[Federal Register Volume 75, Number 189 (Thursday, September 30, 2010)]
[Notices]
[Pages 60411-60415]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-24586]
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COMMODITY FUTURES TRADING COMMISSION
Request for Comment on Options for a Proposed Exemptive Order
Relating to the Trading and Clearing of Precious Metal Commodity-Based
ETFs; Concept Release
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of options for a proposed exemptive order and request
for comment; concept release.
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SUMMARY: Recently, the Commodity Futures Trading Commission
(``Commission,'' or ``CFTC'') has been confronted with the question of
how to treat certain transactions on fractional undivided interests, or
shares, in single commodity investment products referred to as exchange
traded funds (``ETF'' or ``ETFs''),\1\ primarily in the metals complex.
The ETFs have in all relevant instances been structured as trusts
(singularly, ``ETF Trust'' or ``Trust''),\2\ the assets of which
consist of holdings of one specific physical commodity.\3\ The explicit
and sole investment objective of each of these ETF Trusts is to track
as nearly as possible the spot price of the underlying physical
commodity less the expenses of trust operations. The listing of these
ETF shares provides shareholders with efficient exposure to commodity
market price movements.\4\ These Precious Metal Commodity-Based ETFs
have primarily focused on holding either gold or silver, with a recent
expansion into palladium and platinum. The Commission has issued Orders
pursuant to Section 4(c) of the Commodity Exchange Act (the ``Act'')
permitting the trading and clearing of certain transactions on these
Trusts as, respectively, options on securities and security futures.\5\
The Previous Orders have provided exemptions from certain provisions of
the Act, or the Commission's regulations thereunder, which might have
been transgressed by trading or clearing, among other things, options
and futures on Commodity-Based ETFs. The exemption mechanism has
enabled the Commission to reserve judgment as to the jurisdictional
classification (i.e. commodity or security) of Commodity-Based ETFs and
options and futures on Commodity-Based ETFs while at the same time
providing a mechanism to ensure both that the Commission's regulatory
[[Page 60412]]
oversight needs are satisfied (whether through regulation by the
Securities and Exchange Commission (``SEC'') or by attaching conditions
to the exemption orders) and that novel products may be introduced
without undue delay for market participant and investor use.
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\1\ This Release is limited to those ``Commodity ETFs'' that are
structured as grantor trusts with an investment objective of
achieving the price performance of the underlying commodity or
commodities held by such trust, less expenses. Further, for purposes
of this Release, the term or label ``ETF'' is loosely applied to
precious metal commodity-based ETFs (as used interchangeably herein,
``Precious Metal Commodity-Based ETFs'' or ``Commodity-Based
ETFs''), see section 3(a)(1) of the Investment Company Act of 1940
(the ``1940 Act'') and Securities and Exchange Commission (``SEC''),
Exchange-Traded Funds, Investment Company Act Release No. 28192
(March 11, 2008), 73 FR 14618, 14623 (March 18, 2008). As used
herein, ``Precious Metal'' indicates either gold, silver, palladium,
or platinum.
Additionally, when we refer to an ``ETF'' in this Concept
Release, we are not (unless the context otherwise requires)
referring to an entity that meets the definition of an ``investment
company'' and is registered under the 1940 Act. This Release also
does not address those ``ETF Commodity Pools'' that attempt to track
a benchmark index or commodity by engaging in the purchase of
commodity futures and/or options contracts. These ETF Commodity
Pools are subject to regulation by the Commission as a commodity
pool operator (``CPO'') and/or commodity trading adviser (``CTA'')
and may not implicate regulatory issues raised in this Release.
\2\ See e.g. NYSEArca Rule 8.201 (Commodity-Based Trust Shares);
NYSEAmex Rule 1200A (Commodity-Based Trust Shares); NYSE Rule 1300
(streetTracks Gold Shares); and BATS Exchange Rule 14.4.
\3\ See, however, Securities Exchange Act Release Nos. 62402
(June 29, 2010), 75 FR 39292 (July 8, 2010) (notice of filing of a
proposal to list and trade shares of the ETFS Precious Metals Basket
Trust consisting of gold, silver, palladium, and platinum) and 62620
(July 30, 2010) (notice of a proposal to list and trade shares of
ETFS White Metals Basket Trust consisting of silver, palladium, and
platinum).
