[Federal Register Volume 73, Number 250 (Tuesday, December 30, 2008)]
[Notices]
[Pages 79830-79833]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-31110]


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COMMODITY FUTURES TRADING COMMISSION


Order Exempting the Trading and Clearing of Certain Products 
Related to iShares[supreg] COMEX Gold Trust Shares and iShares[supreg] 
Silver Trust Shares

AGENCY: Commodity Futures Trading Commission.

ACTION: Final order.

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SUMMARY: On November 12, 2008, the Commodity Futures Trading Commission 
(``CFTC'' or the ``Commission'') published for public comment in the 
Federal Register \1\ a proposal to exempt the trading and clearing of 
certain contracts called ``options'' and other contracts called 
``security futures'' on each of iShares[supreg] COMEX Gold Trust Shares 
(``Gold Products'') and iShares[supreg] Silver Trust Shares (``Silver 
Products'') (collectively, ``Gold and Silver Products'') from the 
provisions of the Commodity Exchange Act (``CEA'') \2\ and the 
regulations thereunder to the extent necessary to permit them to be 
traded and cleared as described below. The contracts are proposed to be 
traded on national securities exchanges (as to options) and designated 
contract markets registered with the Securities and Exchange Commission 
(``SEC'') as limited purpose national securities exchanges (as to 
security futures), and in both cases to be cleared through the Options 
Clearing Corporation (``OCC'') in its capacity as a registered 
securities clearing agency. Authority for this exemption is found in 
Section 4(c) of the CEA.\3\
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    \1\ 73 FR 66847 (November 12, 2008).
    \2\ 7 U.S.C. 1 et seq.
    \3\ 7 U.S.C. 6(c).

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DATES: Effective Date: December 3, 2008

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,\4\ and a securities 
clearing agency registered pursuant to Section 17A of the Securities 
Exchange Act of 1934 (``the '34 Act'').\5\
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    \4\ 7 U.S.C. 7a-1
    \5\ 15 U.S.C. 78q-l.
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    OCC filed with the CFTC, pursuant to Section 5c(c) of the CEA and 
Commission Regulations 39.4(a) and 40.5 thereunder,\6\ requests for 
approval of rules and rule amendments that would enable OCC (1) to 
clear and settle contracts called ``options'' (``Options'') on Gold and 
Silver Products traded on national securities exchanges, in its 
capacity as a registered securities clearing agency (and not in its 
capacity as a DCO) and (2) to clear and settle contracts called 
``security futures'' (``Security Futures'') on Gold and Silver Products 
traded on designated contract markets \7\ registered with the SEC as 
limited purpose national securities exchanges pursuant to Section 6(g) 
of the '34 Act \8\ (``DCMs'') as security futures subject to the CEA 
and CFTC regulations thereunder governing security futures, in both 
cases in OCC's capacity as a registered securities clearing agency (and 
not in its capacity as a DCO).\9\ Section 5c(c)(3) provides that the 
CFTC must approve 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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    \6\ 7 U.S.C. 7a-2(c), 17 CFR 39.4(a), 40.5.
    \7\ See Section 5 of the CEA, 7 U.S.C. 7.
    \8\ 15 U.S.C. 78f(g).
    \9\ See SR-OCC-2008-13 and SR-OCC-2008-14. OCC has also filed 
these proposed rule changes with the Securities and Exchange 
Commission (``SEC'').
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    The request for approval concerning the Options and Security 
Futures on Gold and Silver Products was filed effective July 23, 2008. 
By letter dated August 20, 2008, the Director of the Division of 
Clearing and Intermediary Oversight, pursuant to delegated authority, 
extended the review period of the request until October 21, 2008 due to 
the novel and complex issues raised by the products that are the 
subject of the request. By letters dated October 16, 2008 and November 
19, 2008, OCC consented to extensions of the review period, ultimately 
until December 3, 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.\10\ The Commission

[[Page 79831]]

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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    \10\ 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.'' \11\ Permitting Options and Security Futures on 
Gold and Silver Products to trade on national securities exchanges (as 
to Options) and DCMs (as to Security Futures) and in both cases be 
cleared by OCC in its capacity as a securities clearing agency, as 
discussed above, appears likely to foster both financial innovation and 
competition. In accordance with the Memorandum of Understanding entered 
into between the CFTC and the 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).
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    \11\ HOUSE CONF. REPORT NO. 102-978, 1992 U.S.C.C.A.N. 3179, 
3213 (``4(c) Conf. Report'').
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    The Options and Security Futures on Gold and Silver Products 
described above are novel instruments. Given, among other things, their 
potential usefulness to the market the Commission believes that this is 
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.\12\
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    \12\ 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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    In the November 12, 2008 Federal Register release, the CFTC 
requested comment as to whether this exemption from the requirements of 
the CEA and regulations thereunder should be granted in the context of 
these transactions. No comments were received.

