[Federal Register Volume 75, Number 189 (Thursday, September 30, 2010)]
[Notices]
[Pages 60411-60415]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-24586]


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COMMODITY FUTURES TRADING COMMISSION


Request for Comment on Options for a Proposed Exemptive Order 
Relating to the Trading and Clearing of Precious Metal Commodity-Based 
ETFs; Concept Release

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of options for a proposed exemptive order and request 
for comment; concept release.

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SUMMARY: Recently, the Commodity Futures Trading Commission 
(``Commission,'' or ``CFTC'') has been confronted with the question of 
how to treat certain transactions on fractional undivided interests, or 
shares, in single commodity investment products referred to as exchange 
traded funds (``ETF'' or ``ETFs''),\1\ primarily in the metals complex. 
The ETFs have in all relevant instances been structured as trusts 
(singularly, ``ETF Trust'' or ``Trust''),\2\ the assets of which 
consist of holdings of one specific physical commodity.\3\ The explicit 
and sole investment objective of each of these ETF Trusts is to track 
as nearly as possible the spot price of the underlying physical 
commodity less the expenses of trust operations. The listing of these 
ETF shares provides shareholders with efficient exposure to commodity 
market price movements.\4\ These Precious Metal Commodity-Based ETFs 
have primarily focused on holding either gold or silver, with a recent 
expansion into palladium and platinum. The Commission has issued Orders 
pursuant to Section 4(c) of the Commodity Exchange Act (the ``Act'') 
permitting the trading and clearing of certain transactions on these 
Trusts as, respectively, options on securities and security futures.\5\ 
The Previous Orders have provided exemptions from certain provisions of 
the Act, or the Commission's regulations thereunder, which might have 
been transgressed by trading or clearing, among other things, options 
and futures on Commodity-Based ETFs. The exemption mechanism has 
enabled the Commission to reserve judgment as to the jurisdictional 
classification (i.e. commodity or security) of Commodity-Based ETFs and 
options and futures on Commodity-Based ETFs while at the same time 
providing a mechanism to ensure both that the Commission's regulatory

[[Page 60412]]

oversight needs are satisfied (whether through regulation by the 
Securities and Exchange Commission (``SEC'') or by attaching conditions 
to the exemption orders) and that novel products may be introduced 
without undue delay for market participant and investor use.
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    \1\ This Release is limited to those ``Commodity ETFs'' that are 
structured as grantor trusts with an investment objective of 
achieving the price performance of the underlying commodity or 
commodities held by such trust, less expenses. Further, for purposes 
of this Release, the term or label ``ETF'' is loosely applied to 
precious metal commodity-based ETFs (as used interchangeably herein, 
``Precious Metal Commodity-Based ETFs'' or ``Commodity-Based 
ETFs''), see section 3(a)(1) of the Investment Company Act of 1940 
(the ``1940 Act'') and Securities and Exchange Commission (``SEC''), 
Exchange-Traded Funds, Investment Company Act Release No. 28192 
(March 11, 2008), 73 FR 14618, 14623 (March 18, 2008). As used 
herein, ``Precious Metal'' indicates either gold, silver, palladium, 
or platinum.
    Additionally, when we refer to an ``ETF'' in this Concept 
Release, we are not (unless the context otherwise requires) 
referring to an entity that meets the definition of an ``investment 
company'' and is registered under the 1940 Act. This Release also 
does not address those ``ETF Commodity Pools'' that attempt to track 
a benchmark index or commodity by engaging in the purchase of 
commodity futures and/or options contracts. These ETF Commodity 
Pools are subject to regulation by the Commission as a commodity 
pool operator (``CPO'') and/or commodity trading adviser (``CTA'') 
and may not implicate regulatory issues raised in this Release.
    \2\ See e.g. NYSEArca Rule 8.201 (Commodity-Based Trust Shares); 
NYSEAmex Rule 1200A (Commodity-Based Trust Shares); NYSE Rule 1300 
(streetTracks Gold Shares); and BATS Exchange Rule 14.4.
    \3\ See, however, Securities Exchange Act Release Nos. 62402 
(June 29, 2010), 75 FR 39292 (July 8, 2010) (notice of filing of a 
proposal to list and trade shares of the ETFS Precious Metals Basket 
Trust consisting of gold, silver, palladium, and platinum) and 62620 
(July 30, 2010) (notice of a proposal to list and trade shares of 
ETFS White Metals Basket Trust consisting of silver, palladium, and 
platinum).
    \4\ For a previous Commission discussion of the structural and 
arbitrage mechanisms underlying a physical gold ETF, see Description 
of the Underlying Commodity in CFTC, Proposed Exemptive Order for ST 
Gold Futures Contracts, 73 FR 13867, at 13868 (March 14, 2008).
    \5\ See CFTC, Order Exempting the Trading and Clearing of 
Certain Products Related to SPDR[reg] Gold Trust Shares, 73 FR 31981 
(June 5, 2008), CFTC, 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 (December 30, 2008), 
and CFTC, 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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    More recently, the Options Clearing Corporation (the ``OCC'') has 
sought approval of rules permitting similar treatment of options and 
futures on certain ETFs based on palladium and platinum.
    The Commission is issuing this Release to solicit comments on: (i) 
Options for a proposed exemptive order in connection with the OCC's 
request for approval of a rule change; and (ii) the Commission's 
treatment of Precious Metal Commodity-Based ETFs generally, including 
whether the Commission should exempt the trading and clearing of 
certain options and futures transactions on gold and silver, and/or 
palladium and platinum, Commodity-Based ETFs on a categorical basis.

