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[Federal Register Volume 75, Number 249 (Wednesday, December 29, 2010)]
[Notices]
[Pages 81977-81979]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-32812]

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COMMODITY FUTURES TRADING COMMISSION

Order Exempting the Trading and Clearing of Certain Products 
Related to the CBOE Gold ETF Volatility Index and Similar Products

AGENCY: Commodity Futures Trading Commission.

ACTION: Final Order.

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SUMMARY: On November 10, 2010, the Commodity Futures Trading Commission 
(``CFTC'' or the ``Commission'') published for public comment in the 
Federal Register a proposal to exempt the trading and clearing of 
certain 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'') and the regulations thereunder, to the 
extent necessary to permit such Options to be so traded and cleared. 
The Commission also requested comment regarding whether it 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''). The Commission has determined to issue this Order 
essentially as proposed. Authority for these exemptions is found in 
Sec.  4(c) of the CEA.

DATES: Effective Date: December 23, 2010.

FOR FURTHER INFORMATION CONTACT: Robert B. Wasserman, Associate 
Director, 202-418-5092, rwasserman@cftc.gov, 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, apolaski@cftc.gov, 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 Sec.  5b of the CEA,\1\ and a securities 
clearing agency registered pursuant to Sec.  17A of the '34 Act.\2\
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    \1\ 7 U.S.C. 7a-1.
    \2\ 15 U.S.C. 78q-l.
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    OCC has filed with the CFTC, pursuant to Sec.  5c(c) of the CEA and 
Sec. Sec.  39.4(a) and 40.5 of the Commission's regulations 
thereunder,\3\ 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).\4\ 
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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    \3\ 7 U.S.C. 7a-2(c), 17 CFR 39.4(a), 40.5.
    \4\ 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[reg] Gold Trust (``SPDR[reg] Gold Trust 
Shares''), an ETF designed to reflect the performance of the price of 
gold bullion.\5\
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    \5\ See Securities Exchange Act Release No. 50603 (Oct. 28, 
2004), 69 FR 64614 (Nov. 5, 2004) (original Approval Order for 
listing and trading shares of the streetTRACKs[reg] Gold Trust 
(renamed the SPDR[reg] Gold Trust on May 20, 2008) on the New York 
Stock Exchange, Inc.).

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[[Page 81978]]

    The Commission has proposed to permit OCC to clear and settle 
options on indexes that measure the volatility of shares of gold ETFs 
generally, regardless of issuer, that are traded on national securities 
exchanges, in OCC's capacity as a registered securities clearing agency 
(and not in its capacity as a DCO). Such options could include 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 '34 Act.

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.\6\ 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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    \6\ 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 to determine the 
jurisdictional status of the Options on the GVZ Index or other options 
on indexes that measure the volatility of shares of gold ETFs. In 
enacting Sec.  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.'' \7\ 
The Commission believes that permitting Options on the GVZ Index and 
other options on indexes that measure the volatility of shares of gold 
ETFs 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.
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    \7\ 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 on the GVZ Index and other options on indexes that 
measure the volatility of shares of gold ETFs, described above, are 
novel instruments. Given, among other things, the fact that the 
Commission has provided exemptions for options on shares of gold ETFs 
on prior occasions,\8\ 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.
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    \8\ See Order Exempting the Trading and Clearing of Certain 
Products Related to SPDR[reg] Gold Trust Shares, 73 FR 31981 (June 
5, 2008), 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 (Dec. 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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    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.\9\
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    \9\ 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 November 10, 2010 Federal Register release,\10\ 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. Seven comments were received, including comments 
from OCC and CBOE, which supported the exemption \11\ and five from 
private citizens.\12\
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    \10\ 75 FR 69058 (Nov. 10, 2010).
    \11\ OCC and CBOE express the belief that the exemption, while 
somewhat helpful, does not go far enough, because, in the opinion of 
each of them, all options on ETFs are securities.
    \12\ None of the comments from private citizens discussed the 
GVZ index, gold ETFs, the volatility of shares of gold ETFs, or 
otherwise addressed the merits of this exemption. Each of the seven 
comments is available on the Commission's Web site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=896.
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III. Findings and Conclusions

