[Federal Register Volume 75, Number 217 (Wednesday, November 10, 2010)]
[Notices]
[Pages 69058-69060]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-28377]


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COMMODITY FUTURES TRADING COMMISSION


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 the CBOE Gold ETF 
Volatility Index and Similar Products

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of Proposed Order and Request for Comment.

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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or the 
``Commission'') is proposing to exempt the trading and clearing of 
certain contracts called ``options'' (``Options'') on the CBOE Gold ETF 
Volatility Index (``GVZ Index''), which would be traded on the Chicago 
Board Options Exchange (``CBOE''), a national securities exchange, and 
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'') \1\ and the 
regulations thereunder, to the extent necessary to permit such Options 
on the GVZ Index to be so traded and cleared. Authority for this 
exemption is found in Section 4(c) of the CEA.\2\ The Commission is 
also requesting comment regarding whether the Commission should provide 
a categorical exemption that would permit the trading and clearing of 
options on indexes that measure the volatility of shares of gold 
exchange-traded funds (``ETFs'') generally, regardless of issuer, 
including options on any index that measures the magnitude of changes 
in, and is composed of the price(s) of shares of one or more gold ETFs 
and the price(s) of any other instrument(s), which other instruments 
are securities as defined in the Securities Exchange Act of 1934 (``the 
'34 Act'').\3\
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    \1\ 7 U.S.C. 1 et seq.
    \2\ 7 U.S.C. 6(c).
    \3\ 15 U.S.C. 78a et seq. The Commission has provided exemptions 
for gold and silver ETF products on three prior occasions. See Order 
Exempting the Trading and Clearing of Certain Products Related to 
SPDR[supreg] Gold Trust Shares, 73 FR 31981 (June 5, 2008), 
Exemptive Order for SPDR[supreg] Gold Futures Contracts, 73 FR 31979 
(June 5, 2008), 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), and 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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DATES: Comments must be received on or before December 10, 2010.

ADDRESSES: Comments may be submitted by any of the following methods:
    <bullet> Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
    <bullet> E-mail: <a href="/cdn-cgi/l/email-protection#6b0c04070f1d04070a1f0207021f125f082b080d1f08450c041d"><span class="__cf_email__" data-cfemail="88efe7e4ecfee7e4e9fce1e4e1fcf1bcebc8ebeefceba6efe7fe">[email protected]</span></a>. Include ``Options on 
GVZ Index and Similar Products'' in the subject line of the message.
    <bullet> Fax: 202-418-5521.
    <bullet> Mail: Send to David A. Stawick, Secretary, Commodity 
Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, 
NW., Washington, DC 20581.
    <bullet> Courier: Same as mail above.
    All comments must be submitted in English, or if not, accompanied 
by an English translation. Comments may be posted as received to http://www.cftc.gov. You should submit only information that you wish to make 
available publicly. If you wish the Commission to consider information 
that may be exempt from disclosure under the Freedom of Information 
Act, a petition for confidential treatment of the exempt information 
may be submitted according to the established procedures in CFTC 
Regulation 145.9.

FOR FURTHER INFORMATION CONTACT: Robert B. Wasserman, Associate 
Director, 202-418-5092, <a href="/cdn-cgi/l/email-protection#1f6d687e6c6c7a6d727e715f7c796b7c31787069"><span class="__cf_email__" data-cfemail="4a383d2b39392f38272b240a292c3e29642d253c">[email protected]</span></a>, Division of Clearing and 
Intermediary Oversight, Commodity Futures Trading Commission, Three 
Lafayette Centre, 1151 21st Street, NW., Washington, DC 20581, or Anne 
C. Polaski, Special Counsel, 312-596-0575, <a href="/cdn-cgi/l/email-protection#81e0f1eeede0f2eae8c1e2e7f5e2afe6eef7"><span class="__cf_email__" data-cfemail="f392839c9f9280989ab390958790dd949c85">[email protected]</span></a>, Division 
of Clearing and Intermediary Oversight, Commodity Futures Trading 
Commission, 525 W. Monroe Street, Suite 1100, Chicago, Illinois 60661.

