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[Federal Register: April 15, 2010 (Volume 75, Number 72)]
[Notices]
[Page 19619-19622]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15ap10-25]


[[Page 19619]]

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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 ETFS Physical Swiss Gold
Shares and ETFS Physical Silver Shares

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'' 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'') \1\ 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.\2\ The
Commission also is requesting comment on whether it should amend all
orders issued exempting the trading and clearing of options and futures
on gold and silver 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.\3\
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    \1\ 7 U.S.C. 1 et seq.
    \2\ 7 U.S.C. 6(c).
    \3\ The Commission has provided exemptions for gold and silver
products on two 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), 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)
(collectively, the ``Previous Orders.'').

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DATES: Comments must be received on or before May 17, 2010.

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: ETFSShares@cftc.gov. Include ``Options and
Security Futures on ETFS Gold and Silver Products'' 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/. All comments must be in English or, if not, accompanied
by an English translation.

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,\4\ and a securities
clearing agency registered pursuant to Section 17A of the Securities
Exchange Act of 1934 (``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 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 \7\ registered with the SEC as
limited purpose national securities exchanges pursuant to Section 6(g)
of the '34 Act \8\ (``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).\9\ 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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    \6\ 7 U.S.C. 7a-2(c), 17 CFR 39.4(a), 40.5.
    \7\ See Section 5 of the CEA, 7 U.S.C. 7.
    \8\ 15 U.S.C. 78f(g).
    \9\ 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 Gold Trust
and ETFS Silver Trust).
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    In each case, the shares of the ETFS Gold Trust and the ETFS Silver
Trust are designed to reflect the performance of the price of gold and
silver bullion, respectively, less the expenses of Trust operations.
The shares of each Trust represent beneficial interest in the Trust
which in turn holds physical allocated gold bullion (ETFS Gold Trust)
and silver bullion (ETFS Silver Trust). The gold and silver bullion is
held in vault by or on behalf of the Trust's custodian. Each physical
bar is properly segregated and allocated to the property of the Trust.
All physical gold and silver conforms to the London Bullion Market
Association's rules for good delivery. ETFS Gold Trust Shares and ETFS
Silver Trust Shares are listed and traded on NYSEArca.

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.\10\ The Commission

[[Page 19620]]

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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    \10\ 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.'' \11\ 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 in either case to be
cleared by OCC in its capacity as a securities clearing agency, as
discussed above, may foster both financial innovation and competition.
In accordance with the Memorandum of Understanding entered into between
the CFTC and the SEC on March 11, 2008, and in particular the addendum
thereto concerning Principles Governing the Review of Novel Derivative
Products, the Commission has permitted novel derivative products that
implicate areas of potential overlapping regulatory concern to be
permitted to trade in either or both a CFTC- or SEC-regulated
environment, in a manner consistent with laws and regulations
(including the appropriate use of all available exemptive and
interpretive authority). The CFTC is requesting comment on whether it
should exempt Options and Security Futures on Gold and Silver Products,
as described above, that are traded on a national securities exchange
or a DCM, respectively, and cleared through OCC in its capacity as a
registered securities clearing agency, from the CEA and the
Commission's regulations thereunder, to the extent necessary to permit
them to be so traded and cleared. The CFTC previously granted
exemptions for similar Options and Security Futures on June 5 and
December 30, 2008.\12\
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    \11\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179,
3213 (``4(c) Conf. Report'').
    \12\ See footnote 3, above.
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    In proposing this exemption, the CFTC need not--and does not--find
that Options on the Gold and Silver Products are (or are not) options
subject to the CEA, or find that Security Futures on the Gold and
Silver Products are (or are not) security futures as defined in Section
1a(31) of the CEA.\13\ During the legislative process leading to the
enactment of Section 4(c) of the CEA, the House-Senate Conference
Committee noted that:
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    \13\ 7 U.S.C. 1a(31).

    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.\14\
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    \14\ 4(c) Conf. Report at 3214-3215.

