[Federal Register Volume 73, Number 244 (Thursday, December 18, 2008)]
[Notices]
[Pages 77015-77020]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-30057]


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COMMODITY FUTURES TRADING COMMISSION


Order: (1) Pursuant to Section 4(c) of the Commodity Exchange Act 
(a) 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 and (b) Determining Certain Floor 
Brokers and Traders To Be Eligible Swap Participants; and (2) Pursuant 
to Section 4d of the Commodity Exchange Act, Permitting Certain 
Customer Positions in the Foregoing Swaps and Associated Property To Be 
Commingled With Other Property Held in Segregated Accounts

AGENCY: Commodity Futures Trading Commission.

ACTION: Order.

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SUMMARY: On December 7, 2007, the Commodity Futures Trading Commission 
(``CFTC'' or ``Commission'') published for public comment requests (a) 
to permit ICE Clear U.S., Inc. (``ICE Clear'') to clear certain over-
the-counter (``OTC'') swap contracts and (b) to determine that certain 
ICE Futures U.S., Inc. (``ICE Futures'') floor brokers and traders are 
Eligible Swap Participants (``ESPs'') for the purpose of trading those 
OTC swaps (``Notice.'').\1\ On January 7, 2008, the comment period was 
extended to February 6, 2008.\2\ ICE Clear also filed a request for an 
order pursuant to Section 4d of the Commodity Exchange Act (``CEA'' or 
``Act'') to allow ICE Clear and Futures Commission Merchants (``FCMs'') 
clearing through ICE Clear to commingle positions in those cleared OTC 
swap contracts and property supporting those positions with property 
and positions otherwise required to be held in customer segregated 
accounts. That request was published on the CFTC's Web site for public 
comment during the same timeframe with the same comment deadline. The 
Commission has reviewed the comments made in response to the requests 
for comment and the entire record in this matter and has determined to 
issue an order granting the requests.
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    \1\ 72 FR 68862 (December 7, 2007).
    \2\ 73 FR 1205 (January 7, 2008).

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DATES: Effective Date: December 12, 2008.

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, Senior 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 4(c) Petition

    ICE Clear, the clearing organization for ICE Futures, sought to 
offer ESPs who enter into certain bilateral swap transactions involving 
coffee, sugar, or cocoa the opportunity to submit them to ICE Clear for 
clearing. ICE Clear 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,\3\ that these swap agreements are 
commonly entered

[[Page 77016]]

into by participants exchanging fixed for floating reference prices, 
and that participants in these markets include trade houses, commodity 
lenders, producers, end users, and large speculators.
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    \3\ 17 CFR Part 35.
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    Part 35 of the Commission's regulations exempts, subject to 
conditions, swap agreements and eligible persons entering into these 
agreements from most provisions of the CEA.\4\ The term ``swap 
agreement'' is defined to include, among other types of agreements, ``a 
* * * commodity swap,'' \5\ which latter term includes swaps on 
agricultural products.\6\ 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 explicitly permit certain off-exchange 
derivative transactions, and thus to promote innovation and 
competition.\7\ In the Commodity Futures Modernization Act of 2000,\8\ 
Congress enacted a number of exemptions and exclusions from the CEA for 
contracts traded outside of Designated Contract Markets (``DCMs''), but 
none apply to agricultural contracts.\9\
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    \4\ Jurisdiction is retained for, inter alia, provisions of the 
CEA proscribing fraud and manipulation. See Commission Reg. Sec.  
35.2, 17 CFR 35.2 (Commission regulations are hereinafter cited as 
``Reg. Sec.  ----'').
    \5\ Reg. Sec.  35.1(b)(1)(i).
    \6\ ``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 (January 22, 1993). Section 4(c) of the CEA 
was added by section 502(a) of the Futures Trading Practices Act of 
1992, Pub. L. 102-546, 106 Stat. 3590.
    \8\ Pub. L. 06-554, 114 Stat. 2763 (2000).
    \9\ See, e.g., CEA section 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,\10\ that the agreement be solely between 
ESPs,\11\ 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.\12\ 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'' 
contracts, with the clearinghouse interposed as central 
counterparty.\13\ A cleared-only contract could be offset by another 
cleared-only contract. Thus, clearing of these OTC contracts would 
result in contracts that were fungible with other cleared-only 
contracts with approximately equivalent terms. In addition, due to the 
clearing guarantee, the creditworthiness of the counterparty would no 
longer be a consideration. Accordingly, the OTC contracts ICE Clear 
clears in this fashion would not fulfill all of the conditions of Part 
35.
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    \10\ Reg. Sec.  35.2(b).
    \11\ Reg. Sec.  35.2(a).
    \12\ Reg. Sec.  35.2(c).
    \13\ 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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    ICE Clear also requested an order under CEA Section 4d so that ICE 
Clear and its clearing members can hold the cleared-only contracts and 
property supporting them in the customer segregated account along with 
exchange-listed futures contracts and associated property, resulting in 
improved collateral management and other benefits.