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 '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 has filed with the CFTC, pursuant to Section 5c(c) of the CEA 
and Commission Regulations 39.4(a) and 40.5 thereunder,\6\ a request 
for approval of a rule that would enable OCC to clear and settle 
Options on the GVZ Index traded on the CBOE, a national securities 
exchange, in its capacity as a registered securities clearing agency 
(and not in its capacity as a DCO).\7\ Section 5c(c)(3) of the CEA 
provides that the CFTC must approve such a rule submitted for approval 
unless it finds that the rule 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 Securities Exchange Act Release No. 62094 (May 13, 
2010), 75 FR 28085 (May 19, 2010) (File No. SR-OCC-2010-07 filed 
with both the CFTC and the Securities and Exchange Commission 
(``SEC'')) and the SEC's approval in Securities Exchange Act Release 
No. 62290 (June 14, 2010), 75 FR 35861 (June 23, 2010). See also 
Securities Exchange Act Release No. 62139 (May 19, 2010), 75 FR 
29597 (May 26, 2010) (SEC approval of the CBOE's listing and trading 
of Options on the GVZ Index).
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    The GVZ Index is an index that measures the implied volatility of 
options on shares of the SPDR[supreg] Gold Trust (``SPDR[supreg] Gold 
Trust Shares''), an ETF designed to reflect the performance of the 
price of gold bullion.\8\
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    \8\ See Securities Exchange Act Release No. 50603 (October 28, 
2004), 69 FR 64614 (November 5, 2004) (original GLD Approval Order 
for listing and trading on the NYSE).

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[[Page 69059]]

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.\9\ 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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    \9\ 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.'' \10\ Permitting Options on the GVZ Index to be 
traded on a national securities exchange and to be cleared by OCC in 
its capacity as a securities clearing agency, as discussed above, may 
foster both financial innovation and competition and may be consistent 
with public interest and the CEA. The CFTC is requesting comment on 
whether it should exempt Options on the GVZ Index, as described above, 
that are traded on a national securities exchange, and cleared through 
OCC in its capacity as a registered securities clearing agency, from 
the provisions of the CEA and the Commission's regulations thereunder, 
to the extent necessary to permit such Options to be so traded and 
cleared. The CFTC previously granted exemptions for options on shares 
of gold ETFs on June 5, 2008, December 30, 2008, and June 29, 2010.\11\
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    \10\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179, 
3213 (``4(c) Conf. Report'').
    \11\ See footnote 3, above.
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    In proposing this exemption, the CFTC need not--and does not--find 
that Options on the GVZ Index are (or are not) options subject to the 
CEA. During the legislative process leading to the enactment of Section 
4(c) of the CEA, the House-Senate Conference Committee noted that:

    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 [CEA]. 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.\12\
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    \12\ 4(c) Conf. Report at 3214-3215.

The Options on the GVZ Index described above raise questions involving 
their nature and the appropriate resulting jurisdiction over them. 
Given their potential usefulness to the market, however, the Commission 
believes that this may be an appropriate case for issuing an exemption 
without making a finding as to the nature of these particular 
instruments.
    Section 4(c)(2) of the CEA 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 Commission-
regulated markets to discharge their 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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    The purposes of the CEA include ``promot[ing] responsible 
innovation and fair competition among boards of trade, other markets 
and market participants.'' \14\ It may be consistent with these and the 
other purposes of the CEA and with the public interest for the mode of 
trading and clearing the Options on the GVZ Index--whether the mode 
applicable to options on securities indexes or commodity indexes--to be 
determined by competitive market forces. Accordingly, the Commission 
proposes to use its authority under Section 4(c) of the CEA to exempt 
the trading of Options on the GVZ Index on a national securities 
exchange, and clearing thereof by a registered securities clearing 
agency, from the provisions of the CEA and the Commission's regulations 
thereunder to the extent necessary to permit such Options to be so 
traded and cleared.
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    \14\ CEA 3(b), 7 U.S.C. 5(b). See also CEA 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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    In addition, the Commission proposes to use its authority under 
Section 4(c) of the CEA to exempt the trading and clearing of options 
on indexes that measure the volatility of shares of gold ETFs 
generally, regardless of issuer. In particular, the Commission proposes 
to exempt the following categories of Options from the provisions of 
the CEA and the Commission's regulations thereunder to the extent 
necessary to permit such Options to be traded on a national securities 
exchange and cleared by OCC, in its capacity as a securities clearing 
agency:
    (a) Options on the GVZ Index;
    (b) Options on any index that measures the volatility (historical 
or expected) of the price(s) of shares of one or more gold ETFs; and
    (c) Options on any index that measures the volatility (historical 
or expected) of price(s) of shares of one or more gold ETFs and the 
price(s) of any other instrument(s), which other instruments are 
securities as defined in Section 3(a)(10) of the '34 Act.