DATES: Comments must be received on or before November 1, 2010. All 
comments must be in English, or if not in English, accompanied by an 
English translation.

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#a1e2cecccccec5c8d5d8e4f5e7d2e1c2c7d5c28fc6ced7"><span class="__cf_email__" data-cfemail="91d2fefcfcfef5f8e5e8d4c5d7e2d1f2f7e5f2bff6fee7">[email protected]</span></a>. Include ``Commodity Based 
ETFs'' 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 received will be posted without change to http://www.CFTC.gov/.

FOR FURTHER INFORMATION CONTACT: Ryne Miller, Attorney Advisor, 202-
418-5921, <a href="/cdn-cgi/l/email-protection#aad8c7c3c6c6cfd8eac9ccdec984cdc5dc"><span class="__cf_email__" data-cfemail="26544b4f4a4a4354664540524508414950">[email protected]</span></a>, or David Van Wagner, Chief Counsel, 202-
418-5481, <a href="/cdn-cgi/l/email-protection#ff9b899e91889e98919a8dbf9c998b9cd1989089"><span class="__cf_email__" data-cfemail="a4c0d2c5cad3c5c3cac1d6e4c7c2d0c78ac3cbd2">[email protected]</span></a>, Division of Market Oversight, Commodity 
Futures Trading Commission, Three Lafayette Centre, 1151 21st Street, 
NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION: 