II. The ICE Futures Petition

    ICE Futures, a U.S. DCM, sought 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 
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.\14\ Therefore, ICE Futures petitioned the Commission for an 
order pursuant to Section 4(c) of the CEA that would permit all ICE 
Futures 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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    \14\ Reg. Sec.  35.1(b)(2)(x).
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    ICE Futures represented 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 FCMs.
    The Commission stated that it anticipated that any Section 4(c) 
order issued in response to ICE Futures' request would be subject to 
the following conditions:
    (1) The contracts, agreements, or transactions would have to be 
executed pursuant to the requirements of Part 35, as modified by the 
order.
    (2) The ICE Futures floor member would have to obtain a financial 
guarantee for the OTC swap transactions from an ICE Futures 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 eligible products identified in the order.
    (4) Permissible OTC swap transactions would have to be submitted 
for clearance by an ICE Futures clearing member to ICE Clear pursuant 
to ICE Clear rules.
    (5) An ICE Futures floor member could not enter into OTC swap 
transactions with another ICE Futures floor member as the counterparty 
for ICE Clear cleared-only contracts.
    (6) ICE Futures would maintain appropriate compliance systems in 
place to monitor the OTC swap transactions of its floor members.\15\
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    \15\ The Commission noted that 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 (``CME'') 
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 a second order (the 
first was issued February 4, 2003) that permitted New York 
Mercantile Exchange (``NYMEX'') 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. Sections 4(c) and 4d of the CEA

A. Permitting the OTC Contracts To Be Cleared

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

[[Page 77017]]

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.\16\ 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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    \16\ 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.'' \17\ The Commission requested comment on whether 
it should permit the OTC transactions in coffee, sugar, and cocoa to be 
cleared through ICE Clear as described above. The Commission also 
requested comment on whether it should determine ICE Futures 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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    \17\ 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 
from Section 4(a) of the CEA only when the Commission 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.\18\
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    \18\ 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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    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''). ICE Futures has 
requested that the Commission expand this list of appropriate persons 
to include ICE Futures floor members. The Commission requested comment 
on this determination. The Commission also requested 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 
(``DCO'').

B. Segregation of Customer Funds

    CEA Section 4d(a)(2) prohibits commingling customer positions 
executed on a contract market and property supporting such positions 
together with any property not required to be so segregated. Section 
4d(a)(2) provides that the Commission may grant exceptions to this 
prohibition by order. In this case, the OTC coffee, sugar, and cocoa 
contracts are not executed on a contract market and thus holding them 
together with customer property and positions required to be segregated 
would, absent a Commission order, violate Section 4d. As discussed 
further below, the Commission has analyzed the risks and benefits 
associated with commingling the cleared-only positions and associated 
customer funds with positions and customer funds otherwise required to 
be segregated, and has determined that the benefits of the proposal 
outweigh the risks and that the proposal, along with conditions set 
forth by the Commission, will provide for a sufficient level of 
safeguards to address the risks adequately.

