[Federal Register Volume 73, Number 130 (Monday, July 7, 2008)]
[Notices]
[Pages 38403-38405]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-15274]


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COMMODITY FUTURES TRADING COMMISSION


Request To Exempt Certain Over-the-Counter Swaps From Certain of 
the Requirements Imposed by Commission Regulation 35.2, Pursuant to the 
Authority in Section 4(C) of the Commodity Exchange Act

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of request for comment on exemption request.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is 
requesting comment on whether to exempt certain over-the-counter 
(``OTC'') swaps from certain of the requirements otherwise imposed by 
Commission Regulation 35.2. Specifically, the petitioners request 
authority to clear certain agricultural

[[Page 38404]]

swaps. This exemption has been requested by the Chicago Mercantile 
Exchange Inc. (``CME''), a registered derivatives clearing organization 
(``DCO''), and the Board of Trade of the City of Chicago, Inc. 
(``CBOT''), a designated contract market. Authority for extending this 
relief is found in Section 4(c) of the Commodity Exchange Act 
(``CEA'').\1\
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    \1\ 7 U.S.C. 6(c).

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DATES: Comments must be received on or before August 21, 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 ``CME/CBOT Section 
4(c) Petition'' 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: Sarah E. Josephson, Special Counsel, 
202-418-5684, [email protected], or Phyllis P. Dietz, Associate 
Director, 202-418-5449, [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. The CME/CBOT Petition

    CME, the DCO that provides clearing services for the CBOT, and the 
CBOT jointly submitted a request to the Commission for an exemptive 
order under Section 4(c) of the CEA.\2\ The order would grant CME 
approval to clear OTC corn basis swaps and corn, wheat, and soybean 
calendar swaps,\3\ and it would permit the CBOT to list those products 
for ``clearing-only.'' The contract size for the basis and calendar 
swap products will be the same as that for corn, wheat, and soybean 
futures--5,000 bushels. However, each of the proposed cleared-only OTC 
products will be cash-settled, in contrast to the CBOT's corn, wheat, 
and soybean futures contracts, which are physically-settled.
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    \2\ A copy of the petition is available on the Commission's Web 
site at http://www.CFTC.gov/.
    \3\ The suite of OTC agricultural swap products that the CBOT 
proposes to list for clearing-only is comprised of corn basis swap 
contracts for the following regions: Northeastern Iowa, Northwestern 
Iowa, Southern Iowa, Eastern Nebraska, Eastern South Dakota, and 
Southern Minnesota; and corn, wheat, and soybean calendar swaps.
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    Part 35 of the Commission's regulations \4\ exempts swap agreements 
and eligible persons entering into such agreements from most provisions 
of the CEA.\5\ The term ``swap agreement'' is defined to include, among 
other types of agreements, a ``basis swap'' or a ``commodity swap.'' 
\6\ Part 35 was promulgated pursuant to authority conferred upon the 
Commission in Section 4(c) of the CEA to exempt certain transactions in 
order to promote innovation and competition.\7\ Various exemptions and 
exclusions were subsequently added to the CEA by the Commodity Futures 
Modernization Act of 2000 (``CFMA''),\8\ but none apply to agricultural 
contracts.\9\
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    \4\ 17 CFR Part 35 (Commission regulations are hereinafter cited 
as ``Reg. ----'').
    \5\ Jurisdiction is retained for, among other things, provisions 
of the CEA proscribing fraud and manipulation. See Reg. 35.2.
    \6\ Reg. 35.1(b)(1)(i). ``Commodity'' is defined in Section 
1a(4) of the CEA 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.''
    \7\ See 58 FR 5587 (Jan. 22, 1993).
    \8\ Pub. L. 106-554, 114 Stat. 2763 (2000).
    \9\ See, e.g., CEA 2(d), (g) and (h).
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    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 \10\ 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.\11\ Under the arrangement proposed by CME and the CBOT, a 
cleared-only OTC contract could be offset by another cleared-only OTC 
contract. Thus, clearing of these OTC contracts would result in 
contracts that are fungible with other cleared-only contracts with 
equivalent terms. In addition, the creditworthiness of the counterparty 
would not be a consideration. Accordingly, the OTC contracts CME would 
clear would not satisfy all of the conditions of Part 35.\12\
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    \10\ Reg. 35.2(b).
    \11\ Reg. 35.2(c).
    \12\ The contracts that the CBOT proposes to list for clearing-
only would, however, meet the requirements of Reg. 35.2(a) and (d) 
in that they would be entered into solely between eligible swap 
participants and executed OTC.
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    However, Part 35 further permits ``any person [to] apply to the 
Commission for exemption from any of the provisions of the Act * * * 
for other arrangements or facilities.'' \13\ CME and the CBOT have 
petitioned the Commission for an order under Section 4(c) of the CEA 
that would exempt cleared-only OTC swaps involving corn, wheat, or 
soybeans to the same extent as contracts that are exempt pursuant to 
Part 35 of the Commission's regulations.
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    \13\ Reg. 35.2(d).
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II. Section 4(c) of the Commodity Exchange Act

    Section 4(c)(1) of the CEA 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 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 and 
competitive manner.'' \15\ Permitting the clearing of OTC corn, wheat, 
and soybean swaps by CME may foster both financial innovation and 
competition. It may benefit the marketplace by providing market 
participants the ability to combine flexible negotiation with central 
counterparty guarantees and capital efficiencies. In addition, the

[[Page 38405]]

CBOT has represented that it expects that the proposed cleared-only OTC 
corn basis and calendar swaps will be a complement to the CBOT's corn 
futures and will enable corn suppliers and users, including 
participants in the ethanol industry, to manage volatile basis risk 
while realizing the benefits of centralized clearing. Similarly, the 
CBOT has stated that it expects that its proposed cleared-only OTC 
wheat and soybean calendar swaps will complement wheat and soybean 
futures, respectively, and will result in similar benefits.
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    \15\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179, 
3213.
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    The Commission is requesting comment on whether it should exempt 
the OTC corn basis swaps and corn, wheat, and soybean calendar swaps 
that are proposed to be cleared by CME and listed by the CBOT, as 
described above, to the same extent as are other contracts that are 
exempt pursuant to Part 35 of the Commission's regulations.
    Section 4(c)(2) provides that the Commission may grant an exemption 
only when it determines that the requirements for which the 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 
cleared-only contracts 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 Commission is requesting comment as 
to whether an exemption from the requirements of the CEA should be 
granted in the context of these transactions.
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    \17\ Section 3(b) of the CEA, 7 U.S.C. 5(b). See also Section 
4(c)(1) of the CEA, 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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    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 designated contract market.

III. Request for Comment

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

IV. 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. 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. 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 these OTC swap agreements to allow 
them to be cleared may promote liquidity and transparency in the 
markets for OTC derivatives on corn, wheat, and soybeans, as well as 
futures on those commodities. Extending the exemption also may promote 
financial integrity by providing the benefits of clearing to these OTC 
markets.
    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. CME'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 derivatives products 
without unnecessary regulatory burden.
    After considering these factors, the Commission has determined to 
seek comment on the exemption request as discussed above. The 
Commission also invites public comment on its application of the cost-
benefit provision.

    Issued in Washington, DC, on June 30, 2008 by the Commission.
David A. Stawick,
Secretary of the Commission.
 [FR Doc. E8-15274 Filed 7-3-08; 8:45 am]
BILLING CODE 6351-01-P