III. Findings and Conclusions

    After considering the complete record in this matter, the 
Commission has determined that the requirements of Section 4(c) have 
been met. First, the exemption is consistent with the public interest 
and with the purposes of the CEA, including ``promot[ing] responsible 
innovation and fair competition among boards of trade, other markets 
and market participants.'' \13\ It appears 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 and clearing the Options and 
Security Futures on Gold and Silver Products to be determined by 
competitive market forces.
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    \13\ CEA Sec.  3(b), 7 U.S.C. 5(b). See also CEA Sec.  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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    Second, Options and Security Futures on Gold and Silver Products 
will be entered into solely between appropriate persons. 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.'' National securities exchanges and OCC, as well as their 
members who will intermediate Options on Gold and Silver Products, are 
subject to extensive and detailed regulation by the SEC under the `34 
Act. Similarly, DCMs and OCC, as well as their members who will 
intermediate Security Futures on Gold and Silver Products, are subject 
to regulation by the SEC and CFTC. Given that the Options and Security 
Futures on Gold and Silver Products will be traded on national 
securities exchanges (as to Options) and DCMs (as to Security Futures), 
the regulatory protections available under securities laws and the 
applicable regulations governing security futures, and the goal of 
promoting fair competition, the Options and Security Futures on Gold 
and Silver Products will be traded by appropriate persons.
    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. There is no reason to believe that 
granting an exemption here would interfere with the Commission's or a 
DCM's ability to oversee the trading of similar products or otherwise 
carry out its duties.
    Therefore, upon due consideration, pursuant to its authority under 
Section 4(c) of the CEA, the Commission hereby issues this Order and 
exempts the trading of Options on Gold and Silver Products on national 
securities exchanges and the trading of Security Futures on Gold and 
Silver Products on DCMs registered with the SEC as limited purpose 
national securities exchanges, and the clearing of both the Options and 
Security Futures through the OCC in its capacity as a registered 
securities clearing agency, from the provisions of the CEA and the 
regulations thereunder, to the extent necessary to permit the Options 
and Security Futures to be so traded and cleared.
    This Order is subject to termination or revision, on a prospective 
basis, if the Commission determines upon further information that this 
exemption is not consistent with the public interest. If the Commission 
believes such exemption becomes detrimental to the public interest, the 
Commission may revoke this Order on its own motion.

IV. Related Matters

A. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \14\ imposes certain 
requirements on federal agencies (including the Commission) in 
connection with their conducting or

[[Page 79832]]

sponsoring any collection of information as defined by the PRA. The 
exemptive order will not require a new collection of information from 
any entities that would be subject to the proposed order.
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    \14\ 44 U.S.C. 3507(d).
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B. Cost-Benefit Analysis

    Section 15(a) of the CEA,\15\ as amended by Section 119 of the 
Commodity Futures Modernization Act of 2000,\16\ 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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    \15\ 7 U.S.C. 19(a).
    \16\ 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 the 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, DCMs, OCC and their members who would 
intermediate the above-described Options and Security Futures on Gold 
and Silver Products are subject to extensive regulatory oversight.
    2. Efficiency, competition, and financial integrity. The exemptive 
order appears likely to enhance market efficiency and competition since 
it could encourage potential trading of Options and Security Futures on 
Gold and Silver Products through modes other than those normally 
applicable to designated contract markets or derivatives transaction 
execution facilities. Financial integrity will not be affected since 
the Options and Security Futures on Gold and Silver Products 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 Options and Security 
Futures on Gold and Silver Products will be subject to OCC's current 
risk-management practices including its margining system.
    5. Other public interest considerations. The exemptive order 
appears likely to encourage development of derivative products through 
market competition without unnecessary regulatory burden.
    The Commission requested comment on its application of these 
factors in the proposing release. No comments were received.
    After considering these factors, the Commission has determined to 
issue this order.
* * * * *

    Issued in Washington, DC, on December 3, 2008 by the Commission.
David A. Stawick,
Secretary of the Commission.