IV. Comment Letters

    The Commission received eleven letters in response to its request 
for comment. An initial comment letter from the CME Group Inc. (``CME 
Group'') requested an extension of the comment period and listed 
various concerns CME Group suggested might have to be addressed in 
order for the Commission to act on ICE Clear's request for an extension 
of the swaps exemption of Part 35. However, a subsequent comment letter 
from CME Group took the position that the Commission should permit the 
clearing of OTC agricultural swap contracts but pursuant to appropriate 
conditions to protect the market and market participants in a manner 
that would establish a level playing field for all DCOs.
    Brief comments from two individuals expressed concerns related to 
their belief that the OTC transactions would be undertaken primarily by 
large traders, such as hedge funds, to the detriment of smaller traders 
who use the markets for hedging. Neither of these comments provided any 
evidence that would support the conclusion that smaller traders would 
be adversely affected by the requested relief. One of the comments did 
note that there was no mention of the application of speculative 
limits. As discussed further below, the order will require ICE Futures 
to apply position accountability levels to the cleared-only contracts 
that are appropriate in light of the position accountability levels 
applicable to the underlying futures contracts.
    The remaining seven comment letters are from two futures exchanges 
and five commodity trading firms, all of which

[[Page 77018]]

support ICE Clear's and ICE Futures' requests for exemption.
    With respect to the ICE Futures request that floor members be 
deemed ESPs, NYMEX commented regarding the Commission's assertion that 
the proposed conditions pertaining to the determination were 
substantially similar to the conditions included in two previously 
issued Commission orders that permit floor members to be ECPs pursuant 
to Section 1a(12)(C) of the CEA.\19\ Specifically, NYMEX stated that 
the Commission previously has required that the clearing member 
providing a financial guarantee to a floor member deemed to be an ECP 
must maintain capitalization of a certain size to be able to issue such 
a guarantee, that the financial requirement was not included in the 
list of conditions to be applied to ICE Futures clearing members 
guaranteeing floor members deemed to be ESPs, and that the Notice did 
not provide any policy rationale for imposing different financial 
standards for clearing member guarantors.
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    \19\ See supra note 15.
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    On February 4, 2003, the Commission issued to NYMEX the first order 
determining that floor members could be ECPs. Due to the order's novel 
nature and the concern that a trader entering into OTC transactions 
could create financial difficulty for the guarantor FCM, the clearing 
entity, or other clearing firms, the order required clearing members 
that guaranteed and cleared OTC transactions to meet specified minimum 
capital requirements, and for NYMEX to submit a report to the 
Commission not later than 30 days after the order was in effect for 18 
months.\20\
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    \20\ The order required that, as part of the report, NYMEX 
review its experiences and the experiences of its floor members and 
clearing members under the order during those 18 months.
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    CME subsequently petitioned the Commission for an order that would 
permit CME floor members to be deemed ECPs. After reviewing the impact 
of the NYMEX order upon NYMEX and its floor members, and noting the 
lack of problems associated with it, the Commission issued an order to 
CME that did not include a special guarantor capitalization 
requirement.\21\ Immediately thereafter, Commission staff advised NYMEX 
that it could petition for a new or amended order that would not 
include a special guarantor capitalization requirement, but NYMEX to 
date has not so petitioned.
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    \21\ The floor member must have a guarantee from, and the trades 
must be cleared by, a CME clearing member FCM. That FCM must have 
adjusted net capital that equals or exceeds the greater of 
$2,500,000, CFTC requirements as computed pursuant to Reg. Sec.  
1.17, or Securities and Exchange Commission requirements.
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V. Findings and Conclusions

