA which 
would exempt certain products related to StreetTRACKS Gold Trust 
Shares traded on a national securities exchange and cleared by the 
Options Clearing Corporation from provisions of the CEA.
    I respectfully dissent from the Commission's issuance of the 
above-referenced proposed order. Should the CFTC ultimately approve 
this order, it is my hope and expectation that the SEC similarly 
will fully exercise its broad exemptive authority under the 
securities laws to permit futures exchanges to trade products that 
are economically equivalent to those that are or may be approved for 
trading on national securities exchanges, and to allow designated 
clearing organizations to clear such products, to ensure that the 
futures markets are not competitively disadvantaged with regard to 
such products. I dissent from today's action, because I do not 
believe that the proposed order provides sufficient basis for or 
assurance of such reciprocity in the future.

Bart Chilton,
Commissioner, Commodity Futures Trading Commission.

 [FR Doc. E8-8942 Filed 4-22-08; 8:45 am]
BILLING CODE 6351-01-P