The CFTC is requesting comment as to whether an exemption from the 
requirements of the CEA and regulations thereunder should be granted in 
the context of these transactions.
    On September 24, 2010, the Commission issued a Request for Comment 
on Options for a Proposed Exemptive Order Relating to the Trading and 
Clearing of Precious Metal

[[Page 69060]]

Commodity-Based ETFs and a Concept Release (``Precious Metal ETF 
Release'').\15\ In the Precious Metal ETF Release, the Commission 
requested comment, in part, regarding whether it should issue a 
categorical Section 4(c) exemption to permit options and futures on 
shares of all or some precious metal commodity-based ETFs to be traded 
and cleared as options on securities and security futures, 
respectively. The comment period for the Precious Metal ETF Release 
expires on November 1, 2010.
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    \15\ See 75 FR 60411 (September 30, 2010).
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    The Commission proposes to use its authority under Section 4(c) of 
the CEA to exempt options on indexes that measure the volatility of 
shares of gold ETFs at this time while it continues to seek comments 
and consider the appropriateness of a categorical exemption with 
respect to options and futures on shares of precious metal commodity-
based ETFs. The Commission believes that options on an index that 
measures commodity price volatility based on shares of such an ETF do 
not raise the same regulatory concerns that may be associated with 
options and futures on shares of an ETF that is based on the underlying 
commodity. In this regard, trading in options and futures on shares of 
a gold ETF could have a potential impact on the deliverable supply by 
removing physical gold from physical marketing channels, while an index 
based on volatility measures does not raise these concerns in that such 
an index does not involve ownership of the commodity, either directly 
or indirectly, by traders in options on such an index.
    Section 4(c)(3) of the CEA 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 
securities clearing agencies, as well as their members who will 
intermediate Options on the GVZ Index and other options on indexes that 
measure the volatility of shares of gold ETFs as described herein, are 
subject to extensive and detailed regulation by the SEC under the `34 
Act.

III. Request for Comment

    The Commission requests comment on all aspects of the issues 
presented by this proposed order.

IV. Related Matters

A. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \16\ 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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    \16\ 44 U.S.C. 3507(d).
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B. Cost-Benefit Analysis

    Section 15(a) of the CEA \17\ 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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    \17\ 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: (1) Protection of market participants and the public; (2) 
efficiency, competitiveness, and financial integrity of futures 
markets; (3) price discovery; (4) sound risk management practices; and 
(5) other public interest considerations. The Commission may 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 is 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 determined that the costs of this proposed order 
are not significant. Although the order would exempt the subject 
options from regulation under the CEA, market participants and the 
public will nonetheless be protected because the options, the markets 
on which they trade, and the intermediaries through which they will be 
traded will be subject to comprehensive regulation by the SEC. The 
Commission has determined that the benefits of the proposed order are 
substantial. The proposed order would promote efficiency in the 
markets, as it would provide certainty that the subject options will 
not be subject to duplicative regulation.
    After considering these factors, the Commission has determined to 
seek comment on the proposed order as discussed above. The Commission 
invites public comment on its application of the cost-benefit 
considerations. Commenters are also are invited to submit any data or 
other information that they may have quantifying or qualifying the 
costs and benefits of the proposal with their comment letters.

    Issued in Washington, DC, on November 4, 2010 by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. 2010-28377 Filed 11-9-10; 8:45 am]
BILLING CODE 6351-01-P


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