Part I--Proposed Exemptive Order

A. Background

    The first Commodity-Based ETF in the U.S. was listed and traded on 
the New York Stock Exchange (``NYSE'') in November 2004.\6\ Since that 
time, Commodity-Based ETFs have generally focused on the precious 
metals of gold and silver,\7\ with palladium and platinum \8\ having 
been the subject of a Commodity-Based ETF only recently.
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    \6\ See NYSE Information Memo Number 04-59 (November 18, 2004) 
(trading of streetTRACKS Gold Shares: Rules 1300 and 1301) and 
Securities Exchange Act Release No. 50603 (October 28, 2004), 69 FR 
64614 (November 5, 2004) (approval of the listing and trading of 
streetTRACKS Gold Shares).
    \7\ See, e.g., Securities Exchange Act Release Nos. 51058 
(January 19, 2005), 70 FR 3749 (January 26, 2005) (approval of the 
iShares COMEX Gold Trust (IAU)); 53521 (March 20, 2006), 71 FR 14967 
(March 24, 2006) (approval of the iShares Silver Trust (SLV)); 59781 
(April 17, 2009), 74 FR 18771 (April 24, 2009) (approval of the ETFS 
Silver Trust); and 59895 (May 8, 2009), 74 FR 22993 (May 15, 2009) 
(approval of the ETFS Gold Trust).
    \8\ See Securities Exchange Act Release No. 61220 (December 22, 
2009), 74 FR 68895 (December 29, 2009) (approval of ETFS Palladium) 
and 60970 (November 9, 2009), 74 FR 59319 (November 17, 2009) 
(approval of ETFS Platinum).
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    The structure and trading of Commodity-Based ETFs is virtually 
identical to traditional ETFs listed and traded on national securities 
exchanges. Shares of ETFs are bought and sold throughout the trading 
day on national securities exchanges. Unlike traditional mutual funds, 
ETFs do not sell or redeem their individual shares at net asset value 
(``NAV'').\9\ Instead, large institutional investors known as 
Authorized Participants (``APs'') buy shares of the ETF directly from 
the Trust in creation unit sizes (``Creation Units''), varying from 
25,000 to 200,000 shares, generally in exchange for an in-kind deposit 
of securities.\10\ Conversely, APs may sell or redeem shares of an ETF 
only in Creation Unit size and generally in exchange for portfolio 
securities (``Redemption Baskets''). In limited cases, such as an ETF 
investing in illiquid securities or derivatives, APs may deposit cash 
instead of securities in exchange for shares of an ETF. For Commodity-
Based ETFs, Creation Units and Redemption Baskets require the delivery 
of the relevant physical commodity plus any cash based on the ETF's 
NAV. ETF shares are traded on national securities exchanges at market 
prices that may, and do, differ from NAV.
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    \9\ NAV is the amount by which the value of an entity's assets 
exceeds the value of its liabilities. NAV is typically calculated on 
a per-share basis by dividing the total value of all assets in a 
portfolio, less any liabilities, by the number of shares 
outstanding.
    \10\ See NYSE Explanation of ETFs, available at http://www.nyse.com/pdfs/ETFs7109.pdf, and SEC statement regarding ETFs, 
available at http://www.sec.gov/answers/etf.htm. See also Kathleen 
Moriarty, Exchange-Traded Funds: Legal and Structural Issues 
Worldwide, 29 Int'l Bus. L. 346 (2001); Stuart M. Strauss, Exchange-
Traded Funds--the Wave of the Future? 7 Investment Lawyer 1 (2000); 
and Stuart Strauss & Scott M. Zoltowski, Exchange Traded Funds, in 
A.L.I.-A.B.A., Investment Mgmt Reg. 67 (Aug. 2006).
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    APs, who are typically exchange market makers or specialists, use 
their ability to exchange Creation Units with their underlying assets 
to provide liquidity for the ETF shares and help ensure that their 
intraday market price approximates the NAV of the ETF. Other investors 
trade ETF shares on national securities exchanges in the secondary 
market. The ability to purchase and redeem Creation Units and 
Redemption Baskets gives ETFs an inherent arbitrage mechanism intended 
to minimize the potential deviation between the market price and NAV of 
ETF shares.\11\ Existing ETFs (including Commodity-Based ETFs) have 
daily transparent portfolios, so that APs and investors know exactly 
what portfolio assets they must assemble if they wish to purchase a 
Creation Unit. The national securities exchanges that trade ETF shares 
disseminate an updated indicative NAV throughout the trading day, 
typically at 15-second intervals.
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    \11\ See Grimm, A Process of Natural Correction: Arbitrage and 
the Regulation of Exchange-Traded Funds Under the Investment Company 
Act, 1 U. Pa. J. Bus & Emp. Law 95 (2008). See also Securities 
Exchange Act Release No. 31591 (), 57 FR 60253 (December 18, 1992) 
(File No. SR-AMEX-92-18) (order approving proposed rule change by 
the Amex relating to Portfolio Depository Receipts), n. 25.
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    Although similar in practice to traditional ETFs that invest in 
securities, by law, Commodity-Based ETFs are not subject to specific 
SEC regulation under the 1940 Act. Instead, Commodity-Based ETFs are 
subject to SEC disclosure review by the SEC's Division of Corporation 
Finance as well as exchange regulation.
    Based on the belief that options and security futures trading 
benefits the liquidity and relative success of the underlying ETF, the 
national securities exchanges and ETF sponsors have sought to be able 
to trade options and futures on Commodity-Based ETFs. In 2008, the 
Commission and the SEC provided regulatory approvals and exemptions so 
that options on shares of the streetTracks Gold Trust (predecessor to 
the SPDR Gold Trust) (symbol: GLD) would be able to be listed and 
traded on the various options exchanges.\12\ Since 2008, the Commission 
has permitted options and futures on several other gold and silver 
Commodity-Based ETFs.\13\
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    \12\ See Securities Exchange Act Release No. 57894 (May 30, 
2008), 73 FR 32061 (June 5, 2008) (approval of SPDR Gold Trust 
options), and CFTC, Order Exempting the Trading and Clearing of 
Certain Products Related to SPDR Gold Trust Shares, 73 FR 31981 
(June 5, 2008), and Exemptive Order for SPDR Gold Futures Contracts, 
73 FR 31979 (June 5, 2008).
    \13\ See footnote 5, supra.