    After considering the complete record in this matter, including the 
comments received, the Commission finds that the requirements of CEA 
Section 4(c) have been met with respect to the requests for an order 
permitting the clearing of certain OTC transactions and determining 
that certain floor brokers and floor traders qualify as ESPs.
    First, permitting the clearing of these transactions is consistent 
with the public interest and with the purposes of the CEA. The purposes 
of the CEA include ``promot[ing] responsible innovation and fair 
competition among boards of trade, other markets, and market 
participants.'' \22\ The purpose of exemptions is ``to promote economic 
or financial innovation and fair competition.'' \23\ Permitting the 
clearing of OTC coffee, sugar, and cocoa transactions by ICE Clear, as 
well as permitting ICE Futures floor members to trade such products, 
would appear to foster both financial innovation and competition. It 
could benefit the marketplace by providing ESPs the ability to bring 
together flexible negotiation with central counterparty guarantees and 
capital efficiencies. Clearing also may increase the transparency of 
the OTC market.
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    \22\ CEA section 3(b), 7 U.S.C. 5(b).
    \23\ CEA section 4(c)(1), 7 U.S.C. 6(c)(1).
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    Second, the bilateral transactions in the OTC agricultural swaps 
would be entered into solely between appropriate persons. These would 
be limited to those persons qualifying as ESPs under Part 35 and those 
floor brokers and traders deemed ESPs herein by the Commission. ICE 
Futures floor brokers or traders that entered into the swap would be 
registered with the Commission and would have the requisite skills, 
experience, and market expertise to trade for their own accounts. Each 
such floor member would be financially backed by the ICE Clear clearing 
member that submits the swap for clearing, and all of its activity in 
the OTC agricultural swaps, limited only to coffee, sugar, or cocoa, 
will be closely monitored by ICE Futures.
    Third, the exemption would not have a material adverse effect on 
the ability of the Commission or any DCM to carry out its regulatory 
responsibilities under the CEA. ICE Clear will use the same systems, 
procedures, people, and processes to clear the bilateral agricultural 
swap contracts in coffee, sugar, and cocoa as it currently employs with 
respect to all of the other transactions it clears.
    With respect to ICE Clear's request for an order pursuant to 
Section 4d permitting ICE Clear and FCMs clearing through ICE Clear to 
commingle funds supporting positions in the cleared-only contracts 
resulting from these agricultural swaps with customer funds required to 
be segregated under CEA Section 4d, the Commission has considered 
whether the additional risk to customers presented by such commingling 
can be adequately addressed and mitigated. Additional risk is presented 
to customers as a result of the risk of default involving the 
commingled cleared-only contracts. However, the carrying FCM should 
have adequate means to address a default by a customer trading these 
contracts. Since each cleared-only contract will have identical 
economic terms as its underlying corresponding contract listed on ICE 
Futures and will settle on both a daily and final basis to that 
corresponding listed contract, the carrying FCM (or, if necessary, ICE 
Clear) economically could hedge any contracts that are the subject of a 
default by entering into the offsetting underlying exchange-listed 
contract. Therefore, the additional risk would be mitigated. The order 
requires that ICE Clear review its members' risk management 
capabilities to verify that all members participating in the program 
maintain sufficient operational capability to engage in such offsetting 
transactions. The order also requires that ICE Futures (1) maintain a 
coordinated market surveillance program that encompasses the cleared-
only contracts and the underlying futures contracts, and (2) adopt 
position accountability levels for each of the cleared-only contracts 
subject to the order that are appropriate in light of the position 
accountability levels applicable to the underlying futures contracts. 
These measures should mitigate market risk.
    Accordingly, the Commission has determined that ICE Clear will be 
able to employ reasonable safeguards to protect customer funds, and 
that it will be able to measure, monitor, manage, and account for risks 
associated with transactions and open interest in the bilateral swap 
contracts as it does for other contracts it clears. The Commission 
believes that ICE Clear has demonstrated sufficiently that it will 
continue to comply with all of the core principles in CEA Section 5b of 
the Act in connection with holding customer positions in OTC 
agricultural swaps with property held in segregated accounts pursuant 
to CEA Section 4d.

