Order Exempting the Trading and Clearing of Certain Products Related to the CBOE Gold ETF Volatility Index and Similar Products

AGENCY:

Commodity Futures Trading Commission.

ACTION:

Final Order.

SUMMARY:

On November 10, 2010, the Commodity Futures Trading Commission (“CFTC” or the “Commission”) published for public comment in the Federal Register a proposal to exempt the trading and clearing of certain options (“Options”) on the CBOE Gold ETF Volatility Index (“GVZ Index”), which would be traded on the Chicago Board Options Exchange (“CBOE”), a national securities exchange, and cleared through the Options Clearing Corporation (“OCC”) in its capacity as a registered securities clearing agency, from the provisions of the Commodity Exchange Act (“CEA”) and the regulations thereunder, to the extent necessary to permit such Options to be so traded and cleared. The Commission also requested comment regarding whether it should provide a categorical exemption that would permit the trading and clearing of options on indexes that measure the volatility of shares of gold exchange-traded funds (“ETFs”) generally, regardless of issuer, including options on any index that measures the magnitude of changes in, and is composed of the price(s) of shares of one or more gold ETFs and the price(s) of any other instrument(s), which other instruments are securities as defined in the Securities Exchange Act of 1934 (“the '34 Act”). The Commission has determined to issue this Order essentially as proposed. Authority for these exemptions is found in § 4(c) of the CEA.

DATES:

Effective Date: December 23, 2010.

FOR FURTHER INFORMATION CONTACT:

Robert B. Wasserman, Associate Director, 202-418-5092, rwasserman@cftc.gov, Division of Clearing and Intermediary Oversight, Commodity Futures Trading Commission, Three Lafayette Centre, 1151 21st Street, NW., Washington, DC 20581, or Anne C. Polaski, Special Counsel, 312-596-0575, apolaski@cftc.gov, Division of Clearing and Intermediary Oversight, Commodity Futures Trading Commission, 525 W. Monroe Street, Suite 1100, Chicago, Illinois 60661.

SUPPLEMENTARY INFORMATION:

I. Introduction

The OCC is both a Derivatives Clearing Organization (“DCO”) registered pursuant to § 5b of the CEA, and a securities clearing agency registered pursuant to § 17A of the '34 Act.

OCC has filed with the CFTC, pursuant to § 5c(c) of the CEA and §§ 39.4(a) and 40.5 of the Commission's regulations thereunder, a request for approval of a rule that would enable OCC to clear and settle options on the GVZ Index traded on the CBOE, a national securities exchange, in its capacity as a registered securities clearing agency (and not in its capacity as a DCO). Section 5c(c)(3) of the CEA provides that the CFTC must approve such a rule submitted for approval unless it finds that the rule would violate the CEA.

The GVZ Index is an index that measures the implied volatility of options on shares of the SPDR® Gold Trust (“SPDR® Gold Trust Shares”), an ETF designed to reflect the performance of the price of gold bullion.

The Commission has proposed to permit OCC to clear and settle options on indexes that measure the volatility of shares of gold ETFs generally, regardless of issuer, that are traded on national securities exchanges, in OCC's capacity as a registered securities clearing agency (and not in its capacity as a DCO). Such options could include options on any index that measures the magnitude of changes in, and is composed of the price(s) of shares of one or more gold ETFs and the price(s) of any other instrument(s), which other instruments are securities as defined in the '34 Act.

II. 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. 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.

Section 4(c) does not require the Commission to determine the jurisdictional status of the Options on the GVZ Index or other options on indexes that measure the volatility of shares of gold ETFs. In enacting § 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.” The Commission believes that permitting Options on the GVZ Index and other options on indexes that measure the volatility of shares of gold ETFs to be traded on a national securities exchange, and to be cleared by OCC in its capacity as a securities clearing agency, as discussed above, may foster both financial innovation and competition.

The Options on the GVZ Index and other options on indexes that measure the volatility of shares of gold ETFs, described above, are novel instruments. Given, among other things, the fact that the Commission has provided exemptions for options on shares of gold ETFs on prior occasions, the Commission believes that this is an appropriate case for issuing an exemption without issuing a finding as to the nature of these particular instruments.

Section 4(c)(2) of the CEA 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 Commission-regulated markets to discharge their regulatory or self-regulatory responsibilities under the CEA.

