[Federal Register: December 6, 2007 (Volume 72, Number 234)]
[Notices]
[Page 68862-68865]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06de07-28]
=======================================================================
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
Notice of Request for Comment on Exemption Requests
AGENCY: Commodity Futures Trading Commission.
Requests to extend, pursuant to the exemptive authority in section
4(c) of the Commodity Exchange Act, the exemption granted under Part 35
of the Commission's regulations to certain over-the-counter swaps that
do not otherwise meet certain of the requirements imposed by Commission
Regulation 35.2 and to determine that, subject to certain conditions,
floor brokers and floor traders are eligible swap participants.
SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or
``Commission'') is requesting comment on whether to extend the
exemption granted under Part 35 of the Commission's regulations to
certain over-the-counter (``OTC'') swaps that do not meet certain of
the requirements otherwise imposed by Commission Regulation 35.2. This
exemption has been requested by ICE Clear U.S., Inc. (``ICE Clear''), a
registered derivatives clearing organization. The Commission is also
requesting comment on whether ICE Futures U.S., Inc. (``ICE Futures
U.S.'') floor traders and floor brokers who are registered with the
Commission, when trading for their own accounts, may be determined to
be eligible swap participants and permitted to enter into certain
specified OTC swap transactions. This exemption has been requested by
ICE Futures U.S., a designated contract market. Authority for extending
this relief is found in Section 4(c) of the Commodity Exchange Act
(``CEA'' or ``Act'').\1\
---------------------------------------------------------------------------
\1\ 7 U.S.C. Sec. 6(c).
---------------------------------------------------------------------------
DATES: Comments must be received on or before January 7, 2008.
ADDRESSES: Comments may be submitted by any of the following methods:
Federal eRulemaking Portal: http://www.regulations.gov/
http://frwebgate.access.gpo/cgi-bin/leaving. Follow the instructions
for submitting comments.
E-mail: secretary@cftc.gov. Include ``ICE Clear Section
4(c) Request'' 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/
.
FOR FURTHER INFORMATION CONTACT: Lois J. Gregory, Special Counsel, 816-
960-7719, lgregory@cftc.gov, or Robert B. Wasserman, Associate
Director, 202-418-5092, rwasserman@cftc.gov, Division of Clearing and
Intermediary Oversight; or Duane C. Andresen, Special Counsel, 202-418-
5492, dandresen@cftc.gov, Division of Market Oversight, Commodity
Futures Trading Commission, Three Lafayette Centre, 1151 21st Street,
NW., Washington, DC 20581.
SUPPLEMENTARY INFORMATION:
I. The ICE Clear Petition
ICE Clear, the clearing organization for ICE Futures U.S., seeks to
offer eligible swap participants who enter into certain bilateral swap
transactions involving coffee, sugar, or cocoa the opportunity to
submit them to ICE Clear for clearing. ICE Clear has represented that
swap transactions in various agricultural products, including coffee,
sugar, and cocoa, currently trade in OTC markets exempt from provisions
of the CEA pursuant to Part 35 of the Commission's regulations. These
are commonly swap agreements entered into by participants exchanging
fixed for floating reference prices. Participants in these markets
include trade houses, commodity lenders, producers, end users, and
large speculators.
Part 35 of the Commission's regulations \2\ exempts swap agreements
and eligible persons entering into these agreements from most
provisions of the Act.\3\ The term ``swap agreement'' is defined to
include, among other types of agreements, ``a * * * commodity swap,''
\4\ which latter term includes swaps on agricultural products.\5\ Part
35 was promulgated pursuant to authority provided to the Commission in
Section 4(c) of the Act to exempt certain transactions in order to
promote innovation and competition.\6\ Various exemptions and
exclusions were subsequently added to the Act by the Commodity Futures
Modernization Act
[[Page 68863]]
of 2000 (``CFMA''),\7\ but none apply to agricultural contracts.\8\
---------------------------------------------------------------------------
\2\ 17 CFR Part 35.