[[Page 77019]]

VI. Related Matters

A. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \24\ 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 will not require a new 
collection of information from any entities that would be subject to 
the exemption.
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    \24\ 44 U.S.C. 3507(d).
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B. Cost-Benefit Analysis

    Section 15(a) of the CEA,\25\ 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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    \25\ 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 has considered the costs and benefits of this 
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 requests will only be entered 
into by persons who are ``appropriate persons'' as set forth in Section 
4(c) of the Act. Only ESPs and those floor brokers and traders deemed 
ESPs pursuant to ICE Futures' request herein will enter into 
transactions in the OTC agricultural swaps that are the subject of ICE 
Clear's request. Allowing the commingling of funds supporting positions 
in the resulting cleared-only contracts with customer funds required to 
be segregated under CEA Section 4d will benefit ESP market participants 
by facilitating clearing and the reduction of credit risk for contracts 
that meet market participants' specific risk-management requirements. 
ESP customers holding positions in cleared-only contracts also would 
benefit from having their property held in segregated accounts in the 
event of the insolvency of an FCM. In addition, the order is premised 
on ICE Clear maintaining a number of existing risk management and other 
safeguards.
    2. Efficiency and competition. Allowing these swap agreements to be 
cleared appears likely to promote liquidity and transparency in the 
markets for OTC derivatives on coffee, sugar, and cocoa, as well as on 
futures on those commodities. Determining ICE Futures floor members to 
be ESPs will likely increase the flow of trading information between 
markets, increase the pool of potential counterparties for participants 
trading OTC, and provide additional trading expertise to the market. 
The commingling of funds supporting cleared-only positions with 
customer funds supporting exchange-traded positions should result in 
improved, more efficient, collateral management and lower 
administrative costs since risk-offsetting positions will be held 
together in the same account rendering a more precise estimation of the 
risk posed by the account. These types of efficiencies also generally 
support competition.
    3. Financial integrity of futures markets and price discovery. 
Price discovery is likely to be enhanced through market competition. 
The extended exemption also may promote financial integrity by 
providing the benefits of clearing to these OTC markets. As discussed 
above, the risks associated with commingling funds supporting cleared-
only positions with customer funds supporting exchange-traded positions 
are appropriately mitigated.
    4. Sound risk management practices. Clearing of OTC transactions is 
likely to foster risk management by the participant counterparties. ICE 
Clear's risk management practices in clearing these transactions are 
subject to the Commission's supervision and oversight.
    5. Other public interest considerations. The granted exemptions are 
likely to encourage market competition in agricultural derivatives 
products without unnecessary regulatory burden.
    The Commission requested comment on its application of these 
factors in the proposing release. No comments were received.

VII. Order

    After considering the above factors and the comment letters 
received in response to its request for comments on its application of 
these factors in the proposing release, the Commission has determined 
to issue the following:

Order

    (1) The Commission, pursuant to its authority under CEA Section 
4(c) and subject to the conditions below, hereby:
    (A) Permits ESPs to submit for clearing, and FCMs and ICE Clear to 
clear, OTC agricultural swap contracts in coffee, sugar, or cocoa; 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 agricultural commodities to be cleared on ICE 
Clear.
    (2) The Commission, pursuant to its authority under CEA Section 4d 
and subject to the conditions below, hereby permits ICE Clear and its 
clearing members that are registered FCMs and acting pursuant to this 
order to hold money, securities, and other property, used to margin, 
guarantee, or secure transactions in OTC agricultural swap contracts 
involving coffee, sugar, or cocoa 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 segregated account or accounts 
maintained in accordance with Section 4d of the CEA (including any 
orders issued pursuant to Section 4d(a)(2) of the CEA) 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 consistently with CEA 
Section 4d and the regulations thereunder.
    (3) This order is subject to the following conditions:
    (A) The contracts, agreements, or transactions subject to this 
order must be executed pursuant to the requirements of Part 35 of the 
Commission's regulations, as modified herein, and are limited to 
cleared-only contracts in the following agricultural products: coffee, 
sugar, or cocoa;