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[[Page 60413]]

    From a procedural standpoint, the issue of the regulation of 
Commodity-Based ETFs comes before the CFTC through filings by a 
contract market or a clearing organization in its capacity as a CFTC 
registrant, requesting Commission approval of certain proposed rule 
change(s) which would permit it to treat options and futures 
transactions on such ETFs as options on securities and security 
futures, respectively. In order to approve such rule changes, the 
Commission has issued exemptive orders for the options or futures in 
question pursuant to its exemptive authority under Section 4(c)(1) of 
the Commodity Exchange Act (``Act''), 7 U.S.C. 6(c).\14\ As noted 
above, the Commission has issued three such exemptive ETF orders, all 
of which have been confined to options and futures on shares of 
specific physical gold and silver ETFs.\15\
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    \14\ Section 4(c)(1) of the Act 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.
    \15\ See footnote 5, supra.
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    Notably, in issuing the Previous Orders providing Section 4(c) 
exemptions for options and futures on gold and silver ETF shares, the 
Commission did not make any finding that the options were either 
options on securities or options subject to the Act, nor did it make 
any finding that the futures were, or were not, security futures.\16\ 
Rather, the exemptions permitted the trading and clearing of options 
and/or futures on the Commodity-Based ETFs as, respectively, options on 
securities and security futures. In doing so, the Commission reserved 
making any affirmative determination as to whether shares of Commodity-
Based ETFs are more properly characterized as either commodities or 
securities. That is, the exemptions have enabled the Commission to 
reserve judgment as to the appropriate jurisdictional classification of 
Commodity-Based ETFs and options and futures on Commodity-Based ETFs. 
The Commission's approach is consistent with the framework envisioned 
by Congress. In the future, and upon the Dodd-Frank Wall Street Reform 
and Consumer Protection Act's (``Dodd-Frank Act'') \17\ effective date, 
certain provisions in the Dodd-Frank Act will provide the Commission 
and the SEC with a legal and procedural framework to use exemptive 
authority to tailor joint regulatory solutions for novel products that 
raise jurisdictional questions--such as those raised by Commodity-Based 
ETFs and options and futures on Commodity-Based ETFs.\18\
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    \16\ Under Section 4(c), the Commission is not required to make 
an express finding of jurisdiction over a product as a condition 
precedent to issuing a Section 4(c) exemption. The 4(c) Conference 
Report states: ``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.'' See House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 
3179, 3214-3215 (``4(c) Conf. Report'').
    \17\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Public Law 111-203, 124 Stat. 1376 (2010).
    \18\ See e.g. Sec. Sec.  717 and 718 of the Dodd-Frank Act, 
which cover ``New Product Approval CFTC--SEC Process'' and 
``Determining Status of Novel Derivative Products'', respectively.
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B. Pending OCC Submission--Transactions on Palladium and Platinum ETFs

    By a submission dated March 1, 2010, the OCC has submitted for 
Commission approval, pursuant to Section 5c(c)(2) of the Act and 
Commission Regulations 39.4(a) and 40.5, a proposed amendment to an 
interpretation of Article I, Section 1.F.(8) of their By-Laws.\19\ The 
interpretation, as amended, would state that the OCC will clear and 
treat as options on securities any options on ETFS Palladium Shares 
(``Palladium Products'') \20\ or ETFS Platinum Shares (``Platinum 
Products''),\21\ and will clear and treat as security futures any 
futures contracts on the Palladium and Platinum Products. Section 
5c(c)(3) of the Act provides that the Commission must approve any such 
rules or rule amendments, which includes a proposed amendment of an 
interpretation, submitted for approval unless it finds that the rules 
or rule amendments would violate the Act. The Commission initially 
extended the review period of the OCC's submission by forty-five days, 
pursuant to Commission Regulation 40.5(c)(1), to June 1, 2010. By 
letter dated June 1, 2010 and pursuant to Commission Regulation 
40.5(c)(2), the OCC consented to a further extension of the review 
period to September 30, 2010. While the OCC's pending rule submission 
deals with options and futures on two specific palladium and platinum 
Commodity-Based ETFs (the Palladium and Platinum Products), the 
Commission is also requesting comment on options for a proposed 
exemption that would permit the trading and clearing, as options on 
securities and security futures, of options and futures on gold and 
silver, and/or palladium and platinum Commodity-Based ETFs on a 
categorical basis, i.e., regardless of issuer.
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    \19\ The complete submission is made available on the 
Commission's Web site at: http://www.cftc.gov/stellent/groups/public/@rulesandproducts/documents/ifdocs/rul030110occ001.pdf.
    \20\ Shares of the Palladium Products are traded on NYSE Arca 
under the symbol ``PALL''.
    \21\ Shares of the Platinum Products are traded on NYSE Arca 
under the symbol ``PPLT''.
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C. Regulatory Implications of Precious Metal Commodity-Based ETFs