\4\ For a previous Commission discussion of the structural and
arbitrage mechanisms underlying a physical gold ETF, see Description
of the Underlying Commodity in CFTC, Proposed Exemptive Order for ST
Gold Futures Contracts, 73 FR 13867, at 13868 (March 14, 2008).
\5\ See CFTC, Order Exempting the Trading and Clearing of
Certain Products Related to SPDR[reg] Gold Trust Shares, 73 FR 31981
(June 5, 2008), CFTC, Order Exempting the Trading and Clearing of
Certain Products Related to iShares[reg] COMEX Gold Trust Shares and
iShares[reg] Silver Trust Shares, 73 FR 79830 (December 30, 2008),
and CFTC, Order Exempting the Trading and Clearing of Certain
Products Related to ETFS Physical Swiss Gold Shares and ETFS
Physical Silver Shares, 75 FR 37406 (June 29, 2010) (collectively,
the ``Previous Orders'').
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More recently, the Options Clearing Corporation (the ``OCC'') has
sought approval of rules permitting similar treatment of options and
futures on certain ETFs based on palladium and platinum.
The Commission is issuing this Release to solicit comments on: (i)
Options for a proposed exemptive order in connection with the OCC's
request for approval of a rule change; and (ii) the Commission's
treatment of Precious Metal Commodity-Based ETFs generally, including
whether the Commission should exempt the trading and clearing of
certain options and futures transactions on gold and silver, and/or
palladium and platinum, Commodity-Based ETFs on a categorical basis.
DATES: Comments must be received on or before November 1, 2010. All
comments must be in English, or if not in English, accompanied by an
English translation.
ADDRESSES: Comments may be submitted by any of the following methods:
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: [email protected]. Include ``Commodity Based
ETFs'' 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: Ryne Miller, Attorney Advisor, 202-
418-5921, [email protected], or David Van Wagner, Chief Counsel, 202-
418-5481, [email protected], Division of Market Oversight, Commodity
Futures Trading Commission, Three Lafayette Centre, 1151 21st Street,
NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
Part I--Proposed Exemptive Order
A. Background
The first Commodity-Based ETF in the U.S. was listed and traded on
the New York Stock Exchange (``NYSE'') in November 2004.\6\ Since that
time, Commodity-Based ETFs have generally focused on the precious
metals of gold and silver,\7\ with palladium and platinum \8\ having
been the subject of a Commodity-Based ETF only recently.
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\6\ See NYSE Information Memo Number 04-59 (November 18, 2004)
(trading of streetTRACKS Gold Shares: Rules 1300 and 1301) and
Securities Exchange Act Release No. 50603 (October 28, 2004), 69 FR
64614 (November 5, 2004) (approval of the listing and trading of
streetTRACKS Gold Shares).
\7\ See, e.g., Securities Exchange Act Release Nos. 51058
(January 19, 2005), 70 FR 3749 (January 26, 2005) (approval of the
iShares COMEX Gold Trust (IAU)); 53521 (March 20, 2006), 71 FR 14967
(March 24, 2006) (approval of the iShares Silver Trust (SLV)); 59781
(April 17, 2009), 74 FR 18771 (April 24, 2009) (approval of the ETFS
Silver Trust); and 59895 (May 8, 2009), 74 FR 22993 (May 15, 2009)
(approval of the ETFS Gold Trust).
\8\ See Securities Exchange Act Release No. 61220 (December 22,
2009), 74 FR 68895 (December 29, 2009) (approval of ETFS Palladium)
and 60970 (November 9, 2009), 74 FR 59319 (November 17, 2009)
(approval of ETFS Platinum).
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The structure and trading of Commodity-Based ETFs is virtually
identical to traditional ETFs listed and traded on national securities
exchanges. Shares of ETFs are bought and sold throughout the trading
day on national securities exchanges. Unlike traditional mutual funds,
ETFs do not sell or redeem their individual shares at net asset value
(``NAV'').\9\ Instead, large institutional investors known as
Authorized Participants (``APs'') buy shares of the ETF directly from
the Trust in creation unit sizes (``Creation Units''), varying from
25,000 to 200,000 shares, generally in exchange for an in-kind deposit
of securities.\10\ Conversely, APs may sell or redeem shares of an ETF
only in Creation Unit size and generally in exchange for portfolio
securities (``Redemption Baskets''). In limited cases, such as an ETF
investing in illiquid securities or derivatives, APs may deposit cash
instead of securities in exchange for shares of an ETF. For Commodity-
Based ETFs, Creation Units and Redemption Baskets require the delivery
of the relevant physical commodity plus any cash based on the ETF's
NAV. ETF shares are traded on national securities exchanges at market
prices that may, and do, differ from NAV.