\3\ Jurisdiction is retained for, inter alia, provisions of the
CEA proscribing fraud and manipulation. See Commission Reg. Sec.
35.2, 17 CFR Sec. 35.2 (Commission regulations are hereinafter
cited as ``Reg. Sec. --'').
\4\ Reg. Sec. 35.1(b)(1)(i).
\5\ ``Commodity'' is defined in Section 1a(4) of the Act to
include a variety of specified agricultural products, ``and all
other goods and articles, except onions * * * and all services,
rights and interests in which contracts for future delivery are
presently or in the future dealt in.''
\6\ See 58 F.R. 5587 (January 22, 1993).
\7\ Pub. L. 106-554, 114 Stat. 2763 (2000).
\8\ See, e.g., CEA Sec. Sec. 2(d), (g) and (h).
---------------------------------------------------------------------------
Part 35 requires, inter alia, that a swap agreement not be part of
a fungible class of agreements that are standardized as to their
material economic terms \9\ and that the creditworthiness of any party
having an interest under the agreement be a material consideration in
entering into or negotiating the terms of the agreement.\10\ Under the
arrangement that ICE Clear seeks to establish, OTC contracts would be
submitted for clearing, a process that would extinguish the original
OTC contract and replace it with an equivalent number of cash-settled
``cleared-only'' futures contracts, with the clearinghouse interposed
as central counterparty.\11\ A cleared-only contract could be offset by
another cleared-only contract. Thus, clearing of these OTC contracts
would result in contracts that are fungible with other cleared-only
contracts with approximately equivalent terms. In addition, the
creditworthiness of the counterparty would not be a consideration.
Accordingly, the OTC contracts ICE Clear would clear in the fashion
proposed would not fulfill all of the conditions of Part 35.
---------------------------------------------------------------------------
\9\ Reg. Sec. 35.2(b).
\10\ Reg.Sec. 35.2(c).
\11\ The OTC transaction would be required to involve the
coffee, sugar, or cocoa underlying the corresponding cleared-only
contract. The unit size, quality, and other specifications for the
OTC coffee, sugar, or cocoa transaction would be approximately
equivalent to the unit size, quality, and other specifications of
the corresponding physical delivery futures contract listed on ICE
Futures.
---------------------------------------------------------------------------
However, Part 35 further invites ``any person [to] apply to the
Commission for exemption from any of the provisions of the Act * * *
for other arrangements or facilities.'' ICE Clear has petitioned the
Commission for an order under Section 4(c) of the Act that would permit
cleared OTC swaps involving coffee, sugar, and cocoa to be exempt on
the same basis as other swaps are exempt under Part 35.
II. The ICE Futures U.S. Petition
ICE Futures U.S. seeks to permit floor traders and floor brokers
(collectively, floor members) who are registered with the Commission,
when trading for their own accounts, to enter into the OTC swap
transactions discussed above. Part 35, however, defines the term
eligible swap participant (``ESP'') to include floor members only as
follows: (1) Floor members generally who are other than natural persons
or proprietorships; (2) floor members who are natural persons, provided
they have total assets exceeding at least $10,000,000; or (3) floor
members who are proprietorships, provided they have total assets
exceeding at least $10,000,000, or have the obligations under the swap
agreement guaranteed or otherwise supported by certain other ESPs, or
have a net worth of $1,000,000 and enter into the swap agreement in
connection with the conduct of their business or to manage the risk of
an asset or liability owned or incurred in the conduct of their
business or reasonably likely to be owned or incurred in the conduct of
their business.\12\ ICE Futures U.S. has petitioned the Commission for
an order under Section 4(c) of the Act that would permit all ICE
Futures U.S. floor members who are registered with the Commission, when
trading for their own accounts, to be ESPs for the purpose of entering
into bilateral swap transactions involving agricultural commodities as
described above.
---------------------------------------------------------------------------
\12\ Reg. Sec. 35.1(b)(2)(x).