    The Commission is issuing this Release because, among other things, 
the Commission believes that options and futures on Commodity-Based 
ETFs may raise certain regulatory issues due to their economic 
similarity to options on commodities and futures on commodities traded 
on designated contract markets. The Commission's concerns include the 
potential that futures contracts based on the commodities underlying 
the ETFs could be affected by withdrawal of the deliverable supply for 
futures contracts, and also, that the Commission would lack the 
jurisdictional capability to surveil persons with positions in the 
Commodity-Based ETFs.\22\
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    \22\ These concerns arise from the Commission's statutory 
mandate under Section 6(c) of the Act, which charges the Commission 
with manipulation authority regarding price of ``any commodity, in 
interstate commerce, or for future delivery [* * *].'' See Section 
6(c) of the Act.
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    The concerns are heightened by the reality that options and futures 
on Commodity-Based ETFs allow market participants to take positions in 
instruments that appear economically similar to Commission-regulated 
products, including products that would otherwise fall under, for 
example, the Commission's market and trade practice surveillance and 
large trader reporting

[[Page 60414]]

system.\23\ By taking positions in options and futures on Commodity-
Based ETFs traded on national securities exchanges, which can achieve 
the same investment objectives and are functionally the same as 
Commission-regulated products, market participants potentially avoid 
incurring any obligation to comply with the Commission's rules and 
regulations (although the market participants do remain subject to the 
existing regulatory regime applicable to the securities markets). 
Beyond this concern, the Commission has examined, and continues to 
examine, the palladium and platinum markets relative to the gold and 
silver markets to review empirical findings which may justify a 
different regulatory resolution for the Palladium and Platinum Products 
as compared to the Commission's approach to gold and silver ETF 
products under the Previous Orders (discussed further at section D, 
infra).
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    \23\ The Commission has previously considered whether special 
conditions should be attached to related exemptions granted pursuant 
to Section 4(c) of the Act:
    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 [on 
precious metal commodity-based ETFs] 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.
    See CFTC, 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, 75 FR 19619 
(April 15, 2010) at 19621. In its order exempting the trading and 
clearing of products related to the ETFS Physical Swiss Gold Shares 
and the ETFS Physical Swiss Silver Shares, the Commission did not 
impose market reporting and large trader reporting requirements. 
However, the Commission noted the comments received and future 
consideration with respect to market and large trader reporting for 
certain gold and silver option products. See CFTC, Order Exempting 
the Trading and Clearing of Certain Products Related to ETFS 
Physical Swiss Gold Shares and ETFS Physical Swiss Silver Shares, 
footnote 5, supra.
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    At the same time, the Commission is seeking comment as to whether 
the trading and clearing (as options on securities or security futures) 
of options and futures on all or some Precious Metal Commodity-Based 
ETFs should be categorically exempted from the Act to the extent 
necessary to permit them to be so traded and cleared, whether 
absolutely or subject to conditions. Related to that issue, the 
Commission has been encouraged by market participants to adopt a 
``generic'' approach for addressing the transactions in question on 
Precious Metal Commodity-Based ETFs as opposed to the existing process 
of performing a case-by-case basis review.\24\ This Release is intended 
to assist in the Commission's consideration relating to a potential 
``generic'' approach, and the Commission is seeking comments to that 
end.
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    \24\ Specifically, on April 15, 2010, the OCC and the Chicago 
Board Options Exchange (``CBOE'') jointly delivered a letter to the 
Chairmen of both the Commission and the SEC, expressing their 
concern about the delays incurred in the case-by-case review method 
of these products. The letter is referenced in a public presentation 
available on the CBOE's Web site at: http://cboenews.cboe.com/pdfs/PressBriefingOIC2010FINAL.pdf, at page 7.
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D. Empirical Observations: Palladium and Platinum v. Gold and Silver

