In the Matter of Intermarket Clearing Corporation-Request for Vacation From Designation as Derivatives Clearing Organization

AGENCY:

Commodity Futures Trading Commission.

ACTION:

Order.

SUMMARY:

In response to a request by the Intermarket Clearing Corporation (“ICC”), the Commodity Futures Trading Commission (“Commission” or “CFTC”) is issuing an order vacating ICC's designation as a Derivatives Clearing Organization (“DCO”).

EFFECTIVE DATE:

December 31, 2003.

FOR FURTHER INFORMATION CONTACT:

R. Trabue Bland, Attorney, Division of Clearing and Intermediary Oversight, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. Telephone: (202) 418-5430. E-mail: tbland@cftc.gov.

SUPPLEMENTARY INFORMATION:

I. Statutory Background

Section 5b(d) of the Commodity Exchange Act (“Act”) provides that DCOs that clear contracts for boards of trade designated by the Commission as contract markets prior to a certain date are deemed registered with the Commission. Under Section 1a(29)(C) of the Act, registered DCOs are “registered entities.” Section 7 of the Act provides that “any person that has been designated or registered as a registered entity in the manner herein provided may have such designation or registration vacated and set aside by giving notice to the Commission requesting that its designation or registration as a registered entity be vacated, which notice shall be served at least ninety days prior to the date named therein as the date when vacation of designation or registration shall take effect.” ICC has requested that the vacation of this registration take place before the expiration of the ninety-day period. In response to the request, the Commission is exempting ICC from the notice requirements of Section 7 of the Act pursuant to Section 4(c) of the Act, which gives the Commission broad exemptive authority, and then vacating ICC's registration.

II. Request for Vacation of Registration

A. Background

By letter to the Division of Clearing Intermediary Oversight, the ICC submitted a request for the vacation of registration. The ICC is a registered DCO under Section 5b(d) of the Act and thus a registered entity as defined in Section 1a(29)(C) of the Act. The ICC is a wholly owned subsidiary of The Options Clearing Corporation (“OCC”), another registered DCO. For the past several years, ICC has not engaged in any clearing activities, and thus the OCC wishes to merge the ICC into the OCC. At the completion of the merger, ICC will cease to exist as a corporate entity. Therefore, the ICC requests that the Commission vacate the registration of ICC as a DCO.

Section 7 of the Act allows “any person that has been designated or registered as a registered entity in the manner herein provided may have such designation or registration vacated and set aside by giving notice to the Commission requesting that its designation or registration as a registered entity be vacated, which notice shall be served at least ninety days prior to the date named therein as the date when vacation of designation or registration shall take effect.” ICC served notice to the Commission on November 17, 2003. However, the merger of ICC and OCC will take place before the end of the calendar year 2003, which will occur before the expiration of the ninety-day notice period required by Section 7 of the Act. Therefore, ICC requests, pursuant to Section 4(c) of the Act, that the Commission exempt ICC from Section 7's ninety-day notice requirement. On December 18, 2003, the Commission published a proposed order and invited comment on ICC's request. The Commission received no comments.

B. Public Interest Considerations

The Commission is waiving the Section 7 ninety-day notice requirement pursuant to section 4(c) of the Act, which grants the Commission broad exemptive authority. Section 4(c) of the Act provides that, in order to promote responsible economic or financial innovation and fair competition, the Commission “may, by rule, regulation or order, exempt any class of agreements, contracts or transactions, including any person or class of persons offering, entering into, rendering advice or rendering other services with respect to, the agreement, contract, or transaction, from the contract market designation requirement of Section 4(a) of the Act, or any other provision of the Act * * * if the Commission determines that the exemption would be consistent with the public interest.”

As explained above, the ICC has not operated as a clearing entity in a number of years. The merger of ICC into OCC will allow the OCC to streamline its operations. The Commission believes that exempting ICC from the ninety-day requirement of section 7 is consistent with the public interest, is consistent with the purposes of the Act and would have no adverse effect on the ability of OCC to fulfill its self-regulatory responsibilities imposed by the Act.

The Commission invited comments specifically on exempting ICC from the ninety-day requirement of section 7 and received no comments.

III. Conclusion

After consideration of the ICC request, the Commission has determined to exempt ICC from the ninety-day notice requirement of section 7 of the Act. Furthermore, the Commission is vacating the Intermarket Clearing Corporation's registration as a derivatives clearing organization upon completion of the merger between ICC and OCC.

IV. Cost-Benefit Analysis

Section 15(a) of the Act requires the Commission to consider the costs and benefits of its action before issuing a new regulation or order under the Act. By its terms, section 15(a) does not require the Commission to quantify the costs and benefits of a new 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.”

Section 15(a) 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, not withstanding its costs, a particular rule 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 order is intended to vacate the registration of the ICC, in order to allow the Options Clearing Corporation to merge with the ICC. The Commission has considered the costs and benefits of the order in light of the specific provisions of Section 15(a) of the Act.

1. Protection of market participants and the public.

The ICC does not provide any clearing services to any designated contract markets. Accordingly, the order should have no effect on the Commission's ability to protect market participants and the public.

2. Efficiency and competition.

The order is not expected to have an effect on efficiency or competition.

3. Financial integrity of futures markets and price discovery.

The order should have no effect, from the standpoint of imposing costs or creating benefits, on the financial integrity or price discovery function of the commodity futures and options markets.

4. Sound risk management practices.

The order should have no effect on sound risk management practices.

5. Other public interest considerations.

The order will have the positive effect of allowing the OCC to streamline its operations.

V. Order

Upon due consideration, and pursuant to its authority under Section 7 of the Act to vacate the designation of a registered entity and pursuant to its authority under Section 4(c) of the Act to exempt ICC from the requirement that notice be served at least 90 days prior to vacation, the Commission finds that:

(1) The Intermarket Clearing Corporation (“ICC”) is currently registered with the Commission as a derivatives clearing organization (“DCO”) under section 5b(d) of the Commodity Exchange Act (the “Act”);

(2) ICC has not engaged in activity as a DCO for several years;

(3) ICC proposes to merge into The Options Clearing Corporation, which is also registered as a DCO;

(4) Upon the effectiveness of that merger, ICC will cease to exist as a corporate entity;

(5) ICC has requested that the Commission terminate ICC's registration as a DCO upon the effectiveness of that merger;

(6) The merger of ICC and OCC will take place before the expiration of the ninety-day notice requirement of section 7 of the Act; and

(7) Exempting ICC from the ninety-day notice requirement of section 7 of the Act will have no adverse effect on any of the regulatory or self-regulatory responsibilities imposed by the Act and will be consistent with the public interest.

Therefore, the Commission hereby orders that ICC's designations as a DCO be and hereby is vacated upon the effectiveness of ICC's merger into the Options Clearing Corporation.