[Federal Register Volume 74, Number 218 (Friday, November 13, 2009)]
[Notices]
[Pages 58608-58610]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-27287]



[[Page 58608]]

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COMMODITY FUTURES TRADING COMMISSION


Request for Comment on a Petition To Exempt Certain Over-the-
Counter Agricultural Swaps From Certain of the Requirements Imposed by 
Commission Regulation 35.2, Pursuant to Section 4(c) of the Commodity 
Exchange Act

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of request for comment.

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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 Kansas City Board of Trade (KCBT), a 
designated contract market, and the Kansas City Board of Trade Clearing 
Corporation (KCBTCC), a registered derivatives clearing organization 
(DCO), have petitioned for an exemption permitting them to list for 
clearing and to clear, respectively, wheat calendar swaps. Authority 
for granting such an exemption is found in Section 4(c) of the 
Commodity Exchange Act (CEA).

DATES: Comments must be received on or before December 14, 2009.

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 ``KCBT/KCBTCC 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: Phyllis P. Dietz, Associate Director, 
202-418-5449, [email protected], or Eileen A. Donovan, Special Counsel, 
202-418-5096, [email protected], Division of Clearing and Intermediary 
Oversight, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street, NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. The KCBT/KCBTCC Petition

    KCBT and KCBTCC (Petitioners) jointly submitted a request to the 
Commission for an exemptive order under Section 4(c) of the CEA.\1\ The 
order would permit KCBT to list certain wheat calendar swaps for 
``clearing only'' and permit KCBTCC to clear those wheat calendar swaps 
(cleared-only contracts).\2\ The contract size (5,000 bushels), 
position limits (5,000 contracts for any single month and 6,500 
contracts for all months combined), and minimum price fluctuations 
($.0025) of the cleared-only contracts would be the same as those of 
the KCBT wheat futures contract. However, the cleared-only contracts 
would be cash-settled, in contrast to KCBT's wheat futures contract, 
which is physically-settled, and would be listed for any of the 12 
calendar months, as compared to the wheat futures contract which is 
listed only for March, May, July, September, and December.
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    \1\ A copy of the petition is available on the Commission's Web 
site at http://www.cftc.gov.
    \2\ The Petitioners also requested that the Commission issue an 
order under Section 4d of the CEA that would permit KCBTCC and 
futures commission merchants (FCMs) to commingle customer funds used 
to margin, secure, or guarantee the cleared-only contracts with 
other funds held in segregated accounts. Although the CEA does not 
require the Commission to provide public ``notice and opportunity 
for hearing'' in connection with the issuance of a 4d order (as is 
required for an order requested under Section 4(c)), public comments 
regarding the Petitioners' request for a 4d order are being accepted 
on the Commission's Web site.
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    The OTC wheat calendar swaps would be negotiated between eligible 
swap participants in the OTC market and then cleared by clearing 
members acting on behalf of their own customers or the customers of 
non-clearing member FCMs or non-member FCMs. Previous requests to clear 
OTC agricultural swaps were limited to clearing member FCMs acting on 
behalf of their own customers.\3\
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    \3\ See 74 FR 12316 (Mar. 24, 2009) (order permitting clearing 
of corn, wheat, and soybean swaps by the Chicago Mercantile 
Exchange); 73 FR 77015 (Dec. 18, 2008) (order permitting clearing of 
coffee, sugar, and cocoa swaps by ICE Clear U.S.).
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    In support of their request, Petitioners represent that daily large 
trader reporting information allows KCBT to monitor for position 
concentration among non-clearing member and non-member FCMs, and the 
risk management and financial surveillance procedures of the non-
clearing member and non-member FCMs' designated self-regulatory 
organizations (DSROs) are similar or identical to those employed by 
KCBT. The Commission requests comment on the impact of permitting the 
OTC wheat calendar swaps to be cleared by clearing FCMs on behalf of 
the customers of non-clearing member FCMs or non-member FCMs, and 
whether there are any conditions that should be placed upon DSROs or 
FCMs to facilitate risk management in connection with such transactions 
in the cleared-only contracts.
    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 ``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\ Public Law 106-554, 114 Stat. 2763 (2000).
    \9\ See, e.g., Sections 2(d), (g), and (h) of the CEA, 7 U.S.C. 
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 Petitioners, a 
cleared-only contract could be offset by another cleared-only contract. 
Thus, clearing of the OTC wheat calendar swaps 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 swaps KCBTCC 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 KCBT proposes to list for clearing-
only would, however, meet the requirements of paragraphs (a) and (d) 
of Reg. 35.2 in that they would be entered into solely between 
eligible swap participants and executed OTC.

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[[Page 58609]]

    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\ Petitioners have requested 
that the Commission grant an order under Section 4(c) of the CEA that 
would exempt cleared-only contracts 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\ The Petitioners represent that permitting 
the clearing of the OTC wheat calendar swaps by KCBTCC may benefit the 
marketplace by providing market participants the ability to combine 
flexible negotiation with central counterparty guarantees and capital 
efficiencies. In addition, Petitioners represent that they expect the 
cleared-only contracts to provide a risk management tool with unique 
attributes, i.e., contract months and settlement features, to address 
price risk and to complement KCBT's wheat futures and options 
contracts.
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    \15\ 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 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\ Thus, 
the Commission is requesting comment on whether it should exempt the 
OTC wheat calendar swaps that are proposed to be cleared by KCBTCC and 
listed by KCBT, as described above, to the same extent as other 
contracts that are exempt pursuant to Part 35 of the Commission's 
regulations.
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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 this exemption would 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 Petitioners' exemption request.

IV. Related Matters

A. Paperwork Reduction Act

    The Paperwork Reduction Act (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. An exemptive order issued by the Commission would not be 
associated with a collection of information. Accordingly, the PRA does 
not apply.
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    \18\ 44 U.S.C. 3501 et seq.
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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

[[Page 58610]]

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 exemption request will only be entered into 
by persons who are ``appropriate persons'' as set forth in Section 4(c) 
of the CEA.
    2. Efficiency, competition, and financial integrity. Extending the 
exemption granted under Part 35 to the OTC wheat calendar swaps to 
allow them to be cleared may promote liquidity and transparency in the 
markets for OTC wheat derivatives as well as wheat futures. Extending 
the exemption also may promote financial integrity by providing the 
benefits of clearing to the OTC wheat market.
    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. KCBTCC'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 an agricultural derivatives product 
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 provisions of Section 15.

    Issued in Washington, DC, on November 6, 2009 by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. E9-27287 Filed 11-12-09; 8:45 am]
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