[Federal Register Volume 75, Number 124 (Tuesday, June 29, 2010)]
[Notices]
[Pages 37406-37409]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-14818]
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COMMODITY FUTURES TRADING COMMISSION
Order Exempting the Trading and Clearing of Certain Products
Related to ETFS Physical Swiss Gold Shares and ETFS Physical Silver
Shares
AGENCY: Commodity Futures Trading Commission.
ACTION: Final order.
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SUMMARY: On April 15, 2010, 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 ETFS Physical Swiss Gold Shares (``Gold
Products'') and ETFS Physical Silver Shares (``Silver Products'')
(collectively, ``Gold and Silver Products''), which would 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 either case cleared through the Options
Clearing Corporation (``OCC'') in its capacity as a registered
securities clearing agency, from the provisions of the Commodity
Exchange Act (``CEA'') \2\ and the regulations thereunder, to the
extent necessary to permit them to be so traded and cleared. Authority
for this exemption is found in Section 4(c) of the CEA.\3\ The
Commission also requested comment on whether it should amend all orders
issued exempting the trading and clearing of options on gold and silver
share-based products from CEA provisions and Commission regulations
thereunder, to impose market and large trader reporting requirements
under Commission regulations to the trading and clearing of the options
in order to assist the Commission in monitoring and addressing, among
other things, the effect on designated contract markets of trading in
such products.\4\
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\1\ 75 FR 19619 (April 15, 2010).
\2\ 7 U.S.C. 1 et seq.
\3\ 7 U.S.C. 6(c).
\4\ The Commission has provided exemptions for gold and silver
products in three prior cases. See Order Exempting the Trading and
Clearing of Certain Products Related to SPDR[supreg] Gold Trust
Shares, 73 FR 31981 (June 5, 2008), Order Exempting the Trading and
Clearing of SPDR Gold Futures Contracts, 73 FR 31979 (June 5, 2008),
and Order Exempting the Trading and Clearing of Certain Products
Related to iShares[supreg] COMEX Gold Trust Shares and
iShares[supreg] Silver Trust Shares, 73 FR 79830 (December 30,
2008).
DATES: Effective Date: June 14, 2010
[[Page 37407]]
FOR FURTHER INFORMATION CONTACT: Robert B. Wasserman, Associate
Director, 202-418-5092, [email protected], or Lois J. Gregory,
Special Counsel, 202-418-5569, [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,\5\ and a securities
clearing agency registered pursuant to Section 17A of the Securities
Exchange Act of 1934 (``the '34 Act'').\6\
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\5\ 7 U.S.C. 7a-1
\6\ 15 U.S.C. 78q-l.
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OCC has filed with the CFTC, pursuant to Section 5c(c) of the CEA
and Commission Regulations 39.4(a) and 40.5 thereunder,\7\ a request
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 \8\ registered with the SEC as
limited purpose national securities exchanges pursuant to Section 6(g)
of the '34 Act \9\ (``DCMs'') as security futures subject to the CEA
and CFTC regulations thereunder governing security futures, in OCC's
capacity as a registered securities clearing agency (and not in its
capacity as a DCO).\10\ 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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\7\ 7 U.S.C. 7a-2(c), 17 C.F.R. Sec. Sec. 39.4(a), 40.5.
\8\ See Section 5 of the CEA, 7 U.S.C. 7.
\9\ 15 U.S.C. 78f(g).
\10\ See Securities Exchange Act Release No. 61591 (February 25,
2010), 75 FR 9981 (March 4, 2010) (File No. SR-OCC-2009-20 filed
with both the Commission and the Securities and Exchange Commission
(``SEC'')). See also Securities Exchange Act Release No. 61483
(February 3, 2010), 75 FR 6753 (February 10, 2010)(SEC approval of
securities exchanges' listing and trading options on ETFS Physical
Swiss Gold Shares and ETFS Physical Silver Shares).
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In each case, the shares of the ETFS Physical Swiss Gold Shares and
the ETFS Physical Silver Shares are designed to reflect the performance
of the price of gold and silver bullion, respectively, less the
expenses of operations. The shares represent entitlement to a specified
quantity of physical gold or silver bullion, or, in certain
circumstances, the proceeds from the sale of such quantity of such
physical gold or silver bullion.
The gold and silver bullion is held in vault by or on behalf of the
custodian. All physical gold and silver conforms to the London Bullion
Market Association's rules for good delivery.