---------------------------------------------------------------------------
ICE Futures U.S. represents that all floor members entering into
the swap transactions would be sophisticated and knowledgeable in the
relevant products and markets and would be fully capable of evaluating
the transactions. Further, because the transaction results in a
cleared-only futures contract, floor members would not be subject to
counterparty credit risk and would rely on the credit of ICE CLEAR and
their clearing futures commission merchants (``FCMs'').
The Commission anticipates that any Section 4(c) order issued in
response to this request would be subject to the following conditions:
(1) The contracts, agreement or transactions would have to be
executed pursuant to the requirements of Part 35, as modified herein.
(2) The ICE Futures U.S. floor member would have to obtain a
financial guarantee for the OTC swap transactions from an ICE Futures
U.S. clearing member that:
(i) Is registered with the Commission as an FCM; and
(ii) Clears the OTC swap transactions thus guaranteed.
(3) Permissible OTC swap transactions would be limited to
``cleared-only'' contracts in the following eligible products: cocoa,
coffee and sugar.
(4) Permissible OTC swap transactions would have to be submitted
for clearance by an ICE Futures U.S. clearing member to ICE Clear
pursuant to ICE Clear Rules.
(5) An ICE Futures U.S. floor member could not enter into OTC swap
transactions with another ICE Futures U.S. floor member as the
counterparty for ICE Clear ``cleared-only'' contracts.
(6) ICE Futures U.S. would maintain appropriate compliance systems
in place to monitor the OTC swap transactions of its floor members.\13\
---------------------------------------------------------------------------
\13\ These conditions are substantially similar to the
conditions included in two previously issued Commission orders that
permit floor members to be eligible contract participants (``ECPs'')
pursuant to Section 1a(12)(C) of the Act, 7 U.S.C. 1a(12)(C). On
March 14, 2006, the Commission issued an order that permitted
Chicago Mercantile Exchange floor members to be ECPs with respect to
OTC transactions in excluded commodities entered into pursuant to
Section 2(d)(1) of the Act. On August 3, 2006, the Commission issued
an order that permitted New York Mercantile Exchange floor members
to be ECPs with respect to OTC transactions in exempt commodities
entered into pursuant to Section 2(h)(1) of the Act.
---------------------------------------------------------------------------
III. 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.\14\ 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.
---------------------------------------------------------------------------
\14\ 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.
---------------------------------------------------------------------------
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
[[Page 68864]]
and competitive manner.''\15\ Permitting the clearing of OTC coffee,
sugar, and cocoa transactions by ICE Clear, as well as permitting ICE
Futures U.S. floor members to trade such products, as discussed above,
may foster both financial innovation and competition. It may benefit
the marketplace by providing ESPs the ability to bring together
flexible negotiation with central counterparty guarantees and capital
efficiencies. The CFTC is requesting comment on whether it should
exempt the OTC transactions in coffee, sugar, and cocoa that are
proposed to be cleared through ICE Clear as described above, in the
same fashion as are other contracts that are exempt pursuant to Part 35
of the Commission's regulations. The CFTC is also requesting comment on
whether it should determine ICE Futures U.S. floor members, subject to
certain conditions, to be ESPs for the purpose of entering into the OTC
transactions in coffee, sugar and cocoa.
---------------------------------------------------------------------------
\15\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179,
3213.
---------------------------------------------------------------------------
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.\16\
---------------------------------------------------------------------------
\16\ 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.
---------------------------------------------------------------------------
The purposes of the CEA include ``promot[ing] responsible
innovation and fair competition among boards of trade, other markets,
and market participants.'' \17\ It may be consistent with these and the
other purposes of the CEA, and with the public interest, for the OTC
contracts described herein and submitted for clearing as described
herein to be exempt as are other contracts under Part 35 of the
Commission's regulations. However, the exception of agricultural
commodities from the exemptions and exclusions provided under the CFMA
for OTC transactions may be relevant to the analysis. Accordingly, the
CFTC is requesting comment as to whether an exemption from the
requirements of the CEA should be granted in the context of these
transactions and these potential participants.