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\9\ NAV is the amount by which the value of an entity's assets
exceeds the value of its liabilities. NAV is typically calculated on
a per-share basis by dividing the total value of all assets in a
portfolio, less any liabilities, by the number of shares
outstanding.
\10\ See NYSE Explanation of ETFs, available at http://www.nyse.com/pdfs/ETFs7109.pdf, and SEC statement regarding ETFs,
available at http://www.sec.gov/answers/etf.htm. See also Kathleen
Moriarty, Exchange-Traded Funds: Legal and Structural Issues
Worldwide, 29 Int'l Bus. L. 346 (2001); Stuart M. Strauss, Exchange-
Traded Funds--the Wave of the Future? 7 Investment Lawyer 1 (2000);
and Stuart Strauss & Scott M. Zoltowski, Exchange Traded Funds, in
A.L.I.-A.B.A., Investment Mgmt Reg. 67 (Aug. 2006).
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APs, who are typically exchange market makers or specialists, use
their ability to exchange Creation Units with their underlying assets
to provide liquidity for the ETF shares and help ensure that their
intraday market price approximates the NAV of the ETF. Other investors
trade ETF shares on national securities exchanges in the secondary
market. The ability to purchase and redeem Creation Units and
Redemption Baskets gives ETFs an inherent arbitrage mechanism intended
to minimize the potential deviation between the market price and NAV of
ETF shares.\11\ Existing ETFs (including Commodity-Based ETFs) have
daily transparent portfolios, so that APs and investors know exactly
what portfolio assets they must assemble if they wish to purchase a
Creation Unit. The national securities exchanges that trade ETF shares
disseminate an updated indicative NAV throughout the trading day,
typically at 15-second intervals.
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\11\ See Grimm, A Process of Natural Correction: Arbitrage and
the Regulation of Exchange-Traded Funds Under the Investment Company
Act, 1 U. Pa. J. Bus & Emp. Law 95 (2008). See also Securities
Exchange Act Release No. 31591 (), 57 FR 60253 (December 18, 1992)
(File No. SR-AMEX-92-18) (order approving proposed rule change by
the Amex relating to Portfolio Depository Receipts), n. 25.
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Although similar in practice to traditional ETFs that invest in
securities, by law, Commodity-Based ETFs are not subject to specific
SEC regulation under the 1940 Act. Instead, Commodity-Based ETFs are
subject to SEC disclosure review by the SEC's Division of Corporation
Finance as well as exchange regulation.
Based on the belief that options and security futures trading
benefits the liquidity and relative success of the underlying ETF, the
national securities exchanges and ETF sponsors have sought to be able
to trade options and futures on Commodity-Based ETFs. In 2008, the
Commission and the SEC provided regulatory approvals and exemptions so
that options on shares of the streetTracks Gold Trust (predecessor to
the SPDR Gold Trust) (symbol: GLD) would be able to be listed and
traded on the various options exchanges.\12\ Since 2008, the Commission
has permitted options and futures on several other gold and silver
Commodity-Based ETFs.\13\
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\12\ See Securities Exchange Act Release No. 57894 (May 30,
2008), 73 FR 32061 (June 5, 2008) (approval of SPDR Gold Trust
options), and CFTC, Order Exempting the Trading and Clearing of
Certain Products Related to SPDR Gold Trust Shares, 73 FR 31981
(June 5, 2008), and Exemptive Order for SPDR Gold Futures Contracts,
73 FR 31979 (June 5, 2008).
\13\ See footnote 5, supra.
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[[Page 60413]]
From a procedural standpoint, the issue of the regulation of
Commodity-Based ETFs comes before the CFTC through filings by a
contract market or a clearing organization in its capacity as a CFTC
registrant, requesting Commission approval of certain proposed rule
change(s) which would permit it to treat options and futures
transactions on such ETFs as options on securities and security
futures, respectively. In order to approve such rule changes, the
Commission has issued exemptive orders for the options or futures in
question pursuant to its exemptive authority under Section 4(c)(1) of
the Commodity Exchange Act (``Act''), 7 U.S.C. 6(c).\14\ As noted
above, the Commission has issued three such exemptive ETF orders, all
of which have been confined to options and futures on shares of
specific physical gold and silver ETFs.\15\
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\14\ Section 4(c)(1) of the Act 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.