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.\11\ 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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\11\ 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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Section 4(c) does not require the Commission determine the
jurisdictional status of the Options and Security Futures on Gold and
Silver Products. 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.'' \12\ 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 to be cleared by
OCC in its capacity as a securities clearing agency, as discussed
above, may foster both financial innovation and competition.
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\12\ 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, the
fact that the Commission has previously exempted similar Gold and
Silver Products, the Commission believes that this is an appropriate
case for issuing an exemption without issuing 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.\13\
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\13\ 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 April 15, 2010 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. The CFTC also requested comment as to whether national
securities exchanges that list Options on Gold and Silver Products
should comply with market reporting requirements and brokers and
traders that carry accounts or trade in Options on Gold and Silver
products should
[[Page 37408]]
comply with large trader reporting requirements.\14\
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\14\ See Parts 15 through 21 of the Commission's regulations.
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Five comments were received: One from OCC, two from national
securities exchanges,\15\ and two from private citizens.\16\ Two of the
comments (OCC and CBOE) support the current exemption, but urge the
Commission to deal with the status of commodity-based ETFs on a
categorical rather than a case-by-case basis. The Commission will
consider this suggestion.
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\15\ Chicago Board Options Exchange (CBOE) and International
Securities Exchange (ISE).
\16\ All five comments are available on the Commission's Web
site, under comment file 10-04, at http://www.cftc.gov/LawRegulation/PublicComments/10-004.html.
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OCC and CBOE also argue that any large trader reporting
requirements imposed by the Commission would result in unnecessary and
duplicative regulatory burdens, while ISE (which also supports the
proposed exemption) notes that securities options exchanges have large
option position reporting requirements in place, and that the
Commission should consider coordinating these protections between
markets in order to address its concern regarding the effective
regulation of interconnected markets. By contrast, one public commenter
(who opposes granting the exemption) suggests that, if the exemption is
granted, it is crucial that reporting requirements be imposed. The
Commission will consider these comments in deciding what action to take
and or to propose with respect to market and large trader reporting for
the trading and clearing of Options Gold and Silver Products and
similar options on gold and silver products for which exemptions have
previously been granted.\17\
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\17\ See footnote 4, supra. The other public commenter submitted
an article suggesting that the silver and gold futures markets were
being manipulated. There was no reference, however, to Options on
Gold or Silver Products.
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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.'' \18\ Particularly in light of the exemptions
previously granted by the Commission with respect to Options and
Security Futures on Gold and Silver Products, it appears consistent
with these and the other purposes of the CEA, and with the public
interest, for the mode of trading and clearing these Options and
Security Futures--whether the mode applicable to options on securities
or commodities, or to security futures or futures--to be determined by
competitive market forces.
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\18\ CEA Sec. 3(b), 7 U.S.C. Sec. 5(b). See also CEA Sec.
4(c)(1), 7 U.S.C. Sec. 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
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, in light of the previous exemptions granted for similar gold
and silver products, the grant of this exemption would not have a
material adverse effect on the ability of the Commission or any DCM to
carry out their regulatory responsibilities under the CEA.
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 Options Clearing Corporation (``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'') \19\ imposes certain
requirements on federal agencies (including the Commission) in
connection with their conducting or sponsoring any collection of
information as defined by the PRA. The proposed exemptive order would
not, if approved, require a new collection of information from any
entities that would be subject to the proposed order.
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\19\ 44 U.S.C. 3507(d).
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B. Cost-Benefit Analysis
Section 15(a) of the CEA,\20\ as amended by Section 119 of the
Commodity Futures Modernization Act of 2000, 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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\20\ 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
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of the specific provisions of Section 15(a) of the CEA, as follows:
\21\
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\21\ See also Previous Orders, 73 FR at 31982 (June 5, 2008), 73
FR at 3 FR at 31980 (June 5, 2008), and 73 FR at 79832 (December 30,
2008).
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1. Protection of market participants and the public. National
securities exchanges, 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 may 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;
that is, 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, 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. In addition,
OCC is supervised by both the SEC and the Commission, and the
Commission has found OCC's risk management practices, including its
margining system, generally sound.\22\
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\22\ One commenter questioned whether the Commission's
conclusions regarding sound risk management practices at OCC were
unduly reliant on supervision by others. In fact, the Commission
itself conducts supervision of OCC and its risk management
practices.
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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. As noted above, one comment was
received.
After considering these factors, the Commission has determined to
issue this order.
Issued in Washington, DC, on June 14, 2010 by the Commission.
Sauntia S. Warfield,
Assistant Secretary of the Commission.
[FR Doc. 2010-14818 Filed 6-28-10; 8:45 am]
BILLING CODE 6351-01-P