    There are significant empirical differences across the precious 
metal markets which may support the Commission taking a different 
regulatory approach with respect to options and futures on Commodity-
Based ETFs holding palladium and platinum than it has previously taken 
with respect to options and futures on Commodity-Based ETFs holding 
gold and silver.
    Global palladium and platinum supplies are considerably smaller in 
volume than supplies of gold and silver, and come predominantly from 
mine production concentrated in a small number of countries, namely, 
South Africa and Russia (``Producer Countries'').\25\ These factors 
make palladium and platinum markets potentially more susceptible to 
tightness during periods of economic growth and subject to potential 
supply shocks from isolated events in either of the Producer Countries. 
Palladium and platinum futures markets consequently become more 
susceptible to price volatility that may result from relatively small 
changes in demand. These concerns were observed in January 2010 when 
the Palladium and Platinum Products were initially listed for trading 
on NYSE Arca, resulting in an apparent one-time increase in short-term 
demand for physical palladium and platinum,\26\ and the NYMEX palladium 
and platinum futures markets entered nearby backwardation.\27\ Indeed, 
the Prospectuses for the Palladium and Platinum Products, dated 
December 30, 2009, and filed with the SEC, acknowledge that purchase of 
the shares may affect the prices of palladium and platinum, 
respectively, and may impact the supply of, and demand for, palladium 
and platinum, respectively.\28\
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    \25\ Data from the Johnson Matthey Platinum 2010 publication 
indicates that 76.5% of global platinum supplies came from South 
Africa in 2009, while 51.1% of global palladium supplies came from 
Russia. Global platinum and palladium supplies for 2009 totaled 5.9 
million ounces and 7.1 million ounces respectively (based on Johnson 
Matthey's data), compared to much larger 2009 global supplies of 
gold (116.6 million ounces) and silver (826.1 million ounces), based 
on data from the CPM Group Gold and Silver Yearbooks for 2010.
    \26\ For example, NYMEX settlement data shows that the April 
2010 to July 2010 active spread for platinum futures was in 
backwardation on 18 out of 19 trading days between January 14, 2010, 
and February 10, 2010, ranging from +$0.20 to +$2.00. The March 2010 
to June 2010 active spread for palladium futures was in 
backwardation on 5 of 6 trading days from January 14, 2010 to 
January 22, 2010, ranging from +$0.05 to +$1.00.
    \27\ Nearby backwardation occurs when the price for the nearby 
futures contract is higher than the price for the next nearest 
expiring contract, a generally unusual circumstance in the precious 
metals markets.
    \28\ See http://www.sec.gov/Archives/edgar/data/1459862/000093041310000057/c58962_424b3.htm, at page 7; see also http://www.sec.gov/Archives/edgar/data/1460235/000093041310000056/c58731_424b3.htm, at page 7.
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    In addition to these distinguishing features, industrial demand 
constitutes a greater percentage of the total demand for both palladium 
and platinum \29\ as compared to industrial demand as a percentage of 
total demand for gold and silver,\30\ and palladium and platinum have 
traditionally not been held for investment purposes to nearly the same 
extent as gold and silver.\31\ Accordingly, the Commission requests 
comment on whether these empirical differences suggest the need for a 
different regulatory approach for options and futures on the Palladium 
and Platinum Products, or any palladium or platinum Commodity-Based 
ETF, as compared to options and futures on the gold and silver 
Commodity-Based ETFs covered by the Previous Orders.
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    \29\ The Prospectus for the Palladium Products states that 
``autocatalysts, automobile components that use palladium, accounted 
for approximately 57% of the global demand in palladium in 2008.'' 
See citation in footnote 26, at page 9. The Prospectus for the 
Platinum Products states that autocatalysts accounted for 
approximately 51% of the 2008 global demand for platinum. See 
citation in footnote 26, at page 9.
    \30\ In comparison, the CPM Group Gold and Silver Yearbooks for 
2010 indicate that 12.5% of global gold demand was for industrial 
purposes in 2009 (this includes electronics and dental/medical 
products), while 45.3% of global silver demand was for industrial 
purposes (this includes photography and electronics and batteries). 
Jewelry demand is not included in these figures.
    \31\ The Johnson Matthey Platinum 2010 publication indicates 
that 9.4% of global demand for platinum in 2009 was for investment 
purposes, while 8.0% of global demand for palladium was for 
investment. In contrast, the CPM Group Gold and Silver Yearbooks for 
2010 indicate that net private investment in gold accounted for a 
larger 44.7% share of global gold demand in 2009 (this includes 
official coins, bullion and medallions), with net private investment 
accounting for around 30.0% of global silver demand in 2009 (this 
includes bullion and coins).
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Part II--Issues for Comment