Commissioner Michael V. Dunn

Signing Statement

CFTC Recommendations in Connection With iShares[supreg] Silver Trust 
Shares and iShares[supreg] COMEX Gold Trust Shares

    According to the CFTC/SEC Memorandum of Understanding (MOU), each 
of our agencies ``recognizes that enhanced coordination and cooperation 
concerning issues of common regulatory interest is necessary in order 
to foster market innovation and fair competition and to promote 
efficiency in regulatory oversight.'' The CFTC/SEC MOU further states 
that ``the agencies can facilitate the introduction of novel derivative 
products to market users and investors.'' While the CFTC and SEC may be 
adhering to the words of their MOU, I am not certain that we are 
following the spirit of this document. I fear that it is no easier 
today for novel products to get to market than it was pre-MOU. I also 
fear that if this lack of cooperation and coordination continues, given 
today's financial environment, both agencies will be doing a disservice 
to the markets we regulate and the investors we seek to protect. I 
believe that in order to foster true cooperation between the CFTC and 
SEC, we must hold joint public meetings so that each agency's Chairmen 
and Commissioners set a tone of cooperation for their staffs, and can 
be held accountable to those they serve if their coordination and 
cooperation does not foster the market innovation or efficiency the 
public demands.
    Pending before the Commission are requests by the Options Clearing 
Corporation (``OCC'') for approval of OCC rules allowing them to clear 
iShares[supreg] Silver Trust Shares and iShares[supreg] Comex Gold 
Trust Shares, and an order pursuant to Section 4(c) of the Commodity 
Exchange Act (CEA) exempting the trading and clearing of the iShares 
Option and Futures Contracts as options on securities and security 
futures.
    The propriety of treating the iShares Option and Futures Contracts 
as options on securities and security futures depends on the status of 
the underlying iShares contracts as securities. While I have questions 
about the status of the underlying iShares contracts as securities, see 
SEC v. W.J. Howey Co., 328 U.S. 293 (1946), I believe innovative 
products, in a regulated environment, should be brought to market in a 
timely fashion. If, absent the 4(c) exemptive order, the OCC rules are 
permitted to be deemed approved, an inference might be drawn concerning 
the status of the iShares Option and Futures Contracts as securities. 
Accordingly, I am voting to approve the 4(c) exemptive order and, based 
on the Commission's approval of that order, to approve the OCC rules. 
While I vote to approve the exemptive order and OCC rules, it is my 
hope that in the future, greater cooperation between our agencies will 
facilitate the introduction of similar innovative products regardless 
of who develops them.

Dissenting in Part and Concurring in Part to Exemptive Order Exempting 
the Trading and Clearing of Certain Products Related to iShares COMEX 
Gold Trust Shares and iShares Silver Trust Shares and Approval of 
Request for Approval of Rules

    As I have noted previously in a similar context, I applaud efforts 
to enhance cooperation and coordination in approving innovative and 
novel products, and it is my hope and expectation that such efforts 
will improve in the near future. I dissent, however, from the 
Commission's issuance of the above-referenced order, because--as I have 
stated before--I believe the Commission's issuance of such an order 
should be predicated upon assurance that the SEC will similarly 
exercise its broad statutory exemptive authorities under the securities 
laws to permit futures exchanges to trade products that are

[[Page 79833]]

economically equivalent to those that are or may be approved for 
trading on national securities exchanges, and to allow derivatives 
clearing organizations to clear such products. My objective here is not 
to impair or impede the trading of such cross-jurisdictional products; 
rather, my concern is solely to ensure that futures markets are not in 
any way competitively disadvantaged. I dissent once again, as I have in 
the past, because I do not believe that we have up to this point 
reached the level of coordination and cooperation between our agencies 
that provides the assurance of such reciprocity. I look forward to 
working with colleagues at the SEC on such collaborative efforts 
promptly to achieve these goals. Given the issuance of the order, 
however, I concur in the approval of the request for approval of rules.
Bart Chilton,
Commissioner, Commodity Futures Trading Commission.
[FR Doc. E8-31110 Filed 12-29-08; 8:45 am]
BILLING CODE 6351-01-P