\15\ See footnote 5, supra.
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Notably, in issuing the Previous Orders providing Section 4(c)
exemptions for options and futures on gold and silver ETF shares, the
Commission did not make any finding that the options were either
options on securities or options subject to the Act, nor did it make
any finding that the futures were, or were not, security futures.\16\
Rather, the exemptions permitted the trading and clearing of options
and/or futures on the Commodity-Based ETFs as, respectively, options on
securities and security futures. In doing so, the Commission reserved
making any affirmative determination as to whether shares of Commodity-
Based ETFs are more properly characterized as either commodities or
securities. That is, the exemptions have enabled the Commission to
reserve judgment as to the appropriate jurisdictional classification of
Commodity-Based ETFs and options and futures on Commodity-Based ETFs.
The Commission's approach is consistent with the framework envisioned
by Congress. In the future, and upon the Dodd-Frank Wall Street Reform
and Consumer Protection Act's (``Dodd-Frank Act'') \17\ effective date,
certain provisions in the Dodd-Frank Act will provide the Commission
and the SEC with a legal and procedural framework to use exemptive
authority to tailor joint regulatory solutions for novel products that
raise jurisdictional questions--such as those raised by Commodity-Based
ETFs and options and futures on Commodity-Based ETFs.\18\
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\16\ Under Section 4(c), the Commission is not required to make
an express finding of jurisdiction over a product as a condition
precedent to issuing a Section 4(c) exemption. The 4(c) Conference
Report states: ``The Conferees do not intend that the exercise of
exemptive authority by the Commission would require any
determination beforehand that the agreement, instrument, or
transaction for which an exemption is sought is subject to the Act.
Rather, this provision provides flexibility for the Commission to
provide legal certainty to novel instruments where the determination
as to jurisdiction is not straightforward. Rather than making a
finding as to whether a product is or is not a futures contract, the
Commission in appropriate cases may proceed directly to issuing an
exemption.'' See House Conf. Report No. 102-978, 1992 U.S.C.C.A.N.
3179, 3214-3215 (``4(c) Conf. Report'').
\17\ Dodd-Frank Wall Street Reform and Consumer Protection Act,
Public Law 111-203, 124 Stat. 1376 (2010).
\18\ See e.g. Sec. Sec. 717 and 718 of the Dodd-Frank Act,
which cover ``New Product Approval CFTC--SEC Process'' and
``Determining Status of Novel Derivative Products'', respectively.
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B. Pending OCC Submission--Transactions on Palladium and Platinum ETFs
By a submission dated March 1, 2010, the OCC has submitted for
Commission approval, pursuant to Section 5c(c)(2) of the Act and
Commission Regulations 39.4(a) and 40.5, a proposed amendment to an
interpretation of Article I, Section 1.F.(8) of their By-Laws.\19\ The
interpretation, as amended, would state that the OCC will clear and
treat as options on securities any options on ETFS Palladium Shares
(``Palladium Products'') \20\ or ETFS Platinum Shares (``Platinum
Products''),\21\ and will clear and treat as security futures any
futures contracts on the Palladium and Platinum Products. Section
5c(c)(3) of the Act provides that the Commission must approve any such
rules or rule amendments, which includes a proposed amendment of an
interpretation, submitted for approval unless it finds that the rules
or rule amendments would violate the Act. The Commission initially
extended the review period of the OCC's submission by forty-five days,
pursuant to Commission Regulation 40.5(c)(1), to June 1, 2010. By
letter dated June 1, 2010 and pursuant to Commission Regulation
40.5(c)(2), the OCC consented to a further extension of the review
period to September 30, 2010. While the OCC's pending rule submission
deals with options and futures on two specific palladium and platinum
Commodity-Based ETFs (the Palladium and Platinum Products), the
Commission is also requesting comment on options for a proposed
exemption that would permit the trading and clearing, as options on
securities and security futures, of options and futures on gold and
silver, and/or palladium and platinum Commodity-Based ETFs on a
categorical basis, i.e., regardless of issuer.