    After considering the complete record in this matter, the 
Commission has determined that the requirements of Sec.  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.'' \13\ It appears consistent with these and 
the other purposes of the CEA, and with the public interest, for the 
mode of trading and clearing Options on the GVZ Index, as well as other 
options on indexes that measure the volatility of shares of gold ETFs, 
whether the mode applicable to options on securities indexes or on 
commodities indexes, to be determined by competitive market forces.
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    \13\ 7 U.S.C. 5(b). See also 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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    Second, Options on the GVZ Index and other options on indexes that 
measure the volatility of shares of gold ETFs will be entered into 
solely between appropriate persons. 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.'' 
\14\ National securities exchanges and OCC, as well as their members 
who will intermediate Options on the GVZ Index and other

[[Page 81979]]

options on indexes that measure the volatility of shares of gold ETFs 
are subject to extensive and detailed regulation by the SEC under the 
`34 Act. Given such regulatory protections, the Commission has 
determined that all persons trading Options on the GVZ Index and other 
options on indexes that measure the volatility of shares of gold ETFs 
on a national securities exchange, and clearing such products through 
OCC in its capacity as a securities clearing agency, are appropriate 
persons.
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    \14\ 7 U.S.C. 6(c)(3).
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    Third, the grant of this exemption would not have a material 
adverse effect on the ability of the Commission or any Commission-
regulated market to carry out their regulatory responsibilities under 
the CEA.\15\
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    \15\ As noted in the proposing release, 75 FR at 69059, on 
September 24, 2010, the Commission has also issued a Request for 
Comment on Options for a Proposed Exemptive Order Relating to the 
Trading and Clearing of Precious Metal Commodity-Based ETFs and a 
Concept Release, 75 FR 60411 (September 30, 2010) (``Precious Metal 
ETF Release''). 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 
expired on November 1, 2010; eight comments were received.
    The Commission will 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 consider the 
appropriateness of a categorical exemption with respect to options 
and futures on shares of precious metal commodity-based ETFs. The 
Commission concludes 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, and thus may impact the gold futures price. 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, and thus 
options on such index would not have a direct impact on deliverable 
supplies or the pricing of gold in the cash market.
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    Therefore, upon due consideration, pursuant to its authority under 
Sec.  4(c) of the CEA, the Commission hereby issues this Order and 
exempts the trading of the following products on national securities 
exchanges, and the clearing of all such products 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 such products 
to be so traded and cleared:
    (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 Sec.  3(a)(10) of the '34 Act.\16\
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    \16\ 15 U.S.C. 78c(a)(10).
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    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'') \17\ imposes certain 
requirements on Federal agencies 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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    \17\ 44 U.S.C. 3507(d).
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B. Cost-Benefit Analysis

    Section 15(a) of the CEA \18\ requires the Commission to consider 
the costs and benefits of its action before issuing an order under the 
CEA. By its terms, Sec.  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, it requires that the 
Commission ``consider'' the costs and benefits of its action.
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    \18\ 7 U.S.C. 19(a).
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    Section 15(a) of the CEA further specifies that the 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 considered the costs and benefits of the order 
in light of the specific provisions of Sec.  15(a) of the CEA. The 
Commission has determined that the costs of this order are not 
significant. Although the order exempts the subject options from 
regulation under the CEA, market participants and the public will 
nonetheless be protected because the national securities exchanges 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 order are 
substantial. The order will promote efficiency in the markets, as it 
will provide certainty that the subject options will not be subject to 
duplicative regulation.
    The Commission requested comment on its application of these 
factors in the proposing release. No such comments were received.
    After considering the costs and benefits, the Commission has 
determined to issue this order.

    Issued in Washington, DC, on December 23, 2010 by the 
Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. 2010-32812 Filed 12-28-10; 8:45 am]
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