CEI. EJ 

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THE OPTIONS CLEARING CORPORATIO'N · . 

ONE N . WACKER DRIVE, SUITE 500, CHICAGO, ILLINOIS 60606 ...,,~ 2· 113 I""' I I I 2 c9 1';'1 • 'i 

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:r •-: St-cnETI\RIM EX ECUTIVE VICE PRESIDEN T. GENERAL COUNSEL, AN[jfl\5~£\J~R'I l - ~ 

WILLIAM H . NAVIN 

TEL 312.322. 1817 FAX 312:322. 1836 

WNAVIN@THEOCC.COM 

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May 25,2007 

Received CFTC 

Recoa'ds Section 

S/02-r/o 1 

Ms. Eileen Donovan 

Office of the Secretary 

Commodity Futures Trading Commission 

Three Lafayette Centre 

. ~· . . . . -' -: . 

1155 21st Street, N.W. 

Washington, DC 20581 COMMENT 

Re: 

Dear Ms. Donovan: 

Proposal to exempt the trading and clearing of certain' · · 

credit default products traded on the Chicago Board Options 

Exchange and cleared by The Options Clearing Corporation 

. . '!' 

The Options Clearing Corporation ("OCC") is submitting this letter in response to the 

request for comments issued by the Commodity Futures Trading Commission (the "CFTC") in 

its Notice of Proposed Order and Request for Comment ("Notice") regarding credit default 

options ("CDOs") and credit default basket options ("CDBOs") to be listed by the Chicago 

Board Options Exchange ("CBOE") and cleared by OCC.

1 

OCC is a securities clearing agency registered as such under Section 17 A of the 

Securities Exchange Act of 1934 (the "Exchange Act") as well as a derivatives clearing 

organization registered under Section 5b of the Commodity Exchange Act (the "CEA"). As 

such, OCC has the ability to clear securities options subject to the jurisdiction of the Securities 

and Exchange Commission (the "SEC"), commodity futures and commodity options subject to 

the CFTC's jurisdiction under the CEA, and security futures contracts subject to the joint 

jurisdiction of the CFTC and the SEC. OCC has submitted rule filings to both the SEC and the 

CFTC proposing to clear, in its capacity as a securities clearing agency, CDOs and CDBOs 

traded on CBOE as securities. As referenced in the Notice, OCC has requested CFTC approval 

of its filing under Section 5c(c) ofthe CEA and CFTC Regulations 39.4(a) and 40.5 thereunder. 

1 See Proposal to Exempt the Trading and Clearing of Certain Credit Default Products Traded on the Chicago Board 

Options Exchange and Cleared Through The Options Clearing Corporation, 72 FR 27091 (May 14, 2007). 

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It is OCC's understanding that the CFTC is proposing to issue the exemption described in 

the Notice as a predicate to issuing the requested approval under Section 5c( c). In so doing, as 

stated in the Notice, "the CFTC need not- and does not - find that COOs and COBOs are (or are 

not) subject to the CEA." The CFTC went on to quote from the legislative history of Section 

4(c) stating: 

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 transactions for 

which an exemption is sought is subject to the Act. .. " (quoting 

H.R. Rep. 102-978, 1992 U.S.C.C.A.N. 3179, 3214-15). 

Section 4( c )(2)(B) of the CEA provides that the CFTC shall not grant an exemption 

unless it determines that the agreements, contracts or transactions subject to the exemption will 

be entered into solely between "appropriate persons" and that the exemption will not have a 

material adverse effect on the ability of the CFTC or any contract market or derivatives 

transaction execution facility to discharge its regulatory or self-regulatory responsibilities under 

the CEA.Z The CFTC has specifically requested comment on whether these conditions will be 

fulfilled if the proposed exemption is issued. For the reasons set forth below, OCC believes that 

it is quite clear that the conditions will be met. 

Section 4( c )(3) defines the term "appropriate persons" to include, in addition to certain 

specified categories of persons, "such other persons that the CFTC determines to be appropriate 

in light of ... the applicability of appropriate regulatory protections." The CFTC noted that 

CBOE and OCC, as well as their members who will intermediate transactions in CDOs and 

CDBOs, "are subject to extensive and detailed regulation by the SEC under the [Exchange Act]." 

Under that regulatory regime, CBOE and other national securities exchanges impose special 

suitability standards for options customers. For example, CBOE Rule 9.9 provides that a 

member who recommends to a customer the purchase or sale (writing) of any option contract 

shall have reasonable grounds for believing that the recommendation is not unsuitable for the 

customer on the basis of the information furnished by the customer after reasonable inquiry as to 

his investment objectives, financial situation and needs, and any other information known by the 

member. The rule also provides that a member shall not recommend to a customer an opening 

transaction in any option contract unless the person making the recommendation has a 

2 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 (I) 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. 
reasonable basis for believing at the time of making the recommendation that the customer has 

such knowledge and experience in financial matters that he may reasonably be expected to be 

capable of evaluating the risks of the recommended transaction, and is financially able to bear 

the risks of the recommended position in the option contract. Provisions relating to procedures 

for approval of customer accounts for options trading and for the writing of uncovered options 

add additional protections. See, for example, CBOE Rules 9.7 and 9.15. In light of these 

specific provisions and the overall regulatory framework of the federal securities laws, there is 

ample basis for finding that CDO and CDBO transactions will be entered into only by 

appropriate persons. 

OCC appreciates the opportunity to make its view known to the CFTC. Please do not 

hesitate to contact the undersigned if you wish to discuss any aspect of this matter with us. 

cc: Ananda K. Radhakrishnan 

John C. Lawton 

Robert B. Wasserman 

Division of Clearing 

and Intermediary Oversight 

Sincerely, 

William H. Navin