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\19\ The complete submission is made available on the
Commission's Web site at: http://www.cftc.gov/stellent/groups/public/@rulesandproducts/documents/ifdocs/rul030110occ001.pdf.
\20\ Shares of the Palladium Products are traded on NYSE Arca
under the symbol ``PALL''.
\21\ Shares of the Platinum Products are traded on NYSE Arca
under the symbol ``PPLT''.
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C. Regulatory Implications of Precious Metal Commodity-Based ETFs
The Commission is issuing this Release because, among other things,
the Commission believes that options and futures on Commodity-Based
ETFs may raise certain regulatory issues due to their economic
similarity to options on commodities and futures on commodities traded
on designated contract markets. The Commission's concerns include the
potential that futures contracts based on the commodities underlying
the ETFs could be affected by withdrawal of the deliverable supply for
futures contracts, and also, that the Commission would lack the
jurisdictional capability to surveil persons with positions in the
Commodity-Based ETFs.\22\
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\22\ These concerns arise from the Commission's statutory
mandate under Section 6(c) of the Act, which charges the Commission
with manipulation authority regarding price of ``any commodity, in
interstate commerce, or for future delivery [* * *].'' See Section
6(c) of the Act.
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The concerns are heightened by the reality that options and futures
on Commodity-Based ETFs allow market participants to take positions in
instruments that appear economically similar to Commission-regulated
products, including products that would otherwise fall under, for
example, the Commission's market and trade practice surveillance and
large trader reporting
[[Page 60414]]
system.\23\ By taking positions in options and futures on Commodity-
Based ETFs traded on national securities exchanges, which can achieve
the same investment objectives and are functionally the same as
Commission-regulated products, market participants potentially avoid
incurring any obligation to comply with the Commission's rules and
regulations (although the market participants do remain subject to the
existing regulatory regime applicable to the securities markets).
Beyond this concern, the Commission has examined, and continues to
examine, the palladium and platinum markets relative to the gold and
silver markets to review empirical findings which may justify a
different regulatory resolution for the Palladium and Platinum Products
as compared to the Commission's approach to gold and silver ETF
products under the Previous Orders (discussed further at section D,
infra).
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\23\ The Commission has previously considered whether special
conditions should be attached to related exemptions granted pursuant
to Section 4(c) of the Act:
In order to preserve the integrity of the price discovery and
risk management functions of Commission regulated markets, it may be
that national securities exchanges that list the options [on
precious metal commodity-based ETFs] should comply with market
reporting requirements and brokers and traders that carry accounts
or trade in options on gold and silver products should comply with
large trader reporting requirements.
See CFTC, Request for Comment on a Proposal to Exempt, Pursuant
to the Authority in Section 4(c) of the Commodity Exchange Act, the
Trading and Clearing of Certain Products Related to ETFS Physical
Swiss Gold Shares and ETFS Physical Silver Shares, 75 FR 19619
(April 15, 2010) at 19621. In its order exempting the trading and
clearing of products related to the ETFS Physical Swiss Gold Shares
and the ETFS Physical Swiss Silver Shares, the Commission did not
impose market reporting and large trader reporting requirements.
However, the Commission noted the comments received and future
consideration with respect to market and large trader reporting for
certain gold and silver option products. See CFTC, Order Exempting
the Trading and Clearing of Certain Products Related to ETFS
Physical Swiss Gold Shares and ETFS Physical Swiss Silver Shares,
footnote 5, supra.
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At the same time, the Commission is seeking comment as to whether
the trading and clearing (as options on securities or security futures)
of options and futures on all or some Precious Metal Commodity-Based
ETFs should be categorically exempted from the Act to the extent
necessary to permit them to be so traded and cleared, whether
absolutely or subject to conditions. Related to that issue, the
Commission has been encouraged by market participants to adopt a
``generic'' approach for addressing the transactions in question on
Precious Metal Commodity-Based ETFs as opposed to the existing process
of performing a case-by-case basis review.\24\ This Release is intended
to assist in the Commission's consideration relating to a potential
``generic'' approach, and the Commission is seeking comments to that
end.
