[Federal Register: July 7, 2008 (Volume 73, Number 130)]
[Notices]
[Page 38403-38405]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07jy08-48]
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COMMODITY FUTURES TRADING COMMISSION
Request To Exempt Certain Over-the-Counter Swaps From Certain of
the Requirements Imposed by Commission Regulation 35.2, Pursuant to the
Authority in Section 4(C) of the Commodity Exchange Act
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of request for comment on exemption request.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is
requesting comment on whether to exempt certain over-the-counter
(``OTC'') swaps from certain of the requirements otherwise imposed by
Commission Regulation 35.2. Specifically, the petitioners request
authority to clear certain agricultural
[[Page 38404]]
swaps. This exemption has been requested by the Chicago Mercantile
Exchange Inc. (``CME''), a registered derivatives clearing organization
(``DCO''), and the Board of Trade of the City of Chicago, Inc.
(``CBOT''), a designated contract market. Authority for extending this
relief is found in Section 4(c) of the Commodity Exchange Act
(``CEA'').\1\
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\1\ 7 U.S.C. 6(c).
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DATES: Comments must be received on or before August 21, 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 ``CME/CBOT Section
4(c) Petition'' 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: Sarah E. Josephson, Special Counsel,
202-418-5684, sjosephson@cftc.gov, or Phyllis P. Dietz, Associate
Director, 202-418-5449, pdietz@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. The CME/CBOT Petition
CME, the DCO that provides clearing services for the CBOT, and the
CBOT jointly submitted a request to the Commission for an exemptive
order under Section 4(c) of the CEA.\2\ The order would grant CME
approval to clear OTC corn basis swaps and corn, wheat, and soybean
calendar swaps,\3\ and it would permit the CBOT to list those products
for ``clearing-only.'' The contract size for the basis and calendar
swap products will be the same as that for corn, wheat, and soybean
futures--5,000 bushels. However, each of the proposed cleared-only OTC
products will be cash-settled, in contrast to the CBOT's corn, wheat,
and soybean futures contracts, which are physically-settled.
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\2\ A copy of the petition is available on the Commission's Web
site at http://www.CFTC.gov/.
\3\ The suite of OTC agricultural swap products that the CBOT
proposes to list for clearing-only is comprised of corn basis swap
contracts for the following regions: Northeastern Iowa, Northwestern
Iowa, Southern Iowa, Eastern Nebraska, Eastern South Dakota, and
Southern Minnesota; and corn, wheat, and soybean calendar swaps.
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Part 35 of the Commission's regulations \4\ exempts swap agreements
and eligible persons entering into such agreements from most provisions
of the CEA.\5\ The term ``swap agreement'' is defined to include, among
other types of agreements, a ``basis swap'' or a ``commodity swap.''
\6\ Part 35 was promulgated pursuant to authority conferred upon the
Commission in Section 4(c) of the CEA to exempt certain transactions in
order to promote innovation and competition.\7\ Various exemptions and
exclusions were subsequently added to the CEA by the Commodity Futures
Modernization Act of 2000 (``CFMA''),\8\ but none apply to agricultural
contracts.\9\
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\4\ 17 CFR Part 35 (Commission regulations are hereinafter cited
as ``Reg. ----'').
\5\ Jurisdiction is retained for, among other things, provisions
of the CEA proscribing fraud and manipulation. See Reg. 35.2.
\6\ Reg. 35.1(b)(1)(i). ``Commodity'' is defined in Section
1a(4) of the CEA 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.''
\7\ See 58 FR 5587 (Jan. 22, 1993).
\8\ Pub. L. 106-554, 114 Stat. 2763 (2000).
\9\ See, e.g., CEA 2(d), (g) and (h).
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Part 35 requires, among other things, that a swap agreement not be
part of a fungible class of agreements that are standardized as to
their material economic terms \10\ 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.\11\ Under the arrangement proposed by CME and the CBOT, a
cleared-only OTC contract could be offset by another cleared-only OTC
contract. Thus, clearing of these OTC contracts would result in
contracts that are fungible with other cleared-only contracts with
equivalent terms. In addition, the creditworthiness of the counterparty
would not be a consideration. Accordingly, the OTC contracts CME would
clear would not satisfy all of the conditions of Part 35.\12\
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\10\ Reg. 35.2(b).
\11\ Reg. 35.2(c).
\12\ The contracts that the CBOT proposes to list for clearing-
only would, however, meet the requirements of Reg. 35.2(a) and (d)
in that they would be entered into solely between eligible swap
participants and executed OTC.
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However, Part 35 further permits ``any person [to] apply to the
Commission for exemption from any of the provisions of the Act * * *
for other arrangements or facilities.'' \13\ CME and the CBOT have
petitioned the Commission for an order under Section 4(c) of the CEA
that would exempt cleared-only OTC swaps involving corn, wheat, or
soybeans to the same extent as contracts that are exempt pursuant to
Part 35 of the Commission's regulations.
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\13\ Reg. 35.2(d).
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II. Section 4(c) of the Commodity Exchange Act
Section 4(c)(1) of the CEA empowers the Commission 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.
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\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.
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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.'' \15\ Permitting the clearing of OTC corn, wheat,
and soybean swaps by CME may foster both financial innovation and
competition. It may benefit the marketplace by providing market
participants the ability to combine flexible negotiation with central
counterparty guarantees and capital efficiencies. In addition, the
[[Page 38405]]
CBOT has represented that it expects that the proposed cleared-only OTC
corn basis and calendar swaps will be a complement to the CBOT's corn
futures and will enable corn suppliers and users, including
participants in the ethanol industry, to manage volatile basis risk
while realizing the benefits of centralized clearing. Similarly, the
CBOT has stated that it expects that its proposed cleared-only OTC
wheat and soybean calendar swaps will complement wheat and soybean
futures, respectively, and will result in similar benefits.
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\15\ House Conf. Report No. 102-978, 1992 U.S.C.C.A.N. 3179,
3213.
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The Commission is requesting comment on whether it should exempt
the OTC corn basis swaps and corn, wheat, and soybean calendar swaps
that are proposed to be cleared by CME and listed by the CBOT, as
described above, to the same extent as are other contracts that are
exempt pursuant to Part 35 of the Commission's regulations.
Section 4(c)(2) provides that the Commission may grant an exemption
only when it determines that the requirements for which the 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\
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\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.
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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.'' \17\ It may be consistent with these and the
other purposes of the CEA, and with the public interest, for the
cleared-only contracts 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 Commission is requesting comment as
to whether an exemption from the requirements of the CEA should be
granted in the context of these transactions.
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\17\ Section 3(b) of the CEA, 7 U.S.C. 5(b). See also Section
4(c)(1) of the CEA, 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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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 designated contract market.
III. Request for Comment
The Commission requests comment on all aspects of the issues
presented by this exemption request.
IV. 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.
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\18\ 44 U.S.C. 3507(d).
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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.
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\19\ 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 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 these OTC swap agreements to allow
them to be cleared may promote liquidity and transparency in the
markets for OTC derivatives on corn, wheat, and soybeans, as well as
futures on those commodities. Extending the exemption also may promote
financial integrity by providing the benefits of clearing to these OTC
markets.
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. CME'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 derivatives products
without unnecessary regulatory burden.
After considering these factors, the Commission has determined to
seek comment on the exemption request as discussed above. The
Commission also invites public comment on its application of the cost-
benefit provision.
Issued in Washington, DC, on June 30, 2008 by the Commission.
David A. Stawick,
Secretary of the Commission.
[FR Doc. E8-15274 Filed 7-3-08; 8:45 am]
BILLING CODE 6351-01-P