In the November 10, 2010 Federal Register release, the CFTC requested comment as to whether this exemption from the requirements of the CEA and regulations thereunder should be granted in the context of these transactions. Seven comments were received, including comments from OCC and CBOE, which supported the exemption and five from private citizens.

III. Findings and Conclusions

After considering the complete record in this matter, the Commission has determined that the requirements of § 4(c) have been met. First, the exemption is consistent with the public interest and with the purposes of the CEA, including “promot[ing] responsible innovation and fair competition among boards of trade, other markets and market participants.” It appears consistent with these and the other purposes of the CEA, and with the public interest, for the mode of trading and clearing Options on the GVZ Index, as well as other options on indexes that measure the volatility of shares of gold ETFs, whether the mode applicable to options on securities indexes or on commodities indexes, to be determined by competitive market forces.

Second, Options on the GVZ Index and other options on indexes that measure the volatility of shares of gold ETFs will be entered into solely between appropriate persons. Section 4(c)(3) of the CEA includes within the term “appropriate persons” a number of specified categories of persons, and also in subparagraph (K) thereof “such other persons that the Commission determines to be appropriate in light of * * * the applicability of appropriate regulatory protections.” National securities exchanges and OCC, as well as their members who will intermediate Options on the GVZ Index and other options on indexes that measure the volatility of shares of gold ETFs are subject to extensive and detailed regulation by the SEC under the `34 Act. Given such regulatory protections, the Commission has determined that all persons trading Options on the GVZ Index and other options on indexes that measure the volatility of shares of gold ETFs on a national securities exchange, and clearing such products through OCC in its capacity as a securities clearing agency, are appropriate persons.

Third, the grant of this exemption would not have a material adverse effect on the ability of the Commission or any Commission-regulated market to carry out their regulatory responsibilities under the CEA.

Therefore, upon due consideration, pursuant to its authority under § 4(c) of the CEA, the Commission hereby issues this Order and exempts the trading of the following products on national securities exchanges, and the clearing of all such products through the Options Clearing Corporation (“OCC”) in its capacity as a registered securities clearing agency, from the provisions of the CEA and the regulations thereunder, to the extent necessary to permit such products to be so traded and cleared:

(a) Options on the GVZ Index;

(b) Options on any index that measures the volatility (historical or expected) of the price(s) of shares of one or more gold ETFs; and

(c) Options on any index that measures the volatility (historical or expected) of price(s) of shares of one or more gold ETFs and the price(s) of any other instrument(s), which other instruments are securities as defined in § 3(a)(10) of the '34 Act.

This Order is subject to termination or revision, on a prospective basis, if the Commission determines upon further information that this exemption is not consistent with the public interest. If the Commission believes such exemption becomes detrimental to the public interest, the Commission may revoke this Order on its own motion.

IV. Related Matters

A. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (“PRA”) imposes certain requirements on Federal agencies in connection with their conducting or sponsoring any collection of information as defined by the PRA. The proposed exemptive order would not, if approved, require a new collection of information from any entities that would be subject to the proposed order.

B. Cost-Benefit Analysis

Section 15(a) of the CEA requires the Commission to consider the costs and benefits of its action before issuing an order under the CEA. By its terms, § 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, it requires that the Commission “consider” the costs and benefits of its action.

Section 15(a) of the CEA further specifies that the costs and benefits shall be evaluated in light of five broad areas of market and public concern: (1) Protection of market participants and the public; (2) efficiency, competitiveness, and financial integrity of futures markets; (3) price discovery; (4) sound risk management practices; and (5) other public interest considerations. The Commission may 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 is 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 has considered the costs and benefits of the order in light of the specific provisions of § 15(a) of the CEA. The Commission has determined that the costs of this order are not significant. Although the order exempts the subject options from regulation under the CEA, market participants and the public will nonetheless be protected because the national securities exchanges on which they trade, and the intermediaries through which they will be traded will be subject to comprehensive regulation by the SEC. The Commission has determined that the benefits of the order are substantial. The order will promote efficiency in the markets, as it will provide certainty that the subject options will not be subject to duplicative regulation.

The Commission requested comment on its application of these factors in the proposing release. No such comments were received.

After considering the costs and benefits, the Commission has determined to issue this order.