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[Federal Register: June 29, 2010 (Volume 75, Number 124)]
[Notices]               
[Page 37406-37409]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29jn10-43]                         

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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, rwasserman@cftc.gov, or Lois J. Gregory, 
Special Counsel, 202-418-5569, lgregory@cftc.gov, 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

[[Page 37409]]

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
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