---------------------------------------------------------------------------
\17\ CEA Sec. section 3(b), 7 U.S.C. 5(b). See also CEA Sec.
section 4(c)(1), 7 U.S.C. Sec. 6(c)(1) (purpose of exemptions is
``to promote responsible economic or financial innovation and fair
competition'').
---------------------------------------------------------------------------
Section 4(c)(3) includes within the term ``appropriate persons'' a
number of specified categories of persons deemed appropriate under the
Act for entering into transactions exempt by the Commission under
Section 4(c). This includes persons the Commission determines to be
appropriate in light of their financial or other qualifications, or the
applicability of appropriate regulatory protections. ESPs, as defined
in Part 35 of the Commission's regulations, will be eligible to submit
for clearing to ICE Clear the OTC transactions described above. That
definition includes many of the classes of persons explicitly referred
to in CEA Section 4(c)(3) (e.g., a bank or trust company) as well as
some classes of persons who are included under the category of Section
4(c)(3)(K) (``[s]uch other persons that the Commission determines to be
appropriate in light of their financial or other qualifications, or the
applicability of appropriate regulatory protections''). The Commission
is proposing to include as appropriate persons for this extended relief
under Part 35 all of the persons who meet the definition of ESP in
Commission Regulation Sec. 35.1(b)(2). For the purposes of the
extended relief requested by ICE Futures U.S., the Commission is also
proposing to expand upon this list of appropriate persons to include,
as discussed above, ICE Futures U.S. floor members. The Commission
seeks comment on this determination.
In light of the above, the Commission also is requesting comment as
to whether these exemptions will affect its ability to discharge its
regulatory responsibilities under the CEA, or with the self-regulatory
duties of any contract market or derivatives clearing organization.
IV. Request for Comment
The Commission requests comment on all aspects of the issues
presented by these exemption requests.
V. Related Matters
A. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (``PRA'') \18\ 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 exemption would not, if
approved, require a new collection of information from any entities
that would be subject to the exemption.
---------------------------------------------------------------------------
\18\ 44 U.S.C. Sec. 3507(d).
---------------------------------------------------------------------------
B. Cost-Benefit Analysis
Section 15(a) of the CEA,\19\ 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) 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.
---------------------------------------------------------------------------
\19\ 7 U.S.C. Sec. 19(a).
---------------------------------------------------------------------------
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 an
exemptive order in light of the specific provisions of Section 15(a) of
the CEA, as follows:
1. Protection of market participants and the public. The contracts
that are the subject of the exemptive request will only be entered into
by persons who are ``appropriate persons'' as set forth in Section 4(c)
of the Act.
2. Efficiency, competition, and financial integrity. Extending the
exemption granted under Part 35 to
[[Page 68865]]
these swap agreements to allow them to be cleared may promote liquidity
and transparency in the markets for OTC derivatives on coffee, sugar,
and cocoa, as well as on futures on those commodities. Extending the
exemption also may promote financial integrity by providing the
benefits of clearing to these OTC markets. Determining ICE Futures U.S.
floor members to be ESPs may increase the flow of trading information
between markets, increase the pool of potential counterparties for
participants trading OTC, and provide essential trading expertise to
the market.
3. Price discovery. Price discovery may be enhanced through market
competition.
4. Sound risk management practices. Clearing of OTC transactions
may foster risk management by the participant counterparties. ICE
Clear's risk management practices in clearing these transactions would
be subject to the Commission's supervision and oversight.
5. Other public interest considerations. The requested exemption
may encourage market competition in agricultural derivative products
without unnecessary regulatory burden.
After considering these factors, the Commission has determined to
seek comment on the exemption requests as discussed above. The
Commission also invites public comment on its application of the cost-
benefit provision.
* * * * *
Issued in Washington, DC, on November 30, 2007 by the
Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. E7-23635 Filed 12-5-07; 8:45 am]
BILLING CODE 6351-01-P