    The Options and Security Futures on Gold and Silver Products
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) 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.\15\
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    \15\ 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.''\16\ It may be consistent with these and the
other purposes of the CEA, with the public interest, with the CFTC-SEC
Memorandum of Understanding of March 11, 2008, and with the addendum
thereto, for the mode of trading and clearing the Options and Security
Futures on Gold and Silver Products--whether the mode applicable to
options on securities or commodities, or to security futures or
futures--to be determined by competitive market forces. Accordingly,
the Commission proposes to use its authority under Section 4(c) of the
Act to exempt the trading of Options on Gold and Silver Products on
national securities exchanges and clearing thereof by OCC in its
capacity as a registered securities clearing agency from the CEA and
the Commission's regulations thereunder to the extent necessary to
permit them to be so traded and cleared. In addition, the Commission
proposes to use its authority under Section 4(c) of the Act to exempt
the trading and clearing of Security Futures on Gold and Silver
Products from those provisions of the Act and the Commission's
regulations thereunder that, if the underlying were considered to be a
commodity that is not a security, would be inconsistent with the
trading and clearing of Security Futures on Gold and Silver Products as
security futures. The proposed exemption would require that
transactions in such contracts comply with the requirements established
for transactions in security futures by the CEA and the Commission's
regulations thereunder. The CFTC is requesting comment as to whether
these exemptions from the requirements of the CEA and regulations
thereunder should be granted in the context of these transactions.
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    \16\ 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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    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

[[Page 19621]]

Security Futures on Gold and Silver Products, are subject to regulation
by the SEC and CFTC. The CFTC is requesting comment as to whether all
persons trading Options and Security Futures on Gold and Silver
Products on national securities exchanges and DCMs, respectively, and
clearing such products on OCC, are appropriate persons.
    The Commission held a public meeting on March 25, 2010 to examine
the trading of futures and options in the precious and base metals
market and analyze how the Commission regulates futures and options
markets on commodities of finite supply. The Commission is considering
the views expressed at that meeting. For the time being, the Commission
continues to decline to determine whether certain products underlain by
physical commodities, such as the subject Gold and Silver Products, are
subject to the Commission's jurisdiction as commodity options and
futures contracts. However, the Commission may make such jurisdictional
determinations in the future, and such determinations may inform the
Commission's approach to consideration of exemptive orders, and of
assessing the rules of registered entities.

III. Large Trader Reporting; Market and Financial Surveillance

    The Commission is considering the question of whether exemptions
such as the one discussed herein, as well as those issued previously on
substantially similar options and futures on gold and silver products,
may interfere with the Commission's ability to discharge its regulatory
responsibilities under the CEA or with the self-regulatory duties of
contract markets. Options and Security Futures on gold and silver
products can be used by those trading them for the same economic
purposes served by entering into commodity options and security futures
on gold and silver. As a result of highly interconnected physical and
derivatives gold and silver markets, the trading of Gold and Silver
Products that are options on national securities exchanges, if traded
in sufficient volumes, can significantly affect the price discovery
function of related commodity futures and option contracts. In
addition, the pools of physical gold and silver aggregated by these
funds can materially affect supplies that are deliverable under the
terms and conditions of related commodity futures and options
contracts. 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 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.\17\ Positions on
security futures contracts on gold and silver products are currently
required to be reported to the Commission by DCMs and
intermediaries.\18\ However, there is no such reporting requirement
with respect to options on gold and silver products that are exempted
from being treated as commodity options. Thus, the Commission seeks
comment as to whether such reporting should be required. Such
information might enhance the Commission's ability to collect and
analyze market data concerning trading in the markets for gold and
silver, and its ability effectively to monitor the trading activity and
financial risk exposure of market participants and thus the risk
exposure of any DCO, such as OCC, clearing as central counterparty
(although in its capacity as a registered securities clearing agency).
If the Commission determines to impose such requirements as to the gold
and silver products that are the subject of the current proposed order,
or those that were the subjects of the Previous Orders, a separate
notice and request for comments will be issued setting forth proposed
specifics of such requirements.
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    \17\ See Parts 15 through 21 of the Commission's regulations.
    \18\ Under Commission Regulation Section 15.03(b), 17 CFR Sec.
15.03(b), the number of contracts that constitute a reportable level
for security futures products on an individual equity security is
1,000. In the instant case, when measured in terms of ounces,
reporting levels for Security Futures on Gold and Silver Products
would be significantly less than that for futures contracts on gold
and silver currently trading on Comex. Thus, visibility with respect
to the Security Futures may be greater than it would under large
trader reporting requirements.
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IV. Request for Comment

    The Commission requests comment on all aspects of the issues
presented by this proposed order.

V. 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 is considering the costs and benefits of this
proposed order in light 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 proposed
exemption 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

[[Page 19622]]

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.
    5. Other public interest considerations. The 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 proposed order as discussed above. The Commission
invites public comment on its application of the cost-benefit
provision.

    Issued in Washington, DC, on April 9, 2010 by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. 2010-8630 Filed 4-14-10; 8:45 am]
BILLING CODE P
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