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\24\ Specifically, on April 15, 2010, the OCC and the Chicago
Board Options Exchange (``CBOE'') jointly delivered a letter to the
Chairmen of both the Commission and the SEC, expressing their
concern about the delays incurred in the case-by-case review method
of these products. The letter is referenced in a public presentation
available on the CBOE's Web site at: http://cboenews.cboe.com/pdfs/PressBriefingOIC2010FINAL.pdf, at page 7.
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D. Empirical Observations: Palladium and Platinum v. Gold and Silver
There are significant empirical differences across the precious
metal markets which may support the Commission taking a different
regulatory approach with respect to options and futures on Commodity-
Based ETFs holding palladium and platinum than it has previously taken
with respect to options and futures on Commodity-Based ETFs holding
gold and silver.
Global palladium and platinum supplies are considerably smaller in
volume than supplies of gold and silver, and come predominantly from
mine production concentrated in a small number of countries, namely,
South Africa and Russia (``Producer Countries'').\25\ These factors
make palladium and platinum markets potentially more susceptible to
tightness during periods of economic growth and subject to potential
supply shocks from isolated events in either of the Producer Countries.
Palladium and platinum futures markets consequently become more
susceptible to price volatility that may result from relatively small
changes in demand. These concerns were observed in January 2010 when
the Palladium and Platinum Products were initially listed for trading
on NYSE Arca, resulting in an apparent one-time increase in short-term
demand for physical palladium and platinum,\26\ and the NYMEX palladium
and platinum futures markets entered nearby backwardation.\27\ Indeed,
the Prospectuses for the Palladium and Platinum Products, dated
December 30, 2009, and filed with the SEC, acknowledge that purchase of
the shares may affect the prices of palladium and platinum,
respectively, and may impact the supply of, and demand for, palladium
and platinum, respectively.\28\
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\25\ Data from the Johnson Matthey Platinum 2010 publication
indicates that 76.5% of global platinum supplies came from South
Africa in 2009, while 51.1% of global palladium supplies came from
Russia. Global platinum and palladium supplies for 2009 totaled 5.9
million ounces and 7.1 million ounces respectively (based on Johnson
Matthey's data), compared to much larger 2009 global supplies of
gold (116.6 million ounces) and silver (826.1 million ounces), based
on data from the CPM Group Gold and Silver Yearbooks for 2010.
\26\ For example, NYMEX settlement data shows that the April
2010 to July 2010 active spread for platinum futures was in
backwardation on 18 out of 19 trading days between January 14, 2010,
and February 10, 2010, ranging from +$0.20 to +$2.00. The March 2010
to June 2010 active spread for palladium futures was in
backwardation on 5 of 6 trading days from January 14, 2010 to
January 22, 2010, ranging from +$0.05 to +$1.00.
\27\ Nearby backwardation occurs when the price for the nearby
futures contract is higher than the price for the next nearest
expiring contract, a generally unusual circumstance in the precious
metals markets.
\28\ See http://www.sec.gov/Archives/edgar/data/1459862/000093041310000057/c58962_424b3.htm, at page 7; see also http://www.sec.gov/Archives/edgar/data/1460235/000093041310000056/c58731_424b3.htm, at page 7.
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In addition to these distinguishing features, industrial demand
constitutes a greater percentage of the total demand for both palladium
and platinum \29\ as compared to industrial demand as a percentage of
total demand for gold and silver,\30\ and palladium and platinum have
traditionally not been held for investment purposes to nearly the same
extent as gold and silver.\31\ Accordingly, the Commission requests
comment on whether these empirical differences suggest the need for a
different regulatory approach for options and futures on the Palladium
and Platinum Products, or any palladium or platinum Commodity-Based
ETF, as compared to options and futures on the gold and silver
Commodity-Based ETFs covered by the Previous Orders.
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\29\ The Prospectus for the Palladium Products states that
``autocatalysts, automobile components that use palladium, accounted
for approximately 57% of the global demand in palladium in 2008.''
See citation in footnote 26, at page 9. The Prospectus for the
Platinum Products states that autocatalysts accounted for
approximately 51% of the 2008 global demand for platinum. See
citation in footnote 26, at page 9.
\30\ In comparison, the CPM Group Gold and Silver Yearbooks for
2010 indicate that 12.5% of global gold demand was for industrial
purposes in 2009 (this includes electronics and dental/medical
products), while 45.3% of global silver demand was for industrial
purposes (this includes photography and electronics and batteries).