    The Commission requests comment, taking into account all of the 
issues presented in this Release and

[[Page 60415]]

considering the Commission's future treatment of options and futures on 
Precious Metal Commodity-Based ETFs as required pursuant to the Dodd-
Frank Act, on each of the following options for a proposed exemptive 
order:
    1. Is there any reason the Commission should not provide a 
categorical Section 4(c) exemption for the trading and clearing of the 
transactions in question on gold and/or silver Commodity-Based ETFs?
    2. Are the palladium and platinum markets sufficiently distinct 
from the gold and silver markets to justify a different regulatory 
approach, for the purposes of a Section 4(c) exemption, for options and 
futures on the Palladium and Platinum Products (i.e. the specific ETF 
products identified in the OCC's pending submission) as compared to 
that for options and futures on gold and silver Commodity-Based ETFs.
    3. More generally, should the Commission consider extending such a 
Section 4(c) exemption to options and futures on palladium and platinum 
Commodity-Based ETFs on a categorical basis (i.e. without respect to 
issuer)?
    4. If the Commission continues granting Section 4(c) exemptions, 
whether on an individual or categorical basis, when presented with a 
request to allow options and futures on Commodity-Based ETFs, should 
the Commission include additional conditions and requirements? For 
example, should the Commission consider imposing large trader reporting 
obligations, position limits,\32\ or other analogous requirements when 
exempting options and futures on Precious Metal Commodity-Based ETFs 
from the Commission's jurisdiction?
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    \32\ The Commission understands that certain position and 
exercise limits on Commodity-Based ETF options currently exist in 
the securities options markets. See, e.g., ISE Rules 412 and 414; 
see also NYSE Amex Rules 904 and 905. In addition, certain position 
limits and position accountability rules apply to security futures 
products listed and traded on OneChicago. See OneChicago Rule 414.
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Related Matters

A. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \33\ 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. At least some of the options for a 
proposed exemptive order described above, if issued with substantive 
reporting or similar conditions, would require a new collection of 
information from any entities that would be subject to the proposed 
order.
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    \33\ 44 U.S.C. 3507(d).
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B. Cost-Benefit Analysis

    In considering the options for a Section 4(c) exemption allowing 
the trading and clearing as options on securities any options on gold, 
silver, palladium, and platinum Commodity-Based ETFs, and to clear and 
treat as security futures any futures contracts on gold, silver, 
palladium, and platinum Commodity-Based ETFs, Section 15(a) of the 
Act,\34\ 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 Act. 
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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    \34\ 7 U.S.C. 19(a).
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    Section 15(a) of the Act 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 Act.
    The Commission is considering the costs and benefits of the options 
for a proposed order described above in light of the specific 
provisions of Section 15(a) of the Act, as follows:
    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, silver, 
palladium, and platinum Commodity-Based ETFs are subject to extensive 
regulatory oversight; however, this regulatory oversight in the 
securities markets does not completely parallel the oversight programs 
seen in CFTC regulated markets.
    2. Efficiency, competition, and financial integrity. The options 
for a proposed exemption may enhance market efficiency and competition 
since they could encourage potential trading of options and security 
futures on the gold, silver, palladium, and platinum Commodity-Based 
ETFs 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, silver, palladium, and platinum 
Commodity-Based ETFs will be cleared by the OCC, a DCO and SEC-
registered clearing agency, and 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 the gold, silver, palladium, and platinum Commodity-Based 
ETFs will be subject to OCC's current risk-management practices 
including its margining system.
    5. Other public interest considerations. The options for a 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 matters discussed above. The Commission invites 
public comment on its application of the cost-benefit provision.
* * * * *

    Issued in Washington, DC, on September 24, 2010 by the 
Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. 2010-24586 Filed 9-29-10; 8:45 am]
BILLING CODE P


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