[[Page 77020]]

    (B) The 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;
    (C) All contracts, agreements, or transactions subject to this 
order must be submitted for clearing by an ICE Futures clearing member 
to ICE Clear pursuant to ICE Clear rules;
    (D) Each ICE Futures floor member acting as an ESP pursuant to this 
order must be the subject of a financial guarantee from a member of ICE 
Clear covering the trading of the OTC swap contracts, agreements, or 
transactions subject to this order. The clearing member must be 
registered with the Commission as an FCM and must clear for the floor 
member the contracts, agreement, or transactions covered by the 
financial guarantee;
    (E) An ICE Futures floor member is prohibited from entering into a 
transaction in a cleared-only contract subject to this order with 
another ICE Futures floor member as the counterparty;
    (F) ICE Clear and its clearing members will mark to market each 
cleared-only contract subject to this order on a daily basis in 
accordance with ICE Clear rules;
    (G) ICE Clear will apply its margining system and calculate margin 
rates for each cleared-only contract subject to this order in 
accordance with its normal and customary practices;
    (H) ICE Futures must maintain appropriate compliance systems in 
place to monitor the transactions of its floor members in the OTC swap 
transactions permitted pursuant to this order;
    (I) ICE Clear will apply appropriate risk management procedures 
with respect to transactions and open interest in the cleared-only 
contracts subject to this order. ICE Clear will conduct financial 
surveillance and oversight of its members clearing the cleared-only 
contracts, and will 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 will take all other 
steps necessary and appropriate to manage risk related to clearing 
cleared-only contracts;
    (J) ICE Clear will make available open interest and settlement 
price information for the cleared-only contracts in the eligible 
products (coffee, sugar, and cocoa) on a daily basis in the same manner 
as for contracts listed on ICE Futures;
    (K) ICE Futures shall establish and maintain a coordinated market 
surveillance program that encompasses the cleared-only contracts 
subject to this order and the underlying futures contracts listed by 
ICE Futures on its designated contract market. ICE Futures shall adopt 
position accountability levels for each of the cleared-only contracts 
subject to this order that are appropriate in light of the position 
accountability levels applicable to the underlying futures contracts.
    (L) Cleared-only contracts subject to this order shall not be 
treated as fungible with any contract listed for trading on ICE 
Futures.
    (M) Each FCM acting pursuant to this order shall keep the types of 
information and records that are described in CEA Section 4g and 
Commission regulations thereunder, including but not limited to Reg. 
Sec.  1.35, with respect to all cleared-only contracts in eligible 
products subject to this order. Such information and records shall be 
produced for inspection in accordance with the requirements of Reg. 
Sec.  1.31;
    (N) ICE Futures shall provide to the Commission the types of 
information 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;
    (O) ICE Clear will apply large trader reporting requirements to 
cleared-only contracts in accordance with its rules, and each FCM 
acting pursuant to this order shall provide to the Commission the types 
of information described in Part 17 of the Commission's regulations in 
the manner described in Parts 15 and 17 of the Commission's regulations 
with respect to all cleared-only contracts in which it participates; 
and
    (P) ICE Clear and ICE Futures shall at all times fulfill all 
representations made in their requests for relief under CEA Sections 
4(c) and 4d and all supporting materials thereto.
    This order is based upon the representations made and supporting 
material provided to the Commission by ICE Clear and ICE Futures in 
their requests. Any material change or omissions in the facts and 
circumstances pursuant to which this order is granted might require the 
Commission to reconsider its finding that the exemptions set forth 
herein are appropriate. Further, in its discretion, the Commission may 
condition, modify, suspend, terminate, or otherwise restrict the 
exemptions granted in this order, as appropriate, on its own motion.

    Issued in Washington, DC, on December 12, 2008 by the 
Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. E8-30057 Filed 12-17-08; 8:45 am]
BILLING CODE 6351-01-P