Jewelry demand is not included in these figures.
\31\ The Johnson Matthey Platinum 2010 publication indicates
that 9.4% of global demand for platinum in 2009 was for investment
purposes, while 8.0% of global demand for palladium was for
investment. In contrast, the CPM Group Gold and Silver Yearbooks for
2010 indicate that net private investment in gold accounted for a
larger 44.7% share of global gold demand in 2009 (this includes
official coins, bullion and medallions), with net private investment
accounting for around 30.0% of global silver demand in 2009 (this
includes bullion and coins).
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Part II--Issues for Comment
The Commission requests comment, taking into account all of the
issues presented in this Release and
[[Page 60415]]
considering the Commission's future treatment of options and futures on
Precious Metal Commodity-Based ETFs as required pursuant to the Dodd-
Frank Act, on each of the following options for a proposed exemptive
order:
1. Is there any reason the Commission should not provide a
categorical Section 4(c) exemption for the trading and clearing of the
transactions in question on gold and/or silver Commodity-Based ETFs?
2. Are the palladium and platinum markets sufficiently distinct
from the gold and silver markets to justify a different regulatory
approach, for the purposes of a Section 4(c) exemption, for options and
futures on the Palladium and Platinum Products (i.e. the specific ETF
products identified in the OCC's pending submission) as compared to
that for options and futures on gold and silver Commodity-Based ETFs.
3. More generally, should the Commission consider extending such a
Section 4(c) exemption to options and futures on palladium and platinum
Commodity-Based ETFs on a categorical basis (i.e. without respect to
issuer)?
4. If the Commission continues granting Section 4(c) exemptions,
whether on an individual or categorical basis, when presented with a
request to allow options and futures on Commodity-Based ETFs, should
the Commission include additional conditions and requirements? For
example, should the Commission consider imposing large trader reporting
obligations, position limits,\32\ or other analogous requirements when
exempting options and futures on Precious Metal Commodity-Based ETFs
from the Commission's jurisdiction?
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\32\ The Commission understands that certain position and
exercise limits on Commodity-Based ETF options currently exist in
the securities options markets. See, e.g., ISE Rules 412 and 414;
see also NYSE Amex Rules 904 and 905. In addition, certain position
limits and position accountability rules apply to security futures
products listed and traded on OneChicago. See OneChicago Rule 414.
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Related Matters
A. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (``PRA'') \33\ 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. At least some of the options for a
proposed exemptive order described above, if issued with substantive
reporting or similar conditions, would require a new collection of
information from any entities that would be subject to the proposed
order.
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\33\ 44 U.S.C. 3507(d).
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B. Cost-Benefit Analysis
In considering the options for a Section 4(c) exemption allowing
the trading and clearing as options on securities any options on gold,
silver, palladium, and platinum Commodity-Based ETFs, and to clear and
treat as security futures any futures contracts on gold, silver,
palladium, and platinum Commodity-Based ETFs, Section 15(a) of the
Act,\34\ 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 Act.
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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\34\ 7 U.S.C. 19(a).
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Section 15(a) of the Act 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 Act.
The Commission is considering the costs and benefits of the options
for a proposed order described above in light of the specific
provisions of Section 15(a) of the Act, as follows:
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, silver,
palladium, and platinum Commodity-Based ETFs are subject to extensive
regulatory oversight; however, this regulatory oversight in the
securities markets does not completely parallel the oversight programs
seen in CFTC regulated markets.
2. Efficiency, competition, and financial integrity. The options
for a proposed exemption may enhance market efficiency and competition
since they could encourage potential trading of options and security
futures on the gold, silver, palladium, and platinum Commodity-Based
ETFs 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, silver, palladium, and platinum
Commodity-Based ETFs will be cleared by the 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 the gold, silver, palladium, and platinum Commodity-Based
ETFs will be subject to OCC's current risk-management practices
including its margining system.
5. Other public interest considerations. The options for a proposed
exemption may encourage development of derivative products through
market competition without unnecessary regulatory burden.
After considering these factors, the Commission has determined to
seek comment on the matters discussed above. The Commission invites
public comment on its application of the cost-benefit provision.
* * * * *
Issued in Washington, DC, on September 24, 2010 by the
Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. 2010-24586 Filed 9-29-10; 8:45 am]
BILLING CODE P